1) Sales of consumer durable goods, such as appliances, are more sensitive to swings in
the business cycle, and therefore companies in these industries face a higher level of
operating risk.
2) Long-term bonds have greater interest rate risk than shorter-term bonds.
3) A saucer-shaped or U-shaped weighted average cost of capital curve results from the
tax deductibility of interest, which results in the downward slope, followed by the
recognition of potential financial distress costs, that cause the upward slope as the
amount of debt ratio increases.
4) An EBIT-EPS analysis allows the decision maker to visualize the impact of different
financing plans on EPS over a range of EBIT levels.
5) Corporations distribute cash back to their owners (stockholders) either as cash
dividends or by repurchasing shares of stock in the open market.
6) An income statement reports a firm’s cumulative revenues and expenses from the
inception of the firm through the income statement date.
7) Financing activities have no impact on the income statement, but rather are reflected
in changes in long-term debt and short-term debt on the balance sheet.
8) Investor A owns 10% of the common stock of IDE Corporation. After IDE completes
a 2-for-1 stock split, Investor A will own 20% of the common stock of the corporation.
9) The industry in which a firm operates has relatively little effect on the relative
amounts of transaction cash held.
10) The EOQ model assumes constant demand and constant unit price.
11) Issuing new short-term bonds to finance an expansion is an example of spontaneous
financing.
12) The YLD% shown in Wall Street Journal stock quotes stands for the stock’s
dividend yield and is calculated by dividing the amount of the dividend by the stock’s
opening price on the first day of the year.
13) Preferred stock is referred to as a hybrid security because it has many
characteristics of both common stock and bonds.
14) When solving time value of money problems using Excel, the type = 0 variable
means payments are made at the end of each period, and the type = 1 variable means
payments are made at the beginning of each period.
15) Under cumulative voting a 10% shareholder will likely be able to elect 10% of the
board of directors.
16) The problem with the constant dividend payout ratio is
A) investors may come to expect a specified amount.
B) the dollar amount of the dividend fluctuates from year to year.
C) management is reluctant to cut the dividend even if there are low profits that year.
D) management cannot decrease the dividend when times are tough.
17) In what way does a cash budget provide management with better information about
financing requirements than a pro forma balance sheet?
A) A pro forma cash budget gives greater details about the depreciation of fixed assets
B) A pro forma cash budget not only delineates the financing that is needed but it also
pinpoints in greater detail when the financing is needed
C) A pro forma cash budget utilizes superior methods in determining a firm’s income
tax liability for the planned period
D) A pro forma cash budget does not offer better information to management regarding
financing than a pro forma balance sheet
18) During the past year the growth corporation increased its sales from $1,000,000 to
$2,000,000 and its EBIT from $250,000 to $400,000. The result of this growth will be
A) a higher operating profit margin and higher net income
B) a lower operating profit margin and lower net income
C) a lower operating profit margin and higher net income
D) a higher P/E ratio
19) While Rogue Corporation has been in business for over 50 years, newly developed
products pushed the firm’s year-over-year growth rate to 35% during the latest three
years. The firm is proud of its history of paying dividends, but the vigorous recent
growth of the firm has left it cash challenged. Which of the following
policies/procedures would you consider best under the circumstances?
A) Borrow long-term to pay the current dividend.
B) Look seriously for a merger partner.
C) Enter into a long-term stock repurchase program.
D) Substitute a stock dividend for the current cash dividend.
20) If the variables in the EOQ inventory model are defined as: S = total units
demanded during the planning period, O = ordering costs per order, C = carrying costs
per unit and Q = inventory order size in units, then the average level of inventory which
a company should have during the planning period is
A) 2/3 Q
B) 1/2 Q
C) SO/C
D) 1/2 S
21) If you were to use the standard deviation as a measure of investment risk, which of
the following has historically been the least risky investment?
A) common stock of large firms
B) U.S. Treasury bills
C) common stock of small firms
D) long-term government bonds
22) Which of the following is TRUE if a firm wishes to collect its accounts faster by
imposing stricter credit terms on its customers?
A) The firm’s average collection period is likely to fall
B) The firm’s accounts receivable turnover might rise
C) The firm’s sales might decrease
D) all of the above
23) Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a
beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium
increases, then
A) the required return on stock B will increase more than the required return on stock A
B) the required returns on stocks A and B will both increase by the same amount
C) the required returns on stocks A and B will remain the same
D) the required return on stock A will increase more than the required return on stock B
24) Your company is considering the replacement of an old delivery van with a new one
that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The
old van is being depreciated using the simplified straight-line method over a useful life
of 8 years. The old van could be sold today for $7,000. The new van has an invoice
price of $80,000, and it will cost $6,000 to modify the van to carry the company’s
products. Cost savings from use of the new van are expected to be $28,000 per year for
5 years, at which time the van will be sold for its estimated salvage value of $18,000.
