FIN3403 Exam 4

3.12 On the statement of cash flows, which of the following are considered financing activities? I. Increase in long-term debt. II. Decrease in accounts payable. III. Interest paid. IV. Dividends paid. A. I and IV only. B. III and IV only. C. II and III only. D. I, III, and IV only. E. I, II, III, and IV.

A. I and IV only

3.39 Which of the following can be used to compute the return on equity? I. Profit margin Return on assets II. Return on assets Equity multiplier III. Profit margin Total asset turnover Debt-equity ratio IV. Net income / Total assets A. II only. B. II and III only. C. II and IV only. D. I, II, and III only. E. I, II, III, and IV.

A. II only

14.13 The dividend growth model: A. Is only as reliable as the estimated rate of growth. B. Can only be used if historical dividend information is available. C. Considers the risk that future dividends may vary from their estimated values. D. Applies only when a firm is currently paying dividends. E. Uses beta to measure the systematic risk of a firm.

A. Is only reliable as the estimated rate of growth

16.26 The concept of homemade leverage is most associated with: A. M&M Proposition I with no tax. B. M&M Proposition II with no tax. C. M&M Proposition I with tax. D. M&M Proposition II with tax. E. The static theory proposition.

A. M&M proposition I with no tax

16.31 M&M Proposition I with tax implies that: A. A firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases. B. The value of a firm is inversely related to the amount of leverage used by the firm. C. The value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield. D. A firm's cost of capital is the same regardless of the mix of debt and equity used by the firm. E. A firm's cost of equity increases as the debt-equity ratio of the firm decreases.

A. a firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases

16.61 M & M Proposition I with tax supports the theory that: A. a firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases. B. the value of a firm is inversely related to the amount of leverage used by the firm. C. the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield. D. a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm. E. a firm's cost of equity increases as the debt-equity ratio of the firm decreases.

A. a firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases.

17.49 Stock splits can be used to: A. Adjust the market price of a stock so it falls within a preferred trading range. B. Decrease the excess cash held by a firm thereby lowering agency costs. C. Increase the par value while decreasing the market price per share. D. Increase the total equity of a firm. E. Adjust the debt-equity ratio.

A. adjust the market price of a stock so it falls within a preferred trading range

16.22 Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Ignore taxes. A. At the break-even point, there is no advantage to debt. B. The earnings per share will equal zero when EBIT is zero for a levered firm. C. The advantages of leverage are inversely related to the level of EBIT. D. The use of leverage at any level of EBIT increases the EPS. E. EPS are more sensitive to changes in EBIT when a firm is unlevered.

A. at the break-even point there is no advantage to debt

3.15 According to the statement of cash flows, an increase in interest expense will _____ the cash flow from _____ activities. A. Decrease; operating. B. Decrease; financing. C. Increase; operating. D. Increase; financing. E. Increase; investment.

A. decrease; operating

14.19 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. equal to the dividend yield

3.41 A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action? A. Equity multiplier. B. Total asset turnover. C. Profit margin. D. Return on assets. E. Return on equity.

A. equity multiplier

16.1 Which one of these actions generally occurs first in a bankruptcy reorganization? A. Filing proofs of claim. B. Dividing creditors into classes. C. Confirming the reorganization plan. D. Distributing cash, property, and securities to creditors. E. Submitting a reorganization plan.

A. filing proofs of claim

3.5 Relationships determined from a firm's financial information and used for comparison purposes are known as: A. Financial ratios. B. Identities. C. Dimensional analysis. D. Scenario analysis. E. Solvency analysis.

A. financial ratios

3.43 The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current: A. Financial ratios to the firm's historical ratios. B. Financial statements to the financial statements of similar firms operating in other countries. C. Financial ratios to the average ratios of all firms located within the same geographic area. D. Financial statements to those of larger firms in unrelated industries. E. Financial statements to the projections that were created based on Tobin's Q.

A. financial ratios to the firm's historical ratios

16.21 You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the: A. Firm is earning just enough to pay for the cost of the debt. B. Firm's earnings before interest and taxes are equal to zero. C. Earnings per share for the levered option are exactly double those of the unlevered option. D. Advantages of leverage exceed the disadvantages of leverage. E. Firm has a debt-equity ratio of .50.

A. firm is earning just enough to pay for the cost of debt

16.33 M&M Proposition II with taxes: A. Has the same general implications as M&M proposition II without taxes. B. States that a firm's capital structure is irrelevant to shareholders. C. Supports the argument that business risk is determined by the capital structure decision. D. Supports the argument that the cost of equity decreases as the debt-equity ratio increases. E. Concludes that the capital structure decision is irrelevant to the value of a firm.

A. has the same general implications as M&M proposition II without taxes

16.10 Westover Mills reduced its taxes last year by $680 by increasing its interest expense by $2,000. Which one of the following terms is used to describe this tax savings? A. Interest tax shield B. Interest credit C. Homemade leverage shield D. Current tax yield E. Tax-loss interest

A. interest tax shield

14.16 The pretax cost of debt: A. Is based on the current yield to maturity of the firm's outstanding bonds. B. Is equal to the coupon rate on the latest bonds issued by a firm. C. Is equivalent to the average current yield on all of a firm's outstanding bonds. D. Is based on the original yield to maturity on the latest bonds issued by a firm. 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 firm's outstanding bonds

14.30 Assigning discount rates to individual projects based on the risk level of each project: A. May cause the firm's overall weighted average cost of capital to either increase or decrease over time. B. Will prevent the firm's overall cost of capital from changing over time. C. Will cause the firm's overall cost of capital to decrease over time. D. Decreases the value of the firm over time. E. Negates the firm's goal of creating the most value for the shareholders.

A. may cause the firm's overall weighted average cost of capital to either increase or decrease overtime

17.65 Sligo Minerals stock is currently trading at $6 a share. The firm believes its primary clientele can afford to spend between $1,500 and $2,000 to purchase a round lot of 100 shares. The firm should consider a: A. reverse stock split. B. liquidating dividend. C. stock dividend. D.stock split. E. special dividend.

A. reverse stock split.

16.14 The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called: A. The static theory of capital structure. B. M&M Proposition I, with taxes. C. M&M Proposition II, with taxes. D. The pecking-order theory. E. The open markets theorem.

A. static theory of capital structure

14.25 Which one of the following statements related to WACC is correct for a firm that uses debt in its capital structure? A. The WACC should decrease as the firm's debt-equity ratio increases. B. The weight assigned to preferred stock decreases as the market value of the stock increases. C. The WACC will decrease as the corporate tax rate decreases. D. The weight of equity is based on the number of shares outstanding and the book value per share. E. The WACC will remain constant unless a firm retires some of its debt.

A. the WACC should decrease as the firm's debt-equity ratio increases

17.25 Which one of the following favors a low dividend policy? A. The tax on capital gains is deferred until the gain is realized. B. Few, if any, positive net present value projects are available to a firm. C. A majority of the shareholders have a low tax rate. D. A majority of the shareholders have better investment opportunities than the firm. E. The presence of an agency conflict with the firm's senior managers.

A. the tax on capital gains is deferred until the gain is realized

3.25 If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 0 B. .5 C. 1.0 D. 1.5 E. 2.0

B. .5

17.5 The ex-dividend date is defined as _____ business day(s) before the date of record. A. 1 B. 2 C. 3 D. 5 E. 10

B. 2

3.33 Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's? A. Al's has more net income than Ben's. B. Ben's is increasing its earnings at a faster rate than the Al's. C. Al's has a higher market value per share than does Ben's. D. Ben's has a lower market-to-book ratio than Al's. E. Al's has a higher earnings growth rate than Ben's.

B. Ben's is increasing its earnings at a faster rate than the AI's

17.21 All else equal, the market value of a stock will tend to decrease by roughly the aftertax value of the dividend on the: A. Dividend declaration date. B. Ex-dividend date. C. Date of record. D. Date of payment. E. Day after the date of payment.

B. Ex-dividend date

3.54 Which one of the following statements is correct? A. Book values should always be given precedence over market values. B. Financial statements are frequently used as the basis for performance evaluations. C. Historical information provides no value to someone who is predicting future performance. D. Potential lenders place little value on financial statement information. E. Reviewing financial information over time has very limited value.

