1) Achieving a lower inventory balance through working capital management can result
in savings from both carrying costs and losses associated with obsolete inventory.
2) Accounting profits, adjusted for taxes and differences in accounting methods,
provide the best measure of relevant cash flows for capital budgeting purposes.
3) The amount of the preferred stock dividend is generally fixed either as a dollar
amount or as a percentage of the par value.
4) Because there are no fixed financing costs, a common stock plan line in an
EBIT-EPS analysis chart will have a less-steep slope than will a bond-plan line.
5) If a bond’s rating declines, the interest rate demanded by investors, called the
required return, also decreases.
6) Near-cash assets consist of marketable securities and accounts receivable.
7) Financial ratios cannot be used to evaluate the creation of shareholder wealth
because they are based on accounting numbers that reflect historical cost and not
current market values.
8) The residual dividend theory is based on the observation that flotation costs make the
cost of new common stock significantly higher than the cost of retained earnings.
9) An increase in financial leverage will increase the absolute value of EPS, everything
else equal.
10) A liquidity-risk premium is the additional return required by investors for securities
that cannot quickly be converted into cash at a reasonably predictable price.
11) When the present financial ratios of a firm are compared with similar ratios for
another firm in the same industry it is called trend analysis.
12) Convertibility is a common feature of common stock; it allows the common
stockholders to convert their common shares into preferred shares or into bonds.
13) Small company stocks have historically had higher average annual returns than
large company stocks, and also a higher risk premium.
14) Which of the following is true if a firm wishes to collect its accounts faster by
imposing stricter credit terms on its customers?
A) The firm’s average collection period is likely to fall
B) The firm’s accounts receivable turnover might rise
C) The firm’s sales might decrease
D) all of the above
15) You estimate you’ll need $200,000 per year for 25 years starting on your 65th
birthday to live on during your retirement. Today is your 50th birthday and you want to
make equal deposits into an account paying 9% interest per year, the first deposit today
and the last deposit on your 64th birthday. How much must each deposit be (rounded to
the nearest $10)?
A) $99,920
B) $85,840
C) $61,385
D) $49,380
16) Gerentology Associates, a highly profitable company, is considering two growth
strategies, one that will achieve sales growth of 20% in one year, and the other that will
achieve 20% growth in sales, but over a 4-year time frame. Assuming Gerentology
Associates uses the percent of sales method, which of the following statements is true?
A) Discretionary financing needed will be much greater for the 4-year growth strategy
B) Discretionary financing needed could be much less for the 4-year growth strategy
due to retained earnings
C) The asset balances at the end of 4 years for strategy two will be much greater than
the asset balances required at the end of year one for strategy one
D) Discretionary financing needed could be much greater for the slow growth strategy
because interest charges will accumulate on the company’s debt
17) You are thinking of buying a craft emporium. It is expected to generate cash flows
of $30,000 per year in years 1 through 5, and $40,000 per year in years 6 through 10. If
the appropriate discount rate is 8%, what amount are you willing to pay for the
emporium?
A) $135,288
B) $167,943
C) $215,048
D) $228,476
18) If a corporation were to choose between issuing a debenture, a mortgage bond, or a
subordinated debenture, everything else equal (such as coupon rate, maturity, etc.)
which would sell for the greatest price?
A) the debenture
B) the mortgage bond
C) the subordinated debenture
D) All of the above types of bonds would sell for the same price
19) While checking the Wall Street Journal bond listings you notice that the price of an
AT&T bond is the same as the price of a K-Mart bond. Based on this information you
know that
A) the bond with the lower coupon rate will have the lower current yield
B) both bonds have the same yield to maturity
C) both bonds will have the same bond rating
D) the bond with the longest time to maturity will have the highest yield to maturity
20) A deferred annuity will pay you $500 at the end of each year for 10 years, however
the first payment will not be made until three years from today (payments will be made
at the end of years 3 through 12). What amount will you have to deposit today to fund
this deferred annuity? Use an 8% discount rate and round your answer to the nearest
$100.
