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An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B's debt level, but not about Company A's debt level. Which of the following would best explain this position?

a. Company B has much higher operating income than Company A
b. Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt
c. Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B
d. Company B has more total assets than Company A

You believe in the power of compounding and decide to save $1 per day by avoiding the purchase of a soda. You deposit the $1 at the end of each day in a bank account that pays 8% interest compounded daily. You are going to take a trip in 20 years with the money you have accumulated. How much money will you have in 20 years, assuming 365 days per year?

a. $7,500
b. $12,438
c. $18,032
d. $22,456

Which of the following statements is most correct concerning diversification and risk?

a. Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
b. Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
c. Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.
d. Asset allocation is important for pension funds but not for individual investors.

SWH Corporation issued bonds on January 1, 2004. The bonds had a coupon rate of 4.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2014. What is the intrinsic value (to the nearest dollar) of an SWH Corporation bond on January 1, 2008 to an investor with a required return of 6%?
a. $888
b. $925
c. $916
d. $947

Kilsheimer Company just paid a dividend of $4 per share. Future dividends are expected to grow at a constant rate of 6% per year. What is the value of the stock if the required return is 12%?
a. $33.33
b. $40.00
c. $66.67
d. $70.67

Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is most correct?
a. Both projects have a positive net present value (NPV).
b. Project A must have a higher NPV than project B.
c. If the required return were less than 12 percent, Project B would have a higher IRR than Project A.
d. Project B has a higher profitability index than Project A.

Which of the following statements is most correct?
a. If a projectâ??s internal rate of return (IRR) exceeds the required return, then the projectâ??s net present value (NPV) must be negative.
b. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
c. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR
d. A project with a NPV = 0 is not acceptable.

Rent-to-Own Equipment Co. is considering a new inventory system that will cost $450,000. The system is expected to generate positive cash flows over the next four years in the amounts of $250,000 in year one, $125,000 in year two, $110,000 in year three, and $80,000 in year four. Rent-to-Own's required rate of return is 10%. What is the payback period of this project?
a. 4.00 years
b. 3.02 years
c. 2.68 years
d. 2.42 years

Ames Manufacturing is considering the purchase of new, sophisticated machinery for a special three-year project. The machinery requires a special lubricating oil that probably will never be used, but must be available at all times should the machine break down. Ames purchases $2,000 of lubricating oil to keep on hand just in case it is needed. At the end of the three-year project, it is expected the lubricating oil can be sold back to the distributor for $2,000. Which of the following statements is most correct?

a. The lubricating oil is a sunk cost that should be excluded from the analysis.
b. The $2,000 for the lubricating oil should be excluded from the analysis because it is recovered at the end of three years, so the final cost is zero.
c. The $2,000 represents an additional investment in working capital that should be included in the capital budgeting analysis.
d. The $2,000 for lubricating oil is simply an accounting entry and does not represent a real cash flow.

Laural Inc. is a household products firm that is considering developing a new detergent. In evaluating whether to go ahead with the new detergent project, which of the following statements is most correct?

a. The company will produce the detergent in a building that they already own. The cost of the building is therefore zero and should be excluded from the analysis.
b. The company will need to use some equipment that it could have leased to another company. This equipment lease could have generated $200,000 per year in after-tax income. The $200,000 should be excluded because the equipment can no longer be leased.
c. The company will need to hire 10 new workers whose salaries and benefits will total $400,000 per year. Labor costs are not part of capital budgeting and should be excluded.
d. The company will produce the detergent in a building that it renovated 2 years ago for $300,000. The $300,000 should be excluded from the analysis.

JW Enterprises is considering a new marketing campaign that will require the addition of a new computer programmer and new software. The programmer will occupy an office in JWâ??s current building and will be paid $8,000 per month. The software license costs $1,000 per month. The rent for the building is $4,000 per month. JWâ??s computer system is always on, so running the new software will not change the current monthly electric bill of $900. The incremental expenses for the new marketing campaign are ________.
a. $13,900 per month
b. $9,000 per month
c. $13,000 per month
d. $8,000 per month

Two considerations that cause a corporationâ??s cost of capital to be different than its investorsâ?? required returns are ________.
a. corporate taxes and flotation costs
b. individual taxes and corporate taxes
c. individual taxes and dividends
d. corporate taxes and the earned income tax credit