B. Financial statements are frequently used as the basis for performance evaluations.

3.52 An increase in which of the following will increase the return on equity, all else constant? I. sales II. net income III. depreciation IV. total equity A. I only B. I and II only C. II and IV only D. II and III only E. I, II, and III only

B. I and II only

17.64 Which two of the following are the best justifications for a reverse stock split? I. combine a reverse stock split with a stock repurchase to enable a firm to go dark II. increase the respectability of the stock III. avoid delisting IV. reduce transaction costs for shareholders A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only

B. I and III only

17.58 If you ignore taxes and costs, a stock repurchase will: I. reduce the total assets of a firm. II. decrease the earnings per share. III. reduce the PE ratio more so than an equivalent stock dividend. IV. reduce the total equity of a firm. A. I and III only B. I and IV only C. II and IV only D. I, III, and IV only E. II, III, and IV only

B. I and IV only

14.42 The aftertax cost of debt generally increases when: I. a firm's bond rating increases. II. the market rate of interest increases. III. tax rates decrease. IV. bond prices rise. A. I and III only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

B. II and III only

3.53 Which of the following can be used to compute the return on equity? I. Profit margin × Return on assets II. Return on assets × Equity multiplier III. Net income/Total equity IV. Return on assets × Total asset turnover A. I and III only B. II and III only C. II and IV only D. I, II, and III only E. I, II, III, and IV

B. II and III only

3.18 Which of the following ratios are measures of a firm's liquidity? I. Cash coverage ratio. II. Interval measure. III. Debt-equity ratio. IV. Quick ratio. A. I and III only. B. II and IV only. C. I, III, and IV only. D. I, II, and III only. E. I, II, III, and IV.

B. II and IV only

17.20 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? A. Neither Kate nor Ted is entitled to the dividend. B. Kate is entitled to the dividend but Ted is not. C. Ted is entitled to the dividend but Kate is not. D. Both Ted and Kate are entitled to the dividend. E. Both Ted and Kate are entitled to one-half of the dividend amount.

B. Kate is entitled to the dividend but Ted is not

16.6 Which one of the following states that the value of a firm is unrelated to the firm's capital structure? A. Homemade leverage. B. M&M Proposition I, no tax. C. M&M Proposition II, no tax. D. Pecking-order theory. E. Static theory of capital structure.

B. M&M Proposition I, no tax

3.35 The price-sales ratio is especially useful when analyzing firms that have which one of the following? A. Volatile market prices. B. Negative earnings. C. Positive PEG ratios. D. A negative Tobin's Q. E. Increasing sales.

B. Negative earnings

17.17 Billingsley United declared a $.20 a share dividend 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? A. Tuesday, October 28 B. Wednesday, October 29 C. Thursday, October 30 D. Wednesday, November 5 E. Thursday, November 6

B. Wednesday, October 29

14.17 Which one of these will increase a firm's aftertax cost of debt? A. a Decrease in the market value of the firm's outstanding bonds. B. a Decrease in the firm's tax rate. C. An increase in the bond's credit rating. D. An increase in the firm's beta. E. A Decrease in the market rate of interest.

B. a decrease in the firm's tax rate

17.16 Which one of the following statements related to cash dividends is correct? A. Extra cash dividends cannot be repeated in the future. B. A dividend is never a liability of the issuer until it has been declared. C. If a firm has paid regular quarterly dividends for at least five consecutive years, it is legally obligated to continue doing so. D. Regular cash dividends reduce paid-in capital. E. The dividend yield expresses the annual dividend as a percentage of net income.

B. a dividend is never a liability of the issuer until it has been declared

3.10 Which one of the following is a source of cash? A. Repurchase of common stock, B. Acquisition of debt, C. Purchase of inventory, D. Payment to a supplier, E. Granting credit to a customer,

B. acquisition of debt

16.11 The unlevered cost of capital refers to the cost of capital for: A. A privately owned entity. B. An all-equity firm. C. A governmental entity. D. A private individual. E. A corporate shareholder.

B. an all equity firm

14.20 The capital structure weights used in computing a firm's weighted average cost of capital: A. Are based on the book values of the firm's debt and equity. B. Are based on the market values of the firm's debt and equity securities. C. Depend upon the financing obtained to fund each specific project. D. Remain constant over time unless the firm issues new securities. E. Are restricted to the firm's debt and common stock.

B. are based on the market values of the firm's debt and equity securities

17.47 Which one of the following is the best justification for a reverse stock split? A. Improve the stock's respectability. B. Avoid delisting. C. Reduce transaction costs for shareholders. D. Improve the stock's liquidity. E. Increase the par value per share.

B. avoid delisting

16.56 Which one of the following is the legal proceeding under which an insolvent firm can be reorganized? A. restructure process B. bankruptcy C. forced merger D. legal takeover E. rights offer

B. bankruptcy

3.21 A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit? A. Current. B. Cash, C. Debt-equity, D. Quick, E. Total debt,

B. cash

17.10 The common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to by which one of the following terms? A. Information content effec B. Clientele effect C. Investor effect D. Distribution effect E. Market reaction effect

B. clientele effect

14.1 A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called? A. Dividend yield. B. Cost of equity. C. Capital gains yield. D. Cost of capital. E. Income return.

B. cost of equity

17.2 Frozen Foods just paid out $3.62 a share to its shareholders. The cash for these payments came from a large sale of assets, not from any earnings of the firm. What are these payments to shareholders called? A. Dividends B. Distributions C. Repurchases D. Payments-in-kind E. Stock splits

B. distributions

17.29 An investor is more likely to prefer a high dividend payout if a firm: A. Has high flotation costs. B. Has few, if any, positive net present value projects. C. Has lower tax rates than the investor. D. Has a stock price that is increasing rapidly. E. Offers substantial gains on its equities, which are taxed at a favorable rate.

B. has few, if any, positive NPV projects

17.37 If you ignore taxes and costs, a stock repurchase will: A. Increase the total assets of the firm. B. Increase the earnings per share. C. Increase the total equity of the firm. D. Reduce the PE ratio more than an equivalent stock dividend. E. Not affect the firm's total assets.

B. increase the earnings per share

16.37 Bankruptcy: A. Occurs when total equity is negative. B. Is a legal proceeding. C. Occurs when a firm cannot meet its financial obligations. D. Refers to a loss of value for debt holders. E. Is an inexpensive means of reorganizing a firm.

B. is a legal proceeding

17.38 Aaron owns 1,600 shares of LP Gas stock which he purchased six years ago at a price of $18 a share. Today, these shares are selling for $26 each. Aaron is subject to a tax rate of 20 percent on both his dividend income and his capital gains. Ignore costs. From Aaron's point of view, a stock repurchase today: A. Is equivalent to a cash dividend. B. Is more desirable than a cash dividend in respect to taxes. C. Will result in the same tax liability as an equivalent cash dividend. D. Is more highly taxed than a cash dividend. E. Is totally unacceptable to him.

B. is more desirable than a cash dividend in respect to taxes

17.59 Steve owns 3,000 shares of NOP, Inc. stock, which he purchased six years ago at a price of $22 a share. Today, these shares are selling for $68 each. Assume the current tax laws are such that Steve is subject to a tax rate of 25 percent on both his dividend income and his capital gains. From Steve's point of view, a stock repurchase today: (Ignore costs) A. is equivalent to a cash dividend in all respects. B. is more desirable than a cash dividend in respect to taxes. C. will result in the same tax liability as an equivalent cash dividend. D. is more highly taxed than a cash dividend. E. is totally unacceptable to him.

B. is more desirable than a cash dividend in respect to taxes.

3.36 Lenders probably have the most interest in which one of the following sets of ratios? A. Return on assets and profit margin. B. Long-term debt and times interest earned. C. Price-earnings and debt-equity. D. Market-to-book and times interest earned. E. Return on equity and price-earnings.

B. long-term debt and times interest earned

3.49 Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. book value

B. long-term solvency

14.26 If a firm uses its WACC as the discount rate for all of the projects it undertakes, then the firm will tend to do all of the following except: A. Reject some positive net present value projects. B. Lower the average risk level of the firm over time. C. Increase the firm's overall level of risk over time. D. Accept some negative net present value projects. E. Favor high risk projects over low risk projects.

B. lower the average risk level of the firm overtime

16.17 A firm should select the capital structure that: A. Produces the highest cost of capital. B. Maximizes the value of the firm. C. Minimizes taxes. D. Is fully unlevered. E. Equates the value of debt with the value of equity.

B. maximizes the value of the firm

16.41 The capital structure that maximizes the value of a firm also: A. Minimizes financial distress costs. B. Minimizes the cost of capital. C. Maximizes the present value of the tax shield on debt. D. Maximizes the value of the debt. E. Maximizes the present value of the bankruptcy costs.

B. minimizes the cost of capital

14.33 Which one of the following statements is correct? A. The subjective approach assesses the risks of each project and assigns an adjustment factor that is unique just for that project. B. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. C. Firms will correctly accept or reject every project if they adopt the subjective approach. D. Mandatory projects should only be accepted if they produce a positive NPV when the firm's WACC is used as the discount rate. E. The pure play approach should only be used with low-risk projects.

B. overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects

16.4 Which one of the following is a marketed claim against a firm's cash flows? A. Tax payment to the IRS. B. Principal payment on long-term debt. C. Payment of employee wages. D. Payment for warranty work on a product produced by the firm. E. Payment of external legal and accounting fees.

