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Question 1 of 25 4.0 Points

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When weighted average cost of capital (WACC) is used to value a levered firm, the interest tax shield is:

A. ignored.

 

B. considered by deducting the interest payment from the cash flows.

 

C. automatically considered because the after-tax cost of debt is used in the WACC formula.

 

D. none of the above

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Question 2 of 25 4.0 Points

 

In order to find the present value of the tax shields provided by debt, the discount rate used is the:

A. cost of capital

 

B. cost of equity

 

C. cost of debt

 

D. none of the above

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Question 3 of 25 4.0 Points

 

On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend?

A. February 5

 

B. February 6

 

C. February 7

 

D. February 8

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Question 4 of 25 4.0 Points

 

A firm has a total market value of $10 million and debt has a market value of $4 million. What is the after-tax weighted average cost of capital if the before – tax cost of debt is 10%, the cost of equity is 15% and the tax rate is 35%?

A. 13%

 

B. 11.6%

 

C. 8.75%

 

D. None of the given answers

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Question 5 of 25 4.0 Points

 

Subsidized loans have the effect of:

A. Increasing the NPV of the loan, thereby reducing the APV.

 

B. Decreasing the NPV of the loan, thereby reducing the APV.

 

C. Decreasing the NPV of the loan, thereby increasing the APV.

 

D. Increasing the NPV of the loan, thereby increasing the APV.

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Question 6 of 25 4.0 Points

 

Why is liquidity relevant?

 

 

 

 

 

Question 7 of 25 4.0 Points

 

Given the following data:

Current assets = 500

Current liabilities = 250

Inventory = 200

Account receivables = 200

 

Calculate the current ratio:

A. 2.0

 

B. 1.0

 

C. 1.5

 

D. None of the above

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Question 8 of 25 4.0 Points

 

Discuss some examples of the conflicts of interest that may arise between bondholders and stockholders when a firm is in financial distress.

 

 

 

 

Question 9 of 25 4.0 Points

 

Efficiency ratios indicate:

I) How productively is the firm utilizing its assets.

II) How liquid is the firm.

III) How profitable is the firm.

IV) How highly is the firm valued by investors.

A. I only

 

B. II only

 

C. III only

 

D. III and IV only

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Question 10 of 25 4.0 Points

 

If an individual wanted to borrow with limited liability he/she should:

A. Invest in the equity of an unlevered firm

 

B. Borrow on his/her own account

 

C. Invest in the equity of a levered firm

 

D. Invest in a risk-free asset like T-bills

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Question 11 of 25 4.0 Points

 

Assets are listed on the balance sheet in order of:

I) Decreasing liquidity

II) Decreasing size

III) Increasing size

IV) Relative life

A. I only

 

B. III and IV only

 

C. II only

 

D. IV only

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Question 12 of 25 4.0 Points

 

Given the following data for year-1:

Profits after taxes = $20 millions;

Depreciation = $6 millions;

Interest expense = $4 millions;

Investment in fixed assets = $12 millions;

Investment in working capital = $4 millions.

Calculate the free cash flow (FCF) for year-1:

A. $4 millions

 

B. $6 millions

 

C. $10 millions

 

D. none of the above

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Question 13 of 25 4.0 Points

 

The difference between Total Assets of a firm and its Total Liabilities is called.

A. Net working capital

 

B. Net current assets

 

C. Net worth

 

D. None of the above

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Question 14 of 25 4.0 Points

 

Assuming that bonds are sold at a fair price, the benefits from the tax shield go to the:

A. managers of the firm

 

B. bondholders of the firm

 

C. stockholders of the firm

 

D. lawyers of the firm

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Question 15 of 25 4.0 Points

 

Profitability ratios indicate:

I) How productively is the firm utilizing its assets.

II) How liquid is the firm.

III) How profitable is the firm.

IV) How highly is the firm valued by the investors.

A. I only

 

B. II only

 

C. III only

 

D. III and IV only

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Question 16 of 25 4.0 Points

 

Floatation costs are incorporated into the APV framework by:

A. Adding them into the all equity value of the project.

 

B. Subtracting them from all equity value of the project.

 

C. Incorporating them into the WACC.

 

D. Disregarding them.

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Question 17 of 25 4.0 Points

 

In order to calculate the tax shields provided by debt, the tax rate used is the:

A. average corporate tax rate

 

B. marginal corporate tax rate

 

C. average of shareholders’ tax rates

 

D. average of bondholders’ tax rates

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Question 18 of 25 4.0 Points

 

Discuss the reasons why a company should prepare a cash budget.

 

 

 

 

Question 19 of 25 4.0 Points

 

One important implication of the efficient markets hypothesis is that:

A. investors should hold a diversified portfolio and avoid active trading.

 

B. investors can benefit by engaging in day trading.

 

C. investors should trade actively help to ensure the highest overall gain in their portfolios.

 

D. all of the above.

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Question 20 of 25 4.0 Points

 

What are the three basic financial statements?

 

 

 

 

Question 21 of 25 4.0 Points

 

Which of the following investors have the strongest tax reason to prefer dividends over capital gains?

A. Pension funds

 

B. Financial institutions

 

C. Individuals

 

D. Corporations

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Question 22 of 25 4.0 Points

 

Stock price cycles or patterns self-destruct as soon as investors recognize them through:

A. stock market regulation by the Securities and Exchange Commission (SEC)

 

B. price fixing by the specialists on New York Stock Exchange

 

C. trading by the investors

 

D. none of the above

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Question 23 of 25 4.0 Points

 

If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the tax rate is 30%)

A. $8.00 million

 

B. $5.6 million

 

C. $30 million

 

D. $26.67 million

 

E. None of the above

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Question 24 of 25 4.0 Points

 

Capital budgeting decisions that include both investment and financing decisions can be analyzed by:

I) Adjusting the present value

II) Adjusting the discount rate

III) Ignoring financing mix

A. I only

 

B. II only

 

C. III only

 

D. I and II only

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Question 25 of 25 4.0 Points

 

Which of the following is a statement of semi-strong form efficiency?

I) If the markets are efficient in the semi-strong form then prices will adjust immediately to public information

II) If the markets are efficient in the semi-strong form then prices reflect all information

III) If the markets are efficient in the semi-strong form then prices will adjust to newly published information after a long time delay

A. I only

 

B. II only

 

C. II and III only

 

D. III only

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