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7. TheGordonModelofestimatingthevalueofafirmisbestusedinconjunctionwith (a) astart-up company (b) apublic utility (c) amanufacturingentity [email protected] companywithadividend-payinghistoryf3b6° 8. TheFreeCash FlowModelisbestusedinconjunctionwith @astart-upcompany ;(S’-\ (b) apublicutility (c) amanufacturingentity (d) amature companywithadividend-payinghistory 9. Relativelyspeaking, commonstockisa costlymethod offinancingthandebt. Ccaj)more fl3(.,9 (b) less 10. Relativelyspeaking, commonstockisa costlymethod offinancingthan preferred stock. (a) more @less 11. Whenthenetpresent valueofaprojectispositive,therateofreturnis the costofcapital. (£illgreaterthan (b) greaterthanorequal to (c) lessthan (d) equalto [email protected] thatofinternallygenerated’?efrunedearnings becauseofflotation costs. @greaterthan (b)lessthan [email protected] to 3b’1 (d)notcomparableto 13. Iflong-termdebtconstitutes30%ofacompany’scapital, preferredstockconstitutes10%ofthecompany’scapitalandcommonstockconstitutes60%ofthecompany’scapital,andthe after-taxcostofcapital is6%forlong-termdebt,12%forpreferredstockand20%forcommonstock,thentheweighted averagecostofcapitalforthecompanyis . (a) 12% (b) 12.67% (c) 20% @15% 14. Weighted marginalcostofcapital——theweighted averagecostofcapital. isthesameas (b) isalwayslessthan (c) shouldneverbecompared with (d) typicallydiffersfrom 15. Abreakpointis (a)thepointatwhichafombecomesbankrupt Jiuthesameasafirm’sweightedmarginalcostofcapital ([email protected]mponentsrises (d)thepointatwhichnomorefinancing ispossible 16. AttheOperatingBreakeven Point, (a) afirm hasreacheditsbreakpoint @EBITequalszero ipSOLJ (c) NetIncomeequalszero (d) thefirm’sNetBookValueequalszero “”””·J7.”Ifafomhasinvestedheavily in technologythathasincreasedfixed costsrelativetoits variablecosts, theresultis—- @anincreaseinoperating leverage (b)adecrease inoperatingleverage C(t}noeffectonoperatingleverage (d) anincrease in financialleverage 18. Financialleverage issaidtoriseasafirm’suseof mcreases. (a) informationtechnology (b) software-basedbusiness models (c) debt @equity 19. Total Leveragecomprises (a) risk andreward c:J:!D)operatingleverage andfinancialleverage .p50<'.l (c) both(a)and(b)arec01Tect (d) noneoftheabove 20. Thetheoreticalbasisfromwhichtheconceptofriskadjusteddiscount ratesisderived is (a)theGordonModel the capitalassetpricingmodel(CAPM) (c) thebasiccostofmoney (d) simulationtheory 21. Thefourbasicsourcesoflong-termfundsforabusinessfirmare: (a) currentliabilities,long-te1mdebt,commonstockandpreferredstock (b) currentliabilities,long-termdebt,commonstockandretained earnings (c) long-termdebt,currentassets, commonstock andretained earnings long-termdebt,commonstock,preferredstockandretained earnings r:::JdJ 22. f The isequaltotherateofreturnthatafirmmustearnonitsinvestmentsinprojects tomaintainthemarketvalueofitsstock. netpresentvalue costofcapital internalrateofreturn (d) gross profitmargin 23. isameasureofNetPresentValuethatallowsdecision makersto comparealternativelong-term projectsthatareofdifferent durations. (a)BookValue J!:)InternalRateofReturn LJ0AnnualizedNetPresentValue D!isci @thesecurenatureofalldebtobligationssincetheyareallcollateralized 26. Asthevolumeoffinancing increases,thecostsofthevarioustypesoffinancing will generally , thefirm’sweightedaveragecostofcapital. (a) increase,lowering @increase,raising (c) decrease,lowering (d) decrease,raising 34. Thepaymentofcashdividendstocorporateshareholdersisdecidedbythe (a)management J2)_shareholdesthemselves ®BoardofD1rectors £&3 (d)CompensationCommittee 35. Firmsareusuallyprohibitedbystatelawfromdistributing (a)retained earningsasdividends @:;paid-incapital asdividends (c) dividendsinayearwhenthefirmhasanetloss (d) assetsasdividends r “36.Theproblem withapolicytoregularly paydividends,fromthefirm’sstandpoint,isthat ‘·U’.ii:hifthe earningsdrop,sodoesthedividendpayment 5’1-IJ Cb)it lullstheshareholders intoafalsesense ofsecurity f(‘evenwhenearningsarelow,thefirm,withintheconstraintsofstate law,is compelledtodistributedividends (d) it increases theshareholders’uncertainty 37. Thepurposeofareversestocksplit is to (a) reducetradingactivity (b) increasethedividend _fs;2.,issueadditionalshares increasethepriceofthestock 8’1’.:J-, 38. Therepurchaseofstock theearningspershareand themarketpriceof thestock. increases, increases (b) decreases,decreases (c) issueadditionalshares (d) decreases,increases 39. Inregardtobusiness valuation,theGordonModelis _ (a) analternativetotheFreeCashFlowmodel (b) thesameastheConstantGrowthmodel (c) applicabletocompaniesthathavelonghistoriesofhavingpaiddividends @all oftheabove (}\ (

