1) All financial managers and economists believe that long-run historical returns are the
best measure available.
2) When asked about key factors of debt policy, financial managers commonly mention
the tax advantage of debt and the importance of maintaining their credit rating.
3) Asked yields can be guaranteed only to investors who buy a bond and hold it until
maturity.
4) The dividend discount model indicates that the value of a stock is the present value
of the dividends it will pay over the investor’s horizon plus the present value of the
expected stock price at the end of that horizon.
5) The CAPM states that the expected risk premium on any security equals its beta
times the market risk premium.
6) The liability of sole proprietors is limited to the amount of their investment in the
company.
7) At expiration a call option will have no value if the stock price is less than exercise
price.
8) Stock options give recipients a right to buy the company stock at a set (exercise)
price. The exercise price is usually the stock’s 4 p.m. price on the date of the grant, an
average of the day’s high and low, or the 4 p.m. price the day before.
9) The economic break-even level of sales will be higher than the accounting
break-even level.
10) The purchase of new equipment is a use of cash, and it reduces the firm’s net cash
balance.
11) The income statement resembles a snapshot of the firm at a specific time.
12) Accounting practices are not standardized across countries.
13) Sunk costs do not affect project NPV.
14) In 2010, the SEC recently introduced a new rule allowing large investors (those
holding a 3% ownership stake in the firm for at least 2 years) to nominate their own
candidates for the board of directors.
15) The costs for public companies of meeting the requirements of the Sarbanes-Oxley
Act and other detailed regulations have helped push corporations to return to private
ownership.
16) Extending trade credit can increase the probability of repeat orders.
17) Callable bonds allow the investor to redeem the bond at face value or let the bond
remain outstanding until maturity.
18) The floor of a convertible bond will be the value of the underlying bond.
19) Adaptability is not a desirable feature in financial plans.
20) How is it possible to invest only in the market portfolio yet have a portfolio beta of
1.5?
A.Don’t diversify away the unique risks
B.Purchase only aggressive stocks for the portfolio
C.Purchase only stocks with high levels of systematic risk
D.Borrow funds to increase your investment
21) What real rate of return is earned by a one-year investor in a bond that was
purchased for $1,000, has an 8% coupon, and was sold for $960 when the inflation rate
was 6%?
A.-1.89%
B.1.92%
C.5.66%
D.11.47%
22) Which of the following strategies will allow real retirement spending to remain
approximately equal, assuming savings of $1,000,000 invested at 8%, a 25-year
horizon, and 4% expected inflation?
A.Spend approximately $63,000 annually
B.Spend approximately $78,225 annually
C.Spend approximately $93,680 annually
D.Spend approximately $127,500 annually
23) Option buyers can have a(n) _____ of exercising their options. Options sellers can
have a(n) _____ of exercising their options.
A.obligation; obligation
B.obligation; right
C.right; right
D.right; obligation
24) Which of the following is more likely to be correct if market value of equity is less
than book value of equity?
A.Investors anticipate excellent earning potential
B.Investors anticipate low earning potential
C.Assets have been fully depreciated
D.The company is bankrupt
25) Which of the following forms of income can individuals defer from taxation?
A.Dividends
B.Interest
C.Realized capital gains
D.Unrealized capital gains
26) In which of the following organizations would agency problems be least likely to
occur?
A.A sole proprietorship
B.A partnership
C.A corporation
D.A closely held corporation
27) A firm’s permanent working capital refers to the:
A.difference between current assets and current liabilities
B.minimum difference between current assets and current liabilities
C.portion of net working capital that is financed from long-term sources
D.amounts that must be held to meet debt covenants
28) Which of the following are both a financial intermediary and a financial institution?
A.Mutual funds
B.Pension funds
C.Insurance companies
D.Hedge funds
29) When underwriters are unsure of the demand for a new offering, they:
A.reduce their spread
B.undertake the issue on a firm commitment basis
C.undertake the issue on a best efforts basis
D.provide shelf registration for the issue
30) A firm is currently expected to develop $2 EPS when operating income equals $4
million and interest expense equals $2 million. How low can operating income drop
before EPS are reduced by half, to $1? Ignore taxes.
