Based on the period of 1926 through 2014, _____ have tended to outperform other
securities over the long-term.
A. U.S. Treasury bills
B. large-company stocks
C. long-term corporate bonds
D. small-company stocks
E. long-term government bonds
Answer:
One advantage of a partnership is the:
A. personal liability for all firm debts.
B. limited life of the entity.
C. limited liability protection for all of the partners.
D. relatively low formation cost.
E. division of management control between general and limited partners.
Answer:
A change in the corporate charter making it more difficult for the firm to be acquired by
increasing the percentage of shareholders that must approve a merger offer is called a:
A. supermajority amendment.
B. standstill agreement.
C. greenmail provision.
D. poison pill amendment.
E. white knight provision.
Answer:
The Steel Pony Company, a maker of all-terrain recreational vehicles, is having
financial difficulties due to high interest payments. The estimated “going concern”
value of the firm is $3.2 million. The senior debt claim is on all fixed assets. The
balance sheet of the firm has current assets of $1.1 million, fixed assets of $2.9 million,
senior debt of $2.2 million, subordinated debt of $1.8 million, with the remainder
allocated to stockholders’ equity.
Assume the firm files for formal bankruptcy and sells the firm for the estimated “going
concern” value and nets 92 percent of that amount after administrative costs, wages, and
taxes are paid. What amount will be distributed to the subordinated debtholders?
A. $709,000
B. $721,000
C. $744,000
D. $811,000
E. $687,000
Answer:
Wilson’s Market is considering two mutually exclusive projects that will not be
repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for
Project B. Project A has an initial cost of $54,500, and should produce cash inflows of
$16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial
cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for
Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and
why?
A. Project A; because its NPV is positive while Project B’s NPV is negative
B. Project A; because it has the higher required rate of return
C. Project B; because it has the largest total cash inflow
D. Project B; because it has a negative NPV which indicates acceptance
E. neither project; because neither has an NPV equal to or greater than its initial cost
Answer:
You invested in long-term corporate bonds and earned 6.1 percent. During that same
time period, large-company stocks returned 12.6 percent, long-term government bonds
returned 5.7 percent, U.S. Treasury bills returned 4.2 percent, and inflation averaged 3.8
percent. What average risk premium did you earn?
A. 1.9%
B. 2.3%
C. 1.3%
D. .4%
E. 6.5%
Answer:
One of the indirect costs of bankruptcy is the incentive toward underinvestment.
Underinvestment generally would result in:
A. the firm selecting all projects with positive NPVs.
B. the firm turning down positive NPV projects that would clearly be accepted if the
firm were all-equity financed.
C. bondholders contributing the full amount of any new investment, but both
stockholders and bondholders sharing in the benefits of those investments.
D. shareholders making decisions based on the best interests of the bondholders.
E. the firm accepting more projects than it would if the probability of bankruptcy was
ignored.
Answer:
Sinking fund arrangements are least apt to contain which one of these requirements?
A. a deferred provision for the first few years
B. a one-time repayment of the entire principal and interest at maturity
C. a balloon payment
D. equal payments of principal over the life of the bond
E. sufficient payments over the bonds’ life to retire the entire bond issue
Answer:
Project X has an initial cost of $20,000 and a cash inflow of $25,000 in Year 3. Project
Y costs $40,700 and has cash flows of $12,000, $25,000, and $10,000 in Years 1 to 3,
respectively. The discount rate is 6 percent and the projects are mutually exclusive.
Based on the individual project’s IRRs you should accept Project _____; based on NPV
you should accept Project ____; the final decision should be to accept Project ____.
A. Y; Y; Y
B. Y; X; X
C. X; Y; Y
D. X; X; X
E. Y; X: Y
Answer:
Which one of the following is a liquidity ratio?
A. quick ratio
B. cash coverage ratio
C. total debt ratio
D. EV multiple
E. times interest earned ratio
Answer:
At a production level of 5,600 units, a project has total costs of $89,000. The variable
cost per unit is $11.20. What is the amount of the total fixed costs?
A. $24,126
B. $26,280
C. $27,090
D. $27,820
E. $28,626
Answer:
BC “n D just paid its annual dividend of $.60 a share. The projected dividends for the
next five years are $.30, $.50, $.75, $1.00, and $1.20, respectively. After that time, the
dividends will be held constant at $1.40. What is this stock worth today at a discount
rate of 14 percent?
