1) Financial slack means having ready access to cash or debt financing.
2) Compared to other countries, the U.S. bankruptcy system is debtor-friendly.
3) Managers that accept projects that only break even on an accounting basis are
helping their shareholders.
4) Only small companies can go through financial markets to obtain financing.
5) Companies can pay out cash to their shareholders in two ways. They can pay a
dividend or they can buy back some of their outstanding shares.
6) Investments in working capital, just like investments in plant and equipment, result
in cash inflows.
7) A tender offer is an attempt by outsiders to buy the stock of the target firm’s
shareholders with the help of the target firm’s managers.
8) The CEO has “ultimate” control over the company’s affairs.
9) The dividend yield of a stock is much like the current yield of a bond. Both ignore
prospective capital gains or losses.
10) When a firm is taken over, its management is usually replaced.
11) A survey of the world’s 500 largest companies found that almost all the companies
use derivatives in some way to manage their risk.
12) A major disadvantage of partnerships is that they have double taxation of profits.
13) When additional borrowing causes the probability of financial distress to increase
rapidly, the potential costs of distress begin to take a substantial bite out of firm value.
14) A dollar tomorrow is worth more than a dollar today.
15) MM’s proposition II states that the:
A.expected return on equity increases as financial leverage increases
B.expected return on assets decreases as expected return on debt decreases
C.firm’s capital structure is irrelevant to value determination
D.greater the proportion of equity, the higher the expected return on debt
16) According to the semistrong form of market efficiency, when new information
becomes available in the market:
A.stock prices will remain unchanged because they already reflect this information
B.stock prices will accurately and rapidly adjust to reflect this new information
C.stock prices will adjust to accurately reflect this new information over the course of
the next few days
D.stock prices will most likely increase because all new information has a positive
effect on stock prices
17) Which of the following statements is correct about a stock currently selling for $50
per share that has a 16% expected return and a 10% expected capital appreciation?
A.Its expected dividend exceeds the actual dividend
B.Its expected return will exceed the actual return
C.It is expected to pay $3 in annual dividends
D.It is expected to pay $8 in annual dividends
18) Suppose an analyst estimates that free cash flow will be $2.43 million in year 5 .
What is the present value of this free cash flow if the company cost of capital is 12%,
the WACC is 10%, and the equity cost of capital is 15%?
A.1.21 million
B.1.38 million
C.1.51 million
D.2.43 million
19) A company has announced $50,000 in net income after paying taxes of $26,000 and
interest of $20,000. It intends to pay $17,000 of net income as dividends. Its assets have
averaged $600,000 over the past year, during which its total debt ratio has averaged
40%. Given this information, answer the following about the company’s profitability:
a. Calculate the ROA and ROE.
b. Calculate the payout and plowback ratios.
c. What effect will the plowback have on the company’s growth in equity?
20) Which of the following is not typically considered a function of financial
intermediaries?
A.Providing a payment mechanism
B.Investing in real assets
C.Accumulating funds from smaller investors
D.Spreading, or pooling risk among individuals
21) A considerable scattering in the plot of points representing the historic returns of a
stock versus the returns on the market indicates the:
A.high beta of the stock
B.unique risk of the stock
C.changes in market risk premium over time
D.current underpricing of the stock
22) Corporations that annually retire a set portion of their long-term debt are said to be
using:
A.indexed bonds
B.sinking funds
C.convertible debt
D.secured debt
23) A firm has $600,000 in current assets and $150,000 in current liabilities. Which of
the following is correct if it uses cash to pay off $50,000 in accounts payable?
A.Current ratio will increase to 5.0
B.Net working capital will increase to $500,000
C.Current ratio will decrease
D.Net working capital will not change
24) The French franc is currently worth $0.15 and it’s selling in the 1-year forward
market at a 10% premium relative to the dollar. Approximately what rate would you
expect to pay for a 1-year loan in France if the rate would be 10% in the United States?
