1) Regardless of the particular source of funds utilized for a project, the required rate of
return, or discount rate, will be the weighted average cost of capital.
2) According to traditional financial theory, the cost of capital curve is U-shaped over
the range of debt-equity mixes.
3) Higher return always induces stockholders to invest in a company.
4) The costs of bond refunding are the call premium and the underwriting cost on the
new bond issue.
5) The earnings-per-share impact of a merger is influenced by relative price-earnings
ratios and the terms of exchange.
6) Checks can be cleared only through the Federal Reserve System.
7) The downside protection of a convertible bond’s floor value insulates the investor
from any possible loss.
8) The dividend payout ratio is the dividend divided by the stock price.
9) For high-IRR investments, it is perfectly acceptable to assume that reinvestment will
occur at an equally high, if not higher, rate.
10) Lower profit margins resulting from increased competition would mean a lower
need for external funds.
11) The payback method is basic to understand and places a heavy emphasis on
liquidity.
12) Fannie Mae, Freddie Mac, and Sallie Mae are private stockholder-owned
corporations whose stocks are traded on the NYSE.
13) Bank deregulation has eased competition between commercial banks, savings and
loans, brokerage houses, and new financial services companies.
14) A convertible bond has both a downside limit (the pure bond value) and an upside
limit (the conversion price).
15) Decision trees present a tabular or graphical comparison of projected decision
outcomes.
16) Warrants never sell for more than their intrinsic value.
17) The Sarbanes-Oxley Act of 2002 has ensured that financial executives refrain from
fraudulent activities.
18) A lock-box is used by the selling corporation to speed up the check collection and
check-clearing process.
19) Which of the following does not affect a company’s dividend policy?
A.Legal rules concerning capital impairment
B.The efficient market hypothesis
C.Access to capital markets
D.The tax position of shareholders
20) The rising ratio of divestitures to new acquisitions that occurred in the past suggests
that
A.poisonpills are no longer effective as a defense against takeovers
B.too much diversification strained the operating capabilities of many firms
C.the portfolio effect has been a highly successful method of reducing risk
D.multinational firms are increasingly considered high risky investments
21) The Required Rate of Return for common stock is Ke = (D1/P0) + g. What are the
assumptions of the model?
A.Growth (g) is constant to infinity
B.The price earnings ratio stays the same
C.The firm must pay a dividend to use this model
D.All of these options are assumptions of the model
22) The Overseas Private Investment Corporation (OPIC)
A.loans money to multinational firms
B.does feasibility studies for multinational firms
C.sells insurance policies to qualified multinational firms
D.None of these options
23) All of the following uses of annual earnings would contribute toward an increase in
shareholder value except for which one?
A.To repurchase shares
B.To invest in projects with high profit potential
C.To pay off debt
D.All of these options increase shareholder value
24) The system whereby funds are moved between computer terminals without use of
checks is
A.electronic funds transfer
B.float
C.a lock-box system
D.magnetic character recognition
25) If fixed costs rise while other variables stay constant
A.the break-even point rises
B.the degree of operating leverage increases
C.total profit declines
D.All of the options
26) An increase in investments in long-term securities will
A.increase cash flow from investing activities
B.decrease cash flow from investing activities
C.increase cash flow from financing activities
D.decrease cash flow from financing activities
27) With regard to interest rates and bond prices, it can be said that
A.a 1% change in interest rates will cause a greater change in long-term bond prices
than short-term prices
B.a 1% change in interest rates will cause a greater change in short-term bond prices
than long-term prices
C.long-term rates are more volatile than short-term rates
D.a decrease in interest rates will cause bond prices to fall
28) Dilution of earnings occurs because
A.a new issue of common stock creates more shares outstanding, which often reduces
earnings per share temporarily
B.the company suffers a decline in earnings after taxes
C.the investment banker collects an underwriting fee
D.All of these options
29) Which of the following does MACRS depreciation provide to corporations?
