TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4) sunk costs should be includederosion effects should be consideredfinancing costs need to be includedopportunity costs are irrelevant
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.
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.
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) -$2,989.48-$2,599.55$1,153.37$2,880.08$3,312.09
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) 4.18 years5.82 years6.62 years7.79 yearsThis project never pays back
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 present value project.will generally cause the internal rate of return for a project to decline.
7. (TCO 4) The situation that exists when the units within a business are allotted a fixed amount of money for capital budgeting, is referred to as: (Points : 4) soft rationing.hard rationing.unit capital rationing.allocated planning.strategic planning.
8. (TCO 3 and 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 $11,000This project should be accepted because it has a negative net present valueThis project should be accepted because it has a payback higher than 3 yearsThe net present value of the project is close to $1,000
9. (TCO 4) Assume Company X plans to invest $60,000 in new computers. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the second year depreciation amount under MACRS? (Points : 4) $12,000$19,200$19,800None of the above
10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? (Points : 4) $82,000$110,000$42,000none of these
11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4) is diversifiableis the total risk associated with surprise eventsit is measured by betait is measured by standard deviation
12. (TCO 8) Which statement is true regarding risk? (Points : 4) the expected return is usually the same as the actual returna key to assess risk is determining how much risk an investment adds to a portfoliorisks can always be decreased or mitigated by the financial managerthe higher the risk, the lower the return investors require for the investment
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?
(Points : 4) 7.33 percent9.82 percent11.26 percent11.33 percent 11.50 percent
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 B? (Points : 4) 14.79 percent15.91 percent18.42 percent19.07 percent19.46 percent
15. (TCO 8) Stock A has an expected return of 14 percent and a beta of 1.3. Stock B has an expected return of 10 percent and a beta of .9. Both stocks have the same reward-to-risk ratio. What is the risk-free rate? (Points : 4) 1.0 percent1.8 percent2.3 percent2.5 percent3.1 percent
TCO 8) Company insiders cannot earn excess profits based on the knowledge they have related to their employer if the financial markets are: (Points : 4) weak form efficient.strong form efficient.semistrong form efficient.efficient at any level.aware that the trader is an insider.
2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 9 percent (after-tax) and common equity at a cost of 16 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 4.5% and 8%more than 13%between 12 and 13%between 13 and 14%none of the above
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) $103.68$36.92$96.00none of these
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.
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> gflotation costs increase the cost of funding.
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%
7. (TCO 5, 6 and 7) All else constant, the weighted average cost of capital for a firm will 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.
8. (TCO 5, 6 and 7) The preferred stock of Blue Sky Air pays an annual dividend of $7.25 a share and sells for $54 a share. The tax rate is 35 percent. What is the firm's cost of preferred stock? (Points : 4) 8.56 percent9.32 percent11.85 percent13.43 percent14.47 percent
9. (TCO 2) Which one of the following occurs if a firm files for Chapter 7 bankruptcy, but does not generally occur if the firm files for Chapter 11 bankruptcy? (Points : 4) a petition is filed in federal courtadministrative fees are incurreda list of creditors is compiledpre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firma trustee-in-bankruptcy is elected by the creditors
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.
11. (TCO 2) Which of the following decreases the cash account? (Points : 4) A payment due is received from a clientDividends are paid to shareholdersRaw materials are purchased and paid for with creditA new machine is purchased and paid for with the business line of credit
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 increased number of customers are taking advantage of the cash discount. The costs of the credit application process and the costs expended in the collection process are carrying costs of granting credit.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.
13. (TCO 2) Which one of the following industries is most apt to have the shortest cash cycle? (Points : 4) electric utility companyairplane manufacturerfast-food restaurantfurniture storeclothing manufacturer
14. (TCO 2) The Yellow Box has the following estimated quarterly sales for next year. The accounts receivable period is 45 days. What is the expected accounts receivable balance at the end of the third quarter? Assume each month has 30 days. (Points : 4) $600$750$900$1,050$1,200
15. (TCO 1) Which one of the following actions best matches the primary goal of financial management? (Points : 4) increasing the net, working capital while lowering the long-term asset requirementsimproving the operating efficiency, thereby increasing the market value of the stockincreasing the firm’s market sharereducing fixed costs and increasing variable costsincreasing the liquidity of the firm by transferring short-term debt into long-term debt
(TCO 1) Which of the following are capital structure concerns? I. how to obtain short-term financingII. the company's financing mix III. the cost of fundsIV. how and where to raise money (Points : 4) I and III, II and IIIII, III and IVI, III and IVAll of the above
2. (TCO 1) Market value is important to the financial manager because: (Points : 4) It reflects the value of the asset based on generally-accepted 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. The market value of an asset reflects its historical cost.
