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Finance Chapter 1 1 Financial assets have value because they are claims on the firm’s real assets and the cash that those assets will produce
1. The liability of sole proprietors is limited to the amount of their investment in the company. FALSE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing […]
Finance Chapter 1 2 Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to
49. Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to: A. increase sales. B. become profitable. C. increase their access to funds. D. avoid double taxation of their profits. AACSB: Reflective […]
Finance Chapter 1 3 When managers’ compensation plans are tied in a meaningful manner to the profits of the firm, agency problems
83. Sole proprietorships resolve the issue of agency problems primarily by: A. avoiding excessive expense accounts. B. discharging those who violate the rules. C. allowing owners to share the cost of their actions with others. D. forcing owners to bear […]
Finance Chapter 10 1 While sensitivity analysis is forward-looking, scenario analysis attempts to reconstruct and analyze the past
1. A capital budget shows a proposed list of investments. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Appreciate the practical problems of capital budgeting in large corporations. Topic: Capital budgeting 2. The strategic […]
Finance Chapter 10 2 What effect will a reduction in the cost of capital have on the accounting break-even level of revenues
46. Weston’s has variable costs that average 68% of sales. If fixed costs increase by $1, what will be the increase in the break-even level of revenues? A. An increase of $0.68 B. An increase of $1.00 C. An increase […]
Finance Chapter 10 3 Which one of the following is most likely the reason why many projects fail to earn their projected rates of return
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-03 Understand why an overestimate of sales is more serious for projects with high operating leverage. Topic: Operating leverage 76. A decision tree shows a 30% probability […]
Finance Chapter 10 4 How are sensitivity, scenario, and break-even analysis used to see the effect of an error in forecasts on project profitability
102. Firms that lack competitive advantages will: A. have difficulty finding positive NPV projects for investment. B. be forced to capture larger market shares to be profitable. C. avoid the need to conduct sensitivity analyses. D. be forced to operate […]
Finance Chapter 11 1 Long-term corporate bonds are the only portfolio of securities found to be riskier than common stocks
1. A market index is used to measure performance of a broad-based portfolio of stocks. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Estimate the opportunity cost of capital for an “average-risk” project. Topic: […]
Finance Chapter 11 2 The appropriate opportunity cost of capital is the return that investors give up on alternative investments that
43. The wider the dispersion of returns on a stock, the: A. lower the expected rate of return. B. higher the standard deviation. C. lower the real rate of return. D. lower the variance. AACSB: Reflective Thinking Accessibility: Keyboard Navigation […]
Finance Chapter 11 3 In general, which stocks should be combined into a portfolio if the goal is the greatest reduction possible in overall portfolio risk
72. In general, which stocks should be combined into a portfolio if the goal is the greatest reduction possible in overall portfolio risk? A. Stocks with returns that are positively correlated B. Stocks with returns that are negatively correlated C. […]
Finance Chapter 11 4 When viewing the long-term trend of the price volatility of U.S. stocks, it is readily apparent that volatility has
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-02 Calculate returns and standard deviation of returns for individual common stocks or for a stock portfolio. Topic: Standard deviation and variance 95. One common reason for […]
Finance Chapter 12 1 The security market line sets a standard for other investments—investors will be willing to hold other investments only if they offer equally good
1. The capital asset pricing model (CAPM) assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Relate the […]
Finance Chapter 12 2 You want to develop a portfolio containing U.S. Treasury bills and two stocks that is equally as risky as the market
50. You want to develop a portfolio containing U.S. Treasury bills and two stocks that is equally as risky as the market. The securities will be equally weighted. If the beta of the first stock is 1.23, what does the […]
Finance Chapter 12 3 What would you recommend to an investor who is considering an investment that, according to its beta, plots below the security market line
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Relate the market risk of a security to the rate of return that investors demand. Topic: Security market line 77. A stock’s risk premium is equal […]
Finance Chapter 12 4 What is the relationship between the market risk of a security and the rate of return that investors demand of that security
106. The CAPM provides a model of determining expected security returns that is: A. precise in its calculations of risk premiums. B. imprecise, but generally an acceptable guideline. C. excellent for high beta stocks. D. excellent for all well-diversified portfolios. […]
Finance Chapter 13 1 The company cost of capital is the expected rate of return that investors demand from the company’s assets and operations.
