1) The information effect hypothesis implies that increasing dividends provides a more
credible signal of higher future earnings than does management’s assertion that future
earnings will be higher.
2) With international investing, unlike domestic investing, exchange rate risk could
cause a marginally-positive-NPV project to be rejected due to the additional risk.
3) If the tax rate on dividends and the tax rate on capital gains are the same, then
investors are indifferent to dividend policy.
4) The minimum denomination of U.S. Treasury bills is $100,000.
5) A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.
6) Accounting profits, adjusted for taxes and differences in accounting methods,
provide the best measure of relevant cash flows for capital budgeting purposes.
7) Only purely domestic firms that buy all of their inputs and sell all of their outputs in
their home countries are unaffected by events in international financial markets.
8) Corporations that are heavily committed to investments in fixed assets that are
expected to produce cash flow over many years generally favor long-term debt to the
extent that they borrow.
9) A project’s contribution to firm risk is relevant for undiversified investors or when
bankruptcy costs exist.
10) A company that sells common stock and uses the money to pay off a loan is
increasing its use of financial leverage.
11) Common-sized income statements are used to compare companies that have the
same amount of revenues.
12) Fixed costs per unit vary inversely with production output.
13) Discretionary financing needed will be zero when the company’s sales growth rate
is zero.
14) The ex-dividend date is typically two days prior to the payment date of the
dividend.
15) There is no difference on an economic basis between a stock dividend and a stock
split.
16) An increase in a corporation’s marginal tax rate will decrease the corporation’s cost
of debt, but have no impact on its cost of preferred stock or cost of common equity.
17) One drawback of the payback method is that some cash flows may be ignored.
18) The effective cost to the borrower of an unsecured bank loan is increased if a
compensating balance is required.
19) Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company’s
dividends are expected to grow at a constant rate of 8.5% indefinitely. The required rate
of return on this stock is 15.5%. You observe a market price of $78.50 for the stock.
Should you purchase this stock?
A) No, the market price is above the intrinsic value of the stock
B) Yes, the market price is below the intrinsic value of the stock
C) No, the growth rate in dividends is too far below the required return
D) Yes, but only if you can keep the stock for at least 5 years
20) Rawhide Outfitters had projected its sales for the first six months of 2012 to be as
follows:
Jan.$ 50,000April$180,000
Feb.$ 60,000May$240,000
Mar.$100,000June$240,000
Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior
to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the
month following the sale, and the remaining 20% in the second month following the
sale. Total other cash expenses are $40,000/month. The company’s cash balance as of
March 1st, 2012 is projected to be $40,000, and the company wants to maintain a
minimum cash balance of $15,000. Excess cash will be used to retire short-term
borrowing (if any exists). The firm has no short-term borrowing as of March 1st, 2012 .
Assume that the interest rate on short-term borrowing is 1% per month. What was
Rawhides’ projected loss for March?
A) $184,000
B) $110,000
C) $84,000
D) none of the above
21) How is preferred stock similar to common stock?
A) Preferred dividend payments usually have unlimited growth potential
B) Investors cannot sue a corporation for the non-payment of dividends
C) Both preferred and common stockholders have voting control of a firm
D) Preferred stock dividends and common stock dividends are fixed
22) A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for
$965. The yield to maturity is
A) 10.49%
B) 10.00%
C) 8.87%
D) 6.50%
23) Biff deposited $9,000 in a bank account, and 10 years later he closes out the
account, which is worth $18,000. What annual rate of interest has he earned over the 10
years?
A) 6.45%
B) 7.18%
C) 9.10%
D) 10.0%
24) The three basic types of issues addressed by the study of finance are
A) capital budgeting, capital structure decisions, and working capital management
B) capital budgeting, working capital management, and investment analysis
C) capital structure decisions, working capital management, and sustained profitability
D) capital budgeting, investment analysis, and cash management
25) A sales forecast for the coming year would reflect
A) any past trend which is expected to continue
B) the influence of any events that might materially affect that trend
C) both A and B
D) neither A nor B
26) How much would you be willing to pay (rounded to the nearest dollar) for a 20-year
ordinary annuity if the payments are $4,500 per year and you want to earn a rate of
return equal to 5.5% per year?
A) $84,500
B) $63,445
C) $56,734
D) $53,777
27) What was the average annual rate of return on long-term corporate bonds during the
period 1926 to 2011?
A) 8.3%
B) 6.5%
C) 6.2%
D) 7.00%
28) A high degree of variability in a firm’s earnings before interest and taxes refers to
A) business risk
B) financial risk
C) financial leverage
D) operating leverage
29) If you want to have $3,575 in 29 months, how much money must you put in a
savings account today? Assume that the savings account pays 12% and it is
compounded monthly (round to nearest $1).
A) $3,147
B) $3,008
C) $2,679
D) $2,438
30) According to the clientele effect
A) companies should have dividend payout ratios of either 100% or 0%
B) companies should avoid making capricious changes in their dividend policies
C) companies should change their dividend policies to please their target group of
investors
D) even if capital markets are perfect, dividend policy still matters
31) Table 4-4
Wes Donnell, Inc.
Balance Sheet
Wes Donnell, Inc.
Income Statement
For the year ended December 31, 2010
In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010 . What is Wes
Donnell’s retained earnings balance for 2010?
A) $10,000
B) $8,000
C) $19,600
D) $2,600
32) Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an
accounts receivable balance of $100,000, what is Jeter’s average daily credit sales?
A) $745.23
B) $1,232.88
C) $22,222.22
D) $1,893.45
33) Given the following information on S & G Inc.’s capital structure, compute the
company’s weighted average cost of capital.