A) $2,200
B) $2,400
C) $2,900
D) $3,400
21) Which of the following statements concerning the required rate of return on stocks
is true?
A) the higher an investor’s required rate of return, the higher the value of the stock
B) If risk is reduced, the required return will decrease because more investors are
risk-averse
C) The required return on preferred stock is generally higher than the required return on
common stock
D) the higher the risk, the higher the required return, other things being equal
22) The yield to maturity on a bond
A) is fixed in the indenture
B) is lower for higher risk bonds
C) is the required rate of return on the bond
D) is generally below the coupon interest rate
23) a Heights Inc. bonds have a coupon rate of 7%, a yield to maturity of 10%, a face
value of $1,000, and mature in 10 years. Which of the following statements is MOST
correct?
A) An investor who purchases the bond today will earn a return of 10% if he sells the
bond after one year
B) An investor who purchases the bond today will earn a return of 7% if he sells the
bond after one year
C) An investor who purchases the bond today will earn a return of 17% per year if he
holds the bond until it matures
D) An investor who purchases the bond today will earn a return of 10% per year if he
holds the bond until it matures
24) Why do currency exchange rates throughout the world trade within a very narrow
range on any given day?
A) because of purchasing power parity
B) because of the international translation effect
C) because of arbitrage
D) because of the law of one price
25) A retailer sells most of its merchandise on credit and bills clients monthly. Which of
the following elements of float does the retailer have the most control over?
A) mail float
B) processing float
C) transit float
D) disbursing float
26) Which of the following sources of short-term financing is likely to have the lowest
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
27) Stock W has the following returns for various states of the economy:
State of the EconomyProbabilityStock W’s Return
Recession10%-30%
Below Average20%-2%
Average40%10%
Above Average20%18%
Boom10%40%
Stock W’s standard deviation of returns is
A) 10%
B) 14%
C) 17%
D) 20%
28) Stimpson Inc. preferred stock pays a $.50 annual dividend. What is the value of the
stock if your required rate of return is 10%?
A) $.05
B) $.50
C) $5.00
D) $50.00
29) You have been accepted to study international economy at the European Central
Bank (ECB) in Frankfurt. You will need $10,500 every 6 months (beginning today) for
the next three years to cover tuition and living expenses. Mom and Dad have agreed to
pay for your education, and want to make one deposit today in a bank account earning
6% interest, compounded semiannually. How much must they deposit now so that you
can withdraw $10,500 at the beginning of each semester over the next 3 years?
A) $54,187
B) $55,797
C) $57,449
D) $56,639
30) Consider two mutually exclusive projects X and Y with identical initial outlays of
$600,000 and useful lives of 5 years. Project X is expected to produce an after-tax cash
flow of $180,000 each year. Project Y is expected to generate a single after-tax net cash
flow of $1,015,000 in year 5. The discount rate is 14 percent.
a.Calculate the net present value for each project.
b.Calculate the IRR for each project.
c.What decision should you make regarding these projects?
31) What was the average annual rate of return on 3-month U.S. Treasury bills during
the period 1987 to 2011?
A) 2.15%
B) 4.23%
C) 3.85%
D) 5.68%
32) All of the following are potential benefits of stock repurchases EXCEPT
A) a means for providing an internal investment opportunity
B) an approach for maintaining the existing capital structure while still making a
distribution to shareholders
C) a favorable impact on earnings per share
D) the elimination of a minority ownership group of stockholders
33) Which of the following statements is MOST correct?
A) If a project’s internal rate of return (IRR) exceeds the required return, then the
project’s net present value (NPV) must be negative
B) If Project A has a higher IRR than Project B, then Project A must also have a higher
NPV
C) The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of
return equal to the IRR
D) A project with a NPV = 0 is not acceptable
34) The Boyles Ceramics, Inc. established a line of credit with a local bank. The
maximum amount that can be borrowed under the terms of the agreement is $1,000,000
at an annual rate of 8 percent. A compensating balance averaging 25 percent of the
amount borrowed is required. Prior to the agreement, Boyles had no deposit with the
bank. Shortly after signing the agreement, Boyles needed $240,000 to pay off a note
that was due. It borrowed the $240,000 from the bank by drawing on the line of credit.
