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HFT 4464 Finance Final Exam

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Ch 8-10
Mitzel Montero
Quiz by Mitzel Montero, updated more than 1 year ago
Mitzel Montero
Created by Mitzel Montero over 6 years ago
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Resource summary

Question 1

Question
Taxes are a relevant cost that should be accounted for in the firm’s weighted average cost of capital.
Answer
  • True
  • False

Question 2

Question
Preferred stock has higher seniority than bonds and common stock
Answer
  • True
  • False

Question 3

Question
The cost of capital raised by the issuance of bonds is typically lower than the cost of capital raised from the issuance of preferred stock or common stock
Answer
  • True
  • False

Question 4

Question
The weights in a firm’s weighted average cost of capital should be a measure of the firm’s target capital structure
Answer
  • True
  • False

Question 5

Question
Issuance or flotation costs are the costs investors pay to brokers when they purchase common stock
Answer
  • True
  • False

Question 6

Question
Which of the following is typically not treated as one of the components of capital in cost of capital schedule calculations
Answer
  • common equity
  • long term debt
  • preferred stock
  • short term debt

Question 7

Question
A firm's weighed average cost of capital is based on investors required rates of return on a firms securities and target capital structure
Answer
  • True
  • False

Question 8

Question
Cost of capital is concerned with the cost of
Answer
  • short term sources of funds
  • long term sources of funds

Question 9

Question
Issuance costs cause the cost of funds from securities to be lower than the investor return
Answer
  • True
  • False

Question 10

Question
_______ is the firms minimum required rate of return on investments
Answer
  • target capital structure
  • weighted average cost of capital
  • cost of capital

Question 11

Question
Which has the highest seniority
Answer
  • common stock
  • bonds
  • preferred stock

Question 12

Question
Which is the riskiest corporate security
Answer
  • bonds
  • common stock
  • preferred stock

Question 13

Question
Funds come from outside the firm
Answer
  • Internal Equity
  • External Equity

Question 14

Question
The firm reinvests profits and provides funds internally
Answer
  • internal equity
  • external equity

Question 15

Question
Why is external common equity capital more expensive then internal common equity capital
Answer
  • Because internal is free, it has no cost since there is no need to attract investors to raise internal equity
  • Because the cost of external must take into account flotation costs, internal does not
  • Actually, external equity is not more expensive than internal, they both have the same cost
  • Because the capital asset pricing model is used to estimate the cost of internal and the dividend valuation model is used to estimate cost of external

Question 16

Question
__________ represents the long-term or permanent sources of the firm’s financing
Answer
  • Equity structure
  • Financial Structure
  • Leverage Structure
  • Capital Structure

Question 17

Question
Which model is typically used to estimate the cost of using external equity capital
Answer
  • arbitrage pricing theory model
  • rate of return on perpetuity model
  • dividend valuation model
  • capital asset pricing model

Question 18

Question
The cost of raising capital with debt is typically less costly for a firm than raising capital with preferred stock. Which one of the following is one of the reasons for this?
Answer
  • Bonds generally have a longer maturity than preferred stocks
  • Preferred stocks are more senior than bonds
  • The interest from bonds is compounded more frequently than the dividends from preferred stocks
  • Interest is a tax-deductible cost, preferred dividends are not

Question 19

Question
Tokyo Food Supplies Corporation sold an issue of 12-year bonds. The bonds sold at $980 each. After issuance costs, Tokyo Food Supplies received $975 each. The maturity value is $1,000 each and the coupon rate is 9% and paid annually. What is the after-tax cost of debt for these bonds if Tokyo Food Supplies’ marginal tax rate is 40%?
Answer
  • 9.36%
  • 5.61%
  • 9.28%
  • 5.57%

Question 20

Question
Young’s Specialized Cruises plans to issue preferred stock at a price of $25 per share. The annual dividend will be $2.18 per share and issuance costs are expected to be $2.00 per share. What is the cost of raising funds with preferred stock for Young?
Answer
  • 9.48%
  • 8.76%
  • 8.72%
  • 8.00%

Question 21

Question
Spencers Magic Shows Incorporated is financed 100% with equity and intends to remain this way. Spencers’ common stock beta is 0.85, the expected market return (average market return) is 14%, and the risk-free rate is 6%. If all of Spencers’ equity is internal, what are the cost of equity and the weighted average cost of capital for Spencers?
Answer
  • 13.10%
  • 12.80%
  • 14.00%
  • 5.48%

Question 22

Question
Shamas Famous Restaurants expects to pay a common stock dividend of $1.50 per share next year (d1). Dividends are expected to grow at a 4% rate for the foreseeable future. Shamas’ common stock is selling for $18.50 per share and issuance costs are $3.50 per share. What is Shamas cost of internal equity?
Answer
  • 12.11%
  • 20.59%
  • 10.00%
  • 14.00%

