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Chapter 15 Question 1 Which of the following statements is CORRECT? Selected Answer: d. All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio. Question 2 The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Refer to the data for the Anson Jackson Court Company (AJC). The firm is considering moving to a capital structure that is comprised of 40% debt and 60% equity, based on market values. The new funds would be used to replace the old debt and to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on debt to rise to 7%, while the required rate of return on equity would rise to 9.5%. If this plan were carried out, what would be AJC's new WACC and total value?
FIN 260 Quizzes 432 Exam Questions and Answers
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Selected Answer: e. 7.38%; $813, Question 3 An all-equity firm with 200,000 shares outstanding, Antwerther Inc., has $2,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Its tax rate is 40%. The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs. Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization? Selected Answer: b. $69. Question 4 If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio. Selected Answer: True Question 5
FIN 260 Quizzes 432 Exam Questions and Answers
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in growth in order to keep a firm's required return constant, other things held constant. Selected Answer: True Question 9 Downie Foods recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split? Selected Answer: b. $31. Question 10 Which of the following statements is NOT correct? Selected Answer: d. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. Chapter 14 Question 1 Which of the following is most CORRECT?
FIN 260 Quizzes 432 Exam Questions and Answers
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Selected Answer: a. Real options are likely to reduce the cost of capital that should be used to discount a project's expected cash flows. Question 2
FIN 260 Quizzes 432 Exam Questions and Answers
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considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars? Selected Answer: b. $461. Question 3 Drilling Experts, Inc. (DEI) finds and develops oil properties and then sells the successful ones to major oil refining companies. DEI is now considering a new potential field, and its geologists have developed the following data, in thousands of dollars. t = 0. A $400 feasibility study would be conducted at t = 0. The results of this study would determine if the company should commence drilling operations or make no further investment and abandon the project. t = 1. If the feasibility study indicates good potential, the firm would spend $1,000 at t = 1 to drill exploratory wells. The best estimate is that there is an 80% probability that the exploratory wells would indicate good potential and thus that further work would be done, and a 20% probability that the outlook would look bad and the project would be abandoned. t = 2. If the exploratory wells test positive, DEI would go ahead and spend $10,000 to obtain an accurate estimate of the amount of oil in the field at t = 2. The best estimate now is that there is a 60% probability that the results would be very good and a 40% probability that results would be poor and the field would
FIN 260 Quizzes 432 Exam Questions and Answers
100%Correct/Verified 2023 Update
be abandoned.
FIN 260 Quizzes 432 Exam Questions and Answers
100%Correct/Verified 2023 Update
expected cash flows. Selected Answer: False Question 7 The executives of Garner-Wagner Inc. are considering a project that has an up- front cost of $3 million and is expected to produce a cash flow of $500,000 at the end of each of the next 5 years. The project's cost of capital is 10%. Refer to the data for Garner-Wagner Incorporated. Based on the above data, what is the project's net present value? Selected Answer: a. −$1,104, Question 8 The option to abandon a project is a real option, but a call option on a stock is not a real option. Selected Answer: True Question 9 Which one of the following is an example of a "flexibility" option? Selected Answer: c. A company agrees to pay more to build a plant in order to be able to change the plant's inputs and/or outputs at a later date if conditions change.
FIN 260 Quizzes 432 Exam Questions and Answers
100%Correct/Verified 2023 Update
Question 10 Real options are most valuable when the underlying source of risk is very low. Selected Answer: False Chapter 13 Question 1 Shultz Business Systems is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. This is just one of many projects for the firm, so any losses can be used to offset gains on other firm projects. What is the project's expected NPV?
FIN 260 Quizzes 432 Exam Questions and Answers
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projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects? Selected Answer: a. Project B, which has below-average risk and an IRR = 8.5%. Question 4 If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. Selected Answer: True Question 5 Because of improvements in forecasting techniques, estimating the cash flows associated with a project has become the easiest step in the capital budgeting process. Selected Answer: False Question 6 Which of the following statements is CORRECT? Selected Answer: e. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to increase. Question 7 The use of accelerated versus straight-line depreciation causes net income
FIN 260 Quizzes 432 Exam Questions and Answers
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reported to stockholders to be lower, and cash flows higher, during every year of a project's life, other things held constant. Selected Answer: False Question 8 Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated. Selected Answer: True Question 9 Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker's books. The lost sales on the older book are a sunk cost and as such should not be considered in the analysis for the new book. Selected Answer: False Question 10 Laramie Labs uses a risk-adjustment when evaluating projects of different risk. Its overall (composite) WACC is 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Laramie evaluates low-risk projects with a risk-adjusted project cost of capital of 8%, average-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects:
FIN 260 Quizzes 432 Exam Questions and Answers
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higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT? Selected Answer: e. Project D probably has a higher IRR. Question 3 Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. Question 4 When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not. Selected Answer: False
FIN 260 Quizzes 432 Exam Questions and Answers
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Question 5 Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows. Question 6 Martin Manufacturing is considering two normal, equally risky, mutually exclusive, but not repeatable projects. Martin's cost of capital is 10%. The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%. Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT? Selected Answer: e. If the crossover rate is 8%, Project B will have the higher NPV. Question 7 Which of the following statements is CORRECT? Selected Answer: e. Projects with "normal" cash flows can have only one real IRR. Question 8 Scott Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's
FIN 260 Quizzes 432 Exam Questions and Answers
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Selected Answer: c. 19.27% Chapter 10 Question 1 Which one of the following corporate board characteristics usually improves corporate governance? Selected Answer: d. The board has a majority of outsiders who have experience and aren't too busy. Question 2 Which one of the following corporate board characteristics usually improves corporate governance? Selected Answer: b. CEO is not the chairman of the board. Question 3 Which one of the following statements is TRUE? Selected Answer: c. One tool of corporate governance is how the company's charter affects the likelihood of a takeover. Question 4 Which one of the following statements is TRUE?
FIN 260 Quizzes 432 Exam Questions and Answers
100%Correct/Verified 2023 Update
Selected Answer: b. One tool of corporate governance is monitoring management. Question 5 Which one of the following statements is TRUE? Selected Answer: c. A classified board is one in which the board members have staggered terms. Question 6 Which one of the following statements is TRUE? Selected Answer: b. A targeted share repurchase is when the company purchases stock from one shareholder at a higher price than it offers to other shareholders. Question 7 Which one of the following statements is TRUE? Selected Answers: c. Creditors have a claim on a firm's earning stream through the dividend payments they receive. d. Lenders will protect themselves from asset switching by charging a higher interest rate. Question 8 Which one of the following statements is TRUE? Selected Answer: d. If a company has a classified board, fewer board seats are filled each year.
FIN 260 Quizzes 432 Exam Questions and Answers
