1) If a project’s value is less than its required investment, then the project is attractive
financially.
2) Target firms frequently deter potential bidders by devising poison pills, which make
the company unappetizing.
3) Assuming a project has the same risk and financing as the firm, it will have a positive
NPV if its rate of return is greater than the firm’s WACC.
4) The big savings from merging two banks would come from consolidating operations
and eliminating redundant costs.
5) If investors believe a company will have the opportunity to make very profitable
investments in the future, they will pay more for the company’s stock today.
6) When a public company makes a general cash offer of debt or equity, it essentially
follows the same procedure used when it first went public.
7) Speculative-grade bonds have default risk; investment grade bonds do not.
8) A reduction in accounts payable uses cash, reducing the firm’s net cash balance.
9) Economies of vertical integration are one possible source of synergy in mergers.
10) The sustainable growth rate is the rate at which the firm can grow without changing
its leverage ratio.
11) Loan covenants can ensure that companies will accept all positive-NPV investments
and reject negative ones.
12) An asset’s liquidity is determined by how readily the asset can be converted to an
appropriate amount of cash.
13) Dividends are deductible for purposes of calculating a corporation’s taxable income.
14) The dividend discount model states that today’s stock price equals the present value
of all expected future dividends.
15) The difference between the current and quick ratios is that inventory has been
subtracted from current assets.
16) The value of a convertible bond is less than the value of a straight bond with similar
coupon and maturity.
17) Shelf registration is used more frequently for equity financing than for debt
financing.
18) If two projects offer the same positive NPV, then:
A.they also have the same IRR
B.they have the same payback period
C.they are mutually exclusive projects
D.they add the same amount to the value of the firm
19) What will be the approximate population of the United States, if its current
population of 300 million grows at a compound rate of 2% annually for 25 years?
A.413 million
B.430 million
C.488 million
D.492 million
20) Which of the following lists presents the order of financing from most preferred to
least preferred according to the pecking order theory?
A.Debt issue, stock issue, internally generated funds
B.Internally generated funds, debt issue, stock issue
C.Stock issue, internally generated funds, debt issue
D.Internally generated funds, stock issue, debt issue
21) Evaluate the following project using an IRR criterion, based on an opportunity cost
of 10%: C0= -6,000, C1= +3,300, C2= +3,300.
A.Accept, since IRR exceeds opportunity cost
B.Reject, since opportunity cost exceeds IRR
C.Accept, since opportunity cost exceeds IRR
D.Reject, since IRR exceeds opportunity cost
22) What is the most commonly bundled type of loan in among asset-backed bonds?
A.Automobile loans
B.Mortgages
C.Credit card receivables
D.None of these
23) Changes in net working capital can occur at:
A.the beginning of a project
B.the end of a project
C.any time during the life of a project
D.the beginning of any accounting period
24) GrowFast currently sells at a price-earnings multiple of 10 . The firm has 2 million
shares outstanding, and sells at a price per share of $40. Steady & Stable has a P/E
multiple of 8, has 1 million shares outstanding, and sells at a price per share of $20.
a. If GrowFast acquires the other firm by exchanging one of its shares for every two of
Steady & Stable’s, what will be the earnings per share of the merged firm?
b. If the merger has no economic gain, what will be the P/E of the new firm? What will
happen to GrowFast’s price per share? Will any of the shareholders experience a change
in wealth?
c. What will happen to GrowFast’s price per share if the market does not realize that the
P/E ratio of the merged firm ought to differ from GrowFast’s premerger ratio? Who
gains and by how much in this case?
25) How many monthly payments remain to be paid on an 8% mortgage with a 30-year
amortization and monthly payments of $733.76, when the balance reaches one-half of
the $100,000 mortgage?
A.Approximately 268 payments
B.Approximately 180 payments
C.Approximately 92 payments
D.Approximately 68 payments
26) The present value of the following cash flows is known to be $6,939.91; $500
today, $2,000 in 1 year, and $5,000 in 2 years. What discount rate is being used?
A.3%
B.4%
C.5%
D.6%
27) Compare the after-tax returns for a corporation that invests in preferred stock with a
12% dividend versus a common stock with no dividend but a 16% capital gain. The
corporation’s tax rate is 35%. The:
A.common stock returns 2.60% more than preferred
B.preferred stock returns 0.34% more than common
C.common stock returns 2.32% more than preferred
D.returns are equal on an after-tax basis
28) The current ratio is a good proxy for a firm’s:
A.liquidity
B.efficiency
C.leverage
D.profitability
29) What is the payable period for a firm with average accounts payable of $4 million
and annual cost of goods sold of $44 million.
