Ex Questions (Ch09,10,14,16,17&21) for Final Exam
Pick the example of a sunk cost from below. Multiple Choice $1,500 of lost sales because an item was out of stock $1,200 paid to repair a machine last year $20,000 project that must be forfeited if another project is accepted $4,500 reduction in current shoe sales if a store commences selling sandals $1,800 increase in comic book sales if a store ceases selling puzzles
$1,200 paid to repair a machine last year
Using the method of your choice, calculate the Net Present Value of the following cash flows. Assume that the required return on this project is 15% Project A Initial Cost -$ 150 Year 1 $ 175 Year 2 $ 100
$78
Based upon the following data: calculate the Discounted Payback Period with a discount rate of 10%. Project A Initial Cost -$ 50,000 Year 1 $ 20,000 Year 2 $ 25,000 Year 3 $ 20,000
2.74 years
As of 2018, _______________ is the maximum tax rate any individual would pay on dividend income.
20 percent
Pick the correct statement related to stock dividend from below. Multiple Choice A large stock dividend reduces retained earnings by the total market value of the issued shares. A large stock dividend reduces the par value per share. A large stock dividend reduces retained earnings by the par value of each share issued. A large stock dividend increases the capital in excess of par value by the market value minus the par value of each share issued. A large stock dividend does not affect the equity accounts or the par value per share.
A large stock dividend reduces retained earnings by the par value of each share issued.
Amy purchased 1,500 shares of Fast Deliveries stock on Monday July 5. Jim purchased 1,000 shares of Fast Deliveries stock on Tuesday, July 6. Fast Deliveries declared a dividend on June 25 to shareholders of record on July 12 and payable on August 5. Which one of the following statements concerning the dividend paid on August 5 is correct given this information?
Both Jim and Amy are entitled to the dividend.
__________ costs are the explicit costs, such as legal and administrative expenses, associated with corporate default.
Direct bankruptcy
______________ is a marketed claim against the cash flows of a company.
Dividend payment to shareholders
Pick the correct statement related to dividend policy from below. Multiple Choice The primary question related to dividend policy is whether or not a dividend should ever be paid. Both dividends and dividend policy are irrelevant. Dividend policy focuses on the timing of dividend payments. Homemade dividends increase the importance of a company's dividend policy decisions. Whether or not a company ever pays a dividend is irrelevant to equity valuation.
Dividend policy focuses on the timing of dividend payments.
______________ is the formula that expresses the absolute purchasing power parity relationship between the U.S. dollar and the British pound.
PUK = S0(PUS)
___________________ is a direct cost of bankruptcy.
Paying an outside accountant to prepare bankruptcy reports
________________ will generally have the highest priority when assets are distributed in a bankruptcy proceeding.
Payment of employees' wages
_____________ is a result of a small stock dividend.
Increase in the common stock account balance
___________ should be excluded in the estimation of the operating cash flows for a project.
Interest expense
Pick the correct statement from below. Multiple Choice Interest rate parity eliminates covered interest arbitrage opportunities. Interest rate parity exists when spot rates are equal for multiple countries. Interest rate parity means the nominal risk-free rate must be equal across countries. Interest rate parity exists when the spot rate is equal to the forward rate. Interest rate parity eliminates exchange rate fluctuations.
Interest rate parity eliminates covered interest arbitrage opportunities.
Indiana Mills reduced its taxes last year by $21,000 by increasing its interest expense by $100,000. How do we call this tax savings?
Interest tax shield
_________________ tells us the amount by which the value of a firm will change if a project is accepted.
Net present value
The best example of erosion related to a hot dog stand located on the beach is seen from which of the following?
Selling fewer hot dogs because hamburgers were added to the menu
What does the Modified Internal Rate of Return (MIRR) assume?
The MIRR assumes that cash flows will be reinvested at the cost of capital.
What is the first step when calculating the crossover rate?
To calculate the cash flow differences between each project.
________________________ is the best example of two mutually exclusive projects from below.
Waiting until a machine finishes molding Product A before being able to mold Product B
Jimmy and Danny have agreed to exchange A$25,000 for $10,000 with the exchange occurring six months from now. We call this agreed-upon exchange rate the ________________
forward rate.
In actual practice, managers most frequently use both _________________ in their investment decision.
internal rate of return and net present value
An individual investor is more likely to prefer a high dividend payout than an investor who ____
is a corporation.
Triangle arbitrage ______________
is a profitable opportunity involving three separate currency exchange transactions.
The internal rate of return _________________________.
is tedious to compute without the use of either a financial calculator or a computer
If a project has a net present value of zero, __________________________.
its cash inflows equal its cash outflows in current dollar terms
An asset's class established its ____________ for tax purposes.
life
If a firm has a certain amount of overseas profits that are invested in U.S. financial assets and the profit amount has not been repatriated, the firm is not allowed to use any of the profit amount to ______________
pay dividends.
The ________________ are the two methods of project analysis that most biased towards short-term projects.
payback and discounted payback
The ___________________ of a project is the length of time a firm must wait to recoup the money it has invested in the project.
payback period
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 _______________________.
permits key employee retention plans only if the affected employee(s) has another job offer
In accordance with the unbiased forward rate condition, the current forward rate is a ________________
predictor of the future spot rate at the equivalent point in time.
With regard to exchange rate risk, translation exposure is defined as the ________________________
problem encountered by an accountant of an international firm who is trying to record balance sheet account values.
In the use of the ____________ approach, a manager will develop the 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.
pure play
We calculate the cost of preferred stock in the same way as when we calculate the __________________.
rate of return on a perpetuity
According to the International Fisher Effect, ______________ rates are equal across countries.
real interest
Howard Farming was unable to meet its financial obligations. It was forced into using legal proceedings to restructure itself so that it could continue as a viable business. How do we call this process?
reorganization
That ___________________ is not required for absolute purchasing power parity to exist.
spot and forward rates must be equal
Susan and Greg have just agreed to exchange U.S. dollars for Australian dollars based on today's exchange rate. In addition, settlement of this transaction will take place tomorrow. The exchange rate applies to this agreement should be the ________________.
spot exchange rate
John has agreed to give 150,000 U.S. dollars to Christina in exchange for British pounds based on today's exchange rate of $1 = £.78. They agree to settle this trade within two business days. We call this exchange __________.
spot trade
According to the _________________, a proposed project is analyzed based on the project's incremental cash flows.
stand-alone principle
Among the variables below, the weighted average cost of capital for a company is least dependent upon the ____________________.
standard deviation of the company's common stock
We should expect that the international bonds and domestic bonds issued by Dell, Inc. (a domestic issuer) are usually _____________.
subject to different regulations
We use the current book value of a fixed asset that was purchased 5 years ago to compute ___________.
tax due on the current salvage value of that asset
Based on M&M Proposition II with taxes, ______________.
the WACC decreases as the debt-equity ratio increases
We can use the bottom-up approach to compute the operating cash flow of a project only when ___________.
the interest expense is equal to zero
The bid price always assumes _____________.
the net present value of the project is zero
If we find the net present value of a project is zero, that implies _________________.
the project earns a return exactly equal to the discount rate
When we assign a discount rate to an individual project, we should do so based on ________________.
the risks associated with the use of the funds required by the project
If we buy shares of a stock, we have to buy them at least _________ business day(s) prior to the date of record in order to receive the next dividend.
three
Bell Leather stock has recently sold for as little as $8 a share and as much as $15 a share. We call the difference between these two prices the ____.
trading range
The ex-dividend date is set as _____ business day(s) before the date of record.
