Question 1. The key sources of value (earning an excess return) for a company can be attributed primarily to __________.

competitive advantage and access to capital quality management and industry attractiveness access to capital and quality management industry attractiveness and competitive advantage Question . The overall (!eighted average) cost of capital is composed of a !eighted average of __________. the cost of common equity and the cost of debt the cost of common equity and the cost of preferred stock the cost of preferred stock and the cost of debt the cost of common equity, the cost of preferred stock, and the cost of debt Question ". #hat is the overall (!eighted average) cost of capital in the follo!ing situation$ The firm has %1& million in long'term debt( % million in preferred stock( and %) million in common equity '' all at market values. The before'tax cost for debt( preferred stock( and common equity forms of capital are )*( +*( and 1,*( respectively. -ssume a .&* tax rate. /..&* /.,.* 9.30% 1&.+&* Question .. 0or !hich of the follo!ing costs is it generally necessary to apply a tax ad1ustment to a yield measure$ Cost of debt. 2ost of preferred stock. 2ost of common equity. 2ost of retained earnings. Question ,. #hich of the follo!ing is not a recogni3ed approach for determining the cost of equity$ 4ividend discount model approach. Before-ta cost of preferred stock p!us risk premium approach. 2apital'asset pricing model approach. 5efore'tax cost of debt plus risk premium approach. Question /. 6n estimating a firm7s cost of equity( you decide to use the " methods discussed in the text and then to take a simple average of the three separate estimates as you feel that in this instance all " methods seem equally 1ustified. The before'tax cost of debt is )*( risk premium above debt is assumed to be /*( the risk'free rate is ,*( the beta is .+&( and the expected market return is 1/*. 6n addition( the firm is expected to gro! dividends at a constant ).1* rate indefinitely and !ill pay a % .&& dividend next year. The firm7s common equity is currently selling at % , per share. The average figure that you come up !ith should be closest to __________. 18.&* 1/.&* "#.0% 1..&* The three methods generate a cost of equity equal to % 9% , : .&)1 ; 1/.1*< )* : /* ; 1.*< and ,* : .+ (1/* ' ,*) ; 1..+*. The average cost is 1,*. Question 8. =acques 0auxpas is attempting to determine his company7s !eighted'average cost of capital. >is first step !as to determine the required rates of return for his company7s long'term debt( preferred stock( and common stock. >e then ad1usted these required rates of return by multiplying each return by one minus the company7s marginal tax rate. =acques is planning on using these three ad1usted required return figures as his component costs of capital. >o! is =acques doing so far$ -ll three of =acques7 component cost figures are -ll three component cost figures are ?nly the required return (yield) on preferred stock and debt should have been ad1usted for taxes. $n!y the required return %yie!d& on debt shou!d have been ad'usted for ta es. Question ). >o! is economic value added (@A-) calculated$ 6t is the difference bet!een the market value of the firm and the book value of equity. 6t is the firm(s net operating profit after ta %)$*+,& !ess a do!!ar cost of capita! charge. 6t is the net income of the firm less a dollar cost that equals the !eighted average cost of capital multiplied by the book value of liabilities and equities. Bone of the above are Question +. #hat is the difference bet!een economic profit and accounting profit$ -conomic profit inc!udes a charge for a!! providers of capita! .hi!e accounting profit inc!udes on!y a charge for debt. @conomic profit covers the profit over the life of the firm( !hile accounting profit only covers the most recent accounting period.

