1) A farmer can avoid delivery on a futures contract by buying an offsetting futures
contract.
2) When bonds are selling at par value, the bonds are known as fixed-rate bonds.
3) Only the IPOs for large corporations are sold in primary markets.
4) The net working capital to total assets ratio is always a larger number than the
current ratio.
5) An increase in short-term interest rates will increase the carrying costs of the firm.
6) When using a profitability index (ratio of net present value to initial investment) to
select projects, a value of 0.63 is preferred over a value of 0.21 .
7) The rates of return on investments outside the corporation set the minimum return for
investment projects inside the corporation.
8) According to the MM dividend-irrelevance proposition, since investors do not need
dividends to convert their shares to cash, they will not pay higher prices for firms with
higher dividend payouts.
9) Smaller businesses are especially dependent upon internally generated funds.
10) There is little doubt that the CAPM captures everything that is going on in the
market.
11) In the United States, banks are the most important source of long-term financing for
businesses.
12) A tender offer is an agreement between the management and shareholders of a firm
to buy back its own shares.
13) The term “irrational exuberance” was coined by former Fed Chairman Alan
Greenspan to describe the dot-com boom.
14) The payment of interest expense is considered cash flow from financing on the
statement of cash flows.
15) An excess of market value over the book value of equity can be attributed to going
concern value.
16) A planning horizon refers to the amount of time necessary to develop the financial
plan.
17) Sunk costs remain the same whether or not you accept the project.
18) The swap is the arrangement by two counterparties to exchange one stream of cash
flow for another.
19) A dividend does not accompany stocks that are purchased on the ex-dividend date.
20) Speculation is foolish unless you have reason to believe that the odds are stacked in
your favor.
21) What is the present value of $100 to be deposited today into an account paying 8%,
compounded semiannually for 2 years?
A.$85.48
B.$100.00
C.$116.00
D.$116.99
22) A stock’s par value is represented by:
A.the maturity value of the stock
B.the price at which each share is recorded
C.the price at which an investor could sell the stock
D.the price received by the firm when the stock was issued
23) Which of the following is correct if you have contracted to purchase 1,000 Swiss
francs 3 months forward at a rate of SFr1.6/$?
A.You pay approximately $625 today for the francs
B.You pay $1,600 today for the francs
C.You pay approximately $625 3 months from now for the francs
D.You pay $1,600 3 months from now for the francs
24) What should be the price of a stock that offers a $4 annual dividend with no
prospects of growth, and has a required return of 12.5%?
A.$8.50
B.$25.00
C.$32.00
D.$50.00
25) A firm’s dividend policy involves a trade-off between:
A.a large asset base and a small asset base
B.high share price versus low share price
C.internal versus external financing of investment
D.all of these
26) Which of the following may be responsible for a fair share of the perennial “project
cost overruns”?
A.Rapidly rising inflation
B.Delays in obtaining contracts and permits
C.Lack of raw materials
D.Forecasting bias by the sponsoring manager
27) The existence of an upward-sloping yield curve suggests that:
A.bonds should be selling at a discount to par value
B.bonds will not return as much as common stocks
C.interest rates will be increasing in the future
D.real interest rates will be increasing soon
28) Which of the following statements appears correct for a corporation with a negative
net income in both the present and the last fiscal year?
A.This year’s loss can be carried back, but last year’s loss cannot be used
B.Neither of the losses can be used to reduce taxes
C.Both losses can be carried forward but not backward
D.Both losses can be carried forward and backward, within certain time limits
29) What is the primary reason for a reduction in share value after a successful rights
issue? The new shares:
A.have higher underwriting expense
B.are offered at attractive prices
C.reduce the firm’s return on equity
D.do not include voting rights
30) Which of the following items should not be included in a listing of current assets?
A.Marketable securities
B.Accounts payable
C.Accounts receivable
D.Inventories
31) Approximately how much was paid to invest in a project that has an economic
break-even level of sales of $5 million, cash flows determined by .1 sales – $300,000, a
6-year life, and an 8% discount rate?
A.$416,667
B.$924,575
C.$1,016,678
D.$2,311,450
32) Which of the following statements is not true regarding financial planning models?
A.They should include as much detail as possible
B.The results of a model are pro forma financial statements
C.The plug variable maintains consistency
D.Financial analysis is not used in financial planning
33) The capital budget should be consistent with the firm’s:
A.growth in sales
B.strategic plans
C.current level of debt
D.dividend policy
34) A firm’s quick ratio of .89 suggests that the firm:
A.has a low level of current liabilities
B.has been overstating the value of its inventory
C.faces a potentially serious liquidity crisis
D.should reduce its holdings of cash and/or marketable securities
35) Dividing a stock’s earnings per share by the expected rate of return will value the
share correctly if no new shares are issued and the dividend yield:
A.exceeds the required return
B.equals the required return
C.is zero
D.is constant
36) Which of the following would act to reduce the carrying costs of inventory?
