1) Times interest earned is an example of a profitability ratio.
2) The dollar value of common stock issuances exceeds the level of preferred stock
issuances and corporate bond issuances.
3) Finding out who is ultimately responsible for a bad debt can be helped by Dun &
Bradstreet’s D-U-N-S (Data Universal Number System) that tracks relationships and the
ownership of businesses within Dun & Bradstreet’s information base.
4) A convertible security is one that can be converted into common stock only at the
option of the issuer.
5) The secondary market characteristically has had stable prices over the past 20 years.
6) The amount of annual payments necessary to accumulate a desired total can be found
by reference to the present value of an annuity table.
7) In periods of tight money, long-term rates are typically higher than short-term rates.
8) The financial manager generally needs to devote little time to management of
working capital.
9) During disinflation, stock prices tend to go up because the investor’s required rate of
return goes down.
10) Preferred stock dividends are a deductible expense for a corporation.
11) The dollar amount of losses incurred when an old asset is sold below book value is
added to the purchase price of a new asset in calculating the base for depreciation.
12) A firm might be willing to accept high risk in a given investment if the portfolio
effect (for the whole firm) is beneficial.
13) Money markets are the simplest form of capital markets because they involve
trading in U.S. dollars.
14) Investment banking is highly concentrated with the top 10 underwriters controlling
90% of the global market for stocks and bonds.
15) The cost of capital is assumed to contain no risk for the firm.
16) It is not necessary to understand interest rate movements when deciding the
structure of short-term debt relative to long-term debt.
17) The increase in supply of short-term investments in the U.S. by Chinese investors
when rates are higher in the U.S. is an example of purchasing power parity.
18) Production planning depends upon the beginning and ending accounts receivable
levels, as well as the projected monthly sales level.
19) Brokers on an organized stock exchange act as an agent for the person buying or
selling securities.
20) Which of the following is not a step in creating the net present value profile?
A.Determine the net present value at a zero discount rate
B.Determine the net present value at a normal discount rate
C.Determine the project’s internal rate of return
D.Determine the payback for the project
21) American Depository Receipts
A.have annual reports and financial statements presented in English
B.pay dividends in dollars
C.are more liquid and less expensive to buy than foreign stock
D.All of these are true
22) The pro forma income statement is important to the overall process of constructing
pro forma statements because it allows us to determine a value for
A.change in retained earnings
B.gross profit
C.interest expense
D.prepaid expenses
23) The greater use of debt by corporations since the late 1970s is best shown by the
A.declining “times interest covered” ratio
B.small amount of common stock sold
C.rising cost of interest
D.inability of earnings to keep up with inflation
24) The first step in the capital budgeting process is
A.collection of data
B.idea development
C.assign probabilities
D.determine cash flows
25) The Milling Corp. has developed a new type of widget. The local distributor
expects to increase his sales by 25% over the past year due to this new development.
Last year’s sales were $150,000 at a selling price of $100 per unit. A safety stock of 35
units has eliminated stockouts. The manager would like to cut costs as much as
possible, so he has come to you for advice.
a) What is the economic order quantity?
b) What is the amount of average inventory?
c) How many orders will be made per year?
d) What is the total cost of this inventory decision?
26) Which of the following is not true about SEC Rule 415?
A.It permits companies to file one comprehensive registration statement, which outlines
the firm’s plans for future long-term financing
B.It allows firms to issue securities when market conditions are appropriate, without
further SEC approval
C.It is consistent with the traditional requirements of the SEC
D.None of these options
27)
Refer to the figure above. Marni’scurrent ratio is ____.
A.0.79:1
B.0.5:1
C.1.84:1
D.None of the options
28) Assuming a tax rate of 30%, the after-tax cost of a $100,000 dividend payment is
A.$100,000
B.$70,000
C.$30,000
D.None of the options
Dividends are not tax deductible.
29) An operating lease
A.has a lease term equal to 75% or more of the estimated property
B.is usually short-term and is often cancelable at the option of the lessee
C.must appear on the balance sheet
D.None of these options
30) A derivative is a financial instrument whose value is determined by
A.a regulatory body such as the SEC
B.an underlying security
C.futures and options
D.None of these options
31) Which of the following is NOT a method for lenders to control pledged inventory?
