Corporate Finance Assignment
Multiple Choice
1. When analyzing two mutually exclusive capital budgeting projects, the NPV and IRR capital budgeting methods can result in different ranking decisions. On a NPV profile (a chart showing the NPV at different discount rates) of these two projects, the cross-over rate is the point at which:
a) the market risk premium equals the asset risk premium.
b) the IRR and NPV for a single project are equal.
c) the IRR for two projects are equal.
d) the NPV for two projects are equal.
e) none of the above.
2. Lan Electronics is considering expanding into another line of business. There are five potential business opportunities available. Each line of business has the same expected return. The betas of the various business lines are provided below. Which of the expansion alternatives would be the best choice for Lan Electronics?
a) copper mines, 1.63 d) toy manufacturing, 0.79
b) machinery construction, 1.00 e) janitorial services, 0.95
c) natural gas exploration, 1.75
3. LH Enterprises borrowed $44 million in the Eurocurrency market 8 months ago at an interest rate of LIBOR plus 111. The LIBOR at that time was 2.83%. The loan is repayable today. How much does LH Enterprises owe?
a) $44,000,000 d) $45,733,600
b) $45,245,200 e) $45,155,733
c) $44,830,133
4. Which of the following is not a source of financing (capital) for a company?
a) assets d) bonds
b) common shares e) all of the above are sources
c) preferred shares
5. Parrish Corp is evaluating a capital budgeting project that has an initial cost of $850 million. The company's cost of capital is 13.8% and the NPV of the project is +$26,352. This means that:
a) the project generates a return of $26,352 to Parrish Corp.
b) the project return of $26,352 is not sufficient given the project's cost of $850 million.
c) the project's expected return is less than 13.8%.
d) the project's expected return is greater than 13.8%.
e) the project is not acceptable.
6. The IRR for a capital budgeting project is:
a) based on the market risk premium.
b) equivalent to the firm's cost of capital.
c) the discount rate that makes the firm's cost of capital equal to zero.
d) the discount rate that makes the project's NPV equal to zero.
e) the point where the project's NPV profile intersects with the firm's cost of capital.
7. The interest expense for a company is equal to its operating income (EBIT). The company's tax rate is 40%. The company's times-interest earned ratio is equal to:
a) 2 d) 1.20
b) 1 e) none of the above.
c) 0.60
8. The cost of capital is the:
a) cost of raising a marginal dollar of financing.
b) cost of the liabilities and equity on the firm's balance sheet.
c) cost of the funds used to acquire the new assets that appear on the firm's balance sheet.
d) cost of the assets that appear on the firm's balance sheet in the OCS weights.
e) cost of raising a marginal dollar of financing in the OCS weights.
9. If inventory decreases on a balance sheet, how would this be treated on a statement of cash flows?
a) It would be a use of cash, since the firm is buying inventory and using cash.
b) It would be a source of cash, since the firm is selling inventory.
c) It would be a use of cash, since the firm is selling inventory it purchased with cash.
d) It would be a source of cash, since the firm is buying inventory that it can resell for cash.
e) There would be no impact.
10. Consider the following statements regarding the retained earnings account.
1) Retained earnings reflects the sum of the firm's net income over its life less all cash dividends paid.
2) Retained earnings is the link between the income statement and the balance sheet.
3) Usually, retained earnings changes every fiscal year.
4) Retained earnings represents funds that are currently available for financing purposes.
Which of the above statements are correct?
a) 1 and 2, only. b) 3 and 4, only. c) 2, 3, and 4, only. d) 1, 2, and 3, only. e) 1, 2, 3, and 4.
11. Winn Shopping Centers is planning to use long-term debt to finance the expansion of their business. For capital budgeting purposes, which of the following should be recognized as part of the cash flows?
a) the after-tax interest payments, but not the principal repayments.
b) the principal repayments, but not the after-tax interest payments.
c) neither the after-tax interest payments, nor the principal repayments.
d) both the after-tax interest payments, and the principal repayments.
12. Which of the following is not a financial intermediary in the financial markets?
a) Chartered banks.
b) Life insurance companies.
c) Government of Canada.
d) Pension Plans.
e) All of the above are financial intermediaries.
13. Lambe Enterprises is evaluating five capital budgeting projects. The firm has unlimited funds. Projects 1 and 2 are independent and Projects 3, 4 and 5 are mutually exclusive. The projects are listed below with their expected returns.
Expected
|
Project
|
Type
|
Return (%)
|
|
1
|
Independent
|
14%
|
|
2
|
Independent
|
12%
|
|
3
|
Mutually exclusive
|
10%
|
|
4
|
Mutually exclusive
|
16%
|
|
5
|
Mutually exclusive
|
15%
|
A ranking of the projects on the basis of their returns from the best to the worst according to their acceptability to the firm would be:
a) 4, 5, 1, 2, and 3.
b) 4, 1, and 2.
c) 3, 2, 1, 5, and 4.
d) 4, 5, 1, and 3.
e) none of the projects are acceptable.
14. A company's accounts receivable turnover ratio is decreasing, the company's average collection period (ACP):
a) is increasing
b) is decreasing
c) could be moving in either direction.
d) there is no impact.
15. Consider the following four financial events:
1) an increase in cost of goods sold.
2) issuing a long-term debenture.
3) a reduction in accounts receivable.
4) a reduction in the line of credit.
Which of the above financial events represent a use of cash for a company?
a) 1 and 3, only. d) 1, 3, and 4, only.
b) 2 and 4, only. e) 1, 2, 3, and 4.
c) 1 and 4, only.