2
Most of the trading in Eurobonds occur in ____________________.
London
The graph that plots the NPVs of a project to various discount rates is called the _____________________of the project.
NPV profile
The combination approach for calculating the Modified Internal Rate of Return (MIRR) differs because:
Negative cash flows are discounted back and positive cash flows are compounded forward.
A direct result of a two-for-one stock split is _________________.
a 50 percent decrease in the par value per share
The information content effect is _________________.
the financial market's reaction to a change in the amount of a company's dividend
An increase in __________ will increase the operating cash flow of a profitable, tax paying company assuming that the bottom-up approach is used to compute the operating cash flow.
depreciation expense
Absolute purchasing power parity is most apt to exist for _____________.
an ounce of silver
The spot exchange rate on the Japanese yen today is ¥110.05 while that on the Canadian dollar is C$1.1379. Financial pages also show that the respective three-month forward rates are ¥111.75 and C$1.1339. As a result of these, the value of the U.S. dollar will _____ with respect to the yen and will _____ with respect to the Canadian dollar.
appreciate; depreciate
In computing a company's weighted average cost of capital, the capital structure weights we used __________.
are based on the market values of the outstanding securities
Rainbow Industries has two separate divisions A and B. Each division is in a separate line of business. Division A is the larger and riskier division. It represents 60 percent of the firm's overall sales. When determining which of the various divisional projects should be accepted, as Rainbow's financial manager, you should ___________________.
assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values
DLink is a levered firm. Its current cost of capital is based on _________________.
both the returns currently required by its debtholders and stockholders
A cash payment made by a company to its shareholders from the normal earnings of business becomes the company's liability on the _________.
declaration date
Ignore any tax effects, _____________ is a project's cash inflow.
decrease in inventory
A(n) ____________ is considered as a reverse stock split.
decrease in the number of shares outstanding without affecting total owners' equity
The net book value of equipment will ______________________.
decrease slower under straight-line depreciation than under MACRS
_____________ costs include the costs incurred by a business in an effort to avoid bankruptcy.
Indirect bankruptcy
The advantages of using average accounting return include its _______________________.
use of easily obtained information
The primary determinant of a firm's cost of capital is the firm's __________________.
use of the funds raised
For a levered firm, flotation costs of its projects should be __________________.
weighted and included in the initial cash flow
The __________ is the average of a company's cost of equity, cost of preferred stock, and aftertax cost of debt that are weighted based on the company's capital structure.
weighted average cost of capital
The drawback of using the top-down approach to compute the operating cash flow is that it ______________
ignores noncash expenses
________________states that the cost of equity capital is directly and proportionally related to capital structure.
M&M Proposition II
Pick the correct statement from below. Multiple Choice Companies prefer to cut dividend payments rather than borrow money to fund a short-term cash need. Share repurchases tend to increase agency costs. Maintaining a steady dividend is a key goal of most dividend-paying companies. Short-term fluctuations in cash flows are the key factor in determining a company's dividend policy. Stock prices tend to ignore unexpected changes in dividend payments.
Maintaining a steady dividend is a key goal of most dividend-paying companies.
Based upon the following data: calculate the Profitability Index. Cost = $325 Present value of future cash flows = $350
1.08
Which of the following is the best definition for depreciation tax shield?
The depreciation tax shield is the amount of tax that is saved because of the depreciation expense.
The Internal Rate of Return (IRR) represents which of the following:
The discount rate that makes the net present value equal to zero.
When choosing between mutually exclusive projects, what is the best method to use?
The highest NPV is always the best option.
The Discounted Payback Period Rule states that a company will accept a project if ____________________.
the calculated discounted payback is less than a pre-specified number of years
Assuming that the interest expense is equal to zero, _____________ is the correct way for calculating the operating cash flow of a project.
Net income + Depreciation
______________ would render a mutually exclusive project unacceptable.
An equivalent annual cost that exceeds that of an alternative project
Pick the correct definition for a variable used in the covered interest arbitrage formula from below. Multiple Choice S0: Current spot rate expressed in dollars per unit of foreign currency. Ft: Future inflation rate at Time t. F1: 360-day forward rate. RUS: U.S. real risk-free interest rate. RFC: Foreign country real interest rate.
F1: 360-day forward rate.
_______________________ would be subject to the most political risk if the operation were conducted outside of a firm's home country.
Raw materials production
______________ is a one-time event that will not be repeated.
Special dividend
Pick the correct statement related to stock repurchase program from below. Multiple Choice U.S. industrial firms have increased their stock repurchases every year for each of the past 20 years. The tax law change in May 2003 led to a huge increase in stock repurchases and a reduction in dividend payments. A tender offer indicates that a company is willing and able to purchase as many shares as shareholders wish to sell. All stock repurchases must be identified as such to the selling party. Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.
Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.
_____________ is the agreement by which a party will exchange a certain amount of local currency (e.g. $1 million U.S.) for a foreign currency (e.g. $1.02 million Canadian) with another party.
Swap
What does mutually exclusive mean?
Taking one project means that we cannot take the other.
The board of directors of Beldon, Inc. decided on Friday, March 7, to pay a dividend of $.35 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?
Thursday, March 20
M&M Proposition II, without taxes, puts forth that ________________.
a company's cost of equity is a linear function with a slope equal to (RA − RD).
According to M&M Proposition I with no tax, ____________________.
a company's debt-equity ratio is completely irrelevant
Hoosier Trucking currently pays an annual dividend of $1 a share and has a beta of 1.5. All else constant, _________ will increase the firm's cost of equity if it computes that cost using the security market line approach.
a reduction in the risk-free rate
_______________ generally occurs first in a bankruptcy reorganization.
Filing proofs of claim
___________________ is the interest rate parity approximation formula.
Ft = S0[1 + (RFC - RUS)]t
A stock dividend of less than _____ percent is classified as a small stock dividend.
20 to 25
Pick the correct statement from below. Multiple Choice A company is technically insolvent when it has a negative book value. A company is technically insolvent when its total debt exceeds its total equity. A company is technically insolvent when it is unable to meet its financial obligations. A company is technically insolvent when it files for bankruptcy protection. A company is technically insolvent when the market value of its stock is less than its book value.
A company is technically insolvent when it is unable to meet its financial obligations.
