Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
Answer
To enable the firm to borrow at a below-market interest rate.
To make it easier to grant stock options to employees.
To help prevent a hostile takeover.
To help retain valued employees.
To increase worker productivity.
Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
Answer
Targeted share repurchases.
Shareholder rights provisions.
Restricted voting rights.
Poison pills.
Abnormally high executive compensation.
Which of the following statements is correct?
Answer
If a company uses the residual dividend model to determine its dividend payments,
dividends payout will tend to increase whenever its profitable investment opportunities
increase.
The stronger management thinks the clientele effect is, the more likely the firm is to adopt a
strict version of the residual dividend model.
Large stock repurchases financed by debt tend to increase earnings per share, but they also
increase the firm's financial risk.
A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in
dividends. Thus, both companies and investors are indifferent between distributing cash
through dividends and stock repurchase programs.
The tax code encourages companies to pay dividends rather than retain earnings
Consider two very different firms, M and N. Firm M is a mature firm in a mature industry. Its
annual net income and net cash flows are both consistently high and stable. However, M's
growth prospects are quite limited, so its capital budget is small relative to its net income. Firm
N is a relatively new firm in a new and growing industry. Its markets and products have not
stabilized, so its annual operating income fluctuates considerably. However, N has substantial
growth opportunities, and its capital budget is expected to be large relative to its net income for
the foreseeable future. Which of the following statements is correct?
Answer
Firm M probably has a higher dividend payout ratio than Firm N.
If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
The two firms are equally likely to pay high dividends.
Firm N is likely to have a clientele of shareholders who want to receive consistent, stable
dividend income.
Firm M probably has a lower debt ratio than Firm N.
Which of the following actions will best enable a company to raise additional equity capital?
Answer
Declare a stock split.
Begin an open-market purchase dividend reinvestment plan.
Initiate a stock repurchase program.
Begin a new-stock dividend reinvestment plan.
Refund long-term debt with lower cost short-term debt
Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to
maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net
income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend
payout ratio?
Answer
40.61%
42.75%
45.00%
47.37%
49.74%
Which of the following statements is NOT correct?
Answer
After a 3-for-1 stock split, a company's price per share should fall, but the number of shares
outstanding will rise.
Investors can interpret a stock repurchase program as a signal that the firm's managers
believe the stock is undervalued.
Companies can repurchase shares to distribute large inflows of cash, say from the sale of a
division, to stockholders without paying cash dividends.
Stockholders pay no income tax on dividends if the dividends are used to purchase stock
through a dividend reinvestment plan.
Stock repurchases can be used by a firm as part of a plan to change its capital structure.
Which of the following statements is correct?
Answer
An open-market dividend reinvestment plan will be most attractive to companies that need
new equity and would otherwise have to issue additional shares of common stock through
investment bankers.
Stock repurchases tend to reduce financial leverage.
If a company declares a 2-for-1 stock split, its stock price should roughly double.
One advantage of adopting the residual dividend policy is that this makes it easier for
corporations to meet the requirements of Modigliani and Miller's dividend clientele theory.
If a firm repurchases some of its stock in the open market, then shareholders who sell their
stock for more than they paid for it will be subject to capital gains taxes.
The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is
60% debt and 40% equity, and its forecasted net income is $550,000. If the company follows a
residual dividend policy, what total dividends, if any, will it pay out?
Answer
$122,176
$128,606
$135,375
$142,500
$150,000
Two operationally similar companies, HD and LD, have the same total assets, operating income
(EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than
LD. Also HD's basic earning power (BEP) exceeds its cost of debt (rd). Which of the following
statements is CORRECT?
Answer
HD should have a higher times interest earned (TIE) ratio than LD.
HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the
standard deviation of ROE, should also be higher than LD's.
Given that BEP > rd, HD's stock price must exceed that of LD.
Given that BEP > rd, LD's stock price must exceed that of HD.
HD should have a higher return on assets (ROA) than LD.
Which of the following statements is CORRECT?
Answer
The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
The optimal capital structure minimizes the cost of equity, which is a necessary condition
for maximizing the stock price.
The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity,
and the WACC.
The optimal capital structure simultaneously maximizes stock price and minimizes the
WACC.
As a rule, the optimal capital structure is found by determining the debt-equity mix that
maximizes expected EPS.
Which of the following statements best describes the optimal capital structure? The optimal
capital structure is the mix of debt, equity, and preferred stock that maximizes the company's
____.
Answer
stock price.
cost of equity.
cost of debt.
cost of preferred stock.
earnings per share (EPS).
Which of the following would increase the likelihood that a company would increase its debt
ratio, other things held constant?
Answer
An increase in the corporate tax rate.
An increase in the personal tax rate.
The Federal Reserve tightens interest rates in an effort to fight inflation.
The company's stock price hits a new low.
An increase in costs incurred when filing for bankruptcy.
Which of the following is NOT associated with (or does not contribute to) business risk? Recall
that business risk is affected by a firm's operations.
Answer
Sales price variability.
The extent to which operating costs are fixed.
The extent to which interest rates on the firm's debt fluctuate.
Input price variability.
Demand variability.
Which of the following statements is CORRECT?
Answer
The capital structure that maximizes the stock price is also the capital structure that
maximizes earnings per share.
The capital structure that maximizes the stock price is also the capital structure that
maximizes the firm's times interest earned (TIE) ratio.
Increasing a company's debt ratio will typically reduce the marginal costs of both debt and
equity financing; however, this still may raise the company's WACC.
If Congress were to pass legislation that increases the personal tax rate but decreases the
corporate tax rate, this would encourage companies to increase their debt ratios.
The capital structure that maximizes the stock price is also the capital structure that
minimizes the weighted average cost of capital (WACC).
Based on the information below for Benson Corporation, what is the optimal capital structure?
Answer
Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
Which of the following statements is most consistent with efficient inventory management? The
firm has a
Answer
low incidence of production schedule disruptions.
below average total assets turnover ratio.
relatively high current ratio.
relatively low DSO.
below average inventory turnover ratio.
Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero
tax bracket?
Answer
Depreciation.
Cumulative cash.
Repurchases of common stock.
Payment for plant construction.
Payments lags.
Which of the following items should a company report directly in its monthly cash budget?
Answer
Cash proceeds from selling one of its divisions.
Accrued interest on zero coupon bonds that it issued.
New shares issued in a stock split.
New shares issued in a stock dividend.
Its monthly depreciation expense.
Which of the following is NOT commonly regarded as being a credit policy variable?
Answer
Collection policy.
Credit standards.
Cash discounts.
Payments deferral period.
Credit period.
Firms generally choose to finance temporary current operating assets with short-term debt
because
Answer
short-term interest rates have traditionally been more stable than long-term interest rates.
a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt
than a firm that borrows short term.
the yield curve is normally downward sloping.
short-term debt has a higher cost than equity capital.
matching the maturities of assets and liabilities reduces risk under some circumstances, and
also because short-term debt is often less expensive than long-term capital.
Which of the following will cause an increase in net working capital, other things held constant?
Answer
A cash dividend is declared and paid.
Merchandise is sold at a profit, but the sale is on credit.
Long-term bonds are retired with the proceeds of a preferred stock issue.
Missing inventory is written off against retained earnings.
Cash is used to buy marketable securities.
A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in
Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The
terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a
forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward
hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638
francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange
rate exposure?
Answer
-$396
-$243
$0
$243
$638
Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange
market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the
pound over the next 30 days. How many dollars will a pound buy in 30 days?
Answer
1.12
1.63
1.82
2.04
3.64
If the inflation rate in the United States is greater than the inflation rate in Britain, other things
held constant, the British pound will
Answer
Depreciate against the U.S. dollar.
Remain unchanged against the U.S. dollar.
Appreciate against other major currencies.
Appreciate against the dollar and other major currencies.
Appreciate against the U.S. dollar.
If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97
shekels per dollar, then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.
Answer
premium of 8%
premium of 18%
discount of 18%
discount of 8%
premium of 16%
Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the
exchange rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate
of Swiss francs to euros?
Answer
0.43
0.86
1.41
1.64
2.27
Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a
1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If
interest rate parity holds, what is the spot exchange rate?
Answer
1 pound = $1.8000
1 pound = $1.6582
1 pound = $1.0000
1 pound = $0.8500
1 pound = $0.6031
A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States.
Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?
Answer
1 U.S. dollar equals 0.69 Swiss francs
1 U.S. dollar equals 0.85 Swiss francs
1 U.S. dollar equals 1.21 Swiss francs
1 U.S. dollar equals 1.29 Swiss francs
1 U.S. dollar equals 1.44 Swiss francs
Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62
Swiss francs. What is the cross exchange rate between the pound and the franc?
Answer
1 British pound equals 3.2400 Swiss francs
1 British pound equals 2.6244 Swiss francs
1 British pound equals 1.8588 Swiss francs
1 British pound equals 1.0000 Swiss francs
1 British pound equals 0.3810 Swiss francs