1) Leveraged buyouts are acquisitions where a large fraction of the purchase price is
financed with debt.
2) A capital budget shows a proposed list of investments.
3) The probability that all six of an executive’s stock-option grants from 1995 to 2002
were dated just before a rise in the stock price (often at the bottom of a steep drop) is as
small as 1 in 300 billion.
4) If a low-risk company invests in a high-risk project, those cash flows should be
discounted at a high cost of capital.
5) A callable bond will have a lower value than a straight bond with the same coupon
rate and maturity.
6) If a company with low credit rating invests in a low-risk project, it should discount
the cash flows at a correspondingly high cost of capital.
7) The mix of a company’s short-term financing is referred to as its capital structure.
8) For many firms the limits on capital funds are ‘soft.” By this we mean that the capital
rationing is not imposed by investors.
9) Counterparties to an interest rate swap exchange both interest payments and principal
amounts.
10) New projects should be undertaken by firms only if they have the same risk as
existing assets.
11) A firm’s cost of capital can be used in valuation of every new project it encounters,
regardless of its risk.
12) The gap between internally generated cash and the cash that the company needs is
called the financial deficit.
13) For investment horizons greater than 20 years, long-term corporate bonds
traditionally have outperformed common stocks.
14) While many firms may hold too much cash, it is virtually impossible to hold too
little cash.
15) Typically, the book debt ratio exceeds the market debt ratio for the nonfinancial
corporate sector.
16) Sustainable growth rates can be estimated by multiplying a firm’s ROE by its
dividend payout ratio.
17) When a financial calculator or spreadsheet program finds a bond’s yield to maturity,
it uses a trial-and-error process.
18) A firm’s net profit margin when ignoring the effects of financing is 20% with an
EBIT of $1.5 million and sales of $5 million. How much did the firm pay in taxes?
A.$50,000
B.$300,000
C.$350,000
D.$500,000
19) What can be expected to happen when stocks having the same expected risk do not
have the same expected return?
A.At least one of the stocks becomes temporarily mispriced
B.This is a common occurrence indicating that one stock has more PVGO
C.This cannot happen if the shares are traded in an auction market
D.The expected risk levels will change until the expected returns are equal
20) If the debt is trading at face value, what coupon rate is being paid on debt for a firm
with an after-tax cost of debt of 7.5% and a tax rate of 40%?
A.10.5%
B.12.0%
C.12.5%
D.18.75%
21) If the spot exchange rate between euros and dollars is 1.5/$ before the dollar
depreciates by 10%, how many dollars will it now (after the depreciation has occurred)
take to pay an invoice of 500?
A.$366.67
B.$370.37
C.$750.00
D.$825.00
22) How much debt is outstanding in a firm that has calculated the present value of a
perpetual tax shield to be $300,000 if the tax rate is 35% and the debt carries a 10% rate
of return?
A.$300,000
B.$857,143
C.$3,000,000
D.$3,750,000
23) Which of the following best explains the combination of a high level of sales
combined with a low cash flow during an accounting period?
A.High depreciation expense
B.Reduction of inventory levels
C.Acquisition of equipment
D.Increase in accounts payable
24) In a valuation of a nonconstant dividend growth stock, the terminal value represents
the:
A.point at which the present value of future dividends equals zero
B.maturity date of the stock
C.present value of future dividends from that point on
D.highest value that the stock will attain
25) Which of the following would not be regulated in a standardized futures contract?
A.Quantity of asset to be traded
B.Quality of asset to be traded
C.The spot price
D.Date of settlement
26) How much could NPV be affected by a worst-case scenario of 25% reduction from
the $3 million in expected annual cash flows on a 5-year project with 10% cost of
capital?
A.$2,843,090
B.$3,750,000
C.$4,578,825
D.$6,155,274
27) The major benefit of diversification is to:
A.increase the expected return
B.remove negative risk assets from the portfolio
C.reduce the portfolio’s systematic risk
D.reduce the expected risk
28) A shareholder owning 100 shares of stock is voting for the board of directors who
are elected by cumulative voting. How many votes did the shareholder cast for Director
‘A’ if four directors are to be elected and the maximum number of votes were cast for
‘A’?
A.25
B.100
C.200
D.400
29) How much should you pay for a $1,000 bond with 10% coupon, annual payments,
and 5 years to maturity if the interest rate is 12%?
A.$927.90
B.$981.40
C.$1,000.00
D.$1,075.82
30) LookGood, Inc. has just announced the bad news that its earnings have dropped by
30%. In fact, its investors had anticipated even worse results (a decrease of 40%). As a
result, LookGood’s stock price:
A.increases
B.remains the same
C.decreases
D.follows a random walk as usual
31) Which of the following is inconsistent with a firm that sells for very near book
value?
