35 test MC

Part 1

A business firm will no longer exist after it has been _________________.

 

	paid with dividends
	restructured with its capital components
	liquidated
	reorganized
	repurchased with its stock

The discount rate assigned to an individual project must be estimated according to 

I. the firm's depreciation rate for a levered firm. 

II. the actual sources of funding used for the project.

III. an average of the firm's overall cost of capital for the past five years.

IV. none of the above statements is correct.

	I only
	II, III and V only
	II only
	IV only
	III and IV only

The net present value (NPV) of a project can be reduced by 

I. moving each of the cash inflows forward to a sooner time period II. increasing the required discount rate III. increasing the amount of the final cash inflow IV. decreasing the project's initial cost at time zero  

	I only
	II only
	I, II, III and IV.
	II and III only
	II, III and IV only

_____________ is defined as the average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure.

 

	Subjective cost of capital
	Structured cost of capital
	Reward to risk ratio
	Weighted average cost of capital
	Weighted capital gains rate

Pro forma financial statements for a proposed project should: I. generally include interest expense.

II. be compiled individually specific to the project only.

III. include all the incremental cash flows related to the project.

IV. exclude all project-related fixed asset acquisitions and disposals.

	II, III, and IV only
	II and III only
	I and II only
	I, II, and IV only
	none of the options is correct

If Microsoft accepts Project A, it will not have the required resources to go for Project B. We call these two projects ______________________ projects. 

 

	economically scaled
	interdependent
	mutually exclusive
	independent
	operationally distinct

M&N Co. made an announcement yesterday. According to this announcement, the company will make a $.25 regular quarterly cash payment per share to its shareholders. This will be paid out of its net income for the year. This kind of cash payment is considered as __________. 

 

 

	repurchase
	regular cash dividend
	special dividend
	extra cash dividend
	liquidating dividend

The dividend growth model can be used to compute the cost of equity for a firm I. that pays no dividend II. that pays a constant dividend III. that pays dividend with a constant rate of decrease IV. that pays dividend with a constant rate of increase  

	II and III only
	I and III only
	I and II only
	I, II and III only
	II, III and IV only

The cost of capital for a(n) _________________ is referred to as unlevered cost of capital.

 

	private entity
	governmental entity
	corporate shareholder
	private individual
	all-equity firm

If we do not consider the effect of taxes and the transaction related costs, a stock repurchase will : 

I. reduce the total debt of a firm.

II. reduce the total equity of a firm.

III. decrease the earnings per share. 

IV. increase the total assets of a firm.

	II and IV only
	I and II only
	II, III, and IV only
	IV only
	II only

The correct definition for depreciation tax shield is the ___________________.

 

	amount of tax that is due when an asset is sold
	amount of tax that is saved because of the depreciation expense
	amount by which the aftertax depreciation expense lowers net income
	tax that is avoided when an asset is sold as salvage
	amount of tax that is saved when an asset is purchased

The advantage(s) of the discounted payback method over the regular payback method in capital budgeting analysis include

I. ease of use

II. liquidity bias

III. the consideration of time value of money 

IV. works well for research and development projects

 

	II only
	III and IV only
	III only
	II, III and IV only
	I, II and III only

The CORRECT statement(s) include :  

I. Regular cash dividends reduce par value of a stock.

II. Extra cash dividends will never be repeated by a firm.

III. A dividend is a liability even before it has been declared.

IV. The dividend yield expresses the annual dividend as a percentage of current stock price.

 

	IV only
	I, II and IV only
	I and III only
	II and III only
	II, III and IV only

The correct statement(s), with respect to M&M Proposition II with no taxes, include : 

I. Financial risk determines the return on assets.

II. Financial risk is determined by the debt-equity ratio. 

III. The cost of equity declines when the amount of leverage used by a firm rises. 

IV. The required return on assets is higher than the weighted average cost of capital. 

	I and IV only
	III and IV only
	II only
	III only
	I and II only

Ignoring any tax effect, a project's cash flows include the cash flows associated with 

I. increase in accounts payable II. increase in inventory III. decrease in accounts receivable IV. equipment acquisition V. payment of wages  

	I , II and III only
	II, IV and V only
	I and III only
	I, II, III, IV and V
	III only

The CORRECT statement(s) include : I. Another name for financial risk is business risk.

II. Financial risk has no impact on the cost of equity.

III. Financial risk is the risk associated with the use of debt. 

IV. Financial risk remains the same no matter how much debt the firm uses.

	I, II, III and IV
	III only
	II and III only
	I, II, and III only
	I and IV only

The CORRECT statement(s) include :  

I. Automatic dividend reinvestment plans help shareholders create their own homemade dividend policies.

II. Automatic dividend reinvestment plans allow stockholders reinvest part or all of the dividends to which they are entitled. 

III. Automatic dividend reinvestment plans sometimes grant employees the privilege of purchasing additional shares at a discounted price.  

	I and II only
	I, II and III
	III only
	II only
	II and III only

Mary has invested in the stock of Roberta Fitness, Inc. which is now an all-equity firm. To lever her position, Mary needs to

	sell some shares of the Roberta Fitness stock and hold the proceeds in cash.
	create a personal debt-equity ratio of 0.50.
	borrow some money and purchase some more shares of the Roberta Fitness stock.
	sell some shares of the Roberta Fitness stock and loan out the proceeds.
	keep her current equity position as the debt of the firm does not affect her personally.

When calculate the weighted average cost of capital (WACC) of a firm, we need to know the costs of the capital components as well as ____________ of the firm. 

