1) The investment banker prefers to avoid a negotiated purchase because it tends to be
the least profitable arrangement for the investment banker.
2) A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.
3) A stock dividend differs from a stock split because in a stock split, the par value of
the company’s stock is reduced, while the par value remains the same after a stock
dividend is paid.
4) If the expected growth rate for dividends is zero, then the value of common stock
will be equal to the current dividend.
5) The yield to maturity is the discount rate that equates the present value of the interest
and principal payments with the current market price of the bond.
6) A high debt ratio can be favorable because higher leverage may result in a higher
return on equity.
7) A firm’s bond rating would be favorably affected if they have a low use of financial
leverage (debt).
8) A security with a reasonably stable price will have a lower required rate of return
than a security with an unstable price.
9) Federal regulations make it impossible for rating agencies to drop a company’s credit
rating more than two notches at a time in order to prevent panic in bond markets.
10) Corporations utilize external financing either because they do not have sufficient
earnings to reinvest or they want to rebalance their capital structures.
11) Other things the same, the use of debt financing reduces the firm’s total tax bill
resulting in a higher total market value.
12) A company concerned about the liquidity of its near-cash securities should invest in
U.S. Treasury bills because the secondary market for U.S. Treasury bills is excellent.
13) The most critical aspect in determining the acceptability of a capital budgeting
project is the impact the project will have on the company’s net income over the
projects entire useful life.
14) The internal rate of return is the discount rate that equates the present value of the
project’s future free cash flows with the project’s initial outlay.
15) LaSalle Industries is considering the purchase of a new strapping machine, which
will cost $150,000, plus an additional $10,500 to ship and install. The new machine will
have a 5-year useful life and will be depreciated to zero using the straight-line method.
The machine is expected to generate new sales of $45,000 per year and is expected to
save $16,000 in labor and electrical expenses over the next 5-years. The machine is
expected to have a salvage value of $20,000. LaSalle’s income tax rate is 35%. What is
the machine’s IRR?
A) 15.75%
B) 18.86%
C) 19.15%
D) 20.03%
16) Which of the following is an advantage of the general partnership form of business
organization?
A) limited liability of business owners
B) low cost of formation
C) easy ability to raise capital
D) double taxation
17) Discretionary financing needs will be higher if ________. Assume “all else equal.”
A) the firm’s net profit margin increases
B) sales decline
C) the dividend payout ratio is raised
D) excess capacity exists for fixed assets
18) Today is your 21st birthday and your bank account balance is $25,000. Your
account is earning 6.5% interest compounded monthly. How much will be in the
account on your 50th birthday?
A) $159,795
B) $162,183
C) $163,823
D) $164,631
19) Design Quilters is considering a project with the following cash flows:
Initial Outlay = $126,000
Cash Flows:Year 1 = $44,000
Year 2 = $59,000
Year 3 = $64,000
If the appropriate discount rate is 11.5%, compute the NPV of this project.
A) -$14,947
B) $2,892
C) $7,089
D) $41,000
20) Which of the following has the highest interest rate risk?
A) a 20-year U.S. Treasury Bond
B) Bendix Corporation six-month commercial paper
C) a six-month money market certificate at a federally issued bank
D) a Southwest Airlines bond maturing in four years
21) Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are
expected to grow at a 12-percent annual rate forever. If Jackson’s current market price is
$40.00, what is the stock’s expected rate of return (nearest .01 percent)?
A) 5.50%
B) 11.00%
C) 18.25%
D) 19.00%
22) An investor currently holds the following portfolio:
Amount
Invested
8,000 shares of Stock A$16,000Beta = 1.3
15,000 shares of Stock B$48,000Beta = 1.8
25,000 shares of Stock C$96,000Beta = 2.2
If the risk-free rate of return is 2% and the market risk premium is 7%, then the
required return on the portfolio is
A) 14.91%
B) 15.93%
C) 21.91%
D) 23.93%
23) An example of a primary market transaction is
A) a new issue of common stock by AT&T
B) a sale of some outstanding common stock of AT&T by an investor
C) AT&T repurchasing its own stock from a stockholder
D) all of the above
24) Which of the following statements about the internal rate of return (IRR) is true?
A) It has the most conservative and realistic reinvestment assumption
B) It never gives conflicting answers
C) It fully considers the time value of money
D) It is greater than the modified internal rate of return if the discount rate is higher
than the IRR
25) DYI Construction Co. is considering a new inventory system that will cost
$750,000. The system is expected to generate positive cash flows over the next four
years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year
three, and $180,000 in year four. DYI’s required rate of return is 8%. What is the net
present value of this project?
A) $104,089
B) $100,328
C) $96,320
D) $87,417
26) Cost of capital is
A) the coupon rate of debt
B) a hurdle rate set by the board of directors
C) the rate of return that must be earned on additional investment if firm value is to
remain unchanged
D) the average cost of the firm’s assets
27) Managing a firm’s cash outflows through use of a “zero balance account” system
offers all but which of the following benefits?