Type ofPercent ofBefore-Tax
CapitalCapital StructureComponent Cost
Bonds40%7.5%
Preferred Stock5%11%
Common Stock (Internal Only)55%15%
The company’s marginal tax rate is 40%.
A) 13.3%
B) 7.1%
C) 10.6%
D) 10%
34) Which of the following statements would be consistent with the residual dividend
theory?
A) Wealthy investors prefer corporations to defer dividend payments because capital
gains produce greater after-tax income
B) Dividends are more certain than capital gains
C) Dividends should only be paid if a firm has profits in excess of the amount needed to
finance the current year’s capital investments
D) Investors are indifferent whether stock returns come from dividend income or capital
gains income
35) Table 4-1
Stewart Company
Balance Sheet
The current ratio is
A) 1.92
B) 1.98
C) 2.86
D) 2.88
36) A bond with a $1,000 face value and a 10 percent annual coupon rate matures in 15
years.
a.Determine the value of the bond to a friend of yours with a required rate of return of
13%.
b.A zero coupon bond with similar risk is selling for $180. The bond has a face value of
$1,000 and matures in 15 years. Your friend asks you which bond she should invest in,
the zero coupon bond or the bond in part (a). Which bond do you recommend, and
why? Assume the market price of the bond in part (a) is $820.
37) If you put $200 in a savings account at the beginning of each year for 10 years and
then allow the account to compound for an additional 10 years, how much will be in the
account at the end of the 20th year? Assume that the account earns 10% and round to
the nearest $100.
A) $8,300
B) $9,100
C) $8,900
D) $9,700
38) Which of the following should be excluded in an analysis of a new project’s cash
flows?
A) additional investment in fixed assets
B) additional investment in accounts receivable
C) additional investment in inventory
D) additional interest expenses on debt financing
39) What information does a firm’s statement of cash flows provide to the viewing
public?
A) a report of investments made and their cost for a specific period of time
B) a report documenting a firm’s cash inflows and cash outflows from operating,
financing, and investing activities for a defined period of time
C) a report of revenues and expenses for a defined period of time
D) an itemization of all of a firm’s assets, liabilities, and equity for a defined period of
time
40) Which of the following statements about the net present value is TRUE?
A) It produces a percentage result that is easy to describe
B) It has an inadequate reinvestment assumption
C) It is likely that there will be more than one NPV for a project
D) It may be used to select among projects of different sizes
41) Three ways that savings can be transferred through the financial markets include all
of the following EXCEPT
A) direct transfer of funds
B) indirect transfer using the investment banker
C) indirect transfer using the venture capital firm
D) indirect transfer using the financial intermediary
42) Jay’s Lumber Supplies earns 2.5 percent on its investment in marketable securities.
A draft disbursing system has been proposed that will increase disbursement float by 4
days. Purchases next year are expected to total $18 million. Individual payments
average $1,000. Use a 365-day year.
a.If the draft system is adopted, what amount of funds can the firm expect to release
during the year?
b.If each issue draft costs the firm $0.30, should the draft system be adopted?
c.Should the firm consider any other factors?
43) Assume that an investor is offered a choice of a risk-free government bond or a
high-risk corporate stock. Further assume that the expected return is the same for both.
According to one of the axioms of finance, which investment would be chosen?
A) the corporate stock
B) the government bond
C) neither, the investor would be indifferent
D) none of the above
44) Marble Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The
return on the market portfolio is 15% and the risk free rate is 4%. According to CAPM,
what is the required rate of return on Collectible’s stock?
A) 37.5%
B) 31.5%
C) 26.5%
D) 23.5%
45) Which of the following statements is TRUE?
A) Short-term bonds have greater interest rate risk than do long-term bonds
B) Long-term bonds have greater interest rate risk than do short-term bonds
C) All bonds have equal interest rate risk
D) Interest rate risk is highest during periods of high interest rates
46) Which of the following statements is an example of a futures market transaction?
A) An investor purchases 100 shares of IBM hoping to sell it in two years for a profit
B) A company purchases an option to buy 1000 barrels of oil anytime between now and
the end of the year
C) A company agrees to purchase 1000 barrels of oil for delivery in six months at a
price of $70 per barrel
D) An executive has a portion of his current year salary deferred until he retires
47) A company with national sales but only one large manufacturing operation and one
administrative headquarters located in the same large northeastern city would most
likely use which of the following techniques for cash management?
A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) bankers’ acceptances
48) An aging schedule of accounts receivable aids the financial manager in determining
A) the amount of receivables that are past due
B) the average age of the customers
C) the receivables turnover
D) the average length of the discount period
49) What is diversifying among different kinds of assets known as?
A) portfolio funding
B) capital asset classification
C) asset allocation
D) multi-diversification
50) Which of the following is NOT an underlying assumption of the EOQ?
A) uniform demand
B) constant unit price
C) variable carrying cost
D) instantaneous delivery
51) The “threat hypothesis”
A) reduces management’s tendency to spend freely
B) encourages management to use debt to further their own interests
C) increases the agency problem
D) increases agency monitoring costs
52) 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
53) Operating return on assets (OROA) is equal to operating profit margin times total
asset turnover.
54) Voellers Upholstery Co. produces inexpensive leather chairs. The average selling
price for one of the chairs is $400. The variable cost per chair is $250. Voellers’ has
average fixed costs per year of $450,000.
a.What is the break-even point in units?
b.What is the break-even point in dollar sales?
c.What would be the operating profit or loss associated with the production and sale of
(1) 3,000 chairs, (2) 4,000 chairs?
55) Which of the following is NOT a source of unsecured short-term credit?
A) trade credit
B) a line of credit
C) floating lien
D) commercial paper
56) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%. The profitability index for Project A is
A) 1.27
B) 1.22
C) 1.17
D) 1.12