13. Which one of the following does not affect the total equity of a firm but does increase the number of shares outstanding?A. Special dividendB. Stock splitC. Share repurchaseD. Rights offerE. Liquidating dividend
B. Stock split
2. Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the:A. Compound rate.B. Current yield.C. Cost of debt.D. Capital gains yield.E. Cost of capital.
C. Cost of debt.
1. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called?A. Dividend yield.B. Cost of equity.C. Capital gains yield.D. Cost of capital.E. Income return.
B. Cost of equity.
92. Cookie Dough Manufacturing has a target debt-equity ratio of .6. Its cost of equity is 16 percent, and its pretax cost of debt is 9 percent. What is the firm's WACC given a tax rate of 34 percent?A. 12.23 percentB. 12.78 percentC. 13.11 percentD. 13.48 percentE. 12.53 percent
A. 12.23 percent
91. Mullineaux Corporation has a target capital structure of 41 percent common stock, 4 percent preferred stock, and 55 percent debt. Its cost of equity is 18 percent, the cost of preferred stock is 6.5 percent, and the pretax cost of debt is 8.5 percent. What is the firm's WACC given a tax rate of 39 percent?A. 9.87 percentB. 10.43 percentC. 10.49 percentD. 13.38 percentE. 15.17 percent
C. 10.49 percent
15. A reverse stock split is defined as:A. An increase in the number of shares outstanding that does not affect owners' equity.B. A firm buying back existing shares of its stock on the open market.C. A firm selling new shares of stock on the open market.D. A decrease in the number of shares outstanding that does not affect total owners' equity.E. A decrease in both the number of shares outstanding and the price per share.
D. A decrease in the number of shares outstanding that does not affect total owners' equity.
16. Which one of the following statements related to cash dividends is correct?A. Extra cash dividends cannot be repeated in the future.B. A dividend is never a liability of the issuer until it has been declared.C. If a firm has paid regular quarterly dividends for at least five consecutive years, it is legally obligated to continue doing so.D. Regular cash dividends reduce paid-in capital.E. The dividend yield expresses the annual dividend as a percentage of net income.
B. A dividend is never a liability of the issuer until it has been declared.
14. Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a share. The difference between these two prices is referred to as the:A. Price variance.B. Bid-ask spread.C. Trading range.D. Opening price.E. Closing price.
C. Trading range.
11. HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called?A. Stock dividendB. Stock splitC. Stock repurchaseD. Reverse stock splitE. Stock repeal
C. Stock repurchase
12. Which one of the following involves a payment in shares by a stock issuer that increases the number of shares a shareholder owns but also decreases the value per share?A. Cash dividendB. Stock dividendC. Stock repurchaseD. Stock splitE. Reverse stock split
B. Stock dividend
84. Western Wear is considering a project that requires an initial investment of $260,000. The firm maintains a debt-equity ratio of .40 and has a flotation cost of debt of 8 percent and a flotation cost of equity of 10.5 percent. The firm has sufficient internally generated equity to cover the equity portion of this project. What is the initial cost of the project including the flotation costs?A. $266,082B. $281,406C. $272,005D. $297,747E. $279,762
A. $266,082
83. You are evaluating a project that requires $460,000 in external financing. The flotation cost of equity is 10.4 percent and the flotation cost of debt is 5.7 percent. What is the initial cost of the project including the flotation costs if you maintain a debt-equity ratio of .40?A. $502,842B. $549,021C. $505,812D. $555,551E. $546,646
C. $505,812
86. Street Corporation's common stock has a beta of 1.27. The risk-free rate is 3.2 percent and the expected return on the market is 12.68 percent. What is the firm's cost of equity?A. 11.49 percentB. 12.84 percentC. 15.24 percentD. 17.67 percentE. 19.30 percent
C. 15.24 percent
85. Yesteryear Productions is considering a project with an initial start up cost of $740,000. The firm maintains a debt-equity ratio of .50 and has a flotation cost of debt of 6.2 percent and a flotation cost of equity of 13.1 percent. The firm has sufficient internally generated equity to cover the equity cost of this project. What is the initial cost of the project including the flotation costs?A. $829,596B. $755,616C. $992,386D. $818,513E. $724,706
B. $755,616
88. Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 per share. What is the bank's cost of preferred?A. 4.60 percentB. 4.64 percentC. 5.39 percentD. 5.43 percentE. 5.54 percent
D. 5.43 percent
87. Stock in Country Road Industries has a beta of 1.46. The market risk premium is 7.5 percent while T-bills are currently yielding 2.5 percent. Country Road's last dividend was $1.55 per share and dividends are expected to grow atan annual rate of 4.5 percent indefinitely. The stock sells for $26a share. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?A. 12.09 percentB. 14.06 percentC. 14.23 percentD. 11.38 percentE. 11.50 percent
A. 12.09 percent
90. Jiminy's Cricket Farm issued a 30-year, 8 percent, semiannual bond six years ago. The bond currently sells for 114 percent of its face value. What is the aftertax cost of debt if the company's tax rate is 31 percent?A. 4.63 percentB. 4.70 percentC. 4.75 percentD. 4.82 percentE. 4.86 percent
B. 4.70 percent
20. Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8. Fast Deliveries declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information?A. Neither Kate nor Ted is entitled to the dividend.B. Kate is entitled to the dividend but Ted is not.C. Ted is entitled to the dividend but Kate is not.D. Both Ted and Kate are entitled to the dividend.E. Both Ted and Kate are entitled to one-half of the dividend amount.
B. Kate is entitled to the dividend but Ted is not.
6. Which one of these identifies the relationship between the return on assets and the return on equity?A. Profit margin.B. Profitability determinant.C. Balance sheet multiplier.D. DuPont identity.E. Debt-equity ratio.
D. DuPont identity.
7. The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:A. Centralized Business Index.B. Peer Grouping codes.C. Standard Industrial Classification codes.D. Governmental ID codes.E. Government Engineered Coding System.
C. Standard Industrial Classification codes.
13. On the statement of cash flows, which of the following are considered operating activities?I. Costs of goods sold.II. Decrease in accounts payable.III. Purchase of equipment.IV. Dividends paid.
I and II only.
12. On the statement of cash flows, which of the following are considered financing activities? I. Increase in long-term debt.II. Decrease in accounts payable.III. Interest paid.IV. Dividends paid.
I and IV only.
15. According to the statement of cash flows, an increase in interest expense will _____ the cash flow from _____ activities.A. Decrease; operating.B. Decrease; financing.C. Increase; operating.D. Increase; financing.E. Increase; investment.
A. Decrease; operating.
14. According to the statement of cash flows, an increase in inventory will _____ the cash flow from _____ activities.A. Increase; operating.B. Decrease; financing.C. Decrease; operating.D. Increase; financing.E. Increase; investment.
C. Decrease; operating.
17. On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?A. Current year sales.B. Current year total assets.C. Base-year sales.D. Base-year total assets.E. Base-year accounts receivables.
E. Base-year accounts receivables.
16. On a common-size balance sheet all accounts for the current year are expressed as a percentage of:A. Sales for the period.B. The base year sales.C. Total equity for the base year.D. Total assets for the current year.E. Total assets for the base year.
D. Total assets for the current year.
19. An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.A. Increase in the cash ratio.B. Increase in the net working capital to total assets ratio.C. Decrease in the quick ratio.D. Decrease in the cash coverage ratio.E. Increase in the current ratio.
C. Decrease in the quick ratio.
11. Which one of the following is a source of cash?A. Increase in accounts receivableB. Decrease in common stockC. Increase in fixed assetsD. Decrease in accounts payableE. Decrease in inventory
E. Decrease in inventory
21. A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?A. CurrentB. CashC. Debt-equityD. QuickE. Total debt
B. Cash
20. An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?A. Accounts payable.B. Cash.C. Inventory.D. Accounts receivable.E. Fixed assets.
D. Accounts receivable.
6. Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?A. Ex-rights dateB. Ex-dividend dateC. Date of recordD. Date of paymentE. Declaration date
C. Date of record
4. Which one of the following is a marketed claim against a firm's cash flows?A. Tax payment to the IRS.B. Principal payment on long-term debt.C. Payment of employee wages.D. Payment for warranty work on a product produced by the firm.E. Payment of external legal and accounting fees.
B. Principal payment on long-term debt.
22. Which one of the following statements related to dividend policy is correct?A. The primary question related to dividend policy is whether or not a firm should ever pay a dividend.B. Both dividends and dividend policy are irrelevant.C. Dividend policy focuses on the timing of dividend payments.D. Homemade dividends increase the importance of a firm's dividend policy decisions.E. Whether or not a firm ever pays a dividend is irrelevant to equity valuation.
C. Dividend policy focuses on the timing of dividend payments.
21. All else equal, the market value of a stock will tend to decrease by roughly the aftertax value of the dividend on the:A. Dividend declaration date.B. Ex-dividend date.C. Date of record.D. Date of payment.E. Day after the date of payment.
B. Ex-dividend date.
30. The information content of a dividend increase generally signals that:A. The firm has a one-time surplus of cash.B. The firm has few, if any, net present value projects to pursue.C. Management believes earnings growth will be strong going forward.D. The firm has more cash than it needs due to a decline in future orders.E. Dividends thereafter will be lower.
C. Management believes earnings growth will be strong going forward.
29. An investor is more likely to prefer a high dividend payout if a firm:A. Has high flotation costs.B. Has few, if any, positive net present value projects.C. Has lower tax rates than the investor.D. Has a stock price that is increasing rapidly.E. Offers substantial gains on its equities, which are taxed at a favorable rate.
B. Has few, if any, positive net present value projects.
53. A firm wants to maintain a stock price around $15 a share. Due to a recent market downturn, the stock is currently selling for $6 a share. The firm should consider a:A. 3-for-1 stock split.B. 4-for-1 stock split.C. 1-for-3 reverse stock split.D. 1-for-4 reverse stock split.E. 1-for-5 reverse stock split.
C. 1-for-3 reverse stock split.
54. Plyler Cabinets declared a dividend of $1.20 a share on May 15 to holders of record on Monday, June 1. The dividend is payable on June 15. Sara purchased 500 shares of Plyler Cabinets stock on Friday, May 29. How much dividend income will she receive on June 15 from Plyler Cabinets?A. $0B. $300C. $450D. $150E. $600
A. $0
51. Alta Gems stock is currently trading at $56 a share. The firm believes its primary clientele can afford to spend between $1,500 and $2,000 to purchase a round lot of 100 shares. The firm should consider a:A. Reverse stock split.B. Liquidating dividend.C. Stock dividend.D. Stock split.E. Special dividend.
D. Stock split.
52. A one-for-four reverse stock split will:A. Increase the par value by 25 percent.B. Increase the number of shares outstanding by 400 percent.C. Increase the market value but not affect the par value per share.D. Increase a $1 par value to $4.E. Increase a $1 par value to $5.
D. Increase a $1 par value to $4
57. Webster United is paying a dividend of $1.32 per share today. There are 350,000 shares outstanding with a market price of $22.40 per share prior to the dividend payment. Ignore taxes. Before the dividend, the company had earnings per share of $1.68. As a result of this dividend, the:A. Retained earnings will decrease by $350,000.B. Retained earnings will increase by $462,000.C. Total firm value will not change.D. Earnings per share will increase to $3.E. Price-earnings ratio will be 12.55.
E. Price-earnings ratio will be 12.55.
58. You own 1,600 shares of Dell Hardware. The company plans on issuing a dividend of $.58 a share at the end of this year and then issuing a final liquidating dividend of $5.30 a share at the end of next year. Your required rate of return on this security is 17 percent. Ignoring taxes, what is the value of one share of this stock to you today?A. $3.30B. $3.43C. $4.37D. $4.92E. $5.32
C. $4.37
55. Aaron purchased 200 shares of KMP stock on May 8. On May 16, he purchased another 300 shares and then on May 20 he purchased a final 100 shares of KMP stock. The company declared a dividend of $1.22 a share on May 6 to holders of record on Friday, May 22. The dividend is payable on June 12. How much dividend income will Steve receive on June 12?A. $732B. $540C. $610D. $310E. $244
C. $610
56. On July 9, you purchased 600 shares of Blue Water stock for $32 a share. On August 4, you sold 100 shares of this stock for $33 a share. You sold an additional 100 shares on August 14 at a price of $34.50 a share. The company declared a dividend of $.76 per share on August 3 to holders of record as of Monday, August 17. This dividend is payable on September 15. How much dividend income will you receive on September 15?A. $304B. $418C. $380D. $360E. $456
C. $380
59. Al owns 400 shares of M&M Enterprises and earns 13.2 percent on his investments. M&M recently stated that it will pay dividends per share of $.48 this year and $.55 next year. Al does not want any dividend income this year but does want as much dividend income as possible next year. Ignoring taxes, what will Al's total homemade dividend be next year?A. $412.00B. $466.38C. $430.50D. $441.80E. $437.34
E. $437.34
17. A firm should select the capital structure that:A. Produces the highest cost of capital.B. Maximizes the value of the firm.C. Minimizes taxes.D. Is fully unlevered.E. Equates the value of debt with the value of equity.
B. Maximizes the value of the firm.
60. Jenningston Mills has a market value equal to its book value. Currently, the firm has excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has 250 shares of stock outstanding and net income of $420. What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?A. $1.83B. $1.89C. $1.96D. $2.00E. $2.08
A. $1.83
30. Financial risk is:A. The risk inherent in a firm's operations.B. A type of unsystematic risk.C. Inversely related to the cost of equity.D. Dependent upon a firm's capital structure.E. Irrelevant to the value of a firm.
D. Dependent upon a firm's capital structure.
29. The business risk of a firm:A. Depends on the firm's level of unsystematic risk.B. Is inversely related to the required return on the firm's assets.C. Is dependent upon the relative weights of the debt and equity used to finance the firm.D. Has a positive relationship with the firm's cost of equity.E. Has no relationship with the required return on a firm's assets according to M&M theory.
D. Has a positive relationship with the firm's cost of equity.
32. M&M Proposition I with taxes is based on the concept that:A. The optimal capital structure is the one that is totally financed with equity.B. The capital structure of a firm does not matter because investors can use homemade leverage.C. A firm's WACC is unaffected by a change in the firm's capital structure.D. The value of a firm increases as the firm's debt increases because of the interest tax shield.E. The cost of equity increases as the debt-equity ratio of a firm increases.
D. The value of a firm increases as the firm's debt increases because of the interest tax shield.
31. M&M Proposition I with tax implies that:A. A firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases.B. The value of a firm is inversely related to the amount of leverage used by the firm.C. The value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.D. A firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.E. A firm's cost of equity increases as the debt-equity ratio of the firm decreases.
A. A firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases.
26. The concept of homemade leverage is most associated with:A. M&M Proposition I with no tax.B. M&M Proposition II with no tax.C. M&M Proposition I with tax.D. M&M Proposition II with tax.E. The static theory proposition.
