1) In a two-for-one stock split, each investor would receive one additional share for
each share already held.
2) Financial planning requires accurate and consistent forecasting.
3) Management’s perceived signals to investors form an important component of
pecking order theory.
4) A risky dollar is worth more than a safe one.
5) Carve-outs are synonyms of spin-offs in the market of corporate control.
6) The stocks of major corporations trade in many markets throughout the world on a
continuous or near-continuous basis.
7) Regarding the profitability of options, it is impossible for a producer who sells put
options to lose more than the price of the option premium.
8) What-if analysis is not crucial to capital budgeting.
9) Financing for public corporations must flow through financial markets.
10) A company that sells $5 million of marketable securities for cash will see a $5
million increase in cash.
11) Interest rate parity tells us that the cost of buying yen forward is exactly the same as
the cost of borrowing dollars, buying yen in the spot market, and leaving them on yen
deposit.
12) Unlike using IRR, selecting projects according to their NPV will always lead to a
correct accept-reject decision.
13) Net working capital will decrease when a firm buys raw materials on credit.
14) FASB’s Statement 123 stipulates that companies must use an option valuation
model to estimate the fair value of any option grants and then deduct this value when
calculating profits.
15) A project that simply breaks even on an accounting basis gives you your money
back but does not cover the opportunity cost of the capital tied up in the project.
16) A consequence of the Sarbanes-Oxley Act has been a decreased reporting burden on
small public companies and a decrease in the number of companies reverting to private
ownership.
17) Receivables turnover ratio and asset turnover ratio are both efficiency ratios.
18) The line plotted to fit observations of a stock’s returns versus the market’s returns
determines the:
A.security market line
B.beta of the stock
C.market risk premium
D.capital asset pricing model
19) If interest is paid m times per year, then the per-period interest rate equals the:
A.effective annual rate divided by m
B.compound interest rate times m
C.effective annual rate
D.annual percentage rate divided by m
20) What is the discount factor for $1 to be received in 5 years at a discount rate of 8%?
A..4693
B..5500
C..6000
D..6806
21) What is the beta of a three-stock portfolio including 25% of stock A with a beta of .
90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73?
A.1.0
B.1.17
C.1.22
D.1.25
22) The Beta corporation had 1,000 shares outstanding and a market value of $90,000
prior to the declaration of a $5 per share dividend. To finance a new project they will
issue equity and the end result will be that the market value of the firm:
A.drops by $1,000
B.drops to $85,000
C.increases by $1,000
D.increases to $95,000
23) Which of the following strategies would continue to be effective if a cash-strapped
firm determines that the effective interest rate charged on trade credit is lower than the
bank’s interest rate?
A.Take the discount but pay after the discount period
B.Borrow from the bank and take the discount
C.Ignore the discount, pay at the end of the period
D.Take the discount and hope for longer payment float
24) A new project requires an increase in both current assets and current liabilities of
$125,000 each. What is the overall impact on net working capital investment?
A.An increase of zero
B.An increase of $125,000
C.An increase of $250,000
D.An increase of $62,500, when averaged over the life of the project
25) If when a coin is tossed the observance of a head rewards you with a dollar and the
observance of a tail costs you fifty cents, how much would you expect to gain after 20
tosses?
A.$5.00
B.$7.50
C.$10.00
D.$15.00
26) Industries that generally perform well when other industries are performing well are
referred to as:
A.diversified industries
B.cyclical industries
C.risk-free industries
D.systematic risk industries
27) Long-term financing decisions commonly occur in the:
A.option markets
B.secondary markets
C.capital markets
D.money markets
28) The shareholders of firm A have offered 1 million shares valued at $10 each to
acquire firm B. After the merger is announced, stock A trades for $9 per share. Which of
the following statements is not correct?
