finance questio – savvyessaywriters.net | Savvy Essay Writers
finance questio – savvyessaywriters.net | Savvy Essay Writers
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1. Determining the best way to raise money to fund a firm’s long-term investments is called:a. the capital budgeting decisionb. the money flow processing decisionc. the portfolio decisiond. the capital structure decision2. Which of the following is NOT true regarding mortgaged-backed securities (MBS)?a. Securitization provides liquidity to the mortgage market and makes it possible for banks toloan more money to home buyers.b. MBS are sold to investors who can hold them as an investment or resell them to otherinvestors.c. The MBS process allows the mortgage bank or other financial institution that made theoriginal mortgage loan to get its money back out of the loan and lend it to someone else.d. All of the above.3. To measure value, the concept of time value of money is used:a. to bring the future benefits and costs of a project, measured by its cash flows, back to thepresentb. to determine the interest rate paid on corporate debtc. to bring the future benefits and costs of a project, measured by its expected profits, backto the presentd. to ensure that expected future profits exceed current profits today4. An investor is considering two equally risky investments. Investment A is expected to return$1,000 per year for the next 5 years. Investment B is expected to return $6,000 at the end of5 years. Which of the following statements is MOST correct if both investments A and B havethe same cost?a. A risk averse investor will select investment A because it provides cash earlier thaninvestment B.b. A risk averse investor will select investment B because it is expected to provide the mostcash ($6,000 > $5,000).c. The investor will select investment A only if the cost is less than $1,000.d. The investor may select investment A or investment B depending on the opportunity costof money. 5. Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further assume that youwere offered a choice to receive the $20 million today, or receive it in equal installments of$1 million per year for 20 years. According to one of the principles of finance, which wouldyou take?a. You would be indifferent as to when you would receive the $20 million since the totalnumber of dollars received is the same either way.b. You would take the $20 million in equal installments of $1 million per year for 20 yearsbecause it would be worth more than if you would receive it today.c. You would take the $20 million in equal installments of $1 million per year for 20 yearsbecause you would be afraid of spending it all right away.d. You would take the $20 million today because it would be worth more than if you wouldreceive it in equal installments of $1 million per year for 20 years.6. Maximization of shareholder wealth:a. is achieved only if cash flows exceed accounting profitsb. represents a zero sum game in which one corporation gains at the expense of othersc. is not a practical goal since it cannot be measured effectivelyd. provides benefits to society as scarce resources are directed to their most productive use7. Which of the following securities will likely have the highest liquidity premium?a. U.S. Treasury Bond maturing in 2027b. U.S. Treasury Billc. AAA-rated corporate bond maturing in 2015 not actively tradedd. BBB-rated corporate bond maturing in 2020 actively traded on a major exchange8. Private placements usually have several advantages associated with them, but also tendto suffer from specific disadvantages. Which of the following is a disadvantage of a privateplacement when compared to other methods of selling new securities?a. higher interest costsb. reduced flotation costsc. avoidance of registration with the SECd. strictly standardized features/terms9. Common examples of financial intermediaries include all of the following EXCEPT:a. life insurance companiesb. venture capital firmsc. pension fundsd. mutual funds10. A life insurance company purchases $1 billion of corporate bonds from premiums collected onits life insurance policies. Therefore:a. the corporate bonds are direct securities and the life insurance policies are directsecuritiesb. the corporate bonds are indirect securities and the life insurance policies are indirectsecuritiesc. the corporate bonds are indirect securities and the life insurance policies are directsecurities.d. the corporate bonds are direct securities and the life insurance policies are indirectsecurities.11. Which of the following represents