Part -2
Question 1. If the financial markets are strong form efficient, then:
only the most talented analysts can determine the true value of a security.
only company insiders have a marketplace advantage.
technical analysis provides the best tool to gain a marketplace advantage.
no one person has an advantage in the marketplace.
every security offers the same rate of return.
Question 2. Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 9 percent (after-tax) and common equity at a cost of 16 percent. Assume debt and common equity each represent 50 percent of the firm's capital structure. What is the weighted average cost of capital?
between 4.5% and 8%
more than 13%
between 12 and 13%
between 13 and 14%
none of the above
Question 3. An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price?
$103.68
$36.92
$96.00
none of these
Question 4. Which of the following is not true regarding the cost of debt?
It is the return that the firm s creditors demand on new borrowing.
It is the interest rate that the firm pays on current/existing borrowing.
An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.
It needs to be converted into an after-tax cost.
Question 5. Which of the following is not true regarding the cost of retained earnings?
it is relevant to the WACC
does not require new funds to be raised
has associated flotation costs
has a cost, which is the opportunity cost associated with stockholder funds
Question 6.A project has the following cash flows. What is the internal rate of return
|
Year
|
0
|
1
|
2
|
3
|
|
Cash flow
|
-$195,600
|
$99,800
|
$87,600
|
$75,300
|
less than 5%
between 5 and 15%
between 15 and 18%
more than 21%
Question 7. Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC)?
the WACC can be used as the required return for all new projects.
the WACC of a leveraged firm will decrease when the tax rate decreases.
an increase in the market risk premium will tend to decrease a firm's WACC.
the WACC is a starting point for the subjective approach to setting discount rates.
a reduction in the risk level of a firm will tend to increase the firm's WACC.
Question 8. The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm's cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100?
5.98%
7.06%
8.05%
9.68%
10.10%
'
Question 9. Which one of the following occurs if a firm files for Chapter 7 bankruptcy, but does not generally occur if the firm files for Chapter 11 bankruptcy?
a petition is filed in federal court
administrative fees are incurred
a list of creditors is compiled
pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm
a trustee-in-bankruptcy is elected by the creditors
Question 10. Which of the following statements is false regarding the cost of capital?
The cost of capital should consider the flotation costs.
All other being equal, it is preferable to use market value weights than book value weights.
The WACC is the most appropriate discount rate for all projects.
Should include the cost of retained earnings.
Question 11. Select any actions that do not affect the cash account.
Goods are sold cash
An interest payment on a notes payable is made
A payment due is received from a client
Dividends are paid to shareholders
Inventory is purchased and paid for with credit
Question 12. Which of the following statements is true
There is an opportunity cost associated with not offering credit.
The costs of the credit application process and the costs expended in the collection process are not carrying costs of granting credit.
Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.
The optimal credit policy, is the policy that produces the largest amount of sales for a firm.
Question 13. Which one of the following industries is most apt to have the shortest cash cycle?
electric utility company
airplane manufacturer
fast-food restaurant
furniture store
clothing manufacturer
Question 14. Delphinia's has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.
|
Q1
|
Q2
|
Q3
|
Q4
|
|
Sales
|
$1,800
|
$1,700
|
$2,100
|
$1,900
|
$567
$600
$821
$1,134
$1,200
Question 15. Why is maximization of the current value per share a more appropriate financial management goal than profit maximization?
Because by maximizing the current stock value, you also maximize the company s profit for the year.
Because this criterion is non-ambiguous.
Because financial managers always act in the best interest of shareholders.
Because it creates short-term gains in the financial statements.
6. Provide three examples of recent well-known unethical behavior cases. Explain the situation in one or two paragraphs. How do you believe that this behavior affected the firm s value?
7. What are sunk costs? Provide at least two real-life examples of sunk costs for a project. Should sunk costs be included as incremental cash flows? Why or why not? Explain your rationale.
8. What is the difference between business risk and financial risk? If Company A has a higher business risk than Company B, should its cost of capital be higher? Why or why not? Explain your rationale.
9. What are some important factors to consider when conducting a credit evaluation and scoring?
Do you believe that it is appropriate for some industries to be more leveraged than others? Explain your rationale.