FIN man

Which one of the following is an example of a sunk cost? Multiple Choice $2,000 in lost sales because an item was out of stock $2,000 paid last year to rent equipment $2,000 project that must be forfeited if another project is accepted $2,000 reduction in Product A revenue if a firm commences selling Product B $2,000 increase in comic book sales if a store ceases selling puzzles

$2,000 paid last year to rent equipment

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity? Multiple ChoiceA decrease in the dividend amount An increase in the dividend amount A decrease in the market rate of return A decrease in the firm's beta A decrease in the risk-free rate

A decrease in the risk-free rate

Which one of the following is a project cash inflow? Ignore any tax effects.

Decrease in inventory

Which of the following statements regarding a firm's pretax cost of debt is accurate? Multiple Choice It is based on the current yield to maturity of the company's outstanding bonds. It is equal to the coupon rate on the latest bonds issued by the company. It is equivalent to the average current yield on all of a company's outstanding bonds. It is based on the original yield to maturity on the latest bonds issued by a company. It must be estimated as it cannot be directly observed in the market.

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

According to ________, the value of a company is unrelated to its capital structure. Multiple Choice the homemade leverage principle M&M Proposition I, no tax M&M Proposition II, no tax the pecking-order theory the static theory of capital structure

M&M Proposition I, no tax

According to ________, the cost of equity capital is directly and proportionally related to capital structure. Multiple Choice the static theory of capital structure M&M Proposition I M&M Proposition II the homemade leverage principle the pecking-order theory

M&M Proposition II

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? Multiple Choice Salvage value Terminal cost Sunk cost Opportunity cost Erosion cost

Opportunity cost

When analyzing the best-case scenario, which of the following variables will be forecast at their highest expected level? Multiple Choice Fixed costs and units value Variable costs and sales price Fixed costs and sales price Salvage value and units sold Initial cost and variable costs

Salvage value and units sold

Which one of the following types of costs was incurred in the past and cannot be recouped? Multiple Choice Incremental Side Sunk Opportunity Erosion

Sunk

Which one of the following statements related to the internal rate of return (IRR) is correct? Multiple Choice The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. A project with an IRR equal to the required return would reduce the value of a firm if accepted. The IRR is equal to the required return when the net present value is equal to zero. Financing type projects should be accepted if the IRR exceeds the required return. The average accounting return is a better method of analysis than the IRR from a financial point of view.

The IRR is equal to the required return when the net present value is equal to zero.

The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has a beta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate? Multiple Choice 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 be estimated only by 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 statements is accurate? Multiple Choice 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.

The depreciation tax shield is best defined as the: Multiple Choice amount of tax that is saved when an asset is purchased. tax that is avoided when an asset is sold as salvage. amount of tax that is due when an asset is sold. amount of tax that is saved because of the depreciation expense. amount by which the aftertax depreciation expense lowers net income.

amount of tax that is saved because of the depreciation expense.

When calculating a firm's weighted average cost of capital, the capital structure weights: Multiple Choice are based on the book values of debt and equity. are based on the market values of the outstanding securities. depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock.

are based on the market values of the outstanding securities.

When evaluating capital project proposals, assume a firm assigns unique discount rates based on the risk level of each project. Accordingly the: Multiple Choice company's overall cost of capital may increase or decrease over time. company's overall cost of capital will not change over time. company's overall cost of capital will decrease over time. value of the company will decrease over time. firm will be unable to maximize value for its shareholders.

company's overall cost of capital may increase or decrease over time.

The optimal capital structure has been achieved when the: Multiple Choice 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.

Sensitivity analysis determines the: Multiple Choice range of possible outcomes given that most variables are reliable only within a stated range. degree to which the net present value reacts to changes in a single variable. net present value range that can be realized from a proposed project. degree to which a project relies on its initial costs. ideal ratio of variable costs to fixed costs for profit maximization.

degree to which the net present value reacts to changes in a single variable.

Financial risk is: Multiple Choice 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

When evaluating any capital project proposal, the cost of capital: Multiple Choice 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

Reyes Events wants to commence a new project but is unable to obtain the financing. This firm is facing: Multiple Choice financial deferral. financial allocation. capital allocation. marginal rationing. hard rationing.

hard rationing.

According to the pecking-order theory, firms prefer to use ________ before any other form of financing. Multiple Choice regular debt convertible debt common stock preferred stock internal funds

internal funds

The business risk of a company: Multiple Choice 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. is positively related to the company's cost of equity. has no relationship with the required return on a company's assets according to M&M theory.

is positively related to the company's cost of equity.

Relationship between risk and return

risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same token, the smaller the risk an investment poses, the smaller the potential return it will provide.

For any given capital project proposal, the discount rate should be based on the: Multiple Choice company's overall weighted average cost of capital. actual sources of funding used for the project. average of the company's overall cost of capital for the past five years. current risk level of the overall firm. risks associated with the use of the funds required by the project.

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

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: Multiple Choice marginal spending. capital preservation. soft rationing. hard rationing. marginal rationing.

soft rationing.

If a project has a net present value equal to zero, then: Multiple Choice the total of the cash inflows must equal the initial cost of the project. the project earns a return exactly equal to the discount rate. a decrease in the project's initial cost will cause the project to have a negative NPV. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. the project's PI must also be equal to zero.

the project earns a return exactly equal to the discount rate.

A project has a net present value of zero. Given this information: Multiple Choice the project has a zero percent rate of return. the project requires no initial cash investment. the project has no cash flows. the summation of all of the project's cash flows is zero. the project's cash inflows equal its cash outflows in current dollar terms.

the project's cash inflows equal its cash outflows in current dollar terms.

To determine a firm's cost of capital, one must include: Multiple Choice only the return required by the firm's current shareholders. only the current market rate of return on equity shares. the weighted costs of all future funding sources. the returns currently required by both debtholders and stockholders. the company's original debt-equity ratio.

the returns currently required by both debtholders and stockholders.

The effect of inflation

unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

if a company has the optimal amount of debt, then the: Multiple Choice value of the firm is equal to VL + TCD. direct financial distress costs must equal the present value of the interest tax shield. debt-equity ratio is equal to 1. value of the levered company will exceed the value of the unlevered company. company has no financial distress costs.

value of the levered company will exceed the value of the unlevered company.

The value of a firm is maximized when the: Multiple Choice cost of equity is maximized. tax rate equals the cost of capital. levered cost of capital is maximized. weighted average cost of capital is minimized. debt-equity ratio is minimized.

weighted average cost of capital is minimized.

Efficient Market Hypothesis

when new information comes into the market, it is immediately reflected in stock prices and thus neither technical nor fundamental analysis can generate excess returns.

The optimal capital structure: Multiple Choice will be the same for all companies within the same industry. will remain constant over time unless the company changes its primary operations. will vary over time as taxes and market conditions change. places more emphasis on operations than on financing. is unaffected by changes in the financial markets.

will vary over time as taxes and market conditions change.