Archives: Quiz

39 21) Cyberco Corporation has 5 million shares of stock outstanding. Cyberco’s after-tax profits are $15 million and the corporation’s stock is selling at a price-earnings multiple of 10, for a stock price of $30 per share. Cyberco management issues […]

31 31) The final approval of a dividend payment comes from A) the controller. B) the president of the company. C) the board of directors. D) It is a joint decision requiring approval from all of the above. Answer: C […]

21 Copyright © 2017 Pearson Education, Inc. 75) What is the information effect associated with dividends? Why does it occur? Keywords: Information Effect, Dividend Policy Learning Obj.: L.O. 13.2 AACSB: Reflective Thinking 76) A corporation decides to cut its dividend […]

11 Copyright © 2017 Pearson Education, Inc. 43) Low dividends may increase stock value according to the A) bird-in-the-hand theory. B) information effect. C) impact of agency costs. D) tax bias in favor of capital gains. Keywords: Tax Bias Learning […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 13 Dividend Policy and Internal Financing Learning Objective 13.1 1) Dividends per share divided by earnings per share equal the dividend payout ratio. Answer: TRUE Diff: 1 Page Ref: 445 Keywords: Dividends Per […]

31 27) The Modigliani and Miller hypothesis suggests that capital structure doesn’t matter. All of the following conditions need to be met for this hypothesis to be true EXCEPT A) corporate income is not subject to taxation. B) capital structure […]

21 22) ACME, Inc. reported the following income statement for 2009: Sales $2,500,000 Variable Costs 900,000 Fixed Operating Costs 700,000 EBIT 900,000 Interest Expense 200,000 EBT 700,000 Taxes (30%) 210,000 Net Income $490,000 Earnings Per Share $4.90 If ACME’s sales […]

11 33) Rogue Tire Masters has fixed costs of $220,000. Tires sell for $95 each and have a unit variable cost of $45. What is Rogue’s break-even point in units? A) 4,000 B) 4,400 C) 5,200 D) 5,500 Answer: B […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 12 Determining the Financing Mix Learning Objective 12.1 1) Business risk refers to the relative dispersion of a firm‘s earnings before interest and taxes. Answer: TRUE Diff: 1 Page Ref: 408 Keywords: Business […]

40 Copyright © 2017 Pearson Education, Inc. 10) If the cash flows of an accepted investment project are negatively correlated with the average cash flow of the firm’s existing assets, then the company‘s total exposure to risk can decrease. Keywords: […]

31 73) Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much energy to run. The industrial size oven will cost $1,200,000. The oven will be depreciated on a straight-line basis […]

21 48) Which of the following are included in the terminal cash flow? A) the expected salvage value of the asset B) any tax payments or receipts associated with the salvage value of the asset C) recapture of any working […]

11 8) If the increase in net working capital is recovered entirely at the end of the project, then it may be ignored. Answer: FALSE Diff: 1 Page Ref: 373 Keywords: Net Working Capital, Recovery of Net Working Capital Learning […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 11 Cash Flows and Other Topics in Capital Budgeting Learning Objective 11.1 1) Accounting profits are used to make capital budgeting decisions because generally accepted accounting principles ensure that profits are the best […]

38 17) Mutually exclusive projects occur when A) projects have uneven cash flows. B) more than one firm can use the projects. C) a set of investment proposals perform essentially the same task. D) projects are independent. Answer: C Diff: […]

31 2) The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required. Answer: TRUE Diff: 1 Page Ref: 348, 349 Keywords: Profitability Index, Capital Rationing Learning Obj.: L.O. 10.3 AACSB: Reflective Thinking […]

21 88) Design Quilters is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 If the appropriate discount rate is 11.5%, compute the […]

11 56) Which of the following statements is MOST correct? A) If a project’s internal rate of return (IRR) exceeds the required return, then the project‘s net present value (NPV) must be negative. B) If Project A has a higher […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 10 Capital-Budgeting Techniques and Practice Learning Objective 10.1 1) Free cash flows represent the benefits generated from accepting a capital-budgeting proposal. Answer: TRUE Diff: 1 Page Ref: 327 Keywords: Capital Budgeting, Free Cash […]

30 Copyright © 2017 Pearson Education, Inc. 29) Office Clean Corporation has a capital structure consisting of 30 percent debt and 70 percent common equity. Assuming the capital structure is optimal, what amount of total investment can be financed by […]

21 68) The cost of common equity financing is more difficult to estimate than the costs of debt and preferred equity. Explain why. Answer: Common equity is unique in two respects. First, the cost of common equity is more difficult […]

11 33) Johnson Production Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of KayCee’s common stock today is $40 per share. If KayCee […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 9 The Cost of Capital Learning Objective 9.1 1) In order to create value, a corporation must earn a rate of return on its invested capital that is higher than the market’s required […]

27 46) Castle, Inc. paid a dividend yesterday of $2 per share. Castle management expects the dividend to increase next year to $3 annually. If the dividend is expected to stay at $3 per year for the foreseeable future, what […]

