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1) Changing management is the only reason that firms make acquisitions.
2) Accrued interest declines with each payment on an amortizing loan.
3) MM's proposition II states that the expected return on equity increases as the firm's
debt-equity ratio increases.
4) One root of the financial crisis of 2007-2009 was the strict money policies promoted
by the U.S. Federal Reserve and other central banks after the technology bubble burst
(i.e., money was relatively expensive during this time).
5) Recent surveys of financial economists and chief financial officers have suggested an
average risk premium of 5.4 to 6.4%.
6) Google's stock price tripling after the IPO suggests that valuing growth stocks is an
exact science.
7) Stock price volatility is beneficial to option holders.
8) Long-term corporate bonds are the only portfolio of securities found to be riskier
than common stocks.
9) The cost of capital for a project depends on the risk of the company.
10) The International Fisher effect stated that "if expected real interest rates are the
same everywhere, then differences in the nominal interest rate must reflect differences
in expected inflation rates."
11) Currently, receivables account for the majority of the current assets of retail firms.
Cash and short-term securities are more important for oil companies, and inventory
makes up the bulk of the current assets of telecom and software companies.
12) A tender offer is one in which the firm's:
A.management offers to sell the company to an acquirer
B.board of directors offers to sell the company to the public
C.shareholders are propositioned to sell their shares to outsiders
D.management offers to buy all outstanding shares of the corporation
13) Which of the following is correct when foreign currency is contracted in the
forward market?
A.A fixed amount is paid when initiating the contract
B.A fixed amount is paid at the end of the contract
C.The amount to be paid is determined and paid at the end of the contract
D.The amount to be paid is determined periodically and paid in installments during the
contract
14) By how much will a bond increase in price over the next year if it currently sells for
$925, has 5 years until maturity, and an annual coupon rate of 7%?
A.$8.26
B.$8.92
C.$12.55
D.$15.00
15) Which of the following companies might you expect to be exposed to less macro
risk?
A.A large producer of flour
B.A regional airline
C.A major commercial bank
D.A machine tool manufacturer
16) All of the following are true of retained earnings except:
A.it is the difference between paid-in capital and the total dividends paid
B.it represents the amount of new capital shareholders indirectly contribute
C.it is equal to earnings times the quantity one minus the payout ratio
D.it is the amount of earnings plowed back into the firm
17) Which of the following statements is not true?
A.Optimal inventory levels involve a trade-off between carrying costs and order costs
B.Carrying costs include the cost of storing goods as well as the cost of capital tied up
in inventory
C.Inventory levels will be lower when storage or interest costs are high and will be
higher when restocking costs are high
D.Inventory level does not rise in direct proportion to sales. As sales increase, the
optimal inventory level rises, but more than proportionately
18) A retailer buys Christmas merchandize from the manufacturer on September 1 . The
manufacturer postdates the invoice to December 31, and the credit terms of the sale are
2/10, net 30 . When is the payment due?
A.January 10
B.January 30
C.February 10
D.September 30
19) When investors are not capable of making superior investment decisions on a
continual basis based on past prices or public or private information, the market is said
to be:
A.weak-form efficient
B.semistrong-form efficient
C.strong-form efficient
D.fundamentally efficient
20) 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 8% annual opportunity cost of funds?
A.$7,200 daily benefit
B.$7,200 annual benefit
C.$30,000 annual benefit
D.$90,000 annual benefit
21) What is meant by investors being able "to undo" the effects of corporate
restructuring? Investors:
A.repay their portion of the firm's debt
B.purchase securities only in unlevered firms
C.will pay more for unlevered shares
D.borrow in their name and replicate the effects of restructuring
22) If pretax profits decrease by 13.8% when the DOL is 3.8, then the decrease in sales
is:
A.0.28%
B.2.75%
C.3.63%
D.10.00%
23) Under which of the following capital structures will a firm's internal growth rate
exceed its sustainable growth rate?
A.Total debt-to-asset ratio equals 35%
B.Equity-to-debt ratio equals 60%
C.Equity-to-debt ratio equals 125%
D.None of these
24) The value of retained earnings on the corporate balance sheet represents the amount
of earnings:
A.not paid out in dividends this period
B.that remains in cash
C.over and above corporate income taxes
D.reinvested in the firm since its inception
25) A firm that wants to increase its sustainable growth rate can do so by __________
the __________ ratio or by __________ the __________ or both.
A.increasing; payout; increasing; ROE
B.increasing; plowback; increasing; ROE
C.decreasing; plowback; increasing; ROE
D.decreasing; payout; decreasing; ROE
26) How may a reduction in cash dividends be in the best interests of current
shareholders?
A.A reduction of cash dividends is always in the best interests of current shareholders
B.The firm will have available cash to increase current investment and future profits
C.Reduced dividends increase managerial compensation, thus increasing their
motivation
D.A reduction of cash dividends cannot be in the best interests of current shareholders
27) A firm is considering a one-time sale of $100,000 to a customer. The cost of goods
sold for this sale is $90,000. If the probability of the customer paying is 0.8, what is the
expected profit from this transaction?
A.Zero
B.-$10,000
C.+$8,000
D.+$10,000
28) What is the market value placed on a firm in which an entrepreneur invests $1
million and a venture capitalist invests $3 million in first-stage financing for a 50%
interest in the firm?
A.$4 million
B.$6 million
C.$7 million
D.$8 million
29) High dividends may be used as __________ of a firm's __________.
A.an indicator; high capital gains
B.an indicator; tax liability
C.a signal; poor prospects
D.a signal; good prospects
30) How would a company's cost of capital calculated from book values be affected if
the company's bonds were selling for more than face value?
A.The cost of capital would increase
B.The cost of capital would decrease
C.The cost of capital would not be affected
D.The effect depends on the bonds' coupon rate
31) The statement that there are no free lunches on Wall Street suggests that:
A.the market is strong-form efficient
B.there is no return to technical or fundamental analysis
C.security prices reflect all available information
D.food purveyors are capitalists
32) Short-term financing decisions commonly occur in the:
A.primary markets
B.secondary markets
C.capital markets
D.money markets
33) Borrowing and lending projects usually can be distinguished by whether:
A.they have positive or negative IRRs
B.the time-zero cash flow is positive or negative
C.their IRR increases as the discount rate increases
D.their rate of return is high or low
34) What is the approximate economic break-even sales for a project costing
$4,000,000 and generating cash flows according to .30 sales - $450,000? Assume the
project will last 10 years and require a discount rate of 12%.
A.$2,093,654
B.$2,359,047
C.$3,859,798
D.$13,783,333
35) It is May 19 and you own a June, European call on ABC Corp. with an exercise
price of $50. The option trades at $40 and ABC is trading at $86. What should you do?
A.Exercise the option now and take the profits
B.Buy more options on ABC Corp
C.Sell your ABC stock before its price declines
D.Sit and wait until the June expiration
36) One common reason for partnerships to convert to a corporate form of organization
is that the partnership:
A.faces rapidly growing financing requirements
B.wishes to avoid double taxation of profits
C.has issued all of its allotted shares
D.agreement expires after ten 10 years
37) XYZ Corp. has a profit margin of 7%, a debt burden of .8, and has financed
two-thirds of its assets through equity. What asset turnover ratio is necessary to achieve
an ROE of 18%?
A.1.26
B.1.61
C.2.14
D.4.02
38) Which of the following statements is correct about a corporation that borrows from
its bank at "Prime plus 1 percent"? The interest rate:
A.is set at a level of the prime rate at initiation of the loan, plus 1 percent
B.can fluctuate up to 1% upward over the life of the loan
C.can be changed upward but not downward over the life of the loan
D.can be changed upward or downward in accordance with prime rate changes over the
life of the loan
39) Which of the following information is not provided by the financial markets?
A.The price of six ounces of gold
B.The cost of borrowing $500,000 for 5 years
C.Microsoft's earnings in 2002
D.The cost of wiring one million yen to Japan
40) The additional inventory investment that is often required for new projects can be
partially funded by:
A.switching to accelerated depreciation methods
B.reducing accounts receivable
C.decreasing equipment purchases
D.increasing accounts payable
41) If a $1,000 convertible bond has a conversion ratio of 50 and the firm's equity is
currently selling for $22 per share, then the:
A.bond should trade for $900
B.bond should trade for $1,000
C.bond should trade for $1,100
D.firm will have already converted the bond
42) Owning a call option that has a high probability of being exercised is said to be
almost equivalent to owning the stock. In which way is owning a call not equivalent to
owning the stock?
A.Option holders pay no income taxes
B.Stockholders do not have capped (restricted) profits
C.Option holders do not receive dividends
D.Stockholders cannot sustain losses
43) Which of the following will allow your firm to achieve its targeted 16% ROA with
an asset turnover of 2.5?
A.A leverage ratio of .0667
B.A P/E ratio of 14
C.A profit margin of 15%
D.A profit margin of 6.4%
44) Which of the following changes will provide an increase (if only in the short-run) in
a firm's ROE?
A.An increase in total assets
B.An increase in the dividend payout ratio
C.An increase in equity
D.An increase in tax rates
45) Who pays the taxes on earnings distributed as dividends?
A.The corporation
B.The investor receiving the dividend
C.Both the corporation and the investor
D.Neither the corporation nor the investor
46) One distinguishing difference between the buyer of a futures contract and the buyer
of an option contract is that the futures buyer:
A.pays a much higher premium than option buyers
B.has an obligation to purchase, not a choice
C.can lose no more than the initial premium
D.has increased rather than reduced risk
47) Using a computer model to repeatedly vary the combination of project variables in
order to compare NPVs is called:
A.Scenario analysis
B.Sensitivity analysis
C.NPV break-even analysis
D.Simulation analysis
48) How much interest will be earned in the next year on an investment paying 12%
compounded annually if $100 was just credited to the account for interest?
A.$88
B.$100
C.$112
D.$200
49) The coupon rate of a bond equals:
A.its yield to maturity
B.a percentage of its face value
C.the maturity value
D.a percentage of its price
50) The most likely interpretation of headlines that read "ABC Corp. adopts shark
repellent" is that:
A.ABC wants to increase the difficulty of a takeover
B.ABC has made a tender offer for the shares of another firm
C.ABC will merge only with small-sized partners
D.ABC Corp. desires to reduce the costs of being acquired
51) How is the profitability index calculated, and how can it be used to choose between
projects when funds are limited?
52) Geothermal Corp. just announced good news: Its earnings have increased by 20%.
Most investors had anticipated an increase of 25%. Will Geothermal's stock price
increase or decrease when the announcement is made?
53) Why doesn't the payback rule always make shareholders better off?
54) How are repurchases used to distribute cash to shareholders?
55) What are the costs and benefits of holding cash?
56) In 2010, how has the dynamic of the proxy contest changed?
57) List and briefly describe the components of a financial planning model.
