1) Stocks that have more volatile price changes have more valuable call options because
call holders:
A.capture upside potential without downside risk
B.realize that volatility decreases the present value of the exercise price
C.have too little variability in the exercise price
D.have transferred all risk to put holders
2) Assuming that an asset has been fully depreciated according to its MACRS class life,
which of the following statements is correct concerning the value of the asset?
A.Its market value is zero
B.Its book value is zero
C.Its book value is the current market value
D.It has neither book value nor market value
3) If the Beta company issues $100 million worth of preferred stock, what will happen
to its net worth if book value of common equity is $500 million?
A.It will increase by $400 million
B.It will decrease by $100 million
C.It will increase to $600 million
D.It will decrease to $400 million
4) What is the present value of your trust fund if it promises to pay you $50,000 on your
30th birthday (7 years from today) and earns 10% compounded annually?
A.$25,000.00
B.$25,657.91
C.$28,223.70
D.$29,411.76
5) What has happened to cause a $250 loss to be marked to the margin account of a
futures contract buyer?
A.The commodity decreased in value on that day
B.The commodity increased in value on that day
C.The commodity decreased in value by $250 over the contract’s life
D.The commodity increased in value by $250 over the contract’s life
6) Of the following, who has tax benefits for preferring dividends?
A.Individual investors
B.Corporations
C.Financial institutions
D.Banks
7) Sensitivity analysis evaluates projects by:
A.forecasting changes in interest rates that would increase financing costs
B.recording profitability changes while changing one variable at a time
C.ensuring that the project sponsor has proper incentives
D.testing for interrelated variables
8) An investor receives a 15% total return by purchasing a stock for $40 and selling it
after one year with a 5% capital gain. How much was received in dividend income
during the year?
A.$2.00
B.$2.20
C.$4.00
D.$6.00
9) Jay’s Jams Inc. was just established with an investment of $5 million in stereo
equipment. Jay expects his company to generate $800,000 a year for the next 10 years,
followed by $1 million a year for the following 10 years. If Jay’s cost of capital is 15%,
find the market value and book value of his company.
A.market value = $9.0 million; book value = $5.0 million
B.market value = $5.0 million; book value = $5.3 million
C.market value = $5.3 million; book value = $5.0 million
D.market value = $18.0 million; book value = $5.0 million
10) When viewing the long-term trend of volatility in U.S. stocks, it is readily apparent
that:
A.volatility has continually increased
B.volatility has continually decreased
C.volatility has offered little discernable trend
D.volatility has remained constant for years
11) What is the WACC for a firm with equal amounts of debt and equity financing, a
17% 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.15.25%
D.16.00%
12) Which of the following is correct concerning a spin-off?
A.A division of a firm is reconstituted as a new firm
B.An unprofitable division is divested
C.A division of a firm is bought by its managers
D.The spin-off generates no free cash flow
13) Financial risk refers to the:
A.risk of owning equity securities
B.risk faced by equityholders when debt is used
C.general business risk of the firm
D.possibility that interest rates will increase
14) A firm with no leases has a long-term debt ratio of 50%. This means that the book
value of equity:
A.equals the book value of long-term debt
B.is less than the book value of long-term debt
C.is greater than the book value of long-term debt
D.is unknown in relation to the book value of long-term debt
15) How might a firm such as General Mills use options to control raw material prices
for breakfast cereals?
A.Buy call options on commodities
B.Sell call options on commodities
C.Buy put options on commodities
D.Sell put options on commodities
16) The security market line displays the relationship between expected return and beta.
17) What return on equity do investors seem to expect for a firm with a $55 share price,
an expected dividend of $5.50, a beta of .9, and a constant growth rate of 5.5%?
A.9.00%
B.10.00%
C.13.95%
D.15.50%
18) How much would an investor expect to pay for a $1,000 par value bond with a 9%
annual coupon that matures in 5 years if the interest rate is 7%?
A.$696.74
B.$1,075.82
C.$1,082.00
D.$1,123.01
19) The effects of a change in sales on working capital will be seen in which section of
a financial plan?
A.Output section
B.Pro forma financial statements
C.Planning model
D.Sources and uses of funds
20) If a stock consistently goes down (up) by 1.6% when the market portfolio goes
down (up) by 1.2%, then its beta:
A.equals 1.04
B.equals 1.24
C.equals 1.33
D.equals 1.40
21) Earnings this year for Plasti-tech Inc. were $200,000. It decided to plow back
$60,000 and recorded $20,000 of depreciation. Plasti-tech’s internally generated funds
are:
A.$40,000
B.$60,000
C.$80,000
D.$140,000
22) Which of the following statements is correct?
A.An option seller makes more profits than an option buyer
B.A futures seller makes more profits than a futures buyer
C.A futures buyer’s profit will be equal to the futures seller’s loss
D.Both futures buyer and seller makes profit
23) A payout ratio of 35% for a company indicates that:
A.35% of dividends are plowed back for growth
B.65% of dividends are plowed back for growth
C.65% of earnings are paid out as dividends
D.35% of earnings are paid out as dividends
24) What is the NPV of a project that costs $100,000, provides $23,000 in cash flows
annually for 6 years, requires a $5,000 increase in net working capital, and depreciates
the asset straight-line over 6 years while ignoring the half-year convention? The
discount rate is 14%.
A.-$15,561
B.-$13,283
C.$13,283
D.$15,561
25) Find the required rate of return for equity investors of a firm with a beta of 1.3
when the risk free rate is 5%, the market risk premium is 5%, and the return on the
market is 10%.
A.11.5%
B.13.0%
C.16.5%
D.18.0%
26) The free-cash-flow theory of takeovers predicts that:
A.firms without free cash flow will become the most common LBOs
B.firms with free cash flow will continue to be the acquirers
C.firms with excess cash do not have a tendency to use it wisely
D.all of these
27) If a firm uses external financing as a plug item, has a new capital budget of $2
million, a net income of $3 million, and a plowback ratio of 40%, how much should be
raised in external funds?
A.$200,000
B.$600,000
C.$800,000
D.$1,200,000
28) When large firms file for bankruptcy:
A.the proceedings involve costly delays and legal tangles, and the business continues to
deteriorate
B.their purpose is usually to nurse the firm back to health and enable it to face the
world again
C.their benefit is that their creditors will be forced by law to give up their claims on the
firm
D.their creditors often try to seize the assets as soon as possible
29) If sales growth for XYZ Corporation exceeds 6%, which in turn causes XYZ to
seek external financing, then 6% is the:
A.external growth rate
B.internal growth rate
C.optimal growth rate
D.sustainable growth rate
30) Which of the following is more likely for a firm practicing the “relaxed” strategy of
long- versus short-term borrowing at the height of sales demand?
A.It will borrow heavily on a short-term basis
B.It will invest heavily in marketable securities
C.It will borrow heavily on a long-term basis
D.Long-term financing will approximate capital requirements
31) Free cash flow can include:
A.dividends
B.coupon payments to bondholders
C.retained earnings
D.all of these
32) Which of the following firms is likely to exhibit the least macro risk exposure?
A.Furniture manufacturer
B.Airline company
C.Dog food processor
D.Auto manufacturer
33) The book value of a firm’s equity is determined by:
A.multiplying share price by shares outstanding
B.multiplying share price at issue by shares outstanding
C.the difference between book values of assets and liabilities
D.the difference between market values of assets and liabilities
34) What can be promised by loan covenants? What cannot be ensured by loan
covenants?
35) Describe the practice of double taxation of corporate earnings in the United States.
36) Is there a tall order when there are many talented and competitive fundamental
analysts?
37) Sappy Syrup’s ROA equals the industry average, but its ROE exceeds the industry
average. How is this possible?
38) Would it ever make financial sense to forgo cash discounts that are offered from
suppliers? Can you provide an example?
39) How can you reconcile the fact that whether an investor favors dividends or capital
gains, the investor should accept the dividend discount model as a determination of
share value?
40) Tabulate and compare the differences among corporations, sole proprietorships, and
partnerships.
41) Discuss the statement, “It is always preferred to select an account that offers
compound interest over an account that offers simple interest.”
42) Determine the net cash flows for periods 1 through 3 for a firm with the following
transactions: $1,000 spent in period 1 and $2,000 spent in period 2 to produce goods to
be sold in the following periodssales of $2,000 in period 2 and $4,000 in period 3 .
One-half of all sales are in cash with the other half collected in the following period.
43) Equity, Inc. is currently an all-equity-financed firm. It has 10,000 shares
outstanding that sell for $20 each. The firm has an operating income of $30,000 and
pays no taxes. The firm contemplates a restructuring that would issue $50,000 in 8%
debt which will be used to repurchase stock. Show the value of the firm, EPS, and rate
of return on the stock before and after the proposed restructuring. What changed?