If the securities markets are efficient, the market’s reaction to new information about a firm’s value (such as an earnings announcement) should be: a. gradual, as investors rationally deliberate the effect of the information on the stock’s value. b. immediate and unbiased. c. slow or fast, depending on the amount of ‘surprise’ contained in the […]
Michigan Industries has three projects under consideration. Project L is a lower-than-average-risk project, project A is an average-risk project, and project H is a higher-than-average-risk project. You have gathered the following information to determine if one or more of these projects has an acceptable rate of return for the firm. • Sources of financing 50% […]
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 ANSWER Answer: C
The conflict resulting from a manager’s desire to increase a firm’s risk without increasing current borrowing costs and lenders’ desire to limit lending is one effect of the ________ problem. A) agency B) leverage C) capital D) variable cost ANSWER A
At the end of year 1 firm XYZ has TA=$325 bn., and it is financed with debt with a book value of $125 mn. and equity with a book value of $200 mn. The firm must pay 10% interest annually on its debt. In year 2, the firm had a net income of $55 mn. […]
The cash conversion cycle of a firm is the difference between the number of days resources are tied up in the operating cycle and the average number of days the firm can delay making payment on the production inputs purchased on credit. Indicate whether the statement is true or false ANSWER TRUE
A corporation has $10,000,000 of 10 percent preferred stock outstanding and a 40 percent tax rate. The amount of earnings before interest and taxes (EBIT) required to pay the preferred dividends is ________. A) $1,000,000 B) $400,000 C) $600,000 D) $1,666,667 ANSWER D
Johnson’s Diner has an adjusted 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%. Johnson is considering expanding by building a new diner in a distant city and considers […]
A firm’s provides valuable services in terms of ensuring that: (i) all parties involved in a project are working on coordinated and timely bases; (ii) original plans and specifications are followed, or alternatively that necessary changes are approved by senior management; (iii) effective product quality and cost controls are instituted at every stage of the […]
The adjusted WACC is the correct discount rate to use when evaluating a firm’s average-risk projects. Indicate whether the statement is true or false. ANSWER Answer: TRUE
