1) Historically, price appreciation, or capital gains yield, has accounted for a greater
portion of returns on common stocks than dividend payments.
2) The goal of profit maximization ignores the risk of financial decisions
3) Both the profitability index (PI) and net present value (NPV) are based on the present
value of all future free cash flows, but the PI is a relative measure while the NPV is an
absolute measure of a project’s desirability.
4) The difference between the price the corporation gets and the public offering price is
called the broker-dealer spread.
5) Companies that sell basic necessities face the highest levels of business risk because
consumers will price shop aggressively for items they purchase on a regular basis.
6) Seasoned secondary offerings occur in the secondary market.
7) The expected rate of return from an investment is equal to the expected cash flows
divided by the initial investment.
8) Financial leverage is typically more under the control of management than is
operating leverage because the nature of the product often dictates the type of
production process needed.
9) Interest payments on a loan obtained specifically to fund a new project should be
considered an incremental cash flow for the new project when determining the
accept/reject decision.
10) The money market includes transactions in short-term financial instruments.
11) The three major components responsible for variation in a company’s income
stream are business risk, operating risk, and financial risk.
12) Three basic factors that determine which sources of short-term financing a firm uses
are the effective cost of financing, the availability of credit, and the influence of the use
of a particular credit source on the cost and availability of other sources of financing.
13) When considering taxes, most investors prefer capital gains over dividend income.
14) The payback period ignores the time value of money and therefore should not be
used as a screening device for the selection of capital budgeting projects.
15) A rational investor would prefer to receive $1,200 today rather than $100 per month
for 12 months.
16) Operating return on assets is equal to the operating profit margin times total asset
turnover.
17) According to the “bird-in-the-hand” dividend theory, the required return for a stock
that pays its entire return from dividends is higher than the required return for a
high-growth stock that pays no dividend.
18) EveningFall, Inc. pays a quarterly dividend of $3.40 per share. Which of the
following statements is most accurate concerning which shareholders will receive the
dividend payment?
A) The shareholders who own the stock on the date the dividend is declared will receive
the dividend, even if they sell their stock before the dividend checks are mailed
B) The shareholders who are identified as owning the stock on the record date will
receive the dividend, even if they sell their stock before the dividend checks are mailed
C) The shareholders who own the stock the day the dividend is paid will receive the
dividend
D) All shareholders who own the stock on the record date, but sell the stock before the
dividend checks are mailed, forfeit their right to receive the dividend and the money
reverts back to the corporation
19) A firm’s cash position would most likely be hurt by
A) decreasing excess inventory
B) establishing stricter (shorter) credit terms
C) retiring outstanding debt
D) increasing the net profit margin
20) Table 4-3
Emery Corporation
Based on the information in Table 4-3, the current and acid-test ratios are, respectively
A) 2.37 and 1.39
B) 2.37 and 1.27
C) 2.18 and 1.39
D) 2.18 and 1.27
21) Which of the following forms of business organizations provide limited liability to
all its owners?
A) general partnership
B) limited partnership
C) corporation
D) both B and C
22) A company has preferred stock with a current market price of $18 per share. The
preferred stock pays an annual dividend of 4% based on a par value of $100. Flotation
costs associated with the sale of preferred stock equal $1.50 per share. The company’s
marginal tax rate is 40%. Therefore, the cost of preferred stock is
A) 28.80%
B) 24.24%
C) 22.22%
D) 14.55%
23) An investor currently holds the following portfolio:
Amount
Invested
4,000 shares of Stock H$8,000Beta = 1.3
7,500 shares of Stock I$24,000Beta = 1.8
12,500 shares of Stock J$48,000Beta = 2.2
The beta for the portfolio is
A) 1.99
B) 1.77
C) 1.45
D) 1.27
24) Bankers Corp has a very conservative Beta of .7, while Biotech Corp has a Beta of
2.1. Given that the T-bill rate is 5%, and the market is expected to return 15%, what is
the expected return of Bankers Corp, Biotech Corp, and a portfolio composed of 60%
of Bankers Corp and 40% Biotech Corp?
a. Solve this problem first by weighting the Betas to calculate a portfolio Beta, and then
using CAPM to calculate the portfolio expected return.
b. Then solve the problem again by calculating the expected return of each asset and
weighting those returns to calculate the portfolio expected return.
c. Why is Biotech Corp’s expected return NOT three times that of Bankers Corp?
