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WorksheetsFINAL LONG QUIZ - FIN MAN
Total questions: 85
Worksheet time: 2hrs 10mins
When evaluating an investment, which option should a firm choose to maximize its benefits?
the least costly source of financing
the most costly source of financing
the weighted average cost of all financing sources
the current opportunity cost
Which financing source should a firm use when evaluating an investment?
The least costly source of financing
The most costly source of financing
The weighted average cost of all financing sources
The current opportunity cost
Choose the right statement from the following:
Cost of debt is always higher than cost of equity
Cost of debt is always lower than cost of equity
Cost of debt can be higher or lower than cost of equity
When company doesn't pay dividend, the cost of equity is zero
The average of a firm's cost of equity and after tax cost of debt that is weighted based on the firm's capital structure is called the:
weighted capital gains rate.
structured cost of capital.
subjective cost of capital
weighted average cost of capital.
Assume that ABC Corporation has the following capital structure: 30 percent debt,10 percent preferred stock, and 60 percent common stock. ABC Corporation wishes to maintain these proportions as it raises new funds. Its before-tax cost of debt is 8 percent, its cost of preferred stock is 10 percent, and its cost of equity is 15 percent.
If the company’s marginal tax rate is 40 percent, what is ABC’s weighted average cost of capital?
12.30%
11.44%
10.44%
13.78%
If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:
I. reject some positive net present value projects.
II. accept some negative net present value projects.
III. favor high risk projects over low risk projects.
IV. increase its overall level of risk over time.
I and III only
III and IV only
I, II, and III only
I, II, III, and IV
Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of equity?
7.58 percent
7.91 percent
8.24 percent
8.57 percent
Sweet Treats common stock is currently priced at $19.06 a share. The company just paid $1.15 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. What is the cost of equity for Sweet Treats?
6.03 percent
6.18 percent
8.47 percent
8.68 percent
A company has paid a dividend of 10c for many years.
The company expects to continue paying dividends at this level in the future.
The company’s current share price is $1.50.
Calculate the cost of equity.
6%
7.66%
6.67%
7.77%
P Co has just paid a dividend of 10c.
Shareholders expect dividends to grow at 7% pa. P Co’s current share price is $2.05 ex div.
Calculate the cost of equity of P Co.
11.21%
3.1%
10%
12.21%
What is the main objective of Financial Management according to Divya, Naira, and Aisha?
Maximization of profit.
Maximization of shareholder's wealth.
Ensuring Financial discipline in the firm.
All of these.
Cost of capital is what?
Lesser than the cost of debt capital.
Equal to the last dividend paid to the equity shareholders.
Equal to the dividend expectations of equity shareholders for the coming year.
None of the above.
Cost of capital is what?
Lesser than the cost of debt capital.
Equal to the last dividend paid to the equity shareholders.
Equal to the dividend expectations of equity shareholders for the coming year.
None of the above.
All of the following statements are correct regarding cost of debt EXCEPT
Before-tax cost of debt is often taken as the total interest on the loan
Cost of debt is also refer to the before-tax cost of debt
Cost of debt is also refer to the after-tax cost of debt
Payment of interest on loan is tax deductible
Which of the following statements is correct?
The appropriate tax rate to use in the adjustment of the before-tax cost of
debt to determine the after-tax cost of debt is the average tax rate because
interest is deductible against the company's entire taxable income.
For a given company, the after-tax cost of debt is generally less than both
the cost of preferred equity and the cost of common equity.
For a given company, the investment opportunity schedule is upward slop-
ing because as a company invests more in capital projects, the returns from
investing increase.
The cost of equity is equal to the:
expected market return.
rate of return required by stockholders.
cost of retained earnings plus dividends.
An analyst gathered the following information about a company and the
market: (See attachment)
Using the Capital Asset Pricing Model (CAPM) approach, the cost of retained
earnings for the company is closest to:
13.6%
15.7%
16.1%
17.8%
A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can
increase the proportion of long term debt to decrease the cost of capital
increase the proportion of short term debt to decrease the cost of capital
decrease the proportion of common stock equity to decrease financial risk
increase the proportion of common stock equity to decrease financial risk
A firm should use .............. when evaluating an investment
the least costly source of financing
the most costly source of financing
the weighted average cost of all financing sources
the current opportunity cost
Choose the right statement from the following:
Cost of debt is always higher than cost of equity
Cost of debt is always lower than cost of equity
Cost of debt can be higher or lower than cost of equity
When company doesn't pay dividend, the cost of equity is zero
A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5%. The cost of the firm's commonstock equity is
5%
8%
10%
13%
The Capital Structure of a company means
the proportion between LT debt and equity
the proportion between liability and equity
the proportion between liability and total asset
the proportion between ST debt + LT debt and equity
Cost of capital can be divided into three item except;
Cost of debt
Cost of preferred share
Cost of investment
Cost of common share
Choose the incorrect statement regarding cost of capital
It takes business risk and financial risk into consideration
Capital structure of a company consist of mixture between debt and equity
Cost of capital must be able to maintain the firm’s market value
Maximum required rate of return to offset the effect of risk associated with business
What term is not related to cost of capital?
