1) Net working capital is determined from the difference between current assets and
current liabilities.
2) The appropriate manner of adjusting for inflationary effects is to discount nominal
cash flows with real interest rates.
3) Return on assets and return on equity are both profitability ratios.
4) The direct exchange rate quotes the number of U.S. dollars that can be exchanged for
one unit of a foreign currency.
5) Credit risk implies that the promised yield to maturity on the bond is higher than the
expected yield.
6) Futures contracts represent a low-cost method of buying foreign currency forward.
7) Debt finance does not affect the operating risk but it does add financial risk.
8) The forward exchange rate for foreign currency is the rate for immediate exchanges.
9) In 2009, repurchases and dividends in the United States were just about equal, but
together amounted to about 25% of total corporate earnings.
10) With floating-rate preferred stock, dividends are linked to interest rates.
11) “What-if” questions ask what will happen to a project in various circumstances.
12) Costs of financial distress arise from disruption to normal business operations as
well as from the effect that financial distress has on the firm’s investment decisions.
13) The stock of Newmont Mining, the world’s largest gold producer, has
above-average volatility but relatively low beta. Why?
14) If a firm has three times as much equity as debt in its capital structure, then the firm
has:
A.25.0% debt
B.66.7% equity
C.40.0% debt
D.33.3% equity
15) Which of the following is correct concerning terms of trade credit of 4/10, EOM,
net 90?
A.The discount period expires on the last day of the month
B.The invoice becomes delinquent 90 days after the last day of the month
C.The discount period ends on the 10th day of the month following the invoice
D.The discount period ends either 10 days after invoicing or at the end of the month,
whichever is earlier
16) What is the effective annual rate of trade credit if the trade credit terms are 1/10, net
30?
A.13.01%
B.18.00%
C.18.43%
D.20.13%
17) What is the book value per share for a firm with 2 million shares outstanding at a
price of $50, a market-to-book ratio of .75, and a dividend payout ratio of 50%?
A.$33.33
B.$37.50
C.$62.50
D.$66.67
18) If a security plots below the security market line, it is:
A.not rewarding the investor for its unique risk
B.underpriced, a situation that should be temporary
C.offering too little return to justify its risk
D.a defensive security, which expects to offer lower returns
19) Which of the following is more likely to be responsible for a firm having low
PVGO?
A.ROE exceeds required return
B.Plowback is very high
C.Payout is very high
D.Book value of equity is low
20) One characteristic of scenario analysis is that:
A.it allows only one variable at a time to change
B.it limits variation to only the more likely combinations
C.all or nearly all variations are analyzed, regardless of likelihood
D.managers generate each variation by hand
21) If a firm’s expected return on equity equals its expected return on assets, then the:
A.expected return on debt exceeds the expected return on assets
B.likelihood of financial distress is high
C.firm has too much debt
D.firm has no debt in its capital structure
22) The slope of the security market line equals:
A.one
B.beta
C.the market risk premium
D.the expected return on the market portfolio
23) Predict the expected spot exchange rate between the Japanese yen and U.S. dollar,
given that inflation in Japan, at 8%, is 4% higher than in the United States and that the
current spot rate is 107/$.
A.102.72/$
B.103.04/$
C.111.12/$
D.111.28/$
24) A company with a return on equity of 15% and a plowback ratio of 60% would
expect a constant-growth rate of:
A.4%
B.9%
C.21%
D.25%
25) Which of the following is likely to be correct for a CCC-rated bond, compared to a
BBB-rated bond?
A.The CCC bond will sell for a higher price
B.The CCC bond will sell for a lower price
C.The CCC bond will offer a higher promised yield to maturity
D.The CCC bond will offer a lower promised yield to maturity
26) What is the opportunity cost of keeping a cash balance of $2.5 million, if the daily
interest rate is 0.025% and the average transaction cost of investing money overnight is
$50?
A.$121
B.$171
C.$575
D.$675
27) What are the annual sales for a firm with $400,000 in debt, a total debt ratio of .4,
and an asset turnover of 3.0?
A.$333,333
B.$1,200,000
C.$1,800,000
D.$3,000,000
28) A project that increased sales was accompanied by a $50,000 increase in inventory,
a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable.
Assuming these amounts remain constant, by how much has net working capital
increased?
A.$5,000
B.$25,000
C.$30,000
D.$45,000
29) In 2010, U.S. corporate and foreign bonds totaled:
A.less than $500 billion
B.about $3 trillion
C.about $7 trillion
D.more than $11 trillion
30) What do you expect to happen to prices in Japan, given nominal interest rates of
10% in the United States and 6% in Japan, and expected U.S. inflation of 6%?
A.Expected Japanese inflation is 1.79%
B.Expected Japanese inflation is 2.15%
C.Expected Japanese inflation is 6.22%
D.Expected Japanese inflation is 10.00%
31) If you buy yen forward when the yen is selling at a forward premium, you will get:
A.more yen than if you buy on spot market
B.fewer yen than if you buy on spot market
C.the same number of yen as on the spot market, but with a lower commission
D.the expectation of more yen, but the difference is not locked in
32) Firms that make investment decisions based on the payback rule may be biased
toward rejecting projects:
A.with short lives
B.with long lives
C.with late cash inflows
D.that have negative NPVs
33) The present value of a perpetuity can be determined by:
A.Multiplying the payment by the interest rate
B.Dividing the interest rate by the payment
C.Multiplying the payment by the number of payments to be made
D.Dividing the payment by the interest rate
34) Your real estate agent mentions that homes in your price range require a payment of
approximately $1,200 per month over 30 years at 9% interest. What is the approximate
size of the mortgage with these terms?
