Reference no: EM13742866

Q1. Dividend policy is influenced by:

• a company's investment opportunities
• a firm's capital structure mix
• a company's availability of internally generated funds
• a and c
• a, b, and c

Q2. The difference between the capital gains tax rate and the income tax rate is an incentive for:

• firms never to split their stock
• firms to declare more stock dividends
• firms to pay more earnings as dividends
• firms to retain more earnings

Q3. NPV and IRR lead to the same accept/reject decision for projects that are:

• Light and variable
• Lemon and lime
• Sweet and sour
• Independent with one sign reversal

Q4. A firm with positive MVA is:

• controlling operating expenses extremely well.
• using investments to produce what investors perceive to be positive net present values.
• experiencing monetary volatility acceleration.
• likely to have an unhappy group of common stockholders.

Q5. The disadvantage of the IRR method is that:

• the IRR deals with cash flows.
• the IRR gives equal regard to all returns within a project's life.
• the IRR will always give the same project accept/reject decision as the NPV.
• the IRR requires long, detailed cash flow forecasts.

Q6. Optimal capital structure is:

• the mix of permanent sources of funds used by the firm in a manner that will maximize the company's common stock price.
• the mix of all items that appear on the right-hand side of the company's balance sheet.
• the mix of funds that will minimize the firm's composite cost of capital
• a and c above

Q7. Noncash expenses include:

• depreciation expenses
• salaries of administrative personnel
• foremen's salaries
• packaging expenses

Q8. An example of a semivariable or semifixed cost is:

• rent
• salaries paid production foremen
• energy costs associated with production
• direct labor

Q9. The degree of operating leverage applies only to:

• positive changes in sales
• negative changes in sales
• positive or negative changes in sales
• positive changes in sales and EBIT

Q10. How frequently do corporations generally pay dividends?

• Annually
• Semi-annually
• Quarterly
• Monthly

Q11. Pizza Yen has annual fixed costs of $250,000 and a variable cost per pizza of $3.50. Yen sells pizzas for $13.50 each. The firm expects to sell 35,000 pizzas annually. What is the unit contribution margin for a pizza?

• $8
• $9
• $10
• $11

Q12. The simulation approach provides us with:

• a single value for the risk-adjusted net present value
• an approximation of the systematic risk level
• a probability distribution of the project's net present value or internal rate of return
• a graphic exposition of the year-by-year sequence of possible outcomes

Q13. A plant may remain operating when sales are depressed

• if the selling price per unit exceeds the variable cost per unit
• to help the local economy
• in an effort to cover at least some of the variable cost
• unless variable costs are zero when production is zero

Q14. What is the economic difference between a stock dividend and a stock split?

• Stock splits create greater economic benefits to shareholders than stock dividends.
• Stock splits increase EPS more than stock dividends.
• There is no economic difference between a stock dividend and a stock split.
• Stock dividends create greater economic benefits to shareholders than stock splits.

Q15. Flotation costs:

• include the fees paid to the investment bankers, lawyers, and accountants involved in selling a new security issue
• encourage firms to pay large dividends
• are encountered whenever a firm fails to pay a dividend
• are incurred when investors fail to cash their dividend check

Q16. Arguments against using the net present value and internal rate of return methods include that

• they fail to use accounting profits.
• they require detailed long-term forecasts of the incremental benefits and costs.
• they fail to consider how the investment project is to be financed.
• they fail to use the cash flow of the project.

Q17. What method is used for calculation of the accounting beta?

• simulation
• regression analysis
• sensitivity analysis
• both a and c

Q18. If the federal income tax rate were increased, the result would be to

• decrease the net present value
• increase the net present value
• increase the payback period
• a and c

Q19. In capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to find which of the following:

• Market value weight of debt
• Pretax component cost of debt
• After-tax component cost of debt
• Component cost of internal equity
• Market value weight of equity

Q20. The _______ designates the date on which the stock transfer books are closed in regard to a dividend payment.

• declaration date
• ex-dividend date
• date of record
• payment date

Q21. Business risk refers to:

• The risk associated with financing a firm with debt.
• The variability of a firm's expected earnings before interest and taxes.
• The uncertainty associated with a firm's CAPM.
• The variability of a firm's stock price.

