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Question
Rank in ascending order (lowest to highest) the relative risk associated with holding the preferred stock, common stock and bonds of a firm:a. preferred stock, bonds, common stock
b. bonds, common stock, preferred stock
c. common stock, preferred stock, bonds
d. bonds, preferred stock, common stock
Answer
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Related questions
Q:
Operating leverage involves the use of
a. equity and debt in equal proportions
b. market power
c. debt
d. assets having fixed costs
Q:
The degree of financial leverage is defined as the percentage change in
a. EBIT resulting from a given percentage change in sales
b. EPS resulting from a given percentage changes in sales
c. EBIT resulting from a given percentage change in EPS
d. EPS resulting from a given percentage change in EBIT
Q:
A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the result of a ____ increase in EBIT.
a. 81%
b. 3%
c. 9%
d. 6%
Q:
Financial leverage causes a firm's ____ to change at a rate greater than the change in ____.
a. EBIT; EPS
b. EPS; EBIT
c. EBIT; sales
d. sales; EBIT
Q:
A firm is considering the purchase of assets that will increase its fixed operating costs. The firm should decrease the proportion of ____ it employs in its capital structure if it wants to maintain its existing degree of combined leverage.
a. debt
b. warrants
c. common stock
d. none of the above
Q:
The degree of combined leverage is equal to the ____ multiplied by the ____.
a. degree of operating leverage, variable cost ratio
b. degree of financial leverage, variable cost ratio
c. degree of operating leverage, degree of financial leverage
d. degree of operating leverage, fixed cost ratio
Q:
A firm that employs relatively large amounts of labor- saving equipment in its operations will have a relatively ____ degree of operating leverage.
a. low
b. constant
c. insignificant
d. high
Q:
The total variability of the firm's EPS associated with a change in sales is an indication of combined leverage and is best measured by
a. DOL
b. DFL
c. DOL + DFL
d. DOL DFL
Q:
Have No Clue Detective Agency is issuing preferred stock which pays a dividend of $6. It is currently selling for $75 and flotation costs are 11% of its price. What is the cost of preferred stock (rounded)?
a. 6%
b. 18%
c. 9%
d. 11%
Q:
Columbia Gas Company's(CG) current capital structure is 35% debt and 65% equity. This year CG has earnings after tax of $5.31 million and is paying $1.6 million in dividends. To finance a transmission pipe line, CG can borrow $2 million at a cost of 10%, the same rate that CG is currently paying on a total of $15 million long-term debt. CG has 1,000,000 shares outstanding and its current market price is $31. If CG's long-term growth rate of dividends is expected to be 8%, what is the weighted cost of capital for the firm? Assume a marginal tax rate of 40%.
a. 10.9%
b. 13.6%
c. 19.6%
d. 16.9%
Q:
Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10% and the market risk premium is 8.8%. Determine Haulsee's cost of equity if the firm's tax rate is 40%.
a. 9.48%
b. 17.1%
c. 14.9%
d. cannot determine from the information provided
Q:
Easy Slider recently sold a 15 year $1,000 face value bond at a discount for $700 that net the firm $692 after flotation costs. The low coupon bond has a 6% coupon with interest paid semiannually. If Easy Slider has a marginal tax rate of 40 percent, what is its after-tax cost of debt for these bonds?
a. 10.0%
b. 6.0%
c. 9.2%
d. 7.8%
Q:
According to Value Line, Bestway has a beta of 1.15. If 3-month Treasury bills currently yield 7.9 percent and the market risk premium is estimated to be 8.3 percent, what is Bestway's cost of equity capital?
a. 17.45%
b. 8.36%
c. 9.55%
d. 9.09%
Q:
For firms subject to the 34% marginal tax rate, the after-tax cost of ____ is roughly two-thirds the cost of preferred stock.
a. retained earnings
b. new common stock
c. long-term debt
d. retained earnings and new common stock
Q:
The CAPM assumes that the only risk of concern to the investor is ____, which is measured by ____.
a. Unsystematic risk, beta
b. Systematic risk, the return to the market portfolio
c. Systematic risk, beta
d. Unsystematic risk, the return to the market portfolio
Q:
The cost of capital is
a. the rate of return required by investors in the firm's securities
b. the minimum rate of return required on new investments of average risk undertaken by the firm
c. approximately 10 percent for most firms
d. a and b only
Q:
Name the four decision models for evaluating capital expenditures and indicate what criteria is used to determine the acceptability of a project?
