•B. add a country risk premium to the risk-free rate when using the capital asset pricingmodel (CAPM).•C. add a country risk premium to the market risk premium when using the capital assetpricing model (CAPM).66Corporate Finance
–C•In order to reflect the increased risk when investing in a developing country, a countryrisk premium is added to the market risk premium when using the CAPM.67Corporate Finance
–An example of a secondary source of liquidity is:•A. negotiating debt contracts.•B. cash flow management.•C. trade credit and bank lines of credit.68Corporate Finance
–A•Secondary sources of liquidity include negotiating debt contracts, liquidating assets, andfiling for bankruptcy protection and reorganization. Primary sources of liquidity includeready cash balances, short-term funds (e.g., trade credit and bank lines of credit), andcash flow management.69Corporate Finance
–Jayco, Inc. has a division that makes red ink for the accounting industry. The unithas fixed costs of $10,000 per month, and is expected to sell 40,000 bottles of inkper month. If the variable cost per bottle is $2.00 what price must the divisioncharge in order to breakeven?•A. $2.25.•B. $2.50.•C. $2.75.70Corporate Finance
–A•40,000 = $10,000/(P - $2)•40,000P - $80,000 = $10,000•P = $90,000/40,000 = $2.25.71Corporate Finance
–A conflict of interest between corporate stakeholders is least likely to be mitigatedby:•A. issuing stock dividends.•B. covenants in debt indentures.•C. including stock options as part of manager compensation.72Corporate Finance
–A•lssuing stock dividends does not necessarily favor one group of stakeholders over anotherbecause neither firm value nor earnings are affected by issuing a stock dividend.Covenants in debt issues protect creditor interests from management actions that wouldincrease the risk of the debt. Including stock options as part of manager compensationserves to align the interests of senior management and shareholders.73Corporate Finance
–Which of the following statements concerning the principles underlying the capitalbudgeting process is most accurate?•A. Cash flows should be based on opportunity costs.•B. Financing costs should be reflected in a project's incremental cash flows.•C. The net income for a project is essential for making a correct capital budgetingdecision.74Corporate Finance
–A•Cash flows are based on opportunity costs. Financing costs are recognized in the project'srequired rate of return. Accounting net income, which includes non-cash expenses, isirrelevant; incremental cash flows are essential for making correct capital budgetingdecisions.75Corporate Finance
–When two mutually exclusive projects with conventional cash flows are beingranked, the net present value (NPV) and internal rate of return (IRR) decision rulesare most likely to conflict when the:•A.projects’ investments are of different scale.
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