Motorola has a contract to buy cellular telephones in Japan in 6 months. Payment will
be in Japanese yen. What type of exchange rate risk does Motorola face?
A.Economic
B.Operating
C.Transaction
D.Translation
Stock X paid a dividend of $2.50 yesterday. It is expected to grow at 7% indefinitely.
X’s return generally responds to market changes twice as much as does the average
stock. Treasury bills currently yield 8%. The market is yielding 11%. What should X
sell for today?
A.$38.21
B.$32.14
C.$17.21
D.$35.71
Which of the following causes net income to differ from cash flow?
A.Depreciation
B.The purchase of inventory on credit
C.The sale of merchandise on credit
D.All of the above
Assume the following facts about a firm’s financing in the next year:
The weighted cost of capital of this project is:
A.11.0%.
B.$113,000.
C.11.3%.
D.10.7%.
Which is not an example of a money market security?
A.A 30 day treasury bill
B.A one year treasury bill
C.Home mortgages
D.30 day loans by large companies
E.None of the above
In the running of a company, stockholders have:
A.a significant amount of direct power.
B.little power to influence corporate decisions.
C.concentrated power.
D.the ability to influence company managers
Which of the following transactions will cause net working capital to decrease?
A.Inventory is purchased on credit.
B.The firm declares and pays a cash dividend.
C.An account payable is paid with cash.
D.Inventory is sold for cash.
E.None of the above would cause net working capital to decrease.
Which of the following statements is most correct?
A.The market value of a bond usually approaches its par value as the bond approaches
maturity.
B.If the government unexpectedly announces that it expects inflation to increase, then
we would probably observe an immediate increase in bond prices.
C.A bond’s price depends on the issuer’s financial condition as well as the general level
of interest rates.
D.Statements a. and c. are correct.
E.All of the statements are correct.
The interest rates we observe on financial instruments are based on the following
components:
A.the real risk-free rate.
B.inflationary expectations.
C.risk premiums.
D.All the above
E.None of the above
Suppose two firms are exactly the same except Firm A has no debt in its capital
structure and Firm B has 50% debt in its capital structure. Firm A has a WACC of 15%.
If Firm B’s cost of debt is 10% (after-tax value), what must Firm B’s cost of equity be to
have the same WACC as Firm A?
A.15%
B.20%
C.12.5%
D.25%
Which of the following best describes the agency relationship in a business setting?
A.Stockholders are the agents of the bondholders.
B.Management are the agents of the employees.
C.Bondholders are the agents of management.
D.Management are the agents of the stockholders.
E.Stockholders are the agents of the employees.
The Summer Breeze Hotel borrowed $100,000 from the Meadowlands Bank to pay for
a new air conditioning system. The loan is for a period of 5 years at an interest rate of
10% and requires 5 equal end-of-year payments that include both principal and interest
on the outstanding balance. What will be the outstanding balance after the third
payment?
A.$60,000
B.$20,865
C.$45,788
D.$50,866
Deductions are expenditures that can be subtracted in calculating taxable income.
Which of the following is a deduction?
A.Dependency exemption
B.Credit card interest
C.Interest on municipal bonds
D.Donations to charities
A source of cash would be generated by which of the following?
A.An increase in accounts receivable
B.An increase in inventory
C.A decrease in accrued expenses
D.An increase in accounts payable
The minimum return that will make an investment acceptable to an investor is called:
A.the required rate of return.
B.the risk premium.
C.the risk-free interest rate.
D.beta.
The following is a listing of tax considerations for John and Jane Alexander, who file
jointly and have two children.
Assume the following hypothetical tax table:
The personal exemption rate is $3,050
The long-term capital gains rate for this family is 18%.
a. How much is the Alexanders’ taxable income?
b. What is the tax on their ordinary income?
c. What is their capital gains tax?
d. What is their overall average tax rate including the tax on capital gains?
e. What is their marginal tax rate on ordinary income?
What is Babcock’s times interest earned, if its total interest charges are $20,000, sales
are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.
A.2.65
B.1.1
C.2.1
D.1.2
If a company buys a machine for $10,000 cash and plans to depreciate it at $1,000 per
year for 10 years, the two most important aspects of this transaction to the finance
manager (as opposed to the accountant) are:
A.the purchase of the machine and the tax savings from the depreciation expense.
B.recording the purchase of the machine and its depreciation expense.
C.calculating depreciation expense and its compliance with the tax code.
D.the impact on factory capacity due to the equipment purchase.
An intuitively pleasing and prudent investment strategy is to hold:
A.high beta stocks in a rising market and low beta stocks in a declining market.
B.high beta stocks in both rising and declining markets.
C.low beta stocks in both rising and declining markets.
D.high beta stocks in a declining market and low beta stocks in a rising market.
A project’s cost of capital is 10%. Which of the following would lead to its acceptance?
A.An IRR of 10%
B.An NPV of ($2,000)
C.An NPV of $2,000
D.An IRR of 8%