1) Commercial paper is much more liquid than money-market mutual funds because
commercial paper is available to only the most creditworthy corporations.
2) The yield to maturity is the discount rate that equates the present value of the interest
and principal payments with the current market price of the bond.
3) Speculative cash balances are held to take advantage of uncertain profit-making
opportunities.
4) If fixed costs are $150,000, price per unit is $10, and variable cost per unit is $4, the
break-even point is 15,000 units.
5) Joe borrowed $10,000 at 10% per year and promised to pay it back in equal annual
installments at the end of each of the next 5 years. Joe’s payment will be $2,100
[($10,000/5) + ($10,000 10%).
6) Cash budgets do not provide reasonable predictions for asset requirements when the
asset purchases are lumpy.
7) Because poor credit-worthy customers may cause bad debt losses, credit sales to
them should not be allowed.
8) If a company’s inventory turnover increases from 8 to 10, then its cash conversion
cycle will also increase, i.e., get longer.
9) Capital structure is equal to financial structure minus current liabilities.
10) Common stock is considered a short-term security because it has no maturity date
and a long-term security is one with a maturity date of more than one year.
11) The characteristic line for any well-diversified portfolio is horizontal.
12) NPV is the most theoretically correct capital budgeting decision tool examined in
the text.
13) Seasonality causes comparability problems in ratio analysis. A common solution is
to use an average account balance as opposed to an ending account balance.
14) A way of managing a firm’s cash disbursements would be through
A) zero balance accounts
B) accounts receivable factoring
C) lockbox system
D) floating lien
15) Company A and Company B both report the same level of sales and net income.
Therefore
A) both A and B will report the same Earnings Per Share
B) both A and B will report the same Gross Profit Margin
C) both A and B will report the same Net Profit Margin
D) both A and C are TRUE
16) Executive compensation in the United States
A) is dominated by performance-based compensation that ensures fair and just pay for
corporate executives
B) is dominated by performance-based compensation designed to reduce agency
problems
C) cannot be linked to stock prices as this would create a conflict of interest with
existing shareholders
D) is well below levels in Europe and Asia
17) Glacier Inc. preferred stock has a 5% stated dividend percentage, and a $100 par
value. What is the value of the stock if your required rate of return is 6% per year?
A) $83.33
B) $94.05
C) $100.00
D) $30.00
18) Which of the following statements would be consistent with the dividend
irrelevance theory?
A) There is no relationship between a firm’s dividend policy and the value of its
common stock
B) Perfect capital markets are assumed to exist which allow investors to buy and sell
stock without incurring any transaction costs
C) Investors are indifferent whether stock returns come from dividend income or capital
gains income
D) All of the above
19) Money market funds
A) are tax exempt
B) typically invest in a diversified portfolio of short-term, high-grade debt instruments
C) are generally very profitable but fail to provide liquidity to the small investor
D) typically sell shares to the public in $25,000 denominations
20) Last National Bank is offering you a loan at 10%; payments on the loan are to be
made monthly. Credit Onion is offering you a loan where payments are to be made
semiannually; the rate on the loan is also 10%. Local Bank down the street is also
offering a loan at 10% where the payments are made quarterly. Which loan has the
lowest annual cost?
A) Last National Bank’s loan
B) Local Bank’s loan
C) Credit Onion’s loan
D) All of the loans will have the same annual cost.
21) Which of the following is TRUE of a zero coupon bond?
A) The bond makes no coupon payments
B) The bond sells at a premium prior to maturity
C) The bond has a zero par value
D) The bond has no value until the year it matures because there are no positive cash
flows until then
22) All the following variables are used in computing the cost of debt EXCEPT
A) maturity value of the debt
B) market price of the debt
C) number of years to maturity
D) risk-free rate
23) Baxter Inc. has a target capital structure of 30% debt, 15% preferred stock, and 55%
common equity. The company’s after-tax cost of debt is 7%, its cost of preferred stock
is 11%, its cost of retained earnings is 15%, and its cost of new common stock is 16%.