A) centralized control over disbursements
B) reduction of management time spent on superficial cash management activities
C) higher rate of return on invested funds
D) reduction of excess balances in outlying accounts
28) Table 4-1
Stewart Company
Balance Sheet
Based on the information in Table 4-1, the average collection period is
A) 36.50 days
B) 32.85 days
C) 46.34 days
D) 29.85 days
29) Which of the following statements is MOST correct?
A) If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield
(interest yield) must also exceed its coupon rate
B) If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less
than its maturity value
C) If two bonds have the same maturity, the same yield to maturity, and the same level
of risk, the bonds should sell for the same price regardless of the bond’s coupon rate
D) Answers B and C are correct
30) Bill is a public accountant auditing Expo Corporation. Based on information in
Expo’s confidential records, Bill recommends the purchase of Expo stock to his brother
A) Bill is involved in insider trading prohibited by the SEC
B) Bill’s brother has no direct connection to Expo Corporation and therefore his
purchase of the stock is not prohibited by insider trading laws
C) Bill is not an insider because he is not an officer or employee of Expo Corporation
D) If Bill told a non-relative who purchases Expo stock, no insider trading laws would
be violated
31) Which of the following is NOT a benefit provided by the existence of organized
security exchanges?
A) providing a continuous market
B) establishing and publicizing fair security prices
C) helping businesses raise new capital
D) standardization of all debt agreements
32) All of the following conclusions on the importance of a dividend policy are true
EXCEPT
A) as a firm’s investment opportunities increase, the dividend payout ratio should
decrease
B) the firm’s expected earning power and the riskiness of these earnings are more
important to the investor than the dividend policy
C) dividends may influence stock price by the investor’s desire to minimize and/or defer
taxes and from the role of dividends in minimizing agency costs
D) in order to avoid surprising investors, management should anticipate financing needs
for the short-term, but not for the long term
33) Float is best described by which of the below?
A) investing excess cash balances
B) the time required for a deposited check to clear through the commercial banking
system and be available for payment
C) the term used to describe payment for the purchase of raw materials that are needed
to complete production of a luxury liner
D) the time that is required to receive payment on a zero balance account
34) The dividend irrelevance hypothesis is based on all of the following assumptions
EXCEPT
A) investment decisions will not be altered by the amount of dividend payments
B) investors do not need cash dividends to supplement their current income
C) perfect capital markets
D) borrowing decisions will not be altered by the amount of dividend payments
35) Given an accounts receivable turnover of 10 and annual credit sales of $900,000,
the average collection period is
A) 18.25 days
B) 36.50 days
C) 90 days
D) 40.56 days
36) Assume that a firm issues a six-month note to purchase inventory. Which of the
following is true if the current ratio before the purchase is 1.0?
A) The firm’s current ratio must decrease
B) The firm’s quick ratio will stay the same
C) The firm’s current ratio will increase
D) The firm’s quick ratio might decrease
37) Which of the following statements concerning private placements is MOST correct?
A) Private placements do not involve investment bankers
B) Although not selling the securities to the public, investment bankers may provide
advice on the evaluation of prospective buyers and the terms of sale for private
placements
C) Private placements are limited to stocks, not bonds
D) More than half of all private placements are sold to federal, state, or local
governments or government agencies
38) Based on the data contained in Table A, what is the break-even point in units
produced and sold?
TABLE A
Average selling price per unit$18.00
Variable cost per unit$13.00
Units sold400,000
Fixed costs$650,000
Interest expense$ 50,000
A) 130,000
B) 140,000
C) 150,000
D) 180,000
39) Arguments against using the net present value and internal rate of return methods
include that
A) they fail to use accounting profits
B) they require detailed long-term forecasts of the incremental benefits and costs
C) they fail to consider how the investment project is to be financed
D) they fail to use the cash flow of the project
40) Propell Inc. is considering the purchase of a new machine that will cost $178,000,
plus an additional $12,000 to ship and install. The new machine will have a 5-year
useful life and will be depreciated using the straight-line method. The machine is
expected to generate new sales of $85,000 per year and is expected to increase
operating costs by $10,000 annually. Propell’s income tax rate is 40%. What is the
projected incremental cash flow of the machine for year 1?
A) $54,800
B) $60,200
C) $66,350
D) $68,200
41) How frequently do corporations generally pay dividends?
A) annually
B) semiannually
C) quarterly
D) monthly
42) The income statement for Simpson, Inc. indicates that tax expense was $30,000.
The balance sheet indicates that taxes payable for the same year increased by $5,000.
What amount did Simpson, Inc. actually pay in taxes during this year?
A) $15,000
B) $20,000
C) $25,000
D) Cannot be determined without the cash balance
43) Graystone bonds have a maturity value of $1,000. The bonds carry a coupon rate of
12 percent. Interest is paid semiannually. The bonds will mature in nine years. If the
current market price is $976.50,
a.what is the yield to maturity on the bond?
b.what is the current yield on the bond?