The cash flows relevant for a foreign investment should, from the parent company’s
perspective, include the financial cash flows that the subsidiary can legally send back to
the parent company plus the cash flows that must remain in the foreign country.
a.True
b.False
If a firm uses debt financing (Debt ratio = 0.40) and sales change from the current level,
which of the following statements is CORRECT?
a.The percentage change in operating income (EBIT) resulting from the change in sales
will exceed the percentage change in net income.
b.The percentage change in EBIT will equal the percentage change in net income.
c.The percentage change in net income relative to the percentage change in sales (and in
EBIT) will not depend on the interest rate paid on the debt.
d.The percentage change in operating income will be less than the percentage change in
net income.
e.Since debt is used, the degree of operating leverage must be greater than 1.
Which of the following statements is CORRECT?
a.An increase in fixed costs, (holding sales and variable costs constant) will reduce the
company’s degree of operating leverage.
b.An increase in interest expense will reduce the company’s degree of financial
leverage.
c.If the company has no debt outstanding, then its degree of total leverage equals its
degree of operating leverage.
d.If a firm’s degree of operating leverage increases, its degree of financial leverage must
also have increased.
e.If the company has no debt outstanding, then its degree of total leverage equals its
degree of financial leverage.
Corporations that invest surplus funds in floating-rate preferred stock benefit from
getting a relatively stable price, and they also benefit from the 70% tax exemption on
preferred dividends received.
a.True
b.False
Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?
a.If a stock has a negative beta, its required return under the CAPM would be less than
5%.
b.If a stock’s beta doubled, its required return under the CAPM would also double.
c.If a stock’s beta doubled, its required return under the CAPM would more than
double.
d.If a stock’s beta were 1.0, its required return under the CAPM would be 5%.
e.If a stock’s beta were less than 1.0, its required return under the CAPM would be less
than 5%.
Which of the following statements is CORRECT?
a.Since accounts payable and accrued liabilities must eventually be paid off, as these
accounts increase, AFN as calculated by the AFN equation must also increase.
b.Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no
excess current assets. Based on the AFN equation, its AFN will be larger than if it had
been operating with excess capacity in both fixed and current assets.
c.If a firm retains all of its earnings, then it cannot require any additional funds to
support sales growth.
d.Additional funds needed (AFN) are typically raised using a combination of notes
payable, long-term debt, and common stock. Such funds are non-spontaneous in the
sense that they require explicit financing decisions to obtain them.
e.If a firm has a positive free cash flow, then it must have either a zero or a negative
AFN.
On January 1st Julie bought a 7-year, zero coupon bond with a face value of $1,000 and
a yield to maturity of 6%. Assume that Julie’s tax rate is 25%. How much tax will Julie
have to pay on the bond the first year she owns it?
a.$ 8.55
b.$ 9.00
c.$ 9.48
d.$ 9.98
e.$10.47
Hartzell Inc. had the following data for 2013, in millions: Net income = $600; after-tax
operating income [EBIT(1 – T)] = $700; and Total assets = $2,000. Information for
2014 is as follows: Net income = $825; after-tax operating income [EBIT(1 – T)] =
$925; and Total assets = $2,500. How much free cash flow did the firm generate during
2014?
a.$383
b.$425
c.$468
d.$514
e.$566
Stocks A, B, and C all have an expected return of 10% and a standard deviation of 25%.
Stocks A and B have returns that are independent of one another, i.e., their correlation
coefficient, r, equals zero. Stocks A and C have returns that are negatively correlated
with one another, i.e., r is less than 0. Portfolio AB is a portfolio with half of its money
invested in Stock A and half in Stock B. Portfolio AC is a portfolio with half of its
money invested in Stock A and half invested in Stock C. Which of the following
statements is CORRECT?
a.Portfolio AC has an expected return that is less than 10%.
b.Portfolio AC has an expected return that is greater than 25%.
c.Portfolio AB has a standard deviation that is greater than 25%.
d.Portfolio AB has a standard deviation that is equal to 25%.
e.Portfolio AC has a standard deviation that is less than 25%.
