1) Calculation of company costs of capital should be conducted with market values
whenever possible.
2) The payback rule always makes shareholders better off.
3) It is easier for individual investors to diversify their risk by buying shares in different
firms than for the firms to combine their operations.
4) The lower the average level of inventory, the more profitable the firm.
5) Private placement contracts may be custom tailored for each individual investor.
6) MM’s proposition II states that the expected return on assets increases as the
debt-equity ratio increases.
7) As the opportunity cost of capital decreases, the net present value of a project
increases.
8) Ford Motor Company and Google have issued two classes of shares with different
voting rights to allow their firms to obtain fresh capital without giving up their
management’s controlling rights.
9) The value of both call and put options increases as the variability of the stock price
increases.
10) Net working capital to total assets and current ratio are both liquidity ratios.
11) Individual capital investment projects are not considered in a financial plan unless
they are very large.
12) The greater the DOL, the greater the protection against operating losses during
economic downturns.
13) The Excel function for future value is FV (rate, nper, pmt, PV).
14) If net income is positive, then cash flow from operations is positive also for that
period.
15) The riskiness of equity securities typically exceeds that of debt securities for firms.
16) An increase in long-term assets is a source of cash.
17) Indirect quotes are rates of foreign currency expressed in U.S. dollars.
18) McDonald’s weighted-average cost of capital is lower than that of Walmart.
19) The clothing industry is considered to have a high degree of operating leverage.
20) Why have firms been willing to borrow money in the absence of having sufficient
cash to pay dividends?
A.Defaulting on dividends lowers credit ratings
B.Borrowing is cheaper than paying to omit dividends
C.Borrowing increases the firm’s asset base
D.Dividend cuts often signal bad future performance
21) Which of the following statements best distinguishes the difference between real
and financial assets?
A.Real assets have less value than financial assets
B.Real assets are tangible; financial assets are not
C.Financial assets represent claims to income that is generated by real assets
D.Financial assets appreciate in value; real assets depreciate in value
22) IBM shares are currently selling at $75. The premium on a call option on IBM
shares with an exercise price of $60 will be:
A.less than $15
B.greater than $15
C.equal to $15
D.zero
23) If a firm’s total debt ratio is greater than .5, then:
A.its current liabilities are quite high
B.its debt-equity ratio exceeds 1.0
C.it has too few total assets
D.it has more long-term debt than equity
24) What happens to the price of a 3-year bond (with par value $1,000) with an 8%
coupon when interest rates change from 8 to 6%?
A.A price increase of $51.54
B.A price decrease of $51.54
C.A price increase of $53.47
D.A price decrease of $53.47
25) What is the variance of return of a three-stock portfolio (each stock being equally
weighted) that produced returns of 20%, 25%, and 30%?
A.16.67
B.33.33
C.50.00
D.100.00
26) The date on which actual dividend checks are mailed to shareholders is the:
A.declaration date
B.payment date
C.ex-dividend date
D.record date
27) Real rates of return are typically less than nominal rates of return due to:
A.inflation
B.capital gains
C.dividend payments
D.depreciation
28) If the value of a levered firm is $4,000,000, then the value of the same firm
all-equity-financed is:
A.$3,000,000
B.$4,500,000
C.$5,500,000
D.$6,000,000
29) Which of the following is fixed (e.g., cannot change) for the life of a given bond?
A.Current price
B.Current yield
C.Yield to maturity
D.Coupon rate
30) Agency problems can best be characterized as:
A.dislike of firm’s bondholders by its equity holders
B.differing incentives between managers and owners
C.spending of corporate resources
D.friction between the primary and secondary markets
31) The company cost of capital is the return that is expected on a portfolio of the
company’s:
A.existing securities
B.equity securities
C.debt securities
D.proposed securities
32) What is the expected spot rate of /$ 1 year from now if the current spot rate is 106/$
and the yen is selling 1-year forward at 114/$?
A.78.9/$
B.98.0/$
C.106.0/$
D.114.0/$
33) Lock-box systems allow local banks to collect and process the firm’s remittance
from that area.
34) In which merger type would one be least likely to observe economies of scale?
A.Horizontal
B.Vertical
C.Conglomerate
D.All of these
35) Which of the following statements seems most appropriate when the Dow Jones
Industrial Average increases by 2%?
A.All stocks on the exchange increased by 2%
B.Only the 30 DJIA stocks increased by 2%
C.A broad-based market indicator was up by 2%
D.The S&P 500 index increased by 2%
36) The effect of marking a futures contract to market is similar to:
A.requiring daily payments from the contract buyer
B.requiring daily payments from the contract seller
C.closing the current position and opening a new position daily
D.imposing a daily fee on both buyers and sellers
37) Which of the following would be considered a eurodollar deposit?
A.Dollars deposited in a U.S. bank
B.Yen deposited in a European bank
C.Dollars deposited in a Japanese bank
D.Marks deposited in a German bank
38) If a project has a cost of $50,000 and a profitability index of 0.4, then:
A.its cash inflows are $70,000
B.the present value of its cash inflows is $30,000
C.its IRR is 20%
D.its NPV is $20,000
39) Which of the following changes will increase the NPV of a project?
