WorksheetsCh.10-11-14-15 Sample Exam
Total questions: 51
Worksheet time: 26mins
When estimating the WACC, the firm's capital structure weights should ideally be based on:
Book values of debt and equity
Target capital structure based on market values
Historical cost of capital allocations
Net working capital ratios
Par values of securities
If a firm's debt-to-equity ratio increases, assuming the cost of debt is lower than equity and taxes are constant, the WACC will:
Always increase
Always decrease
Initially decrease, then increase
Remain unchanged
Be equal to the cost of equity
Which method incorporates both business risk and financial risk into the cost of equity estimation?
Pure-play method
CAPM
WACC
Bond-yield-plus-risk-premium
Dividend-discount model
If flotation costs are ignored in the DCF method, then the estimated cost of new common equity:
Will be too low
Will be too high
Will remain accurate
Will equal the WACC
Cannot be estimated
The WACC is most appropriate when evaluating:
Projects with varying risk profiles
Projects of similar risk to the firm's existing assets
Projects with negative NPV
Projects funded entirely with debt
Speculative investments
When calculating the after-tax cost of debt for WACC purposes, analysts should use:
The yield to maturity on new debt
The average coupon on outstanding debt
The cost of equity times debt beta
The marginal tax rate divided by interest expense
The prime rate plus credit risk spread
A firm's stock just paid a dividend of $2.50. If the dividend is expected to grow at 6% and the current price is $62, what's the cost of equity using the Gordon Growth Model?
10.0%
10.3%
10.5%
11.1%
11.4%
All else constant, increasing a firm's debt in the capital structure typically:
Raises the cost of equity due to increased financial risk
Lowers the cost of equity due to higher leverage
Decreases WACC indefinitely
Eliminates default risk
Has no impact on value
Which of the following is least likely to affect a firm's WACC?
Risk-free rate
Tax rate
Capital structure
Dividend payout ratio
Market risk premium
The cost of retained earnings is:
Lower than debt
Free of cost since no flotation is involved
Equal to the cost of new equity
Equal to the opportunity cost to shareholders
Ignored in capital budgeting
A key assumption of IRR is:
Cash flows are reinvested at the IRR
WACC remains constant over time
Cash flows are risk-free
Projects are of equal duration
All projects have the same scale
If a project has multiple IRRs, the best method for evaluation is:
Payback period
Modified IRR (MIRR)
Internal rate of return
Discounted Payback
Book rate of return
Which of the following is a limitation of the payback period method?
It does not consider time value of money
It is difficult to compute
It gives higher weight to distant cash flows
It always overstates profitability
It leads to higher NPV
A project with normal cash flows and an IRR greater than WACC will always:
Have a positive NPV
Have zero NPV
Be rejected
Be inferior to mutually exclusive projects
Be unprofitable
The profitability index is most useful when:
Comparing projects with equal scale
Evaluating independent projects
Capital is unlimited
Capital rationing is required
NPV is negative
Which factor is not considered in project cash flow estimation?
Sunk costs
Opportunity costs
Externalities
Salvage value
Working capital changes
A project's NPV is the:
Present value of benefits minus costs
IRR discounted at zero
Value created divided by cost
Internal reinvestment rate
Accounting profit from operations
For mutually exclusive projects, the decision should favor:
Higher IRR
Lower payback
Higher NPV
Shorter duration
Lower initial cost
When the IRR of a project is equal to the WACC:
The project adds no value
The NPV is positive
The project should be rejected
IRR is invalid
Payback period is infinite
Which of the following is a benefit of using MIRR over IRR?
Ignores reinvestment assumptions
Handles multiple sign changes
Requires no discount rate
Avoids NPV issues
Increases project duration
A firm that consistently repurchases shares instead of paying dividends is likely aiming to:
Increase float
Decrease EPS
Signal undervaluation
Avoid paying taxes
Increase payout ratio
If a firm announces a larger-than-expected dividend, markets typically interpret this as:
A negative signal
Neutral information
A signal of strong future earnings
A sign of poor liquidity
A sign of high debt
A key assumption in the Modigliani-Miller dividend irrelevance theory is:
Perfect capital markets
Varying tax rates
Investor irrationality
Fluctuating firm risk
Agency conflicts
Stock buybacks are preferred over dividends when:
The firm is overvalued
Investors prefer current income
The firm wants to avoid signaling
The firm believes shares are undervalued
EPS dilution is desired
The firm wants to avoid signaling
The firm believes shares are undervalued
EPS dilution is desired
The clientele effect implies:
All investors prefer dividends
All investors prefer capital gains
Some investors are attracted to specific dividend policies
Investors adjust firm payout ratios
Investors are indifferent to payout methods
A firm with stable earnings, excess cash, and limited growth opportunities should:
Cut dividends
Eliminate share repurchases
Increase leverage
Pay a regular cash dividend
Issue equity
Which of the following is a non-cash distribution method?
