Kelsey International declared a dividend on Friday, November 13, that is payable on
Friday, December 4, to holders of record on Monday, November 30. What is the latest
date that you can purchase this stock if you wish to receive this dividend? Assume there
are no banking holidays within this period of time.
A. Tuesday, November 24
B. Wednesday, November 25
C. Thursday, November 26
D. Friday, November 27
E. Monday, November 30
Answer:
Which one of the following is a unique characteristic of an income bond?
A. Interest income is tax-free.
B. Interest income is paid at the time of issuance.
C. Coupon payments are dependent on the issuer’s income.
D. Coupon payments are paid on a regular monthly basis.
E. Coupon payments can be converted into equity shares.
Answer:
Which one of the following is an intended result of a lockup agreement?
A. Temporarily supporting the market price of IPO shares
B. Maximizing the return to a firm’s original owners from an initial spike in the market
price of IPO shares
C. Increasing the volume of trading for shares of a recent IPO
D. Limiting the price volatility of recent IPO shares caused by day trading
E. Guaranteeing a minimum number of sold shares for an IPO
Answer:
Assume both corporate taxes and financial distress costs apply to a firm. Given this, the
static theory of capital structure illustrates that:
A. a firm’s value and its weighted average cost of capital are inversely related.
B. a firm’s value and its tax rate are inversely related.
C. the maximum value of a firm is obtained when a firm is financed solely with debt.
D. the value of a firm rises as the interest rate on debt rises.
E. the value of a firm rises as both the interest rate on debt and the tax rate rise.
Answer:
Which one of the following describes systemic risk?
A. Risk that affects a large number of assets
B. An individual security’s total risk
C. Diversifiable risk
D. Asset specific risk
E. Risk unique to a firm’s management
Answer:
Cash flow to creditors is equal to:
A. cash flow from assets plus cash flow to stockholders.
B. beginning total liabilities minus ending total liabilities plus interest paid.
C. beginning long-term debt minus ending long-term debt plus interest paid.
D. ending total debt minus beginning total debt plus interest paid.
E. ending long-term debt minus beginning long-term debt plus interest paid.
Answer:
Old Town Industries has three divisions. Division X has been in existence the longest
and has the most stable sales. Division Y has been in existence for five years and is
slightly less risky than the overall firm. Division Z is the research and development side
of the business. When allocating funds, the firm should probably:
A. require the highest rate of return from Division X since it has been in existence the
longest.
B. assign the highest cost of capital to Division Z because it is most likely the riskiest of
the three divisions.
C. use the firm’s WACC as the cost of capital for Division Z as it provides analysis for
the entire firm.
D. use the firm’s WACC as the cost of capital for Divisions A and B because they are
part of the revenue-producing operations of the firm.
E. allocate capital funds evenly amongst the divisions to maintain the current capital
structure of the firm.
Answer:
The ability to delay an investment:
A. is commonly referred to as the best-case scenario.
B. is valuable provided there are conditions under which the investment will have a
positive net present value.
C. ensures that the investment will have an expected net present value that is positive.
D. offsets the need to conduct sensitivity analysis.
E. is referred to as the option to abandon.
Answer:
Your grandparents just gave you a gift of $15,000. You are investing this money for 12
years at 6 percent simple interest. How much money will you have at the end of the 12
years?
A. $15,900
B. $16,000
C. $17,375
D. $25,800
E. $26,938
Answer:
The ‘say on pay” portion of the Dodd-Frank Wall Street Reform and Consumer
Protection Act requires corporations to do which one of the following?
A. Give the chair of the board the final say on executive pay
B. Give the firm’s creditors a nonbinding say on executive pay
C. Give the firm’s creditors a binding say on executive pay
D. Give shareholders a nonbinding vote on executive pay
E. Give shareholders a binding vote on executive pay
Answer:
Which one of the following actions will increase the current ratio, all else constant?
Assume the current ratio is greater than 1.0.