Question 23

Question
Marion’s Miraculous Resorts has a current capital structure that is 50% equity, 40% debt, and 10% preferred stock. This is considered optimal. Marion is considering a $40 million capital budgeting project. Marion has estimated the following: After-tax cost of debt: 8.5% Cost of preferred stock: 9.5% Cost of internal equity: 14.0% If all equity comes from internal sources, what should Marion’s cost of capital be for this project?
Answer
  • 11.35%
  • 9.45%
  • 12.15%
  • 10.67%

Question 24

Question
Which model(s) is used to estimate the cost of using internal equity?
Answer
  • Capital Asset Pricing Model
  • Dividend Valuation Model
  • Bond yield plus risk premium

Question 25

Question
The discounted payback period does not take into account the time value of money
Answer
  • True
  • False

Question 26

Question
The net present value is the ratio of a project’s benefits to its costs and the profitability index is the difference between a project’s benefits and its costs
Answer
  • True
  • False

Question 27

Question
A project’s payback period is the amount of time required for the project’s net cash flows to recover or pay back the net investment
Answer
  • True
  • False

Question 28

Question
A project’s net present value is the sum of the future values of the net cash flows compounded at the required rate of return minus the net investment
Answer
  • True
  • False

Question 29

Question
If a project’s net present value is positive (negative), the project is generally acceptable (unacceptable).
Answer
  • True
  • False

Question 30

Question
A project’s net present value is a measure of a project’s contribution to firm value
Answer
  • True
  • False

Question 31

Question
A capital budgeting project’s internal rate of return is the rate of return causing a project’s net present value to equal the net investment.
Answer
  • True
  • False

Question 32

Question
If a project’s internal rate of return is greater (less) than the required rate of return, the project is generally acceptable (unacceptable).
Answer
  • True
  • False

Question 33

Question
If a capital budgeting project’s cash flows are not normal, the internal rate of return method should be used to make the investment decision
Answer
  • True
  • False

Question 34

Question
The net present value, profitability index, internal rate of return, and modified internal rate of return methods will provide consistent investment decisions for independent projects with normal cash flows
Answer
  • True
  • False

Question 35

Question
Capital budgeting decisions are based upon cost-benefit analysis. A project’s net investment is compared to the project’s net cash flows in order to make a decision.
Answer
  • True
  • False

Question 36

Question
The purpose for capital budgeting projects are
Answer
  • To grow
  • Reduce costs
  • Replace Assets
  • Meet legal requirements

Question 37

Question
When making a capital budgeting decision, cash flows should be estimated on an incremental basis, not a total basis.
Answer
  • True
  • False

Question 38

Question
A capital budgeting project’s sunk costs and opportunity costs are both relevant to the project investment decision.
Answer
  • True
  • False

Question 39

Question
A project’s net cash flows are typically cash inflows whereas a project’s net investment is typically a cash outflow.
Answer
  • True
  • False

Question 40

Question
If a depreciable asset is sold for less than its book value, then taxes must be paid on the difference
Answer
  • True
  • False

Question 41

Question
The estimation of a project’s net cash flows (NCF) should not include changes in
Answer
  • interest expense
  • depreciation.
  • sales revenue
  • cash operating costs

Question 42

Question
Your university is considering what to do with the current football stadium. They plan to invest to upgrade the current football stadium or invest to build a new one closer to campus. What kind of projects are these?
Answer
  • mutually exclusive projects
  • independent projects
  • contingent projects

Question 43

Question
Which of the following is a basic principle when estimating a project’s cash flows?
Answer
  • Only direct effects of a project should be included in cash flow calculations
  • cash flows should be measured on a pretax basis
  • Cash flows should be measured on an incremental basis.
  • Cash flows should ignore depreciation because it is a non-cash charge.

Question 44

Question
What impact will an increase in depreciation have upon a firm?
Answer
  • increase profit and increase cash flow
  • increase profit and decrease cash flow
  • decrease profit and increase cash flow
  • decrease profit and decrease cash flow

Question 45

Question
Which one of the following would not typically be considered a capital budgeting project for a restaurant?
Answer
  • buying toilet paper for both the ladies’ and men’s restrooms
  • renovating the ladies’ restroom
  • installing a new fire suppression and alarm system
  • buying a new dishwashing system

Question 46

Question
Tokyo Food Supplies Corporation is considering an expansion to a new market. Tokyo Food Supplies has already conducted and paid $35,000 for a marketing survey. The expansion will cost $400,000 for new assets, another $25,000 for shipping and delivery costs, and another $70,000 for installation costs. In addition, $150,000 in net working capital will be needed immediately. Compute the net investment.
Answer
  • 680,000
  • 495,000
  • 550,000
  • 645,000

Question 47

Question
Poon’s Noodle House is considering replacing their noodle-processing machine. The current machine was purchased 4 years ago at a total cost of $20,000. It is being depreciated straight-line to a zero value over 8 years. If Poon sells the noodle-processing machine for $6,000, what is the after-tax cash flow to Poon’s Noodle House? Use 40% for the effective tax rate.
Answer
  • 7,600
  • 8,400
  • 24,00
  • 3,600

