“Determining the best way to raise money to fund a firm’s long-term investments is called:the
capital budgeting decisionthe
money flow processing decisionthe
portfolio decisionthe
capital structure decisionWhich of the following is NOT true
regarding mortgaged-backed securities (MBS)?Securitization
provides liquidity to the mortgage market and makes it possible for banks
to loan more money to home buyers.MBS
are sold to investors who can hold them as an investment or resell them
to other investors.

The MBS process allows the mortgage bank or other financial institution that
made the original mortgage loan to get its money back out of the loan and
lend it to someone else.All of the above.
3. To
measure value, the concept of time
value of money is used:
to bring the future
benefits and costs of a project, measured by its cash flows, back to the present
to determine the
interest rate paid on corporate debtto bring the future
benefits and costs of a project, measured by its expected profits, back
to the present
to ensure that expected
future profits exceed current profits today
4. An investor is considering two equally
risky investments. Investment A is expected to return $1,000 per year for the
next 5 years. Investment B is expected to return $6,000 at the end of 5 years.
Which of the following statements is MOST correct if both investments A and B
have the same cost?
A risk averse investor
will select investment A because it provides cash earlier than investment
B.A risk averse investor
will select investment B because it is expected to provide the most cash
($6,000 > $5,000).The investor will select
investment A only if the cost is less than $1,000.The investor may select
investment A or investment B depending on the opportunity cost
of money.
45
BAM 313 Introduction to Financial
Management
Unit 1 Examination
5. Assume that you won the Lotta
Dough Lotto jackpot for $20 million. Further assume that you were offered a
choice to receive the $20 million today, or receive it in equal installments of
$1 million per year for 20 years. According to one of the principles of
finance, which would you take?
You would be indifferent
as to when you would receive the $20 million since the total number of
dollars received is the same either way.You would take the $20
million in equal installments of $1 million per year for 20 years because
it would be worth more than if you would receive it today.You would take the $20
million in equal installments of $1 million per year for 20 years because
you would be afraid of spending it all right away.You would take the $20
million today because it would be worth more than if you would receive it
in equal installments of $1 million per year for 20 years.
Maximization of
shareholder wealth:is
achieved only if cash flows exceed accounting profitsrepresents
a zero sum game in which one corporation gains at the expense of othersis
not a practical goal since it cannot be measured effectivelyprovides
benefits to society as scarce resources are directed to their most
productive useWhich of the following
securities will likely have the highest liquidity premium?U.S.
Treasury Bond maturing in 2027U.S.
Treasury BillAAA-rated
corporate bond maturing in 2015 not actively tradedBBB-rated
corporate bond maturing in 2020 actively traded on a major exchangePrivate placements
usually have several advantages associated with them, but also tend to
suffer from specific disadvantages. Which of the following is a
disadvantage of a private placement when compared to other methods of
selling new securities?higher
interest costsreduced
flotation costsavoidance
of registration with the SECstrictly
standardized features/termsCommon examples of
financial intermediaries include all of the following EXCEPT:life
insurance companiesventure
capital firmspension
fundsmutual
funds
46
BAM 313 Introduction to Financial
Management
Unit 1 Examination
A life insurance company
purchases $1 billion of corporate bonds from premiums collected on its
life insurance policies. Therefore:the
corporate bonds are direct securities and the life insurance policies are
direct securitiesthe
