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Finance: TF, MCQ: Risk, Debt, WACC, net cash flows, payback period, cost of equity

1. A firm controls the amount of financial risk through the level of debt in the firm?
True or False

2. The level of fixed costs would directly impact the amount of business risk for a firm?
True or False

3. The amount of debt on the firm's balance sheet does not affect its capital budgeting decisions?
True or False

4. Funds acquired by the firm through preferred stock have a cost to the firm equal to the preferred dividend divided by the net issuing price (the price that the firm receives on preferred after deducting flotation costs).
True or False

5. The correct weights to use in the WACC calculation are those based on the firm's current capital structure?
True or False

6. The opportunity cost of depreciation is the weighted average cost of capital?
True or False

7. X corporation's next expected dividend is $2.50. The firm has maintained a constant payout ratio of 50% during the past 7 years. Seven years ago, its EPS was $1.50. The firm's beta coefficient is 1.2. The required return on an average stock in the market is 13%, and the risk-free rate is 7%. X's A-rated bonds are yielding 10% and its current stock price is $30. Which of the following values is the most reasonable estimate of its cost of common equity, k(s)?
a. 10%
b. 12%
c. 14%
d. 20%
e. 26%

8. The net cash flows for following project are as follows:
Year NCF
0 ($5,000)
1-4 $2,085 per year
What is the payback period for the following project?

a. 1 year
b. 2 years
c. 2.4 years
d. 2.6 years
e. 3 years

9. The net cash flows for following project are as follows:
Year NCF
0 ($5,000)
1-4 $2,085 per year
If the discount rate is 14%, what is the profitability index for the project?

a. .75
b. .995
c. 1.15
d. 1.215
e. 1.333

10. The project below has the following net cash flows:
Year NCF
0 ($100)
1 $10
2 $60
3 $80
If the discount rate is 10%, what is the project's NPV?

a. $50.00
b. $34.25
c. $22.64
d. $18.79
e. $10.06

Solution Summary

The solution presents the answers with some explanations and calculations.

$2.19