Busi 342 Bielmann TWU Fall 2019 multiple choice questions

are common forms of non cash expenses

depreciation and ammortization

if a viable firm is not growing but is expected to continue over time, then we would expect capital expenditures to be equal to:

Depreciation

which of the following formulas correctly estimates free cash flows to the firm?

FCFF = EBIT × (1 - tax rate) + non cash expenses - capital expenditures - net increases in working capital

Which of the following descriptions of the component costs of capital is INCORRECT?

The cost of debt is estimated using the CAPM as the risk-free rate or long-term government bond yield plus beta times a market risk premium.

Ellis Manufacturing Inc. has estimated FCFF for each of the next five years and believes that subsequent cash flows will grow at a constant annual rate of 4% indefinitely. If FCFF are $500,000 in year five, and the cost of capital is 10%, what is the value in year five of these terminal value cash flows?

And What is the value today of the terminal value calculated for year 5 in the question above?

$8,666,667 Explanation: FV5 = CF6/(r - g) = $500,000(1.04)/(.10 -.04) = $8,666,667

$5,381,318

InfoTech Solutions Inc. has a historic P/E multiple of 26, a current EPS of $1.10 projected to grow by 5% in the coming year, and a forward looking P/E multiple of 22. With this information please estimate the current price of the firm's stock

$25.41

Explanation: D) P = D1 multiple = $1.10 (1.05) * 22 = $25.41

Which of the following is NOT a positive attribute of the price-earnings multiple valuation model?

It implicitly assumes that comparable firms are already fairly pried in the market place

Active Athletics Inc. has an EBIT of $400,000, $150,000 in depreciation, $500,000 in outstanding debt, a forward-looking EV/EBITDA multiple of 6.0, and an estimated cost of capital of 14%. Use the EV/EBITDA approach to value the firm.

$2,800,000

________ refers to the ease with which a firm is able to tap-in to sources of capital.

Financial flexibility

A firm whose debt to equity ratio ________ the industry average will ________ future financing flexibility by financing with equity at the next opportunity but doing so may sacrifice earnings per share.

exceeds, maximize

Assume that a firm's earnings per share (EPS) are expected to be $1.35 next year and that analysts have determined that an appropriate forward-looking multiple is 20 times the projected earnings. What should the stock price be?

$27.00

Explanation: C) Price = EPS multiple = $1.35 20 = $27.00

Pinnacle Financial Management projects that earnings per share for Valley Imports Inc. will increase from the current $1.75 per share to $2.00 next year. If Pinnacle recommends a P/E ratio of 12.5 for Valley Imports, what is the recommended forward looking price for the firm?

$25.00 per share

Explanation: B) Price = EPS multiple = $2.00 12.5 = $25.00.

Which of the following statements is NOT true?

Issuing equity automatically hurts existing shareholders

________ is measured by the proportional amount of debt in the firm's capital structure

Financial risk

Consider a corporation that was originally 100% family owned. Which of the following statements is TRUE?

Each time the company issues new shares family control may be reduced. If the family owns more than 50% of the shares they still have effective control of the firm. Even if the family owns less than 50% of the outstanding shares they may still retain effective control of the firm, especially if there are no other large shareholders.

Which of the following did NOT contribute to the Great Recession of 2007-2009?

The collapse of the U.S. housing market. The tremendous growth of the sub-prime lending market. And The liquidity crisis that resulted when banks became unwilling to lend into a collapsing market.

If a firm takes on ________ it may be downgraded by rating agencies, resulting in ________ interest payments.

too much incremental debt; higher

Which of the following is NOT a common characteristic of issuing short-term debt?

Short-term interest rates are typically HIGHER than long-term rates.

ACME Inc. has a current price of $23.50 per share for its preferred shares that pay an annual dividend of $1.22 What is the current return on the firm's preferred shares?

5.19%

Explanation: A) r = $1.22/$23.50 = 5.19%

To estimate the after-tax cost of preferred stock you must:

None of the above because preferred dividend payments are not tax deductible for the firm.

The ________ is a popular and somewhat intuitive technique for estimating the required return on common equity.

dividend discount model

Janis Corp. just issued an annual dividend of $2.50 per share. The firm anticipates the growth rate in dividends will be 3% annually for the foreseeable future. If the current price is $61 per share, what is the required rate of return for the firm's equity?

7.22%

Explanation: C) r = D1/P + g = 2.5(1.03)/61 + 0.03 = 7.22%

Which of the following is NOT a key component of the CAPM?

diversifiable risk

Beta is a/an ________ measure of risk and assumes that investors hold a ________ portfolio

relative or comparative; well-diversified

Freightway Trucking Inc. uses the CAPM to help estimate their cost of equity. Given the following information, what is the firm's estimated cost of equity? The risk-free return in the market is currently 3%, the market risk premium is 5%, and the firm has a beta of 1.50

10.5%

Explanation: r = rf + beta (MRP) = 3% + 1.50 * (5%) = 10.5%.

Which of the following is typically considered to be the most appropriate proxy for the risk-free rate when applying the CAPM?

10-year Treasury bonds

A firm with a beta of 2.0 should:

require twice the market risk premium.