25) Rawhide Outfitters had projected its sales for the first six months of 2012 to be as
follows:
Jan.$ 50,000April$180,000
Feb.$ 60,000May$240,000
Mar.$100,000June$240,000
Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior
to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the
month following the sale, and the remaining 20% in the second month following the
sale. Total other cash expenses are $40,000/month. The company’s cash balance as of
March 1st, 2012 is projected to be $40,000, and the company wants to maintain a
minimum cash balance of $15,000. Excess cash will be used to retire short-term
borrowing (if any exists). Fielding has no short-term borrowing as of March 1st, 2012.
Assume that the interest rate on short-term borrowing is 1% per month. How much
short term financing is needed by March 30, 2012?
A) $110,000
B) $15,000
C) $70,000
D) $85,000
26) Donner, Inc. will finance a proposed investment by issuing new securities while
maintaining its optimal capital structure of 60% debt and 40% equity. The firm can
issue bonds at a price of $950.00 before $15 flotation costs. The 10-year bonds will
have an annual coupon rate of 8% and a face value of $1,000. The company can issue
new equity at a before-tax cost of 16% and its marginal tax rate is 34%. What is the
appropriate cost of capital to use in analyzing this project?
A) 3.63%
B) 8.77%
C) 9.97%
D) 11.81%
27) Crenshaw Inc. has a $400,000 line of credit with a local bank. The bank requires a
compensating balance of 10% of the loan and extends credit to Crenshaw at 1% over
the current prime rate. Crenshaw needs the use of $200,000 for the three-month period.
They currently have no deposits with the lending bank.
a.What will the effective annual cost of this credit be? (Assume a 360-day year and a
9% prime rate.)
b.Using the above information, what would be the effective interest rate if the firm
discounted the interest on the loan?
28) An aging schedule of accounts receivable aids the financial manager in determining
A) the amount of receivables that are past due
B) the average age of the customers
C) the receivables turnover
D) the average length of the discount period
29) The direct quote in New York is .015 dollar per Pakistani Rupee. The direct quote in
Pakistan is 60 rupees per dollar. This imbalance in rates can be corrected by arbitrage. A
trader will ________ rupees in New York and ________ rupees in Pakistan, causing the
direct quote in New York to ________.
A) buy; sell; increase
B) buy; sell; decrease
C) sell; buy; decrease
D) sell; buy; increase
30) Jimmy just bought a new Ford SUV for his business. The price of the vehicle was
$40,000. Jimmy made a $5,000 down payment and took out an amortized loan for the
rest. The car dealership made the loan at 8% interest compounded monthly for five
years. He is to pay back the principal and interest in equal monthly installments
beginning one month from now. Determine the amount of Jimmy’s monthly payment.
A) $634.56
B) $709.67
C) $745.87
D) $809.33
31) You decide you want your child to be a millionaire. You have a son today and you
deposit $10,000 in an investment account that earns 7% per year. The money in the
account will be distributed to your son whenever the total reaches $1,500,000. How old
will your son be when he gets the money (rounded to the nearest year)?
A) 82 years
B) 74 years
C) 60 years
D) 49 years
32) Minority shareholders have a greater chance of electing a member to the board of
directors if the company uses
A) cumulative voting
B) majority voting
C) minority voting
D) proxy voting
33) Funds that are available in a company’s bank account until its payment check has
cleared refers to
A) mail float
B) processing float
C) transit float
D) disbursing float
34) Rogue Industries reported the following items for the current year: Sales =
$3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000;
Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses
= $80,000; and Taxes = $300,000. Rogue’s operating income is equal to
A) $770,000
B) $1,070,000
C) $1,100,000
D) $1,500,000
35) You are given the following probability distribution for XYZ common stock’s
returns during the next year, which are assumed to be normally distributed. Show all
work below, and complete the following:
a. Calculate the standard deviation of the returns, and round to the nearest one-half
percent.
b. Draw a graphical representation of XYZ’s normal distribution below (ye old
bell-shaped curve). LABEL THE AXES OF THE GRAPH OR THE FOLLOWING
RESULTS WILL BE MEANINGLESS. Using your result in part A for the standard
deviation (rounded to the nearest one-half percent) explain and indicate on the graph,
the probability that XYZ will return more than 13.5%, assuming a normal distribution.
36) All of the following affect the value of a share of common stock EXCEPT
A) the dollar amount of the dividends
B) investors’ required rate of return
C) the future growth rate for dividends
D) the stock and paid-in-capital amounts on the balance sheet
37) Which of the following cash flows are NOT considered in the calculation of the
initial outlay for a capital investment proposal?
