Which of the following statements about portfolio is true?

Stock cash dividend will __________

Increase the total wealth of stockholders.
Reduce retained earnings.
Increase the number of shares to stockholders.
Decrease the number of shares to stockholders.
  1. Generally, the variability in both ROE and EPS increase when a firm increases its financial leverage. _______
True.
False.
  1. A portfolio weight is defined as the total number of shares in a particular asset divided by the total number of shares held in a portfolio.______
True.
False.
  1. Which of the following statements about portfolio is true? ______
The expected return of a portfolio is the weighted average of the expected returns of all individual stocks in the portfolio.
The standard deviation of a portfolio is the weighted average of the standard deviations of all individual stocks in the portfolio.
Portfolio beta is the weighted average of the beta values of all individual stocks in the portfolio.
Both Statement (A) and Statement (C) are correct.
  1. If preferred stock pays a $5 annual dividend and sells for $100. The cost of preferred stock financing is _______ if we don’t consider floatation costs.
5%
10%
25%
50%
  1. A well-diversified portfolio can diversify the company-unique risk, but it cannot diversify the market risk ______
True.
False
  1. The cost of debt must be adjusted for corporate taxes and this is accomplished by multiplying by (1 – Tc), where Tc is corporate tax rate. ______
True.
False.
  1. Operating cash flow is equal to _____
Net income plus depreciation minus taxes.
Net income minus depreciation minus interest expense.
EBIT minus taxes minus depreciation.
EBIT minus taxes plus depreciation.
  1. Which of the following transactions will NOT affect a firm’s retained earnings? _____
quarterly dividend payments
special dividend payments
stock dividend
All of the above
  1. Using the tax shield approach, a(n) _____ will increase the operating cash flow.
decrease in depreciation
decrease in sales
increase in costs
increase in depreciation

 

 

  1. A company’s cost of capital is equal to the weighted average of its investors’ required returns even when we consider floatation costs and taxes._________

True

False

  1. Which one of the following can be completely ignored when analyzing a project?______
depreciation
taxes
net working capital
sunk cost
  1. Working capital includes all of the following items except:
Accounts receivable.
Cash.
Long-term debt.
Account payables.
  1. Which of the following statements about Capital Asset Pricing Model (CAPM) equation “E(RA) = Rf + A(E(RM) – Rf) ” is NOT true ______
E(RA) is the required rate of return for stock A.
Rf is the nominal risk-free rate.
E(RM) is the required rate of return on the individual security.
BA is the beta coefficient for the individual security.
  1. If a stock has beta 0.8, how to interpret it? ______
The stock is riskier than average.
The stock has average risk.
The stock is less risky than average.
Don’t know.
  1. A firm’s optimal capital structure ______
is generally a mix of 40% debt and 60% equity.
exists when the debt-equity ratio is 0.5.
is the debt-equity ratio that exists at the point where the firm’s weighted after-tax cost of debt is minimized.
is the debt-equity ratio that results in the lowest possible weighted average cost of capital and the largest firm value.
  1. Portfolio provides average return but much lower risk. The key is the positive correlations among individual stocks. ______
True.
False.
  1. Business risk is defined as the:______
equity risk that comes from the nature of a firm’s operating activities.
equity risk associated with the capital structure of a firm.
probability that a firm will file bankruptcy.
situation in which a firm causes its creditors to suffer a financial loss.
  1. The cost of equity is the rate of return the marginal stockholder requires on the firm’s common stock._____
True.
False
  1. M&M Proposition I, with taxes, states that the value of a levered (VL) firm is equal to. _______
VU + (TC × D)
VU – (TC × D)
VU ÷ (TC × D)
None of the above is correct

 

  1. Announcements and news contain both an expected component and a surprise component. It is the surprise component that affects a stock’s price and therefore its return____
True
False
  1. The ex-dividend date is defined as _____ business days before the date of_____
two; payment.
three; payment.
two; record.
three; record.
  1. We want to choose the optimal capital structure for a firm that will maximize the firm’s earnings, not stockholder wealth _______

True

False

  1. If a firm maintains a constant debt-equity ratio and pays dividends only after meeting its investment needs, the firm is following a dividend policy which is defined as a(n): _______
stable dividend policy.
residual dividend approach.
constant dividend policy.
variable dividend approach.
  1. A company can NOT buy back its own shares of stock (stock repurchase) on the open market. But the company can make a tender offer to buy back its shares. _______

True

False

 

 

  1. Which one of the following is the prime objective of a residual dividend policy? _______
Maintaining a stable dividend
Increasing the dividend at a steady pace
Meeting the firm’s investment needs
Maintaining a stable dividend payout ratio
  1. Holding cash for normal collection and disbursement activities related to the daily ongoing operations of a firm is called the _____ motive.
precautionary
opportunity
speculative
transaction
  1. Float is defined as the difference between the.
projected cash balance and the actual cash balance.
available balance and the firm’s ledger balance.
sales and the cash collections.
collections and disbursements for any given period of time.
  1. Marshall’s Equipment has a book balance of $34,500. The $900 deposit which was made today will be added to the available balance tomorrow. There is $8,500 worth of outstanding checks. Which one of the following statements accurately reflects this situation.
The $900 is the disbursement float.
The firm’s current available balance = $34,500+$900-$8,500.
The firm’s disbursement float exceeds its collection float.
The firm’s net float is equal to $900 plus $8,500.

 

 

 

 

  1. Which of the following is money market security?
Commercial paper
U.S. treasure bonds.
Preferred stocks
Common stocks.
  1. To estimate the cost of capital, you have been provided with the following data: rRF = 5.00%; RPM = 6.00%; and Beta = 1.0. Based on the CAPM approach, what is the cost of equity? ________
5.0%
6.0%
10.4%
11.0%
  1. Assume that you have been provided with the following data: D1 = $1.30; P0 = $42.50; and g = 7.0% (constant). What is the cost of equity based on the Dividend Growth Model? ________
9.52%
10.06%
11.41%
12.0%
  1. A firm has 35,000 shares of stock outstanding at a price per share of $26. The company has decided to repurchase $130,000 worth of shares. After the repurchase, there will be _____ shares outstanding.
5,000 shares
30,000 shares
35,000 shares
40,000 shares

 

 

  1. Based on the information from Question 33, what is new market price of the stock after the repurchase?
$22.5 per share
$26.0 per share
$28.5 per share
$30.3 per share
  1. Based on the information from Question 33 and 34, does the total market value of the common stock change after the stock repurchase?
Yes
No
  1. Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9% and coupons are paid semiannually. The bond is currently selling for $908.72 per $1000 bond. What is the before-tax cost of debt (YTM)?
5.0%
9.0%
10.0%
15.0%
  1. Based on the information from Question 36, if the firm’s marginal tax rate is 30%. What’s the firm’s after-tax cost of debt?________
3.5%
5.0%
6.3%
7.0%

 

 

 

 

  1. A firm requires capital expenditure of $10 million, which will be raised by issuing $3 million of bonds, $1 million of preferred stock, and $6 million of new common stock. The firm estimates its after-tax cost of debt to be 6%, cost of preferred stock to be 8%, and cost of new common stock to be 15%. What is the weighted average cost of capital? _____
9.67%
10.25%
12.85%
11.60%
  1. A firm sells 15,000 desks a year at an average price per desk of $200. The carrying cost per unit is $2.80. The company orders 200 doors at a time and has a fixed order cost of $45 per order. The desks are sold out before they are restocked. What is the economic order quantity? ________
482 desks
694 desks
804 desks
919 desks
  1. A five-year project is expected to generate revenues of $120,000, variable costs of $72,000, and fixed costs of $20,000. The annual depreciation is $10,000 and the tax rate is 34%. What is the annual operating cash flow?
$11,880
$18,480
$21,880
$24,480
  1. A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year one, $55,000 in year two, $65,000 in year three, and $40,000 in year four. The firm’s required rate of return is 9%. What is the payback period of this project? _______
1.95 years
2.46 years
2.99 years
3.10 years
  1. A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year one, $55,000 in year two, $65,000 in year three, and $40,000 in year four. The firm’s required rate of return is 9%. What is the net present value (NPV) of the project? _____
$28,830.29
$30,929.26
$36,931.43
$39,905.28
  1. A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year one, $55,000 in year two, $65,000 in year three, and $40,000 in year four. The firm’s required rate of return is 9%. What is the internal rate of return (IRR) of this project?
14.03%
17.56%
19.26%
21.78%
  1. A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year one, $55,000 in year two, $65,000 in year three, and $40,000 in year four. The firm’s required rate of return is 9%. What is the profitability index (PI) of this project?
0.87
1.11
1.31
1.83.
  1. If you have 1 share of Berkshire Hathaway Inc. (BRKa). The stock is traded at $173,000. We assume that the firm will announce 1000:1 stock split. What’s total number of share you will have after the stock split? ______
100 shares
1,000 shares
10,000 shares
173,000 shares
  1. Based on the information in Question 45, what will be the total value of your holdings of Berkshire Hathaway stock after the stock split?______
$173,000
$1,730,000
$173,000,000
$1,730,000,000
  1. A firm has a $10 million bond outstanding with a coupon rate of 6%. The tax rate is 35%. What is the present value of the tax shield?______
$3.5 million
0.18 million
$10 million
$13.5 million
  1. A company has after-tax earnings of $39,400 for the year. The firm adheres to a residual dividend policy with a debt-equity ratio of 0.7. The firm needs $56,300 for new investments. What is the amount of the total dividends that will be paid?______
$6,282.35
$13,906.18
$16,218.00
$21,704.04
  1. A company purchased $25,000 worth of inventory. The terms of sale were 2/5, net 45. What’s the implicit interest if a buyer does not take the cash discount? _____
$250
$300
$500
$800

 

 

  1. Based on the information from Question 49, what’s the effective annual rate (EAR) if the buyer does not take the cash discount?_____
10.12%.
18.36%.
10.12%.
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