Finance Final Review

A firm’s capital structure can be determined by examining which parts of the firm’s balance sheet? The debt and equity
Tim’s Tools just issued a dividend of $2.22 per share on its common stock. The company is expected to maintain a constant 2.8 percent growth rate in its dividends indefinitely. If the stock sells for $19 a share, what is the company’s cost of equity? 14.81 percent
Generally speaking, when the information is available, investors prefer to use ____rather than____when evaluating a firm. Market values, book values
Stock in ABC Enterprises has a beta of 1.28. The market risk premium is 7.4 percent, and T-bills are currently yielding 3.6 percent. ABC’s most recently paid dividend was $1.62 per share, and dividends are expected to grow at an annual rate of 2 percent indefinitely. If the stock sells for $38 a share, what is your best estimate of ABC’s cost of equity? 9.71 percent
To value a non-dividend-paying firm, the terminal value used in the valuation calculation will most likely be based on a(n) Target ratio
When a company borrows money from a bank or sells bonds, it is called____. Debt financing
A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and an aftertax cost of debt of 5.2 percent and a tax rate of 35 percent. Given this, which one of the following will increase the firm’s weighted average cost of capital? Increasing the firm’s beta
The ____of an asset or liability is its cost carried on the balance sheet. Book value
A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm: Automatically gives preferential treatment in the allocation of funds to its riskiest division.
Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the: cost of debt
Given the following information for Electric Transport, find the WACC. Assume the company’s tax rate is 35 percent.Debt: 8,100, 6.9 percent coupon bonds outstanding. $1000 par value, 17 years to maturity, selling for 101 percent of par, the bonds make semi annual payments.Common stock: 175,000 shares outstanding, selling for $77 per share, beta is $1.32Preferred Stock: 9,000 shares of preferred stock outstanding, currently selling for $73 per shareMarket: 7.9 percent market risk premium and 3.6 percent risk-free rate 10.4 percent
The weighted average cost of capital is_____. All of the above
You are given the following concerning Around Town Tours:Debt: 7,500, 6.8 percent coupon bonds outstanding, with 11 years to maturity and quoted price of $979.0 this bonds pay interest semiannuallyCommon stock: 284,000 shares of common stock selling for $68 per share the stock has a beta of 1.04 and will pay a dividend of $2.62 next year. the dividend is expected to grow by 2.5 percent per year indefinitelyPreferred stock; 9000 shares of $8 preferred stock selling at $88 per share.Market: 14.6% expected return 4.1% risk-free rateCompany: 34% tax rateCalculate the WACC for this firm 9.0%
The cost of capital is: The cost of each financing component multiplied by the component’s percent of the total borrowed
Healthy Snacks has a target capital structure of 60 percent common stock, 3 percent preferred stock, and 37 percent debt. Its cost of equity is 16.8 percent, the cost of preferred stock is 11.4 percent, and the pretax cost of debt is 8.3 percent. What is the company’s WACC if the applicable tax rate is 34 percent? 12.45 percent
The cost of debt could be which of the following? All of the choices above could be considered the cost of debt
The weighted average cost of capital is defined as the weighted average of a firm’s; Cost of equity, cost of preferred and its after tax cost of debt
Rockingham Motors issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 103.1 percent of its face value. The company’s tax rate is 34 percent. What is the aftertax cost of debt? 5.10 percent
Black Stone Furnaces wants to build a new facility. The cost of capital for this investment is primarily dependent on which one of the following? The nature of the investment
All else constant, an increase in a firm’s cause of debt: Will result in an increase in the firm’s cost of capital
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? Mutually Exclusive
Which of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flow that are interrupted by one or more positive cash flows? Modified internal rate of return
Which of the following indicates that an independent project is definitely acceptable Profit ability index greater than 1.0
The average net income of a project divided by the project’s average book value is referred to as the project’s : Average accounting return
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? net present value
You are using a net present value profile to compare Project A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? The net present value of Project A equals that of Project B, but generally does not equal zero.
