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Question
If interest expense lowers taxes, why does the WACC not decrease indefinitely with the addition of more debt?A) The tax shield effect of debt will result in a lower cost of equity.
B) Increasing debt too much can result in a greater likelihood of firm failure (financial distress).
C) A firm's common stock price will not be affected by the amount of debt a firm uses.
D) Too much common equity increases the probability of bankruptcy.
Answer
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Related questions
Q:
A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000, and $30,000. Which of the following will not change if the required rate of return is increased from 10% to 12%.
A) The net present value.
B) The internal rate of return.
C) The profitability index.
D) The modified internal rate of return.
Q:
Initial Outlay Cash Flow in Period
1 2 3 4
-$4,000 $1,546.17 $1,546.17 $1,546.17 $1,546.17
The IRR (to the nearest whole percent) is:
A) 10%.
B) 18%.
C) 20%.
D) 16%.
Q:
Dieyard Battery Recyclers is considering a project with the following cash flows:
Initial outlay = $13,000
Cash flows: Year 1 = $5,000
Year 2 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%, compute the NPV of this project.
Q:
The equivalent annual cost method is most appropriate in which of the following situations? In each case, assume that several mutually exclusive options are available.
A) Introducing a new product line
B) Adding another store to a chain of retail stores
C) Installation of federally mandated safety equipment
D) Equipment to reduce production costs
Q:
WSU Inc. has various options for replacing a piece of manufacturing equipment. The present value of costs for option Ell is $84,000. Option Ell has a useful life of 5 years; annual operating costs were discounted at 9%. What is the equivalent annual cost?
A) $16,800
B) $21,595.77
C) $14,035.77
D) $18,312
Q:
A machine has a cost of $5,375,000. It will produce cash inflows of $1,825,000 (Year 1); $1,775,000 (Year 2); $1,630,000 (Year 3); $1,585,000 (Year 4); and $1,650,000 (Year 5). At a discount rate of 16.25%, what is the NPV?
A) $81,724
B) $257,106
C) $416,912
D) $190,939
Q:
Project EH! requires an initial investment of $50,000, and has a net present value of $12,000. Project BE requires an initial investment of $100,000, and has a net present value of $13,000. The projects are mutually exclusive. The firm should accept:
A) project EH!.
B) project BE.
C) both projects.
D) neither project.
Q:
Suppose you determine that the NPV of a project is $1,525,855. What does that mean?
A) In all cases, investing in this project would be better than investing in a project that has an NPV of $850,000.
B) The project would add value to the firm.
C) Under all conditions, the project's payback would be less than the profitability index.
D) Other investment criteria might need to be considered.
Q:
The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.
Q:
Competitive market forces make it imperative for a firm to have a systematic strategy for generating capital-budgeting projects.
Q:
Good capital investment opportunities are most likely to exist when:
A) many firms compete to sell similar products.
B) interest rates are high and rising.
C) goods and services can be produced cheaply using readily available tools and technologies.
D) a line of business is expensive to enter and uses proprietary technology.
Q:
World Wide Interlink Corp. has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with an annual dividend of $5 per share. The stock will have a par value of $30. If investors' required rate of return on this investment is currently 20%, what should the preferred stock's market value be?
A) $10
B) $15
C) $20
D) $25
Q:
P/E ratios found in published sources or on the internet are always computed by dividing the next period's expected earnings into the current price of the stock.
Q:
Apple stock is now selling for $315.32 per share. The P/E ratio based on current earnings is 23.72 and the P/E ratio based on expected earnings is 17.48. The expected growth rate in Apples earnings must be:
A) -26%.
B) 36%.
C) 7.6%.
D) 5.5%.
Q:
If the ROE on a new investment is less than the firm's required rate of return:
A) the investment increases the firm's value.
B) the investment leaves the firm's value unchanged.
C) the effect on the firm's value is unpredictable.
D) the investment reduces the firm's value.
Q:
McDonald's stock currently sells for $77.50. It's expected earnings per share are $4.50. The average P/E ratio for the industry is 23.3. If investors expected the same growth rate and risk for McDonald's as for an average firm in the same industry, it's stock price would:
A) stay about the same.
B) rise.
C) fall.
D) there is not enough information.
Q:
Home Depot stock is currently selling for $30 per share. Next year's dividend is expected to be $1.00; next year's earnings per share are expected to be $2.14. Home Depot's P/E ratio is:
A) .07.
B) 14.
C) 2.14.
D) 30.
Q:
Which of the following factors will influence a firm's P/E ratio?
A) The investors' required rate of return
B) Firm investment opportunities
C) General market conditions
D) All of the above
Q:
You are considering the purchase of AMDEX Company stock. You anticipate that the company will pay dividends of $2.00 per share next year and $2.25 per share the following year. You believe that you can sell the stock for $17.50 per share two years from now. If your required rate of return is 12%, what is the maximum price that you would pay for a share of AMDEX Company stock?
Q:
Draper Company's common stock paid a dividend last year of $3.70. You believe that the long-term growth in the dividends of the firm will be 8% per year. If your required return for Draper is 14%, how much are you willing to pay for the stock?
Q:
Kelly owns 10,000 shares in McCormick Spices, which currently has 500,000 shares outstanding. The stock sells for $86 on the open market. McCormick's management has decided on a 2-1 split.
a. Will Kelly's financial position alter after the split, assuming that the stocks will fall proportionately?
b. Assuming only a 35% fall on each stock, what will be Kelly's value after the split?
Q:
A stock dividend increases a firm's retained earnings.
Q:
By virtue of its nature, dividend policy is inherently a wealth-creating activity for the firm's owners.
Q:
Dividend payout ratios are generally much lower for small or newly established firms than for large, publicly owned firms.
Q:
The dividend declaration date is the date at which the stock transfer books are to be closed for determining the investor to receive the next dividend payment.
Q:
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
Q:
Five years ago, Mr. Martinez purchased 1000 shares of JPM stock at $50 per share. If Mr. Martinez ' tax rate is 25% would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at $50 per share?
A) Pay the dividend because he would have no transaction costs.
B) It would make no difference because he would receive $5,000 either way.
C) Repurchase the stock because he would owe no taxes.
D) It would make no difference because the tax rate on dividends is the same as the tax rate on capital gains.
Q:
For accounting purposes, a stock split has been defined as a stock dividend exceeding:
A) 25%.
B) 35%.
C) 45%.
D) 55%.
Q:
A stock dividend will cause changes in the dollar value of which of the below capital accounts?
A) Common stock
B) Additional paid-in capital
C) Retained earnings
D) All of the above
Q:
ZZZ Corporation has declared a stock dividend that pays one share of stock for every 10 shares owned. What will happen to EPS immediately upon the distribution of the stock dividend?
A) There is not enough information to know.
B) EPS will increase by 10%.
C) EPS will not be affected by the stock dividend.
D) EPS will decrease by 10%.