Graham and Harvey (2001) found that _____ were the two most popular capital
budgeting methods.
A. IRR and payback
B. IRR and NPV
C. NPV and PI
D. IRR and modified IRR
E. discounted payback and NPV
Answer:
Prepackaged bankruptcies:
A. generally benefit only the bankrupt firm.
B. require creditor approval within 7 days of filing.
C. area combination of a private workout and legal bankruptcy.
D. were replaced by Section 363 provisions.
E. must result in a full liquidation.
Answer:
A small stock dividend is generally defined as a stock dividend of less than _____
percent.
A. 10 to 15
B. 15 to 20
C. 20 to 25
D. 25 to 30
E. 30 to 35
Answer:
Suppose Binder Corporation’s common stock has a return of 17.61 percent. The
risk-free rate is 3.68 percent, the market return is 12.4 percent, and there is no
unsystematic risk affecting Binder’s return. Given the one-factor arbitrage pricing
model, what is the factor beta?
A. 1.548
B. 1.442
C. 1.203
D. 1.597
E. 1.608
Answer:
Which one of the following is not empirically correct?
A. Some firms use no debt.
B. Most corporations have relatively low debt-asset ratios.
C. Capital structures are fairly constant across industries.
D. Debt levels across industries vary widely.
E. Debt ratios in most countries are considerably less than 100 percent.
Answer:
You are considering two independent projects with the same discount rate of 11 percent.
Project A costs $284,700 and has cash flows of $75,900, $106,400, and $159,800 for
Years 1 to 3, respectively. Project B costs $115,000, and has a cash flow of $50,000 a
year for Years 1 to 3. You have sufficient funds to finance any decision you make.
Which project or projects, if either, should you accept and why?
A. Project A; because it has the larger NPV
B. Project B; because its IRR exceeds the discount rate
C. both projects; because their NPVs are both positive
D. Project A; because it is the larger-sized project with a positive IRR
E. neither project; because their NPVs are less than their initial costs
Answer:
Which one of these best fits the description of an agency cost?
A. increasing the dividend payments per share
B. the benefits received from reducing production costs per unit
C. the payment of corporate income taxes
D. the payment required for an outside audit of the firm
E. the payment of interest on a firm’s debts
Answer:
HNT is an all-equity firm with a beta of .88. What will the firm’s equity beta be if the
firm switches to a debt-equity ratio of .35?
A. .880
B. 8.567
C. .972
D. 1.188
E. 1.204
Answer:
Capital spending is equal to:
A.ending next fixed assets minus beginning net fixed assets.
B.ending net fixed assets minus beginning net fixed assets plus depreciation.
C.ending total assets minus beginning total assets.
D.ending total assets minus beginning total assets minus depreciation.
E.beginning total assets plus asset purchases minus asset sales.
Answer:
Jay’s has a market value of $3,600 and believes that if it acquires Benny’s in a stock
transaction the combination of the new firm will be worth $6,000 given the expected
synergy of $200. If Jay’s wants to keep 75 percent of the synergy for itself, what should
be the value of the stock it issues to Benny’s?
A. $2,050
B. $2,250
C. $2,150
D. $2,000
E. $2,500
Answer:
Downtown Deli has 2,000 shares of stock outstanding with a par value of $1 per share
and a market value of $26 per share. The balance sheet shows $2,000 in the common
stock account, $9,500 in the capital in excess of par account, and $14,500 in the
retained earnings account. The firm just announced a stock dividend of 75 percent.
What is the market value per share after the dividend?
A. $36.00
B. $14.86
C. $45.50
D. $13.50
E. $12.00
Answer:
You just paid $525,000 for a security that will pay you and your heirs $25,000 a year
forever. What rate of return will you earn?
A. 4.95%
B. 4.39%
C. 4.76%
D. 5.00%
E. 4.50%
Answer:
A firm has a debt-equity ratio of .48. Its cost of debt is 7 percent and its overall cost of
capital is 10.8 percent. What is its cost of equity if there are no taxes or other
imperfections?
A. 10.97%
B. 13.05%
C. 12.62%
D. 11.46%
E. 13.67%
Answer:
Assume there are three upcoming IPOs (A, B, and C) that are priced at $20 a share. You
place an order with your broker to purchase 500 shares of each of the three offerings.
Further assume that A is oversubscribed and your allocation is only 100 shares. You
receive a full allocation on both B and C. Offer A is undervalued by $13, B is
overvalued by $8, and C is overvalued by $1. What will be your combined total profit
or loss on these three investments?
A. “$3,200
B. “$1,125
C. $2,000
D. $1,125
E. $3,200
Answer:
An investment with an initial cost of $4,000 produces cash flows of $3,400, −$500,
$2,800, −$100, and $6,000 for Years 1 to 5, respectively. How many IRR’s does this
project have?