DLink's outstanding shares of common stock have all just been bought by a group of individuals. How do we call the return these individuals require on this investment to the firm?
Cost of equity
_________________ defines the uncovered interest parity.
E(St) = S0[1 + (RFC − RUS)]t
_____________ tend to decrease the ability of a shareholder to create his or her own homemade dividend policy.
High transaction fees
________________ makes the capital structure of a company irrelevant.
Homemade leverage
Two traders, Mary and Paul, have agreed to exchange British pounds for French francs between themselves three months from today. This exchange is classified as a _____________
forward trade.
_____________ is the condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate.
Interest rate parity
_____________________ supports the idea that real interest rates are equal across countries.
International Fisher effect
On Friday evening, Bank X loans Bank Y Eurodollars that must be repaid the following Monday morning. Bank X will most likely charge Bank Y the ________________ on this loan.
London Interbank Offer Rate
________________ provides the greatest tendency to increase the percentage of debt included in a company's optimal capital structure.
Low probability of financial distress
The concept of homemade leverage has the most association with _________________.
M&M Proposition I with no tax
___________ states that a company's value is unrelated to its capital structure.
M&M Proposition I, no tax
Pick the correct statement from below. Multiple Choice M&M Proposition II with taxes has the same general implications as M&M Proposition II without taxes. M&M Proposition II with taxes states that capital structure is irrelevant to shareholders. M&M Proposition II with taxes supports the argument that business risk is determined by the capital structure decision. M&M Proposition II with taxes supports the argument that the cost of equity decreases as the debt-equity ratio increases. M&M Proposition II with taxes concludes that the capital structure decision is irrelevant to the value of a firm.
M&M Proposition II with taxes has the same general implications as M&M Proposition II without taxes.
Pick the correct statement from below. Multiple Choice The subjective approach assigns a discount rate to each project based on other companies in the same category as the project. Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. Companies will correctly accept or reject every project if they adopt the subjective approach. Mandatory projects should only be accepted if they produce a positive NPV when the overall company WACC is used as the discount rate. The pure play approach should only be used with low-risk projects.
Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
A stock repurchase will result in a/an _________________.
PE ratio equal to that resulting from a comparable cash dividend
A T-shirt is currently selling for $100 in the U.S. The current exchange rate between U.S. dollar and Canadian dollar is $1 = C$1.43. ____________ provides support to the idea that the T-shirt that sells for $100 in the U.S. is currently selling in Canada for $143.
Purchasing power parity
_______________ involves a payment in shares that increases the number of shares a shareholder owns but also decreases the value per share.
Stock dividend
_________________ does not affect the total equity of a company but does increase the number of shares outstanding.
Stock split
Pick the correct statement related to cost of debt from below. Multiple Choice The aftertax cost of debt varies inversely to changes in market interest rates. The aftertax cost of debt will generally exceed the cost of equity if the relevant tax rate is zero. The aftertax cost of debt will generally equal the cost of preferred if the tax rate is zero. The aftertax cost of debt is unaffected by changes in the market rate of interest. The aftertax cost of debt is highly dependent upon a company's tax rate.
The aftertax cost of debt is highly dependent upon a company's tax rate.
Pick the correct statement related to cost of capital from below. Multiple Choice The cost of capital for a new project is determined by the overall risk level of the firm. The cost of capital for a new project is dependent upon the source of the funds obtained to fund that project. The cost of capital for a new project is dependent upon the firm's overall capital structure. The cost of capital for a new project should be applied as the discount rate for all other projects considered by the firm. The cost of capital for a new project depends upon how the funds raised for that project are going to be spent.
The cost of capital for a new project depends upon how the funds raised for that project are going to be spent.
Richmond Tours has a capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. The firm pays out 30% of net income as dividend. Its beta is 1.21 and pays taxes at the rate of 21 percent. Based on the above, pick the correct statement from below.
The cost of equity is unaffected by a change in the company's tax rate.
What is crossover rate?
The discount rate at which we are indifferent between two investments.
Assume the euro is selling in the spot market for $1.25. Simultaneously, in the three-month forward market the euro is selling for $1.34. Pick the correct statement that describes this situation. Multiple Choice The spot market is out of equilibrium. The forward market is out of equilibrium. The dollar is selling at a premium relative to the euro. The euro is selling at a premium relative to the dollar. The euro is expected to depreciate in value.
The euro is selling at a premium relative to the dollar.
Pick the correct statement from below. Multiple Choice The optimal capital structure of a company minimizes the company's tax payments. The optimal capital structure of a company maximizes the value of that company's marketed claims. The optimal capital structure of a company minimizes both the marketed and nonmarketed claims against that company. The optimal capital structure of a company eliminates all nonmarketed claims against that company. The optimal capital structure of a company equates the company's marketed and nonmarketed claims.
The optimal capital structure of a company maximizes the value of that company's marketed claims.
Pick the correct statement from below. Multiple Choice The optimal capital structure will be the same for all companies within the same industry. The optimal capital structure will remain constant over time unless the company changes its primary operations. The optimal capital structure will vary over time as taxes and market conditions change. The optimal capital structure places more emphasis on operations than on financing. The optimal capital structure is unaffected by changes in the financial markets.
The optimal capital structure will vary over time as taxes and market conditions change.
We use the symbol "RU" to refer to the cost of capital for a(n) ______ while "RA" for ____________.
all-equity company; weighted average cost of capital
As a job assignment from the CEO, Paul (who is the financial manager) has computed the break-even point between a levered and an unlevered capital structure of his company. Ingoring taxes. At the break-even level, his ____________.
company is earning just enough to pay for the cost of the debt
To capital budgeting analysis, the foreign currency approach ___________________
computes the NPV of a project in both the foreign and the domestic currency.
Texas Instruments borrows money at 6.5% interest rate. The 6.5% is also referred to as the ____________ to the firm.
cost of debt
The equivalent annual cost does not consider ________________.
costs of research conducted to identify equipment choices
You find today that $1 is equal to £.77 and equal to C$1.27, in turn, C$1 is equal to £.61 [calculated as C$1(£.77/C$1.27)]. Thus, the __________ is C$1 = £.61.
cross-rate
In accordance with the static theory of capital structure, the optimal capital structure for a company _________________.
equates marginal tax savings from additional debt to the marginal increased bankruptcy costs of that debt
A decrease in a project's _________ will increase the acceptability of the project.
equivalent annual cost
Susan is reviewing a graph that plots earnings per share (EPS) against earnings before interest and taxes (EBIT). The relationship she has learned from the graph is that the steeper the slope of the plotted line the _________________________.
greater the sensitivity of EPS to changes in EBIT
The business risk of a company ___________________.
has a positive relationship with the company's cost of equity
The ability of shareholders to undo a company's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock is refered to as ______________________.
homemade dividend
If a company uses its WACC as the discount rate for all of the projects it undertakes, chances are that it will ______________.
increase the average risk level of the company over time
Ignoring taxes and costs, a stock repurchase will ______.
increase the earnings per share
Flotation costs of a project will __________________.
increase the initial cash outflow of the project
FoodMart is considering a project. The project's flotation costs amount to 9.2% of the funding need. Thus, the project analysis should _________________.
increase the initial project cost by dividing that cost by (1 − .092)
According to the pecking-order theory, ____________ is the form of financing companies prefer to use first.
internal fund
FoodMart's current debt-equity ratio is .41. The company's cost of equity ______
is affected by either a change in the company's beta or its projected rate of growth.
