Quiz 2

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Everest College *

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Finance

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Feb 20, 2024

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Uploaded by kranz07

Corporate Finance - Quiz 2 Question 1 Marks: 1 Which method of calculating the firm’s cost of equity is most likely to incorporate the long-run return relationship between the firm's stock and the market portfolio? Choose one answer. a. Capital asset pricing model b. Dividend discount model c. Bond-yield-plus risk-premium Question 2 Marks: 1 The following information is available for a firm. Market Risk Premium: 7.0% Risk-free Rate: 2.0% Comparable Firm Return: 10.4% Comparable Firm Debt-to-Equity Ratio: 1.0 Comparable Firm Tax Rate: 40.0% The firm’s unlevered beta is closest to: Choose one answer. a. 1.05. b. 1.20. c. 0.75. Question 3 Marks: 1 A company’s optimal capital budget most likely occurs at the intersection of the: Choose one answer. a. marginal cost of capital and investment opportunity schedule.

b. marginal cost of capital and net present value profiles. c. net present value and internal rate of return profiles. Question 4 Marks: 1 A company’s $100 par value preferred stock with a dividend rate of 9.5% per year is currently priced at $103.26 per share. The company's earnings are expected to grow at an annual rate of 5% for the foreseeable future. The cost of the company’s preferred stock is closest to: Choose one answer. a. 9.5%. b. 9.2%. c. 9.7%. Question 5 Marks: 1 Using the debt-rating approach to find the cost of debt is most appropriate when market prices for a company’s debt are: Choose one answer. a. unreliable. b. below par value. c. stable. Question 6 Marks: 1 A twenty-year $1,000 fixed rate non-callable bond with 8% annual coupons currently sells for $1,105.94. Assuming a 30% marginal tax rate and an additional risk premium for equity relative to debt of 5%, the cost of equity using the bond-yield-plus-risk-premium approach is closest to: Choose one answer. a. 12.0%. b. 13.0%. c. 9.9%. Question 7 Marks: 1

Regarding corporate governance, which of the following is most likely a reason for concern when evaluating the compensation committee? The compensation committee: Choose one answer. a. purchases shares on the open market to fund stock option commitments. b. discloses information about compensation paid to executives and board members. c. includes members of executive management. Question 8 Marks: 1 Which of the following is least likely classified as a takeover defense? Choose one answer. a. Cumulative voting. b. Golden parachutes. c. Greenmail. Question 9 Marks: 1 Which of the following is least likely to concern an investor evaluating a corporation’s shareowner rights provisions? Choose one answer. a. Shares held by the founding family have supernormal voting rights. b. Shareowners may nominate board members. c. To ensure accuracy, company executives tabulate and verify shareowner voting. Question 10 Marks: 1 Regarding corporate governance, which of the following most likely would be a reason for concern when evaluating an independent board member’s qualifications? The board member: Choose one answer. a. has served on the board for 14 years. b. owns 1,000 shares of the corporation’s equity. c. has formerly served on the boards of several successful companies. Question 11

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Marks: 1 An investment fund owns 8 percent of the outstanding voting shares of a public company. There are several larger voting blocks of shares such that the investment fund is not assured of being able to elect representation on the board of directors. Which type of shareholder voting right would be most beneficial in allowing the investment fund to ensure their interests are represented on the board? Choose one answer. a. Confidential b. Proxy c. Cumulative Question 12 Marks: 1 A publicly listed company has a 12-person Board of Directors whose composition is as follows: the Chairman, who is the past president of the company and was named Chairman on his retirement date four years ago, five members of senior management including the current president, and six outside directors. Each member is elected for a two-year term and one-half of the positions stand for election every year. The three members of the Audit Committee are all outside directors and have relevant financial experience. The Remuneration Committee is composed of the Chairman and two outside directors. Which of the following actions would provide the greatest improvement in the corporate governance of this company? Choose one answer. a. All members of the Board of Directors should stand for election every year. b. The company’s Vice-President of Finance should be a member of the audit committee. c. The Chairman of the Board should be an independent director. Question 13 Marks: 1 Which of the following is most likely a sign of a good corporate governance structure? Choose one answer.

