. Both New York Stock Exchange and NASDAQ are examples of primary markets.

| March 30, 2017

Question
QUESTION 1

1. Both New York Stock Exchange and NASDAQ are examples of primary markets.

True

False

1 points

QUESTION 2

1. Free cash flow hypothesis states that an increase in dividend should benefit the shareholders by reducing the ability of managers to pursue wasteful activities. Dividends can serve as a way for the board of directors to reduce agency costs. Therefore, firms that pay dividends from free cash flows have higher values than firms that retain free cash flows.

True

False

1 points

QUESTION 3

1. Companies may decide to distribute stock to shareholders of record if the company’s availability of liquid cash is in short supply. Stock dividend is very similar to a stock split in that it increases the total number of shares while lowering the price of each share and does not change the market capitalization or the total value of the shares held.

True

False

1 points

QUESTION 4

1. If a firm total asset turnover is higher than the industry average, it indicates that the company is not generating a sufficient volume of business given its total asset investment.

True

False

1 points

QUESTION 5

1. The objective of the capital budgeting decision is to maximize the stock price of the company, and it is achieved by maximizing the present value of the growth opportunities.

True

False

1 points

QUESTION 6

1. In a regular project with an initial cash outflow and subsequent cash inflows, the net present value is negative when the cost of capital is less than IRR.

True

False

1 points

QUESTION 7

1. If the profitability index of a project is greater than 1, it means the NPV of the project is negative.

True

False

1 points

QUESTION 8

1. In a regular project with an initial cash outflow and subsequent cash inflows, the net present value decreases as the required rate of return increases.

True

False

1 points

QUESTION 9

1. The depreciation tax shield is calculated by T x Depreciation, where T is the firm’s marginal tax rate.

True

False

1 points

QUESTION 10

1. An increase in NWC is treated as a cash outflow in capital budgeting cash flow estimation.

True

False

1 points

QUESTION 11

1. In capital budgeting cash flow estimation, sunk costs should not be included.

True

False

1 points

QUESTION 12

1. The standard deviation (s) of a security’s return is the measure of the total risk, and the beta coefficient (ß) of a security is the measure of the systematic risk.

True

False

1 points

QUESTION 13

1. The slope of the capital market line is the equilibrium price of risk in terms of expected return.

True

False

1 points

QUESTION 14

1. A stock’s total risk consists of company-specific risk, which can be eliminated by diversification, plus market risk, which cannot be eliminated by diversification.

True

False

1 points

QUESTION 15

1. The SML is a graphical presentation of the relationship between a security’s expected return and its beta.

True

False

1 points

QUESTION 16

1. If a security is below the SML, a mean-variance investor would sell the security because it is overvalued.

True

False

1 points

QUESTION 17

1. The cost of debt is equal to one minus the marginal corporate tax rate (1 – Tc) multiplied by the yield to maturity of the outstanding debt.

True

False

1 points

QUESTION 18

1. The financial leverage is the extent to which fixed-income securities are used in a firm’s capital structure.

True

False

1 points

QUESTION 19

1. MM’s proposition I under no taxes implies that an issue of debt increases both the expected earnings per share (EPS) and the risk of the EPS. As a result, the stock price remains the same.

True

False

1 points

QUESTION 20

1. When the personal tax rate for the debt income is the same as the personal tax rate for stock income, the value of the interest tax shield is the same as when we consider only corporate taxes.

True

False

1 points

QUESTION 21

1. One implication of the tradeoff theories of capital structure decision is that firms that are likely to pay taxes at high rates should carry more debt than firms in lower tax brackets.

True

False

1 points

QUESTION 22

1. One implication of the tradeoff theories of capital structure decision is that risky firms, as measures by the variability of asset returns, ought to borrow more, other things equal.

True

False

1 points

QUESTION 23

1. The pecking order theory of capital structure is based on the asymmetric information theory that the announcement of a stock offering by a mature firm is taken as a signal that the firm’s prospects as seen by its management are not bright.

True

False

1 points

QUESTION 24

1. One implication of the pecking order theory of capital structure is that profitable firms have more debt because they don’t need outside money.

True

False

1 points

QUESTION 25

1. One would normally expect the price of stock to go up by approximately the amount of the dividend on the ex-dividend date.

True

False

1 points

QUESTION 26

1. One implication of the clientele effect is that high-tax-bracket investors tend to hold relatively high dividend-yield stocks.

True

False

1 points

QUESTION 27

1. It was found that stock prices tend to increase after announcements of stock repurchase by tender offer.

True

False

1 points

QUESTION 28

1. ________ are the markets in which corporations raise new capital.

Primary markets

Secondary markets

Money markets

Mortgage markets

1 points

QUESTION 29

1. _________ are the markets for short-term debts.

