1) Capital budgeting decisions are used to determine how to raise the cash necessary for
investments.
2) A Treasury bond’s bid price will be lower than the ask price.
3) All large corporations have little debt; it is a necessary condition for maximizing
growth.
4) Even if a firm neither owes nor is owed foreign currency, it still may be affected by
currency fluctuations.
5) The pecking order theory of capital structure depicts the fact that firms prefer internal
financing to avoid sending out adverse signals that may lower the stock price.
6) Forward contracts are standardized contracts sold in organized exchanges.
7) The key to the banks’ ability to make illiquid loans is their ability to pool liquid
deposits from thousands of depositors.
8) The factoring firm bears responsibility for default on accounts receivable purchased
from a firm.
9) When the value of the U.S. dollar fell dramatically in 2006 and 2007, Volkswagen
faced significant economic exposure.
10) The derivative market is also a source of financing.
11) When there are no taxes and capital markets function well, the market value of a
company does not depend on its capital structure.
12) An IOU (“I owe you”) from your brother-in-law is a financial asset.
13) Major banks and securities firms protect their reputations by emphasizing their long
history and their responsible behavior when seeking new customers.
14) The seller of a pork bellies futures contract at $0.41 per pound noted that the
closing price of pork bellies was $0.44 today. What will happen to this contract, which
requires delivery of 40,000 of pork bellies at expiration?
A.A loss of $400 is posted to the account
B.A gain of $400 is posted to the account
C.A loss of $1,200 is posted to the account
D.A gain of $1,200 is posted to the account
15) Which of the following is a source of profit for a swap dealer?
A.Commission charged on the sale of bonds
B.Bid-ask spread
C.Margin account
D.Option premium
16) What is the standard deviation of a portfolio’s returns if the mean return is 15%, the
variance of returns is 184, and there are three stocks in the portfolio?
A.7.83%
B.13.56%
C.41.00%
D.225.00%
17) A firm’s sustainable growth rate represents the:
A.highest growth rate without decreasing the dividend
B.highest growth rate without increasing financial leverage
C.percentage change in sales times the profit margin
D.possible growth without jeopardizing net working capital
18) Which of the following statements about total capital requirement is least likely to
be correct for a profitable firm?
A.Requirements remain constant over time
B.Seasonal variations are often experienced
C.The trend is often upward-sloping
D.A portion of working capital is permanent
19) A project’s payback period is determined to be 4 years. If it is later discovered that
additional cash flows will be generated in years 5 and 6, then:
A.the project’s payback period will be reduced
B.the project’s payback period will be increased
C.the project’s payback period will be unchanged
D.the discount rate must be known to determine whether the payback period changes
20) How much is added to a firm’s weighted-average cost of capital for 45% debt
financing with a required rate of return of 10% and a tax rate of 35%?
A.1.29%
B.2.93%
C.3.50%
D.4.50%
21) If the liquidation value of a firm is negative, then:
A.the firm’s debt exceeds the market value of assets
B.the firm’s debt exceeds the book value of equity
C.the book value of assets exceeds the firm’s debt
D.the market value of assets exceeds the firm’s debt
22) What is the break-even probability of collection for a firm that has a 40% profit
margin (ignore present value)?
A.24%
B.40%
C.60%
D.80%
23) What is the APR on a loan with an effective annual rate of 15.01% and weekly
compounding of interest?
A.12.00%
B.12.50%
C.13.00%
D.14.00%
24) Working capital will affect incremental cash flows if:
A.current liabilities change more than current assets
B.current assets change more than current liabilities
C.inventory changes from previous levels
D.net working capital changes from previous levels
25) Debt financing is made up of explicit and implicit costs that refer to:
A.a higher required ROE and the interest rate bondholders demand, respectively
B.the interest rate bondholders demand and a higher required ROE, respectively
C.the costs of equity and debt, respectively
D.the costs of issuing bonds and the interest rate bondholders demand, respectively
26) When managers select correctly from among mutually exclusive projects, they:
A.may give up rate of return for NPV
B.may give up NPV for rate of return
C.have a tendency to select the largest project
D.focus on payback method to avoid conflicting signals
27) What is the relationship between an investment’s rate of return and its yield to
maturity for an investor that does not hold a bond until maturity?
A.Rate of return is lower than yield to maturity
B.Rate of return is higher than yield to maturity
C.Rate of return equals yield to maturity
D.There is no predetermined relationship
28) Which of the following is not correct concerning futures contracts?
A.They entail an obligation rather than an option
B.The contract price is set at the beginning of the contract
C.The contracts are exchange-traded
D.Gains or losses are recorded at contract expiration
29) Which of the following factors will change when interest rates change?
A.The expected cash flows from a bond
B.The present value of a bond’s payments
C.The coupon payment of a bond
D.The maturity value of a bond
30) A dividend is declared on January 1, has an ex-dividend date of January 20, and a
record date of January 26 . Which of the following shareholders will not receive the
dividend?
A.A shareholder who purchases on December 31
B.A shareholder who purchases on January 10
C.A shareholder who purchases on January 19
D.A shareholder who purchases on January 24
31) A hedger buys a futures contract that obligates the owner to take delivery of 5,000
bushels of wheat at a price of $3.30 per bushel. At expiration the spot price of wheat is
$2.80 per bushel. The hedger has:
A.saved 50 per bushel through hedging
B.gained peace of mind at a price of 50 per bushel
C.the opportunity to avoid taking delivery, since price declined
D.locked in an effective price of $3.05 per bushel
32) Which of the following situations accurately describes a growth stock, assuming
that each firm has a required return of 12%?
A.A firm with PVGO = $0
B.A firm with investment opportunities yielding 10%
C.A firm with investment opportunities yielding 15%
D.All of these firms represent growth stocks
33) Why is it fairly easy to fall into the trap of discounting real cash flows with nominal
rates?
A.It is difficult to determine real discount rates
B.Increases in nominal cash flows are often not forecast
C.Inflation does not impact cash flows, but it does impact discount rates
D.Increases in revenues are offset by increases in costs
34) An East Coast firm should establish a lock-box service on the West Coast:
A.if the firm has a large number of customers
B.if it has banking facilities in West Coast
C.if West Coast customers are currently mailing their checks to an East Coast address
D.if West Coast banks are more efficient
35) Assume that a bond has been owned by four different investors during its 20-year
history. Which of the following is not likely to have been shared by these different
owners?
A.Coupon rate
B.Cash flows
C.Par value
D.Yield to maturity
36) Shares of a corporation can, under certain circumstances, be priced at different
amounts to different investors under the terms of a:
A.proxy agreement
B.public tender offer
C.poison pill
D.shark repellent
37) If a bond offers an investor 11% in nominal return during a year in which the rate of
inflation was 4%, then the investor’s real return was:
A.6.73%
B.7.00%
C.8.75%
D.10.56%
38) The market experienced a volatility spike:
A.during the Great Crash of 1929
B.during the dot-com crash
C.during the banking crisis of 2007-2009
D.all of these
39) What is the inventory period for a firm with an annual cost of goods sold of $8
million, $1.5 million in inventory, and a cash conversion cycle of 75 days?
A.6.56 days
B.18.75 days
C.53.33 days
D.68.44 days
40) If the IRR for a project is 15%, then the project’s NPV would be:
A.negative at a discount rate of 10%
B.positive at a discount rate of 20%
C.negative at a discount rate of 20%
D.positive at a discount rate of 15%
41) XYZ Corp. has improved its average collection period from 55 to 40 days. Which
one of XYZ’s other ratios may appear worse as a result of the improved receivables
collection?
A.Inventory turnover
B.Quick ratio
C.Net profit margin
D.Return on equity
42) The longer the firm’s accounts payable period, the:
A.longer the firm’s cash conversion cycle
B.shorter the firm’s inventory period
C.more the delay in the accounts receivable period
D.less the firm must invest in working capital
43) One common reason for reporting standard deviations rather than variances is that
standard deviations:
A.are lower
B.are stated in understandable units
C.account properly for negative returns
D.take probability estimates into consideration
44) What options may be present in capital investment proposals?
45) Can WACC be used to value an entire business?
46) Find the IRR for a project costing $36,500 and returning $5,000 annually for the
first 4 years, followed by $11,000 annually for 3 years.
47) Why should many investors be cautious when relying on yield to maturity? Is it a
convenient measure of rate of return for investors who might not hold their bonds to
maturity?
48) Why is it difficult and perhaps risky to evaluate financial projects based on APR
alone?
49) Equity, Inc. is currently an all-equity-financed firm. It has 10,000 shares
outstanding that sell for $20 each. The firm has an operating income of $30,000 and
pays no taxes. The firm contemplates a restructuring that would issue $50,000 in 8%
debt which will be used to repurchase stock. Assuming that individuals have the same
borrowing opportunities as corporations, explain how an investor can undo the leverage
that is proposed by Equity, Inc. Under these conditions, what is the value of
restructuring to a firm?
50) Discuss why more firms are turning to internally generated funds to finance new
projects.
51) What are the possible choices of balancing items when using a financial planning
model? Discuss whether some are generally preferable to others.
52) How can options, futures, and forward contracts be used to devise simple hedging
strategies?
53) How are the costs of debt and equity calculated?