1) When choosing portfolios of assets, management should try to achieve the highest
possible return at a given level of risk.
2) Short-term interest rates are generally lower than long-term interest rates.
3) Financial markets exist as a vast global network of individuals and financial
institutions that may be lenders, borrowers, or owners of public companies worldwide.
4) Social responsibility is an expense and thus should be avoided by financial managers
because it will lead to loss of income.
5) The possibility of political risk may be excluded when an investor considers
maximizing expected returns.
6) A bond can only be easily refunded if it has a call feature.
7) Heavy use of long-term debt can be of benefit to a firm, although it adds to the firm’s
overall level of risk.
8) Political risks include the possibility that a government may expropriate a firm’s
profits, or worse, repatriate all of the firm’s assets.
9) The floor value of a bond can change if market interest rates for competitive bonds
change.
10) A 10-year bond pays 6% annual interest in semi-annual payments. The current
market yield to maturity is 4%. The appropriate interest factors should be in the TVM
tables under 2% for 20 periods.
11) A capital (or “financing”) lease usually calls for an annual expense deduction equal
to the lease payment.
12) If a company would like to reduce their average collection period, they can either
offer a cash discount or increase their net terms.
13) “Diluted earnings per share” must assume the conversion of all convertible
securities.
14) A licensing agreement provides a U.S. MNC with a guarantee that they will be able
to export the product to the foreign market.
15) The three most important factors when selecting a financing plan are risk, asset
liquidity, and timing.
16) Selling stockholders generally receive a price below the current market value of
their prior stock during a merger.
17) The sale of a firm’s securities is a source of funds, whereas the payment of
dividends is a use of funds.
18) The “financial futures market”
A.is a place in Chicago where future stocks are traded
B.allows for the delivery of financial instruments at a future point in time
C.is of particular value to small investors in managing their portfolios
D.is a place in Chicago where future stocks are traded and is of particular value to small
investors in managing their portfolios
19) Which of the following is not a form of yield on a bond?
A.Coupon rate (nominal yield)
B.Current yield
C.Dividend yield
D.Yield to maturity
20) The modified internal rate of return assumes that
A.inflows are invested at the traditional interest rate of return
B.inflows are reinvested at the cost of capital
C.outflows must be funded with debt
D.outflows must be funded with equity
21) There are several disadvantages to the payback method, among them:
A.Payback ignores the time value of money
B.Payback emphasizes receiving money back as fast as possible for reinvestment
C.Payback is basic to use and understand
D.Payback can be used in conjunction with time-adjusted methods of evaluation
22) Match the following with the items below:
1>straight-line depreciation
2>elective expensing
3>mutually exclusive
4>incremental depreciation
5>net present value (NPV)
6>replacement decision
7>asset depreciation range (ADR)
A. Equals the present value of the cash inflows minus the present value of the cash
outflows when the cost of capital is used as a discount rate.
B. Is calculated by taking the depreciable cost of an asset and dividing it by the useful
life of the asset.
C. The selection of one choice precludes the selection of any other competitive choice.
D. This value is multiplied by the tax rate to determine the company’s tax shield benefit.
E. The capital budgeting decision on whether or not to replace an old asset with a new
one.
F. The expected physical life of an asset or class of assets.
G. Writing off an asset in the year of purchase for tax purposes rather than depreciating
it over its valued life.
23) A rapid rate of growth in sales may require
A.higher dividend payments to shareholders
B.increased borrowing by the firm to support the sales increase
C.the firm to be more lenient with credit customers
D.sales forecasts to be made less frequently
24) Lou Lewis borrows $10,000 to be repaid over 10 years at 9%. Repayment of
principal in the first year is ______.
A.$1,558
B.$658
C.$742
D.$885
25) If lease payments are reduced and everything else remains constant,
A.times interest earned goes up
B.fixed charge coverage goes up
C.fixed charge coverage stays the same
D.fixed charge coverage goes down
26) A term loan is usually characterized by
A.a maturity of one to seven years
B.a variable interest rate
C.monthly or quarterly installment payments
D.All of these options
27) Lewis, Schultz, and Nobel Development Corp. has an after-tax cost of debt of 4.5%.
With a tax rate of 30%, what is the yield on the debt?
A.4.41%
B.9.0%
C.1.89%
D.6.43%
28) The Harsanyi Corp. is considering four investments. Which provides the highest
after-tax return for Harsanyi Corp. if it is in the 34% federal tax bracket? Assume the
tax rate on dividends is 15%.
