4. Corperate Issuers Questions Bank 2023

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Question #1 of 7 Question ID: 1469208Government regulators typically require periodic disclosure of a company's financial

performance for:

A) private companies only

B) public companies only

C) both private and public companies

Explanation

Regulators typically require periodic reporting of financial results for public companies.Private companies are typically not subject to these requirements

(Module 28.1, LOS 28.b)

Under which business structure are profits potentially subject to double taxation?

(Module 28.1, LOS 28.a)

In a partnership, a general partner's liability for the obligations incurred by the business:A) depends on whether the partnership is general or limited

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Increasing a company's risk exposure in an effort to increase its growth rate is most likely to

be favored by:

A) owners but not lenders

B) both lenders and owners

C) neither lenders nor owners

Explanation

Because the upside for lenders is limited to the promised interest payments and

repayment of principal, they do not benefit from an increased growth rate of the companyand are unlikely to favor actions that increase a company's risk exposure and potential fordefault Because owners have potentially unlimited upside from a company's growth, theyare more likely to favor actions that increase a company's potential growth rate

(Module 28.1, LOS 28.c)

The owner's liability for the business obligations of a sole proprietorship:

A) is limited to the amount invested

B) may be limited or unlimited

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Question #6 of 7 Question ID: 1469207

A corporation that wishes to raise equity capital and have its shares publicly traded is mostlikely to engage in:

A) a management buyout

B) an initial public o ering

C) a direct listing on an exchange

Explanation

An initial public offering is a sale of equity shares to the public Proceeds from the saleincrease the issuer's equity capital A direct listing does not raise capital A managementbuyout is a method to take a public company private

Which of the following payments are contractual obligations of a corporation?

A) Interest and principal payments

B) Interest and common stock dividend payments

C) Interest, principal, and preferred stock dividend payments

Explanation

Interest and principal payments to lenders are contractual obligations A corporation maydistribute dividends to owners but is not required to do so

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In the absence of any ESG-related constraints specified in an investment policy statement, aportfolio manager is most likely to violate fiduciary duty by using ESG factors to:

A) assess the expected return and risk of potential portfolio investments

B)exclude investments with negative ESG characteristics from the investor’s

portfolio

C) choose among investments with similar risk and return characteristics

Explanation

Constructing a portfolio based on ESG factors may violate fiduciary duty if doing so

reduces expected returns Analyzing ESG factors when assessing investment risk or usingESG factors to choose among otherwise equivalent investments would likely not violatefiduciary duty

(Module 29.2, LOS 29.e)

Smith Company's board of directors assigns responsibilities to several committees Thecommittee that is most likely to be responsible for establishing the chief executive officer'scompensation package is Smith's:

A) governance committee

B) remuneration committee

C) risk committee

Explanation

Compensation for a company's senior executives is typically a responsibility of a

remuneration or compensation committee

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Responsibilities of a board of directors' nominations committee are least likely to include:A) recruiting quali ed members to the board.

B) evaluating the independence of directors

C) selecting an external auditor for the company

Explanation

Selecting an external auditor (subject to shareholder approval) is a responsibility of theBoard's audit committee (Module 29.1, LOS 29.c)

Special resolutions that require a supermajority of shareholder votes may be addressed:A) at either the annual general meeting or an extraordinary general meeting

B) only at an extraordinary general meeting

C) only at the annual general meeting

Explanation

Special resolutions may be voted on at the annual general meeting or at an extraordinarygeneral meeting that is called specifically to address them (Module 29.1, LOS 29.c)

A principal-agent relationship most likely exists between a company's:

A) shareholders and managers

B) directors and regulators

C) customers and suppliers

Explanation

The relationship between shareholders and managers is a principal-agent relationship.Shareholders, as principals, through the board of directors hire managers, as agents, toact in the best interests of the shareholders

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Question #6 of 13 Question ID: 1463537The interests of community groups affected by a company's operations are most likely to beconsidered in corporate governance under:

A) special interest theory

Under shareholder theory, corporate governance is most concerned with managing conflicts

of interest between the firm's managers and its:

A) customers

B) owners

C) employees

Explanation

Under shareholder theory, corporate governance is most concerned with managing

conflicts of interest between the firm's managers and its owners (shareholders)

Environmental, social, and governance (ESG) investing is most accurately described as:

