1. J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently, the yield to maturity on these bonds is 14%. If the firm's tax rate is 40%, what is the cost of debt to J & B?
2. 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?
3. Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected to pay $918 for the 10-year bond. Bender will have to pay $33 per bond in flotation costs. What is the cost of debt if the firm is in the 34% tax bracket?
4. Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They are planning to invest in a project which will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds. No new outside equity will be issued. If the required rate of return on the firm's stock is 15% and its marginal tax rate is 40%, compute the firm's cost of capital.
5. Given the following information, determine the risk-free rate.
Cost of equity = 12%
Beta = 1.50
Market risk premium = 3%
6. What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.
The solution explains some multiple choice questions in finance
30 Finance multiple choice questions
1. The goal of the firm should be
a. maximization of profits
b. maximization of shareholder wealth
c. maximization of consumer satisfaction
d. maximization of sales
2. An example of a primary market transaction is
a. a new issue of common stock by AT&T
b. a sale of some outstanding common stock of AT&T
c. AT&T repurchasing its own stock from a stockholder
d. one stockholder selling shares of common stock to another individual
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
c. Stock warrants
d. Profit is king
5. Another name for the acid test ratio is the
a. current ratio
b. quick ratio
c. inventory turnover ratio
d. inventory turnover ratio
6. The accounting rate of return on stockholders' investments is measured by
a. return on assets
b. return on equity
c. operating income return on investment
d. realized rate of inflation
7. If you are an investor, which of the following would you prefer?
a. Earnings on funds invested compound annually
b. Earnings on funds invested compound daily
c. Earnings on funds invested would compound monthly
d. Earnings on funds invested would compound quarterly
8. The primary purpose of a cash budget is to
a. determine the level of investment in current and fixed assets
b. determine accounts payable
c. provide a detailed plan of future cash flows
d. determine the estimated income tax for the year
9. Which of the following is a non-cash expense?
a. Depreciation expenses
b. Interest expense
c. Packaging costs
d. Administrative salaries
10. The break-even model enables the manager of a firm to
a. calculate the minimum price of common stock for certain situations
b. set appropriate equilibrium thresholds
c. determine the quantity of output that must be sold to cover all operating costs
d. determine the optimal amount of debt financing to use
11. A zero-coupon bond
a. pays no interest
b. pays interest at a rate less than the market rate
c. is a junk bond
d. is sold at a deep discount at less than the par value
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
a. increases as the number of discount periods increase
b. is generally larger than the future sum
c. depends upon the number of discount periods
d. increases as the discount rate increases
15. Which of the following is considered to be a spontaneous source of financing?
a. Operating leases
b. Accounts receivable
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
a. 3.43 years
b. 3.17 years
c. 2.88 years
d. 2.6 years
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 __________.
a. less than zero, greater than the required return
b. greater than zero, greater than one
c. greater than one, greater than zero
d. greater than zero, less than one
18. Which of the following is considered to be a deficiency of the IRR?
a. It fails to properly rank capital projects.
b. It could produce more than one rate of return.
c. It fails to utilize the time value of money.
d. It is not useful in accounting for risk in capital budgeting.
19. The firm should accept independent projects if
a. the payback is less than the IRR
b. the profitability index is greater than 1.0
c. the IRR is positive
d. the NPV is greater than the discounted payback
20. The most expensive source of capital is
a. preferred stock
b. new common stock
d. retained earnings
21. The cost associated with each additional dollar of financing for investment projects is
a. the incremental return
b. the marginal cost of capital
c. risk-free rate
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?
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?
24. Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever Brothers' present EBIT is $3 million, and profits available to common shareholders are $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?
25. Zybeck Corp. projects operating income of $4 million next year. The firm's income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will be the projected EPS next year?
26. _________ risk is generally considered only a paper gain or loss.
27. Capital markets in foreign countries
a. offer lower returns than those obtainable in the domestic capital markets
b. provide international diversification
c. in general are becoming less integrated due to the widespread availability of interest rate and currency swaps
d. in general are becoming less integrated due to the widespread availability of interest rate and currency swaps
28. Buying and selling in more than one market to make a riskless profit is called
a. profit maximization
c. international trading
d. an efficient market
29. What keeps foreign exchange quotes in two different countries in line with each other?
a. Cross rates
b. Forward rates
d. Spot rates
30. One reason for international investment is to reduce
a. portfolio risk
b. price-earnings (P/E) ratios
c. advantages in a foreign country
d. exchange rate risk