Finance Final Help
Which of the following would be considered a fixed cost in a manufacturing setting?
Depreciation
Which of the following would be considered a variable cost in a manufacturing setting?
Direct labor
Which of the following statements would be consistent with the bird-in-the-hand dividend theory?
Dividends are more certain than capital gains income.
A significant disadvantage of the payback period is that it:
Does not properly consider the time value of money.
If a firm has no operating leverage and no financial leverage, then a 10% increase in sales will have what effect on EPS?
EPS will increase by 10%
Assume that Harris, Inc. has 10,000,000 common shares outstanding that have a par value of $2 per share. The stock is currently trading for $30 per share. The firm reported a net profit after-tax of $25,000,000. All else equal, what will happen to earnings per share if the company issues a 10% stock dividend?
Earnings per share will decrease because the number of shares outstanding will go up.
C) interest rate parity theory
Except for the effects of small transaction costs, the forward premium or discount should be equal and opposite in size to the difference in the national interest rates for securities of the same maturity. What is the name of this theory? A) the purchasing power parity theory B) the Bobby Fisher effect C) interest rate parity theory D) the law of one price
A) the purchasing power parity theory
Exchange rate changes tend to reflect international differences in inflation rates. What is the name of this theory? A) the purchasing power parity theory B) the IMF effect C) interest rate parity theory D) the law of one price
A) arises from the fact that the spot exchange rate on a future date is a random variable.
Exchange rate risk A) arises from the fact that the spot exchange rate on a future date is a random variable. B) applies only to certain types of international businesses. C) has been phased out due to recent international legislation. D) has been reduced by the adoption of floating exchange rates.
D) all of the above
Exchange rate risk A) exists when the contract is written in terms of the foreign currency. B) exists also in direct foreign investments and foreign portfolio investments. C) does not exist if the international trade contract is written in terms of the domestic currency. D) all of the above
C) direct foreign investments in foreign subsidiaries.
Exchange rate risk is highest for companies with A) international trade contracts denominated in the foreign currency. B) investment portfolios that contain foreign securities. C) direct foreign investments in foreign subsidiaries. D) international trade contracts denominated in the domestic currency.
Milton Parker has a capital structure that consists of $7 million of debt, $2 million of preferred stock, and $11 million of common equity, based upon current market values. Parker's yield to maturity on its bonds is 7.4%, and investors require an 8% return on Parker's preferred and a 14% return on Parker's common stock. If the tax rate is 35%, what is Parker's WACC?
10.18%
Given the following information on S & G Inc.'s capital structure, compute the company's weighted average cost of capital.
10.6%
Kelly Corporation will issue new common stock to finance an expansion. The existing common stock just paid a $1.50 dividend, and dividends are expected to grow at a constant rate 8% indefinitely. The stock sells for $45, and flotation expenses of 5% of the selling price will be incurred on new shares. What is the cost of new common stock be for Kelly Corp.?
11.79%
Sweet Tooth Bakery bakes and sells pies. Sweet Tooth has annual fixed costs of $880,000 and a variable cost per pie of $7.50. Each pie sells for $15.50 each. The firm expects to sell 500,000 pies annually. What is the break-even point in pies?
110,000
Jiffy Co. expects to pay a dividend of $3.00 per share in one year. The current price of Jiffy common stock is $60 per share. Flotation costs are $3.00 per share when Jiffy issues new stock. What is the cost of internal common equity (retained earnings) if the long-term growth in dividends is projected to be 8 percent indefinitely?
13 percent
Rent-to-Own Equipment Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. Rent-to-Own's required rate of return is 8%. What is the internal rate of return of this project?
15.13%
KayCee Manufacturing Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of KayCee's common stock today is $40 per share. If KayCee decides to issue new common stock, flotation costs will equal $4.00 per share. Kaycee's marginal tax rate is 35%. Based on the above information, the cost of retained earnings is:
19.63%.
KayCee Manufacturing Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of KayCee's common stock today is $40 per share. If Kaycee decides to issue new common stock, flotation costs will equal $4.00 per share. Kaycee's marginal tax rate is 35%. Based on the above information, the cost of new common stock is:
20.09%.
Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 11.25%. What is the investment's internal rate of return?
20.53%
Asian Trading Company paid a dividend yesterday of $5 per share (D0 = $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company's stock today is $29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal $2.50 per share. Asian Trading Company's marginal tax rate is 35%. Based on the above information, the cost of retained earnings is:
26.62%.
A U.S. company can borrow 12,000 pounds in Great Britain for 4% interest, paying back 12,480 pounds in one year. Alternatively, the U.S. company can borrow an equivalent amount of U.S dollars in the United States and pay 8% interest. Assuming capital markets are efficient, estimate the expected inflation rate in the United States if inflation in Great Britain is expected to be zero.