A.Firm A appears to have overbid for firm B
B.The NPV of the merger may differ from expectations
C.Shareholders of firm A absorb all additional “cost”
D.Firm A’s stockholders are better off than if the merger were cash financed for $10
million
29) Firms that maintain a constant ratio of debt-equity over a variable business cycle
may find that:
A.debt has grown too large, too fast
B.it is more difficult to maintain a stable dividend
C.debt covenants always accommodate more debt, but often prevent debt prepayment
D.equity is always less expensive to obtain than debt
30) Which of the following bonds would be considered to be of investment grade?
A.A Caa-rated bond
B.A Ca-rated bond
C.A C-rated bond
D.A Baa-rated bond
31) Measures of a firm’s efficiency with respect to earnings include:
A.Profit margin, ROA, P/E ratio, ROE
B.Market-to-book, ROE, payout ratio
C.Profit margin, ROA, ROE, payout ratio
D.ROA, ROE, P/E ratio, payout ratio
32) For a profitable firm in the 30% marginal tax bracket with $100,000 of annual
depreciation expense, the depreciation tax shield would be:
A.$10,500
B.$30,000
C.$35,000
D.$65,000
33) How much interest will be earned in an account into which $1,000 is deposited for
one year with continuous compounding at a 13% rate?
A.$130.00
B.$138.83
C.$169.00
D.$353.34
34) The possibility of bankruptcy will do all of the following except:
A.increase financial distress costs
B.reduce the current market value of the firm
C.reduce the interest rate on debt
D.reduce the possible payoff to stockholders
35) MM proposition I states that a firm’s value is unaffected by its:
A.required rate of return on equity
B.operating income, in the absence of taxes
C.interest rate paid on debt
D.mixture of debt and equity
36) The NPV of an investment proposal becomes negative as a result of allocating a
portion of the corporation president’s salary. It is most likely the case that:
A.the project should be accepted
B.rejecting the project is the correct decision
C.the allocation should be postponed until the project is accepted
D.the salary should be considered an opportunity cost of the project
37) Which of the following statements is correct for an interest rate swap?
A.There is an exchange on principal between counterparties
B.There is no exchange of principal between counterparties
C.There is an exchange of currencies between counterparties
D.There is no exchange of cash between counterparties
38) An underwriter issues a firm commitment to sell 1 million shares at $20 each,
including a $2 spread. How much does the issuing firm receive if only 500,000 shares
are sold?
A.$9 million
B.$10 million
C.$18 million
D.$20 million
39) A polisher costs $10,000 and will cost $20,000 a year to operate and maintain. If the
discount rate is 10% and the polisher will last for 5 years, what is the equivalent annual
cost of the tool?
A.$17,163
B.$22,000
C.$22,638
D.$85,816
40) What stock price reaction would you expect from a firm that unexpectedly raises its
dividend permanently and by a substantial amount?
A.Price should rise, given dividend discount models
B.Price should decline, given discounted cash flow analysis
C.Price will remain constant, due to market efficiency
D.Price will remain constant, due to random-walk behavior
41) A total debt ratio of .35:
A.indicates that the firm is financed with 35% long-term debt
B.would exist if a firm had liabilities of $700 and assets of $2,000
C.indicates that 35 cents of every dollar of capital is in the form of short-term debt
D.indicates that 35 cents of every dollar of capital is in the form of long-term debt
42) Which of the following is least likely to account for an excess of market value over
book value of equity?
A.Inaccurate depreciation methods
B.High rate of return on assets
C.The presence of growth opportunities
D.Valuable off-balance sheet assets
43) With the inclusion of taxes, MM I is incorrect and the capital structure of the firm
can be important due to:
A.lower tax rates on dividends than on debt
B.higher tax rates on retained earnings than on debt
C.lower tax liability due to interest deductibility
D.higher operating income from less dividends
44) If you are a currency speculator, you will always make money by:
A.buying currency with high interest rate
B.buying currency with low interest rate
C.accurately predicting whether exchange rate will change more or less than the interest
rate differential
D.buying the currency with the highest interest rate differential
45) The likely effect of discounting nominal cash flows with real interest rates will be
to:
A.make an investment’s NPV appear more attractive
B.make an investment’s NPV appear less attractive
C.correctly calculate an investment’s NPV if inflation is expected
D.correctly calculate an investment’s NPV, regardless of expected inflation
46) U.S. investments with a 1-year maturity can be made for 6% and Swiss 1-year
investments can be made for 3%. If the spot exchange rate is SFr1.6/$, which of the
following 1-year forward exchange rates would convince you to invest in Switzerland?
