Financial Management of the Firm
During a 12-month period, a company is permitted to issue new securities through crowdfunding up to a limit of: $200 thousand. $500 thousand. $1 million. $5 million. $50 million.
$50 million.
What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? Maximal-growth model Constant-growth model Capital pricing model Realized-earnings model Realized=growth model
Constant-growth model
Assume you invest in a portfolio of long-term corporate bonds. Based on the period 1926-2016, what average annual rate of return should you expect to earn? Less than 5 percent Between 5 and 6 percent Between 6 and 7 percent Between 7 and 8 percent More than 8 percent
Between 6 and 7 percent
DL Farms currently has $600 in debt for every $1,000 in equity. Assume the company uses some of its cash to decrease its debt while maintaining its current equity and net income. Which of the following will decrease as a result of this action? Equity multiplier Total asset turnover Profit margin Return on assets Return on equity
Equity multiplier
You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? Arithmetic return Historical return Expected return Geometric return Required return
Expected return
Which one of the following is the equity risk related to capital structure policy? Market risk Systematic risk Static risk Business risk Financial risk
Financial risk
The stand-alone principle advocates that the project analysis should be based solely on which of the following costs? Sunk Total Variable Incremental Fixed
Incremental
All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? Loan obtained to finance the project Initial investment in inventory to support the project Annual depreciation tax shield Aftertax salvage value Net working capital recovery
Initial investment in inventory to support the project.
A company's current cost of capital is based on: only the return required by the company's current shareholders. the current market rate of return on equity shares. the weighted costs of all future funding sources. both the returns currently required by its debtholders and stockholders. the company's original debt-equity ratio.
both the returns currently required by its debtholders and stockholders.
The business risk of a company: depends on the company's level of unsystematic risk. is inversely related to the required return on the company's assets. is dependent upon the relative weights of the debt and equity used to finance the company. has a positive relationship with the company's cost of equity. has no relationship with the required return on a company's assets according to M&M theory.
has a positive relationship with the company's cost of equity.
The key means of defending against forecasting risk is to: rely primarily on the net present value method of analysis. increase the discount rate assigned to a project. shorten the life of a project. identify sources of value within a project. ignore any potential salvage value that might be realized.
identify sources of value within a project.
The internal rate of return: may produce multiple rates of return when cash flows are conventional. is best used when comparing mutually exclusive projects. is rarely used in the business world today. is principally used to evaluate small dollar projects. is easy to understand.
is easy to understand.
A general partner: is personally responsible for all partnership debts. has no say over a firm's daily operations. faces double taxation whereas a limited partner does not. has a maximum loss equal to his or her equity investment. receives a salary in lieu of a portion of the profits.
is personally responsible for all partnership debts.
Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called: red herrings. tombstones. Green Shoes. registration statements. cash offers.
tombstones.
Which one of the following time periods is associated with low rates of inflation? 1941-1942 1973-1974 2014-2015 1979-1980 1946-1947
2014-2015
Which one of the following statements related to cash dividends is correct? Extra cash dividends cannot be repeated in the future. A dividend is never a liability of the issuer until it has been declared. If a firm has paid regular quarterly dividends for at least five consecutive years, it is legally obligated to continue doing so. Regular cash dividends reduce paid-in capital. The dividend yield expresses the annual dividend as a percentage of net income.
A dividend is never a liability of the issuer until it has been declared.
Coulter Supply has a total debt ratio of .46. What is the equity multiplier? .89 1.17 1.47 1.85 2.17
1.85 Debt to equity ratio is the total debt ration multiplied by 1 minus the total debt ratio. .46(1-.46) =.85 The equity multiplier is 1 plus the debt-equity ratio. 1+.85 = 1.85.
