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Objective Type Set
Online MCQ Assignment
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QN1. ________ is equal to the total market value of the firm’s common stock divided by (the replacement cost of the firm’s assets less liabilities).
A) Book value per share
B) Liquidation value per share
C) Market value per share
D) Tobin’s Q
E) None of the above.

View Answer

Answer: D) Tobin’s Q

QN2. High P/E ratios tend to indicate that a company will _______, ceteris paribus.
A) grow quickly
B) grow at the same speed as the average company
C) grow slowly
D) not grow
E) none of the above

View Answer

Answer: C) grow slowly

QN3. ________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm’s fair market value.
A) Credit analysts
B) Fundamental analysts
C) Systems analysts
D) Technical analysts
E) Specialists

View Answer

Answer: A) Credit analysts

QN4. _______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.
A) Book value per share
B) Liquidation value per share
C) Market value per share
D) Tobin’s Q
E) None of the above

View Answer

Answer: B) Liquidation value per share

QN5. The ______ is a common term for the market consensus value of the required return on a stock.
A) dividend payout ratio
B) intrinsic value
C) market capitalization rate
D) plowback rate
E) none of the above

View Answer

Answer: C) market capitalization rate

QN6. Net profit is equal to:
A) Sales less cost of sales and operating expenses
B) Gross profit less operating expenses
C) Sales less operating expenses
D) Both (a) & (b)

View Answer

Answer: B) Gross profit less operating expenses

QN7. In the long run, a successful acquisition is one that:
A) enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage.
B) enables the acquirer to diversify its asset base.
C) increases the market price of the acquirer’s stock over what it would have been without the acquisition.
D) increases financial leverage.

View Answer

Answer: D) increases financial leverage.

QN8. A tender offer is
A) a goodwill gesture by a “white knight.”
B) a would-be acquirer’s friendly takeover attempt.
C) a would-be acquirer’s offer to buy stock directly from shareholders.
D) viewed as sexual harassment when it occurs in the workplace.

View Answer

Answer: C) a would-be acquirer’s offer to buy stock directly from shareholders.

QN9. You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 15% return.
A) $23.91
B) $24.11
C) $26.52
D) $27.50
E) none of the above

View Answer

Answer: C) $26.52

QN10. The public sale of common stock in a subsidiary in which the parent usually retains majority control is called
A) a pure play.
B) a spin-off.
C) a partial sell-off.
D) an equity carve-out.

View Answer

Answer: D) an equity carve-out.

QN11. One means for a company to “go private” is
A) divestiture.
B) the pure play.
C) the leveraged buyout (LBO).
D) the prepackaged reorganization.

View Answer

Answer: C) the leveraged buyout (LBO).

QN12. Hindrance for going in the international business is known as
A) Synergy
B) Turn key point
C) Trade barrier
D) Minority interest

View Answer

Answer: C) Trade barrier

QN13. ___ is the combination of at least two firms doing similar businesses at the same market level.
A) Diversified activity Merger
B) Horizontal Merger
C) Joint Venture
D) Vertical Merger.

View Answer

Answer: B) Horizontal Merger

QN14. Which of the following is NOT recognized as a misconception about entrepreneurship?
A) Entrepreneurship is found only is small businesses.
B) Entrepreneurship is easy.
C) Successful entrepreneurship needs only a great idea.
D) Entrepreneurial ventures and small businesses are different.

View Answer

Answer: D) Entrepreneurial ventures and small businesses are different.

QN15. An entrepreneur’s primary motivation for starting a business is
A) To make money
B) To be independent
C) To be famous
D) To be powerful

View Answer

Answer: A) To make money

QN16. Entrepreneurs typically form
A) Service businesses
B) Manufacturing companies
C) Constructive companies
D) A variety of ventures

View Answer

Answer: D) A variety of ventures

QN17. Joint ventures have been used by entrepreneur:
A) When the entrepreneur wants to purchase local knowledge
B) When rapid entry in to the market is needed
C) Both of the options given
D) None of the above

View Answer

Answer: D) None of the above

QN18. The ___ of a venture could be that the company has experience in related business.
A) Strength
B) Weakness
C) Opportunity
D) Threat

View Answer

Answer: A) Strength

QN19. Franchising is :
A) Purchase all part of company.
B) Allowing another party to use a product or services under the owner’s name.
C) Joining two or more companies.
D) A company acquiring another company against its will.

View Answer

Answer: B) Allowing another party to use a product or services under the owner’s name.

