A taxpayer€s average rate is the rate that will be paid on the next dollar of income.
A decrease in financial leverage results in a larger tax liability because interest is tax
deductible.
A sinking fund represent a series of payments made into an account that is dedicated to
paying off a bond’s principal at maturity.
Financial intermediation refers to a process in which a financial institution buys stocks
and bonds on behalf of investors who then have a claim on that institution rather than
ownership of the securities themselves.
Breakeven is the level of sales at which revenue covers only the firm’s fixed costs.
Call provisions are most likely exercised by the borrower when interest rates are falling.
Antitrust laws are intended to maintain a competitive economy.
A theoretically ideal way to eliminate market risk is to diversify into the stocks of
companies that make products investors buy when the stock market is depressed.
In the constant-growth model, the market return must be ____ the dividend growth rate
in order for the formula price to be meaningful.
A.less than
B.equal to
C.greater than
D.proportional to
Assume the following facts about a company:
What will be the company’s new EPS if it borrows money at 10% interest and uses it to
retire stock until capital is 40% debt? The stock can be purchased at its book value of
$10 per share.
A.$3.33
B.$4.89
C.$2.93
D.None of the above
The interest rate associated with financing a capital budgeting project:
A.should be included in the estimate of the proposal’s incremental cash flows.
B.should be ignored in the evaluation of the capital budgeting project.
C.is reflected in the cost of capital.
D.None of the above
Initial outlay:
A.includes expenses and assets that have to be purchased.
B.excludes expenses and assets that have to be purchased.
C.includes expenses and assets that have been purchased.
D.includes expenses and excludes assets that have to be purchased.
Which is not associated with the Sarbanes-Oxley Act of 2002?
A.Auditors cannot provide clients with bookkeeping services.
B.Auditors do not report to CEOS and CFOs.
C.Senior managers for auditing firms cannot supervise the audit of a given client for
more than five years.
D.The accounting industry maintains self-regulation.
Kelvin Inc. has required return of 15% and a beta of 2. If the risk-free rate is 3%,
calculate the slope of the SML.
A.0.6%
B.1.2%
C.3.0%
D.4.0%
E.6.0%
How is the MIRR better than the IRR method of capital budgeting?
A.Present and future values are calculated using the cost of capital rather than the IRR.
B.The cash inflows are projected at the beginning of the project.
C.Present value of all cash flows are considered to calculate the rate of return.
D.Cash flows are projected to the end of the project using the IRR.
The efficient market hypothesis:
A.supports the validity of technical analysis but not fundamental analysis.
B.supports the validity of fundamental analysis but not technical analysis.
C.supports the validity of both technical and fundamental analysis.
D.supports the validity of neither technical nor fundamental analysis.
E.is unrelated to the disciplines of fundamental and technical analysis.
A project’s duration should match the term of the financing that it supports. This is
called:
A.project matching.
B.maturity matching.
C.market matching.
D.None of these are correct.
Holding all other variables constant, which of the following will DECREASE the risk
of a bond to the investor?
A.Increase in restrictive covenants
B.Change in bond rating from B to BBB
C.Secured with specific assets of the firm
D.Both a & c
E.All of the above
A project has an IRR of 16% and is being considered by a firm with $5 million in debt
and $15 million in equity. Assuming the debt costs 12% (after-tax value), what is the
most equity can cost for the project to be acceptable to the firm? (hint: set the IRR equal
to WACC)
A.18.25%
B.17.83%
C.17.33%
D.16.89%
Investors pay federal income taxes on the interest earned on bonds issued by:
A.cities.
B.counties.
C.states.
D.the federal government.
Holding all other variables constant, which of the following would increase a firm’s
external funding requirements in the planning period?
A.An increase in assets
B.A decrease in accruals
C.An increase in dividends paid
D.Both a & c
E.All of the above
Using an annual interest rate of 9%, how long will it take a deposit of $1,000 to grow to
$3,000, assuming no additional deposits are made?
A.8.04 years
B.10.00 years
C.11.11 years
D.12.75 years
E.13.50 years
____ refers to the economic reason for holding cash in the bank to pay bills for the
goods and services used.
A.Compensating balance
B.Transactions demand
C.Precautionary demand
D.Speculative demand
The present value of an annuity:
A.is equal to the sum of the present values of each period’s cash flow.
B.has a future value (as an amount) equal to the future value of the annuity.
C.has a future value (as an amount) equal to the sum of the annuity’s cash flows.
D.a and b.
Which of the following is not true of CDOs?
A.They are purchased by banks and worldwide.
B.They are traded in primary and secondary markets.
C.Their ratings from rating agencies are usually low.
D.Their valuation is usually uncertain.
Tracy Corp. expects sales of $30,000, $36,000 and $40,000 for the months of January,
February and March respectively. Historically, 60% of credit customers pay in the
month of sale, 30% in the month following the month of sale, and 10% in the second
month following sale.