Reference no: EM132949259

Question 1a) Internal rate of returnb) Risk-adjusted discount ratec) Average rate of return The ________ reflects the return that must be earned on the given project to compensate the owners adequately according to the project's variability of cash flows.

d) Cost of capital

Question 2

Higher financial leverage cause ____ to increase more for a given increase in ____.

a) EPS; EBIT

b) EPS; sales

c) EBIT; sales

d) EBIT; EPS

Question 3

When evaluating a capital budgeting project, the change in net working capital must be considered as part of

a) The operating cash inflows

b) The initial investment

c) The operating cash outflows.

d) The incremental operating cash inflows

Question 4

Because the degree of total leverage is multiplicative and not additive, when a firm has very high operating leverage it can moderate its total risk by ______.

a) Using a higher level of financial leverage

b) Increasing sales

c) Increasing EBIT

d) Using a lower level of financial leverage

Question 5

A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of $6,000 and a tax rate of 40%. The firm's degree of financial leverage at a base EBIT of $375,000 is _____.

a) 1.29

b) 1.09

c) 1.27

d) 0.97

Question 6

The portion of an asset's sales price that is below its book value and below its initial purchase price is called _____.

a) Book value

b) A capital gain

c) A capital loss

d) Recaptured depreciation

Question 7

A firm has fixed operating costs of $25,000, the sale price per unit of its product is $30, and its variable cost per unit is $25. The firm's operating breakeven point in units is ______ and its breakeven point in dollars is _________.

a) 5,000; $250,250

b) 4,000; $150,000

c) 4,500; $250,250

d) 5,000; $150,000

Question 8

Modigliani and Miller suggest that the value of the firm is not affected by the firm's dividend policy, due to ___________.

a) The information content.

b) The clientele effect.

c) The optimal capital structure.

d) The relevance of dividends.

Question 9

JT Bhd is contemplating selling $10 million worth 10-year, 8% coupon bonds with a par value of $1,000. JT Bhd sells the bonds at $980. Floatation costs are 4%. What would be the cost of long-term debt for JT Bhd?

a) 8.87%

b) 7.99%

c) 8.96%

d) 8.67%

Question 10

Household as a key participant in financial transactions as they are _____________.

a) Net users of funds because they save less money than they borrow

b) Net suppliers of funds because they save more money than they borrow

c) Net purchasers of funds because they save more money than they borrow

d) Net demanders of funds because they save more money than they borrow

Question 11

The book value of an asset is equal to the _______.

a) Fair market value minus the accounting value.

b) Original purchase price minus accumulated depreciation.

c) Depreciated value plus recaptured depreciation.

d) Original purchase price minus annual depreciation expenses.

Question 12

A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivables by $40,000, and inventories by $60,000. At the same time account payable will increase by $ 50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is _____.

a) An increase of $60,000

b) An increase of $50,000

c) An increase of $40,000

d) An increase of $110,000

Question 13

The purpose of a stock split is to _____________.

a) Affect the firm's capital structure.

b) Enhance the trading activity of the stock by lowering the market price.

c) Decrease the dividend.

d) Increase the market price of the stock.

Question 14

When evaluating a capital budgeting project, the change in net working capital must be considered as part of ____________________.

a) The incremental operating cash inflows.

b) The operating cash outflows.

c) The operating cash inflows.

d) The initial investment.

Question 15

In order to enhance the wealth of stockholders and to send positive signals to the market, corporations generally raise funds using the following order:

a) Retained earnings, debt, equity.

b) Debt, retained earnings, equity.

c) Equity, retained earnings, debt.

d) Retained earnings, equity, debt.

Question 16

The agency problem that arises is relating to the conflict between the goals of a firm's owners and the goals of its non-owner managers. The goals of non-owner manager including:

a) Maximizing shareholder value

b) Increasing creditworthiness

c) Corporate goals

d) Job security

Question 17

A company's incentive plans usually link management compensation to ______.

a) Dividends

b) Coupon payments

c) Share price

d) Inventory turnover

Question 18

A firm's operating breakeven point is sensitive to all of the following variables EXCEPT

a) Interest expense

b) Fixed operating costs

c) Sales price per unit

d) Variable operating cost per unit

Question 19

________ leverage is concerned with the relationship between sales revenue and earnings per share.

a) Variable

b) Financial

c) Operating

d) Total

Question 20

What is the NPV of a project whose cost of capital is 15% and initial after-tax cost is $4,500,000 and is expected to provide after-tax operating cash inflows of $1,700,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?

a) -$235,990

b) $235,990

c) $275,991

d) -$275,991

Question 21

A mixer was purchased two years ago for $125,000 and can be sold for $130,000 today. The mixer has been depreciated using the MVCRS 5-years recovery period as follows and the firm pays 40% taxes on both ordinary income and capital gain. Compute recaptured depreciation.

Recovery year

Recovery year

5 years

1- 20%

2- 32

3 -19

4- 12

5-12

6- 5

a) $57.600

b) $65,000

c) $120,000

d) $67,400

Question 22

A corporation is selling an existing asset for $1,000. The asset, when purchased cost $9,000, was being depreciated under MACRS using a 5-year recovery period and has been depreciated for 4 full years. If tee assumed tax rate is 40% on ordinary income and capital gains, the tax effect of this transaction is ____.

Recovery year

5 years

1- 20%

2-32

3-19

4 12

5-12

6- 5

a) $280 tax benefit

b) $290 tax benefit

c) $250 tax benefit

d) $212 tax benefit

Question 23

A corporation has decided to replace an existing asset with a newer model. 2 years ago, the existing asset originally cost $40,000 and was being depreciated under MACRS using a 5-year recovery period. The existing asset can be sold for $30,000 before removal cost, the cost of removal is $5,000 and to be bear by the seller. The new asset will cost $53,000 and will also be depreciated under MACRS using a 5-year recovery period. If the assumed tax rate is 40% on ordinary income and capital gains, the initial investment is ______.

Recovery year

5 years

1-20%

2-32

3-19

4-2

5-12

6-5

a) $30,000

b) $32,440

c) $30,320