The company stock has a beta of 1.5 and the company’s marginal tax rate is 35%. What
is the company’s weighted average cost of capital if retained earnings are used to fund
the common equity portion?
A) 11.20%
B) 12.00%
C) 13.80%
D) 14.45%
24) The slope of the characteristic line of a security is that security’s Beta.
25) Project Alpha has an internal rate of return (IRR) of 15 percent. Project Beta has an
IRR of 14 percent. Both projects have a required return of 12 percent. Which of the
following statements is MOST correct?
A) Both projects have a positive net present value (NPV)
B) Project Alpha must have a higher NPV than Project Beta
C) If the required return were less than 12 percent, Project Beta would have a higher
IRR than Project Alpha
D) Project Beta has a higher profitability index than Project Alpha
26) Which of the following is NOT a definition of yield to maturity?
A) discount rate that equates present value of future cash flows with a bond’s price
B) investors’ required rate of return on a bond investment
C) return that an investor will earn if they buy the bond for its market price and hold it
until maturity
D) discount rate that equates present value of future cash flows with a bond’s face value
27) Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are
expected to grow at a 12-percent annual rate forever. If Jackson’s current market price is
$40.00, what is the stock’s expected rate of return (nearest .01 percent)?
A) 5.50%
B) 11.00%
C) 18.25%
D) 19.00%
28) Stimpson Inc. preferred stock pays a $.50 annual dividend. What is the value of the
stock if your required rate of return is 10%?
A) $.05
B) $.50
C) $5.00
D) $50.00
29) Cary’s wonderful parents established a college savings plan for him when he was
born. They deposited $50 into the account on the last day of each month. The account
has earned 10% compounded monthly, tax-free. Now he’s off to State U. What equal
amount can they withdraw beginning today (his 18th birthday) and each year for three
additional years to spend on his education, assuming that the account now earns 7%
annually.
A) $8,285
B) $8,865
C) $9,486
D) $30,028
30) When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity
financing plan
A) the debt financing plan line will graph with a steeper slope than the equity financing
plan line
B) the debt financing plan line will have a lower level of EBIT at EPS = 0
C) the line of the two financing plans will intersect on the EBIT axis
D) the slope of the equity financing plan line will be steeper than the debt financing
plan line below the intersection of the two lines
31) Sinkmaster Corp. settled a large lawsuit that caused earnings to be negative for the
quarter. This quarterly loss was the first in 22 years. In addition, the company has a
record of 48 consecutive quarters of dividend payments. Which of the following is
correct?
A) The company cannot pay dividends this quarter since the company had no earnings.
B) The company can use cash generated through prior retention of earnings, or
borrowed funds to pay the dividend.
C) The company can omit the dividend; shareholders are always understanding about
the riskiness of business.
D) The clientele effect says that investor choice of investment vehicle is independent of
dividend policy and therefore the payment/omission of the dividend is immaterial.
32) Commercial banks that also provide investment banking services are called
A) conglomerate banks
B) multi-purpose banks
C) investment enhanced banks
D) universal banks
33) AFB Systems is considering a new marketing campaign that will require the
addition of a new computer programmer and new software. The programmer will
occupy an office in AFB’s current building and will be paid $8,000 per month. The
software license costs $1,000 per month. The rent for the building is $4,000 per month.
AFB’s computer system is always on, so running the new software will not change the
current monthly electric bill of $900. The incremental expenses for the new marketing
campaign are
A) $13,900 per month
B) $9,000 per month
C) $13,000 per month
D) $8,000 per month
34) Which of the following cash flows are NOT considered in the calculation of the
initial outlay for a capital investment proposal?
A) increase in accounts receivable
B) cost of issuing new bonds if the project is financed by a new bond issue
C) installation costs
D) None of the aboveall are considered
35) DAS, Inc. declared a $0.50 per share dividend on June 1. The date of record is June
20th, the ex-dividend date is June 18th, and the payment date is June 31st. Andre owns
a share of stock on June 1. Andre sells his share to Brett on June 19th, and Brett sells
the share to LaMarcus on June 29th. Who will receive the dividend?
