**A firm’s capital structure can be determined by examining which parts of the firm’s balance sheet Answer**

**A firm’s capital structure can be determined by examining which parts of the firm’s balance sheet Answer**

Question 3 of 40

A firm’s capital structure can be determined by examining which parts of the firm’s balance sheet?A. the long-term assets

B. the debt and equity

C. the short-term assets and liabilities

D. None of the above because a firm’s capital structure is best observed on the income statement.

Question 4 of 40

In capital budgeting, the __________ is the appropriate discount rate to use when calculating the Net Present Value (NPV) of an average-risk project.A. Weighted Average Cost of Capital (WACC)

B. Internal Rate of Return (IRR)

C. cost of debt

D. cost of Equity

¬Question 5 of 40 2.5 Points

Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm’s existing capital structure. If the cost of debt is 11.00%, the cost of preferred stock is 12.00%, the cost of common stock is 17.00%, and the Weighted Average Cost of Capital (WACC) adjusted for taxes is 15.00%, what is the Internal Rate of Return (IRR) of the project, given the expected cash flows listed here? Use a financial calculator to determine your answer.Category T0 T1 T2 T3

Investment -$3,000,000

Net Working Capital (NWC. -$350,000 $350,000

Operating Cash Flow $1,200,000 $1,200,000 $1,200,000

Salvage $50,000

Total Incremental Cash Flow -$3,350,000 $1,200,000 $1,200,000 $1,600,000A. About 13.11%

B. About 12.02%

C. About 11.16%

D. About 8.94%

Question 6 of 40 2.5 Points

Red Rider Custom Built Bikes (RRB. Inc. has a new project that will require the company to borrow $1,000,000. RRB has made an agreement with three lenders for the needed financing. Valley Bank will give $500,000 and wants 9% interest on the loan. Mountain View Bank will give $300,000 and wants 11% interest on the loan. Desert Bank will give $200,000 and wants 12% interest on the loan. What is the Weighted Average Cost of Capital (WACC) for this $1,000,000?A. 10.67%

B. 10.20%

C. 10.00%

D. 9.67%

Question 7 of 40 2.5 Points

In capital budgeting, the appropriate decision rule for an average-risk project is to accept if the __________ is greater than the Weighted Average Cost of Capital (WACC).A. Net Present Value (NPV)

B. Internal Rate of Return (IRR)

C. cost of equity

D. cost of debt

Question 8 of 40 2.5 Points

The __________ is the cost of each financing component multiplied by that component’s percent of the total funding amount.A. Net Present Value (NPV)

B. Internal Rate of Return (IRR)

C. cost of capital

D. cost of debt

Question 9 of 40 2.5 Points

The following information comes from the Galaxy Construction balance sheet. The value of common stock is $10,000, retained earnings equal $7,000, total common equity equals $17,000, preferred stock has a value of $3,000, and long-term debt totals $15,000. If the cost of debt is 8.00%, preferred stock has a cost of 10.00%, common stock has a cost of 12.00%, and the firm has a corporate tax rate of 30%, calculate the firm’s Weighted Average Cost of Capital (WACC) adjusted for taxes.A. 10.11%

B. 10.00%

C. 9.09%

D. There is not enough information to answer this question.

Question 10 of 40 2.5 Points

Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?A. Rd ÷ (1 + Tc)

B. Rd ÷ (1 – Tc)

C. Rd × (1 – Tc)

D. Rd × (1 + Tc)

Question 11 of 40 2.5 Points

Randy’s Ranch House Café has an adjusted Weighted Average Cost of Capital (WACC) of 10.08%. The company has a capital structure consisting of 70% equity and 30% debt, a cost of equity of 12.00%, a before-tax cost of debt of 8.00%, and a tax rate of 30%. Randy is considering expanding by building a new Randy’s Ranch House Café in a distant city and considers the project to be riskier than his current operation. He estimates his existing beta to be 1.0, the required return on the market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.40. Given this information, and assuming the cost of debt will not change if Randy undertakes the new project, what adjusted Weighted Average Cost of Capital (WACC. should be used in his decision-making?A. 10.08%

B. 12.60%

C. 13.32%

D. 14.16%

Question 12 of 40 2.5 Points

The formula for the Weighted Average Cost of Capital (WACC) adjusted is __________ .Option A

A.

B.

C.

D.

Question 13 of 40 2.5 Points

Use the security market line to determine the required rate of return for the following firm’s stock. The firm has a beta of 1.25, the required return in the market place is 10.50%, the standard deviation of returns for the market portfolio is 25.00%, and the standard deviation of returns for your firm is also 25.00%.A. 13.13%

B. 10.50%

C. 31.25%

D. There is not enough information to answer this question.

Question 14 of 40 2.5 Points

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $39.50. You anticipate that the economy will grow steadily at a rate of 3.00% per year for the foreseeable future. What is the market required rate of return on your firm’s preferred stock?A. 10.82%

