Changing the way you learn

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

	Created by Mitzel Montero over 6 years ago

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