Bacon Signs Inc. has a capital structure made up of 36.4% debt and 63.6% equity. What is the WACC for Bacon Signs if the after-tax cost of long-term debt is 6.3% and the before tax cost of equity is 10.4%.

8.91%

Explanation: WACC = 6.3% 36.4% + 10.4% 63.6% = 8.91%.

Typically, the rate of return on ________ exceeds the rate of return on ________.

long-term bonds; short-term bonds

Which of the following statements about corporate bonds is NOT true?

They generally are not tax deductible for the issuing corporation.

A bond feature that requires firms to repurchase a portion of its bonds on a regular basis throughout the life of the bonds, or to set aside an equivalent amount is known as a:

sinking fund.

With ________ bonds a firm can choose to pay back the investor at a pre-specified date prior to the maturity date, usually at a pre-specified price above the face value, representing a premium to the bondholder

callable

________ is the practice of examining patterns and trends in historical stock prices.

Technical analysis

Roger has been following a stock chart for TechMart Inc. and believes he has detected a pattern that he can use to earn abnormally large returns. If this is true he has demonstrated a violation of which form of market efficiency?

weak form, semi-strong form, strong form

When a private firm makes its equity available to the public in order to meet its need for equity capital, it undertakes a process known as:

an initial public offering

Core Concepts Inc,. has experienced a stock price increase from $100.00 to $131.59 in only three years. Over this time period, what has been the firm's geometric average annual rate of return?

9.58%

Via Calculator: N = 3, PV = -100, PMT = 0, FV = 131.59, solve for r = 9.58%

If the firm has earnings available to common shareholders, it has two choices of what to do with these earnings: it can either ________ or ________.

pay dividends to the common shareholders; retain the earnings to finance future projects and investments.

Ransom Industries Inc, has issued preferred stock that pays $3.00 dividends annually. If the market requires a 12.5% rate of return on the shares, what is the current price of the firm's preferred shares?

$24.00

Explanation: Price = Div/rate = $3/.125 = $24.00.

Which of the following is considered an advantage of the net present value method of capital budgeting over the payback method?

the NPV considers all cash flows, the NPV uses the firm's required rate of return to discount cash flows, the NPV method considers opportunity costs in its calculations

A firm's cost of capital may also be known as:

The cost of financing

The ________ measure is similar to the yield to maturity measure for bonds

IRR

If a project has a ________ NPV, it should also have an IRR ________ the hurdle rate.

positive; greater than

Managers wishing to add value to the firm can do this by adding projects with a ________ net present value.

positive

Which of the following capital budgeting techniques does NOT specifically use time value of money analysis?

payback period

The ________ method provides the number of years required for a project to repay its initial investment.

payback

Which of the following could be categorized as a current asset?

Accounts receivable

When a publicly-traded company retains earnings, those earnings belong to:

Common shareholders

Repurchased shares become:

Treasury stock

A firm reports the following balance sheet items; total current liabilities of $30,000; total assets of $150,000; net working capital of $20,000; and long-term debt of $35,000. What is the amount of the firm's current assets?

$50,000

Mudguard Aircraft Corporation had sales of $8 million and net income of $400,000 in 2018. Mudguard paid a dividend of $300,000. Assuming that their beginning balance for retained earnings was $800,000, calculate their ending balance for retained earnings.

$900,000

Which of the items below is not part of the calculation for operating income?

Interest

Earnings before interest and taxes (EBIT):

Is also known as operating income and Is calculated as gross profit minus operating expenses

For an analyst to be able to estimate a company's value, it is necessary to first understand:

economic condition and prospects, industry condition and prospects, strengths and weaknesses of the company

The main components of a business size-up are:

external environment and internal analysis

The financial management, or financial analysis, framework is built around the following decisions:

financing, investing and operating

Which of the following are considered important economic factors to analyze:

credit conditions, interest rates, financial markets

Gross domestic product is:

the total amount of goods and services produced during a given time period

If a nation has more imports than exports, it is:

a net importing country and the imports will reduce GDP

The main objectives of the U.S. Federal Reserve and other central banks around the world are:

price stability, maximum employment, low inflation

Capital market conditions are relevant to when equities are issued, because:

When stock prices are generally rising, it is usually easier to attract equity capital

The industry portion of the financial analysis framework serves to:

indicate how the company's need for capital may change as industry conditions change, formulate educated, rational expectations about growth potential in the industry, as well as risks, identify the key success factors needed for any company to flourish in the industry

The Six P's of Operations include:

product quality, people and process

How would you describe what finance is?

It is about how to create and maintain economic wealth

The creation of value at the firm level:

Also increases the wealth of a nation, because it means that resources have been allocated to productive uses

If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:

increase the market value of the firm's common stock.

Why is the maximization of profit not a good enough goal for firms?

because it ignores risk and is often short-term focused

You are investor about to invest $5,000 in a business. In considering the most you could be personally responsible for if the company incurred a liability related to injury caused to a customer using one of its products, you understand that it is:

$5,000 if you are a limited partner

Select the TRUE statement:

corporations generate double taxation

The key attribute of a corporation is that:

it is, in a legal sense, a person or being, distinct from its owners

The shareholders of a company are rightly thought of as:

owners

Which of the following is an advantage of incorporation?

limited liability

There are various stakeholders in a business, but the most important are:

shareholders