The following financial information is available on Rawls Manufacturing Company:
Rawls can issue new common stock to net the company $44 per share. Determine the
cost of retained earnings using the dividend growth model approach. (Compute answer
to the nearest .1%).
A.12.3%
B.13.4%
C.13.0%
D.12.7%
Which of the following is not an inventory carrying cost?
A.The cost of storage
B.The cost of borrowing to acquire inventory
C.The costs of spoilage, shrinkage, and breakage
D.The cost of customer complaints about unavailable product
Stock A moves up when the portfolio moves up and down when the portfolio moves
down. Stock B moves down when the portfolio moves up and up when the portfolio
moves down. A and B move up and down about the same amount.
A.A and B are equally risky in a portfolio sense.
B.A is risky because it adds risk to the portfolio, B is not risky because it reduces the
portfolio’s risk.
C.A’s risk can be diversified away.
D.A has some of the personality of B.
In estimating the cost of a new project, the firm should exclude:
A.opportunity costs.
B.fixed costs.
C.variable costs.
D.alternative costs.
E.b and c
In the simplified financial system depicted in Figure 1-1 of the text, in which direction
do interest and dividends flow?
A.From market/investors to companies.
B.From market to investors.
C.Investors to market.
D.From companies to market/investors.
Under a line of credit agreement between a firm and its bank:
A.the loan often must be completely paid off for a portion of the year.
B.the firm can borrow up to a specified maximum during a specified period.
C.the bank is contractually committed to lend the firm the money.
D.a and b.
The WACC is used in evaluating newly proposed capital budgeting projects. It should
therefore be calculated using capital component costs and a capital structure:
A.based on the capital on the firm’s books because that’s the capital it already has and
will use to support new projects.
B.based on conditions the firm will encounter when raising new capital in the next year
because that’s the capital it will use to support new projects.
C.based on existing capital on the books because both old and new projects have to be
supported.
D.based on existing equity but new debt amounts and costs.
Zeta Inc.€s cost of capital is 12% and the risk-free rate is 5%. It plans to invest in a new
project. The cash flow projections ($000) for the project are given below. Calculate the
difference in the traditional NPV and the certainty equivalent NPV.
A.$9.43
B.$7.59
C.$30.35
D.$20.92
The sustainable growth rate concept can be used to show that growth depends on four
fundamentals. Which of the following is an incorrect statement of one of those
fundamentals?
A.Leverage or the use of borrowed money is measured by the equity multiplier.
B.Earnings retention is measured as 1 minus the dividend payout ratio.
C.The firm’s talent in asset management is typically measured by ratios like the ACP.
D.Profitability is measured by ROS, the firm’s return on sales.
Which of the merger waves in the United States consisted largely of conglomerate
mergers?
A.Wave I: 1897 – 1904
B.Wave II: 1916 – 1929
C.Wave III: 1965 – 1969
D.Wave IV: 1981 – 1989
A proprietor who operates his/her own business can incorporate and become the only
shareholder. This action might be taken to provide the owner with the limited liability
of the corporate form. Which of the following best describes the impact of
incorporation in this situation on the limited liability issue?
A.The owner has achieved the full protection of limited liability.
B.The owner can protect his/her personal assets unless fraud is involved in the conduct
of the business.
C.The owner has achieved the full protection of limited liability except for default on
borrowed funds.
D.The owner has in reality achieved very little in the way of limited liability protection.
Separately funded projects:
A.should be evaluated against the cost of their own dedicated capital
B.are usually funded by a source that’s more expensive than the cost of capital
C.reinforces the need to match funding sources and uses with a firm’s ability to raise
capital
D.should be evaluated against the weighted average cost of capital despite the
availability of separate funds
The management of Jasper Equipment Company is planning to purchase a new milling
machine that will cost $160,000 installed. The old milling machine has been fully
depreciated but can be sold for $15,000. The new machine will be depreciated on a
straight-line basis over its 10-year economic life to an estimated salvage value of
$10,000. If this milling machine will save Jasper $20,000 a year in production
expenses, what are the annual net cash flows associated with the purchase of this
machine? Assume a marginal tax rate of 40 percent.
A.$15,000
B.$18,000
C.$27,000
D.None of the above