finance-the-mixture-of-long-term-funding-sources-that-a-firm-uses-to-finance-its-assets

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn

Page
1

Practice quiz

1a.
The mixture of long-term funding sources that a firm uses to finance its assets
is:

A)
capital structure

B)
financial leverage

C)
operating leverage

D)
debt operations

2.
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 conditions

C)
investor perceptions

D)
all of the above

3.
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 sheet

B)
increases in gross fixed equipment

C)
increase in long-term debt

D)
increase in accounts receivables

4.
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%.

FINANCE-The mixture of long-term funding sources that a firm uses to finance its assets.png”>

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?

Page
2

6.The relevant cash flows in capital
budgeting can best be described as:

A)
incremental after-tax net income

B)
incremental cash flows

C)
externality cash flows

D)
changes in fixed asset cash flows

Use
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 cashflows 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 – 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 period

b.
net present value

c.
internal rate of return

9.What is the relevant initial cash
outflow for the following project?

Equipment
cost $ 50,000

Installation
$ 5,000

Cash
increase needed $ 2,000

Inventory
increase needed $ 3,000

Increase
in Accounts payable $ 2,000

A)$58,000

B)$62,000

C)$55,000

D)$60,000

10.
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 “Terminal Value” of this opportunity if you

assume
a long-term growth rate of 3% and your firm’s 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 costs

B)
the level of income that a firm must reach to cover variable costs

C)
the level of sales that a firm must reach to cover all operating costs

D)
the point where operating income equals fixed costs

12.
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)
150,000

B)
250,000

C)
15,385

D)
28,571

13.
Operating leverage has the effect of triggering:

A)
a smaller percentage change in EBIT when a given percentage change in sales

occurs

B)
a smaller given percentage change in EBIT when a larger percentage change in

sales
occurs

C)
a smaller given percentage change in EBIT when a smaller percentage change in

sales
occurs

D)
a larger percentage change in EBIT when a given percentage change in sales

occurs

14.
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)
$33,333

B)
$ 4,348

C)
$300,000

D)
$50,750

15.
Firms with high fixed operating costs:

A)
tend to have low variable costs

B)
tend to have high variable costs

C)
tend to have low operating leverage

D)
tend to have low sales levels

16.
As a firm moves to a capital structure with higher debt:

A)
financial risk of the firm increases

B)
financial risk of the firm decreases if interest payments are tax deductible

C)
financial risk of the firm is unaffected if interest payments are tax
deductible

D)
DOL increases

17.
Which of the following are investment grade bonds?

A)
AAA U.S. Treasury Bonds

B)
A- corporate mortgage bonds

C)
BBB corporate debentures

D)
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 maturity

B)
no restrictive covenants

C)
a claim on specific assets in the event of default

D)
an independent trustee

19.
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 paid

B)
it is almost always paid out in the form of a cash dividend to both common and

preferred
stockholders

C)
it can be reinvested in the firm

D)
it can be reinvested in the firm and can be paid in the form of dividends to
common

stockholders

21.
The board of directors of a publicly traded company:

A)
is elected by, and represents the interests of the common stockholders

B)
is part of the professional management team

C)
is appointed by the CEO

D)
is a figurehead position only

22.
Why might a firm issue new stock?

A)
to send a signal

B)
for dilution–too few shares outstanding makes the share price too high for
some

investors

C)
to increase its debt/equity ratio

D)
to raise capital and therefore lower the firm’s financial risk

23.
Investors are likely to view a new issuance of common stock as a signal that:

A) prospects of the firm are better
than generally believed

B)
prospects of the firm are worse than generally believed

C)
the firm is preparing for a new debt issue

D) new
management or directors of the board are being put in place

More to explorer

Change Management Presentation

Purpose of AssessmentDevelop specific strategies with supporting tactics to implement positive change within an organization. You may refer to the information that you

Driver Safety

 You were recently hired as the fleet safety manager of a company that operates a fleet of 25 delivery trucks within a

Answer:

Title: finance-the-mixture-of-long-term-funding-sources-that-a-firm-uses-to-finance-its-assets

This question has been Solved!

Click the button below to order this solution.

Leave a Reply

Your email address will not be published. Required fields are marked *

Open chat