Capital markets

Money markets

Secondary markets

Mortgage markets

1 points

QUESTION 30

1. Total cash flow or free cash flow is ____________________.

without cost to the firm.

net income plus taxes.

an increase in net working capital.

cash flow in excess of that required to fund profitable capital projects.

None of the above.

1 points

QUESTION 31

1. The dividend growth rate is equal to the product of what two ratios?

ROA, current ratio

ROE, dividend payout ratio

ROE, retention ratio

PM, ROE

1 points

QUESTION 32

1. A reduction in the sales of an existing product caused by the introduction of a new product is an example of a(n) _________.

sunk cost

opportunity cost

erosion cost

fixed cost

1 points

QUESTION 33

1. An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Market Line has to

lend some of her money at the risk-free rate and invest the rest in the optimal risky portfolio.

borrow some money at the risk-free rate and invest it in the optimal risky portfolio

invest only in the risky securities.

hold a portfolio which is not diversified.

1 points

QUESTION 34

1. If other things remain the same, diversification is more effective when _________.

securities returns are negatively correlated.

securities returns are uncorrelated.

securities returns are positively correlated.

securities returns are high.

1 points

QUESTION 35

1. The optimal risky portfolio can be identified by finding .

the minimum variance point on the efficient frontier

the maximum return point on the efficient frontier

the tangency point of the capital market line and the efficient frontier

none of the above answers is correct.

1 points

QUESTION 36

1. The present value (PV) break-even point is better than the accounting break-even point because

PV break-even point is the same as the sensitivity analysis

PV break-even point covers the economic opportunity costs of the investment

PV break-even point covers the fixed costs of production, which the accounting break-even point does not.

PV break-even point covers the variable costs of production, which the accounting break-even point does not.

1 points

QUESTION 37

1. The date on which the right to the next dividend no longer accompanies a stock is called _________.

declaration date

holder-of-record date

ex-dividend date

payment date

1 points

QUESTION 38

1. Which of the following is not a hypothesis to explain the behavior of stock price after stock repurchases?

Information or Signaling Hypothesis

Leverage Hypothesis

Tax Differential Hypothesis

Efficient Market Hypothesis

1 points

QUESTION 39

1. During 2004, the Abel Co. had gross sales of $500,000. The firm’s cost of goods sold and selling expenses were $150,000 and $50,000, respectively. These figures do not include depreciation. Abel also had notes payable of $1,000,000. These notes carried an interest rate of 10 percent. Depreciation was $100,000. Abel’s tax rate in 2004 was 35%. What was Abel’s net income?

$57,500

$62,500

$63,500

$65,000

$67,500

1 points

QUESTION 40

1. In the above question, what was Abel’s operating cash flow?

$175,000

$200,500

$233,500

$265,000

$337,500

1 points

QUESTION 41

1. Tan Co. had total operating revenues of $1,000 over the past year. During that time, average receivables were $50. What was the average collection period (ACP) given a 365-day year?

18.25 days

22.5 days

36.5 days

47.5 days

73 days

1 points

QUESTION 42

1. Aunt Clara has promised to leave you $200 a year starting next year and have it increase at 6% a year thereafter. The payments are expected to go on indefinitely. How much has Aunt Clara left you if your opportunity cost is 10 percent?

$2,500

$3,000

$4,000

$5,000

$6,000

1 points

QUESTION 43

1. In the above question, what is the present value of the cash flows if the first payment will be made in five years?

$2,667

$3,023

$3,415

$4,212

$4,734

1 points

QUESTION 44

1. You borrowed $200,000 to buy a house. The annual interest rate is 7%. You are going to make monthly payments starting 1 month from today for 30 years. What is the monthly payment?

$1,234.2

$1,330.6

$1,731.7

$1,834.4

$2,220.5

1 points

QUESTION 45

1. In the above question, what is the remaining balance of the loan after 20 years’ payments?

$114,600

$133,238

$151,195

$155,321

$165,983

1 points

QUESTION 46

1. For the next 4 questions suppose the following data holds:

In 2006, the RCB Co. has cash flow from operations of $1000, and had net capital spending of $600. In addition, the firm’s net working capital increased by $250. Also, RCB paid $100 interest to the creditors and $80 dividends to the stockholders in 2006. RCB issued no new debts, and did not repurchase any of its common stock in 2006.