If a company uses the capital asset pricing model to determine its cost of equity, its cost of equity ___________.
is dependent upon a reliable estimate of the market risk premium
If quotes are based on units of foreign currency per U.S. dollar and the U.S. dollar appreciated against the euro today, ______________
it now takes more euros to buy one dollar.
North Construction has paid a quarterly dividend of $1.50 per share for the last five years. The ___________is most apt to cause the company to reduce the amount of its next dividend payment.
loss of a major customer which lowers the overall company's outlook for the next few years
You are considering the purchase of a machine out of your evaluation among four new ones. They have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. Under such circumstances, you should choose the machine to purchase based on the ___________________.
lowest equivalent annual cost
The best choice of capital structure for a firm is the one that ________________.
maximizes the value of the firm
The capital structure that ________ the value of a company also _____________.
maximizes; minimizes its cost of capital
If we assign discount rates to individual projects according to the risk level of each project, it ____________.
may cause the company's overall weighted average cost of capital to either increase or decrease over time
Beauty Infinity is a multi-division firm. Each division is in a separate line of business and each presents risks unique to those lines. The firm is currently using its overall WACC as the discount rate for all proposed projects. Because of this, a division within the firm will tend to _________________.
prefer higher risk projects over lower risk projects
The spot exchange rate on Canadian dollars today is C$1.273 and the six-month forward rate is C$1.275. That means the U.S. dollar is selling at a _____ relative to the Canadian dollar and the U.S. dollar is expected to _____ relative to the Canadian dollar.
premium; appreciate
The Tax Cuts and Jobs Act of 2017 encourages corporations to ______________
repatriate their untaxed overseas profits.
UniPlus (a U.S. firm) is making very good profits from its overseas operation. When the firm has paid U.S. taxes on the profits, the profits are considered to be _____________
repatriated
The home currency approach _________________
requires an applicable exchange rate for every time period for which there is a cash flow.
John invested in North Point stock when the firm was unlevered. After that, North Point has changed its capital structure. The firm now has a debt ratio of .35. To unlever his position, John has to _______________.
sell 35 percent of his shares of North Point stock and loan out the sale proceeds
ABC Corp. has excess cash and has decided to buy some of its outstanding shares. We call this process _______________.
stock repurchase
Indiana Gems stock is currently trading at $35. The company's primary clientele are believed to be able to afford to spend between $1,500 and $2,000 to purchase a round lot of 100 shares. To enhance the tradibility of its stock, the company should consider a _______________.
stock split
The M&M theory puts forth that the value of a company is dependent upon _________________.
the total cash flows of that company
Homemade leverage can be defined as _______________________.
the use of personal borrowing to alter an individual's exposure to financial leverage
That ___________________ is the concept basis for M&M Proposition I with taxes.
the value of a taxable company increases as the level of debt increases
When we analyze a project with flotation cost, we set the flotation cost equal to _______________.
the weighted average of the flotation costs associated with each form of financing
Exposure to exchange rate risk over the long run is related to _________________
unexpected changes in relative economic conditions.
The implication of M&M Proposition II with tax is that the ______________________.
weighted average cost of capital decreases as the debt-equity ratio increases
In the foreign exchange market, spot trades must be settled _____________
within two business days.
What is the first step in the Net Present Value (NPV) process?
Estimate the future cash flows.
Pick the correct statement related to crossover point from below. Multiple Choice Graphing the crossover point helps explain why one project is always superior to another project. Graphing the crossover point helps explain how decisions concerning mutually exclusive projects are derived. Graphing the crossover point helps explain how the duration of a project affects the decision as to which project to accept. Graphing the crossover point helps explain how the net present value and the initial cash outflow of a project are related. Graphing the crossover point helps explain how the profitability index and the net present value are related.
Graphing the crossover point helps explain how decisions concerning mutually exclusive projects are derived.
Based upon the following data: calculate the Average Accounting Return Net Income: Year 1: $ 1,500,000 Year 2: $ 1,200,000 Year 3: $ 1,050,000 Year 4: -$ 1,400,000 Year 5: $ 1,350,000 The starting book value is $11,840,000, which will end with $0, at the end of five years.
12.5%
Based upon the following data: calculate the crossover rate. Project A Project B Year 0 -1,000 -1,200 Year 1 600 700 Year 2 650 800
16.5%
Based upon the following data: calculate the Payback Period. Project A Initial Cost -$ 50,000 Year 1 $ 20,000 Year 2 $ 15,000 Year 3 $ 20,000
2.75 years
Using the discounting approach, calculate the MIRR of the following cash flows: Assume that the required return on this project is 15% Project A Initial Cost -$ 50 Year 1 $ 175 Year 2 -$ 115
27.74%
Pick the correct statement related to bid prices from below. Multiple Choice The bid price is the maximum price that a firm should bid. A firm can submit a bid that is higher than the computed bid price and still break even. A bid price ignores taxes. A bid price should be computed based solely on the operating cash flows of the project. A bid price should be computed based on a zero percent required rate of return.
A firm can submit a bid that is higher than the computed bid price and still break even.
_______________ will increase a bid price.
An increase in the required rate of return
Pick the correct statement related to changes in the net working capital requiremnets from below. Multiple Choice Changes in the net working capital requirements can affect the cash flows of a project every year of the project's life. Changes in the net working capital requirements only affect the initial cash flows of a project. Changes in the net working capital requirements only affect the initial and final cash flows of a project. Changes in the net working capital requirements are generally excluded from project analysis due to their irrelevance to the total project. Changes in the net working capital requirements are excluded from project analysis as long as they are recovered when the project ends.
Changes in the net working capital requirements can affect the cash flows of a project every year of the project's life.
Pick the correct statement related to discounted payback from below. Multiple Choice Payback is a better method of analysis than discounted payback. Discounted payback is used more frequently in business than payback. Discounted payback does not require a cutoff point. Discounted payback is biased towards short-term projects. The discounted payback period increases as the discount rate decreases.
Discounted payback is biased towards short-term projects.
When considering Net Working Capital, a project will generally need all of the following, except: Multiple Choice Some cash on hand to pay any expenses that arise. An initial investment in inventories and accounts receivables. Some financing in the form of accounts payable. A balance that represents the investment in net working capital. Only long-term assets to get the project started.
Only long-term assets to get the project started.