Q:
G-III Apparel is considering increasing the size of a warehouse. The cost of the expansion is $825,000 and the increase in inventories and accounts payable will be $410,000 and $360,000 respectively. G-III expects that the expansion will increase net cash flows by $150,000 a year for the next 5 years and $200,000 a year for years 6-12. G-III has a 14% cost of capital and a marginal tax rate of 35%. What is the NPV of the warehouse expansion?
a. -$3,450
b. $60,050
c. $10,050
d. -$338,570
Q:
Using the profitability index, which of the following projects should be accepted? Project M:
NPV = $60,000
NINV = $200,000 Project N:
NPV = $10,000
NINV = $30,000 Project O:
NPV = $2,000
NINV = $5,000 a. Project M
b. Project N
c. Project O
d. All projects should be accepted
Q:
What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.
a. $211,080
b. $392,580
c. $588,710
d. $160,920
Q:
Using the profitability index, which of the following mutually exclusive projects should be accepted?
Project A: NPV = $6,000; NINV = $50,000
Project B: NPV = $10,000; NINV = $120,000
Project C: NPV = $8,000; NINV = $80,000
a. A
b. B
c. C
d. all projects should be accepted
Q:
Sigma is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in year 2, $5,000 in year 3, and $3,000 in year 4. Should Sigma purchase this digger if its cost of capital is 12 percent?
a. Yes, NPV = $3,176
b. Yes, NPV = $5,084
c. Yes, NPV = $16,605
d. Yes, NPV = $19,084
Q:
Would you invest in a project that has a net investment of $14,600 and a single net cash flow of $24,900 in 5 years, if your required rate of return was 12 percent?
a. Yes - the NPV is $862.90
b. No - the NPV is -$1,975.70
c. No - the NPV is -$481.70
d. Yes - the NPV is $165.70
Q:
What is the net present value of a project that requires a net investment of $76,000 and produces net cash flows of $22,000 per year for 7 years? Assume the cost of capital is 15 percent.
a. $ 91,520
b. $ 15,520
c. $ 78,000
d. $167,474
Q:
Hoffman Industries has negotiated a revolving credit agreement with its bank. The bank will loan Hoffman up to $300,000 at an annual interest rate of 10% and requires a 0.3% commitment fee on the unused portion of the credit agreement. The bank's standard policy requires all loan customers to maintain a 10% compensating balance on any amount borrowed. Hoffman currently maintains an average balance of $8,000 that can be used to meet any compensating balance requirements. Compute the annual financing cost of the revolving credit agreement, if the firm borrows an average of $180,000 throughout the year.
a. 10.80 percent
b. 10.20 percent
c. 12.71 percent
d. 2.0 percent
Q:
Pressing Club Corporation can raise needed short-term funds by pledging its receivables. First Bank will lend Pressing 70 percent of the $2.5 million in pledged receivables at 11.2 percent plus a service fee that equals 0.75 percent of the amount of the pledged receivables. Interest is computed based on the amount of receivables pledged. If Pressing's average collection period is 55 days, what is the annual financing cost for the pledged receivables?
a. 2.7%
b. 18.3%
c. 23.1%
d. 11.2%
Q:
Northwest Container Company is considering selling an issue of commercial paper to finance its seasonal needs. A commercial paper dealer has offered to sell a $10 million issue maturing in 90 days at an interest rate of 10 percent per annum (deducted in advance). The dealer's fee for selling the commercial paper would be $10,000. Determine the annual financing cost of commercial paper financing to Northwest.
a. 10.7%
b. 10.3%
c. 10.0%
d. 9.3%
Q:
Determine the annual financing cost of foregoing a cash discount under credit terms of 2/30, net 90.
a. 8.0%
b. 24.0%
c. 12.2%
d. 12.4%
Q:
Idaho Industries currently purchases an average of $20,000 per day of raw materials. Idaho's suppliers offer credit terms of "net 60" and the firm waits until the end of the credit period to pay suppliers. Determine Idaho Industries' current level of trade credit (accounts payable).
a. $ 20,000
b. $600,000
c. $1,200,000
d. $200,000
Q:
Which of the following methods of financing would usually have the lowest cost to the firm?
a. pledging accounts receivable
b. commercial paper
c. factoring accounts receivable
d. line of credit