Fin 2a

Question 1
2 points
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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
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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
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Fixed operating costs do not include:

interest changes

rent

depreciation

all of the above

Question 4
2 points
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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If the cash flow pattern for a project has two sign reversals, then there can be as many as ____ positive IRRs.

1

2

3

4