A. M&M Proposition I with no tax.
25. M&M Proposition I with no tax supports the argument that:A. Business risk has no effect on the return on assets.B. The cost of equity rises as leverage rises.C. The debt-equity ratio of a firm is completely irrelevant.D. Business risk is irrelevant.E. Homemade leverage is irrelevant.
C. The debt-equity ratio of a firm is completely irrelevant.
28. M&M Proposition II, without taxes, is the proposition that:A. The capital structure of a firm has no effect on the firm's value.B. The cost of equity depends on the return on debt, the debt-equity ratio, and the tax rate.C. A firm's cost of equity is a linear function with a slope equal to (RA - RD).D. The cost of equity is equivalent to the required rate of return on a firm's assets.E. The size of the pie does not depend on how the pie is sliced.
C. A firm's cost of equity is a linear function with a slope equal to (RA - RD).
27. Which one of the following statements is correct in relation to M&M Proposition II, without taxes?A. The cost of equity remains constant as the debt-equity ratio increases.B. The cost of equity is inversely related to the debt-equity ratio.C. The required return on assets is equal to the weighted average cost of capital.D. Financial risk determines the return on assets.E. Financial risk is unaffected by the debt-equity ratio.
C. The required return on assets is equal to the weighted average cost of capital.
7. Which one of the following is the primary determinant of a firm's cost of capital?A. Debt-equity ratio.B. Applicable tax rate.C. Cost of equity.D. Cost of debt.E. Use of the funds.
E. Use of the funds.
8. High Adventure is considering a new project that is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of .55 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity?A. By adding the market risk premium to the after tax cost of debt.B. By multiplying the market risk premium by 1.55.C. By using the dividend growth model.D. By using the capital asset pricing model.E. By averaging the costs based on the dividend growth model and the capital asset pricing model.
D. By using the capital asset pricing model.
9. All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.A. A reduction in the dividend amount.B. An increase in the dividend amount.C. A reduction in the market rate of return.D. A reduction in the firm's beta.E. A reduction in the risk-free rate.
E. A reduction in the risk-free rate.
10. A firm's overall cost of equity is:A. Generally less than the firm's WACC given a debt-equity ratio of .40.B. Unaffected by changes in the market risk premium.C. Highly dependent upon the risk level of the firm.D. Generally less than the firm's after tax cost of debt.E. Inversely related to changes in the firm's tax rate.
C. Highly dependent upon the risk level of the firm.
34. The present value of the interest tax shield is expressed as:A. (Tc x D) / Ra..B. Vu + (Tc x D).C. [EBIT x (Tc x D)] / Ru.D. [EBIT x (Tc x D)] / Ra.E. Tc x D.
E. Tc x D.
33. M&M Proposition II with taxes:A. Has the same general implications as M&M proposition II without taxes.B. States that a firm's capital structure is irrelevant to shareholders.C. Supports the argument that business risk is determined by the capital structure decision.D. Supports the argument that the cost of equity decreases as the debt-equity ratio increases.E. Concludes that the capital structure decision is irrelevant to the value of a firm.
A. Has the same general implications as M&M proposition II without taxes.
5. A firm's cost of capital:A. Will decrease as the risk level of the firm increases.B. For a specific project, is primarily dependent upon the source of the funds used for the project.C. Is independent of the firm's capital structure.D. Should be applied as the discount rate for any project considered by the firm.E. Depends upon how the funds raised are going to be spent.
E. Depends upon how the funds raised are going to be spent.
6. The weighted average cost of capital for a wholesaler:A. Is equivalent to the after tax cost of the firm's liabilities.B. Should be used as the required return when analyzing a potential acquisition of a retail outlet.C. Is the return investors require on the total assets of the firm.D. Remains constant when the debt-equity ratio changes.E. Is unaffected by changes in corporate tax rates.
C. Is the return investors require on the total assets of the firm.
11. The cost of equity for a firm with a debt-equity ratio of .35:A. Tends to remain static for firms with increasing levels of risk.B. Increases as the unsystematic risk of the firm increases.C. Ignores the firm's risks when that cost is based on the dividend growth model.D. Equals the risk-free rate plus the market risk premium.E. Equals the firm's pretax weighted average cost of capital.
C. Ignores the firm's risks when that cost is based on the dividend growth model.
12. The dividend growth model cannot be used to compute the cost of equity for a firm that:A. Pays an increasing dividend.B. Reduces its dividend on a regular basis.C. Has a dividend payout ratio of 100 percent.D. Pays a constant dividend year after year.E. Has a retention ratio of 100 percent.
E. Has a retention ratio of 100 percent.
84. Percy's Wholesale Supply has earnings before interest and taxes of $121,000. Both the book and the market value of debt is $190,000. The unlevered cost of equity is 14.7 percent while the pretax cost of debt is 8.6 percent. The tax rate is 35 percent. What is the firm's weighted average cost of capital?A. 11.94 percentB. 12.65 percentC. 13.07 percentD. 14.01 percentE. 14.37 percent
C. 13.07 percent
83. Home Decor has a debt-equity ratio of .48. The cost of equity is 16.4 percent and the aftertax cost of debt is 4.2 percent. What will the firm's cost of equity be if the debt-equity ratio is revised to .70?A. 17.89 percentB. 18.47 percentC. 17.70 percentD. 13.69 percentE. 18.21 percent
E. 18.21 percent
80. Cooper Brands has 72,000 shares of stock outstanding at a market price of $58.60 a share. The company just announced a 5-for-4 stock split. What will be the market price per share after the split?A. $46.88B. $58.20C. $62.12D. $73.25E. $82.50
A. $46.88
79. The Peace River Corporation has 86,000 shares of stock outstanding at a market price of $39 a share. The company has just announced a 4-for-3 stock split. How many shares of stock will be outstanding after the split?A. 72,667 sharesB. 54,333 sharesC. 107,333 sharesD. 114,667 sharesE. 64,500 shares
D. 114,667 shares
76. Prezario's has 25,000 shares of stock outstanding with a par value of $1 per share. The current market value of the firm is $847,000. Currently, the retained earnings account balance is $428,000 and the capital in excess of par value account balance is $187,000. The company just announced a 4-for-1 stock split. What is the common stock account balance after the stock split?A. $8,333B. $25,000C. $75,000D. $77,333E. $232,000
B. $25,000
75. Mario's has 18,000 shares of stock outstanding with a par value of $1 per share and a market price of $4 a share. The balance sheet shows $18,000 in the common stock account, $368,000 in the capital in excess of par value account, and $64,000 in the retained earnings account. The firm just announced a 5-for-1 stock split. What will the paid in surplus account value be after the split?A. $336,000B. $368,000C. $426,000D. $548,000E. $606,000
B. $368,000
78. Western Mountain Water has 11,000 shares of stock outstanding with a par value of $1 per share. The current market value of the firm is $135,000. The balance sheet shows a capital in excess of par value account balance of $68,000 and retained earnings of $49,000. The company just announced a 2-for-1 stock split. What will be the capital in excess of par value account balance after the split?A. $45,333B. $54,667C. $68,000D. $86,667E. $102,000
C. $68,000
77. The Peanut Shack has 6,500 shares of stock outstanding with a par value of $1 per share. The current market value of the firm is $145,600. The company just announced a 5-for-3 stock split. What will the market price per share be after the split?A. $37.33B. $13.44C. $16.18D. $28.20E. $14.93
B. $13.44
72. Della's Pools has 24,000 shares of stock outstanding with a par value of $1 per share and a market price of $26 a share. The firm just announced a 5-for-3 stock split. How many shares of stock will be outstanding after the split?A. 9,600 sharesB. 14,400 sharesC. 12,000 sharesD. 32,000 sharesE. 40,000 shares
E. 40,000 shares
71. Verbal Communications, Inc., has 12,500 shares of stock outstanding with a par value of $1 per share and a market value of $27 per share. The firm just announced a stock dividend of 100 percent. What is the market value per share after the dividend?A. $13.50B. $40.50C. $27.00D. $46.00E. $54.00
A. $13.50
74. South Shore Limited has 21,000 shares of stock outstanding with a par value of $1 per share and a market price of $77.50 a share. The firm just announced a 5-for-2 stock split. What will the par value of the stock be after the split?A. $.40B. $.80C. $1.00D. $5.00E. $2.50
A. $.40
73. Alfonzo's Italian House has 25,000 shares of stock outstanding with a par value of $1 per share and a market price of $28 a share. The firm just announced a 5-for-3 stock split. What will the market price per share be after the split?A. $16.80B. $21.60C. $28.00D. $46.67E. $56.00
A. $16.80
3. The average of a firm's cost of equity and after tax cost of debt that is weighted based on the firm's capital structure is called the:A. Reward to risk ratio.B. Weighted capital gains rate.C. Structured cost of capital.D. Subjective cost of capital.E. Weighted average cost of capital.
E. Weighted average cost of capital.
4. When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the _____ approach.A. Subjective risk.B. Pure play.C. Divisional cost of capital.D. Capital adjustment.E. Security market line.
B. Pure play.
18. The value of a firm is maximized when the:A. Cost of equity is maximized.B. Tax rate is zero.C. Levered cost of capital is maximized.D. Weighted average cost of capital is minimized.E. Debt-equity ratio is minimized.
D. Weighted average cost of capital is minimized.
26. The fact that flotation costs can be significant is an argument for:A. Issuing larger regular dividends than the industry norm.B. Maintaining a constant dividend policy even if the firm frequently has to issue new shares.C. Periodic extra dividend payments.D. Maintaining a constant dividend policy even when profits decline significantly.E. Maintaining a low dividend policy and rarely issuing extra dividends.
E. Maintaining a low dividend policy and rarely issuing extra dividends.
25. Which one of the following favors a low dividend policy?A. The tax on capital gains is deferred until the gain is realized.B. Few, if any, positive net present value projects are available to a firm.C. A majority of the shareholders have a low tax rate.D. A majority of the shareholders have better investment opportunities than the firm.E. The presence of an agency conflict with the firm's senior managers.
A. The tax on capital gains is deferred until the gain is realized.
28. As of 2014, dividend income received by an individual:A. Is taxed at a constant 10 percent rate for all tax filers.B. Is exempt from federal income tax.C. Is taxed at a maximum rate of 20 percent.D. Is taxed at a flat rate of 15 percent.E. Is exempt from federal taxation unless the amount exceeds $5,000.
C. Is taxed at a maximum rate of 20 percent.
27. Which one of the following factors tends to increase cash dividends?A. Capital gains tax deferment.B. Terms contained in bond indentures.C. Corporate investors.D. Flotation costs.E. Homemade dividends.
C. Corporate investors.
81. Deep Hollow Markets has a target capital structure of 30 percent debt, 10 percent preferred stock, and 60 percent common stock. The flotation costs are 10.5 percent for common stock, 8.2 percent for preferred stock, and 5.8 percent for debt. The corporate tax rate is 35 percent. What is the weighted average flotation cost?A. 7.97 percentB. 9.48 percentC. 9.62 percentD. 8.86 percentE. 7.11 percent
D. 8.86 percent
82. The Daily Brew has a debt-equity ratio of .64. The firm is analyzing a new project that requires an initial cash outlay of $420,000 for equipment. The flotation cost is 9.6 percent for equity and 5.4 percent for debt. What is the initial cost of the project including the flotation costs?A. $302,400B. $368,924C. $456,328D. $456,700E. $583,333
C. $456,328
24. Which one of the following tends to decrease the ability of a shareholder to create his or her own homemade dividend policy?A. Low taxes on capital gains.B. Large holdings of shares.C. Dividend reinvestment plans.D. Low-cost equity purchases.E. High transaction fees.
E. High transaction fees.
23. Automatic dividend reinvestment plans:A. Require that participating stockholders reinvest all of the dividends to which they are entitled.B. Grant all participants a discount on share purchases.C. Increase the relevance of corporate dividend policies.D. Help shareholders create their own homemade dividend policies.E. Are no longer available in the u.s.
D. Help shareholders create their own homemade dividend policies.
77. Deep Mining and Precious Metals are separate firms that are both considering a silver exploration project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 16.7 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 12.6 percent. The project under consideration has initial costs of $755,000 and anticipated annual cash inflows of $152,000 a year for 10 years. Which firm(s), if either, should accept this project?A. Company A only.B. Company B only.C. Both Company A and Company B.D. Neither Company A nor Company B.E. Cannot be determined without further information.
D. Neither Company A nor Company B.
78. Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 11.6 percent. Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.3 percent. Sister Pools is considering building and selling its own water features and fountains. The initial cash outlay for this project would be $80,000. The expected net cash inflows are $17,000 a year for seven years. What is the net present value of the Sister Pools project?A. -$1,044.14B. $1,951.97C. $2,262.08D. -$1,508.02E. $1,219.79
B. $1,951.97
79. Decker's is an all-equity financed chain of retail furniture stores. Furniture Fashions, a furniture maker, is the primary supplier to Decker's. Decker's has a beta of 1.54 as compared to Furniture Fashion's beta of 1.37. The risk-free rate of return is 2.6 percent and the market risk premium is 7.9 percent. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?A. 13.42 percentB. 12.92 percentC. 13.50 percentD. 14.08 percentE. 14.54 percent
A. 13.42 percent
80. Bleakly Enterprises has a capital structure of 45 percent common stock, 5 percent preferred stock, and 50 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax rate is 34 percent. What is the weighted average flotation cost?A. 5.83 percentB. 6.20 percentC. 6.42 percentD. 6.67 percentE. 6.88 percent
E. 6.88 percent
73. Carson Electronics uses65 percent common stock and 35 percent debt to finance its operations. The aftertax cost of debt is 5.8 percent and the cost of equity is 16.1 percent. Management is considering a project that will produce a cash inflow of $42,000 in the first year. The cash inflows will then grow at 3 percent per year forever. What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project?A. $299,032B. $442,338C. $411,406D. $382,979E. $441,414
B. $442,338
74. The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.5 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $58,000 and projected cash inflows of $17,000 in year 1, $28,000 in year 2, and $30,000 in year 3. The firm uses 25 percent debt and 75 percent common stock as its capital structure. The company's cost of equity is 15.5 percent while the aftertax cost of debt for the firm is 6.1 percent. What is the projected net present value of the new project?A. -$6,208B. -$1,964C. -$308D. $1,427E. $1,573
B. -$1,964
75. The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of 1.28. The firm is financed solely with common stock. The risk-free rate of return is 3.4 percent. What is an appropriate cost of capital for a division within the firm that has an estimated beta of 1.18?A. 12.37 percentB. 12.41 percentC. 12.54 percentD. 12.67 percentE. 12.80 percent
E. 12.80 percent
76. Miller Sisters has an overall beta of 1.27 and a cost of equity of 13.4 percent for the firm overall. The firm is all-equity financed. Division A within the firm has an estimated beta of 1.46 and is the riskiest of all of the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 7.7 percent?A. 13.12 percentB. 14.86 percentC. 14.63 percentD. 15.77 percentE. 16.01 percent
B. 14.86 percent
46. During the year, Al's Tools decreased its accounts receivable by $160, increased its inventory by $115, and decreased its accounts payable by $70. How did these three accounts affect the firm's cash flows for the year?A. Net source of cash of $120.B. Net source of cash of $205.C. Net source of cash of $45.D. Net use of cash of $115.E. Net use of cash of $25.
