Practice quiz1a. The mixture of long-term funding sources that a firm uses to finance its assets is:A) capital structureB) financial leverageC) operating leverageD) debt operations2. Which of the following factors affect the optimal (best) capital structure for a firm?:A) the firm’s cost of debt, cost of common equity, and cost of preferred stock (if any)B) market conditionsC) investor perceptionsD) all of the above3. When forecasting changes in Net Working Capital, which of the following could likely happen spontaneously as sales increase?A) decrease in common stock on the balance sheetB) increases in gross fixed equipmentC) increase in long-term debtD) increase in accounts receivables4. Your firm is in the 30% tax bracket with a before-tax required rate of return on its equity of 13% and on its debt of 10%. If the firm uses 60% equity and 40% debt financing, calculate its after-tax WACC.5. The following net cash flows are projected for two separate projects. Your required rate of return is 12%.a. Calculate the payback period for each project.b. Calculate the NPV of each project.c. Calculate the IRR of each project.d. Which project(s) would you accept and why?6.The relevant cash flows in capital budgeting can best be described as:A) incremental after-tax net incomeB) incremental cash flowsC) externality cash flowsD) changes in fixed asset cash flowsUse the following to answer questions 7-8:You have been asked to render an opinion to your boss as to whether your employer should enter into the short-term capital project described below.The project requires the purchase of a new piece of equipment for a price of $25,000.The firm has paid a consultant $1,000 to estimate the revenues expected from the project. The firm that ships the equipment and installs it in our plant will charge $500.The project’s incremental operating cash flows before taxes will be $12,000 per year for three years. At the end of three years the equipment will be sold for $5000. The equipment has a three-year useful life and will be depreciated using the three-year MACRS (Modified Accelerated Cost Recovery System â current U.S. accounting rules) schedule that specifies the percentage of equipment costs to be depreciated per year as follows: 33.3%, 44.5%, 14.8%,7.4%). The tax rate is 34% and the firm’s required rate of return is 17%.7. a. What is the Acquisition Cost (the tax basis) for the equipment?b. What are the depreciation deductions for years 1, 2, and 3?c. If the asset is sold for more than its depreciated value, the difference is viewed as taxable income and taxes must be paid on that gain. What will be the after tax net cash flow from the sale of the asset at the end of year three?d. Given the Acquisition Cost, the incremental operating cashflows, the depreciation, the EBIT, and the taxes owed, calculate the total operating cash flow for each of the three years.8. Based on the net cash flows that you calculated in the question above, what is the:a. payback periodb. net present valuec. internal rate of return9. What is the relevant initial cash outflow for the following project?Equipment cost $ 50,000Installation $ 5,000Cash increase needed $ 2,000Inventory increase needed $ 3,000Increase in Accounts payable $ 2,000A) $58,000B)$62,000C)$55,000D)$60,00010. Your firm is considering an acquisition with incremental net cash flows projected to be $152,500 in Year 10, the last year of the analysis that you have done to evaluate the opportunity.A) What is the present value of the âTerminal Valueâ of this opportunity if you assume a long-term growth rate of 3% and your firmâs WACC is 9.0%?B) If the seller insists he will accept no less than $2 million and the total present value of the incremental cash flows for years 0-10 of your forecast = $1 million, should you proceed with the Acquisition? Why or why not?11. The sales break-even point is defined as:A) the level of sales that a firm must reach to cover fixed costsB) the level of income that a firm must reach to cover variable costsC) the level of sales that a firm must reach to cover all operating costsD) the point where operating income equals fixed costs12. Given fixed costs of $200,000, variable costs of $6.20 per unit, and a sales price per unit of $7.00, calculate the break-even point in units.A) 150,000B) 250,000C) 15,385D) 28,57113. Operating leverage has the effect of triggering:A) a smaller percentage change in EBIT when a given percentage change in sales occursB) a smaller given percentage change in EBIT when a larger percentage change in sales occursC) a smaller given percentage change in EBIT when a smaller percentage change in sales occursD) a larger percentage change in EBIT when a given percentage change in sales occurs14. If variable costs = $10.00 per unit; and the selling price = $13.00 per unit, and the break-even point in units = 100,000, calculate the fixed costs.A) $33,333B) $ 4,348C) $300,000D) $50,750(See Excel for Calculation).15. Firms with high fixed operating costs:A) tend to have low variable costsB) tend to have high variable costsC) tend to have low operating leverageD) tend to have low sales levels16. As a firm moves to a capital structure with higher debt:A) financial risk of the firm increasesB) financial risk of the firm decreases if interest payments are tax deductibleC) financial risk of the firm is unaffected if interest payments are tax deductibleD) DOL increases17. Which of the following are investment grade bonds?A) AAA U.S. Treasury BondsB) A- corporate mortgage bondsC) BBB corporate debenturesD) All of the above are investment grade bonds.18. For investors, an important characteristic of a secured bond is that it has:A) a plan for paying off the bond at maturityB) no restrictive covenantsC) a claim on specific assets in the event of defaultD) an independent trustee19. Which statement is FALSE regarding preferred stock?A) Preferred stock is issued by a limited number of corporations.B) Preferred shareholders have priority over the creditors of the corporation.C) Preferred shareholders do not have voting rights.D) All of the above are false.20. Which of the following statements about residual income – i.e., net income after taxes -is not accurate?A) it is income left over after other claimants of the firm have been paidB) it is almost always paid out in the form of a cash dividend to both common andpreferred stockholdersC) it can be reinvested in the firmD) it can be reinvested in the firm and can be paid in the form of dividends to common stockholders21. The board of directors of a publicly traded company:A) is elected by, and represents the interests of the common stockholdersB) is part of the professional management teamC) is appointed by the CEOD) is a figurehead position only22. Why might a firm issue new stock?A) to send a signalB) for dilution–too few shares outstanding makes the share price too high for someinvestorsC) to increase its debt/equity ratioD) to raise capital and therefore lower the firm’s financial risk23. Investors are likely to view a new issuance of common stock as a signal that:A) prospects of the firm are better than generally believedB) prospects of the firm are worse than generally believedC) the firm is preparing for a new debt issueD) new management or directors of the board are being put in place
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