A.Blanket inventory liens
B.Trust receipts
C.Warehousing
D.Factoring
32) Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative.
The dividend is $3.00 per share and has not been paid for three years. If Kuhns earned
$1 million this year, what could be the maximum payment to the preferred stockholders
on a per share basis?
A.$9.50 per share
B.$15.00 per share
C.$6.00 per share
D.$5.00 per share
33) Agency theory would imply that conflicts are more likely to occur between
management and shareholders when
A.the company is owned and operated by the same person
B.management acts in the best interests of maximizing shareholder wealth
C.the chairman of the board is also the chief executive officer (CEO)
D.the board of directors exerts strong and involved oversight of management
34) Reinvested funds from retained earnings theoretically belong to
A.bond holders
B.common stockholders
C.employees
D.All of the options
35) Ali Shah sets aside $2,000 each year for five years. He then withdraws the funds on
an equal annual basis for the next four years. If Ali wishes to determine the amount of
the annuity to be withdrawn in years 6 through 9, he should use the following two
tables in this order:
A.present value of an annuity of $1; future value of an annuity of $1
B.future value of an annuity of $1; present value of an annuity of $1
C.future value of an annuity of $1; present value of $1
D.future value of an annuity of $1; future value of $1
36) Which of the following is NOT a financial motive, but rather an operating motive,
for merger and consolidation?
A.The portfolio diversification effect
B.Tax loss carryforward
C.Greater financing capability
D.Synergy
37) An inverted yield curve would suggest that
A.interest rates are expected to rise
B.interest rates are expected to fall
C.inflation is expected to rise in the future
D.long-term rates are being pushed up by Federal Reserve policy
38) Tanner Co. is a highly successful supplier of leather to manufacturers of leather
goods. Tanner is considering expanding into the U.S. luxury auto seat market. It is
estimated that although selling leather to U.S. auto manufacturers will bring additional
annual sales of $1,000,000, a high 15% of those accounts will be uncollectible. The cost
of conditioning and selling the leather is 70% of sales. Tanner’s tax rate is 30%.
a) Calculate Tanner’s incremental net income on the new sales.
b) Assume Tanner has a receivables turnover of 4 . Calculate Tanner’s incremental
accounts receivable investment and after-tax return on that investment.
c) Tanner’s minimum required ROI is 15%. Should Tanner expand into the auto market?
39) Commercial paper is very popular with many firms because
A.it can usually be issued below the prime rate
B.it satisfies the firm’s need for long-term funds
C.there are no required lines of credit at the bank
D.it is very simple to roll over (refinance) in times of economic turmoil
40) Under what conditions must a distinction be made between money to be received
today and money to be received in the future?
A.A period of recession
B.When idle money can earn a positive return
C.When there is no risk of nonpayment in the future
D.When current interest rates are different from expected future rates
41) Match the following with the items below:
1>risk-adjusted discount rate
2>beta
3>decision tree
4>coefficient of variation
5>efficient frontier
6>portfolio effect
7>expected value
8>risk
9>standard deviation
10>risk-aversion
11>coefficient of correlation
A. The impact of a given investment on the overall risk-return composition of the firm.
B. The degree of associated movement between two or more variables.
C. A measure of uncertainty about the outcome from a given event.
D. A measure of risk determination computed by dividing the standard deviation for a
series of outcomes by the expected value.
E. A measure of the dispersion of a set of numbers around the expected value.
F. As used in the capital budgeting process, it is changed upward or downward from the
normal cost of capital to reflect the risk dimension in a given project.
G. A dislike of risk. Because of it, there must be an increased potential for return in
order to induce most people to take larger risks.
H. A line depicting the optimum investment selections given risk-return trade-offs.
I. Is arrived at by multiplying each outcome times the associated probability and then
summing up the values.
J. A measure of the volatility of returns on an individual stock relative to the market.
K. A tabular or graphical tool that helps to highlight the differences between investment
choices.