_______________ is defined as the option that is forgone so that an asset can be utilized by a specific project.
Opportunity cost
_____________________ provides the best information on the cost-benefit aspects of a project.
Profitability index
All of the following are useful for understanding Profitability Index, except: Multiple Choice A profitability index greater than 1 equals a positive NPV. A profitability index less than 1 equals a negative NPV. The initial investment is excluded when calculating the present value of the future cash flows. The initial investment is included when calculating the present value of the future cash flows. The denominator for the profitability index is the cost of the project.
The initial investment is included when calculating the present value of the future cash flows.
Pick the correct statement related to internal rate of return from below. Multiple Choice The internal rate of return may produce multiple rates of return when cash flows are conventional. The internal rate of return is best used when comparing mutually exclusive projects. The internal rate of return is rarely used in the business world today. The internal rate of return is principally used to evaluate small dollar projects. The internal rate of return is easy to understand.
The internal rate of return is easy to understand.
To calculate a project's average _____________, we divide its average net income by its average book value.
accounting return
For a cost-cutting project, its operating cash flow ___________________
can be positive even though there are no sales.
Erosion can be described as the _____________________.
cash flows of a new project that come at the expense of a firm's existing cash flows
FoodMart has analyzed a new store project and determined that the project's internal rate of return is lower than the firm desires. The project's internal rate of return can be increase by _______________of the project.
condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows
The ___________ is the IRR that causes the net present value of the differences between two project's cash flows to equal zero.
crossover rate
The internal rate of return is the ________________.
discount rate which causes the net present value of a project to equal zero
By using the ________, we compute the value of a project based on the present value of the project's anticipated cash flows.
discounted cash flow valuation
The __________________ of a project is defined as the length of time a firm must wait to recoup, in present value terms, the money it has invested in a project.
discounted payback period
The Average Accounting Return (AAR) Rule states that a company will accept a project that has an average account return that:
exceeds a pre-determined target average accounting return.
If a project has two distinct discount rates which cause its NPV equal zero, then the project is said to _________________.
have multiple internal rates of return
For a proposed project, pro forma statements should generally not ____________________
include interest expense.
In accordance with the stand-alone principle, a project should be analyzed based solely on its _____________ costs.
incremental
A project's ___________ are defined as the difference between a company's future cash flows if it accepts the project and the company's future cash flows if it does not accept the project.
incremental cash flows
All of the following are related to a proposed project. Cash flow at Time 0 includes ______________________.
initial investment in inventory to support the project
Since the average accounting return (AAR) method of project analysis _____________, it is considered as the method's strength.
is easy to calculate
The advantages of the payback method of project analysis include : __________________.
liquidity bias, ease of use
A project's cash flow can be estimated as the project's operating cash flow __________________.
minus both the project's change in net working capital and capital spending
In the analysis of a new production line, _______ should not be included.
money already spent for research and development of the new product
Project X and Project Y are _______________ projects as both would require the simultaneous and exclusive use of the same piece of machinery. Thus, the acceptance of Project X will preclude the acceptance of Project Y.
mutually exclusive
The profitability index is most closely related to _________________.
net present value
To decide which one of two mutually exclusive projects to accept, we need to compare the ___________________.
net present value of the projects
Payback is often used as the sole method of analyzing a proposed small project because __________________.
the benefits of payback analysis usually outweigh the costs of the analysis
Two mutually exclusive projects are competing projects that both _________________________.
require the total use of the same limited resource
If we apply the discounted payback decision rule to all projects, it will likely lead to ________________________.
some positive net present value projects to be rejected
The net present value of a project will increase if _________________.
the aftertax salvage value of the fixed assets increases
If a company uses the MACRS system to estimate its depreciation expenses, then it __________________.
will have a greater depreciation tax shield in Year 2 than in Year 1
___________ costs were the costs incurred in the past and cannot be recouped.
Sunk
The present value of the interest tax shield can be calculated as _________.
TCD
You were considering two mutually exclusive projects: Project A and Project B. They have a crossover point at 12 percent of discount rate. The fact that you accepted Project A with a required return of 13% implies that you _______________.
always accept Project A if the required return exceeds the crossover rate
Two mutually exclusive projects, Projects A and B, have crossover rate of 12 percent, __________________.
the project that is acceptable at a discount rate of 11 percent should be rejected at a discount rate of 13 percent
New Balance, Inc. wants to maintain a stock price around $22 a share. Due to a recent market downturn, the stock is currently selling for $7.5 a share. The company should consider a _____ stock split.
1-for-3 reverse
When we compute the annual cash flows for a project, we calculate the tax amount as ____________.
EBIT(TC) excluding interest expenses
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, after a firm files for bankruptcy protection, creditors have to wait for _________before submitting their own reorganization plan to the court.
18 months
What are non-conventional cash flows?
A combination of cash outflows and inflows.
Pick the correct statement related to cost of equity from below. Multiple Choice A company's overall cost of equity is generally less than its WACC given a debt-equity ratio of .5. A company's overall cost of equity is unaffected by changes in the market risk premium. A company's overall cost of equity is directly related to the risk level of the firm. A company's overall cost of equity is generally less than the firm's aftertax cost of debt. A company's overall cost of equity is inversely related to changes in the level of inflation.
A company's overall cost of equity is directly related to the risk level of the firm.
Pick the correct statement related to cost of debt from below. Multiple Choice A company's pretax cost of debt is based on the current yield to maturity of the company's outstanding bonds. A company's pretax cost of debt is equal to the coupon rate on the latest bonds issued by the company. A company's pretax cost of debt is equivalent to the average current yield on all of a company's outstanding bonds. A company's pretax cost of debt is based on the original yield to maturity on the latest bonds issued by a company. A company's pretax cost of debt has to be estimated as it cannot be directly observed in the market.
A company's pretax cost of debt is based on the current yield to maturity of the company's outstanding bonds.
Pick the correct statement related to WACC from below. Multiple Choice A company's weighted average cost of capital (WACC) is equivalent to the aftertax cost of the outstanding liabilities. A company's weighted average cost of capital (WACC) should be used as the required return when analyzing any new project. A company's weighted average cost of capital (WACC) is the return investors require on the total assets of the firm. A company's weighted average cost of capital (WACC) remains constant when the debt-equity ratio changes. A company's weighted average cost of capital (WACC) is unaffected by changes in corporate tax rates.
A company's weighted average cost of capital (WACC) is the return investors require on the total assets of the firm.
Pick the correct statement related to the foreign exchange market. Multiple Choice The trading floor of the foreign exchange market is located in London. The foreign exchange market is the world's second largest financial market. The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the French franc, and the euro. A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S. currency. The price in U.S. dollars of a foreign currency is referred to as an indirect quote.
A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S. currency.
