Multiple Choice - The fact that, in real life

1. The fact that, in real life, investors don't have identical desires about the taxability and timing of firm payments is known as the
A. bird-in-the-hand theory.
 B. dividend irrelevance theorem.
C. information effect.
D. clientele effect.
2. You're evaluating the proposed acquisition of a new machining tool for $88,000 by your company. The tool falls into the MACRS three-year class, and it will be fully depreciated after three years and sold at that time for $26,000. Use of the tool requires an increase in NWC (spare parts inventory) of $3,500. The tool will have no effect on revenues, but it's expected to save the firm $24,000 per year in before-tax operating costs, mostly labor. The firm's marginal tax rate is 38 percent. What will be the adjusted total cash flow (ATCF) from the sale of the machining tool?
A. $16,120
B. $18,186
C. $22,410
D. $12,820
3. A common criticism of the payback (PB) benchmark is that it doesn't
A. take into account NPV.
B. account for the time value of money (TVM).
C. receive complementing information from discount payback (DPB).
D. consider a project's IRR.

4. Which is the most popular rate-based capital budgeting technique?
A. Capital asset pricing model (CAPM)
B. Internal rate of return (IRR)
 C. Net present value (NPV)
D. Discount period (DP)
5. The tendency of stockholders in firms where the equity is close to being worthless to gamble by investing in an arguably bad project is known as the
A. clientele effect.
B. overinvestment problem.
C. capital structure irrelevance hypothesis.
D. underinvestment problem.

6. What type of values must investors use when dealing with future stock prices and future dividend payments?
A. Discounted values
B. Premium values
C. Expected values
 D. Certain values

7. The rate that a risk-free security would pay if no inflation were expected over its holding period is called the _______ rate.
 A. nominal
B. term structure
C. real risk-free
D. prime

8. In 2015, Camilla's Pet Stores, Inc., reported an ROA of 9.24 percent, ROE of 15.8 percent, and profit margin of 21.2 percent. The firm had total assets equal to $12.8 million at the end of 2015. What's common stockholders' equity as of year-end 2015 for Camilla's Pet Stores, Inc.?
 A. $7.5 million
B. $6.7 million
C. $8.1 million
D. $9.3 million

9. To analyze performance meaningfully, what must ratio results be interpreted against?
A. A standard or benchmark
B. The time value of money (TVM)
C. The discount rate D. ROE
10. Suppose a firm has an EBIT of $1,400,000 and finances its assets with $6,000,000 of debt at 6 percent interest and 300,000 shares of stock selling at $12.50 a share. To lessen the risk associated with this financial leverage, the firm is thinking about reducing its debt by $3,000,000 by selling more stock. The firm is in the 35 percent tax bracket. The change in the capital structure won't have any effect on the firm's operations, thus EBIT will remain at $1,400,000. What's the change in the firm's EPS from this change in capital structure?
A. EPS falls by $0.48 per share
B. EPS rises by $0.54 per share
C. EPS rises by $0.28 per share
D. EPS falls by $0.36 per share

11. Which of these is a factor that encourages managers to finance projects with debt financing rather than selling more stock?
A. Taking on debt is riskier than raising funds by selling equity.
B. A firm's marginal tax rate is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.
C. Interest payments are deducted from operating income for taxable purposes, but dividends paid by corporations to shareholders aren't.
D. Stockholders are entitled to a company's residual cash flows.

12. If the risk-free rate is 5 percent and the risk premium is 7 percent, what's the required return?
 A. –2 percent
B. 12 percent
C. 15 percent
D. 2 percent


13. How long is the useful life of a fixed asset?
A. In excess of one year
B. Less than one year
C. Not more than 10 years
D. In excess of two years


14. What's the difference between APR and EAR?
A. EAR computes interest on a loan from the first day of the loan, while APR computes interest from the end of the first month of the loan.
B. EAR loans use compounding interest, and APR loans don't.
C. Lenders are legally required to show borrowers the EAR on any loan offered.
D. EAR is a more accurate representation of what you'll actually pay in interest on a loan than APR.

15. Perpetuity payments are made
 A. at the start of the year.
 B. quarterly.
C. forever.
D. at the end of the year.

16. A treasury bond bought at the beginning of the year for $1,064 pays $48 in interest payments during the year, ending the year valued at $1,095. What was the percent return?
A. 6.86
B. 8.44
C. 7.42
D. 4.88

 17. Which one of these is a common approach to assessing a stock's relative value?
A. Variable-growth rate
B. Price-earnings (P/E) ratio
C. Constant-growth rate
D. Dividend discount model

18. A correlation value of –1 means returns from two securities
A. are perfectly inversely correlated.
B. have no correlation to each other.
C. move together 50 percent of the time.
D. move perfectly in sync.

19. What's another name commonly used for junk bonds?
 A. Equipment trust certificates
B. High-yield bonds
C. Debentures
D. Mortgage bonds

 20. The applicability of beta depends on a firm's
 A. standard deviation.
B. growth rate.
C. historical returns.
D. future plans.
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