B. 10.59%

C. 7.59%

D. There is not enough information to answer this question.

Question 15 of 40 2.5 Points

The following market information was gathered for the ACME corporation. The common stock is selling for $40.00 per share and there are 100,000 shares outstanding. Retained earnings equal $400,000, preferred stock has 1,000 shares outstanding, selling at $120.00 per share, and 500 outstanding long-term bonds selling for $1,035.00 each. For purposes of estimating the firm’s Weighted Average Cost of Capital (WACC) what are the market value weights of long-term debt, preferred stock, and equity?A. D/V = 11.16%, PS/V = 2.59%, and E/V = 86.25%

B. D/V = 10.27%, PS/V = 2.38%, and E/V = 87.34%

C. D/V = 10.78%, PS/V = 3.08%, and E/V = 86.14%

D. D/V = 33.33%, PS/V = 33.33%, and E/V = 33.33%

Question 16 of 40 2.5 Points

The __________ is the return that the bank or bondholder demands on new borrowing.A. Internal Rate of Return (IRR.

B. Weighted Average Cost of Capital (WACC)

C. cost of equity

D. cost of debt

Question 17 of 40 2.5 Points

It is necessary to assign the appropriate cost of capital for each individual project that reflects that project’s __________ when doing capital budgeting.A. life

B. cash flows

C. riskiness

D. managers

Question 19 of 40 2.5 Points

Which of the statements below is NOT true?A. Preferred stock is a form of hybrid equity financing.

B. Retained earnings are a form of hybrid equity financing.

C. Common stock is a form of equity financing.

D. Corporate bonds are a form of debt financing.

Question 20 of 40 2.5 Points

Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm’s existing capital structure. If the cost of debt is 9.00%, the cost of preferred stock is 12.00%, the cost of common stock is 16.00%, and the Weighted Average Cost of Capital (WACC) adjusted for taxes is 14.00%, what is the Net Present Value (NPV. of the project, given the expected cash flows listed here?

Category T0 T1 T2 T3

Investment -$2,000,000

Net Working Capital (NWC. -$250,000 $250,000

Operating Cash Flow $850,000 $850,000 $850,000

Salvage $50,000

Total Incremental Cash Flow -$2,250,000 $850,000 $850,000 $1,150,000A. -$74,121

B. $499,604

C. $2,175,879

D. $2,479,604

Question 22 of 40 2.5 Points

A __________ inventory item is an item that is not used in current operations but is serving a back-up role in case the current item fails during operation.A. type C

B. redundant

C. reticent

D. beta generation

Question 23 of 40 2.5 Points

Using the information provided, what is the accounts payable cycle for the firm?

Perfect Purchase Electronics

Selected Income Statement Items, 2009

Cash Sales $1,500,000Credit Sales $7,500,000

Total Sales $9,000,000

COGS $6,000,000Perfect Purchase Electronics

Selected Balance Sheet Accounts12/31/2009 12/31/2008 Change

Accounts Receivable $270,000 $240,000 $30,000

Inventory $125,000 $100,000 $25,000

Accounts Payable $110,000 $90,000 $20,000A. 4.06 days

B. 4.87 days

C. 6.08 days

D. 24.33 days

Question 24 of 40 2.5 Points

In terms of the float, the buyer of a product wants to ________ and the seller wants to __________ .A. increase the collection float; decrease the disbursement float

B. decrease the disbursement float; decrease the collection float

C. decrease the collection float; decrease the disbursement float

D. increase the disbursement float; decrease the collection float

Question 25 of 40 2.5 Points

Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. Ready Tees plans on ordering t-shirts 12 times over the next year. Ready Tees receives the same number of t-shirts each time it orders. The carrying cost is $0.10 per shirt per year. The order cost is $500 per order. What is the annual ordering cost of the t-shirt inventory (rounded to the nearest dollar)?A. $5,000

B. $6,000

C. $10,000

D. $12,000

Question 26 of 40 2.5 Points

Perfect Purchase Electronics

Selected Income Statement Items, 2009

Cash Sales $1,500,000Credit Sales $7,500,000

Total Sales $9,000,000

COGS $6,000,000Perfect Purchase Electronics

Selected Balance Sheet Accounts12/31/2009 12/31/2008 Change

Accounts Receivable $270,000 $240,000 $30,000

Inventory $125,000 $100,000 $25,000

Accounts Payable $110,000 $90,000 $20,000Using the information provided, what is the accounts payable turnover for the firm?

A. 15 times

B. 60 times

C. 75 times

D. 90 times

Question 27 of 40 2.5 Points

Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm’s finance department has estimated the following profile for its light-duty trailers and customer base:

Annual sales: 10,000 trailers

Annual production costs per trailer: $1,500

Lost sales if credit is not provided for customers: 2,000 trailers

Default rate if all customers purchase on credit: 3.00%What is the change in the profit margin if the firm moves from a cash-only policy to a credit policy?

