1) The risk that remains in a stock portfolio after efforts to diversify is known as unique
risk.
2) The cost of holding inventory is the interest paid on the money used to buy the
inventory.
3) Other things equal, an increase in average accounts receivable will increase a firm’s
return on assets.
4) The decision to acquire fixed assets is unrelated to the current level of excess
capacity.
5) Optimal inventory levels are lower when carrying costs are high, and are higher
when the cost of restocking inventories is high.
6) Financial markets and intermediaries allow investors and businesses to reduce and
reallocate risk.
7) A company that sells $5 million of marketable securities for cash will see no change
in its net working capital.
8) A market index is used to measure performance of a broad-based portfolio of stocks.
9) A callable bond gives the issuer a potentially valuable option in the case of changing
interest rates.
10) According to the capital asset pricing model, expected rates of return for all
securities and all portfolios lie on the capital market line.
11) The better the risk management policies, the less chance that the firm will incur
numerous costs of distress.
12) Diversification decreases the variability of both unique and market risk.
13) Banks will not usually lend the full value of the assets that are used as security. The
safety margin is likely to be even larger in the case of loans that are secured by
inventory.
14) Shelf registration is a procedure that allows firms to file several registration
statements for one issue of the security.
15) At each point in time all securities of the same risk are priced to offer the same
expected rate of return.
16) An asset in the MACRS 5-year class life will have depreciation expense in 6
different years.
17) The project cost of capital depends on how the capital is used.
18) If shareholders do not like the policies that management pursues, their easiest
solution is to vote in a different board of directors.
19) If the interest rate of one country increases, then the value of that country’s currency
increases in the forward market.
20) Accurate capital budgeting analysis depends on total cash flows as opposed to
incremental cash flows (i.e., the difference between cash flow with project and cash
flow without project).
21) Those who benefit from the interest tax shield are:
A.debtholders
B.equity holders
C.both debtholders and equity holders
D.only the firm’s customers
22) The term “capital structure” refers to:
A.the manner in which a firm obtains its long-term sources of funding
B.the length of time needed to repay debt
C.whether the firm invests in capital budgeting projects
D.which specific assets the firm should invest in
23) Which of the following statements regarding “taxation of dividends and capital
gains under current tax law” is incorrect (assuming that the marginal tax rate for a large
corporation is 35%)?
A.For-profit corporations have a tax reason to prefer dividends
B.Corporations pay corporate income tax on only 30% of any dividends received
C.The effective tax rate on dividends received by large corporations is 35% of the
marginal corporate tax rate
D.Corporations have to pay a 35% tax on the full amount of any realized capital gain
24) A firm reports a net profit margin of 10.0% on sales of $3 million when ignoring the
effects of financing. If taxes are $200,000, how much is EBIT?
A.$100,000
B.$300,000
C.$500,000
D.$800,000
25) An interest rate that has been annualized using compound interest is termed the:
A.simple interest rate
B.annual percentage rate
C.discounted interest rate
D.effective annual interest rate
26) Common stock can be valued using the perpetuity valuation formula if the:
A.discount rate is expected to remain constant
B.dividends are not expected to grow
C.growth rate in dividends is not constant
D.investor does not intend to sell the stock
27) New projects or products can provide positive indirect effects as well as negative
effects. Which of the following appears to be a positive indirect effect?
A.The new, efficient machine uses less electricity
B.Orders of your complementary products increase
C.The project has a positive NPV
D.Accelerated methods of depreciation can be used
28) Which of the following statements is true regarding repurchase agreements?
A.Their maturity is greater than 1 year
B.They are an unsecured form of borrowing
C.U.S. Treasury securities serve as their collateral
D.They make explicit, rather than implicit, interest payments
29) The observation that cash-rich firms often use the funds to diversify rather than
increase dividends indicates that:
A.diversification is too costly for individuals
B.growth is often valued for the sake of growth alone
C.diversification is synergistic
D.dividend-pricing models are of questionable value
30) When the overall market experiences a decline of 8%, an investor with a portfolio
of aggressive stocks will probably experience:
A.portfolio losses of less than 8%
B.portfolio losses greater than 8%
C.portfolio gains of less than 8%
D.portfolio gains greater than 8%
31) If a firm with an asset base of $3 million recently added $150,000 to retained
earnings after a dividend payment of $100,000, then its internal growth rate is:
A.1.67%
B.3.33%
C.5.00%
D.8.33%
32) In the calculation of rates of return on common stock, dividends are _______ and
capital gains are _____.
A.guaranteed; not guaranteed
B.guaranteed; guaranteed
C.not guaranteed; not guaranteed
D.not guaranteed; guaranteed
33) Which of the following option traders receive, rather than pay, a premium?
A.Option sellers
B.Option buyers
C.Both option sellers and buyers
D.Neither buyers nor sellers receive premiums
34) A project with higher than average risk offers an expected return of 18%. Which
statement is correct if the company’s opportunity cost of capital is 12% and the project’s
opportunity cost of capital is 15%?
A.Project NPV is positive; it should be accepted
B.Project NPV is negative; it should be rejected
C.Project NPV is positive but it should be rejected
D.Project NPV is negative but it should be accepted
35) Approximately how long must one wait (to the nearest year) for an initial
investment of $1,000 to triple in value if the investment earns 8% compounded
annually?
A.9 years
B.14 years
C.22 years
D.25 years
36) If the pro forma balance sheet shows that total assets must increase by $400,000
while retaining a debt-equity ratio of .75 then:
A.debt must increase by $300,000
B.equity must increase by the full $400,000
C.debt must increase by $171,429
D.equity must increase by $100,000
37) Assume the total expense for your current year in college equals $20,000.
Approximately how much would your parents have needed to invest 21 years ago in an
account paying 8% compounded annually to cover this amount?