3.85%
Benkart's Tire Store has fixed costs of $220,000. Tires sell for $95 each and have a unit variable cost of $45. What is Benkart's break-even point in units?
4,400
Porky Pine Co. is issuing a $1,000 par value bond that pays 8.5% interest annually. Investors are expected to pay $1,100 for the 12-year bond. Porky will pay $50 per bond in flotation costs. What is the after-tax cost of new debt if the firm is in the 35% tax bracket?
4.70%
Triplin Corporation's marginal tax rate is 35%. It can issue 10-year bonds with an annual coupon rate of 7% and a par value of $1,000. After $12 per bond flotation costs, new bonds will net the company $966 in proceeds. Determine the appropriate after-tax cost of new debt for Triplin to use in a capital budgeting analysis.
4.87%
A new project is expected to generate $800,000 in revenues, $250,000 in cash operating expenses, and depreciation expense of $150,000 in each year of its 10-year life. The corporation's tax rate is 35%. What is the free cash flow from the project in year one?
410,000
Sam owns 5,000 shares of stock in Global X Corporation with a market value of $15,000. Global X declares a 20% stock dividend. After the dividend is paid, Sam owns
6,000 shares with a market value of $15,000.
A corporate bond has a face value of $1,000 and a coupon rate of 9%. The bond matures in 14 years and has a current market price of $946. If the corporation sells more bonds it will incur flotation costs of $26 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt capital?
6.56%
JB Corporation has a retained earnings balance of $2,000,000. The company reported net income of $600,000, sales of $4,000,000, and has 200,000 shares of common stock outstanding. The company announced a dividend of $2.00 per share. Therefore, the company's dividend payout ratio is
66.7%.
Kendall, Inc. has $15 million of outstanding bonds with a coupon rate of 10 percent. The yield to maturity on these bonds is 12.5 percent. If the firm's tax rate is 30 percent, what is relevant cost of debt financing to Kendall, Inc.?
8.75 percent
C) $57.60
A British-made component costs 36 U.K. pounds. A company in the United States needs to buy these components and the current indirect quote indicates that one dollar will buy .6250 pounds. Ignoring transactions costs, how much will one component cost in U.S. dollars? A) $22.50 B) $45.94 C) $57.60 D) $72.00
B) one currency is immediately exchanged for another currency.
A Spot transaction occurs when A) one currency is deposited in a foreign bank. B) one currency is immediately exchanged for another currency. C) one currency is exchanged for another currency at a specified price. D) one currency is exchanged for another currency in 30, 60, or 90 days.
C) The MNC will be exposed to exchange rate losses if the yen increases in value relative to the dollar.
A U.S.-based multinational corporation (MNC) currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen. The company also owes its Japanese suppliers 12,000,000 yen. Which of the following statements is MOST correct? A) The MNC is not exposed to exchange rate risk because it holds both assets and liabilities denominated in yen. B) The MNC will be exposed to exchange rate losses if the yen declines in value relative to the dollar. C) The MNC will be exposed to exchange rate losses if the yen increases in value relative to the dollar. D) The MNC can avoid exchange rate risk by paying its Japanese liabilities with dollars.
C) is exposed to both translation exposure and economic exposure.
A U.S.-based multinational corporation has 100% owned subsidiary in Argentina. The subsidiary operates only domestically, that is, all transactions occur within Argentina. Therefore, the U.S. multinational corporation A) is exposed to translation risk only. B) is not exposed to exchange rate risk because the subsidiary operates 100% domestically. C) is exposed to both translation exposure and economic exposure. D) is most concerned with transactions exposure.
B) $28.97
A bottle of German wine costs €21 (euros) in Berlin. According to the purchasing power parity theory, what would the bottle sell for in New York if it costs the New York company $1.25 per bottle to transport the wine to the United States? Assume the exchange rate is $1.32 per euro. A) $40.54 B) $28.97 C) $27.22 D) $39.50
Which of the following statements about financial leverage is true?
Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT.
B) The manager may decide to invest the funds in the United States due to the international Fisher effect, which suggests inflation in Argentina may make the extra interest income worth less in one year.
A corporate investment manager needs to invest $1,000,000 for the next 6 months. The current nominal rate of interest in the United States is 5%, while the nominal rate of interest in Argentina is 8%. Which of the following statements is MOST correct? A) The manager should invest the funds in Argentina and make an extra $30,000 for the year. B) The manager may decide to invest the funds in the United States due to the international Fisher effect, which suggests inflation in Argentina may make the extra interest income worth less in one year. C) The manager is indifferent between investing the funds in the United States or Argentina because real returns will always be the same in the end. D) The manager cannot invest in Argentina because his company is investing dollars.