A) increase in accounts receivable
B) cost of issuing new bonds if the project is financed by a new bond issue
C) installation costs
D) None of the aboveall are considered
38) Based on the information in Table 4-1, the OROA is
A) 24.73%
B) 39.50%
C) 46.54%
D) 52.78%
39) When reviewing the net present profile for a project
A) the higher the discount rate, the higher the NPV
B) the higher the discount rate, the higher the IRR
C) the IRR will always be a point on the horizontal axis line where NPV = 0
D) the IRR will always be a point on the horizontal axis equal to the required return
40) Investment banking firms offer to facilitate the sale of securities to the public in a
variety of ways. Which of the following methods guarantees the corporation with a
pre-determined price for the securities?
A) a best efforts basis
B) a commission basis
C) a competitive bid
D) an underwriting
41) SteelCo Production, Inc. is considering the use of a lock-box collection system.
SteelCo’s average check receipt is $1,350. The company invests excess cash in money
market certificates and receives an average of 3.5% annual interest. The lock-box
system will speed up SteelCo’s collections by 2.5 days. What is the maximum per check
processing cost that SteelCo should be willing to pay for the lock-box system?
A) $0.1871
B) $0.2987
C) $0.3236
D) $0.4519
42) Marble Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The
return on the market portfolio is 15% and the risk free rate is 4%. What is the risk
premium on the market?
A) 5%
B) 6%
C) 9.00%
D) 11%
43) Distant Thunder, Inc. paid a dividend of $5.00 per share on its common stock
yesterday. Dividends are expected to grow at a constant rate of 10% for the next two
years, at which point the dividends will begin to grow at a constant rate indefinitely. If
the stock is selling for $50 today and the required return is 15%, what it the expected
annual dividend growth rate after year two?
A) 3.365%
B) 3.878%
C) 4.556%
D) 5.000%
44) You hold a portfolio made up of the following stocks:
Investment ValueBeta
Stock L$8,0002.0
Stock M$18,0001.5
Stock N$14,000.4
If the market’s expected return is 14%, and the risk free rate of return is 5%, what is the
expected return of the portfolio?
A) 17.010%
B) 16.700%
C) 15.935%
D) 14.698%
45) What was the average annual rate of return on common stocks of small firms during
the period 1926 to 2011?
A) 15.4%
B) 18.6%
C) 11.9%
D) 9.5%
46) What is the value of a bond that has a par value of $1,000, a coupon of $120
(annually), and matures in 10 years? Assume a required rate of return of 7.02%.
A) $1,198.45
B) $1,200.78
C) $1,284.38
D) $1,349.45
47) The final approval of a dividend payment comes from
A) the controller
B) the president of the company
C) the board of directors
D) It is a joint decision requiring approval from all of the above
48) What is the present value of an annuity of $4,000 received at the beginning of each
year for the next eight years? The first payment will be received today, and the discount
rate is 9% (round to nearest $1).
A) $36,288
B) $35,712
C) $25,699
D) $24,132
49) Determine the effective annualized cost of forgoing the trade discount on terms 1/20
net 45.
A) 14.55%
B) 15.24%
C) 16.780%
D) 20.69%
50) What is the primary advantage of a firm that is able to issue commercial paper to
finance its short-term assets?
A) Commercial paper provides greater flexibility in terms of repayment
B) Interest rates on commercial paper are generally lower than rates on bank loans
C) Commercial paper does not need to be repaid
D) Commercial paper is guaranteed by the Federal Government
51) Assume that you expect to hold a $20,000 investment for one year. It is forecasted
to have a year end value of $21,000 with a 30% probability; a year end value of
$24,000 with a 45% probability; and a year end value of $30,000 with a 25%
probability. What is the standard deviation of the holding period return for this
investment?
A) 12.06%
B) 14.36%
C) 16.36%
D) 33.45%
52) A small biotechnology research corporation has been experiencing losses for the
first three years of its existence, and thus has a negative balance in retained earnings.
The corporation’s stock price, however, is $1 per share. Which of the following
statements is MOST correct?
A) Investors are irrational to pay $1 per share when earnings per share have been
negative for three years
B) Investors believe the stock is worth $1 per share because future earnings (and cash
flows) are expected to be positive
C) The corporation’s accountants must have made a mistake because retained earnings
may not be negative
D) The required return on the stock will be small because the company has very few
assets
53) If we are able to fully diversify, what is the appropriate measure of risk to use?
A) expected return
B) standard deviation
C) beta
D) risk-free rate of return