1) Whenever there is uncertainty, investors might be interested in trading, either to
speculate or to lay off their risks, and a market may rise to meet the trading demand.
2) A project that breaks even in accounting terms will surely have a negative NPV.
3) Anyone holding a stock before its ex-dividend date is entitled to the dividend.
4) Callable bonds may be repurchased by the issuing firm before maturity at the
specified call price.
5) Financial planning models must include as much detail as possible.
6) The interest tax shield generated by a project’s actual equity financing is accounted
for by using the after-tax cost of equity in the WACC.
7) On average, stockholders in target firms earn higher returns from mergers than
stockholders from acquiring firms.
8) A 100% stock dividend results in a doubling of the number of outstanding shares, but
they do not affect the company’s assets, profits, or total value.
9) Even when the yield curve is upward-sloping, investors might rationally stay away
from long-term bonds.
10) According to the efficient market hypothesis, large issues of new stock may depress
the stock price temporarily.
11) Vertical integration has fallen out of fashion recently.
12) Which of the following statements is correct?
A.A convertible bond will be priced less than a similar callable bond
B.A convertible bond will be priced more than a similar callable bond
C.Similar callable and convertible bonds will have the same price
D.Warrants are always priced more than convertible bonds
13) A farmer who sells a futures contract is betting that prices will _____ at the
expiration of the contract.
A.decrease
B.increase
C.remain constant
D.guarantee high profits
14) Other things being equal, the more frequent the compounding period, the:
A.higher the APR
B.lower the APR
C.higher the effective annual interest rate
D.lower the effective annual interest rate
15) Adding depreciation expense to net profit equals:
A.profit before tax
B.total revenues
C.the depreciation tax shield
D.cash flows from operations
16) Mergers that attempt to bootstrap earnings may obtain increased current earnings
per share at the expense of:
A.a higher price-earnings ratio
B.higher total combined market value
C.reduced future growth prospects
D.increased free cash flow
17) Nestl wishes to obtain a loan denominated in Swiss francs but considers the U.S.
market to offer better terms. How can Nestl accomplish this?
A.Borrow francs in Switzerland, exchange for dollars, and arrange a currency swap
B.Borrow francs in Switzerland, exchange for dollars, and arrange an interest rate swap
C.Borrow dollars in the United States, exchange for francs, and arrange an interest rate
swap
D.Borrow dollars in the United States, exchange for francs, and arrange a currency
swap
18) The expected return on a common stock is composed of:
A.dividend yield
B.capital appreciation
C.both dividend yield and capital appreciation
D.capital appreciation minus the dividend yield
19) How much does the $1,000 to be received upon a bond’s maturity in 4 years add to
the bond’s price if the appropriate discount rate is 6%?
A.$209.91
B.$260.00
C.$760.00
D.$792.09
20) Which of the following would be included as inputs to a firm’s financial plan?
A.Capital, plant, and labor resources
B.The firm’s current product line
C.The current balance of retained earnings
D.Sales and economic forecasts
21) Calculate the EBIT for a firm with $4 million total revenues, $3.5 million cost of
goods sold, $500,000 depreciation expense, and $120,000 interest expense.
A.$500,000
B.$380,000
C.$0
D.($120,000)
22) Which of the following statements is correct for an investor starting with $1,000 in
common stocks over a 20-year investment horizon in which stocks averaged 11% in
nominal terms and 4% in real terms? The portfolio value is now approximately:
A.$1,800 in real terms
B.$3,679 in real terms
C.$3,870 in nominal terms
D.$8,062 in nominal terms
23) Which of the following is least likely to be correct for a firm that repeatedly
stretches its payables?
A.The firm may receive more favorable status from suppliers due to its volume of
purchases
B.The firm may reduce its explicit short-term interest expense
C.The cost of forgone discounts may exceed the cost of bank credit
D.The firm may be labeled as a credit risk
24) What percentage change in sales occurs if profits increase by 3% when the firm’s
degree of operating leverage is 4.5?
A.0.33%
B.0.67%
C.1.5%
D.3.33%
25) Which of the following is least likely to be discussed in the articles of
incorporation?
A.The maximum number of shares that can be issued
B.The purpose of the business
C.The price range of the shares of stock
D.The number of members of the board of directors
26) If an automobile manufacturer were to acquire one of the firms listed below, which
acquisition would be called a horizontal merger?
A.A steel mill
B.A rival manufacturer
C.A tire producer
D.A bank
27) Soft capital rationing:
A.is costly to shareholders
B.is used to determine mutually exclusive projects
C.should be costless to the shareholders of the firm
D.solves the problem of investment timing
28) Which of the following will not happen for an investor who owns TIPS during a
period of inflation?
