Stocks with equal stand-alone risk can have opposite risk impacts on a portfolio
because of the timing of the variations in their returns.
The company’s cost of capital is the average rate it pays its investors for the use of their
funds.
An increase in net working capital increases operating cash flows.
Accruals tend to be directly related to a firm’s level of operations.
To many people, income is their paycheck, but in accounting it is typically viewed as
the excess of revenue received over costs and expenses.
A high interest coverage ratio would normally be associated with a low debt ratio.
A firm acquires a supplier or a customer in a horizontal merger.
Since it has no tax effect, the increase in a firm’s net working capital that is required by
a capital investment should be ignored in the valuation of the investment.
In Chapter 7 bankruptcy, firms are voluntarily reorganized. Chapter 11, on the other
hand, requires immediate liquidation.
When currency rates are expressed in terms of units of foreign currency per dollar, it is
called a direct quote.
The spot rate for the Canadian dollar is $.60 and the forward rate is $.58. The currency,
therefore is selling in the forward market at a discount.
One of the major goals of the Dodd-Frank Act is to break up certain existing financial
companies that are too large.
Frazier Inc. paid a dividend of $4 last year (D0). The firm is expecting dividends to
grow at 21% in years 1-2 and 10% in Year 3. After that growth will be constant at 8%
per year. Similar investments return 14%. Calculate the value of the stock today.
A.$71.49
B.$88.31
C.$91.47
D.$116.10
Differences between net income and cash flow come from:
A.accounts receivable.
B.depreciation.
C.short term securities.
D.a and b
One weakness of the internal rate of return approach is that:
A.it does not directly consider the timing of the cash flows from a project.
B.it fails to provide a straightforward decision rule.
C.it implicitly assumes that the firm is able to reinvest the interim cash flows from a
project at the firm’s cost of capital.
D.None of the above
Alpha issued a 6% preferred stock 15 years ago (par value $100). What is it selling for
today if the relevant rate of return is now 9%?
A.$38.15
B.$100.00
C.$66.67
D.$75.46
A company’s cost of capital is the most appropriate discount rate to use when analyzing
which type of project(s)?
A.Replacement projects
B.Expansion projects
C.New venture projects
D.Replacement and expansion projects
E.Expansion and new venture projects
Predatory lending describes:
A.a staggering increase in monthly payments leading to default.
B.monthly payments that are lower than monthly interest charges.
C.commission-driven brokers selling loans to people they know can€t afford them.
D.loans extended to borrowers without proof of incomes.
The following financial information is available on Simmons Inc.:
Determine the cost of retained earnings using the capital asset pricing model approach.
(Compute answer to the nearest 0.1%).
A.12.9%
B.12.6%
C.13.0%
D.None of the above
Temporary working capital is:
A.the seasonal borrowing capacity of a firm.
B.incremental working capital necessary to finance slower than expected collections of
customer receivables.
C.incremental working capital necessary to support peak activity in seasonal
businesses.
D.additional payroll cost and expenses incurred during seasonal peaks.
Which of the following is a reason why calculating the capital structure based on
market prices is considered tedious?
A.Accurate market prices can never be determined.
B.Dividend payout ratios on stocks are usually unpredictable.
C.The market-based structure is constantly changing.
D.The implied error in market-based structures is large.
For which of the following project types is cash flow estimation most difficult?
A.New Venture
B.Replacement
C.Expansion
D.New Market
The return that investors feel is most likely to occur based on currently available
information is known as the:
A.required return.
B.expected return.
C.either the required or expected return.
D.neither the required or expected return.
Which of the following events tend to make it less likely that a company will call a
bond?
A.A reduction in forecast inflation rates.
B.The company’s bonds are downgraded by Moody’s rating service.
C.A significant lawsuit is filed against the company.
D.Answers a. and b. are correct.
E.Answers b. and c. are correct.
Which of the following is the appropriate discount rate to be used when calculating
NPV in the certainty equivalent approach?
A.Cost of capital
B.Risk-free rate
C.Cost of equity
D.Market risk premium
Average inventory is $25,000, sales is $250,000, gross margin is 40% of sales, and net
income is $35,000. The most meaningful calculation of inventory turnover results in an
inventory turns figure of:
A.1 time.
B.2 times.
C.4 times.
D.6 times.
Increasing a firm’s financial leverage also increases ____.
A.the return on equity
B.EBIT
C.the amount of equity
D.the amount of dividends