1) Historically, internally generated cash covers less than half of a firm’s capital
requirements.
2) A common characteristic of money market instruments is their high degree of
liquidity.
3) Market price is not the same as book value or liquidation value.
4) Transaction risk is easily identified and hedged.
5) Conflicts of interest between shareholders and managers may result in the sacrifice
of attractive capital budgeting proposals.
6) Financial plans will rarely succeed unless the forecasts are perfect.
7) A two-for-one stock split is like a 200% stock dividend.
8) MM’s proposition I, or the debt-irrelevance proposition, states that the value of a firm
is unaffected by its capital structure.
9) The method of financing a project affects the determination of its cash flows for
capital budgeting purposes.
10) Since preferred stock dividends are not deductible for tax purposes, few
corporations own preferred stock.
11) Defensive stocks typically provide better returns during periods of economic
downturn since they are not very sensitive to market fluctuations.
12) A common, long-term corporate financial planning horizon would stretch for at
least 15 to 20 years.
13) Nine years after acquiring Chrysler, Daimler paid a leveraged buyout firm $677
million to take Chrysler off its hands.
14) In 2005 China National Offshore Oil Corporation (CNOOC) felt obliged to
withdraw its bid for Unocal, after what is described as “unprecedented political
opposition” in Congress.
15) When Bank of New York and Mellon Financial Corporation merged in 2007,
management forecast annual cost savings of $700 million or over 8% of the current
combined cost.
16) The present value of the total depreciation tax shield will be higher when an asset
uses MACRS than when depreciated straight-line.
17) The principal reason for excluding many intangible assets from the balance sheet is
that they are difficult to value.
18) One way of handling uncertain cash flows is to set an upper and lower limit for cash
balances and a return point to which the cash balance is brought to when the upper or
lower limit is reached.
19) The Financial Accounting Standards Board (FASB) requires that companies
recognize the fact that employee stock options are valuable and therefore are an
expense just like salaries and wages.
20) Because of deficiencies associated with the payback method, it is seldom used in
corporate financial analysis today.
21) A capital investment that generates a 10% rate of return is worthwhile if:
A.corporate bonds of similar risk offer 8% rates of return
B.corporate bonds of similar risk offer 10% rates of return
C.top-quality corporate bonds offer 10% rates of return
D.the expected rate of return on the stock market is 12%
22) The only measure of firm performance that accounts for cost of capital is:
A.ROC
B.ROA
C.ROE
D.EVA
23) Would the following activities increase or decrease the firm’s cash balance?
a. Inventories are increased.
b. The firm reduces its accounts payable.
c. The firm issues additional common stock.
d. The firm buys new equipment.
24) When sales are made without the accompaniment of a formal debt contract, the
sales are said to be on:
A.conditional sale terms
B.open account
C.trade credit
D.sight draft
25) Which of the following is correct when a bond investor’s rate of return for a
particular period equals the bond’s coupon rate?
A.The bond increased in price during the period
B.The bond decreased in price during the period
C.The coupon payment increased during the period
D.The bond price remained unchanged during the period
26) When a depreciable asset is ultimately sold, the sales price is:
A.fully taxable
B.nontaxable
C.nontaxable only if accelerated depreciation was used
D.taxable if sales price exceeds book value
27) If a firm decided to speed up its collection from its customers by reducing the
receivables period and kept the inventory period and payable period the same, then:
A.cash conversion cycle will increase
B.cash conversion cycle will decrease
C.the firm’s investment in working capital will be minimized
D.unable to determine from the information provided
28) Firms having a higher expected return have a higher:
A.level of expected risk
B.dividend yield
C.market value of equity
D.degree of certainty concerning their returns
29) When a company expects to maintain its dividend payments in the future, it will
issue:
A.regular dividends
B.special dividends
C.stock dividends
D.extra dividends
30) An increase in share price following an increase in dividends is logical if the:
A.firm borrows to obtain cash for the dividend
B.increased dividend signals higher future earnings
C.dividend is believed to be temporary
D.clientele effect is not important
31) What effect does a stock dividend have on the book and market values of the firm?
A.Book value increases; market value increases
B.Book value increases; market value decreases
C.Book value decreases; market value increases
D.Book and market values remain constant
32) Under the idealized conditions of MM, which statement is correct when a firm
issues new stock in order to pay a cash dividend on existing shares?
A.The new shares are worth less than the old shares
B.The old shares drop in value to equal the new price
C.The value of the firm is reduced by the amount of the dividend
D.The value of the firm is unaffected
33) What is the plowback ratio for a firm that has earnings per share of $12.00 and pays
out $4.00 per share as dividends?
A.25.00%
B.33.33%
C.66.67%
D.75.00%
34) Which of the following is correct for stock issued under a firm commitment where
the underwriter is to receive an 8% spread?
A.The underwriter’s profits are guaranteed to be 8%
B.The underwriter must sell at least 92% of the shares
C.The underwriter receives 8% of all shares
D.The underwriter may suffer a loss on the issue
35) If ROC is less than a firm’s cost of capital, which of the following must be true?
A.The firm’s EVA is positive
B.The firm’s EVA is negative
C.The firm’s ROE is equal to zero
D.The firm’s ROE is negative
36) According to GAAP, assets and liabilities are typically recorded on the balance
sheet at:
A.historical cost plus depreciation
B.market value
C.salvage value
D.historical cost less depreciation
37) What is the company cost of capital for a firm financed with 30% debt if the debt
requires a 10% return and equity requires a 16% return?
A.11.8%
B.13.3%
C.14.2%
D.14.8%
38) What price was quoted to an investor who paid $982.50 for a $1,000 par value
bond?
A.82:50
B.97:25
C.98:08
D.98:25
39) It may be possible for firms to reduce the time and expense necessary to collect
delinquent debts under a(n):
A.promissory note
B.conditional sale
C.open account
D.EOM billing
40) Which of the following is correct for a firm with $400,000 in net earnings, 20,000
shares, and a 30% payout ratio?
A.Retained earnings will increase by $120,000
B.Each share will receive a $1.20 dividend
C.$120,000 will be spent on new investment
D.The dividend per share will equal $6.00
41) Which of the following is not correct concerning a proposed merger of firms?
A.The acquired firm will cease to exist
B.Shareholders of the acquired firm may receive securities in the acquiring firm
C.Mergers are sometimes combinations of equals
D.Shareholder approval to merge is not required
42) What is the yield to maturity for a bond paying $100 annually that has 6 years until
maturity and sells for $1,000?
A.6.0%
B.8.5%
C.10.0%
D.12.5%
43) Which of the following might indicate the correct choice of a plug figure if a
financial plan shows sources of funds to be $100,000 and uses of funds to be $90,000?
A.External debt must increase by $10,000
B.Dividend payments must decrease by $10,000
C.Cash balances must increase by $10,000
D.The capital budget must decrease by $10,000
44) High inflation rates are usually associated with:
A.low nominal interest rates
B.high nominal interest rates
C.high real interest rates
D.low real interest rates
45) What effect is expected at the end of the life of a project that initially required a
$20,000 increase in net working capital?
A.The $20,000 must now be paid by the firm
B.The firm receives a $20,000 cash inflow
C.Taxable income is reduced by $20,000
D.No effects are expected from sunk costs
46) Which of the following statements is most likely to be correct for a project in which
the NPV is negative when based on flows from net income?
A.NPV may turn positive after adjusting for depreciation expense
B.NPV should be calculated with pretax cash flows
C.NPV has probably been overestimated
D.The project should be rejected or abandoned
47) What is the minimum number of years that an investment costing $500,000 must
return $65,000 per year at a discount rate of 13% in order to be an acceptable
investment?
A.8.69 years
B.14.00 years
C.27.51 years
D.An infinite number of years
48) Which of the following is not necessarily true for a firm with a payout ratio of .15
and ROE of 20%?
A.It reinvests 85% of its earnings back into the firm
B.The firm’s retained earnings will increase the book value of equity by 17%
C.It pays a dividend of 15 cents per share
D.The firm’s earnings and equity will grow by 17% per year
49) You can continue to use your less efficient machine at a cost of $8,000 annually for
the next 5 years. Alternatively, you can purchase a more efficient machine for $12,000
plus $5,000 annual maintenance. At a cost of capital of 15%, you should:
A.Buy the new machine and save $600 in equivalent annual costs
B.Buy the new machine and save $388 in equivalent annual costs
C.Keep the old machine and save $388 in equivalent annual costs
D.Keep the old machine and save $580 in equivalent annual costs
50) The stability of a firm’s operating income is the focus of:
A.financial leverage
B.weighted-average cost of capital
C.capital structure
D.business risk
51) Which of the following is correct for a firm with a debt-equity ratio of .45 if
long-term debt equals 500 and equity equals 2,000? The firm has:
A.current liabilities that are valued at 400
B.current assets that are valued at 400
C.retained earnings that are valued at 900
D.preferred stock of 400
52) Which of the following is not accurate in depicting cash flows from operations?
A.(revenues – expenses)(1 – tax rate) + (depreciation tax rate)
B.(revenues – expenses – taxes paid)
C.(net profit + depreciation)
D.(revenues – cash expenses – taxes paid)
53) What is the change in cash balance for a firm with the following: $10,000 cash flow
from operations, $1,600 cash used for new investment, a reduction in the level of debt
of $2,000, $1,000 in cash dividends, and $200 in depreciation expense?
54) How can the financial manager identify the cost of the capital raised by a
corporation?
55) List four protective covenants that you might be interested in as a prospective
bondholder. Briefly describe why these would be realistic bondholder concerns.
56) What are some of the significant issues that arise when established firms make a
general cash offer or a private placement of securities?
57) Explain the concepts of unique risk and market risk, and how the total level of
portfolio risk can change by adding additional securities.
58) TuPont Corp. has net income of $1.95 million, an effective tax rate of 35%, interest
expense of $400,000, an asset turnover of 2.0, and $14 million in total assets, of which
$7 million is debt. Use the Du Pont system to calculate its ROE, decomposed into
leverage ratio, asset turnover, profit margin, and debt burden.
59) How should the weighted-average costs of capital be applied to projects that are not
average?
60) Why is it stated that the safest way of evaluating the potential gains from a merger
is to focus on the changes in cash flow that will transpire as a result of the merger?
61) How are the gains from mergers distributed between the shareholders of the
acquired and acquiring firms?
62) What is the length of the cash conversion cycle for a firm with $50,000 in
inventory, $60,000 in average receivables, $30,000 in average payables, annual sales of
$700,000, and a cost of goods sold of 75%?