I. tax rate

II. liquidity ratio

III. depreciation rate 

IV. price earning ratio

V. inventory turnover rate  

 

	II and IV only
	I and III only
	I, II, and IV only
	I, III, and IV only
	I only

Which of the following do(es) not apply to the use of average accounting return method of project analysis?

I. no time value of money consideration II. need of a cutoff rate III. easily obtainable information for computation IV. based on retained earnings and book value of asset

	I, II, and IV only
	IV only
	III and IV only
	I and II only
	I, II, III, and IV

The CORRECT statement(s) include : 

I. The IRR is equal to the required return when the net present value is equal to 1. II. The IRR always yields the same accept and reject decisions as the net present value method given mutually exclusive projects. III. The IRR method is a better method of analysis than the average accounting return from a financial point of view. IV. An investment project with an IRR higher than the required return should be accepted.  

	I, II, III and IV
	III and IV only
	I, II, and III only
	I and III only
	I, III and IV only

Top of Form

Example of sunk cost is _____________________.

 

	$2,100 increase in comic book sales if a store commences selling puzzles
	$2,000 spent on investigating whether local residents will buy recycle candles before the consideration of the large scale production of them.
	$24,000 project that must be given up since a similar project is accepted.
	none of the given costs is a suck cost.
	$4,500 of lost sales due to a similar item is introduced.

Bottom of Form

Indiana Subway, Inc. had declared a $0.35 per share dividend on Tuesday, November 8. The dividend will be paid on Thursday, January 30 to shareholders of record on Thursday, December 26. The ex-dividend date is

 

	Tuesday, November 8
	Thursday, January 30
	Wednesday, January 1
	Thursday, December 26
	Tuesday, December 24

When estimating the operating cash flow for a project, we cannot include ____________. 

I. taxes

II. sunk costs

III. variable costs

IV. interest expenses 

V. depreciation tax shield  

	I, II, III and V only
	I, II, III, IV and V
	II and IV only
	I and V only
	I and II only

The INCORRECT statement(s) include : 

I. The IRR method of analysis does not work well for projects with non-conventional cash flows. II. The IRR that causes the profitability index (PI) of the differences between two project's cash flows to equal zero is called the discount rate. III. Just the timing, not the amount, of a project's cash flows will affect the value of the project's IRR. IV. The IRR does not consider the time value of money.  

	I, II, and III only
	II, III and IV only
	I, III and IV only
	III and IV only
	I, II, III and IV

I. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash outflow to the project. II. Project analysis should only include the cash flows that affect the income statement. III. The depreciation tax shield creates a cash inflow for a project. IV. Interest expense should not be included as a cash outflow when analyzing a project.  

	I  only
	I, II, III and IV
	I, III and IV only
	I, II, and III only
	II and IV only

I. Discounted payback is used more frequently in business than is payback. 

II. Discounted payback is biased towards long-term projects while payback is biased towards short-term projects.

III. Payback is a better method of analysis than is discounted payback because the former considers the time value of money of the cash flows.

	III only
	I only
	none of the statements is correct
	II and III only
	I, II and III

I. direct bankruptcy costs

II. indirect bankruptcy costs

III. flotation costs related to bond issuance

IV. sunk costs to investment projects  

	I and II only
	II and III only
	I, II,  III and IV
	I only
	III only

I. the sale of the used equipment at the end of the project II. wage paid to two newly hired workers for the project III. loan used to finance the project IV. cost of inventory replenish  in the third year V. purchase of equipment at the beginning of the project

 

	I, II, and IV only
	I and III only
	I and II only
	IV only
	V only

Which of the following about the dividend growth model is/are CORRECT :

I. is as reliable as the estimated rate of growth. 

II. can be applied to a firm that does not pay dividends.

III. uses standard deviation to measure the systematic risk of a firm.

IV. does not consider the risk that future dividends may vary from their estimated values.

	I only
	I, II and IV only
	I, II and III only
	II and III only
	II, III and IV only

A firm's value will be at the ______________ if its weighted average cost of capital (WACC) is at the ______________. 

 

 

	maximum; maximum
	maximum; minimum
	minimum; minimum
	minimum; maximum
	the same; minimum

Dell Computer Associates, Inc. currently has a substantial amount of excess cash. The company is considering to buy back some of its outstanding shares with this amount of cash. We call this process _______________. 

 

	stock dividend
	stock repeal
	stock recap
	stock repurchase
	stock split

Mimi purchased 1,500 shares of Fast Deliveries stock on November 7. Nathan purchased 1,000 shares of Fast Deliveries stock on November 8. Fast Deliveries declared a dividend on October 20 to shareholders of record on November 20 and payable on December 21. Which one of the following statements concerning the dividend paid on December 21 is correct given this information?

	Mimi is entitled to the dividend but Nathan is not.
	Neither Mimi nor Nathan is entitled to the dividend.
	Both Mimi and Nathan are entitled to the dividend.
	Both Nathan and Mimi are entitled to one-half of the dividend amount.
	Nathan is entitled to the dividend but Mimi is not.

Which of the following statements related to M&M Proposition II is/are CORRECT ?  

I. the size of the pie does not depend on how the pie is sliced.

II. the cost of equity rises as the firm increases its use of debt financing. 

III. without corporate taxes, a firm's cost of equity is a linear function with a slope equal to RD.  

	I and III only
	II only
	I, II and III
	III only
	I only

Which of the following is/are used in the calculations of the capital structure weights when computing the weighted average cost of capital? I. market value of firm's debt II. market value of firm's equity III. market value of firm's preferred stock IV. yield to maturity of firm's bonds V. book value of firm's assets  

	I, III and V only
	I, III, IV and V only
	I, II, III, IV and V
	I and II only
	I, II and III only