(1) The weighted average cost of capital for a firm is the:
(A) Discount rate which the firm should apply to all of the projects it undertakes.
(B) Rate of return a firm must earn on its existing assets to maintain the current value of its stock.
(C) Coupon rate the firm should expect to pay on its next bond issue.
(D) Maximum rate which the firm should require on any projects it undertakes.
(2) A firm with high operating leverage is characterized by __________ while one with high financial leverage is characterized by __________
(A) low fixed cost of production; low fixed financial costs
(B)high variable cost of production; high variable financial costs
(C) high fixed costs of production; high fixed financial costs
(D) low costs of production; high fixed financial costs
(3) Which one of the following statements is correct concerning the weighted average cost of capital (WACC)?
(A) The WACC may decrease as a firm's debt-equity ratio increases.
(B) A firm's WACC will decrease as the corporate tax rate decreases.
(C) The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.
(D) The WACC will remain constant unless a firm retires some of its debt.
(4) Cameron Industries is expected to pay an annual dividend of $1.30 a share next month. The market price of the stock is $24.80 and the growth rate is 3 percent. What is the firm's cost of equity?
(A) 7.58 percent
(B) 7.91 percent
(C) 8.24 percent
(D) 8.40 percent
(5) In calculating the proportional amount of equity financing employed by a firm, we should Use:
(A) The common stock equity account on the firm's balance sheet.
(B) The sum of common stock and preferred stock on the balance sheet.
(C) The book value of the firm.
(D) The current market price per share of common stock times the number of shares outstanding.
(6) In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?
(A) Common stock
(B) Debt
(C) Preferred stock
(D) Reserves & Surplus
(7) The common stock of a company must provide a higher expected return than the debt of the same company because
(A) There is less demand for stock than for debenture.
(B) There is greater demand for stock than for debenture
(C) There is more risk involved for the common debenture
(D) There is a market premium required for debenture
(8) Market values are often used in computing the weighted average cost of capital because
(A) This is the simplest way to do the calculation
(B) This is consistent with the goal of maximizing shareholder value
(C) This is required in the India by the Securities and Exchange Commission
(D) This is a very common mistake.
(9) A critical assumption of the net operating income (NOI) approach to valuation is:
(A) That debt and equity levels remain unchanged
(B) That dividends increase at a constant rate
(C) ThatKoremains constant regardless of changes in leverage
(D) That interest expense and taxes are included in the calculation.
(10) EBIT is usually the same thing as:
(A) Funds provided by operations
(B) Earnings before taxes
(C) Net income
(D) Operating profit.
(11) If a firm has a DOL of 5 at Q units, this tells us that:
(A) If sales rise by 5%, EBIT will rise by 5%.
(B) If sales rise by 1%, EBIT will rise by 1%
(C) If sales rise by 5%, EBIT will fall by 25%.
(D) If sales rise by 1%, EBIT will rise by 5%
(12) A firm's degree of total leverage (DTL) is equal to its degree of operating leverage ______ degree of financial leverage (DFL)
(A) Plus
(B) Minus
(C) Divided by
(D) Multiplied by
(13) SCC Inc. has the following financial information:
Current liabilities $900,000
Long-term debt $1,300,000
Total liabilities $2,200,000
Preferred shares $3,500,000
Common equity $6,200,000
The long-term debt consists of a single bond issue paying 6% interest annually. These bonds currently yield 7.5% in the market. The current cost of the preferred shares is 8%.
The current cost of the common shares is 12%. The company’s tax rate is 40%. What is SCC Inc.’s weighted average cost of capital (rounded to the nearest tenth of a percent)?
(A) 9.4%
(B) 10.2%
(C) 9.8%
(D) 9.2%
(14) Flower Inc. is issuing preferred shares to raise capital. Each preferred share will be issued with a par value of $200 and a cumulative dividend of $18. The preferred shares will result in after-tax underwriting expenses of $3 per share. What is the cost of issuing the preferred shares?
(A) 9.14%
(B) 9.00%
(C) 7.50%
(D) 10.50%
(15) Under Net present value criterion, a project is approved if
(A) Its net present value is positive
(B) The funds are unlimited
(C) Both (A) and (B)
(D) None of the above
(16) The project is accepted of
(A) if the profitability index is equal to one
(B) if the profitability index is less than one
(C) If the profitability index is greater than one
(D) if the profitability index is equal to zero
(17) A project is accepted when
(A) Net present value is greater than zero
(B) Internal Rate of Return will be greater than cost of capital
(C) Profitability index will be greater than unity
(D) Any of the above
(18) A project costs $18,000. The estimated annual cash inflows during its 3-year life are Rs. 8,000, Rs. 7,000 and Rs. 6,000 respectively. What will be the pay-back period?
(A) 2 years
(B) 2.5 years
(C) 3 years
(D) 4 years
(19) ____________ of a project is the sum of all present values of all cash inflows minus present value of outflows?
(A) Pay Back Period
(B) Internal Rate of Return
(C) Benefit Cost Ratio
(D) NPV
(20) Criteria that measures how quickly project will return its original investment is?
(A) Accounting rate of return
(B)Payback period
(C) Internal rate of return
(D) Benefit cost ratio
(21) Indifference criteria when BCR (Benefit Cost Ratio)?
(A) BCR > 1
(B) BCR = 1
(C) BCR < 1
(D) None of above
(22) Criterion for IRR (Internal Rate of Return)?
(A) Accept IRR > Cost of capital
(B) Accept IRR < Cost of capital
(C) Accept IRR = Cost of capital
(D) none of the above
(23) Capital Budgeting is a part of:
(A) Investment Decision
(B) Working Capital Management
(C) Marketing Management
(D) Capital Structure
(24) Capital Budgeting Decisions are:
(A) Reversible
(B) Irreversible
(C) Unimportant
(D) All of the above
(25) Woatich Windmill Company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project? [(Hint: The cash flows from the project are an annuity so you can solve for i in the equation PVA = R(PVIFAi,10).]
(A) 6 percent
(B) 7 percent
(C) 8 percent
(D) 9 percent
