1) In a merger the acquiring firm buys only the assets of the target firm.
2) If factories are operating below full capacity, sales can increase without investment
in fixed assets. However, beyond some sales level, new capacity must be added (and
additional investment in fixed assets must be made).
3) Convertible bonds give the investor the option to buy the firm’s stock in exchange for
the value of the underlying bond.
4) The opportunity cost of capital is the expected rate of return that shareholders can
obtain in the financial markets on investments with the same risk as the firm’s capital
investments.
5) Today’s buyouts are generally smaller and not leveraged as aggressively as the deals
of the 1980s.
6) The risk of tax shields can be reasonably assumed to be the same as that of the
interest payments generating them.
7) It is impossible for an investor to insure against the risk of bond default.
8) Converting an annuity to an annuity due decreases the present value.
9) Any sequence of equally spaced, level cash flows is called an annuity. An annuity is
also known as a perpetuity.
10) Forward contracts are marked to market.
11) The price at which new shares are issued is referred to as the par value of the stock.
12) Suppose a firm needs fresh capital, but its management does not want to give up its
controlling interest. The existing shares could be labeled Class A, and then Class B
shares with limited voting rights could be issued to outside investors.
13) The company cost of capital equals the weighted-average cost of capital (WACC) as
long as the tax rate is non-zero.
14) Comparing the values of undiscounted cash flows is analogous to comparing apples
to oranges.
15) A protective put is a costless way of eliminating the downside risk if holding stock.
16) Financial planning should attempt to minimize risk.
17) As a project’s beta increases, the project’s opportunity cost of capital increases.
18) The call provision of callable bonds comes at the expense of bond holders, for it
limits investors’ capital gain potential.
19) When we compare assets with different lives, we should select the machine that has
the lowest equivalent annual annuity.
20) Bonds selling at a premium price offer a higher current yield (which overstates the
true return) than bonds selling at par value.
21) In a world with corporate taxes but no possibility of financial distress, the value of
the firm is maximized when the:
A.firm uses no debt in its capital structure
B.firm uses no equity in its capital structure
C.firm uses a debt-equity ratio of 1.0
D.corporate tax rate approaches 100%
22) How many IRRs are possible for the following set of cash flows? CF0= 1,000, C1=
+500, C2= -300, C3= +1,000, C4= +200.
A.1
B.2
C.3
D.4
23) Planners often recommend entering a market for ‘strategic” reasons because:
A.the company is facing too much competition in its original market
B.the company may have valuable follow-on investments after establishing itself in the
new market
C.the immediate investment has a positive net present value
D.all of these
24) The option to alter production technology gives managers:
A.the flexibility to adapt to changing situations
B.increased cash flow from operations
C.the opportunity to expand production
D.the ability to expand product lines
25)
A firm is expected to generate $1.5 million in operating income and pay $250,000 in
interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen
to EPS if operating income increases to $2.0 million?
A.EPS increase to $15.63
B.EPS increase to $16.67
C.EPS increase to $17.50
D.EPS increase to $20.00
26) The average beta of individual stocks in the market portfolio:
A.is one
B.is zero
C.is 1/2 (midway between one and zero)
D.cannot be calculated without knowing the stocks in the portfolio
27) As long as the NPV of a project declines smoothly with increases in the discount
rate, the project is acceptable if its:
A.internal rate of return is positive
B.payback period is greater than one
C.rate of return exceeds the cost of capital
D.cash inflows equals the initial cost
28) According to MM, an increase in expected earnings per share can leave the share
price unchanged if the:
A.firm’s operating risk decreases
B.number of shares is decreased
C.required return on equity increases
D.firm has no financial leverage
29) Because of its age, your car costs $4,000 annually in maintenance expense. You
could replace it with a newer vehicle costing $8,000. Both vehicles would be expected
to last 4 more years. If your opportunity cost is 8%, by how much must maintenance
expense decrease on the newer vehicle to justify its purchase?
A.$1,250
B.$1,585
C.$2,000
D.$2,415
30) Which of the following best characterizes the difference between growth stocks and
income stocks?
A.Growth stocks do not pay dividends
B.Income stocks offer higher rates of return
C.Income stocks are seasoned issues
D.Growth stocks have greater PVGO
31) When a public firm declares a stock repurchase:
A.the number of outstanding shares falls along with the price
B.the number of outstanding shares falls and the price may rise or remain unchanged
C.an investor will receive cash in exchange for a smaller percentage of ownership
D.demand drives the stock price up
32) Income that is measured after deduction of the cost of capital is called:
A.operating income
B.operating profit
C.economic income
D.economic profit
33) Which of the following changes will decrease the value of a call option?
