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If you accept the dividend irrelevancy theory, it is possible to maintain a high dividend clientele and still fund future growth. The addition of investment grade baseball trading cards is likely to expand the efficient frontier to a better risk […]

If the present value of $1.00 received n years from today at an interest rate of r is 0.3855, then what is the future value of $1.00 invested today at an interest rate of r% for n years? A. $1.3855 […]

Which of the following statements regarding the net present value rule and the rate of return rule is not true? A. Accept a project if NPV > cost of investment B. Accept a project if NPV is positive C. Accept […]

Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected rate of return. The stock price is $60 and the earnings per share are $12. The company wishes to repurchase 50% of […]

In calculating the weighted average cost of capital, the values used for D, E and V are: A. book values B. liquidating values C. market values D. none of the above Generally, which of the following is true? (b = […]

An increase in the stock price results in an increase in the call option price. According to the authors, a reasonable range for the risk premium in the United States is 5% to 8%. Answer: TRUE The “law of conservation […]

An investor can create the effect of leverage on his/her account by: I) buying equity of an unlevered firm II) by investing in risk-free debt like T-bills III) by borrowing on his/her own account A. I only B. II only […]

Financial Calculator Company proposes to invest $12 million in a new calculator making plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to manufacture and can be sold for $30 per unit. If the […]

The risk-free rate is 5%, the market risk premium is 8% and the project’s beta is 1.25. Calculate the certainty equivalent cash flow for year-3. A. $228.35 B. $197.25 C. $300 D. None of the above Generally, which of the […]

Short-term financial decisions: I) involve short lived assets II) involve short lived liabilities III) are easily reversed A. I only B. II only C. I, II, and III D. III only The value of a previously purchased machine to be […]

According to Strategy C, a firm would: A. Be in permanent need of short-term borrowing B. Have high current cash holdings C. Use low or no short-term debt and more long-term financing D. None of the above The main advantage […]

A project costs $7 million and is expected to produce cash flows if $2 million a year for 10 years. The opportunity cost of capital is 16%. If the firm has to issue stock to undertake the project and issue […]

When faced with financial distress; managers of firms acting on behalf of their shareholders’ interests will: A. favor issuing large quantity of low quality debt to low quantity of high quality debt B. favor paying high dividends to the shareholders […]

By undertaking the analysis in real terms, the financial manager avoids having to forecast inflation. Treasury bonds do not have default risk, but are subject to inflation risk. Answer: TRUE For an European option: Value of put = (Value of […]

In order to calculate the tax shield effect of interest payment for a corporation, always use the: I) average corporate tax rate II) marginal corporate tax rate III) state mandated tax rate A. I only B. II only C. III […]

A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 40% tax […]

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. How would you go about making […]

If the NPV of project A is + $120, and that of project B is -$40 and that of project C is + $40, what is the NPV of the combined project? A. +$100 B. -$40 C. +$70 D. +$120 […]

Volatility of a bond is given by: I) Duration/ (1 + yield) II) Slope of the curve relating the bond price to the interest rate III) Yield to maturity A. I only B. II only C. III only D. I […]

You would like to have enough money saved to receive $100,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve […]

The WACC formula does not change when preferred stock is included. The smaller the time periods used in the binomial model the closer it will come to approximating the Black-Scholes model price. Answer: TRUE The risk that cannot be eliminated […]

Options written on volatile assets are worth more than options written on safer assets. The weighted average cost of capital (WACC) on an after-tax basis is calculated as: WACC = (rD) (1 – TC ) (D/V) + (rE) (E/V) where: […]

Given the following data for Golf Corporation: market price/share = $12; Book value/share = $10; Number of shares outstanding = 100 million; market price/bond = $800; Face value/bond = $1,000; Number of bonds outstanding = 1 million; Calculate the proportions […]

Limited liability is an important feature of: A. Sole proprietorships B. Partnerships C. Corporations D. All of the above The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because: I) Debt […]

The benefit-cost ratio is equal to profitability index plus one. The market value of debt is very close to the book value of debt for healthy firms. Answer: TRUE Depreciation acts as a tax shield in reducing the taxes. Answer: […]

On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend? […]

Which of these dates occurs last in time (when arranged in the chronological order)? A. Payment date B. Ex-dividend date C. Record date D. Dividend declaration date The Granite Paving Co. wishes to have debt-to-equity ratio of 1.5. Currently it […]

Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200; calculate the cash ratio: (assume that the firm has no marketable securities) A. 0.4 B. 2.0 C. 1.5 D. None of […]

You would like to have enough money saved to receive a growing annuity for 25 years, growing at a rate of 4% per year, the first payment being $60,000 after retirement, so that you and your family can lead a […]

In almost al cases the present value break even quantity is higher than the accounting break even quantity. Short-term financial decisions are conceptually easier to make than long-term decisions. Answer: TRUE An European option gives its owner the right to […]

Monte Carlo simulation is a tool for considering all possible combinations of variables. Many companies have automatic dividend reinvestment plans (DRIPs). Answer: TRUE The original work conducted on the dividend payout practices of companies was conducted by Lintner. Answer: TRUE […]