A.The coupon payment will increase in real terms
B.The maturity value will increase in nominal terms
C.The investor’s real rate of return is guaranteed
D.Payments will increase depending on the level of the CPI
29) ABC common stock is expected to have extraordinary growth of 20% per year for 2
years, at which time the growth rate will settle into a constant 6%. If the discount rate is
15% and the most recent dividend was $2.50, what should be the approximate current
share price?
A.$31.16
B.$33.23
C.$37.42
D.$47.77
30) In regard to dividend policy, unless a firm’s investment policy and borrowing
remain constant:
A.its overall cash flows will remain the same
B.its overall cash flows will change
C.stockholders’ risk will increase
D.stockholders’ risk will decrease
31) The correct method to handle overhead costs in capital budgeting is to:
A.allocate a portion to each project
B.allocate them to projects with the highest NPVs
C.ignore all except identifiable incremental amounts
D.ignore them in all cases
32) The Dow Jones Industrial Average is:
A.the most representative of stock market indexes
B.an index of America’s 500 major corporations
C.an index of 30 major industrial stocks
D.an equally weighted index of all stocks traded on the New York Stock Exchange
33) What proportion of earnings is being plowed back into the firm if the sustainable
growth rate is 8% and the firm’s ROE is 20%?
A.8%
B.12%
C.20%
D.40%
34) What is the IRR of a project that costs $100,000 and provides cash inflows of
$17,000 annually for 6 years?
A.0.57%
B.2.00%
C.5.69%
D.56.87%
35) Capital structure decisions refer to the:
A.dividend yield of the firm’s stock
B.blend of equity and debt used by the firm
C.capital gains available on the firm’s stock
D.maturity date for the firm’s securities
36) In the United States, publicly traded corporations, in a given fiscal year, can:
A.offer cash dividends but not stock repurchases
B.offer stock repurchases only and not cash dividends
C.offer stock repurchases only after any changes in cash dividends are declared
D.offer both stock repurchases and dividends
37) Mergers may provide reductions in average production cost as a result of:
A.increased market share
B.a more efficient management
C.economies of scale
D.diversification
38) A farmer hedged his risk by buying put options on wheat with an exercise price of
$2.70 at a price of $0.14 per bushel. If the price of wheat at the expiration of the
contract is $2.70, what is the net revenue from each bushel of wheat?
A.$2.56
B.$2.63
C.$2.70
D.$2.84
39) What is the value of the expected dividend per share for a stock that has a required
return of 16%, a price of $45, and a constant-growth rate of 12%?
A.$1.80
B.$3.60
C.$4.50
D.$7.20
40) Which of the following is a source of cash for a firm?
A.Retained earnings
B.Issuing new debt
C.Issuing new equity
D.All of these
41) The time interval between paying for raw materials and collecting on sales of
finished goods is known as the:
A.inventory cycle
B.matching cycle
C.cash conversion cycle
D.accounts receivable cycle
42) Managers are willing to pay a price to hedge because:
A.they receive increased profits in return
B.the returns on derivative instruments are not taxed
C.they value the reduction in uncertainty
D.it permits the managers to receive higher cash bonuses
43) An aging schedule illustrates the relationship between:
A.customers and repeat sales
B.sales and profitability
C.the ratio of accounts receivable to sales
D.accounts receivable and their average time outstanding
44) Based upon the “trade-off theory” of capital structure, what differences might you
expect in the capital structure of a food producer and a defense contractor?
A.Higher debt-equity ratio for food producer
B.Higher debt-equity ratio for defense contractor
C.Neither firm should use debt in their structure
D.Differences in capital structure will make no valuation differences in these firms
45) A firm has just issued $250 million of equity which caused its stock price to drop by
3%. Calculate the loss in value of the firm’s equity given that its market value of equity
was $1 billion before the new issue:
A.$7.5 million
B.$30.0 million
C.$33.3 million
D.$37.5 million
46) BestFirm has a 50-year history of solid growth and ever-increasing profits. It is
widely regarded as the leading firm of its industry. Hence, BestFirm’s stock:
A.should be a good buy
B.cannot be a good buy
C.should be a safe buy
D.cannot be a safe buy
47) What price risk is an investor exposed to if he owns a share of stock and has
purchased a put option on the stock?
48) How would a convertible bondholder decide whether to exercise his rights of
exchange?
49) Discuss the concept of balancing items in financial planning.
50) What are some of the factors that will commonly affect the abandonment value of a
project? When should abandonment be considered?
51) What are the common motivations for leveraged and management buyouts of the
firm?
52) How can one find the market price of a bond given its yield to maturity and find a
bond’s yield given its price? Why do prices and yields vary inversely?
53) Investors who buy calls or puts have a cap on their possible losses from holding
options. Specifically, they cannot lose more than the value of their premium. How does
this differ for investors who sell options?