The proprietorship form of organization gives the business owner the protection of
limited liability.
Basic overheads are usually considered fixed and left out of project analysis.
Replacement projects are generally expected to save costs without generating new
revenue, so the estimating process tends to be somewhat less elaborate.
The return on capital employed (ROCE) measures performance without regard to
capital structure.
Wealth Taxes are levied by cities and counties on the value of real estate. They are also
called ad valorem taxes.
At a 0% interest the present value factor for an annuity is equal to the number of
payments in the annuity.
In the MM model, the value of the interest tax benefit arising from the tax-deductibility
of interest cannot be readily measured.
An inverted yield curve:
A.exists when short-term interest rates are higher than long-term interest rates.
B.exists when long-term interest rates are higher than short-term interest rates.
C.is also known as a normal yield curve.
D.Both a & c
E.Both b & c
The internal rate of return method assumes that the cash flows over the life of the
project are reinvested at:
A.the risk-free rate.
B.the firm’s cost of capital.
C.the computed internal rate of return.
D.the market capitalization rate.
Which of the following does not appear on the income statement?
A.Cost of Goods Sold
B.Depreciation Expense
C.Accumulated Depreciation
D.Earnings Before Interest and Tax
E.Gross Margin
An investor desires to earn a real interest rate of 6%. If the expected rate of inflation is
5%, what nominal rate of interest would the investor set on a loan if all risk premiums
are zero?
A.8%
B.9%
C.10%
D.11%
E.12%
Your local bank offers 4-year certificates of deposit (CDs) 12 % compounded quarterly.
How much additional interest will you earn over 4 years on a $10,000 CD that is
compounded quarterly, compared with one that is compounded annually?
A.$6,050
B.$0
C.$312
D.$220
Hamming & Heim Corp’s capital of $3,000,000 is currently 100% equity. For the
coming year, they are forecasting that earnings before interest and tax (EBIT) will be
$1,240,000. The firm’s stock is selling at its book value of $12 per share.
Hamming & Heim is considering restructuring capital by buying back its own stock
with cash raised by issuing debt until it reaches a capital structure that’s 40% debt. The
firm will pay 10% interest on any debt issued for this purpose. Assume there is no
change in EBIT as a result of the capital structure change and that the tax rate is 40%.
a. How many shares of stock does Hamming & Heim need to repurchase in order to
achieve the target capital structure of 40% debt and 60% equity?
b. What is Hamming & Heim’s Degree of Financial Leverage (DFL) after implementing
the refinancing plan? (round to the nearest two decimal places)
c. What was Hamming & Heim’s Return on Capital Employed (ROCE) before
implementing the refinancing plan?
d. Will the restructuring improve the firm’s ROE and EPS performance?
The term “yield” is synonymous with the _____ of a security.
A.maturity
B.payout ratio
C.rate of return
D.par value
Match the following:
1>Translation loss A. An exchange rate quoted for delivery of a currency at
a future date
2>Indirect quote B. Rates established by treaty after WWII under which
nations agreed to maintain constant exchange rates with the US dollar
3>Forward exchange rate C. Results when a foreign subsidiary’s financial
statements are consolidated into U.S. dollars after the dollar has strengthened against
the foreign currency
4>Fixed exchange rates D. The number of units of a foreign currency needed to
buy one U.S. dollar
Which of the following is a FALSE statement?
A.Future values and interest rates move in the same direction.
B.The EAR is generally less than the nominal or quoted rate of interest.
C.Compounding means earning interest on interest.
D.Future values decrease with decreases in interest rates
Holding cash for which of the following reasons is an example of transactions demand?
A.Purchase of inputs in response to an abrupt price drop
B.Acquisition of raw material for an emergency demand
C.Immediately producing a new batch of product to replace goods damaged by a flood
D.Payments to tax authorities
Which of the following securities would not be selected?
A.Security A: Expected return: 14%, Standard deviation: 14%
B.Security B: Expected return: 10%, Standard deviation: 12%
C.Security C: Expected return: 11%, Standard deviation: 10%
D.Security D: Expected return: 9%, Standard deviation: 0%
You have borrowed $10,000 to pay off your Spring Break trips. You plan to make
monthly payments over a 10-year period. If the loan’s interest rate is 10% compounded
monthly, how much interest will you pay over the life of the loan?
A.$2,195
B.$3,753
C.$5,856
D.$6,987
Rush and Grubb, a manufacturing concern, has a dividend payout ratio of 40%. If the
company has a net income of $150,000 and 80,000 outstanding shares of stock, what
dividend will be paid on each share of stock?
A.$0.750
B.$1.125
C.$1.875
D.$3.125
E.$4.688
Assume a firm has a beginning inventory of $30,000 and an ending inventory of
$50,000. The result of applying the preferred formulation for calculating its inventory
turnover is 3.0. However, when the sales formulation is used, the result is 5.0. The
firm’s gross profit is:
A.$200,000.
B.$80,000.
C.$40,000.
D.$120,000.
Christy would like to improve the current ratio of her firm, which is now .5, so that she
will have a better chance of obtaining a working capital loan. Which of the following
options would improve her current ratio?
A.Use cash to pay off notes payable
B.Collect some of her accounts receivables
C.Purchase additional inventory on credit
D.Borrow short-term funds to pay off some payables