1) The reinvestment of cash back into the firm’s operations is an example of a flow of
savings to investment.
2) When additional funds must be committed to working capital, those funds are
assumed to be recovered at the end of the project’s life.
3) The required risk premium for any investment is given by the security market line.
4) The asset turnover ratio and inventory turnover ratio are both efficiency ratios.
5) Technical analysts have no effect on the efficiency of the stock market.
6) According to the dividend discount model, a stock’s price today depends on the
investor’s horizon for holding the stock.
7) The potential benefits of additional credit analysis should always be weighed against
the incremental costs.
8) If an idle or incompetent management has a large block of votes, it may use these
votes to stay in control.
9) A company that pays $5,000 previously owed to one of its suppliers will see no
change in its net working capital.
10) Investors who had bought at the stock market peak in March 2000 would have seen
little but falling stock prices over the next two-and-a-half years.
11) An increase in inventories uses cash, reducing the firm’s net cash balance.
12) Which component is more likely to be biased if book values are used in the
calculation of WACC rather than market values?
A.Debt
B.Preferred stock
C.Common stock
D.All categories should be equally biased
13) What is the expected German inflation rate if 3% inflation is expected in the United
States, the spot exchange rate is 1.5/$ and the expected spot rate is 1.6/$?
A.2.81%
B.7.10%
C.9.87%
D.11.43%
14) Second-stage financing occurs:
A.prior to the initial public offering
B.when company founders sell a portion of their shares
C.after the best efforts of the underwriters
D.when the IPO does not raise sufficient cash
15) How much wealthier would you be 1 year from now if you exchange $100,000 into
Hong Kong dollars today at an indirect rate of HK$7.8/$, earn 7% on your Hong Kong
investment, and exchange back at a rate of HK$8.0/$, as compared to investing in the
United States at 4.0%?
A.-$2,600
B.$325
C.$2,000
D.$5,744
16) What is the maximum percentage of variable costs in relation to sales that a firm
could experience and still break even with $5 million revenue, $1 million fixed costs,
and $500,000 depreciation?
A.30%
B.70%
C.80%
D.90%
17) The ratio of net present value to initial investment is known as the:
A.net present value
B.internal rate of return
C.payback period
D.profitability index
18) Liquidity is important to a mutual fund because:
A.a fund that is less liquid will attract more investors
B.the fund’s shareholders may want to redeem their shares at any time
C.the fund’s managers need liquidity to trade actively
D.the fund needs to distribute payouts to its shareholders and managers periodically
19) Which of the firm’s financial statements most clearly recognizes the payment for
new equipment?
A.Balance sheet
B.Income statement
C.Statement of cash flows
D.Statement of condition
20) Calculate the risk premium on stock C given the following information: risk-free
rate = 5%, market return = 13%, stock C beta = 1.3
A.8.0%
B.10.4%
C.15.4%
D.16.9%
21) When new shares are sold at a price greater than par value, the excess over par is
recorded as:
A.capital surplus
B.retained earnings
C.treasury stock
D.authorized capital
22) Firms go public to:
A.raise additional capital
B.diversify public debtholders’ risk
C.avoid second-stage financing
D.increase their leverage
23) If a project’s expected rate of return exceeds its opportunity cost of capital, one
would expect:
A.the profitability index to exceed 1.0
B.the opportunity cost of capital to be too low
C.the IRR to exceed the opportunity cost of capital
D.the NPV to be zero
24) If inflation in Wonderland averaged about 20% per month in 2000, what was the
approximate annual inflation rate?
A.20%
B.240%
C.790%
D.890%
25) When projects are mutually exclusive, selection should be made according to the
project with the:
A.longer life
B.larger initial size
C.highest IRR
D.highest NPV
26) Which of the following values would most likely interest a shareholder?
A.Book value of equity
B.Market value of equity
C.Historical cost of equity
D.none of these
27) Adding warrants as a ‘sweetener” to bonds will:
A.reduce the value of the bond
B.increase the coupon rate of the bond
C.increase the value of the bond
D.make the bond riskier
28) A writer of a call option expects the stock price to:
A.decrease
B.increase
C.split
D.produce quarterly cash dividends
29) Dave’s Wax Inc.’s financial planners have projected a growth rate of 8% for the
coming year. Currently, it has assets of $5,000,000 and retained earnings of $120,000.
Calculate the amount of external financing Dave will need.