7. TheGordonModelofestimatingthevalueofafirmisbestusedinconjunctionwith

(a) astart-up company

(b) apublic utility

(c) amanufacturingentity

[email protected] companywithadividend-payinghistoryf3b6°

8. TheFreeCash FlowModelisbestusedinconjunctionwith

@astart-upcompany ;(S’-\

(b) apublicutility

(c) amanufacturingentity

(d) amature companywithadividend-payinghistory

9. Relativelyspeaking, commonstockisacostlymethod offinancingthandebt.

Ccaj)more fl3(.,9

(b) less

10. Relativelyspeaking, commonstockisacostlymethod offinancingthan preferred stock.

(a) more

@less

11. Whenthenetpresent valueofaprojectispositive,therateofreturnisthe costofcapital.

(£illgreaterthan

(b) greaterthanorequal to

(c) lessthan

(d) equalto

[email protected]erated’?efrunedearnings becauseofflotation costs.

@greaterthan

(b)lessthan

[email protected] to 3b’1

(d)notcomparableto

13. Iflong-termdebtconstitutes30%ofacompany’scapital, preferredstockconstitutes10%ofthecompany’scapitalandcommonstockconstitutes60%ofthecompany’scapital,andthe

after-taxcostofcapital is6%forlong-termdebt,12%forpreferredstockand20%forcommonstock,thentheweighted averagecostofcapitalforthecompanyis.

(a) 12%

(b) 12.67%

(c) 20%

@15%

 

14. Weighted marginalcostofcapital——theweighted averagecostofcapital. isthesameas

(b) isalwayslessthan

(c) shouldneverbecompared with

(d) typicallydiffersfrom

15. Abreakpointis

(a)thepointatwhichafombecomesbankrupt

Jiuthesameasafirm’sweightedmarginalcostofcapital

([email protected]mponentsrises

(d)thepointatwhichnomorefinancing ispossible

16. AttheOperatingBreakeven Point,

(a) afirm hasreacheditsbreakpoint

@EBITequalszero ipSOLJ

(c) NetIncomeequalszero

(d) thefirm’sNetBookValueequalszero

“”””·J7.”Ifafomhasinvestedheavily in technologythathasincreasedfixed costsrelativetoits

variablecosts, theresultis—-

@anincreaseinoperating leverage

(b)adecrease inoperatingleverage

C(t}noeffectonoperatingleverage

(d) anincrease in financialleverage

18. Financialleverage issaidtoriseasafirm’suseofmcreases.

(a) informationtechnology

(b) software-basedbusiness models

(c) debt

@equity

19. Total Leveragecomprises

(a) risk andreward

c:J:!D)operatingleverage andfinancialleverage .p50<‘.l

(c) both(a)and(b)arec01Tect

(d) noneoftheabove

20. Thetheoreticalbasisfromwhichtheconceptofriskadjusteddiscount ratesisderived is

(a)theGordonModel

the capitalassetpricingmodel(CAPM)

