Which one of the following statements related to the static theory of capital structure is
correct?
A. A firm begins to lose value as soon as the first dollar of debt is incurred.
B. The actual value of a firm continually rises in direct proportion to the increased use
of debt.
C. The linear function of a firms value has a constant positive slope.
D. A firms value is maximized when a firm operates at its optimal debt level.
E. The value of a firm will automatically decrease whenever the debt-equity ratio is
decreased.
What is the payback period for a project with the following cash flows?
A. 2.56 years
B. 2.89 years
C. 3.17 years
D. 3.74 years
E. never
The Brown Squirrel has the following estimated sales:
The accounts receivable period is 60 days. How much should the firm expect to collect
in April?
A. $18,600
B. $19,900
C. $21,200
D. $21,450
E. $24,300
What is the net present value of the following cash flows if the relevant discount rate is
8.0 percent?
A. $1,482.15
B. $4,529.59
C. $23,507.19
D. $54,211.40
E. $71,402.02
What is the effective annual rate of 10 percent compounded semiannually?
A. 10.21 percent
B. 10.25 percent
C. 10.35 percent
D. 10.38 percent
E. 10.42 percent
Johns has common stock outstanding at a price of $27 a share. The total market value of
the equity is $435,000. How many shares of stock will be outstanding if the firm does a
2-for-5 reverse stock split?
A. 40,278 shares
B. 36,000 shares
C. 6,444 shares
D. 7,500 shares
E. 16,500 shares
Which one of the following statements is accurate for a levered firm?
A. WACC should be used as the required return for all proposed investments.
B. A firms WACC will decrease whenever the firms tax rate decreases.
C. An increase in the market risk premium will decrease a firms WACC.
D. The subjective approach totally ignores a firms own WACC.
E. A reduction in the risk level of a firm will tend to decrease the firms WACC.
The Berry Patch has sales of $438,000, cost of goods sold of $369,000, depreciation of
$37,400, and interest expense of $13,800. The tax rate is 35 percent. What is the times
interest earned ratio?
A. 2.29
B. 3.46
C. 3.87
D. 4.38
E. 4.79
Textiles Unlimited has gathered projected cash flows for two projects. At what interest
rate would the company be indifferent between the two projects? Which project is better
if the required return is above this interest rate?
A. 11.76 percent; A
B. 12.49 percent; A
C. 12.49 percent; B
D. 13.15 percent; A
E. 13.15 percent: B
New Gadgets is growing at a very fast pace. As a result, the company expects to pay
annual dividends of $0.55, 0.80, and $1.10 per share over the next three years,
respectively. After that, the dividend is projected to increase by 5 percent annually. The
last annual dividend the firm paid was $0.40 a share. What is the current value of this
stock if the required return is 16 percent?
A. $8.50
B. $9.67
C. $10.46
D. $12.23
E. $12.49