1) What is the after-tax cost of preferred stock that pays a 12% dividend and sells at par
if the firm’s tax rate is 35%?
A.7.8%
B.8.5%
C.12.0%
D.16.2%
2) Which of the following would not be included among the costs of carrying
inventory?
A.Obsolescence
B.Opportunity cost of capital
C.Raw material cost
D.Risk of pilferage
3) In order for a manager to correctly decide to postpone an investment until one year
into the future, the NPV of the investment should:
A.grow more rapidly than the IRR
B.grow more rapidly than the cost of capital
C.not decrease
D.remain stable
4) A firm with unpredictable cash flows is trying to set upper and lower limits for cash
balances. Which of the following factors will result in upper and lower limits being
closer to each other?
A.Variance of the cash flows is low
B.Cost of trading securities is high
C.Interest rate is low
D.Current cash balance is low
5) Which of the following is correct?
A.Market value added measures the difference between the market value of the firm’s
equity and its book value
B.Residual income is also called economic value added
C.EVA measures the net profit of a firm or division after deducting the cost of the
capital employed
D.All of these
6) An investment today of $25,000 promises to return $10,000 annually for the next 3
years. What is the approximate real rate of return on this investment if inflation
averages 6% annually during the period?
A.3.5%
B.9.7%
C.14.0%
D.20.0%
7) How is it possible for real rates of return to increase during times when the rate of
inflation increases?
A.Inflation increased more than the real return
B.Nominal returns actually decreased
C.Nominal returns increased more than inflation
D.Nominal returns increased less than inflation
8) What nominal return was received by an investor when inflation averaged 8.0% and
the real rate of return was a negative 2.5%?
A.5.30%
B.5.75%
C.6.50%
D.10.77%
9) What is the after-tax cost to a corporation in the 35% tax bracket of paying $50,000
in preferred stock dividends?
A.$17,500
B.$32,500
C.$50,000
D.$76,923
After-tax cost of preferred stock dividends:
= before-tax cost
= $50,000
Dividends are paid out of after-tax income.
10) On March 30 you are holding a call option on a stock (exercise price of $60), which
will expire on March 31 . The closing price of the stock on March 30 is $ What is the
value of your call option?
A.$1
B.- $1
C.Very little
D.Zero
Proceeds from immediate exercise of this option is negative, but still there is one more
day to expiration, so the option has some value.
11) Which of the following would you expect to be nearly equal across countries?
A.Nominal interest rates
B.Real interest rates
C.Inflation rates
D.Forward premium
12) A firm’s business risk depends upon:
A.its use of debt in the capital structure
B.the risk of the firm’s assets and operations
C.whether individuals are able to undo the leverage
D.the costs of financial distress
13) Funded debt refers to those liabilities that:
A.have established a sinking fund for repayment
B.are not callable at the option of the firm
C.are secured by specific collateral
D.have a maturity of more than one year remaining
14) The basic tenet of the CAPM is that a stock’s expected risk premium should be:
A.greater than the expected market return
B.proportionate to the market return
C.proportionate to the stock’s beta
D.greater than the risk-free rate of return
15) The direct expense of a stock issue includes the:
A.cost of underpricing the stock
B.underwriting spread and other expenses
C.underwriting spread, other expenses, and cost of underpricing
D.underwriting spread
16) Which of the following is most likely to result in a higher P/E ratio for a firm, other
things equal?
A.Lower growth rate in dividends
B.Reduction in the stock’s required rate of return
C.Lower dividend yield
D.Lower stock price
17) How does the price of a put option respond to the following changes, other things
being equal? Does the put price go up or down?
a. Stock price increases.
b. Exercise price increases.
c. Risk-free interest rate increases.
d. Expiration date of the option is extended.
e. Volatility of the stock price falls.
f. Time passes, so the option’s expiration date comes closer.
18) Options are important instruments in the financial marketplace, and have been
traded since at least:
A.1800 B.C
B.1000 B.C
C.1929
D.1972
19) Which of the following statements is correct concerning the internal growth rate?
A.It is maximized when the payout ratio equals zero
B.It is maximized when the plowback ratio equals zero
C.It cannot be less than the sustainable growth rate
D.It decreases as total assets decrease
20) If entering a new market will not produce an immediate net present value, why
would financial planners suggest entering this new market?
