Exam 1 Practice Exercises

Travis & Sons has a capital structure that is based on 45 percent debt, 5 percent preferred stock, and 50 percent common stock. The pretax cost of debt is 8.3 percent, the cost of preferred is 9.2 percent, and the cost of common stock is 15.4 percent. The tax rate is 21 percent. A project is being considered that is equally as risky as the overall company. This project has initial costs of $287,000 and annual cash inflows of $91,000, $248,000, and $145,000 over the next three years, respectively. What is the projected net present value of this project?

$101,488

An analyst is estimating an equity beta for Jay Company, which has a thinly traded stock. Jay is in the same 1ine of business as Cass Company, which trades more frequently and has a beta of 1.2. Jay's debt-to-equity ratio is 2.0 and Cass's debt-to- equity ratio is 1.6. Both companies have a tax rate of 30%. For Jay, the analyst should use an adjusted equity beta closest to: 0.57. 1.24. 1.36. 1.47.

1.36.

Wayco Industrial Supply has a pretax cost of debt of 8.3 percent, a cost of equity of 14.7 percent, and a cost of preferred stock of 8.9 percent. The firm has 165,000 shares of common stock outstanding at a market price of $33 a share. There are 15,000 shares of preferred stock outstanding at a market price of $43 a share. The bond issue has a face value of $750,000 and a market quote of 101. The company's tax rate is 21 percent. What is the weighted average cost of capital?

13.25%

Stock in Country Road Industries has a beta of 1.62. The market risk premium is 8.2 percent while T-bills are currently yielding 2.9 percent. Country Road's last paid annual dividend was $1.87 per share and dividends are expected to grow at an annual rate of 3.8 percent indefinitely. The stock sells for $25 a share. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?

13.87%

Dee's Toys has a target debt-equity ratio of .62. Its WACC is 11.3 percent and the tax rate is 21 percent. What is the cost of equity if the aftertax cost of debt is 6.3 percent?

14.40%

The Shoe Outlet has paid annual dividends of $.58, $.66, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $10.08 a share. What is the cost of equity? Hints: Please use the average of the growth rates over the last four years.

17.13%

Two years ago, a company issued $20 million in long- term bonds at par value with a coupon rate of 9 percent. The company has decided to issue an additional $20 million in bonds and expects the new issue to be priced at par value with a coupon rate of 7 percent. The company has no other debt outstanding and has a tax rate of 40 percent. To compute the company's weighted average cost of capital, the appropriate after- tax cost of debt is closest to:

4.2%

If the risk-free rate is 2% and the market rate of return is 5%, the cost of equity for a company with a beta of 0.8 is closest to: 2.4%. 4.0%. 4.4%. 5.6%.

4.4%.

Dot.Com has determined that it could issue $1,000 face value bonds with an 8 percent coupon paid semi- annually and a five- year maturity at $900 per bond. If Dot.Com's marginal tax rate is 38 percent, its after- tax cost of debt is: 6.2 percent. 6.4 percent. 6.6 percent. 10.6 percent.

6.6 percent.

The Gearing Company has an after- tax cost of debt capital of 4 percent, a cost of preferred stock of 8 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 7 percent. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital budgeting decisions for the average- risk project, the relevant cost of capital is:

7 percent

A financial analyst at Buckco Ltd. wants to compute the company's weighted average cost of capital (WACC) using the dividend discount model. The analyst has gathered the following data: Before- tax cost of new debt: 8 percent Tax rate: 40 percent Target debt- to- equity ratio: 0.8033 Stock price: $30 Next year's dividend: $1.50 Estimated growth rate: 7 percent Buckco's WACC is closest to:

9 percent (8.8%)

Brown Corporation had average days of sales outstanding of 19 days in the most recent fiscal year. Brown wants to improve its credit policies and collection practices and decrease its collection period in the next fiscal year to match the industry average of 15 days. Credit sales in the most recent fiscal year were $300 million, and Brown expects credit sales to increase to $390 million in the next fiscal year. To achieve Brown's goal of decreasing the collection period, the change in the average accounts receivable balance that must occur is closest to: a. +$0.41 million. b. -$0.41 million. c. -$1.22 million. d. +$1.22 million.

a. +$0.41 million.