A. $1,250,000

B. $8,000,000

C. $9,250,000

D. $15,000,000

Question 28 of 40 2.5 Points

The __________ is the period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service.A. cash conversion cycle

B. accounts receivable cycle

C. current ratio

D. business operating cycle

Question 29 of 40 2.5 Points

Lipscomb is set to establish a reorder policy for his remote snack bar located on Vacation Island. He sells 10 cases of soda per day and has a lead-time for delivery of one week. Occasionally, bad weather or mechanical difficulty can delay his delivery by up to three days. At what point should Lipscomb reorder (how many cases on hand) if he wants to also compensate for unexpected order delays?A. 30 cases

B. 70 cases

C. 100 cases

D. There is not enough information to answer this question

Question 30 of 40 2.5 Points

The __________ begins at the time a firm first starts to make a product and lasts until the time the customer buys the product.A. business operating cycle

B. accounts receivable cycle

C. cash conversion cycle

D. production cycle

Question 31 of 40 2.5 Points

The optimal order quantity as determined by the Economic Order Quantity (EOQ. occurs when __________ .A. ordering costs equal carrying costs

B. ordering costs are exactly 1/2 of carrying costs

C. ordering costs are exactly twice as much as carrying costs

D. None of the answers provided are accurate.

Question 32 of 40 2.5 Points

Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm’s finance department has estimated the following profile for its light-duty trailers and customer base:

Annual sales: 10,000 trailers

Annual production costs per trailer: $1,500

Lost sales if credit is not provided for customers: 2,000 trailers

Default rate if all customers purchase on credit: 3.00%What is the dollar value of bad debts the firm expects to accumulate over a year? Given this amount, what is the maximum average amount per customer that the firm should spend on credit screening?

A. $450,000; $45.00

B. $450,000; $56.25

C. $4,500,000; $450.00

D. $4,500,000; $$562.50

Question 33 of 40 2.5 Points

Using the information provided, what is the length of the production cycle for the firm?Perfect Purchase Electronics

Selected Income Statement Items, 2009

Cash Sales $1,500,000Credit Sales $7,500,000

Total Sales $9,000,000

COGS $6,000,000Perfect Purchase Electronics

Selected Balance Sheet Accounts12/31/2009 12/31/2008 Change

Accounts Receivable $270,000 $240,000 $30,000

Inventory $125,000 $100,000 $25,000

Accounts Payable $110,000 $90,000 $20,000A. 6.08 days

B. 7.60 days

C. 53.33 days

D. 6.84 days

Question 34 of 40 2.5 Points

Estimating _________ is one part of managing short-term cash needs. The second part is estimating _________ .A. cash inflow; accounts payable

B. cash inflow; cash outflow

C. accounts receivable; cash outflow

D. accounts receivable; cash inflow

Question 35 of 40 2.5 Points

Using the information provided, what is the collection cycle for the firm?

Perfect Purchase Electronics

Selected Income Statement Items, 2009

Cash Sales $1,500,000Credit Sales $7,500,000

Total Sales $9,000,000

COGS $6,000,000Perfect Purchase Electronics

Selected Balance Sheet Accounts

Accounts Receivable $270,000 $240,000 $30,000

Inventory $125,000 $100,000 $25,000

Accounts Payable $110,000 $90,000 $20,000A. 6.84 days

B. 7.60 days

C. 10.34 days

D. 12.41 days

Question 36 of 40 2.5 Points

Using the information provided, what is the inventory turnover for the firm?Perfect Purchase Electronics

Selected Income Statement Items, 2009

Cash Sales $1,500,000Credit Sales $7,500,000

Total Sales $9,000,000

COGS $6,000,000Perfect Purchase Electronics

Selected Balance Sheet Accounts

Accounts Receivable $270,000 $240,000 $30,000

Inventory $125,000 $100,000 $25,000

Accounts Payable $110,000 $90,000 $20,000A. 23.53 times

B. 53.33 times

C. 48.00 times

D. 60.00 times

Question 37 of 40 2.5 Points

Managing the relationship between current assets and current liabilities of a firm in order to improve the flow of funds is called__________.A. the business operating cycle

B. the cash conversion cycle

C. working capital management

D. the production cycle

Question 38 of 40 2.5 Points

Using the information provided, what is the accounts receivable turnover for the firm?Perfect Purchase Electronics

Selected Income Statement Items, 2009

Cash Sales $1,500,000Credit Sales $7,500,000

Total Sales $9,000,000

COGS $6,000,000Perfect Purchase Electronics

Selected Balance Sheet Accounts12/31/2009 12/31/2008 Change

Accounts Receivable $270,000 $240,000 $30,000

Inventory $125,000 $100,000 $25,000

Accounts Payable $110,000 $90,000 $20,000A. 23.53 times

B. 29.41 times

C. 53.33 times

D. 60.00 times

Question 39 of 40 2.5 Points

With energy costs greater than ever, Berwick’s Bike Shop is well-placed for an expansion. Its initial capital cost (not including working capital) is $750,000, expected after-tax operating cash flow is $225,000 per year for five years, and the recovery of capital assets after five years is $75,000. If this project has a required rate of return of 15% and the initial cost of working capital is $100,000, should Berwick expand the bike shop? (Assume that the $100,000 of working capital is recovered in Year five at the end of the project life) Compute a Net Present Value (NPV) to support your decision..A. Yes, because the NPV = $8,759

B. No, because the NPV = -$850,000

C. No, because the NPV = -$8,759

D. Yes, because the NPV = $858,759

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