week 7 quiz

Question 1

The target capital structure of Traggle Co is 50% debt, 10% preferred equity, and 40% common equity The interest rate on debt is 6%, the yield on the preferred is 7%, the cost of common equity is 115%, and the tax rate is 40% Traggle does not anticipate issuing any new stock What is Traggle’s weighted‐average cost of capital?

: c 71%

a 677%

b 65%

c 71%

d 830%

Question 2

Assume that a firm has a 40% tax rate and the following capital structure:
 


  Amount Cost before tax

Debt $10,000,000 6%

Preferred equity     5,000,000 6%

Common equity   25,000,000 10%

  $40,000,000  


 
 What is the firm’s weighted‐average cost of capital?

: c 79%

a 7%

b 85%

c 79%

d 10%

Question 3

Essex Corporation is evaluating a lease that takes effect on March 1, 2012 The company must make eight equal payments, with the first payment due on March 1, 2012 The concept most relevant to the evaluation of the lease is

: d The future value of an annuity due

a The present value of an annuity due

b The present value of an ordinary annuity

c The future value of an ordinary annuity

d The future value of an annuity due

Question 4

Which of the following describes an option?

: a A contract that allows the holder to purchase a specified quantity of a financial instrument at a specified price

a A contract that allows the holder to purchase a specified quantity of a financial instrument at a specified price

b A standardized contract to take delivery of a specified quantity of a financial instrument in the future

c An agreement to swap a stream of cash flows

d A negotiated contract to purchase a specified quantity of a financial instrument in the future

Question 5

A company purchases an item for $43,000  The salvage value of the item is $3,000  The cost of capital is 8% Pertinent information related to this purchase is as follow
 


  Net cash flows Presents value factor at 8%

Year 1 $10,000 0926

Year 2 15,000 0857

Year 3 20,000 0794

Year 4 27,000 0735


 What is the discounted payback period in years?

: d 325

a 314

b 290

c 310

d 325

Question 6

Which of the following events would decrease the internal rate of return of a proposed asset purchase?

: b Decrease tax credits on the asset

a Decrease related working capital requirements

b Decrease tax credits on the asset

c Use accelerated, instead of straight‐line depreciation

d Shorten the payback period

Question 7

Disco is considering three capital projects that have the following costs and net present values (NPV):

Project Cost NVP

X $40,000 $60,000

Y $60,000 $75,000

Z $50,000 $30,000

Using the profitability index, which project, if any, would be ranked as the most desirable?

: d None of the projects would be more desirable than the other projects

a Project X

b Project Y

c Project Z

d None of the projects would be more desirable than the other projects

Question 8

What is the formula for calculating the profitability index of a project?

: d Divide the present value of the annual after‐tax cash flows by the original cash invested in the project

a Multiply net profit margin by asset turnover

b Divide the initial investment for the project by the net annual cash inflows

c Subtract actual after‐tax net income from the minimum required return in dollars

d Divide the present value of the annual after‐tax cash flows by the original cash invested in the project

Question 9

Which of the following decision‐making models equates the initial investment with the present value of the future cash inflows?

: c Internal rate of return

a Accounting rate of return

b Cost‐benefit ratio

c Internal rate of return

d Payback period

Question 10

Which of the following types of bonds is most likely to maintain a constant market value?

: b Floating‐rate

a Callable

b Floating‐rate

c Convertible

d Zero‐coupon

Question 11

Bonds payable issued with scheduled maturities at various dates are called 

Serial bonds Term bonds

: b 

Yes No

a 

No Yes

b 

Yes No

c 

Yes Yes

d 

No No

Question 12

DQZ Telecom is considering a project for the coming year that will cost $50,000,000  DQZ plans to use the following combination of debt and equity to finance the investment:
 


Issue $15,000,000 of 20‐year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 15% of par  The after‐flotation cost yield is 808%

Use $35,000,000 of funds generated from earnings

The equity market is expected to earn 12%  US Treasury bonds are currently yielding 5% The beta coefficient for DQZ is estimated to be 60  DQZ is subject to an effective corporate income tax rate of 40%


 
 The before‐tax cost of DQZ’s planned debt financing, net of flotation costs, in the first year is

: a 808%

a 808%

b 8%

c 10%

d 792%

Question 13

The weighted average cost of capital for a firm is determined by its cost of 

Short‐term Financing Long‐term Financing

: c 

No Yes

a 

Yes Yes

b 

Yes No

c 

No Yes

d 

No No

Question 14

A company has an outstanding one‐year bank loan of $500,000 at a stated interest rate of 8% The company is required to maintain a 20% compensating balance in its checking account The company would maintain a zero balance in this account if the requirement did not exist What is the effective interest rate of the loan?

: c 10%

a 8%

b 28%

c 10%

d 20%

Question 15

Nexco, Inc is considering factoring its accounts receivable Factorco, Inc has offered the following terms for accounts receivable due in 30 day 

Value of receivables to be held in reserve for contingencies 10%

Following costs are deducted at time accounts are factored:

Interest rate on amounts provided before deducting interest (annual rate) 12%

Factor fee on total receivables factored 2%

If Nexco plans to factor $200,000 of accounts receivable due in 30 days, which one of the following is the amount it will receive from Factorco at the time the accounts are factored?

: c $174,240

a $196,000

b $154,880

c $174,240

d $176,000

Question 16

A firm sells on terms of 2/10 net 60 It sells 1,000 units per day at a unit price of $10 On 60% of sales, customers take the cash discount On the remaining 40% of sales, customers pay, on average, in 70 days What would be the impact on the balance of accounts receivable if the firm initiates a more aggressive collection policy and is able to reduce the average payment period to 60 days for those customers not taking the cash discount? (Assume sales levels are unaffected by the change in policy)

: a Decrease by $40,000

a Decrease by $40,000

b Decrease by $240,000

c Decrease by $4,000

d Decrease by $280,000

Question 17

A firm has daily cash receipts of $100,000 and collection time of 4 days  A bank has offered to reduce the collection time on the firm’s deposits by 2 days for a monthly fee of $500  If money market rates are expected to average 6% during the year, the net annual benefit (loss) from having this service is

: d $ 6,000

a $ 3,000

b $0

c $12,000

d $ 6,000

Question 18

Which of the following describes the derivative risk that relates to the possibility of loss from regulatory action?

: a Legal risk

a Legal risk

b Market risk

c Credit risk

d Basis risk

Question 19

Which of the following factors is inherent in a firm’s operations if it utilizes only equity financing?

: a Business risk

a Business risk

b Financial risk

c Interest rate risk

d Marginal risk

Question 20

A company sells 10,000 skateboards a year at $66 each All sales are on credit, with terms of 3/10, net 30, which means 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days  One half of the customers are expected to take advantage of the discount and pay on day 10  The other half are expected to pay on day 30  Sales are expected to be uniform throughout the year for both types of customers 
 What is the expected average collection period for the company?

: c 20 days

a 15 days

b 30 days

c 20 days

d 10 days

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Status NEW Posted 03 Oct 2017 05:10 PM My Price 14.00

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