1) Indexed bonds were completely unknown in the United States until 1997 when the
U.S. Treasury began to issue inflation-indexed bonds known as Treasury
Inflation-Protected Securities, or TIPS.
2) Real assets can be intangible assets.
3) The present value of an annuity due equals the present value of an ordinary annuity
times the discount rate.
4) Some companies solve their financing problem by borrowing on the strength of their
current assets; others solve it by selling their current assets.
5) Equity capital in young businesses is known as venture capital and it is provided by
venture capital firms, wealthy individuals, and investment institutions such as pension
funds.
6) The current yield measures the bond’s total rate of return.
7) When the market interest rate exceeds the coupon rate, bonds sell for less than face
value to provide enough compensation to investors.
8) Financial planning models routinely adjust for present value and risk.
9) BP’s committing of$500 million to partnership with University of
California-Berkeley to develop new sources of energy is a capital budgeting decision.
10) Discounting real cash flows with real interest rates gives an overly optimistic idea
of a project’s value.
11) Apple Computer is well known for its product innovations. Access to financing was
not vital to Apple’s growth and profitability.
12) Hedge fund managers, unlike mutual fund managers, do not receive
fund-performance-related fees.
13) In a situation of bankruptcy, only the funded debt will be repaid.
14) A corporation such as Walmart with about $400 billion of annual sales has an
average daily cash flow of more than $1,096 million.
15) From June 2001 to June 2006, housing prices in the United States doubled.
16) Fixed assets can be either tangible or intangible.
17) Strong-form market efficiency implies that one could earn above-average returns by
examining the history of a firm’s stock price.
18) Fundamental analysts attempt to get rich by identifying patterns in stock prices.
19) Made-to-measure currency options can be bought from the major banks, and
standardized options are traded on the options exchange.
20) Financial risk is the risk to shareholders that results from debt financing.
21) What is the typical relationship between the standard deviation of an individual
common stock and the standard deviation of a diversified portfolio of common stocks?
A.The individual stock’s standard deviation will be lower
B.The individual stock’s standard deviation will be higher
C.The standard deviations should be equal
D.There is no way to predict this relationship
22) What causes bonds to sell for a premium compared to face value?
A.The bonds have high ratings
B.The bonds have a long period until maturity
C.The bonds have a higher than market coupon rate
D.The bonds are of speculative grade
23) A major focus of financial planning is to:
A.minimize a firm’s risk
B.maximize a firm’s risk
C.analyze and select risks for the firm
D.train the firm’s management to operate without risk
24) Currency swaps are used to:
A.lock in an exchange rate for future delivery of a foreign currency
B.effectively transform loans originated in one currency to a different currency
C.transform fixed-rate loans into variable-rate loans
D.exchange foreign currencies in amounts not possible in the foreign exchange market
25) What will be the effect on retained earnings if a firm with 5,000 shares outstanding
earns $10 per share and has a 30% plowback ratio? It will increase by:
A.$15,000
B.$30,000
C.$35,000
D.$50,000
26) The “Bootstrap Game” is played somewhat in defiance of traditional merger logic in
that it:
A.provides immediate benefit through improved management
B.does not offer a positive NPV from the merger
C.stays in effect only until EPS are increased
D.does not require the approval of a majority of shareholders
27) Common stocks have offered an annual risk premium in nominal terms, but they
have:
A.also offered the risk premium in real terms
B.not offered a risk premium in real terms
C.not offered more than corporate bonds in real terms
D.offered only slightly more than Treasury bonds in real terms
28) Major international commercial banks are:
A.the vast majority of underwriters in the United States
B.not allowed to engage in any form of underwriting
C.not able to compete with U.S. investment banks
D.engaged in underwriting a significant portion of securities
29) When issuing new stock, a firm received $50 million while the underwriting spread
was $4 million and total direct expenses were $6 million. The percentage of the
proceeds absorbed by direct expenses was:
A.7.14%
B.8.00%
C.10.71%
D.12.00%
30) General Gadget Corp. (GGC) is a U.S.-based multinational firm that makes
electrical coconut scrapers. These gadgets are made only in the United States using
local inputs. The scrapers are sold mainly to Asian and West Indian countries where
coconuts are grown.
a. If GGC sells scrapers in Trinidad, what must the firm consider when calculating its
revenues?
b. In what currency should GGC borrow funds to pay for its investment in order to
mitigate its foreign exchange exposure?
c. Suppose that GGC begins manufacturing its products in Trinidad using local
(Trinidadian) inputs and labor. How does this affect its exchange rate risk?
31) If the net present value of a project that costs $20,000 is $5,000 when the discount
rate is 10%, then the:
A.project’s IRR equals 10%
B.project’s rate of return is greater than 10%
C.net present value of the cash inflows is $4,500
D.project’s cash inflows total $25,000
32) Which of the following is true for the owner of a call option?
A.The loss potential is unlimited
B.The profit potential is unlimited
C.The premium exceeds the strike price
D.There is no expiration date, unless the option is a European call
33) One reason suggesting that banks may be better than individuals at matching
lenders to borrowers is that banks:
A.can shift loan risk to their deposit customers
B.are motivated by the potential for profit
C.do not have any income tax liability
D.have information to evaluate creditworthiness
34) Which of the following statements is correct concerning marketable securities on a
firm’s balance sheet?
A.All are U.S. government obligations
B.All earn interest income
C.All are without price risk
D.Not all are guaranteed against loss
35) Instead of increasing its long-term debt by borrowing money to purchase new stereo
equipment, Jay’s Jams Inc. decides to lease the equipment. How does this affect its
long-term debt ratio?
