FC 19983

Which one of the following does not provide a ‘solution” to a projected growth rate in assets that exceeds the sustainable growth rate?
A. Increase the ROE.
B. Allow the debt-equity ratio to increase.
C. Increase the payout ratio.
D. Issue new equity.

What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73?
A. 1.0
B. 1.17
C. 1.22
D. 1.25

Which of the following is correct concerning terms of trade credit of 4/10, EOM, net 90?
A. The discount period expires on the last day of the month.
B. The invoice becomes delinquent 90 days after the last day of the month.
C. The discount period ends on the 10^th day of the following month.
D. The discount period ends either 10 days after invoicing or at the end of the month, whichever is earlier.

Which one of the following statements is correct about a corporation in the 35% tax bracket that can invest either in a bond paying 8% interest or in the preferred stock of another corporation that pays a 6% dividend?
A. The preferred stock should be selected because its after-tax yield is 0.17% higher.
B. The preferred stock should be selected because its after-tax yield is 0.80% higher.
C. The bond should be selected because its after-tax yield is 0.17% lower.
D. The bond should be selected because its after-tax yield is 1.3% higher.

The incremental risk to a portfolio from adding another stock:
A. is always greater than the average portfolio risk.
B. is always less than the average portfolio risk.
C. is always positive.
D. may be either positive or negative.

What is the equivalent annual cost for a project that requires a $40,000 investment at time zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?
A. $20,000.00
B. $21,356.95
C. $22,618.83
D. $25,237.66

Which one of the following statements best describes the total capital requirement for most profitable firms?
A. The general trend in the total capital requirement is downward sloping.
B. The total capital requirement tends to be constant over long periods of time.
C. There are seasonal fluctuations around the total capital requirement trend.
D. The total capital requirement must be funded with short-term debt.

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:
A. increased.
B. decreased.
C. remained constant.
D. changed, but the direction of the change is irrelevant.

Automatic dividend reinvestment plans allow firms to:
A. pay dividends on a more frequent schedule.
B. reduce their cash outflow to shareholders.
C. transform regular dividends into stock dividends.
D. avoid the ex-dividend date reduction in stock price.

If the IRR for a project is 15%, then the project’s NPV would be:
A. negative at a discount rate of 10%.
B. positive at a discount rate of 20%.
C. negative at a discount rate of 20%.
D. positive at a discount rate of 15%.

Which one of the following statements is correct for a firm that has undergone a leveraged buyout?
A. Its shares are traded publicly.
B. Its capital is mostly equity financed.
C. Its shares are not traded publicly.
D. It has a larger shareholder base.

If an automobile manufacturer were to acquire one of the firms listed below, which acquisition would be called a horizontal merger?
A. A steel mill
B. A rival manufacturer
C. A tire producer
D. A bank

The opportunity cost of an asset:
A. should be depreciated annually.
B. can differ depending on market conditions.
C. is typically ignored in capital budgeting.
D. is important only for parcels of land.

Methods of accelerated depreciation:
A. allow more total depreciation over the asset’s life.
B. decrease the depreciation tax shield.
C. increase the depreciation tax shield.
D. allow assets to be depreciated more rapidly.

Capital gains may be preferred by investors over dividends even if dividends and capital gains are taxed at the same rate because:
A. taxes on dividends are withheld immediately.
B. taxes on capital gains are paid annually.
C. taxes on capital gains can be timed.
D. after-tax dividends are less certain than capital gains.

The primary purpose of financial futures is to:
A. benefit from increases in interest rates.
B. protect against swings in interest rates or prices of financial assets.
C. translate one currency into another.
D. guarantee the repayment of loan principal.

New projects or products can provide positive indirect effects as well as negative effects. Which one of the following appears to be a negative indirect effect?
A. The new machine required for the project uses less electricity than the existing machine.
B. Orders for your complementary products are expected to increase.
C. Customer reorders of supplies related to existing products are expected to decrease.
D. Variable costs are expected to decrease since the firm can order larger quantities.

