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# Finance multiple choice; EPS, stock price, leverage, annuity

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Can you help me with the following financial questions (multiple choice)?

*Investor in 40% tax bracket owning a tax emempt bond yielding 6% realizes an equivalent before tax yield of which of the following? 12%, 10%, 8%, 6%

*Optimal capital structure is achieved when?

When a firm's expected profits are maximized, when a firm's expected EPS are maimized, when a firm's expected stock price is maximized, when a firm's break even point is achieved

*Stock currently sells for \$63 per share & the required return on the stock is 10%. Assuming a growth rate of 5%, calculate the stock's last divident paid: \$1, \$3, \$5, \$7

*Firm has a degree of combined leverage of 1.25. Price per unit is \$15 & variable cost per unit is \$5. Interest expense is \$10,000 & fixed costs are \$190,000. Calculate the quanity of output produced:

100,000 units, 120500 units, 150000 units or 200,000 units

*If you have \$20,000 in an account earning 8% annually, what constant amount could you withdraw each year & have nothing remaining at the end of 5 yrs? \$3,525.62 / \$5,008.76 / \$3408.88 / \$2465.78

*Firm has total asset turnover of 2, a net profit margin of 5% and debt ratio of 50%. If the firm has a divident payout of 20%, calculate the sustainable growth rate: 14%, 16% , 18%. 20%

*IBM has current assets of \$4.5 million & current liabilities of \$3.6 million. Current ratio is 1.25 and quick ratio is 0.75. How much does IBM have invested (in millions): \$0.8 / \$1.8 / \$2.4 / \$2.9 / \$3.6

*Company's average collection period is higher than the industry average, then the company might be: enforcing credit conditions upon customers which are too stringent / allowing customers too much time to pay their bills / too tough in collecting its accounts / too liquid

*Investor owned 5,000 of IBM common stock prior to the purchase of unknown prior company merger. At the time of the merger, the dollar was worth 1.7848 German marks. Assume the purchase price was equal to 107.09 marks per share. What was the sales price IBM common stock per share in the US dollars? \$50, \$191, \$107, \$60 or none noted

*In the event that IBM which as a low P/E ratio, were to acquire Smith INC which has a higher P/E ratio, an analyst can be certain that one of the following will happen: IBM will see immediate decrease in P/E, IBM will see immediate decrease in EPS, IBM will see immediate increase in the growth rate of EPS, IBM will see immediate increase in EPS

#### Solution Preview

1. Investor in 40% tax bracket owning a tax exempt bond yielding 6% realizes an equivalent before tax yield of which of the following? 10%

6%/(1-.4) = 10%

2. Optimal capital structure is achieved when? when a firm's expected stock price is maximized

This is by the definition of optimal capital structure.

3. Stock currently sells for \$63 per share & the required return on the stock is 10%. Assuming a growth rate of 5%, calculate the stock's last divident paid: \$3

63*(.1-.05)/1.05 = 3

4. Firm has a degree of combined leverage ...

#### Solution Summary

The solution answers and explains several multiple choice questions below.

\$2.19

## Multiple choice finance questions.

7. The difference between total receipts and total payments referred to as
cumulative cash flow.
beginning cash flow.
net cash flow.
cash balance.

8. In developing the pro forma income statement we follow four important steps:
- 1) compute other expenses,
- 2) determine a production schedule,
- 3) establish a sales projection,
- 4) determine profit by completing the actual pro forma statement.
What is the correct order for these four steps?
1,2,3,4
4,3,2,1
2,1,3,4
3,2,1,4

9. A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers?
Decreased receivables and increased bank loans
Increased receivables and increased bank loans
Increased payables and decreased bank loans
Increased payables and increased bank loans

10. In determining the cost of bank financing, which is the important factor?
Prime rate
Nominal rate
Effective rate
Discount rate

11. Financial leverage is concerned with the relation between
changes in volume and changes in EPS.
changes in volume and changes in EBIT.
changes in EBIT and changes in EPS.
changes in EBIT and changes in operating income.

12. Under normal conditions (70% probability), Financing Plan A will produce \$24,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce \$40,000 less than Plan B. What is the expected value of return for Plan A over Plan B?
\$28,800
\$4,000
\$4,800
\$35,200

13. Mr. Jones borrows \$2,000 for 90 days and pays \$35 interest. What is his effective rate of interest? 9.3%
7.0%
11.7%
None of the above

14. Dr. J. wants to buy an IBM personal computer which will cost \$2,788 four years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside?
\$697.00
\$627.93
\$823.15
\$531.81

15. A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have \$73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given that information, how much will your annual benefits be?
\$3,671
\$3,965
\$8,043
\$13,216

16. In using the internal rate of return method, it is assumed that cash flows can be reinvested at
the cost of equity.
the cost of capital.
the internal rate of return.
the prevailing interest rate.

17.As the cost of capital increases,
fewer projects are accepted
more projects are accepted
project selection remains unchanged
none of the above

18. If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is \$3.00 per unit and fixed costs are \$60,000, what will the firm's net income be at sales of 30,000 units?
\$90,000
\$30,000
\$15,000
\$45,000

19. A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?
A has a lower break-even point than B, but A's profit grows faster after the break-even.
A has a higher break-even point than B, but A's profit grows slower after the break-even.
B has a lower break-even point than A, but A's profit grows faster after break-even.
B has a lower break-even point than A, and profit grows the same rate for both companies after the breakeven point.

20. A call provision, which allows the corporation to force an early maturity on a bond issue, usually contains all but which of the following characteristics?
Most bonds must be outstanding at least 5 years before being called.
After the call date, the call premium tends to decline over time.
The provision typically calls for debt conversion into common stock.
The corporation will pay a premium over par for the bonds.

21. When an investment banking firm contracts to perform on a "best efforts" basis, it tries to
sell a company's stock to the public
none of the above

22. Which of the following are advantages of leasing?
A lease obligation may be substantially less restrictive than the provisions of a bond indenture.
There may be no down payment as in a purchase.
The negative effects of obsolescence may be eliminated.
All of the above.

23. Long-term financing leases currently
show up on the balance sheet.
appear in the footnotes to the annual report.
appear on the company's statement of retained earnings.
do not appear on any financial statements.

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