A. 4
B. 3
C. 5
D. 6
E. 2
Answer:
The Securities Act of 1933 focuses on:
A. all stock transactions.
B. the sales of existing securities.
C. the issuance of new securities.
D. insider trading.
E. Federal Deposit Insurance Corporation (FDIC) insurance.
Answer:
A beta coefficient reflects the response of a security’s return to:
A. the risk-free rate.
B. an unsystematic risk.
C. a systematic risk.
D. the market rate of return.
E. idiosyncratic risk.
Answer:
The expected return on a portfolio is best described as ____ average of the expected
returns on the individual securities held in the portfolio.
A. an arithmetic
B. a weighted
C. a compounded
D. a geometric
E. a minimum
Answer:
A classified board is one which has:
A. representation from various classes of stock.
B. terms that expire at different times.
C. both employee and non-employee directors.
D. directors elected solely by one class of shareholders.
E. directors that have been assigned differing numbers of votes per seat.
Answer:
A firm has zero debt and an overall cost of capital of 13.8 percent. The firm is
considering a new capital structure with 40 percent debt. The interest rate on the debt
would be 7.2 percent and the corporate tax rate is 34 percent. What would be the cost of
equity with the new capital structure?
A. 16.90%
B. 16.11%
C. 16.70%
D. 15.02%
E. 15.59%
Answer:
If the issuer of a stock receives the proceeds from a sale of that issuer’s stock, then the
sale:
A. had to have occurred on the floor of an exchange.
B. was a secondary market transaction.
C. was transacted on the NYSE.
D. was conducted in the primary market.
E. had to have been a limit order.
Answer:
A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700
for Years 1 to 4, respectively. What is the payback period?
A. 2.97 years
B. 2.84 years
C. 3.98 years
D. 3.92 years
E. never
Answer:
Leisure Vacations is considering a 5-year project which will require the purchase of
$1.4 million in new 5-Year MACRS equipment The MACRS rates are 20 percent, 32
percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6,
respectively. The firm desires a minimal 14 percent rate of return and the tax rate is 34
percent. The equipment can be sold at the end of the project for an estimated $225,000.
What is the amount of the aftertax salvage value?
A. $147,600.00
B. $162,418.54
C. $95,322.15
D. $144,238.97
E. $175,917.60
Answer:
Firm V has a market value of $450 and Firm A has a market value of $375. If the two
firms merged their estimated combined value is $900. What is the synergy of the
merger?
A. $50
B. $75
C. $25
D. $20
E. $40
Answer:
ABC Manufacturing historically produced products that were held in inventory until
they could be sold to a customer. The firm is now changing its policy and only
producing a product when it receives an actual order from a customer. All else equal,
this change will:
A. increase the operating cycle.
B. lengthen the accounts receivable period.
C. shorten the accounts payable period.
D. decrease the cash cycle.
E. decrease the inventory turnover rate.
Answer:
You own 300 shares of Abco stock. The firms plans on issuing a dividend of $2.10 a
share one year from today and then issuing a final liquidating dividend of $36.45 a
share two years from today. Your required rate of return is 14.5 percent. Ignoring taxes,
what is the value of one share of this stock to you today?
A. $33.93
B. $29.64
C. $26.62
D. $27.80
E. $31.05
Answer:
The date before which a new purchaser of stock is entitled to receive a declared
dividend, but on or after which she does not receive the dividend, is called the _____
date.
A. ex-rights
B. ex-dividend
C. record
D. payment
E. declaration
Answer:
The systematic response coefficient for productivity, βp, would produce an unexpected
change in any security return of (βP____) if the expected rate of productivity was 1.5
percent and the actual rate was 2.25 percent.
A. .75%
B. -.75%
C. 2.25%
D. -2.25%
E. 1.5%
Answer:
A firm has sales of $38,900, net income of $2,400, total assets of $43,100, and total
equity of $24,700. Interest expense is $830. What is the common-size statement value
of the interest expense?
A. 2.13%
B. 3.08%
C. 1.93%
D. 2.49%
E. 3.46%
Answer:
A put option with a $35 exercise price on ABC stock expires today. The current price of
ABC stock is $36. The put is:
A. funded.
B. unfunded.
C. at the money.
D. in the money.
E. out of the money.
Answer:
The terminal value of a firm is also commonly referred to as the:
A. final value.
B. cash value.
C. non-constant value.
D. estimated value.
E. horizon value.
Answer:
Shareholders discount many corporate announcements because of their prior
expectations. If an announcement causes the price to change that change will mostly be
driven by:
A. the expected part of the announcement.
B. market inefficiency.
C. the unexpected part of the announcement.
D. the systematic risk.
E. expectations of a revised announcement.
Answer:
Assume you are being granted at-the-money stock options today when the stock is
trading at $32 a share. These options mature in one year, the continuously compounded
risk-free rate is 4.2 percent, and the volatility of the stock’s returns is 22 percent. What
is the value of d2 as it is used in the Black-Scholes model?
A. .0927
B. .0752
C. .0809
D. .0847
E. .0936
Answer: