1) Private equity funds tend to focus their investments in situations where promised
returns are very high and the need for funds is brief.
2) The current yield for a bond is constant over time because the coupon rate is fixed.
3) An income statement reports the firm’s revenues and expenses for a specific period of
time such as one year.
4) A company’s capital structure mix is based on the proportion of fixed versus variable
costs in its optimal production process.
5) Budgets should not be used for performance evaluation because there is too much
uncertainty involved and this makes it unfair to the person being evaluated.
6) Most major countries in the world have agreed on fixed exchange rates in order to
facilitate international trade.
7) A share of preferred stock that pays the same annual dividend forever is an example
of a perpetuity.
8) An investor with a required return of 8% for stock A will purchase stock A if the
expected return for stock A is less than or equal to 8%.
9) The primary source of spontaneous financing is accrued taxes.
10) A firm’s weighted average cost of capital is a function of (1) the individual costs of
capital, (2) the capital structure mix, and (3) the level of financing necessary to make
the investment.
11) International expansion often occurs because it is generally easier for firms to
expand the market for their products rather than to develop new products.
12) The sole proprietorship has no legal business structure separate from its owner.
13) In an efficient market, the market value and intrinsic value of a security should be
equal.
14) Which of the following statements is MOST correct concerning a corporation’s
optimal capital structure?
A) The optimal capital structure maximizes the present value of the interest tax shield
B) The optimal capital structure occurs at the point where the market value of the
levered firm is maximized
C) The optimal capital structure minimizes the present value of financial distress costs
and agency costs
D) The optimal capital structure occurs where the present value of the interest tax shield
equals the present value of the firm’s bankruptcy costs
15) A floating lien, chattel mortgage, or terminal warehouse receipt have which of the
following in common?
A) They all pledge accounts receivables as security
B) They have nothing in common
C) They are all unsecured forms of financing
D) They all use inventory to secure a loan
16) Two sisters each open IRAs in 2011 and plan to invest $3,000 per year for the next
30 years. Mary makes her first deposit on January 1, 2011, and will make all future
deposits on the first day of the year. Jane makes her first deposit on December 31, 2011,
and will continue to make her annual deposits on the last day of each year. At the end of
30 years, the difference in the value of the IRAs (rounded to the nearest dollar),
assuming an interest rate of 7% per year, will be
A) $19,837
B) $12,456
C) $6,300
D) $210
17) Project LMK requires an initial outlay of $400,000 and has a profitability index of
1.5 . The project is expected to generate equal annual cash flows over the next twelve
years. The required return for this project is 20%. What is project LMK’s net present
value?
A) $600,000
B) $150,000
C) $120,000
D) $80,000
18) Which of the following statements concerning the constant growth dividend
valuation model is TRUE?
A) The required rate of return must exceed the growth rate
B) The dividend growth rate must be bigger than 8%
C) The growth rate must increase every year
D) The required rate of return must be equal to the growth rate for dividends
19) Your company is considering an investment in one of two mutually exclusive
projects. Project one involves a labor intensive production process. Initial outlay for
Project 1 is $1,495 with expected after tax cash flows of $500 per year in years 1-5 .
Project two involves a capital intensive process, requiring an initial outlay of $6,704.
After tax cash flows for Project 2 are expected to be $2,000 per year for years 1-5 .
Your firm’s discount rate is 10%. If your company is not subject to capital rationing,
which project(s) should you take on?
A) Project 1
B) Project 2
C) Projects 1 and 2
D) Neither project is acceptable
20) A firm’s credit and collection policies usually include
A) terms of sale, quality of customers, and collection of credit sales
B) average collection period, dollar value of aged receivables, and terms of sale
C) terms of sale and collection of credit sales
D) terms of sale, level of credit sales, and collection of credit sales
21) Use the following information to calculate the change in the company’s cash
balance for the year.
A) $145,000
B) $180,000
C) $260,000
D) $365,000
22) The optimal capital structure is the funds mix that will
A) minimize the use of debt
B) achieve an equal proportion of debt, preferred stock, and common equity
C) minimize the firm’s composite cost of capital
D) maximize total leverage
23) Valley Flights, Inc. has a capital structure made up of 40% debt and 60% equity and
a tax rate of 30%. A new issue of $1,000 par bonds maturing in 20 years can be issued
with a coupon of 9% at a price of $1,098.18 with no flotation costs. The firm has no
internal equity available for investment at this time, but can issue new common stock at
a price of $45. The next expected dividend on the stock is $2.70. The dividend for the
firm is expected to grow at a constant annual rate of 5% per year indefinitely. Flotation
costs on new equity will be $7.00 per share. The company has the following
independent investment projects available:
ProjectInitial OutlayIRR
1$100,00010%
2$ 10,0008.5%
3$ 50,00012.5%
Which of the above projects should the company take on?
A) Project 3 only
B) Projects 1 and 2
C) Projects 1 and 3
D) Projects 1, 2 and 3
24) You have just purchased a share of preferred stock for $50.00. The preferred stock
pays an annual dividend of $5.50 per share forever. What is the rate of return on your
investment?
A) 0.055
B) 0.010
C) 0.110
D) 0.220
25) Company K is considering two mutually exclusive projects. The cash flows of the
projects are as follows:
a.Compute the NPV and IRR for the above two projects, assuming a 13% required rate
of return.
b.Discuss the ranking conflict.
c.What decision should be made regarding these two projects?