_______________ will increase the company's aftertax cost of debt.
A decrease in a company's tax rate
Pick the correct statement related to cash dividends from below. Multiple Choice Extra cash dividends cannot be repeated in the future. A dividend is never a liability of the issuer until it has been declared. If a firm has paid regular quarterly dividends for at least five consecutive years, it is legally obligated to continue doing so. Regular cash dividends reduce paid-in capital. The dividend yield expresses the annual dividend as a percentage of net income.
A dividend is never a liability of the issuer until it has been declared.
Pick the correct statement related to reverse split from below. Multiple Choice A one-for-four reverse stock split will increase the par value by 25 percent. A one-for-four reverse stock split will increase the number of shares outstanding by 400 percent. A one-for-four reverse stock split will increase the market value but not affect the par value per share. A one-for-four reverse stock split will increase a $1 par value to $4. A one-for-four reverse stock split will increase a $1 par value to $5.
A one-for-four reverse stock split will increase a $1 par value to $4.
Pick the correct statement from below. Multiple Choice Project analysis should only include the cash flows that affect the income statement. A project can create a positive operating cash flow without affecting sales. The depreciation tax shield creates a cash outflow for a project. Interest expense should always be included when analyzing cost-cutting projects. A bid price maximizes profits on a project for the bidding firm.
A project can create a positive operating cash flow without affecting sales.
Pick the correct statement from below. Multiple Choice Firms should accept low-risk projects prior to funding high-risk projects. Making subjective adjustments to a company's WACC when determining project discount rates unfairly punishes low-risk divisions within the company. A project that is unacceptable today might be acceptable tomorrow given a change in market returns. The pure play method is most frequently used for projects involving the expansion of a company's current operations. Companies that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.
A project that is unacceptable today might be acceptable tomorrow given a change in market returns.
Pick the correct statement related to stock dividend from below. Multiple Choice A small stock dividend increases the common stock account by the market price of each share issued. A small stock dividend reduces cash by the total market value of the issued shares. A stock dividend affects the par value per share but not the equity account balances. A small stock dividend reduces retained earnings by the market price of each share issued. A small stock dividend does not affect the capital in excess of par value account.
A small stock dividend reduces retained earnings by the market price of each share issued.
Pick the correct statement related to stock repurchase program from below. Multiple Choice A stock repurchase program requires all shareholders to sell a fraction of their shares. A stock repurchase program is preferred over a high-dividend program only by tax-exempt shareholders. A stock repurchase program decreases both the number of shares outstanding and the market price per share. A stock repurchase program has no effect on a company's financial statements. A stock repurchase program is essentially the same as a cash dividend program provided there are no taxes or other costs.
A stock repurchase program is essentially the same as a cash dividend program provided there are no taxes or other costs.
Pick the correct statement related to a stock split from below. Multiple Choice A stock split increases the total value of the common stock account. A stock split decreases the value of the retained earnings account. A stock split increases the par value per share. A stock split increases the value of the capital in excess of par account. A stock split decreases the market value per share.
A stock split decreases the market value per share.
Pick the correct statement from below. Multiple Choice The use of forward rates increases the short-run exposure to exchange rate risk. Accounting translation gains and losses are recorded in the equity section of the balance sheet. There is no known method of reducing long-run exchange rate risk. A firm can record a profit on its income statement from a foreign subsidiary even when that subsidiary has no profit thanks to exchange rate risk. Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.
Accounting translation gains and losses are recorded in the equity section of the balance sheet.
If you want to invest in a foreign stock that otherwise could not be traded in the U.S., you can invest in ____________.
American Depository Receipt
____________________ is a suggested method of reducing a U.S. importer's short-run exposure to exchange rate risk.
Entering a forward exchange agreement timed to match the invoice date
Pick the correct statement related to the relationship between a levered and an unlevered capital structure from below. Ignore taxes. Multiple Choice At the break-even point, there is no advantage to debt. The earnings per share will equal zero when EBIT is zero for a levered firm. The advantages of leverage are inversely related to the level of EBIT. The use of leverage at any level of EBIT increases the EPS. EPS are more sensitive to changes in EBIT when a firm is unlevered.
At the break-even point, there is no advantage to debt.
Pick the correct statement related to automatic dividend reinvestment plans from below. Multiple Choice Automatic dividend reinvestment plans require that participating stockholders reinvest all of the dividends to which they are entitled. Automatic dividend reinvestment plans grant all participants a discount on share purchases. Automatic dividend reinvestment plans increase the relevance of corporate dividend policies. Automatic dividend reinvestment plans help shareholders create their own homemade dividend policies. Automatic dividend reinvestment plans are no longer available in the U.S.
Automatic dividend reinvestment plans help shareholders create their own homemade dividend policies.
_____________________ is the best justification for a reverse stock split.
Avoid delisting
Pick the correct statement from below. Multiple Choice Bankruptcy occurs when total equity is negative. Bankruptcy is a legal proceeding. Bankruptcy occurs when a company cannot meet its financial obligations. Bankruptcy refers to a loss of value for debt holders. Bankruptcy is an inexpensive means of reorganizing a company.
Bankruptcy is a legal proceeding.
Pick the correct statement related to Chapter 11 bankruptcy from below. Multiple Choice Prepacks apply only to Chapter 7, not Chapter 11, bankruptcies. Senior management must be replaced prior to exiting a Chapter 11 bankruptcy. A company can only file for Chapter 11 after it becomes totally insolvent. Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage. Chapter 11 involves the total liquidation of the bankrupt firm.
Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage.
Pick the correct statement that is in accordance with the pecking-order theory. Multiple Choice There is a direct relationship between a company's profits and its debt levels. Companies avoid external debt except as a last resort. A company's capital structure is independent of its need for external funding. Companies stockpile internally generated cash. Every company has an optimal capital structure.
Companies stockpile internally generated cash.
Which one of the following factors tends to increase cash dividends?
Corporate investors
_______________ is the date used to determine the names of shareholders who will receive a dividend payment.
Date of record
The board of directors of Hoosier Equipment met this morning and passed a resolution to pay a cash dividend of $.45 a share next month. How do we call today?
Declaration date
Premium Foods just paid out $4 a share to its shareholders. The cash involved were from the proceeds received from a large sale of the firm's assets, not from any earnings of the firm. How do we call this type of payments to shareholders?
Distributions
Pick the correct statement from below. Multiple Choice A reduction in personal tax rates tends to lead to lower dividends. Dividends tend to fluctuate significantly from quarter to quarter. Earnings growth tends to lag dividend growth. Dividend payments are highly concentrated in a relatively small set of large companies. Non-dividend-paying companies are generally more apt to commence paying regular dividends than to implement a stock repurchase program.
Dividend payments are highly concentrated in a relatively small set of large companies.
Red Roof Motel has more cash on hand than it needs for its operations. So, the firm has decided to pay out some of its earnings in the form of cash to its shareholders. How do we call this kind of cash payments?
