1) A cash conversion cycle is the period between a firm’s payment for materials and
collection on its sales.
2) Insider trading is the purchase or sale of shares based on information that is not
available to public investors, and such behavior is accepted by the Securities Exchange
Commission.
3) By offering to buy shares directly from shareholders, the acquiring firm can bypass
the target firm’s management altogether.
4) The longer the time until expiration of a call option, the greater the value of the
option.
5) Financial planning is concerned with possible surprises as well as the most likely
outcomes.
6) The benefit of an interest tax shield is captured by the equity holders.
7) Studies suggest that the indirect costs of bankruptcy are typically of a significant
magnitude.
8) Financial assets have value because they are claims on the firm’s real assets and the
cash that those assets will produce.
9) Projects that have a zero NPV when calculated at the WACC will provide sufficient
returns to creditors and shareholders.
10) For most firms, the majority of their funding is generated internally.
11) Pro formas are projected or forecasted financial statements.
12) To calculate present value, we discount the future value by some interest rate r, the
discount rate.
13) Compound interest pays interest for each time period on the original investment
plus the accumulated interest.
14) Operating leverage increases with fixed cost.
15) The inventory turnover ratio times the average days in inventory equals 365 .
16) Sensitivity analysis takes into consideration the interrelationship of variables.
17) Under which condition does a call option approach its upper bound?
A.When the stock price is far above the strike price
B.When the stock price is closest to the strike price
C.When the stock price is approaching zero
D.When the option is approaching its expiration time
18) When corporate taxes are considered, how does leverage affect the WACC?
A.An increase in leverage will be offset by a decrease in equity financing, thus leaving
WACC unchanged
B.Changes in leverage will affect the WACC only if the interest rate on debt changes
C.Increased leverage will increase the WACC
D.Increased leverage will decrease the WACC
19) To state that net equity issues have been negative indicates that:
A.more shares have been purchased than newly issued
B.new shares have been sold at less than par value
C.issuing stock has been a negative NPV transaction
D.dividend payments have exceeded net income
20) An estimation of the opportunity cost of capital for projects that have an “average”
level of risk is the rate of return on:
A.Treasury bills
B.the market portfolio
C.the market portfolio minus the rate of return on Treasury bills
D.Treasury bonds plus a maturity premium
21) Which of the following might you recommend to a firm with excessive free cash
flow?
A.Acquire a firm to diversify
B.Acquire a firm to bootstrap earnings
C.A leveraged buyout
D.A repurchase of shares
22) The economic order quantity:
A.is the order size that minimizes the costs of orders
B.is independent of forecast sales
C.is a simplified, and even simplistic, version of the real process
D.increases as cost per order decreases
23) Which of the following will reduce the yield to maturity from what the investor
calculated at time of purchase?
A.Increasing interest rates; bonds held to maturity
B.Decreasing interest rates; bonds held to maturity
C.Stable interest rates; bonds sold before maturity
D.Increasing interest rates; bonds sold before maturity
24) If Treasury bills yield 6.0% and the market risk premium is 9.0%, then a portfolio
with a beta of 1.5 would be expected to yield:
A.12.0%
B.17.0%
C.19.5%
D.21.5%
25) What happens to the NPV of a one-year project if fixed costs are increased from
$400 to $600, the firm is profitable, has a 35% tax rate, and employs a 12% cost of
capital?
A.NPV decreases by $200.00
B.NPV decreases by $173.91
C.NPV decreases by $130.00
D.NPV decreases by $113.04
26) You have the opportunity to invest in the United States at 6% or invest in an equally
risky Australian investment that offers 20%. This is too good to be true! The current
exchange rate is A$1.65/$. Which of the following do you suspect about this 1-year
investment?
