# Multiple Choice

1. Firm 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) A has a lower break-even point than B, but A's profit grows faster

after the break-even.

B) A has a higher break-even point than B, but A's profit grows slower

after the break-even.

C) B has a lower break-even point than A, but A's profit grows faster

after break-even.

D) B has a lower break-even point than A, and profit grows the same

rate for both companies after the breakeven point.

2. If a firm has fixed costs of $20,000, variable cost per unit of $.50, and a

breakeven point of 5,000 units, the price is:

A) $2.50

B) $5.00

C) $4.00

D) $4.50

3. A ten-year bond pays 11% interest on a $1000 face value annually. If it

currently sells for $1,195, what is its approximate yield to maturity?

A) 9.33%

B) 7.94%

C) 12.66%

D) 8.10%

4. If a company's stock price (Po) goes up, and nothing else changes, Ke

(the required rate of return) should

A) go up

B) go down

C) remain unchanged

D) need more information

5. The preferred stock of Gapers Inc. pays an annual dividend of $6.50.

The price of the preferred stock, if the required return = 8%, is:

a. $ 52

b. $ 65

c. $ 81.25

d. $325

6. State Street Corp. will pay a dividend on common stock of $4.80 per

share at the end of the year. The required return on common stock (Ke)

is 13.2%. The firm has a constant growth rate of 7.2%. The current

price of the stock (Po) is:

a. $20

b. $36.36

c. $66.67

d. $80

8. The pre-tax cost of debt for a new issue of debt is determined by

A) the investor's required rate of return on issued stock.

B) the coupon rate of existing debt.

C) the yield to maturity of outstanding bonds.

D) all of the above.

9. The weighted average cost of capital for firm X is currently 10%. Firm

X is considering a new project but must raise new debt to finance the

project. Debt represents 25% of the capital structure. If the after-tax

cost of debt will rise from 7% to 8%, what is the marginal cost of

capital?

A) 10.25%

B) 10.75%

C) 12.00%

D) not enough information.

10. Project A has a $5,000 net present value at a zero discount rate and an internal rate of return of 12%. Project B has an $8,000 net present value at a zero percent discount rate and an IRR of return of 10%. If the

projects are mutually exclusive, which one should be chosen?

A) project A because it has a higher internal rate of return

B) project B if the cost of capital is less than the crossover point

C) both projects if the net present value is positive

D) not enough information.

11. An example of negative correlation may exist between the

A) forest products and housing industries.

B) jewelry and discount furniture industries.

C) steel and aluminum industries.

D) oil and auto industries.

12. Which investment has the least amount of risk?

A) Standard deviation = $500, expected return = $5,000

B) Standard deviation = $700, expected return = $ 500

C) Standard deviation = $900, expected return = $ 800

D) Standard deviation = $400, expected return = $ 350

13. A project has the following projected outcomes in dollars: $250, $350,

and $500. The probabilities of their outcomes are 25%, 50%, and 25%

respectively. What is the expected value of these outcomes?

A) $362.5

B) $89.4

C) $94.5

D) $178.3

Show work for the following questions.............

14. Complete the following balance sheet for the Range Company using the

following information:

Debt to Assets = 60 percent

Quick Ratio = 1.1

Asset Turnover = 5x

Fixed Asset Turnover = 12.037x

Current Ratio = 2

Average Collection Period = 16.837 days

Cash Current Liabilities ______

Receivables ________ Bonds Payable ______

Inventory ________ Total Liabilities ______

Total Current Assets ________ Net Worth ______

Plant and Equipment ________ Total Liabilities and Net Worth______

Total Assets $325,000

Assume all sales are on credit and a 360-day year.

15.Eddie's Bar and Restaurant Supplies expects its revenues and payments

for the first part of the year to be:

Sales Payments

January 14,000 18,000

February 20,000 21,300

March 26,000 19,100

April 22,000 22,400

May 18,000 14,700

Seventy percent of the firm's sales are on credit. Past experience shows

that 40 percent of accounts receivable are collected in the month after

sale, and the remainder is collected in the second month after sale.

Prepare a schedule of cash receipts for March, April and May. Eddie's

pays its payments in the following month. Eddie's had a cash balance of

$2,000 on March 1, which is also its minimum required cash balance.

There is an outstanding loan of $2,000 on March 1.

Prepare a cash budget for March, April, and May.

16. You have an opportunity to buy a $1,000 bond which matures in 10

years. The bond pays $30 every six months. The current market interest

rate is 8%. What is the most you would be willing to pay for this bond?

17. The law firm of Bushmaster, Cobra and Asp is considering investing in a

complete small business computer system. The initial investment will be

$35,000. The computer is in the 5-year MACRS category, and the firm's

tax rate is 34%. The computer system is expected to provide additional

revenue of $15,000 per year for the next six years, and to reduce

expenses by $10,000 per year for the same period.

a) Calculate the net after-tax cash flows from this investment.

b) Calculate the net present value of the system; the law firm's weighted

average cost of capital is 12%.

c) Should they buy the computer system?

#### Solution Summary

The solution explains various multiple choice questions relating to finance