Q22. If bankruptcy costs and/or shareholder underdiversification are an issue, what measure of risk is relevant when evaluating project risk in capital budgeting?

• Total project risk
• Contribution-to-firm risk
• Systematic risk
• Capital rationing risk

Q23. The internal rate of return is:

• The discount rate that makes the NPV positive.
• The discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
• The discount rate that makes NPV negative and the PI greater than one.
• The rate of return that makes the NPV positive.

Q24. Assume that Johnson & Squib have 1,000,000 common shares outstanding that have a par value of $3 per share. The stock currently sells for $15 per share. Which of the following will result from a 2 for 1 stock split?

• A decrease in retained earnings of $1,500,000.
• Market value will increase from $15 per share to $30 per share.
• Par value will increase from $3 per share to $6 per share.
• The number of outstanding shares will increase from 1,000,000 to 2,000,000.

Q25. A high degree of variability in a firm's earnings before interest and taxes refers to:

• business risk
• financial risk
• financial leverage
• operating leverage

Q26. Due to a technical breakthrough, the fixed costs for a firm drop by 25%. Prior to this breakthrough, fixed costs were $100,000 and unit contribution margin was and remains at $5.00. The new amount of break-even units will be:

• 20,000
• 25,000
• 15,000
• 5,000

Q27. In general, what effect does capital rationing have on firm value?

• It increases firm value.
• It decreases firm value.
• It may increase or decrease firm value.
• It has no impact on firm value.

Q28. For accounting purposes a stock split has been defined as a stock dividend exceeding:

• 25 percent
• 35 percent
• 50 percent
• 66 2/3 percent

Q29. When does the right of ownership to the current period's dividend terminate?

• The declaration date.
• The holder-of-record date.
• The residual date.
• The ex-dividend date.

Q30. Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

• Conserve cash.
• Reduce the market price to a more popular trading range.
• Obtain additional capital.
• Increase investor's net worth.

Q31. The break-even model enables the manager of the firm to:

• calculate the minimum price of common stock for certain situations
• set appropriate equilibrium thresholds
• determine the quantity of output that must be sold to cover all operating costs
• determine the optimal amount of debt financing to use

Q32. According to the perfect markets approach to dividend policy:

• other things equal, the greater the payout ratio, the greater the share price of the firm
• the price of a share of stock is unrelated to dividend policy
• the firm should retain earnings so stockholders will receive a capital gain
• the firm should pay a dividend only after current equity financing needs have been met

Q33. The alternative formula for operating leverage is (VC = total variable costs and FC = total fixed costs):

• Sales-VC/(Sales-VC-FC)
• Sales-VC-FC/(Sales-VC)
• Sales-FC/(Sales-FC-VC)
• Sales+FC/(Sales-FC-VC)

Q34. Which of the following is the most relevant measure of risk for capital budgeting purposes?

• Project standing alone risk.
• Contribution-to-firm risk.
• Symbiotic risk.
• Unsystematic risk.

Q35. The only definite result from a stock dividend or a stock split is:

• an increase in the P/E ratio
• an increase in the common stock's market value
• an increase in the number of shares outstanding
• cannot be determined from the above

Q36. Which of the following dividend policies will cause dividends per share to fluctuate the most?

• constant dividend payout ratio
• stable dollar dividend
• small, low, regular dividend plus a year-end extra
• no difference between the various dividend policies

Q37. Bubby's Britles generated sales of $250,000 in the latest year. During this same period, the firm's EBIT was $150,000. If the firm were to incur $25,000 in interest expense, what is Bubby's degree of financial leverage?

• .83
• 1.2
• 3.7
• 5.3

Q38. The capital budgeting decision criterion that should be used for mutually exclusive investment projects is:

• net present value
• internal rate of return
• profitability index
• payback

Q39. Which type of risk is a direct result of a firm's financing decision?

• business risk
• financial risk
• systematic risk
• risk aversion

Q40. A significant advantage of the payback period is that it:

• Places emphasis on time value of money.
• Allows for the proper ranking of projects.
• Tends to reduce firm risk because it favors projects that generate early, less uncertain returns.
• Gives proper weighting to all cash flows.