The ex-dividend date is defined as _____ business day(s) prior to the date of record 1 2 3 4 5
2
Which one of the following is a current asset? Accounts payable Trademark Accounts receivable Notes payable Equipment
Accounts receivable
Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment? Ex-rights date Ex-dividend date Date of record Date of payment Declaration date
Date of record
The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a cash dividend of $.42 a share next month. In relation to this dividend, today is referred to as which one of the following dates? Decision date Date-of-record Declaration date Payment date Ex-dividend date
Declaration date
Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? Real estate investment Good reputation of the company Equipment owned by the firm Money due from a customer An item held by the firm for future sale
Good reputation of the company
Kelly's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? Storing supplies in the same space currently used for materials storage Utilizing the basket manager to oversee wreath production Hiring additional employees to handle the increased workload should the firm accept the wreath project. Researching the market to determine if wreath sales might be profitable before deciding to proceed Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt
Hiring additional employees to handle increased workload should the firm accept the wreath project
Which of the following are advantages of the payback method of project analysis? Considers the time value of money, liquidity bias Liquidity bias, arbitrary cutoff point Liquidity bias, ease of use Ignores time value of money, ease of use Ease of use, arbitrary cutoff point
Liquidity bias, ease of use
What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public? Prospectus Red herring Indenture Public disclosure statement Registration statement
Registration statement
Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is Steve using? Simulation testing Sensitivity analysis Break-even analysis Rationing analysis Scenario analysis
Scenario analysis
Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? Moving furniture to provide floor space for the appliances Paying the rent for the store Selling furniture to appliance customers Having the current storage manager oversee appliance sales Using the store's billing system for appliance sales
Selling furniture to appliance customers
The expected return on a stock computed using economic probabilities is: guaranteed the equal the actual average return on the stock for the next five years guaranteed to be the minimal rate of return on the stock over the next two years guaranteed to equal the actual return for the immediate twelve month period a mathematical expectation based on a weighted average and not an actual anticipated outcome the actual return you should anticipate as long as the economic forecast remains constant
a mathematical expectation based on a weighted average and not an actual anticipated outcome
Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the: compound rate. current yield. cost of debt. capital gains yield. cost of capital.
cost of debt
A business partner whose potential financial loss in the partnership will not exceed his investment in that partnership is called a: general partner. sole proprietor. limited partner. corporate shareholder. zero partner.
limited partner.
A partnership with four general partners: distributes profits based on percentage of ownership. has an unlimited partnership life. limits the active involvement in the firm to a single partner. limits each partner's personal liability to 25 percent of the partnership's total debt. must distribute 25 percent of the profits to each partner.
must distribute 25 percent of all the profits to each partner.
The annual dividend yield is computed by dividing _____________ annual dividend by the current stock price. this year's last year's next year's the past 5-year average the next 5-year average
next year's
Shareholder's equity: is referred to as a firm's financial leverage. is equal to total assets plus total liabilities. decreases whenever new shares of stock are issued. includes patents, preferred stock, and common stock. represents the residual value of a firm.
represents the residual value of a firm.
The Securities and Exchange Commission: verifies the accuracy of the information contained in the prospectus. publishes red herrings on prospective new security offerings. examines the prospectus during the Green Shoe period. reviews registration statements to ensure they comply with current laws and regulations. determines the final offer price once they have approved the registration statement.
reviews registration statements to ensure they comply with current laws and regulations.
The internal rate of return is: the discount rate that makes the net present value of a projected equal to the initial cash outlay. equivalent to the discount rate that makes the net present value equal to one. tedious to compute without the use of either a financial calculator or a computer. highly dependent upon the current interest rates offered in the marketplace. a better methodology than net present value when dealing with unconventional cash flows.
tedious to compute without the use of either a financial calculator or a computer.
Working capital management decisions include determining: the minimum level of cash to be kept in a checking account. the best method of producing a product. the number of employees needed to work during a particular shift. when to replace obsolete equipment. if a competitor should be acquired.
the minimum level of cash to be kept in a checking account.
