1) If the market is efficient, stock prices should be expected to react only to new
information that is released.
2) A company that borrows $1 million short term and invests the proceeds in inventory
will see its cash position unchanged.
3) A healthy current ratio and an unhealthy quick ratio may be caused by excess
inventory.
4) The project cost of capital depends on the use to which that capital is put. Therefore,
it depends on the risk of the project and also on the risk of the company.
5) Hedging is foolish unless you have reason to believe that the odds are stacked against
your favor.
6) Sector funds invest in the broad market index.
7) The payback period considers all project cash flows.
8) Financial analysts are involved in monitoring and controlling the risk associated with
investment projects and financing decisions.
9) An effective annual rate must be greater than an annual percentage rate.
10) The primary goal of any company should be to maximize current period profits.
11) Which of the following would be considered a capital budgeting decision?
A.Planning to issue common stock rather than issuing preferred stock
B.Deciding to expand into a new line of products, at a cost of $5 million
C.Repurchasing shares of common stock
D.Issuing debt in the form of long-term bonds
12) A dividend clientele effect assumes that:
A.investors prefer higher rather than lower dividends
B.shareholders are indifferent regarding dividends
C.investors have specific dividend preferences
D.investors have identical dividend preferences
13) The customary delivery procedure at the expiration of a commodity futures contract
is:
A.delivering the commodity to the futures buyer
B.delivering the commodity to the futures exchange
C.offsetting the initial futures position and settling in cash
D.adding the profit or loss to your margin account and continuing to trade
14) Which of the following statements regarding investment in working capital is
incorrect?
A.Investment in working capital, unlike investment in plant and equipment, represents a
positive cash flow
B.The cash flow is measured by the change in working capital, not the level of working
capital
C.The working capital may change during the life of the project
D.Working capital is recovered at the end of the project
15) Which of the following statements is incorrect concerning stock indexes?
A.They have been developed for foreign stocks
B.They have been developed for smaller companies
C.Indexes include all common stocks
D.Some indexes are equally weighted
16) Which of the following should be assumed about a project that requires a $100,000
investment at time-period zero, then returns $20,000 annually for 5 years?
A.The NPV is negative
B.The NPV is zero
C.The profitability index is 1.0
D.The IRR is negative
17) Currently, M & S Inc. has 2 million shares outstanding selling at $70 a share. A
rights issue will be made that allows 1 share to be purchased for every 5 shares
currently held by stockholders for $40 each. Which of the following is true?
A.The number of shares outstanding will fall to 1.6 million
B.The firm will raise $13.33 million
C.The stock price will fall to $65
D.The total value of the firm will equal $124 million
18) Which of the following is correct for a firm that reduces its accounts receivable
balance from the previous quarter?
A.Collections exceeded beginning receivables balance
B.Sales exceeded collections
C.Beginning receivables balance exceeded sales
D.Collections exceeded sales
19) What must happen to prices over the course of a contract for the seller of a futures
contract to maximize benefits of the hedge?
A.Prices must decrease
B.Prices must increase
C.Prices must remain constant
D.The seller will profit on the hedge regardless of the direction of price movements
20) A policy of dividend ‘smoothing” refers to:
A.maintaining a constant dividend payout ratio
B.keeping the regular dividend at the same level indefinitely
C.maintaining a steady progression of dividend increases over time
D.alternating cash dividends with stock dividends
21) Investment projects that plot above the security market line would be considered to
have:
A.a positive NPV
B.a negative NPV
C.a zero NPV
D.an excessively high discount rate
22) One of the easiest methods of diversifying away firm-specific risks is to:
A.buy only stocks with a beta of 1.0
B.build a portfolio with 40 to 55 individual stocks
C.purchase the shares of a mutual fund
D.purchase stocks that plot above the security market line
23) Buckingham, Inc., a British corporation, owes Yank Inc., a U.S. corporation, $1
million due in 2 months. How can Buckingham hedge the exchange risk?
A.Sell pounds in the spot market
B.Buy pounds in the forward market
C.Sell dollars in the spot market
D.Buy dollars in the forward market
24) Which of the following call options would command the higher premium, other
things equal?
A.October 1996 expiration, $45 strike price
B.December 1996 expiration, $40 strike price
C.March 1997 expiration, $45 strike price
D.June 1997 expiration, $40 strike price
25) The weighted-average cost of capital, after tax, for a firm with a 65/35 debt/equity
split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be:
A.7.02%
B.8.63%
C.10.80%
D.13.80%
26) Shelf registration allows firms to:
A.purchase securities for up to 2 years without registration
B.incur only short time delays in selling securities
C.wait for 2 years before paying for securities
D.offer rights issues to nonexisting shareholders
27) The current yield tends to overstate a bond’s total return when the bond sells for a
premium because:
A.the bond’s price will decline each year
B.coupon payments can change at any time
C.bonds selling for a premium have low default risk
D.taxes must be paid on the current yield
28) A positive value for PVGO suggests that the firm has:
A.a positive return on equity
B.a positive plowback ratio
C.investment opportunities with superior returns
D.a high rate of constant growth
29) What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals
$5,000, current ratio equals 3.0, quick ratio equals 1.5, and the firm has $1,800 in
current assets?
A.2.78 times
B.4.17 times
C.5.56 times
D.8.33 times
30) What would you expect to happen to the price of a share of stock on the day it goes
ex-dividend? The price should:
A.increase by the amount of the dividend
B.decrease by the amount of the dividend
C.decrease by one-half the amount of the dividend
D.remain constant
31) Which of the following statements is correct for a firm that has undergone a
leveraged buyout?
A.Its shares are traded publicly
B.Its capital is mostly equity financed
C.Its shares are not traded publicly
D.It has a larger shareholder base
32) When graphing NPV at different discount rates for mutually exclusive projects, the
project with the lower IRR should be selected whenever:
A.the rate corresponding to the crossover NPV exceeds the opportunity cost of capital
B.the rate corresponding to the crossover NPV is less than the opportunity cost of
capital
C.that IRR exceeds the opportunity cost of capital
D.the NPV is negative when discounted at the IRR
33) Which of the following categories of a statement of cash flows is affected by the
payment of interest expense?
A.Cash flows from operations
B.Cash flows from noncash expenses
C.Cash flows from investments
D.Cash flows from financing
34) Firms A and B are each worth $50 million, but generate a $20 million gain when
merged. If the cost of the merger was $5 million, how much did firm A pay for firm B?
A.$50 million
B.$55 million
C.$60 million
D.$65 million
35) A planner’s percentage of sales model forecasts that sales will grow by 20% next
year. If costs of goods sold are proportionate at 70% of sales, then costs of goods sold
will:
A.grow to 90% of sales
B.grow in dollars by 70%
C.not change in dollar amount
D.increase by 20% in dollar terms
36) A primary market would be utilized when:
A.investors buy or sell existing securities
B.shares of common stock are exchanged
C.securities are initially issued
D.a commission must be paid on the transaction
37) What are subprime mortgages and how were they a part of the Financial Crisis of
2007-2009?
38) What risk is assumed by an underwriter when issuing a firm commitment to a
corporation? Will the corporation be better off with the firm commitment?
39) How much is an investor’s tolerance for risk worth over a long horizon? Calculate
the difference in accumulation in real terms for an investor who initially invests
$25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or a
portfolio of diversified common stocks. Assume the historic real returns of 2.1%
annually for bonds and 9.3% for common stocks.
40) Define DOL and discuss what affects it and how to interpret it.
41) Calculate the expected return, variance, and standard deviations for investments in
either stock A or stock B, or an equally weighted portfolio of both.
42) Calculate the payback period for each of the following projects, then comment on
the advisability of selection based on the payback period criterion: Project A has a cost
of $15,000, returns $4,000 after-tax the first year and this amount increases by $1,000
annually over the 5-year life; Project B costs $15,000 and returns $13,000 after-tax the
first year, followed by 4 years of $2,000 per year. The firm uses a 10% discount rate.
43) What are some common errors investors make in assessing the probability of
uncertain outcomes? How did such errors reinforce the dot-com boom?
44) Describe the shape of the current yield curve. Would you consider that to be fairly
typical?
45) How do firms develop a short-term financing plan that meets their need for cash?