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WorksheetsFinance Quiz
Total questions: 60
Worksheet time: 31mins
There are a lot of issues to consider in determining board independence. What would be the best definition of true independence? Independence, as it relates to board members, refers to:
the degree to which these persons are not biased or otherwise controlled by firm management or other groups which may have some degree of control over management.
the degree to which these persons are not biased or otherwise controlled by firm management or the outside audit group.
avoidance of material conflicts of interest.
Which of the following is least likely a method by which firms repurchase their shares?
Tender offer.
Direct negotiation.
Exercise a call provision.
When using net present value (NPV) profiles:
the NPV profile's intersection with the vertical y-axis identifies the project's internal rate of return.
one should accept all independent projects with positive NPVs.
one should accept all mutually exclusive projects with positive NPVs.
Which of the following policies regarding shareowner rights for equity investors is most likely detrimental to the shareowners’ interests?
The company uses a third-party entity to tabulate shareowner votes.
Shareowners can approve changes to the corporate structure only with a supermajority vote.
Shareowners are permitted to vote either by paper ballot or a proxy voting service.
A firm has $4 million in outstanding bonds that mature in four years, with a fixed rate of 7.5% (assume annual payments). The bonds trade at a price of $98 in the open market. The firm’s marginal tax rate is 35%. Using the bond-yield plus method, what is the firm’s cost of equity risk assuming an add-on of 4%?
11.50%.
12.11%.
13.34%.
Financial leverage magnifies:
earnings per share variability.
taxes.
operating income variability.
The two major types of risk affecting a firm are:
financial risk and cash flow risk.
business risk and financial risk.
business risk and collection risk.
Landen, Inc. uses several methods to evaluate capital projects. An appropriate decision rule for Landen would be to invest in a project if it has a positive:
profitability index (PI).
net present value (NPV).
internal rate of return (IRR).
Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting: Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project. Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project. Which of the following regarding Lutz’s statements is most accurate?
Correct Incorrect
Correct Correct
Incorrect Correct
Which of the following is the most appropriate decision rule for mutually exclusive projects?
Accept the project with the highest net present value, subject to the condition that its net present value is greater than zero.
Accept both projects if their internal rates of return exceed the firm’s hurdle rate.
If the net present value method and the internal rate of return method give conflicting signals, select the project with the highest internal rate of return.
When calculating the weighted average cost of capital (WACC) an adjustment is made for taxes because:
equity earns higher return than debt.
equity is risky.
the interest on debt is tax deductible.
The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in years 1 through 4, $35,000 per year in years 5 through 9, and $40,000 in year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. The payback period for this investment is closest to:
5.23 years.
6.12 years.
4.86 years.
A $100 par, 8% preferred stock is currently selling for $80. What is the cost of preferred equity?
10.8%.
10.0%.
8.0%.
The process of evaluating and selecting profitable long-term investments consistent with the firm’s goal of shareholder wealth maximization is known as:
financial restructuring.
monitoring.
capital budgeting.
Which of the following statements about leverage is most accurate?
An increase in fixed costs (holding sales and variable costs constant) will reduce the company's degree of operating leverage.
If the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage.
A decrease in interest expense will increase the company's degree of total leverage.
An example of a secondary source of liquidity is:
cash flow management.
negotiating debt contracts.
trade credit and bank lines of credit.
Additional debt should be used in the firm’s capital structure if it increases:
the value of the firm.
firm earnings.
earnings per share.
Based on the information above, after the repurchase of its common stock, Francis’ EPS will be closest to: ( câu này thiếu thông tin ở trước)
$3.36.
$3.41.
$3.39.
Should DeWalt agree or disagree with Webb’s statements?
Disagree Agree
Agree Agree
Disagree Disagree
The project's cost of capital is 12%. The discounted payback period is closest to: ( thiếu thông tin ở trước )
3.9 years.
2.9 years.
3.4 years.
Which of the following projects would most likely have multiple internal rates of return (IRRs)? The cost of capital for all projects is 10.0%.
Project South only.
Projects East and West.
Projects South and West.
Which of the following is least likely to be useful to an analyst who is estimating the pretax cost of a firm’s fixed-rate debt?
The coupon rate on the firm’s existing debt.
The yield to maturity of the firm’s existing debt.
Seniority and any special covenants of the firm’s anticipated debt.
Are Dixon’s statements CORRECT?( thiếu)
Incorrect Correct
Incorrect Incorrect
Correct Correct
All else equal, a firm's business risk is higher when:
the firm has low operating leverage.
variable costs are the highest portion of its expense.
fixed costs are the highest portion of its expense.
