The difference between the riskiness of debt and equity is relatively constant between
companies, and tends to command an additional risk premium of 3% to 5%.
A rational investor will make an investment only if he or she believes the required
return is equal to or higher than expected return.
Eurodollar transactions take place only in Europe.
A principal dissimilarity between bonds and stocks is the lack of a contractual
agreement to pay dividends to stockholders, whereas bondholders are guaranteed their
interest payment.
Book values reflect the cost of capital already spent. Market values estimate the cost of
capital to be raised in the near future.
Securities analysis is the art and science of selecting investments.
When a call option is out of the money, its intrinsic value is zero but its time premium
may be positive.
In six years, your daughter will be going to college. You wish to have a fund that will
provide her with $10,000 at the end of each of her four years in college. How much
must you deposit today if the money will earn 10 percent in each of the 10 years?
A.$29,744.65
B.$29,783.76
C.$17,878.80
D.$21,651.10
An outlay of $180,000 is expected to yield the following cash flows:
YearNet Cash Flow
1 75,000
2 55,000
3 60,000
4 25,000
5 15,000
6 10,000
The cost of capital is 12 percent. What is the payback period?
A.2 5/6 years
B.2.5 years
C.3 years
D.3 1/3 years
Assume a firm has 20-year, 8% coupon bonds with a current market yield of 10%. With
a combined federal and state corporate tax rate of 40%, the firm’s after-tax cost of debt
is:
A.3.2%
B.4.0%
C.4.8%
D.6.0%
____ allow common stockholders to maintain their proportionate share of ownership.
A.Preemptive Rights
B.Cumulative Voting
C.Proxy Fights
D.Indenture Agreements
Which of the following represents a carrying cost of inventory?
A.Storage expenses
B.Cost of insurance
C.Losses from obsolescence
D.a and b
E.All of the above
A sale of stock between two investors is a ____ market transaction.
A.primary
B.secondary
C.money
D.independent
A recent direct quote for the British pound was $1.5547. The pound’s indirect quote is:
A.£1.5547.
B.$0.6432.
C.£1.1979.
D.£0.6432.
Delta Company has some very exciting prospects in the near future. As a result it is
expected to grow at a rate of 20% for the next year. After that it will grow at 7%
indefinitely. The interest rate is currently 14% and Delta paid a dividend of $2.60
recently. What should Delta sell for today?
A.$44.59
B.$39.45
C.$48.72
D.$41.67
The basic capital budgeting principles involved in determining after-tax incremental
operating cash flows require us to:
A.include sunk costs, but ignore opportunity costs.
B.include opportunity costs, but ignore sunk costs.
C.ignore both opportunity costs and sunk costs.
D.include both opportunity and sunk costs.
Which of the following would cause a decrease in cash?
A.Lengthening the time it takes to collect receivables from 15 to 30 days
B.Selling fixed assets for more than book value
C.An increase in accrued salaries expense
D.Paying suppliers in 60 days versus 45 days