1) Capital budgeting projects that expand sales are more likely to involve increases in
working capital than are projects that involve the replacement of existing assets.
2) Sources of spontaneous financing include trade credit, salaries payable, and accrued
taxes.
3) If current interest rates are low, and therefore expected to increase in the future, a
firm wanting to reduce its interest rate risk would hold debt with longer maturities.
4) EOQ model recommendations may be replaced by anticipatory buying during
periods of high inflation.
5) Subordinated debentures are more risky than unsubordinated debentures because the
claims of subordinated debenture holders are less likely to be honored in the event of
liquidation.
6) The yield-to-maturity is the discount rate that equates the present value of the interest
and principal payments with the face value of the bond.
7) The computation of return on equity, or ROE, does not include retained earnings as
part of common equity because retained earnings includes all net income for the
company since its inception and analysts are trying to calculate the return for just the
current year.
8) Arbitrage is the process of buying in one market and selling in another market in
order to make a riskless profit.
9) A sinking-fund provision allows for the retirement of a portion of preferred stock
each year.
10) An extremely liquid asset is one that can be sold for cash quickly without a
reduction in price below its current market value.
11) A car manufacturer offers either $2,000 cash back or zero percent financing for 5
years. A rational consumer will always take the cash back because money received
today is worth more than money received in the future.
12) One potential rationale for paying dividends is that the payment of dividends
indirectly results in a closer monitoring of management’s investment activities, hence
lowering agency costs.
13) Which of the following is NOT an advantage of trade credit?
A) The amount of extended credit expands and contracts with the needs of the firm
B) The cost of forgoing the discount is less than the prime rate
C) Generally no formal agreements are involved in the extension of trade credit
D) Trade credit is very flexible
14) An asset with an original cost of $100,000 and a current book value of $20,000 is
sold for $50,000 as part of a capital budgeting project. The company has a tax rate of
30%. This transaction will have what impact on the project’s initial outlay?
A) reduce it by $20,000
B) reduce it by $50,000
C) reduce it by $6,000
D) reduce it by $15,000
15) The break-even point is equal to
A) fixed costs divided by (sales price per unit variable cost per unit)
B) fixed costs divided by unit variable costs
C) fixed costs divided by selling price per unit
D) (sales price per unit variable cost per unit) times the fixed costs
16) A zero coupon bond pays no annual coupon interest payments. When it matures at
the end of 7.5 years it pays out $1,000. If investors wish to earn 2.35% per year on this
bond investment, what is the current price of the bond? (Round to the nearest dollar.)
A) $533
B) $561
C) $875
D) $840
17) PBJ Corporation issued bonds on January 1, 2006 . The bonds had a coupon rate of
5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the
bonds mature on January 1, 2021 . What is the yield to maturity for an PBJ Corporation
bond on January 1, 2012 if the market price of the bond on that date is $950?
A) 5.50%
B) 6.23%
C) 8.43%
D) 10.50%
18) Activities of the investment banker include
A) assuming the risk of selling a security issue
B) selling new securities to the ultimate investors
C) providing advice to firms issuing securities
D) all of the above
19) Dividends generally
A) are paid as a fixed percentage of earnings
B) fluctuate more than earnings
C) are guaranteed by the SEC
D) are more stable than earnings
20) Idaho Mining, Inc borrows at prime plus 1.5% on its line of credit. The line requires
a 15% compensating balance. If prime rate is 9%, what is the nominal APR of the line
of credit?
A) 9.0%
B) 6.0%
C) 10.6%
D) 12.4%
21) For accounting purposes a stock split has been defined as a stock dividend
exceeding
A) 25 percent.
B) 35 percent.
C) 50 percent.
D) 66 2/3 percent.
22) Salashar, Inc.’s balance sheet is as follows:
Cash $1,000,000Current Liabilities$1,300,000
Other Current Assets$2,000,000Long-term Debt$4,100,000
Long-term Assets$8,000,000Common Stock$5,000,000
Retained Earnings$ 600,000
Total Assets$11,000,000Total Liab. And Equity$11,000,000
Salashar decides to pay a dividend. Which of the following statements is MOST
correct?