Oil Creek Auto has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory? a. 12.22 percent b. 44.16 percent c. 16.54 percent d. 13.36 percent

a. 12.22 percent

An analyst gathered the following data about a company: Capital Structure: 30% debt, 20% preferred stock, 50% common stock Required rate of return: 10% debt, 11% preferred stock, 18% common stock Assuming a 40% tax rate, what after-tax rate of return must the company earn on its investments? a. 13.0%. b. 14.2%. c. 18.0%. d. 19.5%.

a. 13.0%.

A firm has a dividend payout ratio of 40%, a net profit margin of 10%, an asset turnover of 0.9 times, and a financial leverage multiplier of 1.2 times. The firm's sustainable growth rate is closest to: a. 4.3%. b. 6.5%. c. 8.0%. d. 11.0%.

a. 4.3%.

RGB, Inc.'s receivable turnover is ten times, the inventory turnover is five times, and the payables turnover is nine times. RGB's cash conversion cycle is closest to: a. 69 days. b. 104 days. c. 150 days. d. 185 days.

a. 69 days.

Paragon Co. has an operating profit margin (EBIT / revenue) of 11%, an asset turnover ratio of 1.2, a financial leverage multiplier of 1.5 times, an average tax rate of 35%, and an interest burden of 0.7. Paragon's return on equity is closest to: a. 9%. b. 10%. c. 11%. d. 12%.

a. 9%.

Financial analysis involves using financial data to: a. Assess a company's performance and make recommendations b. Create financial statements c. Evaluate market trends d. Design historical models in Excel

a. Assess a company's performance and make recommendations

Which ratio would a company most likely use to measure its ability to meet short-term obligations? a. Current ratio b. Payables turnover c. Gross profit margin d. ROA

a. Current ratio

Which of the following is least likely a limitation of financial ratios? a. Data on comparable firms are difficult to acquire. b. Determining the target or comparison value for a ratio requires judgment. c. Different accounting treatments require the analyst to adjust the data before comparing ratios. d. None of the above

a. Data on comparable firms are difficult to acquire.

Which one of the following questions is a working capital management decision? a. How much inventory should be on hand for immediate sale? b. Should the company issue new shares of stock or borrow money? c. How much should the company borrow to buy a new building? d. Should the company update or replace its older equipment? e. Should the company close one of its current stores?

a. How much inventory should be on hand for immediate sale?

Which type of financial analysis focuses on a company's ability to meet short-term obligations? a. Liquidity analysis b. Efficiency analysis c. Leverage analysis d. Profitability analysis

a. Liquidity analysis

What does the P/E ratio measure? a. The "multiple" that the stock market places on a company's EPS. b. The relationship between dividends and market prices. c. The earnings for one common share of stock. d. None of the above.

a. The "multiple" that the stock market places on a company's EPS.

A company's pretax cost of debt: a. is based on the current yield to maturity of the company's outstanding bonds. b. is equal to the coupon rate on the latest bonds issued by the company. c. is equivalent to the average current yield on all of a company's outstanding bonds. d. is based on the original yield to maturity on the latest bonds issued by a company. e. has to be estimated as it cannot be directly observed in the market.

a. is based on the current yield to maturity of the company's outstanding bonds.

The cost of preferred stock: a. is equal to the dividend yield. b. is equal to the yield to maturity. c. is highly dependent on the dividend growth rate. d. is independent of the stock's price. e. decreases when tax rates increase.

a. is equal to the dividend yield.

A company's quick ratio is 1.2. If inventory were purchased for cash, the: a. numerator would decrease more than the denominator, resulting in a lower quick ratio. b. denominator would decrease more than the numerator, resulting in a higher current ratio. c. numerator and denominator would decrease proportionally, leaving the current ratio unchanged. d. None of the above

a. numerator would decrease more than the denominator, resulting in a lower quick ratio.