corporate bonds are indirect securities and the life insurance policies
are indirect securitiesthe
corporate bonds are indirect securities and the life insurance policies
are direct securities.the
corporate bonds are direct securities and the life insurance policies are
indirect securities.Which of the following
represents an attempt to measure the net results of the firms operations
(revenues versus expenses) over a given time period?statement
of cash flowssources
and uses of funds statementbalance
sheetincome
statementGross profit is equal
to:revenues
minus expensesprofits
plus depreciationsales
minus cost of goods soldearnings
before taxes minus taxes payableAn income statement may
be represented as follows:Sales
– Expenses = Retained EarningsSales
– Expenses = ProfitsRevenues
– Liabilities = Net IncomeSales
– Liabilities = ProfitsWhich of the following
ratios would be the poorest indicator of how rapidly the firms credit accounts
are being collected?average
collection periodcash
conversion cycletimes
interest earnedaccounts
receivable turnover ratio
47
BAM 313 Introduction to Financial
Management
Unit 1 Examination
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 Bs debt level, but not about Company As debt level. Which of the
following would best explain this position?Company
A has a lower times interest earned ratio and thus the analyst is not
worried about the amount of debt.Company
B has much higher operating income than Company A.Company
B has a higher operating return on assets than Company A, but Company A
has a
higher return on equity than
Company B.
Company
B has more total assets than Company A.Jeter Industries has an
accounts receivable turnover ratio of 4.5. If Jeter has an accounts receivable
balance of $100,000, what is Jeters average daily credit sales?
a. $1,232.88 b. $22,222.22 c.
$1,893.45 d. $745.23
As of today, the most
severe economic crisis to afflict the United States economy is considered
to be:the
Great Depression of the 1930sthe
Reagan Tax Law Changes of 1985the
Great Recession of 2007-2009the
Savings and Loan Crisis of 1978 -1982A corporate treasurer is typically
responsible for each of the following duties EXCEPT:credit
managementcapital
expenditurescash managementcost
accountingA wealthy private
investor providing a direct transfer of funds is called:a
financial intermediaryan
angel investoran
investment bankera
venture capitalist
48
BAM 313 Introduction to Financial
Management
Unit 1 Examination
Rogue Industries
reported the following items for the current year: Sales = $3,000,000;
Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000;
Administrative Expenses = $150,000; Interest Expense = $30,000;
Marketing Expenses = $80,000; and Taxes = $300,000. Rogues net profit
margin is equal to:
a. 35.67% b. 36.67% c. 25.67% d.
50.00%
Septon Inc. has an
average collection period of 74 days. What is the accounts receivable turnover
ratio for Septon Inc.?
a. 2.66 b. 1.74 c. 4.93 d. 2.47
Which form of
organization is free of initial legal requirements?sole
proprietorshipgeneral
partnershipcorporation
both
a and bWhich of the following is NOT a benefit
provided by the existence of organized security exchanges?standardization
of all debt agreementshelping
businesses raise new capitalproviding
a continuous marketestablishing
and publicizing fair security pricesCalifornia Retailing
Inc. has sales of $4,000,000; the firms cost of goods sold is $2,500,000;
and its total operating expenses are $600,000. The firms interest expense
is $250,000, and the corporate tax rate is 40%. What is California
Retailings net income?
a. $288,000 b. $377,000 c. $350,000
d. $390,000
49
BAM 313 Introduction to Financial
Management
Unit 1 Examination
25. Company A and Company B have the same
gross profit margin and the same total asset turnover, but company A has a
higher return on equity. This may result from:
Company
B has more common stock.Company
A has lower selling and administrative expenses, resulting in a higher net
profit
margin.
Company
A has lower cost of goods sold, resulting in a higher net profit margin.Company
A has a lower debt ratio.

What is the present
value of an annuity of $120 received at the end of each year for 11 years?
Assume a discount rate of 7%. The first payment will be received one year
from today (round to nearest $1).
a. $570 b. $250 c. $400 d. $900
You bought a racehorse
that has had a winning streak for six years, bringing in $250,000 at the
end of each year before dying of a heart attack. If you paid $1,155,720
for the horse 4 years ago, what was your annual return over this 4-year
period?
a. 12% b. 8% c. 18% d. 33%
How much money do I need to place into a
bank account that pays a 1.08% rate in order to have $500 at the end of 7
years?
a. $751.81 b. $463.78 c. $629.51 d.
$332.54
Your daughter is born
today and you want her to be a millionaire by the time she is 40 years old.
You open an investment account that promises to pay 11.5% per year. How
much money must you deposit today so your daughter will have $1,000,000 by
her 35th birthday?
a. $20,100 b. $18,940 c. $28,575 d.
$22,150
If you want to have
$3,575 in 29 months, how much money must you put in a savings account today?
Assume that the savings account pays 12% and it is compounded monthly
(round to nearest $1).
a. $2,438 b. $2,679 c. $3,147 d.
$3,008
96
BAM 313 Introduction to Financial
Management
Unit 2 Examination
U.S. Savings Bonds are
sold at a discount. The face value of the bond represents its value on its
future maturity date. Therefore:The
current price of a $50 face value bond that matures in 10 years will be
greater than the current price of a $50 face value bond that matures in 5
years.The
current prices of all $50 face value bonds will be the same, regardless
of their maturity dates because they will all be worth $50 in the future.
The
current price of a $50 face value bond will be higher if interest rates
increase.The
current price of a $50 face value bond that matures in 10 years will be
less than the
current price of a $50 face value
bond that matures on 5 years.
You are considering a
sales job that pays you on a commission basis or a salaried position that pays
you $50,000 per year. Historical data suggests the following probability
distribution for your commission income. Which job has the higher expected
income?
Probability of…
Commission Occurrence
$15,000 .15 $35,000 .20 $48,000 .35
$67,000 .22 $80,000 .18
The salary of $50,000 is
less than the expected commission of $50,050.The salary of $50,000 is
less than the expected commission of $52,720.The salary of $50,000 is
greater than the expected commission of $49,630.The salary of $50,000 is
greater than the expected commission of $48,400.
8. Beginning with an investment in
one companys securities, as we add securities of other companies to our
portfolio, which type of risk declines?
unsystematic riskmarket risksystematic risknon-diversifiable risk
97
BAM 313 Introduction to Financial
Management
Unit 2 Examination

Project 1

Probability

Return

Standard Deviation

Beta

50% chance

22%

12%

1.1

50% chance

– 4%

Project 2

Probability

Return

Standard Deviation

Beta

30% chance

36%

19.5%

0.8

40% chance

10.5%

30% chance

– 20%

Project 3

Probability

Return

Standard Deviation

Beta

10% chance

28%

12%

2.0

70% chance

18%

20% chance

– 8%

Assume the risk-free
rate of return is 2% and the market risk premium is 8%. If you are a risk averse
investor, which project should you choose?Project
3Project
2Project
1Either
Project 2 or Project 3 because the higher expected return on project 3
offsets its
higher risk.
Stock A has a beta of
1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8
and a standard deviation of returns of 18%. If the risk-free rate of
return increases and the market risk premium remains constant, then:the
required returns on stocks A and B will not changethe
required returns on stocks A and B will both increase by the same amountthe
required return on stock A will increase more than the required return on
stock Bthe
required return on stock B will increase more than the required return on
stock A
98
BAM 313 Introduction to Financial
Management
Unit 2 Examination
Suppose interest rates
have been at historically low levels the past two years. A reasonable strategy
for bond investors during this time period would be to:buy
only junk bonds which have higher interest ratesinvest
in long-term bonds to reduce interest rate riskinvest
in short-term bonds to reduce interest rate riskinvest
in long-term bonds to lock in a bond position for when interest rates
increase in the
future
Fred and Ethel are both
considering buying a corporate bond with a coupon rate of 8%, a face value
of $1,000, and a maturity date of January 1, 2025. Which of the following
statements is MOST correct?Fred
and Ethel will only buy the bonds if the bonds are rated BBB or above.Because
both Fred and Ethel will receive the same cash flows if they each buy a
bond,
they both must assign the same
value to the bond.
If
Fred decides to buy the bond, then Ethel will also decide to buy the bond
if markets are
efficient.
Fred
may determine a different value for a bond than Ethel because each
investor may
have a different level of risk
aversion, and hence a different required return.
Which of the following
statements is true?Short-term
bonds have greater interest rate risk than do long-term bonds.Long-term
bonds have greater interest rate risk than do short-term bonds.Interest
rate risk is highest during periods of high interest rates.All
bonds have equal interest rate risk.Crandles common stock
is currently selling for $79.00. It just paid a dividend of $4.60 and dividends
are expected to grow at a rate of 5% indefinitely. What is the required
rate of return on Crandles stock?
a. 11.76% b. 11.11% c. 12.2% d.
14.21%
An example of the growth
factor in common stock is:retaining
profits in order to reinvest into the firmtwo
strong companies merging together to increase their economies of scaleacquiring
a loan to fund an investment in Asiaissuing
new stock to provide capital for future growth
99
BAM 313 Introduction to Financial
Management
Unit 2 Examination
4,000 shares of Stock H 7,500
shares of Stock I 12,500 shares of Stock J
19. The beta for the portfolio is:
a. 1.45 b. 1.27 c. 1.99 d. 1.77
Amount
Invested
$8,000 Beta = 1.3 $24,000 Beta = 1.8 $48,000 Beta = 2.2
100
Waterfront Solutions,
Inc. paid a dividend of $5.00 per share on its common stock yesterday. Dividends
are expected to grow at a constant rate of 4% for the next two years, at
which point the stock is expected to sell for $56.00. If investors require
a rate of return on Waterfronts common stock of 18%, what should the
stock sell for today?
a. $40.22 b. $50.22 c. $44.76 d.
$48.51
Andres parents
established a college savings plan for him when he was born. They
deposited $50 into the account on the last day of each month. The account
has earned 10.9% compounded monthly, tax-free. How much can they withdraw
on his 18th birthday to spend on his education?
a. $33,307 b. $30,028 c. $43,730 d.
$27,560
Charlie wants to retire
in 15 years, and he wants to have an annuity of $50,000 a year for
20 years after retirement. Charlie wants to receive the first annuity
payment the day he retires. Using an interest rate of 8%, how much must
Charlie invest today in order to have his retirement annuity (round to
nearest $10).
a. $167,130 b. $315,240 c. $256,890
d. $200,450
An investor currently holds the
following portfolio:
BAM 313 Introduction to Financial
Management
Unit 2 Examination
Which of the following
will cause the value of a bond to increase, if other things held the same?
interest
rates decreasethe
companys debt rating drops from AAA to BBBinvestors
required rate of return increasesthe
bond is callableA small biotechnology research corporation
has been experiencing losses for the first three years of its existence,
and thus has a negative balance in retained earnings. The corporations stock
price, however, is $1 per share. Which of the following statements is MOST
correct?The
required return on the stock will be small because the company has very
few assets.Investors
believe the stock is worth $1 per share because future earnings (and cash
flows)
are expected to be positive.
The
corporations accountants must have made a mistake because retained
earnings may
not be negative.
Investors
are irrational to pay $1 per share when earnings per share have been
negative for
three years.
How much money must be put into a bank
account yielding 6.42% (compounded annually) in order to have $1,671 at
the end of 11 years? (round to nearest $1)
a. $798 b. $886 c. $921 d. $843
Wendy purchased 800
shares of Robotics Stock at $3 per share on 1/1/09. Wendy sold the shares
on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the risk-free
rate of return is 3%, and the market risk premium is 8%. The required
return on Genetics Stock is:
a. 21.1% b. 13.4% c. 16.5% d. 17.6%

101
BAM 313 Introduction to Financial
Management
Unit 2 Examination
Barts
Moving Company bonds have a 11% coupon rate. Interest is paid
semiannually. The bonds have a par value of $1,000 and will mature 8 years
from now. Compute the value of Barts Moving Company bonds if investors
required rate of return is 9.5%.
a. $1,133.05 b. $1,098.99 c. $1,082.75 d.
$1,197.27
Jackson
Corp. common stock paid $2.50 in dividends last year (D0). Dividends are
expected to grow at a 12-percent annual rate forever. If Jacksons current
market price is $40.00, what is the stocks expected rate of return?
(nearest .01 percent)
a. 18.25% b. 5.50% c. 11.00% d. 19.00%
1. The DEF Company is planning a $64
million expansion. The expansion is to be financed by selling $25.6 million in
new debt and $38.4 million in new common stock. The before-tax required rate of
return on debt is 9 percent and the required rate of return on equity is 14 percent.
If the company is in the 35 percent tax bracket, what is the firms cost of
capital?
a. 8.92% b. 10.74% c. 11.50% d.
9.89%
Valley Flights, Inc. has a capital
structure made up of 40% debt and 60% equity and a tax rate of 30%. A new issue
of $1,000 par bonds maturing in 20 years can be issued with a coupon of 9% at a
price of $1,098.18 with no flotation costs. The firm has no internal equity available
for investment at this time, but can issue new common stock at a price of $45.
The next expected dividend on the stock is $2.70. The dividend for the firm is
expected to grow at constant annual rate of 5% per year indefinitely. Flotation
costs on new equity will be $7.00 per share. The company has the following
independent investment projects available:
Project Initial Outlay IRR
1 $100,000 10%2 $10,000 8.5%3 $50,000 12.5%
Which of the above
projects should the company take on?Project
3 onlyProjects
1, 2 and 3Projects
1 and 3Projects
1 and 2PrimaCare has a capital
structure that consists of $7 million of debt, $2 million of preferred stock,
and $11 million of common equity, based upon current market values. The
firms yield to maturity on its bonds is 7.4%, and investors require an 8%
return on the firms preferred stock and a 14% return on PrimaCares
common stock. If the tax rate is 35%, what is PrimaCares WACC?
a. 7.21% b. 10.18% c. 12.25% d.
8.12%
135
BAM 313 Introduction to Financial
Management
Unit 3 Examination
JPR Company is financed
75 percent by equity and 25 percent by debt. If the firm expects to earn
$30 million in net income next year and retain 40% of it, how large can
the capital budget be before common stock must be sold?$15.5
million$7.5
million$16.0
million$12.0
millionAll else equal, an
increase in beta results in:an
increase in the cost of retained earningsan
increase in the cost of common equity, whether or not the funds come from
retained
earnings or newly issued common
stock
an
increase in the cost of newly issued common stockan
increase in the after-tax cost of debtHaroldson Inc. common
stock is selling for $22 per share. The last dividend was $1.20, and dividends
are expected to grow at a 6% annual rate. Flotation costs on new stock
sales are 5% of the selling price. What is the cost of Haroldsons
retained earnings?
a. 12.09% b. 11.78% c. 11.45% d.
5.73%
A company has preferred
stock that can be sold for $21 per share. The preferred stock pays an
annual dividend of 3.5% based on a par value of $100. Flotation costs
associated with the sale of preferred stock equal $1.25 per share. The
companys marginal tax rate is 35%. Therefore, the cost of preferred stock
is:
a. 14.26% b. 12.94% c. 18.87% d.
17.72%
Which
of the following should NOT be considered when calculating a firms WACC?after-tax
YTM on a firms bondscost
of newly issued preferred stockafter-tax
cost of accounts payablecost
of newly issued common stock
136
BAM 313 Introduction to Financial
Management
Unit 3 Examination
Your firm is considering
an investment that will cost $920,000 today. The investment will produce
cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and
$200,000 in year 5. The discount rate that your firm uses for projects of
this type is 11.25%. What is the investments profitability index?
a. 1.26 b. 1.69 c. 1.21 d. 1.43
Your firm is considering
investing in one of two mutually exclusive projects. Project A requires an
initial outlay of $3,500 with expected future cash flows of $2,000 per
year for the next three years. Project B requires an initial outlay of
$2,500 with expected future cash flows of $1,500 per year for the next two
years. The appropriate discount rate for your firm is 12% and it is not
subject to capital rationing. Assuming both projects can be replaced with
a similar investment at the end of their respective lives, compute the NPV
of the two chain cycle for Project A and three chain cycle for Project B.$2,865
and $94$3,528
and $136$5,000
and $1,500$2,232
and $85The capital budgeting
manager for XYZ Corporation, a very profitable high technology company, completed
her analysis of Project A assuming 5-year depreciation. Her accountant
reviews the analysis and changes the depreciation method to 3-year
depreciation. This change will:increase
the present value of the NCFshave
no effect on the NCFs because depreciation is a non-cash expenseonly
change the NCFs if the useful life of the depreciable asset is greater
than 5 yearsdecrease
the present value of the NCFsLithium, Inc. is
considering two mutually exclusive projects, A and B. Project A costs
$95,000 and is expected to generate $65,000 in year one and $75,000 in
year two. Project B costs $120,000 and is expected to generate $64,000 in
year one, $67,000 in year two, $56,000 in year three, and $45,000 in year
four. Lithium, Inc.s required rate of return for these projects is 10%.
The modified internal rate of return for Project B is:
a. 18.52% b. 22.80% c. 19.75% d.
17.84%
137
BAM 313 Introduction to Financial
Management
Unit 3 Examination
A capital budgeting
project has a net present value of $30,000 and a modified internal rate of
return of 15%. The projects required rate of return is 13%. The internal
rate of return is:greater
than $30,000greater
than 15%between
13% and 15%less
than 13%A new project is
expected to generate $800,000 in revenues, $250,000 in cash operating expenses,
and depreciation expense of $150,000 in each year of its 10-year life. The
corporations tax rate is 35%. The project will require an increase in net
working capital of $85,000 in year one and a decrease in net working
capital of $75,000 in year ten. What is the free cash flow from the
project in year one?
a. $410,000 b. $375,000 c. $380,000
d. $298,000
A local restaurant owner
is considering expanding into another rural area. The expansion project
will be financed through a line of credit with City Bank. The
administrative costs of obtaining the line of credit are $500, and the
interest payments are expected to be $1,000 per month. The new restaurant
will occupy an existing building that can be rented for $2,500 per month.
The incremental cash flows for the new restaurant include:$2,500
per month rent$500
administrative costs, $1,000 per month interest payments, $2,500 per
month rent$1,000
per month interest payments, $2,500 per month rent$500
administrative costs, $2,500 per month rentWhich of the following
should be included in the initial outlay?increased
investment in inventory and accounts receivablepreexisting
firm overhead reallocated to the new projectfirst
year depreciation expense on any new equipment purchasedtaxable
gain on the sale of old equipment being replaced
138
BAM 313 Introduction to Financial
Management
Unit 3 Examination
QRW Corp. needs to
replace an old lathe with a new, more efficient model. The old lathe was purchased
for $50,000 nine years ago and has a current book value of $5,000. (The
old machine is being depreciated on a straight-line basis over a ten-year
useful life.) The new machine costs $100,000. It will cost the company
$10,000 to get the new lathe to the factory and get it installed. The old
machine will be sold as scrap metal for $2,000. The new machine is also
being depreciated on a straight-line basis over ten years. Sales are
expected to increase by $8,000 per year while operating expenses are
expected to decrease by $12,000 per year. QRWs marginal tax rate is 40%.
Additional working capital of $3,000 is required to maintain the new
machine and higher sales level. The new lathe is expected to be sold for
$5,000 at the end of the projects ten-year life. What is the incremental
free cash flow during year 1 of the project?$11,400
$15,200
$12,800
$14,400
The cost of retained earnings is less than
the cost of new common stock because:dividends
are not tax deductibleflotation
costs are incurred when new stock is issuedaccounting
rules allow a deduction when using retained earningsmarginal
tax brackets increaseBeauty Inc. plans to
maintain its optimal capital structure of 40 percent debt, 10 percent preferred
stock, and 50 percent common equity indefinitely. The required return on
each component source of capital is as follows: debt–8 percent; preferred
stock–12 percent; common equity–16 percent. Assuming a 40 percent
marginal tax rate, what after-tax rate of return must the firm earn on its
investments if the value of the firm is to remain unchanged?12.00
percent11.12
percent12.40
percent10.64
percentYour firm is considering
an investment that will cost $920,000 today. The investment will produce
cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and
$200,000 in year 5. The discount rate that your firm uses for projects of
this type is 11.25%. What is the investments internal rate of return?
a. 15.98% b. 27.28% c. 20.53% d.
21.26%
139
BAM 313 Introduction to Financial
Management
Unit 3 Examination
The advantages of NPV
are all of the following EXCEPT:it
provides the amount by which positive NPV projects will increase the
value of the firmit
allows the comparison of benefits and costs in a logical manner through
the use of time
value of money principles
it
recognizes the timing of the benefits resulting from the projectit
can be used as a rough screening device to eliminate those projects whose
returns do
not materialize until later years
Which of the following
are included in the terminal cash flow?recapture
of any working capital increase included in the initial outlaythe
expected salvage value of the assetany
tax payments or receipts associated with the salvage value of the assetall
of the aboveWhich
of the following differentiates the cost of retained earnings from the
cost of newly issued common stock?the
larger dividends paid to the new common stockholdersthe
flotation costs incurred when issuing new securitiesthe
cost of the pre-emptive rights held by existing shareholdersthe
greater marginal tax rate faced by the now-larger firmLithium,
Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000
in year two. Project B costs $120,000 and is expected to generate $64,000
in year one, $67,000 in year two, $56,000 in year three, and $45,000 in
year four. Lithium, Inc.s required rate of return for these projects is
10%. The profitability index for Project B is:
a. 1.55 b. 1.39 c. 1.33 d. 1.48
When
terminating a project for capital budgeting purposes, the working capital
outlay required
at the initiation of the project
will:
increase
the cash flow because it is recaptureddecrease the cash flow because it is an
outlaynot
affect the cash flowdecrease
the cash flow because it is a historical cost