rate of return
market value of the firm
financial statements
investments/
projects
All of the following statements are correct regarding cost of debt EXCEPT
Before-tax cost of debt is often taken as the total interest on the loan
Cost of debt is also refer to the before-tax cost of debt
Cost of debt is also refer to the after-tax cost of debt
Payment of interest on loan is tax deductible
Choose the incorrect statement regarding cost of capital
It takes business risk and financial risk into consideration
Capital structure of a company consist of mixture between debt and equity
Cost of capital must be able to maintain the firm’s market value
Maximum required rate of return to offset the effect of risk associated with business
All of the following statements are correct regarding cost of debt EXCEPT
Before-tax cost of debt is often taken as the total interest on the loan
Cost of debt is also refer to the before-tax cost of debt
Cost of debt is also refer to the after-tax cost of debt
Payment of interest on loan is tax deductible
A single, overall cost of capital is often used to evaluate projects because
it is the only way to measure a firm's required return.
it acknowledges that most new investment projects have about the same degree of risk.
it avoids the problem of computing the required rate of return for each investment proposal.
it acknowledges that most new investment projects offer about the same expected return.
The cost of equity capital is all of the following EXCEPT:
generally lower than the before-tax cost of debt.
by far the most difficult component cost to estimate.
the minimum rate that a firm should earn on the equity-financed part of an investment.
a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
What is the relationship between benefits from investment and costs for investment?
Exponential
No relationship
Inversely proportional
Directly proportional
Which project should be accepted based on the Accounting Rate of Return (ARR) if the threshold is 15%?
Project A
Project B
Both projects
Neither project
What is the Profitability Index (PI) also known as?
Return on Investment (ROI)
Benefit/Cost Ratio
Cost Efficiency Index
Investment Efficiency Ratio
What is the formula for calculating the Payback Period (PP)?
Initial Investment / Annual Cash Inflows
Annual Cash Inflows / Initial Investment
Initial Investment - Annual Cash Inflows
Annual Cash Inflows - Initial Investment
How is the Payback Rule (PP) different from the Discounted Payback Period?
Discounted Payback Period is more accurate than PP
PP is used for short-term investments, while Discounted Payback Period is used for long-term investments
Discounted Payback Period considers the time value of money, while PP does not
PP considers the time value of money, while Discounted Payback Period does not
What is the formula for calculating the Profitability Index (PI)?
Initial Investment / Present Value of Future Cash Flows
Total Revenue / Total Costs
Total Costs / Total Revenue
Present Value of Future Cash Flows / Initial Investment
What does capital budgeting help companies decide?
Which short-term projects to invest in
Which long-term projects to invest in
Which assets to sell
Which employees to hire
What is the internal rate of return (IRR)?
The rate of return on all investments
The discount rate that makes the NPV zero
The average return on equity
The interest rate on loans
What does the payback period method calculate?
The total profit from an investment
The time it takes to recover the initial investment and ignores the time value of money
The rate of return on investment
The discount rate for cash flows
Capital budgeting decisions typically affect a company’s:
Short-term investments
Long-term investments
Daily operations
Employee salaries
What does IRR stand for?
Internal Return Rate
Internal Rate of Return
Investment Rate of Return
Instant Return Rate
What is incremental cash flow?
Total revenue generated from all projects
The additional cash flow generated by an investment
The cash flow from operating activities
The total cash flow of the company
What is the advantage of using NPV over IRR?
NPV is more accurate than IRR
NPV provides a dollar value of profitability, while IRR gives a percentage return
NPV is easier to calculate
NPV ignores the time value of money
What is capital structure?
The management of a company's operations
The mix of debt and equity financing used by a company
The total assets owned by a company
The ratio of profits to expenses
B Corporation is planning to invest P420,000 in a new machine which will depreciate on a straight line basis over 10 years with zero salvage value. The new machine is expected to generate cash flows from operations, net of income tax, of P50,000 per year in each of the first six years and P60,000 per year in each of the last four years of its lie. What is payback period?
7.8 years
4.4 years
8years
7.6 years
Vhong Corporation has determined that if a new equipment costing P120,000 is purchased, the company's net income will increase by P10,000 per year. If the new equipment will be depreciated using the straight line method over a period of 6 years to a zero salvage value, the payback periodis
6 years
12 years
0
4 years
Bukay Corp is planning to purchase a new machine for P140,000. The machine has estimated useful life of 4 years with no salvage value. It will be depreciated on a straight line basis. In evaluating the proposal to acquire the new machine, the company's accountant calculated the book value rate of return to be 10% based on the initial investment in the new machine. The new machine is expected to produce annual net after tax cash inflows from operations of
P14,000
(21,000)
P35,000
P49,000
A new system will require an increase in working capital of P500,00, bit it is expected to generate additional sales of P100,000 per year, if the gross profit rate is 40% and the incremental fixed costs is P20,000, the payback period in years (ignore income taxes) is
20%
2 years
2.50 years
.50 years
What is working capital?
Fixed assets
Current assets - Current liabilities
Total assets
Long-term debt
Which of the following is not a component of current assets?
Inventory
Accounts Receivable
Land and Buildings
Cash
A company's working capital is negative. What does this indicate?
The company is in financial trouble
The company is very profitable
The company has a strong liquidity position
The company's assets are undervalued
What is the primary goal of working capital management?
Maximizing long-term profitability
Minimizing current assets
Minimizing current liabilities
Ensuring liquidity and solvency
Which ratio measures the efficiency of a firm's working capital management?
Net Profit Margin
Debt to Equity Ratio
Return on Assets (ROA)
Inventory Turnover Ratio
A company with a high current ratio is likely to have:
Excessive liquidity
Insufficient liquidity
High profitability
Low profitability
Which of the following is not a source of short-term financing?
Bank loans
Trade credit
Long-term bonds
Commercial paper
The policy of maintaining a higher level of current assets to meet unexpected fluctuations in demand or supply is known as:
Aggressive working capital policy
Conservative working capital policy
Moderate working capital policy
Neutral working capital policy
Which of the following is not a factor that affects a company's working capital needs?
Seasonality of sales
Supplier credit terms
Economic conditions
Management's salary
Which of the following working capital management strategies focuses on minimizing the investment in current assets while maintaining a reasonable level of liquidity?
Aggressive working capital policy
Conservative working capital policy
Moderate working capital policy
Neutral working capital policy
Which financing method is commonly associated with an aggressive working capital policy?
Short-term debt
Long-term debt
Equity financing
Retained earnings
Which financing method is commonly associated with an aggressive working capital policy?
Short-term debt
Long-term debt
Equity financing
Retained earnings
What is a potential downside of pursuing an aggressive approach to managing working capital?
Decreased risk of insolvency
Lower interest expenses
More difficult access to long-term financing
Faster inventory turnover
What is a potential downside of pursuing an aggressive approach to managing working capital?
Decreased risk of insolvency
Lower interest expenses
More difficult access to long-term financing
Faster inventory turnover
What is the main drawback of a conservative working capital policy?
Lower liquidity
High risk of insolvency
Increased financing costs
Difficulty in obtaining short-term loans
What is a working capital?
It is the capital used for running day-to-day operations.
It is referred to as circulating capital.
both
Working Capital Management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelations that exist between them.
True
False
It is the difference between operating current assets and operating current liabilities.
Net Operating Working Capital
Permanent/Fixed Working Capital
Net Working Capital
Trade Receivables are expected to be released in cash within the normal operating cycle or one year.
True
False
________ is a part of the total assets of the company.
current assets
current liabilities
working capital
To financial analysts, “Working Capital” means the same as:
Current Assets – Total Liabilities
Total Assets – Current Liabilities
Total Assets – Total Liabilities
Current Assets – Current Liabilities
What are the aspects of Working Capital Management?
Receivable management
Inventory management
Cash management
All of the above
Current liabilities are debts that have to be paid ________
in the next 12 months
in the next 5 years or more
in order to buy a current asset
to buy more working capital
The working capital situation of a firm can be improved by obtaining ______________ forms of _____________ term finance.
external, short
internal, long
What does the operating cycle measure?
Time between purchasing raw materials and collecting cash from sales
The company's ability to meet long-term financial obligations
The effectiveness of the company's marketing campaigns
The duration of long-term debt
Which of the following is a reason why companies manage working capital?
To secure long-term investment opportunities
To meet short-term operational needs and expenses
To prepare for merger and acquisitions
To evaluate the company's strategic vision
What is the main purpose of sourcing capital in corporate finance?
For political campaigns
For charity organizations
For business expansions
For personal use
What is the main goal of corporate financial planning?
To discourage investors
To hide financial data
To promote transparency and accuracy for future planning
To create confusion
What is the main purpose of capital financing in corporate finance?
To manage human resources
To fund projects/operations
To handle customer service
To handle marketing strategies
What are the three corporate finance activities?
Debt financing, Equity financing, Asset management
Investment banking, Equity investors, Financial intermediaries
Capital financing, Working capital management, Tactical planning
Capital budgeting, Financial accounting, Strategic planning
What is the main goal of strategic planning in corporate management?
Minimizing tax liabilities
Maximizing the entity’s future position
Minimizing operational costs
Maximizing short-term profits
What is the role of corporate planning in managing business finances?
Forecasting and budgeting for flexibility
Ensuring compliance with labor laws
Maximizing advertising expenditure
Minimizing employee turnover
What is the significance of a contingency plan in strategic planning?
Maximizing employee satisfaction
Minimizing operational disruptions
Maximizing short-term profits
Minimizing tax liabilities
What is the purpose of a business plan in corporate management?
Maximizing customer satisfaction
Guiding business operations
Maximizing market share
Minimizing environmental impact
What is the main objective of corporate planning?
Minimizing long-term liabilities
Maximizing employee productivity
Maximizing short-term revenue
Directing and controlling the future of the company
Who runs the company operations for large companies?
Shareholders
Board of Directors
External auditors
Stakeholders
What is the most important lesson/s you have learned in this subject? (6 points)