E. Net use of cash of $25.
47. A firm generated net income of $911. The depreciation expense was $47 and dividends were paid in the amount of $25. Accounts payables increased by $15, accounts receivables increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity?A. $776B. $865C. $959D. $922E. $985
C. $959
48. A firm has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory?A. 12.22 percentB. 44.16 percentC. 16.54 percentD. 13.36 percentE. 46.74 percent
A. 12.22 percent
49. A firm has sales of $4,300, net income of $320, total assets of $4,800, and total equity of $2,950. Interest expense is $65. What is the common-size statement value of the interest expense?A. .89 percentB. 1.51 percentC. 1.69 percentD. 2.03 percentE. 1.35 percent
B. 1.51 percent
42. Which one of the following statements is correct?A. Book values should always be given precedence over market values.B. Financial statements are rarely used as the basis for performance evaluations.C. Historical information is useful when projecting a firm's future performance.D. Potential lenders place little value on financial statement information.E. Reviewing financial information over time has very limited value.
C. Historical information is useful when projecting a firm's future performance.
43. The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current:A. Financial ratios to the firm's historical ratios.B. Financial statements to the financial statements of similar firms operating in other countries.C. Financial ratios to the average ratios of all firms located within the same geographic area.D. Financial statements to those of larger firms in unrelated industries.E. Financial statements to the projections that were created based on Tobin's Q.
A. Financial ratios to the firm's historical ratios.
44. Which of the following represent problems encountered when comparing the financial statements of two separate entities? I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business.II. The operations of the two firms may vary geographically.III. The firms may use differing accounting methods.IV. The two firms may be seasonal in nature and have different fiscal year ends.
I, II, III, and IV.
45. Barlow's Feed had the following current account values. What effect did the change in net working capital have on the firm's cash flows for the year?Beginning of Year - End of Year Cash - $179 - $164 AR - 415 - 480 Inventory - 987 - 923 Accounts payable - 562 - 649A. Net use of cash of $73.B. Net use of cash of $88. C. Net source of cash of $86.D. Net source of cash of $101.E. Net source of cash of $135.
D. Net source of cash of $101.
50. Last year, which is used as the base year, a firm had cash of $52, accounts receivable of $223, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61, accounts receivable of $204, inventory of $527, and net fixed assets of $1,216. What is the common-base year value of inventory?A. .67B. .91C. .88D. 1.04E. 1.18
D. 1.04
51. Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio?A. 2.25B. .53C. .71D. .89E. 1.35
D. .89
76. Auto Care has a pretax cost of debt of 6.6 percent and an unlevered cost of capital of 14.6 percent. The firm's tax rate is 34 percent and the cost of equity is 15.8 percent. What is the firm's debt-equity ratio?A. .77B. .61C. .39D. .54E. .23
E. .23
75. LP Gas has a cost of equity of 17.4 percent and a pretax cost of debt of 8.1 percent. The debt-equity ratio is .48 and the tax rate is 35 percent. What is the unlevered cost of capital?A. 15.19 percentB. 11.85 percentC. 14.29 percentD. 14.46 percentE. 15.08 percent
A. 15.19 percent
24. The weighted average cost of capital for a firm with debt is the:A. Discount rate that the firm should apply to all of the projects it undertakes.B. Rate of return a firm must earn on its existing assets to maintain the current value of its stock.C. Coupon rate the firm should expect to pay on its next bond issue.D. Minimum discount rate the firm should require on any new project.E. Rate of return shareholders should expect to earn on their investment in this firm.
B. Rate of return a firm must earn on its existing assets to maintain the current value of its stock.
78. The June Bug has a $340,000 bond issue outstanding. These bonds have a coupon rate of 6.25 percent, pay interest semiannually, and sell at 101.2 percent of face value. The tax rate is 35 percent. What is the amount of the annual interest tax shield?A. $21,505.00B. $119,000.00C. $5,311.22D. $7,437.50E. $21,250.00
D. $7,437.50
77. Douglass & Frank has a debt-equity ratio of .35. The pretax cost of debt is 8.2 percent while the unlevered cost of capital is 13.3 percent. What is the cost of equity if the tax rate is 39 percent?A. 13.79 percentB. 14.39 percentC. 14.86 percentD. 18.40 percentE. 18.87 percent
B. 14.39 percent
80. D. L. Tuckers has $48,000 of debt outstanding that is selling at par and has a coupon rate of 6.75 percent. The tax rate is 35 percent. What is the present value of the tax shield?A. $3,240B. $1,134C. $2,106D. $16,200E. $16,800
E. $16,800
19. The last date on which you can purchase shares of stock and still receive the next dividend is the date that is _____ business day(s) prior to the date of record.A. 1B. 2C. 3D. 4E. 5
C. 3
79. Georga's Restaurants has 5,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.25 percent. The interest is paid semiannually. What is the amount of the annual interest tax shield if the tax rate is 37 percent?A. $152,625.00B. $162,411.90C. $187,750.00D. $210,420.00E. $233,887.50
A. $152,625.00
82. A firm has debt of $12,000, a leveraged value of $26,400, a pretax cost of debt of 9.20 percent, a cost of equity of 17.6 percent, and a tax rate of 37 percent. What is the firm's weighted average cost of capital?A. 11.47 percentB. 11.52 percentC. 11.69 percentD. 12.23 percentE. 12.48 percent
D. 12.23 percent
81. Jemisen's has expected earnings before interest and taxes of $6,200. Its unlevered cost of capital is 14 percent and its tax rate is 34 percent. The firm has debt with both a book and a face value of $2,500. This debt has a 9 percent coupon and pays interest annually. What is the firm's weighted average cost of capital?A. 12.48 percentB. 13.60 percentC. 13.87 percentD. 14.14 percentE. 14.37 percent
B. 13.60 percent
17. Billingsley United declared a $.20 a share dividend on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?A. Tuesday, October 28B. Wednesday, October 29C. Thursday, October 30D. Wednesday, November 5E. Thursday, November 6
B. Wednesday, October 29
18. Bailey's decided on Friday, March 7 to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?A. Friday, March 7B. Monday, March 17C. Friday, March 14D. Thursday, March 20E. Friday, March 21
D. Thursday, March 20
62. Tucker's National Distributing has a current market value of equity of $10,665. Currently, the firm has excess cash of $640, total assets of $22,400, net income of $3,210, and 500 shares of stock outstanding. Tucker's is going to use all of its excess cash to repurchase shares of stock. What will the stock price per share be after the stock repurchase is completed?A. $20.87B. $20.94C. $21.06D. $21.33E. $21.42
D. $21.33
61. TJ's has a market value equal to its book value. Currently, the firm has excess cash of $389,000, other assets of $911,674, and equity of $886,200. The firm has 60,000 shares of stock outstanding and net income of $984,800. Management has decided to spend 20 percent of the firm's excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?A. 57,937 sharesB. 58,050 sharesC. 54,733 sharesD. 55,578 sharesE. 51,584 shares
C. 54,733 shares
64. Delaware Trust has 450 shares of common stock outstanding at a market price per share of $27. Currently, the firm has excess cash of $400, total assets of $28,900, and net income of $1,320. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after this dividend is paid?A. $2.69B. $2.86C. $2.93D. $3.07E. $3.24
C. $2.93
63. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has excess cash of $1,400 and net income of $15,400. There are 750 shares of stock outstanding. What will be the percentage change in the stock price per share if the firm pays out all of its excess cash as a cash dividend?A. -9.4 percentB. -8.7 percentC. -7.5 percentD. -2.8 percentE. 0 percent
B. -8.7 percent
66. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1 per share. The market value is $12 per share. The balance sheet shows $42,000 in the capital in excess of par account, $20,000 in the common stock account, and $50,500 in the retained earnings account. The firm just announced a 5 percent (small) stock dividend. What will be the balance in the retained earnings account after the dividend?A. $38,500B. $39,500C. $50,500D. $61,500E. $62,500
A. $38,500
65. Josh's, Inc. has 5,000 shares of stock outstanding with a par value of $1 per share and a market value of $27 a share. The balance sheet shows $103,000 in the capital in excess of par account, $5,000 in the common stock account, and $164,800 in the retained earnings account. The firm just announced a stock dividend of 10 percent. What is the value of the capital in excess of par account after the dividend?A. $103,000B. $102,000C. $112,200D. $116,000E. $104,400
D. $116,000
68. Val's Marina Supply has 5,500 shares of stock outstanding with a par value of $1 per share and a market value of $33 per share. The balance sheet shows $5,500 in the common stock account, $29,600 in the capital in excess of par account, and $56,400 in the retained earnings account. The firm just announced a 100 percent stock dividend. What is the value of the capital in excess of par account after the dividend?A. $24,100B. $14,800C. $29,600D. $59,200E. $205,600
C. $29,600
67. Ma's Fried Chicken has 15,000 shares of stock outstanding with a par value of $1 per share and a market value of $38 per share. The balance sheet shows $63,000 in the capital in excess of par account, $15,000 in the common stock account, and $137,000 in the retained earnings account. The firm just announced a 5 percent stock dividend. What will total owners' equity be after the dividend?A. $185,800B. $199,000C. $215,000D. $206,800E. $212,200
C. $215,000
70. The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1 per share and a market value of $8 per share. The balance sheet shows $10,000 in the common stock account, $60,000 in the capital in excess of par account, and $94,300 in the retained earnings account. The firm just announced a 100 percent stock dividend. What will be the value of the common stock account after the dividend?A. $5,000B. $10,000C. $11,000D. $15,000E. $20,000
E. $20,000
69. Kurt's Market has 22,000 shares of stock outstanding with a par value of $1 per share and a market value of $17 per share. The balance sheet shows $22,000 in the common stock account, $236,000 in the capital in excess of par account, and $336,800 in the retained earnings account. The firm just announced a stock dividend of 60 percent. What will be the balance in the retained earnings account after this dividend?A. $323,600B. $336,800C. $348,700D. $125,600E. $112,400
A. $323,600
19. The optimal capital structure has been achieved when the:A. Debt-equity ratio is equal to 1.B. Weight of equity is equal to the weight of debt.C. Cost of equity is maximized given a pretax cost of debt.D. Debt-equity ratio is such that the cost of debt exceeds the cost of equity.E. Debt-equity ratio results in the lowest possible weighted average cost of capital.
E. Debt-equity ratio results in the lowest possible weighted average cost of capital.
20. AA Tours has earnings before interest and taxes (EBIT) that are less than the break-even earnings per share level. Ignore taxes. Which one of these statements is correct given this situation if the firm wishes to improve its earnings per share?A. The firm should increase its long-term debt.B. The firm should increase its use of leverage.C. The firm should issue more equity to pay off debt.D. The firm should reduce its expenses.E. The firm should reduce its output and sales.
D. The firm should reduce its expenses.
21. You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the:A. Firm is earning just enough to pay for the cost of the debt.B. Firm's earnings before interest and taxes are equal to zero.C. Earnings per share for the levered option are exactly double those of the unlevered option.D. Advantages of leverage exceed the disadvantages of leverage.E. Firm has a debt-equity ratio of .50.
A. Firm is earning just enough to pay for the cost of the debt.
22. Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Ignore taxes.A. At the break-even point, there is no advantage to debt.B. The earnings per share will equal zero when EBIT is zero for a levered firm.C. The advantages of leverage are inversely related to the level of EBIT.D. The use of leverage at any level of EBIT increases the EPS.E. EPS are more sensitive to changes in EBIT when a firm is unlevered.
A. At the break-even point, there is no advantage to debt.
16. The pretax cost of debt:A. Is based on the current yield to maturity of the firm's outstanding bonds.B. Is equal to the coupon rate on the latest bonds issued by a firm.C. Is equivalent to the average current yield on all of a firm's outstanding bonds.D. Is based on the original yield to maturity on the latest bonds issued by a firm.E. Has to be estimated as it cannot be directly observed in the market.
A. Is based on the current yield to maturity of the firm's outstanding bonds.
15. The capital asset pricing model approach to equity valuation:A. Is dependent upon the unsystematic risk of a security.B. Assumes the reward-to-risk ratio increases as beta increases.C. Can only be applied to dividend-paying firms.D. Assumes a firm's future risks will be higher than its current risks.E. Assumes the reward-to-risk ratio is constant.
E. Assumes the reward-to-risk ratio is constant.
14. Which one of the following statements related to the capital asset pricing model approach to equity valuation is correct? Assume the firm uses debt in its capital structure.A. This model considers a firm's rate of growth.B. The model applies only to non-dividend-paying firms.C. The model is dependent upon a reliable estimate of the market risk premium.D. The model generally produces the same cost of equity as the dividend growth model.E. This approach generally produces a cost of equity that equals the firm's overall cost of capital.
C. The model is dependent upon a reliable estimate of the market risk premium.
13. The dividend growth model:A. Is only as reliable as the estimated rate of growth.B. Can only be used if historical dividend information is available.C. Considers the risk that future dividends may vary from their estimated values.D. Applies only when a firm is currently paying dividends.E. Uses beta to measure the systematic risk of a firm.
A. Is only as reliable as the estimated rate of growth.
20. The capital structure weights used in computing a firm's weighted average cost of capital:A. Are based on the book values of the firm's debt and equity.B. Are based on the market values of the firm's debt and equity securities.C. Depend upon the financing obtained to fund each specific project.D. Remain constant over time unless the firm issues new securities.E. Are restricted to the firm's debt and common stock.
B. Are based on the market values of the firm's debt and equity securities.
19. The cost of preferred stock:A. Is equal to the dividend yield.B. Is equal to the yield to maturity.C. Is highly dependent on the dividend growth rate.D. Is independent of the stock's price.E. Decreases when tax rates increase.
A. Is equal to the dividend yield.
18. The cost of preferred stock is computed the same as the:A. Pretax cost of debt.B. Rate of return on an annuity.C. Aftertax cost of debt.D. Rate of return on a perpetuity.E. Cost of an irregular growth common stock.
D. Rate of return on a perpetuity.
17. Which one of these will increase a firm's aftertax cost of debt?A. a Decrease in the market value of the firm's outstanding bonds.B. a Decrease in the firm's tax rate.C. An increase in the bond's credit rating.D. An increase in the firm's beta.E. A Decrease in the market rate of interest.
B. a Decrease in the firm's tax rate.
22. The aftertax cost of debt:A. Varies inversely to changes in market interest rates.B. Will generally exceed the cost of equity if the relevant tax rate is zero.C. Will generally equal the cost of preferred if the tax rate is zero.D. Is unaffected by changes in the market rate of interest.E. Is highly dependent upon the firm's tax rate.
E. Is highly dependent upon the firm's tax rate.
21. Black River Tours has a capital structure of 55 percent common stock, 5 percent preferred stock, and 40percent debt. The firm has a 30 percent dividend payout ratio, a beta of 1.21, and a tax rate of 34 percent. Given this, which one of the following statements is correct?A. The after tax cost of debt will be greater than the current yield-to-maturity on the firm's outstanding bonds.B. The firm's cost of preferred is most likely less than the firm's actual cost of debt.C. The firm's cost of equity is unaffected by a change in the firm's tax rate.D. The cost of equity can only be estimated using the capital asset pricing model.E. The firm's weighted average cost of capital will remain constant as long as the firm's capital structure remains constant.
