1. The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.
1. 1. risk-free rate
2. 2. nominal cost
3. 3. risk premium
4. 4. cost of capital
2. The firm's optimal mix of debt and equity is called its
1. 1. optimal ratio.
2. 2. maximum wealth.
3. 3. target capital structure.
4. 4. maximum book value.
3. If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is
1. 1. 4.8 percent.
2. 2. 3.6 percent.
3. 3. 6 percent.
4. 4. 8 percent.
4. A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can
1. 1. decrease the proportion of common stock equity to decrease financial risk.
2. 2. increase short-term debt to decrease the cost of capital.
3. 3. increase the proportion of long-term debt to decrease the cost of capital.
4. 4. increase the proportion of common stock equity to decrease financial risk.
1. 1. Operating
2. 2. Financial
3. 3. Total
4. 4. Variable
6.Breakeven analysis is used by the firm
1. 1. none of these.
2. 2. Both to determine the level of operations necessary to cover all operating costs and to evaluate the profitability associated with various levels of sales.
3. 3. to determine the level of operations necessary to cover all operating costs.
4. 4. to evaluate the profitability associated with various levels of sales.
7.Noncash charges such as depreciation and amortization ________ the firm's breakeven point.
1. 1. understate
2. 2. decrease
3. 3. overstate
4. 4. do not affect
8.If a firm's fixed operating costs decrease, the firm's operating breakeven point will
1. 1. decrease.
2. 2. change in an undetermined direction.
3. 3. increase.
4. 4. remain unchanged.
9.________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.
1. 1. Ratio analysis
2. 2. Operating leverage
3. 3. Total leverage
4. 4. Financial leverage
The answers to the multiple choice questions are highlighted in the attached document.
Finance Multiple Choice Questions: Capital Budgeting and Valuing
1 The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce net after-tax cash flows of $44,503 per year. If the firm's cost of capital is 14 percent, what is the project's IRR? (Hint: Is the firm's cost of capital relevant to an IRR calculation? )
2) Which of the following financial assets would be most susceptible (vulnerable) to a decline in value if interest rates increased?
a. a short term fixed income financial asset (ex. short term bond)
b. a long term fixed income financial asset (ex. long term bond)
c. a long term variable interest rate income financial asset
d. they would all be approximately equally susceptible to a decline in value.
e. None of the above or insufficient information
3 Assume that you can buy a bond for $555 today. The bond will pay you $75 in annual coupon payments (i.e. interest payments) at the end of each of the next 12 years, plus repay the original $1000 par value of the bond at the end of the 12th year. What annual rate of return would you expect to earn on the investment (i.e., what is the bond's YTM?)? (Hint: use your basic TVM keys)
a. 15.7 %
b. 16.1 %
c. 17.6 %
d. 16.5 %
e. None of the above or insufficient information
4 If a firm's current ratio is 4, the firm could liquidate its current assets at only ______ percent of their book value and just have enough (nothing extra from current assets) to still pay off the current liabilities in full.
a. insufficient information to answer; need the inventory amount
b. insufficient information to answer; need the dollar amounts of CA and CL
e. A current ratio has nothing to do with the question being asked
5) Which of the following would least likely be considered as signaling a potential problem regarding the "quality of earnings" for a firm?
a. the firm has experienced a significant increase in earnings relative to the industry overall
b. the firm's accounts receivable account is increasing at a rate faster than the firm's increase in sales.
c. the firm has announced a delay in their release of financial statements due to a change in auditors
d. the firm's accounts receivable account is increasing, but at a rate slower than the firm's increase in sales.
e. all of the above would be considered signals of potential problems regarding he firms' quality of earnings
6) Which of the following is most directly related to value creation?
b. Cash inflow
c. Market share
d. Net income
7 Which of the following assets' book values would, in general, most accurately represent the assets' true market value?
A. Specialized inventory that can only be used for specific projects
b. Inventory that is widely used in many common manufacturing activities
c. real estate assets of the firm
d. equipment assets of the firm used in production activities.
8 The total economic (true, i.e. true financial value) value of the firm is (Please READ ALL alternatives before answering):
a. Found on the balance sheet
b. Equal to the total market value of the stockholders' equity
c. equal to the total market value of the all of the firm's assets
d. Equal to the total market value of the owners and creditors' claim on the firm, by the balance sheet equation( aka accounting equation)
e. both c and d are correct
9 Because of the limited diversification potential of human capital, managers have an incentive to seek:
a. Higher risk projects because they offer the potential for higher returns (payoffs) for the managers
b. higher return projects because they are less risky
c. lower risk projects, because these projects are in the best interest of all stakeholders
d. lower risk projects, because these projects are in the best interest of stockholders
e. lower risk projects, because these projects reduce the probability of the firm going bankrupt.
10 Managerial stock options are an incentive for managers to act in the best interest of:
d. government leaders
e. the public