1) A spinoff is an action in which:
A.the management bids for and acquires the firm
B.one firm issues stock to acquire another firm
C.successful product lines are sold to competitors
D.a portion of the firm’s assets is sold off to form a new company
2) An individual’s income for the year includes both dividend and interest payments.
Which of the following statements will be correct concerning that individual’s tax
liability?
A.Dividends are taxed; tax on interest payments is paid at the corporate level
B.Interest is taxed; tax on dividend payments is paid at the corporate level
C.Both dividend and interest payments are taxed at the personal level
D.All taxes on dividend and interest payments are paid at the corporate level
3) If the liquidation value of a corporation exceeds the market value of the equity, then
the:
A.firm has no value as a going concern
B.firm’s stock will sell for book value
C.firm is not taking advantage of available growth opportunities
D.dividend payout ratio has been too high
4) Dividend policy is a trade-off between ___________ and ___________.
A.retained earnings; borrowing
B.capital budgeting; capital structure
C.retained earnings; issuing stock
D.declaring stock splits; stock dividends
5) Which of the following statements is correct for an individual with a net income of
$50,000.00, a tax liability of $10,704.50, and a 28% marginal tax rate?
A.The average tax rate is 17.63%
B.The average tax rate is 21.41%
C.The average tax rate is 28.00%
D.The average tax rate is unknown but greater than the marginal tax rate
6) A project anticipates net cash flows of $10,000 at the end of year 1, with such
amount growing at the expected 5% rate of inflation over the subsequent 4 years.
Calculate the real present value of this 5-year cash stream if the firm employs a nominal
discount rate of 15%.
A.$33,522
B.$38,377
C.$43,294
D.$55,000
7) How much would an investor need to receive in nominal return if he desires a real
return of 4% and the rate of inflation is 5%?
A.4.20%
B.8.64%
C.9.00%
D.9.20%
8) An investor holds two bonds, one with 5 years until maturity and the other with 20
years until maturity. Which of the following is more likely if interest rates suddenly
increase by 2%?
A.The 5-year bond will decrease more in price
B.The 20-year bond will decrease more in price
C.Both bonds will decrease in price similarly
D.Neither bond will decrease in price, but yields will increase
9) What percentage of value should be allocated to equity in WACC computations for a
firm with $50 million in debt selling at 85% of par, $50 million in book value of equity,
and $65 million in market value of equity?
A.50.0%
B.54.1%
C.56.5%
D.60.5%
10) Your firm’s ledger shows a balance of $1 million which reflects today’s $75,000
deposit and a check for $50,000 that went out in yesterday’s mail. What is the bank’s
ledger balance for your account?
A.$875,000
B.$975,000
C.$1,025,000
D.$1,125,000
11) A large dental lab plans to purchase 1,000 ounces of gold in 1 month. Assume again
that gold prices can be $280, $300, or $320 an ounce.
a. What will total expenses be if the firm purchases call options on 1,000 ounces of gold
with an exercise price of $300 an ounce? The options cost $3 per ounce.
b. What will total expenses be if the firm purchases call options on 1,000 ounces of gold
with an exercise price of $295 an ounce? These options cost $7 per ounce.
12) A warrant has an exercise price of $40, and the current stock price is $38. An
investor holding this option will purchase the stock only if:
A.the dividend yield on the stock exceeds 10%
B.the stock price falls below $38
C.the stock price rises above $40
D.the stock price falls to $20 or below
13) Lease obligations are included in certain leverage ratios because leases:
A.require the payment of interest
B.represent long-term fixed obligations
C.must be financed through a bank
D.are a measure of efficiency, just like debt
14) If equity investors require a 20% rate of return, what is the maximum acceptable
amount of equity financing for a project with $2 million annual cash flows before tax
and interest, $3 million in debt with a 10% coupon, and a 35% tax rate?
A.$5.53 million
B.$5.87 million
C.$8.5 million
D.$9.03 million
15) What is the expected yield on the market portfolio at a time when Treasury bills
yield 6% and a stock with a beta of 1.4 is expected to yield 18%?
A.8.6%
B.10.8%
C.12.0%
D.14.6%
16) ABC Corporation has fallen upon hard times and dividends on its noncumulative
preferred stock have not been paid for 3 years. Which of the following is true?
A.Common shareholders must now receive 3 years’ worth of dividends
B.Preferred shareholders must now receive 3 years’ worth of dividends
C.The corporation must fold if preferred shareholders are not paid
D.Common shareholders have not received dividends for 3 years
17) For each of the following option and securities combinations show what the payoff
would be when the option expires. Assume that each option has the same exercise price
and expiration date.
a. Buy a call and invest the present value of the exercise price in a bank deposit
b. Buy a share and a put option on the share
c. Buy a share, buy a put option on the share, and sell a call option on the share
d. Buy a call option and a put option on the share
18) When securities are issued under a rights issue:
A.existing shareholders have the opportunity to expand their holdings
B.shares are offered to the public at a discount
C.the existing shares will increase in price
D.current shareholders have the right to resell their stock to the issuer
19) Which of the following elements of credit terms might discourage purchasers from
paying with a discount?
A.A higher discount percentage
B.A shorter payment period
C.A longer discount period
D.A longer payment period
20) According to random-walk theory, what are the odds that a stock will increase in
price after having increased on 2 consecutive days of trading?
A.0.0%
B.12.5%
C.50.0%
D.100.0%
21) What is the net value of common equity for a firm with 3 million shares issued, 1
million shares outstanding, $4 million of retained earnings, $2 million of treasury stock
at cost, $1 million in additional paid-in capital, and a $1 par value per share?
A.$4 million
B.$6 million
C.$8 million
D.$10 million
22) What is the approximate standard deviation of returns if over the past 4 years an
investment returned 8.0%, -12.0%, -12.0%, and 15.0%?
A.9.26%
B.10.26%
C.11.26%
D.12.01%
23) One indication that investors expect no synergy from a merger would be that:
A.total market value of the merged firms does not change
B.the P/E ratio of the merged firms changes
C.the acquiring firm financed the merger with cash
D.the merged firms are from different industries
24) Which of the following is incorrect for a borrowing project?
A.Its NPV graph rises as discount rates increase
B.Its cash flow at time zero is typically an inflow
C.Its NPV is positive
D.It’s acceptable if IRR exceeds cost of capital
25) Changing the capital structure by adding debt will not:
A.increase the return that shareholders require
B.increase default risk
C.decrease debtholder risk
D.increase the cost of debt
26) Which of the following appears to be a more suitable investment?
A.Revenues cover fixed and variable costs
B.Investment breaks even in an accounting sense
C.Investment breaks even in an economic sense
D.Revenues exceed cost of goods sold
27) If the market portfolio is expected to offer returns of 16%, then what can be said
about a portfolio expected to return 13%?
A.It plots below the security market line
B.Part of the portfolio is invested in Treasury bills
C.The portfolio is not diversified
D.The portfolio’s beta is less than 1.0
28) The spot price of silver closes at $7 per ounce at the expiration of an option
contract. Which one of the following option positions will have value?
A.The buyer of a call with $5 strike price
B.The seller of a call with $5 strike price
C.The buyer of a put with $5 strike price
D.The seller of a put with $5 strike price
29) If a project’s cash flows exceed the project’s incremental cash flows, it is likely that
the:
A.project interacts with other aspects of the firm
B.project must have high depreciation expense
C.opportunity cost of capital must be high
D.project will have a negative NPV
30) If a convertible bond can be thought of as a straight bond with a call option, then
the call is owned by the _____, and the strike price is the _____.
A.debt issuer; stock price
B.debt issuer; straight bond value
C.bond investor; stock price
D.bond investor; straight bond value
31) The safety margin kept by the bank on loan against liquid assets is called:
A.a haircut
B.a line of credit
C.factoring
D.field warehousing
32) Which of the following is least assured for firms that plowback a portion of
earnings into the firm?
A.Growth in earnings per share
B.Growth in dividends per share
C.Growth in book value of equity
D.Growth in stock price
33) Net working capital is calculated by taking the difference between:
A.total assets and total liabilities
B.inventory and accounts payable
C.current assets and current liabilities
D.cash and long-term debt
34) Although several stock indexes are available to inform investors of market changes,
the Dow Jones Industrial Average:
A.is the broadest-based of the market indexes
B.is the only reliable market index
C.accounts for approximately 70% of U.S. market value
D.is the best-known of the market indexes
35) You’re hoarse from explaining to your supervisor that the cost, if any, of hedging
exchange rate risk can be thought of as an insurance premium to avoid surprises. What
is the cost of hedging a 2 million euro commitment if the spot rate is 1.6/$, the forward
rate is 1.55/$, and the expected spot rate at the end of the hedge is 1.6/$?
A.$0
B.$25,000
C.$40,323
D.$68,966
36) Those subject to the winner’s curse are:
A.underwriters
B.uninformed investors
C.firms issuing IPOs
D.venture capitalists
37) Cash flows occurring in different periods should not be compared unless:
A.interest rates are expected to be stable
B.the flows occur no more than one year from each other
C.high rates of interest can be earned on the flows
D.the flows have been discounted to a common date
38) A project is determined to have equal probability of generating $1 million annually
or $500,000 annually for 4 years. The initial outlay is $2 million. The expected return
on Treasury bills is 6% and the market risk premium is 10%. What is the highest project
beta that will justify acceptance of the project?
A.0.245
B.1.000
C.1.245
D.2.310
39) Stock options have been traded on exchanges since:
A.the founding of the New York Stock Exchange
B.options were discovered in 1946
C.the early part of the 1970s
D.just before the stock market crash in 1987
40) When a firm declares a special cash dividend of $1 per share, shareholders realize
that the:
A.annual dividend will be $4 per share
B.dividends are considered regular
C.dividend is not likely to be repeated
D.stock must be owned prior to the declaration date to receive the dividend
41) A firm has set its target capital structure at 40% debt. Further, it intends to continue
with a 30% dividend payout. Finally, it hopes to maintain a constant growth rate of 7%.
If the profit margin and asset turnover are currently 8% and .9, respectively, do the
constraints sound realistic? If not, what might you suggest?
42) Why are long-term bonds more sensitive to changes in interest rates than short-term
bonds?
43) Healthy Fish, Inc. is considering the purchase of a batch of experimental fish fry for
$10,000. The fry will mature and be ready for the market in a year. A government
agency guarantees the hardiness of the new breedit will make a one-for-one same-size
replacement if any fish should die of infections during the first year when reared
according to clearly specified instructions. Healthy Fish expects to spend another
$42,000 to raise the fish. Suppose that Healthy Fish can enter into a futures contract to
sell the entire batch of fish for $60,000, the contract will cost $3,000. What is the
opportunity cost of capital for this investment? Should Healthy Fish make the
investment? If Healthy Fish cannot set up a futures contract, what is its opportunity cost
of capital? Should it invest in this case? Assume that the current interest rate on AAA
corporate bonds is 6.25%, and that the historical rate of return on the stock exchange is
10%.
44) What information is contained in the shareholders’ equity account in the firm’s
financial statements?
45) Why would payout decisions be used by management to signal the prospects of the
firm?
46) How do firms make initial public offerings and what are the costs of such offerings?
47) Describe the Z score suggested by Edward Altman.