1) Short-term securities have high interest-rate risk.
2) An increase in accounts receivable balance provides an increase in cash flow.
3) Capital budgeting analysis focuses on cash flow as opposed to profits.
4) An economic gain is derived from mergers when two firms are worth more combined
than separate.
5) If the mark is trading at a forward discount relative to the dollar, then you’ll receive
less marks per dollar in the future.
6) When the stock price is very high compared to the exercise price, the call option
premium approximates the difference between the stock price and strike price.
7) A number of copper producers have also found that hedging increases their debt
capacity.
8) According to MM, restructuring the firm will not change its overall value.
9) Zero-coupon bonds are issued at prices below face value, and the investor’s return
comes from the difference between the purchase price and the payment of face value at
maturity.
10) A company that borrows $1 million short term and invests the proceeds in inventory
will see no change in its net working capital.
11) Firms are attracted to the private placement of debt because of the lower average
interest rates.
12) Dividends represent an important component of the firm’s net common equity.
13) Like public companies, private companies can also use their stock price as a
measure of performance.
14) In vertical mergers, the goal is to benefit from the economies of scale.
15) The more frequent the compounding, the higher the future value, other things equal.
16) For the period between 1900 and 2000, the risk premium of Italy is higher than that
of the United States.
17) Pfizer’s spending of $7.6 billion in 2006 on research and development of new drugs
is a capital budgeting decision but not a financing decision.
18) Bonds with the callable feature sell at lower prices than bonds without such a
feature.
19) What is the maximum internal growth rate consistent with not requiring external
funding for a firm reporting net income of $500,000, a dividend payout ratio of 40%,
and total assets of $10 million?
A.2%
B.3%
C.5%
D.6%
20) When corporations need to raise funds through stock issues, they rely on the:
A.primary market
B.secondary market
C.tertiary market
D.centralized NASDAQ exchange
21) What is the rationale for saying that the federal government provides a tax subsidy
to corporate debtors?
A.Interest and principal payments are tax deductible
B.Interest payments are tax deductible
C.Principal payments are tax deductible
D.70% of interest payments are tax deductible
22) Given recent evidence concerning the CAPM, which of the following portfolios
might be expected to plot above the security market line?
A.A portfolio of cyclical stocks
B.A portfolio that includes borrowed funds
C.A portfolio of smaller companies
D.A portfolio split between Treasury bills and the market index
23) Which of the following financial ratios has the highest weight in Altman’s Z-score
estimation?
A.Working capital/total assets
B.Retained earnings/total assets
C.EBIT/total assets
D.Sales/total assets
24) A stock is currently priced at $65 per share and will pay a $4 dividend in one year.
What must the stock sell for in one year to meet investors’ expectations of a 15%
after-tax yield if dividends are taxed at 28%? Ignore capital gains taxes due to investor
timing.
A.$70.75
B.$71.87
C.$63
D.$76.00
25) What is the fixed-cost expenditure for a firm with a DOL of 4.5 that generates
pretax profits of $1 million and has $600,000 in depreciation expense?
A.$1.1 million
B.$2.1 million
C.$2.9 million
D.$3.9 million
26) If it proves possible to make abnormal profits based on information regarding past
stock prices, then the market:
A.is weak-form efficient
B.is not weak-form efficient
C.is semistrong-form efficient
D.is strong-form efficient
27) Although Standard and Poor’s Composite Index contains a small number of U.S.
publicly traded stocks, the Index represents:
A.all stocks that prefer to be equally weighted
B.all stocks that prefer to be value-weighted
C.approximately 50% of U.S. stocks traded, in value
D.approximately 75% of U.S. stocks traded, in value
28)
After analyzing the particulars of firms A and B and their proposed merger, comment on
the desirability of the merger:
Firm A will purchase firm B by offering 625 shares of firm A. The merged firms are
expected to be worth $26,000. Be sure to mention EPS of the merged entity, and so on.
29) The value of a proposed capital budgeting project depends on the:
A.total cash flows produced
B.incremental cash flows produced
C.accounting profits produced
D.increase in total sales produced
30) Which of the following will occur in a statement of cash flows as a result of paying
cash dividends?
