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1) The use of a profitability index will always provide results consistent with selecting
the project with the:
A.highest NPV
B.highest IRR
C.largest dollar invested per rate of return
D.largest return per dollar invested
2) Which of the following terms of sale is the most restrictive?
A.Net 30
B.Seasonal dating
C.CBD
D.COD
3) When a management team buys the firm from current shareholders while continuing
to manage and often incurring large segments of debt, it is known as a:
A.management buyout
B.spin-off
C.successful greenmail attempt
D.corporate breakup
4) If the correlation of returns between foreign projects and domestic projects is less
than 1.0, then:
A.foreign projects should be discounted with a higher rate
B.the domestic firm would be better off without the foreign projects
C.the foreign project may not add much risk to the existing domestic operation
D.the foreign projects will experience a higher degree of inflation
5) What percentage return is achieved by an investor who purchases a stock for $30,
receives a $1.50 dividend, and sells the share one year later for $28.50?
A.-5%
B.0%
C.5%
D.10%
6) The present value of a bond is positively related with:
A.a lower coupon payment
B.greater perceived liquidity
C.greater default risk
D.higher interest rates
7) Which of the following statements is true for a project with $20,000 initial cost, cash
inflows of $5,800 per year for 6 years, and a discount rate of 15%?
A.Its payback period is roughly 3 1/2 years
B.Its NPV is $2,194
C.Its IRR is 1.85%
D.Its profitability index is 0.109
8) A share repurchase is said to be equivalent to the payment of a cash dividend because
each strategy:
A.causes share price to decline
B.causes share price to stay the same
C.creates the same tax liability for the investor
D.leaves the firm with the same amount of assets
9) A project can have as many different internal rates of return as it has:
A.cash inflows
B.cash outflows
C.periods of cash flow
D.changes in the sign of the cash flows
10) Which of the following would be considered an advantage of the sole proprietorship
form of organization?
A.Wide access to capital markets
B.Unlimited liability
C.A pool of expertise
D.Profits taxed at only one level
11) The economic break-even point of a project can be found by:
A.setting the discount rate equal to the DOL
B.solving for the annual sales that will equate total revenue with total cost
C.solving for the annual sales that will give the project an NPV of zero
D.solving for the level of sales that will give the project an IRR of zero
12) Which of the following changes would tend to increase the company cost of capital
for a traditional firm?
A.Decrease the proportion of equity financing
B.Increase the market value of the debt
C.Decrease the proportion of debt financing
D.Decrease the market value of the equity
13) How is it possible to ignore cash dividends that occur far into the future when using
a dividend discount model? Those dividends:
A.will be paid to a different investor
B.will not be paid by the firm
C.have an insignificant present value
D.ignore the tax consequences of future dividends
14) The current yield of a bond can be calculated by:
A.multiplying the price by the coupon rate
B.dividing the price by the annual coupon payments
C.dividing the price by the par value
D.dividing the annual coupon payments by the price
15) If the volatility of the daily cash flows decrease, a firm will:
A.increase the cash balance
B.decrease the cash balance
C.not change the cash balance
D.increase the return point
16) With a stock repurchase:
A.no cash flow is extended from the company
B.the company obtains some of its stock, and the price may rise
C.shareholders' ownership in the company will decrease
D.the equity of the firm will increase
17) The payoffs from holding a call option can be replicated by:
A.borrowing money to buy a put option
B.borrowing money to invest in the stock
C.simultaneously selling a call and buying a put
D.simultaneously buying a share and buying a put
18) Jennifer sold a call option on XXX Corp. with an exercise price of $50. The option
expires tomorrow and XXX is currently trading at $40. The option premium was $3 per
share. What is Jennifer's expected profit or loss per share at tomorrow's expiration?
A.- $3
B.$3
C.$7
D.$10
Jennifer's call will not be exercised since the stock trades at a price below strike price.
She profits by the amount of the call premium, $3 per share.
19) When a public company offers shares to the general public, it does so under a(n):
A.rights issue
B.initial public offering
C.shelf registration
D.general cash offer
20) Which of the following credit agreements will provide the highest likelihood of
cash payment to a seller of goods?
A.Banker's acceptance
B.Time draft
C.Open account
D.Conditional sale
21) When asked about key factors of debt policy, financial managers commonly
mention:
A.the tax advantage of debt
B.the importance of maintaining their credit rating
C.financial slack
D.all of these
22) Restructuring a firm involves changing the:
A.mix of liabilities and equity
B.dividend payout ratio
C.managerial personnel
D.interest rate on debt
23) Which of the following statements is correct for an investor who has purchased
"portfolio insurance" by owning the stock and buying a put option on the stock?
A.The investor profits when the stock price declines
B.Maximum profitability occurs when stock price equals strike price
C.Value per share can decline no further than the strike price less the value of the option
premium
D.The option will certainly be exercised
24) An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, and then
sells the bond for $985. What was the investor's rate of return?
A.9.00%
B.9.23%
C.9.65%
D.10.26%
25) Money that is offered to finance a new business is known as:
A.a general cash offer
B.venture capital
C.private placement
D.a rights issue
26) Ethical decision making in business:
A.reduces the firm's profits
B.requires adherence to implied rules as well as written rules
C.is not in the best interests of shareholders
D.is less important than good capital budgeting decisions
27) Which of the following is least likely to be responsible for a regional manager's
conflict of interest in promoting a capital budgeting proposal?
A.Desire for professional advancement
B.Thorough knowledge of the region
C.Overly optimistic economic forecasts
D.The need for quick profitability
28) According to the free-cash-flow theory of takeovers, postmerger gains in market
value represent:
A.an illogical assessment of earnings prospects
B.the remaining costs of the merger
C.the present value of free cash flow that will no longer be misused
D.losses experienced by arbitrageurs and other speculators
29) At what point on the graph of possible values for a call option does the buyer break
even financially?
A.When stock price equals strike price
B.At any point on the upward-sloping segment of the graph
C.When stock price equals cost of the option plus strike price
D.At the point where the graph intercepts the y-axis
30) Which of the following is not a reason for building financial plans?
A.Considering options
B.Contingency planning
C.Choosing the optimal plan
D.Forcing consistency
31) The gathering of related revenues and expenses into the same period, regardless of
when cash is actually received or paid, is:
A.cash-basis accounting
B.market-value accounting
C.book-value accounting
D.accrual accounting
32) In a large corporation, budget preparation would most likely be conducted by the:
A.treasurer
B.controller
C.chief financial officer
D.financial manager
33) When managers cannot determine whether to invest now or wait until costs
decrease later, the rule should be to:
A.postpone until costs reach their lowest
B.invest now to maximize the NPV
C.postpone until the opportunity cost reaches its lowest
D.invest at the date that gives the highest NPV today
34) MM's proposition of dividend irrelevance depends upon:
A.firms maintaining a constant dividend payout
B.dividends being taxed the same as capital gains
C.the existence of a dividend clientele
D.the efficiency of capital markets
35) Commodity and derivative markets:
A.are sources of financing
B.enable the financial manager to adjust the firm's exposure to various business risks
C.are always over-the-counter markets
D.all of these
36) The majority of an established firm's capital is generated:
A.internally
B.externally
C.through issuance of new shares
D.through funded debt
37) The benefits of portfolio diversification are highest when the individual securities
have returns that:
A.vary directly with the rest of the portfolio
B.vary proportionally with the rest of the portfolio
C.are less than perfectly correlated with the rest of the portfolio
D.are countercyclical
38) Which of the following is not likely to cause a reduction in the NWC turnover
ratio?
A.Sales have decreased
B.Average payables have increased
C.Average inventory has been higher
D.The firm's cash balance is greater
39) Would you be willing to exchange dollars for pounds at a rate of $1.50/£ to invest in
London and earn a 1-year rate of 10%, as opposed to investing in the United States for a
5% return? What things might you first consider before investing?
40) Compare the after-tax rates of return for a corporate investor from the following
two investments: A 20-year corporate bond that sells for par and offers a 9% coupon
versus an investment in preferred stock that sells for $40.00 per share and pays a $3.60
dividend. The corporation has a 35% tax rate.
41) What may make simple comparisons of financial ratios misleading?
42) Assume that call options on Microsoft stock with the same exercise date in October
are available with exercise prices $45, $55, and $65. Also assume that the price of the
middle call were the average of the other two calls. Show that if you sell two of the
middle calls and use the proceeds to buy one each of the other calls, your proceeds in
October may be positive but cannot be negative despite the fact that your net outlay
today is zero. What can you deduce from this example about option pricing?
43) What are the advantages of investing indirectly in stocks and bonds via mutual
funds and pension funds?
44) Managers sometimes state a target growth rate for sales or earnings per share. Do
you think that either makes sense as a corporate goal? If not, why do you think that
managers focus on them?
45) Generalize the formulas for determining the value of the following four option
types: buying a call, buying a put, writing a call, writing a put.
46) What general factors may influence the decision of whether to organize as a sole
proprietorship, a partnership, or a corporation?
47) In 1973 Gordon Moore, one of Intel's founders, predicted that the number of
transistors that could be placed on a single silicon chip would double every 18 months,
equivalent to an annual growth of 59% (i.e., 1.591.5 = 2.0). The first microprocessor
was built in 1971 and had 2,250 transistors. By 2003 Intel chips contained 410 million
transistors, over 182,000 times the number 32 years earlier. What has been the annual
compound rate of growth in processing power? How does it compare with the
prediction of Moore's law?
