Home Spring 2017 Business & Entrepreneur SP201728311006 Week 16 (5/11) Final Exam Final Exam

Started on Thursday, May 11, 2017, 3:07 PM

State Finished
Completed on Thursday, May 11, 2017, 3:11 PM
Time taken 3 mins 30 secs
Marks 25.00/50.00
Grade 50.00 out of 100.00

Question 1 Higher flotation costs will result in all of the following EXCEPT
Correct
Select one:
Mark 1.00 out of
1.00 A. higher cost of retained earnings.
B. higher aftertax cost of debt.

C. higher cost of common equity when new common shares are sold.

D. higher weighted average cost of capital.

The correct answer is: higher cost of retained earnings.

Question 2 A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond matures in 15 years and has a current
Incorrect market price of $925. If the corporation sells more bonds it will incur flotation costs of $25 per bond. If the corporate
tax rate is 35%, what is the aftertax cost of debt capital?
Mark 0.00 out of
1.00
Select one:
A. 6.78%

B. 5.29%

C. 4.45%
D. 3.74%

The correct answer is: 3.74%

Question 3 The firm's cost of capital may also be referred to as the firm's opportunity cost of capital.
Incorrect
Select one:
Mark 0.00 out of
1.00 True

False

The correct answer is 'True'.

Question 4 The firm's cost of capital is important when evaluation the firm's overall value, but should not be used to evaluate
Incorrect individual projects which have their own unique characteristics.

Mark 0.00 out of

Select one:
1.00
True

False

The correct answer is 'False'.

Question 5 A reasonable estimate of the market risk premium based on historical data and expert opinion is between 5% and 7%.
Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 6 XRT, Inc. is issuing a $1,000 par value bond that pays 8.5% interest annually. Investors are expected to pay $1,100 for
Incorrect the 12year bond. The firm will pay $50 per bond in flotation costs. What is the aftertax cost of new debt if the firm
is in the 35% tax bracket?
Mark 0.00 out of
1.00
Select one:
A. 4.55%

B. 8.23%

C. 7.45%
D. 4.70%

The correct answer is: 4.70%

Question 7 The average cost of capital is the appropriate rate to use when evaluating new investments, even though the new
Incorrect investments may be in a higher risk class.

Mark 0.00 out of

Select one:
1.00
True
False

The correct answer is 'False'.

Question 8 Once the weighted average cost of capital (WACC) is determined then all projects of average risk will be compared to
Correct the original WACC regardless of the size of the capital budget.

Mark 1.00 out of

Select one:
1.00
True
False

The correct answer is 'False'.

Question 9 The net present value always provides the correct decision provided that
Incorrect
Select one:
Mark 0.00 out of
1.00 A. the required rate of return is greater than the internal rate of return.

B. the internal rate of return is positive.

C. capital rationing is not imposed.

D. cash flows are constant over the asset's life.

The correct answer is: capital rationing is not imposed.

Question 10 If project A generates $10 million of free cash flow over its five year useful life and project B generates $8 million of
Incorrect free cash flow over its useful life, then Project A will have a shorter payback period than Project B, assuming both
projects require the same initial investment.
Mark 0.00 out of
1.00
Select one:
True
False

The correct answer is 'False'.

Question 11 A project with a payback period of four years is acceptable as long as the company's target payback period is greater
Incorrect than or equal to four years.

Mark 0.00 out of

Select one:
1.00
True

False

The correct answer is 'True'.

Question 12 The profitability index can be helpful when a financial manager encounters a situation where capital rationing is
Correct required.

Mark 1.00 out of

Select one:
1.00
True

False

The correct answer is 'True'.

Question 13 If a project's IRR is equal to its required return, then the project's NPV is equal to zero and its PI is equal to one.
Incorrect
Select one:
Mark 0.00 out of
1.00 True
False

The correct answer is 'True'.

Question 14 IRR should not be used to choose between mutually exclusive projects.
Correct
Select one:
Mark 1.00 out of
1.00 True
False

The correct answer is 'True'.

Question 15 Finance theory suggests that the IRR criterion is the most favorable capital budgeting decision tool.
Incorrect
Select one:
Mark 0.00 out of
1.00 True
False

The correct answer is 'False'.

Question 16 If a project is acceptable using the IRR criterion, it will also be acceptable using the MIRR criterion.
Correct
Select one:
Mark 1.00 out of
1.00 True
False

The correct answer is 'True'.

Question 17 Two projects that have the same cost and the same expected cash flows will have the same net present value.
Incorrect
Select one:
Mark 0.00 out of
1.00 True
False

The correct answer is 'False'.

Question 18 Both the profitability index (PI) and net present value (NPV) are based on the present value of all future free cash
Incorrect flows, but the PI is a relative measure while the NPV is an absolute measure of a project's desirability.

Mark 0.00 out of

Select one:
1.00
True
False

The correct answer is 'True'.

Question 19 A high degree of variability in a firm's earnings before interest and taxes refers to
Correct
Select one:
Mark 1.00 out of
1.00 A. financial risk.
B. business risk.

C. financial leverage.
D. operating leverage.

The correct answer is: business risk.

Question 20 Business risk refers to the relative dispersion (variability) of a company's net income.
Incorrect
Select one:
Mark 0.00 out of
1.00 True
False

The correct answer is 'False'.

