Question 1 2 points Save
The simulation approach provides us with:
a single value for the risk-adjusted net present value
an approximation of the systematic risk level
a probability distribution of the project's net present value or internal rate of return
a graphic exposition of the year-by-year sequence of possible outcomes
Question 2 2 points Save
When deciding upon how much debt financing to employ, most practitioners would cite which of the following as the most important influence on the level of the debt ratio?
providing a borrowing reserve
maintaining desired bond rating
ability to adequately meet financing charges
exploiting advantages of financial leverage
Question 3 2 points Save
Fixed operating costs do not include:
interest changes
rent
depreciation
all of the above
Question 4 2 points Save
According to the perfect markets approach to dividend policy:
other things equal, the greater the payout ratio, the greater the share price of the firm
the price of a share of stock is unrelated to dividend policy
the firm should retain earnings so stockholders will receive a capital gain
the firm should pay a dividend only after current equity financing needs have been met
Question 5 2 points Save
Which of the following would be considered a variable cost in a manufacturing setting?
Rent.
Administrative salaries.
Insurance.
Direct labor.
All of the above.
Question 6 2 points Save
All the following variables are used in computing the cost of debt except:
maturity value of the debt
market price of the debt
number of years to maturity
risk-free rate
Question 7 2 points Save
What is the payback period for a project with an initial investment of $150,000 that provides an annual cash inflow of $20,000 for the first three years and $30,000 per year for years four through eight?
5 years
6 years
7 years
8 years
Question 8 2 points Save
The cost of new preferred stock is equal to:
the preferred stock dividend divided by the market price.
the preferred stock dividend divided by its par value.
(1 - tax rate) times the preferred stock dividend divided by net price.
preferred stock dividend divided by the net selling price of preferred.
Question 9 2 points Save
All of the following are rationales given for a stock dividend or split except:
The price will not fall proportionately to the share increase.
An optimum price range does not exist.
There is positive informational content associated with the announcement.
Conservation of corporate cash.
Question 10 2 points Save
One component of a firm's financial structure which is not a component of its capital structure is:
preferred stock
mortgage bonds
accounts payable
retained earnings
Question 11 2 points Save
What is the economic difference between a stock dividend and a stock split?
Stock splits create greater economic benefits to shareholders than stock dividends.
Stock splits increase EPS more than stock dividends.
There is no economic difference between a stock dividend and a stock split.
Stock dividends create greater economic benefits to shareholders than stock splits.
Question 12 2 points Save
Which of the following expenses associated with a project should be included in a capital budgeting analysis?
Training sales staff on a new product.
Additional electrical expenses associated with new equipment.
Reengineering of a production line associated with a new project.
All of the above.
None of the above.
Question 13 2 points Save
Capital rationing may be imposed because
capital market conditions are poor
of management's fear of debt
stockholder control problems prevent issuance of additional stock
all of the above
Question 14 2 points Save
Which of the following statements would be consistent with the Dividend Irrelevance Theory?
There is no relationship between a firm's dividend policy and the value of its common stock.
Perfect capital markets are assumed to exist which allow investors to buy and sell stock without incurring any transaction costs.
Investors are indifferent whether stock returns come from dividend income or capital gains income.
All of the above.
Question 15 2 points Save
According to the residual theory of dividends:
dividends are a residual after investment financing needs have been met
earnings remaining after payment of preferred stock dividends should be paid to common stockholders
dividend payments are a constant percentage of earnings per share
a dividend is the residual above the payout ratio
Question 16 2 points Save
The alternative formula for operating leverage is (VC = total variable costs and FC = total fixed costs):
Sales-VC/(Sales-VC-FC)
Sales-VC-FC/(Sales-VC)
Sales-FC/(Sales-FC-VC)
Sales+FC/(Sales-FC-VC)
Question 17 2 points Save
The advantages of NPV are all of the following except:
it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years.
it provides the amount by which positive NPV projects will increase the value of the firm.
it allows the comparison of benefits and costs in a logical manner through the use of time value of money principles.
it recognizes the timing of the benefits resulting from the project.
Question 18 2 points Save
Market Value Added is:
Stockholder's required rate of return that is based upon the market value of a firm's common stock relative to the book value of a firm's common stock.
Market value of a firm's common stock, plus the book value of its common stock.
The additional value received for a firm's common stock once the firm is listed on the NYSE.
The difference in the current market value of a firm and the sum of all the funds that have been invested in the firm over its entire operating life.
Question 19 2 points Save
The problem with the constant dividend payout ratio is:
Investors may come to expect a specified amount.
The dollar amount of the dividend fluctuates from year to year.
Management is reluctant to cut the dividend even if there are low profits that year.
All of the above are possible problems.
Question 20 2 points Save
The EBIT-EPS indifference point:
identifies the EBIT level at which the EPS will be the same regardless of the financing plan
identifies the point at which the analysis can use EBIT and EPS interchangeably
identifies the level of earnings at which the management is indifferent about the payments of dividends
none of the above
Question 21 2 points Save
The disadvantage of the IRR method is that:
the IRR deals with cash flows.
the IRR gives equal regard to all returns within a project's life.
the IRR will always give the same project accept/reject decision as the NPV.
the IRR requires long, detailed cash flow forecasts.
Question 22 2 points Save
Which of the following should be included in the determination of the initial outlay of a capital budgeting project?
Installation expenses.
Shipping expenses.
After-tax proceeds from the sale of an obsolete machine that is being replaced.
Invoice cost of a machine.
All of the above.
Question 23 2 points Save
Pizza Yen has annual fixed costs of $250,000 and a variable cost per pizza of $3.50. Yen sells pizzas for $13.50 each. The firm expects to sell 35,000 pizzas annually. What is the break-even point in pizzas?
10,000
25,000
30,000
45,000
Question 24 2 points Save
Optimal capital structure is:
the mix of permanent sources of funds used by the firm in a manner that will maximize the company's common stock price.
the mix of all items that appear on the right-hand side of the company's balance sheet.
the mix of funds that will minimize the firm's composite cost of capital
a and c above
Question 25 2 points Save
A significant disadvantage of the payback period is that it:
Is complicated to explain.
Increases firm risk.
Does not properly consider the time value of money.
All of the above.
None of the above.
Question 26 2 points Save
A stock dividend:
decreases the par value of the stock and increases the number of shares
reduces the pro rata number of shares to each stockholder
increases retained earnings by the total market value of stock dividends
none of the above
Question 27 2 points Save
Stock splits:
increase the number of shares to stockholders
decrease the common stock account by the amount of the split
reduce retained earnings
increase the total wealth of stockholders
Question 28 2 points Save
Incremental cash flows refer to:
The difference between after-tax cash flows and before-tax accounting profits.
The new cash flows that will be generated if a project is undertaken.
The cash flows of a project, minus financing costs.
The cash flows that are foregone if a firm does not undertake a project.
Question 29 2 points Save
Which of the following should be included in an analysis of a new project?
Additional investment in fixed assets.
Additional investment in accounts receivable.
Additional investment in inventory.
All of the above.
Question 30 2 points Save
Which two ratios would be most helpful in managing a firm's capital structure?
balance sheet leverage ratios and profitability ratios
balance sheet ratios and coverage ratios
coverage ratios and liquidity ratios
coverage ratios and profitability ratios
Question 31 2 points Save
The capital budgeting decision criterion that should be used for mutually exclusive investment projects is:
net present value
internal rate of return
profitability index
payback
Question 32 2 points Save
The average cost associated with each additional dollar of financing for investment projects is:
the incremental return
the marginal cost of capital
risk-free rate
beta
the component cost of capital
Question 33 2 points Save
Which of the following statements about the internal rate of return is false?
It has an unrealistic reinvestment assumption.
It never gives conflicting answers.
It fully considers the time value of money.
All of the above.
Question 34 2 points Save
Financial leverage has to do with:
The usage of fixed cost financial securities to finance a portion of a firm's assets.
Using common stock to finance a portion of a firm's assets.
The incurrence of fixed operating costs in the firm's income stream.
None of the above
Question 35 2 points Save
The final approval of a dividend payment comes from:
the controller
the president of the company
the board of directors
It is a joint decision requiring approval from all of the above.
Question 36 2 points Save
A significant advantage of the payback period is that it:
Places emphasis on time value of money.
Allows for the proper ranking of projects.
Tends to reduce firm risk because it favors projects that generate early, less uncertain returns.
Gives proper weighting to all cash flows.
Question 37 2 points Save
A firm's dividend payout ratio is:
The ratio of dividends to sales.
The ratio of dividends to market equity.
The ratio of dividends to earnings.
The ratio of dividends to book equity.
None of the above.
Question 38 2 points Save
An independent project should be accepted if it:
Produces a net present value that is greater than or equal to zero.
Produces a net present value that is greater than the equivalent IRR.
Has only one sign reversal.
None of the above.
Question 39 2 points Save
Which of the following would be considered a fixed cost in a manufacturing setting?
Depreciation.
Direct labor.
Sales commissions.
Direct materials.
All of the above.
Question 40 2 points Save
A high degree of variability in a firm's earnings before interest and taxes refers to:
business risk
financial risk
financial leverage
operating leverage
Question 41 2 points Save
Business risk refers to:
The risk associated with financing a firm with debt.
The variability of a firm's expected earnings before interest and taxes.
The uncertainty associated with a firm's CAPM.
The variability of a firm's stock price.
Question 42 2 points Save
The break-even model enables the manager of the firm to:
calculate the minimum price of common stock for certain situations
set appropriate equilibrium thresholds
determine the quantity of output that must be sold to cover all operating costs
determine the optimal amount of debt financing to use
Question 43 2 points Save
Assume that Johnson & Squib have 1,000,000 common shares outstanding that have a par value of $3 per share. The stock currently sells for $15 per share. Which of the following will result from a 2 for 1 stock split?
A decrease in retained earnings of $1,500,000.
Market value will increase from $15 per share to $30 per share.
Par value will increase from $3 per share to $6 per share.
The number of outstanding shares will increase from 1,000,000 to 2,000,000.
Question 44 2 points Save
Due to a technical breakthrough, the fixed costs for a firm drop by 25%. Prior to this breakthrough, fixed costs were $100,000 and unit contribution margin was and remains at $5.00. The new amount of break-even units will be:
20,000
25,000
15,000
5,000
Question 45 2 points Save
Which of the following statements would be consistent with the residual dividend theory?
Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income.
Dividends are more certain than capital gains.
Dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments.
Investors are indifferent whether stock returns come from dividend income or capital gains income.
None of the above.
Question 46 2 points Save
A project has an initial outlay of $100,000. It has a single payoff at the end of year 4 of $200,000. What is the internal rate of return for the project (round to the nearest %)?
15%
17%
19%
21%
Question 47 2 points Save
A firm's business risk is influenced by:
the competitive position of the firm within the industry
demand characteristics of the firm's products
the operating cost structure of the firm
all of the above
none of the above
Question 48 2 points Save
The calculation of incremental cash flows over a project's life should include
labor and material saving
additional revenue
interest to bondholders
a and b
Question 49 2 points Save
The internal rate of return is:
The discount rate that makes the NPV positive.
The discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
The discount rate that makes NPV negative and the PI greater than one.
The rate of return that makes the NPV positive.
Question 50 2 points Save
If the cash flow pattern for a project has two sign reversals, then there can be as many as ____ positive IRRs.
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