C. The firm's cost of equity is unaffected by a change in the firm's tax rate.
96. The market value balance sheet for MZ Toys reflects cash of $238,000, fixed assets of $420,000, debt of $210,000, and equity of $448,000. The firm declared a 15 percent stock dividend and tomorrow is the ex-dividend date (the chronology for a stock dividend is similar to that for a cash dividend). There are 15,000 shares outstanding. What is the ex-dividend stock price?A. $23.51B. $25.97C. $25.51D. $35.14E. $29.87
B. $25.97
89. Decline, Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 102.7 percent of face value. The issue makes semiannual payments and has an embedded cost of 9 percent annually. What is the aftertax cost of debt if the tax rate is 35 percent?A. 5.64 percentB. 5.90 percentC. 6.17 percentD. 7.37 percentE. 7.42 percent
A. 5.64 percent
2. The sources and uses of cash over a stated period of time are reflected on the:A. Income statement.B. Balance sheet.C. Tax reconciliation statement.D. Statement of cash flows.E. Statement of operating position.
D. Statement of cash flows.
3. A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:A. Total assets.B. Total equity.C. Net income.D. Taxable income.E. Sales.
E. Sales.
4. Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?A. Statement of standardization.B. Statement of cash flows.C. Common-base year statement.D. Common-size statement.E. Base reconciliation statement.
C. Common-base year statement.
5. Relationships determined from a firm's financial information and used for comparison purposes are known as:A. Financial ratios.B. Identities.C. Dimensional analysis.D. Scenario analysis.E. Solvency analysis.
A. Financial ratios.
93. Bruce & Co. expects its EBIT to be $149,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 34 percent. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?A. 18.57 percentB. 16.87 percentC. 17.76 percentD. 18.29 percentE. 18.86 percent
C. 17.76 percent
94. New Schools expects an EBIT of $87,000 every year forever. The firm currently has no debt, and its cost of equity is 14.6 percent. The firm can borrow at 7.4 percent and the corporate tax rate is 34 percent. What will the value of the firm be if it converts to 50 percent debt?A. $381,796.47B. $460,146.57C. $377,407.16D. $437,552.08E. $438,119.30
B. $460,146.57
8. Which one of the following is a source of cash for a non-tax-paying firm?A. Increase in accounts receivable.B. Increase in depreciation.C. Decrease in accounts payable.D. Increase in common stock.E. Increase in inventory.
D. Increase in common stock.
9. Which one of the following is a use of cash?A. Decrease in fixed assets.B. Decrease in inventory.C. Increase in long-term debt.D. Decrease in accounts receivables.E. Decrease in accounts payable.
E. Decrease in accounts payable.
89. Lamont Corp. uses no debt. The weighted average cost of capital is 11 percent. The current market value of the equity is $38 million and there are no taxes. What is EBIT?A. $3,423,000B. $3,508,600C. $3,781,100D. $3,898,700E. $4,180,000
E. $4,180,000
90. SLG Corp. is an all-equity firm with a weighted average cost of capital of 9.68 percent. The current market value of the equity is $27.5 million and the tax rate is 35 percent. What is EBIT?A. $6,180,000B. $2,821,194C. $4,095,385D. $1,730,300E. $9,943,182
C. $4,095,385
91. W.V. Trees, Inc. has a debt-equity ratio of 1.4. Its WACC is 10 percent, and its pretax cost of debt is 9 percent. The corporate tax rate is 33 percent. What is the firm's unlevered cost of equity capital?A. 12.38 percentB. 12.79 percentC. 13.68 percentD. 14.10 percentE. 14.45 percent
A. 12.38 percent
92. KN&J expects its EBIT to be $138,000 every year forever. The firm can borrow at 10 percent. KN&J currently has no debt and its cost of equity is 17.2 percent. The tax rate is 35 percent. What will the value of KN&J be if the firm borrows $50,000 and uses the loan proceeds to repurchase shares?A. $571,512B. $346,600C. $539,012D. $578,900E. $381,588
C. $539,012
85. Eastern Markets has no debt outstanding and a total market value of $154,000. Earnings before interest and taxes, EBIT, are projected to be $12,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 27 percent higher. If there is a recession, then EBIT will be 55 percent lower. The firm is considering a $20,000 debt issue with an interest rate of 6.5 percent. The proceeds will be used to repurchase shares of stock. There are currently 2,000 shares outstanding. Ignore taxes. What will be the percentage change in EPS if the economy enters a recessionary period?A. -62 percentB. -55 percentC. -58 percentD. -71 percentE. -46 percent
A. -62 percent
86. North Side, Inc. has no debt outstanding and a total market value of $175,000. Earnings before interest and taxes, EBIT, are projected to be $16,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 70 percent lower. The company is considering a $70,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 2,500 shares outstanding and the tax rate is 34 percent. What will be the percentage change in EPS if the economy has a strong expansion?A. 38.80 percentB. 41.26 percentC. 43.24 percentD. 50.45 percentE. 53.92 percent
C. 43.24 percent
87. Galaxy Products is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 175,000 shares of stock outstanding. Under Plan II, there would be 90,000 shares of stock outstanding and $1.4 million in debt. The interest rate on the debt is 7 percent and there are no taxes. What is the break-even EBIT?A. $287,878.78B. $201,764.71C. $351,111.11D. $233,333.33E. $341,414.14
B. $201,764.71
88. ABC and XYZ are identical firms in all respects except for their capital structure. ABC is all-equity financed with $480,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $240,000 and the interest rate on its debt is 9 percent. Both firms expect EBIT to be $58,400. Ignore taxes. The cost of equity for ABC is _____ percent, and for XYZ it is ______ percent.A. 12.17; 12.68B. 12.17; 13.33C. 12.17; 15.33D. 12.29; 12.68E. 12.29; 13.33
C. 12.17; 15.33
42. The Shoe Outlet has paid annual dividends of $.65, $.70, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $9a share. What is this firm's cost of equity?A. 8.74 percentB. 13.65 percentC. 10.38 percentD. 9.53 percentE. 11.79 percent
B. 13.65 percent
41. Chelsea Fashions is expected to pay an annual dividend of $1.10 a share next year. The market price of the stock is $21.80 and the growth rate is 4.5 percent. What is the firm's cost of equity?A. 9.77 percentB. 7.91 percentC. 9.24 percentD. 9.55 percentE. 10.54 percent
D. 9.55 percent
91. Drive-Up has sales of $31.4 million, total assets of $27.6 million, and total debt of $14.9 million. The profit margin is 3.7 percent. What is the return on equity?A. 6.85 percentB. 9.15 percentC. 11.08 percentD. 13.31 percentE. 14.21 percent
B. 9.15 percent
92. Corner Supply has a current accounts receivable balance of $246,000. Credit sales for the year just ended were $2,430,000. How many days on average did it take for credit customers to pay off their accounts during this past year?A. 44.29 daysB. 55.01 daysC. 55.50 daysD. 36.95 daysE. 41.00 days
D. 36.95 days
93. BL Industries has ending inventory of $302,800 and cost of goods sold for the year just ended was $1.41 million. On average, how long did a unit of inventory sit on the shelf before it was sold?A. 47.64 daysB. 22.18 daysC. 78.38 daysD. 61.78 daysE. 83.13 days
C. 78.38 days
94. Coulter Supply has a total debt ratio of .46. What is the equity multiplier?A. .89B. 1.17C. 1.47D. 1.85E. 2.17
D. 1.85
87. Dixie Supply has total assets with a current book value of $368,900 and a current replacement cost of $486,200. The market value of these assets is $464,800. What is the value of Tobin's Q?A. .79B. .76C. .96D. 1.26E. 1.05
C. .96
88. Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000 and the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock outstanding and a book value per share of $2.09. What is the market to book ratio?A. 2.75 timesB. 3.18 timesC. 3.54 timesD. 4.01 timesE. 4.20 times
A. 2.75 times
89. A firm has annual sales of $416,000, a price-earnings ratio of 18, and a profit margin of 3.7 percent. There are 12,000 shares of stock outstanding. What is the price-sales ratio?A. .97B. .67C. 1.08D. 1.15E. .86
B. .67
90. Lassiter Industries has annual sales of $328,000 with 8,000 shares of stock outstanding. The firm has a profit margin of 4.5 percent and a price-sales ratio of 1.20. What is the firm's price-earnings ratio?A. 21.9B. 17.4C. 18.6D. 26.7E. 24.3
D. 26.7
95. High Mountain Foods has an equity multiplier of 1.72, a total asset turnover of 1.16, and a profit margin of 4.5 percent. What is the return on equity?A. 11.94 percentB. 19.95 percentC. 12.96 percentD. 14.38 percentE. 8.98 percent
E. 8.98 percent
96. Lancaster Toys has a profit margin of 5.1 percent, a total asset turnover of 1.84, and a return on equity of 16.2 percent. What is the debt-equity ratio?A. .42B. .73C. .81D. .64E. .83
B. .73
43. Sweet Treats common stock is currently priced at $17.15 a share. The company just paid $1.22 per share as its annual dividend. The dividends have been increasing by 2.4 percent annually and are expected to continue doing the same. What is this firm's cost of equity?A. 9.41 percentB. 9.51 percentC. 8.47 percentD. 9.68 percentE. 9.82 percent
D. 9.68 percent
44. The common stock of Metal Molds has a negative growth rate of 1.2 percent and a required return of 17.5 percent. The current stock price is $12.20. What was the amount of the last dividend paid? A. $2.07B. $2.11C. $2.19D. $2.22E. $2.31
E. $2.31
45. Highway Express has paid annual dividends of $1.05, $1.10, $1.12, $1.15, and $1.25 over the past five years, respectively. What is the average dividend growth rate?A. 4.49 percentB. 3.60 percentC. 5.98 percentD. 2.47 percentE. 4.39 percent
A. 4.49 percent
46. Southern Home Cooking just paid its annual dividend of $.75 a share. The stock has a market price of $16.80 and a beta of 1.14. The return on the U.S. Treasury bill is 2.7 percent and the market risk premium is 7.1 percent. What is the cost of equity?A. 9.98 percentB. 10.04 percentC. 10.79 percentD. 10.37 percentE. 10.45 percent
C. 10.79 percent
47. National Home Rentals has a beta of 1.24, a stock price of $22, and recently paid an annual dividend of $.94 a share. The dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of return and a risk premium of 7.5 percent. What is the firm's cost of equity?A. 7.05 percentB. 8.67 percentC. 9.13 percentD. 10.30 percentE. 10.68 percent
E. 10.68 percent
48. Dee's Fashions has a growth rate of 5.2 percent and is equally as risky as the market while its stock is currently selling for $28 a share. The overall stock market has a return of 12.6 percent and a risk premium of 8.7 percent. What is the expected rate of return on this stock?A. 8.7 percentB. 9.2 percentC. 12.6 percentD. 11.3 percentE. 11.7 percent
C. 12.6 percent
49. Tidewater Fishing has a current beta of 1.08. The market risk premium is 7.9 percent and the risk-free rate of return is 3.2 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.16? A. .88 percentB. .63 percentC. 2.60 percentD. 3.12 percentE. 3.83 percent
B. .63 percent
50. Hydro Systems has 15-year bonds outstanding with a coupon rate of 6 percent. Interest is paid annually. The face amount of each bond is $1,000. What is the company's pretax cost of debt if the bonds currently sell for $1,080?A. 5.22 percentB. 4.42 percentC. 4.71 percentD. 5.36 percentE. 5.55 percent
A. 5.22 percent
51. Fashion Wear has bonds outstanding that mature in 12 years, pay interest annually, and have a coupon rate of 7.5 percent. These bonds have a face value of $1,000 and a current market price of $1,060. What is the company's aftertax cost of debt if its tax rate is 35 percent?A. 6.85 percentB. 6.50 percentC. 4.39 percentD. 5.21 percentE. 5.53 percent
C. 4.39 percent
52. Handy Man, Inc., has zero coupon bonds outstanding that mature in eight years. The bonds have a face value of $1,000 and a current market price of $640. What is the pretax cost of debt? (Use semiannual compounding.)A. 6.55 percentB. 5.09 percentC. 5.66 percentD. 7.31 percentE. 7.48 percent
C. 5.66 percent
1. Green Roof Motels has more cash on hand than its operations require. Thus, the firm has decided to pay out some of its earnings in the form of cash to its shareholders. What are these payments to shareholders called?A. DividendsB. Stock paymentsC. RepurchasesD. Payments-in-kindE. Stock splits
A. Dividends
91. The owners' equity accounts for Buel Industries include common stock of $16,000 with a $1 par value, capital surplus of $174,000, and retained earnings of $568,500. How many shares will be outstanding and what will be the par value per share if the firm declares a 1-for-3 reverse stock split?A. 5,333; $1.00B. 5,333; $3.00C. 5,333; $.33D. 48,000; $.33E. 48,000; $1.00
B. 5,333; $3.00
40. Why does the tax amount need adjusted when valuing a firm using the cash flow from assets approach?A. The tax effect of the dividend payments must be eliminated.B. Only straight-linedepreciation can be used when computing taxes for valuation purposes.C. Taxes must be computed for valuation purposes based solely on the marginal tax rate.D. The tax effect of the interest expense must be removed.E. The taxes must be computed for valuation purposes based on the average tax rate for the past 10 years.
D. The tax effect of the interest expense must be removed.
39. When computing the adjusted cash flow from assets the tax amount is calculated as:A. EBT x Tc.B. (EBT - Depreciation) x Tc. C. (EBIT + Depreciation - Change in NWC - Capital spending) x Tc.D. EBIT x Tc.E. (EBIT - Depreciation - Change in NWC - Capital spending) x Tc.