The expected return on a stock given various states of the economy is equal to the: highest expected return given any economic state arithmetic average of the returns for each economic state summation of the individual expected rates of return weighted average of the returns for each economic state return for the economic state with the highest probability of occurrence
weighted average of the returns for each economic state
All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. A reduction in the dividend amount An increase in the dividend amount A reduction in the market rate of return A reduction in the firm's beta A reduction in the risk-free rate
A reduction in the risk-free rate
Which one of the following is the equity risk that is most related to the daily operations of a firm? Market risk Systematic risk Extrinsic risk Business risk Financial risk
Business risk
Theresa is analyzing a project that currently has a projected NPV of zero. Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently. Decrease the sales price Increase the materials cost per unit Decrease labor hours per unit produced Decrease the sales quantity Increase the amount of the initial investment in net working capital
Decrease the labor hours per unit produced
JLK is a partnership that was formed two years ago and has been extremely successful thus far. The owners have decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called? Venture capital offering Shelf offering Private placement Seasoned equity offering Initial public offering
Initial public offering
Unsystematic risk: can be effectively eliminated by portfolio diversification is compensated for by the risk premium is measured by beta is measured by standard deviation is related to the overall economy
can be effectively eliminated by portfolio diversification
What is a prospectus? A letter issued by the SEC authorizing a new issue of securities A report stating that the SEC recommends a new security to investors A letter issued by the SEC that outlines the changes required for a registration statement to be approved A document that describes the details of a proposed security offering along with relevant information about the issuer An advertisement in a financial newspaper that describes a security offering
A document that describes the details of a proposed security offering along with relevant information about the issuer
Which one of the following statements concerning venture capitalists is correct? Venture capitalists always assume management responsibility for the companies they finance. Exit strategy is a key consideration when selecting a venture capitalist. Venture capitalists limit their services to providing money to start-up firms. Most venture capitalists are long-term investors in the companies they finance. A venture capitalist normally invests in a new idea from conception through the IPO.
Exit strategy is a key consideration when selecting a venture capitalist.
Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? Determining how fixed costs affect NPV Estimating the residual value of fixed assets Identifying the potential range of reasonable outcomes. Determining the minimal level of sales required to break-even on an accounting basis. Determining the minimal level of sales required to break-even on a financial basis
Identifying the potential range of reasonable outcomes.
Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8. Fast Deliveries declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information? Neither Kate nor Ted is entitled to the dividend. Kate is entitled to the dividend but Ted is not. Ted is entitled to the dividend but Kate is not. Both Ted and Kate are entitled to the dividend. Both Ted and Kate are entitled to one-half of the dividend amount.
Kate is entitled to the dividend but Ted is not.
Moffatt Construction has paid a quarterly dividend of $1.25 per share for the last three years. Which one of the following is most apt to cause the company to reduce the amount of its next dividend payment? Decrease in the next quarter's revenue Decrease in the next quarter's net income Loss of a major customer which lowers the overall company's outlook for the next few years Major lump sum cash outflow next month to start a new project Increase in the number of new projects under consideration as compared to prior years
Loss of a major customer which lowers the overall company's outlook for the next few years
Which one of the following states that the cost of equity capital is directly and proportionally related to capital structure? Static theory of capital structure M&M Proposition I M&M Proposition II Homemade leverage Pecking-order theory
M&M Proposition II
Which of the following should not be included in the analysis of a new product? Increase in accounts payable for inventory purchases of the new product. Reduction in sales for a current product once the new product is introduced. Market value of a machine owned by the firm which will be used to produce the new product. Money already spent for research and development of the new product. Increase in account's receivable needed to finance sales of the new product.
Money already spent for research and development of the new product.
Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? Net present value Discounted payback Internal rate of return Profitability index Payback
Net present value
Which one of the following correctly describes the dividend yield? Next year's annual dividend divided by today's stock price This year's annual dividend divided by today's stock price This year's annual dividend divided by next year's expected stock price Next year's annual dividend divided by this year's annual dividend The increase in next year's dividend over this year's dividend divided by this year's dividend
Next year's annual dividend divided by today's stock price
Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? Portfolio return Portfolio weight Degree of risk Price-earnings ratio Index value
Portfolio weight
Which of the following functions should be the responsibility of the controller rather than the treasurer? Depositing cash receipts Processing cost reports Analyzing equipment purchases Approving credit for a customer Paying a vendor
Processing cost reports
Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? Best efforts offer Firm commitment offer General cash offer Rights offer Priority offer
Rights offer
Why is payback often used as the sole method of analyzing a proposed small project? Payback considers the time value of money. All relevant cash flows are included in the payback analysis. The benefits of payback analysis usually outweigh the costs of the analysis. Payback is the most desirable of the various financial methods of analysis. Payback is focused on the long-term impact of a project
The benefits of payback analysis usually outweigh the costs of the analysis.