21 27) Backford Company just paid a dividend yesterday of $2.25 per share. The company‘s stock is currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%. What is the growth rate […]

11 2) Cumulative voting is advantageous to minority shareholders because it may allow them to elect a member of the board of directors. Answer: TRUE Diff: 1 Page Ref: 277 Keywords: Cumulative Voting, Minority Shareholders Learning Obj.: L.O. 8.3 AACSB: […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 8 The Valuation and Characteristics of Stock Learning Objective 8.1 1) Preferred stock is referred to as a hybrid security because it has many characteristics of both common stock and bonds. Answer: TRUE […]

30 26) The yield to maturity on long-term bonds A) is equal to the current yield if the bond is selling for face value. B) is equal to the coupon rate on the bond. C) is equal to the net […]

21 24) Bart’s Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of Bart’s Moving Company bonds if investors’ […]

11 5) Liquidation value is of primary importance to investors because it represents the true amount of cash that an investor is likely to receive. Answer: FALSE Diff: 1 Page Ref: 243 Keywords: Liquidation Value Learning Obj.: L.O. 7.3 AACSB: […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 7 The Valuation and Characteristics of Bonds Learning Objective 7.1 1) Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in […]

39 30) You determine that LMN common stock has an expected return of 24%. LMN has a Beta of 1.5. The risk-free rate is 5%, and the market expected return is 15%. Which of the following is most likely to […]

31 56) Discuss whether the standard deviation of a portfolio is, or is not, a weighted average of the standard deviations of the assets in the portfolio. Fully explain your answer. Answer: The standard deviation of a portfolio is not […]

21 22) Because risk is measured by variability of returns, how long we hold our investments does not matter very much when it comes to reducing risk. Answer: FALSE Diff: 1 Page Ref: 219 Keywords: Diversification, Risk Reduction Learning Obj.: […]

11 18) You must add one of two investments to an already well– diversified portfolio. Security A Security B Expected Return = 14% Expected Return = 12% Standard Deviation of Standard Deviation of Returns = 15.0% Returns = 11% Beta […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 6 The Meaning and Measurement of Risk and Return Learning Objective 6.1 1) Accounting profits is the most relevant variable the financial manager uses to measure returns. Answer: FALSE Diff: 1 Page Ref: […]

39 23) If you want to have $3,575 in 29 months, how much money must you put in a savings account today? Assume that the savings account pays 12% and it is compounded monthly; round to nearest $1. A) $3,147 […]

31 Copyright © 2017 Pearson Education, Inc. 73) You borrow $25,000 to buy a car, and agree to make 48 monthly payments of $607.39 to repay the loan. What annual rate of interest, which is being compounded monthly, are you […]

21 42) A deferred annuity will pay you $500 at the end of each year for 10 years, however the first payment will not be made until three years from today (payments will be made at the end of years […]

11 5) If the interest rate is positive, then the present value of an annuity due will be less than the present value of an ordinary annuity. Answer: FALSE Diff: 2 Page Ref: 170 Keywords: Time Value of Money, Annuity, […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 5 The Time Value of Money Learning Objective 5.1 1) The time value of money is the opportunity cost of passing up the earning potential of a dollar today. Answer: TRUE Diff: 1 […]

41 Please refer to Table 4-7 for the following question. Table 4-7 Hokie Corporation Comparative Balance Sheet For the Years Ending December 31, 2009 and 2010 (Millions of Dollars) Assets 2009 2010 Current Assets: Cash $2 $10 Accounts receivable 16 […]

31 89) High Inc. has an accounts receivable turnover ratio of 7.3. Low Company has an accounts receivable turnover ratio of 5. Assuming that High and Low have the same sales level, which of the following statements is correct? A) […]

21 Please refer to Table 4-2 for the following questions. Table 4-2 Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. […]

11 33) Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker’s current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season, and will pay […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 4 Evaluating a Firm’s Financial Performance Learning Objective 4.1 1) When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry it is called […]

31 21) A firm paid dividends of $10,000, paid interest of $20,000, reduced debt principal outstanding (paid off debt) in the amount of $100,000, and sold new stock for $150,000. What was the firm’s cash flow from financing activities? A) […]

21 47) Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm’s Total Liabilities & Equity? A) $2,500,000 B) $1,300,000 C) $2,000,000 D) $1,800,000 Answer: C Diff: […]

11 7) If a company‘s cash balance increases during the year, and the company also reports positive net income, then the company‘s retained earnings balance must increase. Answer: FALSE Diff: 2 Page Ref: 65 Keywords: Retained Earnings Learning Obj.: L.O. […]

1 Foundations of Finance, 9e (Keown/Martin/Petty) Chapter 3 Understanding Financial Statements and Cash Flows Learning Objective 3.1 1) An income statement reports a firm’s cumulative revenues and expenses from the inception of the firm through the income statement date. Answer: […]