an attempt to measure the net results of the firm’soperations (revenues versus expenses) over a given time period?a. statement of cash flowsb. sources and uses of funds statementc. balance sheetd. income statement12. Gross profit is equal to:a. revenues minus expensesb. profits plus depreciationc. sales minus cost of goods soldd. earnings before taxes minus taxes payable13. An income statement may be represented as follows:a. Sales – Expenses = Retained Earningsb. Sales – Expenses = Profitsc. Revenues – Liabilities = Net Incomed. Sales – Liabilities = Profits14. Which of the following ratios would be the poorest indicator of how rapidly the firm’s creditaccounts are being collected?a. average collection periodb. cash conversion cyclec. times interest earnedd. accounts receivable turnover ratio15. An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% andCompany B has a debt ratio of 25%. In his report, the analyst is concerned about Company B’sdebt level, but not about Company A’s debt level. Which of the following would best explainthis position?a. Company A has a lower times interest earned ratio and thus the analyst is not worriedabout the amount of debt.b. Company B has much higher operating income than Company A.c. Company B has a higher operating return on assets than Company A, but Company A has ahigher return on equity than Company B.d. Company B has more total assets than Company A.16. Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an accountsreceivable balance of $100,000, what is Jeter’s average daily credit sales?a. $1,232.88b. $22,222.22c. $1,893.45d. $745.2317. As of today, the most severe economic crisis to afflict the United States’ economy isconsidered to be:a. the Great Depression of the 1930sb. the Reagan Tax Law Changes of 1985c. the Great Recession of 2007-2009d. the Savings and Loan Crisis of 1978 -198218. A corporate treasurer is typically responsible for each of the following duties EXCEPT:a. credit managementb. capital expendituresc. cash managementd. cost accounting19. A wealthy private investor providing a direct transfer of funds is called:a. a financial intermediaryb. an angel investorc. an investment bankerd. a venture capitalist20. Rogue Industries reported the following items for the current year: Sales = $3,000,000;Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000;Administrative Expenses = $150,000; Interest Expense = $30,000;Marketing Expenses = $80,000; and Taxes = $300,000. Rogue’s net profit margin is equal to:a. 35.67%b. 36.67%c. 25.67%d. 50.00%21. Septon Inc. has an average collection period of 74 days. What is the accounts receivableturnover ratio for Septon Inc.?a. 2.66b. 1.74c. 4.93d. 2.4722. Which form of organization is free of initial legal requirements?a. sole proprietorshipb. general partnershipc. corporationd. both a and b23. Which of the following is NOT a benefit provided by the existence of organized securityexchanges?a. standardization of all debt agreementsb. helping businesses raise new capitalc. providing a continuous marketd. establishing and publicizing fair security prices24. California Retailing Inc. has sales of $4,000,000; the firm’s cost of goods sold is $2,500,000;and its total operating expenses are $600,000. The firm’s interest expense is $250,000, andthe corporate tax rate is 40%. What is California Retailing’s net income?a. $288,000b. $377,000c. $350,000d. $390,00025. Company A and Company B have the same gross profit margin and the same total assetturnover, but company A has a higher return on equity. This may result from:a. Company B has more common stock.b. Company A has lower selling and administrative expenses, resulting in a higher net profitmargin.c. Company A has lower cost of goods sold, resulting in a higher net profit margin.d. Company A has a lower debt ratio.1. What is the present value of an annuity of $120 received at the end of each year for 11 years?Assume a discount rate of 7%. The first payment will be received one year from today (roundto nearest $1).a. $570b. $250c. $400d. $9002. You bought a racehorse that has had a winning streak for six years, bringing in $250,000 atthe end of each year before dying of a heart attack. If you paid $1,155,720 for the horse 4years ago, what was your annual return over this 4-year period?a. 12%b. 8%c. 18%d. 33%3. How much money do I need to place into a bank account that pays a 1.08% rate in order tohave $500 at the end of 7 years?a. $751.81b. $463.78c. $629.51d. $332.544. Your daughter is born today and you want her to be a millionaire by the time she is 40 yearsold. You open an