MCQ'S:

31) Faris currently has a capital structure of 40 percent debt and 60 percent equity, but is considering a new product that will be produced and marketed by a separate division. The new division will have a capital structure of 70 percent debt and 30 percent equity. Faris has a current beta of 1.1 but is not sure what the beta for the new division will be. AMX is a firm that produces a product similar to the product under consideration by Faris. AMX has a beta of 1.6, a capital structure of 40 percent debt and 60 percent equity, and a marginal tax rate of 40 percent. Assuming Faris's tax rate is 40 percent, estimate the levered beta for the new product division.

a.3.88

b.2.74

c.2.44

d.1.14

32) Dividend payments reduce all of the following balance sheet items EXCEPT __.

a.stockholders' equity .

b.fixed assets

c.cash

d.retained earnings

33) Cycle Out has 1,000,000 shares outstanding and currently has annual earnings per share of $5.20. If Cycle's stock price is $62.40, what would be the expected stock price if Cycle repurchases 50,000 shares?

a.$75.72

b.$65.68

c.$65.52 .

d.Cannot be determined from the information provided

34) weakness of the net present value/payback method is that ___.

a.because it recognizes the riskiness of various projects, it can develop multiple outcomes

b.it is a complicated calculation

c.it is subjective

d.it is directly related to .

35) IKON is financed entirely with equity, and its beta is 1.31. If the current risk-free rate is 6.25% and the expected market return is 12.8%, what is IKON's required rate of return on a project of average risk?

a.14.83% .

b.17.65%

c.8.58%

d.12.81%

36) n) __ is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year.

a.operating expenditure

b.depreciation charge .

c.capital gain

d.capital expenditure

37) Basin Manufacturing (40% marginal tax rate) is considering a plant expansion project. The equipment will cost $100,000 and will require an additional $10,000 for delivery and installation. The expansion also will require Basin to increase immediately its net working capital by $25,000. The expansion is expected to generate revenues of $150,000 per year. Calculate the project's net investment.

a.$125,000

b.$81,000

c.$135,000 .

d.$131,000

38) a preferred stock is callable, then the calculation of the cost of preferred stock financing is __.

a.similar to that for bonds

b.equal to Dp/Pn

c.less than Dp/Pn

d.equal to Dp less flotation costs .

39) The Percolator Company has the following capital structure:

Common stock ($5 par, 250,000 shares) $1,250,000

Contributed capital in excess of par $5,000,000

Retained earnings $4,000,000

The company declares a 10% stock dividend. The pre-stock dividend market price of the company's stock is $50.

Determine the balance in the common stock account after the stock dividend.

a.$2,500,000

b.$1,250,000

c.$1,375,000

d.$125,000

40) All of the following are methods of adjusting a project for total risk EXCEPT ___.

a.simulation analysis

b.sensitivity analysis

c.the certainty equivalent approach .

d.the carpe diem approach