1. Capital structure refers to a firm’s mix of long-term debt and equity financing. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-01 Calculate a firm’s capital structure. Topic: Capital structure 2. The company cost […]
Finance Chapter 13 2 An increase in which one of the following is most apt to decrease the WACC of a firm that has both debt and equity in its capital structure
42. How much will a firm need in cash flow before tax and interest to satisfy debtholders and equityholders if the tax rate is 40%, there is $10 million in common stock requiring a 12% return, and $6 million in […]
Finance Chapter 13 3 A proposed project has a positive NPV when evaluated at the company cost of capital. If the firm employs debt in its capital structure
70. Assume a firm’s debt is selling at face value. What is the firm’s cost of debt if the debt has a coupon rate of 7.5% and the tax rate is 35%? A. 4.88% B. 4.97% C. 5.21% D. 5.35% […]
Finance Chapter 13 4 How should the weighted-average cost of capital be applied to projects that are not average-risk projects
92. Plasti-tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt has a pretax interest rate of 12%. Plasti-tech’s common stock trades at $15.00 per share and its most recent dividend was $1.00. Future dividends are […]
Finance Chapter 14 1 Only a portion of the board of directors are up for election in any given year when a firm has a classified board
1. Only a portion of the board of directors are up for election in any given year when a firm has a classified board. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-04 Describe voting […]
Finance Chapter 14 2 Which one of these terms applies to the bundling of a group of loans with the subsequent sale of the cash flows from those loans
46. A corporation’s net worth is composed of the: A. book value of common equity plus par value of debt. B. par value plus additional paid-in capital. C. retained earnings less treasury stock. D. book value of common equity plus […]
Finance Chapter 14 3 How does competition in financial markets compare to the competition that can be found in product markets
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 14-05 Describe the major classes of securities sold by the firm. Topic: Tax effects on dividends and payouts 83. Which one of the following statements is correct […]
Finance Chapter 14 4 What procedures are used for elections to a firm’s board of directors and other matters put to shareholders
105. If financial markets were not efficient, it would be more likely for firms to: A. finance investments in a zero-NPV transaction. B. finance investments in a positive NPV transaction. C. totally avoid the need for external financing. D. finance […]
Finance Chapter 15 1 Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals
1. Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals, and investment institutions such as pension funds. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning […]
Finance Chapter 15 2 What would you expect to be the market price of stock after a sold-out rights issue, if each existing shareholder purchases
48. What would you expect to be the market price of stock after a sold-out rights issue, if each existing shareholder purchases one new share at $60 for each three that he or she currently holds, and the current share […]
Finance Chapter 15 3 What is the primary reason for a reduction in share value after a successful rights issue? The new shares
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-04 Describe how companies may make private placements of securities. Topic: Rights offerings 83. What is the primary reason for a reduction in share value after a […]
Finance Chapter 15 4 What are some of the significant issues that arise when established firms make a general cash offer or a private placement of securities
103. What are the benefits of shelf registration to corporations? 1. Securities can be issued in dribs and drabs without incurring excessive costs. 2. Securities can be issued on short notice. 3. Security issues can be timed to take advantage […]
Finance Chapter 16 1 When there are no taxes and capital markets function well, the market value of a company does not depend on its capital structure
1. When there are no taxes and capital markets function well, the market value of a company does not depend on its capital structure. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-01 Show why […]
Finance Chapter 16 2 In a world with corporate taxes but no possibility of financial distress, the value of the firm is maximized when the
44. Assume an unlevered firm changes its capital structure to include $1 million in permanent debt at a 7% interest rate. The tax rate is 35%. According to MM I with taxes, the value of the firm will increase by […]
Finance Chapter 16 3 When corporate taxes and the cost of financial distress are taken into consideration, the market value of a firm is equal to the value
79. What is the expected rate of return to equityholders if the firm has a tax rate of 35%, an interest rate on debt of 10%, a WACC of 15%, and a debt-asset ratio of 60%? A. 12.50% B. 21.25% […]
Finance Chapter 16 4 Discuss how agency problems can develop between shareholders and bondholders when the firm is experiencing financial distress
105. Equity Inc., is currently an all-equity firm. It has 10,000 shares outstanding that sell for $20 each. The firm has an operating income of $30,000 and pays no taxes. The firm contemplates a restructuring that would issue $50,000 in […]