Dividends
__________________ correctly describes the relative purchasing power parity relationship.
E(St) = S0[1 + (hFC − hUS)t
________________ are international bonds issued in multiple countries but denominated in a single currency.
Eurobonds
We call the U.S. dollars that are deposited in a bank in France the _________________.
Eurocurrency
LIBOR is primarily charged on ______________
Eurodollar loans in the London market.
____________________ is the risk that Walmart faces when it opens a store in a foreign country, given that the currency exchange rate between the U.S. and this foreign country fluctuates over time
Exchange rate risk
Newkia Furniture makes vintage chairs and is currently considering making vintage tables as well. __________ is the best example of an incremental operating cash flow related to the table project.
Hiring additional employees to handle the increased workload should the firm accept the table project
According to the video, which of the following are disadvantages of the Average Accounting Return (AAR)? I. Time value of money is ignored. II. An arbitrary benchmark cutoff rate is established. III. Market values are not considered.
I, II and III
According the video, one of the biggest challenges for the Net Present Value method is:
Identifying the appropriate discount rate to use
____________________ will result in a decrease of the net present value of the project.
Increasing a project's initial cost at time zero
Based upon the following data, which of the following mutually exclusive projects should you choose if your required return is 10%? Year Investment A Investment B 0 −$ 150 −$ 150 1 80 40 2 40 50 3 40 60 4 30 55
Investment B with an NPV of 10.33%
All of the following are advantages of the Profitability Index, except: Multiple Choice It is useful for comparing mutually exclusive investments. It is closely related to the Net Present Value calculation. It is typically leads to the same decision as the Net Present Value. It is easy to understand and communicate. It is useful to identify the "bang for the buck".
It is useful for comparing mutually exclusive investments.
All of the following are commonly cited reasons for using the Internal Rate of Return, except: Multiple Choice Rates of return are commonly used when considered positive projects being considered. Internal rate of return is an easy way to provide information about a proposal. The IRR does not need a discount rate to complete the calculation. A high IRR can be assumed to be a positive project to consider. Multiple IRR's allow the company to choose the best one when evaluating projects.
Multiple IRR's allow the company to choose the best one when evaluating projects.
Pick the correct statement related to net present value (NPV) from below. Multiple Choice Net present value is the best method of analyzing mutually exclusive projects. Net present value is less useful than the internal rate of return when comparing different-sized projects. Net present value is the easiest method of evaluation for nonfinancial managers. Net present value cannot be applied when comparing mutually exclusive projects. Net present value is very similar in its methodology to the average accounting return.
Net present value is the best method of analyzing mutually exclusive projects.
Pick the correct statement related to net working capital from below. Multiple Choice Net working capital can be ignored in project analysis because any expenditure is normally recouped at the end of the project. Net working capital requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. Net working capital is rarely affected when a new product is introduced. Net working capital can create either an initial cash inflow or outflow. Net working capital is the only expenditure where at least a partial recovery can be made at the end of a project.
Net working capital can create either an initial cash inflow or outflow.
For independent projects with conventional cash flows, which of the following can we use as a requirement for the project to be accepted?
PI greater than 1.0
Pick the correct statement from below. Multiple Choice Relative purchasing power parity states that identical items should cost the same regardless of the currency used to make the purchase. Relative purchasing power parity relates differences in inflation rates to differences in exchange rates. Relative purchasing power parity compares the real rate of return to the nominal rate of return. Relative purchasing power parity explains the differences in real rates across national boundaries. Relative purchasing power parity relates changes in exchange rates to changes in interest rates.
Relative purchasing power parity relates differences in inflation rates to differences in exchange rates.
Pick the correct statement related to internal rate of return (IRR) from below. Multiple Choice The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. A project with an IRR equal to the required return would reduce the value of a firm if accepted. The IRR is equal to the required return when the net present value is equal to zero. Financing type projects should be accepted if the IRR exceeds the required return. The average accounting return is a better method of analysis than the IRR from a financial point of view.
The IRR is equal to the required return when the net present value is equal to zero.
Pick the correct statement related to WACC for a company that uses debt in its capital structure.
The WACC would most likely decrease if the firm replaced its preferred stock with debt.
Pick the correct statement from below. Multiple Choice The absolute priority rule determines when a firm must be declared officially bankrupt. The absolute priority rule determines how a distressed firm is reorganized. The absolute priority rule determines which judge is assigned to a particular bankruptcy case. The absolute priority rule determines how long a reorganized firm is allowed to remain under bankruptcy protection. The absolute priority rule determines which parties receive payment first in a bankruptcy proceeding.
The absolute priority rule determines which parties receive payment first in a bankruptcy proceeding.
Pick the correct statement related to average accounting rate of return (AAR) from below. Multiple Choice The average accounting rate of return considers the time value of money. The average accounting rate of return measures net income as a percentage of the sales generated by a project. The average accounting rate of return is the best method of financially analyzing mutually exclusive projects. The average accounting rate of return is the primary methodology used in analyzing independent projects. The average accounting rate of return is similar to the return on assets ratio.
The average accounting rate of return is similar to the return on assets ratio.
Pick the correct statement related to bid price from below. Multiple Choice The bid price is the price you must charge to break even at a zero discount rate. The bid price is the aftertax contribution margin. The bid price is the highest price you should charge if you want to win the bid. The bid price is the only price you can bid if the project is to be profitable. The bid price is the minimum price that will provide your target rate of return.
The bid price is the minimum price that will provide your target rate of return.
A project has a required payback period of three years. Pick the correct statement related to the payback analysis of this project from below. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. The cash flow in Year 3 is ignored. The project's cash flow in Year 3 is discounted by a factor of (1 + R)3. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. The project is acceptable whenever the payback period exceeds three years.
The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.
Pick the correct statement related to cost of preferred stock from below. Multiple Choice The cost of preferred stock is equal to the dividend yield. The cost of preferred stock is equal to the yield to maturity. The cost of preferred stock is highly dependent on the dividend growth rate. The cost of preferred stock is independent of the stock's price. The cost of preferred stock decreases when tax rates increase.
The cost of preferred stock is equal to the dividend yield.
Pick the correct statement from below. Multiple Choice The dividend growth model is only as reliable as the estimated rate of growth. The dividend growth model can only be used if historical dividend information is available. The dividend growth model considers the risk that future dividends may vary from their estimated values. The dividend growth model applies only when a company is currently paying dividends. The dividend growth model is based solely on historical dividend information.
The dividend growth model is only as reliable as the estimated rate of growth.
Pick the correct statement from below. Multiple Choice The home currency approach discounts all of a project's foreign cash flows using the current spot rate. The home currency approach employs the uncovered interest parity relationship to project future exchange rates. The home currency approach computes the net present value (NPV) of a project in the foreign curren y and then converts that NPV into U.S. dollars. The home currency approach utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency. The home currency approach utilizes the international Fisher effect to compute the required future exchange rates.
The home currency approach employs the uncovered interest parity relationship to project future exchange rates.
Pick the correct statement related to the information content of a dividend increase from below. Multiple Choice The information content of a dividend increase generally signals that the payer has a one-time surplus of cash. The information content of a dividend increase generally signals that the payer has few, if any, net present value projects to pursue. The information content of a dividend increase generally signals that management believes earnings growth will be strong going forward. The information content of a dividend increase generally signals that the payer has more cash than it needs due to a decline in future orders. The information content of a dividend increase generally signals that dividends thereafter will be lower.
The information content of a dividend increase generally signals that management believes earnings growth will be strong going forward.
All of the following are disadvantages of the Payback Period, except: Multiple Choice The method ignores the time value of money. All projects are considered based upon cash flows alone. Cash flows that extend beyond the cutoff date are not considered. The company must select a specified number of years to compare projects. The method incorporates the time value of money.
The method incorporates the time value of money.
Pick the correct statement from below. Multiple Choice The operation of the forward rate market depends on current forward rates exceeding current spot rates. The operation of the forward rate market depends on current spot rates exceeding current forward rates over time. The operation of the forward rate market depends on current spot rates equaling current forward rates, on average, over time. The operation of the forward rate market depends on forward rates equaling the actual future spot rates on average over time. The operation of the forward rate market depends on current spot rates equaling the actual future spot rates on average over time.
The operation of the forward rate market depends on forward rates equaling the actual future spot rates on average over time.
Pick the correct statement from below. Multiple Choice Capital structure has no effect on shareholder value. The optimal capital structure occurs when the cost of equity is minimized. The optimal capital structure maximizes shareholder value. Shareholder value is maximized when WACC is also maximized. Unlevered firms have more value than levered firms when firms are profitable.
The optimal capital structure maximizes shareholder value.
Pick the correct statement related to independent projects with conventional cash flows. Multiple Choice The internal rate of return decision may contradict the net present value decision. Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. The payback decision rule could override the net present value decision rule should cash availability be limited. The profitability index rule cannot be applied in this situation. The projects cannot be accepted unless the average accounting return decision ruling is positive.
The payback decision rule could override the net present value decision rule should cash availability be limited.
You are the financial manager of One Beach, Inc. It is a national restaurant chain that has a cost of capital of 13%. The restaurant chain is cosidering opening a high end restaurant that is expected to have a cost of capital of 14.5% or higher. If the high-end restaurant can be opened, its NPV will be $600 when discounted at 13%. What would be your best decision for this high-end restaurant project?
The project should probably be put on hold until its cost of capital can be lowered.
Pick the correct statement related to M&M Proposition II without taxes from below. Multiple Choice The cost of equity remains constant as the debt-equity ratio increases. The cost of equity is inversely related to the debt-equity ratio. The required return on assets is equal to the weighted average cost of capital. Financial risk determines the return on assets. Financial risk is unaffected by the debt-equity ratio.
The required return on assets is equal to the weighted average cost of capital.
______________ is considered as the primary advantage of using the dividend growth model to estimate a company's cost of equity.
The simplicity of the model
If the present value of the cash inflows exceeds the initial cost of a project, then the project should be __________________.
accepted because the profitability index is greater than 1
Companies can use stock splits to ______________.
adjust the market price of its stock so the stock falls within a preferred trading range
When __________, we say that the dividend market is in equilibrium.
all clienteles are satisfied
The equity risk that is most related to the daily operations of a firm is ____________________.
business risk
Pick the correct statement from below. Multiple Choice The subjective approach to project analysis is used only when a firm has an all-equity capital structure. The subjective approach to project analysis uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y. The subjective approach to project analysis assigns discount rates to projects based on the discretion of the senior managers of a firm. The subjective approach to project analysis allows managers to randomly adjust the discount rate assigned to a project once the project's standard deviation has been determined. The subjective approach to project analysis applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.
The subjective approach to project analysis assigns discount rates to projects based on the discretion of the senior managers of a firm.
Which one of the following is the reason for the need of adjusting the tax amount when valuing a firm using the cash flow from assets approach.
The tax effect of the interest expense must be removed.
Which of the following favors a low dividend policy?
The tax on capital gains is deferred until the gain is realized.
Pick the correct statement related to WACC from below. Multiple Choice The weighted average cost of capital (WACC) for a firm with debt is the discount rate that the firm should apply to all of the projects it undertakes. The weighted average cost of capital (WACC) for a firm with debt is the rate of return a company must earn on its existing assets to maintain the current value of its stock. The weighted average cost of capital (WACC) for a firm with debt is the coupon rate the firm should expect to pay on its next bond issue. The weighted average cost of capital (WACC) for a firm with debt is the minimum discount rate the firm should require on any new project. The weighted average cost of capital (WACC) for a firm with debt is the rate of return debtholders should expect to earn on their investment in this firm.
The weighted average cost of capital (WACC) for a firm with debt is the rate of return a company must earn on its existing assets to maintain the current value of its stock.
_______________ states that the current forward rate is an unbiased predictor of the future spot exchange rate.
Unbiased forward rate
______________ states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates.
Uncovered interest parity
Pick the correct statement related to Chapter 7 bankruptcy from below. Multiple Choice A company in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern. Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated. Chapter 7 bankruptcies are always involuntary on the part of the firm. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock can be issued.
Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated.
Whole Grains declared a dividend of $.50 a share on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?
Wednesday, October 29
Financial risk is ________________.
dependent upon a company's capital structure
A project's _________ is the annual annuity stream of payments that has the same present value as the project's costs.
equivalent annual cost
To determine which one out of three machines with differing prices and differing operating costs and lives to purchase and provided that the selected machine will be replaced when worn out, we should make our decision based on the machines' __________________.
equivalent annual cost
All else equal, on the _________________, the market value of a stock will tend to decrease by roughly the aftertax value of the dividend.
ex-dividend date
A(n) _____________ is the price of one euro expressed in U.S. dollars.
exchange rate
The equity risk that is related to capital structure policy is called _______________________.
financial risk
The very basic form of a swap will involve the trading of a ________________
fixed rate for a variable rate.
Microsoft has £500,000 in excess cash from its foreign operations. The company would like to exchange these funds for U.S. dollars. The exchange will occur in the _____________ market.
forex
The percent of investment that the project costs can be referred to as all of the following, except: Multiple Choice required return appropriate discount rate cost of money free cash flow cost of capital
free cash flow
When a firm has its optimal amount of debt, _______________.
its value of being a levered firm will exceed its value of being an unlevered firm
Flotation costs could be a reason for _______
maintaining a low dividend policy and rarely issuing extra dividends.
A project has an initial cost of $35,000 and a market value (determined by the PV of its expected future cash inflows) of $28,000. The diference between these two values is call the project's __________.
net present value
The present value of an investment's future cash flows divided by the initial cost of the investment is equal to its ____________________.
profitability index
The Payback Period Rule states that a company will accept a project if _______________________
the calculated payback is less than a pre-specified number of years.