1) Markets are efficient when prices adjust rapidly to new information, continuous
markets exist. and large dollar trades can be absorbed without large price movements.
2) The Internet has accounted for an acceleration of productivity for “old economy”
firms.
3) The payback method is not really a theoretically correct approach.
4) Risk management will be an important factor over the next decade.
5) Long-term financing is usually less expensive than short-term financing because it is
not as advantageous to the corporation as short-term financing.
6) The sale of securities backed by the receivables of large credit-worthy firms is a large
and growing source of financing.
7) In determining the future value of an ordinary annuity, the final payment is not
compounded at all.
8) Preferred stock is excluded from stockholders’ equity because it does not have full
voting rights.
9) Book value is equal to net worth.
10) The “risk premium” is primarily concerned with business risk, financial risk, and
inflation risk.
11) Calculation of the yield of an investment provides the total return over multiple
years.
12) Although depreciation does not provide cash to the firm directly, the fact that it is
tax-deductible can provide cash inflow to the company.
13) Although Apple Computers has a profit margin significantly greater than that of a
long-time industry giant such as IBM, IBM continues to have a higher return on equity
than Apple. The primary reason for this unusual condition is that IBM has a much
greater equity than Apple.
14) Operating leverage will change when a firm alters the mix of fixed capital resources
and variable labor that it uses.
15) To use a dividend valuation model, a firm must have a constant growth rate, and the
discount rate must not exceed the growth rate.
16) Replacement cost accounting (current cost method) during a period of inflation will
usually
A.increase assets, decrease net income before taxes, and lower the return on equity
B.increase assets, increase net income before taxes, and increase the return on equity
C.decrease assets, increase net income before taxes, and increase the return on equity
D.None of the options apply
17) Dr. Stein has just invested $10,000 for his son (age 7). The money will be used for
his son’s education 15 years from now. He calculates that he will need $100,000 for his
son’s education by the time the boy goes to school. What rate of return will Dr. Stein
need to achieve this goal?
A.Between 9% and 10%
B.Between 16% and 17%
C.Between 10% and 11%
D.Between 15% and 16%
18) In order to evaluate risk, management may also set qualitative risk classes. Rank
these four projects from least risky to most risky, all other things being equal.
1> Completely new market in United States.
2> Completely new market in South America.
3> Addition to normal product line.
4> Repair to old machinery.
A.4, 3, 1, 2
B.1, 2, 3, 4
C.3, 4, 1, 2
D.4, 3, 2, 1
19) All of the following are examples of carrying costs except
A.interest expense
B.warehouse space
C.shipping costs
D.insurance premiums
20) Why is the cost of debt normally lower than the cost of preferred stock?
A.Preferred stock dividends are tax deductions
B.Interest on debt is tax deductible
C.Preferred stock dividends must be paid before common stock dividends
D.Common stock dividends are not tax-deductible
21) Given that there are 4,000,000 shares outstanding in Miller Corp., how many shares
will be required for a minority group of stockholders to elect two of the nine members
on the board of directors? (Assume cumulative voting is required.)
A.800,001
B.1,000,001
C.1,090,910
D.1,000,000
22) If a Czech crown is equal to $.05, the U.S. dollar is equal to how many Czech
crowns?
A.25.00
B.4.00
C.20.00
D.400.00
23) Corporations prefer bonds over preferred stock for financing their operations
because
A.preferred stocks require a dividend
B.bond interest rates change with the economy, while stock dividends remain constant
C.the after-tax cost of debt is less than the cost of preferred stock
D.None of these options
24) Ms. Smith borrowed $2,000 at an 8% stated rate of interest and was to pay back the
loan in 24 monthly payments. What is her effective rate of interest using the installment
loan formula?
A.10.5%
B.15.4%
C.18.9%
D.22.0%
25) Firm X has a tax rate of 30%. The price of its new preferred stock is $75 and its
flotation cost is $3.15. The cost of new preferred stock is 8%. What is the firm’s
dividend?
A.$7.18
B.$5.75
C.$7.56
D.None of these options
26) The document that outlines the covenants and duties existing between bondholders
and the issuing corporation is called
A.an indenture
B.a debenture
C.secured debt
D.protective covenants
27) SWIFT’s implementation of the ‘smart card” is expected to
A.decrease the likelihood of electronic fraud
B.remove the need for secret information to be sent through the mail
C.guarantee the identity of the sender
D.All of the options
28) A project’s cash flows have a beta of 1.2, a standard deviation of $340, and a
coefficient of variation of 0.40 . What is the expected cash flow?
