1) The financial manager typically cannot control the level of credit sales, and hence the
company’s investment in accounts receivable, as the level of credit sales is determined
in large part by the nature of the business enterprise.
2) If an old asset is sold for its depreciated, or book, value, then no taxes result and
there is no tax effect from the sale.
3) The risk-adjusted discount rate for a replacement decision will be less than the rate
used by the same firm when considering a new product line.
4) Capital structure is equal to financial structure minus current liabilities.
5) When the accounts receivable of a firm have been factored, bad debt losses remain
the responsibility of the borrowing firm and must be made good.
6) Net profit margin is equal to the gross profit margin times the operating profit
margin.
7) A company’s market capitalization is generally greater than its book value, in part
due to its reputation for being able to deliver growth, attract top talent, and avoid ethical
mistakes.
8) The net present value profile clearly demonstrates that the NPV of a project increases
as the discount rate increases.
9) If a project has multiple internal rates of return, the lowest rate should be used for
decision making purposes.
10) Marketable securities are purchased when excess cash is temporarily available and
sold when cash is needed.
11) Factoring accounts receivable is the sale of a firm’s receivables while pledging
accounts receivable is the use of accounts receivable as collateral for a loan.
12) Sources of spontaneous financing include trade credit, salaries payable, and accrued
taxes.
13) Forecasts of revenues and their related expenses are the basis on which firms
forecast their future financing needs.
14) Discretionary financing needed must be obtained through additional borrowing
because additional equity measured by the increase in retained earnings has already
been deducted.
15) The capital budgeting decision-making process involves measuring the incremental
cash flows of an investment proposal and evaluating the attractiveness of these cash
flows relative to the project’s cost.
16) You are going to pay $800 into an account at the beginning of each of 20 years. The
account will then be left to compound for an additional 20 years until the end of year
40, when it will turn into a perpetuity. You will receive the first payment from the
perpetuity at the end of the 41st year. If the account pays 14%, how much will you
receive from the perpetuity each year (round to nearest $1,000)?
A) $140,000
B) $150,000
C) $160,000
D) $170,000
17) All of the following are likely to result in a lower dividend, other things the same,
EXCEPT
A) statutory restrictions
B) debt covenants
C) liquidity constraints
D) highly diverse ownership
18) Which of the following statements is MOST correct concerning diversification and
risk?
A) Risk-averse investors often choose companies from different industries for their
portfolios because the correlation of returns is less than if all the companies came from
the same industry
B) Risk-averse investors often select portfolios that include only companies from the
same industry group because the familiarity reduces the risk
C) Only wealthy investors can diversify their portfolios because a portfolio must
contain at least 50 stocks to gain the benefits of diversification
D) Proper diversification generally results in the elimination of risk
19) Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on
the CAPM. If the risk free rate of return is 4.2%, the expected return on the market
portfolio is
A) 21%
B) 19.2%
C) 13.4%
D) 10.2%
20) TC, Inc. has $15 million of outstanding bonds with a coupon rate of 10 percent. The
yield to maturity on these bonds is 12.5 percent. If the firm’s tax rate is 30 percent, what
is relevant cost of debt financing to Kendall, Inc.?
A) 13.75 percent
B) 8.75 percent
C) 7.00 percent
D) 3.75 percent
21) A company is expanding and has already signed a lease on new office space that
costs $10,000 per month. The company also needs a new information system and hired
a consultant to recommend new software. The consultant was paid $5,000 for her
recommendation. Now the company is trying to make a choice between three
competing software products. In the capital budgeting decision to purchase new
software, the monthly rent for the office space is ________ and the consultant’s fee is
________.
A) a sunk cost; a sunk cost
B) an opportunity cost; a sunk cost
C) incremental cash outflow; an opportunity cost
D) a sunk cost; a part of the initial outlay
22) Assume that you have $165,000 invested in a stock whose beta is 1.25, $85,000
invested in a stock whose beta is 2.35, and $235,000 invested in a stock whose beta is
1.11. What is the beta of your portfolio?
A) 1.37
B) 2.01
C) 1.85
D) 1.57
23) Coppell Timber Company had total earnings last year of $5,000,000, but expects
total earnings to drop to $4,750,000 this year because of a slump in the housing
industry. There are currently 1,000,000 shares of common stock outstanding. The
company has $4,000,000 worth of investments to undertake this year. The company
finances 40 percent of its investments with debt and 60 percent with equity capital. The
company paid $3.00 per share in dividends last year.
a.If the company follows a pure residual dividend policy, how large a dividend will
each shareholder receive this year?
b.If the company maintains a constant dividend payout ratio each year, how large a
dividend will each shareholder receive this year?
c.If the company follows a constant dollar dividend policy, how large a dividend will
each shareholder receive this year?
24) Which of the following is FALSE concerning bonds?
A) The indenture spells out the obligations of the bond issuer
B) Mortgage bonds are secured by assets such as real estate
C) Debentures are secured by specific assets other than real estate
D) Subordinated debentures are riskier than unsubordinated debentures
25) What is the greatest risk associated with cash management?
A) yields
B) insolvency
C) holding too much cash
D) managing float
26) All of the following are sufficient indications to accept a project EXCEPT (assume
that there is no capital rationing constraint, and no consideration is given to payback as
a decision tool)
A) the net present value of an independent project is positive
B) the profitability index of an independent project exceeds one
C) the IRR of a mutually exclusive project exceeds the required rate of return
D) the NPV of a mutually exclusive project is positive and exceeds that of all other
projects
27) Which of the following statements is MOST correct regarding beta?
A) Beta must be calculated using at least 5 years of monthly returns data to be accurate
B) Beta can only be measured properly using daily returns
C) Beta for a particular company remains constant over time
D) Even professionals may not agree on the measurement of beta
28) An asset with an original cost of $100,000 and a current book value of $20,000 is
sold for $50,000 as part of a capital budgeting project. The company has a tax rate of
30%. This transaction will have what impact on the project’s initial outlay?
A) reduce it by $20,000
B) reduce it by $50,000
C) reduce it by $6,000
D) reduce it by $15,000
29) Beaver Corporation stock is currently selling for $58.00. It is expected to pay a
dividend of $5.00 at the end of the year. Dividends are expected to grow at a constant
rate of 7.5% indefinitely. Compute the required rate of return on Beaver Corporation
stock.
A) 12.48%
B) 15.65%
C) 13.64%
D) 16.12%
30) TransSystems Inc. has a total equity of $560,000; sales of $2,250,000; total assets
of $995,000; and current liabilities of $310,000. What is TransSystems Inc.’s debt ratio?
A) 55.4%
B) 43.7%
C) 31.2%
D) 66.7%
31) Working capital includes all of the following EXCEPT
A) cash
B) accounts receivable
C) accounts payable
D) inventories
32) If a shareholder cannot attend the corporation’s annual meeting, the shares may still
be voted using
A) the preemptive right
B) a proxy
C) majority voting rules
D) the cumulative voting right
33) 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
internal rate of return of this project?
A) 10.87%
B) 11.57%
C) 13.68%
D) 15.13%
34) Private placements are
A) limited to debt securities
B) limited to equity securities
C) available for both debt and equity securities, but the market is dominated by equity
issues
D) especially appealing to new, small, and medium-sized companies
35) Bill’s BikeShop has a return on assets of 12%. Anton’s assets = $100 while Anton’s
owner’s equity = $40 and its debt equals $60. What is Bill’s return on equity?
A) 18%
B) 20%
C) 30%
D) 12%
36) Ted Tech Inc. is offering a 10% stock dividend. The firm currently has 200,000
shares outstanding and after-tax profits of $800,000. The current price of the stock is
$48.
a.Calculate the new earnings per share.
b.What is the original price/earnings multiple?
c.Providing that the price/earnings multiple stays the same, what will the new stock
price be after the stock dividend?
37) The problem with the constant dividend payout ratio is
A) investors may come to expect a specified amount
B) the dollar amount of the dividend fluctuates from year to year
C) management is reluctant to cut the dividend even if there are low profits that year
D) management cannot decrease the dividend when times are tough
38) A company has preferred stock that can be sold for $21 per share. The preferred
stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs
associated with the sale of preferred stock equal $1.25 per share. The company’s
marginal tax rate is 35%. Therefore, the cost of preferred stock is
A) 18.87%
B) 17.72%
C) 14.26%
D) 12.94%
39) Which of the following statements is true regarding convertible bonds?