The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the ________ method. a. percentage of sales b. sales dilution c. sales reconciliation d. common-size

a. percentage of sales

An example of a capital budgeting decision is deciding: a. whether or not to purchase a new machine for the production line. b. how much money should be kept in the checking account. c. how much inventory to keep on hand. d. how many shares of stock to issue. e. how to refinance a debt issue that is maturing.

a. whether or not to purchase a new machine for the production line.

Urban's, which is currently operating at full capacity, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a profit margin of 5 percent. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 3 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year? a. −$908.50 b. −$722.50 c. $967.30 d. $1,698.00

a. −$908.50

Morgan Insurance Ltd. issued a fixed- rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5 percent. The stock's current value is: a. $25.00. b. $26.92. c. $32.37 d. $37.31.

b. $26.92.

Porter's Corner has sales of $4,650 net income of $490, total assets of $5,820, and total debt of $2,760. Assets and costs are proportional to sales. Debt and equity are not. No dividends or taxes are paid. Next year's sales are projected to be $5,487. What is the amount of the external financing needed? a. -$28 b. $469 c. $611 d. $1,048

b. $469

A company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required return on debt is 9% and 14% for equity. If the company is in the 40% tax bracket, the company's marginal cost of capital is closest to: a. 7.2%. b. 10.6%. c. 12.0%. d. 14.2%

b. 10.6%.

RGB, Inc., has a gross profit of $45,000 on sales of $150,000. The balance sheet shows average total assets of $75,000 with an average inventory balance of $15,000. RGB's total asset turnover and inventory turnover are closest to: a. 7.00 times, 2.00 times b. 2.00 times, 7.00 times c. 0.50 times, 0.33 times d. 0.50 times, 2.00 times

b. 2.00 times, 7.00 times

RGB, Inc.'s income statement shows sales of $1,000, cost of goods sold of $400, pre-interest operating expense of $300, and interest expense of $100. RGB's interest coverage ratio is closest to: a. 2 times. b. 3 times. c. 4 times. d. 5 times.

b. 3 times.

RGB, Inc.'s purchases during the year were $100,000. The balance sheet shows an average account payable balance of $12,000. RGB's payables payment period is closest to: a. 37 days. b. 44 days. c. 52 days. d. 67 days.

b. 44 days.

A company has $5 million in debt outstanding with a coupon rate of 12%. Currently, the yield to maturity (YTM) on these bonds is 14%. If the firm's tax rate is 40%, what is the company's after-tax cost of debt? a. 5.6%. b. 8.4%. c. 10.3% d. 14.0%.

b. 8.4%.

A company's $100, 8% preferred is currently selling for $85. What is the company's cost of preferred equity? a. 8.0%. b. 9.4%. c. 10.8%. d. 11.5%.

b. 9.4%.

A creditor most likely would consider a decrease in which of the following ratios to be positive news? a. Interest coverage (times interest earned). b. Debt - to - total assets. c. Return on assets. d. Return on equity

b. Debt - to - total assets.

The proportion of profits distributed as dividends is known as: a. Dividend retention ratio b. Dividend pay-out ratio c. Finance manager's ratio d. Shareholder's wealth ratio

b. Dividend pay-out ratio

Which of the following would best explain an increase in receivables turnover? a. The company adopted new credit policies last year and began offering credit to customers with weak credit histories. b. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables. c. To match the terms offered by its closest competitor, the company adopted new payment terms now requiring net payment within 30 days rather than 15 days, which had been its previous requirement. d. None of the above

b. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables.

Leverage ratios are used to evaluate a company's: a. Efficiency in managing assets b. Financial risk and performance related to debt c. Ability to meet short-term obligations d. Performance in generating revenue and cash flow

b. Financial risk and performance related to debt

Which of the following statements is correct? a. The appropriate tax rate to use in the adjustment of the before-tax cost of debt to determine the after-tax cost of debt is the average tax rate because interest is deductible against the company's entire taxable income. b. For a given company, the after- tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity. c. For a given company, the investment opportunity schedule is upward sloping because as a company invests more in capital projects, the returns from investing increase. d. The cost of debt is further increased if interest expense is tax deductible

b. For a given company, the after- tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity.

