Multiple Choice and Explanatory Questions
1. In the United States, which of the following types of organization has the greatest revenue in total?
Sole proprietorship
C corporation
S corporation
Limited partnership
2. A sole proprietorship is owned by
one person.
one or two people, but if there are two owners, they must be married to each other.
up to 100 owners.
up to 64 owners.
3. Which of the following would cause the present value of an annuity to increase?
Reducing the number of payments.
Increasing the interest rate.
Decreasing the interest rate.
Decreasing the liquidity of the payments.
4. Which of the following is an annuity due?
A typical car loan.
A typical mortgage.
A typical apartment rental agreement.
A credit card balance.
5. If you were a manager of a company, which of the three right side components of the DuPont Identity would you want to increase and which would you want to decrease, other things being equal? Give a specific example for how to do that for each of the three.
6. A stock has just paid a dividend and will pay a dividend of $3.00 in a year. The dividend will stay constant for the rest of time. The return on equity for similar stocks is 14%. What is P0?
7. A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0?
8. A particular bond has 8 years to maturity. It has a face value of $1,000. It has a YTM of 7% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for?
9. A bond currently sells for $1,000 and has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM?
10. What is β and why is it important to investors and issuers of stock? Describe the behavior of stocks with βs of greater than one, less than one, and less than zero.
11. A company has 100 million shares outstanding trading for $8 per share. It also has $900 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 12%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital?
12. What is the difference between capital structure and capital budgeting? Explain and give an example of a capital structure decision and an example of a capital budgeting decision.
13. What is the difference between the cash cycle and the operating cycle? Under what condition would they be the same?
14. A company has the opportunity to do any of the projects for which the
net cash flows per year are shown below. The company has a cost of capital of 12%.
Which should the company do and why? You must use at least two capital budgeting
methods. Show your work
|
Year
|
A
|
B
|
C
|
|
0
|
-300
|
-100
|
-300
|
|
1
|
100
|
-50
|
100
|
|
2
|
100
|
100
|
100
|
|
3
|
100
|
100
|
100
|
|
4
|
100
|
100
|
100
|
|
5
|
100
|
100
|
100
|
|
6
|
100
|
100
|
100
|
|
7
|
-100
|
-200
|
0
|
Question 1. In the United States, which of the following types of organization has the greatest revenue in total?
Question 2. Which of the following statements is NOT correct?
Question 3. Sole proprietorships have all of the following advantages except?
Question 4. Which of the following would cause the present value of an annuity to decrease?
Question 5. In a TVM calculation, if incoming cash flows are positive, outgoing cash flows must be
Question 6. Which of the following statements is correct?
Question 7. The Chadmark Corporation's budgeted monthly sales are $3,000. In the first month, 40% of its customers pay and take the 2% discount. The remaining 60% pay in the month following the sale and don't receive a discount. Chadmark's bad debts are very small and are excluded from this analysis. Purchases for next month's sales are constant each month at $1,500. Other payments for wages, rent, and taxes are constant at $700 per month. Construct a single month's cash budget with the information given. What is the average cash gain or loss) during a typical month for the Chadmark Corporation?
8. If you were a manager of a company, which of the three right side components of the DuPont Identity would you want to increase and which would you want to decrease, other things being equal? Give a specific example for how to do that for each of the three.
9. Leak Inc. forecasts the free cash flows in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond and do not make any half-year adjustments).
Year: 1 2
Free cash flow: -$50 $100
10. A stock pays an annual dividend of $2.50 and that dividend is not expected to change. Similar stocks pay a return of 10%. What is P0?
11. A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0?
12. A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semiannual coupons are $50. What is the bonds current market price?
13. A bond currently sells for $1,000 and has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM?
14. A company has 10 million shares outstanding trading for $7 per share. It also has $300 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital?
15. Name and describe the three functions of managerial finance. For each, give an example other than those used in the text and lecture.
16. Explain thoroughly how stock portfolios affect the risk to an investor.
17. What is the Cash Conversion Cycle CCC)? Name the components of the CCC and explain why the CCC is important to business.
18. A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
|
Year
|
A
|
B
|
C
|
|
0
|
-300
|
-100
|
-300
|
|
1
|
100
|
-50
|
100
|
|
2
|
100
|
100
|
100
|
|
3
|
100
|
100
|
100
|
|
4
|
100
|
100
|
100
|
|
5
|
100
|
100
|
100
|
|
6
|
100
|
100
|
100
|
|
7
|
-100
|
-200
|
0
|