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1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4)
sunk costs should be included
erosion effects should be considered
financing costs need to be included
opportunity costs are irrelevant
Question 2.2. (TCO 4) There are several disadvantages to the payback method, among them: (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) A net present value of zero implies that an investment: (Points : 4)
has no initial cost.
has an expected return that is less than the required return.
should be rejected even if the discount rate is lowered.
never pays back its initial cost.
is earning a return that exactly matches the requirement.
Question 4.4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 15 percent?
(Points : 4)
Question 5.5. (TCO 4) Leward Manufacturing is spending $115,000 to update its equipment. This is necessary if the firm wishes to be competitive in the marketplace and provide a wide array of product models. The company estimates that these updates will improve its cash inflows by $27,500 a year, for eight years. What is the payback period? (Points : 4)
This project never pays back
Question 6.6. (TCO 4) Ignoring the option to expand: (Points : 4)
overestimates the internal rate of return on a project.
ignores the possibility that a negative net present value project might be positive, given changes over time.
ignores the possibility that one variable is the primary source of the forecasting risk associated with a project.
underestimates the net present value of a project.
Question 7.7. (TCO 4) ____________, refers to the situation a firm faces when it has positive net present value projects, but cannot obtain financing for those projects. (Points : 4)
a sunk cause.
Question 8.8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4)
The net present value of the project is approximately $1,011
This project should be accepted because it has a negative net present value
This project’s payback period is 10 years or more
All of the above are true
Question 9.9. (TCO 4) Assume Company X plans to invest $60,000 in industrial equipment. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS? (Points : 4)
None of the above
Question 10.10. (TCO 1 and 4) Assume a project has earnings before depreciation, and taxes of $110,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? (Points : 4)
a loss of $21,000
none of these
Question 11.11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4)
is the total risk associated with surprise events
it is not project or firm specific
it is measured by standard deviation
Question 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 investment
Question 13.13. (TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?
State of EconomyProbability of State of EconomyRate of Return
(Points : 4)
Question 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)
Question 15.15. (TCO 8) You currently own a portfolio valued at $24,000 that has a beta of 1.1. You have another $8,000 to invest, and would like to invest it in a manner such that the risk of the new portfolio matches that of the overall market. What does the beta of the new security have to be? (Points : 4)
Question 1.1. (TCO 8) Weak form market efficiency states that the value of a security is based on: (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 financed with debt at a cost of 6 percent (after-tax) and common equity at a cost of 18 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points : 4)
between 3 and 9%
more than 14%
none of the above
Question 3.3. (TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price? (Points : 4)
none of these
Question 4.4. (TCO 5, 6 and 7) Which of the following is not true regarding the cost of debt? (Points : 4)
It is the return that the firm’s creditors demand on new borrowing.
It is the interest rate that the firm pays on current/existing borrowing.
An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.
It needs to be converted into an after-tax cost.
Question 5.5. (TCO 5) Which of the following is true regarding the cost of retained earnings? (Points : 4)
it is irrelevant to the WACC
requires new funds to be raised
need to be adjusted for the flotation costs
have a cost, which is the opportunity cost associated with stockholder funds
Question 6.6. (TCO 4) A project has the following cash flows. What is the internal rate of return?
(Points : 4)
less than 5%
between 5 and 15%
between 15 and 18%
more than 21%
Question 7.7. (TCO 5, 6 and 7) Which one of the following is a correct statement? (Points : 4)
Current tax laws favor debt financing.
A decrease in the dividend growth rate increases the cost of equity.
An increase in the systematic risk of a firm will decrease the firm’s cost of capital.
A decrease in a firm’s debt-equity ratio will usually decrease the firm’s cost of capital.
The cost of preferred stock decreases when the tax rate increases.
Question 8.8. (TCO 5, 6 and 7) The nine percent preferred stock of Bean Coffee is selling for $39 a share. What is the firm’s cost of preferred stock if the tax rate is 35 percent and the par value per share is $100?(Points : 4)
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 above
Question 10.10. (TCO 5) Which of the following statements is true regarding the cost of capital? (Points : 4)
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 not include the cost of retained earnings.
Depends primarily on the source of the funds, not the use.
Question 11.11. (TCO 2) Select any actions that do not affect the cash account. (Points : 4)
Goods are sold cash
An interest payment on a notes payable is made
A payment due is received from a client
Dividends are paid to shareholders
Inventory is purchased and paid for with credit
Question 12.12. (TCO 2) Which of the following statements is true? (Points : 4)
The optimal credit policy minimizes the total cost of granting credit.
Firms should avoid offering credit at all cost.
An increase in a firm’s average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.
Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.
The optimal credit policy, is the policy that produces the largest amount of sales for a firm.
Question 13.13. (TCO 2) All else constant, a decrease in the accounts receivable period will: (Points : 4)
lengthen the accounts payable period.
shorten the inventory period.
lengthen the operating cycle.
shorten the cash cycle.
shorten the accounts payable period.