Finance Chapter 17 1 Companies can pay out cash to their shareholders in two ways. They can pay a dividend or they can buy back some of their outstanding shares
1. A dividend does not accompany stocks that are purchased on the ex-dividend date. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-01 Describe how dividends are paid and shares are repurchased. Topic: Chronology of […]
Finance Chapter 17 2 Capital gains may be preferred by investors over dividends even if dividends and capital gains are taxed at the same rate because
45. Which one of the following signals is most likely to elicit a decrease in share price? A. A repurchase of 5% of the firm’s stock B. An increase in the regular quarterly dividend C. A decrease in the regular […]
Finance Chapter 17 3 Which one of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split
78. The date on which actual dividend checks are mailed to shareholders is the: A. declaration date. B. payment date. C. ex-dividend date. D. record date. AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-01 Describe […]
Finance Chapter 17 4 How does the information content of a repurchase program differ from that of a dividend increase increase
104. Why would payout decisions be used by management to signal the prospects of the firm? A firm that chooses a high-dividend policy without the cash flow to back it up will find that it ultimately has to either cut […]
Finance Chapter 18 1 Financial planning is necessary because financing and investment decisions interact and should not be made independently
1. A planning horizon refers to the amount of time necessary to develop the financial plan. FALSE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 Describe the contents and uses of a financial plan. Topic: […]
Finance Chapter 18 2 How much equity would be required if the results of a financial planning model indicate that the firm’s assets will grow to $4 million
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-03 Estimate the effect of growth on the need for external financing. Topic: Internal and sustainable growth rates 49. If a firm with an asset base of […]
Finance Chapter 18 3 In the percentage of sales model, which one of these is least apt to increase in a linear fashion as sales increase
84. What is the internal growth rate for a firm with an ROE of 20%, a dividend payout ratio of 40%, and an equity-to-debt ratio of 60%? A. 4.50% B. 5.39% C. 8.00% D. 12.00% IG = (1 – 0.40) […]
Finance Chapter 18 4 Managers sometimes state a target growth rate for sales or earnings per share. Do you think that either makes sense as a corporate goal
105. How can a firm quickly determine if its desired rate of growth is feasible? The internal growth rate is the maximum rate that the firm can grow if it relies entirely on reinvested profits to finance its growth, that […]
Finance Chapter 19 1 When financial managers are asked the key reason for choosing short-term rather than long-term debt, they often say that they try
1. When financial managers are asked the key reason for choosing short-term rather than long-term debt, they often say that they try to match the maturities of the firm’s assets and liabilities. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember […]
Finance Chapter 19 2 What happens to a firm whose uses of cash exceed its sources of cash during an accounting period
51. A firm’s permanent working capital refers to the: A. difference between fixed assets and current assets. B. maximum difference between current assets and current liabilities. C. portion of net working capital that is financed from long-term sources. D. amounts […]
Finance Chapter 19 3 What are some of the major sources of short-term financing and how are interest rates commonly quoted on these types of loans
86. Which one of the following would not be included as a source of short-term financing? A. Line of credit B. Increase in the minimum operating cash balance C. Sale of marketable securities D. Stretching of accounts payable AACSB: Communication […]
Finance Chapter 19 4 The text suggests that, of the three strategies discussed, the relaxed strategy is probably the worst from the standpoint of managerial evaluation
104. What is the best level of long-term financing relative to the total capital requirement? It is hard to say. However, we can make a few practical observations: 1. Matching maturities. When financial managers are asked the most important reason […]
Finance Chapter 2 1 The reinvestment of cash back into the firm’s operations is an example of a flow of savings to investment
1. Only small companies can go through financial markets to obtain financing. FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-03 Explain the functions of financial markets and institutions. Topic: Financial institution functions 2. […]
Finance Chapter 2 2 Which type of financial institution generally does not accept deposits but does underwrite stock offerings
51. Which one of the following statements is not characteristic of mutual funds? A. They are always considered to be financial institutions. B. They raise money by selling shares to investors. C. They pool the savings of many investors. D. […]
Finance Chapter 2 3 Approximately what percent of the shares issued by U.S. corporations are held by investors outside of the U.S.