A.10.00%
B.11.62%
C.14.55%
D.20.88%
25) A corporation is considered to be closely held when:
A.only a few shareholders exist
B.the market value of the shares is stable
C.it operates in a small geographic area
D.management also serves as the board of directors
26) The best criterion for success in a capital budgeting decision would be to:
A.minimize the cost of the investment
B.maximize the number of capital budgeting projects
C.maximize the difference between cash inflows and cost
D.finance all capital budgeting projects with debt
27) A firm sells its $1,000,000 receivables to a factor for $960,000. Average collection
period is one month. The effective annual rate is:
A.27.43%
B.48.00%
C.60.10%
D.63.21%
28) Investment risk can best be described as the:
A.dispersion of possible returns
B.elimination of macro risk through diversification
C.possibility of changes in the cost of capital
D.level of systematic risk for an undiversified investor
29) Given a particular set of project cash flows, which of the following statements is
correct?
A.There can be only one NPV for the project, even with multiple discount rates
B.There can be only one IRR for the project
C.There can be more than one IRR for the project
D.There can be only one profitability index for the project, even with multiple discount
rates
30) What is the after-tax cost of preferred stock that sells for $10.00 per share and offers
a $1.20 dividend when the tax rate is 35%?
A.4.20%
B.7.80%
C.8.33%
D.12.00%
31) Splitting AT&T in 1996 into four separate firms is an example of a:
A.leveraged buyout
B.spin-off
C.management buyout
D.tender offer
32) A cash coverage ratio of less than one indicates:
A.the firm does not have enough cash to make its interest payments
B.the firm does have enough cash to make its interest payments, but not its lease
obligations
C.the firm has too little depreciation expense
D.earnings need to fall by only a small amount before interest obligations cannot be
covered
33) If exchange rates adjust to reflect inflation differentials across countries, then:
A.the law of one price will always hold
B.no one will use forward currency markets
C.interest rates will be equal across countries
D.PPP is said to hold
34) What should be the current price of a stock if the expected dividend is $5, the stock
has a required return of 20%, and a constant dividend growth rate of 6%?
A.$19.23
B.$25.00
C.$35.71
D.$37.86
35) Which of the following assumptions is made when declaring that the break-even
probability of collection is lower for customers with repeat orders?
A.The discount rate is fairly high
B.The cost of the item will continually decline
C.The sales price of the item will continually increase
D.Payment on the first order ensures payments on subsequent orders
36) Which of the following is least likely to contribute to going concern value?
A.High liquidation value
B.Extra earning power
C.Future investment opportunities
D.Intangible assets
37) In general, when deciding whether a market participant needs to buy or sell futures
contracts in order to hedge, the rule could be:
A.buy futures if you have the underlying asset and sell futures if you need the
underlying asset
B.sell futures if you have the underlying asset and buy futures if you need the
underlying asset
C.buy futures if you want to speculate, sell futures if you want to hedge
D.buy futures if you are willing to have unlimited risk, sell futures if you want capped
risk
38) “Double taxation” refers to:
A.all partners paying equal taxes on profits
B.corporations paying taxes on both dividends and retained earnings
C.paying taxes on profits at the corporate level and dividends at the personal level
D.the fact that marginal tax rates are doubled for corporations
39) Which of the following would likely be most detrimental to a firm’s current ratio if
that ratio is currently 2.0?
A.Buy raw materials on credit
B.Sell marketable securities at cost
C.Pay off accounts payable with cash
D.Pay off a portion of long-term debt with cash
40) Which of the following statements correctly compares international accounting
standards?
A.The standards are becoming less similar over time
B.The standards are typically more lenient in the United States
C.The standards are stricter in the United States in some regards
D.Balance sheets differ, but income statements are similar in all countries
41) Assuming all of the following firms have a required return of 14%, which would
you expect to have a positive present value of growth opportunities?
