20. Which of the following best describes a firm’s cost of capital?
a. The average yield to maturity on debt
b. The average cost of the firm’s assets
c. The rate of return that must be earned on its investments in order to satisfy the firm’s investors
d. The coupon rate on preferred stock
21. Given the following information for PepsiCo, determine the company’s weighted average cost of capital.
Value Cost of Capital
Restaurant Division $ 5 Billion 13%
Snack Foods Division 7 Billion 12%
Beverages Division 13 Billion 8%
The weighted average cost of capital is derived after taking into consideration the weightings, for each finance source. Therefore WACC = 13% (5/25) + 12% (7/25) + 8% (13/25).
22. A __________ is a business combination of two companies in which the new company maintains the identity of the acquiring company.
b. holding company
23. Which of the following is not a potential advantage of a merger in the United States?
a. A better financing structure
b. A better use of tax-loss carry-forwards
c. A more secure monopolization of an industry
d. A lower operating risk through diversification
24. If one security has a greater risk than another security, how will investors respond?
a. They will require a lower rate of return for the investment that has greater risk.
b. They would be indifferent regarding their expectation of rates of return for either investment.
c. They will require a higher rate of return for the investment that has greater risk.
d. None of the above
The tenet, of both the efficient frontier, in portfolio analysis and the Capital assets pricing model, is that investors are rational and will only take more risk for more returns.
25. Which of the following is a characteristic of an efficient market?
a. Small number of individuals
b. Opportunities exist for investors to profit from publicly available information.
c. Security prices reflect fair value of the firm.
d. Immediate response occurs for new public information.
The efficient market hypothesis assumes that share prices are reflective of all forms of information. Under the hypothesis, there are three forms of market efficiency: weak form, semi-strong form, and strong form.
26. If a company’s average collection period is higher than the industry average, then the
company might be:
a. enforcing credit conditions upon its customers which are too stringent.
b. allowing its customers too much time to pay their bills.
c. too tough in collecting its accounts.
d. too liquid.
27. If an investor were to sell 100 shares of Microsoft stock to another investor in the securities market, this would be referred to as what type of transaction?
a. A primary market transaction
b. A secondary market transaction
c. A money market transaction
d. A futures market transaction
The secondary market is the market for “confirmed” shares. The market is populated by companies that have been listed for a long time.
28. Which of the following is NOT a basic function of a budget?
a. Budgets indicate the need for future financing.
b. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
c. Budgets compare historical costs of the firm with its current cost performance.
d. Budgets allow for performance evaluation.
A budget is a quantitative assessment of future actions. The difference, between the inflows and outflows shows the amount of funding required. A budget can also be used for performance evaluation.
29. Break-even analysis can be useful in:
a. capital expenditure analysis.
b. bond refunding decisions.
c. rights offering decisions.
d. all of the above.
Break-even analysis, as described above, is the technique used to determine a no profit or loss position.