FC 827 1 Dividends are best defined

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1) Dividends are best defined as:

A.cash payments to shareholders

B.cash payments to either bondholders or shareholders

C.cash or stock payments to shareholders

D.cash or stock payments to either bondholders or shareholders

E.distributions of stock to current shareholders

2) Which one of the following is included in net working capital?

A.Newly purchased equipment with a useful life of 6 years

B.Mortgage on a building payable over the next 12 years

C.Interest on a long-term debt

D.10-year bonds issued to the general public

E.Invoice from a supplier for inventory purchased

3) Assume both corporate taxes and financial distress costs apply to a firm. Given this,

the static theory of capital structure illustrates that:

A.a firm’s value and its weighted average cost of capital are inversely related

B.a firm’s value and its tax rate are inversely related

C.the maximum value of a firm is obtained when a firm is financed solely with debt

D.thevalue of a firm rises as the interest rate on debt rises

E.the value of a firm rises as both the interest rate on debt and the tax rate rise

4) The economic order quantity approach states that inventory order sizes should be

determined in which one of the following manners?

A.By dividing annual item sales by the carrying cost per item and multiplying by 2

B.By computing the average number of items sold each month

C.By equating restocking costs with carrying costs

D.By dividing the inventory into various groups based on the value per item

E.By computing the amount of the derived demand

5) Which one of the following parties can sell shares of ABC stock in the primary

market?

A.ABC company

B.Any corporation, other than the ABC company

C.Institutional shareholder

D.Private individual shareholder

E.Any of these

6) You are considering the following two mutually exclusive projects. The crossover

point is _____ and Project _____ should be accepted at a 12 percent discount rate.

A.11.07 percent; B

B.11.38 percent; A

C.11.38 percent; B

D.14.02 percent; A

E.14.02 percent; B

7) The clientele effect states that investors fall into various groups because of

differences in their preferences for which one of the following?

A.Share price levels

B.Risk level

C.Short-term versus long-term investments

D.Rates of return

E.Dividends

8) Which one of the following is the theory that a firm should borrow up to the point

where the additional tax benefit from an extra dollar of debt equals the additional costs

associated with financial distress from that additional debt?

A.M&M Proposition I, with taxes

B.M&M Proposition II, with taxes

C.M&M Proposition I, without taxes

D.Homemade leverage proposition

E.Static theory of capital structure

9) A credit card has an annual percentage rate of 12.9 percent and charges interest

monthly. The effective annual rate on this account:

A.will be less than 12.9 percent

B.can either be less than or equal to 12.9 percent

C.is 12.9 percent

D.can either be greater than or equal to 12.9 percent

E.will be greater than 12.9 percent

10) Which one of the following is probably the most effective means of increasing

investors’ interest in an IPO?

A.Extending the lockup period

B.Issuing the IPO through a rights offering

C.Underpricing the IPO

D.Eliminating the quiet period

E.Eliminating the Green Shoe option

11) The period 1926-2011 illustrates that U.S. Treasury bills:

A.outperform inflation by approximately 1 percent every year

B.have a zero standard deviation

C.can either outperform or underperform inflation on an annual basis

D.produce a rate of return roughly equivalent to the rate of return on long-term

government bonds

E.routinely have negative annual returns

12) An upward-sloping term structure of interest rates indicates:

A.the real rate of return is lower for short-term bonds than for long-term bonds

B.there is an indirect relationship between real interest rates and time to maturity

C.there is an indirect relationship between nominal interest rates and time to maturity

D.the nominal rate is declining as the real rate rises as the time to maturity increases

E.the nominal rate is increasing even though the real rate is constant as the time to

maturity increases

13) A bond has an 8 percent coupon rate, a face value of $1,000, semiannual payments,

and sells at par. The current yield is _____ percent and the effective annual yield is

_____ percent.

A.6.76; 6.87

B.6.76; 6.96

C.7.00; 7.00

D.8.00; 8.16

E.7.23; 7.23

14) Which of the following are inversely related to increases in a firm’s current assets?

I. Reorder costs

II. Shortage costs

III. Restocking costs

IV. Carrying costs

A.I and III only

B.II and IV only

C.I, II, and III only

D.II, III, and IV only

E.I, III, and IV only

15) Davidson Interiors declared a dividend to holders of record on Thursday, October

15, that is payable on Monday, November 2 . Suenette purchased 200 shares of

Davidson Interiors stock on Monday, October 12, and Jake purchased 100 shares of this

stock on the following day. Which one of the following statements is correct given this

information?

A.Both Suenette and Jake will receive this dividend

B.Suenette will receive the dividend but Jake will not

C.Jake will receive the dividend but Suenette will not

D.Neither Suenette nor Jake will receive this dividend

E.You cannot determine who will or will not receive this dividend based on the

information provided

16) Last year, Paul invested $38,000 in Oil Town stock, $11,000 in long-term

government bonds, and $8,000 in U.S. Treasury bills. Over the course of the year, he

earned returns of 12.1 percent, 7.2 percent, and 4.1 percent, respectively. What was the

nominal risk premium on Oil Town’s stock for the year?

A.2.1 percent

B.4.9 percent

C.6.0 percent

D.7.8 percent

E.8.0 percent

17) You’ve observed the following returns on Blast It Corporation’s stock over the past

five years: 11 percent, -28 percent, 16 percent, 18 percent, and – 3 percent, respectively.

What was the variance of the returns over this period?

A.0.03598

B.0.03637

C.0.03692

D.0.03714

E.0.03781

18) Which of the following characteristics will tend to cause a firm to adopt a more

liberal credit policy?

