Course Introduction
Corporate Finance
Study Guide Questions
Corporate Finance explores the fundamental principles and strategies that guide financial decision-making within corporations. The course covers essential topics such as capital budgeting, capital structure, dividend policy, working capital management, valuation of financial assets, risk management, and mergers and acquisitions. Students learn how firms raise and allocate capital, analyze investment opportunities, and manage financial risks to maximize enterprise value. Through case studies and quantitative analysis, the course equips students with practical skills for assessing financial performance, understanding market dynamics, and navigating the complex financial landscape of modern businesses.
Recommended Textbook Fundamentals of Financial Management 14th Edition by Eugene F. Brigham
Available Study Resources on Quizplus
28 Chapters
1838 Verified Questions
1838 Flashcards
Source URL: https://quizplus.com/study-set/3258
Page 2
Chapter 1: An Overview of Financial Management
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/64686
Sample Questions
Q1) Assume that the corporate tax rate is 34% and the personal tax rate is 35%.The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation.The firm will not need to retain any earnings,so all of its after-tax income will be paid out to its investors,who will have to pay personal taxes on whatever they receive.What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization?
A)20.4%
B)20.8%
C)21.2%
D)21.7%
E)22.1%
Answer: E
Q2) The more capital a firm is likely to require,the greater the probability that it will be organized as a corporation.
A)True
B)False
Answer: True
To view all questions and flashcards with answers, click on the resource link above. Page 3
Chapter 2: Financial Markets and Institutions
Available Study Resources on Quizplus for this Chatper
33 Verified Questions
33 Flashcards
Source URL: https://quizplus.com/quiz/64687
Sample Questions
Q1) Which of the following statements is CORRECT?
A)Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.
B)Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.
C)Hedge funds have more in common with investment banks than with any other type of financial institution.
D)Hedge funds have more in common with commercial banks than with any other type of financial institution.
E)Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated investors" (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.
Answer: E
To view all questions and flashcards with answers, click on the resource link above.
Chapter 3: Financial Statements, cash Flow, and Taxes
Available Study Resources on Quizplus for this Chatper
130 Verified Questions
130 Flashcards
Source URL: https://quizplus.com/quiz/64688
Sample Questions
Q1) Arvo Corporation is trying to choose between three alternative investments.The three securities that the company is considering are as follows:
Tax-free municipal bonds with a return of 8.8%.
Wooli Corporation bonds with a return of 11.75%.
CFI Corp.preferred stock with a return of 9.8%. The company's tax rate is 25%.What is the after-tax return on the best investment alternative?
A)7.383%
B)7.772%
C)8.181%
D)8.612%
E)9.065%
Answer: E
Q2) Which of the following items is NOT normally considered to be a current asset?
A)Accounts receivable.
B)Inventory.
C)Bonds.
D)Cash.
E)Short-term, highly-liquid, marketable securities. Answer: C
To view all questions and flashcards with answers, click on the resource link above.
Page 5
Chapter 4: Analysis of Financial Statements
Available Study Resources on Quizplus for this Chatper
133 Verified Questions
133 Flashcards
Source URL: https://quizplus.com/quiz/64689
Sample Questions
Q1) Brookman Inc's latest EPS was $2.75,its book value per share was $22.75,it had 315,000 shares outstanding,and its debt/total invested capital ratio was 44%.The firm finances using only debt and common equity and its total assets equal total invested capital.How much debt was outstanding?
A)$4,586,179
B)$4,827,557
C)$5,081,639
D)$5,349,094
E)$5,630,625
Q2) Beranek Corp has $720,000 of assets (which equal total invested capital),and it uses no debt: it is financed only with common equity.The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%,using the proceeds from borrowing to buy back common stock at its book value.How much must the firm borrow to achieve the target debt ratio?
A)$273,600
B)$288,000
C)$302,400
D)$317,520
E)$333,396
To view all questions and flashcards with answers, click on the resource link above.
Page 6
Chapter 5: Time Value of Money
Available Study Resources on Quizplus for this Chatper
163 Verified Questions
163 Flashcards
Source URL: https://quizplus.com/quiz/64690
Sample Questions
Q1) How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?
A)$438.03
B)$461.08
C)$485.35
D)$510.89
E)$537.78
Q2) Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?
A)73.67%
B)77.55%
C)81.63%
D)85.93%
E)90.45%
Q3) Starting to invest early for retirement increases the benefits of compound interest. A)True B)False
To view all questions and flashcards with answers, click on the resource link above.
