1) As the volume of production increases the variable cost-per unit of the product
decreases.
2) A balance sheet is a statement of the financial position of the firm on a given date,
including its asset holdings, liabilities, and equity.
3) Three ways that savings can be transferred through the financial markets to those in
need of funds include direct transfers, indirect transfers using the investment banker,
and indirect transfers using the financial intermediary.
4) The existence of taxes can directly affect a common shareholder’s preference for
capital gains or dividend income.
5) Commercial paper is a short-term, unsecured, promissory note.
6) Historically, investments with the highest returns have the lowest standard deviations
because investors do not like risk.
7) The future value of a 10-year ordinary annuity is twice as much as the future value of
an otherwise identical 5-year annuity.
8) The most relevant form of growth for valuing a firm’s common stock is internal
growth.
9) Payable-through drafts look like checks but are not drawn on a bank.
10) On the basis of number of shares traded, more stocks are traded over the counter
than on organized exchanges.
11) Management of a firm’s liquidity involves management of the firm’s investment in
current assets as well as its mix of long-term capital.
12) Seasoned secondary offerings occur in the secondary market.
13) ABC Corp 5% preferred stock with a par value of $100 and a market price of $125
will pay an annual dividend this year of $12 per share.
14) A security with a beta of one has a required rate of return equal to the overall
market rate of return.
15) Variation in the rate of return of an investment is a measure of the riskiness of that
investment.
16) When forecasting fixed asset requirements, the projected fixed asset balance will
A) not increase proportionally with sales if the existing level of fixed assets is sufficient
to support current sales
B) not increase proportionally if excess capacity exists
C) remain the same since the balance is fixed
D) always increase proportionally with sales
17) Dividend policy is influenced by
A) a company’s investment opportunities
B) a firm’s capital structure mix
C) a company’s availability of internally generated funds
D) all of the above
18) Which of the following is NOT a motive for a corporation to hold cash balances?
A) transactions
B) float
C) precautionary
D) speculative
19) Table 3-1
Jones Company
Financial Information
Assuming that no common stock was repurchased during the year, the firm issued how
much new common stock during 2010?
A) $500
B) $1,000
C) $1,500
D) $2,000
20) 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%
21) It is important to consider a new project’s affect on the cash flows of existing
projects because of
A) cannibalism
B) synergy
C) sunk costs
D) A and B above
22) A small biotechnology research corporation has been experiencing losses for the
first three years of its existence, and thus has a negative balance in retained earnings.
The corporation’s stock price, however, is $1 per share. Which of the following
statements is MOST correct?
A) Investors are irrational to pay $1 per share when earnings per share have been
negative for three years
B) Investors believe the stock is worth $1 per share because future earnings (and cash
flows) are expected to be positive
C) The corporation’s accountants must have made a mistake because retained earnings
may not be negative
D) The required return on the stock will be small because the company has very few
assets
23) You are going to pay $100 into an account at the beginning of each of the next 40
years. At the beginning of the 41st year you buy a 30 year annuity whose first payment
comes at the end of the 41st year (the accounts earn 12%). How much will you receive
at the end of the 41st year (i.e. the first annuity payment). Round to nearest $100.
A) $93,000
B) $7,800
C) $11,400
D) $10,700
24) Basic tools of capital-structure management include
A) EBIT-EPS analysis
B) comparative leverage ratios
C) capital budgeting techniques
D) both A and B
25) In the present value bond valuation model, risk is generally incorporated into the
A) maturity amount
B) timing of cash flows (assuming more risky cash flows are received early)
C) discount rate or required return
D) cash flows (making some smaller if they are more risky)
26) A significant advantage of the payback period is that it
A) places emphasis on time value of money
B) allows for the proper ranking of projects
C) tends to reduce firm risk because it favors projects that generate early, less uncertain
returns
D) gives proper weighting to all cash flows
27) Wheeler Corporation had retained earnings as of 12/31/10 of $15 million. During
2011, Wheeler’s net income was $7 million. The retained earnings balance at the end of
2011 was equal to $20 million. Therefore
A) Wheeler paid a dividend in 2010 of $5 million
B) Wheeler paid a dividend in 2010 of $2 million
C) Wheeler sold common stock during 2010 for $5 million
D) Wheeler purchased treasury stock in 2010 for $2 million
28) A company is going to issue a $1,000 par value bond that pays a 7% annual coupon.
The company expects investors to pay $942 for the 20-year bond. The expected
flotation cost per bond is $42, and the firm is in the 34% tax bracket. Compute the
following:
a.The yield to maturity on the firm’s bonds
b.The firm’s after-tax cost of existing debt
c.The firm’s after-tax cost of new debt
29) Kelly owns 10,000 shares in McCormick Spices, which currently has 500,000
shares outstanding. The stock sells for $86 on the open market. McCormick’s
management has decided on a two-for-one split.
a. Will Kelly’s financial position change after the split, assuming that the stock’s price
will fall proportionately?
Trevor Corporation – Stock Split
Market price$ 86.00
Split multiple 2
Shares outstanding500,000
b. Assuming only a 35% decrease in the stock price, what will be Kelly’s value after the
split?
30) A company trying to optimize the use of float will try to
A) increase its disbursing float
B) decrease its disbursing float
C) decrease processing float
D) Both A and C
31) Which of the following statements about the corporate form of business
organization is TRUE?
A) The corporate form has the disadvantage of double taxation relative to a sole
proprietorship
B) The corporate form is preferred over the sole proprietorship because a corporation is
easier to form and faces less regulation
C) Sole proprietorships are the most common form of business organization because
liability is limited to the amount invested in the business by the sole proprietor
D) The corporate form has the advantage of unlimited liability
32) Which of the following expenses associated with a project should NOT be included
in a capital budgeting analysis?
A) additional allocated fixed overhead from corporate headquarters
B) additional maintenance expenses associated with new equipment
C) reengineering of a production line associated with a new project
D) training sales staff on a new product
33) You decide you want your child to be a millionaire. You have a son today and you
deposit $10,000 in an investment account that earns 7% per year. The money in the
account will be distributed to your son whenever the total reaches $1,500,000. How old
will your son be when he gets the money (rounded to the nearest year)?
A) 82 years
B) 74 years
C) 60 years
D) 49 years
34) Which of the following is an advantage of utilizing short-term debt to finance the
acquisition of short-term assets?
A) Interest rates on short-term debt are usually lower than interest-rates on long-term
debt
B) It exposes the firm to less risk than if the firm were to use long-term debt
C) It improves the firm’s debt ratio
D) It increases the firm’s sustainable growth rate
35) Which of the following statements concerning preferred stock is MOST correct?
A) Preferred stock is valued the same as zero coupon bonds because the cash flow
patterns are similar
B) If a corporation issues 4% preferred stock with a par value of $100, the dividend will
increase by 4% per year
C) Preferred stock dividends are typically the same each year, allowing a preferred
stock to be valued as a perpetuity
D) Preferred stock dividends are calculated as a percentage of common stock dividends,
although the preferred stock dividends must be paid first
36) Two companies have identical assets and operating activities. Which of the follow
statements is TRUE?
A) Both companies have the same net income
B) The company with more debt will have lower operating income due to interest
expense
C) The company with more debt will have higher operating income due to leverage
D) The company with more debt will have lower net income due to interest expense
37) John Q. Enterprises is considering two potential investments. The probability
distributions of annual end-of-year cash flows for the respective projects are:
Both projects will require an initial outlay of $45,000 and will have an estimated life of
6 years. Project A is considered a riskier investment and will have to have a
risk-adjusted required rate of return of 15%, while Project B’s risk-adjusted required
rate of return is 12%.
a.Determine the expected value of each project’s annual cash flow.
b.Determine each project’s risk-adjusted net present value.
38) Net working capital refers to which of the following?
A) cash, accounts receivable, and inventory
B) notes payable, accruals, and accounts payable
C) current assets plus current liabilities
D) current assets divided by current liabilities
E) current assets minus current liabilities
39) Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will
be repaid after 120 days, with Simpson paying a total of $12,400. What is the
approximate cost of credit using the APY, or annual percentage yield, calculation?
A) 4.33%
B) 10.34%
C) 12.25%
D) 12.46%
40) Your firm is considering an investment that will cost $920,000 today. The
investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through
4, and $200,000 in year 5 . The discount rate that your firm uses for projects of this type
is 11.25%. What is the investment’s profitability index?
A) 1.21
B) 1.26
C) 1.43
D) 1.69
41) 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
42) Spontaneous sources of funds refers to all of the below EXCEPT
A) accruals
B) a bank loan
C) accounts payable
D) common stock
43) Crenshaw Inc. has a $400,000 line of credit with a local bank. The bank requires a
compensating balance of 10% of the loan and extends credit to Crenshaw at 1% over
the current prime rate. Crenshaw needs the use of $200,000 for the three-month period.
They currently have no deposits with the lending bank.
a.What will the effective annual cost of this credit be? (Assume a 360-day year and a
9% prime rate.)
b.Using the above information, what would be the effective interest rate if the firm
discounted the interest on the loan?
