Multiple Choice Answers

Which of the following statements concerning preferred stock is true?
A. Preferred stockholders have a prior claim on the income and assets of the firm, as compared to the claims of lenders.
B. Preferred stock dividends per share are normally increased as the earnings of the firm increase.
C. Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problems.
D. Preferred stockholders are the ultimate owners of the firm.

Mortgage bonds are __________.
A. secured by a lien on the issuer’s general assets
B. secured by the lien on the issuer’s specific, real assets
C. usually secured by assets such as common shares of one of the issuer’s subsidiaries
D. a form of unsecured debt

From the lessee’s viewpoint, the relevant discount rate for evaluating a lease versus buy decision is the __________.
A. cost of issuing new common stock
B. pretax cost of issuing debt
C. after-tax cost of issuing debt
D. lessor’s cost of debt

__________ says to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide.
A. The capital market efficiency
B. The options principle
C. The principle of comparative advantage
D. The principle of incremental benefits

The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John’s expects that expansion will allow them to sell an additional 4.5 million loaves in the next 5 years. What additional revenues minus expenses will be generated from expansion?
A. $912,500
B. $1,000,500
C. $1,012,500
D. $1,102,500

Which of the following statements is true?
A. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sources.
B. Hard capital rationing refers to the rationing imposed internally by the firm.
C. A post audit is a set of procedures for evaluating a capital budgeting decision after the fact.
D. Few firms will engage in capital rationing.

In efficient markets, as in the United States, market prices are not expected to be __________.
A. wrong
B. fair
C. followed by many analysts
D. incorporate all information

Boeing® is a world leader in commercial aircraft. In the face of competition, Boeing® often faces a critical __________ decision: whether to develop a new generation of passenger aircraft.

A. present value
B. payback
C. capital budgeting
D. dividend

Ideas for capital budgeting projects come from all levels within an organization. The bottom-up process results in ideas moving __________ through the organization.
A. downward
B. upward
C. sideways
D. any way

Which of the following statements is true?
A. A mutually exclusive project can be chosen independently of other projects
B. When undertaking one project prevents investing in another project, and vice versa, the projects have a positive payback.
C. A conventional project has an initial cash outflow followed by one or more expected future cash inflows.
D. Whenever projects are independent and conventional, the internal rate of return (IRR) and net present value (NPV) methods will disagree

In practice, the __________ rule is the preferred criteria to accept or reject a capital investment project.

B. profitability index
D. payback
The Jerome Inc. western regional branch has been looking to install a new distribution center. The analysts have run the numbers on the distribution center costs and annual inflow from the investment. The project will cost $5 million at the beginning of the first year. The project will generate $1 million in earnings before interest and taxes at the end of each year. Jerome is in the 35% tax bracket and annual depreciation equates to $500,000 per year. The distribution center’s end of the fifth year’s salvage equals its book value, or $2,500,000. Compute the project’s NPV, assuming Jerome’s WACC equals 12%.
A. -$1,238,328
B. $564,060
C. $1,825,731
D. -$66,776

The __________ method breaks down when evaluating projects in which the sign of the cash flow changes.
D. Payback

Studies show systematic differences in capital structures across industries. These are due primarily to differences in __________.
A. a firm’s inventory turnover ratio
B. the ability of assets to support borrowing
C. accounting practices
D. management’s attitude toward what other industries are doing

Capital structure decisions refer to the
A. dividend yield of the firm’s stock
B. blend of equity and debt used by the firm
C. capital gains available on the firm’s stock
D. maturity date for the firm’s securities