A.The inventory is capable of spoiling
B.The inventory will rapidly go out of style
C.General interest rates decrease in the economy
D.General interest rates increase in the economy
37) Firms with substantial amounts of free cash flow often discover that:
A.conglomerate mergers are the best use for the funds
B.accounting profits are what truly matter
C.they have become takeover targets
D.their capital budgets have been too low
38) What should be the stock value one year from today for a stock that currently sells
for $35, has a required return of 15%, an expected dividend of $2.80, and a constant
dividend growth rate of 7%?
A.$37.45
B.$37.80
C.$40.25
D.$43.05
39) Which statement is true about terms of trade credit of 2/10, net 30?
A.A 10% cash discount is offered for payment before 30 days
B.A 2% cash discount can be taken for payment before the 10th of the following month
C.A 10% cash discount can be taken if paid by the second day after invoicing
D.No cash discount is offered after the eleventh day
40) Calculate the profit per share for an investor that exercises a put option with a strike
price of $60 when the stock is selling for $46 and the premium for the put option was
$4.
A.-$14
B.-$10
C.$10
D.$18
41) Which of the following would be least expected to change as a result of a higher
average age of receivables?
A.Current ratio
B.Total collection costs
C.Accounts payable
D.Bad debt expense
42) Issue costs for equity are higher than those for debt for all of the following reasons
except:
A.equity issues have higher administrative costs
B.underwriting stock is riskier than underwriting bonds
C.equity issues involve significantly more time to sell
D.equity issues have lower economies of scale
43) Sources and uses of funds are made equal through:
A.a balancing item
B.pro forma financial statements
C.borrowed cash
D.additions to retained earnings
44) An accepted time draft is quite similar to:
A.selling on open account
B.a conditional sale
C.a check dated in the future
D.an overdue account
45) An investor divides her portfolio into thirds, with one part in Treasury bills, one part
in a market index, and one part in a diversified portfolio with beta of 1.50 . What is the
beta of the investor’s overall portfolio?
A.0.833
B.1.000
C.1.167
D.1.250
46) What is the future value of $10,000 on deposit for 5 years at 6% simple interest?
A.$7,472.58
B.$10,303.62
C.$13,000.00
D.$13,382.26
47) An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and
then sells it for $1,040. What was the investor’s rate of return?
A.5.71%
B.6.00%
C.6.67%
D.7.00%
48) If the direct quote for the euro () is $0.51/, then the indirect quote for the euro will
be:
A.0.0051/US$
B.1.0000/US$
C.1.0049/US$
D.1.9608/US$
49) On average, empirical evidence suggests that those who cover foreign exchange
commitments in the forward market pay a premium of approximately _____ to avoid
exchange rate risk.
A.0.0%
B.3.1%
C.5.0%
D.7.3%
50) Which of the following changes to the terms of credit would make the effective
annual rate increase?
A.Increase the cash discount percentage
B.Extend the discount period
C.Extend the payment period
D.All of these
51) A system by which firms assign their customers for collection purposes to regional
banks that transfer funds to a central bank is known as:
A.a lock-box system
B.a zero-balance account
C.a wire transfer
D.concentration banking
52) A common stock is held for 2 years, during which time it receives an annual
dividend of $20. The stock was sold for $100 and generated an average annual return of
32%. What price was paid for the stock?
A.$61.60
B.$64.80
C.$88.00
D.$90.91
53) Periodic receipts of interest by the bondholder are known as:
A.the coupon rate
B.a zero-coupon
C.coupon payments
D.the default premium
54) Suppose Heinz is considering two issues of 20-year maturity coupon bonds; one
issue will be callable, the other not. For a given coupon rate, will the callable or
noncallable bond sell at the higher price? If the bonds are both to be sold to the public
at face value, which bond must have the higher coupon rate?
55) Calculate the nominal and real returns for the following corporate bond investment:
Purchased for $840 one year ago, 4% coupon rate, sold for $894. The inflation rate was
5.0% during the year. Would you consider this an appropriate investment if Treasury
bills had yielded 6.0% over the same period?
56) Show the breakdown of stock price between a firm’s assets that are already in place
and its present value of growth opportunities, assuming: next year’s expected earnings
equal $5.00, 13% required rate of return, 17% return on equity, and 45% plowback
ratio.
57) After calculating a firm’s financial ratios, in what manner might they be analyzed to
assess the firm’s performance?
58) What is a callable bond and how is its value determined?