1) The firm’s cost of capital may also be referred to as the firm’s opportunity cost of
capital.
2) Shareholders, as owners of the corporation, face unlimited liability for the
corporation’s debts, while bondholders, as creditors, may only lose the value of their
investment if the company goes bankrupt.
3) A direct quote of $1.6 per British Pound in the United States is equivalent to a direct
quote of .625 British Pounds per U.S. dollar in Great Britain.
4) A high debt ratio can be favorable because higher leverage may result in a higher
return on equity.
5) Tim invested $1,000 in a mutual fund paying 8% per year. John invested $500 in the
same fund. If both Tim and John keep their money invested for the same period of time,
Tim will end up with twice as much money as John.
6) Any project deemed acceptable using the discounted payback period will also be
acceptable if using the traditional payback period.
7) A limited liability company (LLC) is taxed like a partnership but provides limited
liability for its owners similar to a corporation.
8) Near-cash assets consist of marketable securities and accounts receivable.
9) Since stock dividends do not require payment in cash, their impact on a corporation’s
share price can be only positive (if there is an information effect) or neutral, but not
negative.
10) When an unexpected change in dividend policy develops, investors may attach
informational content to the events.
11) Its ability to raise capital by selling stock makes the corporation the best form of
organization in terms of raising capital.
12) The objective of managing cash inflows is to decrease the float while the objective
of managing cash outflows is to increase the float.
13) The key ingredient in a firm’s financial planning is an accurate sales forecast.
14) Non-uniform demand can be accommodated in the EOQ model by allowing for
non-uniform ordering costs.
15) Adding gourmet coffee stations to my convenience store is expected to increase
sales of my breakfast sandwiches; however, the sales of breakfast sandwiches should
not be included in the evaluation of the gourmet coffee project because only relevant,
incremental cash flows should be considered.
16) A corporate treasurer is typically responsible for cash management, credit
management, and raising capital.
17) The main disadvantage of the NPV method is the need for detailed, long-term
forecasts of free cash flows generated by prospective projects.
18) Each purchase occurring in the secondary markets increases the total stock of
financial assets that exist in the economy.
19) Triangular arbitrage eliminates exchange rate differentials across three markets for
three currencies.
20) For a typical corporation, which of the following capital structures will result in the
lowest weighted average cost of capital?
A) 40% debt, 20% preferred stock, 40% common equity
B) 50% debt, 10% preferred stock, 40% common equity
C) 60% debt, 10% preferred stock, 30% common equity
D) 60% debt, 15% preferred stock, 25% common equity
21) A corporate treasurer is typically responsible for each of the following duties
EXCEPT
A) cash management
B) credit management
C) capital expenditures
D) cost accounting
22) What is the future value of $500 invested at 8.94% compounded quarterly for 12.5
years (round to nearest $1)?
A) $670
B) $1,510
C) $1,617
D) $46,739
23) Table 4-3
Emery Corporation
Assuming that the firm has no preferred stock, and paid $300,000 in common
dividends, the firm’s return on equity was
A) 79.43%
B) 61.89%
C) 43.34%
D) 33.53%
24) Table 4-3
Emery Corporation
The operating profit margin is
A) 13.75%
B) 18.59%
C) 25.80%
D) 33.33%
25) A corporation sells securities to an investment banking firm on January 1st. The
next day an international oil crisis causes stock prices to drop dramatically. The
corporation is immune from the drop in price of its stock due to which function of the
investment banking firm?
A) hedging
B) distributing
C) reinsurance
D) underwriting
26) A flower shop is trying to determine the optimal order quantity of the wicker
baskets that it places many of its arrangements in. The store thinks it will sell 2000 of
these baskets over the next year. The baskets cost the shop $2.00 each. The carrying
costs of the baskets is $0.15 each per year. It costs the shop $8.00 to order.
a.What is the economic order quantity?
b.What is the total cost for ordering the baskets once a year? Four times a year?
27) The current ratio of a firm would be increased by which of the following?
A) Land held for investment is sold for cash
B) Equipment is purchased, financed by a long-term debt issue
C) Inventories are sold for cash
D) Inventories are sold on a credit basis
28) Which of the following affects the precautionary motive for holding cash?
A) the cash flow predictability
B) the firm’s access to external funds
C) both A and B
D) none of the above
29) Table 4-1
Stewart Company
Balance Sheet
Assuming that no preferred dividends were paid, the return on common equity is
A) 55.15%
B) 44.86%
C) 38.83%
D) 17.56%
30) Apollo Corp. reported the following balance sheet:
Apollo Corp.’s debt ratio is
A) 32.17%
B) 37.62%
C) 39.45%
D) 42.95%
31) Manfred Manufacturing is involved in the production of machine parts. The
company uses 600,000 pounds of steel annually. The current purchasing cost for steel is
$3.20 per pound. The carrying cost for inventory is 10 percent of the purchase price.
The cost of ordering steel is $800 per order. The company has decided to maintain a
safety stock of 15,000 pounds. The delivery time per order is 6 days. The company
works 365 days a year.
a.Determine the optimal EOQ.
b.How many orders will be placed annually?
c.What is the average inventory?
d.What is the inventory order point? (That is, at what level of inventory should a new
order be placed?)
e.What is the company’s total inventory costs for the year?
32) Which of the following would be considered a fixed cost in a manufacturing
setting?
A) depreciation
B) direct labor
C) sales commissions
D) direct materials
33) The rate on T-bills is currently 2%. Environment Help Company stock has a beta of
1.5 and a required rate of return of 17%. According to CAPM, determine the return on
the market portfolio.
A) 27.5%
B) 19.0%
C) 14.0%
D) 12.0%
34) In order to send your first child to Law School when the time comes, you want to
accumulate $40,000 at the end of 18 years. Assuming that your savings account will
pay 6% compounded annually, how much would you have to deposit if:
a.You want to deposit an equal amount at the end of each year?
b.You want to deposit one large lump sum today?
35) 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
36) Market efficiency implies which of the following?
A) book value = intrinsic value
B) market value = intrinsic value
C) book value = market value
D) liquidation value = book value
37) The “bird-in-the-hand” dividend theory suggests that
A) high dividends increase stock value because shareholders believe they can earn a
higher return than the company
B) high dividends increase stock value because shareholders are more certain of the
dividend yield than of potential future capital gains
C) high dividends increase stock value because capital markets are inefficient and
dividends are the only sure way to get money from an equity investment
D) high dividends decrease stock value because dividend payments take money out of
the corporate “nest” and reduce the ability of the corporation to function effectively
38) Capital market transactions include which of the following?
A) any security that is purchased from a brokerage firm that is well capitalized
B) common stock of a public corporation
C) all securities that are purchased in the open market
D) U.S. Treasury bills
39) Which of the following relationships is TRUE regarding the costs of issuing the
following securities?
A) common stock > bonds > preferred stock
B) preferred stock > common stock > bonds
C) bonds > common stock > preferred stock
D) common stock > preferred stock > bonds
40) Which of the following categories of owners have limited liability?
A) general partners
B) sole proprietors
C) shareholders of a corporation
D) both A and B
41) PrimaCare has a capital structure that consists of $7 million of debt, $2 million of
preferred stock, and $11 million of common equity, based upon current market values.
The firm’s yield to maturity on its bonds is 7.4%, and investors require an 8% return on
the firm’s preferred and a 14% return on PrimaCare’s common stock. If the tax rate is
35%, what is Parker’s WACC?
A) 7.21%
B) 8.12%
C) 10.18%
D) 12.25%
42) Which of the following securities will likely have the highest maturity risk
premium?
A) U.S. Treasury Bond maturing in 2027
B) BBB-rated corporate bond maturing in 2020 actively traded on a major exchange
C) AAA-rated corporate bond maturing in 2015 not actively traded
D) U.S. Treasury Bill
43) Apollo Corp. reported the following balance sheet:
Apollo Corp.’s current ratio is
A) 2.59
B) 2.74
C) 2.98
D) 3.88
44) Congratulations! You are the proud winner of the multi-state Sour Ball Lottery. You
are to receive $2,000,000 at the end of each year for the next 20 years. While the
Lottery Commission refers to this as a $40,000,000 jackpot, if you choose the “cash
option” they will give you much less than that; you can receive a lump sum payment
today equal to the present value of the ordinary annuity instead of the 20 annual
payments. If the discount rate that the Lottery Commission uses to determine the lump
sum payoff is 7%, what is your payoff if you select the cash option?
A) $26,945,332
B) $39,707,503
C) $42,977,401
D) $21,188,028
45) Ethical behavior
A) is the fifth basic principles of finance
B) cannot be a concern to managers who are expected to maximize shareholder value
C) in the corporate world means not breaking any laws
D) is essential in business because unethical behavior destroys trust and business
relationships
46) Which of the following is NOT TRUE for a limited partnership?
A) limited liability for its owners
B) One general partner must exist who has unlimited liability
C) Only the name of general partners can appear in the name of the firm
D) Limited partners may sell their interest in the company