1) An investor owns 300 shares of stock currently selling for $70 per share. What
should the investor expect to have after the stock declares a three-for-two split?
A.200 shares selling for $93.10 each
B.200 shares selling for $105.00 each
C.450 shares selling for $46.67 each
D.450 shares selling for $93.10 each
2) When a corporation decides to issue long-term debt in order to pay for the
acquisition of real assets, it has made a:
A.capital budgeting decision
B.financing decision
C.money market decision
D.secondary market decision
3) What is the decision rule in the case of sign changes that produce multiple IRRs for a
project?
A.Select the lowest IRR to be conservative
B.Select the highest IRR to maximize the benefits
C.Any or all of the IRRs are justified to use
D.Evaluate the project according to NPV
4) The rise of the dot-coms in the late 1990s is probably due to:
A.investors reducing their expectations from common stocks
B.investors being reluctant to incur losses and being overconfident
C.a sharp improvement in the prospects for dividend growth
D.the efficiency of the markets
5) What happens in the case of a bond selling for $1,000 that can be converted to 20
shares of stock that are currently selling for $55 per share?
A.The bondholder will lose $100
B.The stock will go down to $50 per share
C.The bond’s price will go down to $900
D.The bondholder will choose to convert
6) The consent of a corporation’s stockholders must be received prior to any:
A.issue of new securities
B.selection of an underwriter
C.increase in authorized capital
D.private placement of securities
7) A firm’s inventory and accounts payable periods are 80 and 42 days, respectively.
How long can the firm’s receivables period be in order to have no longer than a 65-day
cash conversion cycle?
A.27 days
B.38 days
C.57 days
D.103 days
8) What is the accounting break-even level of revenues for a firm with $6 million in
sales, variable costs of $3.9 million, fixed costs of $1.2 million, and depreciation of $1
million?
A.$3,428,571
B.$6,100,000
C.$6,285,714
D.$6,557,377
9) If sensitivity analysis concludes that the largest impact on profits would come from
changes in the sales level, then:
A.fixed costs should be traded for variable costs
B.variable costs should be traded for fixed costs
C.the project should not be undertaken
D.additional marketing analysis may be beneficial before proceeding
10) What is the expected constant-growth rate of dividends for a stock with current
price of $100, expected dividend payment of $10 per share, and a required return of
16%?
A.6.00%
B.6.25%
C.8.00%
D.10.00%
If the $10 dividend were divided by .10, it would equal the $100 price. Thus, 6% is the
only growth rate that will allow the denominator to equal .10 .
11) Which of the following security portfolios should offer the highest maturity
premium?
A.Common stocks, because they never mature
B.Long-term Treasury bonds, because of potential fluctuations in interest rates
C.Treasury bills, because of fluctuations in inflation rates
D.The Dow, because it is the oldest and most stable index
12) Which of the following is least likely to influence the opportunity cost of an asset?
A.Its current market value
B.Alternative uses for the asset
C.The current demand for the asset
D.Its current book value
13) Calculate the break-even level of sales, assuming $1.4 million fixed costs, $400,000
depreciation expense, and variable costs-to-sales ratio of 65%.
A.$2,769,231
B.$2,857,143
C.$4,000,000
D.$5,142,857
14) An asset turnover ratio of 1.75 can be interpreted as:
A.$1.75 in sales are generated for every $1.00 of assets
B.$1.75 in additional assets are generated for every $1.00 of sales
C.$1.75 in assets are used to generate $1.00 of sales
D.$1.00 in sales are used to generate $1.75 in assets
15) Company X has 2 million shares of common stock outstanding at a book value of
$2.00 per share. The stock trades for $3.00 per share. It also has $2 million in face value
of debt that trades at 90% of par. What is its ratio of debt to value for WACC purposes?
A.13.9%
B.23.1%
C.31.0%
D.76.9%
16) If a firm’s cash-flow statement shows that cash was used for investments, which of
the following would seem most likely?
A.The inventory balance increased
B.Common stock was repurchased
C.New machines were acquired
D.Cash dividends were paid
17) Which of the following observations provides evidence against strong-form market
efficiency?
