The difference between the capital gains tax rate and the income tax

Q1. Dividend policy is influenced by:
     a. a company’s investment opportunities
     b. a firm’s capital structure mix
     c. a company’s availability of internally generated funds
     d. a and c
     e. a, b, and c

Q2. The difference between the capital gains tax rate and the income tax rate is an incentive for:
     a. firms never to split their stock
     b. firms to declare more stock dividends
     c. firms to pay more earnings as dividends
     d. firms to retain more earnings

Q3. NPV and IRR lead to the same accept/reject decision for projects that are:
     a. Light and variable
     b. Lemon and lime
     c. Sweet and sour
     d. Independent with one sign reversal

Q4. A firm with positive MVA is:
     a. controlling operating expenses extremely well.
     b. using investments to produce what investors perceive to be positive net present values.
     c. experiencing monetary volatility acceleration.
     d. likely to have an unhappy group of common stockholders.

Q5. The disadvantage of the IRR method is that:
     a. the IRR deals with cash flows.
     b. the IRR gives equal regard to all returns within a project’s life.
     c. the IRR will always give the same project accept/reject decision as the NPV.
     d. the IRR requires long, detailed cash flow forecasts.

Q6. Optimal capital structure is:
     a. the mix of permanent sources of funds used by the firm in a manner that will maximize the company’s common stock price.
     b. the mix of all items that appear on the right-hand side of the company’s balance sheet.
     c. the mix of funds that will minimize the firm’s composite cost of capital
     d. a and c above

Q7. Noncash expenses include:
     a. depreciation expenses
     b. salaries of administrative personnel
     c. foremen’s salaries
     d. packaging expenses

Q8. An example of a semivariable or semifixed cost is:
     a. rent
     b. salaries paid production foremen
     c. energy costs associated with production
     d. direct labor

Q9. The degree of operating leverage applies only to:
     a. positive changes in sales
     b. negative changes in sales
     c. positive or negative changes in sales
     d. positive changes in sales and EBIT

Q10. How frequently do corporations generally pay dividends?
     a. Annually
     b. Semi-annually
     c. Quarterly
     d. Monthly

Q11. Pizza Yen has annual fixed costs of $250,000 and a variable cost per pizza of $3.50. Yen sells pizzas for $13.50 each. The firm expects to sell 35,000 pizzas annually. What is the unit contribution margin for a pizza?
     a. $8
     b. $9
     c. $10
     d. $11

Q12. The simulation approach provides us with:
     a. a single value for the risk-adjusted net present value
     b. an approximation of the systematic risk level
     c. a probability distribution of the project’s net present value or internal rate of return
     d. a graphic exposition of the year-by-year sequence of possible outcomes

Q13. A plant may remain operating when sales are depressed
     a. if the selling price per unit exceeds the variable cost per unit
     b. to help the local economy
     c. in an effort to cover at least some of the variable cost
     d. unless variable costs are zero when production is zero

Q14. What is the economic difference between a stock dividend and a stock split?
     a. Stock splits create greater economic benefits to shareholders than stock dividends.
     b. Stock splits increase EPS more than stock dividends.
     c. There is no economic difference between a stock dividend and a stock split.
     d. Stock dividends create greater economic benefits to shareholders than stock splits.

Q15. Flotation costs:
     a. include the fees paid to the investment bankers, lawyers, and accountants involved in selling a new security issue
     b. encourage firms to pay large dividends
     c. are encountered whenever a firm fails to pay a dividend
     d. are incurred when investors fail to cash their dividend check

Q16. Arguments against using the net present value and internal rate of return methods include that
     a. they fail to use accounting profits.
     b. they require detailed long-term forecasts of the incremental benefits and costs.
     c. they fail to consider how the investment project is to be financed.
     d. they fail to use the cash flow of the project.

Q17. What method is used for calculation of the accounting beta?
     a. simulation
     b. regression analysis
     c. sensitivity analysis
     d. both a and c

Q18. If the federal income tax rate were increased, the result would be to
     a. decrease the net present value
     b. increase the net present value
     c. increase the payback period
     d. a and c

Q19. In capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to find which of the following:
     a. Market value weight of debt
     b. Pretax component cost of debt
     c. After-tax component cost of debt
     d. Component cost of internal equity
     e. Market value weight of equity

Q20. The _______ designates the date on which the stock transfer books are closed in regard to a dividend payment.
     a. declaration date
     b. ex-dividend date
     c. date of record
     d. payment date

Q21. Business risk refers to:
     a. The risk associated with financing a firm with debt.
     b. The variability of a firm’s expected earnings before interest and taxes.
     c. The uncertainty associated with a firm’s CAPM.
     d. The variability of a firm’s stock price.

