1) Debt financing affects neither the operating risk nor the business risk of the firm.
2) The price at which new shares are sold to investors almost always exceeds par value.
The difference is entered into the company’s accounts as additional paid-in capital, or
capital surplus.
3) As a firm changes to a higher debt ratio, debtholders are likely to demand higher
rates of return.
4) Only at the expiration date can an investor expect to find the value of call options
above their lower bound.
5) Return on assets is always a larger number than the return on equity.
6) A bond’s payment at the maturity is referred to as its face value.
7) An annuity factor represents the future value of $1 that is deposited today.
8) Concentration banking allows the banks to use the local collection system to clear
the customers’ checks.
9) The balance sheet presents a snapshot of the firm’s assets and liabilities at one
particular moment.
10) Cyclical stocks tend to perform well when other stocks are performing well also.
11) If one portfolio’s variance exceeds that of another portfolio, its standard deviation
will also be greater than that of the other portfolio.
12) Debt financing does not affect the operating risk but it does add financial risk. For
example, when there is only half the equity to absorb the same amount of operating
risk, risk per share must double.
13) An aging schedule is a statement sent to customers who are behind in payments.
14) The cost of issuing commercial paper is generally lower than that of a line of credit.
15) If the firm decreases its debt ratio, both the debt and the equity will become riskier.
The debtholders and equity holders require a higher return to compensate for the
increased risk.
16) When accounts payable exceed the sum of inventory and accounts receivable, net
working capital is negative.
17) Interest tax shields are available to the firm on debt and preferred stock but not on
common equity.
18) Callable bonds give the option to the issuing firm and hence reduce the value of the
bond.
19) Which of the following would not be included in inventory carrying cost?
A.Insurance expense for the inventory
B.Opportunity cost of capital for inventory investment
C.Cost of inventory
D.Cost of shelf space
20) Firms that lack competitive advantages will:
A.have difficulty finding positive NPV projects for investment
B.be forced to capture larger market shares to be profitable
C.avoid the need to conduct sensitivity analyses
D.be forced to operate with a high degree of operating leverage
21) What is the most logical explanation for a +2.0% return on a stock with a beta of
1.0 in a month where the market returned +1.0%?
A.The stock is aggressive
B.The market is undervalued
C.Favorable firm-specific news was reported
D.The beta is incorrect
22) If Treasury bills are yielding 10% at a time when the market risk premium is 6%,
then the:
A.market portfolio should yield 4%
B.market portfolio should yield 6%
C.market portfolio should yield 16%
D.market portfolio should yield 22%
23) An efficient capital market is one in which:
A.all securities that investors want are offered
B.all transactions are closed within 2 days
C.current prices reflect all current information
D.the lowest interest rates are offered
24) What should be the current price of a share of stock if a $5 dividend was just paid,
the stock has a required return of 20%, and a constant dividend growth rate of 6%?
A.$19.23
B.$25.00
C.$35.71
D.$37.86
25) The present value of the costs of financial distress increases with increases in the
debt ratio because the:
A.expected return on assets increases
B.present value of the interest tax shield is greater
C.equity tax shield is depleted
D.probability of default and/or bankruptcy is greater
26) Debt usage will have an effect on:
A.business risk
B.financial risk
C.operating risk
D.asset risk
27) A major purpose of the prospectus is to:
A.inform investors of the security’s rate of return
B.advise investors of the security’s potential risk
C.distribute stock warrants to prospective investors
D.list the security’s dividend payment dates
28) One way that investors contribute capital to the firm is by:
A.plowing back money into retained earnings
B.paying less than par value for the stock
C.receiving dividends and reinvesting them on their own
D.increasing the amount of treasury stock
29) Investors who own bonds having lower credit ratings should expect:
A.lower yields to maturity
B.higher default possibilities
C.lower coupon payments
D.higher present value of cash flows
30) Suppose that:
If no other information is available, what will your guess about the spot rate in 1 year
be?
A.1.5331
B.1.5372
C.1.5502
D.2.0000
31) If an investor purchases a 3%, 2-year TIPS and the CPI increases 3% over each of
the next 2 years, how much does the investor receive at maturity?
A.$1,000.00
B.$1,030.00
C.$1,060.90
D.$1,092.73
32) The seller of a copper futures contract noticed that his account was marked with a
$500 gain yesterday. If the standardized contract requires delivery of 25,000 pounds of
copper, what happened that day to the price of copper?
A.The price closed down $0.02 per pound
B.The price closed up $0.02 per pound
C.The price closed down $0.20 per pound
D.The price closed up $0.20 per pound
33) Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40
each to an underwriter and the underwriter sells the shares at $43 each. By the end of
the first day’s trading, the issuing company’s stock price had risen to $70. In percentage
terms, how much market value is absorbed by the total cost (direct expenses plus
underpricing cost)?
A.13.33%
B.23.33%
C.33.33%
D.43.33%
34) If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30
years with monthly payments of $965.55, how much interest is paid over the life of the
loan?
A.$120,000
B.$162,000
C.$181,458
D.$227,598
35) Calculate the average collection period for Dotte Inc. if its accounts receivables
were $500 and $600 at the end of each of the last two years, and its revenue over the
last year was $3,000.
A.60 days
B.61 days
C.67 days
D.73 days
36) A hedger buys a futures contract that obligates the owner to take delivery of 5,000
bushels of wheat at a price of $3.30 per bushel. At expiration the spot price of wheat is
$3.80 per bushel. The hedger has:
A.saved 50 per bushel through hedging
B.gained peace of mind at a price of 50 per bushel
C.the opportunity to avoid taking delivery, since price declined
D.locked in an effective price of $3.05 per bushel
37) When is it appropriate to include sunk costs in the evaluation of a project?