A)integrating environmental and social considerations into the investment

decision making process

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B)investing only in companies that promote environmental or social initiatives

favored by an investor

C)excluding companies from consideration for investment based on

environmental or social considerations

Explanation

ESG investing is using environmental, social, and governance factors when making

investment decisions Investing only in companies that promote environmental or socialinitiatives favored by an investor is best described as impact investing Excluding

companies from consideration for investment based on environmental or social

considerations is best described as negative screening Impact investing and negativescreening are two of the approaches an investor can use to implement ESG investing.(Module 29.2, LOS 29.e)

Risks that may arise from ineffective corporate governance least likely include:

A) reduced default risk

B) less e ective decision making

C) weaker nancial performance

Explanation

Ineffective corporate governance is likely to increase default risk

(Module 29.2, LOS 29.d)

The stakeholders of a company that are least likely to prefer a relatively riskier companystrategy that has the potential for superior company performance are:

A) shareholders

B) creditors

C) suppliers

Explanation

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A company's creditors prefer less risk because their potential gains from superior

company performance are limited, while they have significant downside risk from poorperformance that could threaten the company's solvency Shareholders have the greatestgains from superior company performance Suppliers may benefit from superior

performance of a company to which they supply goods and services, but in general theyprefer stable business operations and continuation of their business relationship with thecompany

The stakeholder theory of corporate governance is primarily focused on:

A) the interests of various stakeholders rather than the interests of shareholders

B)resolving the competing interests of those who manage companies and other

groups a ected by a company’s actions

C) increasing the value a company

Explanation

Resolving the conflicting interests of both shareholders and other stakeholders is thefocus of corporate governance under stakeholder theory Shareholders are among thegroups whose interests are considered under stakeholder theory

The stakeholder group that typically prefers the greatest amount of business risk is:

A) directors

B) shareholders

C) senior managers

Explanation

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Compared to the other two groups, shareholders have the greatest potential gains fromriskier strategies and can diversify their holdings across firms in order to reduce theinfluence of company specific risk While senior managers can gain from company

outperformance, they typically prefer less risk than shareholders because managers' risk

of poor company performance on the value of their options and on their careers cannot

be easily diversified away

Thematic investing is most accurately described as:

A)identifying the best companies in each sector with respect to environmental

and social factors

B) considering a single environmental or social factor when selecting investments

C)excluding companies or sectors from consideration for investment based on

environmental and social factors

Explanation

Thematic investing refers to selecting investments with a view to a specific environmental,social, or governance factor Identifying the best companies in each sector with respect toenvironmental and social factors is referred to as best-in-class investing Excluding

companies or sectors from consideration for investment based on environmental andsocial factors is referred to as negative screening

(Module 29.2, LOS 29.f)

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A firm is least likely to reduce its capital needs by adopting which of the following businessmodels?

Nebrid Company describes itself as a B2B firm This means that Nebrid:

A) is a marketplace for buyers and sellers

B) provides both inbound and outbound logistics

C) sells its products or services to other businesses

Explanation

B2B businesses are those that sell their products to other businesses

An example of macro risk that companies may face is:

A) exchange-rate risk

B) ESG risk

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C) capital investment risk.

Explanation

Macro risks include economic factors such as exchange-rate changes ESG risk and capitalinvestment risk are examples of firm-specific risks

Debrin Company uses a tiered pricing strategy Debrin is most likely to:

A) o er a discount for buying a large number of units

B) charge higher prices during peak times of day

C)set a temporarily low price until it builds market share and scales up

production

Explanation

Tiered pricing refers to setting prices based on a customer's volume of purchases

Binder Company describes itself as a direct sales business In terms of its business model,this refers to Binder's:

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Question #6 of 6 Question ID: 1469212Redbin Software publishes a multiplayer video game Redbin allows users to download thebasic software at no charge and makes enhanced features available at various prices.

Redbin's pricing strategy is best described as:

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If two projects are mutually exclusive, a company:

A) can accept either project, but not both projects

B) must accept both projects or reject both projects

C) can accept one of the projects, both projects, or neither project

One of the basic principles of capital allocation is that:

A) opportunity costs should be excluded from the analysis of a project

B) decisions are based on cash ows

C) projects should be analyzed on a pre-tax basis

Explanation

Key principles of the capital allocation process are:

1 Decisions are based on cash flows, not accounting income

2 Cash flows are based on opportunity costs

3 The timing of cash flows is important

4 Cash flows are analyzed on an after-tax basis

5 Financing costs are reflected in the project's required rate of return

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A company is considering a $10,000 project that will last 5 years.

Annual after tax cash flows are expected to be $3,000

A firm is reviewing an investment opportunity that requires an initial cash outlay of $336,875and promises to return the following irregular payments:

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To determine the net present value of the investment, given the required rate of return,

we can discount each cash flow to its present value, sum the present value, and subtractthe required investment

Year Cash Flow PV of Cash flow at 8%

Which of the following steps is least likely to be a step in the capital allocation process?A) Arranging nancing for capital projects

B) Conducting a post-audit to identify errors in the forecasting process

C) Forecasting cash ows and analyzing project pro tability

Explanation

Arranging financing is not one of the administrative steps in the capital budgeting process.The four administrative steps in the capital budgeting process are:

1 Idea generation

2 Analyzing project proposals

3 Creating the firm-wide capital budget

4 Monitoring decisions and conducting a post-audit

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Should a company accept a project that has an IRR of 14% and an NPV of $2.8 million if thecost of capital is 12%?

A) No, based on the NPV and the IRR

B) Yes, based on the NPV and the IRR

C) Yes, based only on the NPV

Explanation

The project should be accepted on the basis of its positive NPV and its IRR, which exceedsthe cost of capital

Garner Corporation is investing $30 million in new capital equipment The present value offuture after-tax cash flows generated by the equipment is estimated to be $50 million.Currently, Garner has a stock price of $28.00 per share with 8 million shares outstanding.Assuming that this project represents new information and is independent of other

expectations about the company, what should the effect of the project theoretically be onthe firm's stock price?

A) The stock price will increase to $30.50

B) The stock price will increase to $34.25

C) The stock price will remain unchanged

Explanation

In theory, a positive NPV project should provide an increase in the value of a firm's shares

NPV of new capital equipment = $50 million - $30 million = $20 million

Value of company prior to equipment purchase = 8,000,000 × $28.00 =

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Question #8 of 25 Question ID: 1463563Fisher, Inc., is evaluating the benefits of investing in a new industrial printer The printer willcost $28,000 and increase after-tax cash flows by $7,000 during each of the next four yearsand $6,000 in each of the two years after that The internal rate of return (IRR) of the printerproject is closest to:

Lincoln Coal is planning a new coal mine, which will cost $430,000 to build The mine willbring cash inflows of $200,000 annually over the next seven years It will then cost $170,000

to close down the mine in the following year Assume all cash flows occur at the end of theyear Alternatively, Lincoln Coal may choose to sell the site today If Lincoln has a 16%

required rate of return, the minimum price they should accept for the property is closest to:A) $326,000

B) $310,000

C) $318,000

Explanation

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The key is first identifying this as a NPV problem The minimum price the company shouldaccept for selling the property is the net present value of the mine if the company builtand operated it.

Next, the year of each cash flow must be property identified; specifically: CF0 = –430,000;

With respect to capital investments, the greatest amount of detailed analysis is typicallyrequired when deciding whether to:

A) address safety-related concerns

B) replace a functioning machine with a newer model to reduce costs

C) introduce a new product or develop a new market

Explanation

Introducing a new product or entering a new market involves sales and expense

projections that can be highly uncertain, and therefore require the greatest degree ofdetailed analysis Addressing safety or regulatory concerns or replacing old machinerytypically involve less uncertainty and do not require the same depth of analysis as

developing a new product or entering a new market

Polington Aircraft Co just announced a sale of 30 aircraft to Cuba, a project with a netpresent value of $10 million Investors did not anticipate the sale because governmentapproval to sell to Cuba had never before been granted The share price of Polington shouldtheoretically:

A)not necessarily change because new contract announcements are made all thetime

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B)increase by the project NPV divided by the number of common shares

outstanding

C)increase by the NPV × (1 – corporate tax rate) divided by the number of

common shares outstanding

Explanation

Since the sale was not anticipated by the market, the share price should rise by the NPV ofthe project per common share NPV is already calculated using after-tax cash flows

Financing costs for a capital project are:

A) subtracted from estimates of a project’s future cash ows

B) subtracted from the net present value of a project

C) captured in the project’s required rate of return

Explanation

Financing costs are reflected in a project's required rate of return Project specific

financing costs should not be included as project cash flows The firm's overall weightedaverage cost of capital, adjusted for project risk, should be used to discount expectedproject cash flows

An investment is purchased at a cost of $775,000 and returns $300,000 at the end of years 2and 3 At the end of year 4 the investment receives a final payment of $400,000 The IRR ofthis investment is closest to:

A) 8.65%

B) 9.45%

C) 13.20%

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Cf0 = -775,000, C01 = 0, F01 = 1, C02 = 300,000, F02 = 2, C03 = 400,000, F03 = 1; IRR =8.6534

The CFO of Axis Manufacturing is evaluating the introduction of a new product The costs of

a recently completed marketing study for the new product and the possible increase in thesales of a related product made by Axis are best described (respectively) as:

A) opportunity cost; externality

If the calculated net present value (NPV) is negative, which of the following must be correct.The discount rate used is:

A) greater than the internal rate of return (IRR)

B) less than the internal rate of return (IRR)

C) equal to the internal rate of return (IRR)

Explanation

When the NPV = 0, this means the discount rate used is equal to the IRR If a discount rate

is used that is higher than the IRR, the NPV will be negative Conversely, if a discount rate

is used that is lower than the IRR, the NPV will be positive

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An analyst has gathered the following data about a company with a 12% cost of capital:

Project P Project Q

Cash inflows $5,000/year $7,500/year

If the projects are independent, what should the company do?

A) Accept both Project P and Project Q

B) Accept Project P and reject Project Q

C) Reject both Project P and Project Q

The effects that the acceptance of a project may have on other firm cash flows are bestdescribed as:

A) pure plays

B) externalities

C) opportunity costs

Explanation

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Externalities refer to the effects that the acceptance of a project may have on other firmcash flows Cannibalization is one example of an externality.

Which of the following is least relevant in determining project cash flow for a capital

Sunk costs are not to be included in investment analysis Opportunity costs and the

project's impact on taxes are relevant variables in determining project cash flow for acapital investment (Module 31.1, LOS 31.b)

As the director of capital budgeting for Denver Corporation, an analyst is evaluating twomutually exclusive projects with the following net cash flows:

Year Project X Project Z

If Denver's cost of capital is 15%, which project should be chosen?

A) Project X, since it has the higher IRR

B) Project X, since it has the higher net present value (NPV)

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C) Neither project.

Explanation

NPV for Project X = -100,000 + 50,000 / (1.15)1 + 40,000 / (1.15)2 + 30,000 / (1.15)3 + 10,000/ (1.15)4

= -100,000 + 43,478 + 30,246 + 19,725 + 5,718 = -833

NPV for Project Z = -100,000 + 10,000 / (1.15)1 + 30,000 / (1.15)2 + 40,000 / (1.15)3 + 60,000/ (1.15)4

= -100,000 + 8,696 + 22,684 + 26,301 + 34,305 = -8,014

Reject both projects because neither has a positive NPV

Which of the following types of capital investments are most likely to generate little to norevenue?

A) Going concern projects

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The estimated annual after-tax cash flows of a proposed investment are shown below:

Year 1: $10,000

Year 2: $15,000

Year 3: $18,000

After-tax cash flow from sale of investment at the end of year 3 is $120,000

The initial cost of the investment is $100,000, and the required rate of return is 12% The netpresent value (NPV) of the project is closest to:

Johnson's Jar Lids is deciding whether to begin producing jars Johnson's pays a consultant

$50,000 for market research that concludes Johnson's sales of jar lids will increase by 5% if italso produces jars In choosing the cash flows to include when evaluating a project to beginproducing jars, Johnson's should:

A)exclude the cost of the market research and include the e ect on the sales of

jar lids

B)include both the cost of the market research and the e ect on the sales of jar

lids

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C)include the cost of the market research and exclude the e ect on the sales of jarlids.

Explanation

Sunk costs should be excluded from cash flows, as they are costs that cannot be avoidedeven if the project is not undertaken Externalities, such as positive or negative effects ofaccepting a project on sales of the company's existing products, should be included in thecash flows (Module 31.1, LOS 31.b)

Jack Smith, CFA, is analyzing independent investment projects X and Y Smith has calculatedthe net present value (NPV) and internal rate of return (IRR) for each project:

Project X: NPV = $250; IRR = 15%

Project Y: NPV = $5,000; IRR = 8%

Smith should make which of the following recommendations concerning the two projects?A) Accept Project X only

B) Accept Project Y only

C) Accept both projects

Explanation

The projects are independent, meaning that either one or both projects may be chosen.Both projects have positive NPVs, therefore both projects add to shareholder wealth andboth projects should be accepted

The effect of a company announcement that they have begun a project with a current cost

of $10 million that will generate future cash flows with a present value of $20 million is mostlikely to:

A) increase value of the rm’s common shares by $10 million

B) increase the value of the rm’s common shares by $20 million

C) only a ect value of the rm’s common shares if the project was unexpected

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Stock prices reflect investor expectations for future investment and growth A new

positive-NPV project will increase stock price only if it was not previously anticipated byinvestors

The financial manager at Genesis Company is looking into the purchase of an apartmentcomplex for $550,000 Net after-tax cash flows are expected to be $65,000 for each of thenext five years, then drop to $50,000 for four years Genesis' required rate of return is 9% onprojects of this nature After nine years, Genesis Company expects to sell the property forafter-tax proceeds of $300,000 What is the respective internal rate of return on this project?A) 7.01%

B) 13.99%

C) 6.66%

Explanation

CF0 = –$550,000; CF1 = $65,000; F1 = 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 = 1 CPTIRR = 7.0152 Note that the cash flows in year 9 have to be netted to calculate the IRRcorrectly

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An example of a primary source of liquidity is:

A) using trade credit from vendors

B) renegotiating debt agreements

C) ling for bankruptcy

Explanation

Primary sources of liquidity include cash resulting from selling goods and services,

collecting receivables, generating cash from other sources and sources of short-termfunding such as trade credit from vendors and lines of credit from banks Filing for

bankruptcy and renegotiating debt agreements are best described as secondary sources

of liquidity because they are sources to which a firm resorts when in financial distress.(Module 32.1, LOS 32.c)

A firm has average days of receivables outstanding of 22 compared to an industry average of

29 days An analyst would most likely conclude that the firm:

A) may have credit policies that are too strict

B) has a lower cash conversion cycle than its peer companies

C) has better credit controls than its peer companies

Explanation

The firm's average days of receivables should be close to the industry average A

significantly lower average days receivables outstanding, compared to its peers, is anindication that the firm's credit policy may be too strict and that sales are being lost topeers because of this We cannot assume that stricter credit controls than the average forthe industry are "better." We cannot conclude that credit sales are less, they may be more,but just made on stricter terms The average days of receivables are only one component

of the cash conversion cycle

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A company has better liquidity than its peer group if its:

A) quick ratio is lower

B) average trade payables are lower

C) receivables turnover is higher

Explanation

Higher receivables turnover is an indicator of better receivables liquidity since receivablesare converted to cash more rapidly A lower quick ratio is an indication of less liquidity.Lower trade payables could be related to better liquidity, but could also be consistent withvery poor liquidity and a requirement from its suppliers of cash payment

The condition that occurs when a company disburses cash too quickly, stretching the

company's cash reserves, is best described as a:

The quick ratio is considered a more conservative measure of liquidity than the current ratiobecause the quick ratio excludes:

A) inventories

B) marketable securities

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Which of the following sources of liquidity is the most reliable?

A) Revolving line of credit

B) Committed line of credit

C) Uncommitted line of credit

sources of liquidity

A large, creditworthy manufacturing firm would most likely get short-term financing by:A) issuing commercial paper

B) factoring its receivables

C) entering into an agreement for a committed line of credit

Explanation

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Large, creditworthy firms can get the lowest cost of financing by issuing commercial paper.Selling receivables to a factor is a higher cost source of funds used by firms with poorcredit quality A committed line of credit requires payment of a fee and represents bankborrowing, which would be attractive to a firm that did not have the size or

creditworthiness to issue commercial paper

Which of the following sources of short-term liquidity is considered reliable enough that itcan be listed in the footnotes to a firm's financial statements as a source of liquidity?

A bank offers a corporation a line of credit for a certain amount but reserves the right torefuse to honor any request for the use of the line This arrangement is best described as:A) a regular line of credit

B) a revolving line of credit

C) an uncommitted line of credit

Explanation

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With an uncommitted line of credit, a bank extends an offer of credit for a certain amountbut may refuse to lend if circumstances change With a regular or committed line of credit,

a bank extends an offer of credit that it commits to for a given time period A revolving line

of credit allows companies to borrow and repay funds as their needs change over time.(Module 32.1, LOS 32.a)

Which of the following is least likely an indicator of a firm's liquidity?