Which of the following statements concerning corporate governance is least accurate?
Good corporate governance means that the board can work effectively with management.
Good corporate governance dictates that the firm’s financial, operating and governance activities are reported to stakeholders in a fair, accurate and timely manner.
Corporate governance defines the appropriate rights, roles and responsibilities of management, the board, and stakeholders within a firm.
Compared to the snack cakes division, the operating breakeven quantity for the bread division is:
less.
greater.
the same.
The most likely explanation for this is that the firm:
is relying more on its suppliers for short-term liquidity.
has improved its inventory turnover.
is paying its bills for raw materials more rapidly.
An analyst who is evaluating a firm’s working capital management would be least likely to be concerned if the firm’s:
number of days of inventory is higher than that of its peers.
total asset turnover is lower than its industry average.
operating cycle is shorter than that of its peers.
Which of the following activities would least likely be an example of good corporate governance?
The board has decided to eliminate finders’ fees for its members for any potential acquisitions that are brought to management’s attention.
Management is allowed to act independently of board of directors.
The board of directors has decided to conduct a self-assessment.
If the calculated net present value (NPV) is negative, which of the following must be CORRECT. The discount rate used is:
less than the internal rate of return (IRR).
equal to the internal rate of return (IRR).
greater than the internal rate of return (IRR).
What is the book value per share (BVPS) after a share repurchase of $10 million?
$10.12
$9.84.
$10.00.
The share price of Polington should:
not necessarily change because new contract announcements are made all the time.
increase by the project NPV divided by the number of common shares outstanding.
increase by the NPV × (1 – corporate tax rate) divided by the number of common shares outstanding.
When a company is evaluating two mutually exclusive projects that are both profitable but have conflicting NPV and IRR project rankings, the company should:
accept the project with the higher net present value.
accept the project with the higher internal rate of return.
use a third method of evaluation such as discounted payback period.
Which of the following would NOT be a good source for information about a company’s proxy voting rules?
Company’s articles of organization and by-laws.
Firm’s corporate governance statement.
Firm’s annual report.
Financial risk is borne by:
common shareholders.
creditors.
managers.
The condition that occurs when a company disburses cash too quickly, stretching the company’s cash reserves, is best described as a:
drag on liquidity.
pull on liquidity.
liquidity premium.
Jayco, Inc., sells blue ink for $4.00 a bottle. The ink's variable cost per bottle is $2.00. Ink has fixed cost of $10,000. What is Jayco's breakeven point in units?
2,500.
5,000.
6,000.
Which of the following statements about the internal rate of return (IRR) for a project with the following cash flow pattern is CORRECT? Year 0: -$ 2,000 Year 1: $10,000 Year 2: -$ 10,000
No IRRs can be calculated.
It has a single IRR of approximately 38%.
It has two IRRs of approximately 38% and 260%.
One of the basic principles of capital budgeting is that:
cash flows should be analyzed on a pre-tax basis.
opportunity costs should be excluded from the analysis of a project.
decisions are based on cash flows, not accounting income.
A firm records the following cash flows on the same day: $250 million from debt proceeds; $100 million funds transferred to a subsidiary; $125 million in interest payments; and $30 million in tax payments. The net daily cash position:
improved.
worsened.
remained the same.
The audit committee of a company’s Board of Directors is most likely to act in the interests of shareholders when:
a company officer other than the CEO controls the audit budget.
the committee has authority to prevent the company from engaging in non-audit business relationships with its external auditors.
a reliable communication 'firewall' is in place between the committee and the company’s internal auditors.
An analyst gathered the following data about a company: Capital Structure Required Rate of Return 30% debt 10% for debt 20% preferred stock 11% for preferred stock 50% common stock 18% for common stock Assuming a 40% tax rate, what after-tax rate of return must the company earn on its investments?
13.0%.
14.2%.
10.0%.
A company’s outstanding 20-year, annual-pay 6% coupon bonds are selling for $894. At a tax rate of 40%, the company’s after-tax cost of debt capital is closest to:
5.1%
4.2%.
7.0%
The most accurate way to account for flotation costs when issuing new equity to finance a project is to:
increase the cost of equity capital by dividing it by (1 – flotation cost).
adjust cash flows in the computation of the project NPV by the dollar amount of the flotation costs.
increase the cost of equity capital by multiplying it by (1 + flotation cost).
The uncertainty in return on assets due to the nature of a firm’s operations is known as:
business risk.
financial leverage.
tax efficiency.
Which one of the following statements about the marginal cost of capital (MCC) is most accurate?
A breakpoint on the MCC curve occurs when one of the components in the weighted average cost of capital changes in cost.