QN20. Many mergers begin through a series of negotiations between the two companies. If the two companies decide to seriously investigate the possibility of a merger, they will launch Phase II Due Diligence and execute a:
A) Post Merger Contract
B) Formal Joint Conference
C) Merger & Acquisition Agreement
D) Letter of Intent

View Answer

Answer: D) Letter of Intent

QN21. Either party in a merger and acquisition may be entitled to indemnification because of a significant misrepresentation. Indemnification is usually not due until a certain threshold has been reached. This threshold amount is often called the:
A) Reciprocal Amount
B) Basket Amount
C) Striking Price
D) Closing Rate

View Answer

Answer: B) Basket Amount

QN22. On March 3, 1998, Miser Steel made a tender offer to acquire Reliance Steel. Miser’s tender offer is set to expire on March 23, 1998. On March 21, 1998, another company called Ohio Steel made a tender offer to acquire Reliance Steel. Based on consideration of Ohio Steel’s tender offer, the closing date for Miser Steel’s tender offer is:
A) March 21, 1998
B) March 23, 1998
C) March 25, 1998
D) March 31, 1998

View Answer

Answer: B) March 23, 1998

QN23. Due diligence requires the collection of a lot of information. Which of the following information types would be least important for due diligence to work properly?
A) Employment Records of Target Company
B) Property Records of Competing Companies
C) Financial Records of Target Company
D) Property Records of Target Company

View Answer

Answer: A) Employment Records of Target Company

QN24. Due diligence will attempt to restate financial statements in relation to what will take place after the two companies merge. One area of particular concern as it relates to the Balance Sheet is:
A) Proper Valuation of Cash
B) Par Value Assigned to Stock
C) Selection of Depreciation Methods
D) Possible Understatement of Liabilities

View Answer

Answer: D) Possible Understatement of Liabilities

QN25. Due diligence is particularly important in the case of a reverse merger since it is necessary to “clean the Shell Company.” One important aspect of cleaning the Shell Company is to:
A) Confirm ownership of the Shell Company
B) Identify cultural and social issues
C) Plan for long-term integration
D) Evaluate human resource capital

View Answer

Answer: A) Confirm ownership of the Shell Company

QN26. The following are examples of changes in corporate control except:
A) Merger & Acquisition
B) Leverage Buy Out (LBOs)
C) Proxy fights
D) Spin-Off & carve-outs

View Answer

Answer: C) Proxy fights

QN27. Leveraged buyouts (LBOs) almost always involve:
A) AAA grade debt
B) Issuance of new shares of stock to many investors.
C) Junk grade debt
D) All of the above

View Answer

Answer: C) Junk grade debt

QN28. Which of the following tactics completely eliminates the possibility of a takeover via tender offer?
A) Leverage Buy Out (LBOs)
B) Exclusionary self-tender
C) Targeted repurchase
D) Super majority amendment.

View Answer

Answer: A) Leverage Buy Out (LBOs)

QN29. Big gainers from LBOs were:
A) Junk bond holder
B) Raiders
C) Selling stockholders.
D) Investment banking firm.

View Answer

Answer: C) Selling stockholders.

QN30. Junk bonds are bonds with:
A) AAA or Aaa ratings
B) BBB or Baa ratings
C) BB or Ba ratings.
D) D rated bonds.

View Answer

Answer: C) BB or Ba ratings.

QN31. In case of carve-outs:
A) Shares of the new company are given to the shareholders of the parent company
B) Shares of the new company are sold in a public offering
C) Shares of the new company are bought by borrowing or issuing junk bonds
D) None of the above.

View Answer

Answer: B) Shares of the new company are sold in a public offering

QN32. A privatization is a:
A) Sale of a government-owned company to private investor
B) Sale of private companies to the government.
C) Sale of a publicly traded company to private investors.
D) None of the above.

View Answer

Answer: A) Sale of a government-owned company to private investor

QN33. Which of the following statements regarding spin-offs and carve-outs is not true?
A) Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company.
B) Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company.
C) Gains or losses from carve-outs are taxed at the corporate tax rate.
D) None of the above.

View Answer

Answer: A) Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company.

QN34. The following are important motives for privatization except:
A) Revenue for the government.
B) Increased efficiency.
C) Conglomerate merger.
D) Privatization.

View Answer

Answer: C) Conglomerate merger.

QN35. “Effective” control of a firm requires approximately:
A) 100% ownership.
B) 51% ownership.
C) 50% ownership.
D) 20% ownership.

View Answer

Answer: D) 20% ownership.

QN36. Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:
A) .667
B) 1.0
C) 1.125
D) 1.5.