A) The dividend cannot exceed $1,000,000, the amount of cash available
B) The dividend cannot exceed $1,700,000, the amount of net working capital
C) The dividend cannot exceed $600,000, the amount of retained earnings
D) The dividend cannot exceed $11,000,000, the amount of total assets
23) Which of the following is NOT a benefit provided by the existence of organized
security exchanges?
A) providing a continuous market
B) establishing and publicizing fair security prices
C) helping businesses raise new capital
D) standardization of all debt agreements
24) Your firm is considering an investment that will cost $920,000 today. The
investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through
4, and $200,000 in year 5 . The discount rate that your firm uses for projects of this type
is 11.25%. What is the investment’s equivalent annual annuity?
A) $52,377
B) $42,923
C) $41,387
D) $40,399
25) Permanent sources of financing include all but
A) corporate bonds
B) common stock
C) preferred stock
D) commercial paper
26) A stock repurchase may be viewed as
A) a dividend decision when the firm has excess cash.
B) a financing decision when the firm wants to alter its capital structure.
C) an operating leverage decision.
D) both A and B.
27) Cash management system objectives include
A) maintaining sufficient cash to meet disbursal needs
B) maintaining idle cash balances at “doomsday event” levels
C) maintaining accounts payable balances at zero by early bill payment
D) all of the above are objectives of the system
28) A small company struggling to reach profitability just announced a major new
government contract that will validate its technology and generate revenue for the next
several years. The announcement of the contract will
A) cause the stock price to increase because rcs (the required return) is likely to
increase
B) cause the stock price to decrease because the government usually pays below market
price for the goods and services it purchases
C) cause the stock price to increase because rcs (the required return) is likely to
decrease and g (the growth rate in future dividends) is likely to increase
D) have no effect on the stock price because the company has not yet paid any
dividends
29) If a corporation were to choose between issuing a debenture, a mortgage bond, or a
subordinated debenture, everything else equal (such as coupon rate, maturity, etc.)
which would sell for the greatest price?
A) the debenture
B) the mortgage bond
C) the subordinated debenture
D) All of the above types of bonds would sell for the same price
30) How much money do I need to place into a bank account that pays a 1.08% rate in
order to have $500 at the end of 7 years?
A) $332.54
B) $751.81
C) $463.78
D) $629.51
31) Preferred stock differs from common stock in that
A) preferred stock usually has a maturity date
B) preferred stock investors have a higher required return than common stock investors
C) preferred stock dividends are fixed
D) common stock investors have a required return and preferred stock investors do not
32) Financing a portion of a firm’s assets with securities bearing a fixed rate of return in
hopes of increasing the return to stockholders refers to
A) business risk
B) financial leverage
C) operating leverage
D) combined leverage
33) If the NPV (Net Present Value) of a project with one sign reversal is positive, then
the project’s IRR (Internal Rate of Return) ________ the required rate of return.
A) must be less than
B) must be greater than
C) could be greater or less than
D) cannot be determined without actual cash flows
34) Higher flotation costs will result in all of the following EXCEPT
A) higher after-tax cost of debt
B) higher weighted average cost of capital
C) higher cost of retained earnings
D) higher cost of common equity when new common shares are sold
35) WSM Wine Importers, Inc. purchased 75,000 cases of French wine at a cost of
6,000,000 Euros. If the current exchange rate is 0.7576 Euros to the U.S. dollar, what is
the purchase price of the wine in U.S. dollars?
A) $9,684,148
B) $9,328,651
C) $8,350,012
D) $ 7,919,747
36) Which of the following transactions will lower a company’s financial leverage?
A) A mortgage loan is obtained and the proceeds are used to pay off existing short-term
debt
B) Preferred stock is sold and the proceeds are used to pay off existing short-term debt
C) Common stock is sold and the proceeds are used to pay off existing short-term debt
D) Short-term debt is obtained to get the company through a period of negative net
income and cash flow
37) CBD Computer Inc. is attempting to estimate its needs for funds during each of the
months covering the third quarter of 20XX. Pertinent information is given below:
a. Past and estimated future sales for 20XX:
April $80,000July$ 90,000
May 95,000August 130,000
June 70,000September 110,000
October 140,000
b.Rent expense is $2,500 per month.
c.A quarterly interest payment on $100,000 in 7% notes payable is to be paid during
September, 20XX.
d.Wages and salaries are estimated as follows:
July$ 8,000
August 10,000
September 12,000
Payments are made within the month in which the wages are earned.
e.Sixty percent of sales are for cash, with the remaining 40% collected in the month
following the sale.
f.CBD pays 80% of the sales price for merchandise and makes payment in the same
month in which the sales occur, although purchases are made in the month prior to the
anticipated sales.
g.CBD plans to pay $7,500 in cash for a new forklift truck in July.
h.Short-term loans can be obtained at the end of each month at 13% annual interest with
interest paid during each month for which the loan is outstanding.
i.CBD’s ending cash balance for June 30, 200X is $67,000:
the minimum balance the firm wishes to have in any month is $35,000.
Required: Set up a cash budget for CBD for the quarter ended September 30, 20XX.
38) The pure play method
A) calculates beta using only project returns
B) uses the beta of a firm that is similar to the project being analyzed to determine the
required rate of return for the project
C) selects a firm similar to the project being analyzed and uses its returns as the market
return in estimating a project beta
D) selects one of the firm’s existing projects that is similar to the project being analyzed
and uses that project’s required rate of return
39) Most preferred stocks have a feature that requires all past unpaid preferred dividend
payments be paid before any common stock dividends can be paid. What is the name of
this feature?
A) participating
B) cumulative
C) provisional
D) convertible
40) As a company accounts payable manager, which of the following credit terms are
most likely to entice you to take the cash discount?
A) 1/10 net 45
B) 2/10 net 60
C) 1/10 net 30
D) 2/10 net 90
41) Using the constant growth dividend valuation model and assuming dividends will
growth a constant rate forever, the increase in the value of the stock each year should be
equal to the
A) growth rate in dividends, g
B) required return on the stock, rcs
C) dividend yield plus the capital gains yield
D) dividend yield
42) A British-made component costs 36 U.K. pounds. A company in the United States
needs to buy these components and the current indirect quote indicates that one dollar
will buy .6250 pounds. Ignoring transactions costs, how much will one component cost
in U.S. dollars?
A) $22.50
B) $45.94
C) $57.60
D) $72.00
43) All of the following are income statement items EXCEPT
A) accrued expenses
B) depreciation expense
C) cost of goods sold
D) interest expense
44) A project would be acceptable if
A) the payback is greater than the discounted equivalent annual annuity
B) the equivalent annual annuity is greater than or equal to the firm’s discount rate
C) the profitability index is greater than the net present value
D) the net present value is positive
45) Prices of securities that are traded in the Over-the-Counter Markets are determined
by
A) the Federal Trade Commission
B) a continuous modified auction process
C) the buyers of these securities
D) a “bid” and “ask” negotiation process of broker-dealers of these securities
46) Use the following data:
Market risk premium = 10%
Risk free rate = 2%
Beta of XYZ stock = 1.6
Beta of PDQ stock = 2.4
Investment in XYZ stock = $15,000
Investment in PDQ stock = $60,000
You have no assets other than your investments in XYZ and PDQ stock.
What is the expected return of your portfolio? Show all work.
47) Prepare an income statement using the information given below. Make sure to
identify gross profit, operating income, and net income.
48) What is the information effect associated with dividends? Why does it occur?
49) The current rate of return on a one-year U.S. Government security is 3%. The rate
of return on a two-year U.S. Government security is 5%. According to the expectations
theory, what is the return on a one-year U.S. Government security purchased one year
from today?
50) An investor buys a 20-year BBB-rated corporate bond with a nominal annual rate of
return of 10%. The average inflation rate is expected to be 2%. The default risk
premium is expected to be 5% and the maturity premium is 4%. Calculate the real rate
of interest.
51) Cindy wants $2.5 million for her retirement at age 65. Cindy is 25 years old today
and plans to deposit equal amounts each year starting on her 26th birthday and ending
on her 65th birthday. If her investments earn 6% per year, how much must each deposit
be?