(c) thebasiccostofmoney

(d) simulationtheory

 

21. Thefourbasicsourcesoflong-termfundsforabusinessfirmare:

(a) currentliabilities,long-te1mdebt,commonstockandpreferredstock

(b) currentliabilities,long-termdebt,commonstockandretained earnings

(c) long-termdebt,currentassets, commonstock andretained earnings

long-termdebt,commonstock,preferredstockandretained earnings r:::JdJ

22.

f

The isequaltotherateofreturnthatafirmmustearnonitsinvestmentsinprojects tomaintainthemarketvalueofitsstock.

netpresentvalue costofcapital

internalrateofreturn

(d) gross profitmargin

23. isameasureofNetPresentValuethatallowsdecision makersto comparealternativelong-term projectsthatareofdifferent durations.

(a)BookValue

J!:)InternalRateofReturn

LJ0AnnualizedNetPresentValue D!isci <q-J;(lll…

(d) Cost ofcapital

24. Whendeterminingtheafter-tax costofabond,thefacevalueoftheissuemustbeadjusted tothenetproceeds byconsidering

(a)therisk

@theflotationcost ·P30

(c) theapproximatereturns

(d) noneoftheabove

‘–25.Debtisgenerally consideredtheleastexpensivesourceofcapital. Thisisnotdueto

, itsrisktoinvestors relativetothatofcommonstockandpreferredstock

(b) itsposition inthepriorityofclaimsonassetsandearnings intheeventofliquidation

· (c)the taxdeductibilityofinterestpayments

‘<“> @thesecurenatureofalldebtobligationssincetheyareallcollateralized

26. Asthevolumeoffinancing increases,thecostsofthevarioustypesoffinancing will generally,thefirm’sweightedaveragecostofcapital.

(a) increase,lowering

@increase,raising

(c) decrease,lowering

(d) decrease,raising

 

34. Thepaymentofcashdividendstocorporateshareholdersisdecidedbythe

(a)management

J2)_shareholdesthemselves

®BoardofD1rectors £&3

(d)CompensationCommittee

35. Firmsareusuallyprohibitedbystatelawfromdistributing

(a)retained earningsasdividends

@:;paid-incapital asdividends

(c) dividendsinayearwhenthefirmhasanetloss

(d) assetsasdividends

 

r

“36.Theproblem withapolicytoregularly paydividends,fromthefirm’sstandpoint,isthat

‘·U’.ii:hifthe earningsdrop,sodoesthedividendpayment 5’1-IJ

Cb)it lullstheshareholders intoafalsesense ofsecurity

f(‘evenwhenearningsarelow,thefirm,withintheconstraintsofstate law,is compelledtodistributedividends

(d) it increases theshareholders’uncertainty

37. Thepurposeofareversestocksplit is to

(a) reducetradingactivity

(b) increasethedividend

_fs;2.,issueadditionalshares

increasethepriceofthestock 8’1’.:J-,

38. Therepurchaseofstocktheearningspershareandthemarketpriceof thestock. increases, increases

(b) decreases,decreases

(c) issueadditionalshares

(d) decreases,increases

39. Inregardtobusiness valuation,theGordonModelis_

(a) analternativetotheFreeCashFlowmodel

(b) thesameastheConstantGrowthmodel

(c) applicabletocompaniesthathavelonghistoriesofhavingpaiddividends

@all oftheabove (}\ (

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