View Answer

Answer: C) 1.125

QN37. The restructuring of a corporation should be undertaken if
A) The restructuring can prevent an unwanted takeover.
B) The restructuring is expected to create value for shareholders.
C) The restructuring is expected to increase the firm’s revenue.
D) The interests of bondholders are not negatively affected.

View Answer

Answer: B) The restructuring is expected to create value for shareholders.

QN38. The “information effect” refers to the notion that
A) A corporation’s actions may convey information about its future prospects.
B) Management is reluctant to provide financial information that is not required by law.
C) Agents incur costs in trying to obtain information.
D) The financial manager should attempt to manage sensitive information about the firm.

View Answer

Answer: A) A corporation’s actions may convey information about its future prospects.

QN39. In the long run, a successful acquisition is one that:
A) Enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage.
B) Enables the acquirer to diversify its asset base.
C) Increases the market price of the acquirer’s stock over what it would have been without the acquisition.
D) Increases financial leverage.

View Answer

Answer: C) Increases the market price of the acquirer’s stock over what it would have been without the acquisition.

QN40. Bidding companies often pay too much for the acquired firm. The hubris hypothesis explains this by suggesting that the bidders
A) Have too little information to make an optimal decision.
B) Have big egos and this impedes rational decision-making.
C) Have difficulty in thinking strategically over the long-term.
D) Are overly influenced by the tax consequences of an acquisition.

View Answer

Answer: B) Have big egos and this impedes rational decision-making.

***

QN41. Music Doctors Company has an expected ROE of 14%. The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.
A. 4.8%
B. 5.6%
C. 7.2%
D. 6.0%

View Answer

Answer: B. 5.6%+

QN42. An analyst has determined that the intrinsic value of Dell stock is $34 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 27, then it would be reasonable to assume the expected EPS of Dell in the coming year is ______.
A. $3.63
B. $4.44
C. $14.40
D. $1.26

View Answer

Answer: D. $1.26+

QN43. Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm’s corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be
A. $1,000,000
B. $2,000,000
C. $3,000,000
D. $4,000,000

View Answer

Answer: B. $2,000,000+

QN44. A firm’s earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that ________.
A. the stock experienced a drop in the P/E ratio
B. the firm had a decrease in dividend payout ratio
C. the firm increased the number of shares outstanding
D. the required rate of return decreased

View Answer

Answer: A. the stock experienced a drop in the P/E ratio+

QN45. In the dividend discount model, _______ which of the following are not incorporated into the discount rate?
A. real risk-free rate
B. risk premium for stocks
C. return on assets
D. expected inflation rate

View Answer

Answer: C. return on assets+

QN46. Which of the following would tend to reduce a firm’s P/E ratio?
A. The firm significantly decreases financial leverage
B. The firm increases return on equity for the long term
C. The level of inflation is expected to increase to double-digit levels
D. The rate of return on Treasury bills decreases

View Answer

Answer: C. The level of inflation is expected to increase to double-digit levels+

QN47. Costs are accumulated for each activity as a separate cost object in
A. ABC analysis
B. Target Costing
C. Traditional Costing
D. None of the above

View Answer

Answer: A. ABC analysis+

QN48. The target profit is subtracted from the target price to arrive at the target cost.
A. True
B. False

View Answer

Answer: A. True+

QN49. Why should a company go for transfer pricing?
A. To maximize the company’s total profitability.
B. To increase internal specialization.
C. To complement the capacity utilization of the supplier division.
D. All of the above

View Answer

Answer: D. All of the above+

QN50. “Shareholder wealth” in a firm is represented by:
A. The number of people employed in the firm.
B. The book value of the firm’s assets less the book value of its liabilities.
C. The amount of salary paid to its employees.
D. Number of shares held X market price of shares

View Answer

Answer: D. Number of shares held X market price of shares+

QN51. Which of the following are relevant in formulating and implementing business strategy?
A. The rivalry amongst existing organizations within the industry.
B. The bargaining power of suppliers.
C. The bargaining power of customer.
D. All of the above

View Answer

Answer: D. All of the above+

QN52. Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends.
A. dividend payout ratio
B. degree of financial leverage
C. variability of earnings
D. inflation rate

View Answer

Answer: A. dividend payout ratio+

QN53. A firm has a return on equity of 14% and a dividend payout ratio of 60%. The firm’s anticipated growth rate is ___.
A. 5.6%
B. 10%
C. 14%
D. 20%

View Answer

Answer: A. 5.6%+

QN54. The dividend discount model
A. ignores capital gains.
B. incorporates the after-tax value of capital gains.
C. includes capital gains implicitly.
D. restricts capital gains to a minimum.

View Answer

Answer: C. includes capital gains implicitly.+

QN55. The most appropriate discount rate to use when applying a FCFF valuation model is the _____.
A. required rate of return on equity
B. WACC
C. risk-free rate
D. A or C depending on the debt level of the firm

View Answer

Answer: B. WACC+

QN56. Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:
A. .667
B. 1.0
C. 1.125
D. 1.5

View Answer

Answer: C. 1.125+

QN57. The restructuring of a corporation should be undertaken if
A. The restructuring can prevent an unwanted takeover.
B. The restructuring is expected to create value for shareholders.
C. The restructuring is expected to increase the firm’s revenue.
D. The interests of bondholders are not negatively affected.

View Answer

Answer: B. The restructuring is expected to create value for shareholders.+

QN58. A firm’s degree of operating leverage (DOL) depends primarily upon its
A. sales variability.
B. level of fixed operating costs.
C. closeness to its operating break-even point.
D. debt-to-equity ratio.

View Answer

Answer: C. closeness to its operating break-even point.+

QN59. EBIT is usually the same thing as:
A. funds provided by operations.
B. earnings before taxes.
C. net income.
D. operating profit.

View Answer

Answer: D. operating profit.+

QN60. A firm’s degree of total leverage (DTL) is equal to its degree of operating leverage —————– its degree of financial leverage (DFL).
A. plus
B. minus
C. divided by
D. multiplied by

View Answer

Answer: D. multiplied by+

QN61. The term “capital structure” refers to:
A. long-term debt, preferred stock, and common stock equity.
B. current assets and current liabilities.
C. total assets minus liabilities.
D. shareholders’ equity.

View Answer

Answer: A. long-term debt, preferred stock, and common stock equity.+

QN62. Economies of scale, market share dominance, and technological advances are reasons most likely to be offered to justify a ____.
A. financial acquisition
B. strategic acquisition
C. divestiture
D. supermajority merger approval provision

View Answer

Answer: B. strategic acquisition+

QN63. A firm can acquire another firm ____.
A. only by purchasing the assets of the target firm
B. only by purchasing the common stock of the target firm
C. by either purchasing the assets or the common equity of the target firm.
D. None of the above are methods of acquiring the target firm

View Answer

Answer: C. by either purchasing the assets or the common equity of the target firm.+

QN64. How do you refer to the public sale of stock in a subsidiary in which the parent usually retains majority control?
A. Virtual corporation.
B. Joint venture.
C. Corporate liquidation.
D. Equity carve-out.

View Answer

Answer: D. Equity carve-out.+

QN65. Modigliani and Miller argue that the dividend decision ____.
A. is irrelevant as the value of the firm is based on the earning power of its assets
B. is relevant as the value of the firm is not based just on the earning power of its assets
C. is irrelevant as dividends represent cash leaving the firm to shareholders, who own the firm anyway
D. is relevant as cash outflow always influences other firm decisions

View Answer

Answer: A. is irrelevant as the value of the firm is based on the earning power of its assets+

QN66. The ____ is the proportion of earnings that are paid to common shareholders in the form of a cash dividend.
A. retention rate
B. 1 plus the retention rate
C. growth rate
D. dividend payout ratio

View Answer

Answer: D. dividend payout ratio+

QN67. A critical assumption of the net operating income (NOI) approach to valuation is:
A. that debt and equity levels remain unchanged.
B. that dividends increase at a constant rate.
C. that ko remains constant regardless of changes in leverage.
D. that interest expense and taxes are included in the calculation.

View Answer

Answer: C. that ko remains constant regardless of changes in leverage.+

QN68. The traditional approach towards the valuation of a company assumes:
A. that the overall capitalization rate holds constant with changes in financial leverage.
B. that there is an optimum capital structure.
C. that total risk is not altered by changes in the capital structure.
D. that markets are perfect.

View Answer

Answer: B. that there is an optimum capital structure.+

QN69. The cost of capital for a firm — when we allow for taxes, bankruptcy, and agency costs —
A. remains constant with increasing levels of financial leverage.
B. first declines and then ultimately rises with increasing levels of financial leverage.
C. increases with increasing levels of financial leverage.
D. decreases with increasing levels of financial leverage.

View Answer

Answer: B. first declines and then ultimately rises with increasing levels of financial leverage.+

QN70. When sequential long-term financing is involved, the choice of debt or equity influences the future financial————- of the firm.
A. timing
B. flexibility
C. liquidity
D. None of the above

View Answer

B. flexibility

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