1) Takeovers are often described as part of a broader market for corporate control.
2) A banker’s acceptance is usually used in overseas trade.
3) The security market line provides a standard for project rejection.
4) The winner’s curse theory assumes that the informed investor receives the majority of
the underpriced IPOs.
5) As a project comes to its end, there is a disinvestment in working capital, which also
generates positive cash flow as inventories are sold off and accounts receivable are
collected.
6) The advantage of the bookbuilding method is that it allows underwriters to give
preference to those investors whose bids are most helpful in setting the issue price and
to offer them a reward in the shape of underpricing.
7) Market efficiency implies that security prices impound new information quickly.
8) Both the NPV and the internal rate of return methods recognize that the timing of
cash flows affects project value.
9) In a rights offering, the shares are priced at a substantial discount to current market
value, which ensures that the shareholders will either exercise the rights themselves or
sell them to other investors.
10) Debt can be used as a plug item in financial planning.
11) The expected return on an investment provides compensation to investors both for
waiting and for worrying.
12) A company that sees a customer pay a $2,500 bill resulting from a previous sale will
see no change in its net working capital.
13) Financial planning is a process of deciding which risks to take.
14) A company gains, as a result of net float, the amount on checks that has been
deposited by a company but that has not been cleared.
15) The interest tax shield is equal to the:
A.difference between interest expense and income taxes
B.amount of interest paid in a given year
C.product of the interest expense and the tax rate
D.product of the debt principal and the interest rate on debt
16) Which of the following statements is generally true concerning the costs of security
issue?
A.Underpricing is rarely a significant cost
B.Equity is cheaper to issue than debt
C.Debt is cheaper to issue than equity
D.There are no economies of scale in security issuance
17) A farmer stores his fall harvest of corn and sells corn futures for March delivery at
$2.50 per bushel. In March the spot price of corn is $2.20 per bushel. Which of the
following is correct?
A.The farmer is obligated to deliver corn to the futures buyer at $2.20
B.The farmer has locked in an effective price of $2.50 per bushel
C.The farmer would have been better off without the futures contact
D.The farmer will receive $4.70 per bushel, which more than doubles the profit
obtained without futures
18) If the plotting of a portfolio’s returns against returns on the market index produces a
tight pattern, then:
A.the portfolio appears to be well diversified
B.the portfolio has a beta of 0
C.the portfolio has very little systematic risk
D.the portfolio has a very low market risk premium
19) A company reports significantly higher earnings on a Monday. You purchase the
stock on Tuesday and earn superior returns in the absence of other new information.
The market appears to be:
A.weak-form efficient at best
B.weak-form efficient at the least
C.semistrong-form efficient at best
D.strong-form efficient at the least
20) The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation
rate in the United States is 5%. What is the approximate inflation rate in the United
Kingdom?
A.1.3%
B.2.9%
C.4.1%
D.7.0%
21) The yield curve depicts the current relationship between:
A.bond yields and default risk
B.bond maturity and bond ratings
C.bond yields and maturity
D.promised yields and default premiums
22) The variance of a stock’s returns can be calculated as the:
A.average value of deviations from the mean
B.average value of squared deviations from the mean
C.square root of average value of deviations from the mean
D.sum of the deviations from the mean
23) Firms spend an increasing amount of time evaluating real options, which are:
A.options on real assets such as an option to abandon
B.call and put options traded on organized exchanges
C.call options such as warrants and convertible bonds
D.put options such as held by shareholders of a firm with financial leverage
24) With respect to the balance sheet, an increase in equity of $2,000 with an increase
in net income to $2,500, leads us to believe:
A.the firm paid a dividend of $500
B.the firm plowed $500 back into the company
C.$500 went into retained earnings
D.debt increased by $2,000
25) Secured debt is debt that:
A.carries a fixed interest rate
B.is held by a trustee until repayment
C.has more than one year until maturity
D.has specific collateral backing it
26) Corporate debt instruments are most commonly traded:
A.on the NYSE
B.on NASDAQ
C.in the money market
D.in the over-the-counter market
27) If an investor can earn 20% on underpriced IPOs, but will lose 10% on overpriced
IPOs in which he was awarded $2,000 worth of the overpriced issue, how much of the
underpriced issue must he be awarded in order to gain $500?
