Diversification achieved through a merger can reduce the variability of the earnings of
the acquiring firm.
Indentures and covenants on borrowing restrict the firm’s business operations, but do
not limit its ability to pay dividends.
A portfolio’s beta coefficient is the weighted average of the betas of the individual
stocks, where the weights are the relative amounts invested in each stock.
Municipal bonds are debt obligations of the states, municipalities and political
subdivisions. They are exempt from federal taxation
If a firm’s stock price increases and interest rates decrease, its weighted average cost of
capital will decrease.
Unlike a stock dividend or a stock split, share repurchase should increase stockholder
wealth.
The process whereby a shareholder assigns the right to vote his or her shares of stock to
another person is referred to as a proxy. In proxy fights, parties with conflicting
interests solicit proxies for the purpose taking over the board of directors.
An investor will typically enter into an investment only when he or she has established
a minimum required return that will either be met or exceeded by the expected return.
You are considering an investment that will pay you $100 in Year 1, $500 in Year 2, $0
in Year 3 and $600 in Year 4. If you require a 12% return, what is the most you should
pay for this investment today? (Round to nearest $)
A.$915
B.$869
C.$734
D.$698
IRR does not include the following in its analysis:
A.the time value of money.
B.all of the project’s cash flows.
C.a measure of the change in shareholders wealth.
D.a clearly defined, objective decision criteria.
E.All of the above
J&J Construction had the following results for this year: Sales of $20,000; Assets of
$10,000; Current liabilities of $200; Return on Sales of 10%. If they are projecting a
growth in sales of 20% and a dividend payout of 50%, calculate their external financing
required. (Assume that assets, current liabilities, and income grow at the same rate as
sales.)
A.$520
B.$760
C.$1,140
D.$1,380
Consideration of risk is essential to the capital budgeting process. Which of the
following statements is true?
A.Recognizing risk is a major step toward bringing theory in line with the real world.
B.Business managers do recognize risk, but they do it through judgments based on the
results of analyses when decisions are finally made.
C.Although we are unable to put the idea that cash flows are subject to probability
distributions into our analysis, better capital budget decisions can be made when the
relevance of risk is acknowledged.
D.All of the above
Which of the following is not used in the development of cash flow estimates for capital
projects?
A.Opportunity costs
B.Financing costs
C.Depreciation costs
D.Taxes
E.Overhead costs
A stable dividend, which is very desirable:
A.grows at a constant rate.
B.is constant.
C.moves up and down but not much.
D.increases following earnings increases, but never decreases.
Investor aversion to the payment of dividends originates principally from:
A.the belief that “a bird in hand is worth two in the bush.”
B.capital gains receive favorable tax treatment.
C.neither a nor b.
D.both a and b.
In Step Video is considering expanding its video rental library to 8,000 tapes. The
purchase price of the additional videos will be $80,000 and the shipping cost is another
$4,000. To house the tapes, the owner will have to spend another $10,000 for display
shelves, increase net working capital by $5,000, and interest expenses will add another
$8,000 to the operating cost. What is the net investment to In Step Video for this
project?
A.$95,000
B.$99,000
C.$84,000
D.$107,000
Modern portfolio theory suggests that:
A.it is always wise to create a stock portfolio that captures a high average rate of return.
B.the higher the expected return, the higher the portfolio’s risk.
C.it is always wise to create a stock portfolio consisting of similar stocks.
D.a riskless portfolio is always the wisest alternative.
The CAPM asserts that the only company specific factor affecting required return is:
A.market risk.
B.the risk-free rate.
C.investment risk.
D.risk aversion.