50 multiple choice finance questions

1.      Stock cash dividend will __________

2.      Generally, the variability in both ROE and EPS increase when a firm increases its financial leverage. _______

3.      A portfolio weight is defined as the total number of shares in a particular asset divided by the total number of shares held in a portfolio.______

4.      Which of the following statements about portfolio is true? ______

5.      If preferred stock pays a $5 annual dividend and sells for $100. The cost of preferred stock financing is _______ if we don't consider floatation costs.

6.      A well-diversified portfolio can diversify the company-unique risk, but it cannot diversify the market risk ______

7.      The cost of debt must be adjusted for corporate taxes and this is accomplished by multiplying by (1 - T_c), where T_c is corporate tax rate. ______

8.      Operating cash flow is equal to _____

9.      Which of the following transactions will NOT affect a firm's retained earnings? _____

10.  Using the tax shield approach, a(n) _____ will increase the operating cash flow.

11.  A company's cost of capital is equal to the weighted average of its investors' required returns even when we consider floatation costs and taxes._________

[removed]True

[removed]False

12.  Which one of the following can be completely ignored when analyzing a project?______

13.  Working capital includes all of the following items except:

14.  Which of the following statements about Capital Asset Pricing Model (CAPM) equation "E(R_A) = R_f+ _A(E(R_M) - R_f) " is NOT true ______

15.  If a stock has beta 0.8, how to interpret it? ______

16.  A firm's optimal capital structure ______

17.  Portfolio provides average return but much lower risk. The key is the positive correlations among individual stocks. ______

18.  Business risk is defined as the:______

19.  The cost of equity is the rate of return the marginal stockholder requires on the firm's common stock._____

20.  M&M Proposition I, with taxes, states that the value of a levered (V_L) firm is equal to. _______

21.  Announcements and news contain both an expected component and a surprise component. It is the surprise component that affects a stock's price and therefore its return____

22.  The ex-dividend date is defined as _____ business days before the date of_____

23.  We want to choose the optimal capital structure for a firm that will maximize the firm's earnings, not stockholder wealth _______

[removed]True

[removed]False

24.  If a firm maintains a constant debt-equity ratio and pays dividends only after meeting its investment needs, the firm is following a dividend policy which is defined as a(n): _______

25.  A company can NOT buy back its own shares of stock (stock repurchase) on the open market. But the company can make a tender offer to buy back its shares. _______

[removed]True

[removed]False

26.  Which one of the following is the prime objective of a residual dividend policy? _______

27.  Holding cash for normal collection and disbursement activities related to the daily ongoing operations of a firm is called the _____ motive.

28.  Float is defined as the difference between the.

29.  Marshall's Equipment has a book balance of $34,500. The $900 deposit which was made today will be added to the available balance tomorrow. There is $8,500 worth of outstanding checks. Which one of the following statements accurately reflects this situation.

30.  Which of the following is money market security?

31.  To estimate the cost of capital, you have been provided with the following data: r_RF = 5.00%; RP_M = 6.00%; and Beta = 1.0. Based on the CAPM approach, what is the cost of equity? ________

32.  Assume that you have been provided with the following data: D₁ = $1.30; P₀ = $42.50; and g = 7.0% (constant). What is the cost of equity based on the Dividend Growth Model? ________

33.  A firm has 35,000 shares of stock outstanding at a price per share of $26. The company has decided to repurchase $130,000 worth of shares. After the repurchase, there will be _____ shares outstanding.

34.  Based on the information from Question 33, what is new market price of the stock after the repurchase?

35.  Based on the information from Question 33 and 34, does the total market value of the common stock change after the stock repurchase?

36.  Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9% and coupons are paid semiannually. The bond is currently selling for $908.72 per $1000 bond. What is the before-tax cost of debt (YTM)?

37.  Based on the information from Question 36, if the firm's marginal tax rate is 30%. What's the firm's after-tax cost of debt?________

38.  A firm requires capital expenditure of $10 million, which will be raised by issuing $3 million of bonds, $1 million of preferred stock, and $6 million of new common stock. The firm estimates its after-tax cost of debt to be 6%, cost of preferred stock to be 8%, and cost of new common stock to be 15%. What is the weighted average cost of capital? _____

39.  A firm sells 15,000 desks a year at an average price per desk of $200. The carrying cost per unit is $2.80. The company orders 200 doors at a time and has a fixed order cost of $45 per order. The desks are sold out before they are restocked. What is the economic order quantity? ________

40.  A five-year project is expected to generate revenues of $120,000, variable costs of $72,000, and fixed costs of $20,000. The annual depreciation is $10,000 and the tax rate is 34%. What is the annual operating cash flow?

41.  A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year one, $55,000 in year two, $65,000 in year three, and $40,000 in year four. The firm's required rate of return is 9%. What is the payback period of this project? _______

42.  A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year one, $55,000 in year two, $65,000 in year three, and $40,000 in year four. The firm's required rate of return is 9%. What is the net present value (NPV) of the project? _____

43.  A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year one, $55,000 in year two, $65,000 in year three, and $40,000 in year four. The firm's required rate of return is 9%. What is the internal rate of return (IRR) of this project?

44.  A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year one, $55,000 in year two, $65,000 in year three, and $40,000 in year four. The firm's required rate of return is 9%. What is the profitability index (PI) of this project?

45.  If you have 1 share of Berkshire Hathaway Inc. (BRKa). The stock is traded at $173,000. We assume that the firm will announce 1000:1 stock split. What's total number of share you will have after the stock split? ______

46.  Based on the information in Question 45, what will be the total value of your holdings of Berkshire Hathaway stock after the stock split?______

47.  A firm has a $10 million bond outstanding with a coupon rate of 6%. The tax rate is 35%. What is the present value of the tax shield?______

48.  A company has after-tax earnings of $39,400 for the year. The firm adheres to a residual dividend policy with a debt-equity ratio of 0.7. The firm needs $56,300 for new investments. What is the amount of the total dividends that will be paid?______

49.  A company purchased $25,000 worth of inventory. The terms of sale were 2/5, net 45. What's the implicit interest if a buyer does not take the cash discount? _____

50.  Based on the information from Question 49, what's the effective annual rate (EAR) if the buyer does not take the cash discount?_____