The capital structure is industry specific and not firm specific. That is, all firms in a
particular industry will have the same capital structure.
Financial risk is defined as the expected variation in EBIT.
In most companies, the level of working capital needed to operate efficiently varies
with sales.
A firm’s financial managers should always attempt to set a credit policy that will result
in no bad debts.
The balance sheet can be thought of as a listing of all of sources and uses of cash over a
specific period of time.
The term “yield” relates only to investments whose holding period extends beyond one
year, whereas “rate of return” typically relates to shorter-term investments.
An option is an obligation to take a certain course of action.
In Modigliani and Miller’s most basic model, the independence hypothesis, implies that
a firm cannot create value by manipulating capital structure.
A firm’s credit policy affects both its credit sales and its ACP.
Real interest rates have no inflation adjustments.
In a modern economy, consumer savings can be transferred to business investment by
means of financial instruments.
Through financial intermediaries, individuals invest directly in firms’ stocks and bonds.
In a favorable economic climate, at low to moderate levels of debt, investors value the
positive effects of leverage and almost ignore increases in risk.
The issuing corporation or government entity is usually involved in a secondary market
transaction.
The Degree of Financial Leverage(DFL) quantifies the effect of leverage by relating
relative changes in EBIT to relative changes in EPS.
Which of the following will ensure better capital budgeting decisions?
A.Ignoring or rejecting projects from people who may have an interest in their approval
B.Only accepting projects that have been proposed by the top management to reduce
unintentional biases
C.Independently verifying technical inputs received by individuals proposing the
projects
D.Using both time value based and non-time value based techniques to screen projects
when personal interest is suspected
Which of the following is not true regarding bonds?
A.Both principal and interest are paid to the investor
B.Bondholders are owners of the borrowing firm
C.Buying a bond means lending money
D.All of the above
Calculate the profitability index for a project with the following cash flows. Assume a
cost of capital of 10%
A.0.78
B.1.13
C.1.24
D.1.57
According to MM, if we ignore bankruptcy costs, an increase in financial leverage can
increase the value of the firm:
A.in a world without taxes.
B.if interest is tax-deductible.
C.if interest is not tax-deductible.
D.a and b
E.All of the above
What is the rate of return on an investment if you lend $1,000 and are repaid $1,254.70
two years later?
A.12%
B.25%
C.6%
D.18%
E.4%
Information about a credit applicant:
A.is rarely available.
B.can be obtained directly from the applicant.
C.is frequently exchanged among firms selling to the same customer through credit
bureaus.
D.cannot be obtained from commercial banks.
E.b and c
Which of the following defensive tactics is not appropriate before a takeover attempt is
underway?
A.Poison pills
B.Staggered election of directors
C.Golden parachutes
D.Greenmail
Waller Corporation has an $18 million revolving credit agreement with its bank at
prime plus 3%, based on a calendar year. It borrowed $3 million on June 1, when it
accessed the agreement for the first time. Prime is 8.75% and the bank’s commitment
fee is 1/4% annually. What bank charges will Waller incur for the month of June?
A.$262,500
B.$3,120
C.$32,496
D.$29,375
Financial markets connect:
A.production’s need for savings with consumption’s available money.
B.consumption’s need for money with production’s available savings.
C.production’s need for money with consumption’s available spending.
D.production’s need for money with consumption’s available savings.
What is the after-tax cash flow that results from the sale for $150,000 of a capital asset
that has a book value of $200,000, given a 40% tax rate?
A.$150,000
B.$130,000
C.$90,000
D.$170,000
E.$120,000
Little Giant is building a manufacturing plant that will require a cash outlay of
$300,000 for the initial purchase of a building, $450,000 for remodeling the first year,
and $710,000 for new equipment in the second year. If the firm’s cost of capital is 12
percent, what is the present value of the net investment at time 0?
A.$1,460,000
B.$1,132,070
C.$1,267,793
D.$300,000
Although the CAPM is intuitively appealing in that it relates risk and return in a
straightforward manner, the model’s predictive value is often challenged because:
A.statistical tests have not been conclusive in validating the relationship between beta
and return proposed by the CAPM.
B.the CAPM only addresses unsystematic risk, not market risk.
C.beta measures only the stock’s coefficient of business-specific risk.
D.All of the above
If a bond rating lowers, one can expect the bond€s yield to maturity to ____.
A.remain the same
B.increase
C.decrease
D.equal the coupon rate
Approximately what percent of earnings are paid out as dividends by U.S. companies?
A.20% – 30%
B.30% – 40%
C.40% – 50%
D.50% – 60%
E.60% – 70%
A high average collection period may indicate:
A.management’s willingness to quickly write-off questionable receivables.
B.customers are paying for purchases quickly.
C.a strict collection policy.
D.None of the above
Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each. Cost
of goods sold will be 40% of the sale price. Depreciation expense will be $3,000,
interest expense $2,500, and other expenses will be $4,000. Wessel’s tax rate is 20%.
What will Wessel Corp’s net income be for 2005?
A.$ 3,500
B.$ 6,800
C.$14,000
D.$16,400
E.$28,400
Capital markets deal in:
A.short- term stock.
B.short-term debt securities.
C.municipal bonds.
D.long -term debt and stock.
The degree of total leverage is equal to the degree of ____ multiplied by the ____.
A.operating leverage, variable cost ratio
B.financial leverage, variable cost ratio
C.operating leverage, degree of financial leverage
D.operating leverage, fixed cost ratio
Find the sales of the Sharkton Company using the following information:
Companies are sometimes able to show very rapid growth in EPS over a few years. This
often gets investors interested and they bid the stock’s price up. Suppose Contesco Inc.
has such a record over the last three years which have been very favorable in its
industry. At the same time, however, Contesco’s capital has gone from 20% to 80%
debt. What advice would you give to someone interested in buying Contesco stock?
You just borrowed $15,000 from a finance company to start a business. If you are
required to repay $16,800 interest and principal in one year, what is the nominal interest
rate that the finance company is charging? If inflation is 2.5%, what is the expected real
rate of interest?
TMK International just purchased equipment manufactured in Japan. The contract calls
for the payment of 120 million Japanese yen, due in 90 days. Assume the present
exchange rate is 109 yen per U.S. dollar, but rises to 112 yen per U.S. dollar in 90 days.
What is the U.S. dollar gain or loss if no hedge is taken?
Why may an analysis that makes even a rough estimate of the probability distribution of
project NPV or IRR be infinitely more valuable to management than a point estimate?
Why are scenario and especially decision tree analysis particularly valuable with regard
to this issue?
Which is harder, planning for a new or an existing business? Why?