A.A decrease in the discount rate
B.A decrease in the size of the cash inflows
C.An increase in the initial cost of the project
D.A decrease in the number of cash inflows
40) How much cash flow before tax and interest is necessary to support a project that
requires $4 million annually for equity investors and $2 million annually in interest
payments if the firm’s tax rate is 35%?
A.$7.40 million
B.$8.10 million
C.$8.15 million
D.$8.85 million
41) What happens to the implied interest rate on trade credit as the time interval
between the discount period and payment period is decreased?
A.The rate declines
B.The rate increases
C.The rate remains constant
D.It is impossible to predict without knowing length of discount period
42) Decreases in the risk-free rate will reduce:
A.the market risk premium
B.the stock’s risk premium
C.the stock’s beta
D.the stock’s expected return
43) A fundamental analyst:
A.relies on the same information as the technical analyst, but believes in the random
walk
B.studies a firm’s financial statements to determine pricing inefficiencies
C.believes that the market is strong-form efficient
D.performs an unnecessary function, since markets are efficient
44) What is the return on equity for a firm with 15% return on assets, 10% return on
debt, and a .75 debt-equity ratio?
A.18.75%
B.20.00%
C.23.75%
D.26.25%
45) What is the required asset turnover for a firm with a 12% profit margin, 50% equity,
and a 40% dividend payout that wishes to grow at 6% without increasing financial
leverage?
A..42
B..56
C..63
D.1.00
46) The rationale for not including sunk costs in capital budgeting decisions is that they:
A.are usually small in magnitude
B.revert at the end of the investment
C.have no incremental effect
D.reduce the estimated NPV
47) Which of the following statements is incorrect concerning private placements?
A.Terms of the financing can be custom-tailored
B.The securities are not made available to the public
C.The securities are often less marketable
D.Only a small amount of corporate debt is financed in this manner
48) What capital gain must a non-dividend-paying stock attain in order for a corporate
investor in the 35% tax bracket to be indifferent to a stock paying an 8% dividend but
having no capital gain?
A.8.00%
B.9.29%
C.11.02%
D.12.31%
49) The average of beta values for all individual stocks is:
A.greater than 1.0; most stocks are aggressive
B.less than 1.0; most stocks are defensive
C.unknown; betas are continually changing
D.exactly 1.0; these stocks represent the market
50) A corporation’s net worth is composed of the:
A.book value of common equity
B.par value plus additional paid-in capital
C.retained earnings less treasury stock
D.book value of common equity plus preferred stock
51) Hershey’s Chocolate is concerned about cocoa prices prior to building inventory for
Halloween sales. Analysts project that price per ton could vary from $1,250 to $1,500.
A September call option can be purchased with a $1,300 strike price for a premium of
$145. What is Hershey’s worst-case scenario if it purchases these options?
A.Cocoa prices will rise to $1,500 and Hershey is protected only to a price of $1,300
B.Cocoa prices will decline to $1,250 and Hershey must pay an extra $50 per ton
C.Cocoa prices will not rise above Hershey’s break-even price of $1,445, which equals
the sum of the strike price plus the option premium
D.Cocoa prices will remain below $1,300 and Hershey will lose $145 per option
contract
52) A bond’s yield to maturity takes into consideration:
A.current yield but not price changes of a bond
B.price changes but not current yield of a bond
C.both current yield and price changes of a bond
D.neither current yield nor price changes of a bond
53) Which of the following would not be a customary source of credit information on
customers?
A.Dun and Bradstreet
B.Internal Revenue Service
C.Credit Bureau
D.Customer’s bank
54) If the present value of the tax shield equals the present value of the costs of
financial distress, then the:
A.firm is using the optimal level of debt
B.firm is paying too high an interest rate
C.firm’s market value equals the value of the unlevered firm
D.firm should increase its use of debt
55) Why does accounting income differ from cash flow?
56) A U.S. firm owes 10 million 3 months from now. The spot exchange rate is 95/$ and
the forward rate is 96/$. Is the yen selling at a forward premium or discount, related to
the dollar? Does the firm face exchange risk? Would you suggest that it buy now or
later?
57) 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 $2.40
dividend. The corporation has a 35% tax rate.
58) Calculate the present value of the depreciation tax shield for an asset in the 3-year
class life costing $100,000. Three-year class percentages are 33.33%, 44.45%, 14.81%,
and 7.41%, respectively for years 1 through 4 . The firm has a 35% tax rate and a 10%
cost of capital. Compare this present value to that calculated for straight-line
depreciation with no salvage value.
59) Describe the basic differences between mergers, leveraged buyouts, management
buyouts, divestitures, and spin-offs.
60) Would you expect the price of a 10-year floating-rate bond to be more or less
sensitive to changes in interest rates than the price of a 10-year maturity fixed-rate
bond?
61) Describe the process for calculating a yield to maturity for a bond, and tell what
could cause the yield to maturity to change.