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. |

- Generally, the variability in both ROE and EPS increase when a firm increases its financial leverage. _______

True. | ||

False. |

- 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. |

- 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. |

- 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% |

- A well-diversified portfolio can diversify the company-unique risk, but it cannot diversify the market risk ______

True. | ||

False |

- The cost of debt must be adjusted for corporate taxes and this is accomplished by multiplying by (1 – T
_{c}), where T_{c}is corporate tax rate. ______

True. | ||

False. |

- 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. |

- 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 |

- 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 |

- 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

- Which one of the following can be completely ignored when analyzing a project?______

depreciation | ||

taxes | ||

net working capital | ||

sunk cost |

- Working capital includes all of the following items except:

Accounts receivable. | ||

Cash. | ||

Long-term debt. | ||

Account payables. |

- Which of the following statements about Capital Asset Pricing Model (CAPM) equation “E(R
_{A}) = R_{f }+_{A}(E(R_{M}) – R_{f}) ” is NOT true ______

E(R_{A}) is the required rate of return for stock A. |
||

R_{f} is the nominal risk-free rate. |
||

E(R_{M}) is the required rate of return on the individual security. |
||

_{BA} is the beta coefficient for the individual security. |

- 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. |

- 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. |

- Portfolio provides average return but much lower risk. The key is the positive correlations among individual stocks. ______

True. | ||

False. |

- 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. |

- The cost of equity is the rate of return the marginal stockholder requires on the firm’s common stock._____

True. | ||

False |

- M&M Proposition I, with taxes, states that the value of a levered (V
_{L}) firm is equal to. _______

V_{U} + (T_{C} × D) |
||

V_{U} – (T_{C} × D) |
||

V_{U} ÷ (T_{C} × D) |
||

None of the above is correct |

- 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 |

- The ex-dividend date is defined as _____ business days before the date of_____

two; payment. | ||

three; payment. | ||

two; record. | ||

three; record. |

- We want to choose the optimal capital structure for a firm that will maximize the firm’s earnings, not stockholder wealth _______

True

False

- 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. |

- 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

- 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 |

- 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 |

- 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. |

- 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. |

- Which of the following is money market security?

Commercial paper | ||

U.S. treasure bonds. | ||

Preferred stocks | ||

Common stocks. |

- To estimate the cost of capital, you have been provided with the following data: r
_{RF}= 5.00%; RP_{M}= 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% |

- Assume that you have been provided with the following data: D
_{1}= $1.30; P_{0}= $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% |

- 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 |

- 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 |

- 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 |

- 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% |

- 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% |

- 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% |

- 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 |

- 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 |

- 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 |

- 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 |

- 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% |

- 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. |

- 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 |

- 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 |

- 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 |

- 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 |

- 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 |

- 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%. |