Q22. If bankruptcy costs and/or shareholder underdiversification are an issue, what measure of risk is relevant when evaluating project risk in capital budgeting?
     a. Total project risk
     b. Contribution-to-firm risk
     c. Systematic risk
     d. Capital rationing risk

Q23. The internal rate of return is:
     a. The discount rate that makes the NPV positive.
     b. The discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
     c. The discount rate that makes NPV negative and the PI greater than one.
     d. The rate of return that makes the NPV positive.

Q24. Assume that Johnson & Squib have 1,000,000 common shares outstanding that have a par value of $3 per share. The stock currently sells for $15 per share. Which of the following will result from a 2 for 1 stock split?
     a. A decrease in retained earnings of $1,500,000.
     b. Market value will increase from $15 per share to $30 per share.
     c. Par value will increase from $3 per share to $6 per share.
     d. The number of outstanding shares will increase from 1,000,000 to 2,000,000.

Q25. A high degree of variability in a firm’s earnings before interest and taxes refers to:
     a. business risk
     b. financial risk
     c. financial leverage
     d. operating leverage

Q26. Due to a technical breakthrough, the fixed costs for a firm drop by 25%. Prior to this breakthrough, fixed costs were $100,000 and unit contribution margin was and remains at $5.00. The new amount of break-even units will be:
     a. 20,000
     b. 25,000
     c. 15,000
     d. 5,000

Q27. In general, what effect does capital rationing have on firm value?
     a. It increases firm value.
     b. It decreases firm value.
     c. It may increase or decrease firm value.
     d. It has no impact on firm value.

Q28. For accounting purposes a stock split has been defined as a stock dividend exceeding:
     a. 25 percent
     b. 35 percent
     c. 50 percent
     d. 66 2/3 percent

Q29. When does the right of ownership to the current period’s dividend terminate?
     a. The declaration date.
     b. The holder-of-record date.
     c. The residual date.
     d. The ex-dividend date.

Q30. Which of the following is the most valid reason to split a stock that has a market price of $110 per share?
     a. Conserve cash.
     b. Reduce the market price to a more popular trading range.
     c. Obtain additional capital.
     d. Increase investor’s net worth.

Q31. The break-even model enables the manager of the firm to:
     a. calculate the minimum price of common stock for certain situations
     b. set appropriate equilibrium thresholds
     c. determine the quantity of output that must be sold to cover all operating costs
     d. determine the optimal amount of debt financing to use

Q32. According to the perfect markets approach to dividend policy:
     a. other things equal, the greater the payout ratio, the greater the share price of the firm
     b. the price of a share of stock is unrelated to dividend policy
     c. the firm should retain earnings so stockholders will receive a capital gain
     d. the firm should pay a dividend only after current equity financing needs have been met

Q33. The alternative formula for operating leverage is (VC = total variable costs and FC = total fixed costs):
     a. Sales-VC/(Sales-VC-FC)
     b. Sales-VC-FC/(Sales-VC)
     c. Sales-FC/(Sales-FC-VC)
     d. Sales+FC/(Sales-FC-VC)

Q34. Which of the following is the most relevant measure of risk for capital budgeting purposes?
     a. Project standing alone risk.
     b. Contribution-to-firm risk.
     c. Symbiotic risk.
     d. Unsystematic risk.

Q35. The only definite result from a stock dividend or a stock split is:
     a. an increase in the P/E ratio
     b. an increase in the common stock’s market value
     c. an increase in the number of shares outstanding
     d. cannot be determined from the above

Q36. Which of the following dividend policies will cause dividends per share to fluctuate the most?
     a. constant dividend payout ratio
     b. stable dollar dividend
     c. small, low, regular dividend plus a year-end extra
     d. no difference between the various dividend policies

Q37. Bubby’s Britles generated sales of $250,000 in the latest year. During this same period, the firm’s EBIT was $150,000. If the firm were to incur $25,000 in interest expense, what is Bubby’s degree of financial leverage?
     a. .83
     b. 1.2
     c. 3.7
     d. 5.3

Q38. The capital budgeting decision criterion that should be used for mutually exclusive investment projects is:
     a. net present value
     b. internal rate of return
     c. profitability index
     d. payback

Q39. Which type of risk is a direct result of a firm’s financing decision?
     a. business risk
     b. financial risk
     c. systematic risk
     d. risk aversion

Q40. A significant advantage of the payback period is that it:
     a. Places emphasis on time value of money.
     b. Allows for the proper ranking of projects.
     c. Tends to reduce firm risk because it favors projects that generate early, less uncertain returns.
     d. Gives proper weighting to all cash flows.

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