The MCC is the cost of the last dollar obtained from bondholders.
The MCC falls as more and more capital is raised in a given period.
Apple Industries, a firm with unlimited funds, is evaluating five projects. Projects A and B are independent and Projects C, D, and E are mutually exclusive. The projects are listed with their rate of return and NPV. Assume that the applicable discount rate is 10%. Rank the projects the firm should select.
All projects should be selected.
Project A, Project B, and Project D.
Project A, Project B, and Project C.
The NPV profile is a graphical representation of the change in net present value relative to a change in the:
discount rate.
prime rate.
internal rate of return.
What is the firm’s target debt and preferred stock portion of the capital structure based on existing capital structure?
0.40 0.10
0.41 0.10
0.41 0.06
The least appropriate security for investing short-term excess cash balances would be:
preferred stock.
bank certificates of deposit.
time deposits.
Which of the following is most accurate regarding the component costs and component weights in a firm’s weighted average cost of capital (WACC)?
The appropriate pre-tax cost of a firm’s new debt is the average coupon rate on the firm’s existing debt.
The weights in the WACC should be based on the book values of the individual capital components.
Taxes reduce the cost of debt for firms in countries in which interest payments are tax deductible.
An appropriate cash management strategy for a company that has a seasonally high need for cash prior to the holiday shopping season would least likely include:
allowing short-term securities to mature without reinvestment.
borrowing funds though a bank line of credit.
investing in U.S. Treasury notes at other times of the year because they are highly liquid.
Stolzenbach Technologies has a target capital structure of 60% equity and 40% debt. The schedule of financing costs for the Stolzenbach is shown in the table below: Amount of New Debt (in millions) After-tax Cost of Debt Amount of New Equity (in millions) Cost of Equity $0 to $199 4.5% $0 to $299 7.5% $200 to $399 5.0% $300 to $699 8.5% $400 to $599 5.5% $700 to $999 9.5% Stolzenbach Technologies has breakpoints for raising additional financing at both:
$500 million and $700 million.
$500 million and $1,000 million.
$400 million and $700 million.
Based on the above data, which of the following can the analyst conclude? Iridescent Carpeting: Thiếu current ratio 2.3x 1.
has stronger profitability than its competitors.
has better short-term liquidity than its competitors.
is most likely a younger company than its competitors.
Which of the following rights concerning shareholder-sponsored board nominations and shareholder-sponsored resolutions would be advantageous to an investor?
The right to propose initiatives for consideration at the annual meeting, but not the right to nominate or remove board members in certain circumstances.
The right to nominate or remove board members in certain circumstances, and the right to propose initiatives for consideration at the annual meeting.
The right to nominate or remove board members in certain circumstances, but not the right to propose initiatives for consideration at the annual meeting.
What is the impact on shareholder wealth of a share repurchase versus cash dividend of equal amount when the tax treatment of the two alternatives is the same?
A share repurchase will sometimes lead to higher total shareholder wealth than a cash dividend of an equal amount.
A share repurchase will always lead to higher total shareholder wealth than a cash dividend of an equal amount.
A share repurchase is equivalent to a cash dividend of an equal amount, so total shareholder wealth will be the same.
All of the following negatively affect shareholders’ proxy voting rights, EXCEPT:
preventing investors who wish to vote their shares from trading during a period prior to the annual meeting.
requiring attendance at the annual meeting.
allowing proxy voting by means other than a paper ballot.
Which of the following is least likely to be useful to an analyst when estimating the cost of raising capital through the issuance of non-callable, nonconvertible preferred stock?
The stated par value of the preferred issue.
The firm’s corporate tax rate.
The preferred stock’s dividend rate.
The Chief Financial Officer of Large Closeouts Inc. (LCI) determines that the firm must engage in capital rationing for its capital budgeting projects. Which of the following describes the most likely reason for LCI to use capital rationing? LCI:
must choose between projects that compete with one another.
would like to arrange projects so that investing in a project today provides the option to accept or reject certain future projects.
has a limited amount of funds to invest.
Jeffery Marian, an analyst with Arlington Machinery, is estimating a country risk premium to include in his estimate of the cost of equity for a project Arlington is starting in India. Marian has compiled the following information for his analysis: Indian 10-year government bond yield = 7.20% 10-year U.S. Treasury bond yield = 4.60% Annualized standard deviation of the Bombay Sensex stock index = 40%. Annualized standard deviation of Indian dollar denominated 10-year government bond = 24% Annualized standard deviation of the S&P 500 Index = 18%. The estimated country risk premium for India based on Marian’s research is closest to:
2.6%.
4.3%.
5.8%.
