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    Multiple Choice questions in Corporate Finance

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    1. You have the following data for the Fosberg Winery. What is Fosberg's return on assets (ROA) ? Return on equity = 15%; Earnings before taxes = $30,000; Total asset turnover = 0.80; Profit margin = 4.5%; Tax rate = 35%.
    A) 3.6%
    B) 3.9%
    C) 5.7%
    D) 6.4%
    E) 9.3%

    2. Given the following information, what is the value of XYZ Corporation?
    Common Stock: 14. 2 million shares outstanding, price = $35 per share
    Bond Issue 1: $500 million total face value, price = 102% of face value
    Bond Issue 2: $175 million total face value, price = $850 per bond
    A) $697.52 million
    B) $874.82 million
    C) $987.24 million
    D) $1,049.43 million
    E) $1,155.75 million

    3. Which of the following statements concerning the actual value of a firm are correct?
    I. The actual firm value is equal to the M&M Proposition I with tax value minus the financial distress costs.
    II. The actual value of a firm is equal to the value of the firm with no debt plus the present value of the tax shield on debt minus the financial distress costs.
    III. The actual value of a firm with debt is generally greater than the value of a firm without debt.
    IV. The maximum value of a firm is at the point where the additional gain from leverage is just offset by the additional financial distress cost.
    A) II and III only
    B) II and IV only
    C) I and IV only
    D) II, III, and IV only
    E) I, II, III, and IV

    4. Assume a firm's current ratio equals 3.5. Which of the following actions would increase it?
    A) Discarding and writing off spoiled inventory.
    B) Receiving a full cash payment on an account receivable.
    C) Paying off a short-term bank loan with the proceeds from new long-term debt.
    D) Purchasing new fixed assets using the proceeds from a new stock issue.
    E) Buying inventory on credit, thereby increasing accounts payable.

    5. Which of the following is (are) a measure of long-term solvency?
    I Total debt ratio
    II Cash coverage ratio
    III Price-earnings ratio
    IV Market-to-book ratio
    A) I only
    B) I and III only
    C) I and II only
    D) III and IV only
    E) I, II, and IV only

    6. A firm has three bond issues outstanding as shown below. Based on this information what is the weighted average cost of debt?
    Market value Coupon Rate Yield to Maturity
    $500,000 8.00% 7.20%
    $600,000 7.00% 8.40%
    $900,000 6.00% 7.80%

    A) 6.80%
    B) 7.32%
    C) 7.46%
    D) 7.83%
    E) 8.01%

    7. Rank the following goals in increasing order of importance in a compromise dividend policy.
    I. Avoid dividend cuts
    II. Maintain a target debt/equity ratio
    III. Avoid the need to sell equity
    IV. Avoid cutting back on positive NPV projects
    A) IV, II, I, III
    B) II, III, IV, I
    C) IV, I, III, II
    D) I, II, IV, III
    E) IV, I, II, III

    8. A firm has sales of $500, total assets of $300, and a debt/equity ratio of 2. If its return on equity is 15%, what is its net income?
    A) $7.50
    B) $15.00
    C) $22.50
    D) $32.50
    E) $50.00

    9. Rocky Ground Camping Supply Inc. has 200,000 shares of stock outstanding, each with a market value of $15. In addition, on the balance sheet the common stock account has a balance of $1,950,000 and retained earnings of $1,450,000. If the firm declares a 4-for-1 stock split, what is the stock's market value after the split? Assume there are no taxes or transaction costs.
    A) $3.75
    B) $5.00
    C) $7.50
    D) $10.00
    E) $12.50

    10. Which of the following apply to levered firms but not to unlevered firms?
    I. Financial risk
    II. Systematic risk
    III. Business risk
    IV. Interest tax shield
    A) I only
    B) I and IV only
    C) II and III only
    D) II, III, and IV only
    E) I, II, and IV only

    11. Anthony's Anchovies, Inc. sold a 20-year bond issue two years ago. The bond has a 5.35% annual coupon and a $1,000 face value. If the current market price of the bond is $751.64 and the tax rate is 34%, what is the aftertax cost of debt?
    A) 4.2%
    B) 4.4%
    C) 8.0%
    D) 6.6%
    E) 5.3%

    12. The theory that a change in the capital structure weights is exactly offset by the change in the cost of equity is known as:
    A) Homemade leverage.
    B) Financial leverage.
    C) The targeted capital structure theory.
    D) M&M Proposition II.
    E) M&M Proposition I.

    13. A firm with net income of $500,000 pays 48% of net income out in dividends. If the firm has 150,000 shares of common stock outstanding, what is the dividend paid per share of stock?
    A) $0.30
    B) $1.44
    C) $1.53
    D) $1.60
    E) $3.33

    14. A firm has 2,000,000 shares of common stock outstanding with a market price of $2 per share. It has 2,000 bonds outstanding, each selling for $1,200. The bonds mature in 15 years, have a coupon rate of 10%, and pay coupons annually. The firm's beta is 1.2, the risk free rate is 5%, and the market risk premium is 7%. The tax rate is 34%. Calculate the WACC.
    A) 5.42%
    B) 6.53%
    C) 9.36%
    D) 10.28%
    E) 11.57%

    15. A residual dividend is a payment to shareholders that:
    A) Occurs on a regular quarterly basis and normally remains constant in amount.
    B) Is paid in addition to the normal quarterly distribution amount.
    C) Is paid only from funds remaining after all positive net present value projects have been funded.
    D) Represents the funds remaining after a partial liquidation has been used to reduce debt.
    E) Occurs based on funds generated from an unusual one-time event.

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