Question 21 The breakeven model assumes that selling price per unit and variable cost per unit of output are constant over the
Correct relevant range of output.

Mark 1.00 out of

Select one:
1.00
True
False

The correct answer is 'True'.

Question 22 Fixed costs are called indirect costs while variable costs are called direct costs.
Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 23 Operating leverage contributes ultimately to the variability of a firm's earnings per share.
Incorrect
Select one:
Mark 0.00 out of
1.00 True

False

The correct answer is 'True'.

Question 24 Financial leverage is typically more under the control of management than is operating leverage because the nature
Correct of the product often dictates the type of production process needed.

Mark 1.00 out of

Select one:
1.00
True

False

The correct answer is 'True'.

Question 25 A corporation with $1 million in retained earnings at the end of the year could easily pay a dividend of $500,000.
Incorrect
Select one:
Mark 0.00 out of
1.00 True
False

The correct answer is 'False'.

Question 26 Other things equal, individuals in highincome tax brackets should have a preference for firms that retain their
Incorrect earnings rather than pay dividends.

Mark 0.00 out of

Select one:
1.00
True
False

The correct answer is 'True'.

Question 27 If John owns 5% of XYZ corporation before its 2 for 1 stock split, John will own 5% of XYZ corporation after the stock
Correct split as well.

Mark 1.00 out of

Select one:
1.00
True

False

The correct answer is 'True'.

Question 28 After a stock split of 2:1, each investor will have twice the number of shares, but the same percentage ownership in
Correct the firm that he had before the split.

Mark 1.00 out of

Select one:
1.00
True
False

The correct answer is 'True'.

Question 29 A firm's stock price may decline by less than 50% after a 2 for 1 stock split if the reduction in price moves the stock
Correct into its optimal trading range.

Mark 1.00 out of

Select one:
1.00
True

False

The correct answer is 'True'.

Question 30 Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and
Incorrect increasing value per share due to repurchase programs is tax deferred.

Mark 0.00 out of

Select one:
1.00
True

False

The correct answer is 'True'.

Question 31 A stock repurchase plan can be viewed as both a financing decision and an investment decision.
Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 32 Financial forecasting is the process of attempting to estimate a firm's future financing requirements.
Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 33 The percent of sales method assumes that all assets and all liabilities increase proportionally with sales, but retained
Correct earnings does not.

Mark 1.00 out of

Select one:
1.00
True

False

The correct answer is 'False'.

Question 34 Discretionary financing needed is equal to the predicted change in total assets minus the change in retained
Incorrect earnings.

Mark 0.00 out of

Select one:
1.00
True
False

The correct answer is 'False'.

Question 35 If the sales growth rate is greater than zero, then the discretionary financing needed will also be greater than zero.
Incorrect
Select one:
Mark 0.00 out of
1.00 True

False

The correct answer is 'False'.

Question 36 A budget is a forecast of future events.

Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 37 The annual cash budget not only shows the amount of financing needed for the year, but also when the funds will be
Correct needed.

Mark 1.00 out of

Select one:
1.00
True

False

The correct answer is 'True'.

Question 38 Two advantages of financing with current liabilities are flexibility and lower interest cost.
Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 39 Higher liquidity (holding larger cash and marketable securities balances) generally results in a lower return on equity.
Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 40 A firm increases the risks of insolvency by keeping relatively large amounts of money tied up in marketable
Incorrect securities.

Mark 0.00 out of

Select one:
1.00
True

False

The correct answer is 'False'.

Question 41 A company decreases the risk of insolvency by financing longterm assets with shortterm debt.
Incorrect
Select one:
Mark 0.00 out of
1.00 True

False

The correct answer is 'False'.

Question 42 Notes payable is a spontaneous source of financing.

Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'False'.

Question 43 The hedging principle involves the use of hedge funds to manage the firm's working capital.
Incorrect
Select one:
Mark 0.00 out of
1.00 True
False

The correct answer is 'False'.

Question 44 The cash conversion cycle is equal to the days of sales outstanding plus the days of sales in inventory plus the days
Incorrect of payables outstanding.

Mark 0.00 out of

Select one:
1.00
True

False

The correct answer is 'False'.

Question 45 The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.
Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 46 Compounding effectively raises the cost of shortterm credit.
Correct
Select one:
Mark 1.00 out of
1.00 True

False

The correct answer is 'True'.

Question 47 Accrued wages and taxes are secured sources of financing because companies are obligated to make these payments
Incorrect before they make payments on any other loans or pay dividends.

Mark 0.00 out of

Select one:
1.00
True
False

The correct answer is 'False'.

Question 48 Factoring accounts receivable is the sale of a firm's receivables while pledging accounts receivable is the use of
Correct accounts receivable as collateral for a loan.

Mark 1.00 out of

Select one:
1.00
True

False

The correct answer is 'True'.

Question 49 The cost of trade credit varies directly with the size of the cash discount and inversely with the length of time
Correct between the end of the discount period and the final due date.

Mark 1.00 out of

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1.00
True
False

The correct answer is 'True'.

Question 50 Credit terms of 2/10, net 30 have a lower effective cost than credit terms of 2/10, net 60 because in the first case
Incorrect the loan will be repaid sooner.

Mark 0.00 out of

Select one:
1.00
True

False

The correct answer is 'False'.