A.$1,500
B.$2,500
C.$3,500
D.$10,000
28) Stock that is sold through a rights issue:
A.is offered for cash to the general investing public
B.will not affect the market price of the shares
C.is limited for sale to existing shareholders
D.must be sold on a firm commitment basis
29) What is the standard deviation of the market portfolio if the standard deviation of a
fully diversified portfolio with a beta of 1.25 equals 20%?
A.16.00%
B.18.75%
C.25.00%
D.32.50%
30) What is the return on equity for a firm that has a constant dividend growth rate of
7% and a dividend payout ratio of 60%?
A.2.80%
B.4.20%
C.11.67%
D.17.50%
31) Why is it important to include the tax effect into cost of capital computations for
firms with debt financing?
A.Firms pay taxes on the outstanding principal amount of the debt
B.Taxable income is reduced by the amount of the interest expense
C.Comparisons with equity financing would otherwise not be possible
D.Taxes are paid on interest but not on dividends
32) What is the sustainable growth rate for a firm with $250,000 in net income, $20,000
in preferred stock dividends, $80,000 in common stock dividends, and an average
equity balance of $1 million?
A.8%
B.10%
C.15%
D.17%
33) Capital losses will automatically be the case for bond investors who buy:
A.discount bonds
B.premium bonds
C.zero-coupon bonds
D.junk bonds
34) A firm generates sales of $250,000, depreciation expense of $50,000, taxable
income of $50,000, and has a 35% tax rate. By how much does net cash flow deviate
from net income?
A.$17,500
B.$50,000
C.$67,500
D.$82,500
35) Prospective investors are advised of a stock’s potential risks by the:
A.underwriter
B.underpricing laws
C.prospectus
D.initial public offering
36) Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40
each to an underwriter and the underwriter sells the shares at $43 each. By the end of
the first day’s trading, the issuing company’s stock price had risen to $70. What is the
cost of underpricing?
A.$81 million
B.$91 million
C.$101 million
D.$111 million
37) What effective interest rate is charged to a purchaser receiving terms of 5/10, net 90
if the purchaser avoids the discount and pays in 90 days?
A.20.00%
B.22.81%
C.24.93%
D.26.37%
38) Which of the following financial ratios is not used to develop Altman’s Z-score
from multiple discriminant analysis?
A.Market value of equity/book debt
B.EBIT/total assets
C.Interest expense/total assets
D.Working capital/total assets
39) Underwriters are more likely to oversell new stock issues during:
A.a bear market or market crash
B.a stable period
C.a bull market or market boom
D.all of these
40) What are the basic relationships between spot exchange rates, forward exchange
rates, interest rates, and inflation rates?
41) What options may be provided in financial securities?
42) Does firm value increase when more debt is used?
43) Discuss how betas are measured for individual stocks.
44) ABC Corporation is experiencing hard capital rationing and will not be able to
invest more than $1,000,000 this year. Develop a profitability index for the following
four projects and state that would be selected: All four projects will last 3 years and the
firm uses a 10% discount rate.
45) Suppose that you are thinking of opening a lock box. Given that:
What is your gain from such a lock-box system?
46) How can an individual save and invest in a corporation?
47) What essential features of inventory management are successfully captured by the
“economic order quantity” model?
48) Illustrate the difference between majority and cumulative voting systems using as
an example a shareholder who owns 1,000 shares and an election in which three
directors will be selected. Why might shareholders care about which voting system is
adopted?
49) What is an exchange traded fund? What are some popular choices of exchange
traded funds?