The level of a firm’s receivables is influenced solely by factors outside the financial
managers’ control.
The incremental cash flow principle states that the new project’s cash flows should
include all increases or decreases in cash flows to the firm due to accepting the new
project.
The floating exchange rate system has been in effect since the end of World War II
(1945).
When a firm decides to go public, its first stock issue is an initial public offering.
Financing activities also include long-term purchases and sales of financial assets.
The present value of an annuity is simply the sum of the annuity’s payments,
traditionally made at the end of each of the time periods.
The primary financial goal of the corporation is to maximize profits.
The procedure to determine the after-tax cost of debt requires that the semi-annual
coupon rate be multiplied by one minus the corporate marginal tax rate and then
multiplied by two.
The underlying reason that financial leverage contributes to shareholder wealth is that
under certain conditions it improves financial performance as measured by EBIT, ROE,
and EPS.
A stream of equal payments at regular time intervals that goes on forever is called a
non-ending stream.
The word “term” refers to the bond€s lifetime when it is first issued.
The expectations theory says that the yield curve can slope upward or downward.
The value of real options is approximately the same regardless of circumstances.
From an accounting standpoint, stock splits are accomplished by:
A.increasing the number of shares outstanding.
B.increasing par value of existing shares.
C.reducing the par value of existing shares.
D.a and c
The agency problem exists primarily in companies of which:
A.ownership is widely dispersed.
B.common stock is closely held.
C.management has stock ownership.
D.Both a & c
Assume that the dividend on Central Power Company’s $3.25 preferred stock issue is
paid annually at the end of the year. Determine the price of this issue if its return is
12%.
A.$3.25
B.$39
C.$12
D.$27.08
Assume the following facts about a firm:
Would a lock box system that reduces check clearing time from six to three days be
justified?
A.Yes, because it would save more than $1,800 annually.
B.No, because it would cost $2,100 annually.
C.Yes, because of the additional convenience of a shorter clearing time.
D.Indifferent, the cost and expense are about the same.
If a firm chooses to use equity for external funding and leaves debt constant within its
forecasts, what does this imply about the financial statement forecasts?
A.Interest expense will vary throughout the forecast.
B.The taxable income will change due to increasing dividends.
C.The equity will increase by net income every period assuming external funding is
necessary.
D.The debt/interest problem does not exist.
If you invest the $10,000 you receive at graduation (age 22) in a mutual fund which
averages a 12% annual return, how much will you have at retirement in 40 years?
A.$909,090
B.$930,510
C.$783,879
D.$510,285
A competent merger analysis calculates the maximum per share price that should be
paid for an acquisition as:
A.the pre-merger market price plus the per share value of synergies.
B.the NPV of the incremental cash flows coming from the acquisition divided by the
number of shares of the target’s stock that are outstanding.
C.the targets terminal value.
D.the NPV of the target’s terminal value divided by the number of share tendered.
If the spot rate for Swiss francs is $.6658/franc and the six month forward rate is
$.6637/franc, the market is indicating that the Swiss franc is expected to:
A.strengthen relative to the dollar.
B.weaken relative to the European currency.
C.lose value relative to the dollar over the next 6 months.
D.gain value relative to the dollar over the next 6 months.
A share of stock is currently selling for $31.80. If the anticipated constant growth rate
for dividends is 6% and investors are seeking a 16% return, what is the dividend just
paid?
A.$1.91
B.$3.18
C.$3.00
D.$5.09
Which of the following is NOT true regarding an NPV profile?
A.It slopes downward and to the right.
B.They slope upward and to the left.
C.It graphs NPV versus IRR.
D.It crosses the horizontal axis at IRR.
Sale of an asset for less than book value creates a loss which reduces the company’s
taxes by an amount equal to ____ times ____.
A.one-half the loss, the company’s marginal tax rate
B.the loss, one minus the company’s marginal tax rate
C.one-half the loss, one minus the company’s marginal tax rate
D.the loss, the company’s marginal tax rate
Cash flows have been estimated in detail for the first six years of a new venture’s life.
Management feels the new business will go on indefinitely, and will probably grow at
an average rate of 3% per year starting at $50M in year seven. The project is being
evaluated using a cost of capital of 11%. What is the contribution of this terminal value
assumption to the sixth year cash flow?
A.$50M
B.$625M
C.$455M
D.$1,667M
What present amount is equivalent to $100 received at the end of 5 years, given an
interest rate of 16%?
A.$47.60
B.$327.40
C.$40.20
D.$163.60
E.$32.30
The market for initial public offerings (IPOs) is very:
A.safe and risk free.
B.safe, but risky.
C.volatile and risky.
D.lucrative.
A firm that employs a relatively large proportion of debt in its capital structure will
have a relatively ____ degree of financial leverage.
A.low
B.high
C.insignificant
D.constant
When the net income of the combined companies after a merger exceeds the sum of the
net incomes prior to the merger, ____ is said to exist.
A.goodwill
B.synergy
C.leverage
D.greenmail
Which is not affected by the Sarbanes-Oxley Act of 2002?
A.The auditing function of the firm.
B.The structure of the employee pension plan for non-executives.
C.Executive compensation packages.
D.The ability of the CEO to borrow money from the firm.
Decision tree analysis:
A.provides a relatively quick and easy way to get a rough idea of the probability
distribution of NPV outcomes in a capital budgeting project.
B.may prompt management to reject a project with a positive NPV (point estimate).
C.does not apply to IRR analysis.
D.a and b are both correct.