A. Cash purchase of inventory
B. Cash payment of an account receivable
C. Cash payment of an account payable
D. Credit sale of inventory at cost
E. Cash sale of inventory at a loss
Answer:
Which one of the following statements is true regarding the period 1926-2011?
A. The returns on small-company stocks were less volatile than the returns on
large-company stocks.
B. The risk-free rate of return remained constant over the time period.
C. U.S. Treasury bills had a positive average real rate of return.
D. Bonds had an average rate of return that exceeded the average return on stocks.
E. The inflation rate was just as volatile as the return on long-term bonds.
Answer:
Textiles Unlimited has gathered projected cash flows for two projects. At what interest
rate would the company be indifferent between the two projects? Which project is better
if the required return is above this interest rate?
A. 11.76 percent; A
B. 12.49 percent; A
C. 12.49 percent; B
D. 13.15 percent; A
E. 13.15 percent: B
Answer:
Which of the following are true statements?
I. Venture capitalists tend to be long-term investors in a firm.
II. Venture capital is relatively easy to obtain for most new firms.
III. Venture capitalists generally have an exit strategy.
IV. Venture capitalists tend to specialize in one type of financing for a select type of
firm.
A. I and II only
B. III and IV only
C. I and III only
D. I and IV only
E. II and IV only
Answer:
The Space and Rocket Center takes an average of 55 days to sell its inventory and an
average of 2.5 days to collect payment on its sales. What is the inventory turnover rate?
A. 6.64
B. 7.29
C. 8.68
D. 10.18
E. 22.00
Answer:
One year ago, Peyton purchased 3,600 shares of Broncos stock for $101,124. Today, he
sold those shares for $26.60 a share. What is the total return on this investment if the
dividend yield is 1.9 percent?
A. -3.98 percent
B. -3.40 percent
C. -2.29 percent
D. 1.10 percent
E. 3.40 percent
Answer:
Which one of the following will result from a stock repurchase?
A. Increase in the number of shares outstanding
B. Decrease in the earnings per share
C. Decrease in the market price per share
D. Increase in the market value of equity per share
E. Decrease in the PE ratio
Answer:
Assume that long-term corporate bonds had an average return of 5.3 percent and a
standard deviation of 9.3 percent for a 30-year period. What range of returns would you
expect to see on these bonds 68 percent of the time?
A. -4.0 percent to 14.6 percent
B. -4.0 percent to 22.9 percent
C. -11.3 percent to 14.6 percent
D. -11.3 percent to 17.4 percent
E. -11.3 percent to 22.9 percent
Answer:
Suppose that Martin Metal Products changes its policy and starts requiring all of its
customers to pay within 20 days rather than the 30 days that it currently allows. Which
one of the following will result from this change?
A. Increase in receivables period
B. Increase in inventory period
C. Decrease in cash cycle
D. Increase in operating cycle
E. Increase in accounts payable period
Answer:
Braxton’s Cleaning Company stock is selling for $32.60 a share based on a 14 percent
rate of return. What is the amount of the next annual dividend if the dividends are
increasing by 5 percent annually?
A. $2.71
B. $2.75
C. $2.78
D. $2.86
E. $2.93
Answer:
What are some of the key factors an individual should consider before selecting a
first-stage venture capitalist?
Answer:
Explain how taxes affect the value of a firm based on M&M Proposition I.
Answer:
Explain how a Dutch auction operates and why a firm might choose to sell its securities
in this manner.
Answer:
Explain why the capital structure of a firm is irrelevant to equity investors.
Answer:
Which is more important from a finance perspective’”net income or operating cash
flow? What is the difference between these two values?
Answer:
Explain what capital structure management is and give three examples of capital
structure decisions.
Answer:
You are having a discussion with one of your classmates on dividend policy. Your
classmate states that dividend policy is totally irrelevant. Write a response to this
statement justifying that in the real world, dividend policy does matter.
Answer:
What are the differences between a regular cash dividend, a liquidating dividend, a
special dividend, and an extra cash dividend?
Answer:
Identify and briefly explain three ways in which a firm can finance its short-term assets.
Answer: