An increase in the number of time periods reduces the present value of an annuity if all
other variables are held constant.
Bank credit is a minor source of short-term financing for firms.
Investors are given the option accepting calls on bonds with call features.
The vehicle for an equity investment is generally a bond, while for a debt investment it
is a share of stock.
Real options are generally worth more than their expected NPV impact due to the effect
real options have on risk.
Assume that the Security Market Line (SML) is based on a risk free rate of 5% and a
market rate of 11%. What will happen to the SML if the forecast of inflation increases
and investors become more risk averse?
A.The SML will shift down and have a steeper slope
B.The SML will shift up and have a less steep slope
C.The SML will shift down and have the same slope
D.The SML will shift down and have a less steep slope
E.The SML will shift up and have a steeper slope
Given the following information, calculate the return on equity for Chaus, Inc.
Return on Sales= 5%
Total asset turnover = 2
Debt ratio = .73
A.14%
B.7.3%
C.37%
D.21%
Jim Bo’s currently has annual cash revenues of $240,000 and annual operating expenses
of $185,000 including $35,000 in depreciation. The firm’s marginal tax rate is 40
percent. A new cutting machine can be purchased for $120,000 that will increase
revenues by $50,000 per year while operating expenses would increase to $205,000,
including $42,000 in depreciation. Compute Jim Bo’s annual incremental after-tax net
cash flows.
A.$25,000
B.$20,800
C.$93,000
D.$19,000
Below are two examples of tossing two coins simultaneously, with the following
probability distribution of returns:
EXAMPLE #1 (Two coins tossed simultaneously)
Head + head yields 40% gain
Head + tail yields 10% gain
Tail + head yields 10% gain
Tail + tail yields 20% loss
EXAMPLE #2 (Two coins tossed simultaneously)
Head + head yields 70% gain
Head + tail yields 10% gain
Tail + head yields 10% gain
Tail + tail yields 50% loss
From the two examples, which of the following statements is true?
A.example 1 has a higher expected return, but also has higher risk
B.example 2 has a higher expected return, but also has higher risk
C.example 2 has a lower expected return, but also has higher risk
D.the examples have the same expected returns and example 2 has higher risk
Methods used by lenders who advance funds with the borrower’s inventory as collateral
involve varying amounts of administration, attention, and cost. They do not include:
A.trust receipts or chattel mortgage agreements whereby the inventory is specifically
identified by serial number and cannot be sold without the lender’s permission.
B.warehousing the collateralized inventory at the lender’s facility.
C.a blanket lien granting the lender a collateral position in all of the borrower’s
inventory, which is physically maintained at the borrower’s facility.
D.using public or field warehousing facilities.
_____ include(s) direct labor and direct materials as well as other items that go up and
down with sales, such as commissions.
A.Expenses
B.Overhead
C.Variable cost
D.Depreciation
A project having a payback period of 4.73 years implies ____.
A.the NPV is greater than zero
B.the NPV is less than zero
C.the NPV equals zero
D.nothing about the NPV
The yield curve is:
A.inverted when short-term rates are higher than long-term rates.
B.normal when it slopes upward to the right.
C.a plot of interest rates versus term, also called the term structure of interest rates.
D.All of the above
A project increases accounts receivable and accounts payable by $500,000.00 each. All
other working capital accounts are unaffected. What is the project€s effect on working
capital?
A.Working capital increases by $1 million.
B.Cannot be calculated without considering accumulated depreciation.
C.Working capital is unaffected.
D.Working capital increases, but the amount cannot be determined.
An annuity with $1,000 annual payments at the end of each year, with a 10% interest
rate, is worth how much at the end of four years?
A.$4,641.00
B.$3,169.87
C.$5,105.10
D.None of the above
Which of the following is most likely to occur if a firm’s equity does not grow as fast as
its assets in the long run?
A.Long-term debt will increase
B.Current liabilities will be reduced
C.Dividend-payout ratio will increase
D.Profit margin will decrease
Your grandparents have just given you a $50,000 savings bond that matures in 20 years.
If the discount rate is 10%, what did they pay for the bond?
A.$7,450
B.$8,175
C.$8,900
D.$1,490
A firm is planning for next year and has developed the following information.
What inventory balance should be included in next year’s plan if management intends to
increase inventory turnover by two turns in the coming year? Calculate using ending
balances and the COGS formulation of inventory turnover.
A.$1.74M
B.$1.90M
C.$1.30M
D.$1.24M
Although the maturity value of a bond is fixed, changes in current interest rates will:
A.influence the amount of the semiannual coupon payment.
B.affect the bond’s yield.
C.inversely affect the market price of the bond.
D.b and c
Your rich uncle gave you $10,000 today on your 20thbirthday. You want to invest the
money and then start making monthly deposits, beginning one month from today, so
that you will accumulate $500,000 by the time you are 60 years old. You believe that
you can earn 8% on your investment. How much will you have to deposit each month
to reach your goal of $500,000 by your 60thbirthday?
A.Less than $75
B.$76 – $100
C.$101 – $125
D.$126 – $150
E.More than $150
The return on an investment in stock:
A.is subject to risk but is generally non-negative like a savings account.
B.has a standard deviation that has historically been small relative to its average value.
C.consists of dividend and capital gains yields.
D.is always very risky.