A.$128,035
B.$147,940
C.$149,140
D.$393,120
35) Financial plans covering a short planning horizon rarely extend beyond:
A.1 year
B.3 years
C.5 years
D.10 years
36) During the year the following changes were observed.
I. Inventory period increased by 12 days.
II. Receivables period decreased by 6 days.
III. Accounts payable period increased by 4 days.
Find the net change in cash conversion cycle.
A.-10 days
B.+2 days
C.+10 days
D.+14 days
37) What should be the price for a common stock paying $3.50 annually in dividends if
the growth rate is zero and the discount rate is 8%?
A.$22.86
B.$28.00
C.$42.00
D.$43.75
38) ABC Corp. entered into a currency swap with its bank, providing that ABC borrows
$5 million at 10% and swaps for a 12% yen loan. The spot exchange rate is 105/$. If
interest only is to be repaid on an annual basis, how much does ABC pay annually to
the bank?
A.1.26 million
B.5.71 million
C.52.50 million
D.63.00 million
39) Which of the following futures contract holders is speculating?
A.A wheat farmer who sells wheat futures
B.A cattle rancher who buys live cattle futures
C.A candy maker who buys sugar futures
D.An oil producer who sells crude oil futures
40) The required return on an equity security is comprised of a:
A.dividend yield and ROE
B.current yield and a terminal value
C.sustainable growth rate and a plowback yield
D.dividend yield and a capital gains yield
41) What is the proportion of debt financing for a firm that expects a 24% return on
equity, a 16% return on assets, and a 12% return on debt? Ignore taxes.
A.54.0%
B.60.0%
C.66.7%
D.75.0%
42) When a corporation issues permanent debt, the value of all its securities:
A.increases by the present value of the tax shield
B.decreases by the present value of the tax shield
C.increases by the annual interest tax shield
D.decreases by the annual interest tax shield
43) How much more would you be willing to pay today for an investment offering
$10,000 in 4 years rather than the normally advertised 5-year period? Your discount rate
is 8%.
A.$544.47
B.$681.48
C.$740.74
D.$800.00
$7,350.30 vs. $6,805.83
$544.47 difference.
44) In capital budgeting analysis, an increase in working capital can be shown as:
A.a cash inflow at the beginning of the project
B.an outflow at the beginning and an equal inflow at the end of the project
C.an inflow at the beginning and an equal outflow at the end of the project
D.a decrease in the initial amount invested
45) Which of the following would you expect to improve the dollar NPV of a foreign
capital budgeting proposal?
A.The risk-free rate in the foreign country is higher than in the United States
B.Lower inflation is expected in the foreign country than in the United States
C.The foreign country has a less stable political environment
D.All of these
46) Which of the following is correct for a firm with EPS of $2.00 per share and a 45%
payout ratio?
A.45% of earnings will be plowed back into the firm
B.Dividends will equal $1.10 per share
C.Book value per share of equity will increase by $1.10
D.Retained earnings will be unchanged
47) It has been determined that 0.5 share of stock should be purchased with borrowed
funds to replicate the payoff to one call option. What is the option’s strike price if the
stock could range in value from $110 to $10 at the expiration of the option?
A.$40
B.$50
C.$60
D.$70
48) Which of the following is not a source of cash?
A.Net income
B.Repayment of a bank loan
C.Reduction in accounts receivable
D.Depreciation
49) Trade credit is created when:
A.customers return unacceptable goods
B.final consumers purchase goods on credit
C.companies purchase goods on credit
D.current assets exceed current liabilities
50) What is the difference between a fundamental analyst and a technical analyst?
A.Only a fundamental analyst believes markets are inefficient
B.A technical analyst focuses on financial statement analysis
C.Only a technical analyst helps keep the market efficient
D.A fundamental analyst analyzes such information as earnings and asset values
51) What is the difference between spot and forward exchange rates?
52) Assume that the current stock price is $50 per share, that call options can be
purchased with an exercise price of $60 per share, that bank loans can be obtained for a
10% nominal rate, and that at expiration of the option in 3 months, the stock will either
be valued at $30 or $70. Show that it is possible to replicate the stock payoff by
borrowing and buying a call option.
53) Explain why the market value of common stock often differs from its liquidation
value or its book value.
54) Firms A and B face the following borrowing rates for a 5-year fixed-rate debt issue
in U.S. dollars or euros:
Suppose that firm A wishes to borrow U.S. dollars and firm B wishes to borrow euros.
Show how a swap could be used to reduce the borrowing costs for each company.
Assume a spot exchange rate of 1 euro to the dollar.
55) Is financial slack always valuable?
56) How does competition among investors lead to efficient markets?
57) The text suggests that, of the three strategies shown, the relaxed strategy is probably
the worst from the standpoint of managerial evaluation. Why is this thought to be the
case, and when may it be an acceptable practice?
58) Your bookstore is set up as an incorporated business. If you draw $70,000 from
your bookstore as your salary, such that your bookstore’s taxable income for the year
becomes $30,000, how much personal tax and corporate tax must you pay to the federal
government? By how much would your taxes change if you reduce your salary to
$27,950, such that your bookstore’s taxable income becomes $72,050? Assume that you
pay personal taxes as an unmarried taxpayer, and that the tax rates are as shown below.
59) What is the effect of growth on the need for external financing?