1) Investment banking firms are prohibited from selling securities due to conflicts of
interest.
2) Inventories are considered fixed assets because inventory levels remain fairly
constant throughout the year.
3) Profits-to-Sales relationships are defined as profit margins.
4) If a project is acceptable using the IRR criterion, it will also be acceptable using the
MIRR criterion.
5) If a project is acceptable using the net present value criteria, then it will also be
acceptable under the less stringent criteria of the payback period.
6) Venture capitalists typically provide funds to high-risk start up companies but take no
active role in their management.
7) The rate of return available on the next best investment alternative for the saver
refers to the opportunity cost of funds.
8) The expected yield on junk bonds is higher than the yield on AAA-rated bonds
because of the higher default risk associated with junk bonds.
9) The syndicate can be thought of as a wholesaler of securities and the dealer
organization as a retailer of securities.
10) In order to create value a corporation must earn a rate of return on its invested
capital that is higher than the market’s required rate of return on that invested capital.
11) Total assets must always equal the sum of temporary, permanent, and spontaneous
sources of financing.
12) The required rate of return for an asset is equal to the risk-free rate plus a risk
premium.
13) The purpose of maintaining a raw materials inventory is to integrate the purchasing
and production functions.
14) Federal regulations make it impossible for rating agencies to drop a company’s
credit rating more than two notches at a time in order to prevent panic in bond markets.
15) Which of the following is most likely to be a temporary source of financing?
A) commercial paper
B) preferred stock
C) long-term debt
D) common stock
16) The Securities and Exchange Commission (SEC)
A) regulates only initial public offerings, or IPOs
B) regulates only primary market transactions to ensure investors are provided with
adequate and accurate information on new securities
C) regulates both primary and secondary markets
D) regulates initial public offerings, but not seasoned equity offerings, in the primary
market
17) Business risk refers to
A) the risk associated with financing a firm with debt
B) the variability of a firm’s expected earnings before interest and taxes
C) the uncertainty associated with a firm’s CAPM
D) the variability of a firm’s stock price
18) Changes in the general economy, like changes in interest rates or tax laws represent
what type of risk?
A) company-unique risk
B) market risk
C) unsystematic risk
D) diversifiable risk
19) The calculation of incremental free cash flows over a project’s life should include
A) labor and material saving
B) additional revenue
C) interest to bondholders
D) A and B
20) Trinitron, Inc. purchased a new molding machine for $85,000. The company paid
$8,000 for shipping and another $7,000 to get the machine integrated with the
company’s existing assets. Trinitron, Inc. must maintain a supply of special lubricating
oil just in case the machine breaks down. The company purchased a supply of oil for
$4,000. The machine is to be depreciated on a straight-line basis over its expected
useful life of 8 years. Trinitron is replacing an old machine that was purchased 6 years
ago for $50,000. The old machine was being depreciated on a straight-line basis over a
ten year expected useful life. The machine was sold for $15,000. Trinitron’s marginal
tax rate is 40%. What is the amount of the initial outlay?
A) $89,000
B) $87,000
C) $91,000
D) $85,000
21) Trade credit is an example of which of the following sources of financing?
A) spontaneous
B) temporary
C) permanent
D) discretionary
22) The “bird-in-the-hand dividend theory” supports which view of the effect of
dividend policy on company value?
A) A firm’s dividend policy is irrelevant
B) High dividends increase stock values
C) Low dividends increase stock values
D) Constant dividends increase stock values
23) Company A has a higher days sales outstanding ratio than Company B. Therefore
A) Company A sells more on credit than Company B
B) Company A has a higher percentage of cash to credit sales than Company B
C) Company A must be collecting its accounts receivable faster than Company B, on
average
D) Other things being equal, Company B has a cash flow advantage over Company A
24) You purchased 3,000,000 Indian rupees in London at an exchange rate of 54.86 to
the dollar and simultaneously sold the rupees in Bahrain at an exchange rate of 55.12 to
the dollar. What is the name for such a transaction?
A) trend trading
B) arbitrage
C) currency swapping
D) exchange rate hedging
25) One potential reason for a share repurchase is
A) to increase the power of a minority group of shareholders.
B) maximize the dilution in earnings associated with a merger.
C) a reduction in the firm’s cost associated with servicing small stockholders.
D) to signal the market that the firm’s stock price is too high.
26) Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will
be repaid after 120 days, with Simpson paying a total of $12,400. What is the
approximate cost of credit using the APR, or annual percentage rate, calculation?
A) 3.33%
B) 4.00%
C) 10.00%
D) 11.75%
27) AFB Corp. needs to replace an old lathe with a new, more efficient model. The old
lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.
(The old machine is being depreciated on a straight-line basis over a ten-year useful
life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new
lathe to the factory and get it installed. The old machine will be sold as scrap metal for
$2,000. The new machine is also being depreciated on a straight-line basis over ten
years. Sales are expected to increase by $8,000 per year while operating expenses are
expected to decrease by $12,000 per year. AFB’s marginal tax rate is 40%. Additional
working capital of $3,000 is required to maintain the new machine and higher sales
level. The new lathe is expected to be sold for $5,000 at the end of the project’s ten-year
life. What is the incremental free cash flow during years 2 through 10 of the project?
A) $13,600
B) $14,400
C) $15,800
D) $16,400
28) Which of the following is the slope of the security market line?
A) beta
B) one
C) It varies, and is steeper for riskier securities
D) the market risk premium
29) You have $25,000 in an investment account today. How much will be in the account
in 30 years if the account earns (a) 8% per year, (b) 8% compounded semiannually, (c)
8% compounded quarterly, (d) 8% compounded monthly, and (e) 8% compounded
daily? Comment on the effect of more frequent compounding.
30) You are considering an investment in a U.S. Treasury bond but you are not sure
what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%;
inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default
risk premium for AAA-rated corporate bonds is 3.5%. What rate of interest should the
U.S. Treasury bond pay?
A) 8.5%
B) 6.0%
C) 5.0%
D) 2.5%
31) An American manufacturer with its corporate headquarters in New York City is
purchasing goods from a French supplier. Which of the following statements is TRUE
regarding the exchange rate risk for this contract?
A) The American company will bear all of the exchange rate risk if the contract is
denominated in dollars
B) The French company will bear all of the exchange rate risk if the contract is
denominated in dollars
C) Both companies could bear exchange rate risk if the contract is denominated in
British Pounds
D) Both B and C are correct
32) Design Quilters is considering a project with the following cash flows:
Initial Outlay = $126,000
Cash Flows:Year 1 = $44,000
Year 2 = $59,000
Year 3 = $64,000
If the appropriate discount rate is 11.5%, compute the NPV of this project.
A) -$14,947
B) $2,892
C) $7,089
D) $41,000
33) A corporate bond has a coupon rate of 9%, a face value of $1,000, and matures in
15 years. Which of the following statements is MOST correct?
A) An investor with a required return of 10% will value the bond at more than $1,000
B) An investor who buys the bond for $900 and holds the bond until maturity will have
a capital loss
C) An investor who buys the bond for $900 will have a yield to maturity on the bond
greater than 9%
D) If the bond’s market price is $900, then the annual interest payments on the bond
will be $81
34) Dynamic Industries paid a dividend of $1.65 on its common stock yesterday. The
dividends of Wallace Industries are expected to grow at 9% per year indefinitely. If the
risk free rate is 3% and investors’ risk premium on this stock is 8%, estimate the value
of Wallace Industries stock 2 years from now.
A) $106.84
B) $100.43
C) $91.81
D) $54.71
35) Nogrowth Corporation expects their dividend to stay at $0.50 per share each year
into the foreseeable future. Therefore
A) the stock will be valued at $0.50 times the number of years an investor plans to keep
it
B) the value of the stock can be estimated as $0.50 divided by an investor’s required
rate of return
C) the value of the stock can not be determined using the dividend valuation model
because the growth rate is zero
D) the value of the stock is positive only if the required return is negative
36) A firm that maintains a ‘stable dollar dividend per share” will generally not increase
the dividend unless
A) a stock split occurs.
B) the firm merges with another profitable firm.
C) the firm is sure that a higher dividend level can be maintained.
D) the P/E ratio has increased steadily over the past 5 years.
37) In August 2004, Google first sold its common stock to the public at $85 per share
and raised $1.76 billion. This is an examples of
A) a primary market transaction
B) a secondary market transaction
C) a venture capital firm transaction
D) a money market transaction
38) Which of the following is the initial and most important step in the preparation of
pro forma financial statements?
A) Estimate the levels of investment in current and fixed assets
B) Determine the rate of interest that will be required for borrowed funds
C) Project the firm’s sales revenues for the planning period
D) Approximate the cost of raw materials
39) A company that increases its liquidity by holding more cash and marketable
securities is
A) likely to achieve a higher return on equity because of higher interest income
B) likely to achieve a lower return on equity because of the smaller rates of return
earned on cash and marketable securities compared to the firm’s other investments
C) going to maximize firm value because risk is decreased
D) going to have to sell common stock to raise the cash to become more liquid
40) As of today, the most severe economic crisis to afflict the United States economy is
considered to be
A) the Great Depression of the 1930s
B) the Great Recession of 2007 – 2009
C) the Reagan Tax Law Changes of 1985
D) the Savings and Loan Crisis of 1978 – 1982
41) William Corp. Bonds have a current yield of 7% and mature in 10 years. Smith
Corp. Bonds have a current yield of 5% and mature in 10 years. Given this information,
which of the following statements is MOST correct?
A) William Corp. Bonds will have a higher yield to maturity than Smith Corp. Bonds
B) Smith Corp. Bonds will sell for a lower price than William Corp. Bonds
C) Smith Corp. Bonds are riskier than William Corp. Bonds
D) If both bonds have the same yield to maturity, then the price of Smith Corp. Bonds
must be less than the price of William Corp. Bonds
42) Which of the following sources of short-term financing is likely to have the highest
interest rate?
A) accounts receivable loan (pledging of accounts receivable)
B) line of credit
C) line of credit with a compensating balance
D) commercial paper
43) J.B. Corporation is considering the purchase of equipment that has an invoice price
of $450,000. The equipment was recommended by a consulting firm that did an
analysis for J.B. Corporation. J.B. paid the consulting firm $12,000 for its report. The
cost of shipping and installation is $50,000. The equipment will be depreciated on a
straight-line basis over its useful life of 10 years, assuming no salvage value. The
equipment will replace existing assets that have a current book value of $100,000 and
which could be sold for $150,000. Additional net working capital of $15,000 will be
required to maintain the equipment and to support higher sales. J.B.’s marginal tax rate
is 40%. Calculate the initial outlay required to fund this project.
44) Wheely Bike Manufacturers expects to produce and sell 9,000 made-to-order
bicycles this year. Variable costs are 40 percent of sales while fixed costs total
$600,000. At what price must each bicycle be sold for Wheely to earn EBIT of
$450,000?
45) Brett’s, Inc. has received a proposal from its bank to establish a lock-box system to
accelerate the receipt of $600 million annually on 900,000 checks. By its own analysis
Brett’s, Inc.believes such a system would decrease total float by 3.5 days. If Brett’s, Inc.
can earn 7 percent before taxes on the released funds, what is the maximum that Brett’s,
Inc. should be willing to pay the bank per check for the service? Use a 365-day year.
46) Brett’s, Inc. is a national distributor of women’s apparel. The company expects to
receive 95,000 checks during the coming year totaling $78 million. A large bank has
offered to install a lock-box system at a charge of $0.45 per processed check. If Brett’s,
Inc. is able to earn 5 percent before tax on additional funds, what is the minimum
amount of total float days that must be saved to make the system worthwhile? Use a
365-day year.
47) You purchase $10,000 worth of supplies every 90 days and never take the trade
discount of 2/10 net 30 . How much could you save each (360-day) year if you took the
discount?
48) Describe the three divergent views of dividend policy’s effect on share price.
49) Crimson Plumbing Supplies expects total sales of $9,000,000 this year. Ten percent
of the company’s sales are paid in cash; credit sales are usually paid by check. The
average check size is $3,000. Second National Bank is offering the company a lock-box
system. The fees are $800 per month plus $.60 per check. Short-term marketable
securities are currently earning 8 percent per year. What reduction in check collection
time is necessary for Carrollton Plumbing Supplies to be neither better nor worse off
from adopting the proposed system? Use a 365-day year.
50) Toto and Associates’ preferred stock is selling for $27.50 a share. The firm nets
$25.60 after issuance costs. The stock pays an annual dividend of $3.00 per share. What
is the cost of existing, and new, preferred stock respectively?