B. principal payment on long term debt

14.4 When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the _____ approach. A. Subjective risk. B. Pure play. C. Divisional cost of capital. D. Capital adjustment. E. Security market line.

B. pure play

14.24 The weighted average cost of capital for a firm with debt is the: A. Discount rate that the firm should apply to all of the projects it undertakes. B. Rate of return a firm must earn on its existing assets to maintain the current value of its stock. C. Coupon rate the firm should expect to pay on its next bond issue. D. Minimum discount rate the firm should require on any new project. E. Rate of return shareholders should expect to earn on their investment in this firm.

B. rate of return a firm must earn on its existing assets to maintain the current value of its stock

17.12 Which one of the following involves a payment in shares by a stock issuer that increases the number of shares a shareholder owns but also decreases the value per share? A. Cash dividend B. Stock dividend C. Stock repurchase D. Stock split E. Reverse stock split

B. stock dividend

17.13 Which one of the following does not affect the total equity of a firm but does increase the number of shares outstanding? A. Special dividend B. Stock split C. Share repurchase D. Rights offer E. Liquidating dividend

B. stock split

17.46 Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do something to acknowledge the loyalty of the shareholders but needs all of its available cash to fund the firm's rapid growth. The market price of the stock is currently trading at the upper end of its preferred trading range. The firm is most apt to consider which one of the following in this situation? A. Liquidating dividend B. Stock split C. Reverse stock split D. Extra cash dividend E. Special cash dividend

B. stock split

16.44 The basic lesson of M&M theory is that the value of a firm is dependent upon: A. The firm's capital structure. B. The total cash flow of the firm. C. Minimizing the marketed claims. D. The amount of marketed claims to that firm. E. Size of the stockholders' claims.

B. the total cash flow of the firm

14.35 The flotation cost for a firm is computed as: A. The arithmetic average of the flotation costs of both debt and equity. B. The weighted average of the flotation costs associated with each form of financing. C. The geometric average of the flotation costs associated with each form of financing. D. One-half of the flotation cost of debt plus one-half of the flotation cost of equity. E. A weighted average based on the book values of the firm's debt and equity.

B. the weighted average flotation costs associated with each form of financing

16.63 Bankruptcy: A. creates value for a firm. B. transfers value from shareholders to bondholders. C. technically occurs when total equity equals total debt. D. costs are limited to legal and administrative fees. E. is an inexpensive means of reorganizing a firm.

B. transfers value from shareholders to bondholders.

16.50 Which one of the following statements related to Chapter 7 bankruptcy is correct? A. A firm in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern. B. Under a Chapter 7 bankruptcy, a trustee will assume control of the firm's assets until those assets can be liquidated. C. Chapter 7 bankruptcies are always involuntary on the part of the firm. D. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy. E. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock are generally issued prior to the firm coming out of bankruptcy.

B. under a chapter 7 bankruptcy, a trustee will assume control of the firm's assets until those assets can be liquadated

16.47 Corporations in the U.S. tend to: A. Minimize taxes. B. Underutilize debt. C. Rely less on equity financing than they should. D. Have relatively similar debt-equity ratios across industry lines. E. Rely more heavily on debt than on equity as the major source of financing.

B. underutilize debt

3.1 Activities of a firm that require the spending of cash are known as: A. Sources of cash. B. Uses of cash. C. Cash collections. D. Cash receipts. E. Cash on hand.

B. uses of cash

3.29 RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following? A. Utilizing its fixed assets more efficiently than Sam's. B. Utilizing its total assets more efficiently than Sam's. C. Generating $1 in sales for every $1.26 in net fixed assets. D. Generating $1.26 in net income for every $1 in net fixed assets. E. Maintaining the same level of current assets as Sam's.

B. utilizing its total assets more efficiently than Sam's

16.39 If a firm has the optimal amount of debt, then the: A. Direct financial distress costs must equal the present value of the interest tax shield. B. Value of the levered firm will exceed the value of the firm if it were unlevered. C. Value of the firm is minimized. D. Value of the firm is equal to VL + TC D. E. Debt-equity ratio is equal to 1.

B. value of the levered firm will exceed the value of the firm if it were unlevered

3.22 A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following? A. Pay all of its debts that are due within the next 48 hours. B. Pay all of its debts that are due within the next 48 days. C. Cover its operating costs for the next 48 hours. D. Cover its operating costs for the next 48 days. E. Meet the demands of its customers for the next 48 hours.

C or D. cover its operating costs for the next 48 days

17.53 A firm wants to maintain a stock price around $15 a share. Due to a recent market downturn, the stock is currently selling for $6 a share. The firm should consider a: A. 3-for-1 stock split. B. 4-for-1 stock split. C. 1-for-3 reverse stock split. D. 1-for-4 reverse stock split. E. 1-for-5 reverse stock split.

C. 1 for 3 reverse stock split

16.2 Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, how long after a firm files for bankruptcy protection do creditors have to wait before submitting their own reorganization plan to the court? A. 60 days B. 45 days C. 180 days D. 12 months E. 18 months

C. 180 days

17.43 A small stock dividend is defined as a stock dividend of less than _____ percent. A. 10 to 15 B. 15 to 20 C. 20 to 25 D. 25 to 30 E. 30 to 35

C. 20 to 25

17.62 A small stock dividend is defined as a stock dividend of less than _____ percent. A. 10 to 15 B. 15 to 20 C. 0 to 25 D. 25 to 30 E. 30 to 35

C. 20 to 25

17.19 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. A. 1 B. 2 C. 3 D. 4 E. 5

C. 3

16.12 The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs. A. Flotation B. Issue C. Direct bankruptcy D. Indirect bankruptcy E. Unlevered

C. Direct Bankruptcy

16.59 Which of the following statements are correct in relation to M & M Proposition II with no taxes? I. The required return on assets is equal to the weighted average cost of capital. II. Financial risk is determined by the debt-equity ratio. III. Financial risk determines the return on assets. IV. The cost of equity declines when the amount of leverage used by a firm rises. B. II and IV only C. I and II only D. III and IV only E. I and IV only

C. I and II only

3.13 On the statement of cash flows, which of the following are considered operating activities? I. Costs of goods sold. II. Decrease in accounts payable. III. Purchase of equipment. IV. Dividends paid. A. I and III only. B. III and IV only. C. I and II only. D. I, III, and IV only. E. I, II, III, and IV.

C. I and II only

17.63 Which of the following account balance changes occur as a result of a large stock dividend? I. increase in common stock II. decrease in capital in excess of par III. increase in capital in excess of par IV. decrease in retained earnings A. I and III only B. II and IV only C. I and IV only D. II and III only E. I, III, and IV only

C. I and IV only

17.57 Which of the following shareholders tend to favor a high dividend policy? I. retired individuals II. endowment funds III. corporate investors IV. investors with high dividend tax rates but low capital gains tax rates A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

C. I, II, and III only

3.40 The DuPont identity can be used to help managers answer which of the following questions related to a firm's operations? I. How many sales dollars has the firm generated per each dollar of assets? II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity? III. How much net profit is a firm generating per dollar of sales? IV. Does the firm have the ability to meet its debt obligations in a timely manner? A. I and III only. B. II and IV only. C. I, II, and III only. D. II, III and IV only. E. I, II, III, and IV.

C. I, II, and III only

3.47 On the Statement of Cash Flows, which of the following are considered operating activities? I. costs of goods sold II. decrease in accounts payable III. interest paid IV. dividends paid A. I and III only B. III and IV only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV

C. I, II, and III only

3.38 An increase in which of the following will increase the return on equity, all else constant? I. Total asset turnover. II. Net income. III. Total assets. IV. Debt-equity ratio. A. I only. B. I and II only. C. I, II, and IV only. D. I, II, and III only. E. I, II, III, and IV.

C. I, II, and IV only

16.62 The interest tax shield has no value when a firm has a: I. tax rate of zero. II. debt-equity ratio of 1. III. zero debt. IV. zero leverage. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, and IV only

C. I, III, and IV only

17.56 Which of the following tend to keep dividends low? I. shareholders desiring current income II. terms contained in bond indenture agreements III. the desire to maintain constant dividends over time IV. flotation costs A. II and III only B. I and IV only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV

C. II, III, and IV only

16.7 Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure? A. Static Theory of capital structure B. M&M Proposition I C. M&M Proposition II D. Homemade leverage E. Pecking-order theory

C. M&M Proposition II

3.50 Jasper United had sales of $21,000 in 2011 and $24,000 in 2012. The firm's current accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The net working capital turnover rate increased. D. The fixed asset turnover decreased. E. The receivables turnover rate decreased.

C. The net working capital turnover rate increased.

16.28 M&M Proposition II, without taxes, is the proposition that: A. The capital structure of a firm has no effect on the firm's value. B. The cost of equity depends on the return on debt, the debt-equity ratio, and the tax rate. C. A firm's cost of equity is a linear function with a slope equal to (RA - RD). D. The cost of equity is equivalent to the required rate of return on a firm's assets. E. The size of the pie does not depend on how the pie is sliced.