16. The NPV and IRR methods of capital budgeting can sometimes result in different rankings for mutually exclusive capital budgeting projects. Consider the following statements that may explain the reasons the different rankings can occur.
1. Differences can result because of differences in the size and timing of the cash inflows for the projects.
2. Differences in rankings can occur because time value of money is not explicitly considered in one of the capital budgeting methods.
3. Differences in ranking can occur because one of the methods does not consider all of the cash flows associated with a project.
4. Differences in ranking can occur due to different re-investment rate assumptions regarding the project's cash inflows.
Which of the above explanations are correct?
a) 1 and 4, only.
b) 2 and 3, only.
c) 2, 3, and 4, only.
d) 1, 3, and 4, only.
e) 1, 2, 3, and 4.
17. Crowner Enterprises is evaluating two independent projects. Project A has incremental capital cost $369,000 and is expected to have a useful life of five years. After-tax cash inflows are expected to be $112,700 per year. Project B has an incremental cost of $550,000 and a useful life of four years. After-tax cash inflows are expected to be $181,080 per year. The company has sufficient funds to invest in both projects if required. Crowner should:
a) invest in both projects if the company's cost of capital is 15% or less.
b) invest in Project B only if the company's cost of capital is 15% or less.
c) invest in both projects if the company's cost of capital is 12% or less.
d) invest in Project A only if the company's cost of capital is 12% or less.
e) invest in neither project if the company's cost of capital is 12% or less.
18. Bond A has a coupon rate of 10% and matures in 2 years. Bond B also has a coupon rate of 10% and matures in 22 years. Both bonds are rated A. If yields on debt securities in the market decrease:
a) the fall in the market price of bond A would exceed the fall in the market price of bond B.
b) the fall in the market price of bond B would exceed the fall in the market price of bond A.
c) the rise in the market price of bond A would exceed the rise in the market price of bond B.
d) the rise in the market price of bond B would exceed the rise in the market price of bond A.
e) the change in the market price of bond A would equal the change in the market price of bond B.
19. The type of risk depicted in the above example is , and investors rationally demand a
a) default risk, a default risk premium
b) default risk, a maturity risk premium
c) inflation, a liquidity premium
d) interest rate risk, a maturity risk premium
e) reinvestment rate risk, an expectations premium
20. What is the primary goal of financial management?
a) To increase the company's earnings.
b) To maximize the company's cash flow.
c) To maximize the value of the company's common shares.
d) To minimize the risk of the company.
e) To maximize the company's sales.
21. The market price of a company's common shares will fall if any of the following occur EXCEPT:
a) expected dividends decrease.
b) the growth rate in dividends increase.
c) the risk of the common shares increase.
d) the required return on the common shares increase.
e) all of the above will result in the share price falling.
22. When a company "goes public", this refers to:
a) registering a prospectus with a provincial securities commission.
b) listing common shares on one of the organized stock exchanges for the first time.
c) registering with one of the over-the-counter exchanges.
d) publication of the stock's price quotations in the financial news.
e) receiving approval from the Bank of Canada to issue common shares the first time.
23. A firm's current earnings per share are $5 and the firm has a price/earnings ratio of 15. It is expected that the company earnings will grow by 10% and that an "appropriate" price/earnings ratio for the company is 14. What is the value of the firm's common shares?
a) $75.00 per share
b) $70.00 per share
c) $82.50 per share
d) $77.00 per share
e) the company assigns a share price independent of EPS and the P/E ratio.
24. On June 25, Maxwell Corp. sold 500,000 new common shares to the public for $25 per share but, due to issue costs, Maxwell only received $23.75 per share. Prior to the sale of the new shares, the company had 2.5 million common shares outstanding. Income available to common shareholders for the quarter ended June 30 is $6 million. What is the impact on earnings per share of the new issue?
a) EPS is reduced (diluted) by $2.40 per share.
b) EPS is reduced (diluted) by $2.00 per share.
c) EPS is reduced (diluted) by $0.40 per share.
d) EPS is reduced (diluted) by $1.25 per share.
e) EPS is not affected since Maxwell receives funds from the share issue.
25. A $1,000 par value treasury-bill with 98 days to maturity is sold to yield 2.86%. What is the most you should pay for this treasury-bill?
a) $1,000
b) $992.38
c) $993.46
d) $994.14
e) none of the above
26. A company requires external financing of $50 million, which it is going to raise by issuing new common shares. Where would this transaction occur?
a) In the primary market within the capital market.
b) In the secondary market within the capital market.
c) In the primary market of the money market.
d) In the secondary market of the money market.
e) In the market associated with the banking function.
27. Which of the following statements about bond ratings is true?
a) The federal government publishes bond ratings.
b) Bonds rated "C" are considered to be high quality bonds.
c) Bond ratings assess the firm's ability to make dividend payments.
d) There is an inverse relationship between bond ratings and yields.
e) None of the above statements about bond ratings are true.
28. Money market securities are:
a) long-term debt securities like bonds and debentures.
b) common shares.
c) preferred shares.
d) short-term debt securities like treasury-bills and bankers' acceptances
e) all of the above are money market securities.
29. In today's newspaper, the quote on Nova Inc.'s debentures is 86.58. What does this mean?
a) The debentures can be sold for $86.58 of their par value.
b) The debentures can be purchased for $86.58 per debenture certificate.
c) The debentures are trading for 86.58% of their par value.
d) Interest rates decreased between the date of the debenture's issue and now.
e) Two of the above.
30. A sinking fund:
a) can only be beneficial for the investor.
b) results in the gradual retirement of a debt issue.
c) must be exercised by purchasing debt in the open market.
d) always results in the debt being purchased at less than par value.
e) all of the above.