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1) The interest factor for the future value of an annuity is simply the sum of the interest
factors for the future value using the same number of periods.
2) The purchasing power parity theory states that currency exchange rates tend to vary
inversely with their respective purchasing powers in order to provide similar purchasing
powers.
3) Forced conversions of convertible bonds occur when unethical corporate executives
call corporate bonds prematurely.
4) The investment banker is someone who buys large new issues of stocks and then
sells them to the public after their price has risen.
5) If the retail price of a stock issuance is $17.50 and the syndicate members' price is
$15.50, the total spread is 11.4%.
6) Generally, the higher the coefficient of variation a project has, the higher the discount
rate it should be assigned.
7) Finance paper usually carries a higher rate of interest than direct paper.
8) Preferred stock would be valued the same as a common stock with a zero dividend
growth rate.
9) The market price of "floating rate" preferred stock is less volatile than that of regular
preferred stock.
10) Permanent current assets are not similar to fixed assets because they are fully
liquidated within the year.
11) When a potential customer has a mediocre credit history, a firm should never
consider allowing them to become a customer.
12) FIFO will cause inflated profits during deflation.
13) Operating leverage primarily affects the left-hand side of the balance sheet, while
financial leverage affects the right-hand side of the balance sheet.
14) Firm A employs a high degree of operating leverage; Firm B takes a more
conservative approach. Which of the following comparative statements about firms A
and B is true?
A.A has a lower break-even point than B, but A's profit grows faster after the breakeven
B.A has a higher break-even point than B, but A's profit grows slower after the
breakeven
C.B has a lower break-even point than A, but A's profit grows faster after the breakeven
D.B has a lower break-even point than A, and profit grows the same rate for both
companies after the break-even point
15) If investors are pessimistic about the future, the spread between yields on
high-grade and low-grade bonds
A.increases
B.stays the same
C.decreases
D.None of these options
16) An "ADR" is used to
A.facilitate investment in foreign shares by American investors
B.allow American investors to participate in the debt securities of other countries
C.guarantee dividends from foreign companies
D.insure against foreign exchange currency risk
17) Which of the following kinds of risk is NOT uniquely associated with MNCs?
A.Exchange rate risk
B.Business risk
C.Political risk
D.None of these options are uniquely associated with MNCs
18) A "what if" simulation using a computer helps to
A.reduce the risk associated with a particular investment
B.determine the effects of changes in certain variables
C.increase the accuracy of the inputs
D.More than one of the options
19) With respect to the United States and its relationship with the rest of the world, it
can be said that
A.the U.S. has invested more dollars in the rest of the world than foreign countries have
invested in the U.S
B.the U.S. has actively helped foreign countries finance their government deficits
C.foreign investors hold large positions in U.S. government securities
D.All of these options
20) Match the following with the items below:
1>capital asset pricing model
2>marginal cost of capital
3>optimal capital structure
4>financial capital
5>weighted average cost of capital
6>flotation costs
7>cost of capital
8>dividend valuation model
A. The distribution expense involved in selling securities to the public.6
B. The result of multiplying the cost of each item in the capital structure by its
corresponding representation in the overall capital structure and summing the results.5
C. Features the best possible mix of debt, preferred stock, retained earnings, and new
common stock.3
D. Determines the value of a share of stock by taking the present value of the expected
future stream of dividends.8
E.The cost of alternative sources of financing to the firm.7
F. Relates the risk-return tradeoffs of individual securities to market returns.1
G. The cost of the most recent dollars of funds raised.2
H. Appears on the balance sheet under long-term liabilities and equity.4
21) RFID chips have been used to
A.track livestock
B.track marathon runners' times
C.track inventory at retailers
D.All of the options
22) In comparison to securities issued by the U.S. Treasury, securities issued by U.S.
government agencies like the Federal Home Loan Bank
A.are significantly riskier than Treasury securities
B.are much less liquid than Treasury securities
C.yield slightly more than Treasury securities
D.usually require the payment of higher commissions when purchased than Treasury
securities
23) The owner of a call has
A.the right and the obligation to buy an asset at a given price
B.the right and the obligation to sell an asset at a given price
C.the right but not the obligation to buy an asset at a given price
D.the right but not the obligation to sell an asset at a given price
24) Income can be distorted by factors other than inflation. The most important causes
of distortion for inter-industry comparisons are
A.timing of revenue receipts and nonrecurring gains or losses
B.tax write-off policy and use of different inventory methods
C.Both of these
D.None of the options
25) Which of the following is NOT a potential challenge or downside to a merger?
A.Anti-trust laws
B.Dilution
C.Firm valuation
D.Synergy
26) The Whipple Corporation currently has common stock selling for $40 per share on
the National Stock Exchange. Warrants are also available, giving the warrant holder the
option of purchasing one share of common stock for every three warrants held. The
exercise price is $32 per share. The warrants are currently selling for $7 per warrant.
a) How much would you have to spend to buy one share of stock using the warrants?
Does this make sense?
b) What is the intrinsic value of the warrant?
c) What is the speculative premium on this warrant?
27) Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order,
carrying costs of $1.00 per unit, and desires to keep 100 units in safety stock. Assuming
level production, what should be their average inventory?
A.200-300
B.301-400
C.401-500
D.501-600
28) In examining the liquidity ratios, the primary emphasis is the firm's
A.ability to effectively employ its resources
B.overall debt position
C.ability to pay short-term obligations on time
D.ability to earn an adequate return
29) Match the following to the items below:
1>portfolio effect
2>synergy
3>tax loss carryforward
4>market value maximization
5>Saturday night special
6>consolidation
7>merger
8>white knight
9>terms of exchange
10>two-step buyout
11>merger premium
A.A loss that can be extended for a number of years to offset taxable income.
