1) Treasury stock generally does not have voting rights, does not earn dividends, and
does not have a claim on assets in liquidation.
2) The cost of capital is the rate of return a firm must earn on investments in order to
increase the firm’s value.
3) Preferred stock is a special form of stock having a fixed periodic dividend that must
be paid prior to payment of any interest to outstanding bonds.
4) The three basic types of risks associated with international cash flows are business
and financial risks, inflation and exchange rate risks, and political risks.
5) The internal rate of return (IRR) is defined as the discount rate that equates the net
present value with the initial investment associated with a project.
6) Dividends received by a corporation on an investment in the common and preferred
stock of another corporation, where ownership in the dividend paying corporation is
less than 20%, is subject to 70 percent exclusion for tax purposes.
7) The various causes of business failure are mismanagement, poor economic
conditions, and corporate maturity.
8) Benchmarking is a type of time-series analysis in which the firm’s ratio values are
compared to those of a key competitor or group of competitors, primarily to isolate
areas of opportunity for improvement.
9) Sunk costs are cash outlays that have already been made and therefore have no effect
on the cash flows relevant to the current decision.
10) The repurchase of common stock results in a type of reverse dilution, since the
earnings per share and the market price of stock are increased by reducing the number
of shares outstanding.
11) If the P/E paid is greater than the P/E of the acquiring company, on a postmerger
basis the target firm’s EPS increases and the acquiring firm’s EPS decreases.
12) An internal rate of return greater than the cost of capital guarantees that the firm
will earn at least its required return.
13) In an inefficient market, securities are typically in equilibrium, which means that
they are fairly priced and that their expected returns equal their required returns.
14) XYZ Corporation borrowed $100,000 for six months from the bank. The rate is
prime plus 2 percent. The prime rate was 8.5 percent at the beginning of the loan and
changed to 9 percent after two months. This was the only change. How much interest
must XYZ corporation pay?
A) $2,476
B) $5,417
C) $18,212
D) $21,500
15) A popular extension of materials requirement planning that integrates data from
numerous areas such as accounting, finance, engineering, and manufacturing using a
sophisticated computer system is called ________.
A) computerized materials integration II
B) manufacturing resource planning II
C) inventory allocation planning II
D) inventory integration planning II
16) Although a firm’s existing mix of financing sources may reflect its target capital
structure, it is ultimately ________.
A) the internal rate of return that is relevant for evaluating the firm’s future investment
opportunities
B) the marginal cost of capital that is relevant for evaluating the firm’s future
investment opportunities
C) the risk-free rate of return that is relevant for evaluating the firm’s future investment
opportunities
D) the risk-free rate of return that is relevant for evaluating the firm’s future financing
opportunities
17) When determining the after-tax cost of a bond, the face value of the issue must be
adjusted to the net proceeds amounts by considering ________.
A) the risks
B) the flotation costs
C) the approximate returns
D) the taxes
18) Tangshan China Company’s stock is currently selling for $80.00 per share. The
expected dividend one year from now is $4.00 and the required return is 13 percent.
What is Tangshan’s dividend growth rate assuming that dividends are expected to grow
at a constant rate forever?
A) 8%
B) 9%
C) 10%
D) 11%
19) Relative to cash flows of domestic firms, by diversifying internationally,
multinationals ________.
A) will have higher cash flows
B) can achieve further risk reduction
C) are unable to change the risk
D) pay higher dividends
20) Consider the following projects, X and Y, where the firm can only choose one.
Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y
also costs $600, and generates cash flows of $500 and $275 for the next 2 years,
respectively. Which investment should the firm choose if the cost of capital is 10
percent?
A) Project X, since it has a higher NPV than Project Y
B) Project Y, since it has a higher NPV than Project X
C) Project X, since it has a lower NPV than Project Y
D) Project Y, since it has a lower NPV than Project X
21) Which of the following is true of conversion feature of a bond?
A) It adds a degree of speculation to a bond issue, although the issue still maintains its
value as a bond
B) It decreases the marketability and liquidity of a bond since conversion feature is
perceived by the market as a pessimistic approach about the firm’s future
C) It is analogous to the put option, since it gives the bondholders the option to sell the
bonds at any time till maturity
D) It increases the cost of debt financing
22) Common stockholders are sometimes referred to as ________.
A) non preemptive right holders
B) managers
C) creditors
D) residual owners
23) The amount of money that would have to be invested today at a given interest rate
over a specified period in order to equal a future amount is called ________.
A) future value
B) present value
C) future value of an annuity
D) compounded value
24) A firm has an issue of preferred stock outstanding that has a stated annual dividend
of $4. The required return on the preferred stock has been estimated to be 16 percent.
The value of the preferred stock is ________.
A) $64
B) $16
C) $25
D) $50
25) What is the current price of a $1,000 par value bond maturing in 9 years with a
coupon rate of 8 percent, paid annually, that has a YTM of 9 percent?
A) $700
B) $945
C) $940
D) $1,062
26) Detta borrows $20,000 from the bank. For a five-year loan, the bank requires
annual end-of-year payments of $4,878.05. The annual interest rate on the loan is
________.
A) 6 percent
B) 7 percent
C) 8 percent
D) 9 percent
27) A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has
determined that it can stretch the credit period (net period only) by 25 days without
damaging its credit standing with the supplier. Assuming the firm needs short-term
financing and can borrow from the bank on a line of credit at an interest rate of 14
percent, the firm should ________.
A) give up the cash discount and finance the purchase with the line of credit
B) give up the cash discount and pay on the 70th day after the date of sale
C) take the cash discount and pay on the first day of the cash discount period
D) take the cash discount and finance the purchase with the line of credit, the cheaper
source of funds
28) Daniel Custom Cycles’ common stock currently pays no dividends. The company
plans to begin paying dividends beginning 3 years from today. The first dividend will
be $3.00 and dividends will grow at 5 percent per year thereafter. Given a required
return of 15 percent, what would you pay for the stock today?
A) $25.33
B) $18.73
C) $29.86
D) $22.68
29) Lower (less positive and more negative) the correlation between asset returns,
________.
A) lesser the potential diversification of risk
B) greater the potential diversification of risk
C) lower the potential profit
D) lesser the assets have to be monitored
30) If a firm has class A and class B common stock outstanding, it means that
________.
A) each class receives a different dividend
B) the par value of each class is different
C) the dividend paid to one of the classes is tax deductible by the corporation
D) one of the classes is probably nonvoting stock
31) A(n) ________ lease is a contractual arrangement whereby the lessee agrees to
make periodic payments to the lessor for five or fewer years for an asset’s services. This
type of lease may also be canceled at the option of the lessee.
A) financial
B) operating
C) capital
D) direct