3. (TCO 1) Use the following tax table to answer this question: McKenzie, Inc. earned $144,320 in taxable income for the year. What is the company’s approximate average tax rate? (Points : 4) 27%29%31%33%35%
4. (TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, 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, APRLocal Bank, EARRegional Bank, EARLocal Bank, APR
5. (TCO 3) You deposited $8,000 in your bank account today. 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) a decrease in the interest rate increasing the initial amount of your deposit decreasing the frequency of the interest payments extending the length of the investment period
6. (TCO 3) You want to have $15,000 for a down payment on a house five years from now. If you can earn 13 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal? (Points : 4) $7,858.11$8,141.40$9,803.58$12,464.28$14,213.25
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) $2,291.89$2,809.10$3,287.46$3,412.67$4,145.68
8. (TCO 3) John borrowed $5,500 four years ago at an annual interest rate of 10 percent. The loan term is seven years. Since he borrowed the money, Sonny has been making annual payments of $550 to the bank. Which type of loan does John have? (Points : 4) interest-onlypure discountcompoundedamortizedcomplex
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 16 percent? Assume annual payments. (Points : 4) $1315$1300$756$1000
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.
11. (TCO 7) Which one of the following statements concerning financial leverage is correct? (Points : 4) The benefits of leverage are unaffected by the amount of a firm's earnings.The use of leverage will always increase a firm's earnings per share.The shareholders of a firm are exposed to greater risk anytime a firm uses financial leverage.Earnings per share are unaffected by changes in a firm's debt-equity ratio.Financial leverage is beneficial to a firm only when the firm has minimal earnings.
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) 10.5%10.6%11.5%12.1%
13. (TCO 8) Which of the following is true regarding bonds? (Points : 4) Most bonds do not carry default risk.Municipal bonds are free of 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.None of the above is true
14. (TCO 8) Two years ago, MorningStar Company issued seven percent, 25-year bonds and Track, Inc. issued seven 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) Track's decreased more than Morningstar'sMorningstar's increased more than Track'sMorningstar's decreased more than Track'sThey are both priced the same
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) deferred callmarketliquiditydebenturesinking fund
(TCO 6) Which of the following is true regarding convertible bonds? (Points : 4) Are relatively uncommonCan be exchanged for a fixed number of shares after the maturity onlyCan be exchanged for a fixed number of shares before maturityAllow the holder to require the issuer to buy the bond back
2. (TCO 6 and 7) The term debenture refers to (Points : 4) long-term, secured debt.long-term, unsecured debt.the after-acquired property clause.a document covering the specific terms of the debt issue.
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 current yield? (Points : 4) 9%14% 11% Cannot be determined None of the above
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 21stCentury.
5. (TCO 2) Storage and tracking costs, insurance and taxes, and losses due to theft are examples of: (Points : 4) Inventory depletion costsSunk costsCarrying costsShortage costs
6. (TCO 1) Provide three examples of situations in which business ethics play a role in the financial management process. Explain your rationale, and how these situations may affect the value of the firm. (Points : 10)
7. (TCO 4) What is an opportunity cost? Provide two real-life examples of opportunity costs for a project. Should opportunity costs be included in the project analysis process? Why or why not? Explain your rationale. (Points : 10)
8. (TCO 8) Consider the following statement: “Any risk is diversifiable”. Do you agree or disagree? Why? (Points : 10)
9. (TCO 2) What are the costs associated with extending (or not extending) a credit policy to customers? (Points : 10)
10. (TCO 6 and 7) Do you believe that it is appropriate for some industries to be more leveraged than others? Explain your rationale. (Points : 10)
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