Question 1

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 20% of the time.What rate of return must each successful project pay the Fund for it to break even?
A)0%
B)100%
C)200%
D)400%

Accepted Answer

If the Fund selects 5 projects that hit 20% of the time, then only one project will be successful. Therefore, the total amount lent by the Fund will be $1,000,000 (5 projects x $200,000 per project). 
For the Fund to break even, the successful project must return the entire $1,000,000 lent by the Fund plus the cost of the unsuccessful projects, which is $800,000 (4 unsuccessful projects x $200,000 per project). Therefore, the successful project must return $1,800,000 to the Fund. 
The rate of return required for the successful project to achieve this is calculated as follows:
$1,800,000 / $200,000 = 9
So the successful project must pay the Fund a rate of return of 900% to break even. This is equivalent to 400% more than the amount of the initial investment, so the answer is D) 400%.

Question 2

________ financial world is one without taxes,bankruptcy,and other imperfections.
A)An imperfect
B)A friction-full
C)A perfect
D)A realistic

Accepted Answer

A perfect financial world is one without any imperfections such as taxes, bankruptcy, or other frictional forces. This concept is often used as a theoretical benchmark for economic analysis and modeling.

Question 3

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.

Question 4

The return to the investor is the ________.
A)reward to the borrower
B)cost to the borrower
C)cost to the manager
D)internal rate of return

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 5

________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.
A)An optimal
B)An irrelevant
C)A perfect
D)A minimal

Accepted Answer

An optimal capital structure is one that maximizes the value of the firm. This means that the company balances the cost of debt with the benefits of equity financing to determine the ideal combination of debt and equity. A company that has an optimal capital structure is able to minimize its cost of capital and maximize shareholder value.

Question 6

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

The higher the perceived risk of repayment, the higher the cost of the funds, as lenders will require compensation for taking on a higher level of risk.

Question 7

Capital structure refers to how the firm finances its operations and growth through a combination of ________.
A)equity types
B)security types
C)types of earnings
D)types of debt

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 8

Which of the statements below is FALSE?
A)Two different individuals or companies could go to the same bank and request exactly the same amount of funding for their projects and yet could be required to pay different costs for their funds.
B)It is important to remember that a public company is a separate entity and in that capacity can borrow from bondholders,preferred stockholders,and common shareholders,but not from banks.
C)Lenders,regardless of their classification,all consider their funds as investments,for which they hope to make a positive return.
D)The return to the investor is the cost to the seller.

Accepted Answer

This statement is false because public companies can also borrow from banks in addition to bondholders, preferred stockholders, and common shareholders.

Question 9

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

Accepted Answer

The answer of The return to the investor is the...

Question 10

All markets are open to all borrowers.

Accepted Answer

All markets have certain eligibility criteria and lending requirements that borrowers must meet. Not all borrowers may qualify for all markets.

Question 11

A large public firm cannot issue which of the following types of securities?
A)Common stock
B)T-Bills
C)Preferred stock
D)Bonds

Accepted Answer

T-Bills are a type of government security, and public firms do not have the authority to issue them. However, public firms can issue common stock, preferred stock, and bonds.

Question 12

Investors Al and Bea lend $100,000 to each new idea.Al's history is that he selects low-risk projects or ideas that hit 50% of the time.Bea'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 Al and Bea for them to break even?
A)Al's rate is 200% and Bea's rate is 450%.
B)Al's rate is 100% and Bea's rate is 400%.
C)Al's rate is 200% and Bea's rate is 400%.
D)Al's rate is 450% and Bea's rate is 100%.

Accepted Answer

To break even, Al needs to have a return rate of 100% since he invests in low-risk projects that hit 50% of the time. This means that he will earn $100,000 for every successful project. 
Bea's break-even point is trickier to calculate. Since she invests in high-risk projects that hit only 20% of the time, she will need a higher return rate to break even. Let x be the rate of return that a successful project for Bea needs to pay. She loses $100,000 on projects that fail, and earns $100,000(1+x) on projects that succeed. Therefore, to break even, we solve the equation: 
0 = (-$100,000)(0.8) + ($100,000)(1+x)(0.2)
Simplifying: 
80,000 = 20,000(1+x)
4 = 1+x 
x = 3
So, Bea needs a return rate of 300% to break even. Therefore, the answer is choice B, Al's rate is 100% and Bea's rate is 400%.

