Question 1

Rhonda lends $200,000 for each new idea.Rhonda's history is that he selects low-risk projects or ideas that hit 60% of the time.What rate of return must each successful project pay Rhonda for him to break even?

Accepted Answer

To break even, Rhonda needs to recover the investment on the 40% of projects that don't succeed through the 60% that do. If $200,000 is invested in each project, and 60% succeed, for every $200,000 lost on a failed project, $200,000 * 60% = $120,000 must make up for it in a successful project. To cover the $200,000 investment plus the loss from a failed project, a successful project must generate $200,000 (to cover its own cost) + $200,000 (to cover the failed project's cost) = $400,000. The rate of return required on the $200,000 investment to reach $400,000 is ($400,000 - $200,000) / $200,000 = 1 or 100%. Since 60% of projects need to cover 100% of the losses, the rate of return needed on each successful project is 100% / 60% = 1.6667 or 166.67%. However, this calculation seems to misunderstand the question's intent, which is simpler: to break even when 60% of projects succeed, the return on those projects must offset the total investment in all projects. If 60% need to cover the cost of 100% of the projects, the calculation should be simpler: for every $100 lost, $60 needs to make $100 for Rhonda to break even, which means a return of $100 on $60, or a 66.67% return on the successful projects.

Question 2

The return to the investor is the ________.

Accepted Answer

The return to the investor is considered the cost to the borrower because it represents the interest or dividends the borrower must pay to the investor for the use of their funds.

Question 3

In a perfect financial world,a company's value is dependent on its capital structure.

Accepted Answer

In a perfect financial world, a company's value would be determined solely by its underlying operations and future growth prospects, and not by its capital structure. However, in reality, factors such as debt-to-equity ratio and cost of capital can affect a company's valuation, making the answer somewhat nuanced.

Question 4

A ________ is a separate entity and in that capacity can borrow from banks,bondholders,preferred stockholders,and common shareholders.

Accepted Answer

A public company is a separate legal entity that is able to raise capital by borrowing funds from banks, issuing bonds, and selling preferred and common shares. This is in contrast to a sole proprietorship, which is not a separate legal entity and does not have the ability to issue securities or borrow funds in the same way. Limited partnerships and government organizations also have limitations on their ability to raise capital.

Question 5

________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.

Accepted Answer

An optimal capital structure is one that strikes a balance between debt and equity financing that maximizes the value of the firm. This means that the company will use the right amount of debt and equity financing to minimize its overall cost of capital while maximizing shareholder value. In contrast, an irrelevant capital structure would have no impact on the value of the firm, while a perfect capital structure would require no debt financing at all. A minimal capital structure would imply that the company had no debt at all, which may not be optimal for all firms.

Question 6

________ financial world is one without taxes,bankruptcy,and other imperfections.

Accepted Answer

A perfect financial world is one without any imperfections, including taxes and bankruptcy. In reality, however, these imperfections are an integral part of the financial world. Therefore, option C is the best choice.

Question 7

Investors Curt and Doug lend $100,000 to each new idea.Curt's history is that he selects low-risk projects or ideas that hit 80% of the time.Doug's history is that she takes on high-risk projects that hit 40% of the time.What rate of return must each successful project pay Curt and Doug for them to break even?

Accepted Answer

To break even, the return from the successful projects must cover the total investment in all projects. For Curt, with an 80% success rate on a $100,000 investment, 80% of the projects need to cover 100% of the investment. This means each successful project needs to return the original investment plus 25% more (since 80% * 125% = 100%). For Doug, with a 40% success rate, each successful project needs to return the original investment plus 150% more to cover the losses from the 60% that fail (since 40% * 250% = 100%).

Question 8

Which of the statements below is FALSE?

Accepted Answer

This statement is false because public companies can borrow from banks as part of their financing options.

Question 9

Which of the statements below is FALSE?

Accepted Answer

The statement "The 'riskier' borrower will most likely have to pay a lower cost for funds" is false. In general, lenders charge higher interest rates to borrowers they perceive as more risky, because they demand compensation for taking on additional risk. Therefore, the cost of funds for a riskier borrower will typically be higher, not lower.

Question 10

The federal government bond market is open only to ________.

Accepted Answer

The federal government bond market is open only to the federal government. State, local, and municipal agencies have their own respective bond markets.

Question 11

The return to the investor is the cost to the seller.

Accepted Answer

The return to the investor is the amount of money that the investor receives from the investment. The cost to the seller is the amount of money that the seller pays to sell the investment. These two amounts are not the same.

Question 12

Investors Curt and Doug lend $100,000 to each new idea.Curt's history is that he selects low-risk projects or ideas that hit 50% of the time.Doug's history is that she takes on high-risk projects that hit 20% of the time.What rate of return must each successful project pay Curt and Doug for them to break even?

