Multiple Choice Question 1

Cadmium Electronics Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm's cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC?

9.2%

8.4%

9.6%

10.4%

Multiple Choice Question 2

Gangland Water Guns, Inc. has a debt-to-equity ratio of 0.5. If the firm's cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC?

9%

10%

11%

None of the above.

Multiple Choice Question 3

The use of debt financing

causes a manager to take on riskier projects in order to make interest payments.

limits the ability of managers to waste stockholders' money.

allows managers to make discretionary interest payments.

is more expensive than issuing equity due to the use of covenants.

Multiple Choice Question 4

The use of debt financing

increases agency costs between the stockholders and management by limiting the amount of risk the managers take.

increases agency costs since managers prefer to keep more retained earnings rather than paying dividend.

both increases agency costs between the stockholders and management by limiting the amount of risk the managers take and increases agency costs since managers prefer to keep more retained earnings rather than paying dividend.

reduces agency costs between the stockholders and management by increasing the amount of risk the managers take.

Multiple Choice Question 5

The asset substitution problem occurs when

managers substitute less risky assets for riskier ones to the detriment of equity holders.

managers substitute more risky assets for less risky ones to the detriment of bondholders.

managers substitute less risky assets for more risky ones to the detriment of bondholders.

managers substitute more risky assets for less risky ones to the detriment of equity holders.

Multiple Choice Question 6

Packman Corporation has a reported EBIT of $500, which is expected to remain constant in perpetuity. The firm borrows $2,000, and its coupon rate is 8%. If the company's marginal tax rate is 30% and its average tax rate is 20%, what are its after-tax earnings?

$238

$272

$259

None of the above

Multiple Choice Question 7

Which of the following supports the trade-off theory of capital structure?

Firms use cash on hand first, since issuing equity and debt is expensive.

A firm's capital structure is the result of past equity and debt issuance decisions.

Firms have a target capital structure.

Both firms use cash on hand first, since issuing equity and debt is expensive and a firm's capital structure is the result of past equity and debt issuance decisions.

Multiple Choice Question 8

Which of the following statements is true of S-corporation?

An S-corporation can have more than 100 stockholders.

An S-corporation is a variation of the LLC (limited liability company).

All profits of an S-corporation pass directly to the stockholders as they would pass to the partners in a partnership.

Only foreign investors can own the shares of an S-corporation.

Multiple Choice Question 9

Which of the following statements is true about business plans?

A well-prepared business plan makes it easier for an entrepreneur to communicate to potential investors precisely what returns an investor might expect to receive.

A well-prepared business plan always avoids contingent liabilities as the plan helps to predict and change the occurrence of a contingent liability.

A business plan is useful only in case of exigency in the business environment otherwise a business plan is not important.

A business plan is a trivial part in the overall strategy formulation and its impact on business operations in the long run is miniscule.

Multiple Choice Question 10

Which of the following statements is true of business valuation principle?

The value of a business is solely affected by managers' financing decisions.

As per first valuation principle, the value of business does not change over time.

Estimating the fair market value of a business includes the value of synergies or the effects of any investor-specific management style.

The fair market value of a business is the value of that business to a hypothetical person who is knowledgeable about the business.

Multiple Choice Question 11

When using the multiples analysis approach to valuing a business, one must be aware:

of the presence of a marketability premium that can be sizable.

of the adjusted book value of a business which is the cost of duplicating the assets of the business in their present form as of the valuation date.

of the presence of a marketability discount that can be sizable.

of the stock value of similar companies whose shares are not publicly traded.

Multiple Choice Question12

The transaction approach is difficult to use because:

transactions involving the purchase or sale of an entire business in an industry tend to occur frequently and hence the amount of data is immense.

transactions data are typically as reliable as the data available for multiples analysis, especially when they are associated with a private firm.

the terms of the transactions can be easy to assess.

the terms of the transactions can be difficult to assess.

Multiple Choice Question 13

Which of the following statements about the free cash flow from the firm (FCFF) approach is true?

The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses, are added in the calculation of FCFF.

We include the cash necessary to pay short-term liabilities that do not have interest charges associated with them, such as accounts payable and accrued expenses.

The total value of the firm, VF, is computed as the present value of the FCFF, discounted by the firm's weighted average cost of capital,WACC.

The present value of these cash flows exceeds the total value of the firm, or its enterprise value.

Multiple Choice Question 14

Sonicmony Soft, makes designer gold bracelets. Its annual costs include shop rent of $15,000, salaries for two jewelers of $125,000, design software costs of $12,000, and other overhead costs of $15,000. An average bracelet is priced at $6,500. It costs $2,200 in raw material, $1,500 in labor, and $400 in other expenses. What is the minimum number of bracelets that need to be sold to earn a profit? (Round to nearest whole unit.)

18 bracelets

47 bracelets

70 bracelets

14 bracelets

Multiple Choice Question 15

Settetocol, inc., has cash of $12,000, receivables of $35,000, and inventory of $28,000. In addition, the firm has fixed assets of $120,000. Management has also told you that you can reasonably expect to collect 93 percent of the receivables, that the inventory could be sold to realize 84 percent of its book value, and that the sale of the property, plant, and equipment would yield $94,000. What is the liquidation value of this company? (Round to the nearest dollar.)

$139,695

$138,695

$174,866

$162,070

Multiple Choice Question 16

Cervil had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Cervil has an enterprise value/EBITDA multiple of 5.40. What is the enterprise value of Cervil? (Round to the nearest million dollars.)

$453 million

$1,334 million

$1,315 million

$1,787 million