The new van will be depreciated using the simplified straight-line method over its
5-year useful life. The company’s tax rate is 35%. Working capital is expected to
increase by $5,000 at the inception of the project, but this amount will be recaptured at
the end of year five. What is the initial outlay required to fund this replacement project?
A) $81,200
B) $78,600
C) $74,500
D) $73,580
25) All of the following are criticisms of the payback period criterion EXCEPT
A) time value of money is not accounted for
B) cash flows occurring after the payback are ignored
C) it deals with accounting profits as opposed to cash flows
D) none of the above; they are all criticisms of the payback period criteria
26) Of the following, which differs in meaning from the other three?
A) systematic risk
B) market risk
C) undiversifiable risk
D) asset-unique risk
27) Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a
line of credit with a bank that allows the company to borrow funds with an 8% interest
rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds
on deposit with the bank and will need the loan to cover the compensating balance as
well as their other financing needs. What will be the annual percentage rate, or APR, for
this financing?
A) 10.00%
B) 12.12%
C) 10.67%
D) 13.33%
28) Beginning with an investment in one company’s securities, as we add securities of
other companies to our portfolio, which type of risk declines?
A) systematic risk
B) market risk
C) non-diversifiable risk
D) unsystematic risk
29) QuadCity Manufacturing, Inc. reported the following items: Sales = $6,000,000;
Variable Costs of Production = $1,500,000; Variable Selling and Administrative
Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal
Tax Rate =35%. QuadCity’s break-even point in sales dollars is
A) $2,050,633
B) $2,197,500
C) $2,438,750
D) $2,785,000
30) Which of the following should be included in the initial outlay?
A) taxable gain on the sale of old equipment being replaced
B) first year depreciation expense on any new equipment purchased
C) preexisting firm overhead reallocated to the new project
D) increased investment in inventory and accounts receivable
31) You discover an antique in your attic that you purchased at an estate sale 10 years
ago for $400. You auction it on eBay and receive $8,000 for your item. What annual
rate of return did you earn?
A) 200.00%
B) 34.93%
C) 30.47%
D) 20.00%
32) Table 4-2
Drummond Company
Balance Sheet
The average collection period is
A) 70 days
B) 81 days
C) 89 days
D) 127 days
33) The 30-day forward exchange rate is .01073033 dollars per yen. If this forward rate
represents a per year discount of 2.5% from the current spot rate, what is the current
spot exchange rate?
A) .01073033 dollars per yen
B) .01257754 dollars per yen
C) .01329684 dollars per yen
D) .01093833 dollars per yen
34) A financial manager is evaluating a project which is expected to generate profits of
$100,000 per year for the next 10 years. The project should be accepted if
A) the cost of the project is less than $1,000,000
B) the cost of the project is less than the present value of $100,000 per year for 10 years
C) this project’s expected profits are higher than any other projects the corporation has
available
D) the present value of the project’s cash inflows exceeds the present value of the
project’s cash outflows
35) Redrock Inc. is a household products firm that is considering developing a new
detergent. In evaluating whether to go ahead with the new detergent project, which of
the following statements is MOST correct?
A) The company will produce the detergent in a building that they already own. The
cost of the building is therefore zero and should be excluded from the analysis
B) The company will need to use some equipment that it could have leased to another
company. This equipment lease could have generated $200,000 per year in after-tax
income. The $200,000 should be excluded because the equipment can no longer be
leased
C) The company will need to hire 10 new workers whose salaries and benefits will total
$400,000 per year. Labor costs are not part of capital budgeting and should be excluded
D) The company will produce the detergent in a building that it renovated 2 years ago
for $300,000. The $300,000 should be excluded from the analysis
36) You are thinking of buying a craft emporium. It is expected to generate cash flows
of $30,000 per year in years 1 through 5, and $40,000 per year in years 6 through 10 . If
the appropriate discount rate is 8%, what amount are you willing to pay for the
emporium?
A) $135,288
B) $167,943
C) $215,048
D) $228,476
37) Investors want a return that satisfies the following expectations:
A) A return for delaying consumption
B) An additional return for taking on risk
C) An additional return for accepting dividends rather than capital gains
D) Both A and B
38) A U.S.-based multinational corporation has 100% owned subsidiary in Argentina.
The subsidiary operates only domestically, that is, all transactions occur within
Argentina. Therefore, the U.S. multinational corporation
A) is exposed to translation risk only
B) is not exposed to exchange rate risk because the subsidiary operates 100%
domestically
C) is exposed to both translation exposure and economic exposure
D) is most concerned with transactions exposure
39) In an efficient securities market the market value of a security is equal to
A) its liquidation value
B) its book value
C) its intrinsic value
D) par value
40) Which of the following accounts does NOT belong on the asset side of a balance
sheet?
