1) To be included in a capital budgeting analysis, all incremental free cash flows must
be expensed on the company’s books, otherwise generally accepted accounting
principles will be violated.
2) When the corporation sells securities directly to the investment public without
involving an investment banker, it is called a privileged subscription.
3) Financial structure is another term for capital structure.
4) Giving the company’s CEO stock options as part of his or her compensation package
is an example of an agency cost.
5) Investors expect to receive the highest returns from government-issued securities
because the government will not default on securities that it has issued.
6) Determining how a firm should raise money to fund its long-term investments is
referred to as capital structure decisions.
7) If a bond sells for its par value, the coupon interest rate and yield to maturity are
equal.
8) The value of a bond is equal to the present value of the bond’s interest payments plus
the present value of the bond’s maturity value, all discounted at the bond’s coupon rate.
9) An increase in a corporation’s marginal tax rate will cause the corporation’s after tax
cost of debt to increase, other things remaining the same.
10) The upper limit on common stock dividends, which is set by the SEC, is generally
equal to the sum of dividends paid on the company’s preferred stock.
11) In terms of trade credit, default costs vary indirectly with the quality of the
customer.
12) A bond selling at a discount will have a built-in capital gain if the bond is held to
maturity.
13) Discretionary financing needed will be zero when the company’s sales growth rate
is zero.
14) Forward rates, like spot rates, are quoted in both direct and indirect form.
15) A significant disadvantage of the internal rate of return is that it
A) does not fully consider the time value of money
B) does not give proper weight to all cash flows
C) can result in multiple rates of return (more than one IRR)
D) is expressed as a percentage
16) Which of the following accounts does NOT belong on the asset side of a balance
sheet?
A) accounts receivable
B) marketable securities
C) cash
D) common stock
17) Salvage value would most likely NOT be considered by
A) net present value
B) internal rate of return
C) payback
D) A and B
18) Assume that an investment is forecasted to produce the following returns: a 20%
probability of a 12% return; a 50% probability of a 16% return; and a 30% probability
of a 19% return. What is the standard deviation of return for this investment?
A) 5.89%
B) 16.1%
C) 2.43%
D) 15.7%
19) Project LMK requires an initial outlay of $500,000 and has a profitability index of
1.4. The project is expected to generate equal annual cash flows over the next ten years.
The required return for this project is 16%. What is project LMK’s internal rate of
return?
A) 19.88%
B) 22.69%
C) 24.78%
D) 26.12%
20) You decide to borrow $250,000 to build a new home. The bank charges an interest
rate of 8% compounded monthly. If you pay back the loan over 30 years, what will your
monthly payments be (rounded to the nearest dollar)?
A) $1,123
B) $1,237
C) $1,687
D) $1,834
21) Which of the following conclusions would be true if you earn a higher rate of return
on your investments?
A) The greater the present value would be for any lump sum you would receive in the
future
B) The lower the present value would be for any lump sum you would receive in the
future
C) Your rate of return would not have any effect on the present value of any sum to be
received in the future
D) The greater the present value would be for any annuity you would receive in the
future
22) Bacon Signs Company preferred stock pays a perpetual annual dividend of 4.5% of
its $100 par value. If investors’ required rate of return on this stock is 12%, what is the
value per share?
A) $37.50
B) $31.82
C) $8.50
D) $45.00
23) In an ideal world, which of the following would be used to evaluate firm
performance?
A) book value of assets
B) corporate retained earnings from the day of incorporation
C) accounting assets and profits
D) market value of assets
24) Potential sources of financing to support an increase in sales include all of the
following EXCEPT
A) increase in the dividend payout ratio
B) increase in spontaneous liabilities
C) increase in accounts payable
D) issuance of bonds and/or common stock
25) Interstate Appliance Inc. is considering the following 3 mutually exclusive projects.
Projected cash flows for these ventures are as follows:
Plan APlan BPlan C
InitialInitialInitial
Outlay=$3,600,000Outlay=$6,000,000Outlay=$3,500,000
Cash Flow:Cash Flow:Cash Flow:
Yr 1=$ -0-Yr 1=$4,000,000Yr 1=$2,000,000
Yr 2= -0-Yr 2= 3,000,000Yr 2= -0-
Yr 3= -0-Yr 3= 2,000,000Yr 3=2,000,000
Yr 4= -0-Yr 4= -0-Yr 4=2,000,000
Yr 5=$7,000,000Yr 5= -0-Yr 5=2,000,000
If Interstate Appliance has a 12% cost of capital, what decision should be made
regarding the projects above?
A) accept plan A
B) accept plan B
C) accept plan C
D) accept Plans A, B and C
26) Working capital management is concerned with
A) how a firm can best manage its cash flows as they arise in its day-to-day operations
B) how a firm should raise money to fund its investments
C) what long-term investments a firm should undertake
D) managing a firms capital stock
27) Valley Manufacturing Inc. just issued $1,000 par 20-year bonds. The bonds sold for
$758.18 and pay interest semiannually. Investors require a rate of 9% on the bonds.
What is the bonds’ coupon rate?
A) 6%
B) 7%
C) 8%
D) 9%
28) You are analyzing the purchase of new equipment. Since you are not an expert on
this type of equipment, you hire a consulting firm to make recommendations. The
consultant charged you $1,500 and recommended the purchase of the latest model from
ACME Corp. of America. The equipment costs $80,000, and it will cost another
$10,000 to modify it for special use by your firm. The equipment will be depreciated on
a straight-line basis over six years with no salvage value. You expect the equipment will
be sold after three years for $28,000. Use of the equipment will require an increase in
your company’s net working capital of $4,000, but this $4,000 will be recovered at the
end of year three. The use of the equipment will have no effect on revenues, but it is
expected to save the firm $50,000 per year in before-tax operating costs. Your
company’s marginal tax rate is 35%. What is the terminal cash flow for this project?
A) ($17,000)
B) $24,500
C) $33,950
D) $37,950
29) A financial advisor tells you that you can make your child a millionaire if you just
start saving early. You decide to put an equal amount each year into an investment
account that earns 7.5% interest per year, starting on the day your child is born. How
much would you need to invest each year (rounded to the nearest dollar) to accumulate
a million for your child by the time he is 35 years old? (Your last deposit will be made
on his 34th birthday.)
A) $6,525
B) $7,910
C) $12,500
D) $20,347
30) The ________ is the premium to compensate for the price change expected to occur
over the life
of the bond or investment instrument.
A) inflation-risk premium
B) maturity premium
C) real risk-free interest rate premium
D) default-risk premium
31) Quantum, Inc. declared a $2 per share dividend on October 1. The date of record is
October 20th, the ex-dividend date is October 18th, and the payment date is October
31st. Mitchell owns a share of stock on October 1. Mitchell sells his share to Gene on
October 18th, Gene sells the share to Dimitri on October 20th, and Dimitri sells the
share to Hank on October 30th. Who will receive the dividend?
A) Mitchell
B) Gene
C) Dimitri
D) Hank
32) You are going to pay $100 into an account at the beginning of each of the next 40
years. At the beginning of the 41st year you buy a 30 year annuity whose first payment
comes at the end of the 41st year (the accounts earn 12%). How much will you receive
at the end of the 41st year (i.e. the first annuity payment). Round to nearest $100.
A) $93,000
B) $7,800
C) $11,400
D) $10,700
33) Table 4-3
Emery Corporation
Based on the information in Table 4-3, the operating return on total assets is
A) 55.62%
B) 10.06%
C) 44.74%
D) 33.33%
34) It is January 1st and Darwin Davis has just established an IRA (Individual
Retirement Account). Darwin will put $1000 into the account on December 31st of this
year and at the end of each year for the following 39 years (40 years total). How much
money will Darwin have in his account at the end of the 40th year? Assume that the
account pays 12% interest compounded annually and round to nearest $1000.
A) $93,000
B) $766,000
C) $767,000
D) $850,000
35) Charlie wants to retire in 15 years, and he wants to have an annuity of $50,000 a
year for 20 years after retirement. Charlie wants to receive the first annuity payment the
day he retires. Using an interest rate of 8%, how much must Charlie invest today in
order to have his retirement annuity (round to nearest $10).
A) $167,130
B) $200,450
C) $256,890
D) $315,240
36) A lockbox system can reduce all of the following elements of float EXCEPT
A) mail float
B) processing float
C) transit float
D) disbursing float
37) All of the following are false EXCEPT
A) the mail float is caused by the time lapse from the moment a firm receives the check
and begins to process it
B) the processing float is caused by the time necessary for a bank to process the check
C) the transit float is caused by the time lapse from the moment a customer mails a
check until the firm begins to process it
D) the disbursing float derives from the fact that funds remain in a firm’s bank account
until its payment check is cleared through the banking system
38) You charged $1,000 on your credit card for Christmas presents. Your credit card
company charges you 26% annual interest, compounded monthly. If you make the
minimum payments of $25 per month, how long will it take ( to the nearest month) to
pay off your balance?
A) 94 months
B) 79 months
C) 54 months
D) 40 months
39) Based on the information in Table 4-1, the fixed asset turnover ratio is
A) 1.69
B) 2.17
C) 4.39
D) 4.80
40) The break-even point is equal to
A) fixed costs divided by (sales price per unit variable cost per unit)
B) fixed costs divided by unit variable costs
C) fixed costs divided by selling price per unit
D) (sales price per unit variable cost per unit) times the fixed costs
41) Which of the following does NOT provide an indication of liquidity?
A) quick ratio
B) debt ratio
C) inventory turnover
D) average collection period
42) Your company is considering a project with the following cash flows:
Initial Outlay = $3,000,000
Cash Flows Year 1-8 = $547,000
Compute the internal rate of return on the project.
A) 6.38%
B) 8.95%
C) 9.25%
D) 12.34%