BUSN 379 MCQs

2. (TCO 4) There are several disadvantages to the payback method, among them: (Points : 4)

       payback ignores the time value of money.
       payback can be used in conjunction with time adjusted methods of evaluation.
       payback is easy to use and to understand.
       none of the above is a disadvantage.

6. (TCO 4) Ignoring the option to expand: (Points : 4)

       overestimates the internal rate of return on a project.
       ignores the possibility that a negative net present value project might be positive, given changes over time.
       ignores the possibility that one variable is the primary source of the forecasting risk associated with a project.
       underestimates the net present value of a project.

7. (TCO 4) ___________, occurs when a firm cannot raise financing for a project under any circumstances. (Points : 4)

       contingency planning.
       hard rationing.
       soft rationing.
       capital constraint.
       scenario analysis.

8. (TCO 3 and 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4)

       The net present value of the project is $11,000
       This project should be accepted because it has a negative net present value
       This project should be accepted because it has a payback higher than 3 years
       The net present value of the project is close to $1,000

11. (TCO 8) Which of the following factors will affect the expected rate of return on a security? (Points : 4)

       multiple states of the economy
       probability of occurrence for any one economic state
       market rate of return given a particular economic state
       all of the above will affect the expected rate of return

12. (TCO 8) Which statement is true regarding risk? (Points : 4)

       the expected return is usually the same as the actual return
       a key to assess risk is determining how much risk an investment adds to a portfolio
       risks can always be decreased or mitigated by the financial manager
       the higher the risk, the lower the return investors require for the investment

15. (TCO 8) Stock A has an expected return of 14 percent and a beta of 1.3. Stock B has an expected return of 10 percent and a beta of .9. Both stocks have the same reward-to-risk ratio. What is the risk-free rate? (Points : 4)

       1.0 percent
       1.8 percent
       2.3 percent
       2.5 percent
       3.1 percent

1. (TCO 8) Weak form market efficiency states that the value of a security is based on: (Points : 4)

       all public and private information.
       historical information only.
       all publicly available information.
       all publicly available information, plus any data that can be gathered from insider trading.
       random information with no clear distinction as to the source of that information.

2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 6 percent (after-tax) and common equity at a cost of 18 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points : 4)

       between 3 and 9%
       exactly 12%
       more than 14%
       exactly 11%
       none of the above

3. (TCO 5, 6 and 7) An issue of common stock is selling for $57.20. The year end dividend is expected to be $2.32, assuming a constant growth rate of six percent. What is the required rate of return? (Points : 4)

       10.3%
       10.1%
       4.1%
       5.8%

4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points : 4)

       It is the return that the firm’s creditors demand on new borrowing.
       It is always equal to the weighted cost of capital.
       An appropriate method to compute the cost of debt is using the coupon rate of current bonds outstanding.
       All of the above are true.

5. (TCO 5) Which of the following is true regarding the cost of retained earnings? (Points : 4)

       it is irrelevant to the WACC
       requires new funds to be raised
       need to be adjusted for the flotation costs
       have a cost, which is the opportunity cost associated with stockholder funds

7. (TCO 5, 6 and 7)  Which one of the following is a correct statement? (Points : 4)

       Current tax laws favor debt financing.
       A decrease in the dividend growth rate increases the cost of equity.
       An increase in the systematic risk of a firm will decrease the firm’s cost of capital.
       A decrease in a firm’s debt-equity ratio will usually decrease the firm’s cost of capital.
       The cost of preferred stock decreases when the tax rate increases.

8. (TCO 5, 6 and 7) The preferred stock of Blue Sky Air pays an annual dividend of $7.25 a share and sells for $54 a share. The tax rate is 35 percent. What is the firm’s cost of preferred stock? (Points : 4)

       8.56 percent
       9.32 percent
       11.85 percent
       13.43 percent
       14.47 percent

9. (TCO 2) Which one of the following occurs if a firm files for Chapter 7 bankruptcy, but does not generally occur if the firm files for Chapter 11 bankruptcy? (Points : 4)

       a petition is filed in federal court
       administrative fees are incurred
       a list of creditors is compiled
       pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm
       a trustee-in-bankruptcy is elected by the creditors

10. (TCO 5) Which of the following statements is true regarding the cost of capital? (Points : 4)

       The cost of capital should not consider any flotation costs.
       All other being equal, it is preferable to use book value weights than market value weights.
       The WACC is the most appropriate discount rate for all projects.
       Depends primarily on the use of the funds, not the source.

11. (TCO 2) Which of the following increases the cash account? (Points : 4)

       Goods are sold on credit
       An interest payment on a notes payable is made
       A payment due is received from a client
       Raw materials are purchased and paid for with credit

12. (TCO 2) Which of the following statements is true? (Points : 4)

       The optimal credit policy minimizes the total cost of granting credit.
       Firms should avoid offering credit at all cost.
       An increase in a firm’s average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.
       Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.
       The optimal credit policy, is the policy that produces the largest amount of sales for a firm.

13. (TCO 2) All else constant, a decrease in the accounts receivable period will: (Points : 4)

       lengthen the accounts payable period.
       shorten the inventory period.
       lengthen the operating cycle.
       shorten the cash cycle.
       shorten the accounts payable period.

14. (TCO 2) Highland, Inc. has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. How much does the firm expect to collect in the fourth quarter? Assume that each month has 30 days. 

Q1

Q2

Q3

Q4

Sales

$3,200

$4,500

$4,400

$2,900

(Points : 4)

       $3,250
       $3,400
       $3,600
       $3,750
       $3,900

15. (TCO 1) Which one of the following actions best matches the primary goal of financial management? (Points : 4)

       increasing the net, working capital while lowering the long-term asset requirements
       improving the operating efficiency, thereby increasing the market value of the stock
       increasing the firm’s market share
       reducing fixed costs and increasing variable costs
       increasing the liquidity of the firm by transferring short-term debt into long-term debt

1. (TCO 1) Which of the following are capital structure concerns?
I. how to obtain short-term financing
II. the company’s financing mix
III. the cost of funds
IV. how and where to raise money (Points : 4)

       I and II
       I, II and III
       II, III and IV
       I, III and IV
       All of the above

2. (TCO 1) Market value is important to the financial manager because: (Points : 4)

       It reflects the value of the asset based on generally-accepted accounting principles.
       Is a crucial component of the balance sheet, and can impact the financial statements.
       Market values reflect the amount someone is willing to pay today for an asset. The market value of an asset reflects its historical cost.

4. (TCO 3) Regional Bank offers you an APR of nine percent compounded quarterly, and Local Bank offers you an EAR of 9.15 percent for a new automobile loan. You should choose ______________ because its _______ is lower. (Points : 4)

       Regional Bank, APR
       Local Bank, EAR
       Regional Bank, EAR
       Local Bank, APR

5. (TCO 3) You deposited $5,000 in your bank account today. An increase in which of the following will increase the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply: (Points : 4)

        interest rate
        initial amount of your deposit
        frequency of the interest payments
        length of the investment period

7. (TCO 3) Paper Pro needed a new store. The company spent $65,000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at eight percent interest for 11 years. What is the amount of each monthly payment? (Points : 4)

       $91.05
       $284.13
       $556.50
       $682.87
       $731.60

8. (TCO 3) Which type of loan is comparable to the present value of a future lump sum? (Points : 4)

       effective annual rate
       amortized
       interest-only
       annual percentage
       pure discount

9. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 13 percent? Assume annual payments. (Points : 4)

       $1078
       $1085
       $927
       $1000

10. (TCO 6) The market where new securities are offered is called the _____ market. (Points : 4)

       primary
       main
       secondary
       principal
       dealer

11. (TCO 7) A taxpaying, levered firm’s optimal capital structure: (Points : 4)

       is 100 percent equity financing.
       consists of equal amounts of debt and equity financing.
       is the mixture of debt and equity financing that minimizes the firm’s aftertax cost of debt.
       is the mixture of debt and equity financing that minimizes the weighted average cost of capital.
       is 100 percent debt financing.

12. (TCO 3) SmithKline Company’s bonds are currently selling for $1,157.75 per $1000 par-value bond. The bonds have a 10 percent coupon rate and will mature in 10 years. What is the approximate yield to maturity? (Points : 4)

       6.96%
       7.69%
       11.0%
       12.1%

13. (TCO 8) Which of the following is true regarding bonds? (Points : 4)

       Bonds do not carry default risk.
       Bonds are sensitive to changes in the interest rates.
       Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
       Municipal bonds are free of default risk.
       None of the above is true

14. (TCO 8) Two years ago, Maple Enterprises issued six percent, 20-year bonds and Temple Corp issued six percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm’s bond prices in the market, assuming they have equal risk? (Points : 4)

       Maple’s decreased more than Temple’s
       Temple’s decreased more than Maple’s
       Maple’s increased more than Temple’s
       They are both priced the same

15. (TCO 6) A call provision in a bond agreement grants the issuer the right to: (Points : 4)

       repurchase the bonds prior to maturity at a pre-specified price.
       replace the bonds with equity securities.
       repurchase the bonds after maturity at a pre-specified price.
       change the coupon rate, provided the bondholders are notified in advance.
       buy back the bonds on the open market prior to maturity.