A.Increases total depreciation
B.Lengthens the lives of assets for depreciation purposes
C.Shortens the lives of assets for depreciation purposes
D.Full-year versus half-year convention
30) Some dividend reinvestment plans allow the stockholder to acquire shares of stock
A.from the company’s unissued shares
B.in the market through the company’s transfer agent
C.at a discount from the market price
D.All of these options
31) Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are
expected to be $1,500, $1,500, and $10,000 in the three years over which the project
will produce cash flows. If the discount rate is 9%, what is the net present value of the
project?
A.Less than $0
B.Between $0 and $400
C.Between $400 and $800
D.More than $800
32) When a firm enters Stage III of its life cycle, which of the following is NOT likely
to be observed?
A.Dividend payout ratios are likely to rise to a moderate level of 20-30% of earnings
B.More competition is likely to enter the firm’s market
C.Sales begin to decrease
D.Stock splits are common
33) A convertible bond is currently selling for $1,125. It is convertible into 20 shares of
common stock that presently sell for $40 per share. The conversion premium is
A.$325
B.$215
C.66.74 shares
D.23.8 shares
34) The general rule for using the weighted average cost of capital (WACC) in capital
budgeting decisions is to accept all projects with
A.rates of return greater than or equal to the WACC
B.rates of return less than the WACC
C.rates of return equal to or less than the WACC
D.positive rates of return
35) Total asset turnover indicates the firm’s
A.liquidity
B.debt position
C.ability to use its assets to generate sales
D.profitability
36) How many of the following items decrease cash flow in the statement of cash
flows?
Increase in accounts receivable
Increase in notes payable
Depreciation expense
Increase in investments
Decrease in accounts payable
Decrease in prepaid expenses
Dividend payment
Increase in accrued expenses
A.Two of these items decrease cash flow
B.Three of these items decrease cash flow
C.Four of these items decrease cash flow
D.Five of these items decrease cash flow
37) Although debt financing is usually the cheapest component of capital, it cannot be
used in excess because
A.interest rates may change
B.the firm’s stock price will increase and raise the cost of equity financing
C.the financial risk of the firm may increase and thus drive up the cost of all sources of
financing
D.underwriting costs may change
38) Pressure to increase current asset buildup often results from
A.a decline in sales growth
B.rapidly expanding sales
C.increased demands of short-term creditors
D.None of the options
39) If the company’s accounts receivable turnover is increasing, the average collection
period
A.is going up slightly
B.is going down
C.could be moving in either direction
D.is going up by a significant amount
40) The Securities Act of 1933 is primarily concerned with
A.original issues of securities
B.secondary trading of securities
C.the national securities markets
D.protecting customers of bankrupt securities firms
41) The weak form of the efficient market hypothesis states that an investor can profit
by using past price data.
42) When the yield curve is upward sloping, generally a financial manager should
A.utilize long-term financing
B.utilize short-term financing
C.wait for future financing
D.lease
43) Match the following to the items below:
1>merger premium
2>market value maximization
3>two-step buyout
4>synergy
5>horizontal integration
6>merger arbitrageur
7>vertical integration
8>takeover tender offer
A. An unfriendly acquisition that is not initially negotiated with the management of the
target firm.
B. Acquiring competitors, which is often curbed by antitrust policy.
C. A type of takeover in which two offers are made: an initial offer to buy 51% of the
stock at a price above current market value for a limited time only, after which a price
below the current market value will be paid.
D. The acquisition of buyers and sellers of goods and services to the company.
E. The concept of maximizing the wealth of the stockholders.
F. A specialist in merger investments who attempts to capitalize on the difference
between the value offered and the current market value of the acquisition candidate.
G. 2 + 2 = 5 effect.
H. That part of a buyout or exchange offer that represents a value over and above the
market value of the acquired firm.
44) A correlation coefficient of _____ provides the greatest possible risk reduction to
the firm.
A.-2
B.-1
C.0
D.+1
45) Buchanan Corp. is refunding $10 million worth of 10% debt. The new bonds will
be issued for 8%. The corporation’s tax rate is 35%. The call premium is 9%. What is
the net cost of the call premium after taxes?
A.$390,000
B.$1,080,000
C.$585,000
D.$702,000
46) A higher interest rate (discount rate) would
A.reduce the price of corporate bonds
B.reduce the price of preferred stock
C.reduce the price of common stock
D.All of these options
47) Which of the following questions does break-even analysis attempt to address?
A.How much do changes in volume affect costs and profits?
B.At what point does the firm break even?
C.What is the most efficient level of fixed assets to employ?
D.All of the options
48) The “ex-dividend date” is the date
A.on which recipients of the dividend are determined
B.the dividend is paid
C.the dividend is declared
D.which no longer includes dividend payments for stock bought on that date
49) Companies list their stock around the globe to
A.capitalize on the inefficiency inherent in foreign markets
B.increase liquidity for their stockholders
C.provide opportunities for the sale of new stock in foreign countries
D.increase liquidity for their stockholders and provide opportunities for the sale of new
stock in foreign countries
50) A firm will repurchase their own shares in the market because
A.it can stabilize their price in the market
B.they believe the shares are selling at a high price
C.it will generally provide a benefit to the shareholders
D.All of these options
51) All of the following are advantages to the corporation of issuing convertibles except
for which one?
A.Provides a low-cost financing alternative for large, high-quality companies
B.Is used when the corporation believes its stock is undervalued
C.Generally is lower cost than straight debt
D.Provides access for small companies to the debt market
52) Eurodollars are
A.United States dollars deposited in foreign banks
B.foreign dollars deposited in United States banks
C.investments of common market countries
D.None of these options
53) Mr. Sullivan is borrowing $2 million to expand his business. The loan will be for 10
years at 12% and will be repaid in equal quarterly installments. What will the quarterly
payments be?
54) Fullerton Company’s bonds are currently selling for $1,200.00 per $1,000 par-value
bond. The bonds have a 10% coupon rate and will mature in 10 years. What is the
approximate yield to maturity? (Solve this problem using either Excel’s “Goal Seek”
function or a financial calculator.)
55) Given the balance sheet and income state for Simmons Maintenance Company,
compute the ratios that are also shown for the industry average. For each ratio, indicate
whether Simmons is better or worse than the industry average. For inventory turnover,
use sales rather than cost of goods sold.
56) The following is the December 31, 2010 balance sheet for the Epics Corporation.
Sales for 2010 were $3,000,000, with the cost of goods sold being 60% of sales.
Depreciation expense was 10% of the gross plant and equipment at the beginning of the
year. Interest expense was 9% on the notes payable and 11% on the bonds payable.
Selling and administrative expenses were $200,000 and the firm’s tax rate is 40%.
Prepare an income statement.
57) If you borrow $15,000 at $1,000 interest for one year, what is your effective interest
cost for the following payment plans?
58) King, Inc., a successful Midwest firm, is considering opening a branch office on the
West Coast. Under normal economic conditions, with a 45% probability of occurring,
King can expect to earn a net income of $70,000 per year. In a mini-recession, at 25%
probability, King will earn $20,000. In a severe recession, at a 20% probability, King
will lose $15,000. There is also a slight probability (10%) that King will lose $300,000
if the expansion fails and the branch office must be closed. Should King open a branch
office in California based on these assumptions?
59) Sara Shouppe has invested $100,000 in an account at her local bank. The bank will
pay her a constant amount each year for six years, starting one year from today, and the
account’s balance will be 0 at the end of the sixth year. If the bank has promised Ms.
Shouppe a 10% return, how much will they have to pay her each year?
60) Simon Fixtures Corp. is expected to pay $2.10 per share in dividends at the end of
the next 12 months. The growth rate in dividends is expected to be constant at 4% per
year. If the stock is selling for $50 per share, what is the required rate of return?