A.$850
B.$167
C.$2,400
D.$500
29) The two-step buyout is a recent merger ploy that has which of the following
characteristics?
A.It is negotiated in a social, rather than a business setting
B.The acquiring firm offers to pay a very high price for the target company’s stock, and
a short time later announces another price that may be higher or lower
C.The acquiring firm offers to pay a very high price for the target company’s stock for a
limited time only, after which it will pay a lower price
D.It forces stockholders to sell out
30) The after-tax cost of debt will almost always be below
A.the before-tax cost of debt
B.the weighted average cost of capital
C.the cost of equity
D.All of these options
31) Free cash flow is equal to cash flow from operating activities
A.plus capital expenditures, minus dividends
B.minus capital expenditures, plus dividends
C.plus capital expenditures, plus dividends
D.minus capital expenditures, minus dividends
32) A Eurobond is a
A.bond payable in the investor’s currency but sold outside the borrower’s country
B.bond payable in the investor’s currency but sold inside the borrower’s country
C.bond payable in the borrower’s currency and sold inside the borrower’s country
D.bond payable in the borrower’s currency but sold outside the borrower’s country
33) Which of the following does NOT influence the yield to maturity for a security?
A.Required real rate of return
B.Risk free rate
C.Business risk
D.Historic yields
34) A bond that has a “yield to maturity” greater than its coupon interest rate will sell
for a price
A.below par
B.at par
C.above par
D.that is equal to the face value of the bond plus the value of all interest payments
35) If flotation costs go down, the cost of new preferred stock will
A.go up
B.go down
C.stay the same
D.slowly increase
36) Which of the following is not a primary source of capital to the firm?
A.Assets
B.Common stock
C.Preferred stock
D.Bonds
37) When considering the efficient frontier, financial managers should adhere to all of
the following guidelines except which one?
A.Select the projects on the leftmost and uppermost sector of the possible projects
B.Prefer the project on the far right side of the efficient frontier because it offers the
highest return
C.Maximize return for a given level of risk
D.Minimize risk for a given level of return
38) As the compounding rate becomes lower and lower, the future value of inflows
approaches
A.0
B.the present value of the inflows
C.infinity
D.More information is needed
39) Consider the following information for Ball Corp.
What is the operating profit for Ball Corp.?
A.$71,450
B.$90,000
C.$130,000
D.None of the options
40)
Refer to the figure above. The firm’s receivable turnover is ____.
A.10x
B.8x
C.20x
D.12x
41) One of the major disadvantages of a sole proprietorship is
A.that there is unlimited liability to the owner
B.the simplicity of decision making
C.low organizational costs
D.low operating costs
42) An increase in the riskiness of a particular security would NOT affect
A.the risk premium for that security
B.the premium for expected inflation
C.the total required return for the security
D.investors’ willingness to buy the security
43) Options contracts contrast with futures contracts because
A.options are not traded on organized exchanges
B.options do not create an obligation for the owner of the instrument
C.options are derivatives
D.None of these options
44) Which of the following is not a financial advantage to companies using debt?
A.Debt is paid back in “cheaper” dollars during inflationary periods
B.Bond holders have no control over the actions of management
C.The cost of debt can lower the weighted overall cost of capital
D.Interest payments are tax deductible
45) Rocky Scholes Swimwear’s warrant is trading for $10.00. The warrant carries the
option to purchase a half share of common stock for $50. What is the speculative
premium if the stock price is $65?
A.$1.00
B.$2.50
C.$5.00
D.None of these options
46) Which of the following is not a condition under which a prudent manager would
accept some risk in financing?
A.Predictable cash-flow patterns
B.Inventory is highly perishable
C.The price of inventory is stable
D.Basic access to capital markets
47) Which of the following statements is false with respect to the use of rights in
financing?
A.Rights offerings are used by many U.S. companies
B.Shares are usually priced at a premium
C.Rights offerings are especially popular in Europe
D.All of these statements are true
48) “Dutch auction” preferred stock
A.is issued first to the bidder willing to accept the lowest yield
B.matures periodically, and is then re-auctioned at a subsequent bidding
C.allows corporate investors to take advantage of preferred stock tax benefits
D.All of these options
49) For acceptable investments, the reinvestment assumption under the internal rate of
return is generally
A.higher than under the net present value method
B.lower than under the net present value method
C.at the cost of capital
D.below the cost of capital
50) The orientation of book value per share is ________, while the orientation of
market value per share is _________.
A.short term; long term
B.future; historical
C.historical; future
D.long term; short term