1) Working capital management involves managing a firm’s liquidity.
2) From the shareholders’ perspective, a stock repurchase has a potential tax advantage
over the payment of a cash dividend.
3) If the interest rate is positive, then the present value of an annuity due will be less
than the present value of an ordinary annuity.
4) Unique security risk can be eliminated from an investor’s portfolio through
diversification.
5) When economies of scale exist, the percent of sales method will overestimate the
assets required and therefore overestimate the amount of discretionary financing
needed.
6) Common stockholders demand a return on the price paid for their common stock, but
since retained earnings on the balance sheet are merely “on paper” they do not require a
return on earnings that have been retained.
7) Financial theory assumes that individuals are risk averse.
8) The hedging principle is used to address the issue of how much short-term financing
a firm should use.
9) The independence hypothesis allows for bankruptcy and agency costs.
10) Preferred stock is riskier than long-term debt because its claim on assets and
income come after those of bonds.
11) The goal of profit maximization ignores the risk of financial decisions
12) Actual returns are always less than expected returns because actual returns are
determined at the end of the period and must be discounted back to present value.
13) Sunk costs are cash outflows that will occur regardless of the current accept/reject
decision, and therefore should be excluded from the analysis.
14) Bond prices are inversely related to market interest rates.
15) A firm’s income statement reports the results from operating the business for a
period of time, while the firm’s balance sheet provides a snapshot of the firm’s financial
position at a specific point in time.
16) A bond selling at a discount will have a built-in capital gain if the bond is held to
maturity.
17) When using a financial calculator, cash outflows generally have to be entered as
negative numbers, because a financial calculator sees money “leaving your hands.”
18) You want $20,000 in 5 years to take your spouse on a second honeymoon. Your
investment account earns 7% compounded semiannually. How much money must you
put in the investment account today? (round to the nearest $1).
A) $14,178
B) $12,367
C) $15,985
D) $13,349
19) If you expect NoDiv Corporation to sell for $75 per share in three years while
paying no dividends along the way, and if your required rate of return is 16% per year,
how much is the stock worth today?
A) $42.68
B) $48.05
C) $51.10
D) $74.64
20) An example of a primary market transaction involving a money market security is
A) a new issue of a security with a very short maturity
B) a new issue of a security with a very long maturity
C) the transfer of a previously-issued security with a very short maturity
D) the transfer of a previously-issued security with a very long maturity
21) Initial OutlayCash Flow in Period
1234
$4,000,000$1,546,170$1,546,170$1,546,170$1,546,170
The Internal Rate of Return (to nearest whole percent) is
A) 10%
B) 18%
C) 20%
D) 24%
22) Your company has received a $50,000 loan from an industrial finance company. The
annual payments are $6,202.70. If the company is paying 9 percent interest per year,
how many loan payments must the company make?
A) 15
B) 13
C) 12
D) 19
23) High dividends may increase stock values due to all of the following reasons
EXCEPT
A) dividends are more certain than capital gains
B) higher dividends are used to signal higher expected future earnings
C) dividends are used as a tool to minimize agency costs
D) higher dividends allow companies to increase their proportion of external equity
financing
24) Krause Precision Tools, Inc. will use an estimated 700,000 small processors in its
manufacturing process next year. The carrying cost of processor inventory is $3.00 per
unit and the cost of reordering processors is $100 per order. What is Krause’s economic
ordering quantity for small processors?
A) 6,340
B) 6,831
C) 7,118
D) 7,300
25) Dazzly Diamond Corp. called for credit at the Home Alone Bank of Paris, TX. The
terms included a $35,000 maximum loan with interest of 1 percent over prime, and the
agreement also requires a 15% compensating balance throughout the year. The prime
rate is currently 12 percent.
a.If Dazzly Diamond Corp. maintains a balance in its account of $5,250 to $6,000, what
is the effective cost of credit through the line-of-credit agreement where the maximum
amount of the loan is used?
b.Recompute the effective cost of credit to Dazzly Diamond if it will have to borrow the
compensating balance and the maximum amount possible under the agreement.
26) A justification for no dividend payments that would be pleasing to shareholders
could be
A) insufficient cash available for dividend payments
B) positive NPV investment projects that require the firm to retain cash for investment
purposes
C) an investor clientele that prefers current liquidity
D) cash will be used for a stock dividend
27) Wildings, Inc. common stock has a beta of 1.2 . If the expected risk free return is
4% and the expected market risk premium is 9%, what is the expected return on
Wildings’ stock?
A) 10.0%
B) 12.0%
C) 13.8%
D) 14.8%
28) ________ is a short-term promissory note sold by large corporations to raise cash.
A) Repurchase agreement
B) Money market mutual fund
C) Commercial paper
D) U.S. Treasury bills
29) Which of the following statements about the internal rate of return (IRR) is TRUE?
A) It has the most conservative and realistic reinvestment assumption
B) It never gives conflicting answers
C) It fully considers the time value of money
D) It is greater than the modified internal rate of return if the discount rate is higher
than the IRR
30) Investment A has an expected return of 15% per year, while investment B has an
expected return of 12% per year. A rational investor will choose
A) investment A because of the higher expected return
B) investment B because a lower return means lower risk
C) investment A if A and B are of equal risk
D) investment A only if the standard deviation of returns for A is higher than the
standard deviation of returns for B
31) Which of the following strategies may be used to alter a firm’s capital structure
toward a higher percentage of debt compared to equity?
A) stock dividend
B) stock split
C) maintain a low dividend payout ratio
D) stock repurchase
32) A wide bid/ask spread could indicate which of the following?
A) the presence of arbitrageurs
B) large volume transactions are taking place
C) frequent trading of a currency
D) an inefficient market
33) Which of the following supports the “bird-in-the-hand” dividend theory?
A) Investors prefer dividends to capital gains because of the time value of money
B) Increasing a firm’s dividends transfers risk and ownership from the current
shareholders to new owners
C) Investment decisions are not influenced by dividend policy
D) Capital mix decisions are not influenced by dividend policy
34) Which of the following statements concerning liquidity and debt is TRUE?
A) The greater the use of short-term debt, the lower the risk of illiquidity
B) Long-term debt is generally less costly than short-term debt
C) A firm can reduce its risk for illiquidity by shifting from short-term debt to long-term
debt
D) The risk of illiquidity does not depend on the mix of short-term versus long-term
debt
35) S-type corporations have all of the following advantages EXCEPT
A) they are taxed as partnerships
B) the owners have limited liability
C) distributions are taxed twice, similar to corporate dividend payments
D) all owners must be people, no corporations
36) Suppose a U.S. importer purchases an Italian product today but will not pay for it
for 90 days. The cost of the product today is 35,000 euros. The spot exchange rate today
is .6233 euros per dollar. The importer creates a forward-market hedge. The 90-day
forward rate is .6100 euros per dollar. The amount the U.S. importer will pay in 90 days
is
A) $56,153
B) $57,377
C) $55,683
D) $56,667
37) LPD Logistics, Inc.’s projected sales for the first six months of 2010 are given
below.
Jan.$300,000April$350,000
Feb.$350,000May$500,000
Mar.$475,000June$400,000
20% of sales are collected in the month of the sale, 75% are collected in the month
following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of
sales. Purchases are made the month prior to the sales and are paid during the month the
purchases are made (i.e. goods sold in March are bought and paid for in February).
Total other cash expenses are $35,000/month. The company’s cash balance as of
February 1, 2010 will be $30,000. Excess cash will be used to retire short-term
borrowing (if any). LPD has no short term borrowing as of February 28, 2010 . Assume
that the interest rate on short-term borrowing is 1% per month. The company must have
a minimum cash balance of $20,000 at the beginning of each month. What is LPD’s
projected total receipts (collections) for March?
A) $357,500
B) $310,000
C) $456,000
D) $475,000
38) You must add one of two investments to an already well- diversified portfolio.
Security ASecurity B
Expected Return = 14%Expected Return = 14%
Standard Deviation ofStandard Deviation of
Returns = 15.8%Returns = 19.7%
Beta = 1.8Beta = 1.5
If you are a risk-averse investor, which one is the better choice?
A) Security A
B) Security B
C) Either security would be acceptable
D) cannot be determined with information given
39) You are a retired worker whose income is derived from your company pension plan
and social security. However, you are highly dependent upon the income generated
from your 401(k) plan, which is heavily weighted in stocks that pay substantial
dividends. Which of the following dividend policies would you prefer?
A) constant dividend payment ratio
B) stable dollar dividend per share
C) small, regular dividend plus a year-end extra
D) any of the above would be equally desirable
40) If a firm has no operating leverage and no financial leverage, then a 10% increase in
sales will have what effect on EPS?
A) EPS will remain the same
B) EPS will increase by 10%
C) EPS will decrease by 10%
D) EPS will increase by less than 10%
41) The Modigliani and Miller hypothesis does NOT work in the “real world” because
A) interest expense is tax deductible, providing an advantage to debt financing
B) higher levels of debt increase the likelihood of bankruptcy, and bankruptcy has real
costs for any corporation
C) both A and B
D) dividend payments are fixed and tax deductible for the corporation
42) You are in charge of one division of Yeti Surplus Inc. Your division is subject to
capital rationing. Your division has 4 indivisible projects available, detailed as follows:
ProjectInitial OutlayIRRNPV
12 million18%2,500,000
21 million15%950,000
31 million10%600,000
43 million9%2,000,000
If you must select projects subject to a budget constraint of 5 million dollars, which set
of projects should be accepted so as to maximize firm value?
A) Projects 1, 2 and 3
B) Project 1 only
C) Projects 1 and 4
D) Projects 2, 3 and 4
43) Which of the following statements would be consistent with the bird-in-the-hand
dividend theory?
A) Investors are indifferent whether stock returns come from dividend income or capital
gains income
B) Dividends are more certain than capital gains income
C) Wealthy investors prefer corporations to defer dividend payments because capital
gains produce greater after-tax income
D) Dividends are less certain than capital gains
44) Cost of capital is
A) the coupon rate of debt
B) a hurdle rate set by the board of directors
C) the rate of return that must be earned on additional investment if firm value is to
remain unchanged
D) the average cost of the firm’s assets
45) If you hold a portfolio made up of the following stocks:
Investment ValueBeta
Stock X$4,0001.5
Stock Y$5,0001.0
Stock Z$1,000.5
What is the beta of the portfolio?
A) 1.33
B) 1.24
C) 1.15
D) 1.00
46) A company collects 25% of its sales during the month of sale, 65% one month after
the sale, and 10% two months after the sale. The company expects sales of $50,000 in
August, $80,000 in September, $90,000 in October, and $60,000 in November. How
much money is expected to be collected in October?
A) $90,000
B) $79,500
C) $55,000
D) $22,500
47) Prices of securities that are traded on the organized exchanges are determined by
A) a “bid” and “ask” negotiation process amongst brokers who hold these securities in
their own account
B) the Securities Exchange Commission
C) a continuous auction process reflecting the sentiments of buyers and sellers
D) the sellers of the securities