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? internal rate of return and net present value
Which one of the following methods of analysis is most appropriate to use when to investments are mutually exclusive Net present value
In which one of the following situations with the payback method be the preferred method of analysis Investment funds available only for a limited period of time
Which one of the following methods of analysis ignores cash flows Average accounting return
Which one of the following statements is correct? The payback period Ignores the time value of money
Which one of the following indicators offers the best assurance that a project will produce value for its owners? Positive NPV
Deborah profitability index reflects the value created for a dollar Invested
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? profitability index
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? discount rate
Contingency planning focuses on the: managerial options implicit in a project
Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project’s net present value. What type of analysis is being conducted? Sensitivity analysis
The analysis of a new project should exclude: sunk costs
The operating cash flows of a project: include erosion effects
Sensitivity Analysis helps identify the variable within a project that presents the greatest forecasting risk.
A proposed project will increase a firm’s accounts payables. This increase is generally: a cash inflow at time zero and a cash outflow at the end of the project
Which one of the following is a correct value to use if you are conducting a best-case scenario analysis? Lowest expected value for fixed costs
Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. All of the following are relevant cost to this project with the exception of: A percentage of the current operating overhead
Valley forge and metal purchase a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk costs? I assume the truck has a usable life of five years. Money spent last month repairing a damage front fender
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost? sunk cost
Forecasting risk is best defined as estimation risk
Which one of the following refers to a method of increasing the rate at which an asset is depreciated? Accelerated cost recovery system
Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost: of the blueprints that have been drawn of the expansion area.
Which one of the following refers to the option to expand into related businesses in the future? Strategic option
The amount by which a firm’s tax bill is to reduced as a result of the depreciation expense is referred to as the depreciation: Tax shield
Which one of the following is the equity risk arising from the capital structure selected by a firm financial risk
Which one of the following terms applies to the costs incurred by a firm that is trying to avoid filling for bankruptcy? Indirect bankruptcy costs
Which one of the following terms is inclusive of both direct and indirect bankruptcy costs? financial distress costs
The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as: homemade leverage
Tree Farms currently has 48,000 shares of stock outstanding and no debt. The price per share is $22.50. The firm is considering borrowing funds at 8.5% interest and using the proceeds to re-purchase 1750 shares up stock. Ignore taxes. how much is the firm borrowing? $39,375
The level of financial risk to which a firm is exposed is dependent on the firm’s: debt-equity ratio
Which one of the following is minimized when the value of a firm is maximized ? WACC
In the process of liquidation, some types of claims receive preference over other claims. Which one of the following determines which type of claim is paid first? Absolute priority rule
Which one of the following statements concerning financial leveraged is correct? Financial leverage magnifies both profits and losses
Which one of the following supports the theory that the value of a firm increases as the firm’s level of debt increases? M&M Proposition I with taxes
Which one of the following is a direct bankruptcy costs? Legal and accounting fees related to a bankruptcy proceeding
Which one of the following is an example of a direct bankruptcy costs In curing legal fees for the preparation of bankruptcy filings
When calculating the after-tax weighted average cost of capital,(WACC) which of the following costs are adjusted for taxes in the equation? The before-tax cost of Debt
Which of the items is sometimes termed hybrid equity financing? Preferred stock
Which of the following would be classified as equity financing for a firm? Preferred shareholders, common shareholders, and retained earnings
Which of the following would be classified as debt lenders for a firm? Suppliers, nonbank lenders, and commercial banks
A firm that uses its weighted average cost of capital as the required return for all of its investment will: Increase the risk level of the firm over time
Which one of the following will affect the capital structure weights used to compute a firm’s weighted average cost of capital? Increase in the market value of the firm’s common stock
An increase in the levered firm’s tax rate will: Decrease the firm’s cost of capital
Kurt, who is a divisional manager, continually brags that his division’s required return for its projects is 1 percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt’s division? Kurt’s division is less risky than the other divisions.
Which one of the following statements concerning capital structure weights is correct? The repurchase of preferred stock will increase the weight of debt.
