Ransom Industries Inc, has issued preferred stock that pays $3.00 dividends annually. If the market requires a 12.5% rate of return on the shares, what is the current price of the firm’s preferred shares? A) $21.33 B) $24.00 C) $41.67 D) There is not enough information to answer this question. ANSWER B Explanation: […]
A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is ________. A) 12 percent B) 13.3 percent C) 13.6 percent D) 15.4 percent […]
Value is created when the industry is profitable and the firm is in a disadvantaged competitive position within the industry. Indicate whether the statement is true or false ANSWER FALSE
A(n) ________ effectively raises the interest cost to the borrower on a line of credit. A) operating-change restriction B) annual cleanup C) compensating balance D) commitment fee ANSWER C
Carol’s Dolls has fixed operating costs of $25,000. Its sale price is $55 per doll, and its variable operating cost is $30 per doll. It sells 3,000 dolls per month. The firm’s earnings before interest and taxes is ________. A) $37,500 B) $55,000 C) $75,000 D) $50,000 ANSWER D
From a firm’s perspective, preferred shares are at least as desirable as bonds because the firm is able to deduct preferred dividend payments for tax purposes like it can bond interest expenses. Indicate whether the statement is true or false ANSWER FALSE
________ is the process whereby the firm sells receivables to a lender at a discount (say 2 percent) to the actual value of the receivables. Customers then repay the money they owe to the firm directly to the lender instead. A) Factoring of payables B) Loan sharking C) Bridge loaning D) Factoring of receivables […]
Assume an M&M world with taxes where the corporate tax rate is 25%, the before tax required return on debt is 8%, the required return on the unlevered firm is 12%, and the firm is financed 20% with debt and 80% with equity. What is the required return on equity? A) 12.75% B) 15.00% C) […]
The ________ is, in theory, the interest rate offered to a bank’s most credit worthy customers. A) LIBOR B) prime rate C) promissory rate D) bridge rate ANSWER B
How is the typical profitability of a stage 2 firm different from a stage 1 and a stage 3 firm? What will be an ideal response? ANSWER Stage 1 represents the initial or start-up stage of firms within a particular industry. At this point, the firms tend to have very low demand and […]