B. The combination of two or more firms to form an entirely new entity.
C. The combination of two or more firms in which one firm acquires the others, causing
them to lose their identity.
D. The recognition that the whole may be equal to more than the sum of the parts.
E. Value paid over the existing price of the acquired firm.
F. The buyout ratio or terms of trade in a merger or an acquisition.
G. A merger price offer that takes place in two stages.
H. A third firm that management calls on to avoid an initial unfriendly takeover.
I. The impact of a given investment on the overall risk-return composition of the firm.
J. The concept of maximizing the wealth of the stockholders.
K. An offer made just before the market closes for the weekend and takes the target
company's officers by surprise.
30) Which of the following is not an advantage of private placement?
A.No expensive registration process
B.Typically lower interest rates
C.More flexibility in negotiation
D.No extensive public relations requirements
31) Which of the following is not an advantage of borrowing in the Eurodollar market?
A.Greater availability of credit
B.Lower overhead costs for lending banks
C.The absence of compensating balance requirements
D.A constant lending rate over time
32) Which of the following statements regarding the June 2009 bankruptcy of General
Motors is false?
A.The government provided more than $50 billion in the bailout
B.The common stockholders received nothing
C.The U.S. government owns 85% of the common stock of GM
D.The preferred stockholders received nothing
33) Investors consider which of the following to be the most important measure of bond
returns?
A.The coupon rate
B.The yield to maturity
C.The current yield
D.None of these options
34) When developing a credit scoring report, many variables would be considered.
Which of the following best represents the major factors Dun & Bradstreet would
examine?
A.The age of the management team, the dollar amount of sales, net profits, and
long-term debt
B.The age of the company, the number of employees, and the level of current assets
C.The financial statements, satisfactory or slow payment experiences, and negative
public records (suits, liens, judgments, and bankruptcies)
D.The company's cash balances, return on equity, and its average tax rates
35) The longer the time to maturity,
A.the greater the price increase from an increase in interest rates
B.the less the price increase from an increase in interest rates
C.the greater the price increase from a decrease in interest rates
D.the less the price decrease from a decrease in interest rates
36)
Refer to the figure above. The firm's debt-to-asset ratio is ____.
A.44%
B.33%
C.19%
D.34%
37) The need for an increase or decrease in short-term borrowing can be predicted by
A.ratio analysis
B.trend analysis
C.a cash budget
D.an income statement
38) Price Corp. is considering selling to a group of new customers and creating new
annual sales of $90,000. Five percent will be uncollectible. The collection cost on these
accounts is 3% of new sales, the cost of producing and selling is 80% of sales, and the
firm is in the 30% tax bracket. What is the profit on new sales?
A.$7,560
B.$9,660
C.$7,245
D.None of the options
39) Using the risk-adjusted discount rate approach, projects with high coefficients of
variation will have ______ net present values than projects with low coefficients of
variation and similar cash flows.
A.somewhat higher
B.substantially higher
C.lower
D.either somewhat higher or substantially higher
A high V represents greater risk. Greater risk results in a higher expected rate of return,
which will be used to discount future cash inflows. The higher the discount rate, the
smaller the present value.
40) The effective rate on a loan with a 7% stated rate and 15% compensating balance is
approximately ______.
A.11%
B.7.2%
C.8.2%
D.None of these options
41) Proper risk-return management means that
A.the firm should take as few risks as possible
B.the firm must determine an appropriate trade-off between risk and return
C.the firm should earn the highest return possible
D.the firm should value future profits more highly than current profits
42) A 'subordinated debenture"
A.must be transferred with the bond to which it is attached
B.is used mainly by railroad companies and usually specifies equipment as collateral
C.entitles the bondholder to purchase shares of common stock at a specific price
D.is an unsecured bond with an inferior claim on assets in the event of liquidation
43) In forecasting a firm's cash needs for some future period
A.the percent-of-sales method is a "broad-brush" approach
B.cash budgets are more exact than the percent-of-sales method
C.a cash budget approach can deal effectively with both level and seasonal production
schedules
D.All of the options
44) The Eurobond market has which of the following characteristics?
A.Eurobond issues are denominated in the currency where the bond issue is sold
B.Disclosure requirements in the Eurobond market are much less stringent than those
required by the U.S. Securities and Exchange Commission
C.Eurobond issues are underwritten by the European Central Bank
D.Eurobond issues are always denominated in euros
45) Which of the following best represents the hierarchy of creditor and stockholder
claims?
A.Common stock, senior secured debt, subordinated debentures
B.Senior debentures, subordinated debentures, junior secured debt
C.Senior secured debt, subordinated debentures, common stock
D.Preferred stock, secured debt, debentures
46) When a firm's earnings are falling more rapidly than its stock price, its P/E ratio
will
A.remain the same
B.go up
C.go down
D.either go up or down
47) A stock split
A.is treated by accountants just like a stock dividend
B.reduces the retained earnings account
C.does not change the total dollar amount in the common stock account
D.increases corporate wealth
48) When a firm sells a new issue through an investment banker, the costs incurred
A.are the "give up" expense of the spread, plus the legal and accounting fees, printing
expense, and other small fees
B.are the spread to the underwriter, which includes all the costs of legal and accounting
fees, printing expense, and other small fees
C.are dependent upon the number of underwriters in the syndicate
D.are the "give up" expense of the spread, plus the legal and accounting fees, printing
expense, and other small fees, and are dependent upon the number of underwriters in
the syndicate