A project has a required payback period of three years. Which of the following statements is correct concerning the payback analysis of this project? The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. The cash flow in Year 3 is ignored. The project's cash flow in Year 3 is discounted by a factor of (1+R)^3. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. The project is acceptable whenever the payback period exceeds three years.
The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.
Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? The vice president of finance reports to the chairman of the board The chief executive officer rereports to the president The controller reports to the chief financial officer The treasurer reports to the president The chief operations officer reports to the vice president of production
The controller reports to the chief financial officer.
Black River Tours has a capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. The dividend payout ratio is 30 percent, the company's beta is 1.21, and the tax rate is 21 percent. Given this, which one of the following statements is correct? The aftertax cost of debt will be greater than the current yield-to-maturity on the company's outstanding bonds. The company's cost of preferred is most likely less than the company's actual cost of debt. The cost of equity is unaffected by a change in the company's tax rate. The cost of equity can only be estimated using the capital asset pricing model. The weighted average cost of capital will remain constant as long as the company's capital structure remains constant.
The cost of equity is unaffected by a change in the company's tax rate.
Which one of the following will be used in the computation of the best-case analysis of a proposed project? Minimal number of units that are expected to be produced and sold The lowest expected salvage value that can be obtained for a project's fixed assets The lowest anticipated sales price per unit The lowest variable cost per unit that can reasonably be expected The highest level of fixed costs that is actually anticipated.
The lowest variable cost per unit that can reasonably be expected.
Which one of these statements is correct? Capital structure has no effect on shareholder value. The optimal capital structure occurs when the cost of equity is minimized. The optimal capital structure maximizes shareholder value. Shareholder value is maximized when WACC is also maximized. Unlevered firms have more value than levered firms when firms are profitable.
The optimal capital structure maximizes shareholder value.
Bailey's decided on Friday, March 7, to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record? Friday, March 7 Monday, March 17 Friday, March 14 Thursday, March 20 Friday, March 21
Thursday, March 20
Which one of the following statements is a correct reflection of the US financial markets for the period 1926-2016? US Treasury bill returns never exceeded a return of 9 percent in any one year. US Treasury bills had an annual return in excess of 10 percent in three or more years Inflation equated or exceeded the return on US Treasury bills every year during the period Long-term government bonds outperformed US Treasury bills every year during the period National deflation occurred in at least one year during every decade during the period
US Treasury bills had an annual return in excess of 10 percent in three or more years
A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent? Portfolio Non-diversifiable Market Unsystematic Expected
Unsystematic
Which one of the following is the primary determinant of a firm's cost of capital? Debt-equity ratio of any new funds raised Marginal tax rate Pretax cost of equity Aftertax cost of equity Use of the funds raised
Use of the funds raised
United Foods declared a dividend of $.62 a share on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date? Tuesday, October 28 Wednesday, October 29 Thursday, October 30 Wednesday, November 5 Thursday, November 6
Wednesday, October 29
Fixed costs: change as a small quantity of output produced changes. are constant over the short-run regardless of the quantity of output produced. are defined as the change in total costs when one more unit of output is produced. are subtracted from sales to compute the contribution margin. can be ignored in scenario analysis since they are constant over the life of a project.
are constant over the short-run regardless of the quantity of output produced
Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 65 percent of the company's overall sales. Division A is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should: allocate more funds to Division A since it is the larger of the two divisions. fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values. allocate the company's funds to the projects with the highest net present values based on the company's weighted average cost of capital. assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values. fund the highest net present value projects from each division based on an allocation of 65 percent of the funds to Division A and 35 percent of the funds to Division B.
assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: must continue to provide audited financial statements to the public. must continue to provide a detailed list of internal control.deficiencies on an annual basis. can provide less information to its shareholders than it did prior to "going dark." can continue publicly trading its stock but only on the exchange on which it was previously listed. ceases to exist.
can provide less information to its shareholders that it did prior to "going dark."
You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the: company is earning just enough to pay for the cost of the debt. company's earnings before interest and taxes are equal to zero. earnings per share for the levered option are exactly double those of the unlevered option. advantages of leverage exceed the disadvantages of leverage. company has a debt-equity ratio of .50.
company is earning just enough to pay for the cost of the debt.
The optimal capital structure has been achieved when the: debt-equity ratio is equal to 1. weight of equity is equal to the weight of debt. cost of equity is maximized given a pretax cost of debt. debt-equity ratio is such that the cost of debt exceeds the cost of equity. debt-equity ratio results in the lowest possible weighted average cost of capital.
debt-equity ratio results in the lowest possible weighted average cost of capital.
Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: was unaffected by the announcement. increased proportionately with the dividend decrease. decreased proportionately with the dividend decrease. decreased by $0.03 per share. increased by $0.03 per share.
decreased proportionately with the dividend decrease.
Financial risk is: the risk inherent in a company's operations. a type of unsystematic risk. inversely related to the cost of equity. dependent upon a company's capital structure. irrelevant to the value of a company.
dependent upon a company's capital structure.
The cost of capital for a new project: is determined by the overall risk level of the firm. is dependent upon the source of the funds obtained to fund that project. is dependent upon the firm's overall capital structure. should be applied as the discount rate for all other projects considered by the firm. depends upon how the funds raised for that project are going to be spent.
depends upon how the funds raised for that project are going to be spent.
One disadvantage of the corporate form of business ownership is the: limited liability of its shareholders for the firm's debts. double taxation of the distributed profits. firm's greater ability to raise capital that other forms of ownership. firm's potential for an unlimited life. firm's ability to issue additional shares of stock.
double taxation of distributed profits.
A limited partnership: has an unlimited life. can opt to be taxed as a corporation. terminates at the death of any one limited partner. has at least one partner who has unlimited liability for all the partnership's debts. consists solely of limited partners.
has at least one partner who has unlimited liability for all the partnership's debts.
Forecasting risk is defined as the possibility that: some proposed projects will be rejected. some proposed projects will be temporarily delayed. incorrect decisions will be made due to erroneous cash flow projections. some projects will be mutually exclusive. tax rates could change over the life of a project.
incorrect decisions will be made due to erroneous cash flow projections.
A firm should select the capital structure that: produces the highest cost of capital. maximizes the value of the firm. minimizes taxes. is fully unlevered. equates the value of debt with the value of equity.
maximizes the value of the firm.
If a stock portfolio is well diversified, then the portfolio variance: will equal the variance of the most volatile stock in the portfolio may be less than the variance of the least risky stock in the portfolio must be equal to or greater than the variance of the least risky stock in the portfolio will be the weighted average of the variances of the individual securities in the portfolio will be an arithmetic average of the variance of the individual securities in the portfolio
may be less than the variance of the least risky stock in the portfolio
For the period 1926-2016, US Treasury bills always: provided an annual rate of return that exceeded the annual inflation rate had an annual rate of return in excess of 1.2 percent provided a positive annual rate of return earned a higher annual rate of return than long-term government bonds had a greater variation in returns year-over-year than did long-term government bonds
provided a positive annual rate of return
The primary advantage of using the dividend growth model to estimate a company's cost of equity is: the ability to apply either current or future tax rates. the model's applicability to all corporations. is the model's consideration of risk. the stability of the computed cost of equity over time. the simplicity of the model.
the simplicity of the model.
The last date on which you can purchase shares of stock and still receive the next dividend is the date that is _____ business day(s) prior to the date of record. one two three four five
three
The treasurer of a corporation generally reports directly to the: board of directors chairman of the board chief executive officer president vice president of finance
vice president of finance