1) An increase in current liabilities is a source of cash for the firm.
2) You should never compare cash flows occurring at different times without first
discounting them to a common date.
3) In general, shareholders of the target firm benefit from takeovers.
4) Businesses that aggressively exploit any means to increase current earnings may
cross over into fraudulent account practices.
5) Real estate futures on the Chicago Mercantile Exchange were launched in 2006 and
enable participants to protect themselves against changes in house prices in 10 U.S.
cities.
6) Differences in classes of stock often appear in their right to vote.
7) Forward contracts are equivalent to tailor-made futures contracts.
8) When you are considering whether to replace an aging machine with a new one, you
should compare the annual cost of operating the old one with the equivalent annual
annuity of the new one.
9) History has shown a positive relationship between higher interest rates and higher
subsequent rates of inflation.
10) Bonds with a rating of Ba or below by Moody’s are referred to as speculative grade,
high-yield, or junk bonds.
11) A company’s CFO wants to maintain a target debt-to-equity ratio of 1/4 . If the
WACC is 18.6%, and the pretax cost of debt is 9.4%, what is the cost of common equity
assuming a tax rate of 34%?
A.19.90%
B.20.90%
C.21.70%
D.22.73%
12) What type of risk is properly reflected in a project’s discount rate?
A.Market risk
B.Unique risk
C.Total risk
D.Diversifiable risk
13) What happens to the price of a futures contract as expiration draws closer?
A.It exceeds the spot price of the asset
B.It is exceeded by the spot price of the asset
C.It approaches the spot price of the asset
D.There is no relationship between futures price and spot price as the contract
approaches expiration
14) How much is required in external financing if first-stage pro forma statements
indicate $1 million in net income, $300,000 in dividends, and a $900,000 increase in
total assets?
A.$200,000
B.$500,000
C.$800,000
D.No external financing is required
15) Which of the firm’s financial managers is most likely to be involved with obtaining
financing for the firm?
A.Treasurer
B.Controller
C.Chief Operating Officer
D.Board of directors
16) A stock paying $5 in annual dividends sells now for $80 and has an expected return
of 14%. What might investors expect to pay for the stock 1 year from now?
A.$82.20
B.$86.20
C.$87.20
D.$91.20
17) What is the profit per share for an investor who has purchased a share of stock and
two put options with an exercise price of $40, given that the purchase price of the stock
was $42, each put cost $2 per share, and the stock was valued at $30 at expiration?
A.-$16
B.- $6
C.- $4
D.$4
18) What type of investors will now have proxy access to nominate their own
candidates for the board of directors?
A.Shareholders who hold at least 3% ownership for at least 5 years
B.Shareholders of any size who have held shares for at least 5 years
C.Shareholders who hold at least 3% ownership for at least 2 years
D.Nonprofit institutional investors
19) What is the percentage return on a stock that was purchased for $50.00, paid a
$3.00 dividend after one year, and was then sold for $49.00?
A.-2.50%
B.2.50%
C.4.00%
D.7.50%
20) The manager of XYZ Corp. feels that a dividend increase will increase stock price
because many investors value stock with a dividend-discount model. Why might MM
disagree with this assertion?
A.The increased dividend makes the firm much riskier
B.Future dividend growth may slow due to lower retained earnings
C.Investors prefer capital gains over dividends
D.Dividend increases will increase the book value but not the market value of the firm
21) Investors may prefer lower dividends over higher dividends because:
A.the low dividends are more predictable
B.capital gains may be taxed less heavily than dividends
C.of the “bird in the hand” logic
D.low dividends indicate heavy investment for the future
22) If the standard deviation of a portfolio’s returns is known to be 30%, then its
variance is:
A.5.48%
B.5.48% squared
C.900.00%
D.900.00% squared
23) Which of the following statements about net working capital (NWC) is correct?
A.NWC is positive for all firms
B.As NWC decreases, potential liquidity increases
C.NWC excludes inventory, which is deemed illiquid
D.Decreases in NWC can increase the firm’s risk
24) With respect to bonds, when interest rates increase typically:
A.the coupon rate also increases
B.the coupon rate remains unchanged
C.the price of the bond rises
D.the price of the bond remains unchanged
25) Project A has an IRR of 20% while Project B has an IRR of 30%. Under which of
the following situations might you be inclined to select Project A, assuming the projects
to be mutually exclusive, lending projects?
A.Project A is riskier
B.Project A requires a smaller initial investment
C.Project A requires a larger initial investment
D.Project A requires cash outflows in the final period
26) Which of the following is not a financing decision?
A.Should the firm borrow money from a bank or sell bonds?
B.Should the firm shut down an unprofitable factory?
C.Should the firm buy or lease a new machine that it is committed to acquiring?
D.Should the firm issue preferred stock or common stock?
