The drawback in the replacement chain method, arises when a large number of
replacements are necessary to obtain equal time horizons for competing projects.
The constant growth model assumes dividends will grow at a constant rate that exceeds
the market return.
A combination of top-down and bottom-up planning ensures a realistic compromise
between the conservatism of the top-down plan and the aggressive optimism of the
bottom- up plan.
A strategic plan is broad and conceptual rather than detailed and numerical. It does,
however, contain precise financial projections supported by a great deal of detail.
A common size income statement presents each line item as a percent of assets.
The least risky capital projects are replacements. Expansions and new business ventures
are progressively more risky.
Because stocks rely on dividends as the principal source of cash flow, ascertaining stock
prices is an easier and more precise process than the valuation of bonds, which relies on
variable coupon payments.
Variability in a firm’s EPS reflects both the firm’s operating risk and its financial risk.
A trend over the last six decades has been a significant increase in the level of foreign
stocks and bonds included in the investment portfolios of American citizens.
The option to purchase land at a fixed price for a specified period is a flexibility option.
The common size income statement:
A.facilitates comparisons by stating every line item as a percent of revenue.
B.eliminates the need to evaluate the firm by its dollar performance by showing how
each component of the income statement stands as a percentage of assets.
C.shows the interaction of the income statement and balance sheet.
D.All of the above
Which of the following is the correct mathematical expression for ROCE?
A.ROCE = EBITDA x (1 – T) / (Debt + Equity)
B.ROCE = Net income x (1 – T) / (Debt + Equity)
C.ROCE = EBT x (1 – T) / (Debt + Equity)
D.ROCE = EBIT x (1 – T) / (Debt + Equity)
Which is an example of debt financing?
A.Issuing stock to raise capital
B.Using the company€s earnings to fund a project
C.A leasing agreement
D.Issuing bonds to raise capital
Which of the following concepts is NOT associated with preferred stock?
A.A Fixed Dividend
B.Dividend Growth
C.Dividend Yield
D.Both b & c
E.All of the above
Last year Alpine Growers experienced a 34% increase in earnings per share on 11%
increase in sales. If management knows that Alpine’s DOL is 1.5, what is its DFL?
A.3.09
B.2.06
C.3.55
D.1.67
An important reason for making financial projections is forecasting whether the firm
will need money from outside sources in the coming year. If the planning assumptions
result in a need for extra money, it shows up in the plan as:
A.a negative net income.
B.a negative equity account.
C.an increase in debt.
D.a very substantial drop in revenue.
Beta measures:
A.business risk.
B.risk aversion.
C.total risk.
D.market risk.
____ is a growing practice in which people concern themselves with the activities of the
issuing business.
A.Agency control
B.Morality analysis
C.Socially responsible investing
D.Wealth maximization
Capital rationing:
A.is a technique for allocating scarce financial resources among viable projects.
B.determines which projects pass the NPV and/or IRR tests.
C.implies that all projects with positive NPVs should be undertaken.
D.generally gives terrible results when done intuitively.
_____ include average collection period and inventory turnover.
A.Liquidity ratios
B.Debt management ratios
C.Asset management ratios
D.Profitability ratios
Which of the following creates spontaneous financing?
A.Accounts payable
B.Accrual liabilities
C.Trade credit
D.Both a. and b. create spontaneous financing.
E.All of the above create spontaneous financing.
Phoenix Company common stock is currently selling for $20 per share. Security
analysts at Smith Blarney have assigned the following probability distribution to the
price of (and rate of return on) Phoenix stock one year from now:
Assuming that Phoenix is not expected to pay any dividends during the coming year,
determine the expected rate of return on Phoenix Stock.
A.8%
B.0%
C.10%
D.40%
Financial intermediaries are:
A.pension funds.
B.bond markets.
C.credit unions.
D.stock markets.
The price that investors are willing to pay for a firm’s securities can best be described
by which of the following statements?
A.If a company is performing poorly, investors will not buy that company’s securities.
B.If a company is performing well, investors will buy the company’s stock at almost
any price because the price of the stock should increase.
C.Since the value of a company’s securities depends largely on future cash flows,
investors will consider the company’s performance in estimating the future cash flows
that will come from owning its securities.
D.Since risk is difficult to assess for any particular company, investors don’t usually
consider risk when deciding how much to pay for a company’s securities.
Which of the following might be senior debt?
A.Debentures
B.Callable unsecured bonds
C.Subordinated debentures
D.Both a and b
E.All of the above
The following information is available concerning a firm’s capital:
Debt: Five thousand bonds with a face value of $1000 and an initial 20-year term were
issued five years ago with a coupon rate of 8%. Today these bonds are selling for
$846.30.
Preferred stock: Twenty thousand shares of preferred stock paying an annual dividend
of $9.50 are outstanding. The shares currently trade at $79.16.
Common equity: Two hundred thousand shares of common stock are outstanding which
are now selling for $22.50 per share. An annual dividend of $1.70 was just paid and is
expected to grow indefinitely at 6%.
Target capital structure: The firm’s target capital structure is of 30% debt, 20% preferred
stock, and 50% equity.
The firm can issue any type of security without paying floatation costs. The combined
federal and state tax rate is 40%.
Calculate the firm’s WACC based on its
A local terrorist group in Peru destroyed Haverty Inc.’s plant and murdered the
American plant manager. This is an example of:
A.political risk.
B.weakness on the part of the host government.
C.partisan unrest.
D.anti-Americanism.
Baxter Inc. is in a fast growing industry, but doesn’t seem to be able to match its
competitors’ growth rates. Selected financial information for Baxter is as follows
($000):
Research has revealed that the average firm in Baxter’s industry pays out 10% of its
earnings in dividends, earns 4 cents after tax on every sales dollar, has an equity
multiplier of 3.0 and a total asset turnover of 1.9.
