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1 | |
Beta is the _____ of the characteristic line for a security which is developed when the returns of the security are plotted against the returns of a(n) _____. |
| | A) | intercept; risk-free security |
| | B) | intercept; market index |
| | C) | slope; risk-free security |
| | D) | slope; market index |
| | E) | slope; industrial sector |
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2 | |
Which one of the following statements is correct? |
| | A) | A firm should always use the industry beta when computing the cost of equity capital. |
| | B) | A firm should always use the firm's beta when computing the cost of equity capital. |
| | C) | The beta of a firm tends to remain relatively constant over time as long as the firm's operations remain relatively constant. |
| | D) | All firms in the same industry have relatively equal betas. |
| | E) | The beta of the market is equal to zero. |
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3 | |
Which one of the following statements is correct? |
| | A) | Stocks with high standard deviations must also have high betas. |
| | B) | Highly cyclical stocks tend to have low betas. |
| | C) | Beta measures the covariability of a stock's returns with the risk-free rate of return. |
| | D) | High-tech firms are barely affected by the business cycle. |
| | E) | The cyclicality of a stock differs from its variability. |
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4 | |
Increasing the _____ costs as a percentage of total costs _____ the operating leverage of a firm. I. fixed; increases
II. fixed; decreases
III. variable; increases
IV. variable; decreases |
| | A) | I only |
| | B) | I and III only |
| | C) | I and IV only |
| | D) | II and III only |
| | E) | II and IV only |
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5 | |
An increase in the contribution margin of a unit of sales: |
| | A) | has no effect on the operating leverage. |
| | B) | increases the operating leverage. |
| | C) | increases the financial leverage of a firm. |
| | D) | decreases the financial leverage of a firm. |
| | E) | has no effect on the risk level of a firm. |
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6 | |
Anthony's Antiques, Inc., has 4% preferred stock outstanding at $32 per share. What is its cost of preferred stock? |
| | A) | 8.0 percent |
| | B) | 9.0 percent |
| | C) | 10.0 percent |
| | D) | 11.0 percent |
| | E) | 12.5 percent |
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7 | |
The calculation of the weighted average cost of capital (WACC) requires the determination of the: I. market value of the bonds outstanding relative to the total market value of the firm.
II. corporate tax rate.
III. current market value of a firm's equity based on the total number of shares outstanding and the market value per share.
IV. market value of the equity outstanding relative to the total market value of the firm. |
| | A) | I and II only |
| | B) | II and III only |
| | C) | I, II, and IV only |
| | D) | II, III, and IV only |
| | E) | I, II, III, and IV |
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8 | |
All else equal, a higher corporate tax rate will: |
| | A) | increase the WACC of a firm with debt and equity in its capital structure. |
| | B) | decrease the WACC of a firm with debt in its capital structure. |
| | C) | not affect the WACC of a firm with debt in its capital structure. |
| | D) | decrease the WACC of a firm with only equity in its capital structure. |
| | E) | change the WACC of a firm with debt in its capital structure, but the direction of the change cannot be determined without more information. |
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9 | |
Hartley Psychiatric, Inc., needs to purchase office equipment for its 2,000 drive-in therapy centers nationwide. The initial cost of the equipment is $2 million. It is estimated that the aftertax cash inflows from the project will be $210,000 annually forever. Hartley has a capital structure which consists of 40 percent debt and 60 percent equity, based on market values. The firm's cost of equity is 13 percent and its pre-tax cost of debt is 8 percent. The tax rate is 35 percent. What is the net present value of the project if the project's risk level is equal to that of the overall firm? |
| | A) | $103,600 |
| | B) | $125,506 |
| | C) | $132,409 |
| | D) | $141,414 |
| | E) | $157,008 |
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10 | |
Uptown Psychiatric, Inc., needs to purchase office equipment for its 2,000 drive-in therapy centers nationwide. The initial cost of the equipment is $2 million. It is estimated that the after-tax cash inflows from the project will be $210,000 annually forever. Uptown has a capital structure of 70% equity and 30% debt. The firm's cost of equity is 13 percent and its pre-tax cost of debt is 8 percent. What is the net present value of the project if the tax rate is 35 percent? |
| | A) | -$33,966 |
| | B) | -$30,019 |
| | C) | $8,542 |
| | D) | $12,506 |
| | E) | $18,034 |
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