investment account that promises to pay 11.5% per year. How much moneymust you deposit today so your daughter will have $1,000,000 by her 35th birthday?a. $20,100b. $18,940c. $28,575d. $22,1505. If you want to have $3,575 in 29 months, how much money must you put in a savings accounttoday? Assume that the savings account pays 12% and it is compounded monthly (round tonearest $1).a. $2,438b. $2,679c. $3,147d. $3,008Unit 2 Examination6. U.S. Savings Bonds are sold at a discount. The face value of the bond represents its value onits future maturity date. Therefore:a. The current price of a $50 face value bond that matures in 10 years will be greater thanthe current price of a $50 face value bond that matures in 5 years.b. The current prices of all $50 face value bonds will be the same, regardless of theirmaturity dates because they will all be worth $50 in the future.c. The current price of a $50 face value bond will be higher if interest rates increase.d. The current price of a $50 face value bond that matures in 10 years will be less than thecurrent price of a $50 face value bond that matures on 5 years.7. You are considering a sales job that pays you on a commission basis or a salaried position thatpays you $50,000 per year. Historical data suggests the following probability distribution foryour commission income. Which job has the higher expected income?Probability of…Commission Occurrence$15,000 .15$35,000 .20$48,000 .35$67,000 .22$80,000 .18a. The salary of $50,000 is less than the expected commission of $50,050.b. The salary of $50,000 is less than the expected commission of $52,720.c. The salary of $50,000 is greater than the expected commission of $49,630.d. The salary of $50,000 is greater than the expected commission of $48,400.8. Beginning with an investment in one company’s securities, as we add securities of othercompanies to our portfolio, which type of risk declines?a. unsystematic riskb. market riskc. systematic riskd. non-diversifiable risk9. Assume the risk-free rate of return is 2% and the market risk premium is 8%. If you are a riskaverse investor, which project should you choose?a. Project 3b. Project 2c. Project 1d. Either Project 2 or Project 3 because the higher expected return on project 3 offsets itshigher risk.10. Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and themarket risk premium remains constant, then:a. the required returns on stocks A and B will not changeb. the required returns on stocks A and B will both increase by the same amountc. the required return on stock A will increase more than the required return on stock Bd. the required return on stock B will increase more than the required return on stock AUnit 2 Ex11. Suppose interest rates have been at historically low levels the past two years. A reasonablestrategy for bond investors during this time period would be to:a. buy only junk bonds which have higher interest ratesb. invest in long-term bonds to reduce interest rate riskc. invest in short-term bonds to reduce interest rate riskd. invest in long-term bonds to lock in a bond position for when interest rates increase in thefuture12. Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%, a facevalue of $1,000, and a maturity date of January 1, 2025. Which of the following statements isMOST correct?a. Fred and Ethel will only buy the bonds if the bonds are rated BBB or above.b. Because both Fred and Ethel will receive the same cash flows if they each buy a bond,they both must assign the same value to the bond.c. If Fred decides to buy the bond, then Ethel will also decide to buy the bond if markets areefficient.d. Fred may determine a different value for a bond than Ethel because each investor mayhave a different level of risk aversion, and hence a different required return.13. Which of the following statements is true?a. Short-term bonds have greater interest rate risk than do long-term bonds.b. Long-term bonds have greater interest rate risk than do short-term bonds.c. Interest rate risk is highest during periods of high interest rates.d. All bonds have equal interest rate risk.14. Crandle’s common stock is currently selling for $79.00. It just paid a dividend of $4.60 anddividends are expected to grow at a rate of 5% indefinitely. What is the required rate of returnon Crandle’s stock?a. 11.76%b. 11.11%c. 12.2%d. 14.21%15. An example of the growth factor in common stock is:a. retaining profits in order to reinvest into the firmb. two strong companies merging together to increase their economies of scalec. acquiring a loan to fund an investment in Asiad. issuing new stock to provide capital for future growthUnit 2 Ex16. Waterfront Solutions, Inc. paid a dividend of $5.00 per share on its common stock yesterday.Dividends are expected to grow at a constant rate of 4% for the next two years, at which pointthe stock is expected to sell for $56.00. If investors require a rate of return on Waterfront’scommon stock of 18%, what should the stock sell for today?a. $40.22b. $50.22c. $44.76d. $48.5117. Andre’s parents established a college savings plan for him when he was born. They deposited$50 into the account on the last day of each month. The account has earned 10.9%compounded monthly, tax-free. How much can they withdraw on his 18th birthday to spend onhis education?a. $33,307b. $30,028c. $43,730d. $27,56018. Charlie wants to retire in 15 years, and he wants to have an annuity of $50,000 a year for20 years after retirement. Charlie wants to receive the first annuity payment the day heretires. Using an interest rate of 8%, how much must Charlie invest today in order to have hisretirement annuity (round to nearest $10).a. $167,130b. $315,240c. $256,890d. $200,450An investor currently holds the following portfolio:AmountInvested4,000 shares of Stock H $8,000 Beta = 1.37,500 shares of Stock I $24,000 Beta = 1.812,500 shares of Stock J $48,000 Beta = 2.219. The beta for the portfolio is:a. 1.45b. 1.27c. 1.99d. 1.7720. Which of the following will cause the value of a bond to increase, if other things held thesame?a. interest rates decreaseb. the company’s debt rating drops from AAA to BBBc. investors’ required rate of return increasesd. the bond is callable21. A small biotechnology research corporation has been experiencing losses for the first threeyears of its existence, and thus has a negative balance in retained earnings. The corporation’sstock price, however, is $1 per share. Which of the following statements is MOST correct?a. The required return on the stock will be small because the company has very few assets.b. Investors believe the stock is worth $1 per share because future earnings (and cash flows)are expected to be positive.c. The corporation’s accountants must have made a mistake because retained earnings maynot be negative.d. Investors are irrational to pay $1 per share when earnings per share have been negative forthree years.22. How much money must be put into a bank account yielding 6.42% (compounded annually) inorder to have $1,671 at the end of 11 years? (round to nearest $1)a. $798b. $886c. $921d. $84323. Wendy purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Wendy sold theshares on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the risk-free rate of return is3%, and the market risk premium is 8%. The required return on Genetics Stock is:a. 21.1%b. 13.4%c. 16.5%d. 17.6%24. Bart’s Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. Thebonds have a par value of $1,000 and will mature 8 years from now. Compute the value ofBart’s Moving Company bonds if investors’ required rate of return is 9.5%.a. $1,133.05b. $1,098.99c. $1,082.75d. $1,197.2725. Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected togrow at a 12-percent annual rate forever. If Jackson’s current market price is $40.00, what isthe stock’s expected rate of return? (nearest .01 percent)a. 18.25%b. 5.50%c. 11.00%d. 19.00%1. The DEF Company is planning a $64 million expansion. The expansion is to be financed byselling $25.6 million in new debt and $38.4 million in new common stock. The before-taxrequired rate of return on debt is 9 percent and the required rate of return on equity is 14percent. If the company is in the 35 percent tax bracket, what is the firm’s cost of capital?a. 8.92%b. 10.74%c. 11.50%d. 9.89%Valley Flights, Inc. has a capital structure made up of 40% debt and 60% equity and a taxrate of 30%. A new issue of $1,000 par bonds maturing in 20 years can be issued with acoupon of 9% at a price of $1,098.18 with no flotation costs. The firm has no internal equityavailable for investment at this time, but can issue new common stock at a price of $45. Thenext expected dividend on the stock is $2.70. The dividend for the firm is expected to grow atconstant annual rate of 5% per year indefinitely. Flotation costs on new equity will be $7.00per share. The company has the following independent investment projects available:Project Initial Outlay IRR1 $100,000 10%2 $10,000 8.5%3 $50,000 12.5%2. Which of the above projects should the company take on?a. Project 3 onlyb. Projects 1, 2 and 3c. Projects 1 and 3d. Projects 1 and 23. PrimaCare has a capital structure that consists of $7 million of debt, $2 million of preferredstock, and $11 million of common equity, based upon current market values. The firm’s yieldto maturity on its bonds is 7.4%, and investors require an 8% return on the firm’s preferredstock and a 14% return on PrimaCare’s common stock. If the tax rate is 35%, what isPrimaCare’s WACC?a. 7.21%b. 10.18%c. 12.25%d. 8.12%Unit 3 Examination136BAM 313 Introduction to Financial Management4. JPR Company is financed 75 percent by equity and 25 percent by debt. If the firm expectsto earn $30 million in net income next year and retain 40% of it, how large can the capitalbudget be before common stock must be sold?a. $15.5 millionb. $7.5 millionc. $16.0 milliond. $12.0 million5. All else equal, an increase in beta results in:a. an increase in the cost of retained earningsb. an increase in the cost of common equity, whether or not the funds come from retainedearnings or newly issued common stockc. an increase in the cost of newly issued common stockd. an increase in the after-tax cost of debt6. Haroldson Inc. common stock is selling for $22 per share. The last dividend was $1.20, anddividends are expected to grow at a 6% annual rate. Flotation costs on new stock sales are 5%of the selling price. What is the cost of Haroldson’s retained earnings?a. 12.09%b. 11.78%c. 11.45%d. 5.73%7. A company has preferred stock that can be sold for $21 per share. The preferred stock paysan annual dividend of 3.5% based on a par value of $100. Flotation costs associated withthe sale of preferred stock equal $1.25 per share. The company’s marginal tax rate is 35%.Therefore, the cost of preferred stock is:a. 14.26%b. 12.94%c. 18.87%d. 17.72%8. Which of the following should NOT be considered when calculating a firm’s WACC?a. after-tax YTM on a firm’s bondsb. cost of newly issued preferred stockc. after-tax cost of accounts payabled. cost of newly issued common stockUnit 3 Examination137BAM 313 Introduction to Financial Management9. Your firm is considering an investment that will cost $920,000 today. The investment willproduce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 inyear 5. The discount rate that your firm uses for projects of this type is 11.25%. What is theinvestment’s profitability index?a. 1.26b. 1.69c. 1.21d. 1.4310. Your firm is considering investing in one of two mutually exclusive projects. Project A requiresan initial outlay of $3,500 with expected future cash flows of $2,000 per year for the nextthree years. Project B requires an initial outlay of $2,500 with expected future cash flows of$1,500 per year for the next two years. The appropriate discount rate for your firm is 12% andit is not subject to capital rationing. Assuming both projects can be replaced with a similarinvestment at the end of their respective lives, compute the NPV of the two chain cycle forProject A and three chain cycle for Project B.a. $2,865 and $94b. $3,528 and $136c. $5,000 and $1,500d. $2,232 and $8511. The capital budgeting manager for XYZ Corporation, a very profitable high technology company,completed her analysis of Project A assuming 5-year depreciation. Her accountant reviews theanalysis and changes the depreciation method to 3-year depreciation. This change will:a. increase the present value of the NCFsb. have no effect on the NCFs because depreciation is a non-cash expensec. only change the NCFs if the useful life of the depreciable asset is greater than 5 yearsd. decrease the present value of the NCFs12. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs$120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 inyear three, and $45,000 in year four. Lithium, Inc.’s required rate of return for these projectsis 10%. The modified internal rate of return for Project B is:a. 18.52%b. 22.80%c. 19.75%d. 17.84%Unit 3 Examination138BAM 313 Introduction to Financial Management13. A capital budgeting project has a net present value of $30,000 and a modified internal rate ofreturn of 15%. The project’s required rate of return is 13%. The internal rate of return is:a. greater than $30,000b. greater than 15%c. between 13% and 15%d. less than 13%14. A new project is expected to generate $800,000 in revenues, $250,000 in cash operatingexpenses, and depreciation expense of $150,000 in each year of its 10-year life. Thecorporation’s tax rate is 35%. The project will require an increase in net working capital of$85,000 in year one and a decrease in net working capital of $75,000 in year ten. What is thefree cash flow from the project in year one?a. $410,000b. $375,000c. $380,000d. $298,00015. A local restaurant owner is considering