2. What was RBC’s total cash flow from assets in 2006?

100

150

180

250

450

1 points

QUESTION 47

1. What was RBC’s cash flow to creditors in 2006?

50

80

100

150

180

1 points

QUESTION 48

1. What was RBC’s cash flow to stockholders in 2006?

-100

50

80

100

120

1 points

QUESTION 49

1. How much new common stock did RBC issue in 2006?

30

50

60

80

100

1 points

QUESTION 50

1. For the next 8 questions suppose the following data holds:

IBC, Inc. is considering the purchase of a $300,000 computer that has an economic life of 5 years. The computer will be depreciated according to 5-year MACRS schedule (20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%). The market value of the computer will be $50,000 in 5 years. The use of computer will save annual costs of $100,000 for the next five years. For simplicity, these cost savings are assumed to occur at the end of these years. As a result of this project, the net working capital will increase by $40,000 immediately, and it will be recovered at the end of year 5. The firm’s tax rate is 40% and its cost of capital is 12%.

2. What is the initial investment requirement (t=0)?

$140,000

$200,000

$240,000

$260,000

$340,000

1 points

QUESTION 51

1. What is the operating cash flow one year from today (t=1)?

$73,824

$74,250

$83,040

$84,000

$98,400

1 points

QUESTION 52

1. What is the operating cash flow two years from today (t=2)?

$73,824

$74,250

$83,040

$84,000

$98,400

1 points

QUESTION 53

1. What is the operating cash flow three year from today (t=3)?

$73,824

$74,250

$83,040

$84,000

$98,400

1 points

QUESTION 54

1. What is the operating cash flow four years from today (t=4)?

$73,824

$74,250

$83,040

$84,000

$98,400

1 points

QUESTION 55

1. How much tax is the firm expected to pay when the asset is sold for $50,000 in year 5?

$8,543

$9,671

$10,127

$13,088

$15,233

1 points

QUESTION 56

1. What is the total cash flow five year from today (t=5)?

$97,431

$100,313

$112,452

$139,824

$150,736

1 points

QUESTION 57

1. What is the project’s NPV?

$4,998

$10,616

$15,231

$21,267

$22,347

1 points

QUESTION 58

1. For the next 4 questions suppose the following data holds:

Initial Investment

$8,000

Fixed Costs

$6,000/year

Variable Costs

$30/unit

Depreciation

$2,000/year

Price

$50/unit

Discount Rate

12%

Project Life

4 years

Tax rate

40%

2.
How much is the contribution margin (after-tax)?

$6

$8

$10

$12

$20

1 points

QUESTION 59

1. What is the accounting break-even point?

300 units

400 units

450 units

500 units

525 units

1 points

QUESTION 60

1. How much is the EAC of the initial investment?

$2,212

$2,356

$2,634

$2,856

$2,946

1 points

QUESTION 61

1. What is the PV break-even point?

412 units

453 units

487 units

522 units

571 units

1 points

QUESTION 62

1. You invest $100 in the market portfolio with an expected return of 12% and a standard deviation of 15%, and a T-bill that pays 5%. If you desire to form a portfolio with an expected return of 10%, what percentages of your money must you invest in the market portfolio?

45.3%

65.5%

71.4%

83.5%

85.24%

1 points

QUESTION 63

1. The market portfolio has an expected return of 12% and a standard deviation of 20 %. The standard deviation of ABC Company’s stock is 40% and its correlation coefficient with the market portfolio is 0.6.What is the beta of ABC’s stock?

0.75

0.9

0.95

1.0

1.2

1 points

QUESTION 64

1. For the next 2 questions suppose the following holds:

The risk-free rate is 6%, the market risk premium (=E(RM) – RF) is 9%.

2. You invest $600 in Security A with a beta of 1.2 and $400 in Security B with beta of 1.5. What is the beta of this formed portfolio?

1.15

1.3

1.32

1.41

1.52

1 points

QUESTION 65

1. Based on the CAPM, what is the required rate of return of your portfolio?

14.37%

15.42%

16.68%

17.88%

18.25%

1 points

QUESTION 66

1. The following information applies to the next 10 problems.

The Wallace Corporation is a zero growth firm with an expected EBIT of $800,000 on a permanent basis, and corporate tax rate of 40 percent. Wallace uses no debt, and the cost of equity to an unlevered firm in the same risk class is 12.0 percent. The firm has 100,000 shares outstanding.

2. What is the value of the firm?

$2,500,000

$2,800,000

$3,800,00

$4,000,000

$4,400,000

1 points

QUESTION 67

1. What is the EPS (earnings per share) of the firm?

$4.0

$4.2

$4.4

$4.6

$4.8

1 points

QUESTION 68

1. What is the price per share of the firm’s stock?

$34

$36

$38

$40

$44

1 points

QUESTION 69

1. The following information applies to the next 7 problems.

Now, the Wallace Corporation decides to change its capital structure by borrowing $1.5 million at 8% interest on a permanent basis, and repurchasing some of its stocks.

We still assume the same information from above.
The Wallace Corporation is a zero growth firm with an expected EBIT of $800,000 on a permanent basis, and corporate tax rate of 40 percent. When Wallace used no debt, and the cost of equity to an unlevered firm in the same risk class is 12.0 percent. The firm had 100,000 shares outstanding before the repurchase.

