BU 440 BU440 EXAM 8 ANSWERS - ASHWORTH

BU 440 BU440 EXAM 8 ANSWERS - ASHWORTH

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BU440 Managerial Finance II Exam 8 Answers
Question 1

5 / 5 points
You have a project that costs $800,000. It has a 1/3 chance of paying off $3,000,000 and a 2/3 chance of paying off $0. What is the expected profit from the new project?
Question options:
a) 
$300,000

b) 
$200,000

c) 
$100,000

d) 
Zero

Question 2

5 / 5 points
The federal government bond market is open only to:
Question options:
a) 
state government agencies.

b) 
local government agencies.

c) 
the federal government.

d) 
municipal government.

Question 3

5 / 5 points
At the optimal debt-to-equity ratio, the cost of capital (WACC) is __________ for the firm. This point reflects the maximum benefit of leverage.
Question options:
a) 
the lowest

b) 
the highest

c) 
at the midpoint

d) 
irrelevant

Question 4

5 / 5 points
The indirect costs of bankruptcy are called: .
Question options:
a) 
marginal losses.

b) 
debt capacity.

c) 
capital structure costs.

d) 
financial distress costs. 

Question 5

5 / 5 points
With the background ideas of using the cheapest source first and the impact of asymmetric information, the pecking order hypothesis predicts which of the following?
Question options:
a) 
Firms prefer internal financing second to external financing.

b) 
If external financing is required, firms should first seek equity financing.

c) 
If external financing is required, firms will choose to issue the riskiest security first, starting with debt financing and using equity as a last resort.

d) 
If external financing is required, firms will choose to issue the safest or cheapest security first, starting with debt financing and using equity as a last resort.

Question 6

5 / 5 points
According to the pecking order hypothesis, less profitable companies in an asymmetric world will need more external financing and will seek __________, using __________ as a last resort.
Question options:
a) 
equity funding; the debt market

b) 
the use of retained earnings; the debt market

c) 
debt financing; the equity market

d) 
the use of retained earnings; the equity market

Question 7

5 / 5 points
If company earnings give a rate of return less than the cost of debt, then it may be advantageous for the firm to be:
Question options:
a) 
all-equity.

b) 
owned mostly by debt holders.

c) 
half owned by debt holders.

d) 
one-third owned by equity holders.

Question 8

5 / 5 points
A __________ is a separate entity that can borrow from banks, bondholders, preferred stockholders, and common shareholders.
Question options:
a) 
limited partnership

b) 
sole proprietorship

c) 
government organization

d) 
public company

Question 9

5 / 5 points
To say that the investing decision and financing decision of a firm are separable is to say that firms first select___________ and then select __________:
Question options:
a) 
what products or services they will produce; how best to finance these products or services.

b) 
how best to finance products or services; what products or services they will produce.

c) 
what services they want; what products they will produce.

d) 
what products they will produce; what services they want.

Question 10

5 / 5 points
Financial leverage is the degree to which a firm or individual utilizes borrowed money to:
Question options:
a) 
pay wages.

b) 
pay dividends.

c) 
magnify equity earnings.

d) 
diminish equity earnings.

Question 11

5 / 5 points
Fresh out of Harvard Business School, Joe Walker, new CFO of Dixie's Southern Cornbread Company, wants to shake things up at the sleepy little food company. The firm is currently an all-equity firm because "that's the way we've always done it." Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 600 shares, but Walker is thinking about borrowing $6,000 at 10% per year and buying back 200 of those shares. Referring to this scenario, what level of EBIT would make this an attractive strategy?
Question options:
a) 
$2,000

b) 
$1,800

c) 
$1,600

d) 
$1,400

Question 12

5 / 5 points
The initial decision of what products and services to produce has a much __________ impact on the profitability of the firm when compared to the __________ decision.
Question options:
a) 
smaller; financing

b) 
larger; dividend

c) 
larger; investment

d) 
larger; financing 

Question 13

5 / 5 points
Which of the statements below is FALSE?
Question options:
a) 
Two different individuals or companies could go to the same bank and request exactly the same amount of funding for their projects and yet could be required to pay different costs for their funds.

b) 
It is important to remember that a public company is a separate entity and in that capacity can borrow from bondholders, preferred stockholders, and common shareholders, but not from banks.

c) 
Lenders, regardless of their classification, all consider their funds as investments, for which they hope to make a positive return.

d) 
The return to the investor is the cost to the seller of the financial asset.

Question 14

5 / 5 points
One way of measuring the advantage of financial leverage to the owners of the company is:
Question options:
a) 
to examine the earnings per share (EPS) of a company before borrowing from debt lenders.

b) 
to examine the earnings per share (EPS) of a company after borrowing from debt lenders.

c) 
to examine the dividends per share (DPS) of a company before and after borrowing from debt lenders.

d) 
to examine the earnings per share (EPS) of a company before and after borrowing from debt lenders.

Question 15

5 / 5 points
The more __________ used, the greater the leverage a company employs on behalf of its owners.
Question options:
a) 
debt

b) 
equity

c) 
debt and equity

d) 
All of these

Question 16

5 / 5 points
Moving from one source of funding to another in a particular order is called the:
Question options:
a) 
pecking order hypothesis.

b) 
barnyard order hypothesis.

c) 
funding order hypothesis.

d) 
capital market hypothesis.

Question 17

5 / 5 points
The indirect costs of bankruptcy can include which of the following?
Question options:
a) 
Setting aside projects with good NPVs

b) 
Lost sales

c) 
Loss of confidence in the firm's products and services

d) 
All of the above

Question 18

5 / 5 points
__________ capital structure is a combination of debt and equity that maximizes the value of the firm.
Question options:
a) 
An optimal

b) 
A prime

c) 
A perfect

d) 
A minimal

Question 19

5 / 5 points
The process of borrowing money from others to make money on your idea is commonly known in the investment world as:
Question options:
a) 
"losing other people's money."

b) 
"using other people's money."

c) 
"abusing other people's money."

d) 
"misusing other people's money."

Question 20

5 / 5 points
Fresh out of Harvard Business School, Joe Walker, new CFO of Dixie's Southern Cornbread Company, wants to shake things up at the sleepy little food company. The firm is currently an all-equity firm because "that's the way we've always done it." Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 600 shares, but Walker is thinking about borrowing $6,000 at 10% per year and buying back 200 of those shares. Referring to this scenario, if Southern Cornbread's EBIT is $1,800, compare EPS before and after the new debt.
Question options:
a) 
All-equity EPS = $3.00, leveraged-equity EPS = $4.50

b) 
All-equity EPS = $4.50, leveraged-equity EPS = $3.00

c) 
All-equity EPS = $3.00, leveraged-equity EPS = $3.00

d) 
All-equity EPS = $4.50, leveraged-equity EPS = $4.50


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