b/ maximization of shareholder wealth
2. An example of a primary market transaction is
a. a new issue of common stock by AT&T
3. According to the agency problem, _________ represent the principals of a corporation.
4. Which of the following is a principle of basic financial management?
a. Risk/return tradeoff
5. Another name for the acid test ratio is the
b/ quick ratio
6. The accounting rate of return on stockholders’ investments is measured by
c/ operating income return on investment
7. If you are an investor, which of the following would you prefer?
b/ Earnings on funds invested compound daily
8. The primary purpose of a cash budget is to
c/ provide a detailed plan of future cash flows
9. Which of the following is a non-cash expense?
a. Depreciation expenses
10. The break-even model enables the manager of a firm to
c/ determine the quantity of output that must be sold to cover all operating costs
11. A zero-coupon bond
d/ is sold at a deep discount at less than the par value
Actually this could be a and d
12. If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years?
13. At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
14. The present value of a single future sum
d/ depends upon the number of discount periods
15. Which of the following is considered to be a spontaneous source of financing?
d/ Accounts payable
16. Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%.
Initial outlay = $450
Year 1 = $325
Year 2 = $65
Year 3 = $100
d/ 2.6 years
450-325=125-65=60/100 = 2years +.6
17. For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.
b/ greater than zero, greater than ones
18. Which of the following is considered to be a deficiency of the IRR?
b/ It could produce more than one rate of return.
For projects with negative cash flows, more than 1 IRR can be computed
19. The firm should accept independent projects if
b/ the profitability index is greater than 1.0
NPV > 0
20. The most expensive source of capital is
b/ new common stock
21. The cost associated with each additional dollar of financing for investment projects is
b/ the marginal cost of capital
22. The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?
9%(1-40%)*20/50+14%*30/50 = 10.56%
23. Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
10%*(1-40%)*30%+11%*20%+18%*50% = 13%
24. Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever...