1) Only individual investors participate in public offerings, while institutional investors
participate in private placements.
2) A project’s standing alone risk allows for diversification within a sole firm.
3) The existence of a forward-spot differential creates an arbitrage opportunity that will
eliminate the differential almost immediately.
4) $10,000 invested at 10% per year for 5 years earns interest equal to $6,105.10;
therefore, $10,000 invested at 10% per year for 10 years will earn interest equal to
$12,210.20 (2 times $6,105.10).
5) Trade credit appears on a company’s balance sheet as accounts payable.
6) The net present value profile clearly demonstrates that the NPV of a project increases
as the discount rate increases.
7) If a project uses an asset the corporation already owns, the cost of that asset for
capital budgeting purposes is zero to reflect the advantage the project has over projects
that require the purchase of new assets.
8) If the before-tax cost of debt is 7% and the firm has a 40% marginal tax rate, the
after-tax cost of debt is 2.8%.
9) Using the weighted cost of capital as a cutoff rate assumes that future investments
will be financed so as to maintain the firm’s target degree of financial leverage.
10) Financial ratios are useful for measuring performance because maximizing the
return on equity for common shareholders is the primary goal of financial managers.
11) Higher liquidity (holding larger cash and marketable securities balances) generally
results in a lower return on equity.
12) The best form of business entity to attract new capital is the sole proprietorship
because investors only need to deal with one owner.
13) If an old asset is sold for its depreciated, or book, value, then no taxes result and
there is no tax effect from the sale.
14) The astute financial manager will seek to attain the highest current ratio possible.
15) You are considering the three securities listed below.
a. Calculate the expected return for each security.
b. Calculate the standard deviation of returns for each security.
c. Compare Stock A with Stocks B and C. Is Stock A preferred over the others?
16) Centralized control over disbursements is assisted by which of the following cash
management techniques?
A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) both B and C
17) Table 4-1
Stewart Company
Balance Sheet
The accounts receivable turnover is
A) 10.00
B) 11.11
C) 8.11
D) 9.50
18) If you put $10 in a savings account at the beginning of each month for 15 years,
how much money will be in the account at the end of the 10th year? Assume that the
account earns 12% compounded monthly and round to the nearest $1.
A) $1,200
B) $2,323
C) $5,046
D) $3,485
19) Table 4-1
Stewart Company
Balance Sheet
Based on the information in Table 4-1, the inventory turnover ratio is
A) 1.3 times
B) 2.0 times
C) 2.5 times
D) 2.9 times
20) Blackjack Inc. wants to replace a 9-year-old machine with a new machine that is
more efficient. The old machine cost $70,000 when new and has a current book value of
$15,000. Blackjack can sell the machine to a foreign buyer for $14,000. Blackjack’s tax
rate is 35%. The effect of the sale of the old machine on the initial outlay for the new
machine is
A) ($14,350)
B) ($13,650)
C) ($9,100)
D) $1,000
21) DAS, Inc has a line of credit with FBT Bank that allows DAS to borrow up to
$400,000 at an annual interest rate of 11 percent. However, DAS must keep a
compensating balance of 25 percent of any amount borrowed on deposit at the bank.
DAS does not normally have a cash balance account with the bank. What is the
effective annual cost of credit?
A) 11.45%
B) 12.59%
C) 14.67%
D) 16.00%
22) All of the following will make the break-even point increase, other things equal,
EXCEPT
A) fixed costs increase
B) the sales price per unit is decreased due to competition
C) variable costs increase due to higher direct labor cost
D) the number of units sold for the year decreased
23) QRW Corp. needs to replace an old lathe with a new, more efficient model. The old
lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.
(The old machine is being depreciated on a straight-line basis over a ten-year useful
life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new
lathe to the factory and get it installed. The old machine will be sold as scrap metal for
$2,000. The new machine is also being depreciated on a straight-line basis over ten
years. Sales are expected to increase by $8,000 per year while operating expenses are
expected to decrease by $12,000 per year. QRW’s marginal tax rate is 40%. Additional
working capital of $3,000 is required to maintain the new machine and higher sales
level. The new lathe is expected to be sold for $5,000 at the end of the project’s ten-year
life. What is the incremental free cash flow during year 1 of the project?
A) $12,800
B) $14,400
C) $11,400
D) $15,200
24) What financial statement explains the changes that took place in the firm’s cash
balance over a period?
A) statement of cash flow
B) balance sheet
C) income statement
D) reconciliation of free cash flow
25) Bryant Inc. just issued $1,000 par 30-year bonds. The bonds sold for $1,107.20 and
pay interest semiannually. Investors require a rate of 7.75% on the bonds. What is the
bonds’ coupon rate?
A) 9.333%
B) 7.750%
C) 4.125%
D) 8.675%
26) The final approval of a dividend payment comes from
A) the controller.
B) the president of the company.
C) the board of directors.
D) It is a joint decision requiring approval from all of the above.
27) Mr. Wizard’s Magic Shoppe had the following condensed balance sheet at the end
of operation for 2010:
Mr. Wizard’s Magic Shoppe
Balance Sheet
December 31, 2010
During 2011, the following occurred
a.Mr. Wizard’s sold some of its investments for $13,000 which resulted in a gain of
$300 after taxes. The gain (net of taxes) has been included in the company’s 2011 net
income.
b.Additional land for a plant expansion was purchased for $25,000.
c.Bonds payable were paid in the amount of $10,000.
d.An additional $35,000 in capital stock was issued.
e.Dividends of $15,000 were paid to stockholders.
f.Net income for 2011 was $48,000 after allowing for $15,000 in depreciation.
g.A second parcel of land was purchased through the issuance of $10,000 in bonds, and
$5,000 in long-term notes payable.
Required:
a. Prepare a statement of cash flows for the year ended 12/31/2011 . (check figure:
ending cash balance = $72,500)
b. Prepare a condensed balance sheet for Mr. Wizard’s at December 31, 2011 .
28) Distant Thunder, Inc. paid a dividend of $5.00 per share on its common stock
yesterday. Dividends are expected to grow at a constant rate of 10% for the next two
years, at which point the dividends will begin to grow at a constant rate indefinitely. If
the stock is selling for $50 today and the required return is 15%, what it the expected
annual dividend growth rate after year two?
A) 3.365%
B) 3.878%
C) 4.556%
D) 5.000%
29) Facade Securities has an issue of $1,000 par value bonds with 18 years remaining to
maturity. The bonds pay 7.7% interest on a semiannual basis. The current market price
of the bonds is $1,175. What is the yield-to-maturity of the bonds?
A) 6.09%
B) 6.87%
C) 7.24%
D) 8.38%
30) AFB, Inc. requires an investment in equipment of $600,000 to replace existing
equipment. The existing equipment will produce after-tax salvage value of $70,000. Net
working capital requirements are increased by $50,000. What is the total cash outflow
at time zero?
A) $720,000
B) $650,000
C) $530,000
D) $580,000
31) If we are able to fully diversify, what is the appropriate measure of risk to use?
A) expected return
B) standard deviation
C) beta
D) risk-free rate of return
32) Accrued wages and accrued taxes are considered to be
A) permanent sources of financing because companies must always pay wages and
taxes
B) spontaneous sources of unsecured short-term financing
C) secured sources of short-term financing
D) current assets
33) The break-even model enables the manager of the firm to
A) calculate the minimum price of common stock for certain situations
B) set appropriate equilibrium thresholds
C) determine the quantity of output that must be sold to cover all operating costs
D) determine the optimal amount of debt financing to use
34) A capital budgeting project has a net present value of $30,000 and a modified
internal rate of return of 15%. The project’s required rate of return is 13%. The internal
rate of return is
A) greater than $30,000
B) less than 13%
C) between 13% and 15%
D) greater than 15%
35) You believe in the power of compounding and decide to save $1 per day by
avoiding the purchase of a soda. You deposit the $1 at the end of each day in a bank
account that pays 8% interest compounded daily. You are going to take a trip in 20
years with the money you have accumulated. How much money will you have in 20
years, assuming 365 days per year?
