1) Due to strict stock market controls, the most a stock’s value can drop in one trading
day is 5%.
2) The cost of debt capital is obtained by substituting the net proceeds per bond for the
bond price in the bond valuation equation and solving for the required return.
3) If fixed costs are $150,000, price per unit is $10, and variable cost per unit is $4, the
break-even point is 15,000 units.
4) The percent of sales method provides a general estimate, but the more detailed cash
budget will ultimately be used to estimate financing needs.
5) The cost of debt increases relative to the investor’s required return due to flotation
costs, but decreases relative to the investor’s required return due to the tax deductibility
of interest.
6) A direct quote is always denominated in U.S. dollars, since the dollar is the medium
of exchange in international business.
7) The present value of a deferred annuity (e.g., an annuity that starts 10 years from
today) can be calculated in two steps: (1) calculate the future value of the annuity, and
(2) calculate the present value of the amount determined in step (1).
8) Notes payable and bonds payable are spontaneous liabilities.
9) Firms like to hold large stocks of cash since the risk of becoming insolvent is
minimized.
10) Junk bonds typically have an interest rate of between 3 and 5 percent more than
AAA-rated long-term debt.
11) A homeowner that owes more on his/her mortgage than the home is worth is said to
be “under water”.
12) If company A has a lower average collection period than company B, then company
A will have a higher accounts receivable turnover.
13) The forecasted retained earnings balance is equal to (current retained
earnings/current sales) times projected sales for next year.
14) A common method of evaluating a firm’s financial ratios is to compare the current
values of the firm’s ratios to its own ratios from prior periods. This is referred to as
trend analysis.
15) Major sources of secured credit include commercial banks, finance companies, and
factors.
16) Calculating the cost of capital for divisions within a company is not recommended
because the data is too fragmented and all divisions are part of the same company in
any case.
17) We typically expect to find rapidly growing firms to have high payout ratios.
18) The initial step in any effective cash management program is cash flow forecasting.
19) In an efficient market, the market value and intrinsic value of a security should be
equal.
20) The risk of illiquidity is increased if either cash and marketable securities are
decreased, or if the firm relies more heavily of long-term debt.
21) Harold considers investing in an LM Corp. bond and decides not to purchase the
bond. Which of the following statements is MOST correct?
A) The intrinsic value of the bond for the investor is less than the market value of the
bond
B) The liquidation value of the bond is greater than the market value of the bond
C) The intrinsic value of the bond for the investor is less than the par value of the bond
D) The intrinsic value of the bond for the investor is greater than the book value of the
bond
22) Determine the effective annualized cost of forgoing the trade discount on terms 2/15
net 65.
A) 11.30%
B) 14.69%
C) 32.6%
D) 48.98%
23) Preferred stock valuation usually treats the preferred stock as a
A) capital asset
B) perpetuity
C) common stock
D) long-term bond
24) ACME, Inc. expects its current annual $2.50 per share common stock dividend to
remain the same for the foreseeable future. Therefore, the value of the stock to an
investor with a required return of 12% is
A) $3.00
B) $18.33
C) $20.83
D) $30.00
25) Williams Inc. has a current ratio equal to 3, a quick ratio equal to 1.8, and total
current assets of $6 million. Williams’ inventory balance is
A) $2,000,000
B) $2,400,000
C) $4,000,000
D) $4,800,000
26) Decker Corp. common stock has a required return of 17.5% and a beta of 1.75. If
the expected risk free return is 3%, what is the expected return for the market based on
the CAPM?
A) 11.29%
B) 14.29%
C) 13.35%
D) 15.27%
27) You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The
annual interest rate is closest to
A) 1.5 percent
B) 12 percent
C) 18 percent
D) 24 percent
28) Preferred stock differs from common stock in that
A) preferred stock usually has a maturity date
B) preferred stock investors have a higher required return than common stock investors
C) preferred stock dividends are fixed
D) common stock investors have a required return and preferred stock investors do not
29) All of the following will increase the discretionary financing needed EXCEPT
A) decrease the net profit margin
B) decrease the dividend payout ratio
C) decrease the sales growth rate
D) decrease the spontaneous financing
30) Which of the following is NOT true regarding mortgaged-backed securities(MSB)?