26) Table 4-2
Drummond Company
Balance Sheet
The return on equity is
A) 19.33%
B) 18.47%
C) 16.66%
D) 15.65%
27) Statutory restrictions on dividend payments include all of the following EXCEPT
A) if liabilities exceed assets
B) if the amount of the dividend exceeds the firm’s retained earnings
C) if the dividend is being paid from capital invested in the firm
D) if, because of the dividend payment, the firm intends to sell new common stock to
fund its capital budget
28) A commitment fee is
A) an amount paid on the unused portion of a loan in a private placement
B) an amount paid by an investment banker to ensure the sale of securities
C) paid by investors to guarantee that a company will borrow from them
D) paid by bondholders to secure the right to convert bonds into common stock
29) Project W requires a net investment of $1,000,000 and has a payback period of 5.6
years. You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,
and Year 3 free cash flow is $100,000 too high. After making the necessary adjustments
A) the payback period for Project W will be longer than 5.6 years
B) the payback period for Project W will be shorter than 5.6 years
C) the IRR of Project W will increase
D) the NPV of Project W will decrease
30) Private placements are
A) limited to debt securities
B) limited to equity securities
C) available for both debt and equity securities, but the market is dominated by equity
issues
D) especially appealing to new, small, and medium-sized companies
31) Payable through drafts
A) provides for effective control over field payments
B) are not legal instruments
C) cannot be cleared through the banking system
D) are a form of commercial paper
32) Alloy Corp. is considering the acquisition of a new processing line. The processor
can be purchased for $4,550,000. It will cost $65,000 to ship and $190,500 to install the
processor. A recently completed feasibility study that was performed at a cost of
$45,000 indicated that the processor would produce a positive NPV. Studies have
shown that employee-training expenses will be $150,000. What is the total investment
in the processing line for capital budgeting purposes?
A) $4,550,000
B) $4,700,000
C) $4,955,500
D) $5,000,500
33) Which of the following statements is MOST correct?
A) If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield
(interest yield) must also exceed its coupon rate
B) If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less
than its maturity value
C) If two bonds have the same maturity, the same yield to maturity, and the same level
of risk, the bonds should sell for the same price regardless of the bond’s coupon rate
D) Answers B and C are correct
34) Increased depreciation expenses affect tax-related cash flows by
A) increasing taxable income, thus increasing taxes
B) decreasing taxable income, thus reducing taxes
C) decreasing taxable income, with no effect on cash flow since depreciation is a
non-cash expense
D) pushing a corporation into a higher tax bracket
35) A firm’s cash position would most likely be helped by
A) delaying payment of accounts payable
B) more liberal credit policies for their customers
C) purchasing land for investment purposes
D) holding larger inventories
36) Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets
of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart’s P/E ratio
is 12, what is the company’s current stock price?
A) $60 per share
B) $96 per share
C) $240 per share
D) $360 per share
37) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%. The equivalent annual annuity amount for project A
is
A) $12,989
B) $13,357
C) $15,024
D) $18,532
38) One theory that is useful states that the forward premium or discount should be
equal and opposite in sign to the difference in the national interest rates for securities of
the same maturity. This theory is known as
A) the forward rate theory
B) the interest rate parity theory
C) the exchange rate theory
D) the covered interest arbitrage theory
39) Cyberco Corporation has 5 million shares of stock outstanding. Cyberco’s after-tax
profits are $15 million and the corporation’s stock is selling at a price-earnings multiple
of 10, for a stock price of $30 per share. Cyberco management issues a 25% stock
dividend.
a.Calculate Cyberco’s earnings per share before and after the stock dividend.
b.Suppose an investor owns 100 shares of Cyberco before the stock dividend. Use the
price earnings multiple to estimate the value of the investor’s holdings both before and
after the dividend.
c.Comment on the results of the stock dividend for current shareholders.
40) The present value of $1,000 to be received in 5 years is ________ if the discount
rate is 12.78%.
A) $368
B) $494
C) $548
D) $687
41) The following information pertains to the Classic Burger Restaurant chain:
a.If sales increase by 10%, what will be the new level of EPS if the firm has 100,000
shares outstanding?
b.What is the percentage increase in EPS? Explain the difference between the
percentage increase in sales and the percentage increase in EPS.
42) The effective annual cost of not taking advantage of the 1/10, net 60 terms offered
by a supplier is
A) 1.50%
B) 5.37%
C) 6.69%
D) 7.27%
43) Alice Kitchen’s, Inc. bonds have a 10% coupon rate with semiannual coupon
payments. They have 12 and 1/2 years to maturity and a par value of $1,000. Compute
the value of Alice’s bonds if investors’ required rate of return is 8%.
A) $1,156.22
B) $1,239.33
C) $1,137.10
D) $1,084.44
44) What is the net present value’s assumption about how cash flows are reinvested?
A) They are reinvested at the IRR
B) They are reinvested at the APR
C) They are reinvested at the firm’s discount rate
D) They are reinvested only at the end of the project
45) TellTRUE Corporation has preferred stock which paid an annual dividend in 2009
of $5 per share. TellTRUE also has common stock which paid a dividend in 2009 of $5.
Which of the following statements is MOST correct concerning TellTRUE stock?
A) The price of the preferred stock should equal the price of the common stock since
the dividends are the same
B) The price of the common stock could be higher than the price of the preferred stock
if the common stock dividends are expected to grow in the future
C) The price of the preferred stock is expected to be higher than the price of the
common stock because the required return on preferred stock is higher than the required
return on common stock
D) If the required return on the preferred stock is the same as the required return on the
common stock, then the price of preferred stock should equal the price of the common
stock if markets are efficient
46) A firm’s optimal capital structure occurs where?
A) EPS are maximized, and WACC is minimized
B) Stock price is maximized, and EPS are maximized
C) Stock price is maximized, and WACC is maximized
D) WACC is minimized, and stock price is maximized
47) Which of the following might occur when a firm increases its collection efforts:
A) an increase in inventory costs
B) an increase in bad debts
C) an increase in sales
D) a decline in accounts payable