-ccounting profit is based on current accepted accounting rules !hile economic profit is based on cash flo!s. -ll of the above are Question 1&. #hat is the idea behind pro1ect'specific required rates of return for a firm or division$ /ifferent pro'ects shou!d have different required rates of return because they are not a!ike .ith respect to risk. @ach firm should have a different required rate of return because firms are not alike !ith respect to risk and have been created historically by pro1ects taken that differ !ith regards to risk. - division of the firm !ill al!ays have a required rate of return different from the firm7s overall !eighted average cost of capital because the risk of the division al!ays differs from that of the firm. -ll of the above are Question 11. #hat is meant by using proxy firms !ith the 2-CD model$ - proxy firm is one that uses the capital'asset pricing (2-CD) model as its primary evaluation tool in determining pro1ect selection or re1ection. - proxy firm is one that uses the !eighted average cost of capital (#-22) as its primary evaluation tool in determining pro1ect selection or re1ection. - proxy firm is a privately held firm in the same industry as the firm. + pro y firm is a pub!ic!y traded firm, .hich may be entire!y engaged in a business that is near!y identica! to the pro'ect, used to estimate the beta for a pro'ect. Question 1 . - company that has more than half of its voting shares o!ned by another company is generally referred to as a __________ of the other firm. 1oint'venture partner proxy subsidiary division Question 1". #hich of the follo!ing is correct regarding the capital component costs for a group$ The component cost of common equity is based on the firm7s component cost of common equity. ,he component cost of debt is based on the firm(s component cost of debt. 5oth of the above ans!ers are -ll of the above ans!ers are Question 1.. #hich of the follo!ing statements is correct regarding the risk'ad1usted discount rate (E-4E) approach$ 0nder the 1+/1 approach, .e shou!d accept a pro'ect if its net present va!ue %)*2& ca!cu!ated using a riskad'usted discount rate is positive. -d1usting the firm7s overall cost of capital up!ard is required if the pro1ect or group are of higher than average risk. Fnder the E-4E approach( !e !ould still compare a pro1ect7s internal rate of return (6EE) to the firm7s overall !eighted' average cost of capital in order to decide acceptance9re1ection. -d1usting the firm7s overall cost of capital do!n!ard is required if the pro1ect or group are of lo!er than average risk. Question 1,. -ssume management is looking at a set of possible pro1ects !ith regards to their expected BCA( standard deviation( and management7s risk attitude. The firm should attempt to take the set of pro1ects __________. that fall on the lo!est indifference curve that fa!! on the highest indifference curve !here the choice is on the indifference curve that is the farthest to the southeast that has the lo!est standard deviation Question 1/. #e can use the 2-CD and a proxy firm to estimate the required rate of return on a pro1ect. Gometimes( ho!ever( it is necessary to ad1ust the beta of the proxy company for differences in capital structure bet!een our firm and the proxy firm. -ssuming that the proxy firm has long'term debt in its capital structure( the unlevered beta of the proxy firm !ill be __________ its measured (levered) beta. !o.er than higher than higher or lo!er than identical to Question 18. The ad1usted present value (-CA) is best described as being __________. equal to the discounted value of all cash flo!s after the discount rate is ad1usted up!ard for additional risk equa! to the discounted va!ue of operating cash f!o.s p!us the present va!ue of any ta -shie!d benefits !ess any f!otation costs equal to the discounted value of operating cash flo!s plus the present value of any tax'shield benefits equal to the discounted value of operating cash flo!s less any flotation costs Question 1). #hich one of the follo!ing pro1ects '' -( 5( 2( or 4 '' should be accepted$ The expected return on the market is 1/* and the risk' free rate is /*. *ro'ect +, .hich has a beta of 0.#0 and has an e pected return of "".3%. Cro1ect 5( !hich has a beta of .,& and has an expected return of ,..*.

Cro1ect 2( !hich has a beta of 1. , and has an expected return of 1). *. Cro1ect 4( !hich has a beta of 1.&& and has an expected return of 1,.)*. Question 1+. Gocks'B'Ghoes( 6nc.( used a proxy company to calculate an unlevered beta of &.+& for its Gocks 4ivision. The firm7s corporate cost of debt is ,* on an after'tax basis. Gock'B'Ghoes finances its pro1ects !ith a roughly )&*9 &* mix of debt and equity. The market has an expected rate of return of 1/* and the risk'free rate is /*. The required rate of return (divisional cost of capital) for the Gocks 4ivision should be closest to !hich of the follo!ing four ans!ers$ /* 4% 1,* 1/* Question &. .seven.com( 6nc.( is currently using a Hgroup'specific required returnH approach for handling capital budgeting hurdle rates for its four divisions. The 2@?7s son( 4irk( has 1ust been appointed the ne! 20?. >e !ants all four( diverse divisions to have the same required return( or hurdle rate( and that !ould be the firm7s !eighted'average cost of capital. 6f .seven.com s!itches to a single hurdle rate for all divisions( accept9re1ect capital budgeting decisions !ill no! be __________. better( because all divisions !ill be treated more fairly biased in favor of 5bad5 %i.e., va!ue-destroying&, high-risk pro'ects biased in favor of HbadH (i.e.( value'destroying)( lo!'risk pro1ects so bad that only HbadH (i.e.( value'destroying) pro1ects !ill be assured of being accepted