Question 14.14. (TCO 2) Delphinia’s has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.
(Points : 4)
Question 15.15. (TCO 1) Why is maximization of the current value per share a more appropriate financial management goal than profit maximization? (Points : 4)
Because by maximizing the current stock value, you also maximize the company’s profit for the year.
Because this criterion is non-ambiguous.
Because financial managers always act in the best interest of shareholders.
Because it creates short-term gains in the financial statements.
Question 1.1. (TCO 1) Which one of the following activities best exemplify working capital management? (Points : 4)
Sale long-term bonds to raise funds for a new machine.
Determine the return of a potential project.
Calculate the cash flows for a project.
Manage payments to suppliers.
Question 2.2. (TCO 1) Book values are different from market values because: (Points : 4)
Book values reflect the value of the asset based on generally-accepted accounting principles.
Book values are used in the company’s balance sheet.
Book values do not reflect the amount someone is willing to pay today for an asset.
All of the above
None of the above
Question 3.3. (TCO 1) Use the following tax table to answer this question:
Taxable IncomeTax Rate
McKenzie, Inc. earned $144,320 in taxable income for the year. What is the company’s approximate average tax rate? (Points : 4)
Question 4.4. (TCO 3) Regional Bank offers you an APR of nine percent compounded quarterly, and Local Bank offers you an EAR of 9.15 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, APR
Question 5.5. (TCO 3) You deposited $5,000 in your bank account today. An increase in which of the following will increase the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply: (Points : 4)
initial amount of your deposit
frequency of the interest payments
length of the investment period
Question 6.6. (TCO 3) Amy needs to save $20,000 in cash to buy a new car five years from today. She expects to earn 6.5 percent, compounded annually, on her savings. How much does she need to deposit today, if this is the only money she saves for this purpose? (Points : 4)
Question 7.7. (TCO 3) The new home that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment? (Points : 4)
Question 8.8. (TCO 3) Which type of loan is comparable to the present value of a future lump sum? (Points : 4)
effective annual rate
Question 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 13 percent? Assume annual payments. (Points : 4)
Question 10.10. (TCO 6) Which of the following is true regarding the primary market? (Points : 4)
it is the market where the largest number of shares are traded on a daily basis.
it is the market in which the largest number of issues are listed.
it is the market with the largest number of participants.
it is the market where new securities are offered.
it is the market where shareholders trade most frequently with each other.
Question 11.11. (TCO 7) A taxpaying, levered firm’s optimal capital structure: (Points : 4)
is 100 percent equity financing.
consists of equal amounts of debt and equity financing.
is the mixture of debt and equity financing that minimizes the firm’s aftertax cost of debt.
is the mixture of debt and equity financing that minimizes the weighted average cost of capital.
is 100 percent debt financing.
Question 12.12. (TCO 3) What is the approximate yield to maturity for a seven-year bond that pays 11 percent interest on a $1000 face value annually if the bond sells for $952? (Points : 4)
Question 13.13. (TCO 8) Which of the following is true regarding bonds? (Points : 4)
Bonds do not carry default risk.
Bonds are not sensitive to changes in the interest rates.
Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
Municipal bonds are not free of default risk.
None of the above is true
Question 14.14. (TCO 8) Two years ago, Maple Enterprises issued six percent, 20-year bonds and Temple Corp issued six percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm’s bond prices in the market, assuming they have equal risk? (Points : 4)
Maple’s decreased more than Temple’s
Temple’s decreased more than Maple’s
Maple’s increased more than Temple’s
They are both priced the same
Question 15.15. (TCO 6) Star Industries has one bond issue outstanding. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision. (Points : 4)
Question 1.1. (TCO 6) Which of the following is true regarding convertible bonds? (Points : 4)
Are relatively uncommon
Can be exchanged for a fixed number of shares after the maturity only
Can be exchanged for a fixed number of shares before maturity
Allow the holder to require the issuer to buy the bond back
Question 2.2. (TCO 6 and 7) Financial leverage deals with: (Points : 4)
the relationship of fixed and variable costs.
the percentage of debt in the capital structure.
the entire income statement.
the entire balance sheet.
Question 3.3. (TCO 6) Company A has a bond outstanding with $90 annual interest payment, a market price of $820, and a maturity date in five years. Assume the par value to be $1,000. What is the bond’s yield to maturity? (Points : 4)
Cannot be determined
None of the above
Question 4.4. (TCO 2) Which one of the following practices will reduce a firm’s collection float? (Points : 4)
utilizing zero-balance accounts
depositing checks weekly, rather than daily
requiring all customers pay by check, rather than with cash
installing a lockbox system
paying all bills five days sooner
Question 5.5. (TCO 2) Storage and tracking costs, insurance and taxes, and losses due to theft are examples of: (Points : 4)
Inventory depletion costs
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