A.Expected inflation is higher in the United States
B.The 1-year forward exchange rate is A$1.8679/$
C.Real interest rates are higher in the United States
D.The Australian dollar is selling forward at an 8.48% premium relative to the dollar
27) Large-scale efforts to make a firm less appealing in the midst of a potential merger
are known as:
A.proxy fights
B.leveraged buyouts
C.shark repellents
D.poison pills
28) The board of directors is dissatisfied with last year’s ROE of 15%. If the profit
margin and asset turnover ratio remain unchanged at 8% and 1.25, respectively, by how
much must the leverage ratio (i.e., assets/equity) increase to achieve 20% ROE?
A.Leverage ratio must increase by .5
B.Leverage ratio must increase by 5
C.Leverage ratio must increase by 16.67%
D.Leverage ratio must increase by 33.3%
29) As the discount rate is increased, the NPV of a specific project will:
A.increase
B.decrease
C.remain constant
D.decrease to zero, then remain constant
30) When the length of the financing is directly related to the life of the asset being
financed, the firm is said to follow a:
A.policy of maturity matching
B.restrictive financing strategy
C.matched depreciation strategy
D.minimum working capital strategy
31) Which of the following statements is generally not true for an investor who faces
unlimited liability on an investment?
A.The investor owns stock in the firm
B.The investor has no partners
C.The investor is subject to double taxation
D.The investor is responsible for managing the firm
32) What price will be paid for a U.S. Treasury bond with an ask price of 135:20?
A.$1,350.20
B.$1,350.31
C.$1,350.63
D.$1,356.25
33) Which of the following characteristics applies to the amortization of a loan such as
a home mortgage?
A.The amortization decreases with each payment
B.The amortization increases with each payment
C.The amortization is constant throughout the loan
D.The amortization fluctuates monthly with changes in interest rates
34) When Tri-C Corp. compares its ratios to industry averages, it has a higher current
ratio, an average quick ratio, and a low inventory turnover. What might you assume
about Tri-C?
A.Its cash balance is too low
B.Its cost of goods sold is too low
C.Its current liabilities are too low
D.Its average inventory is too high.
35) According to the NPV rule, all projects should be accepted if NPV is positive when
discounted at the:
A.internal rate of return
B.opportunity cost of capital
C.risk-free interest rate
D.accounting rate of return
36) A maturity premium is offered on long-term Treasury bonds due to:
A.the risk of changing interest rates
B.the risk of default
C.their unique risk
D.their systematic risk
37) The primary purpose of laws prohibiting a firm from paying dividends that include
its legal capital is to:
A.reduce investors’ tax liability
B.ensure that the balance sheet balances
C.prevent managers from paying out all the firm’s assets
D.prevent managers from paying large dividends
38) If a stock is purchased for $25 per share and held one year, during which time a
$1.75 dividend is paid and the price climbs to $29.5, the nominal rate of return is:
A.13.00%
B.14.00%
C.20.00%
D.25.00%
39) Costs of distress are greater when a large amount of __________ affect(s) the
prosperity of the firm.
A.intangible assets
B.tangible assets
C.net working capital
D.retained earnings
40) When calculating a project’s payback period, cash flows are discounted at:
A.the opportunity cost of capital
B.the internal rate of return
C.the risk-free rate of return
D.a discount rate of zero
41) What would you recommend to an investor who is considering an investment that,
according to its beta, plots below the security market line (SML)?
A.Invest; return is high relative to risk
B.Don’t invest; risk is high relative to return
C.Invest; stocks revert to the SML over time
D.Don’t invest; stocks below the SML have too much unique risk
42) Which of the following statements regarding depreciation is incorrect?
A.The depreciation tax shield adjusts with the level of inflation
B.The nominal amount of depreciation is fixed, thus the higher the rate of inflation, the
lower the real value of the depreciation that you can claim
C.Tax law allows accelerated depreciation
D.The rate at which firms are permitted to depreciate equipment is known as the
modified accelerated cost recovery system, or MACRS
43) How much must be saved annually, beginning 1 year from now, in order to
accumulate $50,000 over the next 10 years, earning 9% annually?
A.$3,291
B.$3,587
C.$4,500
D.$4,587
44) Which of the following statements is correct when Treasury bills yield 7.5% and the
market risk premium is 9.5%?
A.The S&P 500 would be expected to yield about 8.50%
B.The S&P 500 would be expected to yield about 9.50%
C.The S&P 500 would be expected to yield about 12.68%
D.The S&P 500 would be expected to yield about 17.00%
45) The opportunity cost of capital:
A.is the interest rate that the firm pays on a loan from a financial institution
B.is the maximum acceptable rate of return on a project
C.is the minimum acceptable rate of return on a project
D.is always less than 10%
46) If next year’s dividend is forecast to be $5.00, the constant-growth rate is 4%, and
the discount rate is 16%, then the current stock price should be:
A.$31.25
B.$40.00
C.$41.67
D.$43.33
47) Which of the following is not likely to be a characteristic of a numerical credit
scoring system?
A.Is used to prescreen credit applications
B.Analyzes financial ratios to determine credit
C.Is less subjective than using individual loan officers
D.Is most appropriate for consumer loans
48) Which of the following statements is correct for stock purchased on the last day to
trade “cum dividend”?
A.A dividend will be declared on the next trading day
B.A dividend will be paid on the next trading day
C.The stock price should decline on the next trading day
D.The stock price should have declined on the previous trading day
49) Ignoring defaults, what is the approximate effective cost of factoring if receivables
are sold at a 4% discount and the average collection period is 2 months?
A.19.40%
B.24.00%
C.26.53%
D.27.75%
50) In a graphic depiction of accounting break-even analysis, the larger the slope of the
total cost line, the:
A.higher the level of fixed costs
B.higher the level of total revenue
C.higher the number of units sold
D.higher the percentage of variable costs
51) A firm with zero net working capital has:
A.no cash or marketable securities
B.insufficient inventories
C.excessive current liabilities
D.a quick ratio of less than 1.0
52) Which of the following credit decisions appears correct for a customer who intends
to order $1,000 of goods annually that have a 20% profit margin if the probability of
default is 20% and the discount rate is 10%?
A.Reject because expected loss equals $320
B.Reject because expected profit equals $0
C.Accept because expected profit equals $1,440
D.Accept because expected profit equals $3,200
53) Moonshine Industries has produced a barrel per week for the past 20 years but
cannot grow because of certain legal hazards. It earns $25 per share per year and pays it
all out to stockholders. The stockholders have alternative, equivalent-risk ventures
yielding 20% per year on average. How much is one share of Moonshine worth?
Assume the company can keep going indefinitely.
54) Discuss the concept of dividend ‘smoothing.”
55) Investing $100,000 in additional raw materials todaymostly in palladiumshould
allow Cryogenic Concepts to increase production and earn an additional $112,000 next
year. This payoff would cover the investment today, plus a 12% return. Palladium is
traded in commodity markets. The CFO has studied the history of returns on
investments in palladium and believes that investors in that precious metal can
reasonably expect a 15% return. Is Cryogenic’s investment in palladium a good idea?
Why or why not?
56) What are the key differences between a financial intermediary and a financial
institution?
57) How can an analyst feel comfortable in stating that the value of a stock is equal to
the discounted value of all future dividends when a company may pay dividends
indefinitely and it is virtually impossible to predict dividends beyond some reasonable
horizon?
58) How are sensitivity, scenario, and break-even analysis used to see the effect of an
error in forecasts on project profitability? Why is an overestimate of sales more serious
for projects with high operating leverage?
59) In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5
million, and depreciation expense of $200,000. The firm has a single issue of debt
outstanding with face value of $l million, market value of $.92 million, and a coupon
rate of 8%. What is the firm’s times interest earned ratio?
60) What is the payoff to buyers and sellers of call and put options?