The cost of capital is the appropriate discount rate in capital budgeting when:
A.all the projects are equally risky.
B.all the projects have the same risk as the current firm.
C.the projects can be ranked from riskiest to least risky.
D.all the projects have less risk than the risk of the current firm.
According to Value Line, Bestway has a beta of 1.15. If 3-month Treasury bills
currently yield 7.9 percent and the market risk premium is estimated to be 8.3 percent,
what is Bestway’s cost of retained earnings?
A.17.45%
B.8.36%
C.9.55%
D.None of the above
In general, the greatest economies of scale are possible with ____ mergers.
A.conglomerate
B.vertical
C.horizontal
D.integrated
Which of the following is true of the fourth wave of mergers from 1981 to 1989?
A.It was characterized as a period of congeneric mergers and hostile takeovers the
mergers of very large companies.
B.It reflected the globalization of businesses.
C.It was characterized by private equity groups buying up companies for purely
financial reasons.
D.It was characterized by conglomerate mergers.
Use the following information to calculate the interest rate on an eight-year bond just
issued by Becher Inc.
Inflation: next two years = 2.5%
year 3 and beyond = 4.5%
Pure Rate = 2.0%
Maturity Risk Premium = zero for a 1-year maturity, increasing by 0.1% each year
thereafter
Default Risk Premium = 1.5%
Liquidity Risk Premium = 0.0% for treasuries; 0.5% for corporate bonds
A.7.7%
B.8.2%
C.8.7%
D.9.2%
E.9.4%
Assume the following selected financial information about a firm that is about to
restructure capital by exchanging equity for debt:
a. If the firm operates in the world of the Modigliani-Miller model with taxes but
without bankruptcy costs what would be the market value of its equity after the
restructuring?
b. By how much would the firm’s total value and therefore shareholder wealth increase
as a result of the swap? Explain.
c. Would we be able to answer the questions in part a and b precisely in the MM model
with taxes and bankruptcy costs? Why?
The principle behind time value of money is based on the fact that:
A.a sum of money in hand today is worth more than the same sum in the future.
B.a sum of money in hand today is worth less than the same sum in the future.
C.a sum of money in the future is worth less than the same sum in hand today.
D.a and c
Net working capital is defined as:
A.current assets minus current liabilities.
B.working capital minus short-term debt.
C.current assets plus current liabilities.
D.All of the above
Which of the following is not a method for incorporating risk analysis into capital
budgeting?
A.Positive/Negative analysis
B.Monte Carlo simulations
C.Scenario analysis
D.Sensitivity analysis
E.Decision tree models
Most Eurobonds are denominated in:
A.American dollars.
B.British pounds.
C.European euros.
D.Swiss francs.
If $10,000 is received and deposited at 10% at the end of each of the next six years,
how much will be in the account after the last payment is deposited?
A.$96,000
B.$77,156
C.$43,553
D.$87,355
According to the Modified Accelerated Cost Recovery System (MACRS), automobiles
are to be placed with other assets that have a five-year class life. Assume Dallmeyer
Digital bought a car in December 2004. What would be the last year in which it would
take recognize depreciation on the vehicle?
A.2004
B.2009
C.2010
D.2011
The usefulness of ratios is enhanced by comparisons. The most common comparisons
are:
A.history, national performance measures, and budget.
B.history, competition, and budget.
C.history, stock market indexes, and competition.
D.competition, budget, and internal financing sources.
Haverty Corp’s bonds are selling to yield new investors a return of 9%, while its
preferred stock is yielding 11%. Flotation costs are 10% of the proceeds of new issues
sold to the public, and the firm’s tax rate is 40%. The company just paid a dividend of
$2.00 and is expected to grow at 6% indefinitely. Its stock is selling for $21.20.
Most firms choose accelerated depreciation for tax accounting because:
A.reported net income is higher.
B.tax payments are made sooner, resulting in a lower deferred tax liability.
C.operating expenses are correspondingly reduced.
D.income taxes are deferred.
List the following types of bonds in order of interest rates from low to high, all other
factors being equal: Subordinated debt; Senior debt; Senior debt that is also convertible
A.Subordinated, Senior, Convertible
B.Senior, Convertible, Subordinated
C.Convertible, Senior, Subordinated
D.Convertible, Subordinated, Senior
E.Senior, Subordinated, Convertible
When is a second break in the MCC likely to occur?
A.As the stock gets continually harder to sell.
B.When debt gets more expensive with increasing financial risk.
C.Never, the MCC generally only breaks once.
D.Somewhat later, but breaks after the first are irrelevant because they’re beyond the
IOS.