A) Inventory turnover

B) Amount of credit sales

C) Cash as a percentage of sales

Liquidating short-term assets and renegotiating debt agreements are best described as afirm's:

A) primary sources of liquidity

B) pulls and drags on liquidity

C) secondary sources of liquidity

Explanation

Secondary sources of liquidity include liquidating short-term or long-lived assets,

negotiating debt agreements (i.e., renegotiating), or filing for bankruptcy and reorganizingthe company Primary sources of liquidity are the sources of cash a company uses in itsnormal operations Pulls and drags on liquidity refer to factors that weaken a company'sliquidity position

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An analyst computes the following ratios for Iridescent Carpeting Inc and compares theresults to the industry averages:

Financial Ratio Iridescent Carpeting Industry Average

Based on the above data, which of the following can the analyst conclude? Compared to itscompetitors, Iridescent Carpeting is more:

short-competitors based on the net profit margin and return on equity The analyst can alsoconclude that the company has less financial leverage (risk) than the industry averagebased on the total debt / total capital ratio

Which of the following sources of credit would an analyst most likely associate with a

borrower of the lowest credit quality?

B) Uncommitted line of credit

C) Committed line of credit

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Committed lines and revolving lines of credit all contain a commitment by a lender to lend

up to a maximum amount, at the borrower's option for some period of time A firm withlower credit quality may have an uncommitted line of credit which offers no guaranteefrom the lender to provide any specific amount of funds in the future

An example of a secondary source of liquidity is:

A) negotiating debt contracts

Which of the following factors is most likely to cause a firm to need short-term financing?A) Return of principal from maturing investments

B) Operating cash in ows that uctuate seasonally

C) Shorter cash conversion cycle than the industry average

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Question #1 of 28 Question ID: 1457976The cost of capital for preferred stock is estimated as:

A) the preferred stock dividend divided by its par value

B) the preferred stock dividend divided by its market price

C) the after-tax preferred stock dividend divided by its market price

Explanation

The cost of preferred stock = Dps / P

The cost of preferred stock is most appropriately estimated as the preferred dividend

divided by the preferred stock's:

A) par value

B) current market price

C) estimated price in the next period

Explanation

The cost of preferred stock, kps, is Dps / price

A financial analyst is estimating the effect on the cost of capital for a company of a decrease

in the marginal tax rate The company is financed with debt and common equity A decrease

in the firm's marginal tax rate would:

A) decrease the cost of capital because of a lower after-tax cost of debt and equity

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B) increase the cost of capital because of a higher after-tax cost of debt and equity.C) increase the cost of capital because of a higher after-tax cost of debt.

Explanation

The cost of debt capital is affected by the marginal tax rate because interest costs are deductible A lower marginal tax rate decreases the value to the firm of the tax deductionfor interest and therefore increases the after-tax cost of debt capital Cost of equity capital

tax-is not affected by the marginal tax rate

A $100 par, 8% preferred stock is currently selling for $80 What is the cost of preferredequity?

The after-tax cost of preferred stock is always:

A) higher than the cost of common shares

B) equal to the before-tax cost of preferred stock

C) less than the before-tax cost of preferred stock

Explanation

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The after-tax cost of preferred stock is equal to the before-tax cost of preferred stock,because preferred stock dividends are not tax deductible The cost of preferred shares isusually higher than the cost of debt, but less than the cost of common shares.

A company's outstanding 20-year, annual-pay 6% coupon bonds are selling for $894 At a taxrate of 40%, the company's after-tax cost of debt capital is closest to:

A) 5.10%

B) 4.2%

C) 7.00%

Explanation

Pretax cost of debt: N = 20; FV = 1000; PV = –894; PMT = 60; CPT → I/Y = 7%

After-tax cost of debt: kd = (7%)(1 – 0.4) = 4.2%

When calculating the weighted average cost of capital (WACC) an adjustment is made fortaxes because:

A) interest on debt is tax deductible

B) dividends paid are taxable to the shareholder

C) dividends paid are tax deductible

Explanation

The cost of debt capital is adjusted for taxes because interest paid by the firm is typicallytax deductible The costs of equity and preferred stock are not adjusted for taxes becausedividends are not deductible for corporate taxes Taxes owed by shareholders do notaffect a firm's cost of capital

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A company has $5 million in debt outstanding with a coupon rate of 12% Currently the YTM

on these bonds is 14% If the tax rate is 40%, what is the after tax cost of debt?

An analyst gathered the following data about a company:

Capital Structure Required Rate of Return

20% preferred stock 11% for preferred stock

50% common stock 18% for common stock

Assuming a 40% tax rate, what is the minimum rate of return the company should require aproject to generate?

Tiêu đề	Corporate Issuers Questions Bank 2023
Trường học	University of Example
Chuyên ngành	Finance
Thể loại	Questions bank
Năm xuất bản	2023
Thành phố	Example City

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Số trang	74
Dung lượng	1,24 MB