D. EBIT x Tc.
82. East Coast Marina has 148,000 shares of stock outstanding. The current market value of the firm is $11.68 million. The company has capital in excess of par value of $1.7 million and a common stock account value of $148,000. The company is planning a stock split of 5-for-3 What will the market price per share be after the split?A. $28.67B. $47.35C. $66.67D. $116.67E. $131.53
B. $47.35
59. Naylor's is an all-equity firm with 60,000 shares of stock outstanding at a market price of $50 a share. The company has earnings before interest and taxes of $102,000. Naylor's has decided to issue $825,000 of debt at 7.5 percent and use the proceeds to repurchase shares. Currently, you own 500 shares of Naylor's stock. How many shares of this stock will you continue to own if you unlever this position? Assume you can loan out funds at 7.5 percent interest. Ignore taxes.A. 322.2 sharesB. 350.0 sharesC. 362.5 sharesD. 425.5 sharesE. 502.8 shares
C. 362.5 shares
60. Pewter & Glass is an all-equity firm that has 145,000 shares of stock outstanding. The company is in the process of borrowing $750,000 at 6.8 percent interest to repurchase 8,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?A. $14,702,500B. $13,593,750C. $14,250,000D. $12,500,000E. $12,648,250
B. $13,593,750
61. The Jean Outlet is an all-equity firm that has 152,000 shares of stock outstanding. The company has decided to borrow $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder. What is the total value of the firm if you ignore taxes?A. $18,387,702B. $18,500,000C. $19,666,667D. $21,413,333E. $22,293,333
E. $22,293,333
62. Noelle owns 19 percent of The Toy Factory. She has decided to retire and wants to sell all of her shares in this closely held, all-equity firm. The other shareholders have agreed to have the firm borrow the $487,000 needed to repurchase her shares of stock. What is the total market value of the firm? Ignore taxes.A. $2,563,158B. $2,489,111C. $2,608,515D. $2,549,079E. $2,619,307
A. $2,563,158
55. Holly's is currently an all-equity firm that has 12,000 shares of stock outstanding at a market price of $36 a share. The firm has decided to leverage its operations by issuing $120,000 of debt at an interest rate of 7.2 percent. This new debt will be used to repurchase shares of the outstanding stock. The restructuring is expected to increase the earnings per share. What is the minimum level of earnings before interest and taxes that the firm is expecting? Ignore taxes.A. $31,104B. $40,516C. $42,000D. $37,141E. $45,020
A. $31,104
56. Paradise Travels is an all-equity firm that has 6,000 shares of stock outstanding at a market price of $34 a share. The firm's management has decided to issue $40,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 7 percent. What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.A. $2.46B. $2.38C. $1.67D. $1.43E. $1.94
B. $2.38
57. Miller's Dry Goods is an all-equity firm with 50,000 shares of stock outstanding at a market price of $40 a share. The company's earnings before interest and taxes are $142,000. Miller's has decided to add leverage to its financial operations by issuing $500,000 of debt at 6 percent interest and using the proceeds to repurchase shares of stock. You own 500 shares of Miller's stock and can loan out funds at 6 percent interest. How many shares of Miller's stock must you sell to offset the leverage that Miller's is assuming? (Assume you loan out all of the funds you receive from the sale of stock. Ignore taxes.)A. 133 sharesB. 100 sharesC. 125 sharesD. 148 sharesE. 150 shares
C. 125 shares
58. You currently own 900 shares of JKL which is an all-equity firm with 250,000 shares of stock outstanding at a market price of $20 a share. The company's earnings before interest and taxes are $120,000. JKL has decided to issue $1 million of debt at 6.5 percent interest and use the proceeds to repurchase shares of stock. How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 6.5 percent interest?A. 120 sharesB. 150 sharesC. 200 sharesD. 180 sharesE. 250 shares
D. 180 shares
63. Winter's Toyland has a debt-equity ratio of .65. The pretax cost of debt is 8.7 percent and the required return on assets is 16.1 percent. What is the cost of equity if you ignore taxes?A. 19.31 percentB. 19.74 percentC. 20.29 percentD. 20.46 percentE. 20.91 percent
E. 20.91 percent
64. Roy & Daughter has a cost of equity of 13.9 percent and a pretax cost of debt of 6.8 percent. The required return on the assets is 12.9 percent. What is the firm's debt-equity ratio based on M&M II with no taxes?A. .164B. .333C. .408D. .108E. .229
A. .164
16. The absolute priority rule determines:A. When a firm must be declared officially bankrupt.B. How a distressed firm is reorganized.C. Which judge is assigned to a particular bankruptcy case.D. How long a reorganized firm is allowed to remain under bankruptcy protection.E. Which parties receive payment first in a bankruptcy proceeding.
E. Which parties receive payment first in a bankruptcy proceeding.
39. Which one of the following statements is correct?A. A reduction in personal tax rates tends to lead to lower dividends.B. Dividends tend to fluctuate significantly from quarter to quarter.C. Earnings growth tends to lag dividend growth.D. Dividend payments are highly concentrated in a relatively small set of large firms.E. Non-dividend-paying firms are generally more apt to commence paying regular dividends than to implement a stock repurchase program.
D. Dividend payments are highly concentrated in a relatively small set of large firms.
40. Which one of the following statements appears to be supported by the current dividend policies of U.S. industrial firms?A. Firms tend to increase the dividend amount per share, even when it's unclear if the increase can be maintained.B. Investors no longer react to changes, either up or down, in dividends.C. Newer, high-growth firms tend to pay larger dividends than mature firms.D. Dividends are still viewed by shareholders as a signal of a firm's future outlook.E. Managers are no longer hesitant to lower dividend payments.
D. Dividends are still viewed by shareholders as a signal of a firm's future outlook.
31. S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last 10 quarters. Which one of the following is most apt to cause the firm to reduce the amount of its next dividend payment?A. Decrease in the next quarter's revenue.B. Decrease in the next quarter's net income.C. Loss of a major customer which lowers the firm's outlook for the next few years.D. Major lump sum cash outflow next month to settle a class action product liability lawsuit on a product that is no longer produced.E. Decrease in the number of new projects under consideration as compared to last year.
C. Loss of a major customer which lowers the firm's outlook for the next few years.
32. The dividend market is in equilibrium when:A. All firms adopt a low dividend policy.B. Half of the firms adopt a low dividend policy and half adopt a high dividend policy.C. All clienteles are satisfied.D. Dividends remain constant and no special dividends are declared.E. The total amount of the annual dividends is equal to the net income for the year.
C. All clienteles are satisfied.
33. Which one of the following statements related to stock repurchases is correct?A. An open market stock repurchase increases the total wealth of a shareholder if you ignore taxes, costs, and market imperfections.B. Targeted repurchases must be offered to all shareholders but can be done in steps such that only a portion of the shareholders have the option to sell at any one point in time.C. When a firm wishes to repurchase shares in the open market, it will do so in a special trading session that is set up by the SEC.D. A firm may spend more cash over the course of a year on stock repurchases than it does on cash dividends.E. Tender offer prices must be set equal to the opening market price on the day the tender offer is announced.
D. A firm may spend more cash over the course of a year on stock repurchases than it does on cash dividends.
34. Which one of the following statements related to stock repurchases is correct?A. U.S. industrial firms have increased their stock repurchases every year for each of the past 20 years.B. The tax law change in May 2003 led to a huge increase in stock repurchases and a reduction in dividend payments.C. A tender offer indicates that a firm is willing and able to purchase however many shares the current shareholders wish to sell.D. All stock repurchases must be identified as such to the selling party.E. Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.
E. Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.
35. A stock repurchase program:A. Requires all shareholders to sell a fraction of their shares.B. Is preferred over a high-dividend program only by tax-exempt shareholders.C. Decreases both the number of shares outstanding and the market price per share.D. Has no effect on a firm's financial statements.E. Is essentially the same as a cash dividend program provided there are no taxes or other costs.
E. Is essentially the same as a cash dividend program provided there are no taxes or other costs.
36. Which one of the following is a result of a stock repurchase?A. Increase in the number of shares outstanding.B. Increase in the market price per share.C. Increase in the total equity of the repurchasing firm.D. Decrease in EPS.E. PE ratio equal to that resulting from a comparable cash dividend.
E. PE ratio equal to that resulting from a comparable cash dividend.
37. If you ignore taxes and costs, a stock repurchase will:A. Increase the total assets of the firm.B. Increase the earnings per share.C. Increase the total equity of the firm.D. Reduce the PE ratio more than an equivalent stock dividend.E. Not affect the firm's total assets.
B. Increase the earnings per share.
38. Aaron owns 1,600 shares of LP Gas stock which he purchased six years ago at a price of $18 a share. Today, these shares are selling for $26 each. Aaron is subject to a tax rate of 20 percent on both his dividend income and his capital gains. Ignore costs. From Aaron's point of view, a stock repurchase today:A. Is equivalent to a cash dividend.B. Is more desirable than a cash dividend in respect to taxes.C. Will result in the same tax liability as an equivalent cash dividend.D. Is more highly taxed than a cash dividend.E. Is totally unacceptable to him.
B. Is more desirable than a cash dividend in respect to taxes.
66. Kelso's has a debt-equity ratio of .6 and a tax rate of 35 percent. The firm does not issue preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent. What is the weighted average cost of capital?A. 10.46 percentB. 10.67 percentC. 10.86 percentD. 11.38 percentE. 11.57 percent
C. 10.86 percent
65. AZ Products has 375,000 shares of common stock outstanding at a market price of $32 a share. Next year's annual dividend is expected to be $1.50 a share and the dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds have a pretax yield of 7.65 percent and sell at 98.6 percent of face value. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital?A. 5.41 percentB. 6.06 percentC. 7.52 percentD. 5.58 percentE. 6.59 percent
B. 6.06 percent
64. Central Systems desires a weighted average cost of capital of 12 percent. The firm has an aftertax cost of debt of 5.4 percent and a cost of equity of 15.2 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?A. 2.06B. 1.78C. .56D. .48E. .67
D. .48
36. Lenders probably have the most interest in which one of the following sets of ratios?A. Return on assets and profit margin.B. Long-term debt and times interest earned.C. Price-earnings and debt-equity.D. Market-to-book and times interest earned.E. Return on equity and price-earnings.
B. Long-term debt and times interest earned.
63. Wayco Industrial Supply has a pretax cost of debt of 7.6 percent, a cost of equity of 16.8 percent, and a cost of preferred stock of 9.1 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital?A. 15.18 percentB. 10.84 percentC. 11.32 percentD. 12.60 percentE. 14.88 percent
E. 14.88 percent
70. Silo Mills is an all-equity financed firm that has a beta of 1.14 and a cost of equity of 12.8 percent. The risk-free rate of return is 2.8 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of six years. What discount rate should be assigned to this project?A. 13.33 percentB. 11.84 percentC. 13.62 percentD. 13.84 percentE. 12.09 percent
B. 11.84 percent
69. The Market Outlet is an all-equity financed firm with a beta of 1.38 and a cost of equity of 14.945 percent. The risk-free rate of return is 4.25 percent. What discount rate should the firm assign to a new project that has a beta of 1.25?A. 13.54 percentB. 13.72 percentC. 13.94 percentD. 14.14 percentE. 14.36 percent
C. 13.94 percent
68. Delta Lighting has 30,000 shares of common stock outstanding at a market price of $15 a share. This stock was originally issued at $31 per share. The firm also has a bond issue outstanding with a total face value of $280,000 which is selling for 86 percent of par. The cost of equity is 13 percent while the aftertax cost of debt is 6.9 percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted average cost of capital?A. 10.07 percentB. 10.87 percentC. 12.36 percentD. 13.29 percentE. 13.47 percent
B. 10.87 percent
67. Granite Works maintains a debt-equity ratio of .65 and has a tax rate of 32 percent. The pretax cost of debt is 9.8 percent. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share. The current market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent. This year, the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2 percent each year. Using an average expected cost of equity, what is the weighted average cost of capital?A. 8.44 percentB. 8.78 percentC. 8.96 percentD. 9.13 percentE. 9.20 percent
E. 9.20 percent
25. Which one of the following statements related to WACC is correct for a firm that uses debt in its capital structure?A. The WACC should decrease as the firm's debt-equity ratio increases.B. The weight assigned to preferred stock decreases as the market value of the stock increases.C. The WACC will decrease as the corporate tax rate decreases.D. The weight of equity is based on the number of shares outstanding and the book value per share.E. The WACC will remain constant unless a firm retires some of its debt.
A. The WACC should decrease as the firm's debt-equity ratio increases.
26. If a firm uses its WACC as the discount rate for all of the projects it undertakes, then the firm will tend to do all of the following except:A. Reject some positive net present value projects.B. Lower the average risk level of the firm over time.C. Increase the firm's overall level of risk over time.D. Accept some negative net present value projects.E. Favor high risk projects over low risk projects.
B. Lower the average risk level of the firm over time.
23. The weighted average cost of capital for a firm can depend on all of the following except the:A. Firm's beta.B. Coupon rate of the outstanding bonds.C. Growth rate of the firm's dividends.D. Firm's marginal tax rate.E. Standard deviation of the firm's common stock.
E. Standard deviation of the firm's common stock.
71. Travis & Sons has a capital structure that is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pretax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The tax rate is 39 percent. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,000, and $116,000 over the next three years, respectively. What is the projected net present value of this project?A. $68,211.04B. $68,879.97C. $69,361.08D. $74,208.18E. $76,011.23
E. $76,011.23
29. The discount rate assigned to an individual project should be based on the:A. Firm's weighted average cost of capital.B. Actual sources of funding used for the project.C. Average of the firm's overall cost of capital for the past five years.D. Current risk level of the overall firm.E. Risks associated with the use of the funds required by the project.
E. Risks associated with the use of the funds required by the project.
30. Assigning discount rates to individual projects based on the risk level of each project:A. May cause the firm's overall weighted average cost of capital to either increase or decrease over time.B. Will prevent the firm's overall cost of capital from changing over time.C. Will cause the firm's overall cost of capital to decrease over time.D. Decreases the value of the firm over time.E. Negates the firm's goal of creating the most value for the shareholders.
A. May cause the firm's overall weighted average cost of capital to either increase or decrease over time.
27. Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should:A. Allocate more funds to Division A since it is the largest of the two divisions.B. Fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values.C. Allocate the company's funds to the projects with the highest net present values based on the firm's weighted average cost of capital.D. Assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.E. Fund the highest net present value projects from each division based on an allocation of 70 percent of the funds to Division A and 30 percent of the funds to Division B.
D. Assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
18. Which of the following ratios are measures of a firm's liquidity?I. Cash coverage ratio. II. Interval measure.III. Debt-equity ratio.IV. Quick ratio.
II and IV only.
28. Jenner's is a multi division firm that uses its overall WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to:A. Receive less project funding if its line of business is riskier than that of the other divisions.B. Avoid risky projects so it can receive more project funding.C. Become less risky over time based on the projects that are accepted.D. Have an equal probability with all the other divisions of receiving funding.E. Prefer higher risk projects over lower risk projects.
