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SBA Final Pre Assessment

The document presents a series of multiple-choice questions related to financial concepts such as the Capital Asset Pricing Model (CAPM), cost of capital, capital structure, and investment evaluation methods. It covers topics like the optimal capital structure, cost of preferred stock, dividend valuation models, and payback periods for investments. Each question includes options for answers, focusing on key financial metrics and decision-making processes in corporate finance.

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7 views3 pages

SBA Final Pre Assessment

The document presents a series of multiple-choice questions related to financial concepts such as the Capital Asset Pricing Model (CAPM), cost of capital, capital structure, and investment evaluation methods. It covers topics like the optimal capital structure, cost of preferred stock, dividend valuation models, and payback periods for investments. Each question includes options for answers, focusing on key financial metrics and decision-making processes in corporate finance.

Uploaded by

bacaratsamirah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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[Document title]

Name:

1. Using the Capital Asset Pricing Model (CAPM) approach of computing the cost of common equity and
retained earnings, which among the following formulas is correctly stated?
a. KRF - (KM + KRF) β c. KRF + (KM - KRF) β
b. (KRF + KM) β d. (KM - KRF) β
2. A firm’s target or optimal capital structure is consistent with which one of the following?
a. Minimum risk c. Maximum earnings per share
b. Minimum cost of debt d. Minimum weighted-average cost of capital
3. Cost of capital is
a. The amount the company must pay for its plant assets
b. The dividends a company must pay on its equity securities.
c. The cost the company must incur to obtain its capital resources.
d. The cost the company is charged by investment bankers who handle the issuance of equity or long-
term debt securities.
4. In an investment in plant asset, the return that keeps the market price of the firm stock unchanged is
a. Net present value c. Adjusted rate of return
b. Cost of capital d. Unadjusted rate of return
5. The dividend growth rate is relevant to which of the following costs of capital?
a. Cost of debt and equity
b. Cost of common and preferred equity
c. Cost of common equity and retained earnings
d. Cost of debt, common equity and retained earnings
6. The payback method measures
a. Cash flows of an investment c. Economic life of an investment
b. Profitability of an investment d. How quickly investment may be recovered
7. Generally speaking, the most expensive source of financing is:
a. Debt c. Retained earnings
b. Preferred stock d. New common stock
8. Capital budgeting is concerned with
a. Decisions affecting only capital intensive industries
b. Analysis of short-range decisions
c. Analysis of long-range decisions
d. Scheduling office personnel in office buildings
9. Capital structure decisions involve determining the proportions of financing from
a. Debt or equity c. Short-term or long-term assets
b. Short-term or long-term debt d. Retained earnings or common stock
10. Securing of funds for investment at a fixed rate of return to fund suppliers, to enhance the well-being of the
common stockholders is known as:
a. Financial leverage c. Prudent borrowing
b. Fund management d. Financial arbitrage
11. Marlo Co. has 5% preferred stock with a par value of P 100. Selling price is P 123.50 per share and flotation costs
are P 0.50 per share. If tax rate is 20%, then what is the cost of preferred stock?
a. 4.03% c. 4.7%
b. 4.07% d. 5%
12. The investment-banking firm of Syria & Associates will use a dividend valuation model to appraise the shares of
the Lebanon Corporation. Dividends (D1) at the end of the current year will be P 1.20. The growth rate (g) is 9
percent and the discount rate (K) is 13 per cent. What should be the price of the stock to the public?
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a. P 28.75 c. P 30.00
b. P 29.00 d. P 31.50
13. England Co. paid cash dividends to its common stockholders over the past 12 months at P 2.20 per share. The
current market value of the common stocks is P 40 per share, and investors are anticipating the common
dividends to grow at a rate of 6% annually. The cost to issue new common stocks will be 5% of the market value.
What will be the cost of the new common stock issue?
a. 11.50% c. 11.83%
b. 11.79% d. 12.14%
14. Emirates Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the
firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following
information for Emirates Corporation is provided:

The market price of common stock is 60 per share.


The dividend next year is expected to be P 3 per share.
Expected growth in dividends is a constant 10%.
New bonds can be issued at face value with a 10% coupon rate.
The current capital structure of 40% long-term debt and 60% equity is considered to be optimal.
Anticipated earnings to be retained in the coming year are P 3 million
The firm has a 40% marginal tax rate.

What is the after-tax cost of the new bond issue?


a. 4% c. 10%
b. 6% d. 14%
15. What is the cost of using retained earnings for financing?
a. 5% c. 10%
b. 9% d. 15%
16. If the company must assume a 20% flotation cost on new stock issuances, what is the cost of new common
stock?
a. 6.25% c. 15%
b. 10% d. 16.25%
17. In 2021, Japan Corporation increased earnings before interest and taxes by 17%. During the same period, net
income after tax increased by 42%. What is the degree of financial leverage for 2021?
a. 1.70 c. 2.47
b. 4.20 d. 5.90
18. Old equipment with a book value of P 15,000 will be replaced by new equipment with a purchase price of P
50,000, exclusive of freight charges of P 2,000. The market value of the old equipment is P 11,000. Repair costs
of P 2,000 can be avoided if the new equipment is acquired. Assume a tax rate of 35%, what is the net
investment of the project?
a. P 33,800 c. P 39,700
b. P 38,300 d. P 52,000
Costs (Cash outflows): 50,000 + 2,000 = P 52,000
Savings (Cash inflows): 11,000 + 0.35 (15,000 – 11,000) + 2,000 (1 – 0.35) = P 13,700
19. A company is planning to buy a machine that costs P 12,000 and has an annual depreciation for tax purposes of
P2,400 for 5 years. The machine is expected to result in cash savings from operations of P 4,000 per year. If the
tax rate is 50%, then what is the payback period for the new machine?
a. 3 years c. 5 years
b. 3.75 years d. 6 years
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20. Tiffany & Co. is considering the purchase of a P 100,000 machine that is expected to reduce operating cash
expenses by P 25,000 per year. This machine, which has no salvage value, has a useful life of 10 years and will be
depreciated on a straight-line basis. What would be the simple rate of return on original investment?
a. 10% c. 25%
b. 15% d. 35%

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