The single most significant reason for an investor to hold a stock that pays no dividends
is that favorable tax implications are associated with appreciation in value and capital
gains.
If a company truly never paid a dividend, there would be no way for the investing
community as a whole to ever get a return on its investment. It would therefore not
make sense to invest in the firm’s stock.
The three components of an interest rate are the base rate (the pure rate plus an inflation
adjustment), the risk premium, and the premium the consumer must get to defer
consumption.
The main advantage of commercial paper is that its maturity is longer than that of a
bank loan.
The mix of capital components in use by a company at a point in time is known as its
capital structure. This capital structure is generally described in terms of percentages
referring to the relative sizes of the components.
If money has a time value, then the future value of an investment will always be more
than the original amount invested and the present value of an investment will always be
less than the anticipated future sum of money.
Commercial paper is similar to a bond, except that it is sold at a discount rather than
having coupon payments and has a maturity of 9 months or less.
The value the market assigns to a firm’s securities is a function of the expected cash
flows that come from owning the securities and the risk of actually receiving those cash
flows.
In firms of moderate size or larger, the finance department is typically relieved of the
“watchdog” responsibility of monitoring the efficient use of money by other
departments.
Junk bonds became popular in the 1980s based on the idea that high risk firms failed
only slightly more often than low risk firms.
The first break in the MCC is usually found by dividing planned retained earnings by
the proportion of equity in the capital structure.
The expectations theory is a refinement of the signaling effect which states that
investors will be disappointed by and will react negatively to a dividend increase that’s
smaller than expected.
Markets in which information travels quickly and is immediately reflected in prices are
called:
A.informed markets.
B.quick markets.
C.liquid markets.
D.efficient markets.
If a stock return is expected to be the same as the expected return on the market, the
stock’s CAPM beta is ____.
A.0.0
B.0.5
C.1.0
D.undefined
A thirty-year bond would be initially issued in which market(s)?
A.Capital market
B.Primary market
C.Secondary market
D.Both a and b
Interest rates and stock prices move:
A.randomly exhibiting no causal relationship.
B.in opposite directions.
C.up and down together.
D.None of the above
Characteristics of accruals as a source of financing include:
A.spontaneous.
B.costless.
C.non-controllable by financial manager.
D.a and c
E.All of the above
Conflicting arguments continue as to the impact of dividend policy to stock price.
Which of the following theories or arguments is most valid?
A.Dividend Irrelevance Theory
B.The “Bird in the Hand” theory
C.The Dividend Preference Argument
D.All are valid under certain conditions
To reduce or eliminate exchange rate risk, international buyers usually hedge future
payments with:
A.spot rates.
B.forward rates.
C.forward contracts.
D.negotiations with the seller.
Use the following information for questions 8-a through 8-c. You have been asked to
evaluate the purchase of a new machine for your company. It will cost $60,000, and it
falls into the MACRS 3-year class (Yr. 1 – 33.3%; Yr. 2 – 44.4%; Yr. 3 – 14.8%; Yr. 4 –
7.5%). The purchase will require a $6,000 increase in repair parts inventory. Parts are
expensed for tax purposes at the time they are acquired. The machine will replace one
$25,000/year operator. It is expected to last for four years when it can be sold including
any spare parts still on hand for $5,000. The tax rate is 40% and your company’s cost of
capital is 12%.a. What is the initial outlay for this project?
a. $46,000
b. $48,000
c. $54,000
d. $60,000
e. $66,000b. What is the (operating) cash flow in Year 2?
a. $10,656
b. $15,000
c. $25,656
d. $26,640
e. $41,640c. What is the cash flow in year 4?
a. $30,000
b. $18,000
c. $17,000
d. $19,800
e. $11,000
The most common term for a consumption tax is:
A.wealth tax.
B.progressive tax.
C.sales tax.
D.income tax.
Which of the following states the component cost preferred stock? (f is the flotation
cost percent, D is the annual preferred dividend, and k is the preferred’s market yield on
the preferred stock?
A.D / [1 – f]
B.D / [k + f]
C.k / [1 + f]
D.k / [1 – f]
The more frequent the compounding the:
A.greater the present value.
B.greater the amount deposited.
C.greater the effective interest rate.
D.lower the future value.
Financial leverage involves substituting debt for equity in the firm’s capital structure,
operating leverage involves:
A.substituting variable costs for fixed costs in the firm’s cost structure.
B.substituting fixed costs for variable costs in the firm’s cost structure.
C.increasing financial risk.
D.None of the above
A firm has a previous debt issue on its balance sheet that pays coupons of 8% annually.
Newer bonds with equivalent maturity would have 10% annual coupons in order to sell
at par value. Based on this information, which statement is true?
A.The existing bonds would sell for more than par value.
B.The WACC calculation should use 8% as the cost of debt.
C.The WACC calculation should use a value higher than 10% as the cost of debt.
D.The existing bonds would sell at discount.
Designs Now is opening a showcase office to display and sell its computer designed
poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the
second year, $240,000 in the third year. If Designs uses 11 percent as its discount rate,
what is the present value of the cash flows?
A.$429,720
B.$457,620
C.$456,000
D.$424,820
Lender control over borrower use of pledged inventory is greatest under which of the
following financing arrangements?
A.Warehouse receipts
B.Floating lien
C.Trust receipts
D.Lender control is equal under all of the above.
A use of cash would be generated by which of the following?
A.An increase in accounts receivable
B.A decrease in inventory
C.An increase in accounts payable
D.An increase in accrued expenses
Which of the following is not part of the cash conversion cycle?
A.Receivable
B.Sale
C.Inventory
D.none of the above