A.$952.00
B.$1,600.00
C.$1,728.00
D.$3,973.00
38) Which of the following is true for a firm having a stock price of $42, an expected
dividend of $3, and a sustainable growth rate of 8%?
A.It has a required return of 15.14%
B.It has a dividend payout ratio of 37.5%
C.It has an ROE of 7.14%
D.It has a plowback rate of 7.14%
39) The option for a firm to expand future production has value because:
A.future production will be profitable
B.the option requires no investment today
C.the future holds uncertainty
D.today’s production costs are lower than in the future
40) A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and
$500,000 depreciation would show what accounting profit with sales of $3 million?
Ignore taxes.
A.Zero loss
B.$370,000 loss
C.$666,667 loss
D.$800,000 loss
41) What is the yield to maturity on Dotte Inc.’s bonds if its after-tax cost of debt is
10% and its tax rate is 35%?
A.6.50%
B.13.50%
C.15.38%
D.16.42%
42) A parcel of corporate land was recently dedicated as the new plant site. What cost
allocation should the land receive, based on the following: original cost of $200,000,
market value of $300,000, net book value of $200,000, a recent offer to purchase for
$250,000.
A.$200,000
B.$250,000
C.$275,000
D.$300,000
43) What would you estimate to be the required rate of return for equity investors if a
stock sells for $40.00 and will pay a $4.40 dividend that is expected to grow at a
constant rate of 5%?
A.7.6%
B.12.0%
C.12.6%
D.16.0%
44) Which of the following concerns is likely to be most important to portfolio
investors seeking diversification?
A.Total volatility of individual securities
B.Standard deviation of individual securities
C.Correlation of returns between securities
D.Achieving the risk-free rate of return
45) Which of the following presents the correct relationship? As the coupon rate of a
bond increases, the bond’s:
A.face value increases
B.current price decreases
C.interest payments increase
D.maturity date is extended
46) What credit decision is appropriate for a potential customer that offers an 80%
chance of paying on a $10,000 (present value) sale that has an 80% (present value)
cost?
A.Grant credit since expected profit is $3,200
B.Grant credit since expected profit is $800
C.Refuse credit since expected profit is zero
D.Refuse credit since expected loss is $3,000
47) Convertible bonds resemble a combination of what two types of securities?
A.Investment grade bonds and junk bonds
B.Bonds and common stock
C.Bonds and warrants
D.Bonds and preferred stock
48) Which of the following is least likely to provide a motivation for vertical
integration?
A.A continuous source of raw materials
B.A desire to spread fixed costs across more output
C.Access to an efficient distribution channel
D.Acquisition of an established customer base
49) The opportunity cost of an asset:
A.should be depreciated annually
B.can differ depending on market conditions
C.is typically ignored in capital budgeting
D.is important only for parcels of land
50) When the firm has a high retention ratio, thus paying low dividends, the dividend is
a by-product of what kind of decision?
A.Borrowing
B.Debt policy
C.Financing
D.Capital budgeting
51) The present value at any given discount rate of the depreciation tax shield is:
A.equal for all depreciation methods
B.higher with MACRS than straight-line depreciation
C.higher for the 10th year than the 7-year recovery period class
D.likely to increase annually due to inflation
52) Which of the following statements is correct about banker’s acceptances?
A.They are equivalent to a sight draft
B.They represent the norm for installment sales
C.The bank guarantees payment of the invoice
D.The bank retains title to the merchandise
53) Which of the following is not generally considered a benefit of hedging?
A.It reduces one or more aspects of business risk
B.It allows prices to be locked in advance
C.The costs of hedging are paid by the speculators
D.It can stabilize profits
54) Why is the value of a call option said to increase as the interest rate increases?
A.The stock seller must pay the call owner more interest
B.The present value of the strike price is reduced
C.As interest rates increase, stock prices increase
D.Interest rate increases reduce the option premium
55) When Patricia sells her General Motors common stock at the same time that Brian
purchases the same amount of GM stock, GM receives:
A.the dollar value of the transaction
B.the dollar amount of the transaction, less brokerage fees
C.only the par value of the common stock
D.nothing
56) At what point is the payoff from owning a call option on a stock greater than the
payoff from owning the stock itself?
A.When stock price exceeds strike price at expiration
B.When strike price exceeds stock price at expiration
C.When stock price equals strike price at expiration
D.Call payoff never exceeds stock payoff
57) The goal of managing working capital, such as inventory, should be to minimize
the:
A.costs of carrying inventory
B.opportunity cost of capital
C.aggregate of carrying and shortage costs
D.amount of spoilage or pilferage
58) ABC Corp. stock is selling for $30 per share when a 10% stock dividend is
declared. If you own 100 shares of ABC Corp. then you will receive:
A.$3
B.$3 times 100 shares = $300
C.$300 plus 10 shares of ABC Corp
D.10 shares of ABC Corp
59) Which of the following is correct concerning real interest rates?
A.Real interest rates are constant
B.Real interest rates must be positive
C.Real interest rates must be less than nominal interest rates
D.Real interest rates, if positive, indicate increased purchasing power
60) “Since internal funds provide the bulk of industry’s needs for capital, the securities
markets serve little function.” Does the speaker have a point?
61) Discuss the market’s reaction to new stock issues.
62) Percentage of sales models usually assume that costs, fixed assets, and working
capital all increase at the same rate as sales. When do you think that these assumptions
do not make sense? Would you feel happier using a percentage of sales model for
short-term or long-term planning?
63) Discuss the statement, “Money has a time value.”
64) Would you prefer a savings account that paid 7% interest, compounded quarterly,
over an account that paid 7.5% with annual compounding if you had $1,000 to deposit?
Would the answer change if you had $100,000 to deposit?