Question 1. - firm has a 4?I of "., at Q units. #hat does this tell us about the firm$ 6f sales rise by ".,* at the firm( then @56T !ill rise by 1*. 6f @56T rises by ".,* at the firm( then @CG !ill rise by 1*. 6f @56T rises by 1* at the firm( then @CG !ill rise by ".,*. 6f sa!es rise by "% at the firm, then -B6, .i!! rise by 3.#%. Question . - firm has a 40I of "., at J dollars. #hat does this tell us about the firm$ 6f sales rise by ".,* at the firm( then @56T !ill rise by 1*. 6f @56T rises by ".,* at the firm( then @CG !ill rise by 1*. 6f @56T rises by 1* at the firm( then @CG !ill rise by ".,*. 6f sales rise by 1* at the firm( then @56T !ill rise by ".,*. Question ". >igher operating leverage is related to the use of additional __________. ?pen >int for Question " in a ne! !indo!. fixed costs variable costs debt financing common equity financing @nd of Question "

Question .. Io!er financial leverage is related to the use of additional __________. ?pen >int for Question . in a ne! !indo!. fixed costs variable costs debt financing common equity financing @nd of Question .

Question ,.

2alculate the break'even (quantity) point given the follo!ing information. The firm has %1(&&&(&&& in fixed costs. The firm produces only one product and anticipates selling each unit for % , !ith variable costs of %, per unit. ?pen >int for Question , in a ne! !indo!. &&(&&& ,&(&&& .&(&&& There is not sufficient information provided to calculate the sales break'even point. @nd of Question ,

Question /. 2alculate the break'even point for sales revenues given the follo!ing information. The firm has %1(&&&(&&& in fixed costs. The firm anticipates that variable costs !ill be %1 for every %, in sales. ?pen >int for Question / in a ne! !indo!. %1( ,&(&&& %1(&&&(&&& % ,&(&&& % &&(&&& @nd of Question /

Question 8. 2alculate the degree of operating leverage (4?I) at .&&(&&& units of quantity sold. The firm has %1(&&&(&&& in fixed costs. The firm anticipates selling each unit for % , !ith variable costs of %, per unit. ?pen >int for Question 8 in a ne! !indo!. "."" 1. , 1.1. There is not sufficient information provided to calculate the degree of operating leverage (4?I). @nd of Question 8

Question ). #hich of the follo!ing formulas represents a correct calculation of the degree of operating leverage$ ?pen >int for Question ) in a ne! !indo!. (Q ' Q5@)9Q (@56T) 9 (@56T ' 02) KQ(C'A) : 02L 9 KQ(C'A) L KQ(C'A)L 9 KQ(C'A) ' 02L @nd of Question )

Question +. 2alculate the degree of financial leverage (40I) for a firm !hen its @56T is % (&&&(&&&. The firm has %"(&&&(&&& in debt that costs 1&* annually. The firm also has a +*( %1(&&&(&&& preferred stock issue outstanding. The firm pays .&* in taxes. ?pen >int for Question + in a ne! !indo!.

