fin 300 exam 3 ch 9-12
The target capital structure of Sigma Solvers Inc. indicates that only 50 percent of the total capital should be equity, the remainder of funds should come from the issues of bonds (30 percent) and preferred stock (20 percent). In the next year, Sigma Solvers' net income will be $40 million. As the payout ratio is 50 percent, $20 million will be paid out as dividends and $20 million will be added to retained earnings. The total capital that can be raised before new common stock needs to be issued to finance new capital projects is _____.
$40 million
Olive Drab Inc.'s common stock currently sells for $25 per share, the expected dividend to be paid at the end of current year is $1.45 per share, and its expected long-term growth rate is 6.5 percent. Which of the following is Olive Drab's required rate of return on retained earnings as per the discounted cash flow (DCF) approach? (Round off the answer to two decimal places.)
12.30 percent
Arizona Rock, an all-equity firm, currently has a beta of 1.25, and a risk-free rate (rRF) of 7 percent and market rate (rM) as 14 percent. The expected return is _____.
15.75%
ZincBoe Enterprises, an all-equity firm, has a beta coefficient of 1.5. The risk-free rate is 10 percent, and the market risk premium is 6 percent. The expected rate of return is _____.
19%
TruStar company is considering investing in a new furnace, which is less risky than the other furnaces it has purchased in the past. It generally expects a return of 10% from an average-risk project and adjusts the discount rate by 2% depending on the risk of a project. TruStar should expect a return of _____ from this project.
8%
Which of the following statements about companies that use processing costing is false?
A processing department is an organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product. Costs are accumulated by department. Correct Answer: Raw material costs are added only to the first processing department. A separate Work in Process account is maintained for each processing department.
Which of the following statements is true of a required rate of return?
A required rate of return is the discount rate that the IRR must exceed for a project to be considered acceptable.
Which of the following mathematical expressions computes the cost of retained earnings according to the capital asset pricing model (CAPM)?
Cost of retained earnings = Risk-free rate + (Market return - Risk-free rate) × Beta coefficient
Which of the following capital budgeting techniques has experienced the greatest increase in usage by firms since the 1970s?
Net present value
Which of the following mathematical expressions computes the component cost of preferred stock?
Preferred dividend / (Current market price of preferred stock - Flotation cost)
Capital budget is an outline of _____.
Process costing accumulates costs by department. Process costing assigns departmental costs uniformly to all identical units that pass through the department during a period. Process costing systems compute unit costs by department. Correct Answer: Process costing is used when a company produces a continuous flow of units that are distinguishable from one another.
For a company, financial risk arises from the use of _____.
fixed-income securities
_____ increase the rate that the firm must earn to pay the preferred dividend.
flotation costs
operation costing
has both characteristics of job costing and process costing. has common and individual characteristics -produced in batches
The times-interest-earned (TIE) ratio provides an indication of:
how well the company can cover its interest payments with operating income
According to the trade-off theory, why is corporate debt less expensive than common stock or preferred stock?
interest charges are tax deductible
The point where the NPV profile on a graph that shows the net present values for a project at various discount rates crosses the X-axis indicates a project's
internal rate of return
Suppose the firm's required rate of return is stated in nominal terms, but the project's expected cash flows are expressed in real dollars. In this situation, other things held constant, the calculated net present value (NPV) would be:
lesser than the nominal NPV
If two projects are of equal size and have the same life, then the _____ and the _____ will always lead to the same project selection decision.
net present value (NPV), modified internal rate of return (MIRR)
Sneaker Styles Company manufactures a wide variety of sneakers. Which of the following systems is most suitable for Sneaker Styles?
operation costing
Which of the following strikes a balance between risk and return to achieve the ultimate goal of maximizing the price of the firm's stock?
optimal capital structure
As per the _____ method of capital budgeting, it is better to recover the cost of (investment in) a project sooner rather than later.
payback period
The length of time required to recover the original cost of an investment is known as the investment's _____.
payback period
Repatriation of earnings refers to the:
process of sending cash flows from a foreign subsidiary back to the parent company.
The investment opportunity schedule shows the amount of investment at different _____.
rates of return
The depreciable basis of a capital asset generally includes the purchase price of the asset plus the _____ that are required to make the asset operational.
shipping and installation costs
Which of the following costs should be included under relevant cash flows while making capital budgeting decisions?
shipping and installation costs
The optimal mix of debt, preferred stock, and common equity with which a firm plans to finance investments is called its _____ capital structure.
target
To determine the true cost of debt, the yield to maturity (YTM) should be adjusted for _____.
tax savings on interest on debt
The future value of the cash inflows is called the
terminal value
The yield to maturity (YTM) on a bond is _____
the average rate of return that investors require to provide funds to a firm in the form of debt.
Which of the following is required to compute the internal rate of return (IRR) of a project?
the cash inflows and cash outflows for the project
The bond-yield-plus-risk-premium approach assumes that:
the cost of equity is closely related to the firm's cost of debt.
Operating leverage is the presence of fixed operating costs that do not change when:
the level sales changes
In evaluating independent projects, if a project is acceptable using the internal rate of return (IRR) method, then _____.
the net present value (NPV) method will also show that it is acceptable
The ability to borrow money at a reasonable cost when good investment opportunities arise is known as _____.
the reserve borrowing capacity
To compute a project's traditional payback period (PB), the _____ cash flows that it is expected to generate during its life are used; to compute a project's discounted payback period (DPB), the _____ of the cash flows that it is expected to generate during its life are used.
unadjusted: present value
process costing
used by companies that produce homogeneous products in large quantities
job order costing
used by companies to produce many different products in one facility
The use of cost of capital at the intersection of investment opportunity schedule and marginal cost of capital schedule for capital budgeting results in:
an optimal level of financing and investment
If a firm's degree of operating leverage (DOL) equals 2.0 and if sales increase by 10 percent, then _____ will increase by 20 percent.
earnings before interest and taxes (EBIT)
The two types of capital budgeting projects discussed in the book are:
expansion and replacement
Which of the following is associated with political risks?
expropriation of assets
Corporate risk is important because:
a firm's stability affects the return earned
If two firms differ only in their amounts of fixed business costs, the firm with the higher amount of fixed business costs is said to have _____.
a higher degree of operating leverage
An action taken by a firm's management that provides clues to investors about how management views the firm's prospects is known as _____.
a signal