A.Cash flows from operations will increase
B.Cash flows from investments will decrease
C.Cash flows from financing will decrease
D.Cash balances will not be affected
31) The outputs of a financial planning model often include:
A.the firm’s current financial statements
B.a range of macroeconomic forecasts
C.cost projections for operating the planning models
D.projected financial statements of the firm
32) Investors who hold warrants essentially have a:
A.put option on the firm’s bonds
B.put option on the firm’s equity
C.call option on the firm’s bonds
D.call option on the firm’s equity
33) MM’s assertion that dividend policy will not affect the value of the firm requires
that dividend policy does not:
A.alter the retained earnings of the firm
B.affect investment and borrowing policies
C.allow the payout ratio to change
D.alter the number of outstanding shares
34) Which of the following would not be considered a financial asset?
A.A patent
B.A personal IOU
C.A checking account balance
D.A share of stock
35) If The Wall Street Journal lists a stock’s dividend as $1, then it is most likely the
case that the stock:
A.pays $1 quarterly, or an estimated $4 annually
B.pays $0.25 quarterly, or an estimated $1 annually
C.paid $1 during the past quarter, with no future dividends forecast
D.paid $1 during the past year, with no future dividends forecast
36) Which of the following statements is correct for a firm that has a sustainable growth
rate that exceeds its projected growth rate in assets?
A.The projected growth in assets will be restricted
B.The internal growth rate will provide the remaining assets
C.The firm’s ROE must increase
D.The debt-equity ratio will increase unless equity is issued
37) A times interest earned ratio of 5.0 indicates that the firm:
A.pays 5 times its earnings in interest expense
B.earns significantly more than its interest obligations
C.has interest expense equal to 5% of EBIT
D.has low tax liability
38) Research indicates that the correlation coefficient between successive days’ stock
price changes is:
A.quite close to +1
B.quite close to -1
C.quite close to zero
D.directly related to the stock’s beta
39) If a corporation uses cumulative voting, then ______ of a shareholder’s votes _____
be cast for one candidate
A.some; must
B.none; can
C.all; can
D.all; must
40) Which of the following is least liquid?
A.Foreign currency
B.U.S. Treasury bonds
C.Rare coins
D.Savings deposit
41) What is the internal growth rate for a firm with an ROE of 20%, a dividend payout
ratio of 40%, and an equity-to-debt ratio of 60%?
A.4.50%
B.5.39%
C.8.00%
D.12.00%
42) Customers may change firms when faced with minimal inventory selection. Sales
lost in this manner illustrate the:
A.costs of carrying inventory
B.lack of customer loyalty
C.need to maintain a high current ratio
D.impact of shortage costs
43) Which of the following statements is true for a stock that sells now for $60, pays an
annual dividend of $4.00, and experienced a 20% return on investment over the past
year? Its price one year ago was:
A.$42.00
B.$46.15
C.$48.46
D.$53.33
44) What decision should be made on a project of above-average risk if the project’s
IRR exceeds the WACC?
A.Accept the project; NPV is positive
B.Reject the project; NPV is negative
C.Decide after discounting at the IRR
D.Decide after discounting at an appropriate rate
45) What are some of the major sources of short-term financing, and how are interest
rates on these loans quoted?
46) How does the information content of a repurchase program differ from that of
dividend increase? Which signal has lasting result?
47) How do firms compute weighted-average costs of capital?
48) How does the Du Pont formula help identify the determinants of the firm’s return on
its assets and equity?
49) Why are secondary market transactions of importance to corporations?
50) Calculate the NPV for a project costing $200,000 and providing $20,000 annually
for 40 years. The discount rate is 8%. By how much would the NPV change if the
inflows were reduced to 30 years?
51) What is the net present value of an investment, and how do you calculate it?
52) Calculate a firm’s required rates of return for both of its equity components: Its
common stock sells for $50.00 per share and will pay a $6.00 dividend which is
expected to grow at a constant 5% rate. Its preferred stock sells for $22.50 per share and
pays $1.80 in dividends. What accounts for the difference in returns, given that these
are both forms of equity?
53) What is the present value of a company with a WACC of 12%, and the following
cash flows for years 1 to 5, respectively: $1 million, $1.25 million, $1.5 million, $1.75
million, $2 million. Assume the firm will then grow at 5% per year, indefinitely.
54) Why is it important to make the distinction between company opportunity cost of
capital and project opportunity cost of capital when evaluating projects?