1) To the individual recipient, preferred stock dividends offer no advantage over
common stock dividends.
2) A warrant may carry a speculative premium above intrinsic value if it will not expire
until far into the future.
3) During the global financial crisis that began in late 2008, the dollar fell in value
relative to the British pound and the euro.
4) In the new issues market for corporate capital, common stocks account for the largest
percentage of new funds raised.
5) The annual percentage rate (APR) is a measure of the effective rate of interest on a
loan on an annualized basis.
6) A reduction in carrying costs would increase the economic order quantity.
7) Monthly installment loans usually increase the effective rate of borrowing by
approximately 2 times the stated rate.
8) It is possible to merge with a company so that the merger results in the same earnings
per share but still lowers the new firm’s cost of capital.
9) By using long-term capital to cover short-term needs, the firm is virtually assured of
becoming technically insolvent.
10) Degree of combined leverage considers the impact of a change in volume on the
change in operating income.
11) The capital markets serve as a way of allocating available capital to the most
efficient user.
12) In terms of revenues and profits, the corporation is by far the most important form
of business organization in the United States.
13) Every message routed through SWIFT is encrypted and every money transaction is
authorized by another code for security purposes.
14) The closer a firm is to its break-even point, the lower the degree of operating
leverage it will be.
15) The efficient market hypothesis is generally concerned with the impact of
information on the behavior of stock prices.
16) Commercial paper offers which of the following advantages to the issuer?
A.It may be issued below the prime rate
B.It requires no compensating balances
C.It is secured by corporate assets to protect the buyer
D.It may be issued below the prime rate and requires no compensating balances
17)
Refer to the figure above. The firm’s average collection period is
A.18 days
B.277 days
C.139 days
D.20 days
18) The XLarge Corporation has a convertible bond outstanding with a conversion price
of $35 per share. The $1,000 par value bonds have a 6% annual coupon rate, paid
semi-annually, and 20 years to maturity. The firm’s common stock is currently selling
for $44 per share and the convertible bonds are selling for $1,200.00.
a) Calculate the conversion ratio.
b) Calculate the conversion value.
c) If equivalent bonds are currently yielding 12% to maturity, what is the pure bond
value of this bond?
d) How much downside protection does the pure bond value provide to an investor?
Would this be an appropriate investment for a risk-averse investor?
19) Given the following, what is free cash flow?
A.$150,000
B.$270,000
C.$180,000
D.$130,000
20) McKinsee Inc. is developing a plan to finance its asset base. The firm has
$3,000,000 in current assets, of which 20% is permanent, and $10,000,000 is in fixed
assets. Long-term rates are currently 8%, while short-term rates are at 6%. McKinsee’s
tax rate is 30%.
a) Construct a conservative financing plan with 80% of the assets financed by long-term
sources. If McKinsee’s earnings before interest and taxes are $4,500,000, what will its
net income be?
b) An alternative and more aggressive plan would be to finance 60% of total assets with
long-term financing. Assuming that EBIT was again $4,500,000, what will net income
be under this alternative?
c) If the yield curve was steeply upward sloping, which plan would you recommend?
Why?
21) You are to receive $12,000 at the end of five years. The available yield on
investments is 6%. Which table would you use to determine the value of that sum
today?
A.Present value of an annuity of $1
B.Future value of an annuity of $1
C.Present value of $1
D.Future value of $1
22) With the exception of real estate investments, MACRS depreciation is beneficial to
corporations because it
A.increases total depreciation
B.lengthens the lives of assets for depreciation purposes
C.shortens the lives of assets for depreciation purposes
D.classifies assets into specific, well-understood groups for depreciation purposes
23) Which of the following is NOT a disadvantage of ADRs?
A.Foreign currency exchange risk
B.Financial statements written in a foreign language
C.Information lag
D.Less frequent reporting of financial results
24) The break-even point can be calculated as
A.variable costs divided by contribution margin per unit
B.total costs divided by contribution margin per unit
C.variable costs times contribution margin per unit
D.fixed costs divided by contribution margin per unit
25) Doug has been approached by his broker to purchase a bond for $795. He believes
the bond should yield 8%. The bond pays a 5% annual coupon rate and has 12 years left
until maturity. What should Doug’s analysis of the bond indicate to him? Use annual
analysis.
A.The bond is undervalued; he should purchase it
B.The bond is undervalued; he should not purchase it
C.The bond is overvalued; he should purchase it
D.The bond is overvalued; he should not purchase it
26) To find the yield on investment that requires the payment of a single amount
initially, and which then return a single amount some time in the future, the most
efficient table one could use is
A.the present value of $1
B.the future value of an annuity of $1
C.present value of an annuity of $1
D.None of these
27) According to the “marginal principle of retained earnings,” dividends are
A.the active variable
B.the passive variable
C.not usually paid
D.a certain fixed percentage of earnings
28) A bond pays 7% yearly interest in semi-annual payments for 10 years. The current
yield on similar bonds is 9%. To determine the market value of this bond, you must
A.find the interest factors (IFs) for 20 periods at 9%
B.find the interest factors (IFs) for 10 periods at 7%
C.find the interest factors (IFs) for 10 periods at 4.5%
D.find the interest factors (IFs) for 20 periods at 4.5%
29) Hoover Inc. has current assets of $350,000 and fixed assets of $650,000. Current
liabilities are $100,000 and long-term liabilities are $250,000. There is $120,000 in
preferred stock outstanding and the firm has issued 10,000 shares of common stock.
Compute book value (net worth) per share
A.$84.00
B.$53.00
C.$75.00
D.None of the options
30) Combined leverage is concerned with the relationship between
A.changes in EBIT and changes in EPS
B.changes in volume and changes in EPS
C.changes in volume and changes in EBIT
D.changes in EBIT and changes in net income
31) The most important capital markets in the world (in terms of dollar value) are
located in
A.New York
B.London
C.Toronto
D.Tokyo
32) A firm may repurchase its own stock in the market because
A.it will increase the stockholders’ wealth
B.the firm’s stock is temporarily depressed
C.it provides positive informational content
D.All of these options
33) Disinflation as compared to inflation would normally be good for investments in
A.bonds
B.gold
C.collectible antiques
D.textbooks
34) A multinational corporation may be defined as
A.a company that owns property in a foreign country
B.a company that hires foreign laborers
C.a company that carries on some business activity outside of its own national borders
D.More than one of the options
35) A firm has a debt-to-total assets ratio of 60%, $300,000 in debt, and a net income of
$50,000. Calculate return on equity.
A.60%
B.20%
C.25%
D.There is not enough information to calculate return on equity
36) In developing data for accounts receivable for the pro forma balance sheet, the
analyst is most likely to turn to the
A.pro forma income statement
B.cash budget
C.prior balance sheet
D.statement of retained earnings
37) Foreign investors have preferred to invest in the United States EXCEPT for which
of the following reasons?
A.Less stringent regulation of securities markets
B.The political stability of the U.S. government
C.The U.S. dollar is the world’s international currency
D.All of these options are reasons that foreign investors prefer to invest in the United
States
38) Free cash flow is equal to
A.cash flow from operating activities plus capital expenditures, minus dividends
B.cash flow from operating activities plus capital expenditures, plus dividends
C.cash flow from operating activities plus dividends, minus capital expenditures
D.cash flow from operating activities minus capital expenditures, minus dividends
39) Which of the following is a common approach in dealing with uncertainty?
A.A Monte Carlo simulation
B.An internal rate of return
C.The net present value
D.The payback period
40)
Refer to the figure above. Megaframe’s quick ratio is ____.
A.2:1
B.1:1
C.1.5:1
D.12:1
41) Place the following investment decisions in order from the lowest risk to the highest
risk:
a) purchase of replacement machinery
b) new product in a foreign market
c) new product in the local market
d) repair of existing machinery
A.b, c, a, d
B.d, a, b, c
C.d, b, a, c
D.d, a, c, b
42) Professors Harry Markowitz and William Sharpe received their Nobel Prize in
Economics for their contributions to the
A.options pricing model
B.theories of working capital management
C.theories of risk-return and portfolio management
D.theories of international capital budgeting
43) Assuming level production throughout the year, and assuming receivables are
collected in two equal installments over the two months subsequent to the sales period,
developing the related areas of the cash budget requires which of the following steps?
A.Calculate beginning accounts receivable balance
B.Calculate COGS
C.Estimate monthly net cash flow and bank borrowing or repayments
D.Calculate ending inventory
44) The difference between the amount of cash on the firm’s books and the amount
credited to it by its bank is
A.an overdraft
B.interest revenue
C.extended disbursement
D.float
45) In a parallel loan arrangement,
A.the United States parent firm lends dollars to the U.S. affiliate, while the Dutch
parent firm lends guilders to the Dutch affiliate
B.the United States parent firm lends dollars to the Dutch affiliate, while the Dutch
parent lends guilders to the American affiliate
C.the United States parent lends guilders to the Dutch affiliate, while the Dutch parent
lends dollars to the American affiliate
D.the parent firms lend funds to each other, while the affiliates lend funds to each other
46) Fred Jury is a portfolio manager who has $900,000 of a client’s money to invest in
highly speculative instruments. Jury is contemplating the purchase of 40,000 shares of
Shakee Corp. common stock, which is currently selling on the American Stock
Exchange at $30.00 per share. Alternatively, he could buy warrants on Shakee Corp.
common stock for $5.50. Each warrant gives the holder the right to buy one share of
Shakee Corp. common stock at $24.00 per share.
a) How many warrants could Mr. Jury buy with the $900,000?
b) If he had purchased the common stock directly, and its price had increased to $37.20
per share, calculate his dollar and percentage return on the investment.
c) Assume that when the price of the stock goes to $37.20 per share, the warrant sells
for its intrinsic value. If Jury sells his warrants at this point, calculate his dollar and
percentage return on the investment.
47) New common stock is more expensive than Ke
A.to compensate for risk
B.to compensate for more dividends
C.to compensate for expansionary problems
D.to cover distribution costs
48) Which of the following is NOT a benefit of commercial paper to a corporation?
A.It is often issued at below the prime interest rate
B.There are no compensating balance requirements
C.It is less risky
D.It provides prestige to the issuer
49) The internal rate of return and net present value methods
A.always give the same investment decision answer
B.never give the same investment decision answer
C.usually give the same investment decision answer
D.always give conclusions different from the payback method
50) While shopping in the Mexican market, you find that limes cost 11 pesos each. You
remember that back home, they cost 80 cents each. If the purchasing power parity
theory holds, the rate of exchange is
A.13.75 pesos/dollar or 7.3 cents/peso
B.80 pesos/dollar or 1.25 cents/peso
C.7.3 pesos/dollar or 13.75 cents/peso
D.Not enough information is given to determine an answer
51) Investment banking is changing dramatically into an industry where
A.investment bankers are using larger syndicates to distribute initial public offerings
B.investment bankers are becoming increasingly larger so that they can take on more
risk and have less need for large syndicates
C.investment bankers don’t need a distribution network because most new issues are
sold directly to institutional investors
D.new investment banking firms are being established to deal with the increasing
number of companies looking for capital