1) The statement of cash flow explains the changes that took place in the firm’s cash
balance over the period of interest.
2) One method used to monitor the collections of accounts receivable is aging.
3) Although under normal operating conditions preferred shareholders do not have
voting rights, protective provision generally allow for voting rights in the event of
nonpayment of preferred dividends.
4) Business risk refers to the relative dispersion of a firm’s earnings before interest and
taxes.
5) It is never appropriate to compare nominal rates unless they include the same number
of compounding periods per year.
6) Break-even analysis ignores fixed costs because fixed costs do not change.
7) Marketable securities are near-cash assets because they can be converted into cash
quickly.
8) The accounting book value of an asset represents the historical cost of the asset
rather than its current market value or replacement cost.
9) A fast-growing company with many high net present value projects may maximize
shareholder wealth by NOT paying a dividend.
10) Cash budgets do not provide reasonable predictions for asset requirements when the
asset purchases are lumpy.
11) A corporation that increases it net profit margin will need less discretionary
financing, other things being equal.
12) Limited liability companies are more flexible than S-type Corporations because
limited liability companies operate under state laws.
13) Borrowing money causes a corporation’s return on operating assets to decrease
because of the interest that must be paid.
14) The information effect suggests dividend policy matters because dividends act as a
persuasive communications tool, signaling investors about the financial condition of the
firm.
15) Haroldson Inc. common stock is selling for $22 per share. The last dividend was
$1.20, and dividends are expected to grow at a 6% annual rate. Flotation costs on new
stock sales are 5% of the selling price. What is the cost of Haroldson’s retained
earnings?
A) 5.73%
B) 11.45%
C) 11.78%
D) 12.09%
16) Consider the following four types of payments that could be made by a normal
operating firm: interest, common dividends, income taxes, and preferred dividends.
Compared to the other payments mentioned, where would you rank common dividend
payments in terms of the order of payment if the firm is liquidating?
A) first
B) second
C) third
D) fourth
17) The principle of risk-return tradeoff means that
A) higher risk investments must earn higher returns
B) an investor who takes more risk will earn a higher return
C) a rational investor will only take on higher risk if he expects a higher return
D) an investor who bought stock in a small corporation five years ago has more money
than an investor who bought U.S. Treasury bonds five years ago
18) What is diversifying among different kinds of assets known as?
A) portfolio funding
B) capital asset classification
C) asset allocation
D) multi-diversification
19) Which of the following best describes cash flow from financing activities?
A) Interest income, plus dividend income, minus taxes
B) Interest expense, minus dividends paid
C) Interest paid, plus dividends paid, plus increase (or minus decrease) in stock, plus
increase (or minus decrease) in debt
D) Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt,
minus interest paid, minus dividends paid
20) It is your 6th birthday today. You have a trust fund with $50,000 that is earning 8%
per year. You expect to withdraw $30,000 per year for 7 years starting on your 22nd
birthday for graduate school. How much money will be left in the trust fund after your
last withdrawal (rounded to the nearest $10)?
A) $125,660
B) $35,780
C) $4,140
D) You will not have enough money to pay for graduate school
21) QRW, Inc. has a retained earnings balance of $2,000,000. The company reported
net income of $600,000, sales of $4,000,000, and has 200,000 shares of common stock
outstanding. The company announced a dividend of $2.00 per share. Therefore the
company’s dividend payout ratio is
A) 66.7%
B) 50%
C) 20%
D) 10%
22) A significant advantage of the internal rate of return is that it
A) provides a means to choose between mutually exclusive projects
B) provides the most realistic reinvestment assumption
C) avoids the size disparity problem
D) considers all of a project’s cash flows and their timing
23) The following information pertains to the Classic Burger Restaurant chain:
a.If sales increase by 10%, what will be the new level of EPS if the firm has 100,000
shares outstanding?
b.What is the percentage increase in EPS? Explain the difference between the
percentage increase in sales and the percentage increase in EPS.
24) Fortunately, Europe was largely shielded from the economic recession that afflicted
the world economy in 2007. The European economies contracted less and have
recovered much more rapidly than their counterparts in the United States and China.
