1) The main purpose in contracting to purchase foreign currency in the forward market
is to:
A.earn a premium (interest) on the exchange
B.lock into a price now
C.take advantage of future price reductions
D.avoid the more expensive spot rates
2) In the context of housing, what is an ARM?
A.A mortgage with high initial payments, offset by significantly lower payments later
B.A mortgage with low initial payments, offset by significantly higher payments later
C.A mortgage with no initial payments, offset by significantly high payments later
D.A mortgage with equal payments per period
3) The primary purpose of financial futures is to:
A.benefit from increases in interest rates
B.protect against swings in interest rates or prices of financial assets
C.translate one currency into another
D.guarantee the repayment of loan principal
4) If a firm generates $2,000 in sales and has a $500 increase in accounts receivable
during an accounting period, based on these two categories cash flow will increase by:
A.$2,500
B.$2,000
C.$1,500
D.$500
5) The incremental risk to a portfolio from adding another stock:
A.is always greater than the average portfolio risk
B.is always less than the average portfolio risk
C.is always positive
D.is often positive but can be negative
6) The most likely reason that underpricing of new issues occurs more frequently than
overpricing is that:
A.underwriters desire to reduce the risk of a firm commitment
B.demand for a new issue is typically too high
C.underwriters earn low rates of return
D.issuing firms demand that equity be underpriced
7) What effect might operating leverage be expected to have on a project’s beta?
A.Beta will increase
B.Beta will decrease
C.Beta will not be affected
D.The effect depends on the market risk premium
8) If Georgia Pacific (lumber products) were to acquire a national homebuilding firm,
the combination would be termed a:
A.horizontal merger
B.vertical merger
C.conglomerate merger
D.spin-off by the national homebuilding firm
9) Based on the following information, make an estimate of the stock’s beta: Month 1 =
Stock +1.5%, Market +1.1%; Month 2 = Stock +2.0%, Market +1.4%; Month 3 = Stock
-2.5%, Market -2.0%.
A.Beta is greater than 1.0
B.Beta is less than 1.0
C.Beta equals 1.0
D.There is no consistent pattern of returns
10) First-stage pro forma balance sheets do not determine:
A.whether external financing is required
B.the need for additional fixed assets
C.the amount of the balancing item
D.the financing mix for external funding
11) Financial futures are available to protect against all of the following except:
A.interest rate risk
B.level of equity prices
C.currency swap risk
D.exchange rate risk
12) When a project’s internal rate of return equals its opportunity cost of capital, then:
A.the project should be rejected
B.the project has no cash inflows
C.the net present value will be positive
D.the net present value will be zero
13) If the total assets of a firm are unaffected by a stock dividend, then:
A.the stock should retain the same price per share
B.stock dividends should be preferred by corporations over cash dividends
C.an investor’s wealth should not be changed
D.only bondholders benefit from stock dividends
14) Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000
indefinitely, costs $10 million, is riskier than the firm’s average projects, and the firm
uses a 12.5% WACC?
A.Yes, since NPV is positive
B.Yes, since a zero NPV indicates marginal acceptability
C.No, since NPV is zero
D.No, since NPV is negative
NPV = -$10 million + $1.25 million/.125 = -10 + 10 = 0
However, the 20% rate does not reflect the projects’ greater risk; thus NPV is negative.
15) When taxes are considered, the value of a levered firm equals the value of the:
A.unlevered firm
B.unlevered firm plus the value of the debt
C.unlevered firm plus the present value of the tax shield
D.unlevered firm plus the value of the debt plus the value of the tax shield
16) If managers intend to adjust the projections of foreign investments, it is probably
better to make the adjustments in:
A.the discount rate used
B.the cash flows projected
C.both the discount rate and cash flows
D.the exchange rate, but never in the discount rate
17) The difference between an American call option and a European call option is:
A.the European call has a final exercise date
B.the American call trades only on domestic stocks
C.the European call can be exercised only on one day
D.the American call generates profits regardless of which direction the stock moves
18) In a statement of cash flows, which category includes depreciation expense?
A.Operations
B.Investments
C.Financing
D.None of these; depreciation is a noncash expense
19) Pro formas refer to:
A.plans developed by a certified financial planner
B.the inputs in the financial planning process
C.projected financial statements
D.deviations in results from previous financial plans
20) Corporations that attach warrants to their bonds are hoping to:
A.sell equity without paying flotation costs
B.convert the bonds into stock at a later date
C.reduce the cost of debt by increasing bond prices
D.increase the price of their shares
21) Allocations of overhead should not affect a project’s incremental cash flows unless
the:
A.project actually increased overhead expenses
B.overhead cannot be recovered at the end of the project
C.overhead cannot be allocated to other projects
D.accountant is required to allocate costs to this project
22) By how much must a firm reduce its assets in order to improve ROA from 10% to
12% if the firm’s profit margin is 5% on sales of $4 million?
A.$240,000
B.$333,333
C.$400,000
D.$516,167
23) That Italian antique was priced at 3 million lire which, fortunately, does not have to
be paid for 3 months. The lira has a spot exchange rate of L2,000/$ but is trading 3
months forward at a 5% discount. If you contract ahead now, how many dollars will the
antique cost?
A.$1,425
B.$1,429
C.$1,575
D.$1,579
24) The pecking order theory suggests that less profitable firms borrow more because:
A.equity issues are more expensive
B.leverage is preferred over raising funds internally
C.debt issues are good omens
D.they have insufficient internal funds
25) Averaging the deviations from the mean for a portfolio of securities will:
A.compute the standard deviation
B.compute the variance
C.equal zero
D.equal the number of securities in the portfolio
26) Which of the following bonds is likely to be viewed by investors as the riskiest?
A.Subordinated debt
B.Indexed bond
C.Secured bond
D.Asset-backed bonds
27) In general, a firm’s credit policy should grant the credit whenever the expected:
A.loss from default is less than the cost of the product
B.profit from granting credit exceeds zero
C.profit exceeds the price of the product
D.probability of a loss is less than 50%
28) Suppose I add interest tax shields and costs of financial distress to MM’s leverage
irrelevance proposition. What’s the result?
29) Explain how financial ratios may be used to predict bankruptcy?
30) What two major decisions are made by financial managers?
31) Miller and Modigliani proclaim that, under certain ideal conditions, dividend policy
is irrelevant. What is it that they are specifically proclaiming to be irrelevant? Explain
with the following example. Assume that a firm has $100,000 in assets at market value,
no debt, and 100 shares outstanding. Further, $10,000 of the assets are in cash which
represents the recent net income of the firm. Now the firm can choose whether to pay
out, say, a 50% dividend which will necessitate the issuance of $5,000 in new shares, or
to pay no dividend and plow back all $10,000 of earnings into a project with an
attractive NPV.
32) Ignoring the idealized world of MM, why might a higher dividend payout ratio be
considered detrimental to firm value?
33) What is the basic difference in strategy between buying and selling a futures
contract?