1) The S&P 500 accounts for nearly 75% of the total value of stocks traded in the
United States.
2) The degree of operating leverage (DOL) shows the relationship between sales and
pretax profits.
3) In the United States, auctions of common stock are rare. For example, in 2004
Google raised $1.7 billion in the world’s largest IPO to be sold by auction.
4) The company cost of capital is always at least as large as the weighted-average cost
of capital for the same firm.
5) Speculators are a necessary component of well-functioning futures markets.
6) One advantage to private placements is the low cost associated with its issue.
7) The put option that comes with the puttable bonds makes the bond more valuable.
8) The discount factor is used to calculate the present value of $1 received in year t.
9) Instead of selling part of its operations, companies sometimes spin off a business by
separating it from the parent firm and distributing to its shareholders the stock in the
newly independent company.
10) Typical firms that will engage in private placements usually have a low degree of
risk.
11) When securities are priced fairly, then financing at current market rates is a positive
NPV transaction.
12) A eurobond (a bond that is sold internationally) is always denominated in euro.
13) Warrants are long-term call options on a company’s stock issued by an organized
stock exchange.
14) The bookbuilding method used by almost all IPOs in the United States is like an
auction, since potential buyers indicate how many shares they are prepared to buy at
given prices.
15) Profits are maximized in a firm when the number of bad accounts is minimized.
16) Opportunity costs are evaluated for investment decisions at their historical (that is,
book) cost.
17) Financing for private corporations must flow through financial intermediaries.
18) When one firm merges with another, the:
A.boards of directors will merge also
B.merger must be approved by 75% of the shareholders of the target firm
C.merger must be approved by at least 50% of the shareholders of the target firm
D.target firm will cease to exist
19) If a firm chooses to maintain a fixed debt-equity ratio, it can raise the additional
needed funds by:
A.issuing debt, in which case dividends become the balancing item
B.issuing debt, in which case the amount of debt itself becomes the balancing item
C.issuing stock, in which case dividends become the balancing item
D.issuing stock, in which case no balancing item is needed
20) Firms with valuable intangible assets are more likely to show a(n):
A.excess of book value over market value of equity
B.high going-concern value
C.low liquidation value
D.low P/E ratio
21) The largest IPO at the time of this edition, the Visa IPO in 2008:
A.was underwritten by a single underwriter
B.had no significant underpricing
C.was underwritten by the four largest underwriters
D.increased by over $12 in the first day of trading
22) According to the CAPM, a stock’s expected return is positively related to its beta.
23) Which of the following changes offer the greatest chance of changing a project’s
NPV from negative to positive?
A.Substituting preferred stock for debt
B.Selling the debt at less than par value
C.Reducing project risk
D.Decreasing the marginal tax rate
24) The statement “We’ve got too much invested in that project to pull out now”
possibly illustrates the need to:
A.switch to an accelerated method of depreciation
B.be reacquainted with the concept of sunk costs
C.reduce net working capital assigned to the project
D.reduce discount rates to improve NPV
25) A project costing $20,000 generates cash inflows of $9,000 annually for the first 3
years, followed by cash outflows of $1,000 annually for 2 years. At most, this project
has ______ different IRR(s).
A.one
B.two
C.three
D.five
26) The system of electing a board of directors where each director is voted on
separately is known as:
A.majority voting
B.supermajority voting
C.cumulative voting
D.proxy voting
27) Corporate income statements are designed primarily to show:
A.cash flows during a period
B.account balances at the end of a period
C.performance during a period
D.market values of assets and liabilities
28) What balancing entry is most likely to be called for if previously excluded
intangible assets were added to a firm’s balance sheet?
A.Increase accumulated depreciation
B.Decrease long-term debt
C.Increase shareholders’ equity
D.Decrease current assets
29) Retained earnings result from:
A.the sale of additional shares of stock to investors
B.income not paid to shareholders
C.an excess of assets over liabilities
D.market values that exceed book values
30) In general, what is changing as you read down the left-hand side of a balance sheet?
A.The assets are more fully depreciated
B.The assets are growing in value
C.The assets are increasing in maturity
D.The assets are becoming less liquid
31) What is the undiscounted cash flow in the final year of an investment, assuming
$10,000 after-tax cash flows from operations, $1,000 from the sale of a fully
depreciated machine, $2,000 required in additional working capital, and a 35% tax rate?
A.$8,450
B.$12,600
C.$12,650
D.$14,000
32) Which of the following statements is correct concerning stock dividends?
A.Common stock dividends cannot be paid if preferred stock dividends are in arrears
B.Preferred stock dividends cannot be paid if common stock dividends are in arrears
C.Common and preferred dividends must be paid simultaneously
D.No stock dividends can be paid if the firm has no cash
33) Which of the following methods will provide a correct analysis for capital
budgeting purposes?
A.Discounting real cash flows with real rates
B.Discounting real cash flows with nominal rates
C.Discounting nominal cash flows with real rates
D.All of these methods will provide similar results
34) Methods of accelerated depreciation:
A.allow more 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
35) How much will be recorded as a firm’s additional paid-in capital if it issues 1
million shares that have a $5 par value for $15 per share?
A.$0
B.$5,000,000
C.$10,000,000
D.$15,000,000
36) How does a bond dealer generate profits when trading bonds?
A.By maintaining bid prices lower than ask prices
B.By maintaining bid prices higher than ask prices
C.By retaining the bond’s next coupon payment
D.By lowering the bond’s coupon rate
37) The primary difference between U.S. Treasury bills and U.S. Treasury bonds is that
the bills:
A.do not have default risk
B.have more price volatility
C.have a shorter maturity at time of issue
D.offer a higher return
38) In a year in which common stocks offered an average return of 18%, Treasury
bonds offered 10% and Treasury bills offered 7%, the risk premium for common stocks
was:
A.1%
B.3%
C.8%
D.11%
39) Which of the following appears to be a safe assumption when there is no difference
between the forward and spot exchange rates between two currencies?
A.The countries have equal nominal interest rates
B.The spot rate is expected to change
C.Expected inflation is less than the nominal rate
D.Both currencies are selling at a premium relative to the other
40) Which of the following is not an accepted method of attempting to increase a firm’s
net float?
A.Remote bank locations
B.Lock-box systems
C.Check kiting
D.Concentration banking
41) An investor owns 5,000 shares, which is 1% of a corporation’s outstanding stock
before a stock repurchase. The investor did not sell any of his stock during the 25,000
share repurchase. Which of the following statements is correct?
A.The investor still owns 1% of the corporation
B.The stock’s price is likely to drop by 5%
C.The investor owns more than 1% of the corporation
D.The investor now has 5,250 shares
42) The activities of speculators are necessary in the futures markets in order to:
A.prevent hedgers from trading options
B.provide a continual stream of profit to hedgers
C.maintain futures prices at appropriate levels
D.understand the direction of future price changes
43) Positive NPV projects exist because:
A.analysts select sufficiently low discount rates
B.most projects are unique and innovative
C.cash-flow projections are extended into the future
D.firms hold competitive advantages
44) When corporate taxes and the cost of financial distress are taken into consideration,
the market value of a firm equals the value if all-equity-financed _____ the PV of the
tax shield _____ the costs of financial distress.
A.plus; plus
B.minus; plus
C.plus; minus
D.minus; minus
45) Contrast the Dow Jones Industrial Average and the Standard and Poor’s Composite
Index.
46) Use your knowledge of current corporate tax laws to show that a preferred stock
with a 9% dividend might be preferred to a common stock having a 12% capital gain.
47) Assume that a share of stock is currently selling for $80, that a call option can be
purchased for an $8 premium and an exercise price of $80, and that a put option can be
purchased for a $4 premium and an exercise price of $80. If the investor buys one
share, one call, and one put option, what type of price movements will be desirable?
Illustrate the investor’s potential profits.
48) What are the functions of financial markets?
49) Assume PPP holds at a time when the exchange rate is 1.75/$ and a market basket
of goods costs 500. How many dollars would you expect to spend on the goods?
Germany is expecting 10% inflation while the United States is expecting 4% inflation.
What would you predict to happen to exchange rates?
50) Although sensitivity analysis can provide managers with keen insights, there can be
problems with the reliability of the NPV revisions. Discuss potential reasons for these
problems.
51) How was the role of many bankers in the Financial Crisis of 2007-2009 an example
of an agency problem?
52) Why do bonds exhibit interest rate risk?