A.Treasury bonds at 5.0%
B.Corporate bonds at 8.0%
C.Municipal bonds at 5.0%
D.Preferred stock at 6.0%
29) Use of the marginal cost of capital
A.acknowledges that when retained earnings are used up as a source of equity, the cost
of capital rises as new common stock is sold to support more growth
B.recognizes that the return from the last dollar of funds generated should be greater
than or equal to the cost of the last dollar of funds raised
C.acknowledges that when retained earnings are used up as a source of equity, the cost
of capital rises as new common stock is sold to support more growth and recognizes
that the return from the last dollar of funds generated should be greater than or equal to
the cost of the last dollar of funds raised
D.None of these options are correct
30) As the economy moves through a business cycle, which of the following “term
structure of interest rates” theories dominates the shape of the yield curve.
A.The expectations hypothesis
B.The market segmentation theory
C.The liquidity premium theory
D.None of these theories dominate the shape of the yield curve
31) A new restaurant is ready to open for business. It is estimated that the food costs
(variable cost) will be 30% of sales, while fixed costs will be $540,000. The first year’s
sales estimates are $1,500,000. The cost to start up this restaurant will be $2,000,000.
Two financing alternatives are being considered: a) 50% equity financing and 50% debt
at 9%, or b) all equity financing. Common stock can be sold at $5 per share.
a) Compute the operating break-even point in dollars (excluding startup costs in year
one).
b) Compute DOL at the end of the first projected year.
c) Compute DFL and DCL for both financing plans at the end of the first projected year.
32) An issue of common stock is selling for $57.20. The year-end dividend is expected
to be $2.32, assuming a constant growth rate of 4%. What is the required rate of return?
A.10.3%
B.10.1%
C.8.1%
D.None of these options
33) A “normal” term structure of interest rates would depict
A.short-term rates higher than long-term rates
B.long-term rates higher than short-term rates
C.no general relationship between short- and long-term rates
D.intermediate rates (one to five years) lower than both short-term and long-term rates
34) Star Corp. issued bonds two years ago with a 7% coupon rate. Their bonds are
currently trading for $928 in the market. Which of the following most likely has
occurred since the time of issue?
A.Interest rates decreased
B.Inflation increased
C.Risk decreased
D.Real rates of return decreased
35) Dilution in earnings per share occurs when a company with
A.a high P/E ratio buys a company with a low P/E ratio
B.a low P/E ratio buys a company with a high P/E ratio
C.a high growth rate in earnings per share buys a company with a low growth rate in
earnings per share
D.a low growth rate in earnings per share buys a company with a high growth rate in
earnings per share
36) Which of the following is not subtracted in arriving at operating income?
A.Interest expense
B.Cost of goods sold
C.Depreciation
D.Selling and administrative expense
37) During tight money periods
A.long-term rates are higher than short-term rates
B.short-term rates are higher than long-term rates
C.short-term rates are equal to long-term rates
D.the relationship between short- and long-term rates remains unchanged
38) A firm has $4,000,000 in its common stock account and $10,000,000 in its paid-in
capital account. The firm issued 1,000,000 shares of common stock. What is the par
value of the common stock?
A.$40 per share
B.$10 per share
C.$4 per share
D.$14 per share
39) The shorter the length of time between a present value and its corresponding future
value,
A.the lower the present value, relative to the future value
B.the higher the present value, relative to the future value
C.the higher the interest rate used in the discounting to the present value
D.None of these options
40) If a firm uses level production with seasonal sales
A.as sales decline inventory will increase
B.as sales decline inventory will decrease
C.as sales decline accounts receivables will increase
D.as sales decline inventory and accounts receivables will increase
41) Which of the following balance sheet accounts will be affected by a stock dividend
but not by a stock split?
A.Retained earnings
B.Cash
C.Common stock
D.Dividends-in-arrears
42) A correlation coefficient of _____ provides no risk reduction.
A.0
B.-1
C.+1
D.+.5
43) Net worth is equal to stockholders’ equity
A.plus dividends
B.minus preferred stock
C.plus preferred stock
D.minus liabilities
44) What has motivated American firms to move their operations to foreign countries?
