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1) A firm with a debt-equity ratio of 1/2, return on assets of 15%, and return on debt of
10% will have return on equity of:
A.15.00%
B.16.67%
C.20.00%
D.21.17%
2) The international Fisher effect is valid in the long run because:
A.inflation rates are equal in different countries
B.investors will move their money into countries with high real interest rates
C.investors will move their money into countries with high nominal interest rates
D.investors will move their money into countries with low inflation
3) Which of the following expense categories is subtracted from total revenues to help
arrive at a firm's EBIT?
A.Cash dividends
B.Depreciation expense
C.Interest expense
D.Tax liability
4) Which of the following identifies the distinction between a U.S. Treasury bond and a
Treasury note?
A.Bonds make coupon payments; notes do not
B.Bills have default risk; bonds do not
C.Bonds are priced in 32s; notes are not
D.Bonds initially have more than 10 years until maturity; notes have fewer than 10
years initially
5) Which of the following statements is false regarding MM's proposition I?
A.Firm value is unaffected by its capital structure
B.It is also called the debt irrelevance proposition
C.Shareholders should care about the firm's debt policy
D.After restructuring, the firm's value should be the same as it was prior to restructuring
6) A cost should be considered sunk when it:
A.is fully depreciated
B.produces no additional sales revenues
C.has no effect on future flows
D.is replaced by costs that are not yet sunk
7) Why is debt financing said to include a tax shield for the company?
A.Taxes are reduced by the amount of the debt
B.Taxes are reduced by the amount of the interest
C.Taxable income is reduced by the amount of the debt
D.Taxable income is reduced by the amount of the interest
8) What is the pretax cost of debt for a firm in the 35% tax bracket that has a 10%
after-tax cost of debt?
A.5.85%
B.12.15%
C.15.38%
D.25.71%
9) Which of the following is not a logical justification for dividend preference (vs.
capital gains) in the real world?
A.Institutional restrictions involving dividends
B.Higher share prices from higher payouts
C.A steady source of cash without transaction costs
D.Differing income tax rates
10) In each of the following cases, explain briefly which of the two companies is likely
to be characterized by the higher ratio.
a. Debt-equity ratio: an electronics store or a tour operator
b. Payout ratio: BigBookstore or HomeRobots
c. Ratio of sales to assets: a restaurant or a car rental company
d. Average collection period: The Power Company or Joe's FastFood
11) Where does a "convertible bond" get its name?
A.The option of converting into shares of common stock
B.The option of increasing its coupon payments when interest rates increase
C.The option of converting from zero-coupon to coupon-paying bond
D.The option of increasing yield without decreasing price
12) A secondary offering IPO occurs when:
A.new shares are sold to provide the company with additional funds
B.the second public issue of equity becomes available
C.the company's founders or venture capitalists market a portion of their shares
D.not all of the shares in a primary IPO were sold
13) Which of the following is true regarding convertible securities?
A.A convertible bondholder is forced to convert at a specific time
B.The convertible option on a bond gives the owner the right to buy shares from a
company at a set price
C.The owner of a warrant option will benefit if the firm's stock does poorly
D.The owner of a warrant option will benefit if the firm's stock does well
14) Issuing additional long-term debt of $5 million and buying new long-term assets
worth $5 million will result in a net cash flow of:
A.$5 million
B.$10 million
C.Zero
D.$15 million
15) Eurobonds are long-term, corporate liabilities that:
A.are issued by European firms
B.must be held inside the United States by foreigners
C.are marketed in many countries
D.are repaid in U.S. dollars
16) The merger between Chase Manhattan and Chemical bank is an example of a:
A.vertical merger
B.horizontal merger
C.conglomerate merger
D.direct merger
17) A managerial objective to increase market share is more likely to be successful in
the long run if the firm is:
A.selling shares in the secondary market
B.the low-cost producer in the industry
C.managed by the board of directors
D.investing in capital budgeting projects
18) Stockholders' expected return on a stock priced at $25 per share with zero-growth
dividends of $4.00 is:
A.6.25%
B.13.64%
C.16.00%
D.21.00%
19) The company cost of capital for a firm with a 65/35 debt/equity split, 8% cost of
debt, 15% cost of equity, and a 35% tax rate would be:
A.7.02%
B.9.12%
C.10.45%
D.13.80%
20) At what point does a customer's unpaid account become delinquent when the terms
of sale are 2/10, net 60?
A.11 days after the sale
B.31 days after the sale
C.61 days after the sale
D.71 days after the sale
21) Which of the following actions could improve a firm's current ratio if it is now less
than 1.0?
