1. ________ refers to the difficulties experienced by firms as they attempt to meet financial commitments to their creditors. a. Financial distress b. Capital structure c. Capital budgeting d. Working capital management

2. ________ occurs when a firm buys back some of its own common shares. a. A leveraged buyout b. An IPO c. A share repurchase d. Secondary offering

3. Longneck Brewery Inc. has net income of $3.00 per share and a dividend payout ratio of 35%. How large is the firm's per share dividend payment? a. $1.05 b. $1.95 c. $1.50 d. $0.35

4. The pecking-order model of capital structure suggests the order in which firms prefer to raise capital is ______. a. debt, then retained earnings, then external equity b. retained earnings, then debt, then external equity c. preferred stock, then debt, then external equity d. debt, then external equity, then retained earnings

5. We can interpret the optimal level of debt as the firm's ________, or the highest amount the firm can borrow before the value of the firm begins to decline. a. equity capacity b. equity multiplier c. debt capacity d. interest tax shield

6. ________ describes a legal state whereby a firm cannot pay its creditors. a. Capital distress b. Bankruptcy c. Liquification d. Capital structure

7. The interest tax shield is equal to ______. a. $0 b. (EBIT - I ) * (1-the tax rate) c. (equity + debt) * (1-the tax rate) d. the tax rate multiplied by the amount of interest

8. Which of the following is NOT one of M-M's perfect capital market assumptions? a. no taxes b. individuals can borrow or lend at the same rate c. every party has equal access to information d. bankruptcy costs are reasonably low

9. Optimal capital structure is the manager's determination of debt capacity and debt-equity mix that _________. a. puts the firm at the EBIT-EPS breakeven point b. maximizes shareholder control c. minimizes the amount of debt held by the firm d. minimizes the overall cost of capital

10. If a firm takes on ________ it may be downgraded by rating agencies, resulting in ________ interest payments. a. too much incremental debt; lower b. too much incremental debt; higher c. too little incremental debt; lower d. too little incremental debt; higher

11. Assume that a firm's earnings per share (EPS) are expected to be $1.35 next year and that analysts have determined that an appropriate forward-looking multiple is 20 times the projected earnings. What should the stock price be? a. $11.35 b. $20.00 c. $27.00 d. $28.75

12. ________ is measured by the proportional amount of debt in the firm's capital structure. a. Relative risk b. Business risk c. Operating risk d. Financial risk

13. Creative Industries Inc. is looking to finance a new project with either debt or equity. The firm anticipates that its breakeven EPS-EBIT point is when EBIT reaches $3,000,000. If the projected EBIT are $3,500,000 for the foreseeable future, then to maximize EPS the firm should issue ______. a. equity. b. debt c. preferred shares d. a dual class of equity

14. If a firm has a positive debt-equity ratio, and a positive tax rate, then levered beta for the firm must be ________ the unlevered beta for the firm. a. less than b. greater than c. equal to d. can not definitively answer this question

15. Plastic Products Inc. has a levered beta of 1.30, a debt-equity ratio of 0.50, and a tax rate of 40%. What is the value of the firm's unlevered beta? a. 0.70 b. 1.00 c. 1.30 d. 1.60

16. ________ took place in financial markets during the Great Recession because large financial institutions took excess risks to realize abnormal positive returns in the housing market while they were simultaneously protected from abnormal losses by being "too-big-to-fail." a. Disintermediation b. Deregulation c. Corporate tax reform d. Moral hazard

17. Mason Construction Inc. had net sales of $480,000, costs of sales of $130,000, additional expenses of $200,000, depreciation of $40,000, and a tax rate of 30%. Use this information to determine the firm's after tax earnings on a cash basis. a. $77,000 b. $105,000 c. $117,000 d. $145,000

18. The Price-Earnings valuation model estimates the price of a share of stock today as the ______. a. sum of a forward looking P/E multiple and the EPS in the next period b. product of the firm's historic P/E multiple and the EPS in the next period c. product of a forward looking P/E multiple and the EPS in the next period d. product of a forward looking P/E multiple and the current EPS

19. Which of the following statements about economic value added (EVA) is NOT true? a. EVA is a measure of value creation. b. EVA is a process for attempting to create value. c. If a firm generates positive EVA then it increases shareholder value. d. all of the above are true

20. Which of the following is NOT a factor that would be analyzed by a firm as part of an external SWOT analysis? a. expected inflation b. expected growth of firm-wide sales c. expected changes in GDP d. political uncertainty

21. If a firm is projected to increases revenues by 10% AND net income by the same amount, which of the following must be TRUE? a. there can be no variable costs b. there can be no fixed costs c. there can be no taxes d. the change in expenses must be exactly equal to the change in revenues

22. Rogue River Retail Inc. has a before-tax cost of debt of 8.00%, a cost of equity of 12.00%, a tax rate of 30.00% and no preferred stock outstanding. If the firm is made up of 50% debt and 50% equity, what is the firm's after-tax cost of borrowing? a. 12.00% b. 11.60% c. 8.00% d. 5.60%

23. Which of the following is likely to lead to an increase in a firm's cost of debt financing? a. an increase in expected inflation b. an increase in the riskiness of assets c. an increase in the average age of debt financing d. all of the above

24. Which of the following equations for the book value plus adjustment method is correct? a. value of equity (VE) = market value of equity - adjustments b. value of equity (VE) = book value of equity + adjustments c. value of equity (VE) = book value of equity - adjustments d. value of equity (VE) = market value of equity + adjustments

25. Cranston Cranks Inc. is a manufacturer of high quality bicycle components. The firm's levered beta is equal to 1.20. When added to a well-diversified portfolio that matches the market beta, the firm would ________ the portfolio beta. a. increase b. decrease c. not affect d. There is insufficient information to answer this question.