A) accounts receivable
B) accumulated depreciation
C) cash
D) accruals
41) It is January 1st and Darwin Davis has just established an IRA (Individual
Retirement Account). Darwin will put $1000 into the account on December 31st of this
year and at the end of each year for the following 39 years (40 years total). How much
money will Darwin have in his account at the end of the 40th year? Assume that the
account pays 12% interest compounded annually and round to nearest $1000.
A) $93,000
B) $766,000
C) $767,000
D) $850,000
42) You are considering an investment in a AAA-rated U.S. corporate bond but you are
not sure what rate of interest it should pay. Assume that the real risk-free rate of interest
is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the
default risk premium for AAA-rated corporate bonds is 3.5%. What rate of interest
should the U.S. corporate bond pay?
A) 8.5%
B) 6.0%
C) 5.0%
D) 2.5%
43) You are considering buying some stock in Continental Grain. Which of the
following are examples of non-diversifiable risks?
I.Risk resulting from a general decline in the stock market.
II.Risk resulting from a possible increase in income taxes.
III.Risk resulting from an explosion in a grain elevator owned by Continental.
IV.Risk resulting from a pending lawsuit against Continental.
A) I and II
B) III and IV
C) I only
D) II, III, and IV
44) The market value of a leveraged firm is equal to the market value of an unleveraged
firm
A) plus the present value of tax shields minus the present value of financial distress
costs plus the present value of agency costs
B) plus the present value of tax shields plus the present value of financial distress costs
plus the present value of agency costs
C) minus the present value of tax shields minus the present value of financial distress
costs minus the present value of agency costs
D) plus the present value of tax shields minus the present value of financial distress
costs minus the present value of agency costs
45) What was the average annual rate of return on 3-month U.S. Treasury bills during
the period 1987 to 2011?
A) 2.15%
B) 4.23%
C) 3.85%
D) 5.68%
46) Which of the following investments is clearly preferred to the others for an investor
who is not holding a well-diversified portfolio?
Investment
A18%20%
B20%20%
C20%22%
A) Investment A
B) Investment B
C) Investment C
D) Cannot be determined without information regarding the risk-free rate of return
47) Backford Company just paid a dividend yesterday of $2.25 per share. The
company’s stock is currently selling for $60 per share, and the required rate of return on
Backford Company stock is 16%. What is the growth rate expected for Backford
Company dividends assuming constant growth?
A) 9.47%
B) 9.89%
C) 10.87%
D) 11.81%
48) 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 profit margin is equal to
A) 25.67%
B) 35.67%
C) 36.67%
D) 50.00%
49) Rural Hydroponics has total equity of $560,000; sales of $2,250,000; current assets
of $700,000; and total liabilities of $435,000. What is Rural Hydroponics’ total asset
turnover?
A) 4.02
B) 3.21
C) 2.26
D) 5.51
50) Kohler Manufacturing typically achieves one of three production levels in any
given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds
of steel. In tracking some of its costs, Kohler’s controller discovered one cost that was
$10 per pound at a production level of 8 million pounds, $8 per pound at a production
level of 10 million pounds, and $5 per pound at a production level of 16 million
pounds. This is an example of a
A) variable cost
B) fixed cost
C) semivariable cost
D) semifixed cost
51) Stock W has the following returns for various states of the economy:
State of the EconomyProbabilityStock W’s Return
Recession10%-30%
Below Average20%-2%
Average40%10%
Above Average20%18%
Boom10%40%
Stock W’s standard deviation of returns is
A) 10%
B) 14%
C) 17%
D) 20%
52) Assume that Plavor Brands, Inc. has 10,000,000 common shares outstanding that
have a par value of $2 per share. The stock is currently trading for $30 per share. The
firm reported a net profit after-tax of $25,000,000. All else equal, what will happen to
earnings per share if the company issues a 10% stock dividend?
A) Earnings per share will remain the same since a stock dividend does not create an
expense.
B) Earnings per share will increase because the dividend increases the value of the
company.
C) Earnings per share will decrease because the number of shares outstanding will go
up.
D) The impact cannot be determined without additional information on the new price
per share.
53) Use the “percent of sales method” of preparing pro forma financial statements to
determine the projection for next year’s accounts payable. Make the following
assumptions: current year’s sales are $27,800,000; current year’s cost of goods sold is
$17,528,000; sales are expected to rise by 30%. The firm’s investment in accounts
payable in the current year is $2,218,500. What is the projection for next year’s
accounts payable?
A) $2,127,000
B) $3,781,750
C) $2,884,050
D) $4,184,000
54) We compute the profitability index of a capital budgeting proposal by
A) multiplying the internal rate of return by the cost of capital
B) dividing the present value of the annual after tax cash flows by the cost of capital
C) dividing the present value of the annual after tax cash flows by the cash investment
in the project
D) multiplying the cash inflow by the internal rate of return