Which one of these statements correctly applies to an unlevered firm that pays no taxes?
A. The return on equity exceeds the WACC.
B. The return on assets equals the return on equity and also equals WACC.
C. The return on assets equals the return on equity and exceeds WACC.
D. The return on equity equals WACC and exceeds the return on assets.

Amy wants to know if inventory is increasing as a percentage of total assets. Which one of these statements most easily provides the information she is seeking?
A. Statement of cash flows
B. Balance sheet
C. Common-size balance sheet
D. Income statement

When a firm announces a two-for-one stock split (in the absence of other new information), investors should expect that:
A. the earnings per share will decrease by 50% but the stock price will remain constant.
B. the stock price will decrease by 50% but earnings per share will remain constant.
C. both the earnings per share and the stock price will remain the same.
D. both earnings per share and the stock price will decrease by 50%.

A stream of equal cash payments lasting forever is termed:
A. an annuity.
B. an annuity due.
C. an installment plan.
D. a perpetuity.

If the company cost of capital is 20% and a proposed project’s cost of capital is 15%, then discounting the projects’ cash flows at 20% would:
A. determine where the project plots in relation to the security market line.
B. make the project look more attractive than it should be.
C. be correct from a theoretical perspective.
D. be incorrect and could cause the project to be erroneously rejected.

An East Coast firm should establish a lock-box service on the West Coast if:
A. the firm has a large number of customers.
B. it has banking facilities in the West Coast area.
C. West Coast customers are currently mailing their checks to an East Coast address.
D. West Coast banks are more efficient.

Which one of the following is most apt to discourage purchasers from taking a discount?
A. A higher discount percentage
B. A shorter payment period
C. A longer discount period
D. A longer payment period

What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost of debt is 7%, the tax rate is 35%, and the required return on equity is 18%?
A. 54.00%
B. 63.64%
C. 70.26%
D. 77.78%

MM’s proposition II without taxes states that the:
A. expected return on equity increases as financial leverage increases.
B. expected return on assets decreases as expected return on debt decreases.
C. firm’s capital structure is irrelevant to the firm’s overall value.
D. greater the proportion of equity, the higher the expected return on debt.

If the statement of sources and uses of cash shows a decrease in the cash balance, an increase in which one of the following might have eliminated that decrease?
A. Cash dividends paid
B. Accounts payable
C. Accounts receivable
D. Inventory

Why are most futures contracts not settled through delivery of the product?
A. Most contracts are settled through the margin account.
B. Most contracts expire with neither party having an obligation to the other party.
C. Most participants cancel their futures contracts through purchase of an option contract.
D. It is easier and cheaper to settle in cash or by offset.

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $7.50 per bushel. In March the spot price of corn is $7.20 per bushel. Which of the following is correct?
A. The farmer is obligated to deliver corn to the futures buyer at $7.20.
B. The farmer has locked in an effective price of $7.50 per bushel.
C. The farmer would have been better off without the futures contract.
D. The farmer will receive $7.35 per bushel which is the average of the spot and futures prices.

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend if you ignore taxes? The price should:
A. increase by the amount of the dividend.
B. decrease by the amount of the dividend.
C. decrease by one-half the amount of the dividend.
D. remain constant.

Which one of the following would you expect to represent the broadest-based index of U.S. stocks?
A. Wilshire 5000
B. Dow Jones Industrial Average
C. Standard and Poor’s Composite
D. Financial Times Index

When a corporation fails, the maximum that can be lost by an individual shareholder is:
A. the amount of their initial investment.
B. the amount of their share of the profits.
C. their proportionate share required to pay the corporation’s debts.
D. the amount of their personal wealth.

Assume a firm is financed with 30% debt on which it pays 9%. What is the expected return on equity if the expected return on assets is 14%?
A. 16.14%
B. 17.86%
C. 14.92%
D. 15.50%

Which one of the following is least likely to contribute to the positive-NPV investments found in product markets?
A. Patented-production processes
B. Financing strategies
C. Brand-name product recognition
D. Lack of competition

How is it possible for real rates of return to increase during times when the rate of inflation increases?
A. Inflation increased more than the real return.
B. Nominal returns actually decreased.
C. Nominal returns increased more than inflation.
D. Nominal returns increased less than inflation.