A.Low current earning power
B.No intangible assets
C.High future earning power
D.Low, unstable dividend payment
32) The break-even level of revenues represents the point at which the firm has:
A.zero pretax profit
B.zero net present value
C.covered all opportunity costs
D.covered all fixed and variable costs
33) What effect will a reduction in the cost of capital have on the accounting break-even
level of revenues?
A.It raises the break-even level
B.It reduces the break-even level
C.It has no effect on the break-even level
D.This cannot be determined without knowing the length of the investment horizon
34) Which of the following functions does not require financial markets?
A.Transporting of cash across time
B.Provision of liquidity
C.Risk reduction by investment in diversified portfolios
D.Provision of trade information
35) Approximately how much should be accumulated by the beginning of retirement to
provide a $2,500 monthly check that will last for 25 years, during which time the fund
will earn 8% interest with monthly compounding?
A.$261,500.00
B.$323,800.00
C.$578,700.00
D.$690,000.00
36) Under which of the following forms of market efficiency would stock prices always
reflect fair value?
A.Weak-form efficiency
B.Semistrong-form efficiency
C.Strong-form efficiency
D.All of these are correct due to capital market efficiency
37) What is the expected real rate of interest for an account that offers a 12% nominal
rate of return when the rate of inflation is 6% annually?
A.5.00%
B.5.66%
C.6.00%
D.9.46%
38) A bond differs from a share of stock in that:
A.a bond represents a claim on the firm
B.a bond has more risk
C.a bond has guaranteed returns
D.a bond has a maturity date
39) If a decision tree indicates an expected NPV of $1 million, then:
A.at least one of the outcomes had a negative NPV
B.all of the outcomes had a positive NPV
C.$1 million is the firm’s minimum guaranteed profit
D.the project still contains uncertainty
40) With respect to the dividend-payment process, the price of a share of stock can
logically be expected to drop on:
A.the payment date
B.the date of record
C.the ex-dividend date
D.the declaration date
41) Which of the following security issues might have the lowest direct costs?
A.Bonds
B.Convertibles
C.Seasoned equity offerings
D.IPOs
42) If a firm’s net income is positive and its noncash expenses are positive, which of the
following could account for a negative amount of cash provided by operations?
A.Current assets decrease more than current liabilities decrease
B.Current assets increase more than current liabilities increase
C.Current assets decrease more than current liabilities increase
D.A large addition is made to plant and equipment
43) What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity
if the respective costs for these components are 6% after tax, 12% after tax, and 18%
before tax? The firm’s tax rate is 35%.
A.9.48%
B.11.16%
C.12.00%
D.15.60%
44) A project has a payback period of 5 years and the firm employs a 10% cost of
capital. Which of the following statements is correct concerning this project’s
discounted payback?
A.Discounted payback will exceed 5 years
B.Discounted payback will be less than 5 years
C.Discounted payback will decrease if the project’s IRR exceeds 10%
D.Discounted payback will increase if the project’s IRR is less than 10%
45) Which of the following could account for a firm that has a negative net income, yet
has a positive amount of cash provided by operations?
A.The net loss was greater than the amount of depreciation expense
B.Inventory increased significantly more than accounts payable
C.Accounts receivable decreased by significantly more than accounts payable
D.Cash balances declined to the desired amount
46) Calculate the rate at which a firm can grow without changing its leverage if its
payout ratio is 70%, equity outstanding at the beginning of the year is $900,000, and its
net income for the year is $150,000.
A.5.00%
B.11.67%
C.14.00%
D.16.67%
47) What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity
if the respective costs for these components are 9.23% before tax, 12% after tax, and
18% before tax? The firm’s tax rate is 35%.
A.9.48%
B.11.16%
C.12.00%
D.15.60%
48) The manager of StarPerformer Mutual Fund expects the fund to earn a rate of return
of 12% this year. The beta of the fund’s portfolio is .8 . If the rate of return available on
risk-free assets is 5% and you expect the rate of return on the market portfolio to be
15%, should you invest in StarPerformer? Can you create a portfolio with the same risk
as StarPerformer Mutual Fund, but with a higher expected rate of return? Explain why
in reality, a mutual fund must be able to provide an expected rate of return that is higher
than that predicted by the security market line in order for investors to consider the fund
an attractive investment opportunity.
49) Modern Artifacts can produce keepsakes that will be sold for $80 each.
Nondepreciation fixed costs are $1,000 per year and variable costs are $60 per unit. If
the project requires an initial investment of $3,000 and is expected to last for 5 years
and the firm pays no taxes, what are the accounting and economic break-even levels of
sales? The initial investment will be depreciated straight-line over 5 years to a final
value of zero, and the discount rate is 10%.
50) What problem can be caused by “mixing” real and nominal cash flows in
discounting exercises?
51) How do we perform on NPV analysis for projects with cash flows in foreign
currencies?
52) Explain why bond investors may be interested in TIPS rather than traditional bonds.
Why have TIPS not been popular lately?