Wang Securities had a long-term stable debt-to-equity ratio of 0.65. Recent bank borrowing for expansion into South America raised the ratio to 0.75. The increased leverage has what effect on the asset beta and equity beta of the company? a. The asset beta and the equity beta will both rise. b. The asset beta will remain the same and the equity beta will rise. c. The asset beta will remain the same and the equity beta will decline d. The asset beta and the equity beta will both decline..

b. The asset beta will remain the same and the equity beta will rise.

The capital structure weights used in computing a company's weighted average cost of capital: Hints: assume we do not know the firm's target capital structure. a. are based on the book values of debt and equity. b. are based on the market values of the outstanding securities. c. depend upon the financing obtained to fund each specific project. d. remain constant over time unless new securities are issued or outstanding securities are redeemed. e. are restricted to debt and common stock.

b. are based on the market values of the outstanding securities.

A company's current ratio is 1.9. If some of the accounts payable are paid off from the cash account, the: a. numerator would decrease by a greater percentage than the denominator, resulting in a lower current ratio. b. denominator would decrease by a greater percentage than the numerator, resulting in a higher current ratio. c. numerator and denominator would decrease proportionally, leaving the current ratio unchanged. d. None of the above

b. denominator would decrease by a greater percentage than the numerator, resulting in a higher current ratio.

A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by: a. accounts payable. b. long-term debt. c. fixed assets. d. retained earnings. e. common stock.

b. long-term debt.

The cost of equity is equal to the: a. expected market return. b. rate of return required by stockholders. c. cost of retained earnings plus dividends. d. Cost of debt premium

b. rate of return required by stockholders.

To study trends in a firm's cost of goods sold (COGS), the analyst should standardize the cost of goods sold numbers to a common-sized basis by dividing COGS by: a. assets. b. sales. c. net income. d. inventory

b. sales.

When the equity portion of the financing for new capital projects will be raised by issuing new equity shares, equity flotation costs should be: a. used to adjust the estimated cost of equity capital. b. treated as part of each project's initial cash outflow. c. disregarded because they are unlikely to be material. d. None of the above

b. treated as part of each project's initial cash outflow.

An analyst who needs to model and forecast a company's earnings for the next three years would be least likely to: a. assume that key financial ratios will remain unchanged for the forecast period. b. use common-size financial statements to estimate expenses as a percentage of net income. c. examine the variability of the predicted outcomes by performing a sensitivity or scenario analysis d. None of the above

b. use common-size financial statements to estimate expenses as a percentage of net income.

When developing forecasts, analysts should most likely: a. develop possibilities relying exclusively on the results of financial analysis. b. use the results of financial analysis, analysis of other information, and judgment. c. aim to develop extremely precise forecasts using the results of financial analysis d. None of the above

b. use the results of financial analysis, analysis of other information, and judgment.

Which of the following equations least accurately represents return on equity? a. net profit margin)(equity turnover). b. (net profit margin)(total asset turnover)(assets / equity). c. (ROA)(interest burden)(tax retention rate). d. (ROA)(interest burden)(equity turnover).

c. (ROA)(interest burden)(tax retention rate).

Return on equity using the traditional DuPont formula equals: a. (net profit margin) (interest component) (solvency ratio). b. (net profit margin) (total asset turnover) (tax retention rate). c. (net profit margin) (total asset turnover) (financial leverage multiplier). d. (operating profit margin) (total asset turnover) (financial leverage multiplier).

c. (net profit margin) (total asset turnover) (financial leverage multiplier).

RGB, Inc., has a net profit margin of 12%, a total asset turnover of 1.2 times, and a financial leverage multiplier of 1.2 times. RGB's return on equity is closest to: a. 12.0%. b. 14.2%. c. 17.3%. d. 21.9%.

c. 17.3%.

If RGB, Inc., has annual sales of $100,000, average accounts payable of $30,000, and average accounts receivable of $25,000, RGB's receivables turnover and average collection period are closest to: a. 2.1 times, 174 days b. 3.3 times, 111 days c. 4.0 times, 91 days d. 0.4 times, 91 days

c. 4.0 times, 91 days

Which one of the following statements is correct? a. Firms should accept low-risk projects prior to funding high-risk projects. b. Making subjective adjustments to a company's WACC when determining project discount rates unfairly punishes low-risk divisions within the company. c. A project that is unacceptable today might be acceptable tomorrow given a change in market returns. d. The pure play method is most frequently used for projects involving the expansion of a company's current operations. e. Companies that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play

c. A project that is unacceptable today might be acceptable tomorrow given a change in market returns.

All other things held constant, which of the following transactions will increase a firm's current ratio if the ratio is greater than one? a. Accounts receivable are collected and the funds received are deposited in the firm's cash account. b. Fixed assets are purchased from the cash account. c. Accounts payable are paid with funds from the cash account. d. None of the above

c. Accounts payable are paid with funds from the cash account.

What does the dividend decision of a corporation involve? a. Determining the optimal retention ratio b. Deciding when to distribute dividends c. Addressing whether to distribute dividends and how much to distribute d. Evaluating the proportion of profits retained in the business

c. Addressing whether to distribute dividends and how much to distribute

Assuming no changes in other variables, which of the following would decrease ROA? a. A decrease in the effective tax rate. b. A decrease in interest expense. c. An increase in average assets. d. an decrease in average assets

c. An increase in average assets.

When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance? a. Net working capital policy b. Capital structure policy c. Dividend policy d. Capital budgeting policy

c. Dividend policy

Which method of financial analysis compares several years of financial data to determine a growth rate? a. Profitability analysis b. Leverage analysis c. Horizontal analysis d. Vertical analysis

c. Horizontal analysis

Which one of the following is correct in relation to pro forma statements? a. Fixed assets must increase if sales are projected to increase. b. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. c. The addition to retained earnings is equal to net income less cash dividends. d. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. e. Inventory changes are not proportional to sales changes.

c. The addition to retained earnings is equal to net income less cash dividends.

An analyst observes a decrease in a company's inventory turnover. Which of the following would most likely explain this trend? a. The company installed a new inventory management system, allowing more efficient inventory management. b. Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period. c. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers. d. none of the above

c. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

Which type of financial analysis involves expressing various components of the income statement as a percentage of revenue? a. Leverage analysis b. Horizontal analysis c. Vertical analysis d. Profitability analysis

c. Vertical analysis

The decision to issue additional shares of stock is an example of: a. working capital management. b. capital budgeting. c. a capital structure decision. d. a controller's duties. e. a net working capital decision.

c. a capital structure decision.

The cost of debt can be determined using the yield- to-maturity and the bond rating approaches. If the bond rating approach is used, the: a. coupon is the yield. b. yield is based on the interest coverage ratio. c. company is rated and the rating can be used to assess the credit default spread of the company's debt. d. None of the above

c. company is rated and the rating can be used to assess the credit default spread of the company's debt.

Comparison of a company's financial results to other peer companies for the same time period is called: a. technical analysis b. time-series analysis c. cross- sectional analysis d. top-down analysis.

c. cross- sectional analysis

Which of the following ratios would be most useful in determining a company's ability to cover its lease and interest payments? a. ROA b. total asset turnover c. fixed charge coverage d. ROE

c. fixed charge coverage

An analyst who is interested in a company's long-term solvency would most likely examine the: a. return on total capital. b. defensive interval ratio. c. fixed charge coverage ratio. d. Current ratio.

c. fixed charge coverage ratio.

The cost of equity for a company with a debt-equity ratio of .41: a. tends to remain static even as the company's level of risk increases. b. increases as the unsystematic risk of the company's stock increases. c. is affected by either a change in the company's beta or its projected rate of growth. d. equals the risk-free rate plus the market risk premium. e. equals the company's pretax weighted average cost of capital.

c. is affected by either a change in the company's beta or its projected rate of growth.

In order to assess a company's ability to fulfill its long-term obligations, an analyst would most likely examine: a. activity ratios b. liquidity ratios c. solvency ratios d. turnover ratios.

c. solvency ratios

LL Companies has sales of $9,800, net income of $1,060, total assets of $8,950, and total debt of $4,760. Assets and costs are proportional to sales. Debt and equity are not. A dividend of $371 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $10,584. What is the amount of the external financing need? a. $716 b. $1,333 c. −$1,574 d. $-28

d. $-28

Last year, which is used as the base year, a firm had cash of $52, accounts receivable of $223, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61, accounts receivable of $204, inventory of $527, and net fixed assets of $1,216. What is this year's common-base-year value of inventory? a. .67 b. .91 c. .88 d. 1.04

d. 1.04

Which one of the following terms is defined as the management of a firm's long-term investments? a. Working capital management b. Financial allocation c. Agency cost analysis d. Capital budgeting

d. Capital budgeting

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? a. Cash management b. Capital budgeting c. Working capital management d. Capital structure e. Cost analysis

d. Capital structure

Building scenarios and performing sensitivity analysis in financial analysis help to: a. Estimate a business's worth b. Make projections for the future c. Assess a company's performance d. Determine the worst-case or best-case scenarios for a company's future

d. Determine the worst-case or best-case scenarios for a company's future

Which financial analysis involves estimating a business's worth? a. Rates of Return analysis b. Efficiency analysis c. Horizontal analysis d. Valuation analysis

d. Valuation analysis

A company's current cost of capital is based on: a. only the return required by the company's current shareholders. b. the current market rate of return on equity shares. c. the weighted costs of all future funding sources. d. both the returns currently required by its debtholders and stockholders. e. the company's original debt-equity ratio.

d. both the returns currently required by its debtholders and stockholders.

Financial planning: a. focuses solely on the short-term outlook for a firm. b. is a process that firms employ only when major changes to a firm's operations are anticipated. c. is a process that firms undergo once every five years. d. considers multiple options and scenarios. e. provides minimal benefits for firms that are highly responsive to economic changes.

d. considers multiple options and scenarios.

A firm's external financing need is met by: a. retained earnings. b. net working capital and retained earnings. c. net income and retained earnings. d. debt or equity. e. owners' equity, including retained earnings.

d. debt or equity.

Capital structure decisions include determining: a. how to allocate investment funds to multiple projects. b. how much inventory will be needed to support a project. c. the amount of funds needed to finance customer purchases of a new product. d. how much debt should be assumed to fund a project. e. which one of two projects to accept.

d. how much debt should be assumed to fund a project.

Working capital management decisions include determining: a. the best method of producing a product. b. the number of employees needed to work during a particular shift. c. when to replace obsolete equipment. d. the minimum level of cash to be kept in a checking account. e. if a competitor should be acquired.

d. the minimum level of cash to be kept in a checking account.

On a common-size balance sheet all accounts for the current year are expressed as a percentage of: a. sales for the period. b. the base year sales. c. total equity for the base year. d. total assets for the current year. e. total assets for the base year.

d. total assets for the current year.

Which one of the following is a working capital management decision? a. What amount of long-term debt is required to complete a project? b. What type(s) of equipment is (are) needed to complete a current project? c. Should a project should be accepted? d. How many shares of stock should the firm issue to fund an acquisition? e. Should the firm pay cash for a purchase or use the credit offered by the supplier?

e. Should the firm pay cash for a purchase or use the credit offered by the supplier?

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of: a. total assets. b. total equity. c. net income. d. taxable income. e. sales.

e. sales.

The weighted average cost of capital for a company is least dependent upon the: a. company's beta. b. coupon rate of the company's outstanding bonds. c. growth rate of the company's dividends. d. company's marginal tax rate. e. standard deviation of the company's common stock.

e. standard deviation of the company's common stock.

The discount rate assigned to an individual project should be based on: a. the company's overall weighted average cost of capital. b. the actual sources of funding used for the project. c. an average of the company's overall cost of capital for the past five years. d. the current risk level of the overall firm. e. the risks associated with the use of the funds required by the project.

e. the risks associated with the use of the funds required by the project.

SebCoe plc, a British firm, is evaluating an investment in a £50 million project that will be financed with 50% debt and 50% equity. Management has already determined that the NPV of this project is £5 million if it uses internally generated equity. However, if the company uses external equity, it will incur flotation costs of 5.8%. Assuming flotation costs are not tax deductible, the NPV using external equity would be:

£3.55 million because flotation costs reduce NPV by $1.45 million.