A
high degree of variability in a firms earnings before interest and taxes
refers to:
a. business risk
b. financial leverage c. operating leverage d. financial risk
If
a firm has no operating leverage and no financial leverage, then a 10%
increase in sales will have what effect on EPS?EPS
will increase by 10%EPS
will remain the sameEPS
will increase by less than 10%EPS
will decrease by 10%According
to the moderate view of capital costs and financial leverage, as the use
of debt financing increases:the cost of capital continuously
increasesthere
is an optimal level of debt financingthe
cost of capital remains constantthe
cost of capital continuously decreasesThe primary weakness of
EBIT-EPS analysis is that:it
double counts the cost of debt financingit
applies only to firms with large amounts of debt in their capital
structureit
may only be used by firms that are profitable this yearit
ignores the implicit cost of debt financingPotential applications
of the break-even model include:optimizing
the cash-marketable securities position of a firmreplacement
for time-adjusted capital budgeting techniquespricing
policyAll
of the above.
190
BAM 313 Introduction to Financial
Management
Unit 4 Examination
The Modigliani and
Miller hypothesis does NOT work in the real world because:interest
expense is tax deductible, providing an advantage to debt financinghigher
levels of debt increase the likelihood of bankruptcy, and bankruptcy has
real costs
for any corporation
both
a and bdividend
payments are fixed and tax deductible for the corporationA corporation with very
high growth prospects and many positive NPV projects to fund may want to
increase its dividend based on the:very
low agency costs of the corporationinformation
effecttax
bias against capital gainsresidual
dividend theoryWhich of the following
strategies may be used to alter a firms capital structure toward a higher
percentage of debt compared to equity?stock
splitstock
repurchasestock
dividendmaintain
a low dividend payout ratioAFB, Inc.s dividend
policy is to maintain a constant payout ratio. This year AFB, Inc. paid out
a total of $2 million in dividends. Next year, AFB, Inc.s sales and
earnings per share are expected to increase. Dividend payments are
expected to:increase
above $2 million only if the company issues additional shares of common
stockdecrease
below $2 millionincrease
above $2 milli”