The dividend controversy is whether paying or not paying dividends affects stock price.
Evaluating several possible cash flow scenarios gives a feel for variability of a project’s
NPV.
Commercial failure (as opposed to economic failure) is an issue between a business and
its owners rather than its creditors.
The Treasurer is usually the executive in charge of the finance department in a large
corporation.
Companies generally don’t have to pay dividends, but if they have always done so in the
past and stockholders invested because of that history, a legal case can be made to force
payment even if earnings are depressed.
Financing costs such as interest costs should be included in the cash flow estimates for
evaluating a project.
Accounts payable is listed as a liability and therefore, by definition, requires the
payment of interest by the borrower.
Risk in finance is defined as the variability of return.
A firm with an aggressive expansion policy would seek investors who favor income
generated by the cash stream of dividends rather than investors who favor income
through capital appreciation.
If the degree of operating leverage is 1.3 and the degree of financial leverage is 1.7, the
degree of total leverage is 3.0.
A low turnover figure can mean some old inventory is on the books that isn’t being
used.
Indirect planning assumptions are made about specific physical or economic items such
as revenues, the market for product, or capital expenditures. Direct planning
assumptions, on the other hand are usually based on financial ratios.
Because the statement of cash flows derives its information from the balance sheets of
the firm, it can be referred to more formally as the statement of changes in net working
capital.
The certainty equivalent approach uses the cost of capital as the appropriate discount
rate.
____ involves selecting projects subject to a funding limitation.
A.Capital Budgeting
B.Capital Rationing
C.Cost of Capital
D.Capital Financing
Depreciation:
A.does not affect cash flows.
B.does not affect profits.
C.is not a cash outflow.
D.is a cash inflow.
A new project will increase inventory and accounts receivable by an average of $1
million each. Cash levels and other working capital accounts are expected to not
change. What effect will the project have on working capital?
A.Working capital increases by $2 million.
B.Working capital increases by $1 million.
C.Working capital is unaffected.
D.Working capital decreases by $1 million.
Sunk costs are:
A.outlays that have already made and that would not affect future decisions.
B.similar to opportunity costs.
C.fixed costs that must be included in the project’s cash flows.
D.variable costs that must be included in the project’s cash flows.
E.the deciding factor in most project decisions.
The main criticism of the Payback method is:
A.it doesn’t use time value.
B.it ignores cash flows after the payback is reached.
C.it assumes that inflows can be reinvested at the internal rate of return.
D.a and b
Dividend payments reduce all of the following balance sheet items except;
A.cash.
B.fixed assets.
C.stockholder’s equity.
D.retained earnings.
Which of the following apply to an S-type corporation?
A.Double taxation of earnings
B.Taxation similar to a partnership
C.Can be owned by another corporation
D.None of the above
To be acceptable to the acquirer, the total premium paid must be:
A.exactly the pre-merger value of the target firm.
B.zero.
C.no greater than the additional value to the acquirer created by the merger.
D.negative.
E.None of the above
Henderson Inc. is forecasting sales of $24,000. What ACP must it achieve to keep its
receivables at about $1,000?
A.10 days
B.15 days
C.20 days
D.30 days
“Mr. Stone, I must say you are making a mistake. I know you have spent $6,000 on
research and development to develop this project, but that money must not be used as a
negative cash flow of the project.” Apparently, Mr. Stone does not understand the
concept of:
A.side-effect costs.
B.opportunity costs.
C.sunk costs.
D.variable costs.
E.depreciation not taken.
Rent2U, Inc. is considering expanding their operations. The company owns a lot near
the present facility on which a new building can be constructed. The land was
purchased 10 years ago for $75,000 and now has a market value of $180,000. Assuming
a tax rate of 20%, calculate the opportunity cost of the land.
A.$84,000
B.$105,000
C.$159,000
D.$180,000
Last year, Monroe Products had $25,000 net cash provided by its operating activities.
Its investing activities used $30,000, and its financing activities provided $10,000. Its
cash balance at the beginning of the year was $15,000. By how much did Monroe’s cash
balance increase?
A.$10,000
B.$0
C.$5,000
D.None of the above
If the present value of a perpetuity is $6,000 and the discount rate is 8%, how large are
the payments?
A.$60,000
B.$750
C.$480
D.$1,000
E.$75,000
Inflation, war, political upheaval, and other broad economic events cause:
A.business specific risk.
B.diversifiable risk.
C.non-diversifiable unsystematic risk.
D.market risk.
The security market line can be thought of as expressing relationships between required
rates of return and:
A.the time value of money.
B.beta which reflects market risk.
C.total risk.
D.portfolio diversification.
If the firm’s total equity is $600,000, its long-term debt is $300,000, and its current
liabilities are $100,000, then its debt to equity ratio is:
A.3:1.
B.2:1.
C.1:1.
D.None of the above
If after a repurchase, there is a reduction in the market price of the remaining shares:
A.value is passed to those shareholders who sold at the expense of those who didn’t.
B.value is passed to the continuing shareholders at the expense of management.
C.value is passed to those shareholders who sold at the expense of management.
D.value is passed to the continuing shareholders at the expense of those who sold.
A security’s value is equal to:
A.the book value of the firm.
B.the book value of the firm divided by number of shares.
C.the future value of its expected cash flows.
D.the present value of its expected cash flows.