A major disadvantage of the proprietorship form is the difficulty of raising money.
The cash budget measures both the timing and amount of a firm’s cash flows.
Since the component cost of debt is less than the component cost of equity, a shift in the
composition of a firm’s capital structure towards debt will always reduce a firm’s cost of
capital.
Cash reserved to make payments to vendors is an example of precautionary demand.
A foreign bond is identical to domestic bonds except that it is issued by a foreign firm
or government.
Tax deductible expenses are included in the initial outlay without consideration of tax
savings because they’re incremental
The value of a real option is at least the increase in the project’s estimated NPV arising
from the option’s inclusion.
In loans negative amortization means:
A.commission driven brokers sell loans to people who cannot afford them.
B.loans are granted to borrowers without proof of income.
C.early payments are lower than monthly interest charges.
D.interest is charged at rates that move with the market.
Companies attempt to issue bonds at coupon rates that are equal to market rates at the
time of issue. Because of the time delay necessary to print and issue bonds:
A.there is usually some discount or premium associated with new issues.
B.the market temporarily modifies its yield to permit the bond to sell at face value at
issue.
C.the issuing company modifies the coupon rate on the issue date to equal the market’s
yield.
D.All of the above
You are interested in a $1,000, 20-year bond that is currently selling for $1,171.59. If
you require a 10% return on your investment, what is the minimum coupon rate you can
accept? The bond makes semiannual coupon payments.
A.6%
B.8%
C.10%
D.12%
E.14%
Assume that pre-tax profit of $50,000 has been earned by a business, and the
owner/proprietor wants to withdraw all of the after-tax profit for personal use. Assume
the tax rate for a C corporation is 34%, while the rate for a person is 27%. The after-tax
earnings available under the corporate and proprietorship forms are:
A.for a corporation, $33,000; for a proprietorship, $36,500.
B.for a corporation, $23,760; for a proprietorship, $36,500.
C.for either a corporation or a proprietorship, $36,500.
D.for either a corporation or a proprietorship, $23,760.
The term structure of interest rates or yield curve is the pattern of interest rate yields for
debt securities that are similar in all respects except for differences in:
A.tax status.
B.liquidity.
C.risk of default.
D.term or maturity.
Webley Corp. issued a $1,000 bond at a coupon rate of 12%. The bond has 30 years
remaining, until maturity. Comparable bonds are yielding 8%. What should Webley’s
bond sell for today? (Round to nearest $)
A.$878
B.$932
C.$1,147
D.$1,381
E.$1,452
Assume that you have just won $5,000,000 in the lottery and will receive $250,000 per
year for the next 20 years. How much is your prize worth today if the interest rate is
8%?
A.$1,072,731
B.$2,454,525
C.$2,185,219
D.$1,165,250
Which of the following statements is correct?
A.The market value of a bond will always approach the bond’s maturity price as
maturity approaches, even if the firm is insolvent.
B.Bond prices and interest rates always move in the same direction.
C.The yield to maturity will always be the coupon yield.
D.None of the above
A bond that pays no coupons and matures in ten years will ____.
A.sell at a premium if the market interest rate decreases
B.sell at a premium if the market interest rate increases
C.sell at par prior to maturity
D.always sell at a discount prior to maturity assuming the market rate of interest is
above zero
A company can raise money to purchase assets by:
A.borrowing money.
B.issuing stock.
C.using money earned.
D.Both a & b
E.All of the above
Which of the following if the correct mathematical expression of the degree of financial
leverage (DFL)?
A.DFL = %EBT / %EPS
B.DFL = %EBIT / %EPS
C.DFL = %EPS / %EBIT
D.DFL = %EPS / %EBT
The most recent dividend was $2.50, the anticipated constant growth rate is 4%, the
selling price today is $28 per share, and flotation costs are 18%. What is the cost of
retained earnings?
A.15.3%
B.14.9%
C.12.9%
D.13.3%
Which of the following describes the relationship between changes in market interest
rates and the market value of bonds?
A.When interest rates increase, bond prices increase.
B.When interest rates decrease, bond prices decrease.
C.When interest rates increase, bond prices decrease.
D.When interest rates decrease, bond prices increase.
E.Both c. and d. are correct.
The most common example of abuse of the agency relationship is:
A.management’s compensation and perquisites.
B.managers working long hours.
C.breach of fiduciary responsibilities.
D.gross disregard of bondholders’ interests.
Which of the following changes would result in higher receivables?
A.Tightening credit policy
B.An increase in the net period of the terms of sale
C.An increase in the prompt payment discount offered
D.All of the above
If the IRR of a project is equal to the discount rate of the project then ____.
A.the PI is zero
B.the payback period is zero
C.the NPV is zero
D.the present value payback period is zero
A stock has a current dividend of $0.32 with a growth rate of 8% annually. Assuming a
10% annual discount rate, what should the price of the stock be one year from today?
A.$18.66
B.$16.00
C.$17.28
D.$3.20
The cost of capital is:
A.related to the average rate of return required by investors in the firm’s securities.
B.the minimum rate of return the firm should require on capital budgeting projects of
average risk.
C.approximately 10 percent for most firms.
D.a and b
A positive NPV implies an:
A.unacceptable project on a stand-alone basis.
B.the best project available.
C.unacceptable project base on its future inflow.
D.acceptable project on a stand-alone basis.
Given the following balance sheets for Joshua Trucking answer the next five questions.
Joshua Trucking’s net income was $12 million. It paid out $10 million in dividends. All
numbers are in millions.
1> What is Joshua Trucking’s cash flow from operations?
2> What is Joshua Trucking’s cash flow from investing activities?
3> What is Joshua Trucking’s cash flow from financing activities?
4> What is Joshua Trucking’s net cash flow?
5>What is Joshua Trucking’s return on equity?
Why don’t hostile takeovers create feuds between the stockholders of the companies
involved?
The Morrison Company has $1.5 million in excess cash it wishes to distribute to
shareholders.
Selected financial information is as follows:
If Morrison chooses to distribute the cash through a stock repurchase and the
price-earnings ratio doesn’t change through the transaction, what will be the market
price of the stock after the shares are acquired?
If it makes tax sense to finance businesses with debt, why do firms typically borrow
less than half of their capital, i.e., what are the negatives of debt financing?
The projected cash flows for two mutually exclusive projects are as follows:
If the cost of capital is 10%, does the equivalent annual annuity method give a clear
indication of which project should be undertaken? Calculate the EAAs for both projects
and comment on the result
Why would a bondholder of a convertible bond exchange its relatively certain stream of
cash payments for stock which has no assurance of dividends?
Contrast the merger negotiations in a friendly merger and a hostile merger.