Finance Multiple Choice Exam Questions and
Answers 2024-2025
Miller Ltd is considering changing its capital structure from 100% equity to 80% equity (i.e. 20% debt
relative to total assets) by repurchasing and cancelling shares. The number of shares outstanding are
currently 10,000, but will drop to 8,000 after the repurchase. Miller will fund the repurchase by
borrowing funds at an 8% interest rate. Total assets are $200,000, EBIT is $25,000, and the company tax
rate is 30%. What is the effect on earnings per share associated with the EBIT of $25,000 for the new
alternative capital structure?
a) EPS will decrease to $2.18
b) EPS will decrease to $1.53
c) EPS will increase to $0.82
d) EPS will increase to $2.73
e) EPS will increase to $1.91
e) EPS will increase to $1.91
EPS = Earnings available to ordinary shareholders / Numbers of ordinary shares issued.
Earnings available to ordinary shareholders =
25,000 - 3,200 = 21,800
Tax = 21,800 x 0.3 = 6,540
21,800 - 6,540 = 15,260
EPS = 15,,000
Which of the following statements is most correct?
,a) A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained
earnings is not zero, the cost of retained earnings is generally lower than the after-tax cost of debt
financing.
b) The capital structure that minimizes the firm's cost of capital is also the capital structure that
maximizes the firm's stock price.
c) The capital structure that minimizes the firm's cost of capital is also the capital structure that
maximizes the firm's earnings per share.
d) If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an
increase in its debt ratio will always reduce its overall cost of capital.
e) A and B are both correct.
b) The capital structure that minimizes the firm's cost of capital is also the capital structure that
maximizes the firm's stock price.
According to Modigliani and Miller, in a perfect capital market the implications of a firm's choice of
capital structure are that financial leverage:
a) Has no effect on firm value.
b) Increases firm value.
c) Decreases firm value.
d) Initially increases firm value, but at excessive levels, decreases firm value.
e) Initially decreases firm value, but at excessive levels, increases firm value.
a) Has no effect on firm value.
WhyNot Ltd is considering relaxing its credit standards, which will result in annual sales increasing from
$1.50 million to $1.79 million. Costs of goods sold represent 35% of sales and the average collection
period is expected to increase from 35 to 53 days. The firm requires a return of 10.0%.
What is the expected additional profit contribution from sales as a result of the relaxation of credit
standards.
,a) $290,000
b) $101,500
c) $90,971
d) $525,000
e) $188,500
e) $188,500
Additional sales = 1,790,000 - 1,500,000 = 290,000
Cost of goods sold = 0.35 x 290,000 = 101,500
Profit contribution = 0.65 x 290,000 = 188,500
Why Not Ltd is considering relaxing its credit standards, which will result in annual sales increasing from
$1.50 million to $1.79 million. Costs of goods sold represent 35% of sales and the average collection
period is expected to increase from 35 to 53 days. The firm requires a return of 10.0%.
What is the effect of the proposal to relax credit standards on the turnover of accounts receivable?
a) It will decrease 6.88679
b) It will increase 10.42857
c) It will increase 6.88679
d) It will decrease to 10.42857
e) Turnover of accounts receivable will remain unchanged.
a) It will decrease 6.88679
Turnover of accounts receivable = 365 / Average collection period
Proposed = = 6.88679
Current = = 10.42857
, WhyNot Ltd is considering relaxing its credit standards, which will result in annual sales increasing from
$1.50 million to $1.79 million. Costs of goods sold represent 35% of sales and the average collection
period is expected to increase from 35 to 53 days. The firm requires a return of 10.0%.
What is the effect of the proposal to relax credit standards on the average investment in accounts
receivable?
a) It will decrease to $40,629
b) It will increase $40,629
c) It will decrease to $50,342
d) It will increase to $90,971
e) The average investment in accounts receivable will remain unchanged.
d) It will increase to $90,971
Proposed: Cost of goods sold = 0.35 x 1,790,000 = 626,500
Average investment in AR = Variable cost of annual sales / AR turnover
Average investment in AR = 626,.88679 = 90,971
Current: Cost of goods sold = 0.35 x 1,500,000 = 525,000
Average investment in AR = 525,.42857 = 50,342
Which of the following actions are likely to reduce the length of a company's cash conversion cycle?
a) Adopting a just-in-time inventory system which reduces the average age of inventory.
b) Reducing the average collection period on its accounts receivable.
c) Reducing the amount of time the company takes to pay its suppliers.
Answers 2024-2025
Miller Ltd is considering changing its capital structure from 100% equity to 80% equity (i.e. 20% debt
relative to total assets) by repurchasing and cancelling shares. The number of shares outstanding are
currently 10,000, but will drop to 8,000 after the repurchase. Miller will fund the repurchase by
borrowing funds at an 8% interest rate. Total assets are $200,000, EBIT is $25,000, and the company tax
rate is 30%. What is the effect on earnings per share associated with the EBIT of $25,000 for the new
alternative capital structure?
a) EPS will decrease to $2.18
b) EPS will decrease to $1.53
c) EPS will increase to $0.82
d) EPS will increase to $2.73
e) EPS will increase to $1.91
e) EPS will increase to $1.91
EPS = Earnings available to ordinary shareholders / Numbers of ordinary shares issued.
Earnings available to ordinary shareholders =
25,000 - 3,200 = 21,800
Tax = 21,800 x 0.3 = 6,540
21,800 - 6,540 = 15,260
EPS = 15,,000
Which of the following statements is most correct?
,a) A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained
earnings is not zero, the cost of retained earnings is generally lower than the after-tax cost of debt
financing.
b) The capital structure that minimizes the firm's cost of capital is also the capital structure that
maximizes the firm's stock price.
c) The capital structure that minimizes the firm's cost of capital is also the capital structure that
maximizes the firm's earnings per share.
d) If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an
increase in its debt ratio will always reduce its overall cost of capital.
e) A and B are both correct.
b) The capital structure that minimizes the firm's cost of capital is also the capital structure that
maximizes the firm's stock price.
According to Modigliani and Miller, in a perfect capital market the implications of a firm's choice of
capital structure are that financial leverage:
a) Has no effect on firm value.
b) Increases firm value.
c) Decreases firm value.
d) Initially increases firm value, but at excessive levels, decreases firm value.
e) Initially decreases firm value, but at excessive levels, increases firm value.
a) Has no effect on firm value.
WhyNot Ltd is considering relaxing its credit standards, which will result in annual sales increasing from
$1.50 million to $1.79 million. Costs of goods sold represent 35% of sales and the average collection
period is expected to increase from 35 to 53 days. The firm requires a return of 10.0%.
What is the expected additional profit contribution from sales as a result of the relaxation of credit
standards.
,a) $290,000
b) $101,500
c) $90,971
d) $525,000
e) $188,500
e) $188,500
Additional sales = 1,790,000 - 1,500,000 = 290,000
Cost of goods sold = 0.35 x 290,000 = 101,500
Profit contribution = 0.65 x 290,000 = 188,500
Why Not Ltd is considering relaxing its credit standards, which will result in annual sales increasing from
$1.50 million to $1.79 million. Costs of goods sold represent 35% of sales and the average collection
period is expected to increase from 35 to 53 days. The firm requires a return of 10.0%.
What is the effect of the proposal to relax credit standards on the turnover of accounts receivable?
a) It will decrease 6.88679
b) It will increase 10.42857
c) It will increase 6.88679
d) It will decrease to 10.42857
e) Turnover of accounts receivable will remain unchanged.
a) It will decrease 6.88679
Turnover of accounts receivable = 365 / Average collection period
Proposed = = 6.88679
Current = = 10.42857
, WhyNot Ltd is considering relaxing its credit standards, which will result in annual sales increasing from
$1.50 million to $1.79 million. Costs of goods sold represent 35% of sales and the average collection
period is expected to increase from 35 to 53 days. The firm requires a return of 10.0%.
What is the effect of the proposal to relax credit standards on the average investment in accounts
receivable?
a) It will decrease to $40,629
b) It will increase $40,629
c) It will decrease to $50,342
d) It will increase to $90,971
e) The average investment in accounts receivable will remain unchanged.
d) It will increase to $90,971
Proposed: Cost of goods sold = 0.35 x 1,790,000 = 626,500
Average investment in AR = Variable cost of annual sales / AR turnover
Average investment in AR = 626,.88679 = 90,971
Current: Cost of goods sold = 0.35 x 1,500,000 = 525,000
Average investment in AR = 525,.42857 = 50,342
Which of the following actions are likely to reduce the length of a company's cash conversion cycle?
a) Adopting a just-in-time inventory system which reduces the average age of inventory.
b) Reducing the average collection period on its accounts receivable.
c) Reducing the amount of time the company takes to pay its suppliers.