A.Include sunk costs when they are relatively large
B.Include sunk costs if they improve the project’s NPV
C.Include sunk costs if they are considered to be overhead costs
D.It is never appropriate to include sunk costs
38) Which of the following statements is correct for a firm that is 55% debt-financed
and the value of equity equals $58 million?
A.The firm is valued at approximately $105 million
B.The firm is valued at approximately $129 million
C.The debt is valued at approximately $32 million
D.The debt is valued at approximately $68 million
39) Which of the following will increase the present value of an annuity, other things
equal?
A.Increasing the interest rate
B.Decreasing the interest rate
C.Decreasing the number of payments
D.Decreasing the amount of the payment
40) What occurs when the value of a firm’s debt exceeds the value of shareholders’
equity?
A.The firm is bankrupt
B.The firm’s assets have no value
C.A high rate of interest is being paid on the debt
D.The firm is financed more through debt than through equity
41) A firm is considering a project that will generate perpetual cash flows of $50,000
per year beginning next year. The project has the same risk as the firm’s overall
operations. If the firm’s WACC is 12.0%, and its debt-to-equity ratio is 1.33, what is the
most it could pay for the project and still earn its required rate of return?
A.$313,283
B.$375,094
C.$416,667
D.$554,167
42) What APR is being earned on a deposit of $5,000 made 10 years ago today if the
deposit is worth $9,948.94 today? The deposit pays interest semiannually.
A.3.56%
B.6.76%
C.7.00%
D.7.12%
43) You are currently holding a call option on a stock with an exercise price of $80. If
the current stock price is $60, your net proceeds by exercising this option will be:
A.-$20
B.$0
C.$20
D.$60
44) According to the theory of purchasing power parity, exchange rates will adjust so
that differences in:
A.interest rates across countries are offset
B.forward rates across countries are offset
C.expected inflation across countries are offset
D.international Fisher rates are offset
45) The “gold standard” of investment criteria refers to:
A.net present value
B.internal rate of return
C.payback period
D.profitability index
46) What happens to the coupon rate of a bond that pays $80 annually in interest if
interest rates change from 9% to 10%?
A.The coupon rate increases to 10%
B.The coupon rate remains at 9%
C.The coupon rate remains at 8%
D.The coupon rate decreases to 8%
47) LiveBetter can choose between the two following issues:
a. A public issue of $10 million face value of 10-year debt. The interest rate on the debt
would be 8.5% and the debt would be issued at face value. The underwriting spread
would be 1.5% and other expenses would be $80,000.
b. A private placement of $10 million face value of 10-year debt. The interest rate on
the debt would be 9% and the total issuing expenses would be $30,000.
Which deal should LiveBetter choose?
48) How much does each additional sales dollar contribute toward profit for a firm with
$5 million break-even level of revenues and $1.5 million in fixed costs including
depreciation?
A.$0.30
B.$0.33
C.$0.50
D.$0.67
49) A firm has $4 million in total assets and $2.2 million in equity. How much of its
$500,000 capital budget should be debt-financed to retain the same debt-equity ratio?
A.$50,000
B.$225,000
C.$275,000
D.$450,000
50) Which of the following is least likely to explain why entrepreneurs contribute their
personal funds to start-up projects? Their contribution:
A.acts as a signal to venture capitalists
B.repays debt held by the venture capitalist
C.retains a portion of the firm’s equity
D.provides incentive to expend effort
51) Which firm will benefit the most from a lock-box service?
A.A firm that has a large number of suppliers
B.A firm that writes a large number of checks daily
C.A firm that has a geographically dispersed customer base
D.A firm that sells goods to a very few customers
52) Current period depreciation expense is listed:
A.on the balance sheet
B.in the investment section of the cash flow statement
C.on the income statement
D.on neither the balance sheet nor the income statement; it is a noncash expense
53) A firm that follows a “relaxed strategy” toward the total capital requirement will be
a:
A.short-term borrower
B.short-term lender
C.long-term lender
D.long-term borrower
54) What motivation is provided for managers not to follow the relaxed strategy of
long- versus short-term financing?
A.Transaction costs are required to continually obtain financing
B.Short-term investment income is often unattractive
C.Investment opportunities must frequently be ignored
D.Long-term financing has burdensome tax consequences
55) A stock is currently selling for $70 per share and its call option has a $90 exercise
price. What is the lower limit on the value of the call option?
A.- $20
B.0
C.$10
D.$20
56) Unlimited liability is faced by the owners of:
A.corporations
B.partnerships and corporations
C.sole proprietorships and partnerships
D.all forms of business organization
57) If a payment of principal is due in 13 months on a long-term liability, that payment
will now appear as:
A.a current liability
B.long-term debt
C.cash
D.interest expense
58) Discuss the functions conducted by security underwriters.
59) Why would bondholders be willing to pay more for bonds that contain warrants?
60) How are the terms “defensive” and “aggressive” applied to individual stocks or
portfolios?
61) A bank can purchase an ATM (automated teller machine) for $110,000 that has an
estimated life of 6 years. Maintenance over that period will begin at $2,500 annually
and increase at a 10% rate. If the ATM is purchased, the bank will not be required to
hire one additional (human) teller. Including fringe benefits, the teller costs $18,000 per
year, and this amount is expected to increase 5% annually. If the bank’s cost of capital is
10%, which alternative should be selected?
62) A firm reports an ROE of 14%, a leverage ratio of 1.5, an asset turnover of 1.667,
and a profit margin of 9%. Calculate the firm’s ROA and then comment on the ROA in
relation to ROE. What is happening?
63) What information can the financial manager obtain from an aging schedule of
accounts receivable?
64)
How can you measure and interpret the market risk, or beta, of a security?