Question 48

Question
Spencers Majestic Foods is considering the replacement of some old equipment. The new equipment will cost $300,000 including delivery and installation. The old equipment to be replaced has a book value of $100,000 and can be sold pre-tax for $120,000. If the firm’s effective tax rate is 40%, compute the net investment.
Answer
  • 180,000
  • 192,000
  • 188,000
  • 228,000

Question 49

Question
A project is expected to increase a firm’s sales revenue by $50,000 annually, increase it cash expenses by $20,000 annually, and increase its depreciation by $15,000 annually. Given this information, what is the project’s expected annual net cash flow? Use a 40% effective tax rate.
Answer
  • 21,000
  • 24,000
  • 9,000
  • 33,000

Question 50

Question
A project is expected to increase a firm’s sales revenue by $12,000 annually, decrease it cash expenses by $18,000 annually, and increase its depreciation by $10,000 annually. Given this information, what is the project’s expected annual net cash flow? Use a 40% effective tax rate.
Answer
  • 22,000
  • 400
  • 12,000
  • 18,000

Question 51

Question
The discounted payback period does not take into account the time value of money
Answer
  • True
  • False

Question 52

Question
A project’s payback period is the amount of time required for the project’s net cash flows to recover or pay back the net investment.
Answer
  • True
  • False

Question 53

Question
If a project’s net present value is positive (negative), the project is generally acceptable (unacceptable).
Answer
  • True
  • False

Question 54

Question
A project’s net present value is a measure of a project’s contribution to firm value
Answer
  • True
  • False

Question 55

Question
If a project’s internal rate of return is greater (less) than the required rate of return, the project is generally acceptable (unacceptable).
Answer
  • True
  • False

Question 56

Question
Which one of the following capital budgeting decision methods measures how long it takes for a project’s benefits to recover the project’s cost?
Answer
  • MIRR
  • net present value
  • payback period
  • profitability index

Question 57

Question
The payback period is a useful measure of a project’s
Answer
  • profitability
  • rate of return
  • economic life
  • liquidity risk

Question 58

Question
What is the profitability index for an acceptable capital budgeting project?
Answer
  • greater than 1
  • less than 1
  • greater than 0
  • less than 9

Question 59

Question
Which of the following is true for 5-year project with a 3-year payback period?
Answer
  • The net present value is zero.
  • The net present value is positive.
  • The net present value is negative.
  • Not enough information

Question 60

Question
Which of the following is true about the net present value method?
Answer
  • It is the best single measure of a project’s liquidity risk.
  • It is not a good measure of a project’s profitability.
  • It is the best single measure of a project’s profitability.
  • It is the best single measure of a project’s overall risk.

Question 61

Question
A capital budgeting project has a net investment of $450,000 and is expected to generate net cash flows of $150,000 annually for 5 years. What is the net present value at a 15% required rate of return?
Answer
  • 52,823
  • 41,144
  • 300,000
  • 64,962

Question 62

Question
A capital budgeting project has a net investment of $1,000,000 and is expected to generate net cash flows of $350,000 annually for 4 years. What is the internal rate of return?
Answer
  • 2.48%
  • 22.11%
  • 26.43%
  • 14.96%

Question 63

Question
A capital budgeting project is expected to have the following cash flows: Year Cash Flows 0 −$850,000 1 $300,000 2 $400,000 3 $500,000 What is the project’s payback period?
Answer
  • 1.5 yrs
  • 2.3 yrs
  • 2.5 yrs
  • 3.3 yrs

Question 64

Question
A capital budgeting project is expected to have the following cash flows: Year Cash Flows 0 −$850,000 1 $300,000 2 $400,000 3 $500,000 What is the project’s net present value at an 18% required rate of return?
Answer
  • -4,173.50
  • -18,725.33
  • 10,800.96
  • 350,000.00

Question 65

Question
A capital budgeting project is expected to have the following cash flows: Year Cash Flows 0 -$1,000,000 1 $400,000 2 $500,000 3 $700,000 What is the project’s internal rate of return?
Answer
  • 27.95%
  • 30.88%
  • 21.65%
  • 24.90%

Question 66

Question
Which of these measures profitability of a project
Answer
  • payback period
  • discounted payback period
  • NPV
  • PI
  • IRR
  • MIRR

Question 67

Question
Which of these measures risk and liquidity of a project
Answer
  • payback period
  • discounted payback period
  • NPV
  • PI
  • IRR
  • MIRR

Question 68

Question
Which is the best indicator for profitability
Answer
  • MIRR
  • PI
  • NPV
  • Discounted payback period

Question 69

Question
Which is the best indicator for liquidity and risk
Answer
  • NPV
  • discounted payback period
  • PI
  • MIRR

Question 70

Question
Which is the best indicator for margin for safety
Answer
  • IRR
  • MIRR
  • NPV
  • PI
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