2. What is the value of the firm with $1.5 million debt, according to MM with corporate taxes?

$3,600,000

$3,800,000

$4,350,00

$4,600,000

$5,250,000

1 points

QUESTION 70

1. What is the value of equity?

$2,700,000

$3,100,000

$3,350,000

$3,450,000

$3,750,000

1 points

QUESTION 71

1. What is the firm’s cost of equity when the firm uses $1,500,000 debt?

12.5%

13.16%

13.54%

14.25%

15.16%

1 points

QUESTION 72

1. What is the stock price of the firm at which shares are repurchased?

$38

$40.33

$43

$44

$46

1 points

QUESTION 73

1. What is the number of shares the firm repurchases with $1,500,000?

32,609

34,091

34,884

37,190

39,474

1 points

QUESTION 74

1. What is the EPS (earnings per share) of the firm, when the firm uses $1,500,000 debt?

$5.35

$5.53

$5.77

$6.05

$6.42

1 points

QUESTION 75

1. What is the firm’s value when both corporate and personal taxes are considered. Assume that the personal tax rates of Wallace’s investors are 30 percent on debt (interest) income and 20 percent (on average) on income from stocks.

$4,00,000

$4,211,333

$4,314,286

$4,471,429

$4,600,000

1 points

QUESTION 76

1. For the next 8 questions suppose the following data.

The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3.

2.

In addition to the information above, suppose the APV approach is used to evaluate the project for the next 4 questions.

3. How much is the unlevered cash flow?

$72,000

$84,000

$100,000

$120,000

$144,000

1 points

QUESTION 77

1. What is the NPV of the project to an all-equity firm?

$-34,451

$-26,471

$-12,417

$25,376

$34,451

1 points

QUESTION 78

1. What is the NPV of the financing side effects (NPVF)?

$44,334

$57,754

$62,250

$65,000

$75,250

1 points

QUESTION 79

1. What is the APV of the project?

$12,341

$27,799

$31,283

$35,779

$45,337

1 points

QUESTION 80

1. Suppose the FTE approach is used to evaluate the project for the next 3 questions.
Use the information in Problem 76,

How much is the levered cash flow?

$42,250

$48,000

$55,236

$64,203

$70,520

1 points

QUESTION 81

1. What is the rS, discount rate for the equity of the levered firm?

16.25%

18.14%

19.06%

19.67%

20.20%

1 points

QUESTION 82

1. What is the Initial Net Equity Investment?

$200,000

$225,500

$250,500

$275,500

$305,615

1 points

QUESTION 83

1. For the next question suppose the WACC approach is used to evaluate the project.
Use the information in Problem 76,

What is the rWACC of the project?

12.48%

13.33%

14.96%

15.23%

18.34%

1 points

QUESTION 84

1. The following data apply to the next 2 problems.

Suppose Mr.X wants to sell a share of ABD stock which he bought for $100 two years ago. The selling price today is $140. He pays 20% tax on capital gains and pays 30% tax on dividend income. Suppose further that tomorrow is the ex-dividend date, and the amount of dividend is $5 per share.

2.
If he sells the stock today, what would be the after-tax income from the sales?

$130

$131.5

$132

$133

$140

1 points

QUESTION 85

1. If he can sell the share for $135 tomorrow morning, what would be the after-tax income from the sales?

$130

$131.5

$132

$133

$140

1 points

QUESTION 86

1. The following data apply to the next 2 problems.

Midwest Electric recently declared a 20 percent stock dividend. On the date of the stock dividend Midwest had 16 million shares outstanding priced at $46 per share in the market. An accounting entry was required on the balance sheet transferring some retained earnings to the common stock account. Retained earnings were $280 million prior to the transaction. (See the table below.)

2.

Stockholders’ Equity Accounts (millions of dollars)
(Before Stock Dividend)

Common Stock (16 million shares outstanding, $2 par)

$32

Additional Paid-in capital

88

Retained Earnings

280

Total common stockholders’ equity

400

3.

What was the dollar amount of retained earnings after the transfer?

$130m

$131.25m

$132.8m

$134.4m

$145m

1 points

QUESTION 87

1. What was the dollar amount of par value after the transfer?

$33.8m

$36.8m

$38.4m

$44.8m

$50.2m

1 points

QUESTION 88

1. Strategic Systems Inc. expects to have net income of $1,000,000 during the next year. Its target, and current, capital structure is 40 percent debt and 60 percent common equity. The Director of Capital Budgeting has determined that the optimal capital budget for next year is $1.2 million. If Strategic uses the residual dividend model to determine next year’s dividend payout, what is the expected payout ratio?

20%

24%

28%

30%

34%

1 points

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