Week 8 REQUIRED Quiz

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Week 8 REQUIRED Quiz
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Part 1 of 1 - Week 8 Required Quiz 4.0/ 100.0 Points
Question 1 of 25
4.0/ 4.0 Points
If an investor buys "a" proportion of an unlevered firm's (firm U) equity then his/her payoff is:
A.(a) * (profits)
B.(a) * (interest)
C.(a) * (profits - interest)
D.none of the above
Answer Key: A
Question 2 of 25
0.0/ 4.0 Points
What is the model that is used to prepare a pro-forma statement?
Feedback: A pro-forma statement is prepared using the percentage-of-sales model. This method assumes that the next
financial statement period will retain the same relationship between sales and relevant balance sheet and income
statement items as it did in the prior period.
Question 3 of 25
0.0/ 4.0 Points
Which of the following is a statement of semi-strong form efficiency?
I) If the markets are efficient in the semi-strong form then prices will adjust immediately to public information
II) If the markets are efficient in the semi-strong form then prices reflect all information
III) If the markets are efficient in the semi-strong form then prices will adjust to newly published information after a long
time delay
A.I only
B.II only
C.II and III only
D.III only
Answer Key: A
Question 4 of 25
0.0/ 4.0 Points
In order to calculate the tax shield effect of interest payment for a corporation, always use the: I) average corporate tax
Week 8 REQUIRED Quiz
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rate II) marginal corporate tax rate III) state mandated tax rate
A.I only
B.II only
C.III only
D.I and III only
Answer Key: B
Question 5 of 25
0.0/ 4.0 Points
State the important differences between investment decisions and financing decisions.
Feedback: Generally, investment decisions have positive NPVs, while financing decisions have zero NPV. Mostly,
investment decisions are irreversible while financing decisions are reversible. Investment decisions are made in factor
markets while financing decisions are made in financial markets.
Question 6 of 25
0.0/ 4.0 Points
In order to find the present value of the tax shields provided by debt, the discount rate used is the:
A.cost of capital
B.cost of equity
C.cost of debt
D.none of the above
Answer Key: C
Question 7 of 25
0.0/ 4.0 Points
Capital structure is irrelevant if:
A.the capital markets are perfect
B.each investor holds a fully diversified portfolio
C.each investor holds the same proportion of debt and equity of the firm
D.all of the above
Answer Key: D
Question 8 of 25
0.0/ 4.0 Points
The cash budget is the primary short-term financial planning tool. The key reasons a cash budget is created are:
I) To estimate your investment in assets
II) To estimate the size and timing of your new cash flows
III) To prepare for potential financing needs
A.I only
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B.II and III only
C.II only
D.III only
Answer Key: B
Question 9 of 25
0.0/ 4.0 Points
Which of the following is an example of leverage ratios?
A.Debt-Equity ratio
B.Quick ratio
C.Payout ratio
D.Return on equity
Answer Key: A
Question 10 of 25
0.0/ 4.0 Points
Briefly explain the information content of share repurchase.
Feedback: Share repurchases are generally a rare event. When a firm announces a repurchase program it is not
making a long-term commitment. Firms repurchase shares when they accumulated cash that they are not able to
invest profitably. Share repurchase may indicate under priced stock. Share repurchase may also be used to signal
management's confidence in the future of the firm.
Question 11 of 25
0.0/ 4.0 Points
The reason that MM Proposition I does not hold good in the presence of corporate taxes is because:
A.Levered firms pay lower taxes when compared with identical unlevered firms
B.Bondholders require higher rates of return compared with stockholders
C.Earnings per share are no longer relevant with taxes
D.Dividends are no longer relevant with taxes
Answer Key: A
Question 12 of 25
0.0/ 4.0 Points
Which of the following statement(s) is/are true if the efficient market hypothesis holds?
I) It implies perfect forecasting ability
II) It implies market is irrational
III) It implies that prices follow a particular pattern
IV) It implies that prices reflect all available information
A.I only
Week 8 REQUIRED Quiz
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B.II only
C.I and III only
D.IV only
Answer Key: D
Question 13 of 25
0.0/ 4.0 Points
Given the following data:
Sales =3200
Cost of goods sold =1600
Average total assets =1600
Average inventory =200
Calculate the asset turnover ratio:
A.2.0
B.0.9375
C.1.33
D.None of the above
Answer Key: A
Feedback: Asset turnover ratio =3200/1600 =2.0
Question 14 of 25
0.0/ 4.0 Points
The after-tax weighted average cost of capital is determined by:
A.Multiplying the weighted average after tax cost of debt by the weighted average cost of equity
B.Adding the weighted average before tax cost of debt to the weighted average cost of equity
C.Adding the weighted average after tax cost of debt to the weighted average cost of equity
D.Dividing the weighted average before tax cost of debt to the weighted average cost of equity
Answer Key: C
Question 15 of 25
0.0/ 4.0 Points
Generally, a firm is able to find positive NPV opportunities with:
I) Financing decisions
II) Capital investment decisions
III) Short-term borrowing decisions
A.I only
B.I and III only
C.III only
D.II only
Week 8 REQUIRED Quiz
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Answer Key: D
Question 16 of 25
0.0/ 4.0 Points
If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield?
(Assume that the tax rate is 30%)
A.$8.00 million
B.$5.6 million
C.$30 million
D.$26.67 million
E.None of the above
Answer Key: C
Feedback: PV of interest tax shield =(0.3)(100) =$30 million
Question 17 of 25
0.0/ 4.0 Points
Given the following data:
Total current assets =$852
Total current liabilities =$406
Long-term debt =$442
Calculate the net working capital.
A.$446
B.$852
C.$410
D.None of the above
Answer Key: A
Feedback: Net working capital =852 - 406 =446
Question 18 of 25
0.0/ 4.0 Points
Assuming that bonds are sold at a fair price, the benefits from the tax shield go to the:
A.managers of the firm
B.bondholders of the firm
C.stockholders of the firm
D.lawyers of the firm
Answer Key: C
Week 8 REQUIRED Quiz
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Question 19 of 25
0.0/ 4.0 Points
Which of the following is an example of liquidity ratios?
A.Times interest earned (TIE)
B.P/E ratio
C.Return on equity
D.Quick ratio
Answer Key: D
Question 20 of 25
0.0/ 4.0 Points
The firm's internal growth rate is defined as:
A.retained earnings/net income
B.retained earnings/net assets
C.retained earnings/total assets
D.none of the above
Answer Key: B
Question 21 of 25
0.0/ 4.0 Points
Discuss the process of preparing a financial plan?
Feedback: The process of preparing a financial plan involves:
Project next year's operating cash flows
Project additional investment in net working capital and fixed assets
Estimate the difference between projected operating cash flow and the projected uses
Construct pro forma balance sheet incorporating additional assets and increases in debt and equity
Performing sensitivity analysis and scenario analysis
Question 22 of 25
0.0/ 4.0 Points
If an individual wanted to borrow with limited liability he/she should:
A.Invest in the equity of an unlevered firm
B.Borrow on his/her own account
C.Invest in the equity of a levered firm
D.Invest in a risk-free asset like T-bills
Answer Key: C
Question 23 of 25
0.0/ 4.0 Points
Firms can repurchase shares in the following ways:
Week 8 REQUIRED Quiz
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I) Open market repurchase
II) Through a tender offer
III) Through a Dutch auction process
IV) Through direct negotiation with a major shareholder
A.I only
B.II only
C.III only
D.I, II, III, and IV
Answer Key: D
Question 24 of 25
0.0/ 4.0 Points
Minimizing the weighted average cost of capital (WACC) is the same as:
A.Maximizing the market value of the firm
B.Maximizing the book value of the firm
C.Maximizing the profits of the firm
D.Maximizing the liquidating value of the firm
Answer Key: A
Question 25 of 25
0.0/ 4.0 Points
The pecking order theory of capital structure predicts that:
A.If two firms are equally profitable, the more rapidly growing firm will borrow more, other things equal
B.Firms prefer equity to debt financing
C.Risky firms will end up borrowing less
D.Risky firms will end up borrowing more
Answer Key: A