A. $7.56
B. $10.60
C. $8.02
D. $9.28
E. $9.43
Answer:
The bottom-up approach to computing the operating cash flow applies only when:
A. both the depreciation expense and the interest expense are equal to zero.
B. the interest expense is equal to zero.
C. the project is a cost-cutting project.
D. no fixed assets are required for the project.
E. taxes are ignored and the interest expense is equal to zero.
Answer:
You need some money today and the only friend you have that has any is your “miserly’
friend. He agrees to loan you the money you need, if you make payments of $20 a
month for the next six months. In keeping with his reputation, he requires that the first
payment be paid today. He also charges you 1.5% interest per month. How much total
interest does he expect to earn?
A. $3.94
B. $4.35
C. $1.34
D. $3.63
E. $5.96
Answer:
A stop order to sell at $46 will be executed:
A. at a price of $46 at the end of the day on which the order was placed.
B. at $46 following the first trade with a price below $46.
C. as a market order once a trade occurs at a price of $46 or less.
D. immediately at a price of $46.
E. as a market order once a trade occurs at a price of $46 or higher.
Answer:
Which one of the following will not affect the operating cycle?
A. decreasing the payables turnover from 7 times to 6 times
B. increasing the days sales in receivables
C. decreasing the inventory turnover rate
D. increasing the average receivables balance
E. decreasing the credit repayment times for the firm’s customers
Answer:
Uptown Bank provides lockbox services. They estimate that you can reduce your
average mail time by 2.2 days and your combined clearing and processing time by .75
days by implementing their system. Your firm receives 65 checks a day with an average
value of $298 each. The current T-Bill rate is .01 per day. Assume a 365-day year.
Uptown Bank will charge your firm $.30 per check. What is the annual net savings from
installing this system?
A. $3,215.84
B. $1,022.15
C. $548.32
D. “$5,031.84
E. “$3,218.28
Answer:
If a project is assigned a required rate of return of zero, then:
A. the timing of the project’s cash flows has no bearing on the value of the project.
B. the project will always be accepted.
C. the project will always be rejected.
D. whether the project is accepted or rejected will depend on the timing of the cash
flows.
E. the project can never add value for the shareholders.
Answer:
Assume that over the past 85 years, the total annual returns on large-company common
stocks averaged 12.3 percent, small-company stocks averaged 17.4 percent, long-term
government bonds averaged 5.7 percent, and U.S. T-bills averaged 3.8 percent. What
was the average risk premium earned by long-term government bonds, and
small-company stocks respectively?
A. 1.8%; 13.3%
B. 1.9%; 13.6%
C. 4.4%; 11.9%
D. 1.9%; 5.1%
E. -6.6; 5.1%;
Answer:
The written agreement between a corporation and its bondholders might contain a
prohibition against paying dividends in excess of current earnings. This prohibition is
an example of a(n):
A. maintenance of security provision.
B. collateral restriction.
C. affirmative indenture.
D. restrictive covenant.
E. put provision.
Answer:
The length of time between the acquisition of inventory and the collection of cash from
receivables is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.
Answer:
An option that may be exercised at any time up to and including its expiration date is
called a(n) _____ option.
A. futures
B. Asian
C. Bermudan
D. European
E. American
Answer:
Which one of these conditions must exist if the standard deviation of a portfolio is to be
less than the weighted average of the standard deviations of the individual securities
held within that portfolio?
A. β< 1
B. Rm> 1
C. ρ< 1
D. β = 0
E. ρ >1
Answer:
Assume the price of a stock rises upon the announcement that the firm’s chief executive
officer (CEO) was killed in a freak accident. This market reaction is most indicative of
the:
A. uncertainty of the firm’s future existence.
B. random nature of stock price movements.
C. expected management turmoil that is anticipated.
D. underperformance of that CEO.
E. sadness of hearing the news.
Answer:
Stock A has a beta of 1.2, Stock B’s beta is 1.46, and Stock C’s beta is .72. If you invest
$2,000 in Stock A, $3,000 in Stock B, and $5,000 in Stock C, what will be the beta of
your portfolio?
A. 1.008
B. 1.014
C. 1.038
D. 1.067
E. 1.127
Answer:
A firm currently has a 36-day cash cycle. Assume the firm changes its operations such
that it decreases its receivables period by 4 days, decreases its inventory period by 1
day, and decreases its payables period by 2 days. What will the length of the cash cycle
be after these changes?