E. Prefer higher risk projects over lower risk projects.
68. A firm has a debt-equity ratio of 62 percent, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income?A. $28,079B. $19,197C. $50,159D. $40,451E. $52,418
84. Big Tree Lumber has earnings per share of $1.36. The firm's earnings have been increasing at an average rate of 2.9 percent annually and are expected to continue doing so. The firm has 21,500 shares of stock outstanding at a price per share of $23.40. What is the firm's PEG ratio?A. 2.27B. 11.21C. 4.85D. 3.94E. 5.93
E. 5.93
66. Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an equity multiplier of 1.49. What is the return on equity?A. 17.14 percentB. 18.63 percentC. 19.67 percentD. 21.69 percentE. 22.30 percent
B. 18.63 percent
67. Taylor's Men's Wear has a debt-equity ratio of 56 percent, sales of $829,000, net income of $38,300, and total debt of $206,300. What is the return on equity?A. 3.32 percentB. 10.40 percentC. 5.74 percentD. 18.57 percentE. 14.16 percent
B. 10.40 percent
64. Hungry Lunch has net income of $68,710, a price-earnings ratio of 13.7, and earnings per share of $.24. How many shares of stock are outstanding?A. 13,558B. 20,897C. 185,745D. 171,000E. 286,292
E. 286,292
65. A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 21.3, and a book value per share of $7.92. What is the market-to-book ratio?A. 2.12B. 1.84C. 1.39D. 2.45E. 2.69
A. 2.12
62. Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of 9.68 percent. The firm has a total debt ratio of 64 percent. What is the return on equity?A. 13.09 percentB. 16.04 percentC. 21.03 percentD. 18.56 percentE. 19.64 percent
E. 19.64 percent
63. Bernice's has $823,000 in sales. The profit margin is 3.9 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $15. What is the price-earnings ratio?A. 3.51B. 3.98C. 4.42D. 3.15E. 4.27
A. 3.51
85. Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings ratio of 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?A. 2.48 percentB. 1.06 percentC. 3.32 percentD. 5.20 percentE. 10.60 percent
C. 3.32 percent
86. A firm has total assets with a current book value of $71,600, a current market value of $82,300, and a current replacement cost of $90,400. What is the value of Tobin's Q?A. .85B. .87C. .90D. .94E. .91
E. .91
41. A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action?A. Equity multiplier.B. Total asset turnover.C. Profit margin.D. Return on assets.E. Return on equity.
A. Equity multiplier.
40. The DuPont identity can be used to help managers answer which of the following questions related to a firm's operations?I. How many sales dollars has the firm generated per each dollar of assets?II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity?III. How much net profit is a firm generating per dollar of sales?IV. Does the firm have the ability to meet its debt obligations in a timely manner?
I, II, and III only.
35. The price-sales ratio is especially useful when analyzing firms that have which one of the following?A. Volatile market prices.B. Negative earnings.C. Positive PEG ratios.D. A negative Tobin's Q.E. Increasing sales.
B. Negative earnings.
34. Tobin's Q relates the market value of a firm's assets to which one of the following?A. Initial cost of creating the firm.B. Current book value of the firm.C. Average asset value of similar firms.D. Average market value of similar firms.E. Today's cost to duplicate those assets.
E. Today's cost to duplicate those assets.
33. Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?A. Al's has more net income than Ben's.B. Ben's is increasing its earnings at a faster rate than the Al's.C. Al's has a higher market value per share than does Ben's.D. Ben's has a lower market-to-book ratio than Al's.E. Al's has a higher earnings growth rate than Ben's.
B. Ben's is increasing its earnings at a faster rate than the Al's.
32. Which one of the following will decrease if a firm can decrease its operating costs, all else constant?A. Return on equity.B. Return on assets.C. Profit margin.D. Total asset turnover.E. Price-earnings ratio.
E. Price-earnings ratio.
39. Which of the following can be used to compute the return on equity? I. Profit margin x Return on assetsII. Return on assets x Equity multiplierIII. Profit margin x Total asset turnover x Debt-equity ratioIV. Net income / Total assets
II only.
38. An increase in which of the following will increase the return on equity, all else constant?I. Total asset turnover.II. Net income.III. Total assets.IV. Debt-equity ratio.
I, II, and IV only.
37. Which one of the following accurately describes the three parts of the DuPont identity?A. Operating efficiency, equity multiplier, and profitability ratio.B. Financial leverage, operating efficiency, and profitability ratio.C. Equity multiplier, profit margin, and total asset turnover.D. Debt-equity ratio, capital intensity ratio, and profit margin.E. Return on assets, profit margin, and equity multiplier.
C. Equity multiplier, profit margin, and total asset turnover.
87. The Olive Vase has 62,000 shares of stock outstanding with a par value of $1 per share and a market value of $17 a share. The company just announced a 3-for-5 reverse stock split. Currently, you own 600 shares of this stock. What will the total value of your shares be after the reverse stock split?A. $3,300B. $6,120C. $10,200D. $4,080E. $17,000
C. $10,200
68. Lester's has expected earnings before interest and taxes of $69,750, an unlevered cost of capital of 12.6 percent, and debt with both a book and face value of $78,000. The debt has a coupon rate of 5.75 percent. The tax rate is 34 percent. What is the value of the firm?A. $245,056.82B. $347,600.00C. $391,877.14D. $264,806.10E. $371,348.92
C. $391,877.14
65. The Corner Bakery has a debt-equity ratio of .62. The firm's required return on assets is 14.2 percent and its cost of equity is 16.1 percent. What is the pretax cost of debt based on M&M Proposition II with no taxes?A. 7.10 percentB. 10.68 percentC. 11.14 percentD. 17.56 percentE. 18.40 percent
C. 11.14 percent
86. Purvis Lawn Products has 18,000 shares of stock outstanding at a market price of $5.50 a share. What will the market price per share be if the company does a 1-for-4 reverse stock split?A. $1.38B. $5.50C. $11.00D. $16.50E. $22.00
E. $22.00
71. Mountain Groves has an unlevered cost of capital of 12.8 percent, a cost of debt of 7.8 percent, and a tax rate of 34 percent. What is the target debt-equity ratio if the targeted cost of equity is 15.51 percent?A. .54B. .69C. .82D. .48E. .73
C. .82
72. Johnson Tire Distributors has debt with both a face and a market value of $12,000. This debt has a coupon rate of 6 percent and pays interest annually. The expected earnings before interest and taxes are $2,100, the tax rate is 30 percent, and the unlevered cost of capital is 11.7 percent. What is the firm's cost of equity?A. 22.46 percentB. 22.87 percentC. 23.20 percentD. 23.59 percentE. 25.14 percent
C. 23.20 percent
81. The Mining Co. has 20,000 shares of stock outstanding. The current market value of the firm is $328,000. The company has retained earnings of $27,000, capital in excess of par value of $160,000, and a common stock account value of $40,000. The company is planning a reverse stock split of 2-for-5. What will the par value per share be after the split?A. $.15B. $.20C. $1.00D. $2.50E. $5.00
E. $5.00
14. The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:A. The static theory of capital structure.B. M&M Proposition I, with taxes.C. M&M Proposition II, with taxes.D. The pecking-order theory.E. The open markets theorem.
A. The static theory of capital structure.
13. The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.A. FlotationB. Direct bankruptcyC. Indirect bankruptcyD. Financial solvencyE. Capital structure
C. Indirect bankruptcy
12. The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs.A. FlotationB. IssueC. Direct bankruptcyD. Indirect bankruptcyE. Unlevered
C. Direct bankruptcy
11. The unlevered cost of capital refers to the cost of capital for:A. A privately owned entity.B. An all-equity firm.C. A governmental entity.D. A private individual.E. A corporate shareholder.
B. An all-equity firm.
10. Westover Mills reduced its taxes last year by $680 by increasing its interest expense by $2,000. Which one of the following terms is used to describe this tax savings?A. Interest tax shieldB. Interest creditC. Homemade leverage shieldD. Current tax yieldE. Tax-loss interest
A. Interest tax shield
9. Which one of the following is the equity risk related to a firm's capital structure policy?A. MarketB. SystematicC. StaticD. BusinessE. Financial
E. Financial
8. Which one of the following is the equity risk that is most related to the daily operations of a firm?A. Market riskB. Systematic riskC. Extrinsic riskD. Business riskE. Financial risk
D. Business risk
7. Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure?A. Static Theory of capital structureB. M&M Proposition IC. M&M Proposition IID. Homemade leverageE. Pecking-order theory
C. M&M Proposition II
6. Which one of the following states that the value of a firm is unrelated to the firm's capital structure?A. Homemade leverage.B. M&M Proposition I, no tax.C. M&M Proposition II, no tax.D. Pecking-order theory.E. Static theory of capital structure.
B. M&M Proposition I, no tax.
5. Homemade leverage is:A. The incurrence of debt by a corporation in order to pay dividends to shareholders.B. The exclusive use of debt to fund a corporate expansion project.C. The use of personal borrowing to alter the individual's degree of financial leverage.D. Best defined as an increase in a firm's debt owed to local lenders.E. The term used to describe the capital structure of a levered firm.
C. The use of personal borrowing to alter the individual's degree of financial leverage.
98. You own 1,200 shares of stock in A-Z Tours. You will receive a dividend of $.65 in one year. In two years, A-Z will pay a liquidating dividend of $35 per share. The required return is 16 percent. If you only want $200 total in dividends in the first year, what will be your homemade dividend in the second year?A. $35,696B. $40,764C. $42,673D. $61,402E. $63,878
C. $42,673
3. A $.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of business is called a:A. RepurchaseB. Liquidating dividendC. Regular cash dividendD. Special dividendE. Extra cash dividend
C. Regular cash dividend
3. Which one of these statements is correct?A. Capital structure has no effect on shareholder value.B. The optimal capital structure occurs when the cost of equity is minimized.C. The optimal capital structure maximizes shareholder value.D. Shareholder value is maximized when WACC is also maximized.E. Unlevered firms have more value than levered firms when firms are profitable.
C. The optimal capital structure maximizes shareholder value.
8. Which one of the following refers to the ability of shareholders to undo a firm's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock?A. Perfect foresight modelB. PersonalizationC. RecapitalizationD. Offsetting leverageE. Homemade dividend
E. Homemade dividend
7. Dividend payments are distributed on which one of the following dates?A. Ex-rights dateB. Ex-dividend dateC. Date of recordD. Date of paymentE. Declaration date
D. Date of payment
4. The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a cash dividend of $.42 a share next month. In relation to this dividend, today is referred to as which one of the following dates?A. Decision dateB. Date-of-recordC. Declaration dateD. Payment dateE. Ex-dividend date
C. Declaration date
97. You own 1,000 shares of stock in Avondale Corporation. You will receive a dividend of $1.04 per share in one year. In two years, Avondale will pay a liquidating dividend of $37.50 per share. The required return on Avondale stock is 15.8 percent. What will your dividend income be this year if you use homemade dividends to create two equal annual dividend payments?A. $19,270B. $16,712C. $18,667D. $17,935E. $20,400
D. $17,935
2. Frozen Foods just paid out $3.62 a share to its shareholders. The cash for these payments came from a large sale of assets, not from any earnings of the firm. What are these payments to shareholders called?A. DividendsB. DistributionsC. RepurchasesD. Payments-in-kindE. Stock splits
B. Distributions
95. The market value balance sheet for Cherry Pie Corp. reflects a cash of $22,000, fixed assets of $209,000, and equity of $231,000. There are 5,000 shares of stock outstanding with a par value of $1 per share. The company has announced that it is going to repurchase $18,000 worth of stock. What will the price of the stock be after this repurchase?A. $46.20B. $36.60C. $39.20D. $42.60E. $43.80
A. $46.20
94. The market value balance sheet for Apple Pie Corp. reflects cash of $38,000, fixed assets of $221,000, and equity of $259,000. There are 8,000 shares of stock outstanding with a par value of $1 per share. The company has declared a dividend of $1.23 per share. The stock goes ex dividend tomorrow. Ignore any tax effects. What will be the price of the stock tomorrow morning?A. $32.38B. $36.20C. $31.15D. $32.15E. $31.38
C. $31.15
93. Glendale Paving currently has 212,000 shares of stock outstanding that sell for $44 per share. Assume no market imperfections or tax effects exist. What will be the new share price if the firm declares a stock dividend of 25 percent?A. $55.00B. $32.00C. $33.75D. $35.20E. $40.00
D. $35.20
92. The Turtle Cave currently has 160,000 shares of stock outstanding that sell for $60 per share. Assume no market imperfections or tax effects exist. What will be the new share price if the firm declares a stock dividend of 10 percent?A. $52.17B. $54.55C. $60.00D. $64.50E. $69.00
B. $54.55
5. The ex-dividend date is defined as _____ business day(s) before the date of record.A. 1B. 2C. 3D. 5E. 10
B. 2
95. Deep Mines has 14 million shares of common stock outstanding with a beta of 1.15 and a market price of $42 a share. There are 900,000 shares of 9 percent preferred stock outstanding valued at $80 a share. The 10 percent semiannual bonds have a face value of $1,000 and are selling at 91 percent of par. There are 220,000 bonds outstanding that mature in 17 years. The market risk premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm's tax rate is 32 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project?A. 14.59 percentB. 14.72 percentC. 15.17 percentD. 15.54 percentE. 13.15 percent
E. 13.15 percent
96. Suppose your company needs $26 million to build a new assembly line. Your target debt-equity ratio is .45. The flotation cost for new equity is 9.9 percent, but the floatation cost for debt is only 4.3 percent. What is the true cost of building the new assembly line after taking flotation costs into account?A. $27.82 millionB. $28.31 millionC. $22.07 millionD. $26.12 millionE. $28.12 million
B. $28.31 million
93. Fama's Llamas has a weighted average cost of capital of 9.5 percent. The company's cost of equity is 15.5 percent, and its pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What is the company's target debt-equity ratio?A. 0.89B. 0.92C. 0.98D. 1.01E. 1.54
E. 1.54
94. Dee's Toys has a target debt-equity ratio of .55. Its WACC is 12.4 percent and the tax rate is 34 percent. What is the cost of equity if the aftertax cost of debt is 5.5 percent?A. 15.75 percentB. 15.84 percentC. 14.41 percentD. 14.79 percentE. 16.20 percent
E. 16.20 percent
1. Which one of these actions generally occurs first in a bankruptcy reorganization?A. Filing proofs of claim.B. Dividing creditors into classes.C. Confirming the reorganization plan.D. Distributing cash, property, and securities to creditors.E. Submitting a reorganization plan.
A. Filing proofs of claim.
2. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, how long after a firm files for bankruptcy protection do creditors have to wait before submitting their own reorganization plan to the court?A. 60 daysB. 45 daysC. 180 daysD. 12 monthsE. 18 months
C. 180 days
1. Activities of a firm that require the spending of cash are known as:A. Sources of cash.B. Uses of cash.C. Cash collections.D. Cash receipts.E. Cash on hand.
B. Uses of cash.
98. Franktown Motors is expected to have an EBIT of $2.2 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $158,000, $92,000, and $114,000, respectively. All are expected to grow at 15 percent per year for four years. The firm currently has $12 million in debt and 750,000 shares outstanding. After year 5, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The company's WACC is 8.7 percent and the tax rate is 34 percent. What is the price per share of the company's stock?A. $27.82B. $29.34C. $22.07D. $26.12E. $16.47
B. $29.34
10. Which one of the following is a source of cash?A. Repurchase of common stockB. Acquisition of debtC. Purchase of inventoryD. Payment to a supplierE. Granting credit to a customer
B. Acquisition of debt
10. The common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to by which one of the following terms?A. Information content effectB. Clientele effectC. Investor effectD. Distribution effectE. Market reaction effect
B. Clientele effect
9. What is the information content effect?A. Any type of new information that causes a firm to cease paying dividends.B. Any news announcement that was anticipated and thus produces no reaction from investors.C. The primary contributing data that helps directors determine the amount of a particular dividend payment.D. Any type of reaction from a shareholder in response to a news announcement related to the stock issuer.E. The financial market's reaction to a change in the amount of a firm's dividend.
