A firm has a product that sells for $25. The direct cost of manufacturing the product is
$15 per unit. The product’s contribution margin is:
A.$10.
B.40%.
C.60%.
D.67%.
Retained earnings are:
A.the only internally generated capital source.
B.the least expensive source of capital because they’re not subject to administrative
expenses.
C.free to the company because they come from ordinary operating earnings.
D.All of the above
Blackstone, Inc. is considering expanding 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 $50,500 and now has a market value of $106,900. Assuming a tax rate of
20%, calculate the opportunity cost of the land.
A.$95,620
B.$79,460
C.$56,040
D.$11,280
When interest rates change, bond yields adjust through:
A.changes in present value of the principal.
B.changes in price.
C.changes in the term to maturity.
D.changes in the coupon payment.
Which of the following is usually the lowest?
A.After-tax cost of debt
B.Before-tax cost of debt
C.Cost of preferred stock
D.Cost of common stock
E.Marginal cost of capital
The following tax schedule applies to an individual. Her taxable income is $40,000.
How much is her total tax?
10% of the first $10,000
15% of the next $15,000
25% of the next $10,000
35% of the next $20,000
A.$8,500
B.$10,000
C.$7,500
D.$7,000
Cash beyond the firm’s typical needs that is available for distribution to common
shareholders is called “free cash flow” and consists of the following:
A.net cash flow of the firm.
B.net cash flow after payment of dividends.
C.net cash flow less certain cash reinvested to keep the business competitive.
D.net cash flow plus depreciation.
When a firm’s cost structure consists principally of fixed costs,:
A.it is said to have a great deal of operating leverage.
B.those costs consist of rent, depreciation, direct labor, management salaries, direct
materials, and utilities.
C.the firm might be a factory with many people and few machines.
D.All of the above
In a merger, the minimum total price acceptable to the target’s shareholders is:
A.more than the pre-merger value of the firm.
B.the additional value created by the merger in the eyes of the acquirer.
C.the pre-merger value of the firm.
D.b plus c
E.None of the above
Seasonal working capital needs are best financed by:
A.short-term loans.
B.sales of long-term debt.
C.forgoing dividend payments.
D.selling inventories.
You have borrowed $130,000 to buy a new motor home. Your loan is to be repaid over
15 years at 8% compounded monthly. If you pay an extra $200 per month on the motor
home, how many years will it take to pay off the loan?
A.10.3 years
B.11.5 years
C.12.8 years
D.13.3 years
Your uncle promises to give you $550 per quarter for the next five years starting today.
How much is his promise worth right now if the interest rate is 8% compounded
quarterly?
A.$9,173.14
B.$13,363.57
C.$13,630.84
D.$8,993.27
Which of the following is true of financial leverage?
A.It affects the sensitivity of net income to changes in sales.
B.It arises from the use of debt financing.
C.It is increased by an increase in operating leverage.
D.a and b
The use of fixed cost sources of funds, such as debt and preferred stock, affect a firm’s:
A.financial risk.
B.degree of operating leverage.
C.market power.
D.business risk.
Once a bond has been issued, if the holder of the bond retains it until maturity:
A.the market value of the bond may change, but the cash flows will not.
B.the cash flows associated with the bond may change, but the market value will not.
C.both the market value of the bond and the cash flows may change.
D.neither the market value of the bond or the cash flows will change.
Which of the following S&P rating(s) would be considered investment grade?
A.BBB
B.BB
C.B
D.Both a and b
E.None of the above
A combination in which all of the combining companies are dissolved and a new firm is
formed is a:
A.holding company.
B.leveraged buyout.
C.consolidation.
D.composition.
Which of the following arises because long-term bond prices change more with interest
rate movements than short-term bond prices?
A.Liquidity risk
B.Maturity risk
C.Default risk
D.Inflation risk
A portfolio is a collection of:
A.all risk-free assets in the market.
B.financial and non-financial assets in the market.
C.investment assets held by an investor.
D.financial assets and liabilities of a company.