7
Chapter 6: Interest Rates
Available Study Resources on Quizplus for this Chatper
82 Verified Questions
82 Flashcards
Source URL: https://quizplus.com/quiz/64691
Sample Questions
Q1) Because the maturity risk premium is normally positive,the yield curve must have an upward slope.If you measure the yield curve and find a downward slope,you must have done something wrong.
A)True
B)False
Q2) Assume the following: The real risk-free rate,r*,is expected to remain constant at 3%.Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter.The maturity risk premium is zero.Given this information,which of the following statements is CORRECT?
A)The yield curve for U.S. Treasury securities will be upward sloping.
B)A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
C)A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
D)The real risk-free rate cannot be constant if inflation is not expected to remain constant.
E)This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Bonds and Their Valuation
Available Study Resources on Quizplus for this Chatper
92 Verified Questions
92 Flashcards
Source URL: https://quizplus.com/quiz/64692
Sample Questions
Q1) Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000.They pay a $65 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to maturity (YTM)?
A)5.78%
B)6.09%
C)6.39%
D)6.71%
E)7.05%
Q2) Keenan Industries has a bond outstanding with 15 years to maturity,an 8.25% nominal coupon,semiannual payments,and a $1,000 par value.The bond has a 6.50% nominal yield to maturity,but it can be called in 6 years at a price of $1,120.What is the bond's nominal yield to call?
A)6.20%
B)6.53%
C)6.85%
D)7.20%
E)7.55%
To view all questions and flashcards with answers, click on the resource link above.
Page 9
Chapter 8: Risk and Rates of Return
Available Study Resources on Quizplus for this Chatper
146 Verified Questions
146 Flashcards
Source URL: https://quizplus.com/quiz/64693
Sample Questions
Q1) Bae Inc.is considering an investment that has an expected return of 15% and a standard deviation of 10%.What is the investment's coefficient of variation?
A)0.67
B)0.73
C)0.81
D)0.89
E)0.98
Q2) Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?
A)The required return on a stock with beta = 1.0 will not change.
B)The required return on a stock with beta > 1.0 will increase.
C)The return on "the market" will remain constant.
D)The return on "the market" will increase.
E)The required return on a stock with a positive beta < 1.0 will decline.
Q3) Risk-averse investors require higher rates of return on investments whose returns are highly uncertain,and most investors are risk averse.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Stocks and Their Valuation
Available Study Resources on Quizplus for this Chatper
89 Verified Questions
89 Flashcards
Source URL: https://quizplus.com/quiz/64694
Sample Questions
Q1) Classified stock differentiates various classes of common stock,and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.
A)True
B)False
Q2) Mooradian Corporation's free cash flow during the just-ended year (t = 0)was $150 million,and its FCF is expected to grow at a constant rate of 5.0% in the future.If the weighted average cost of capital is 12.5%,what is the firm's total corporate value,in millions?
A)$1,895
B)$1,995
C)$2,100
D)$2,205
E)$2,315
Q3) The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 11
Chapter 10: The Cost of Capital
Available Study Resources on Quizplus for this Chatper
94 Verified Questions
94 Flashcards
Source URL: https://quizplus.com/quiz/64695
Sample Questions
Q1) If expectations for long-term inflation rose,but the slope of the SML remained constant,this would have a greater impact on the required rate of return on equity,r<sub>s</sub>,than on the interest rate on long-term debt,r<sub>d</sub>,for most firms.Therefore,the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.
A)True
B)False
Q2) Since 70% of the preferred dividends received by a corporation are excluded from taxable income,the component cost of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should,theoretically,be
Cost of equity = r<sub>s</sub>(0.30)(0.50)+ r<sub>ps</sub>(1 T)(0.70)(0.50).
A)True
B)False
Q3) The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: The Basics of Capital Budgeting
Available Study Resources on Quizplus for this Chatper
108 Verified Questions
108 Flashcards
Source URL: https://quizplus.com/quiz/64696
Sample Questions
Q1) Which of the following statements is CORRECT?
A)For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR.
B)To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV.
C)The NPV and IRR methods both assume that cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself.
D)If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the higher IRR probably has more of its cash flows coming in the later years.
E)If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years.
Q2) The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.
A)True B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 13
Chapter 12: Cash Flow Estimation and Risk Analysis
Available Study Resources on Quizplus for this Chatper
81 Verified Questions
81 Flashcards
Source URL: https://quizplus.com/quiz/64697
Sample Questions
Q1) Estimating project cash flows is generally the most important,but also the most difficult,step in the capital budgeting process.Methodology,such as the use of NPV versus IRR,is important,but less so than obtaining a reasonably accurate estimate of projects' cash flows.
A)True
B)False
Q2) Which of the following statement completions is NOT CORRECT? For a profitable firm,when MACRS accelerated depreciation is compared to straight-line depreciation,MACRS accelerated allowances produce
A)Higher depreciation charges in the early years of an asset's life.
B)Larger cash flows in the earlier years of an asset's life.
C)Larger total undiscounted profits from the project over the project's life.
D)Smaller accounting profits in the early years, assuming the company uses the same depreciation method for tax and book purposes.
E)Lower tax payments in the earlier years of an asset's life.
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
Available Study Resources on Quizplus for this Chatper
41 Verified Questions
41 Flashcards
Source URL: https://quizplus.com/quiz/64698
Sample Questions
Q1) A firm's optimal capital budget consists of all independent projects with positive NPVs plus those mutually exclusive projects that have the highest positive NPVs.
A)True
B)False
Q2) If a firm practices capital rationing,this means that it is accepting fewer projects than would be theoretically optimal; hence,it is not maximizing its theoretical value.
A)True
B)False
Q3) Which one of the following is NOT a real option?
A)The option to expand production if the product is successful.
B)The option to buy shares of stock if its price is expected to increase.
C)The option to expand into a new geographic region.
D)The option to abandon a project if cash flows turn out to be lower than expected.
E)The option to switch the type of fuel used in an industrial furnace to lower the cost of production.
To view all questions and flashcards with answers, click on the resource link above.
15
Chapter 14: Capital Structure and Leverage
Available Study Resources on Quizplus for this Chatper
88 Verified Questions
88 Flashcards
Source URL: https://quizplus.com/quiz/64699
Sample Questions
Q1) A major contribution of the Miller model is that it demonstrates,other things held constant,that
A)personal taxes increase the value of using corporate debt.
B)personal taxes lower the value of using corporate debt.
C)personal taxes have no effect on the value of using corporate debt.
D)financial distress and agency costs reduce the value of using corporate debt.
E)debt costs increase with financial leverage.
Q2) If a firm borrows money,it is using financial leverage.
A)True
B)False
Q3) The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage,other things held constant.
A)True
B)False
Q4) The trade-off theory states that capital structure decisions involve a tradeoff between the costs and benefits of debt financing.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
Available Study Resources on Quizplus for this Chatper
75 Verified Questions
75 Flashcards
Source URL: https://quizplus.com/quiz/64700
Sample Questions
Q1) Which of the following statements is CORRECT?
A)If a company has a 2-for-1 stock split, its stock price should roughly double.
B)Capital gains earned on shares repurchased are taxed less favorably than dividends, which is why companies typically pay dividends and avoid share repurchases.
C)Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
D)Stock repurchases increase the number of outstanding shares.
E)The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.
Q2) If on January 3,2015,a company declares a dividend of $1.50 per share,payable on January 31,2015,then the price of the stock should drop by approximately $1.50 on January 31.
A)True
B)False
Q3) A "reverse split" reduces the number of shares outstanding.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Working Capital Management
Available Study Resources on Quizplus for this Chatper
126 Verified Questions
126 Flashcards
Source URL: https://quizplus.com/quiz/64701
Sample Questions
Q1) A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.
A)True B)False
Q2) Net operating working capital,defined as current assets minus the difference between current liabilities and notes payable,is equal to the current ratio minus the quick ratio.
A)True
B)False
Q3) Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
A)Payment lags.
B)Payment for plant construction.
C)Cumulative cash.
D)Repurchases of common stock.
E)Writing off bad debts.
To view all questions and flashcards with answers, click on the resource link above. Page 18
Chapter 17: Financial Planning and Forecasting
Available Study Resources on Quizplus for this Chatper
39 Verified Questions
39 Flashcards
Source URL: https://quizplus.com/quiz/64702
Sample Questions
Q1) When we use the AFN equation to forecast the additional funds needed (AFN),we are implicitly assuming that all financial ratios are constant.If financial ratios are not constant,regression techniques can be used to improve the financial forecast.
A)True
B)False
Q2) If a firm wants to maintain its ratios at their existing levels,then if it has a positive sales growth rate of any amount,it will require some amount of external funding.
A)True
B)False
Q3) A rapid build-up of inventories normally requires additional financing,unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
Q4) The first,and most critical,step in constructing a set of forecasted financial statements is the sales forecast.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 19
Chapter 18: Derivatives and Risk Management
Available Study Resources on Quizplus for this Chatper
35 Verified Questions
35 Flashcards
Source URL: https://quizplus.com/quiz/64703
Sample Questions
Q1) Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 10-year,semiannual payment,6% coupon Treasury note is 105-21.If the note has a $1,000 par value,what is the implied Treasury note rate?
A)5.27%
B)5.53%
C)5.80%
D)6.10%
E)6.40%
Q2) Suppose a CBOT 10-year U.S.Treasury note futures contract has a quoted price of 89-09.What is the implied annual interest rate inherent in this futures contract?
A)6.81%
B)7.17%
C)7.55%
D)7.92%
E)8.32%
Q3) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Chapter 19: Multinational Financial Management
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/64704
Sample Questions
Q1) In Japan,90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return.In the United States,90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%.All securities are of equal risk,and Japanese securities are denominated in terms of the Japanese yen.Assuming that interest rate parity holds in all markets,which of the following statements is most CORRECT?
A)The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
B)The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
C)The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
D)The yen-dollar exchange rate in the 180-day forward market equals the yen-dollar exchange rate in the 90-day spot market.
E)The relationship between spot and forward interest rates cannot be inferred.
Q2) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 21
Chapter 20: Hybrid Financing: Preferred Stock, leasing, warrants,
and Convertibles
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/64705
Sample Questions
Q1) Herring Inc.is considering issuing 15-year,8% semiannual coupon,$1,000 face value convertible bonds at a price of $1,000 each.Each bond would be convertible into 25 shares of common stock.If the bonds were not convertible,investors would require an annual nominal yield of 10%.What is the straight-debt value of each bond at the time of issue?
A)$725.58
B)$763.76
C)$803.96
D)$846.28
E)$888.59
Q2) Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2011.At any time prior to maturity on February 1,2031,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,P<sub>c</sub>?
A)$40.00
B)$42.00
C)$44.10
D)$46.31
E)$48.62
To view all questions and flashcards with answers, click on the resource link above. Page 22
Chapter 21: Mergers and Acquisitions
Available Study Resources on Quizplus for this Chatper
39 Verified Questions
39 Flashcards
Source URL: https://quizplus.com/quiz/64706
Sample Questions
Q1) Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.
A)True
B)False
Q2) The text gives a number of valid,acceptable reasons for companies to merge.Which of the following is NOT acceptable?
A)Synergistic benefits arising from mergers.
B)Reduction in competition resulting from mergers.
C)Acquisition of assets at below replacement value.
D)Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately.
E)Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.
Q3) In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 23
Chapter 22: Continuous Compounding and Discounting
Available Study Resources on Quizplus for this Chatper
8 Verified Questions
8 Flashcards
Source URL: https://quizplus.com/quiz/64707
Sample Questions
Q1) How much should you be willing to pay for an account today that will have a value of $1,000 in 10 years under continuous compounding if the nominal rate is 10%?
A)$349.49
B)$367.88
C)$386.27
D)$405.59
E)$425.87
Q2) You have $5,436.60 in an account that pays 10% interest,compounded continuously.If you deposited some funds 10 years ago,how much was your original deposit?
A)$1,900
B)$2,000
C)$2,100
D)$2,205
E)$2,315
To view all questions and flashcards with answers, click on the resource link above.
24
Chapter 23: Zero Coupon Bonds
Available Study Resources on Quizplus for this Chatper
18 Verified Questions
18 Flashcards
Source URL: https://quizplus.com/quiz/64708
Sample Questions
Q1) Vogril Company issued 20-year,zero coupon bonds with an expected yield to maturity of 9%.The bonds have a par value of $1,000 and were sold for $178.43 each.What is the expected interest expense on these bonds for Year 8?
A)$29.36
B)$30.82
C)$32.36
D)$33.98
E)$35.68
Q2) A 4-year,zero coupon Treasury bond sells at a price of $762.8952.A 3-year,zero coupon Treasury bond sells at a price of $827.8491.Assuming the expectations theory is correct,what does the market believe the price of 1-year,zero coupon bonds will be in 3 years?