I. Repeat customers

II. Excess capacity

III. High variable costs

IV. Limited competition

A.I and II only

B.III and IV only

C.I, II, and III only

D.II, III, and IV only

E.I, II, III, and IV

19) You are considering an investment for which you require a 14 percent rate of return.

The investment costs $61,900 and will produce cash inflows of $26,000 for three years.

Should you accept this project based on its internal rate of return? Why or why not?

A.Yes, because the IRR is 12.51 percent

B.Yes, because the IRR is 13.65 percent

C.Yes, because the IRR is 13.67 percent

D.No, because the IRR is 12.51 percent

E.No, because the IRR is 13.65 percent

20) Which one of the following is most closely related to the net present value profile?

A.Internal rate of return

B.Average accounting return

C.Profitability index

D.Payback

E.Discounted payback

21) You have $1,500 today in your savings account. How long must you wait for your

savings to be worth $4,000 if you are earning 1.1 percent interest, compounded

annually?

A.76.68 years

B.79.69 years

C.72.13 years

D.80.57 years

E.89.66 years

22) In New York, you can exchange $1 for 0.7538 or £0.6789. In Berlin, £1 costs

1.1087. How much profit can you earn on $1,000 using triangle arbitrage?

A.$1.09

B.$1.17

C.$1.47

D.$1.58

E.$1.70

23) A flexible short-term financial policy will tend to have more of which of the

following than a restrictive short-term financial policy will?

I. uncollectable accounts receivable

II. work stoppages for lack of raw materials

III. carrying costs

IV. obsolete or out-of-date inventory

A.I and II only

B.III and IV only

C.II and III only

D.I, II, and III only

E.I, III, and IV only

24) Given an interest rate of zero percent, the future value of a lump sum invested today

will always:

A.remain constant, regardless of the investment time period

B.decrease if the investment time period is shortened

C.decrease if the investment time period is lengthened

D.be equal to $0

E.be infinite in value

25) Travis invests $10,000 today into a retirement account. He expects to earn 8

percent, compounded annually, on his money for the next 26 years. After that, he wants

to be more conservative, so only expects to earn 5 percent, compounded annually. How

much money will he have in his account when he retires 38 years from now, assuming

this is the only deposit he makes into the account?

A.$129,411.20

B.$132,827.88

C.$134,616.56

D.$141,919.67

E.$142,003.12

26) The equity multiplier is equal to:

A.one plus the debt-equity ratio

B.one plus the total asset turnover

C.total debt divided by total equity

D.total equity divided by total assets

E.one divided by the total asset turnover

27) The exchange rates in New York for $1 are Can$1.2381 and £0.6789. In Toronto,

Can$1 will buy £0.5487. How much profit can you earn on $10,000 using triangle

arbitrage?

A.$6.56

B.$6.88

C.$6.97

D.$7.03

E.$7.11

28) Which of the following will tend to increase the credit period?

I. Increase in the buyer’s inventory period

II. Decrease in the buyer’s inventory period

III. Increase in the buyer’s operating cycle

IV. Decrease in the buyer’s operating cycle

A.I and III only

B.I and IV only

C.II and III only

D.II and IV only

E.II only

29) Capstone Investments is considering a project that will produce cash inflows of

$11,000 in year 1, $24,000 in year 2, and $36,000 in year 3 . What is the present value

of these cash inflows if the company assigns the project a discount rate of 12 percent?

A.$41,997.60

B.$46,564.28

C.$54,578.17

D.$54,868.15

E.$63,494.54

30) Cash dividends send which two of the following signals to the market?

I. Agency costs will be lowered since less cash will be held by the firm.

II. The firm is planning on downsizing.

III. The firm is currently, and expects to continue to be, profitable.

IV. The firm will no longer conduct stock repurchases.

A.I and II only

B.II and III only

C.III and IV only

D.II and IV only

E.I and III only

31) Given the following information, what is the variance of the returns on this stock?

A.0.021387

B.0.021449

C.0.021506

D.0.021538

E.0.0215641

32) The rate of return on which one of the following is used as the risk-free rate?

A.Long-term government bonds

B.Long-term corporate bonds

C.Inflation, as measured by the Consumer Price Index

D.U.S. Treasury bill

E.Large-company stocks

33) The current spot rate between the UK and the U.S. is £0.6528 per $1. The expected

inflation rate in the U.S. is 1.8 percent. The expected inflation rate in the UK is 3.4

percent. If relative purchasing power parity exists, what will the exchange rate be two

years from now?

A.£0.6549/$1

B.£.0.6632/$1

C.£.0.6739/$1

D.£0.6982/$1

E.£0.5331/$1

34) The opportunities that a manager has to modify a project once it has started are

called:

A.sensitivity choices

B.managerial options

C.scenario adjustments

D.restructuring options

E.erosion control measures

35) Which one of the following statements concerning financial leverage is correct?

A.Financial leverage increases profits and decreases losses

B.Financial leverage has no effect on a firm’s return on equity

C.Financial leverage refers to the use of common stock

D.Financial leverage magnifies both profits and losses

E.Increasing financial leverage will always decrease the earnings per share

36) Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on

the board of directors. Assume there are three open seats in the current election and

Mary casts all 300 of her votes for a single candidate. What is the term used to describe

this type of voting?

A.Proxy

B.Aggregate

C.Cumulative

D.Straight

E.Condensed

37) Which one of the following principles refers to the assumption that a project will be

evaluated based on its incremental cash flows?

A.Forecast assumption principle

B.Base assumption principle

C.Fallacy principle

D.Erosion principle

E.Stand-alone principle

38) To ensure an unsecured line of credit is used solely for short-term purposes, the loan

arrangement frequently includes which one of the following?

A.Cleanup period

B.Grace period

C.Revolver

D.Factoring arrangement

E.Lien on the borrower’s inventory