Which of the following actions does NOT help managers defend against a hostile
takeover?
a.Establishing a poison pill provision.
b.Granting lucrative golden parachutes to senior managers.
c.Establishing a super-majority provision in the company’s bylaws to raise the
percentage of the board of directors that must approve an acquisition from 50% to 75%.
d.Retiring long-term debt early to reduce total debt on the balance sheet which will
increase the firm’s financial position.
e.Finding a “white squire” that will buy enough of the target firm’s shares to block the
hostile takeover.
Madura Inc. wants to increase its free cash flow by $180 million during the coming
year, which should result in a higher EVA and stock price. The CFO has made these
projections for the upcoming year:
EBIT is projected to equal $850 million.
Gross capital expenditures are expected to total to $360 million versus depreciation of
$120 million, so its net capital expenditures should total $240 million.
The tax rate is 40%.
There will be no changes in cash or marketable securities, nor will there be any changes
in notes payable or accruals.
What increase in net operating working capital (in millions of dollars) would enable the
firm to meet its target increase in FCF?
a.$ 72
b.$ 90
c.$108
d.$130
e.$156
Which of the following is an example of a capital market instrument?
a.Commercial paper.
b.Preferred stock.
c.U.S. Treasury bills.
d.Banker’s acceptances.
e.Money market mutual funds.
A lockbox plan is most beneficial to firms that
a.have suppliers who operate in many different parts of the country.
b.have widely dispersed manufacturing facilities.
c.have a large marketable securities portfolio, and cash, to protect.
d.receive payments in the form of currency, such as fast food restaurants, rather than in
the form of checks.
e.have customers who operate in many different parts of the country.
From the lessee viewpoint, the riskiness of the cash flows, with the possible exception
of the residual value, is about the same as the riskiness of the lessee’s
a.equity cash flows.
b.capital budgeting project cash flows.
c.debt cash flows.
d.pension fund cash flows.
e.sales.
Assume that the City of Tampa sold an issue of $1,000 maturity value, tax-exempt
(muni), zero coupon bonds 5 years ago. The bonds had a 25-year maturity when they
were issued, and the interest rate built into the issue was a nominal 10%, but with
semiannual compounding. The bonds are now callable at a premium of 10% over the
accrued value. What effective annual rate of return would an investor who bought the
bonds when they were issued and who still owns them earn if they were called today?
a.10.08%
b.10.61%
c.11.17%
d.11.75%
e.12.37%
PQR Manufacturing Corporation has $1,500,000 in debt outstanding. The company’s
before-tax cost of debt is 10%. Sales for the year totaled $3,500,000 and variable costs
were 60% of sales. Net income was equal to $600,000 and the company’s tax rate was
40%. If PQR’s degree of total leverage is equal to 1.40, what is its degree of operating
leverage?
a.1.0987
b.1.1565
c.1.2174
d.1.2783
e.1.3422
A call option whose underlying stock value is less than the corresponding exercise price
is an example of a(n)
a.Straddle option.
b.Put option.
c.Out-of-the-money option.
d.Naked option.
e.Covered option.
Which of the following would tend to increase a firm’s target debt ratio, other things
held constant?
a.The costs associated with filing for bankruptcy increase.
b.The corporate tax rate is increased.
c.The personal tax rate is increased.
d.The Federal Reserve tightens interest rates in an effort to fight inflation.
e.The company’s stock price hits a new low.
If a firm utilizes debt financing, a 10% decline in earnings before interest and taxes
(EBIT) will result in a decline in earnings per share that is larger than 10%, and the
higher the debt ratio, the larger this difference will be.
a.True
b.False
Which of the following statements is CORRECT, holding other things constant?
a.Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs,
hence they tend to use relatively little debt.
b.An increase in the personal tax rate is likely to increase the debt ratio of the average
corporation.
c.If changes in the bankruptcy code make bankruptcy less costly to corporations, then
this would likely lead to lower debt ratios for corporations.
d.An increase in the company’s degree of operating leverage would tend to encourage
the firm to use more debt in its capital structure so as to keep its total risk unchanged.
e.An increase in the corporate tax rate would in theory encourage companies to use
more debt in their capital structures.