expanding into another rural area. The expansionproject will be financed through a line of credit with City Bank. The administrative costs ofobtaining the line of credit are $500, and the interest payments are expected to be $1,000per month. The new restaurant will occupy an existing building that can be rented for $2,500per month. The incremental cash flows for the new restaurant include:a. $2,500 per month rentb. $500 administrative costs, $1,000 per month interest payments, $2,500 per month rentc. $1,000 per month interest payments, $2,500 per month rentd. $500 administrative costs, $2,500 per month rent16. Which of the following should be included in the initial outlay?a. increased investment in inventory and accounts receivableb. preexisting firm overhead reallocated to the new projectc. first year depreciation expense on any new equipment purchasedd. taxable gain on the sale of old equipment being replacedUnit 3 Examination139BAM 313 Introduction to Financial Management17. QRW Corp. needs to replace an old lathe with a new, more efficient model. The old lathe waspurchased for $50,000 nine years ago and has a current book value of $5,000. (The oldmachine is being depreciated on a straight-line basis over a ten-year useful life.) The newmachine costs $100,000. It will cost the company $10,000 to get the new lathe to the factoryand get it installed. The old machine will be sold as scrap metal for $2,000. The new machineis also being depreciated on a straight-line basis over ten years. Sales are expected to increaseby $8,000 per year while operating expenses are expected to decrease by $12,000 per year.QRW’s marginal tax rate is 40%. Additional working capital of $3,000 is required to maintainthe new machine and higher sales level. The new lathe is expected to be sold for $5,000 atthe end of the project’s ten-year life. What is the incremental free cash flow during year 1 ofthe project?a. $11,400b. $15,200c. $12,800d. $14,40018. The cost of retained earnings is less than the cost of new common stock because:a. dividends are not tax deductibleb. flotation costs are incurred when new stock is issuedc. accounting rules allow a deduction when using retained earningsd. marginal tax brackets increase19. Beauty Inc. plans to maintain its optimal capital structure of 40 percent debt, 10 percentpreferred stock, and 50 percent common equity indefinitely. The required return on eachcomponent source of capital is as follows: debt–8 percent; preferred stock–12 percent;common equity–16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate ofreturn must the firm earn on its investments if the value of the firm is to remain unchanged?a. 12.00 percentb. 11.12 percentc. 12.40 percentd. 10.64 percent20. Your firm is considering an investment that will cost $920,000 today. The investment willproduce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 inyear 5. The discount rate that your firm uses for projects of this type is 11.25%. What is theinvestment’s internal rate of return?a. 15.98%b. 27.28%c. 20.53%d. 21.26%Unit 3 Examination140BAM 313 Introduction to Financial Management21. The advantages of NPV are all of the following EXCEPT:a. it provides the amount by which positive NPV projects will increase the value of the firmb. it allows the comparison of benefits and costs in a logical manner through the use of timevalue of money principlesc. it recognizes the timing of the benefits resulting from the projectd. it can be used as a rough screening device to eliminate those projects whose returns donot materialize until later years22. Which of the following are included in the terminal cash flow?a. recapture of any working capital increase included in the initial outlayb. the expected salvage value of the assetc. any tax payments or receipts associated with the salvage value of the assetd. all of the above23. Which of the following differentiates the cost of retained earnings from the cost of newlyissued common stock?a. the larger dividends paid to the new common stockholdersb. the flotation costs incurred when issuing new securitiesc. the cost of the pre-emptive rights held by existing shareholdersd. the greater marginal tax rate faced by the now-larger firm24. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs$120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 inyear three, and $45,000 in year four. Lithium, Inc.’s required rate of return for these projectsis 10%. The profitability index for Project B is:a. 1.55b. 1.39c. 1.33d. 1.4825. When terminating a project for capital budgeting purposes, the working capital outlay requiredat the initiation of the project will:a. increase the cash flow because it is recapturedb. decrease the cash flow because it is an outlayc. not affect the cash flowd. decrease the cash flow because it is a historical cost1. A high degree of variability in a firm’s earnings before interest and taxes refers to:a. business riskb. financial leveragec. operating leveraged. financial risk2. If a firm has no operating leverage and no financial leverage, then a 10% increase in sales willhave what effect on EPS?a. EPS will increase by 10%b. EPS will remain the samec. EPS will increase by less than 10%d. EPS will decrease by 10%3. According to the moderate view of capital costs and financial leverage, as the use of debtfinancing increases:a. the cost of capital continuously increasesb. there is an optimal level of debt financingc. the cost of capital remains constantd. the cost of capital continuously decreases4. The primary weakness of EBIT-EPS analysis is that:a. it double counts the cost of debt financingb. it applies only to firms with large amounts of debt in their capital structurec. it may only be used by firms that are profitable this yeard. it ignores the implicit cost of debt financing5. Potential applications of the break-even model include:a. optimizing the cash-marketable securities position of a firmb. replacement for time-adjusted capital budgeting techniquesc. pricing policyd. All of the above.Unit 4 Examination191BAM 313 Introduction to Financial Management6. The Modigliani and Miller hypothesis does NOT work in the “real world” because:a. interest expense is tax deductible, providing an advantage to debt financingb. higher levels of debt increase the likelihood of bankruptcy, and bankruptcy has real costsfor any corporationc. both a and bd. dividend payments are fixed and tax deductible for the corporation7. A corporation with very high growth prospects and many positive NPV projects to fund maywant to increase its dividend based on the:a. very low agency costs of the corporationb. information effectc. tax bias against capital gainsd. residual dividend theory8. Which of the following strategies may be used to alter a firm’s capital structure toward a higherpercentage of debt compared to equity?a. stock splitb. stock repurchasec. stock dividendd. maintain a low dividend payout ratio9. AFB, Inc.’s dividend policy is to maintain a constant payout ratio. This year AFB, Inc. paidout a total of $2 million in dividends. Next year, AFB, Inc.’s sales and earnings per share areexpected to increase. Dividend payments are expected to:a. increase above $2 million only if the company issues additional shares of common stockb. decrease below $2 millionc. increase above $2 milliond. remain at $2 million10. Which of the following is true?a. In industries with volatile earnings, the residual dividend policy results in the mostconsistent dividend stream.b. If the clientele effect is correct, firms should follow a constant dividend payout ratio policy.c. In general, the higher the number of positive NPV investment opportunities for a firm, thelower the dividend payout ratio.d. According to the informational content of dividends, an increase in dividends is always apositive signal.Unit 4 Examination192BAM 313 Introduction to Financial Management11. Which of the following is always a non-cash expense?a. salariesb. depreciationc. income taxesd. None of the above.12. Which of the following is a limitation of the “percent of sales method” of preparing pro formafinancial statements?a. Inventory levels are seldom affected by changes in sales volume.b. A firm’s investment in accounts receivable is seldom related to sales volume.c. Not all assets and liabilities increase or decrease as a constant percent of sales.d. The dividend payout ratio may change from one year to the next.13. Spontaneous sources of funds refer to all of the below EXCEPT:a. accounts payableb. accrualsc. common stockd. a bank loan14. Selection of a source of short-term financing should include all of the following EXCEPT:a. the effect of the use of credit from a particular source on the cost and availability of othersources of creditb. the floatation costs for debenturesc. the effective cost of creditd. the availability of financing in the amount and for the time needed15. The terminal warehouse agreement differs from the field warehouse agreement in that:a. the cost of the terminal warehouse agreement is lower due to the lower degree of riskb. the warehouse procedure differs for both agreementsc.
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