A.A firm with a P/E ratio of 9
B.A firm with a P/E ratio of 6
C.A firm with an E/P ratio of 20%
D.None of these firms are expected to have positive PVGO
42) How much will a firm need in cash flow before tax and interest to satisfy
debtholders and equityholders if the tax rate is 40%, there is $10 million in common
stock requiring a 12% return, and $6 million in bonds requiring an 8% return?
A.$1,392,000
B.$1,488,000
C.$2,480,000
D.$2,800,000
43) An increase in earnings per share after a merger may not indicate increased value if
the:
A.number of shares has increased
B.price of the acquirer’s stock increases
C.price-earnings ratios were different in the premerger firms
D.firm’s additional earnings are spent on legal expenses of the merger
44) The phrase “Forecasts do not develop in a vacuum” is a reminder that:
A.forecasters are known not to work well alone
B.planners will offer 10 plans when asked for 1
C.competitors also make plans and react to ours
D.forecasts should be developed at headquarters
45) Find the break-even size of wire transfer if the cost of wire transfer is $20, the daily
interest rate is 0.02%, and the reduction in float is 3 days.
A.$1,000
B.$25,000
C.$33,333
D.$100,000
46) An increase in depreciation expense will (other things equal):
A.increase net income
B.decrease net income
C.increase taxable income
D.decrease the market value of assets
47) Firms facing financial distress may pass up positive-NPV projects rather than
commit new equity because:
A.they prefer to finance with debt
B.the benefits may be shared with the bondholders
C.no cash is available for dividends
D.there is no interest tax shield associated with equity
48) A firm’s capital structure is represented by its mix of:
A.assets
B.liabilities and equity
C.assets and liabilities
D.assets, liabilities, and equity
49) If a firm’s cash coverage ratio is greater than its times interest earned ratio, then:
A.the firm’s assets are not fully depreciated
B.the firm has no lease obligations
C.the firm has very little long-term debt
D.the firm has a high degree of liquidity
50) What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost
of debt is 7.0%, the tax rate is 35%, and the required return on equity is 18%?
A.54.00%
B.63.64%
C.70.26%
D.77.78%
51) An assumption of the MM dividend irrelevance proposition is:
A.investors are willing to pay higher prices for shares with higher payouts
B.capital gains are offset by receiving no dividend
C.extra cash dividends are offset by a capital gain
D.extra cash dividends are offset by a capital loss
52) Which of the following would correctly differentiate general partners from limited
partners in a limited partnership?
A.General partners have more job experience
B.General partners have an ownership interest
C.General partners are subject to double taxation
D.General partners have unlimited personal liability
53) When subtracting an asset’s accumulated depreciation from its historic cost, the
resulting value is termed the:
A.book value of the asset
B.market value of the asset
C.depreciation expense
D.current asset value
54) What happens to a firm whose uses of cash exceed its sources of cash during an
accounting period?
A.It borrows on a short-term basis
B.It declares a net loss on the income statement
C.It experiences an increase in cash balance
D.It experiences a decrease in cash balance
55) Develop a current stock value for a firm that is expected to have extraordinary
growth of 25% for 4 years, after which it will face more competition and slip into a
constant-growth rate of 5%. Its required return is 14% and next year’s dividend is
expected to be $5.00.
56) What is the difference between real and nominal cash flows and between real and
nominal interest rates?
57) In general, would you suspect that it’s getting easier or more difficult to play the
float?
58) Describe how adding depreciation expense to net income can approximate cash
flow from operations. Does depreciation expense really reflect a cash flow?
59) On each nondelinquent sale, Cast Iron Company receives revenues with a present
value of $1,200 and incurs costs with a present value of $1,000. Suppose that 10% of
Cast Iron’s customers are slow payers and that slow payers have a probability of 30% of
defaulting on their bills. If it costs $5 to determine whether a customer has been a
prompt or slow payer in the past, should Cast Iron undertake such a check? Hint: What
is the expected savings from the credit check? It will depend on both the probability of
uncovering a slow payer and the savings from denying these payers credit.
60) Discuss the capital asset pricing model in general, including the method of
determining expected returns.