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Accounting quiz 2




Question;Page 1;Practice quiz;1a. The mixture of long-term funding;sources that a firm uses to finance its assets is;A) capital structure;B) financial leverage;C) operating leverage;D) debt operations;2. Which of the following factors;affect the optimal (best) capital structure for a firm?;A) the firm's cost of debt, cost of;common equity, and cost of preferred stock (if any);B) market conditions;C) investor perceptions;D) all of the above;3. When forecasting changes in Net;Working Capital, which of the following could likely;happen spontaneously as sales increase?;A) decrease in common stock on the;balance sheet;B) increases in gross fixed equipment;C) increase in long-term debt;D) increase in accounts receivables;4. Your firm is in the 30% tax bracket;with a before-tax required rate of return on its;equity of 13% and on its debt of 10%.;If the firm uses 60% equity and 40% debt;financing, calculate its after-tax;WACC.;5. The following net cash flows are;projected for two separate projects. Your required;rate of return is 12%.;a. Calculate the payback period for;each project.;b. Calculate the NPV of each project.;c. Calculate the IRR of each project.;d. Which project(s) would you accept;and why?;Page 2;6.The relevant cash flows in capital;budgeting can best be described as;A) incremental after-tax net income;B) incremental cash flows;C) externality cash flows;D) changes in fixed asset cash flows;Use the following to answer questions;7-8;You have been asked to render an;opinion to your boss as to whether your employer should enter into the;short-term capital project described below.;The project requires the purchase of a;new piece of equipment for a price of $25,000.;The firm has paid a consultant $1,000;to estimate the revenues expected from the project. The firm that ships the;equipment and installs it in our plant will charge $500.;The project's incremental operating;cash flows before taxes will be $12,000 per year for three years. At the end of;three years the equipment will be sold for $5000. The equipment has a;three-year useful life and will be depreciated using the three-year MACRS;(Modified Accelerated Cost Recovery System ? current U.S. accounting rules);schedule that specifies the percentage of equipment costs to be depreciated per;year as follows: 33.3%, 44.5%, 14.8%,7.4%). The tax rate is 34% and the firm's;required rate of return is 17%.;7. a. What is the Acquisition Cost (the;tax basis) for the equipment?;b. What are the depreciation deductions;for years 1, 2, and 3?;c. If the asset is sold for more than;its depreciated value, the difference is viewed as;taxable income and taxes must be paid;on that gain. What will be the after tax net cash;flow from the sale of the asset at the;end of year three?;d. Given the Acquisition Cost, the incremental;operating cashflows, the depreciation;the EBIT, and the taxes owed, calculate;the total operating cash flow for each of the;three years.;8. Based on the net cash flows that you;calculated in the question above, what is the;a. payback period;b. net present value;c. internal rate of return;9.What is the relevant initial cash;outflow for the following project?;Equipment cost $ 50,000;Installation $ 5,000;Cash increase needed $ 2,000;Inventory increase needed $ 3,000;Increase in Accounts payable $ 2,000;A)$58,000;B)$62,000;C)$55,000;D)$60,000;10. Your firm is considering an;acquisition with incremental net cash flows projected to be $152,500 in Year;10, the last year of the analysis that you have done to evaluate the;opportunity.;A) What is the present value of the;?Terminal Value? of this opportunity if you;assume a long-term growth rate of 3%;and your firm?s WACC is 9.0%?;B) If the seller insists he will accept;no less than $2 million and the total present value;of the incremental cash flows for years;0-10 of your forecast = $1 million, should;you proceed with the Acquisition? Why;or why not?;11. The sales break-even point is;defined as;A) the level of sales that a firm must;reach to cover fixed costs;B) the level of income that a firm must;reach to cover variable costs;C) the level of sales that a firm must;reach to cover all operating costs;D) the point where operating income;equals fixed costs;12. Given fixed costs of $200,000;variable costs of $6.20 per unit, and a sales price per unit of $7.00;calculate the break-even point in units.;A) 150,000;B) 250,000;C) 15,385;D) 28,571;13. Operating leverage has the effect;of triggering;A) a smaller percentage change in EBIT;when a given percentage change in sales;occurs;B) a smaller given percentage change in;EBIT when a larger percentage change in;sales occurs;C) a smaller given percentage change in;EBIT when a smaller percentage change in;sales occurs;D) a larger percentage change in EBIT;when a given percentage change in sales;occurs;14. If variable costs = $10.00 per;unit, and the selling price = $13.00 per unit, and the;break-even point in units = 100,000;calculate the fixed costs.;A) $33,333;B) $ 4,348;C) $300,000;D) $50,750;15. Firms with high fixed operating;costs;A) tend to have low variable costs;B) tend to have high variable costs;C) tend to have low operating leverage;D) tend to have low sales levels;16. As a firm moves to a capital;structure with higher debt;A) financial risk of the firm increases;B) financial risk of the firm decreases;if interest payments are tax deductible;C) financial risk of the firm is;unaffected if interest payments are tax deductible;D) DOL increases;17. Which of the following are;investment grade bonds?;A) AAA U.S. Treasury Bonds;B) A- corporate mortgage bonds;C) BBB corporate debentures;D) All of the above are investment;grade bonds.;18. For investors, an important;characteristic of a secured bond is that it has;A) a plan for paying off the bond at;maturity;B) no restrictive covenants;C) a claim on specific assets in the;event of default;D) an independent trustee;19. Which statement is FALSE regarding;preferred stock?;A) Preferred stock is issued by a;limited number of corporations.;B) Preferred shareholders have priority;over the creditors of the corporation.;C) Preferred shareholders do not have;voting rights.;D) All of the above are false.;20. Which of the following statements;about residual income - i.e., net income after taxes -is not accurate?;A) it is income left over after other;claimants of the firm have been paid;B) it is almost always paid out in the;form of a cash dividend to both common and;preferred stockholders;C) it can be reinvested in the firm;D) it can be reinvested in the firm and;can be paid in the form of dividends to common;stockholders;21. The board of directors of a;publicly traded company;A) is elected by, and represents the;interests of the common stockholders;B) is part of the professional;management team;C) is appointed by the CEO;D) is a figurehead position only;22. Why might a firm issue new stock?;A) to send a signal;B) for dilution--too few shares;outstanding makes the share price too high for some;investors;C) to increase its debt/equity ratio;D) to raise capital and therefore lower;the firm's financial risk;23. Investors are likely to view a new;issuance of common stock as a signal that;A) prospects of the firm are better;than generally believed;B) prospects of the firm are worse than;generally believed;C) the firm is preparing for a new debt;issue;D);new management or directors of the board are being put in place


Paper#42883 | Written in 18-Jul-2015

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