A) The holder has the right to sell these bonds back to the issuer if the bonds don’t
perform well
B) The holder can convert these bonds into an equal number of new bonds if they
choose to do so
C) These bonds are convertible into common stock of the issuing firm at a prespecified
price
D) These bonds have a variable interest rate
40) SNL has sales of $2,250,000; a gross profit of $825,000; total operating costs of
$620,000; income taxes of $74,800; total assets of $995,000; and interest expense of
$18,000. What is SNL’s times interest earned ratio?
A) 1.3
B) 11.4
C) 8.1
D) 45.8
41) AFB, Inc. is considering replacing an old machine with a new one. Two months ago
their chief engineer completed a training seminar on the new machine’s operation and
efficiency. The $3,000 cost for this training session has already been paid. If the new
machine is purchased, it would require $7,000 in installation and modification costs to
make it suitable for operation in the factory. The old machine originally cost $80,000
five years ago and is being depreciated by $10,000 per year. The new machine will cost
$100,000 before installation and modification. It will be depreciated by $12,000 per
year. The old machine can be sold today for $12,000. The marginal tax rate for the firm
is 40%. Compute the relevant initial outlay in this capital budgeting decision.
A) $79,500
B) $97,800
C) $90,800
D) $87,800
42) Table 4-4
Wes Donnell, Inc.
Balance Sheet
Wes Donnell, Inc.
Income Statement
For the year ended December 31, 2010
In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes
Donnell’s retained earnings balance for 2010?
A) $10,000
B) $8,000
C) $19,600
D) $2,600
43) JPR Company’s preferred stock is currently selling for $28.00, and pays a perpetual
annual dividend of $2.00 per share. Underwriters of a new issue of preferred stock
would charge $3 per share in flotation costs. The firm’s tax rate is 40%. Compute the
cost of new preferred stock for JPR.
A) 4.80%
B) 7.14%
C) 8.00%
D) 9.15%
44) Denver Systems has total assets of $1,000,000; common equity of $400,000; a
gross profit of $800,000; total operating expenses of $620,000; interest expense of
$20,000; income taxes of $74,000; and preferred dividends of $30,000. What is Denver
Systems’ return on equity?
A) 7.5%
B) 20.0%
C) 21.5%
D) 14.0%
45) Which of the following ratios would be the best way to determine how customers
are paying for their purchases?
A) inventory turnover
B) total asset turnover
C) current ratio
D) average collection period
46) If you put $10,000 in an investment that returns 11 percent compounded monthly
what would you have after 10 years (round to nearest $1)?
A) $29,892
B) $27,559
C) $25,486
D) $22,489
47) Assume that you went to Las Vegas and hit the jackpot for $5 million. Further
assume that you were offered a choice to receive the $5 million today, or receive it in
two years. According to one of the principles of finance, which would you take?
A) the $5 million in two years because you would be afraid of spending it all right away
B) the $5 million in two years because it would be worth more than if you would
receive it today
C) You would be indifferent as to when you would receive the $5 million
D) the $5 million today because it would be worth more than if you would receive it in
two years
48) Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $4). The
dividend is expected to grow at a constant rate of 8% per year. The price of Sentry
Manufacturing’s stock today is $29 per share. If Sentry Manufacturing decides to issue
new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing’s
marginal tax rate is 35%. Based on the above information, the cost of new common
stock is
A) 28.38%
B) 24.12%
C) 26.62%
D) 31.40%
49) Suppose a corporation can change its depreciation method so that its tax payments
will decrease by $5,000 this year but increase by $5,000 next year.
A) The change will have no impact on the value of the company because its cash flow
over time will be the same
B) The change will decrease the value of the company because investors don’t like
changes in accounting methods
C) The change will decrease the value of the company because lower tax payments this
year result from lower reported income
D) The change will increase the value of the company because the value of the cash
savings this year exceeds the cost of the cash payments next year
50) An important (additional) consideration for a direct foreign investment is
A) political risk
B) maximizing the firm’s profits
C) attaining a high international P/E ratio
D) maintaining the domestic cost of capital