A.20.0 days
B.30.0 days
C.35.6 days
D.33.2 days
30) To state that financing at current market terms is a zero-NPV transaction indicates
that:
A.firms should avoid these methods of financing
B.there is no cost involved in the financing
C.the market has not set financing terms correctly
D.there are no “bargains” when financing at current terms
31) What happens over time to the real cost of purchasing a home if the mortgage
payments are fixed in nominal terms and inflation is in existence?
A.The real cost is constant
B.The real cost is increasing
C.The real cost is decreasing
D.The price index must be known to answer this question
32) What rate of return should an investor expect for a stock that has a beta of 1.25
when the market is expected to yield 14% and Treasury bills offer 6%?
A.10.0%
B.11.2%
C.12.4%
D.16.0%
33) Which of the following statements is correct for a project with a positive NPV?
A.The IRR must be greater than 0
B.Accepting the project has an indeterminate effect on shareholders
C.The discount rate exceeds the cost of capital
D.The profitability index equals 1
34) A farmer can hedge the risk of downward movement in the price of the produce by:
A.buying a call option
B.selling a put option
C.buying a put option
D.buying a futures contract
35) All of the following are types of innovative bonds except:
A.preferred stock
B.asset-backed bonds
C.reverse floaters
D.indexed bonds
36) The legal “life” of a corporation is:
A.coincidental with that of its CEO
B.equal to the life of its board of directors
C.permanent, as long as shareholders don’t change
D.permanent, regardless of current ownership
37) Which of the following would not be considered a real asset?
A.A corporate bond
B.A machine
C.A patent
D.A factory
38) Three months ago you bought for $4 a put option on a stock with an exercise price
of $100. If the stock price at expiration of this option is $92, what is your return on
investment?
A.200%
B.150%
C.100%
D.50%
39) Your accountant suspects a mistake in the computation of the payables period,
which has been reported at 54.75 days. Calculate the correct payables period, given the
following: annual sales = $1,200,000, annual cost of goods sold = $700,000, average
accounts payable = $105,000.
A.31.94 days
B.54.75 days
C.179.58 days
D.212.92 days
40) MM’s proposition concerning dividends contends that shareholders will:
A.offer higher prices for higher dividend payouts
B.not offer higher prices for higher dividend payouts
C.offer higher prices for lower dividend payouts
D.purchase only stocks that have high dividend payouts
41) A credit card account that charges interest at the rate of 1.25% per month would
have an annually compounded rate of _______ and an APR of _______.
A.16.08%; 15.00%
B.14.55%; 16.08%
C.12.68%; 15.00%
D.15.00%; 14.55%
42) Where would you prefer to invest, and why, if nominal rates are 10% in the United
States and 25% in Holland, while the expected rates of inflation are 5% and 19%,
respectively? Assume investments of equal risk.
A.Invest in Holland due to higher nominal rate
B.Invest in United States; real return is 1.1% higher
C.Invest in United States; real return is 0.1% higher
D.Invest in Holland; real return is 0.24% higher
43) The modified internal rate of return can be used to correct for:
A.negative NPV calculations
B.multiple internal rates of return
C.undefined payback periods
D.borrowing projects
44) Compared to accounting profits, why is EVA a better measure of a company’s
performance? What might happen to a manager if his or her plant earns a negative
EVA?
45) Some home loans involve “points,” which are fees charged by the lender. Each
point charged means that the borrower must pay 1% of the loan amount as a fee. For
example, if 0.5 point is charged on a $100,000 loan, the loan repayment schedule is
calculated on the $100,000 loan, but the net amount the borrower receives is only
$99,500. What is the effective annual interest rate charged on such a loan, assuming that
loan repayment occurs over 360 months, and that the interest rate is 1% per month?
46) If the stock market return in 2005 turns out to be 30%, what will happen to our
estimate of the “normal” risk premium? Does this make sense?
47) Congratulations! A stock of which you own 100 shares has just split three for two.
Its market price before the split was $30 per share. Now discuss what you would expect
to happen with this stock and your ownership interests.
48) What is a firm’s weighted-average cost of capital if the stock has a beta of 1.45,
Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In
addition to equity, the firm finances 30% of its assets with debt that has a yield to
maturity of 9%. The firm is in the 35% marginal tax bracket.
49) What do you think are the advantages of holding futures rather than the underlying
commodity? What do you think are the disadvantages?