Question 1.1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points :4) sunk costs should be included erosion effects should not be considered financing costs are not included opportunity costs are irrelevantQuestion 2.2. (TCO 4) There are several disadvantages to the payback method, amongthem: (Points : 4) payback ignores the time value of money. payback can be used in conjunction with time adjusted methods of evaluation. payback is easy to use and to understand. none of the above is a disadvantage.Question 3.3. (TCO 3 and 4) The net present value is: (Points : 4) negative when a project’s benefits exceed its costs. equal to the present value of an investment’s benefits. equal to zero when the discount rate equals the IRR. negative when a project’s IRR exceeds the required rate of return. the current measure of a project’s cash inflows.Question 4.4. (TCO 3 and 4) What is the net present value of a project with the following cashflows, if the discount rate is 15 percent?Year01234Cashflow$45,000$11,520$13,630$16,470$18,990(Points : 4) ­$2,989.48 ­$2,599.55 $1,153.37 $2,880.08 $3,312.09Question 5.5. (TCO 4) The Inventive Co. is considering a new project. This project requires aninitial cash investment of $70,000. The project will generate cash inflows of $10,500 in the firstyear. Then, the project will do nothing for two years, after which time cash inflows of $25,000 willbe generated for four years. How long will it take the Inventive Co. to recover its $70,000investment? (Points : 4) 5.16 years 5.38 years 6.11 years 6.62 years 6.94 yearsQuestion 6.6. (TCO 4) The postponement of a project until conditions are more favorable: (Points :4) is a valuable option. is referred to as the option to extend. could not cause a negative net present value project to become a positive net presentvalue project. will generally cause the internal rate of return for a project to decline.Question 7.7. (TCO 4) ____________, refers to the situation a firm faces when it has positive netpresent value projects, but cannot obtain financing for those projects. (Points : 4) capital planning. soft rationing. capital rationing. hard rationing. a sunk cause.Question 8.8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and thefollowing cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is10%. Which of the following is true regarding this investment? (Points : 4) The net present value of the project is approximately $10,000 This project should be accepted because it has a positive net present value This project’s payback period is 10 years or more None of the above is trueQuestion 9.9. (TCO 4) Assume Company X plans to invest $60,000 in new computers. UsingTables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amountunder MACRS? (Points : 4) $12,000 $8,575 $19,800 None of the aboveQuestion 10.10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, andtaxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What arethe after­tax cash flows for the company? (Points : 4) $82,000 $110,000 $42,000 none of theseQuestion 11.11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4) is diversifiable is the total risk associated with surprise events it is not project or firm specific it is measured by standard deviationQuestion 12.12. (TCO 8) Which statement is true regarding risk? (Points : 4) the expected return is usually the same as the actual return a key to assess risk is determining how much risk an investment adds to a portfolio risks can always be decreased or mitigated by the financial manager the higher the risk, the lower the return investors require for the investmentQuestion 13.13. (TCO 8) The stock of Uptown Men’s Wear is expected to produce the followingreturns, given the various states of the economy. What is the expected return on this stock?State ofEconomyProbability of Stateof EconomyRate ofReturnRecession.20.10Normal.75.14Boom.05.22(Points : 4) 9.6 percent 10.4 percent 12.8 percent 13.6 percent 15.3 percentQuestion 14.14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B,$13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock A? (Points : 4) 14.79 percent 15.91 percent 18.42 percent 19.07 percent 25.72 percentQuestion 15.15. (TCO 8) Stock A has an expected return of 14 percent and a beta of 1.3. Stock Bhas an expected return of 10 percent and a beta of .9. Both stocks have the same reward­to­riskratio. What is the risk­free rate? (Points : 4) 1.0 percent 1.8 percent 2.3 percent 2.5 percent 3.1 percentQuestion 1.1. (TCO 8) Weak form market efficiency states that the value of a security is basedon: (Points : 4) all public and private information. historical information only. all publicly available information. all publicly available information, plus any data that can be gathered from insider trading. random information with no clear distinction as to the source of that information.Question 2.2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financedwith debt at an after­tax cost of 8 percent and common equity at a cost of 20 percent. Assumedebt and common equity each represent 50 percent of the firm’s capital structure. What is theweighted average cost of capital? (Points : 4) between 4% and 10% between 11 and 12% between 12 and 13% exactly 14% more than 14%Question 3.3. (TCO 5, 6 and 7) An issue of common stock’s most recent dividend is $3.75. Itsgrowth rate is eight percent. What is its price if the market’s rate of return is 16 percent? (Points :4) $25.01 $46.88 $50.63 none of theseQuestion 4.4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points : 4) It is the return that the firm’s creditors demand on new borrowing. It is always equal to the weighted cost of capital. An appropriate method to compute the cost of debt is using the coupon rate of current bondsoutstanding. All of the above are true.Question 5.5. (TCO 5) Retained earnings has a cost associated with it because: (Points : 4) new funds must be raised. there is an opportunity cost associated with stockholder funds. Ke> g flotation costs increase the cost of funding.Question 6.6. (TCO 4) A project has the following cash flows. What is the internal rate of return?Year0123Cashflow$195,600$99,800$87,600$75,300(Points : 4) less than 5% between 5 and 15% between 15 and 18% more than 21%Question 7.7. (TCO 5, 6 and 7) All else constant, the weighted average cost of capital for a firmwill decrease if: (Points : 4) a firm’s bonds start selling at a premium, rather than at a discount. the market risk premium increases. the firm replaces some of its debt with preferred stock. corporate taxes are eliminated. the dividend yield on the common stock increases.Question 8.8. (TCO 5, 6 and 7) The six percent preferred stock of FKH Manufacturing is sellingfor $62 a share. What is the firm’s cost of preferred stock, if the tax rate is 34 percent and thepar value per share is $100? (Points : 4) 5.98% 7.06% 8.05% 9.68% 10.10%Question 9.9. (TCO 2) The bankruptcy process has been utilized by firms as a means of: (Points :4) renegotiating labor contracts. reducing labor costs. avoiding payment of a legal judgment. improving the firm’s competitive position. all of the aboveQuestion 10.10. (TCO 5) Which of the following statements is false regarding the cost of capital? (Points :4) The cost of capital should consider the flotation costs. All other being equal, it is preferable to use market value weights than book value weights. The WACC is the most appropriate discount rate for all projects. Should include the cost of retained earnings.Question 11.11. (TCO 2) Which of the following decreases the cash account? (Points : 4) A payment due is received from a client Dividends are paid to shareholders Raw materials are purchased an
d paid for with credit A new machine is purchased and paid for with the business line of creditQuestion 12.12. (TCO 2) Which of the following statements is true? (Points : 4) Firms should avoid offering credit at all cost. An increase in a firm’s average collection period generally indicates that an increasednumber of customers are taking advantage of the cash discount. The costs of the credit application process and the costs expended in the collectionprocess are carrying costs of granting credit. Character, refers to the ability of a firm to meet its credit obligations out its operatingcash flows. The optimal credit policy, is the policy that produces the largest amount of sales for afirm.Question 13.13. (TCO 2) Which one of the following credit terms is most apt to produce theshortest accounts receivable period?(Points : 4) net 25 net 10 1/10, net 30 3/10, net 15 2/20, net 45Question 14.14. (TCO 2) Highland, Inc. has the following estimated quarterly sales for next year.The accounts receivable period is 30 days. How much does the firm expect to collect in thefourth quarter? Assume that each month has 30 days.SalesQ1Q2Q3Q4$3,200$4,500$4,400$2,900(Points : 4) $3,250 $3,400 $3,600 $3,750 $3,900Question 15.15. (TCO 1) Why is maximization of the current value per share a more appropriatefinancial management goal than profit maximization? (Points : 4) Because by maximizing the current stock value, you also maximize the company’s profitfor the year. Because this criterion is non­ambiguous. Because financial managers always act in the best interest of shareholders. Because it creates short­term gains in the financial statements.Question 1.1. (TCO 1) Which of the following are capital structure concerns?I. how to obtain short­term financingII. the company’s financing mixIII. the cost of fundsIV. how and where to raise money (Points : 4) I and II I, II and III II, III and IV I, III and IV All of the aboveQuestion 2.2. (TCO 1) Market value is important to the financial manager because: (Points : 4) It reflects the value of the asset based on generally­accepted accounting principles. Is a crucial component of the balance sheet, and can impact the financial statements. Market values reflect the amount someone is willing to pay today for an asset. Themarket value of an asset reflects its historical cost.Question 3.3. (TCO 1) Use the following tax table to answer this question:Taxable IncomeTax Rate$0­$50,00015%$50,001­75,00025 $75,001­100,00034 $100,001­335,00039 $335,001­10,000,00034 McKenzie, Inc. earned $144,320 in taxable income for the year. What is the company’sapproximate average tax rate? (Points : 4) 27% 29% 31% 33% 35%Question 4.4. (TCO 3) Regional Bank offers you an APR of 19 percent compoundedsemiannually, and Local Bank offers you an EAR of 19.50 percent for a new automobile loan.You should choose ______________ because its _______ is lower. (Points : 4) Regional Bank, APR Local Bank, EAR Regional Bank, EAR Local Bank, APRQuestion 5.5. (TCO 3) You deposited $5,000 in your bank account today. An increase in which ofthe following will increase the future value of your deposit, assuming that all interest isreinvested? Assume the interest rate is a positive value. Select all that apply: (Points : 4) interest rate initial amount