C. a firm's cost of equity is a linear function with a slop equal to (Ra-Rd)

14.31 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 firm's WACC when determining project discount rates unfairly punishes low-risk divisions within a firm. 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 firm's current operations. E. Firms that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.

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

17.32 The dividend market is in equilibrium when: A. All firms adopt a low dividend policy. B. Half of the firms adopt a low dividend policy and half adopt a high dividend policy. C. All clienteles are satisfied. D. Dividends remain constant and no special dividends are declared. E. The total amount of the annual dividends is equal to the net income for the year.

C. all clienteles are satisfied

14.32 The subjective approach to project analysis: A. Is used only when a firm has an all-equity capital structure. B. Uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y. C. Assigns discount rates to projects based on the discretion of the senior managers of a firm. D. Allows managers to randomly adjust the discount rate assigned to a project once the project's beta has been determined. E. Applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.

C. assigns discount rates to projects based on the discretion of the senior managers of a firm

14.46 Phil's is a sit-down restaurant that specializes in home-cooked meals. Theresa's is a walk-in deli that specializes in specialty soups and sandwiches. Both firms are currently considering expanding their operations during the summer months by offering pre-wrapped donuts, sandwiches, and wraps at a local beach. Phil's currently has a WACC of 14 percent while Theresa's WACC is 10 percent. The expansion project has a projected net present value of $12,600 at a 10 percent discount rate and a net present value of -$2,080 at a 14 percent discount rate. Which firm or firms should expand and offer food at the local beach during the summer months? A. Phil's only B. Theresa's only C. both Phil's and Theresa's D. neither Phil's nor Theresa's E. cannot be determined from the information provided

C. both Phil's and Theresa's

3.4 Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time? A. Statement of standardization. B. Statement of cash flows. C. Common-base year statement. D. Common-size statement. E. Base reconciliation statement.

C. common-base year statements

17.27 Which one of the following factors tends to increase cash dividends? A. Capital gains tax deferment. B. Terms contained in bond indentures. C. Corporate investors. D. Flotation costs. E. Homemade dividends.

C. corporate investors

14.2 Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the: A. Compound rate. B. Current yield. C. Cost of debt. D. Capital gains yield. E. Cost of capital.

C. cost of debt

17.6 Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment? A. Ex-rights date B. Ex-dividend date C. Date of record D. Date of payment E. Declaration date

C. date of record

17.4 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? A. Decision date B. Date-of-record C. Declaration date D. Payment date E. Ex-dividend date

C. declaration date

3.19 An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. A. Increase in the cash ratio. B. Increase in the net working capital to total assets ratio. C. Decrease in the quick ratio. D. Decrease in the cash coverage ratio. E. Increase in the current ratio.

C. decrease in the quick ratio

3.14 According to the statement of cash flows, an increase in inventory will _____ the cash flow from _____ activities. A. Increase; operating. B. Decrease; financing. C. Decrease; operating. D. Increase; financing. E. Increase; investment.

C. decrease; operating

17.22 Which one of the following statements related to dividend policy is correct? A. The primary question related to dividend policy is whether or not a firm should ever pay a dividend. B. Both dividends and dividend policy are irrelevant. C. Dividend policy focuses on the timing of dividend payments. D. Homemade dividends increase the importance of a firm's dividend policy decisions. E. Whether or not a firm ever pays a dividend is irrelevant to equity valuation.

C. dividend policy focuses on the timing of dividend payments

3.37 Which one of the following accurately describes the three parts of the DuPont identity? A. Operating efficiency, equity multiplier, and profitability ratio. B. Financial leverage, operating efficiency, and profitability ratio. C. Equity multiplier, profit margin, and total asset turnover. D. Debt-equity ratio, capital intensity ratio, and profit margin. E. Return on assets, profit margin, and equity multiplier.

C. equity multiplier, profit margin, and total asset turnover

14.10 A firm's overall cost of equity is: A. Generally less than the firm's WACC given a debt-equity ratio of .40. B. Unaffected by changes in the market risk premium. C. Highly dependent upon the risk level of the firm. D. Generally less than the firm's after tax cost of debt. E. Inversely related to changes in the firm's tax rate.

C. highly dependent on the risk level of the firm

3.42 Which one of the following statements is correct? A. Book values should always be given precedence over market values. B. Financial statements are rarely used as the basis for performance evaluations. C. Historical information is useful when projecting a firm's future performance. D. Potential lenders place little value on financial statement information. E. Reviewing financial information over time has very limited value.

C. historical information in useful when projecting a firm's future performance

14.11 The cost of equity for a firm with a debt-equity ratio of .35: A. Tends to remain static for firms with increasing levels of risk. B. Increases as the unsystematic risk of the firm increases. C. Ignores the firm's risks when that cost is based on the dividend growth model. D. Equals the risk-free rate plus the market risk premium. E. Equals the firm's pretax weighted average cost of capital.

C. ignores the firm's risks when that cost is based on the dividend growth model

3.48 According to the Statement of Cash Flows, a decrease in accounts receivable will _____ the cash flow from _____ activities. A. decrease; operating B. decrease; financing C. increase; operating D. increase; financing E. increase; investment

C. increase; operating

16.13 The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs. A. Flotation B. Direct bankruptcy C. Indirect bankruptcy D. Financial solvency E. Capital structure

C. indirect bankruptcy

17.28 As of 2014, dividend income received by an individual: A. Is taxed at a constant 10 percent rate for all tax filers. B. Is exempt from federal income tax. C. Is taxed at a maximum rate of 20 percent. D. Is taxed at a flat rate of 15 percent. E. Is exempt from federal taxation unless the amount exceeds $5,000.

C. is taxed at a maximum rate of 20 percent

14.6 The weighted average cost of capital for a wholesaler: A. Is equivalent to the after tax cost of the firm's liabilities. B. Should be used as the required return when analyzing a potential acquisition of a retail outlet. C. Is the return investors require on the total assets of the firm. D. Remains constant when the debt-equity ratio changes. E. Is unaffected by changes in corporate tax rates.

C. is the return investors require on the total assets of the firm

16.49 A firm is technically insolvent when: A. It has a negative book value. B. Total debt exceeds total equity. C. It is unable to meet its financial obligations. D. It files for bankruptcy protection. E. The market value of its stock is less than its book value.

C. it is unable to meet its financial obligations

16.57 A business firm ceases to exist as a going concern as a result of which one of the following? A. divestiture B. share repurchase C. liquidation D. Leorganization E. capital restructuring

C. liquidation

17.31 S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last 10 quarters. Which one of the following is most apt to cause the firm to reduce the amount of its next dividend payment? A. Decrease in the next quarter's revenue. B. Decrease in the next quarter's net income. C. Loss of a major customer which lowers the firm's outlook for the next few years. D. Major lump sum cash outflow next month to settle a class action product liability lawsuit on a product that is no longer produced. E. Decrease in the number of new projects under consideration as compared to last year.

C. loss of a major customer which lowers the firm's outlook for the next few years

17.41 Which one of the following statements is correct? A. Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash need. B. Share repurchases tend to increase agency costs. C. Maintaining a steady dividend is a key goal of most dividend-paying firms. D. Tax rates are the key factor in determining a firm's dividend policy. E. Stock prices tend to ignore expected changes in dividend payments.

C. maintaining a steady dividend is a key goal of most dividend paying firms

17.30 The information content of a dividend increase generally signals that: A. The firm has a one-time surplus of cash. B. The firm has few, if any, net present value projects to pursue. C. Management believes earnings growth will be strong going forward. D. The firm has more cash than it needs due to a decline in future orders. E. Dividends thereafter will be lower.

C. management believes earnings growth will be strong going forward

3.26 The cash coverage ratio directly measures the ability of a firm to meet which one of its following obligations? A. Payment to supplier. B. Payment to employee. C. Payment of interest to a lender. D. Payment of principal to a lender. E. Payment of a dividend to a shareholder.

C. payment of interest to a lender

17.45 A large stock dividend: A. Reduces retained earnings by the total market value of the issued shares. B. Reduces the par value per share. C. Reduces retained earnings by the par value of each share issued. D. Increases the capital in excess of par value by the market value minus the par value of each share issued. E. Does not affect the equity accounts or the par value per share.

C. reduces retained earnings by the par value of each share issued

17.3 A $.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of business is called a: A. Repurchase B. Liquidating dividend C. Regular cash dividend D. Special dividend E. Extra cash dividend

C. regular cash dividend

3.23 Ratios that measure a firm's liquidity are known as _____ ratios. A. Asset management. B. Long-term solvency. C. Short-term solvency. D. Profitability. E. Book value.