&.8) &.)& 1. . 1. + @nd of Question +

Question 1&. #hich of the follo!ing formulas represents the correct calculation of the degree of financial leverage$ ?pen >int for Question 1& in a ne! !indo!. K B6 : T : 6 L 9 K B6 ' 6 ' C49(1'T) L @56T 9 K @56T ' 6 ' C49(1'T) L @56T 9 K B6 ' 6 ' C49(1'T) L -ll of the above are correct methods to calculate the degree of financial leverage (40I). @nd of Question 1&

Question 11. - firm is considering three different financing alternatives '' debt( preferred stock( and common equity. The firm has created an @56T'@CG chart that sho!s several indifference points. #hat does each indifference point sho! the firm$ ?pen >int for Question 11 in a ne! !indo!. The level of @56T that generates identical @CG under t!o alternative financing plans. The level of sales that generates identical @56T and @CG figures. 6t sho!s the level of @56T and @CG at !hich 40I is identical under t!o alternative financing plans. Bone of the above. @nd of Question 11

Question 1 . #hich of the follo!ing statements is correct$ ?pen >int for Question 1 in a ne! !indo!. The coefficient of variation of @56T( 2A@56T( is a measure of relative financial risk. The coefficient of variation of @CG( 2A@CG( is a measure of relative total firm risk. Total firm risk equals business risk times financial risk. - relative measure of relative business risk equals the difference( 2A@CG ' 2A@56T. @nd of Question 1

Question 1". #hich of the follo!ing statements is not correct regarding the calculation of the degree of total leverage (4TI)$ ?pen >int for Question 1" in a ne! !indo!. 4TIQ units ; 4?IQ units x 40I@56T of J dollars 4TIQ units ; Q(C'A) 9 MQ(C'A) ' 02 ' 6 ' KC49(6'T)LN 4TIG dollars ; (@56T : 02 ) 9 M@56T ' 6 ' KC49(6'T)LN< 4TIG dollars ; 2A@56T x 40I@(@56T) @nd of Question 1"

Question 1.. 2alculate the degree of total leverage (4TI) for a firm that has %1& million in sales. The firm has @56T of % (&&&(&&& after accounting for %1(&&&(&&& in fixed costs. The firm has %"(&&&(&&& in debt that costs 1&* annually. The firm also has a +*( %1(&&&(&&& preferred stock issue outstanding. The firm pays .&* in taxes. ?pen >int for Question 1. in a ne! !indo!. 1.., 1.)/ 1.+. .1/ @nd of Question 1.

Question 1,. The maximum amount of debt (and other fixed'charge financing) that a firm can adequately service is referred to as the __________. ?pen >int for Question 1, in a ne! !indo!. debt capacity debt'service burden adequacy capacity fixed'charge burden @nd of Question 1,

Question 1/. The cash required during a specific period to meet interest expenses and principal payments is referred to as theO ?pen >int for Question 1/ in a ne! !indo!. debt capacity. debt'service burden. adequacy capacity. fixed'charge burden. @nd of Question 1/

Question 18. #hich of the follo!ing statements is not correct as it relates to acceptable alternatives to analy3ing the appropriate financing mix for a firm (other than the basic 4?I( 40I( and 4TI)$ ?pen >int for Question 18 in a ne! !indo!. 2omparison of industry capital structure ratios. Talk !ith !hat investment professionals such as analysts( institutions( and investment bankers believe. @xamine the ratings of the firm7s securities by various rating services. 2heck the company7s 4un P 5radstreet composite credit appraisal. @nd of Question 18

Question 1).

#hich of the follo!ing ratings apply to an investment grade quality security$ ?pen >int for Question 1) in a ne! !indo!. 555 rating by Gtandard and Coor7s. 5a rating by Doody7s. 5 rating by Gtandard and Coor7s. 5oth the first and second ans!ers are ratings that are considered investment grade. @nd of Question 1)

Question 1+. #hich of the follo!ing costs !ould be considered a fixed cost$ ?pen >int for Question 1+ in a ne! !indo!. Ea! materials. 4epreciation. 5ad'debt losses. Croduction labor. @nd of Question 1+

Question &. 6n the context of operating leverage break'even analysis( if selling price per unit falls and all other variables remain constant( the operating break'even point in units !ill __________. ?pen >int for Question & in a ne! !indo!. fall rise stay the same