D) equal to future spot rates.
Forward rates are all of the following EXCEPT A) quoted in both direct and indirect form. B) quoted at a premium or discount. C) beneficial to risk-reduction. D) equal to future spot rates.
C) requires delivery, at a specified future date, of one currency for a specified amount of another currency.
A forward exchange contract A) gives the owner the right, but not the obligation, to buy a foreign currency at a fixed exchange rate for a fixed period of time. B) gives the owner the right to purchase a foreign currency at some point in the future and any gains or losses are credited/debited to the account at the close of business each day. C) requires delivery, at a specified future date, of one currency for a specified amount of another currency. D) requires delivery, within two working days, of one currency for a specified amount of another currency.
Mutually exclusive projects occur when:
A set of investment proposals perform essentially the same task.
D) an inefficient market
A wide bid/ask spread could indicate which of the following? A) the presence of arbitrageurs B) large volume transactions are taking place C) frequent trading of a currency D) an inefficient market
A) IMXP will pay $100,000 and receive 113,540,000 yen 30 days from now.
IMXP Corp. enters into a 30-day forward exchange contract to buy 113,540,000 yen for $100,000. Which of the following statements is true concerning this transaction? A) IMXP will pay $100,000 and receive 113,540,000 yen 30 days from now. B) IMXP will pay $100,000 today and receive 113,540,000 yen 30 days from now. C) The spot exchange rate in 30 days will be 113.54 yen per dollar. D) IMXP will receive 113,540,000 yen today and pay $100,000 30 days from now.
B) arbitrageur.
If the exchange rate quotes in two different countries were out of line with each other, an enterprising trader could make a profit by buying in the market where the currency was cheaper and simultaneously selling it in the market where the currency was more expensive. Such a person would be known as a(n) A) spot trader. B) arbitrageur. C) cross trader. D) capitalist.
Under what condition would you not accept a project that has a positive net present value?
If the firm is limited in the capital it has available (capital rationing).
B) spot rate
If you are an importer of goods and you need to make payment for the purchase of inventory before the close of business today, which of the below is the correct term for the exchange rate that you will use? A) indirect rate B) spot rate C) direct rate D) forward rate
D) forward rate
If you are an importer of goods and you will make payment for the purchase of inventory on 90-day terms, which of the below is the correct term for the exchange rate that you will use? A) indirect rate B) spot rate C) direct rate D) forward rate
C) Both A and B are correct.
In addition to those risks faced by domestic corporations, multinational corporations face A) political risk. B) exchange risk. C) Both A and B are correct. D) All domestic and multinational corporations face similar risk profiles.
All of the following are criticisms of the payback period criterion except:
It deals with accounting profits as opposed to cash flows.
Which of the following statements about the internal rate of return (IRR) is true?
It fully considers the time value of money.
Which of the following statements about project standing alone risk is true?
It ignores the fact that much of the risk of a project will be diversified away as the project is combined with the firm's other projects.
Which of the following statements about the net present value is true?
It may be used to select among projects of different sizes.
CDE Corporation declared a $2 per share dividend on October 1. The date of record is October 20th, the ex-dividend date is October 18th, and the payment date is October 31st. Joe owns a share of stock on October 1. Joe sells his share to Mary on October 17th, Mary sells the share to Tom on October 20th, and Tom sells the share to William on October 30th. Who will receive the dividend?
Mary
A) interest rate parity theory.
Money-market hedges and forward-market hedges rely on the A) interest rate parity theory. B) purchasing power parity theory. C) law of large numbers. D) capital asset pricing model.
Why should firms that own and operate multiple businesses that have different risk characteristics use business-specific, or divisional costs of capital?
Not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involved.
B) the interest rate parity theory.
One theory that is useful states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity. This theory is known as A) the forward rate theory. B) the interest rate parity theory. C) the exchange rate theory. D) the covered interest arbitrage theory.
D) all of the above.
Problems of multinationals include A) cash management and positioning of funds. B) managing receivables. C) global control. D) all of the above.
An independent project should be accepted if it:
Produces a net present value that is greater than or equal to zero.
Which of the following would not be a part of a firm's capital structure?
Short-term notes payable
Which of the following should be excluded in an analysis of a new project's cash flows?
Additional interest expenses on debt financing
Which of the following should NOT be considered when calculating a firm's WACC?
After-tax cost of accounts payable
You are a retired worker whose income is derived from your company pension plan and social security. However, you are highly dependent upon the income generated from your 401(k) plan, which is heavily weighted in stocks that pay substantial dividends. Which of the following dividend policies would you prefer?
Stable dollar dividend per share
D) government requirements that ownership must be limited to U.S. citizens.
All of the following are examples of political risk for a U.S. company investing in a foreign country EXCEPT A) expropriation of plant and equipment. B) the problem of blocked funds. C) substantial changes in foreign country tax laws. D) government requirements that ownership must be limited to U.S. citizens.
B) spot-market hedges.
Strategies to counter exchange rate risk include all of the following EXCEPT A) futures contracts. B) spot-market hedges. C) forward-market hedges. D) money-market hedges.
D) Both B and C are correct.
An American manufacturer with its corporate headquarters in New York City is purchasing goods from a French supplier. Which of the following statements is true regarding the exchange rate risk for this contract? A) The American company will bear all of the exchange rate risk if the contract is denominated in dollars. B) The French company will bear all of the exchange rate risk if the contract is denominated in dollars. C) Both companies could bear exchange rate risk if the contract is denominated in British pounds. D) Both B and C are correct.
A) political risk.
An important (additional) consideration for a direct foreign investment is A) political risk. B) maximizing the firm's profits. C) attaining a high international P/E ratio. D) maintaining the domestic cost of capital.
B) 84,965
Assume that the British pound is worth 1.6242 U.S. dollars. If a new Jaguar costs $138,000, what is the cost in British pounds? A) 201,000 B) 84,965 C) 71,642 D) 119,998
While Captive, Inc. has been in business for over 50 years, newly developed products pushed the firm's year-over-year growth rate to 35% during the latest three years. The firm is proud of its history of paying dividends, but the vigorous recent growth of the firm has left it cash challenged. Which of the following policies/procedures would you consider best under the circumstances?
Substitute a stock dividend for the current cash dividend.
Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is most correct?
Both projects have a positive net present value (NPV).
B) arbitrage.
Buying and selling in more than one market to make a riskless profit is called A) profit-maximization. B) arbitrage. C) international trading. D) cannot be determined from the above information
A) 0.6833 euros per dollar
Suppose a U.S. importer purchases an Italian product today but will not pay for it for 90 days. The cost of the product today is 30,000 euros. The spot exchange rate today is .6233 euros per dollar. If the U.S. importer does not hedge the position, which of the following spot exchange rates in 90 days will yield the highest returns? A) 0.6833 euros per dollar B) 0.6499 euros per dollar C) $1.4844 per euro D) $1.5387 per euro
B) $57,377.
Suppose a U.S. importer purchases an Italian product today but will not pay for it for 90 days. The cost of the product today is 35,000 euros. The spot exchange rate today is .6233 euros per dollar. The importer creates a forward-market hedge. The 90-day forward rate is .6100 euros per dollar. The amount the U.S. importer will pay in 90 days is A) $56,153. B) $57,377. C) $55,683. D) $56,667.
D) $64,252
Suppose a U.S. importer purchases an Italian product today but will not pay for it for 90 days. The cost of the product today is 85,000 euros. The spot exchange rate today is .7559 euros per dollar. How much is the cost today in dollars? A) $58,062 B) $56,153 C) $65,683 D) $64,252
A significant disadvantage of the internal rate of return is that it:
Can result in multiple rates of return (more than one IRR).
Which of the following statements concerning stock repurchases is most correct?
Companies currently spend more money on stock buybacks than on dividend payments.
A significant advantage of the internal rate of return is that it:
Considers all of a project's cash flows and their timing.
Which of the following is NOT an important consideration in measuring risk for a capital budgeting project for a well-diversified firm?
Contribution to firm risk
Which of the following should not be considered when calculating a firm's WACC?
Cost of carrying inventory
Northwest Industries is considering a project with the following cash flows:
$1,193
Sweet Tooth Bakery bakes and sells pies. Sweet Tooth has annual fixed costs of $880,000 and a variable cost per pie of $7.50. Each pie sells for $15.50 each. The firm expects to sell 500,000 pies annually. What is the break-even point in sales dollars?
$1,705,000
Your firm is considering an investment that will cost $920000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 11.25%. What is the investment's net present value?
$192,369
Moline Manufacturing Corporation reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate =35%. Moline's break-even point in sales dollars is:
$2,050,633
A local restaurant owner is considering expanding into another urban area. The expansion project will be financed through a line of credit with First National Bank. The administrative costs of obtaining the line of credit are $500, and the interest payments are expected to be $1,000 per month. The new restaurant will occupy an existing building that can be rented for $2,500 per month. The incremental cash flows for the new restaurant include:
$2,500 per month rent.
Project XYZ requires an initial outlay of $400,000 and has a profitability index of 1.5. The project is expected to generate equal annual cash flows over the next twelve years. The required return for this project is 20%. What is project XYZ's net present value?
$200,000
JB Appliance, Inc. stock is currently selling for $20 per share. The company completed a 5-for-1 stock split two days earlier. Two years ago, the company had a 2-for-1 stock split. If the stock splits had not happened, the price of JB Appliance, Inc. stock would, other things being equal, be
$200.00 per share.
A project for Jevon and Aaron, Inc. results in additional accounts receivable of $400,000, additional inventory of $180,000, and additional accounts payable of $70,000. What is the additional investment in net working capital?
$510,000
JW Enterprises is considering a new marketing campaign that will require the addition of a new computer programmer and new software. The programmer will occupy an office in JW's current building and will be paid $8,000 per month. The software license costs $1,000 per month. The rent for the building is $4,000 per month. JW's computer system is always on, so running the new software will not change the current monthly electric bill of $900. The incremental expenses for the new marketing campaign are:
$9,000 per month.
Margo Inc. wants to replace a 9-year-old machine with a new machine that is more efficient. The old machine cost $70,000 when new and has a current book value of $15,000. Margo can sell the machine to a foreign buyer for $14,000. Margo's tax rate is 35%. The effect of the sale of the old machine on the initial outlay for the new machine is:
($14,350).
A) Yes, because the forward premium on the pound (2%) is exactly offset by the lower interest rate in Great Britain.
Suppose the 360-day forward exchange rate is 1.657 dollars per British pound, and the current spot rate is 1.625 dollars per British pound. If the 360-day interest rate in the United States is 5% and the 360-day interest rate in Great Britain is 3%, is the market in equilibrium according to the interest rate parity theory? A) Yes, because the forward premium on the pound (2%) is exactly offset by the lower interest rate in Great Britain. B) No, because the higher interest rate in the United States (2%) implies that the forward exchange rate should be 2% lower than the current spot rate. C) No, because the forward premium on the pound is 2% while the interest rate in the United States is 67% higher than the interest rate in Great Britain. D) Cannot be determined without knowing the amount of money being exchanged.
D) 111.257 yen per euro
Suppose the current exchange rates are 1.3215 dollars per euro, and 84.19 yen per dollar. What is the current exchange rate between yen and euros? A) 86.356 yen per euro B) 147.571 yen per euro C) 151.696 yen per euro D) 111.257 yen per euro
D) .0121356 dollars per yen.
Suppose the current spot rate in New York is .0119 dollars per yen. Inflation for the coming year in the United States is expected to be 3%, while inflation for the coming year is Japan is expected to be only 1%. Using the purchasing power parity theory, what is the expected spot rate at the end of the year should be A) .0110147 dollars per yen. B) .0108159 dollars per yen. C) .0138373 dollars per yen. D) .0121356 dollars per yen.
A) .01073033 dollars per yen
The 30-day forward exchange rate is .01073033 dollars per yen. If this forward rate represents a per year discount of 2.5% from the current spot rate, what is the current spot exchange rate? A) .01073033 dollars per yen B) .01257754 dollars per yen C) .01329684 dollars per yen D) .01093833 dollars per yen
Abrams Steel Company has very high operating leverage due to the capital intensive nature of the steel business. Abrams' CEO is concerned about the variability in the firm's EPS if sales should drop, and decides to take action. Which of the following will reduce the variability in the firm's EPS for a given change in sales?
The CEO may decrease the firm's financial leverage, thus lowering the firm's total leverage.
A) U.S. exports are more competitive in Europe.
The Euro increased dramatically in value against the U.S. dollar between 2000 and 2009. The result has been that A) U.S. exports are more competitive in Europe. B) U.S. goods cost more in Europe. C) U.S. travelers are finding it less expensive to travel in Europe. D) European exports to the United States are more competitive.
Which of the following statements is most correct?
The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR.
All of the following are sufficient indications to accept a project except (assume that there is no capital rationing constraint, and no consideration is given to payback as a decision tool):
The IRR of a mutually exclusive project exceeds the required rate of return.
A wildcat oil driller has enough capital to invest in only one project, that is, to drill one well in an East Texas oil field. A major oil company is drilling 100 wells in the same field. The probability of successfully striking oil is 10% for any well drilled in this field. Which of the following statements is most correct concerning the risk involved in these capital budgeting projects?
The best measure of risk for the wildcat oil driller is project standing alone risk.
A major corporation is considering a capital budgeting project that involves the development of a new technology. The controller estimates the net present value to be negative, yet argues that the company should invest in the project. Which of the following statements is most correct?
The controller may be considering the option to expand or modify the project in the future.