85. Which one of these enterprises generally acts as an underwriter for an initial public offering? A. Commercial bank B. Government C. Investment bank D. Insurance company AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: […]
Finance Chapter 20 1 Firms are more likely to grant credit the higher the probability that a potential customer will become a repeat customer
1. Most large payments between business entities are made electronically through either CHIPS or Fedwire. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-06 Compare the different techniques that firms use to make and receive […]
Finance Chapter 20 2 Which one of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers
48. Which one of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers? A. The break-even probability is higher than for single sale customers. B. The break-even probability is lower than for single […]
Finance Chapter 20 3 Which one of the following conditions would make a lock-box system potentially more attractive to a firm
82. What is the benefit for a firm with daily sales of $30,000 to be able to speed up collections by 3 days, assuming an annual opportunity cost of funds of 8%? A. $7,200 daily benefit B. $7,200 annual benefit […]
Finance Chapter 20 4 How can it evaluate the differences between parking the funds in commercial paper versus repurchase agreements
104. What information can the financial manager obtain from an aging schedule of accounts receivable? The purpose of an aging schedule is to list the total amount of receivables in each time category. This is generally done by customer account. […]
Finance Chapter 21 1 Instead of selling part of its operations, companies sometimes spin off a business by separating it from the parent firm and distributing to
1. When a firm is taken over, its management is usually replaced. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 21-03 Describe ways that companies change their ownership or management. Topic: Motives for mergers and […]
Finance Chapter 21 2 In which one of the following ways can the management teams of many corporations influence the board of directors
54. An increase in earnings per share after a merger may not indicate increased value if the: A. number of shares has increased. B. price of the acquirer’s stock increases. C. price-earnings ratios were different in the premerger firms. D. […]
Finance Chapter 21 3 Which one of the following statements is correct for a firm that has undergone a leveraged buyout
92. Firm B’s 1 million shares of stock currently sell for $20 each. Firm A estimates the economic gain from the merger to be $10 million and is prepared to offer $22 cash for each share of B. What percentage […]
Finance Chapter 21 4 Why is it stated that the safest way of evaluating the potential gains from a merger is to focus on the changes in cash flow that will transpire as a result of the merger
110. Energetic Inc., believes that it can acquire Satisfied Industries and improve efficiency to the extent that the market value of Satisfied will increase by $5 million. Satisfied currently sells for $20 a share, and there are 1 million shares […]
Finance Chapter 22 1 The New York Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market
1. The New York Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market. FALSE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 22-01 Understand the difference between […]
Finance Chapter 22 2 The theory that goods in a foreign country should be priced approximately equal after currency translation to goods in a host country is referred to as the law of
43. If the spot exchange rate between euros and dollars is €1.5/$ before the dollar depreciates by 10%, how many dollars will it take after the depreciation has occurred to pay an invoice of €500? A. $366.67 B. $370.37 C. […]
Finance Chapter 22 3 Which one of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies
75. Assume nominal rates are 10% in the United States and 25% in Holland, while the expected rates of inflation are 5% and 19%, respectively. Assuming investments of equal risk, you should invest in: A. the United States because of […]
Finance Chapter 22 4 Why should interest rate parity mean that the forward premium should equal the interest rate differential between countries
98. What is the international Fisher effect and how would you test it, knowing that 6% inflation is expected in the United States but only 3% is expected in Spain. The nominal U.S. interest rate is 9%. The international Fisher […]
Finance Chapter 23 1 The lower limit on a call option’s value is equal to the greater of zero or the exercise price minus the stock price
1. The seller of a put option is betting that the market value of the stock will decrease. FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 23-01 Calculate the payoff to buyers and sellers […]
Finance Chapter 23 2 The option to abandon a project investing in real assets can be considered to have a strike price equal to the
49. Executive stock options are issued with the hope that the recipient will: A. sell the shares they currently own thereby diversifying the firm’s ownership. B. work to increase the value of the firm’s stock. C. never execute them. D. […]