A.An increase in stock price
B.An increase in strike price
C.An increase in stock price volatility
D.An increase in interest rates
34) Which of the following is not correct concerning forward contracts? Forward
contracts:
A.are not standardized
B.do not set the price until the end of the contract
C.are not traded on organized exchanges
D.are not marked to market daily
35) A firm with high operating leverage is expected to:
A.have high variable costs
B.have low fixed costs
C.have a high degree of profitability
D.perform better when sales are high
36) What percentage of direct expense is required to market stock if the issuer incurs $1
million in other expenses to sell 3 million shares at $40 each to an underwriter and the
underwriter sells the shares at $43 each?
A.6.98%
B.7.19%
C.7.75%
D.8.33%
37) A firm currently offers terms of sale of 3/20, net 40 . What effect will the following
actions have on the implicit interest rate charged to customers that pass up the cash
discount? State whether the implicit interest rate will increase or decrease.
a. The terms are changed to 4/20, net 40 .
b. The terms are changed to 3/30, net 40 .
c. The terms are changed to 3/20, net 30 .
38) The payoffs from investing in options are designed so that:
A.both buyers and sellers can profit
B.the seller’s (buyer’s) gain is the buyer’s (seller’s) loss
C.roughly 20% of sellers and 50% of buyers profit
D.few buyers or sellers profit; they buy “insurance”
39) A cotton producer has purchased cotton futures that involve 50,000 pounds of
cotton at a price of $0.60 per pound. By contract expiration the producer finds that
cotton prices have declined by $0.07 per pound. As a result of the futures contracts, the
producer will:
A.lose $3,500 per contract in the futures market which offsets gains in the cash market
B.gain $3,500 per contract in the futures market which offsets losses in the cash market
C.lose $3,500 per contract in the futures market and suffer an opportunity cost in the
cash market
D.gain $3,500 per contract in the futures market and gain $0.10 per pound in the cash
market
40) Which of the following is not a takeover defense?
A.Shark repellant
B.Poison pill
C.White knight
D.Proxy contest
41) $3,000 is deposited into an account paying 10% annually, to provide three annual
withdrawals of $1,206.34 beginning in one year. How much remains in the account
after the second payment has been withdrawn?
A.$1,326.97
B.$1,206.34
C.$1,096.69
D.$587.32
42) What is the marginal tax rate for a corporation with $60,000 taxable income and an
average tax rate of 16.67% if the next-lowest marginal tax rate of 15% covers taxable
incomes up to $50,000?
A.15.00%
B.16.67%
C.18.34%
D.25.00%
43) Why are dividend changes rather than their absolute level perceived to be more
important to managers and shareholders?
A.Managers change dividends only under threatening conditions
B.Dividend changes are thought to signal future expectations
C.MM state that the absolute level of dividends is irrelevant
D.Changes determine whether borrowing must occur
44) Protective covenants prevent bond issuers from irresponsible overborrowing
behavior and are offered for the benefit of:
A.common shareholders
B.preferred shareholders
C.bondholders
D.both common and preferred shareholders
45) What must happen to asset turnover to leave ROE unchanged from its original 16%
level if the profit margin is reduced from 8% to 6% and the leverage ratio increases
from 1.2 to 1.6? Asset turnover must:
A.remain constant
B.increase from 1.46 to 2.33
C.decrease from 14.58 to 2.33
D.increase from 4.76 to 9.60
46) Corporations may have a legitimate preference for dividends over capital gains
because:
A.capital gains have a 50% tax rate
B.dividends received by corporations are not taxable
C.30% of dividends received by corporations are exempt from taxation
D.70% of dividends received by corporations are exempt from taxation
47) Which of the following would be more likely to make an unacceptable project
appear acceptable?
A.Discounting real cash flows with real rates
B.Discounting nominal cash flows with real rates
C.Discounting real cash flows with nominal rates
D.Discounting nominal cash flows with nominal rates
48) Reinvesting earnings into a firm will not increase the stock price unless:
A.the new paradigm of stock pricing is maintained
B.true depreciation is less than reported depreciation
C.the firm’s dividends are growing also
D.the ROE of new investments exceeds the firm’s required return
49) You are importing TV sets worth 10,000,000 from a Japanese manufacturer, and
this amount is payable after 6 months. You can hedge your exchange risk by:
A.buying Japanese yen in the forward market
B.selling Japanese yen in the forward market
C.borrowing Japanese yen
D.doing nothing
50) What is the approximate maximum amount that a firm should consider paying for a
project that will return $15,000 annually for 5 years if the opportunity cost is 10%?
A.$33,520
B.$56,860
C.$62,540
D.$75,000
51) Which of the following is correct if an underwriter is selling stock to the public at
$40 per share, the underwriter receives a $3 per share spread, 2 million shares are sold,
and the issuing firm receives $111 million from the underwriter?
A.The underwriter’s spread was greater than $3
B.The issue appreciated in price immediately
C.The issue included 3 million shares
D.The stock was issued on a best efforts basis
52) What is the expected constant-growth rate of dividends for a stock currently priced
at $50, that just paid a dividend of $4, and has a required return of 18%?
A.3.41%
B.5.50%
C.9.26%
D.12.5%
53) The slope of the regression line that exhibits the past relationship between a stock’s
return and the market’s return is the:
A.security market line
B.stock’s beta
C.market risk premium
D.stock’s unique risk
54) A firm with $600,000 fixed costs and $200,000 depreciation is expected to produce
$225,000 in profits. What is its DOL?
A.3.56
B.3.67
C.4.56
D.4.67
55) What is the effect on break-even level of revenues for each dollar of increase in
fixed costs plus depreciation for a firm with 70% variable costs?
A.An increase of $0.30
B.An increase of $1.00
C.An increase of $1.43
D.An increase of $3.33
56) Which of the following changes in working capital is least likely, given an increase
in the overall level of sales?
A.An increase in inventories
B.An increase in accounts payable
C.A decrease in accounts receivable
D.An increase in accounts receivable
57) Higher Z scores from a multiple discriminate analysis indicate a:
A.higher risk of bankruptcy
B.lower degree of creditworthiness
C.lower amount of working capital
D.higher degree of solvency
58) Financial markets and intermediaries:
A.channel savings to real investment
B.enable investors and businesses to reduce risk
C.provide liquidity
D.all of these
59) The following table shows the price of a Starbuck’s tall latte coffee in different
locations expressed in local currencies and converted into dollars using the spot rate of
exchange. For example, a tall latte in London costs £1.90; at an exchange rate of $1.989
per pound, this is equivalent to a price of £1.90 $1.989/£ = $3.78. This is 24% higher
than the cost of a similar coffee in New York; for the costs to be equal, the pound would
need to depreciate against the dollar.
a. Make an educated guess before doing any calculation: Which currency is least
undervalued or overvalued against the U.S. dollar? Why do you guess so?
b. What spot exchange rate establishes the law of one price for the tall latte in New
York and in each of the foreign cities?
c. If the nominal spot exchange rates are as given, what are the real exchange rates
(latte exchange rates)? What are the units of the calculation?
d. According to your calculation, are the foreign currencies overvalued or undervalued
against U.S. Dollar?
60) Which of the following situations should provide managers with the most comfort if
accounts receivable balances are increasing each quarter?
A.The sales level has decreased
B.The sales level has increased
C.The rate of collections has decreased
D.The rate of collections has increased
61) Describe the distinguishing characteristics of the major financial markets.
62) Discuss what it means for a futures contract to be marked to market. If you provide
an example, assume that the hedger has purchased a 5,000 bushel wheat contract at a
price of $3.90 per bushel.
63) Show that a stock repurchase is conceptually the same as a cash dividend using the
following example: Repo Corp. has 1,000 shares outstanding at a market price of $20
per share. In debating whether to declare a 5% cash dividend, the directors instead
chose to repurchase 50 of the outstanding shares.
64) Develop a case for the interrelationship of ethical decision making by corporate
management and profitability of the firm.
65) Sappy Syrup has a profit margin below the industry average, but its ROA equals the
industry average. How is this possible?
66) Why will sellers be less reluctant to grant credit under terms of a banker’s
acceptance? How do the acceptances work, in general?
67) Discuss the concept of a “negative risk asset.”
68) What actions can shareholders take when the corporation is underperforming and
the board of directors is not aggressive in holding managers to task?
69) How do corporate income taxes modify MM’s leverage irrelevance proposition?