A) buy; sell; increase
The direct quote in New York is .015 dollar per Pakistani rupee. The direct quote in Pakistan is 60 rupees per dollar. This imbalance in rates can be corrected by arbitrage. A trader will ________ rupees in New York and ________ rupees in Pakistan, causing the direct quote in New York to ________. A) buy; sell; increase B) buy; sell; decrease C) sell; buy; decrease D) sell; buy; increase
The internal rate of return is:
The discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?
The equivalent annual annuity.
Which of the following differentiates the cost of retained earnings from the cost of newly-issued common stock?
The flotation costs incurred when issuing new securities.
Which of the following causes a firm's cost of capital (WACC) to differ from an investor's required rate of return on the company's common stock?
The incurrence of flotation costs when new securities are issued.
C) fresh vegetables.
The law of one price suggests that all of the following will have the same price in different countries EXCEPT A) oil. B) grain. C) fresh vegetables. D) silver.
A project would be acceptable if:
The net present value is positive.
Incremental cash flows refer to:
The new cash flows that will be generated if a project is undertaken.
Which of the following statements is most correct concerning a corporation's optimal capital structure?
The optimal capital structure occurs at the point where the market value of the levered firm is maximized.
A bakery company is considering one capital budgeting project involving the replacement of a sophisticated brick oven, and another capital budgeting project involving research and development into synthetic food substitutes. Which of the following statements is most correct concerning the risk-adjusted discount rate(s) for the projects?
The rate will likely be higher for the research and development project because of the uncertainty involved with research and development projects.
Humongous Corporation is a multidivisional conglomerate. The Food Division is undergoing a capital budgeting analysis and must estimate the division's beta. This division has a different level of systematic risk than is typical for Humongous Corporation as a whole. The most appropriate method for estimating this beta is
The regression coefficient from a time series regression of Food Division's return on assets on a market index
Arden Corporation pays a quarterly dividend of $1.00 per share. Which of the following statements is most accurate concerning which shareholders will receive the dividend payment?
The shareholders who are identified as owning the stock on the record date will receive the dividend, even if they sell their stock before the dividend checks are mailed.
B) 30.57%.
The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211 pounds per dollar. The percent-per-year discount on the 30-day pound is A) 32.77%. B) 30.57%. C) 48.00%. D) 45.93%.
D) .04 premium
The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211 pounds per dollar. Therefore, pounds in the forward market are selling at a ________ to the current spot rate. A) .958 discount B) .958 premium C) .04 discount D) .04 premium
What is the net present value's assumption about how cash flows are reinvested?
They are reinvested at the firm's appropriate discount rate.
What is the internal rate of return's assumption about how cash flows are reinvested?
They are reinvested at the project's internal rate of return.
A firm's weighted average cost of capital is a function of (1) the individual costs of capital, (2) the capital structure mix, and (3) the level of financing necessary to make the investment.
True
A firm's optimal capital structure occurs where?
WACC is minimized, and stock price is maximized.
D) $ 7,919,747
WSM Wine Importers, Inc. purchased 75,000 cases of French wine at a cost of 6,000,000 euros. If the current exchange rate is 0.7576 euros to the U.S. dollar, what is the purchase price of the wine in U.S. dollars? A) $9,684,148 B) $9,328,651 C) $8,350,012 D) $ 7,919,747
A) to reduce portfolio risk
Which of the following is a reason for international investment? A) to reduce portfolio risk B) to increase P/E ratio C) to gain an advantage in a foreign country D) to gain access to foreign currency
C) Both A and B
Which of the following is true regarding the correct price of the forward contract? A) If the quote is less than the computed price, the forward contract is undervalued. B) If the quote is greater than the computed price, the forward contract is overvalued. C) Both A and B D) Neither A nor B
C) The actual spot rate that will prevail in the future is not known today.
Which of the following is true? A) The forward rate is the same as the spot rate that will prevail in the future. B) The future spot rate is equal to the forward rate less the current spot rate. C) The actual spot rate that will prevail in the future is not known today. D) The future spot rate is the current spot rate increased by the inflation rate.
D) All of the above are correct.
Which of the following parity conditions is (are) correct? A) The interest-rate parity theory states that the forward premium/discount should be equal and opposite in size to the national interest rate differential. B) The purchasing-power parity theory states that in the long run exchange rate changes tend to reflect international differences in inflation rates. C) The international Fisher effect states that national interest rate differentials are the result of inflation differentials. D) All of the above are correct.
C) because of arbitrage
Why do currency exchange rates throughout the world trade within a very narrow range on any given day? A) because of purchasing power parity B) because of the international translation effect C) because of arbitrage D) because of the law of one price
B) arbitrage
You purchased 3,000,000 Indian rupees in London at an exchange rate of 54.86 to the dollar and simultaneously sold the rupees in Bahrain at an exchange rate of 55.12 to the dollar. What is the name for such a transaction? A) trend trading B) arbitrage C) currency swapping D) exchange rate hedging
A company is expanding and has already signed a lease on new office space that costs $10,000 per month. The company also needs a new information system and hired a consultant to recommend new software. The consultant was paid $5,000 for her recommendation. Now the company is trying to make a choice between three competing software products. In the capital budgeting decision to purchase new software, the monthly rent for the office space is ________ and the consultant's fee is ________.
a sunk cost; a sunk cost
When deciding upon how much debt financing to employ, most practitioners would cite which of the following as the most important influence on the level of the debt ratio?
ability to adequately meet financing charges
One component of a firm's financial structure which is not a component of its capital structure is:
accounts payable.
The net present value method
all of above.
Which of the following are included in the terminal cash flow?
all of these
Dividend policy is influenced by:
all of these.
All of the following are potential benefits of stock repurchases except:
an approach for maintaining the existing capital structure while still making a distribution to shareholders.
Dividends generally:
are more stable than earnings.
Eastlick Dairy invests in a new kind of frozen dessert called polar cream that becomes very popular. So many new customers come to the store that the sales of existing ice cream products are increased. The extra sales revenue
are synergistic effects that should be counted as incremental revenues for the polar cream project.
Basic tools of capital-structure management include:
both EBIT-EPS analysis and comparative leverage ratios.
The Modigliani and Miller hypothesis does not work in the "real world" because
both interest expense is tax deductible, providing an advantage to debt financing and higher levels of debt increase the likelihood of bankruptcy, and bankruptcy has real costs for any corporation.
Taste Good Chocolates develops a new candy bar and plans to sell each bar for $1. Taste Good predicts that 1 million candy bars will be sold in the first year if the new candy bar is produced and sold, and includes $1 million of incremental revenues in its capital budgeting analysis. A senior executive in the company believes that 1 million candy bars will be sold, but lowers the estimate of incremental revenue to $700,000. What would explain this change?
cannibalization of 300,000 of Taste Good Chocolates' other candy bars
The net present value always provides the correct decision provided that
capital rationing is not imposed.
Using the weighted average cost of capital as the required rate of return for every project will:
cause a firm to reject projects that should have been accepted and cause a firm to accept projects that were too risky.
Due to changes in regulatory requirements, the transactions costs associated with selling corporate securities increased by $1 per share. This change will
cause the cost of capital to increase.
Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal?
cost of issuing new bonds if the project is financed by a new bond issue
In general, which of the following rankings, from highest to lowest cost, is most accurate?
cost of new common stock, cost of retained earnings, cost of preferred stock, cost of debt
The correct order of dividend process dates is:
declaration date, ex-dividend date, date of record, payment date.
We compute the profitability index of a capital budgeting proposal by
dividing the present value of the annual after tax cash flows by the cash investment in the project.
JBC Corp. declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet JBC Corp. stock declined by 3% the day of the announcement. RBG Corp. declared a dividend of $2 per share, which was the same as the prior year, and its stock increased in value by 2% on the day of the announcement. These events could be most readily explained by the
expectations theory.
Acme Conglomerate Corporation operates three divisions. One division involves significant research and development, and thus has a high-risk cost of capital of 15%. The second division operates in business segments related to Acme's core business, and this division has a cost of capital of 10% based upon its risk. Acme's core business is the least risky segment, with a cost of capital of 8%. The firm's overall weighted average cost of capital of 11% has been used to evaluate capital budgeting projects for all three divisions. This approach will
favor projects in the research and development division because the higher risk projects look more favorable if a lower cost of capital is used to evaluate them.
Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders is refered to as:
financial leverage.
Kocher Steel typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kocher Steel's controller discovered one cost that was $10 per pound at a production level of 8 million pounds, $8 per pound at a production level of 10 million pounds, and $5 per pound at a production level of 16 million pounds. This is an example of a
fixed cost.
The break-even point is equal to
fixed costs divided by (sales price per unit - variable cost per unit).
As production levels increase,
fixed costs per unit decrease and variable costs per unit stay the same.
For the net present value (NPV) criteria, a project is acceptable if NPV is ________, while for the profitability index a project is acceptable if PI is ________.
greater than or equal to zero; greater than or equal to one
Ames Drilling Corp. reported that its sales and EBIT increased by 10%, but its EPS increased by 30%. The much larger change in earnings per share could be the result of
high financial leverage.
Higher flotation costs will result in all of the following except:
higher cost of retained earnings
High dividends may increase stock values due to all of the following reasons except:
higher dividends allow companies to increase their proportion of external equity financing.
All of the following are likely to result in a lower dividend, other things the same, except:
highly diverse ownership.
Acme Auto Repair developed a new diagnostic testing procedure that is expected to increase sales by $10,000 per month. As more drivers bring in their vehicles, Acme expects to also do more oil changes and brake repairs. As a result, inventory levels of oil and brake parts must be increased by $5,000. Revenues from oil changes and brake jobs are expected to increase by $4,000 per month. An example of a synergistic effect from the new diagnostic testing procedure is the:
increase in revenues from oil changes and brake jobs of $4,000 per month.
Which of the following is a fixed cost?
insurance
Which of the following is NOT considered in the calculation of incremental cash flows?
interest payments if new debt is issued and increased dividend payments if additional preferred stock is issued
Joe's Discount Club currently has a weighted average cost of capital of 12%. Joe's has been growing rapidly over the past several years, selling common stock in each year to finance its growth. However, due to difficult economic times this year, Joe's decides to cut its dividend and increase its retained earnings so that the common equity portion of its capital structure will include only retained earnings and no new common stock will be sold. Joe's weighted average cost of capital this year should be
less than 12%.
A significant disadvantage of the internal rate of return is that it:
may have an unrealistic reinvestment assumption with respect to the discount rate used for re-investment of the cash flows.
The optimal capital structure is the funds mix that will
minimize the firm's composite cost of capital.
If depreciation expense in year one of a project increases for a highly profitable company,
net income decreases and incremental free cash flow increases.
Sunk costs are:
not relevant in capital budgeting.
All of the following are methods available to a corporation that desires to repurchase stock except:
offering to employees who own an interest in the firm.
Salvage value would most likely not be considered by
payback.
The market value of a leveraged firm is equal to the market value of an unleveraged firm
plus the present value of tax shields minus the present value of financial distress costs minus the present value of agency costs.
The payment of dividends may indirectly result in closer monitoring of management's investment activities, thus increasing shareholder value by
reducing agency costs.
What method is used for calculation of the accounting beta?
regression analysis
All the following variables are used in computing the cost of debt except:
risk-free rate.
An increase in flotation costs will most likely result in which of the following?
smaller dividend payments so that less external equity financing is needed
The CEO of Marletti Pasta Company wants a dividend policy that minimizes the likelihood of decreasing the company's dividend per share. Which of the following policies should the CEO select?
stable dollar dividend per share
Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity?
stock repurchase
As part of its expansion project, A.J. Industries Equipment Division has expanded its office space by 200 square feet. The company's administrative overhead is allocated based on the square footage of each business segment. Although the total administrative overhead for the company will remain the same, the Equipment Division will be charged more for administrative overhead. For the Equipment Division expansion project, the administrative overhead is an example of a(n)
sunk cost.
When reviewing the net present value profile for a project
the IRR will always be a point on the horizontal axis line where NPV = 0.
The final approval of a dividend payment comes from:
the board of directors.
A corporation has been paying out $1 million per year in dividends for the past several years. This year, the company wants to pay the $1 million dividend, but can't. All of the following are reasons the company cannot continue its dividend payment policy except:
the company's net income this year is less than $1 million.
Each of the following factors may cause a corporation to lower its dividend payout ratio except:
the corporation's earnings predictability is high.
The break-even point in sales dollars is convenient if:
the firm deals with more than one product.
The Net Present Value (or NPV) criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________, and the Internal Rate of Return (or IRR) criteria assumes that expected future cash flows are reinvested at ________.
the firm's appropriate discount rate, the internal rate of return
Operating leverage refers to:
the incurrence of fixed operating costs in the firm's income stream.
Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?
the information effect
The average cost associated with each additional dollar of financing for investment projects is:
the marginal cost of capital.
Optimal capital structure is:
the mix of permanent sources of funds used by the firm in a manner that will maximize the company's common stock price.
All of the following will make the break-even point increase, other things equal, except
the number of units sold for the year decreased.
According to the perfect markets approach to dividend policy:
the price of a share of stock is unrelated to dividend policy.
One method of accounting for systematic risk for a project involves identifying a publicly traded firm that is engaged in the same business as that project and using its required rate of return to evaluate the project. This method is referred to as ________.
the pure play method
Which of the following factors would most likely be present if a company increases its dividend payout ratio significantly?
the variability of expected future earnings decreases
Interest rate parity exists because
there are investors who stand ready to engage in arbitrage.
According to the moderate view of capital costs and financial leverage, as the use of debt financing increases:
there is an optimal level of debt financing.
The pure play method:
uses the beta of a firm that is similar to the project being analyzed to determine the required rate of return for the project.
Kocher Steel typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kocher Steel's controller discovered one cost that was $10 per pound no matter what the production level for the year. This is an example of a
variable cost.