A.It will decrease
B.It will increase
C.It will remain unchanged
D.The effects are unknown without the amount of the lease obligation
36) How much interest is earned in just the third year on a $1,000 deposit that earns 7%
interest compounded annually?
A.$70.00
B.$80.14
C.$105.62
D.$140.00
37) Which of the following capital budgeting proposals is most likely to display a
conflict of interests?
A.The proposal with the highest NPV
B.The proposal with the longest payback period
C.The proposal with the highest IRR and quickest payback
D.The proposal to solve pollution problems cited by the EPA
38) If a project’s expected return is 15%, which represents a 35% return in a booming
economy and a 5% return in a stagnant economy, what is the probability of a booming
economy?
A.18.33%
B.25.00%
C.33.33%
D.50.00%
39) The implications of the forecasts from a financial plan are determined by the:
A.plan inputs
B.balancing item
C.planning model
D.plowback ratio
40) What is the marginal impact on taxes for a profitable corporation in the 35%
marginal tax bracket that incurs an additional dollar of depreciation expense?
A.A decrease of 65 cents
B.A decrease of 35 cents
C.An increase of 65 cents
D.Zero impact
41) What is the amount of the annual depreciation tax shield for a firm with $200,000 in
net income, $75,000 in depreciation expense, and a 35% marginal tax rate?
A.$26,250
B.$43,750
C.$70,000
D.$75,000
42) Which of the following elements of credit terms might encourage purchasers from
paying with a discount?
A.A lower discount percentage
B.A longer payment period
C.A shorter discount period
D.A shorter payment period
43) The overall goal of capital budgeting projects should be to:
A.decrease the firm’s reliance on debt
B.increase the firm’s sales
C.increase the firm’s outstanding shares of stock
D.increase the wealth of the firm’s shareholders
44) How much will a firm need in cash flow before tax and interest to satisfy
debtholders and equityholders if the tax rate is 35%, there is $13 million in common
stock requiring a 10% return, and $6 million in bonds requiring a 6% return?
A.$1,392,000
B.$1,488,000
C.$2,360,000
D.$2,480,000
45) If a 20% reduction in forecast sales would not extinguish a project’s profitability,
then sensitivity analysis would suggest:
A.deemphasizing that variable as a critical factor
B.requiring a more detailed sales forecast
C.that the initial sales forecasts were inflated
D.reallocating fixed costs to this product
46) What is the most likely conclusion for a firm whose statement of cash flows shows
an increase in cash balances and has negative cash flows from both operations and
financing?
A.The firm has low depreciation expense
B.The firm did not pay any dividends
C.The firm sold more equipment than it purchased
D.The firm has a low interest rate on its debt
47) A firm issues 100,000 equity shares with a total market value of $5,000,000. The
firm’s market value of debt is also of equal amount (i.e., $5,000,000). The firm is
expected to generate $1.5 million in operating income and pay $250,000 in interest.
Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if
the firm’s borrowing and interest expense increases by 50% and the number of shares in
circulation is cut by 50% (assuming that the share price remains unchanged with this
change in capital structure)?
A.EPS decrease to $10.00
B.EPS decrease to $11.67
C.EPS increase to $15.00
D.EPS increase to $22.50
48) The option to abandon a project investing in real assets can be considered to have a
strike price equal to the:
A.historical cost of the asset
B.market value of the asset at abandonment
C.forgone revenues anticipated from the project
D.forgone interest on the bonds used to finance the real assets
49) The CAPM provides a model of determining expected security returns that is:
A.precise in its calculations of risk premiums
B.imprecise, but generally an acceptable guideline
C.excellent for high beta stocks
D.excellent for well-diversified portfolios
50) What dividend is paid on preferred stock if investors require a 9% rate of return and
the stock has a market value of $54.00 per share and a book value of $50.00 per share?
A.$2.92
B.$4.50
C.$4.68
D.$4.86
51) Corporations are referred to as public companies when their:
A.shareholders have no tax liability
B.shares are held by the federal or state government
C.stock is publicly traded
D.products or services are available to the public
52) When a manager does not accept a positive NPV project, shareholders face an
opportunity cost in the amount of the:
A.project’s initial cost
B.project’s NPV
C.project’s discounted cash flows
D.soft capital rationing budget
53) How much more is a perpetuity of $1,000 worth than an annuity of the same
amount for 20 years? Assume a 10% interest rate and cash flows at end of period.
A.$297.29
B.$1,486.44
C.$1,635.08
D.$2,000.00
54) An investor who owns stock on the company’s __________ date will receive the
dividends declared.
A.ex-dividend
B.record
C.payment
D.declaration
55) According to MM, if individuals cannot obtain the same borrowing terms as firms,
then:
A.capital structure may be relevant
B.capital structure may be irrelevant
C.individuals should not invest in levered firms
D.firms should increase their payments to individuals
56) What is the market price of a share of stock for a firm with 100,000 shares
outstanding, a book value of equity of $3,000,000, and a market/book ratio of 3.0?
A.$8.57
B.$30.00
C.$90.00
D.$105.00
57) What is the NPV for the following project cash flows at a discount rate of 15%? C0
= ($1,000), C1 = $700, C2 = $700.
A.($308.70)
B.($138.00)
C.$138.00
D.$308.70
58) Following the Z score proposed by Edward Altman, calculate the Z score of a firm
with the following financial ratios:
EBIT/total assets = .12
Sales/total assets = 1.4
Market equity/book debt = .9
Retained earnings/total assets = .4
Working capital/total assets = .12
59) What happens when capital structure changes?
60) Describe the process of sensitivity analysis and list some of the common variables
that you would expect to analyze.
61) Why is beta thought to be a more relevant measure of risk than standard deviation
for a diversified investor?
62) Discuss the premise behind the validity of a numerical credit scoring system.