A.Convert marketable securities to cash
B.Pay accounts payable with cash
C.Buy inventory on credit
D.Sell inventory at cost
22) Producers who hedge through the purchase of put options must remember that they
may be:
A.reducing their profits compared to not hedging
B.obligated to sell their product at a lower than market price
C.increasing their overall risk
D.facing unlimited price risk
23) The spot exchange rate for the Canadian dollar (C$) is U.S.$0.68/C$. The 6-month
interest rate in the United States is 2.5%, and 3.0% in Canada. What is the 6-month
forward rate for the Canadian dollar?
A.US$0.6734/C$
B.US$0.6767/C$
C.US$0.6833/C$
D.US$0.6866/C$
24) In "field warehousing" the inventory is kept by the:
A.borrowing firm
B.lending institution
C.independent warehousing company
D.firm and the lender jointly
25) Which of the following is most likely correct for a diversified stock portfolio that
exhibits a higher standard deviation than the market index?
A.The portfolio contains fairly aggressive stocks
B.The portfolio's stock plot below the security market line
C.The portfolio's beta is less than 1.0
D.The portfolio contains a significant amount of unique risk
26) What happens to expected portfolio return if the portfolio beta increases from 1.0 to
1.5, the risk-free rate decreases from 5 to 4%, and the market risk premium increases
from 8 to 9%?
A.It increases from 12 to 14.0%
B.It increases from 13 to 17.5%
C.It increases from 14 to 21.0%
D.It remains unchanged
27) Which of the following projects would you feel safest in accepting? Assume the
opportunity cost of capital to be 12% for each project.
A."A" has a small, but negative, NPV
B."B" has a positive NPV when discounted at 10%
C."C's" cost of capital exceeds its rate of return
D."D" has a zero NPV when discounted at 14%
28) The accounting break-even point for a firm is a function of its:
A.net cash flows and depreciation expense
B.fixed costs and profit on each sale
C.variable costs and its tax liability
D.revenues and fixed costs
29) When financial managers take action to minimize the carrying costs of current
assets, they:
A.are likely to maximize profits
B.also consider spoilage costs
C.may increase costs due to shortages
D.engage in the matching of maturities
30) A stock's beta measures the:
A.average return on the stock
B.variability in the stock's returns compared to that of the market portfolio
C.difference between the return on the stock and return on the market portfolio
D.market risk premium on the stock
31) What was the sales volume in the current quarter if beginning accounts receivable,
at $5,000, was $1,000 higher than ending, and $20,000 was collected?
A.$19,000
B.$20,000
C.$21,000
D.$24,000
32) Boards of directors may be legally restricted in their declaration of dividends if:
A.the cash must be borrowed for the dividend payment
B.dividends have increased substantially over a short period of time
C.the dividend would create a situation of insolvency
D.the stock is selling at a low relative price
33) The company cost of capital:
A.measures what investors want from the company
B.depends on current profits and cash flows
C.is measured using security book values
D.depends on historical profits and cash flows
34) The final variable to have its value determined in a financial plan is often referred to
as the:
A.net income
B.balancing item
C.retained earnings plowback
D.growth forecast
35) What is the present value of a four-period annuity of $100 per year that begins 2
years from today if the discount rate is 9%?
A.$297.21
B.$323.86
C.$356.85
D.$388.97
36) Congress passed the Sarbanes-Oxley Act in 2001 . The act attempts to ensure that
the firm's financial reports accurately represent its financial condition. However,
general consensus thinks that accounting rules still give firms considerable leeway
when preparing their financial statements. List three examples of gray areas that allow
for judgment calls.
37) Evaluate the following mutually exclusive projects using IRR as a selection
criterion. Assuming the discount rate to be 14%, which projectif eitherwould be
selected? Project A costs $50,000 and returns $15,000 after-tax annually. Project B
costs $35,000 and returns $11,000 after-tax annually. Both projects last 5 years.
38) Compare the price sensitivity to changes in interest rates for the following bonds: a
5-year and a 10-year bond, each with a 7% coupon. Both bonds currently sell at par.
How much will the price of each bond change if interest rates increase to 8%? Why is
there a difference in the price change?
39) If a firm's average collection period is 42 days, and this compares favorably to the
industry average, what questions may you want to ask before assuming that the firm is
"efficient"?
40) Stock A has a current price of $25.00, a beta of 1.25, and a dividend yield of 6%. If
the Treasury bill yield is 5% and the market portfolio is expected to return 14%, what
should stock A sell for at the end of an investor's 2-year investment horizon?
41) If the spot exchange rate between lire and dollars is L1600/$ and the forward
exchange rate is L1550/$, what would you predict to be the expected future spot rate? Is
the lira appreciating or depreciating against the dollar?
42) Describe in general a firm's cash conversion cycle.
43) How can companies use swaps to change the risk of securities that they have
issued?
44) What are the contents and uses of a financial plan?