A) Andre
B) Brett
C) LaMarcus
D) no one, since the share was not owned consistently by one person over the period
36) Examine the securities below and identify the security with the highest liquidity
premium, the highest default risk premium, and the highest maturity premium.
a.30-Year U.S. Government Treasury Bond maturing in 2025
b.25-Year BBB-rated Corporate Bond maturing in 2030, actively traded on the New
York Exchange
c.10-Year AAA-rated Corporate Bond maturing in 2020, thinly traded on a regional
exchange
d.3-Month U.S. Treasury Bill
37) The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher
level of accountability for which of the following groups?
A) corporate officers
B) public accountants
C) boards of directors
D) all of the above
38) Table 4-5
Yen Inc.
Balance Sheet
Yen Inc.
Income Statement
For the year ended December 31, 2010
What was Yen’s quick ratio at the end of 2010?
A) 2.10
B) 1.43
C) 2.93
D) 1.79
39) Which of the following are included in the terminal cash flow?
A) the expected salvage value of the asset
B) any tax payments or receipts associated with the salvage value of the asset
C) recapture of any working capital increase included in the initial outlay
D) all of the above
40) The telecommunications system that provides a national information linkup among
brokers and dealers operating in the over-the-counter market is called
A) NCIS
B) NSQA
C) NASDAQ
D) NASQ
41) You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The
annual interest rate is closest to
A) 1.5 percent
B) 12 percent
C) 18 percent
D) 24 percent
42) AFB Corp. needs to replace an old lathe with a new, more efficient model. The old
lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.
(The old machine is being depreciated on a straight-line basis over a ten-year useful
life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new
lathe to the factory and get it installed. The old machine will be sold as scrap metal for
$2,000. The new machine is also being depreciated on a straight-line basis over ten
years. Sales are expected to increase by $8,000 per year while operating expenses are
expected to decrease by $12,000 per year. AFB’s marginal tax rate is 40%. Additional
working capital of $3,000 is required to maintain the new machine and higher sales
level. The new lathe is expected to be sold for $5,000 at the end of the project’s ten-year
life. What is the project’s terminal cash flow?
A) $3,000
B) $5,000
C) $6,000
D) $8,000
43) John calls his stockbroker and instructs him to purchase 100 shares of Microsoft
Corporation common stock. This transaction occurs in the
A) secondary market
B) primary market
C) credit market
D) futures market
44) A corporate financial manager trying to maximize shareholder value
A) is not concerned with ethics but rather with writing iron-clad contracts
B) can safely ignore ethics as long as no laws are broken
C) must behave ethically in order to stay out of jail
D) is concerned with ethics because unethical behavior destroys trust, and businesses
cannot function without a certain degree of trust
45) All of the following are equity accounts on a balance sheet EXCEPT
A) retained earnings
B) cash
C) common stock
D) paid-in capital
46) Which of the following is a reason for international investment?
A) to reduce portfolio risk
B) to increase P/E ratio
C) to gain an advantage in a foreign country
D) to gain access to foreign currency
47) In general the greater a firm’s reliance upon short-term debt or current liabilities
A) the lower will be its liquidity
B) the greater will be its liquidity
C) liquidity will remain constant
D) there will be no effect on liquidity
48) The “perfect storm” of factors that contributed to the economic crisis of 2007
include
A) increases in the minimum wage rate, unchecked illegal immigration, and state
government deficits
B) financial deregulation, unchecked commodity prices, floating currency exchange
rates
C) poorly chosen mortgage loans, falling housing prices, and a contracting economy
D) agency costs, inefficient markets, and perfect capital markets
49) Put the following in order of their claim on assets of a firm, starting with the LAST
to have a claim:
A. Subordinated debenturesB. Debentures (unsubordinated)
C. Common StockD. Preferred stock
A) C, B, A, D
B) C, D, A, B
C) B, A, C, D
D) D, C, B, A
E) D, C, A, B