A.$0
B.$70,000
C.$184,000
D.$280,000
30) Shelf registration was enacted to allow:
A.the Department of Justice to prosecute those guilty of insider trading
B.the prospectus to be distributed after the sale of securities begins
C.underwriters to join together in syndication
D.single registration of limited future financing plans
31) As the debt-equity ratio decreases when debt is not risk free:
A.debtholders demand a higher expected return
B.debtholders demand a lower expected return
C.the expected return on equity increases
D.the expected return on assets increases
32) How will a percentage of sales model treat cost of goods sold if sales revenues are
expected to grow by 20% to $1 million? Cost of goods sold will:
A.grow at a slower rate than sales
B.remain proportionate to sales
C.be forecast to increase at the rate of inflation
D.increase to $800,000
33) Which of the following actions does not help reduce risk?
A.Extending the service warranty for your notebook
B.Converting your money market account to a mutual fund account
C.Contracting to sell your farm produce to the neighborhood grocery
D.Buying Japanese yen now when you plan to study in Japan next year
34) How high can accounts receivable be allowed to grow before the firm’s receivables
period exceeds 50 days if annual sales equal $5 million and the cash conversion cycle
equals 75 days?
A.$342,466
B.$684,932
C.$1,027,397
D.$1,712,329
35) When shareholders attempt to garner additional votes in an attempt to oust
management, it is called a:
A.management buyout
B.tender offer
C.proxy contest
D.poison pill
36) When does a change in the value of a call option come the closest to matching the
price change in a share of stock?
A.When the stock is priced far above the strike price
B.When the stock is priced far below the strike price
C.When the stock is priced very near the strike price
D.Changes in call value always come close to matching changes in stock price
37) What is the level of profits for a firm in which DOL = 5 and fixed costs including
depreciation = $300,000?
A.$60,000
B.$75,000
C.$1,200,000
D.$1,500,000
38) Which of the following risks would be classified as a unique risk for an auto
manufacturer?
A.Interest rates
B.Steel prices
C.Business cycles
D.Foreign exchange rates
39) Which of the following statements regarding calculating cash flow from operations
is incorrect?
A.Cash flow from operations = revenues – cash expenses – taxes paid
B.Cash flow from operations = net profit + depreciation
C.Depreciation tax shield = depreciation (1 -tax rate)
D.Cash flow from operations = (revenues – cash expenses) (1 – tax rate) + (depreciation
tax rate)
40) The use of financial leverage will be detrimental to a firm’s ROE if the:
A.firm has no long-term debt
B.firm’s profit margin does not exceed its asset turnover
C.interest expense exceeds the tax liability
D.interest rate on debt exceeds the firm’s ROA
41) An asset’s liquidity measures its:
A.potential for generating a profit
B.cash requirements
C.ease and cost of being converted to cash
D.proportion of debt financing
42) Comebaq Computers is aiming to increase its market share by slashing the price of
its new range of personal computers. Are costs and assets likely to increase or decrease
as a proportion of sales? Explain.
43) Calculate the accounting break-even point for the following firm: revenues of
$700,000, $100,000 fixed costs, $75,000 depreciation, 60% variable costs, and a 35%
tax rate. What happens to the break-even if a trade-off is made that increases fixed costs
by $30,000 and decreases variable costs to 55% of sales?
44) A portfolio of three stocks with total market value of $1,000,000 currently has a
beta of 1.4. In light of an expected market downturn, you wish to reduce the portfolio
beta to no more than 1.0 . Two stocks are likely candidates for sale, one with a beta of
1.8 and a market value of $200,000 and the other with a beta of 1.5 and a market value
of $250,000. Assuming that you could find one appropriate stock to replace these two,
what should be its beta?
45) The financial analyst at GoodBuys reasoned that since the costs of flotation amount
to about 15% of the proceeds for small common stock issues, the opportunity cost of
external equity capital is about 15 percentage points higher than that of retained
earnings. Comment on his reasoning.
46) Determine the change in net working capital that appears warranted for the
following proposed project: Inventory levels will increase 20% from their current value
of $500,000; cash will increase by $25,000; wage accruals will increase by $60,000;
machinery will increase by $75,000; accounts receivablebecause of a new collection
systemwill increase by only $15,000; accounts payable will increase by $45,000. What
happens to net working capital at the end of the project’s life?
47) How do venture capital firms design successful deals?
48) PAWS, Inc. has structured a currency swap through its bank. PAWS intends to use
the funds to finance an expansion in its Irish operations. The terms are that PAWS will
borrow $2 million at a 9% rate, with interest only paid in the first 2 years and all
principal repaid after three years. The bank will provide punts (Irish currency) at an
exchange rate of Ir£.65/$ and an interest rate of 12%. Illustrate the flows between
PAWS and the bank during the 3-year loan.