Finance Chapter 23 3 How does the price of a put option respond to the following changes, other things being equal? Does the put price go up or down
84. What is the minimum value of the call option on a convertible bond (with face value of $1,000) with a conversion ratio of 30 if the bond offers a 9% coupon, has 10 years until maturity, and market interest […]
Finance Chapter 23 4 Generalize the formulas for determining the value of the following four option types: buying a call, buying a put, writing a call, writing a put
102. What is the payoff to buyers and sellers of call and put options? There are two basic types of options. A call option is the right to buy an asset at a specific exercise price on or before the […]
Finance Chapter 24 1 If you are not better informed than the highly paid professionals in banks and other institutions, you should use derivatives for speculation, not for hedging
1. A survey of the world’s 500 largest companies found that the vast majority of the companies use derivatives in some way to manage their risk. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 […]
Finance Chapter 24 2 What happens to the price you will pay at expiration if the euro depreciates during the contract period
50. The process of marking a futures contract to market means that: A. the profitability of the contract is locked in from the onset of the contract. B. the amount of commodity to be delivered changes as prices change. C. […]
Finance Chapter 24 3 Why might an individual or organization be willing to swap their fixed-rate loans for floating-rate loans
AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 Understand why companies hedge to reduce risk. Topic: Hedging 86. Which one of the following characteristics is similar in both futures and forward contracts? A. Future asset […]
Finance Chapter 24 4 What is an interest rate swap, and what might motivate a borrower to arrange for one with a bank
107. What is the basic difference in strategy between buying and selling a futures contract? Assuming that the buyer of a futures contract is hedging, the strategy is to protect against future cost increases, typically in raw materials. Thus, the […]
Finance Chapter 3 1 An asset’s liquidity is determined by how readily the asset can be converted to an appropriate amount of cash
1. An asset’s liquidity is determined by how readily the asset can be converted to an appropriate amount of cash. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Interpret the information contained in the […]
Finance Chapter 3 2 What happens to the market value of a firm’s equity as the book value of the firm’s equity increases
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-01 Interpret the information contained in the balance sheet; income statement; and statement of cash flows. Topic: Noncash items 50. If market interest rates have increased since […]
Finance Chapter 3 3 Which one of the following statements is correct for a corporation with a negative net income in both the present and the last fiscal year
AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Interpret the information contained in the balance sheet; income statement; and statement of cash flows. Topic: Generally Accepted Accounting Principles (GAAP) 88. Which of these statements related […]
Finance Chapter 3 4 Discuss reasons why a market-value balance sheet may be distinctly different from a book-value balance sheet
108. What is the change in cash for a firm with the following: $10,000 cash flow from operations, $1,600 cash used for new investment, a reduction in the level of debt of $2,000, $1,000 in cash dividends, and $200 in […]
Finance Chapter 4 1 The income statement of a firm shows the value of its assets and liabilities over a specified period of time.
1. The income statement of a firm shows the value of its assets and liabilities over a specified period of time. FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-02 Calculate and interpret key […]
Finance Chapter 4 2 Which one of these changes indicates an improvement in a firm’s asset management efficiency
AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 04-02 Calculate and interpret key measures of financial performance; including economic value added (EVA) and rates of return on capital; assets; and equity. Topic: Profitability ratios 44. After-tax […]
Finance Chapter 4 3 Instead of increasing its long-term debt by borrowing money from a bank to purchase new stereo equipment, Jay’s Jams Inc
74. What is the residual income for a firm with $1 million in total capital, $300,000 in net income, and a 20% cost of capital? A. $100,000 B. $140,000 C. $240,000 D. $500,000 Residual income = net income – (cost […]
Finance Chapter 4 4 After calculating a firm’s financial ratios, in what manner might they be analyzed to assess the firm’s performance
Thus, all three ratios double when the denominator is cut in half. AACSB: Analytic Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 04-03 Calculate and interpret key measures of operating efficiency; leverage; and liquidity. Topic: Short-term solvency ratios 99. A firm […]
Finance Chapter 5 1 Compound interest pays interest for each time period on the original investment plus the accumulated interest.
1. Compound interest pays interest for each time period on the original investment plus the accumulated interest. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-01 Calculate the future value of money that is invested […]
Finance Chapter 5 2 to be repaid in three equal, annual payments with 10% interest. Approximately how much principal is amortized with the first payment
41. If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate? A. 1.04% B. 4.17% C. […]
Finance Chapter 5 3 What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually
65. What will be the monthly payment on a home mortgage of $75,000 at 12% interest, to be amortized over 30 years? A. $771.46 B. $775.90 C. $1,028.61 D. $1,034.53 Payment = $75,000/[(1/.01) – 1/.01(1.01)360] Payment = $771.46 AACSB: Analytic […]
Finance Chapter 5 4 What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding
90. What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding? A. 10.00% B. 10.47% C. 10.52% D. 11.05% EAR = [1 + (.10/12)] 12 – 1 = .1047, or 10.47% […]
Finance Chapter 5 5 What is the difference between real and nominal cash flows and between real and nominal interest rates
106. A loan officer states, “Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage.” Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest. […]
Finance Chapter 6 1 When the market interest rate exceeds the coupon rate, bonds sell for less than face value to provide enough compensation to investors
1. A bond’s payment at maturity is referred to as its face value. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Distinguish among a bond’s coupon rate; current yield; and yield to maturity. Topic: […]
Finance Chapter 6 2 If a bond investor’s rate of return for a particular period equaled the bond’s coupon rate, then during that period, the bond’s price
Rate of return = [$1,037.19 + (.065 × $1,000) – $1,054.47]/$1,054.47 = .0453, or 4.53% AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 06-02 Find the market price of a bond given its yield to maturity; […]
Finance Chapter 6 3 What are the conditions imposed on a debt issuer that are designed to protect bondholders called
82. How much should you be prepared to pay for a 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%? A. $411.84 B. $897.04 C. $985.00 D. $1,000.00 Price = (.06 × $1,000) {(1/.075) […]
Finance Chapter 7 1 The dividend discount model indicates that the value of a stock is the present value of the dividends it will pay over the investor’s horizon
1. The dividend discount model indicates that the value of a stock is the present value of the dividends it will pay over the investor’s horizon, plus the present value of the expected stock price at the end of that […]
Finance Chapter 7 2 When valuing stock with the dividend discount model, the present value of future dividends will
44. If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if dividends grow annually at a constant rate of 6%? A. $1.33 B. […]
Finance Chapter 7 3 What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation
71. Which of the following is true for a firm having a stock price of $42, an expected dividend of $3, and a sustainable growth rate of 8%? A. It has a required return of 15.14%. B. It has a […]
Finance Chapter 7 4 Studies indicate that stocks of firms with the best earnings news outperform the stocks of firms with the worst earnings news for at least six months
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-05 Understand what professionals mean when they say that there are no free lunches on Wall Street. Topic: Fundamental and technical analysis 99. Studies indicate that stocks […]
Finance Chapter 8 1 Because of deficiencies associated with the payback method, it is seldom used in corporate financial analysis today
1. As the opportunity cost of capital decreases, the net present value of a project increases. TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 08-01 Calculate the net present value of a project. Topic: […]
Finance Chapter 8 2 When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to
46. As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its: A. internal rate of return is positive. B. payback period is greater than one. C. rate of […]
Finance Chapter 8 3 To justify postponing a project for one year, the NPV needs to increase over that year by a rate that is equal to or greater than
85. A project’s payback period is determined to be 4 years. If it is later discovered that additional cash flows will be generated in years 5 and 6, then the project’s payback period will: A. be reduced. B. be increased. […]
Finance Chapter 9 1 Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows
1. Capital budgeting analysis focuses on cash flow as opposed to profits. TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Identify the cash flows from a proposed new project. Topic: Cash flows 2. Accurate […]
Finance Chapter 9 2 Which one of the following would be more apt to make an unacceptable project appear acceptable
48. The likely effect of discounting nominal cash flows with real interest rates will be to: A. make an investment’s NPV appear more attractive. B. make an investment’s NPV appear less attractive. C. correctly calculate an investment’s NPV if inflation […]
Finance Chapter 9 3 Which one of the following is representative of how depreciation expense is handled in the face of inflation
AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-01 Identify the cash flows from a proposed new project. Topic: Project analysis and evaluation 86. A parcel of corporate land was recently dedicated as the new […]