Accepted Answer

To break even, both Curt and Doug need to make back the $100,000 they lent per project. 
For Curt, since he selects low-risk projects that hit 50% of the time, he expects to make back his initial $100,000 investment plus an additional $100,000 in profit for every 2 successful projects (50% of the time). Therefore, each successful project must pay Curt a rate of return of 100%. 
For Doug, since she takes on high-risk projects that hit 20% of the time, she expects to make back her initial $100,000 investment plus an additional $400,000 in profit for every 5 successful projects (20% of the time). Therefore, each successful project must pay Doug a rate of return of 400%. 
Therefore, the answer is B: Curt's rate is 100% and Doug's rate is 400%.

Question 13

In general,the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds.

Accepted Answer

This is because lenders typically charge higher interest rates or require more collateral for loans that they perceive as riskier, in order to compensate for the increased likelihood of default. Alternatively, they may offer lower rates for loans to borrowers with stronger credit histories or more substantial assets, who are considered less risky. Therefore, the cost of funds is closely tied to the creditworthiness and perceived default risk of the borrower.

Question 14

All markets are open to all borrowers.

Accepted Answer

Not all markets are open to all borrowers due to factors such as creditworthiness, regulatory restrictions, and market segmentation.

Question 15

The municipal bond market is open only to ________.

Accepted Answer

The municipal bond market is open only to state and local government agencies, hence Choice D is the correct option. The federal government can issue Treasury bonds, but these are not considered municipal bonds. Therefore, Choices A, B, and C are not entirely accurate.

Question 16

Capital structure refers to how the firm finances its operations and growth through a combination of ________.

Accepted Answer

Capital structure refers to the mix of debt and equity securities that a company uses to finance its operations and growth. This includes bonds, stocks, and other forms of securities, but does not specifically refer to types of earnings or exclusively to types of debt or equity.

Question 17

Allied Investment Fund lends $200,000 for each new idea.The Fund's history is that it selects high-risk projects or ideas that hit 10% of the time.What rate of return must each successful project pay the Fund for it to break even?

Accepted Answer

For the fund to break even, the successful projects must cover the cost of the 90% that fail. If 1 out of 10 projects succeeds, it needs to cover the investment in all 10 projects. Therefore, it must return the original investment ($200,000) times 10, which is $2,000,000. To find the rate of return: ($2,000,000 - $200,000) / $200,000 = 900%.

Question 18

Oprah lends $150,000 for each new idea.Oprah's history is that she selects low-risk projects or ideas that hit 40% of the time.What rate of return must each successful project pay Oprah for her to break even?

Accepted Answer

The rate of return must be 150% for Oprah to break even. This is because she lends $150,000 for each new idea, and she selects low-risk projects or ideas that hit 40% of the time. This means that she will lose money on 60% of the projects she invests in. In order to make up for these losses, she must earn a rate of return of 150% on the projects that she does win.

Question 19

A large public firm cannot issue which of the following types of securities?

Accepted Answer

T-Bills are issued by the US Treasury and cannot be issued by a public firm. Public firms can issue common stock, preferred stock, and bonds.

Question 20

The best combination of debt and equity creates what we call an imperfect capital structure.

Accepted Answer

The best combination of debt and equity creates what is known as the optimal capital structure, not an imperfect capital structure. The optimal capital structure is the one that balances the costs and benefits of debt and equity financing to minimize the firm's overall cost of capital and maximize its value.

Quiz 16: Capital Structure

Rhonda lends $200,000 for each new idea.Rhonda's history is that he selects low-risk projects or ideas that hit 60% of the time.What rate of return must each successful project pay Rhonda for him to break even?

The return to the investor is the ________.

In a perfect financial world,a company's value is dependent on its capital structure.

A ________ is a separate entity and in that capacity can borrow from banks,bondholders,preferred stockholders,and common shareholders.

________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.

________ financial world is one without taxes,bankruptcy,and other imperfections.

Which of the statements below is FALSE?

Which of the statements below is FALSE?

The federal government bond market is open only to ________.

The return to the investor is the cost to the seller.

In general,the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds.

All markets are open to all borrowers.

The municipal bond market is open only to ________.

Capital structure refers to how the firm finances its operations and growth through a combination of ________.

Allied Investment Fund lends $200,000 for each new idea.The Fund's history is that it selects high-risk projects or ideas that hit 10% of the time.What rate of return must each successful project pay the Fund for it to break even?

Oprah lends $150,000 for each new idea.Oprah's history is that she selects low-risk projects or ideas that hit 40% of the time.What rate of return must each successful project pay Oprah for her to break even?

A large public firm cannot issue which of the following types of securities?

The best combination of debt and equity creates what we call an imperfect capital structure.