Due to changes in regulatory requirements, the transactions costs associated with selling corporate securities increased by $1 per share. This change will ________.
a. cause the cost of capital to decrease
b. cause the cost of capital to increase
c. have no effect on the cost of capital because transactions costs are expensed immediately
d. cause the cost of capital to decrease only if investors may be billed for part of the increase in transactions costs

Jiffy Wax Corp. can sell common stock for $15 per share and its investors require a 14% return. However, the administrative or flotation costs associated with selling the stock amount to $2.40 per share. What is the cost of capital for Jiffy Wax if the corporation raises money by selling common stock?
a. 30.00%
b. 21.50%
c. 16.67%
d. 14.00%

The break-even model enables the manager of the 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

Which of the following transactions will lower a companyâ??s financial leverage?
a. a mortgage loan is obtained and the proceeds are used to pay off existing short-term debt
b. preferred stock is sold and the proceeds are used to pay off existing short-term debt
c. common stock is sold and the proceeds are used to pay off existing short-term debt
d. short-term debt is obtained to get the company through a period of negative net income and cash flow

Moline Manufacturing Corporation reported the following items: Sales = $5,000,000; Variable Costs of Production = $2,000,000; Variable Selling and Administrative Expenses = $250,000; Fixed Costs = $1,650,000; EBIT = $1,100,000; and the Marginal Tax Rate = 40%. Moline's break-even point in sales dollars is ________.
a. $3,900,000
b. $3,750,000
c. $3,000,000
d. $2,340,000

All of the following are potential benefits of stock repurchases except:
a. A means for providing an internal investment opportunity
b. An approach for maintaining the existing capital structure while still making a distribution to shareholders
c. A favorable impact on earnings per share
d. The elimination of a minority ownership group of stockholders

Low dividends may increase stock value according to the ________.
a. bird-in-the-hand theory
b. information effect
c. impact of agency costs
d. tax bias in favor of capital gains

Which of the following is always a non-cash expense?
a. income taxes
b. salaries
c. depreciation
d. none of the above

A company collects 20% of its sales during the month of sale, 50% one month after the sale, and 30% two months after the sale. The company expects sales of $30,000 in August, $40,000 in September, $50,000 in October, and $30,000 in November. How much money is expected to be collected in October?
a. $50,000
b. $41,000
c. $35,000
d. $39,000

The inventory loan arrangement in which all of the borrower's inventories are used as collateral is termed a:
a. terminal warehouse agreement
b. floating lien agreement
c. chattel mortgage agreement
d. field warehouse financial agreement

The inventory loan agreement in which the lender can increase his or her security interest by having specific items of inventory identified in the loan agreement is called
a. a floating lien agreement
b. a chattel mortgage agreement
c. a field warehouse agreement
d. inventory identification agreement

Transit float is caused by ________.
a. the time necessary for a deposited check to clear the banking system and become usable funds to the company
b. the time funds are not available, through the company's bank account, until its payment check has cleared the banking system
c. the elapsed time from the moment a customer mails his remittance check until the firm begins to process it
d. the time required for the firm to process remittance checks

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Below are my answers.

ANSWERS

An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B's debt level, but not about Company A's debt level. Which of the following would best explain this position?
c. Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B
The lower ROE results from the higher charges

You believe in the power of compounding and decide to save $1 per day by avoiding the purchase of a soda. You deposit the $1 at the end of each day in a bank account that pays 8% interest compounded daily. You are going to take a trip in 20 years with the money you have accumulated. How much money will you have in 20 years, assuming 365 days per year?
c. $18,032
Number of days = 365 x 20 = 7300
1*((1+(8%/365))^7300 - 1)/(8%/365) = 18,032

Which of the following statements is most correct concerning diversification and risk?
c. Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.

SWH Corporation issued bonds on January 1, 2004. The bonds had a coupon rate of 4.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2014. What is the intrinsic value (to the nearest dollar) of an SWH Corporation bond on January 1, 2008 to an investor with a required return of 6%?
a. $888
coupon = 1000*4.5%/2 = 22.50
Payment = 10 years x 2 = 20 years
Required rate of return = 6%/2 = 3%
PV of principal = 1,000/(1+3%)^20 =553.68
PV of interest = 22.5*(1-(1/(1+3%)^20)/3% = 334.74
Intrinsic value = 553.68 + 334.54 = 888.42

Kilsheimer Company just paid a ...

Solution Summary

The inventory loan arrangement is assessed.

$2.19