E. The financial market's reaction to a change in the amount of a firm's dividend.
97. River Walk Tours is expected to have an EBIT of $354,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $24,000, $2,000, and $33,000, respectively. All are expected to grow at 7 percent per year for three years. After year 4, the adjusted cash flow from assets is expected to grow at 3.2 percent indefinitely. The company's WACC is 9.2 percent and the tax rate is 34 percent. What is the terminal value of the firm's cash flows?A. $3,992,419B. $4,691,189C. $3,711,052D. $4,008,051E. $4,123,008
B. $4,691,189
99. Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case, $5,500 would be spent. Current earnings are $1 per share, and the stock currently sells for $27 per share. There are 2,500 shares outstanding. Ignore taxes and other imperfections. You own one share of stock in this company. If the company issues the dividend, your total investment will be worth ____ as compared to ____ if the company opts for a share repurchase.A. $26; $27B. $27; $26C. $24.80; $27D. $23; $33E. $27; $27
E. $27; $27
105. Which of these are factors to consider when comparing utility firms that generate electric power and have the same SIC code? I. Type of ownership.II. Regulatory considerations.III. Fiscal year end.IV. Methods of power generation.
I, II, III, and IV.
100. Stone Walls has a long-term debt ratio of.6 and a current ratio of 1.2. Current liabilities are $800, sales are $7,800, profit margin is 6.5 percent, and return on equity is 15.5 percent. What is the amount of the firm's net fixed assets?A. $8,880.15B. $8,017.43C. $7,666.67D. $5,848.15E. $8,977.43
B. $8,017.43
99. Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days' sales in receivables?A. 21.90 daysB. 27.56 daysC. 33.18 daysD. 35.04 daysE. 36.19 days
C. 33.18 days
98. Canine Supply has sales of $2,800, total assets of $1,900, and a debt-equity ratio of .5. Its return on equity is 15 percent. What is the net income?A. $210B. $130C. $240D. $350E. $190
E. $190
97. Best-Ever Chicken has a debt-equity ratio of .94. Return on assets is 8.5 percent, and total equity is $520,000. What is the net income?A. $44,200B. $88,880C. $85,748D. $41,548E. $74,909
C. $85,748
104. Which one of these correctly expresses the calculation of the common-size, base year value of inventory for 2015? Assume 2014 is the base year.A. 2015 inventory / 2015 Total assetsB. 2015 inventory / 2014 inventoryC. (2015 inventory / 2015 total assets) / (2014 inventory / 2014 total assets) )D. (2015 inventory / 2014 inventory) / (2015 total assets / 2014 total assets)E. (2015 inventory / 2015 sales) / (2014 inventory / 2014 sales)
C. (2015 inventory / 2015 total assets) / (2014 inventory / 2014 total assets) )
103. Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 3.2, and a current ratio of 2.9. What is the cost of goods sold?A. $980,000B. $1,060,000C. $1,200,000D. $1,400,000E. $1,560,000
D. $1,400,000
102. The Docksider has net income for the most recent year of $24,650. The tax rate was 15 percent. The firm paid $1,800 in total interest expense and deducted $2,900 in depreciation expense. What was the cash coverage ratio for the year?A. 20.48 timesB. 11.48 timesC. 12.39 timesD. 18.72 timesE. 13.69 times
D. 18.72 times
101. A firm has a debt-total asset ratio of 58 percent and a return on total assets of 13 percent. What is the return on equity?A. 26.27 percentB. 30.95 percentC. 45.00 percentD. 22.41 percentE. 13.50 percent
B. 30.95 percent
24. Which one of the following statements is correct?A. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.C. The debt-equity ratio can be computed as 1 plus the equity multiplier.D. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.E. An increase in the depreciation expense will not affect the cash coverage ratio.
E. An increase in the depreciation expense will not affect the cash coverage ratio.
25. If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?A. 0B. .5C. 1.0D. 1.5E. 2.0
B. .5
22. A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?A. Pay all of its debts that are due within the next 48 hours.B. Pay all of its debts that are due within the next 48 days.C. Cover its operating costs for the next 48 hours.D. Cover its operating costs for the next 48 days.E. Meet the demands of its customers for the next 48 hours.
D. Cover its operating costs for the next 48 days.
23. Ratios that measure a firm's liquidity are known as _____ ratios.A. Asset management.B. Long-term solvency.C. Short-term solvency.D. Profitability.E. Book value.
C. Short-term solvency.
61. The Downtowner has 950,000 shares of common stock outstanding valued at $38 a share along with 40,000 bonds selling for $1,020 each. What weight should be given to the debt when the firm computes its weighted average cost of capital?A. 46.67 percentB. 55.05 percentC. 51.79 percentD. 53.06 percentE. 48.27 percent
D. 53.06 percent
28. The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?A. Decrease in the inventory turnover rate.B. Decrease in the net working capital turnover rate.C. Increase in the fixed asset turnover rate.D. Decrease in the day's sales in inventory.E. Decrease in the total asset turnover rate.
D. Decrease in the day's sales in inventory.
29. RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following?A. Utilizing its fixed assets more efficiently than Sam's.B. Utilizing its total assets more efficiently than Sam's.C. Generating $1 in sales for every $1.26 in net fixed assets.D. Generating $1.26 in net income for every $1 in net fixed assets.E. Maintaining the same level of current assets as Sam's.
B. Utilizing its total assets more efficiently than Sam's.
26. The cash coverage ratio directly measures the ability of a firm to meet which one of its following obligations?A. Payment to supplier.B. Payment to employee.C. Payment of interest to a lender.D. Payment of principal to a lender.E. Payment of a dividend to a shareholder.
C. Payment of interest to a lender.
27. All-State Moving had sales of $899,000 in 2014 and $967,000 in 2015. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?A. The total asset turnover rate increased.B. The days' sales in receivables increased.C. The net working capital turnover rate increased.D. The fixed asset turnover decreased.E. The receivables turnover rate decreased.
C. The net working capital turnover rate increased.
30. Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.A. Asset management.B. Long-term solvency.C. Short-term solvency.D. Profitability.E. Turnover.
D. Profitability.
31. If a firm produces a 13 percent return on assets and also a 13 percent return on equity, then the firm:A. May have short-term, but not long-term debt.B. Is using its assets as efficiently as possible.C. Has no net working capital.D. Has a debt-equity ratio of 1.0.E. Has an equity multiplier of 1.0.
E. Has an equity multiplier of 1.0.
60. Florida Groves has a $250,000 bond issue outstanding that is selling at 102 percent of face value. The firm also has 2,000 shares of preferred stock valued at $38 a share and 45,000 shares of common stock valued at $24 a share. What weight should be assigned to the preferred stock when computing the firm's weighted average cost of capital?A. 5.75 percentB. 2.20 percentC. 4.75 percentD. 6.03 percentE. 5.39 percent
E. 5.39 percent
59. Theresa's Flower Garden has 750 bonds outstanding that are selling for $989 each, 2,500 shares of preferred stock with a market price of $47 a share, and 30,000 shares of common stock valued at $56 a share. What weight should be assigned to the common stock when computing the firm's weighted average cost of capital?A. 62.08 percentB. 66.16 percentC. 47.11 percentD. 54.00 percentE. 55.45 percent
B. 66.16 percent
58. The Well Derrick has 5.5 percent preferred stock outstanding that sells for $48 a share. This stock was originally issued at $45 per share. What is the cost of preferred stock if the firm's tax rate is 35 percent?A. 12.22 percentB. 7.94 percentC. 7.45 percentD. 11.46 percentE. 12.80 percent
D. 11.46 percent
57. Grill Works has 7 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock?A. 13.77 percentB. 13.29 percentC. 13.67 percentD. 14.29 percentE. 14.54 percent
D. 14.29 percent
56. Simple Foods has a zero coupon bond issue outstanding that matures in nine years. The bonds are selling at 42 percent of par value. What is the company's after tax cost of debt if the tax rate is 38 percent? (Use semiannual compounding.)A. 5.48 percentB. 5.73 percentC. 6.12 percentD. 7.73 percentE. 9.88 percent
C. 6.12 percent
55. The outstanding bonds of Tech Express are priced at $989 and mature in 10 years. These bonds have a face value of $1,000, a coupon rate of 6 percent, and pay interest annually. The firm's tax rate is 35 percent. What is the firm's after tax cost of debt?A. 3.01 percentB. 3.22 percentC. 3.35 percentD. 4.00 percentE. 4.41 percent
D. 4.00 percent
54. Jay's Bakery has a bond issue outstanding that matures in four years. The bonds pay interest semiannually. Currently, the bonds are quoted at 102.3 percent of face value and carry a coupon rate of 9 percent. What is the firm's after tax cost of debt if the tax rate is 35 percent?A. 6.88 percentB. 8.66 percentC. 5.63 percentD. 5.40 percentE. 8.31 percent
D. 5.40 percent
53. The Pet Market has $1,000 face value bonds outstanding with 18 years to maturity, a coupon rate of9 percent, annual interest payments, and a current price of $835. What is the after tax cost of debt if the tax rate is 34 percent?A. 3.79 percentB. 6.42 percentC. 6.61 percentD. 8.28 percentE. 7.37 percent
E. 7.37 percent
31. Which one of the following statements is correct?A. Firms should accept low-risk projects prior to funding high-risk projects.B. Making subjective adjustments to a firm's WACC when determining project discount rates unfairly punishes low-risk divisions within a firm.C. A project that is unacceptable today might be acceptable tomorrow given a change in market returns.D. The pure play method is most frequently used for projects involving the expansion of a firm's current operations.E. Firms that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.
C. A project that is unacceptable today might be acceptable tomorrow given a change in market returns.
62. Phillips Equipment has 75,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 6 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $64a share. The common stock has a beta of 1.21 and sells for $44 a share. The U.S. Treasury bill is yielding 2.3 percent and the return on the market is 11.2 percent. The corporate tax rate is 34 percent. What is the firm's weighted average cost of capital?A. 9.69 percentB. 10.64 percentC. 11.18 percentD. 11.30 percentE. 11.56 percent
A. 9.69 percent
32. Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an after tax cost of capital of 13 percent and Travel Excitement has an after tax cost of capital of 11 percent. Both firms are considering investing in new web sites that will enhance online reservations. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project?A. Wilderness Adventures only.B. Travel Excitement only.C. Both Wilderness Adventures and Travel Excitement.D. Neither Wilderness Adventures nor Travel Excitement.E. Cannot be determined without further information.
C. Both Wilderness Adventures and Travel Excitement.
23. Jessica invested in Quantro stock when the firm was unlevered. Since then, Quantro has changed its capital structure and now has a debt-equity ratio of .30. To unlever her position, Jessica needs to:A. Borrow some money and purchase additional shares of Quantro stock.B. Maintain her current equity position as the debt of the firm does not affect her personally.C. Sell some shares of Quantro stock and hold the proceeds in cash.D. Sell some shares of Quantro stock and loan out the sale proceeds.E. Create a personal debt-equity ratio of .30.
A. Borrow some money and purchase additional shares of Quantro stock.
24. Which one of the following makes the capital structure of a firm irrelevant?A. Taxes.B. Interest tax shield.C. 100 percent dividend payout ratio.D. Debt-equity ratio that is greater than 0 but less than 1.E. Homemade leverage.
E. Homemade leverage.
72. Panelli's is analyzing a project with an initial cost of $110,000 and cash inflows of $65,000 in year 1 and $74,000 in year 2. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of .45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent. What is the projected net present value of this project?A. $7,411B. $7,809C. $8,333D. $8,938E. $9,840
E. $9,840
54. Katlin Markets is debating between a levered and an unlevered capital structure. The all-equity capital structure would consist of 75,000 shares of stock. The debt and equity option would consist of 40,000 shares of stock plus $320,000 of debt with an interest rate of 6.25 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.A. $42,208.15B. $44,140.71C. $46,333.33D. $49,666.67E. $42,857.14
E. $42,857.14
53. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:A. Permits creditors to file a prepack immediately after a firm files for bankruptcy protection.B. Prevents creditors from submitting any reorganization plans.C. Prevents firms from filing for bankruptcy protection more than once.D. Permits key employee retention plans only if an employee has another job offer.E. Allows firms to pay bonuses to all key employees to entice those employees to remain in the firm's employ.
D. Permits key employee retention plans only if an employee has another job offer.
48. In general, the capital structures used by U.S. firms:A. Tend to overweigh debt in relation to equity.B. Generally result in debt-equity ratios between .45 and .60.C. Are fairly standard for all SIC codes.D. Tend to be those that maximize the use of the firm's available tax shelters.E. Vary significantly across industries.
E. Vary significantly across industries.
47. Corporations in the U.S. tend to:A. Minimize taxes.B. Underutilize debt.C. Rely less on equity financing than they should.D. Have relatively similar debt-equity ratios across industry lines.E. Rely more heavily on debt than on equity as the major source of financing.
B. Underutilize debt.
46. Which one of the following is correct according to pecking-order theory?A. There is a direct relationship between a firm's profit and its debt levels.B. Firms avoid external debt except as a last resort.C. A firm's capital structure is independent of its need for external funding.D. Firms stockpile internally generated cash.E. There is an optimal capital structure for every firm.
D. Firms stockpile internally generated cash.
45. Which form of financing do firms prefer to use first according to the pecking-order theory?A. Regular debtB. Convertible debtC. Common stockD. Preferred stockE. Internal funds
E. Internal funds
52. Which one of these statements related to Chapter 11 bankruptcy is correct?A. Prepacks apply only to Chapter 7, not Chapter 11 bankruptcies.B. Senior management must be replaced prior to firm exiting Chapter 11.C. A firm can only file for Chapter 11 after it becomes totally insolvent.D. Firms may file for Chapter 11 in an attempt to gain a competitive advantage.E. Chapter 11 involves the total liquidation of a firm.
D. Firms may file for Chapter 11 in an attempt to gain a competitive advantage.
51. Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding?A. Consumer claims.B. Dividend payment to preferred shareholders.C. Company contribution to the employees' retirement account.D. Payment to an unsecured creditor.E. Payment of employee wages.
E. Payment of employee wages.
50. Which one of the following statements related to Chapter 7 bankruptcy is correct?A. A firm in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern.B. Under a Chapter 7 bankruptcy, a trustee will assume control of the firm's assets until those assets can be liquidated.C. Chapter 7 bankruptcies are always involuntary on the part of the firm.D. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy.E. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock are generally issued prior to the firm coming out of bankruptcy.
B. Under a Chapter 7 bankruptcy, a trustee will assume control of the firm's assets until those assets can be liquidated.
49. A firm is technically insolvent when:A. It has a negative book value.B. Total debt exceeds total equity.C. It is unable to meet its financial obligations.D. It files for bankruptcy protection.E. The market value of its stock is less than its book value.
C. It is unable to meet its financial obligations.
15. Edwards Farm Products was unable to meet its financial obligations and was forced into using legal proceedings to restructure itself so that it could continue as a viable business. The process this firm underwent is known as a:A. Merger.B. Repurchase program.C. Liquidation.D. Reorganization.E. Divestiture.
D. Reorganization.
50. Which one of the following is a direct result of a 2-for-1 stock split?A. A 100 percent increase in the number of shareholders.B. A 100 percent increase in the common stock account balance.C. A 100 percent decrease in the stock price.D. A 50 percent increase in the number of shares outstanding.E. A 50 percent decrease in the par value per share.
E. A 50 percent decrease in the par value per share.
49. Stock splits can be used to:A. Adjust the market price of a stock so it falls within a preferred trading range.B. Decrease the excess cash held by a firm thereby lowering agency costs.C. Increase the par value while decreasing the market price per share.D. Increase the total equity of a firm.E. Adjust the debt-equity ratio.
A. Adjust the market price of a stock so it falls within a preferred trading range.
48. A stock split:A. Increases the total value of the common stock account.B. Decreases the value of the retained earnings account.C. Increases the par value per share.D. Increases the value of the capital in excess of par account.E. Decreases the market value per share.
E. Decreases the market value per share.
47. Which one of the following is the best justification for a reverse stock split?A. Improve the stock's respectability.B. Avoid delisting.C. Reduce transaction costs for shareholders.D. Improve the stock's liquidity.E. Increase the par value per share.
B. Avoid delisting.
46. Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do something to acknowledge the loyalty of the shareholders but needs all of its available cash to fund the firm's rapid growth. The market price of the stock is currently trading at the upper end of its preferred trading range. The firm is most apt to consider which one of the following in this situation?A. Liquidating dividendB. Stock splitC. Reverse stock splitD. Extra cash dividendE. Special cash dividend
B. Stock split
45. A large stock dividend:A. Reduces retained earnings by the total market value of the issued shares.B. Reduces the par value per share.C. Reduces retained earnings by the par value of each share issued.D. Increases the capital in excess of par value by the market value minus the par value of each share issued.E. Does not affect the equity accounts or the par value per share.
C. Reduces retained earnings by the par value of each share issued.
44. Which one of the following is a result of a small stock dividend?A. Increase in retained earnings.B. Decrease in total owner's equity.C. Decrease in cash.D. Decrease in capital in excess of par value.E. Increase in common stock.
E. Increase in common stock.
43. A small stock dividend is defined as a stock dividend of less than _____ percent.A. 10 to 15B. 15 to 20C. 20 to 25D. 25 to 30E. 30 to 35
C. 20 to 25
42. A small stock dividend:A. Increases the common stock account by the market price of each share issued.B. Reduces cash by the total market value of the issued shares.C. Only affects the par value not the equity account balances.D. Reduces retained earnings by the market price of each share issued.E. Does not affect the capital in excess of par value account.
D. Reduces retained earnings by the market price of each share issued.
41. Which one of the following statements is correct?A. Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash need.B. Share repurchases tend to increase agency costs.C. Maintaining a steady dividend is a key goal of most dividend-paying firms.D. Tax rates are the key factor in determining a firm's dividend policy.E. Stock prices tend to ignore expected changes in dividend payments.
C. Maintaining a steady dividend is a key goal of most dividend-paying firms.
41. The capital structure that maximizes the value of a firm also:A. Minimizes financial distress costs.B. Minimizes the cost of capital.C. Maximizes the present value of the tax shield on debt.D. Maximizes the value of the debt.E. Maximizes the present value of the bankruptcy costs.
B. Minimizes the cost of capital.
42. The optimal capital structure:A. Will be the same for all firms in the same industry.B. Will remain constant over time unless the firm changes its primary operations.C. Will vary over time as taxes and market conditions change.D. Places more emphasis on operations than on financing.E. Is unaffected by changes in the financial markets.
C. Will vary over time as taxes and market conditions change.
39. If a firm has the optimal amount of debt, then the:A. Direct financial distress costs must equal the present value of the interest tax shield.B. Value of the levered firm will exceed the value of the firm if it were unlevered.C. Value of the firm is minimized.D. Value of the firm is equal to VL + Tc x D.E. Debt-equity ratio is equal to 1.
B. Value of the levered firm will exceed the value of the firm if it were unlevered.
40. Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm?A. Exceptionally high depreciation expenses.B. Very low marginal tax rate.C. Substantial tax shields from other sources.D. Low probability of financial distress.E. Minimal taxable income.
D. Low probability of financial distress.
37. Bankruptcy:A. Occurs when total equity is negative.B. Is a legal proceeding.C. Occurs when a firm cannot meet its financial obligations.D. Refers to a loss of value for debt holders.E. Is an inexpensive means of reorganizing a firm.
B. Is a legal proceeding.
38. Which one of the following is a direct cost of bankruptcy?A. Bypassing a positive NPV project to avoid additional debt.B. Firm investing in cash reserves.C. Maintaining a debt-equity ratio that is lower than the optimal ratio.D. Losing a key company employee.E. Paying an outside accountant to prepare bankruptcy reports.
E. Paying an outside accountant to prepare bankruptcy reports.
35. The interest tax shield is a key reason why:A. The required rate of return on assets rises when debt is added to the capital structure.B. The value of an unlevered firm is equal to the value of a levered firm.C. The net cost of debt to a firm is generally less than the cost of equity.D. The cost of debt is equal to the cost of equity for a levered firm.E. Firms prefer equity financing over debt financing.
C. The net cost of debt to a firm is generally less than the cost of equity.
36. Based on M&M Proposition I with taxes, the weighted average cost of capital:A. Is equal to the aftertax cost of debt.B. Has a linear relationship with the cost of equity capital.C. Is unaffected by the tax rate.D. Decreases as the debt-equity ratio increases.E. Is equal to Ru x (1 - Tc).
D. Decreases as the debt-equity ratio increases.
34. Which one of the following statements is correct?A. The subjective approach assesses the risks of each project and assigns an adjustment factor that is unique just for that project.B. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.C. Firms will correctly accept or reject every project if they adopt the subjective approach.D. Mandatory projects should only be accepted if they produce a positive NPV when the firm's WACC is used as the discount rate.E. The pure play approach should only be used with low-risk projects.
B. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
33. The subjective approach to project analysis:A. Is used only when a firm has an all-equity capital structure.B. Uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y.C. Assigns discount rates to projects based on the discretion of the senior managers of a firm.D. Allows managers to randomly adjust the discount rate assigned to a project once the project's beta has been determined.E. Applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.
C. Assigns discount rates to projects based on the discretion of the senior managers of a firm.
36. The flotation cost for a firm is computed as:A. The arithmetic average of the flotation costs of both debt and equity.B. The weighted average of the flotation costs associated with each form of financing.C. The geometric average of the flotation costs associated with each form of financing.D. One-half of the flotation cost of debt plus one-half of the flotation cost of equity.E. A weighted average based on the book values of the firm's debt and equity.
B. The weighted average of the flotation costs associated with each form of financing.
35. When a firm has flotation costs equal to 6.8 percent of the funding need, project analysts should:A. Increase the project's discount rate to offset these expenses by multiplying the firm's WACC by 1.068.B. Increase the project's discount rate to offset these expenses by dividing the firm's WACC by (1 - .068).C. Add 6.8 percent to the firm's WACC to determine the discount rate for the project.D. Increase the initial project cost by multiplying that cost by 1.068.E. Increase the initial project cost by dividing that cost by (1 - .068).
E. Increase the initial project cost by dividing that cost by (1 - .068).
38. Flotation costs for a levered firm should be:A. Ignored when analyzing a project because they are a sunk cost.B. Spread over the life of a project thereby reducing the cash flows for each year of the project.C. Considered only when two projects are mutually exclusive.D. Weighted and included in the initial cash flow.E. Totally ignored when internal equity funding is utilized.
D. Weighted and included in the initial cash flow.
37. Incorporating flotation costs into the analysis of a project will:A. Cause the project to be improperly evaluated.B. Increase the net present value of the project.C. Increase the project's rate of return.D. Increase the initial cash outflow of the project.E. Have no effect on the present value of the project.
D. Increase the initial cash outflow of the project.
43. The static theory of capital structure advocates that the optimal capital structure for a firm:A. Is highly dependent on a constant debt-equity ratio over time.B. Remains fixed over time.C. Is independent of the firm's tax rate.D. Is independent of the firm's debt-equity ratio.E. Equates the tax savings from an additional dollar of debt to the increased bankruptcy costs.
E. Equates the tax savings from an additional dollar of debt to the increased bankruptcy costs.
44. The basic lesson of M&M theory is that the value of a firm is dependent upon:A. The firm's capital structure.B. The total cash flow of the firm.C. Minimizing the marketed claims.D. The amount of marketed claims to that firm.E. Size of the stockholders' claims.
B. The total cash flow of the firm.
57. Terry's Pets paid $2,380 in interest and $2,200 in dividends last year. The times interest earned ratio is 2.4 and the depreciation expense is $760. What is the value of the cash coverage ratio?A. 1.42B. .77C. 2.94D. 2.72E. 2.46
D. 2.72
56. A firm has sales of $96,400, costs of $53,800, interest paid of $2,800, and depreciation of $7,100. The tax rate is 34 percent. What is the value of the cash coverage ratio?A. 15.21B. 12.14C. 17.27D. 23.41E. 12.68
A. 15.21
59. Flo's Flowers has accounts receivable of $4,511, inventory of $1,810, sales of $138,609, and cost of goods sold of $64,003. How many days does it take the firm to sell its inventory and collect the payment on the sale assuming that all sales are on credit?A. 11.88 daysB. 22.20 daysC. 16.23 daysD. 14.50 daysE. 18.67 days
B. 22.20 days
58. The Up-Towner has sales of $913,400, costs of goods sold of $579,300, inventory of $187,400, and accounts receivable of $78,900. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?A. 74.19 daysB. 84.69 daysC. 118.08 daysD. 106.46 daysE. 121.07 days
C. 118.08 days
53. A firm has total assets of $310,100 and net fixed assets of $168,500. The average daily operating costs are $2,980. What is the value of the interval measure?A. 31.47 daysB. 47.52 daysC. 56.22 daysD. 68.05 daysE. 104.62 days
B. 47.52 days
52. Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?A. .31B. .42C. .47D. .51E. .56
D. .51
55. A firm has total debt of $4,850 and a debt-equity ratio of .57. What is the value of the total assets?A. $6,128.05B. $7,253.40C. $9,571.95D. $11,034.00E. $13,358.77
E. $13,358.77
54. A firm has a debt-equity ratio of .57. What is the total debt ratio?A. .36B. .30C. .44D. 2.27E. 2.75
A. .36
61. TJ's has annual sales of $813,200, total debt of $176,000, total equity of $395,000, and a profit margin of 5.63 percent. What is the return on assets?A. 8.02 percentB. 6.48 percentC. 9.94 percentD. 7.78 percentE. 11.59 percent
A. 8.02 percent
60. A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars worth of sales are generated from every $1 in total assets?A. $1.08B. $1.14C. $1.19D. $1.26E. $1.30
A. $1.08
73. Lamey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and taxes of $21,800. The company has $25,000 in bonds outstanding that sell at par and have a coupon rate of 6 percent. What is the cost of equity?A. 11.60 percentB. 13.36 percentC. 15.64 percentD. 14.07 percentE. 14.29 percent
A. 11.60 percent
74. Key Motors has a cost of equity of 11.29 percent and an unlevered cost of capital of 10.4 percent. The company has $22,000 in debt that is selling at par value. The levered value of the firm is $64,000 and the tax rate is 34 percent. What is the pretax cost of debt?A. 5.73 percentB. 6.18 percentC. 6.59 percentD. 7.82 percentE. 9.92 percent
D. 7.82 percent
89. City Center Pharmacy has 11,500 shares of stock outstanding with a par value of $1 per share and a market value of $12 a share. The company just announced a 3-for-7 reverse stock split. What will the market value per share be after the reverse stock split?A. $5.14B. $12.00C. $23.33D. $28.00E. $33.14
D. $28.00
90. The Green Fiddle has declared a $5 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Green Fiddle stock sells for $71.50 per share, and the stock is about to go ex-dividend. What will be the ex-dividend price?A. $67.25B. $67.90C. $78.30D. $79.50E. $82.23
A. $67.25
67. Hanover Tech is currently an all-equity firm that has 320,000 shares of stock outstanding with a market price of $19 a share. The current cost of equity is 15.4 percent and the tax rate is 34 percent. The firm is considering adding $1.2 million of debt with a coupon rate of 8 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity?A. $5.209 millionB. $5.288 millionC. $5.312 millionD. $6.512 millionE. $6.708 million
B. $5.288 million
88. The Green Florist has 44,000 shares of stock outstanding with a par value of $1 per share and a market value of $12.60 a share. The company just announced a 2-for-5 reverse stock split. Currently, you own 700 shares of this stock. How many shares will you own after the reverse stock split?A. 140 sharesB. 280 sharesC. 480 sharesD. 1,600 sharesE. 1,750 shares
B. 280 shares
85. The common stock of Gillen Entertainment is selling for $52 a share. The firm has a book value of $357,400 and a market value of $886,000. How many shares of stock will be outstanding if the firm does a 5-for-2 stock split?A. 6,815 sharesB. 2,749 sharesC. 17,183 sharesD. 42,596 sharesE. 32,211 shares
D. 42,596 shares
66. L.A. Clothing has expected earnings before interest and taxes of $56,700, an unlevered cost of capital of 16.2 percent, and a tax rate of 35 percent. The company also has $9,500 of debt that carries a coupon rate of 7 percent. The debt is selling at par value. What is the value of this firm?A. $222,579B. $223,333C. $224,108D. $230,825E. $225,476
D. $230,825
83. Jean's Warehouse has 16,000 shares of stock outstanding. The current market value of the firm is $768,000. The company has retained earnings of $130,000, paid in surplus of $321,000, and a common stock account value of 16,000. The company is planning a 5-for-3 stock split. What will the retained earnings account value be after the split?A. $73,800B. $130,000C. $153,600D. $205,000E. $245,500
B. $130,000
84. The common stock of High Energy is selling for $62 a share. Currently, the firm has a total market value of $812,000 and a book value of $387,600. How many shares of stock will be outstanding if the firm does a 3-for-2 stock split?A. 8,731 sharesB. 9,377 sharesC. 4,168 sharesD. 17,727 sharesE. 19,645 shares
E. 19,645 shares
69. The Book Worm is an unlevered firm with an aftertax net income of $237,600. The unlevered cost of capital is 15.6 percent and the tax rate is 34 percent. What is the value of this firm?A. $1,270,867.03B. $1,339,007.68C. $1,523,076.92D. $1,378,414.14E. $1,447,489.14
C. $1,523,076.92
70. An unlevered firm has a cost of capital of 16.7 percent and earnings before interest and taxes of $489,602. A levered firm with the same operations and assets has face value of debt of $650,000 with a coupon rate of 7.5 percent that sells at par. The applicable tax rate is 35 percent. What is the value of the levered firm?A. $2,397,212.30B. $2,398,256.67C. $2,402,509.08D. $2,133,136.53E. $2,001,018.21
D. $2,133,136.53