FIN 306 Multiple Choice Quiz, questions and answers - Latest 2025-26.

FIN 306 Multiple Choice Relevant cash flows for a project are best described as ________. A.incremental cash flows B.incidental cash flows C.contingent cash flows D.sunk cash flows A. ________ projects have the same function; the acceptance of one ________ the others from consideration. A. Capital; eliminates B.Mutually exclusive; eliminates C.Replacement; eliminates D.Independent; does not eliminate B. When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering ________. A. the flotation costs B. the taxes C. the approximate returns D. the risks A. What is IRR of the following stream of cash flows? Year CF 0 -$40,000 1 10,000 2 8,000 3 6,5004 4,500 5 10,000 A. 10% B. 8% C. -5.50% D. -0.86% D. A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long minus−term debt by $100,000. The change in net working capital is ________. A. an increase of $120,000 B. a decrease of $120,000 C. an increase of $60,000 D. a decrease of $60,000 D. In order to recognize the interrelationship between financing and investments, a firm should use ________ when evaluating an investment. A. the weighted average cost of all financing sources B. the current opportunity cost C. the most costly source of financing D. the least costly source of financing A.The ________ approach is used to convert the net present value of unequal−lived projects into an equivalent annual amount (in net present value terms). A. internal rate of return B. annualized net present value C. investment opportunities schedule D. risk-adjusted discount rate B. A conventional cash flow pattern associated with capital investment projects consists of an initial ________. A. outflow followed by a series of outflows B. outflow followed by a series of inflows C. inflow followed by a broken series of outlay D. outflow followed by a broken cash series B. Tangshan Mining Company is considering investing in one of two mutually exclusive projects M and N which are described below. Tangshan Mining's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40. Tangshan Mining Company is considering investment in one of two mutually exclusive projects M and N which are described below. Tangshan Mining's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40.A. Project N because it has a higher IRR B. Project N because it has a higher NPV C. Project M because it has a higher NPV D. Project M because it has a higher IRR Using the risk-adjusted discount rate method of project evaluation, the NPV for Project N is ________. (See Table 12.3) A. $166,132 B. $600,000 C. $122,970 D. $85,732 D. A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm could ________. A. accept Project X because its IRR is higher than Project Z B. reject both the projects because they have negative IRR C. accept Project Z because its IRR is higher than Project X D. accept both projects because they have equal IRR D.Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75 and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value? A. 5.50% B. 7.73% C. 5.27% D. 5.82% D. A firm with limited dollars available for capital expenditures is subject to ________. A. capital dependency B. capital rationing C. capital gains D. working capital constraints B. A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is ________. A. 1 year B. 2 years C. between 1 and 2 years D. between 2 and 3 years D.A nonconventional cash flow pattern associated with capital investment projects consists of an initial ________. A. inflow followed by a series of outflows B. outflow followed by a series of inflows C. outflow followed by a series of both cash inflows and outflows D. inflow followed by a series of both cash inflows and outflows C. What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share? A. $5.00 B. $3.60 C. $4.00 D. $3.33 C.A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: ModifyingAbove and below Start 2 By 1 Matrix 1st Row 1st Column Bold Start 2 By 1 Matrix 1st Row 1st Column Target Market 2nd Row 1st Column Source of Capital Proportions After minus Tax Cost EndMatrix 2nd Row 1st Column Start 3 By 1 Matrix 1st Row 1st Column Long minus term debt 40 % 6 % 2nd Row 1st Column Preferred stock 10 11 3rd Row 1st Column Common stock equity 50 15 EndMatrix EndMatrix with brackets Target Market Source of Capital Proportions After−Tax Cost Long−term debt 40% 6% Preferred stock 10 11 Common stock equity 50 15 The weighted average cost of capital is ________. A. 11 percent B. 10.7 percent C. 15 percent D. 6 percent A. What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share? A. 9.46% B. 16.88% C. 12.57% D. 17.96% D. Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. Project A Project B Initial Investment $350,000 $425,000Year Cash Inflows (CF) 1 $140,000 $175,000 2 165,000 150,000 3 190,000 125,000 4 100,000 5 75,000 6 50,000 The NPVs of Projects A and B are ________. (See Table 12.6) A. $95,066 and $56,386, respectively B. −$56,386 and minus−$95,066, respectively C. $56,386 and $95,066, respectively D. $45,000 and $650,000, respectively c The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.1) A. an annuity and a nonconventional cash flow B. a mixed stream and a conventional cash flow C. an annuity and a conventional cash flow D. a mixed stream and a nonconventional cash flow C.The approximate beforeminus−tax cost of debt for a 15minus−year, 10 percent, $1,000 par value bond selling at $950 is ________. A. 15.4 percent B. 10.7 percent C. 10 percent D. 12 percent B. ________ is the process of evaluating and selecting longminus−term investments that are consistent with a firm's goal of maximizing owners' wealth. A. Capital budgeting B. Recapitalizing assets C. Ratio analysis D. Securitization A. Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial afterminus−tax cost is $5,000,000 and it is expected to provide afterminus−tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4? A. Yes, since the risk exposure of the project is less than the maximum acceptable risk exposure. B. No, since the payback period of the project is more than the maximum acceptable payback period. C. Yes, since the payback period of the project is less than the maximum acceptable payback period. D. No, since the risk exposure of the project is more than the maximum acceptable risk exposure. B. What is the payback period for Tangshan Mining company's new project if its initial afterminus−tax cost is $5,000,000 and it is expected to provide afterminus−tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?A. 3.33 years B. 2.33 years C. 4.33 years D. 1.33 years A. The basic motive for capital expenditure is to ________. A. improve leverage B. replace current assets C. expand operations D. renew current assets C. Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent? A. Project Y, since it has a lower NPV than Project X B. Project Y, since it has a higher NPV than Project X C. Project X, since it has a lower NPV than Project Y D. Project X, since it has a higher NPV than Project Y D. Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called ________. A. sunk costsB. opportunity costs foregone C. incremental past expenses D. incremental historical costs A. If a corporation has an average tax rate of 40 percent, the approximate annual, afterminus−tax cost of debt for a 10minus−year, 8 percent, $1,000 par value bond selling at $1,150 is ________. A. 8 percent B. 6 percent C. 4.8 percent D. 3.6 percent D. Generally, the order of cost, from the least expensive to the most expensive, for longminus−term capital of a corporation is ________. A. new common stock, retained earnings, preferred stock, longminus−term debt B. longminus−term debt, preferred stock, retained earnings, new common stock C. common stock, preferred stock, longminus−term debt, shortminus−term debt D. preferred stock, new common stocks, common stock, retained earnings B. The cost of capital reflects the cost of funds ________. A. at current book values B. over a longminus−run time periodC. at a given point in time D. that makes the net present value of a project equal zero B. ________ projects do not compete with each other; the acceptance of one ________ the others from consideration. A. Capital; eliminates B. Mutually exclusive; eliminates C. Replacement; eliminates D. Independent; does not eliminate D. A tax adjustment must be made in determining the cost of ________. A. long-term debt B. preferred stock C. retained earnings D. common stock A. The ________ is the firm's desired optimal mix of debt and equity financing. A. market value B. book value C. cost of capital D. target capital structure D.A $60,000 outlay for a new machine with a usable life of 15 years is called ________. A. replacement expenditure B. operating expenditure C. financing expenditure D. capital expenditure D. Which of the following is true of long-term funds? A. They are the funds available to a business on the basis of inventory held and require detailed inventory tracking. B. they are a type of investment fund which invests in money market investments of high quality and low risk. C. They provide an easy way to reduce financing costs because they are relatively cheaper than shortterm funds. D. They are the sources that supply the financing necessary to support a firm's capital budgeting activities. D. Which pattern of cash flow stream is the most difficult to use when evaluating projects? A. nonconventional flow B. annuity C. mixed stream D. conventional flow A.________ reflects the return that must be earned on the given project to compensate the firm's owners adequately. A. Average rate of return B. Internal rate of return C. Cost of capital D. Risk-adjusted discount rate D. The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.2) A. an annuity and a nonconventional cash flow B. a mixed stream and a conventional cash flow C. an annuity and a conventional cash flow D. a mixed stream and a nonconventional cash flow B initial cash outflows and subsequent operating cash inflows for a project are referred to as ________. A. ordinary cash flows B. relevant cash flows C. perpetual cash flows D. necessary cash flows B.A firm has a beta of 1.2. The market return equals 14 percent and the riskminus−free rate of return equals 6 percent. The estimated cost of common stock equity is ________. A. 6 percent B. 14 percent C. 7.2 percent D. 15.6 percent The estimated cost of common stock equity is = risk free rate + beta(return - risk free rate ) = 6 + 1.2(14-6) = 15.6% D. Which of the following is true of the acceptminus−reject approach? A. It involves ranking projects on the basis of some predetermined measure, such as the rate of return. B. It cannot be used when the firm has limited funds. C. It can be used for making capital budgeting decisions when there is capital rationing. D. It can be used only for evaluating mutually exclusive projects. C. A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a fiveminus−year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________. A. $7,560 tax liability B. $0 tax liability C. $4,400 tax liability D. $7,720 tax liability D.If cost of capital is 8.5% then estimate the net present value of following stream of cash flows: Year Cash-flow 0 -$12,000 1 8,000 2 7,000 3 5,000 A. $8,000 B. $6,225 C. $5,234 D. -$3,200 C. The ________ is the rate of return that a firm must earn on its investments in order to maintain the market value of its stock. A. cost of capital B. internal rate of return C. modified internal rate of return D. yield to maturity A. The first step in the capital budgeting process is ________. A. decision making B. implementation C. review and analysis D. proposal generation D.Which of the following is an unsophisticated capital budgeting technique? A. net present value B. payback period C. profitability index D. internal rate of return B. payback period XYZ Inc. is planning to buy a new machine. The cost of the machine is $25,000 and it will generate $12,000, $8,000, $7,000 and $10,000 in years 1, 2, 3, and 4 respectively. Based on the information given above, estimate payback period of this investment. A. 2.71 years B. 2.35years C. 2 years D. 3 years A. A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a fiveminus−year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a fiveminus−year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________. A. $50,000 B. $54,240 C. $42,000 D. $52,440 B.A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows: Modifying Above and below Start 2 By 1 Matrix 1st Row 1st Column Bold Year Dividend 2nd Row 1st Column Start 5 By 1 Matrix 1st Row 1st Column 1 $ 2.00 2nd Row 1st Column 2 2.14 3rd Row 1st Column 3 2.29 4st Row 1st Column 4 2.45 5st Row 1st Column 5 2.62 EndMatrix EndMatrix with brackets Year Dividend 1 $2.00 2 2.14 3 2.29 4 2.45 5 2.62 The cost of the firm's common stock equity is ________. A. 4.1 percent B. 12.1 percent C. 5.1 percent D. 15.4 percent B.