Stock dividend
Special dividend
Liquidating dividend
Interim dividend
Extra dividend
A stock split differs from a stock dividend in that:
It increases shareholder wealth
It results in more retained earnings
It usually aims to reduce share price
It pays out cash
It is taxed as income
Holding all else constant, a dividend cut usually leads to:
A price increase
Market neutrality
A price drop
Higher dividend yield
Lower market volatility
Which of the following typically supports high dividend payouts?
Volatile earnings
High growth firms
Institutional investor preferences
Debt covenant restrictions
High flotation costs
A firm with a high current ratio and low quick ratio may have:
High levels of inventory
Insufficient payables
Excess cash
No receivables
Low working capital
Which of the following is not a spontaneous source of financing?
Accounts payable
Wages payable
Short-term bank loan
Accrued expenses
Deferred taxes
Which of the following policies maximizes liquidity risk?
Conservative working capital policy
Relaxed credit terms
Aggressive financing of current assets
High levels of inventory buffer
Large cash balances
A firm's cash conversion cycle can be reduced by:
Increasing the days receivable
Increasing inventory holding
Paying suppliers faster
Collecting faster from customers
Raising prices
If the average collection period increases, the firm's:
Liquidity improves
Cash flow improves
Receivables increase
Inventory shrinks
Current ratio falls
A firm finances all current assets with long-term capital. This is a:
Aggressive policy
Matching policy
Conservative policy
Flexible policy
Passive policy
The goal of working capital management is to:
Minimize inventory
Maximize short-term profits
Maintain optimal liquidity while supporting operations
Avoid all debt
Maximize fixed costs
Trade credit is:
Interest-free long-term financing
A costly financing source
A spontaneous liability
Paid in advance
Discounted based on earnings
A tight credit policy will typically:
Decrease bad debt losses
Increase sales
Improve customer loyalty
Lengthen the cash conversion cycle
Increase receivables
If inventory turnover increases, all else equal:
Inventory level rises
Days inventory outstanding increases
CCC increases
Inventory level decreases
Working capital increases
A firm's beta is 1.4, the risk-free rate is 4%, and the market risk premium is 6.5%. If the flotation cost increases the cost of new common equity by 3%, what is the firm's cost of new common equity?
13.6%
15.5%
16.1%
14.2%
12.7%
A company's capital structure is 60% equity and 40% debt. Its after-tax cost of debt is 5.4% and cost of equity is 13.2%. What is the WACC?
10.08%
9.52%
8.97%
10.76%
11.20%
Initial investment = $900,000. Project generates $250,000/year for 5 years. Discount rate = 10%.
$36,400
$28,700
$52,300
$47,750
$60,000
Company has 2 million shares, net income = $6 million, pays out 60% of earnings. What's DPS?
$1.20
$1.80
$2.20
$1.50
$3.00
A firm has $10M in excess cash. Its stock trades at $50/share. It repurchases shares. Current shares = 4 million.
3.6 million
3.7 million
3.8 million
3.9 million
4.0 million
Given: DSO = 35 days, DIO = 60 days, DPO = 40 days. Find cash conversion cycle.
45 days
55 days
60 days
65 days
50 days
Given: COGS = $2,400,000 Average Inventory = $300,000. What is inventory turnover?
6.5x
7.2x
8.0x
9.1x
7.8x
Project X has cash flows of -$1,000 (initial), then $400, $400, and $400 over the next three years. If the WACC is 10%, what is the project's discounted payback period?
2.12 years
2.46 years
2.83 years
3.00 years
1.98 years
ABC Corp. has 5 million shares outstanding and announces a $2.50 per share cash dividend. How much will total dividends be?
$12.5 million
$10.5 million
$8.5 million
$13.5 million
$9.5 million
A company's inventory turnover ratio is 6 times per year. What is the average Days Inventory Outstanding (DIO)?
50 days
61 days
70 days
80 days
90 days