C. short-term solvency

3.7 The U.S. government coding system that classifies a firm by the nature of its business operations is known as the: A. Centralized Business Index. B. Peer Grouping codes. C. Standard Industrial Classification codes. D. Governmental ID codes. E. Government Engineered Coding System.

C. standard industrial classification codes

17.11 HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called? A. Stock dividend B. Stock split C. Stock repurchase D. Reverse stock split E. Stock repeal

C. stock repurchase

16.54 Homemade leverage is: A. the incurrence of debt by a corporation in order to pay dividends to shareholders. B. the exclusive use of debt to fund a corporate expansion project. C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. D. best defined as an increase in a firm's debt-equity ratio. E. the term used to describe the capital structure of a levered firm.

C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

16.25 M&M Proposition I with no tax supports the argument that: A. Business risk has no effect on the return on assets. B. The cost of equity rises as leverage rises. C. The debt-equity ratio of a firm is completely irrelevant. D. Business risk is irrelevant. E. Homemade leverage is irrelevant.

C. the debt-equity ratio of a firm is completely irrelevant

14.21 Black River Tours has a capital structure of 55 percent common stock, 5 percent preferred stock, and 40percent debt. The firm has a 30 percent dividend payout ratio, a beta of 1.21, and a tax rate of 34 percent. Given this, which one of the following statements is correct? A. The after tax cost of debt will be greater than the current yield-to-maturity on the firm's outstanding bonds. B. The firm's cost of preferred is most likely less than the firm's actual cost of debt. C. The firm's cost of equity is unaffected by a change in the firm's tax rate. D. The cost of equity can only be estimated using the capital asset pricing model. E. The firm's weighted average cost of capital will remain constant as long as the firm's capital structure remains constant.

C. the firm's cost of equity is unaffected by a change in the firm's tax rate

14.14 Which one of the following statements related to the capital asset pricing model approach to equity valuation is correct? Assume the firm uses debt in its capital structure. A. This model considers a firm's rate of growth. B. The model applies only to non-dividend-paying firms. C. The model is dependent upon a reliable estimate of the market risk premium. D. The model generally produces the same cost of equity as the dividend growth model. E. This approach generally produces a cost of equity that equals the firm's overall cost of capital.

C. the model is dependent upon reliable estimate of the market risk premium

16.35 The interest tax shield is a key reason why: A. The required rate of return on assets rises when debt is added to the capital structure. B. The value of an unlevered firm is equal to the value of a levered firm. C. The net cost of debt to a firm is generally less than the cost of equity. D. The cost of debt is equal to the cost of equity for a levered firm. E. Firms prefer equity financing over debt financing.

C. the net cost of debt to a firm is generally less than the cost of equity

3.27 All-State Moving had sales of $899,000 in 2014 and $967,000 in 2015. The firm's current accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The net working capital turnover rate increased. D. The fixed asset turnover decreased. E. The receivables turnover rate decreased.

C. the net working capital turnover rate increased

16.3 Which one of these statements is correct? A. Capital structure has no effect on shareholder value. B. The optimal capital structure occurs when the cost of equity is minimized. C. The optimal capital structure maximizes shareholder value. D. Shareholder value is maximized when WACC is also maximized. E. Unlevered firms have more value than levered firms when firms are profitable.

C. the optimal capital structure maximizes shareholder value

16.27 Which one of the following statements is correct in relation to M&M Proposition II, without taxes? A. The cost of equity remains constant as the debt-equity ratio increases. B. The cost of equity is inversely related to the debt-equity ratio. C. The required return on assets is equal to the weighted average cost of capital. D. Financial risk determines the return on assets. E. Financial risk is unaffected by the debt-equity ratio.

C. the required return on assets is equal to the weighted average cost of capital

17.14 Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a share. The difference between these two prices is referred to as the: A. Price variance. B. Bid-ask spread. C. Trading range. D. Opening price. E. Closing price.

C. trading range

16.5 Homemade leverage is: A. The incurrence of debt by a corporation in order to pay dividends to shareholders. B. The exclusive use of debt to fund a corporate expansion project. C. The use of personal borrowing to alter the individual's degree of financial leverage. D. Best defined as an increase in a firm's debt owed to local lenders. E. The term used to describe the capital structure of a levered firm.

C. use of personal borrowing to alter the individual's degree of financial leverage

3.55 It is easier to evaluate a firm using financial statements when the firm: A. is a conglomerate. B. has recently merged with its largest competitor. C. uses the same accounting procedures as other firms in the industry. D. has a different fiscal year than other firms in the industry. E. tends to have many one-time events such as asset sales and property acquisitions.

C. uses the same accounting procedures as other firms in the industry.

16.42 The optimal capital structure: A. Will be the same for all firms in the same industry. B. Will remain constant over time unless the firm changes its primary operations. C. Will vary over time as taxes and market conditions change. D. Places more emphasis on operations than on financing. E. Is unaffected by changes in the financial markets.

C. will vary over time as taxes and market conditions change

3.56 A firm uses 2011 as the base year for its financial statements. The common-size, base-year statement for 2012 has an inventory value of 1.08. This is interpreted to mean that the 2012 inventory is equal to 108 percent of which one of the following? A. 2011 inventory B. 2011 total assets C. 2012 total assets D. 2011 inventory expressed as a percent of 2011 total assets E. 2012 inventory expressed as a percent of 2012 total assets

D. 2011 inventory expressed as a percent of 2011 total assets

3.6 Which one of these identifies the relationship between the return on assets and the return on equity? A. Profit margin. B. Profitability determinant. C. Balance sheet multiplier. D. DuPont identity. E. Debt-equity ratio.

D. DuPont identity

14.38 When computing the adjusted cash flow from assets the tax amount is calculated as: A. EBT TC. B. (EBT - Depreciation) TC. C. (EBIT + Depreciation - Change in NWC - Capital spending) TC. D. EBIT X TC. E. (EBIT - Depreciation - Change in NWC - Capital spending) TC.

D. EBIT x Tc

16.60 Which of the following statements related to financial risk are correct? I. Financial risk is the risk associated with the use of debt financing. II. As financial risk increases so too does the cost of equity. III. Financial risk is wholly dependent upon the financial policy of a firm. IV. Financial risk is the risk that is inherent in a firm's operations. A. I and III only B. II and IV only C. II and III only D. I, II, and III only E. I, II, III, and IV

D. I, II, and III only

16.65 A firm may file for Chapter 11 bankruptcy: I. in an attempt to gain a competitive advantage. II. using a prepack. III. while allowing the current management to continue running the firm. IV. only after the firm becomes insolvent. A. I and III only B. I and II only C. I, II, and IV only D. I, II, and III only E. I, II, III, and IV

D. I, II, and III only

16.64 Which of the following are correct according to pecking-order theory? I. Firms stockpile internally-generated cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms avoid external debt at all costs. IV. A firm's capital structure is dictated by its need for external financing. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV

D. I, II, and IV only

17.54 Automatic dividend reinvestment plans: I. require that stockholders reinvest all of the dividends to which they are entitled. II. sometimes grant shareholders the privilege of purchasing additional shares at a discounted price. III. help shareholders create their own homemade dividend policies. IV. help make corporate dividend policies irrelevant to individual stockholders. A. II only B. III only C. II and III only D. II, III, and IV only E. I, II, III, and IV

D. II, III, and IV only

17.61 Which of the following balance sheet accounts are affected by a small stock dividend? I. cash II. common stock III. retained earnings IV. capital in excess of par value A. I and III only B. II and III only C. II and IV only D. II, III, and IV only E. I, II, III, and IV

D. II, III, and IV only

17.60 Which one of the following statements correctly applies to U.S. industrial firms based on the period of 1984-2004? A. Earnings growth rates tend to lag dividend growth rates. B. Dividends tend to fluctuate significantly from quarter to quarter C. The percentage of these firms paying dividends in 2004 was higher than in 1984. D. The total amount of dividends paid by these firms was greater in 2004 than in 1984. E. Non-dividend paying firms in 1984 were more apt to commence paying regular dividends than to implement a stock repurchase program.

D. The total amount of dividends paid by these firms was greater in 2004 than in 1984.

17.18 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? A. Friday, March 7 B. Monday, March 17 C. Friday, March 14 D. Thursday, March 20 E. Friday, March 21

D. Thursday, March 20

17.15 A reverse stock split is defined as: A. An increase in the number of shares outstanding that does not affect owners' equity. B. A firm buying back existing shares of its stock on the open market. C. A firm selling new shares of stock on the open market. D. A decrease in the number of shares outstanding that does not affect total owners' equity. E. A decrease in both the number of shares outstanding and the price per share.

D. a decrease in the number of shares outstanding that does not affect total owners' equity

17.33 Which one of the following statements related to stock repurchases is correct? A. An open market stock repurchase increases the total wealth of a shareholder if you ignore taxes, costs, and market imperfections. B. Targeted repurchases must be offered to all shareholders but can be done in steps such that only a portion of the shareholders have the option to sell at any one point in time. C. When a firm wishes to repurchase shares in the open market, it will do so in a special trading session that is set up by the SEC. D. A firm may spend more cash over the course of a year on stock repurchases than it does on cash dividends. E. Tender offer prices must be set equal to the opening market price on the day the tender offer is announced.

D. a firm may spend more cash over the course of a year on stock repurchases than it does on cash dividends

3.20 An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? A. Accounts payable. B. Cash. C. Inventory. D. Accounts receivable. E. Fixed assets.

D. accounts receivable

14.27 Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should: A. Allocate more funds to Division A since it is the largest of the two divisions. B. 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. C. Allocate the company's funds to the projects with the highest net present values based on the firm's weighted average cost of capital. D. Assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values. E. Fund the highest net present value projects from each division based on an allocation of 70 percent of the funds to Division A and 30 percent of the funds to Division B.

D. assign appropriate, but differing, discount rates to each project and then select the projects with the highest and present values

16.8 Which one of the following is the equity risk that is most related to the daily operations of a firm? A. Market risk B. Systematic risk C. Extrinsic risk D. Business risk E. Financial risk

D. business risk

14.8 High Adventure is considering a new project that is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of .55 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity? A. By adding the market risk premium to the after tax cost of debt. B. By multiplying the market risk premium by 1.55. C. By using the dividend growth model. D. By using the capital asset pricing model. E. By averaging the costs based on the dividend growth model and the capital asset pricing model.

D. by using the capital asset pricing model

17.7 Dividend payments are distributed on which one of the following dates? A. Ex-rights date B. Ex-dividend date C. Date of record D. Date of payment E. Declaration date

D. date of payment

3.28 The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways? A. Decrease in the inventory turnover rate. B. Decrease in the net working capital turnover rate. C. Increase in the fixed asset turnover rate. D. Decrease in the day's sales in inventory. E. Decrease in the total asset turnover rate.

D. decrease in the day's sales in inventory

16.36 Based on M&M Proposition I with taxes, the weighted average cost of capital: A. Is equal to the aftertax cost of debt. B. Has a linear relationship with the cost of equity capital. C. Is unaffected by the tax rate. D. Decreases as the debt-equity ratio increases. E. Is equal to RU (1 - TC).

D. decreases as the debt-equity ratio increases

16.30 Financial risk is: A. The risk inherent in a firm's operations. B. A type of unsystematic risk. C. Inversely related to the cost of equity. D. Dependent upon a firm's capital structure. E. Irrelevant to the value of a firm.

D. dependent upon a firm's capital structure

17.39 Which one of the following statements is correct? A. A reduction in personal tax rates tends to lead to lower dividends. B. Dividends tend to fluctuate significantly from quarter to quarter. C. Earnings growth tends to lag dividend growth. D. Dividend payments are highly concentrated in a relatively small set of large firms. E. Non-dividend-paying firms are generally more apt to commence paying regular dividends than to implement a stock repurchase program.

D. dividend payments are highly concentrated in a relatively small set of large firms

17.1 Green Roof Motels has more cash on hand than its operations require. Thus, the firm has decided to pay out some of its earnings in the form of cash to its shareholders. What are these payments to shareholders called? A. Dividends B. Stock payments C. Repurchases D. Payments-in-kind E. Stock splits

D. dividends

17.40 Which one of the following statements appears to be supported by the current dividend policies of U.S. industrial firms? A. Firms tend to increase the dividend amount per share, even when it's unclear if the increase can be maintained. B. Investors no longer react to changes, either up or down, in dividends. C. Newer, high-growth firms tend to pay larger dividends than mature firms. D. Dividends are still viewed by shareholders as a signal of a firm's future outlook. E. Managers are no longer hesitant to lower dividend payments.

D. dividends are still viewed by shareholders as a signal of a firm's future outlook

16.52 Which one of these statements related to Chapter 11 bankruptcy is correct? A. Prepacks apply only to Chapter 7, not Chapter 11 bankruptcies. B. Senior management must be replaced prior to firm exiting Chapter 11. C. A firm can only file for Chapter 11 after it becomes totally insolvent. D. Firms may file for Chapter 11 in an attempt to gain a competitive advantage. E. Chapter 11 involves the total liquidation of a firm.

D. firms may file for chapter 11 in an attempt to gain a competitive advantage

16.46 Which one of the following is correct according to pecking-order theory? A. There is a direct relationship between a firm's profit and its debt levels. B. Firms avoid external debt except as a last resort. C. A firm's capital structure is independent of its need for external funding. D. Firms stockpile internally generated cash. E. There is an optimal capital structure for every firm.

D. firms stockpile internally generated cash

16.29 The business risk of a firm: A. Depends on the firm's level of unsystematic risk. B. Is inversely related to the required return on the firm's assets. C. Is dependent upon the relative weights of the debt and equity used to finance the firm. D. Has a positive relationship with the firm's cost of equity. E. Has no relationship with the required return on a firm's assets according to M&M theory.

D. has a positive relationship with the firm's cost of equity

17.23 Automatic dividend reinvestment plans: A. Require that participating stockholders reinvest all of the dividends to which they are entitled. B. Grant all participants a discount on share purchases. C. Increase the relevance of corporate dividend policies. D. Help shareholders create their own homemade dividend policies. E. Are no longer available in the u.s.

D. help shareholders create their own homemade dividend policies

17.52 A one-for-four reverse stock split will: A. Increase the par value by 25 percent. B. Increase the number of shares outstanding by 400 percent. C. Increase the market value but not affect the par value per share. D. Increase a $1 par value to $4. E. Increase a $1 par value to $5.

D. increase a $1 par value to $4

3.45 Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in notes payable C. decrease in common stock D. increase in accounts payable E. increase in inventory

D. increase in accounts payable

3.8 Which one of the following is a source of cash for a non-tax-paying firm? A. Increase in accounts receivable. B. Increase in depreciation. C. Decrease in accounts payable. D. Increase in common stock. E. Increase in inventory.

D. increase in common stock

14.36 Incorporating flotation costs into the analysis of a project will: A. Cause the project to be improperly evaluated. B. Increase the net present value of the project. C. Increase the project's rate of return. D. Increase the initial cash outflow of the project. E. Have no effect on the present value of the project.

D. increase the initial cash outflow of the project

16.40 Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm? A. Exceptionally high depreciation expenses. B. Very low marginal tax rate. C. Substantial tax shields from other sources. D. Low probability of financial distress. E. Minimal taxable income.

D. low profitability of financial distress

14.47 Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel Excitement has an aftertax cost of capital of 11 percent. Both firms are considering building wilderness campgrounds complete with man-made lakes and hiking trails. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project? A. Wilderness Adventures only B. Travel Excitement only C. both Wilderness Adventures and Travel Excitement D. neither Wilderness Adventures nor Travel Excitement E. cannot be determined without further information

D. neither Wilderness Adventures nor Travel Excitement

16.53 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: A. Permits creditors to file a prepack immediately after a firm files for bankruptcy protection. B. Prevents creditors from submitting any reorganization plans. C. Prevents firms from filing for bankruptcy protection more than once. D. Permits key employee retention plans only if an employee has another job offer. E. Allows firms to pay bonuses to all key employees to entice those employees to remain in the firm's employ.

D. permits key employee retention plans only if an employee has another job offer

3.30 Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. A. Asset management. B. Long-term solvency. C. Short-term solvency. D. Profitability. E. Turnover.

D. profitability

14.18 The cost of preferred stock is computed the same as the: A. Pretax cost of debt. B. Rate of return on an annuity. C. Aftertax cost of debt. D. Rate of return on a perpetuity. E. Cost of an irregular growth common stock.

D. rate of return on a perpetuity

17.42 A small stock dividend: A. Increases the common stock account by the market price of each share issued. B. Reduces cash by the total market value of the issued shares. C. Only affects the par value not the equity account balances. D. Reduces retained earnings by the market price of each share issued. E. Does not affect the capital in excess of par value account.

D. reduces retained earnings by the market price of each share issued

16.15 Edwards Farm Products was unable to meet its financial obligations and was forced into using legal proceedings to restructure itself so that it could continue as a viable business. The process this firm underwent is known as a: A. Merger. B. Repurchase program. C. Liquidation. D. Reorganization. E. Divestiture.

D. reorganization

16.58 AA Tours is comparing two capital structures to determine how to best finance its operations. The first option consists of all equity financing. The second option is based on a debt-equity ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes. A. select the leverage option because the debt-equity ratio is less than 0.50 B. select the leverage option since the expected EBIT is less than the break-even level C. select the unlevered option since the debt-equity ratio is less than 0.50 D. select the unlevered option since the expected EBIT is less than the break-even level E. cannot be determined from the information provided

D. select the unlevered option since the expected EBIT is less than the break-even level

16.23 Jessica invested in Quantro stock when the firm was unlevered. Since then, Quantro has changed its capital structure and now has a debt-equity ratio of .30. To unlever her position, Jessica needs to: A. Borrow some money and purchase additional shares of Quantro stock. B. Maintain her current equity position as the debt of the firm does not affect her personally. C. Sell some shares of Quantro stock and hold the proceeds in cash. D. Sell some shares of Quantro stock and loan out the sale proceeds. E. Create a personal debt-equity ratio of .30.

D. sell some shares of Quantro stock and loan out the sale proceeds

3.2 The sources and uses of cash over a stated period of time are reflected on the: A. Income statement. B. Balance sheet. C. Tax reconciliation statement. D. Statement of cash flows. E. Statement of operating position.

D. statement of cash flows

17.51 Alta Gems stock is currently trading at $56 a share. The firm believes its primary clientele can afford to spend between $1,500 and $2,000 to purchase a round lot of 100 shares. The firm should consider a: A. Reverse stock split. B. Liquidating dividend. C. Stock dividend. D. Stock split. E. Special dividend.

D. stock split

16.20 AA Tours has earnings before interest and taxes (EBIT) that are less than the break-even earnings per share level. Ignore taxes. Which one of these statements is correct given this situation if the firm wishes to improve its earnings per share? A. The firm should increase its long-term debt. B. The firm should increase its use of leverage. C. The firm should issue more equity to pay off debt. D. The firm should reduce its expenses. E. The firm should reduce its output and sales.

D. the firm should reduce its expenses

14.39 Why does the tax amount need adjusted when valuing a firm using the cash flow from assets approach? A. The tax effect of the dividend payments must be eliminated. B. Only straight-linedepreciation can be used when computing taxes for valuation purposes. C. Taxes must be computed for valuation purposes based solely on the marginal tax rate. D. The tax effect of the interest expense must be removed. E. The taxes must be computed for valuation purposes based on the average tax rate for the past 10 years.

D. the tax effect of the interest expense must be removed

16.32 M&M Proposition I with taxes is based on the concept that: A. The optimal capital structure is the one that is totally financed with equity. B. The capital structure of a firm does not matter because investors can use homemade leverage. C. A firm's WACC is unaffected by a change in the firm's capital structure. D. The value of a firm increases as the firm's debt increases because of the interest tax shield. E. The cost of equity increases as the debt-equity ratio of a firm increases.

D. the value of a firm increases as the firm's debt increases because of the interest tax shield

3.16 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

14.37 Flotation costs for a levered firm should be: A. Ignored when analyzing a project because they are a sunk cost. B. Spread over the life of a project thereby reducing the cash flows for each year of the project. C. Considered only when two projects are mutually exclusive. D. Weighted and included in the initial cash flow. E. Totally ignored when internal equity funding is utilized.

D. weighted and included in the initial cash flow

16.18 The value of a firm is maximized when the: A. Cost of equity is maximized. B. Tax rate is zero. C. Levered cost of capital is maximized. D. Weighted average cost of capital is minimized. E. Debt-equity ratio is minimized.

D. weighted average cost of capital is minimized

14.44 The weighted average cost of capital for a firm may be dependent upon the firm's: I. rate of growth. II. debt-equity ratio. III. preferred dividend payment. IV. retention ratio. A. I and III only B. II and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

14.45 If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor high risk projects over low risk projects. IV. increase its overall level of risk over time. A. I and III only B. III and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV

E. I, II, III, and IV

16.55 By definition, which of the following costs are included in the term "financial distress costs"? I. direct bankruptcy costs II. indirect bankruptcy costs III. direct costs related to being financially distressed, but not bankrupt IV. indirect costs related to being financially distressed, but not bankrupt A. I only B. III only C. I and II only D. III and IV only E. I, II, III, and IV

E. I, II, III, and IV

17.55 Which of the following tends to increase the ability of a shareholder to create his or her own homemade dividend policy? I. low taxes on capital gains II. dividend reinvestment plans III. large holdings of shares IV. low cost equity purchases A. II only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

3.44 Which of the following represent problems encountered when comparing the financial statements of two separate entities? I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business. II. The operations of the two firms may vary geographically. III. The firms may use differing accounting methods. IV. The two firms may be seasonal in nature and have different fiscal year ends. A. I and II only. B. II and III only. C. I, III, and IV only. D. I, II, and III only. E. I, II, III, and IV.

E. I, II, III, and IV

14.40 The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. firms that have a 100 percent retention ratio II. firms that pay a constant dividend III. firms that pay an increasing dividend IV. firms that pay a decreasing dividend A. I and II only B. I and III only C. II and III only D. I, II, and III only E. II, III, and IV only

E. II, III, and IV only

14.41 Which of the following statements are correct? I. The SML approach is dependent upon a reliable measure of a firm's unsystematic risk. II. The SML approach can be applied to firms that retain all of their earnings. III. The SML approach assumes a firm's future risks are similar to its past risks. IV. The SML approach assumes the reward-to-risk ratio is constant. A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. II, III, and IV only

E. II, III, and IV only

17.36 Which one of the following is a result of a stock repurchase? A.. Increase in the number of shares outstanding. B. Increase in the market price per share. C. Increase in the total equity of the repurchasing firm. D. Decrease in EPS. E. PE ratio equal to that resulting from a comparable cash dividend.

E. PE ratio equal to that resulting from a comparable cash dividend

16.34 The present value of the interest tax shield is expressed as: A. (TC D) / RA.. B. VU + (TC D). C. [EBIT (TC D)] / RU. D. [EBIT (TC D)] / RA. E. (TC)x (D).

E. Tc X D

3.34 Tobin's Q relates the market value of a firm's assets to which one of the following? A. Initial cost of creating the firm. B. Current book value of the firm. C. Average asset value of similar firms. D. Average market value of similar firms. E. Today's cost to duplicate those assets.

E. Today's cost to duplicate those assets

17.50 Which one of the following is a direct result of a 2-for-1 stock split? A. A 100 percent increase in the number of shareholders. B. A 100 percent increase in the common stock account balance. C. A 100 percent decrease in the stock price. D. A 50 percent increase in the number of shares outstanding. E. A 50 percent decrease in the par value per share.

E. a 50% decrease in the par value per share

14.9 All else constant, which one of the following will increase a firm's cost of equity if the firm 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. A reduction in the dividend amount. B. An increase in the dividend amount. C. A reduction in the market rate of return. D. A reduction in the firm's beta. E. A reduction in the risk-free rate.

E. a reduction in the risk-free rate

3.24 Which one of the following statements is correct? A. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0. B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. C. The debt-equity ratio can be computed as 1 plus the equity multiplier. D. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity. E. An increase in the depreciation expense will not affect the cash coverage ratio.

E. an increase in the depreciation expense will not affect the cash coverage ratio

14.15 The capital asset pricing model approach to equity valuation: A. Is dependent upon the unsystematic risk of a security. B. Assumes the reward-to-risk ratio increases as beta increases. C. Can only be applied to dividend-paying firms. D. Assumes a firm's future risks will be higher than its current risks. E. Assumes the reward-to-risk ratio is constant.

E. assumes the reward-to-risk ratio is constant

3.17 On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following? A. Current year sales. B. Current year total assets. C. Base-year sales. D. Base-year total assets. E. Base-year accounts receivables.

E. base-year accounts receivable

16.19 The optimal capital structure has been achieved when the: A. Debt-equity ratio is equal to 1. B. Weight of equity is equal to the weight of debt. C. Cost of equity is maximized given a pretax cost of debt. D. Debt-equity ratio is such that the cost of debt exceeds the cost of equity. E. Debt-equity ratio results in the lowest possible weighted average cost of capital.

E. debt-equity ratio results in the lowest possible weighted average cost of capital

3.9 Which one of the following is a use of cash? A. Decrease in fixed assets. B. Decrease in inventory. C. Increase in long-term debt. D. Decrease in accounts receivables. E. Decrease in accounts payable.

E. decrease in accounts payable

3.46 Which one of the following is a use of cash? A. increase in notes payable B. decrease in inventory C. increase in long-term debt D. decrease in accounts receivables E. decrease in common stock

E. decrease in common stock

3.11 Which one of the following is a source of cash? A. Increase in accounts receivable, B. Decrease in common stock, C. Increase in fixed assets, D. Decrease in accounts payable, E. Decrease in inventory,

E. decrease in inventory

17.48 A stock split: A. Increases the total value of the common stock account. B. Decreases the value of the retained earnings account. C. Increases the par value per share. D. Increases the value of the capital in excess of par account. E. Decreases the market value per share.

E. decreases the market value per share

14.5 A firm's cost of capital: A. Will decrease as the risk level of the firm increases. B. For a specific project, is primarily dependent upon the source of the funds used for the project. C. Is independent of the firm's capital structure. D. Should be applied as the discount rate for any project considered by the firm. E. Depends upon how the funds raised are going to be spent.