a. The separation of the chief executive position from the chair position on the company’s board. b. Independent board members comprise a minority proportion on the company’s board. c. Independent board members are allowed to meet shareholders only in the presence of the entire board. Question 14 Marks: 1 Business risk most likely incorporates operating risk and: Choose one answer. a. sales risk. b. interest rate risk. c. financial risk. Question 15 Marks: 1 If the degree of financial leverage (DFL) is 1.00, the operating breakeven point compared to the breakeven point, is most likely: Choose one answer. a. lower. b. the same. c. higher. Question 16 Marks: 1 A company decides to repurchase 5 million of its outstanding 20 million shares with debt funding. After the repurchase, the company’s after-tax earnings decline by 20%. The new earnings per share (EPS) is most likely: Choose one answer. a. equal to the pre-repurchase EPS. b. greater than the pre-repurchase EPS. c. less than the pre-repurchase EPS. Question 17

Marks: 1 The following information is available for a firm: Revenue: £ 800,000 Variable Cost: £ 400,000 Fixed Cost: £ 200,000 Operating Income: £ 200,000 Interest: £ 60,000 Net Income: £ 140,000 The firm’s degree of total leverage (DTL) is closest to: Choose one answer. a. 2 b. 1.43 c. 2.86 Question 18 Marks: 1 A share repurchase method that requires existing shareholders to indicate the number of shares they will tender over a range of prices is most likely an example of a: Choose one answer. a. Dutch auction. b. repurchase by direct negotiation. c. purchase of shares on the open market. Question 19 Marks: 1 A company is investigating the purchase of a banker’s acceptance (BA). The $1,000,000 face value BA has 150 days to maturity and is quoted at 4.05 percent on a discount-basis yield. If the company’s marginal tax rate is 25 percent, then the money market yield on the BA is closest to: Choose one answer. a. 4.12%

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b. 3.13% c. 4.18% Question 20 Marks: 1 A company plans to issue €2,500,000 (face value) of commercial paper for one month. The company is quoted a rate of 5.88 percent with a dealer’s commission of 1/8 percent and a backup line cost of 1/4 percent, both of which will be assessed on the face value. The effective cost of the financing is closest to: Choose one answer. a. 6.03% b. 6.29% c. 6.16% Question 21 Marks: 1 A company is offered trade credit terms of 2/10, net 45. The implicit cost of failing to take the discount and instead paying the account in 45 days is closest to: Choose one answer. a. 23.45% b. 23.1% c. 21.28% Question 22 Marks: 1 An analyst gathers the following information for a company: Liquidity measure Company Inventory turnover 20.7 Accounts payable turnover 14.1 Accounts receivable turnover

12.5 The company’s operating cycle is closest to: Choose one answer. a. 33.2 days b. 20.9 days c. 46.8 days Question 23 Marks: 1 The following information is available for a company and the industry in which it competes: Company Industry Accounts receivable turnover 5.6 times 6.5 times Inventory turnover 4.2 times 4 times Number of days of payables 28 days 36 days Relative to the industry, the company’s operating cycle: Choose one answer.

a. is longer, but its cash conversion cycle is shorter. b. and cash conversion cycle are both longer. c. is shorter, but its cash conversion cycle is longer. Question 24 Marks: 1 Which of the following is the most appropriate technique for forecasting cash flow for the short term? Choose one answer. a. Simple projections b. Statistical models c. Projection models and averages Question 25 Marks: 1 Information about the 2009 actual results for a company and its projected sales, cost of goods sold and assets for 2010 are presented below: All figures in ₤-000s 2009 actual 2010 projected Sales 9,000 9,900 Cost of goods sold 3,000 3,450 Total assets 4,500 4,725 Current assets

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1,800 Current liabilities 1,200 Based on the projected sales increase, the best estimate of 2010 projected current assets (in ₤- 000s) is closest to: Choose one answer. a. 1,980 b. 1,890 c. 2,070