A.To create new core strengths
B.For the possibility of follow-up investments
C.The existing market is subject to takeover
D.To recover lost profits in their current market
21) What is the variance of return of a three-stock portfolio (with unequal weights 25%,
50%, and 25%) that produced returns of 20%, 25%, and 30%, respectively?
A.10.00
B.12.50
C.15.00
D.20.00
22) Assuming that the international Fisher effect is holding, what will be the effect of an
increase in nominal interest rate on the currency?
A.Currency will appreciate
B.Currency will depreciate
C.There will be no significant change in exchange rate
D.Currency will sell at a forward premium
23) Given that markets are efficient, what is the most logical explanation of the fact that
a portfolio manager can outperform the S&P 500 by 5% annually?
A.The manager is an expert stock selector
B.The manager has relied on insider information
C.Stocks do not follow a random-walk pattern
D.The manager’s results have not been adjusted for the riskiness of the portfolio
24) If you purchase a 5-year, zero-coupon bond for $500, how much could it be sold for
3 years later if interest rates have remained stable?
A.$650.00
B.$723.05
C.$757.86
D.$800.00
25) Efficiency ratios:
A.include the quick ratio, asset turnover ratio, and return on equity
B.are used to measure how well the company uses its assets
C.are used to measure how liquid the company is
D.help answer questions of firm stability
26) Which of the following offers the most plausible scenario for a firm that maintained
a constant degree of operating leverage when its level of fixed costs doubled?
A.Depreciation expense increased
B.Variable cost percentage decreased
C.Sales revenues declined
D.Pretax profits decreased
27) Manufacturers who are concerned about volatile commodity prices often use option
contracts to alter their risks. What is the worst-case scenario for a seller of put options
on corn with a strike price of $2.25 per bushel?
A.If corn prices drop below $2.25 the option premium will be lost
B.If corn prices rise above $2.25 the option premium will be lost
C.Losses can be unlimited if prices drop sufficiently
D.Losses can be unlimited if prices rise sufficiently
28) A firm uses the profitability index to select between two mutually exclusive
investments. If no capital rationing has been imposed, which project should be
selected?
A.Select the project with the higher profitability index
B.Select the project with the lower profitability index
C.Without capital rationing, both projects can be selected
D.Without capital rationing, select by NPV method
29) A balance sheet portrays the value of a firm’s assets and liabilities:
A.over an annual period
B.over any stated period of time
C.at any stated point in time
D.only at the end of the calendar year
30) Which of the following will increase a firm’s times interest earned ratio?
A.An increase in debt
B.A decrease in cost of goods sold
C.An increase in interest expense
D.A decrease in net income
31) What type of voting does a corporation have if there are two directors to elect and
Director Jones received 50 votes from a shareholder who owns 100 shares?
A.Majority voting
B.Cumulative voting
C.Supermajority voting
D.Cannot tell voting type from given information
32) Which of the following industry has low operating leverage?
A.Steel
B.Railroads
C.Electric utilities
D.Autos
33) A corporate board of directors should provide support for the top management team:
A.under all circumstances
B.in all decisions related to cash dividends
C.only when the board has confidence in management’s actions
D.if shareholders are pleased with the firm’s performance
34) Which of the following forms of debt would be likely to offer debtholders the
lowest interest rate?
A.Secured debt that is not callable
B.Secured debt with a sinking fund
C.Subordinated debt that is callable
D.Subordinated debt with a sinking fund
35) Perhaps the best method for estimating the market value of shareholders’ equity is
to:
A.read from the firm’s balance sheet
B.read from the firm’s income statement
C.multiply number of shares outstanding by the price of each share
D.add the retained earnings plus total liabilities
36) Financial markets are used for trading:
A.both real assets and financial assets
B.the goods and services produced by a firm
C.securities, such as shares of IBM
D.the raw materials used in manufacturing
37) Which of the following would not be judged a traditional category of capital
budgeting project?
A.Machine replacement proposals
B.Salary adjustment proposals
C.New product proposals
D.Plant expansion proposals
38) If the indirect exchange rate between French francs and U.S. dollars is 6.8/1, then
the direct exchange rate between these currencies is:
A.$.1471/FFr
B.$/6.8FFr
C.FFr/$6.8
D.FFr/$.1471
39) How is the standard deviation of returns for individual common stocks or for a
stock portfolio calculated?
40) How can you estimate the opportunity cost of capital for an “average-risk” project?
41) What are the essential features of the taxation of corporate and personal income?
42) Discuss how agency problems can develop between shareholders and bondholders
when the firm is experiencing financial distress.