Question 13

Alice lends $200,000 for each new idea.Alice's history is that she selects low-risk projects or ideas that hit 50% of the time.What rate of return must each successful project pay Alice for her to break even?
A)0%
B)50%
C)100%
D)200%

Accepted Answer

Since Alice selects low-risk projects or ideas that hit 50% of the time, we can assume that half of the projects will be successful and half will fail. In order to break even, Alice needs to earn back the $200,000 she lent for each new idea.

If a project is successful, Alice needs to earn $200,000 in profit to break even. Since Alice lent $200,000 and needs to earn $200,000 in profit, the rate of return must be 100%. Therefore, the answer is C) 100%.

Question 14

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 is dependent on its ability to generate profits, manage risk, and make strategic investments. While a company's capital structure can impact its financial health, it is not the sole determinant of its value.

Question 15

A ________ is a separate entity and in that capacity can borrow from banks,bondholders,preferred stockholders,and common shareholders.
A)limited partnership
B)sole proprietorship
C)government organization
D)public company

Accepted Answer

A public company is a type of business organization that is separate and distinct from its owners/shareholders. As a separate legal entity, it can borrow money from various sources including banks, bondholders, preferred stockholders, and common shareholders. Limited partnerships, sole proprietorships, and government organizations do not have the same capacity to borrow funds in this way.

Question 16

The federal government bond market is open only to ________.
A)state government agencies
B)local government agencies
C)the federal government
D)municipal government

Accepted Answer

The federal government bond market is open only to the federal government, as it is the issuer of these bonds. State and local government agencies issue their own bonds in the municipal bond market.

Question 17

Investors Al and Bea lend $100,000 to each new idea.Al's history is that he selects low-risk projects or ideas that hit 80% of the time.Bea'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 Al and Bea for them to break even?
A)Al's rate is 150%,and Bea's rate is 25%.
B)Al's rate is 40%,and Bea's rate is 40%.
C)Al's rate is 25%,and Bea's rate is 150%.
D)Al's rate is 30%,and Bea's rate is 150%.

Accepted Answer

For Al to break even, he needs to make $100,000 x 0.8 = $80,000 on successful projects.
Therefore, his rate of return needs to be $80,000/$100,000 = 0.8 or 80%.
For Bea to break even, she needs to make $100,000 x 0.4 = $40,000 on successful projects.
Therefore, her rate of return needs to be $40,000/$100,000 = 0.4 or 40%.
So the answer is C since Al's rate is 25%,and Bea's rate is 150%.

Question 18

The municipal bond market is open only to ________.
A)state government agencies
B)local government agencies
C)the federal government
D)Both A and B

Accepted Answer

The municipal bond market is open only to state and local government agencies, which issue municipal bonds to raise funds for public projects such as infrastructure, education, and healthcare. The federal government does not issue municipal bonds, but rather issues its own government bonds in the broader financial market. Therefore, both A and B (state and local government agencies) are the correct choices.

Question 19

George lends $200,000 for each new idea.George's history is that he selects low-risk projects or ideas that hit 80% of the time.What rate of return must each successful project pay George for him to break even?
A)20.50%
B)22.00%
C)23.50%
D)25.00%

Accepted Answer

To break even, George needs to cover the losses from the 20% of projects that fail. If 80% of projects succeed, then each successful project must return enough to cover the $200,000 investment plus the losses from the failed projects. The break-even rate of return is calculated as 1/(success rate) - 1, which is 1/0.8 - 1 = 0.25 or 25%.

Question 20

Which of the statements below is FALSE?
A)The "riskier" borrower will most likely have to pay a lower cost for funds.
B)In the bond market,we see different rates as the different yields on bonds for different companies.
C)In the equity market,we see different rates as the different required returns for companies due to their different betas.
D)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

The statement that the "riskier" borrower will most likely have to pay a lower cost for funds is false. In fact, the opposite is typically true, as lenders will require a higher cost of funds to compensate for the higher risk of non-repayment from riskier borrowers.

Quiz 16: Capital Structure

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 20% of the time.What rate of return must each successful project pay the Fund for it to break even?

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

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

The return to the investor is the ________.

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

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.

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

Which of the statements below is FALSE?

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

All markets are open to all borrowers.

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

Alice lends $200,000 for each new idea.Alice's history is that she selects low-risk projects or ideas that hit 50% of the time.What rate of return must each successful project pay Alice for her to break even?

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.

The federal government bond market is open only to ________.

The municipal bond market is open only to ________.

George lends $200,000 for each new idea.George's history is that he selects low-risk projects or ideas that hit 80% of the time.What rate of return must each successful project pay George for him to break even?

Which of the statements below is FALSE?