What is the effective annual cost of credit?
A) 12.50%
B) 11.11%
C) 10.67%
D) 8.85%
35) You have a savings bond that will be worth $750 when it matures in 3 years, but
you need cash today. If the current going rate of interest is 5%, what is your bond worth
if you sell it today (rounded to the nearest dollar)?
A) $675
B) $648
C) $625
D) $612
36) If a corporation wants a guarantee that all of its shares of stock will be sold, it
should use which of the following distribution methods?
A) competitive bid purchase
B) privileged subscription with no standby agreement
C) commission or best-efforts contract
D) direct sale
37) Which of the following statements about factoring is true?
A) The firm, not the factor, bears the risk of collecting bad receivables in a factoring
arrangement
B) Factoring involves the outright sale of a firm’s accounts receivable to the factor
C) The borrowing firm is able to obtain a greater advance against inventory in a
factoring arrangement than in a typical line of credit secured by accounts receivable
D) Factoring firms sell the receivables of other firms
38) A company with national sales but only one large manufacturing operation and one
administrative headquarters located in the same large northeastern city would most
likely use which of the following techniques for cash management?
A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) bankers’ acceptances
39) Which of the following affect an asset’s value to an investor?
I.Amount of an asset’s expected cash flow
II.The riskiness of the cash flows
III.Timing of an asset’s cash flows
IV.Investor’s required rate of return
A) I, II, III
B) I, III, IV
C) I, II, IV
D) I, II, III, IV
40) If a firm relies on short-term debt or current liabilities in financing its asset
investments, and all other things remain the same, what can be said about the firm’s
liquidity?
A) The firm will be relatively more liquid
B) The firm will be relatively less liquid
C) The liquidity of the firm will be unchanged
D) The firm will be more liquid only if interest rates are below the company’s weighted
average cost of capital
41) Which of the following statements would be consistent with the residual dividend
theory?
A) Wealthy investors prefer corporations to defer dividend payments because capital
gains produce greater after-tax income
B) Dividends are more certain than capital gains
C) Dividends should only be paid if a firm has profits in excess of the amount needed to
finance the current year’s capital investments
D) Investors are indifferent whether stock returns come from dividend income or capital
gains income
42) The cost of retained earnings is less than the cost of new common stock because
A) marginal tax brackets increase
B) flotation costs are incurred when new stock is issued
C) dividends are not tax deductible
D) accounting rules allow a deduction when using retained earnings
43) The prime rate of interest is
A) the rate the bank charges its most credit-worthy borrowers
B) the rate the bank charges for money it borrows from the Federal Reserve Board
C) the rate the bank charges its average borrower
D) the rate the bank charges on home mortgages
44) The acid-test ratio of a firm would be unaffected by which of the following?
A) Accounts payable are reduced by obtaining a short-term loan
B) Common stock is sold and the money is invested in marketable securities
C) Inventories are sold for cash
D) Inventories are sold on a short-term credit basis
45) How much would you be willing to pay (rounded to the nearest dollar) for a 20-year
annuity due if the payments are $4,500 per year and you want to earn a rate of return
equal to 5.5% per year?
A) $84,500
B) $63,445
C) $56,734
D) $53,777
46) A way of managing a firm’s cash disbursements would be through
A) zero balance accounts
B) accounts receivable factoring
C) lockbox system
D) floating lien
47) A corporation announces a large increase in its annual dividend, but its stock price
declines. This could result from
A) residual dividend theory
B) bird-in-the-hand theory
C) perfect capital markets
D) MM’s indifference theorem
48) Private placements usually have several advantages associated with them, but also
tend to suffer from specific disadvantages. Which of the following is a disadvantage of
a private placement when compared to other methods of selling new securities?
A) strictly standardized features/terms
B) higher interest costs
C) reduced flotation costs
D) avoidance of registration with the SEC