1) A portfolio combining two assets with less than perfectly positive correlation can
reduce total risk to a level below that of either of the components.
2) The Gordon model assumes that the value of a share of stock equals the future value
of the current price of share that it is expected to remain constant over an infinite time
horizon.
3) The owners of a holding company can control significantly larger amounts of assets
than they could acquire through mergers.
4) The market value of a convertible security is likely to be greater than its straight
value or conversion value.
5) Short-term financial management is concerned with management of a firm’s current
assets and current liabilities to achieve a balance between profitability and risk.
6) Exchange rate risk hedging tools include Monte Carlo swaps, synthetic insurance
contracts, and inventory swaps.
7) Exchange rate risk can often be hedged by using currency forward, futures, or
options markets.
8) NAFTA is a treaty establishing free trade and open markets among Europe and the
United States.
9) A financial merger is a merger transaction undertaken to achieve economies of scale.
10) A trustee is a paid party representing the bond issuer in the bond indenture.
11) When current assets exceed current liabilities, a firm has negative net working
capital.
12) The depreciable value of an asset, under MACRS, is the ________.
A) current cost
B) current cost minus salvage value
C) the original cost plus installation
D) the original cost plus installation costs, minus salvage value
13) If a United States Savings bond can be purchased for $14.60 and has a maturity
value at the end of 25 years of $100, what is the annual rate of return on the bond?
A) 6 percent
B) 7 percent
C) 8 percent
D) 9 percent
14) Preferred stockholders ________.
A) do not have preference over common stockholders in the case of liquidation
B) have preference over bondholders in the case of liquidation
C) do not have preference over bondholders in the case of liquidation
D) have preference over creditors in the case of liquidation
15) A proxy statement is a statement transferring ________.
A) the ownership of a bondholder to another party
B) the votes of a bondholder to the another party
C) the votes of a stockholder to another party
D) the ownership of a stockholder to another party
16) The aggressive financing strategy is a ________ method while the conservative
financing strategy is a ________ method.
A) high-profit, high-risk; low-profit, low-risk
B) high-profit, low-risk; low-profit, high-risk
C) low-profit, high-risk; high-profit, low-risk
D) low-profit, low-risk; high-profit, high-risk
17) Jia borrows $50,000 at 10 percent annually compounded interest to be repaid in
four equal annual installments. The actual end-of-year loan payment is ________.
A) $10,774
B) $12,500
C) $14,340
D) $15,773
18) A(n) ________ is an annuity with an infinite life making continual annual
payments.
A) amortized loan
B) principal
C) perpetuity
D) APR
19) As the price of the underlying stock falls below the exercise price of a warrant, the
investor’s ability to earn larger potential return diminishes. Therefore, the warrant
premium will ________.
A) increase
B) decrease
C) remain unchanged
D) double
20) Tangshan Mining Company has an outstanding issue of convertible bonds with a
$1,000 par value. The bonds have a 10 percent coupon rate, have a 10-year maturity,
and are convertible into 100 shares of common stock. The yield to maturity on bonds of
similar risk is 10 percent. Based on this information, the straight bond value of the bond
is ________.
A) $1,000.00
B) $978.39
C) $1,087.36
D) $1,123.86
21) Which of the following securities is a popular hybrid security?
A) preferred stock
B) common stock
C) options
D) futures
22) Find the future value at the end of year 3 of the following stream of cash flows
received at the end of each year, assuming the firm can earn 8 percent on its
investments.
A) $45,000
B) $53,396
C) $47,944
D) $56,690
23) Which of the following is true of risk-return trade off?
A) Risk can be measured on the basis of variability of return
B) Risk and return are inversely proportional to each other
C) T-bills are more riskier than equity due to imbalances in government policies
D) Riskier investments tend to have lower returns
24) Table 7.1
The required return is assumed to be 17 percent. Using the Gordon model, calculate the
per share value of the stock for 2014. (See Table 7.1)
25) MACRS RATE
Darling Paper Container, Inc. purchased several machines at a total cost of $300,000.
The installation cost for this equipment was $25,000. The firm plans to depreciate the
equipment using the MACRS 5-year normal recovery period. Prepare a depreciation
schedule showing the depreciation expense for each year.
26) Table 12.5
Nico Manufacturing is considering investment in one of two mutually exclusive
projects X and Y which are described below. Nico Manufacturing’s overall cost of
capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent.
Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40.
Calculate the risk-adjusted discount rates for Project X and Project Y. (See Table 12.5)
27)
28) On December 31, 2014, Bradshaw Corporation had $485,000 as an ending balance
for its retained earnings account. During 2015, the corporation declared a $3.50/share
dividend to its stockholders. The company has 35,000 shares of common stock
outstanding. When the books were closed for 2015 year end, the corporation had a final
retained earnings balance of $565,000. What was the net profit earned by Bradshaw
Corporation during 2015?
29) During 2002, a firm has sold 5 assets described below. Calculate the tax liability on
the assets. The firm pays a 40 percent tax rate on ordinary income.
30) Table 6.2
Calculate the current value of Bond M if the time of maturity is six years. (See Table
6.2)
31) Nico establishes a seven-year, 8 percent loan with a bank requiring annual
end-of-year payments of $960.43. Calculate the original principal amount.
32) Brian borrows $5,000 from a bank at 8 percent annually compounded interest to be
repaid in five annual installments. Calculate the principal paid in the third year.
33) A wealthy industrialist wishes to establish a $2,000,000 trust fund which will
provide income for his grandchild into perpetuity. He stipulates in the trust agreement
that the principal may not be distributed. The grandchild may only receive the interest
earned. If the interest rate earned on the trust is expected to be at least 7 percent in all
future periods, how much income will the grandchild receive each year?