City Rentals has 44,000 shares of common stock outstanding at a market price of $32 a share. The common stock just paid a $1.50 annual dividend and has a dividend growth rate of 2.5 percent. There are 7,500 shares of $9 preferred stock outstanding at a market price of $72 a share. The outstanding bonds mature in 11 years, have a total face value of $825,000, a face value per bond of $1,000, and a market price of $989 each, and a pretax yield to maturity of 8.3 percent. The tax rate is 35 percent. What is the firm’s weighted average cost of capital? 7.76 percent
In an efficient market, the cost of equity for a highly risky firm: Increases in direct relation to the stock’s systematic risk
_____ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings. capital structure
Farmer’s Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach? Pure play approach
Which one of the following is most apt to cause a wise manager to increase a project cost of capital assume the firm is levered? Manager learns the project is riskier than previously believed
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as: multiple rates of return.
Which one of the following indicates that a project is expected to create value for its owners? Positive net present value
The modified internal rate of return is specifically designed to address the problems associated with: unconventional cash flows
Which one of the following is the primary advantage of payback analysis? ease of use
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. Internal rate of return that exceeds the required return
Which one of the following statements is correct? If the internal rate of return equals the required return, the net present value will equal zero.
The average accounting return: measures profitability rather than cash flow
In which one of the following situations would the payback mattered be the preferred method of analysis? Investment funds available only for a limited period of time
Which one of the following methods of analysis has the greatest bias toward short-term projects? payback
Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women’s store. The cost of the expansion will be $148,000. She can use this additional space to add children’s clothing, an exclusive gifts department, or a home décor section. She estimates the present value of the cash inflows from these projects are $121,000 for children’s clothing, $178,000 for exclusive gifts, and $145,000 for decorator items. Which option(s), if any, should she accept? Exclusive gifts only
Dismal Outlook is unable to obtain financing for any new projects under any circumstances. This company is faced with: hard rationing
Which one of the following terms refers to the best option that was foregone when a particular investment is selected? opportunity cost
The networking capital invested in the project is generally: Recouped at the end of the project
The opportunities that a manager has to modify a project once the project has started are called: managerial options
Scenario Analysis helps determine the reasonable range of expectations for a project’s anticipated outcome.
Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as: scenario analysis
The pro forma income statement for a personal investment should include all of the following except: Changes in networking capital
Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? stand-alone principle
When is a firm insolvent from an accounting perspective? When the firm has a negative net worth
Which one of the following represents the present value of the interest tax shield? Tc ×D
Which one of the following is the equity risk arising from the daily operations of a firm? business risk
The Tree House has a pretax cost of debt of 7.3 percent and a return on assets of 12.8 percent. The debt-equity ratio is .46, Ignore the taxes. What is the cost of the equity? 15.33%
Which one of the following is an implication of M&M proposition II without taxes? The risk of equity is affected by both financial and operating leverage
The Bethlehem Inn is an all-equity firm with 9,000 shares outstanding at a value per share of $26.80. Differ is issuing $39,932 of debt and using the proceeds to reduce the number of outstanding shares. How many shares of stock will be outstanding once the dent is issued? ignores taxes. 7,510 shares
Which one of the following statements concerning financial leverage is correct? Changes in the capital structure of a firm will generally change the firm’s earnings per share.
Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision? Risk level of the project
When evaluating a project, the dividend growth model: is relatively simple to use.
Which one of the following will decrease the after-tax cost of debt for a firm? Increase in tax rates
The cost of retain earnings____ Is all of the above
When a company borrows money from a bank or sells bonds, it is called___ Debt financing
Percision Cuts has a target debt-equity ratio of .48. It’s cost of equity is 16.4% and it’s pretax cost of debt is 8.2%. If the tax rate is 34% what is the company’s WACC? 12.84%(WACC=(1/1.48)(.164)+(.48/1.48)(.082)(1-.34)=.1284 or 12.84%
Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity? The annual dividend used in the computation must be for Year 1 if you are Time 0’s stock price to compute the return.
The cost of capital for a project depends primarily on which one of the following? How the project uses its funds
The___ is the cost of each financing component multiplied by the component’s percent of the total funding amount. Cost of capital
A firm has multiple divisions of similar nature, yet varying degrees of risk. Which one of the following would be the most appropriate, yet relatively easy, means of assigning discount rates to each of its proposed investments? Assign every project a rate equal to the firm’s WACC plus or minus a subjective adjustment
The internal rate of return is unreliable As an indicator of whether or not an investment should be accepted given which one of the following? The investment is mutually exclusive with another investment of a different size
If an investment is producing a return that is equal to the required return, the investment’s net present value will be: zero
The net present value of an investment represents the difference between the investment’s: Costs and its market value
The payback period Is the length of time It takes an investment to generate sufficient cash flows to enable the project to: recoup its initial cost
Which one of the following is most closely related to the net present value profile? internal rate of return
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project? Current market value of the building
Any changes to a firm’s projected future cash flows that are caused by adding a new project are referred to as: incremental cash flows
Which one of the following statements is the core principle of M&M Proposition I, without taxes? The capital structure of a firm is totally irrelevant.
Taunton’s is an all-equity firm that has 160,000 shares of stock outstanding. Neil, the financial vice president is considering borrowing $275,000 at 7.45% interest to repurchase 25,000 shares. ignoring taxes, what is the current value of the firm? $1,260,000?(Value per share=$275,000/25,000=$11Firm value=160,000 x $11=$1,760,000)
Which one of the following best defines legal bankruptcy? a legal proceeding for liquidating or reorganizing a business
Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at the price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells for 104 % of face. The yield to maturity on the debt is 8.81%. What is the firms weighted average cost of capital if the tax rate is 35%? 14.52%
Which one of the following statements is accurate for a levered firm? A reduction in the risk level of a firm will tend to decrease the firm’s WACC.
Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the: risk-free rate decreases.
Which one of the following is used as the pretax cost of debt? Weighted average yield to maturity on the firm’s outstanding debt
Which of the following are tax-deductible expenses for corporations? Interest expenses
Derek’s is a brick-and-motor toy store. The firm is considering expanding its operations to include Internet sales. Which one of the following would be the best for me to use in a pure play approach to analyzing the proposed expansion? A toy store that sells online only
Market values require multiplying the ________ of each component source of capital by the ________. Price * Quantity
Net present value involves discounting and investment’s: Future cash flow’s
Which one of the following analytical methods is based on net income? Average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? Average accounting return
Which one of the following statements is correct? If the internal rate of return because the required return, the net present value will equal to zero
Generally speaking, payback is best to use to evaluate which type of projects? Low-cost, short-term
Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called: soft rationing
Which one of the following refers to the option to expand into related businesses in the future? Strategic option
Scenario analysis ask questions such as: What is the best outcome that should reasonably be expected?
Flour Mills is a all-equity firm with a total market value of $891,860. The firm has 38,000 shares of stock outstanding. Management is considering issuing $275,000 of debt at an interest rate of 7.5% and using the proceeds on a stock repurchase. Ignore taxes. How many shares kind of firm repurchase if it issues the debt security? 11,717 shares( shares purchased=$275,000/($891,860/38,000)= 11,717 shares
Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship? interest tax shield
All else constant, the weighted average cost of capital for a risky leverage firm will decrease if: The firm’s bonds start selling at a premium rather than at a discount
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? net present value
Which one of the following terms is most commonly use to describe the cash flows of a new project that are simply an offset of reduce cash flows for a current project? Erosion
Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement? Option to abandon
Which one of the following create cash inflows from networking capital? Increase in inventory and decrease in cash
The ability to delay an investment: is valuable provided there are conditions under which the investment will have a positive net present value
Which one of the following will generally receive the highest priority in a bankruptcy liquidation, assuming the absolute priority rule is followed? Bankruptcy administrative expenses
Peter’s Tools recently defaulted on a bank loan. To avoid a bankruptcy proceeding the bank agreed to a composition. This conversation would do which one of the following? Reduce the amount of the loan payments so Peter’s can pay on time

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