25) All of the following statements about balance sheets are true EXCEPT
A) Assets – Liabilities = Shareholders’ Equity
B) assets are reported at historical cost
C) balance sheets show average asset balances over a one-year period
D) a balance sheet reports a company’s financial position at a specific point in time
26) If the market price of a bond decreases, then
A) the yield to maturity decreases
B) the coupon rate increases
C) the yield to maturity increases
D) the coupon rate decreases
27) The DEF Company is planning a $64 million expansion. The expansion is to be
financed by selling $25.6 million in new debt and $38.4 million in new common stock.
The before-tax required rate of return on debt is 9 percent and the required rate of return
on equity is 14 percent. If the company is in the 35 percent tax bracket, what is the
firm’s cost of capital?
A) 8.92%
B) 9.89%
C) 11.50%
D) 10.74%
28) Mountain Retreat and Resort is undergoing a major expansion. The expansion will
be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market
price of the bonds is $1,070 each. The firm’s flotation expense on the new bonds will be
$50 per bond. The firm’s marginal tax rate is 35%. What is the relevant cost of the new
bonds for capital budgeting purposes?
A) 5.14%
B) 5.69%
C) 8.45%
D) 4.82%
29) Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $4). The
dividend is expected to grow at a constant rate of 8% per year. The price of Sentry
Manufacturing’s stock today is $29 per share. If Sentry Manufacturing decides to issue
new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing’s
marginal tax rate is 35%. Based on the above information, the cost of retained earnings
is
A) 28.38%
B) 24.12%
C) 26.62%
D) 31.40%
30) The CEO of High Tech International decides to change an accounting method at the
end of the current year. The change results in reported profits increasing by 5%, but the
company’s cash flows are not changed. If capital markets are efficient, then
A) the stock price will not be affected by the accounting change
B) the stock price will increase due to higher profits
C) the stock price will increase only if the accounting change will also result in higher
profits in the next year
D) the stock price will decrease because accounting method changes are not permitted
under generally accepted accounting principles
31) Newtown Manufacturing, Inc. uses semi-hex joints in its manufacturing process. If
Stein’s total demand for the joints for next year is estimated to be 57,000 units, and if
the cost per order is $225, what is Newtown’s economic order quantity of semi-hex
joints? Assume that carrying costs for semi-hex joints are $0.75 per unit.
A) 3,729
B) 3,987
C) 4,944
D) 5,848
32) Which of the following changes will make the value of a stock go up, other things
being held constant?
A) The required return decreases
B) The required return increases
C) In general, investors become more risk averse
D) The growth rate of dividends decreases
33) A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond
matures in 15 years and has a current market price of $925. If the corporation sells more
bonds it will incur flotation costs of $25 per bond. If the corporate tax rate is 35%, what
is the after-tax cost of debt capital?
A) 3.74%
B) 4.45%
C) 5.29%
D) 6.78%
34) Which of the following is NOT true regarding common stock?
A) Dividends, unlike interest payments, are not tax deductible
B) Common stock, unlike bond principal, does not mature
C) Common stockholders are owners of the firm, whereas bondholders are creditors
D) Dividend payments, like interest payments, are fixed
35) Messenger, Inc. bonds have a 4% coupon rate with semiannual coupon payments
and a $1,000 par value. The bonds have 11 years until maturity, and sell for $925. What
is the current yield for Messinger’s bonds?
A) 2.16%
B) 3.45%
C) 4.32%
D) 5.52%
36) Which of the following types of risk is diversifiable?
A) unsystematic, or company-unique risk
B) betagenic, or ecocentric risk
C) systematic risk
D) market risk
37) The beta of ABC Co. stock is the slope of
A) the security market line
B) the characteristic line for a plot of returns on the S&P 500 versus returns on
short-term Treasury bills
C) the arbitrage pricing line
D) the characteristic line for a plot of ABC Co. returns against the returns of the market
portfolio for the same period
38) All of the following elements of a cash management program will likely contribute
to an increase in the value of the firm EXCEPT
A) collect cash more quickly
B) slow down cash disbursements
C) prepare more accurate cash flow forecasts
D) increase cash balances for precautionary reasons
39) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%. The profitability index for Project B is
A) 1.55
B) 1.48
C) 1.39
D) 1.33
40) Business risk refers to
A) the risk associated with financing a firm with debt
B) the variability of a firm’s expected earnings before interest and taxes
C) the uncertainty associated with a firm’s CAPM
D) the variability of a firm’s stock price
41) A bond maturing in 10 years pays $80 each year (including year 10) and $1,000
upon maturity. Assuming 10 percent to be the appropriate discount rate, the present
value of the bond is
A) $877.11
B) $1,000.00
C) $416.39
D) $1,785.67
42) To compound $100 quarterly for 20 years at 8%, we must use
A) 40 periods at 4%
B) 5 periods at 12%
C) 10 periods at 4%
D) 80 periods at 2%
43) You have contracted to buy a house for $250,000, paying $30,000 down and taking
out a fully amortizing loan for the balance, at a 5.7% annual rate for 30 years. What will
your monthly payment be if they make equal monthly installments over the next 30
years (to the nearest dollar)?
