It is appropriate that the WACC reflect historic costs of capital as the best estimate of
what capital will cost during the coming period.
The DFL quantifies the effect of leverage, but it can also be thought of as a measure of
financial risk.
If an American firm owns property in another country, and that country’s currency
strengthens against the dollar, the firm will incur a translation loss on its consolidated
books.
The fact that dividends are discretionary means that companies are entirely free to pay
whatever dividends they want.
If a project requires a plant addition that replaces an existing structure, then the cash
inflow from the disposal of the existing structure must be counted as part of the
project’s initial outlay.
An unfriendly merger or hostile takeover occurs only when one of two bitterly
competitive rival firms acquires the other.
Capital budgeting involves planning and justifying how money is spent on short-term
items like inventory, and payroll as well as on long-term projects such as new business
ventures, equipment replacement, and expansion.
An assumption implicit in the net present value technique is that all cash flows are
reinvested at the cost of capital.
The clientele effect supports the treatment of dividends as a residual.
To determine a firm’s WACC, it is necessary to compensate for the effect of:
A.transaction costs associated with doing business in financial markets.
B.the tax implications of debt.
C.None of the above
D.Both a and b
Which of the following is not true concerning privately held companies?
A.Generally does not have a large number of shareholders.
B.Cannot make sales solicitations across state lines.
C.Sales are severely restricted by federal regulation.
D.Stock cannot be sold to anyone other than current stockholders.
Seabee makes quarterly (end of period) payments of $30,000 into a pension fund
earning 12 percent compounded quarterly for 10 years. How much interest will have
been earned in 10 years?
A.$2,262,030
B.$2,105,880
C.$905,880
D.$1,062,030
A merger may be stopped if a majority of the target’s stockholders _____the price
offered by the acquiring company.
A.reject
B.accept
C.negotiate
D.ignore
“We have the space and the staff for this new project. They won’t cost us a penny.” Such
a statement seems to ignore the concept of:
A.sunk costs.
B.costs in other parts of the company.
C.fixed costs.
D.opportunity costs.
E.depreciation not taken.
J&J Manufacturing is considering a project with the following cash flows. Calculate the
payback period of the project.
A.1.2 years
B.2.2 years
C.3.2 years
D.4.2 years
A stock’s beta measures:
A.its performance.
B.market risk.
C.volatility in the overall market.
D.its return on investment.
Economists forecast the following inflation rates for the next four years
What inflation adjustment should be included in the interest rate on a four-year loan
made today?
A.3%, because that’s the rate at the time the loan is made and borrowers won’t pay any
more
B.6%, because that’s the rate that will exist when the loan is repaid and the lender can
loan the money out again
C.4.5%, because that’s the average expected inflation rate over the life of the loan
D.at least 7%, because the lender needs to protect itself from unexpectedly high
inflation rates
An effective program of working capital management requires that:
A.the firm run with the absolute minimum in each current asset account.
B.a series of cost/benefit tradeoffs be considered because running a business is easier
with more working capital than with less, but holding working capital costs money.
C.large inventories be maintained to adequately service customers.
D.credit can be easily granted to customers to encourage higher sales.
Assume a firm has declared a 10% stock dividend on its 1.5 million shares of
outstanding $3 par value common stock. If the market value of the stock at the date of
the stock dividend is $10 per share and the retained earnings account balance just
before the dividend was $2,600,000, what is the retained earnings balance after the
dividend?
A.$2,450,000
B.$1,100,000
C.$1,500,000
D.$2,150,000
If recent direct quotes in U.S. dollars are $1.65 for the British pound and $.50 for the
Australian dollar, the exchange rate between British pounds and Australian dollars
(pounds/Australian dollars) is:
A.3.30 Australian dollars to the British pound.
B.3.30 British pounds to the Australian dollar.
C..3030 Australian dollars to the British pound.
D..3030 British pounds to the Australian dollar.