A.Trade barriers, lower production costs, access to skilled workers, and U.S. tax
deferral
B.Trade barriers, lower production costs, access to natural resources, and manufacturing
C.Import tariffs, foreign unions, foreign technology, and expropriation
D.Lower production costs, U.S. tax deferral, access to natural resources, manufacturing,
and expropriation
45) We expect that we can receive annual incremental income after taxes of $25,000,
including an adjustment for uncollectible accounts. What is the maximum commitment
to A/R that we should be willing to assume if our firm’s minimum required after-tax
return is 8%?
A.$36,000
B.$312,500
C.$168,000
D.$180,000
46) Which is a characteristic of the price of preferred stock?
A.Since preferred stock dividends are fixed, they are tax-deductible
B.Because preferred stock has no maturity, the price analysis is similar to that of debt
C.Preferred stock is valued as a perpetuity
D.None of these options
47) Match the following with the questions below:
1>cash flow from financing
2>marketable securities
3>net worth or book value
4>depreciation
5>cash flows from operations
6>balance sheet
7>free cash flow
8>earnings per share
9>marginal corporate tax rate
10>notes payable
11>cash flows from investing
12>historical cost accounting
13>liquidity
14>P/E ratio
15>income statement
16>stockholders’ equity
17>statement of cash flows
A. All the assets of the firm minus the liabilities and preferred stock.
B. A financial statement that indicates what the firm owns or possesses, and how these
assets are financed in the form of liabilities or ownership interest.
C.Changes accrual-based information from the income statement and balance sheet to
cash-based information.
D. The relative convertibility of short-term assets into cash.
E. The levy expressed as a percentage that applies to each new dollar of taxable income.
F. The multiplier applied to earnings per share to determine the current value of the
firm’s stock.
G. The income available to common stockholders divided by the number of common
shares outstanding.
H. A financial statement that measures the profitability of the firm over a period of time.
I. Temporary investments of excess cash.
J. Represents the net cash flow that results from changes in the amount of a firm’s
long-term assets.
K. The total ownership position of preferred and common stockholders.
L.Traditional method of accounting using original costs minus depreciation.
M. Represents the net cash flow that results from a firm’s production and sales
activities.
N. Short-term signed obligations to banks or other creditors.
O. Cash flow that is generated (or reduced) from the sale or repurchase of securities, the
payment of cash dividends, and borrowings or repayment of debt.
P. The allocation of the initial cost of an asset over its useful life.
Q. Cash flow from operations minus capital expenditures minus dividend payments.
48) A company’s value based on the assumption that its divisions would be sold
individually is called its ___________ value.
A.book
B.market
C.break up
D.real
49) In order to finance a shipment of badminton sets, Rujisawa Import-Export is
seeking a $700,000 one-year bank loan. The Marine Bank requires that Rujisawa
maintain a 25% compensating balance and requires four quarterly payments. The
Lincoln Bank requires only a 15% compensating balance, but requires 12 monthly
payments. In addition, Lincoln discounts the loan. Both banks state that their interest
rate is 8%.
a) Which bank has the lowest effective interest rate?
(NOTE: Deduct the compensating balances from the principal in determining the
effective rate.)
b) If Lincoln Bank eliminated its compensating-balance requirement, would your
answer change?
50) Which of the following hedging strategies is not used to minimize transaction
exposure?
A.The Eurobond market
B.The forward exchange market
C.The money market
D.The currency futures market
51) Joe Nautilus has $210,000 and wants to retire. What approximate return must his
money earn so he may receive annual benefits of $30,000 for the next 10 years?
A.12%
B.Between 12% and 13%
C.About 7%
D.Greater than 15%
52) In addition to comparison with industry ratios, it is also helpful to analyze ratios
using
A.trend analysis
B.historical comparisons
C.neither; only industry ratios provide valid comparisons
D.trend analysis and historical comparisons
53) Preferred stock dividends __________ earnings available to common stockholders.
A.increase
B.decrease
C.do not effect
D.There is not enough information to determine
54) Which of the following techniques allows explicit consideration of more than one
possible outcome?
A.Operating leverage
B.Present value
C.Least-squares regression
D.Expected value
55) In developing the pro forma income statement, we follow four important steps:
1) Compute other expenses.
2) Determine a production schedule.
3) Establish a sales projection.
4) Determine profit by completing the actual pro forma statement.
What is the correct order for these four steps?
A.1,2,3,4
B.3,2,4,1
C.2,1,3,4
D.3,2,1,4
56) The ‘strong” form of the efficient market hypothesis states that
A.past price data is positively correlated to future prices
B.prices reflect all public information
C.all information both public and private is immediately reflected in stock prices
D.None of these options