of your deposit frequency of the interest payments length of the investment periodQuestion 6.6. (TCO 3) Amy needs to save $20,000 in cash to buy a new car five years fromtoday. She expects to earn 6.5 percent, compounded annually, on her savings. How much doesshe need to deposit today, if this is the only money she saves for this purpose? (Points : 4) $12,468.07 $12,502.14 $14,597.62 $17,044.32 $17,129.01Question 7.7. (TCO 3) Paper Pro needed a new store. The company spent $65,000 to refurbishan old shop and create the current facility. The firm borrowed 75 percent of the refurbishmentcost at eight percent interest for 11 years. What is the amount of each monthly payment? (Points :4) $91.05 $284.13 $556.50 $682.87 $731.60Question 8.8. (TCO 3) Amy borrowed $5,000 from her bank three years ago. The loan term is fiveyears. Each year, Amy must repay the bank $1,000 plus the annual interest. Which type of loandoes Amy have? (Points : 4) amortized blended discount interest­only pure discount complexQuestion 9.9. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest.The bonds mature in 25 years. What is the current price of the bond, if the YTM is 11 percent?Assume annual payments. (Points : 4) $1080 $1085 $925 $1000Question 10.10. (TCO 6) The market where new securities are offered is called the _____market. (Points : 4) primary main secondary principal dealerQuestion 11.11. (TCO 7) Which one of the following statements concerning financial leverage iscorrect? (Points : 4) Financial leverage increases profits and decreases losses. Financial leverage has no effect on a firm’s return on equity. Financial leverage, refers to the use of common stock. Financial leverage magnifies both profits and losses. Increasing financial leverage will always increase the earnings per share.Question 12.12. (TCO 3) What is the approximate yield to maturity for a seven­year bond thatpays 11 percent interest on a $1000 face value annually if the bond sells for $952? (Points : 4) 10.5% 10.6% 11.5% 12.1%Question 13.13. (TCO 8) Which of the following is true regarding bonds? (Points : 4) Bonds do not carry default risk. Bonds are sensitive to changes in the interest rates. Moody’s and Standard and Poor’s provide information regarding a bond’s interest raterisk. Municipal bonds are free of default risk. None of the above is trueQuestion 14.14. (TCO 8) Two years ago, MorningStar Company issued seven percent, 25­yearbonds and Track, Inc. issued seven percent, 10­year bonds. Since their time of issue, interestrates have increased. Which of the following statements is true of each firm’s bond prices in themarket, assuming they have equal risk? (Points : 4) Track’s decreased more than Morningstar’s Morningstar’s increased more than Track’s Morningstar’s decreased more than Track’s They are both priced the sameQuestion 15.15. (TCO 6) A sinking fund is an account managed by a bond trustee for the solepurpose of: (Points : 4) paying interest payments on a semi­annual basis. redeeming bonds early. repaying the face value at maturity. paying the expenses required to reissue outstanding bonds. paying the “balloon payment” at maturity.Question 1.1. (TCO 6) Which of the following is true regarding put bonds? (Points : 4) Have coupons that depend on the company’s income Can be exchanged for a fixed number of shares before maturity only Can be exchanged for a fixed number of shares before maturity Allow the holder to require the issuer to buy the bond backQuestion 2.2. (TCO 6 and 7) The term debenture refers to (Points : 4) long­term, secured debt. long­term, unsecured debt. the after­acquired property clause. a document covering the specific terms of the debt issue.Question 3.3. (TCO 6) Company A has a bond outstanding with $90 annual interest payment, amarket price of $820 and a maturity date in five years. Assume the par value to be $1,000. Whatis the bond’s coupon rate and current yield, respectively? (Points : 4) 11% and 9% 9% and 11% 9% and 14% Cannot be determined None of the aboveQuestion 4.4. (TCO 2) Which of the following does not reduce collection float? (Points : 4) installing a lockbox system. deposit collections weekly, instead of daily. requiring all customers pay by cash, rather than with check. utilize the benefits of the Check Clearing Act for the 21 stCentury.Question 5.5. (TCO 2) Storage and tracking costs, insurance and taxes, and losses due to theftare examples of: (Points : 4) Inventory depletion costs Sunk costs Inventory costs None of the above5 Short answer questions­Question 6.6. (TCO 1) Provide three examples of situations in which business ethics play a role inthe financial management process. Explain your rat
ionale, and how these situations may affectthe value of the firm. (Points : 10) Question 7.7. (TCO 4) What are sunk costs? Provide at least two real­life examples of sunk costsfor a project. Should sunk costs be included as incremental cash flows? Why or why not? Explainyour rationale. (Points : 10) Question 8.8. (TCO 8) What is the difference between business risk and financial risk? If CompanyA has a higher business risk than Company B, should its cost of capital be higher? Why or whynot? Explain your rationale.(Points : 10) Question 9.9. (TCO 2) What are some important elements of the collection policy? (Points : 10) Question 10.10. (TCO 6 and 7) How can you calculate the cost of debt? What methods can youuse? Provide at least two examples. (Points : 10)
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