A) $7,500
B) $12,438
C) $18,032
D) $22,456
36) The present value of the expected future cash flows of an asset represents the asset’s
A) liquidation value
B) book value
C) intrinsic value
D) par value
37) Which of the following parity conditions is (are) correct?
A) The interest-rate parity theory states that the forward premium/discount should be
equal and opposite in size to the national interest rate differential
B) The purchasing-power parity theory states that in the long run exchange rate changes
tend to reflect international differences in inflation rates
C) The international Fisher effect states that national interest rate differentials are the
result of inflation differentials
D) All of the above are correct
38) You have contracted to buy a house for $250,000, paying $30,000 down and taking
out a fully amortizing loan for the balance, at a 5.7% annual rate for 30 years. What will
your monthly payment be if they make equal monthly installments over the next 30
years (to the nearest dollar)?
A) $1,035
B) $1,123
C) $1,189
D) $1,277
39) A plant may remain operating when sales are depressed
A) if the selling price per unit exceeds the variable cost per unit
B) to help the local economy
C) in an effort to cover at least some of the variable cost
D) unless variable costs are zero when production is zero
40) Operating leverage refers to
A) financing a portion of the firm’s assets with securities bearing a fixed rate of return
B) the additional chance of insolvency borne by the common shareholder
C) the incurrence of fixed operating costs in the firm’s income stream
D) a high degree of variable costs of production
41) Nike Corp. buys on 3/10, net 30 days. What is the nominal cost of interest if Nike
does not take advantage of the trade discount offered? Assume a 360-day year.
A) 12.0%
B) 22.3%
C) 55.7%
D) 66.3%
42) A bond will sell at a premium (above par value) if
A) the market value of the bond is greater than the discount rate of the bond
B) investor’s current required rate of return is below the coupon rate of the bond
C) current market interest rates are moving in the same direction as bond values
D) the economy is in a recession
43) Each of the following factors may cause a corporation to lower its dividend payout
ratio EXCEPT
A) the corporation’s earnings predictability is high
B) the corporation’s current and quick ratios are higher than industry average
C) the corporation’s retained earnings balance is high
D) current common shareholders are unable to participate in new equity offerings
44) Smith Manufacturing Inc. expects the following results in year one of a new
project:
Revenue$400,000
Cash Expenses150,000
Depreciation90,000
EBIT$160,000
Taxes48,000
Net Income$112,000
The annual change in operating cash flow is equal to
A) $298,000
B) $202,000
C) $160,000
D) $250,000
45) Table 4-1
Stewart Company
Balance Sheet
The OROA is
A) 24.73%
B) 39.50%
C) 46.54%
D) 52.78%
46) How much money must be put into a bank account yielding 6.42% (compounded
annually) in order to have $1,671 at the end of 11 years (round to nearest $1)?
A) $921
B) $886
C) $843
D) $798
47) The stock market with the most stringent listing requirements is the
A) New York Stock Exchange (NYSE)
B) NASDAQ Stock Market
C) American Stock Exchange (AMEX)
D) All organized exchanges have the same listing requirements in order to make trading
fair for all investors
48) Mountain Retreat and Resort is undergoing a major expansion. The expansion will
be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market
price of the bonds is $1,070 each. The firm’s flotation expense on the new bonds will be
$50 per bond. The firm’s marginal tax rate is 35%. What is the relevant cost of the new
bonds for capital budgeting purposes?
A) 5.14%
B) 5.69%
C) 8.45%
D) 4.82%
49) Which of the following actions would decrease a firm’s liquidity?
A) selling stock and reducing accounts payable
B) selling machinery and using proceeds to retire bonds
C) reducing accounts receivable and buying bonds
D) selling bonds and holding proceeds in the cash account
50) Assuming no corporate taxes, the independence hypothesis suggests that a firm’s
weighted average cost of capital will
A) remain constant regardless of capital structure because the cost of debt and the cost
of equity are the same
B) remain constant because the cost of equity will be increasing as the amount of debt
increases due to the increased risk
C) increase proportionally with the increase in the amount of debt a firm uses
D) decrease proportionally with the increase in the amount of debt a firm uses
51) A corporation announces a large increase in its annual dividend, but its stock price
declines. This could result from
A) residual dividend theory
B) bird-in-the-hand theory
C) perfect capital markets
D) MM’s indifference theorem
52) Which of the following statements is MOST correct concerning diversification and
risk?
A) Diversification is mainly achieved by the selection of individual securities for each
type of asset held in a portfolio
B) Diversification is mainly achieved by the asset allocation decision, not the selection
of individual securities within each asset category
C) Large company stocks and small company stocks together in a portfolio lead to
dramatic reductions in risk because their returns are negatively correlated
D) Asset allocation is important for pension funds but not for individual investors
53) Which of the following statements is MOST correct concerning the relationship
between a company’s cash budget and its income statement?
A) If net income is positive for 3 or more months in a row, then cash flow must be
positive
B) If net income is positive, then cash flow must be positive
C) If net income is positive, then cash flow could be positive or negative, but if net
income is negative, cash flow must also be negative
D) Cash flow could be positive whether net income is positive or negative
54) Table 3-1
Jones Company
Financial Information
Calculate the amount of dividends paid by Jones Company in 2010 (no assets were
disposed of during the year, and there was no change in interest payable or taxes
payable).
A) $2,000
B) $2,500
C) $3,500
D) $4,000
55) Gibson Industries is issuing a $1,000 par value bond with an 8% annual interest
coupon rate that matures in 11 years. Investors are willing to pay $972, and flotation
costs will be 9%. Gibson is in the 34% tax bracket. What will be the after-tax cost of
new debt for the bond?
56) The preferred stock of Wells Co. sells for $17 and pays a $1.75 dividend. The net
price of the stock after issuance costs is $15.30. What is the cost of capital for new
preferred stock?
57) Calculate the value of a bond that is expected to mature in 18 years with a $1,000
face value. The coupon rate is 4%, and the required rate of return is 8%. Interest is paid
annually.
58) U.S Technologies preferred stock sells for $80 and pays $9 each year in dividends.
What is the expected rate of return?
59) Diana Ltd. paid a $2.50 per share dividend yesterday. The dividend is expected to
grow at 10 percent per year for the foreseeable future. Diana Ltd. has a beta of 1.6, a
standard deviation of returns of 30 percent, and a required return of 18%. What is the
value of a share of Diana Ltd. common stock?
60) Table 4-7
Hokie Corporation Comparative Balance Sheet
For the Years Ending December 31, 2009 and 2010
(Millions of Dollars)
Hokie had net income of $28 million for 2010 and paid total cash dividends of $20
million to their common stockholders.
Calculate the following 2010 financial ratios of Aggie Corporation using the
information given in Table 4-7:
i.current ratio
ii.acid test ratio
iii.debt ratio
iv.return on total assets
v.return on common equity
61) If provided the nominal rate of interest (r) of 7.4% and the anticipated rate of
inflation (i) of 4.5%, what is the real rate of interest (R)?
62) Sunshine Candy Company’s capital structure for the past year of operation is shown
below.
First mortgage bonds at 12%$2,000,000
Debentures at 15% 1,500,000
Common stock (1,000,000 shares)5,000,000
Retained earnings500,000
TOTAL$9,000,000
The federal tax rate is 50 percent. Sunshine Candy Company, home-based in Orlando,
wants to raise an additional $1,000,000 to open new facilities in Tampa and Miami. The
firm can accomplish this via two alternatives: (1) It can sell a new issue of 20-year
debentures with 16 percent interest; or (2) 20,000 new shares of common stock can be
sold to the public to net the candy company $50 per share. A recent study, performed by
an outside consulting organization, projected Sunshine Candy Company’s long-term
EBIT level at approximately $6,800,000. Find the indifference level of EBIT (with
regard to earnings per share) between the suggested financing plans.
63) John won the lottery on Monday and can take either $50,000 per year for 20 years,
or $500,000 today. Bill won the same lottery on Tuesday and has the same options for
receiving the cash. A well respected financial advisor is hired by both John and Bill.
The advisor recommends that John take the $50,000 per year for 20 years but advises
Bill to take the $500,000 up front payment. How is it possible to give different advice to
two clients regarding the exact same cash flows?