A.SFr1.55/$
B.SFr1.60/$
C.SFr1.65/$
D.SFr1.70/$
47) How much value would be added to a firm that could permanently reduce its
collection period by 2 days if daily collections average $10,000 and the opportunity
cost is 5% annually?
A.$1,000
B.$1,200
C.$10,000
D.$20,000
48) Discuss (with formula) the general dividend discount model and its three major
submodels as introduced in the chapter.
49) Which of the following techniques may be more appropriate to analyze projects
with interrelated variables?
A.Sensitivity analysis
B.Scenario analysis
C.Break-even analysis
D.DOL analysis
50) Approximately how much must be saved for retirement in order to withdraw
$100,000 per year for the next 25 years if the balance earns 8% annually, and the first
payment occurs 1 year from now?
A.$1,067,000
B.$1,250,000
C.$2,315,000
D.$2,500,000
51) Other things equal, which of the following groups of stakeholders should expect to
lose value as a result of an LBO?
A.Selling stockholders
B.Buying stockholders
C.Bondholders
D.Investment bankers
52) Which of the following will not permit a higher internal growth rate, other things
equal?
A.A higher plowback ratio
B.A higher debt-to-asset ratio
C.A higher return on equity
D.A higher return on assets
53) Which of the following statements is more likely if cash and marketable securities
increase by $5,000 during a period in which cash provided by operations increases by
$1,000 and cash used by investments decreases by $500?
A.Cash provided by financing increases by $3,500
B.Cash used by financing decreases by $1,000
C.Debt increases by more than cash dividends paid
D.Debt is reduced by more than cash dividends paid
As a plug figure, cash provided by financing must have increased by $4,500. If
dividends paid exceeded the increase to debt, this number would be negative.
54) The difference between an NPV break-even level of sales and an accounting
break-even level of sales is:
A.the consideration of opportunity cost
B.the consideration of depreciation expense
C.the allowance of the sales level to vary in response to changes in demand
D.the inclusion of income taxes
55) A major benefit of investing in mutual funds is:
A.reducing the beta of the investment portfolio
B.increasing the beta of the investment portfolio
C.low cost reduction of exposure to unique risks
D.eliminating market risk
56) A stock offers an expected dividend of $3.50, has a required return of 14%, and has
historically exhibited a growth rate of 6%. Its current price is $35.00 and shows no
tendency to change. How can you explain this price based on the constant growth
dividend discount model?
57) LittleToys has $50 million invested in fixed assets and generates sales of $60
million. Currently, the company is working at only 80% of capacity. How much can
sales expand without any further investment in fixed assets? How much investment in
fixed assets would be required to support a 30% expansion in sales?
58) Fritz and Frieda went to business school together 10 years ago. They have just been
hired by a midsized corporation that wants to bring in new financial managers. Fritz
studied finance, with an emphasis on financial markets and institutions. Frieda majored
in accounting and became a CPA 5 years ago. Who is more suited to be treasurer and
who controller? Briefly explain.
59) Explain the relationships among the earnings-price (E/P) ratio, required rate of
return, and present value of growth opportunities.
60) If a firm’s inventory level of $10,000 represents 30 days’ sales, what is the annual
cost of goods sold? What is the inventory turnover ratio?
61) Your firm has just tendered for a contract in Japan. You won’t know for 3 months
whether you get the contract but if you do, you will receive a payment of 10 million yen
a year from now. You are worried that if the yen declines in value, the dollar value of
this payment will be less than you expect and the project could even show a loss.
Discuss the possible ways that you could protect the firm against a decline in the value
of the yen. Illustrate the possible outcomes if you do get the contract and if you don’t.
