1) Financial models ensure consistency between growth assumptions and financing
plans, and they identify the best financing plan.
2) For most managers, discounted cash flow analysis is in fact the dominant tool for
project evaluation.
3) A company may deduct the interest paid to debtholders and the dividends paid to
shareholders when calculating its taxable income.
4) Investors often take the stock split decision as a signal of management’s confidence
in the future.
5) The price of a call option increases while its exercise price decreases.
6) Almost all foreign exchange trading occurs on the floors of the FOREX exchanges in
New York and London.
7) Corporations are less likely to repurchase callable bonds when market interest rates
have risen.
8) Permanent working capital requirements can be financed using commercial paper.
9) Discounting real cash flows at a nominal rate is a serious mistake.
10) Buying currency in the forward market is a costly way of hedging the currency risk.
11) The weighted-average cost of capital is the return the company needs to earn after
tax in order to satisfy all its security holders.
12) A project should be accepted if its return plots above the security market line.
13) Keeping a large surplus of cash and investing it in Treasury bills will bring positive
NPV to a firm.
14) Macro risks are faced by all common stock investors.
15) The option to abandon a project becomes more valuable as the possible outcomes
become more varied.
16) Stock market indexes are found in several countries outside the United States.
17) Scenario analysis allows managers to look at different and sometimes inconsistent
combinations of variables.
18) Your cash manager is currently using wire transfer to obtain collections from distant
locations each time that the cash accumulates to $50,000. Evaluate the financial logic of
this policy if the wire transfer costs $20, saves 3 days of mail time, and interest rates
average 7% annually.
A.Stop the policy; $8.77 is lost with each transfer
B.Stop the policy unless the transfer amount is increased to approximately $65,200
C.Continue the policy at the current transfer amount
D.Improve policy by reducing transfer amount to $34,800
Break-even wire transfer = 3 days (7%/365) $50,000 = $28.77
$28.77 > $20
Therefore, the transfer would be cost-effective at amounts transferred of $34,761.90 or
more.
19) Selling a futures contract may be appropriate for one who wishes to:
A.lock in a future sales price
B.lock in a future purchase price
C.speculate that future spot prices are going down
D.have a ready market in which to sell product
20) Ray’s Jams Inc. was just established with an investment of $5 million in stereo
equipment. Ray expects his company to generate $800,000 a year for the next 200
years. If Ray’s cost of capital is 15%, find the market value and book value of his
company.
A.market value = $9.0 million; book value = $5.0 million
B.market value = $5.0 million; book value = $5.3 million
C.market value = $5.33 million; book value = $5.0 million
D.market value = $7.0 million; book value = $5.0 million
21) The value of a call option increases as the time to expiration increases because:
A.the exercise price continually decreases
B.opportunity increases to surpass exercise price
C.dividends accumulate while waiting to be paid
D.the option can be repeatedly exercised
22) The risk premium that is offered on common stock is equal to the:
A.expected return on the stock
B.real rate of return on the stock
C.excess of expected return over a risk-free return
D.expected return on the S&P 500 index
23) Which of the following is not correct concerning the financial futures markets?
A.One of the prominent exchanges for financial futures is the Chicago Board of Trade
B.The contracts were first traded in 1972
C.A major use is protection from interest rate risk
D.Trading in commodity futures significantly exceeds trading in financial futures
24) Which of the following is correct for the owner of a June call, valued at $3, on XYZ
Corp. with a strike price of $60? XYZ Corp. currently trades at $55.
A.XYZ is expected to go to $63 per share
B.The option cannot currently be exercised
C.The option owner’s current profit is $3 per share
D.The option may expire without value
25) If the value of a firm’s net fixed assets equals the value of the accumulated
depreciation, from an accounting context the fixed assets are:
A.new
B.fully depreciated
C.one-half depreciated
D.equal in value to the firm’s current assets
26) If last month a stock with beta of 1.0 lost 2% while the S&P 500 had a 1% gain,
then it appears that:
A.beta has been calculated incorrectly
B.the S&P 500 cannot represent the market
C.the firm may have released negative information
D.the market index had a good month
27) What is the new share price for a corporation with a current share price of $4 that
employs a 1-for-10 reverse split?
A.$0.40
B.$4.00
C.$36
D.$40.00
28) Which of the following bonds would be likely to exhibit a greater degree of interest
rate risk?
A.A zero-coupon bond with 20 years until maturity
B.A coupon-paying bond with 20 years until maturity
C.A floating-rate bond with 20 years until maturity
D.A zero-coupon bond with 30 years until maturity
29) What tax liability is created by a corporation in the 35% tax bracket that receives
$50,000 in preferred stock dividends?
A.$0
B.$5,250
C.$12,250
D.$17,500
30) The beta of an investment in U.S. Treasury bills is:
A.0.0
B.0.5
C.1.0
D.meaningless; only common stocks have betas
31) A firm’s after-tax operating income was $1,000,000 in 2010 . It started the year with
a total capitalization of $8,000,000 and ended 2010 with a total capitalization of
$9,000,000. If the capital raised in 2010 did not contribute significantly to 2010’s
operating income, which of the following best represents the firm’s return on capital in
2010?
A.12.5%
B.11.8%
C.11.1%
D.10.0%
32) Although unique risk is present in differing amounts, individual stocks are:
A.exposed to the same amount of market risk
B.exposed to differing amounts of market risk also
C.not exposed to market risk; only the general economy is subject to market risk
D.able to diversify away their market risk
33) Which of the following may be the best measure of company performance?
A.EVA
B.Net income
C.ROA
D.ROE
34) A company’s board of directors is primarily an agent of the company’s:
A.management
B.employees
C.shareholders
D.management and employees
35) Which of the following credit agreements provides the least protection to the seller?
A.Banker’s acceptance
B.Conditional sale
C.Open account
D.Commercial draft
36) Which of the following would not be associated with a zero-coupon bond?
A.Yield to maturity
B.Discount bond
C.Current yield
D.Interest-rate risk
37) ABC Corp. has offered 1 million shares having a total market value of $8 million
for XYZ Corp. After the merger is announced, shares in ABC trade for $7 each. If ABC
is confident about XYZ’s value, what has happened to the cost of the merger?
A.It increases by $1 million
B.It decreases by $1 million
C.It increases by $9 million
D.It remains constant
38) Given a set future value, which of the following will contribute to a lower present
value?
A.Higher discount rate
B.Fewer time periods
C.Less frequent discounting
D.Lower discount factor
39) How much should you pay for a share of stock that offers a constant-growth rate of
10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?
A.$42.00
B.$45.00
C.$45.45
D.$47.00
40) Assuming some positive returns on Treasury bills, what can you assume about an
investor whose diversified portfolio of stocks yielded 25% when the market portfolio
yielded 15%?
A.Treasury bills are offering a 10% yield
B.The portfolio beta is greater than 1.0
C.The portfolio beta equals 1.67
D.The investor’s portfolio contains many defensive stocks
41) An investor is faced with the decision of whether to invest in a stock with an
expected return of 14% or a stock in the same industry with an expected 20% return.
Which of the following seems most likely?
A.The 20% stock is a better investment
B.The 14% stock is overpriced
C.Both stocks will have approximately the same return
D.Both stocks are priced correctly given their perceived risk
42) Any capital surplus shown by a firm on its balance sheet results from:
A.not paying out all net income as dividends
B.repurchasing shares for treasury stock
C.issuing stock at a price higher than par value
D.retained earnings
43) $50,000 is borrowed, to be repaid in three equal, annual payments with 10%
interest. Approximately how much principal is amortized with the first payment?
A.$2,010.60
B.$5,000.00
C.$15,105.74
D.$20,105.74
44) Which of the following signals is most likely to elicit a decrease in share price?
A.A repurchase of 5% of the firm’s stock
B.An increase in the regular quarterly dividend
C.A decrease in the regular quarterly dividend
D.Borrowing funds in order to pay a cash dividend
45) What is the expected return on equity for a firm with a 14% expected return on
assets that pays 9% on its debt, which totals 30% of assets?
A.16.14%
B.17.00%
C.19.00%
D.25.67%
46) Which of the following would you expect to represent the broadest-based index of
U.S. stocks?
A.Wilshire 5000
B.Dow Jones 500
C.Standard and Poor’s Composite
D.Financial Times Index
47) The most important function of an underwriter is to:
A.assess the firm’s capital needs
B.approve the prospectus before distribution to the public
C.provide private placement of the firm’s debt
D.buy the issue of securities from the firm and resell to the public
48) Create the statement of sources and uses of cash from the following entries:
49) Rhonda and Reggie Hotspur are working hard to save for their children’s college
education. They don’t need more cash for current consumption but will face big tuition
bills in 2020 . Should they therefore avoid investing in stocks that pay generous current
cash dividends? Explain briefly.
50) Why is it important that financial plans incorporate adaptability?
51) Provide examples of managerial goals other than the maximization of market value.
52) What is the basic difference between hedgers and speculators?
53) Discuss the concept of “maturities matching” in finance.
54) A 10-year maturity convertible bond with a 6% coupon on a company with a bond
rating of Aaa is selling for $1,050. Each bond can be exchanged for 20 shares, and the
stock price currently is $50 per share. Other Aaa-rated bonds with the same maturity
would sell at a yield to maturity of 8%. What is the value of the bondholders’ call
option? Why is the bond selling for more than the value of the shares it can be
converted into?