A) MSB are sold to investors who can hold them as an investment or resell them to
other investors
B) The MSB process allows the mortgage bank or other financial institution that made
the original mortgage loan to get its money back out of the loan and lend it to someone
else
C) Securitization provides liquidity to the mortgage market and makes it possible for
banks to loan more money to home buyers
D) All of the above statements are true
31) Wheeler Corporation had retained earnings as of 12/31/10 of $15 million. During
2011, Wheeler’s net income was $7 million. The retained earnings balance at the end of
2011 was equal to $20 million. Therefore
A) Wheeler paid a dividend in 2010 of $5 million
B) Wheeler paid a dividend in 2010 of $2 million
C) Wheeler sold common stock during 2010 for $5 million
D) Wheeler purchased treasury stock in 2010 for $2 million
32) The advantages of NPV are all of the following EXCEPT
A) it can be used as a rough screening device to eliminate those projects whose returns
do not materialize until later years
B) it provides the amount by which positive NPV projects will increase the value of the
firm
C) it allows the comparison of benefits and costs in a logical manner through the use of
time value of money principles
D) it recognizes the timing of the benefits resulting from the project
33) Which of the following is NOT an important consideration in measuring risk for a
capital budgeting project for a well-diversified firm?
A) systematic risk
B) contribution to firm risk
C) total project risk
D) None of the aboveall may be important in measuring project risk
34) What is the primary tool for short-term financial forecasting?
A) pro forma income statement
B) pro forma balance sheet
C) pro forma cash budget
D) capital budgeting
35) Which of the following statements would be consistent with the dividend
irrelevance theory?
A) There is no relationship between a firm’s dividend policy and the value of its
common stock
B) Perfect capital markets are assumed to exist which allow investors to buy and sell
stock without incurring any transaction costs
C) Investors are indifferent whether stock returns come from dividend income or capital
gains income
D) All of the above
36) Three ways that savings can be transferred through the financial markets include all
of the following EXCEPT
A) direct transfer of funds
B) indirect transfer using the investment banker
C) indirect transfer using the venture capital firm
D) indirect transfer using the financial intermediary
37) Profits are down so the controller decides to change the corporation’s accounting
policy relating to inventory costing. The change will allow the corporation to report
higher income and higher assets, although the physical inventory has not changed.
Which of the following statements is MOST correct?
A) The stock price is likely to increase because income is higher
B) The stock price is likely to be unaffected because the stock market is efficient
C) The stock price is likely to decrease because reported inventory is higher
D) If the stock price increases, the stock market is efficient
38) The Euro increased dramatically in value against the U.S. dollar between 2000 and
2009. The result has been that
A) U.S. exports are more competitive in Europe
B) U.S. goods cost more in Europe
C) U.S. travelers are finding it less expensive to travel in Europe
D) European exports to the United States are more competitive
39) Bass Frozen Foods, Inc. has found three acceptable investment opportunities. The
three projects require a total of $5 million in financing. It is the company’s policy to
finance its investments by using 40% debt and 60% common equity. The firm has
generated $3.8 million dollars from its operations that could be used to finance the
common equity portion of its investments.
a.What portion of the new investments will be financed by common equity and what
portion by debt?
b.According to the residual dividend theory, how much would be paid out in dividends?
40) A forward exchange contract
A) gives the owner the right, but not the obligation, to buy a foreign currency at a fixed
exchange rate for a fixed period of time
B) gives the owner the right to purchase a foreign currency at some point in the future
and any gains or losses are credited/debited to the account at the close of business each
day
C) requires delivery, at a specified future date, of one currency for a specified amount
of another currency
D) requires delivery, within two working days, of one currency for a specified amount
of another currency
41) Bob invested $2,000 in an investment fund on his 21st birthday. The fund pays 7%
interest compounded semiannually. Bob is celebrating his 50th birthday today. Bob
decides he wants to retire on his 60th birthday and he wants to withdraw $75,000 per
year, the first withdrawal on his 60th birthday and the last withdrawal on his 90th
birthday. Bob expects to receive $100,000 from his employer on his 55th birthday in
recognition of his long service to the company. Assume Bob has not taken any money
out of his investment fund since he initially funded it on his 21st birthday, and that he
will deposit the $100,000 from his employer into the investment fund on his 55th
birthday. The investment fund will be used to pay for Bob’s retirement.
If Bob makes no additional deposits into his investment fund, how much will be
available for retirement at age 60?
Since the amount in (a) is insufficient to meet his retirement goals, Bob decides to
deposit equal annual amounts into the investment fund beginning on his 51st birthday
and ending on his 59th birthday, so that he can meet his retirement goals. How much
will each deposit be?
42) Which of the following would be considered a variable cost in a manufacturing
setting?
A) rent
B) administrative salaries
C) insurance
D) direct labor
43) What is the yield to maturity of a bond that pays an 5% coupon rate with annual
coupon payments, has a par value of $1,000, matures in 15 years, and is currently
selling for $769?
A) 2.4%
B) 5.7%
C) 7.6%
D) 9.5%
44) Mix Sweet Shop bakes and sells pies. Mix has annual fixed costs of $880,000 and a
variable cost per pie of $7.50. Each pie sells for $15.50 each. The firm expects to sell
500,000 pies annually. What is the break-even point in sales dollars?
A) $3,100,000
B) $2,875,000
C) $1,705,000
D) $1,625,000
45) When the intrinsic value of an asset exceeds the market value
A) the asset is undervalued to the investor
B) the asset is overvalued to the investor
C) market value and intrinsic value are always the same; therefore, this could not
happen
D) liquidation value must be higher than book value
46) A company borrows $10,000 and puts the money into its checking account. This
transaction will increase the company’s current ratio if prior to the transaction the
company’s current ratio was
A) equal to one
B) greater than one
C) less than one
D) greater than or less than one, but not equal to one
47) Which of the following is NOT a category of inventory?
A) raw materials
B) work-in-process
C) purchases
D) finished goods
48) Which of the following features, or benefits, belong to a firm’s common
stockholders?
A) limited liability
B) ownership of the firm
C) voting rights
D) all of the above
49) Considerations in the selection of a proper marketable-securities mix include all of
the following EXCEPT
A) financial risk
B) interest rate risk
C) maturity
D) liquidity
50) TC Corp paid a dividend today of $5 per share. The dividend is expected to grow at
a constant rate of 6.5% per year. If TC Corp stock is selling for $50.00 per share, the
stockholders’ expected rate of return is
A) 11.50%
B) 13.56%
C) 15.49%
D) 16.50%
51) A significant advantage of the payback period is that it
A) places emphasis on time value of money
B) allows for the proper ranking of projects
C) tends to reduce firm risk because it favors projects that generate early, less uncertain
returns
D) gives proper weighting to all cash flows
52) What is the future value of $500 invested at 8.94% compounded quarterly for 12.5
years (round to nearest $1)?
A) $670
B) $1,510
C) $1,617
D) $46,739
53) All of the following are benefits of organized stock exchanges EXCEPT
A) increased stock price volatility
B) continuous markets
C) fair security prices
D) easier access to new capital for business expansion
54) 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
55) S-type corporations have all of the following advantages EXCEPT
A) they are taxed as partnerships
B) the owners have limited liability
C) distributions are taxed twice, similar to corporate dividend payments
D) all owners must be people, no corporations
56) What is the present value of an annuity of $120 received at the end of each year for
11 years? Assume a discount rate of 7%. The first payment will be received one year
from today (round to nearest $1).
A) $250
B) $400
C) $570
D) $900
57) As production levels increase
A) variable costs per unit decrease
B) fixed costs per unit increase
C) fixed costs per unit stay the same and variable costs per unit increase
D) fixed costs per unit decrease and variable costs per unit stay the same
58) 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