27) Accrual accounting, which attempts to match sales revenues and the expenses
associated with the production of the goods, is conducted in an attempt to:
A.reduce income-tax liability
B.reduce bias in reported profitability measures
C.speed up the receipt of accounts receivable
D.reduce the time necessary to depreciate assets
28) What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with
a 7% coupon and sells the bond 1 year later for $1,037.19?
A.5.00%
B.5.33%
C.6.46%
D.7.00%
29) To avoid inconsistency, financial planners should be sure to:
A.draw information from many different resources
B.do all forecasting themselves
C.produce perfectly accurate forecasts
D.use forecasts based on common macroeconomic assumptions
30) Which of the following would not be expected to change with changes in the firm’s
capital structure?
A.Weighted-average cost of capital
B.Expected return on equity
C.Expected return on assets
D.Expected earnings per share
31) Which of the following statements is true with respect to financial and product
markets?
A.In product markets, companies rarely find investments that yield a positive NPV
B.Financial markets face fast-moving competition
C.Competition in financial markets is not as thorough as in product markets
D.Competition in product markets is more intense than in financial markets
32) Which of the following would not be considered a money market instrument?
A.U.S. Treasury bill with 91 days until maturity
B.Commercial paper with 180 days until maturity
C.Certificate of deposit with 15 months until maturity
D.A repurchase agreement, backed by U.S. government securities, with less than 1
week until maturity
33) Which of the following describes a seasoned offering?
A.An IPO of common stock for a well-known firm
B.An IPO that is offered during the best buying season
C.An additional equity issue from a publicly traded firm
D.Any shares traded in the secondary market are seasoned offerings
34) Consider the following spot exchange rates: $1.60/£, 105/$, 1.6/$, and L2,020/$.
Which of the following seems to violate the law of one price if gold sells for $290 per
ounce in the United States?
A.1 troy oz. gold = £181.25
B.1 troy oz. gold = 30,450
C.1 troy oz. gold = 405
D.1 troy oz. gold = L585,800
35) Which of the following does not provide a ‘solution” to a projected growth rate in
assets that exceeds the sustainable growth rate?
A.Increase the ROE
B.Allow the debt-equity ratio to increase
C.Increase the payout ratio
D.Issue new equity
36) The international Fisher effect predicts that differences in nominal interest rates
between countries reflect differences in:
A.real rates of interest
B.purchasing power parity
C.the standard of living
D.expected inflation
37) A firm’s first offering of stock to the general public is known as:
A.first-stage financing
B.an IPO
C.a general cash offer
D.a seasoned offering
38) The fact that historical returns on Treasury bills are less volatile than common stock
returns indicates that:
A.the variance of Treasury bill returns is zero
B.the standard deviation of Treasury bill returns is negative
C.the real return on Treasury bills has been negative
D.common stocks should offer a higher return than Treasury bills
39) What is the maximum that should be invested in a project at time zero if the inflows
are estimated at $50,000 annually for 3 years, and the cost of capital is 9%?
A.$101,251.79
B.$109,200.00
C.$126,565.00
D.$130,800.00
40) What is the WACC for a firm with equal amounts of debt and equity financing, a
16% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its
debt that is selling at par value?
A.10.40%
B.14.25%
C.15.13%
D.16.00%
41) What is the value of a convertible bond with a conversion ratio of 25, face value of
$1,000, coupon of 10% and yield of 10%? Common stock of this firm is currently
selling at $35.
A.$875
B.$1,000
C.$1,125
D.$1,875
42) During the banking crisis of 2007-2009 the U.S. government bailed out all of the
corporations except:
A.AIG
B.Lehman Brothers
C.Fannie Mae
D.all were bailed out
43) What is meant by “default risk” in bonds, and how do investors respond to it?
44) It is easy to imagine that a financial manager would be reluctant to abandon a
project in which large sums of money have been invested with no cash return. Discuss
the important concept here that should be the manager’s guiding policy.
45) Discuss what effect you would expect the following debt provisions to have on the
yield that corporations must offer investors: funded (versus unfunded) debt, sinking
fund, call provision, subordinated debt, secured debt.
46) What is the weighted-average cost of capital for a firm with the following sources
of funds and corresponding required rates of return: $5 million common stock at 16%,
$500,000 preferred stock at 10%, and $3 million debt at 9%. All amounts are listed at
market values and the firm’s tax rate is 35%.
47) A proposed capital project will cost $20 million and generate $4 million annually in
after-tax cash flows for 10 years. The cost of capital for a project of this risk level is
12.2%. Should the project be accepted? Why or why not?
48) In addition to the tax shield offered by the federal government, debt has a lower
required rate of return than equity. Why is it not common to see firms that have much
larger debt components in their capital structure?
49) Discuss the potential benefits to a corporation of shelf registration.