1) Negative historical returns are not possible during periods of high volatility (high
standard deviations of returns) due to the risk-return tradeoff.
2) Accounting rules specify that assets on the balance sheet must be reported at current
market value, because this is the valuation most useful to potential investors.
3) The cost of preferred stock is equal to the preferred stock dividend divided by the net
proceeds per preferred share.
4) For many industries accounts receivable comprise as much as 25 percent of total
assets.
5) Other things held equal, a bond with a call provision is worth more to investors than
a bond without a call provision.
6) The risk of illiquidity is increased if either cash and marketable securities are
decreased, or if the firm relies more heavily of long-term debt.
7) For a growing firm, external financing needed will most likely be greater than
discretionary financing needed due to increases in accounts payable and accruals.
8) Hershey’s expects to sell $2 million of its new candy bar, although $200,000 of this
amount would have been spent on its existing candy bar. The $2 million is the
appropriate cash inflow for the new candy bar project, while the $200,000 will be
counted against the return on the old candy bar.
9) Earnings before taxes, or taxable income, is equal to operating income minus
financing costs.
10) The U.S. dollar is the most frequently traded currency in foreign currency markets,
accounting for over 40% of total trading.
11) Discretionary financing needed must be obtained through additional borrowing
because additional equity measured by the increase in retained earnings has already
been deducted.
12) The size disparity problem occurs when mutually exclusive projects of unequal size
are being examined.
13) Synergistic benefits from an investment project include cannibalism.
14) Generally, the least important motive for holding liquid assets for a typical
company is the speculative motive.
15) Stocks that plot above the security market line are underpriced because their
expected returns exceed their risk-adjusted required returns.
16) If a firm were to unexpectedly omit payment of its quarterly dividend, that firm’s
stock price would probably drop.
17) The break-even model assumes that selling price per unit and variable cost per unit
of output are constant over the relevant range of output.
18) A company concerned about the liquidity of its near-cash securities should invest in
U.S. Treasury bills because the secondary market for U.S. Treasury bills is excellent.
19) Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be
repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent.
What is the monthly payment?
A) $500.92
B) $543.79
C) $563.82
D) $597.24
20) If Cathy deposits $12,000 into a bank account that pays 6% interest compounded
quarterly, what will the account balance be in seven years?
A) 18,001
B) 18,207
C) 19,112
D) 19,344
21) The law of one price suggests that all of the following will have the same price in
different countries EXCEPT
A) oil
B) grain
C) fresh vegetables
D) silver
22) How much money must you pay into an account at the end of each of 20 years in
order to have $100,000 at the end of the 20th year? Assume that the account pays 6%
per year, and round to the nearest $1.
A) $1,840
B) $2,028
C) $2,195
D) $2,718
23) Assume that a firm issues a six-month note to purchase inventory. Which of the
following is TRUE if the current ratio before the purchase is 1.0?
A) The firm’s current ratio must decrease
B) The firm’s quick ratio will stay the same
C) The firm’s current ratio will increase
D) The firm’s quick ratio might decrease
24) Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1
million shares of stock at $5 each to Goldman Sachs, who then is responsible for selling
the shares to investors. This is an example of a
A) privileged subscription
B) standby agreement
C) negotiated purchase
D) commission or best-efforts agreement
25) Which of the following is generally under the control of the financial manager?
A) the percentage of credit sales to total sales
B) the actual level of sales
C) the credit policies
D) A and B
26) All of the following are likely to increase the cost of a company’s short-term
financing EXCEPT
A) an increase in the bank’s prime lending rate
B) an increase in the compensating balance required
C) taking a loan on a discount basis
D) an increase in the company’s debt rating by Moody’s or Standard and Poors
27) Valley Manufacturing Inc. just issued $1,000 par 20-year bonds. The bonds sold for
$758.18 and pay interest semiannually. Investors require a rate of 9% on the bonds.
What is the bonds’ coupon rate?
A) 6%
B) 7%
C) 8%
D) 9%
28) Which of the following is a spontaneous source of financing?
A) accrued expenses
B) notes payable
C) common stock
D) paid-in-capital
29) Which of the following changes will make the value of a stock go up, other things
being held constant?
A) The required return decreases
B) The required return increases
C) In general, investors become more risk averse
D) The growth rate of dividends decreases
30) Assume that Bunch Inc. has an issue of 18-year $1,000 par value bonds that pay 7%
interest, annually. Further assume that today’s required rate of return on these bonds is
5%. How much would these bonds sell for today? Round off to the nearest $1.
A) $1,233.79
B) $1,201.32
C) $1,134.88
D) $1,032.56
31) All of the following would result in an increase in stockholders equity EXCEPT
A) the company sold common stock at par value
B) the company sold common stock above par value
C) the company purchased treasury stock
D) the company had positive net income greater than dividends paid
32) Asset efficiency ratios for Fischer, Inc. are given in the table below. Based on this
information, Fischer, Inc.’s fixed asset turnover ratio is likely to be ________.
Fischer, Inc. Peer Group
Total Asset Turnover 1.58X 2.05X
Accounts Receivable Turnover 17.55X 14.35X
Inventory Turnover 6.34X 5.22X
Fixed Asset Turnover ????? 3.50X
A) equal to 3.50
B) less than 3.50
C) greater than 3.50
D) negative
33) Wendy purchased 800 shares of Robotics Stock at $3 per share on 1/1/09 . Wendy
sold the shares on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the risk-free rate
of return is 3%, and the market risk premium is 8%. The required return on Genetics
Stock is
A) 13.4%
B) 16.5%
C) 17.6%
D) 21.1%
34) The Native Industries, Inc. is going to issue 180-day commercial paper to raise $25
million. It anticipates a discounted interest rate of 13 percent, and dealer placement
costs of approximately $60,000. What is the effective annual cost of credit to Native
Industries?
A) 13.46%
B) 14.06%
C) 14.45%
D) 15.38%
35) WineCellars Inc. currently has a weighted average cost of capital of 12%.
WineCellars has been growing rapidly over the past several years, selling common
stock in each year to finance its growth. However, due to difficult economic times this
year, WineCellars decides to cut its dividend and increase its retained earnings so that
the common equity portion of its capital structure will include only retained earnings
and no new common stock will be sold. WineCellars weighted average cost of capital
this year should be
A) zero, since no new stock will be sold
B) less than 12%
C) equal to 12%
D) greater than 12%
36) Adventure Outfitter Corp. can sell common stock for $27 per share and its investors
require a 17% return. However, the administrative or flotation costs associated with
selling the stock amount to $2.70 per share. What is the cost of capital for Adventure
Outfitter if the corporation raises money by selling common stock?
A) 27.00%
B) 18.89%
C) 18.33%
D) 17.00%
37) You are thinking of adding one of two investments to an already well- diversified
portfolio.
Security ASecurity B
Expected Return = 14%Expected Return = 16%
Standard Deviation ofStandard Deviation of
Returns = 16%Returns = -20%
Beta = 1.2Beta = 1.2
If you are a risk-averse investor, which one is the better choice?
A) Security A
B) Security B
C) Either security would be acceptable because they have the same beta
D) Security B, but only if Security B’s required return is greater than 12%
38) The expected rate of return on a share of common stock whose dividends are
growing at a constant rate (g) is which of the following, where D1 is the next dividend
and Vc is the current value of the stock?
A) (D1 + g)/Vc
B) D1/Vc + g
C) D1/g
D) D1/g + Vc
39) At 6 percent compounded monthly, how long will it take to triple your money?
A) 221 months
B) 175 months
C) 102 months
D) 48 months
40) Joe is deciding whether or not to invest $10,000 in a business that has pending
lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can
lose is
A) $10,000 if Joe is a general partner
B) $10,000 if Joe is a sole proprietor
C) $10,000 if Joe is a limited partner
D) $10,000 plus his share of the lawsuits if Joe is a limited partner
41) Which of the following statements concerning stock repurchases is MOST correct?
A) Increasingly companies are using stock repurchases to distribute cash to their
shareholders, but dividends remain the primary means to distribute cash.
B) Companies currently spend more money on stock buybacks than on dividend
payments.
C) Repurchasing stock is strictly a financing decision made by the corporation.
D) A tender offer is the only way to complete a stock repurchase due to SEC rules.
42) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%. The modified internal rate of return for Project B is
A) 17.84%
B) 18.52%
C) 19.75%
D) 22.80%
43) A new machine can be purchased for $1,200,000. It will cost $35,000 to ship and
$15,000 to modify the machine. A $12,000 recently completed feasibility study
indicated that the firm can employ an existing factory owned by the firm, which would
have otherwise been sold for $180,000. The firm will borrow $750,000 to finance the
acquisition. Total interest expense for 5-years is expected to approximate $350,000.
What is the investment cost of the machine for capital budgeting purposes?
A) $2,180,000
B) $1,780,000
C) $1,442,000
D) $1,430,000
44) Pentrax Corp issued 25 year bonds in 2002 with a coupon rate of 6% and a face
value of $1,000. The bonds sold for face value when issued. Since 2002, interest rates
have increased, so the going rate on similar bonds is now 9%. Which of the following
statements is most accurate?
A) An investor who purchased an Pentrax bond in 2002 and plans to keep the bond until
it matures expects to earn 6% per year over the life of the bond
B) Pentrax Corp must now pay bondholders interest payments of $90 per year due to
the increase in interest rates
C) An investor who purchased an Pentrax bond in 2002 and plans to keep the bond until
it matures expects an increase in return from 6% per year to 9% per year
D) The price of an Pentrax Corp bond should be higher than $1,000 due to the increase
in rates
45) Techno Robots produces a functioning toy robot. At a production and sales level of
10,000 robots, the firm has the following information:
Selling price per unit = $15
Variable costs per unit = $8
EBIT = $17,500
a.What is the break-even point in units for the firm?
46) The Johnson Corporation issues a bond which has a coupon rate of 10.20%, a yield
to maturity of 10.55%, a face value of $1,000, and a market price of $850. Therefore,
the annual interest payment is
A) $101.75
B) $102
C) $105.50
D) $120.0
47) In terms of the costs to organize each, which of the following sequences is correct,
moving from highest to lowest cost?
A) general partnership, sole proprietorship, limited partnership, corporation
B) sole proprietorship, general partnership, limited partnership, corporation
C) corporation, limited partnership, general partnership, sole proprietorship
D) sole proprietorship, general partnership, corporation, limited partnership
48) The one-year interest rate is 4%. The interest rate for a two-year security is 6%.
According to the unbiased expectations theory, the one-year interest rate one year from
now must be equal to
A) 5.00%
B) 8.00%
C) 8.04%
D) 10.00%
49) A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond
matures in 15 years and has a current market price of $925. If the corporation sells more
bonds it will incur flotation costs of $25 per bond. If the corporate tax rate is 35%, what
is the after-tax cost of debt capital?
A) 3.74%
B) 4.45%
C) 5.29%
D) 6.78%
50) JPR Company is financed 75 percent by equity and 25 percent by debt. If the firm
expects to earn $30 million in net income next year and retain 40% of it, how large can
the capital budget be before common stock must be sold?
A) $7.5 million
B) $12.0 million
C) $15.5 million
D) $16.0 million
51) If the Beta for stock A equals zero, then
A) stock A’s required return is equal to the required return on the market portfolio
B) stock A’s required return is equal to the risk-free rate of return
C) stock A has a guaranteed return
D) stock A’s required return is greater than the required return on the market portfolio
52) ACME, Inc. reported the following income statement for 2009:
If ACME’s sales next year increase by 20%, what will ACME’s earnings per share be?
A) $5.76
B) $6.45
C) $7.14
D) $7.58
53) Banker’s acceptances have the following characteristics EXCEPT
A) typically maturities of 1 to 5 years
B) fully taxable at the federal, state, and local levels
C) are sold on a discount basis and payable to the bearer
D) are not “issued” in predetermined denominations
54) 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
55) Problems of multinationals include
A) cash management and positioning of funds.
B) managing receivables.
C) global control.
D) all of the above.