1) In 2007, banks across the world revealed huge losses in the U.S. subprime mortgage
market. Investors shrank from illiquid securities and there was a “flight to quality.”
2) A two-for-one stock split results in a doubling of the number of outstanding shares,
but they do not affect the company’s assets, profits, or total value.
3) When securities are issued under a firm commitment, the underwriter bears the risk
of low sales.
4) Technical analysts would be more likely than other investors to index their portfolios.
5) Retained earnings will decrease when stock is repurchased as treasury stock.
6) The payback rule states that a project is acceptable if you get your money back
within a specified period.
7) A successful investment is one that increases the value of the firm.
8) In order to maintain a zero-balance account, a firm transfers all collections to a single
account.
9) An increase in a firm’s debt ratio will have no effect on the required rate of return for
equityholders.
10) A change in the company’s capital structure will change the amount of taxes paid
but will not change the WACC.
11) At moderate debt levels the probability of financial distress is trivial and therefore
the tax advantages of debt dominate.
12) Nominal dollars refer to the amount of purchasing power.
13) Depreciation charge is a cash payment.
14) Balance sheets have traditionally recorded amounts in terms of market values.
15) Opportunity costs for organizational resources:
A.are limited to the explicit cash flows involved
B.are determined according to the marginal tax rate
C.can involve no cash flows
D.should not be determined for existing products
16) Which of the following financial intermediaries can loan money directly to
businesses?
A.Mutual funds
B.Pension funds
C.Insurance companies
D.All of these
17) __________ are those expected to be turned into cash in the near future, while
__________ are those expected to be fulfilled in the near future, and the difference
between the two is __________.
A.Current assets; current liabilities; shareholders’ equity
B.Current assets; current liabilities; net working capital
C.Fixed assets; current liabilities; net working capital
D.Liquid assets; liquid liabilities; shareholders’ equity
18) When a firm issues 50,000 shares with a par value of $5 for $22 per share,
additional paid-in capital will:
A.decrease by $250,000
B.increase by $250,000
C.increase by $850,000
D.increase by $1,100,000
19) What is one reason why short-term securities are safe for keeping idle cash
balances?
A.Low interest-rate risk
B.High returns
C.High net present value
D.Ease of receiving interest payments
20) A firm that is located in New York receives on the average 2,000 checks a day from
its customers in the Twin Cities area. Average payment per check is $1,500. A bank in
the Twin Cities is offering a lock-box arrangement for collection and processing of
these checks at a cost of $0.50 per check. This arrangement will reduce the float by 2
days. The daily interest rate for the firm is 0.02%. What is the net saving from the
lock-box arrangement?
A.$200
B.$400
C.$1,000
D.$1,200
21) Plasti-tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt
has a before-tax interest rate of 12%. Plasti-tech’s common stock trades at $15.00 per
share and its most recent dividend was $1.00. Future dividends are expected to grow by
4%. If the tax rate is 34%, what is Plasti-tech’s WACC?
A.7.39%
B.9.57%
C.9.73%
D.11.20%
22) Which of the following situations is most likely to occur today for a stock that went
down in price yesterday?
A.The stock will increase in price
B.The stock will decrease in price
C.The stock has a 30% chance of decreasing in price
D.The stock has no predictable price-change pattern
23) Those who invest in derivative instruments with the purpose of increasing rather
than decreasing risk are known as:
A.option traders
B.futures traders
C.hedgers
D.speculators
24) The main purpose of a market-value balance sheet is to:
A.show an inflated value of the firm
B.avoid the recording of certain liabilities
C.value assets and liabilities without GAAP restrictions
D.improve the credit rating of the firm
25) U.S. Treasury bond yields do not contain a:
A.coupon interest payment
B.nominal interest rate
C.default premium
D.yield to maturity
26) Which of the following groups is least likely to be considered a stakeholder of the
firm?
A.Government
B.Bondholders
C.Competitors
D.Employees
27) The cost of a merger may outweigh the potential gain if the:
A.present value of the acquired firm exceeds the price paid for it
B.present value of the merged firms is greater than the sum of their individual values
C.merger allows cost savings to occur
D.acquired firm’s shareholders receive more than the value of their firm
28) When a firm announces a two-for-one stock split (in the absence of other new
information), investors should expect that:
A.earnings per share will fall in half but stock price will remain the same
B.stock price will fall in half but earnings per share will remain the same
C.both earnings per share and stock price will remain the same
D.both earnings per share and stock price will fall by half
29) Because most hedging acts to reduce risk, managers should expect that hedging
will:
A.increase profits
B.decrease profits
C.increase the firm’s stock price
D.stabilize the firm’s dividend payout
30) A manufacturer contemplates a change in technology that would reduce fixed costs
from $800,000 to $600,000, and reduce depreciation expense from $125,000 to
$100,000. However, the ratio of variable costs to sales will increase from 68% to 80%.
What will happen to break-even level of revenues?
A.A reduction to the level of $875,000
B.A reduction to the level of $2,890,625
C.An increase to the level of $3,500,000
D.An increase to the level of $3,625,000
31) Calculate the economic break-even level of sales for a project requiring an
investment of $3,000,000 and providing as cash flows .15 sales less $250,000. Assume
the project will generate these cash flows for 10 years and that the discount rate is 10%.
A.$3,254,890
B.$3,504,890
C.$4,921,549
D.$19,686,667
32) A corporation’s dividend payout ratio is the percentage of _____ paid out as
dividends.
A.cash
B.earnings
C.earnings before interest and taxes
D.retained earnings
33) Which of the following statements is correct for a firm in which depreciation
expense exceeds EBIT? The firm:
A.will have a net loss
B.will have no income-tax liability
C.needs to lower its interest expense
D.can still have a positive net income
34) Investors are willing to purchase stocks having high P/E ratios because:
A.they expect these shares to sell for a lower price
B.they expect these shares to offer higher dividend payments
C.these shares are accompanied by guaranteed earnings
D.they expect these shares to have greater growth opportunities
35) If market interest rates have increased since a company last borrowed long-term
funds, the market value of these long-term funds will likely be:
A.greater than their book value
B.less than their book value
C.equal to their book value
D.unknown without knowing the maturity of the debt
36) What happens to a firm that reinvests its earnings at a rate equal to the firm’s
required return?
A.Its stock price will remain constant
B.Its stock price will increase by the sustainable growth rate
C.Its stock price will decline unless dividend payout ratio is zero
D.Its stock price will decline unless plowback rate exceeds required return
37) An example that specifically contradicts strong-form market efficiency in U.S.
stock markets is that:
A.excess profits are observed in cases of insider trading
B.stock prices follow predictable patterns in each month
C.random-walk behavior is reliable
D.fundamental analysts outperform the S&P 500
38) What is the expected return on equity for a firm with a 14% expected return on
assets that pays 9% on its debt, which totals 70% of assets?
A.16.14%
B.17.00%
C.19.00%
D.25.67%
39) An example of liquid assets would be:
A.buildings
B.company cars
C.finished goods
D.fixed assets
40) An example of a firm’s financing decision would be:
A.acquiring a competitive firm
B.determining how much to pay for a specific asset
C.issuing 10-year versus 20-year bonds
D.deciding whether or not to increase the price of its products
41) Your forecast shows $500,000 annually in sales for each of the next 3 years. If your
second and third year predictions have failed to incorporate 2.5% expected annual
inflation, how far off in total dollars is your 3-year forecast?
A.$37,813
B.$50,000
C.$52,550
D.$76,250
42) What is the minimum probability of collection that should be accepted by firms that
have a 25% profit margin? Ignore the time value of money.
A.20%
B.25%
C.50%
D.75%
43) What price was reported in the financial press for a bond that was sold to an
investor for $1,045.63?
A.95:14
B.95:44
C.104:18
D.104:56
44) In addition to the number of stocks represented, a difference between the S&P 500
and the Dow is that the S&P 500:
A.dates back to the nineteenth century while the Dow is a recent innovation
B.is value-weighted while the Dow is an equally-weighted index
C.includes foreign stocks while the Dow is domestic
D.index includes dividends in its return while the Dow does not
45) Discuss the statement, “Only market risk matters to a diversified investor.”
46) How do measures such as market value added and economic value added help
assess the firm’s performance?
47) Explain the pecking order theory of capital structure. How will this affect the
“optimal” capital structure for a firm?
48) A corporation has excess cash that does not appear to be needed for several months.
How can it evaluate the differences between parking the funds in commercial paper
versus repurchase agreements?
49) The Chief Financial Officer at HB Electronics notes that its cost of debt is below
that of equity. He reasons that the firm should ensure that it is able to increase its
borrowings, because otherwise the firm will be forced to use more expensive equity to
finance its new projects. Then, the firm may have to reject some projects that it would
have accepted when evaluated at the lower cost of debt. Comment on this reasoning.
50) What is meant by over-the-counter trading?
51) Explain why bond prices fluctuate in response to changing interest rates. What
adverse effect might occur if bond prices remain fixed prior to their maturity?
52) How can the net present value rule be used to analyze three common problems that
involve competing projects: when to postpone an investment expenditure; how to
choose between projects with equal lives; and when to replace equipment?