E. depends upon how the funds raised are going to be spent

16.43 The static theory of capital structure advocates that the optimal capital structure for a firm: A. Is highly dependent on a constant debt-equity ratio over time. B. Remains fixed over time. C. Is independent of the firm's tax rate. D. Is independent of the firm's debt-equity ratio. E. equates the tax savings from an additional dollar of debt to the increased bankruptcy costs.

E. equates the tax savings from an additional dollar of debt to the increased bankruptcy costs

16.9 Which one of the following is the equity risk related to a firm's capital structure policy? A. Market B. Systematic C. Static D. Business E. Financial

E. financial

14.43 The aftertax cost of debt: A. varies inversely to changes in market interest rates. B. will generally exceed the cost of equity if the relevant tax rate is zero. C. will generally equal the cost of preferred if the tax rate is zero. D.is unaffected by changes in the market rate of interest. E. has a greater effect on a firm's cost of capital when the debt-equity ratio increases.

E. has a greater effect on a firm's cost of capital when the debt-equity ratio increases.

14.12 The dividend growth model cannot be used to compute the cost of equity for a firm that: A. Pays an increasing dividend. B. Reduces its dividend on a regular basis. C. Has a dividend payout ratio of 100 percent. D. Pays a constant dividend year after year. E. Has a retention ratio of 100 percent.

E. has a retention ratio of 100%

3.31 If a firm produces a 13 percent return on assets and also a 13 percent return on equity, then the firm: A. May have short-term, but not long-term debt. B. Is using its assets as efficiently as possible. C. Has no net working capital. D. Has a debt-equity ratio of 1.0. E. Has an equity multiplier of 1.0.

E. has an equity multiplier of 1.0

17.24 Which one of the following tends to decrease the ability of a shareholder to create his or her own homemade dividend policy? A. Low taxes on capital gains. B. Large holdings of shares. C. Dividend reinvestment plans. D. Low-cost equity purchases. E. High transaction fees.

E. high transaction fees

17.8 Which one of the following refers to the ability of shareholders to undo a firm's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock? A. Perfect foresight model B. Personalization C. Recapitalization D. Offsetting leverage E. Homemade dividend policy

E. homemade dividend policy

16.24 Which one of the following makes the capital structure of a firm irrelevant? A. Taxes. B. Interest tax shield. C. 100 percent dividend payout ratio. D. Debt-equity ratio that is greater than 0 but less than 1. E. Homemade leverage.

E. homemade leverage

17.44 Which one of the following is a result of a small stock dividend? A. Increase in retained earnings. B. Decrease in total owner's equity. C. Decrease in cash. D. Decrease in capital in excess of par value. E. Increase in common stock.

E. increase in common stock

14.34 When a firm has flotation costs equal to 6.8 percent of the funding need, project analysts should: A. Increase the project's discount rate to offset these expenses by multiplying the firm's WACC by 1.068. B. Increase the project's discount rate to offset these expenses by dividing the firm's WACC by (1 - .068). C. Add 6.8 percent to the firm's WACC to determine the discount rate for the project. D. Increase the initial project cost by multiplying that cost by 1.068. E. Increase the initial project cost by dividing that cost by (1 - .068).

E. increase the initial project by dividing that cost by (1 - .068)

16.45 Which form of financing do firms prefer to use first according to the pecking-order theory? A. Regular debt B. Convertible debt C. Common stock D. Preferred stock E. Internal funds

E. internal funds

17.35 A stock repurchase program: A. Requires all shareholders to sell a fraction of their shares. B. Is preferred over a high-dividend program only by tax-exempt shareholders. C. Decreases both the number of shares outstanding and the market price per share. D. Has no effect on a firm's financial statements. E. Is essentially the same as a cash dividend program provided there are no taxes or other costs.

E. is essentially the same as a cash dividend program provided there are no taxes or other costs

14.22 The aftertax cost of debt: A. Varies inversely to changes in market interest rates. B. Will generally exceed the cost of equity if the relevant tax rate is zero. C. Will generally equal the cost of preferred if the tax rate is zero. D. Is unaffected by changes in the market rate of interest. E. Is highly dependent upon the firm's tax rate.

E. is highly dependent upon the firm's tax rate

17.26 The fact that flotation costs can be significant is an argument for: A. Issuing larger regular dividends than the industry norm. B. Maintaining a constant dividend policy even if the firm frequently has to issue new shares. C. Periodic extra dividend payments. D. Maintaining a constant dividend policy even when profits decline significantly. E. Maintaining a low dividend policy and rarely issuing extra dividends.

E. maintaining a low dividend policy and rarely issuing extra dividends

1638 Which one of the following is a direct cost of bankruptcy? A. Bypassing a positive NPV project to avoid additional debt. B. Firm investing in cash reserves. C. Maintaining a debt-equity ratio that is lower than the optimal ratio. D. Losing a key company employee. E. Paying an outside accountant to prepare bankruptcy reports.

E. paying an outside accountant to prepare bankruptcy reports

16.51 Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding? A. Consumer claims. B. Dividend payment to preferred shareholders. C. Company contribution to the employees' retirement account. D. Payment to an unsecured creditor. E. Payment of employee wages.

E. payment of employee wages

14.28 Jenner's is a multi division firm that uses its overall WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to: A. Receive less project funding if its line of business is riskier than that of the other divisions. B. Avoid risky projects so it can receive more project funding. C. Become less risky over time based on the projects that are accepted. D. Have an equal probability with all the other divisions of receiving funding. E. Prefer higher risk projects over lower risk projects.

E. prefer higher risk projects over lower risk projects

3.32 Which one of the following will decrease if a firm can decrease its operating costs, all else constant? A. Return on equity. B. Return on assets. C. Profit margin. D. Total asset turnover. E. Price-earnings ratio.

E. price-earnings ratio

3.51 Shareholders probably have the most interest in which one of the following sets of ratios? A. return on assets and profit margin B. long-term debt and times interest earned C. price-earnings and debt-equity D. market-to-book and times interest earned E. return on equity and price-earnings

E. return on equity and price-earnings

14.29 The discount rate assigned to an individual project should be based on the: A. Firm's weighted average cost of capital. B. Actual sources of funding used for the project. C. Average of the firm's overall cost of capital for the past five years. D. Current risk level of the overall firm. E. Risks associated with the use of the funds required by the project.

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

3.3 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

14.23 The weighted average cost of capital for a firm can depend on all of the following except the: A. Firm's beta. B. Coupon rate of the outstanding bonds. C. Growth rate of the firm's dividends. D. Firm's marginal tax rate. E. Standard deviation of the firm's common stock.

E. standard deviation of the firm's common stock

17.34 Which one of the following statements related to stock repurchases is correct? A. U.S. industrial firms have increased their stock repurchases every year for each of the past 20 years. B. The tax law change in May 2003 led to a huge increase in stock repurchases and a reduction in dividend payments. C. A tender offer indicates that a firm is willing and able to purchase however many shares the current shareholders wish to sell. D. All stock repurchases must be identified as such to the selling party. E. Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.

E. stock repurchases can be relatively tax-efficient method of distributing cash to shareholders

17.9 What is the information content effect? A. Any type of new information that causes a firm to cease paying dividends. B. Any news announcement that was anticipated and thus produces no reaction from investors. C. The primary contributing data that helps directors determine the amount of a particular dividend payment. D. Any type of reaction from a shareholder in response to a news announcement related to the stock issuer. E. The financial market's reaction to a change in the amount of a firm's dividend.

E. the financial market's reaction to a change in the amount of a firm's dividend

14.7 Which one of the following is the primary determinant of a firm's cost of capital? A. Debt-equity ratio. B. Applicable tax rate. C. Cost of equity. D. Cost of debt. E. Use of the funds.

E. use of the funds

16.48 In general, the capital structures used by U.S. firms: A. Tend to overweigh debt in relation to equity. B. Generally result in debt-equity ratios between .45 and .60. C. Are fairly standard for all SIC codes. D. Tend to be those that maximize the use of the firm's available tax shelters. E. Vary significantly across industries.

E. vary significantly across industries

14.3 The average of a firm's cost of equity and after tax cost of debt that is weighted based on the firm's capital structure is called the: A. Reward to risk ratio. B. Weighted capital gains rate. C. Structured cost of capital. D. Subjective cost of capital. E. Weighted average cost of capital.

E. weighted average cost of capital

16.16 The absolute priority rule determines: A. When a firm must be declared officially bankrupt. B. How a distressed firm is reorganized. C. Which judge is assigned to a particular bankruptcy case. D. How long a reorganized firm is allowed to remain under bankruptcy protection. E. Which parties receive payment first in a bankruptcy proceeding.

E. which parties receive payment first in a bankruptcy proceeding