A. 31 days
B. 35 days
C. 33 days
D. 37 days
E. 38 days
Answer:
The external funds needed (EFN) equation projects the addition to retained earnings as:
A. PM Δ Sales.
B. PM Δ Sales (1 – d).
C. PM Projected sales (1 – d).
D. Projected sales (1 – d).
E. PM Projected sales.
Answer:
Wilt has a consulting contract with a firm that states that he will receive annual
payments of $50,000 a year for five years with the first payment due today. What is the
current value of this contract if the discount rate is 8.4 percent?
A. $214,142.50
B. $201,867.47
C. $195,618.19
D. $197,548.43
E. $224,267.10
Answer:
One purpose of identifying all of the incremental cash flows related to a proposed
project is to:
A. isolate the total sunk costs so they can be evaluated to determine if the project will
add value to the firm.
B. eliminate any cost which has previously been incurred so that it can be omitted from
the analysis of the project.
C. make each project appear as profitable as possible for the firm.
D. include both the proposed and the current operations of a firm in the analysis of the
project.
E. identify any and all changes in the cash flows of the firm for the past year so they
can be included in the analysis.
Answer:
A car dealer is willing to lease you a car for $319 a month for 60 months. Payments are
due on the first day of each month starting with the day you sign the lease contract. If
your cost of money is 4.9 percent, compounded monthly, what is the current value of
the lease?
A. $17,882.75
B. $17,906.14
C. $17,014.34
D. $16,235.42
E. $16,689.54
Answer:
Firms generally:
A. set high target payout ratios when they are relatively young.
B. decrease their dividends as soon as they expect earnings to decline.
C. allow their dividend changes to lag their earnings changes.
D. set short-term target ratios of dividends to earnings.
E. set the dividend growth rate equal to the firm’s earnings growth rate.
Answer:
Which one of these terms is used to refer to short-term debt?
A. unfunded debt
B. allocated debt
C. notes
D. bonds
E. expensed debt
Answer:
You are expecting a payment of Can$138,000 two years from now. The risk-free rate of
return is 2.7 percent in Canada and 3.1 percent in the U.S. The current exchange rate is
Can$1.1415 = $1. Approximately how much will the payment 2 years from now be
worth in U.S. dollars?
A. $148,319
B. $156,271
C. $121,867
D. $122,300
E. $144,169
Answer:
Money market preferred stock is a relatively new financial instrument. Explain why this
product has such appeal to business firms.
Answer:
One thing lenders sometimes require when loaning money to a small corporation is an
assignment of the common stock as collateral on the loan. Then, if the business fails to
repay its loan, the ownership of the stock certificates can be transferred directly to the
lender. Why might a lender want such an assignment? What advantage of the corporate
form of organization comes into play here?
Answer:
List and briefly discuss the advantages and disadvantages of the internal rate of return
(IRR).
Answer:
Most financial experts will agree that net present value is the best capital budgeting
method. Explain why this is so and also explain how even NPV can be unreliable when
projecting project results.
Answer:
Explain the rationale behind the statement that equity is a call option on the firm’s
assets. When would a shareholder allow the call to expire?
Answer:
Identify the three primary characteristics of a restrictive short-term financial policy.
Answer:
Assume you are comparing two stocks that are identical in every way except that one
stock pays dividends and the other does not. How would you expect this difference to
affect the annual performance of the dividend-paying stock as compared to the
non-dividend-paying stock?
Answer:
Tobi owns a perpetuity that will pay $1,500 a year, starting one year from now. He
offers to sell you all of the remaining payments after the next 25 payments have been
paid. What price should you offer him for payments 26 onward if you desire a rate of
return of 8 percent? What does your offer price illustrate about the value of
perpetuities?
Answer:
Explain the use of real and nominal discount rates in discounting cash flows. Which is
used more often and why?
Answer:
Answer:
Describe the foreign currency and home currency approaches to capital budgeting.
Which is better? Which approach would you recommend a U.S. firm use?
Answer:
In working capital management, there are some actions that increase or decrease cash.
What are some of the items that increase and decrease the cash account, respectively?
Answer:
Why are warrants and convertibles issued?
Answer:
Explain the half year convention used in MACRS depreciation.
Answer:
In a multi-factor model, explain what a factor represents and the role that beta plays in
relation to factors. How do factors and betas affect the actual return?
Answer: