1) The strategic planning portion of the capital budgeting process is essentially a
“bottom-up” process.
2) The value of the target firm’s bonds goes down when a leveraged buyout is
announced.
3) While control of large public companies in the United States is exercised through the
board of directors and pressure from the stock market, in many other countries the stock
market is less important and control shifts to major stockholders, typically banks and
other companies.
4) Increasing leverage will always act to increase a firm’s ROE.
5) Unlike options, a futures contract binds the buyer to buy the commodity at a fixed
price.
6) For a given amount, the lower the discount rate, the less the present value.
7) Even after relaxing the MM assumption of no taxes, it can be observed that
restructuring does not affect the value of the firm.
8) There are two costs of debt finance. The explicit cost of debt is the rate of interest
that bondholders demand. But there is also an implicit cost, because overborrowing
increases the required rate of return to equity.
9) Sunk costs influence capital budgeting decisions only when the sunk costs exceed
future cash inflows.
10) A financial intermediary invests in financial assets rather than real assets.
11) The nominal interest rate is the difference between real interest rate and inflation.
12) Corporate dividends are less volatile than corporate earnings.
13) A general cash offer is necessary when issuing a private placement.
14) Which of the following statements is incorrect concerning the equity component of
the WACC?
A.The value of retained earnings is not included
B.Market values should be used in the calculations
C.Preferred equity has a separate component
D.There is a tax shield such as with debt
15) The optimal capital structure is met when:
A.additional borrowing results in lower financial distress costs
B.additional borrowing is offset by the interest tax shield
C.the tax savings from additional leverage are offset by the costs of distress
D.the present value of the tax shield is greater than the value of an all-equity-financed
firm
16) How much time must be saved to justify a lock-box system that processes 350
checks per day at an average amount of $400 per check if the system will cost $20,000
annually and interest rates average 8%?
A.0.56 days
B.1.79 days
C.2.14 days
D.7.00 days
17) The terminal value of a share of stock:
A.is similar to the maturity value of a bond
B.refers to the share value at the end of the investor’s holding period
C.is the value received by investors upon liquidation of the firm
D.is the price for shares traded through a dealers’ market
18) Market interest rates have risen substantially in the 5 years since an investor
purchased Treasury bonds that were offering a 7% return. If the investor sells now he or
she is likely to receive:
A.greater than a 7% total return
B.less than a 7% total return
C.a 7% total rate of return
D.a 7% nominal return but less than a 7% real return
19) The variance of an investment’s returns is a measure of the:
A.volatility of the rates of return
B.probability of a negative return
C.historic return over long periods
D.average value of the investment
20) The Canine Kennel uses 600 cases of dog food annually and orders 40 cases in each
shipment. If the annual carrying cost per case (due to opportunity costs and extremely
large dogs) is $5, what is the total annual carrying cost for dog food?
A.$100
B.$196
C.$200
D.$250
21) When the level of fixed costs is decreased, the break-even level of revenues:
A.will automatically decrease
B.will automatically increase
C.may or may not be changed, depending on variable costs
D.will remain unchanged, because fixed costs cannot be altered
22) A primary purpose of restricting the investment of idle cash balances to money
market instruments is to:
A.obtain government guarantees on the investment
B.minimize transaction costs
C.carry a minimal amount of interest-rate risk
D.have a continual market for selling the investment
23) What is the net effect on a firm’s working capital if a new project requires $30,000
increase in inventory, $10,000 increase in accounts receivable, $35,000 increase in
machinery, and a $20,000 increase in accounts payable?
A.-$5,000
B.+$10,000
C.+$20,000
D.+$55,000
24) The stock in your portfolio was selling for $40 per share yesterday, but has today
declared a three-for-two split. Which of the following statements seems to be true?
A.There will be two-thirds as many shares outstanding, and they will sell for $60.00
each
B.There will be four times as many shares outstanding, and they will sell for $160.00
each
C.There will be 50% more shares outstanding, and they will sell for $26.67 each
D.There will be one-and-one-half times as many shares outstanding, and they will sell
for $60.00 each
25) What is the cash conversion cycle for a firm with $3 million average inventories,
$1.5 million average accounts payable, a receivables period of 40 days, and an annual
cost of goods sold of $18 million?
A.14.59 days
B.46.25 days
C.70.41 days
D.136.25 days
26) The inventory turnover ratio compares:
A.current assets to average inventory
B.cost of goods sold to average inventory
C.average receivables to average inventory
D.average assets to average inventory
27) If investors can consistently profit from thorough reading of published financial
information, then the market can, at best, be characterized as:
A.weak-form efficient
B.semistrong-form efficient
C.strong-form efficient
D.all of these
28) An increase in a firm’s financial leverage will:
A.increase the variability in earnings per share
B.always reduce the operating risk of the firm
C.increase the value of the firm in a non-MM world
D.increase the WACC
29) One corporate activity that is specifically reserved for the board of directors is the:
A.declaration of dividends
B.custody of records
C.preparation of budgets
D.day-to-day operation of the firm
30) Sole proprietorships resolve the issue of agency problems by:
A.avoiding excessive expense accounts
B.discharging those who violate the rules
C.allowing owners to share the cost of their actions with others
D.forcing owners to bear the full cost of their actions
31) A company can pay for its expansion in all the following ways except:
A.by using the earnings generated from its sale of obsolete equipment
B.by persuading the director’s mother to make a personal loan to the company
C.by purchasing bonds in the secondary market
D.by selling stock certificates for a new subsidiary
32) A conglomerate merger occurs when:
A.both partners are large in size
B.large synergies are expected to develop
C.firms from different industries merge
D.both management teams remain intact after the merger
33) What is the annual cost of goods for a firm, with accounts payable period of 35 days
and average accounts payable of $600,000.
A.$5,753,425
B.$6,171,429
C.$6,257,143
D.$17,142,857
34) How much would you expect to receive for a nominal interest rate in Holland if
funds can be invested in the United States at a rate of 7% when inflation is expected to
be 4% in the United States and 8% in Holland?
A.5.19%
B.7.93%
C.9.08%
D.11.11%
35) What is the present value at a 10% discount rate of the depreciation tax shield for a
firm in the 35% tax bracket that purchases a $50,000 asset being depreciated
straight-line over a 5-year life to a zero salvage value?
A.$10,866
B.$13,268
C.$17,500
D.$37,908
36) What is the expected dividend to be paid in 3 years if yesterday’s dividend was
$6.00, dividends are expected to grow at a constant 6% annual rate, and the firm has a
10% expected return?
A.$6.75
B.$7.15
C.$7.80
D.$9.37
37) Your firm, which operates in the United States, has a contractual payment of £1
million due in 3 months. Which of the following methods would be considered
speculative regarding your exchange rate risk?
A.Buy 1 million pounds now at the current spot rate
B.Buy 1 million pounds in 3 months at the current spot rate
C.Contract forward to buy 1 million pounds in 3 months
D.Borrow dollars, convert to pounds at spot, and invest for 3 months
38) 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. What is the
total cost (direct expenses plus underpricing cost)?
A.$81 million
B.$91 million
C.$101 million
D.$111 million
39) Why might a bond’s current yield offer an incomplete idea of what return the
investor is receiving?
40) Calculate the nominal return, real return, and risk premium for the following
common stock investment:
41) Why should financial managers be concerned about double taxation of corporate
earnings?
42) How should the cash flows of a proposed new project be calculated?
43) Calculate the NPV for the following capital budgeting proposal: $100,000 initial
cost, to be depreciated straight-line over 5 years to an expected salvage value of $5,000,
35% tax rate, $45,000 additional annual revenues, $15,000 additional annual expense,
$8,000 additional investment in working capital, and 11% cost of capital.
44) Suppose the interest rate on 1-year loans in the United States is 5% while in the
United Kingdom the interest rate is 6%. The spot exchange rate is $1.55/£ and the
forward rate is $1.54/£. In what country would you choose to borrow? To lend? Can
you profit from this situation?
