1) The net working capital of a firm will decrease when accrued wages are paid with
cash.
2) The balancing items in a financial planning model are variables that adjust to
maintain the consistency of a financial model. They are also known as plugs.
3) As a side benefit, better risk management decreases the firm’s debt capacity.
4) The credit crisis of 2007 to 2009 largely left the market for commercial paper
unaffected.
5) Book values are “forward-looking” measures of value.
6) The New York Stock Exchange is one of few markets to have a higher daily volume
than the foreign exchange market.
7) A firm that buys on credit is in effect borrowing from its supplier.
8) The company cost of capital does not make an adjustment for the tax effect.
9) MM’s dividend irrelevance proposition assumes that dividends do not affect
investment or borrowing policies.
10) Debt financing affects neither the operating risk nor the business risk of the firm.
However, if there is less equity outstanding, a change in operating income has a greater
impact on earnings per share.
11) The issued and repurchased shares are held in a company’s treasury and are known
as treasury stock.
12) SEC has insisted that the security should be sold to no more than one hundred or so
knowledgeable investors in a private placement.
13) For all U.S. corporations except those in the lowest and highest tax brackets, their:
A.marginal tax rate exceeds their average tax rate
B.average tax rate exceeds their marginal tax rate
C.marginal tax rate equals their average tax rate
D.marginal tax rate equals 15%
14) If the exchange rate of euros/U.S. dollars is 2.04/1, then:
A.it takes $2.04 to buy each euro
B.the euro is worth more than one U.S. dollar
C.each euro is worth approximately 49 cents
D.20 cents will purchase one euro
15) As debt is added to the capital structure, the:
A.WACC will continually decline
B.WACC will continually increase
C.cost of debt can be expected to rise
D.WACC will be unaffected
16) Which of the following financial markets is in one centralized location?
A.NYSE
B.NASDAQ
C.The over-the-counter market
D.The European Monetary Union
17) A firm with ______ profit margin should extend credit to customers with a high
probability of default.
A.high
B.average
C.low
D.zero
18) When management selects production technologies that include a high proportion
of fixed costs, it:
A.decreases the DOL
B.increases the DOL
C.decreases the NPV-breakeven level of sales
D.reduces the NPV of the cash flows
19) What is the most likely prediction after a firm reduces its regular dividend
payment?
A.Earnings are expected to decline
B.Investment is expected to increase
C.Retained earnings are expected to decrease
D.Share price is expected to increase
20) A financial institution:
A.is a kind of financial intermediary
B.simply pools and invests savings
C.raises financing by selling shares or policies
D.invests primarily in commodities
21) A homeowner can refinance the mortgage loan on the house at a lower rate when
the interest rates go down. The right to refinance at a lower rate is a(n):
A.put option
B.call option
C.option to expand
D.none of these
22) A firm’s goal is to maintain a 75% debt-equity ratio. How much equity would be
required if the results of a financial planning model indicate that the firm’s assets will
grow to $4 million?
A.$1.00 million
B.$1.71 million
C.$2.29 million
D.$3.00 million
23) Which of the following is the most appropriate reason for an acquiring firm’s
shareholders to prefer using stock financing for acquisitions?
A.There is no cash outflow
B.It mitigates the effects of overvaluation of the target firm
C.It mitigates the effects of undervaluation of the target firm
D.It avoids dilution of shares
24) The primary reason for an underwriters’ syndication is to:
A.monitor the actions of the different underwriters
B.reduce the risk of selling a large issue
C.increase the size of the spread
D.avoid the scrutiny of the Securities and Exchange Commission
25) A bond with 10 years until maturity, an 8% coupon, and an 8% yield to maturity
increased in price to $1,107.83 yesterday. What apparently happened to interest rates?
A.Rates increased by 2.0%
B.Rates decreased by 2.0%
C.Rates increased by .72%
D.Rates decreased by 1.5%
26) How much should you be prepared to pay for a 10-year bond with a 6% coupon and
a yield to maturity of 7.5%?
A.$411.84
B.$897.04
C.$985.00
D.$1,000.00
27) If an investor purchases a bond when its current yield is higher than the coupon
rate, then the bond’s price will be expected to:
A.decline over time, reaching par value at maturity
B.increase over time, reaching par value at maturity
C.be less than the face value at maturity
D.exceed the face value at maturity
28) The investmenttiming decision is aimed at analyzing whether the:
A.cash flows occur at the beginning or end of each time period
B.payback period or NPV analysis should be used
C.project is a borrowing or lending project
D.investment should occur now or at some future point
29) Average daily collection of checks for a firm is $50,000. The firm also writes on the
average $35,000 of checks daily. If the collection period for checks is 5 days, calculate
the net float.
A.-$75,000
B.$75,000
C.-$425,000
D.$425,000
30) The WACC is used to value:
A.projects with any risk
B.projects with the same risk as the firm’s current business
C.projects with the same risk as the firm’s debt
D.projects with the same risk as the firm’s equity
31) In a three-for-two stock split for a company that previously had 1 million shares
outstanding selling at $100 per share and a total market value of $100 million, which of
the following is true?
A.The number of outstanding shares will drop to 666,666, and the stock price will
increase to $150
B.The number of outstanding shares will increase to 1.5 million, and the stock price
will drop to $66.67
C.The number of outstanding shares will increase to 1.5 million, and the stock price
will rise to $133.33
D.The market value of the firm will increase
32) Which effort will help a firm boost its internal growth rate?
A.Plowing back a high proportion of its earnings
B.Achieving a high return on equity
C.Maintaining a low debt-to-asset ratio
D.All of these
33) Treasury bonds have provided a higher historical return than Treasury bills, which
can be attributed to:
A.greater default ris
B.a higher level of unique risk
C.greater price risk due to longer maturities
D.the fact that they are less frequently traded than bills
34) In general, equity is considered a _____ investment than debt, because payments on
debt are _____.
A.safer; lower
B.safer; less certain
C.riskier; guaranteed by the company
D.riskier; guaranteed by the federal government
35) The purpose of a floating-rate bond is to:
A.save interest expense for corporate issuers
B.avoid making interest payments until maturity
C.shift the yield curve
D.offer rates adjusted to current market conditions
36) Which of the following statements is correct concerning the cost of two firms
merging? The cost:
A.is fixed when the merger is financed with cash
B.can be affected by postmerger gains if cash is used
C.decreases as the postmerger share price increases when stock is used to finance the
merger
D.is not determined until after the merger, regardless of the type of financing
37) Any financial benefit derived from the interest tax shield accrues to the:
A.bondholders
B.shareholders
C.bondholders and shareholders, equally
D.shareholders and the federal government
38) The “recovery” of an additional investment in working capital is assumed to:
A.occur at the end of the project’s life
B.occur at the beginning of the project’s life
C.occur whenever the project first shows a profit
D.be a sunk cost
39) Which of the following would not be considered a use of cash?
A.Dividends
B.Decreased accounts payable
C.Depreciation
D.Increased accounts receivable
40) Depreciation expense is used to:
A.allocate costs to all departments of the firm
B.determine when an asset is fully paid off
C.allocate historical cost over the life of an asset
D.equate the historical cost and market values of an asset
41) When mutually exclusive projects have different lives, the project that should be
selected will have the:
A.highest IRR
B.longest life
C.lowest equivalent annual cost
D.highest NPV, discounted at the opportunity cost of capital
42) What is the relationship between the market risk of a security and the rate of return
that investors demand of that security?
43) Discuss how tactics such as shark repellents or poison pills accomplish their intent.
44) A soybean farmer anticipates the harvest of 10,000 bushels but is concerned about
the spot price that may exist at that time. He therefore sells two futures contracts (5,000
bushels each, @ $5.75 per bushel). Unfortunately, the farmer was overly pessimistic,
and the spot price at contract expiration is $6.00 per bushel. Ignoring the premium paid,
and making the simplifying assumption that the contract was only held for one “day,”
show the farmer’s financial results of hedging.
45) What does it mean to say that financing is a zero-NPV transaction?
46) How might differences in the tax treatment of dividends and capital gains affect
dividend policy?