A.Some mutual funds outperformed the market in 1997
B.Managers trading in their own stock obtain superior returns
C.You cannot make superior profits by trading stocks after earnings reports are issued
D.Stock prices follow a random walk
18) If the spot indirect exchange rate of Mexican pesos for U.S. dollars is 9.8/1 and the
peso is trading at a forward premium of 3%, then you will receive:
A.more than 9.8 pesos per dollar in the future
B.less than 9.8 pesos per dollar in the future
C.9.83 pesos per dollar in the future
D.10.09 pesos per dollar in the future
19) Potential savings from a lock-box system will be reduced by:
A.the additional processing time required
B.the additional mailing time required
C.local bank charges
D.an increase in interest rates
20) Many investors may be drawn to municipal bonds because of the bonds’:
A.speculative grade ratings
B.high coupon payments
C.long periods until maturity
D.exemption from federal taxes
21) With respect to the notion that stock prices follow a random walk, several
researchers have concluded that:
A.stock prices reflect a majority of available information about the firm
B.successive price changes are predictable
C.past stock price changes provide little useful information about current stock prices
D.stock prices always rise excessively in January
22) When an accountant does not report all of the potentially relevant financial
information on the firm’s financial statements, the accountant is most likely:
A.hiding transactions from the shareholders
B.using the discretion that is built into GAAP
C.not following GAAP
D.not licensed to practice accounting
23) In regard to new issues of common stock, economists have found that the
announcement of a new issue:
A.results in the stock price falling
B.causes the stock price to rise
C.has no effect on the stock price
D.increases the market value of the stock temporarily
24) The enactment of shelf registration is likely to have increased:
A.the cost of issuing new securities
B.the profits of venture capitalists
C.competition among underwriters
D.the underpricing of securities
25) Firms that are acquired to take advantage of bootstrapping often have:
A.a lower price-earnings ratio than the acquirer
B.a higher price-earnings ratio than the acquirer
C.more outstanding shares than the acquirer
D.a higher market valuation than the acquirer
26) What effect on the growth rate of earnings can be accomplished by decreasing the
dividend payout ratio from 70% to 40% if the firm has an ROE of 20%?
A.The growth rate can increase from 6% to 10.5%
B.The growth rate can increase from 6% to 12%
C.The growth rate can increase from 8% to 14%
D.The growth rate can increase from 11% to 14%
27) Which of the following changes would be likely to increase the NPV of a project?
A.Increasing the firm’s opportunity cost of capital
B.Permitting a net decrease in working capital
C.Spreading the total cash inflows over a longer interval
D.Increasing the project’s estimated expenses
28) What is the residual income for a firm with $1 million in total capital, $300,000 in
net income, and a 20% cost of capital?
A.$100,000
B.$140,000
C.$240,000
D.$500,000
29) What is the amount of the operating cash flow for a firm with $500,000 profit
before tax, $100,000 depreciation expense, and a 35% marginal tax rate?
A.$260,000
B.$325,000
C.$360,000
D.$425,000
30) XYZ Corp. has 1,000 shares outstanding and retained earnings of $25,000.
Theoretically, what would you expect to happen to the price of their stock, currently
selling for $30 per share, if a 25% stock dividend is declared?
A.Price should increase to $44.00 per share
B.Price should increase to $37.50 per share
C.Price should decrease to $24.00 per share
D.Nothing; price should remain at $30.00
31) What rate of return is expected from a stock that sells for $30 per share, pays $1.50
annually in dividends, and is expected to sell for $33 per share in one year?
A.5.00%
B.10.00%
C.14.09%
D.15.00%
32) What appears to be the targeted debt ratio of a firm that issues $15 million in bonds
and $35 million in equity to finance its new capital projects?
A.15.00%
B.30.00%
C.35.00%
D.70.00%
33) How much should you be prepared to pay for a 10-year bond with a 6% coupon,
semiannual payments, and a semiannually compounded yield of 7.5%?
A.$895.78
B.$897.04
C.$938.40
D.$1,312.66
34) The following are all important items to look out for when you perform capital
budgeting for a company except
A.be aware of allocated overhead costs
B.include all indirect effects
C.include sunk costs
D.include opportunity costs
35) All of the following are advantages of shelf registration except:
A.The issuing firm can avoid competition from underwriters
B.Securities can be issued with short notice
C.Securities can be issued in small amounts without excessive costs
D.It allows the firm to take advantage of market conditions
36) In calculating the present value of $1,000 to be received 5 years from today, the
discount factor has been calculated to be .7008 . What is the apparent interest rate?
A.5.43%
B.7.37%
C.8.00%
D.9.50%
37) Calculate the WACC for a firm with a debt-equity ratio of 1.5 . The debt pays 10%
interest and the equity is expected to return 16%. Assume a 35% tax rate and risk-free
debt.
38) How do changes in working capital affect project cash flows?
39) What procedures are used for elections to a firm’s board of directors and other
matters put to shareholders?
40) The board of directors is dissatisfied with last year’s ROE of 15%. If the profit
margin and asset turnover remain unchanged at 8% and 1.25, respectively, by how
much must the total debt ratio increase to achieve 20% ROE?
41) A firm is considering the following changes: increasing inventory variety, which
will increase inventory to $60,000, and offering more liberal sales terms, which will
result in average receivables increasing to $65,000. These actions are expected to
increase sales to $800,000 per year, and cost of goods will remain at 75%. Because of
the increased purchases, average payables will increase to $35,000. What effect will
these changes have on the cash conversion cycle?
42) What might cause investors to rationally stay away from long-term bonds even
when the yield curve is upward-sloping?