42) A common stock that pays a constant dividend can be valued as if it were
A.a corporate bond
B.a stock paying a growing dividend
C.preferred stock
D.a discount bond
43) Aardvark Software Inc. can purchase all the stock of Zebra Computer Services for
$1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000
per year for each of the next 12 years. Based solely on the cash flow analysis and the
facts provided, Aardvark should
A.not purchase Zebra Computer Services
B.purchase Zebra Computer Services
C.purchase Zebra only if Aardvark’s cost of capital is between 5% and 10%
D.purchase Zebra only if Aardvark’s cost of capital is above 10%
44) Publishing companies are characterized by
A.fluctuating production to match sales
B.seasonal sales
C.low inventories due to computer inventory management
D.fluctuating production to match sales and seasonal sales
45) Carol Thomas will pay out $6,000 at the end of year 2, $8,000 at the end of year 3,
and receive $10,000 at the end of year 4 . With an interest rate of 13%, what is the net
value of the payments versus receipts in today’s dollars?
A.$7,326
B.$10,242
C.$16,372
D.$4,112
46) You require an IRR of 14% to accept a project. If the project will yield $10,000 per
year for 10 years, what is the maximum amount that you would be willing to invest in
the project?
A.Less than $50,000
B.More than $50,000 and less than $60,000
C.More than $60,000 and less than $70,000
D.More than $70,000
47) Firms that successfully increase their rates of inventory turnover will, among other
things,
A.be able to reduce their borrowing needs
B.be able to reduce their dividend payments to stockholders
C.find it more difficult to be given credit by their resource suppliers
D.have a greater need for high balances in their cash accounts
48) All of the following are recognized as important influences in the development of
the banking crisis of 2008 and the resulting credit crisis EXCEPT for which one?
A.Consumers, especially homeowners, took on too much debt
B.Too many subprime loans were repackaged and sold as securities
C.The IMF bailed out Freddie Mac and Fannie Mae
D.Real estate prices collapsed
49) Vickrey Technology has had net income of $1,500,000 in the current fiscal year.
There are 1,000,000 shares of common stock outstanding along with convertible bonds,
which have a total face value of $8 million. The $8 million is represented by 5,000
different $1,000 bonds. Each $1,000 bond pays 4% interest. The conversion ratio is 30 .
The firm is in a 30% tax bracket. What is Vickrey’s “diluted earnings per share?”
A.$1.43
B.$1.81
C.$2.00
D.None of these options
50) In a replacement decision, if an old asset sells below book value, from a tax
standpoint
A.there is a decrease in cash flow
B.there is an increase in cash flow
C.there is no effect on cash flow
D.there is a decrease in net present value
51) Ideally, which of the following type of assets should be financed with long-term
financing?
A.Fixed assets only
B.Fixed assets and temporary current assets
C.Fixed assets and permanent current assets
D.Temporary and permanent current assets
52) If three investment alternatives all have some degree of risk and different expected
returns, which of the following measures could best be used to rank the risk levels of
the projects?
A.The coefficient of correlation
B.The coefficient of variation
C.The standard deviation of returns
D.The net present value
53) Which of the following is NOT a primary investor in preferred stock?
A.Commercial banks
B.Corporations
C.Insurance companies
D.Pension funds
54) Shannon Corporation has two bonds outstanding. Both bonds have coupon rates of
7%. Current yields for bonds of equal risk are 8%. Bond A has a maturity of 20 years,
while Bond B has a maturity of 10 years. Interest is paid semiannually. Calculate the
following for both bonds using semiannual analysis.
a) If market rates for bonds of equal risk fell to 6%, what would be the maximum price
an investor would be willing to pay for these bonds?
b) If market rates for bonds of equal risk remained at 8%, what would be the bonds’
current worth?
c) If market rates for bonds of equal risk rose to 10%, what would be the bonds’
theoretical value?
55) The required return by investors is directly influenced by all of the following
except:
A.Inflation
B.U.S. Treasury rates
C.Dividends
D.Risk
56) Mr. Fish wants to build a house in eight years. He estimates that the total cost will
be $150,000. If he can put aside $10,000 at the end of each year, what rate of return
must he earn in order to have the amount needed?
A.Between 17% and 18%
B.Between 15% and 16%
C.12%
D.None of these options