A) $1,035
B) $1,123
C) $1,189
D) $1,277
44) A financial analyst expects Crane Service Inc. to pay a dividend of $2 per share one
year from today, a dividend of $3 per share in years two, and estimates the value of the
stock at the end of year two to be $22. If your required return on Crane Service stock is
14 %, what is the most you would be willing to pay for the stock today if you plan to
sell the stock in two years?
A) $20.99
B) $26.75
C) $26.90
D) $27.00
45) Studio 55, Inc. has an issue of preferred stock that pays a dividend of $4.00. The
preferred stockholders require a rate of return on this stock of 9%. At what price should
the preferred stock sell for? Round off to the nearest $0.10.
A) $36.00
B) $44.40
C) $62.50
D) $88.80
46) Which of the following statements about project standing alone risk is true?
A) It ignores the fact that much of the risk of a project will be diversified away as the
project is combined with the firm’s other projects
B) It ignores the cash flows that are associated with a project that occur beyond the
payback period
C) It takes into consideration the effects of diversification of the firm’s shareholders
D) It provides the best measure of project risk for a large, widely-held company
47) A company collects 25% of its sales during the month of sale, 65% one month after
the sale, and 10% two months after the sale. The company expects sales of $50,000 in
August, $80,000 in September, $90,000 in October, and $60,000 in November. How
much money is expected to be collected in October?
A) $90,000
B) $79,500
C) $55,000
D) $22,500
48) AFB, Inc.’s dividend policy is to maintain a constant payout ratio. This year AFB,
Inc. paid out a total of $2 million in dividends. Next year, AFB, Inc.’s sales and earnings
per share are expected to increase. Dividend payments are expected to
A) remain at $2 million
B) increase above $2 million
C) decrease below $2 million
D) increase above $2 million only if the company issues additional shares of common
stock
49) Sutter Corporation’s common stock is selling for $16.80 a share. Last year Sutter
paid a dividend of $.80. Investors are expecting Sutter’s dividends to grow at an annual
rate of 5% per year. What is the cost of internal equity?
50) Table 4-7
Hokie Corporation Comparative Balance Sheet
For the Years Ending December 31, 2009 and 2010
(Millions of Dollars)
Hokie had net income of $28 million for 2010 and paid total cash dividends of $20
million to their common stockholders.
Calculate the following 2010 financial ratios of Aggie Corporation using the
information given in Table 4-7:
i.current ratio
ii.acid test ratio
iii.debt ratio
iv.return on total assets
v.return on common equity
51) Bay Land, Inc. has the following distribution of returns:
Assuming that these returns are normally distributed, what is the probability that Bay
Land, Inc. will return less than 7.25%? Show all work, and clearly explain and state
your answer.
52) Is it possible for a company that has negative net income and negative operating
cash flow to end the year with an increase in cash and an increase in stock price?
Explain your answer.
53) Discuss the risk-return tradeoff experienced in working-capital management.
54) An investment will pay $500 in three years, $700 in five years and $1000 in nine
years. If your opportunity rate is 6%, what is the present value of this investment?
55) Crimson Plumbing Supplies expects total sales of $9,000,000 this year. Ten percent
of the company’s sales are paid in cash; credit sales are usually paid by check. The
average check size is $3,000. Second National Bank is offering the company a lock-box
system. The fees are $800 per month plus $.60 per check. Short-term marketable
securities are currently earning 8 percent per year. What reduction in check collection
time is necessary for Carrollton Plumbing Supplies to be neither better nor worse off
from adopting the proposed system? Use a 365-day year.