A)$921.54
B)$939.97
C)$958.77
D)$977.94
E)$997.50
To view all questions and flashcards with answers, click on the resource link above.
Chapter 24: Bankruptcy and Reorganization
Available Study Resources on Quizplus for this Chatper
4 Verified Questions
4 Flashcards
Source URL: https://quizplus.com/quiz/64709
Sample Questions
Q1) Which of the following statements is most CORRECT?
A)Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered since that time.
B)Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy are governed solely by state laws.
C)All bankruptcy petitions are filed by creditors seeking to protect their claims on firms in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's management.
D)Chapter 11 and 7 are the most important bankruptcy Chapter for financial management purposes. If a reorganization plan cannot be worked out under Chapter 11, then the company will be liquidated as prescribed in Chapter 7 of the Act.
E)"Restructuring" a firm's debt can involve forgiving a certain portion of the debt but does not involve changing the debt's maturity or its contractual interest rate.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 25: Calculating Beta Coefficients
Available Study Resources on Quizplus for this Chatper
8 Verified Questions
8 Flashcards
Source URL: https://quizplus.com/quiz/64710
Sample Questions
Q1) Which of the following statements is CORRECT?
A)The CAPM is an ex ante model, which means that all of the variables should be historical values that can reasonably be projected into the future.
B)The beta coefficient used in the SML equation should reflect the expected volatility of a given stock's return versus the return on the market during some future period.
C)The general equation: Y = a + bX + e, is the standard form of a simple linear regression where b = beta, and X equals the independent return on an individual security being compared to Y, the return on the market, which is the dependent variable.
D)The rise-over-run method is not a legitimate method of estimating beta because it measures changes in an individual security's return regressed against time.
To view all questions and flashcards with answers, click on the resource link above.
Chapter
Available Study Resources on Quizplus for this Chatper
5 Verified Questions
5 Flashcards
Source URL: https://quizplus.com/quiz/64711
Sample Questions
Q1) Sunshine Inc.has two equally-sized divisions.Division A has a beta of 0.8 and Division B has a beta of 1.2.The company is 100% equity financed.The risk-free rate is 6% and the market risk premium is 5%.Sunshine assigns different hurdle rates to each division based on each division's market risk.Which of the following statements is CORRECT?
A)Sunshine's composite WACC is 10%.
B)Division B has a lower WACC than Division A.
C)If the same WACC is used for each division, the firm would select too many Division A projects and reject too many Division B projects.
D)If the same WACC is used for each division, the firm would select too many Division B projects and reject too many Division A projects.
E)Sunshine's composite WACC is 12%.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 27: Techniques for Measuring Beta Risk
Available Study Resources on Quizplus for this Chatper
3 Verified Questions
3 Flashcards
Source URL: https://quizplus.com/quiz/64712
Sample Questions
Q1) Interstate Transport has a target capital structure of 50% debt and 50% common equity.The firm is considering a new independent project that has a return of 13% and is not related to transportation.However,a pure-play proxy firm has been identified that has a beta of 1.38.Both firms have a marginal tax rate of 40%,and Interstate's before-tax cost of debt is 12%.The risk-free rate is 10% and the market risk premium is 5%.The firm should:
A)Reject the project; its return is less than the firm's required rate of return on the project of 16.9%.
B)Accept the project; its return is greater than the firm's required rate of return on the project of 12.05%.
C)Reject the project; its return is only 13%.
D)Accept the project; its return exceeds the risk-free rate and the before-tax cost of debt.
E)Be indifferent between accepting or rejecting; the firm's required rate of return on the project equals its expected return.
To view all questions and flashcards with answers, click on the resource link above. Page 29
Chapter 28: Degree of Leverage
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/64713
Sample Questions
Q1) Your firm's EPS last year was $1.00.You expect sales to increase by 15% during the coming year.If your firm has a degree of operating leverage equal to 1.25 and a degree of financial leverage equal to 3.50,then what is its expected EPS?
A)$1.57
B)$1.66
C)$1.74
D)$1.83
E)$1.92
Q2) The degree of operating leverage has which of the following characteristics?
A)The closer the firm is operating to the breakeven quantity, the smaller the DOL.
B)A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output, other things held constant.
C)The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variable Q (Quantity), P (Price), and V (Volume).
D)The DOL relates the change in net income to the change in operating income.
E)If the firm has no debt, the DOL will equal 1.
To view all questions and flashcards with answers, click on the resource link above.