A.Operating income drops to $3.5 million
B.Operating income drops to $3.0 million
C.Operating income drops to $2.5 million
D.Operating income drops to $2.0 million
31) The discount rate that makes the present value of a bond’s payments equal to its
price is termed the:
A.rate of return
B.yield to maturity
C.current yield
D.coupon rate
32) If managers are rational, they will hedge only when they perceive that:
A.prices are headed in an adverse direction
B.derivative instruments are priced lower than actual value
C.risk reduction is preferable to higher potential profits
D.they can increase their profitability by doing so
33) A new, more efficient machine will last 4 years and allow inventory levels to
decrease by $100,000 during its life. At a cost of capital of 13%, how does the net
working capital change affect the project’s NPV?
A.NPV increases by $38,668
B.NPV increases by $61,330
C.NPV increases by $100,000
D.NPV increases by $138,668
34) NPV fails as a decision rule when:
A.the firm faces capital rationing
B.the firm faces mutually exclusive projects
C.the firm faces long-lived projects
D.none of these
35) Which of the following assets is likely to be considered the most liquid?
A.Marketable securities
B.Net fixed assets
C.Accounts payable
D.Inventories
36) Why may a large increase in earnings not translate into a large increase in
dividends?
A.The earnings will be taxed
B.Some investors may prefer capital gains
C.Managers wish to assess the earning’s persistence
D.The earnings may already be a part of retained earnings
37) Assuming at the $50,000 income level that the corporate tax rate increases from 15
to 25%, which of the following statements is correct for a firm with $75,000 income?
A.Its marginal tax rate is 15%
B.Its average tax rate is 25%
C.Its marginal tax rate is 18.33%
D.Its average tax rate is 18.33%
38) A private placement avoids which of the following costs?
A.Depression in the stock price
B.Administration costs
C.Registration with the SEC
D.Fixed costs
39) The rate at which the assets of a firm can grow without the requirement of external
sources of financing is the:
A.internal growth rate
B.sustainable growth rate
C.pro forma growth rate
D.plowback rate
40) The record date for a dividend is scheduled between the:
A.declaration date and the with-dividend date
B.with-dividend date and ex-dividend date
C.ex-dividend date and the payment date
D.declaration date and ex-dividend date
41) Plasti-tech Inc. has decided to go public and has sold 2 million of its shares to its
underwriter for $20 per share. The underwriter then sold them to the public for $22
each. Plasti-tech also encountered $0.5 million in administrative fees. Soon after the
issue, the stock price rose to $25. Find Plasti-tech Inc.’s total cost of this issue.
A.$4.5 million
B.$9.5 million
C.$10.5 million
D.$14.5 million
42) The salesperson offers, “Buy this new car for $25,000 cash or, with appropriate
down payment, pay $500 per month for 48 months at 8% interest.” Assuming that the
salesperson does not offer a free lunch, calculate the “appropriate” down payment.
A.$1,000.00
B.$4,520.64
C.$5,127.24
D.$8,000.00
A difference of $4,520.64 exists between cash price and loan value. This should be the
down payment.
43) The reason why the IRR criterion can give conflicting signals with mutually
exclusive projects is:
A.the NPVs of these projects cross over at some discount rate
B.discounted cash flow is not considered with mutually exclusive projects
C.IRR performs better with accounting returns than with cash flows
D.mutually exclusive projects have multiple IRRs
44) Last year’s asset turnover ratio was 2.0 . Sales have increased by 25% and average
total assets have increased by 10% since that time. What is the current asset turnover
ratio?
A.1.82
B.2.05
C.2.15
D.2.27
45) A company is about to issue new shares of stock. If the par value per share is $4, the
price of the new shares will most likely be:
A.less than $4
B.equal to $4
C.greater than $4
D.equal to the capital surplus
46) World Enterprises is determined to report earnings per share of $2.67. It therefore
acquires the Axle Company:
There are no gains from the merger. In exchange for Axle shares, World Enterprises
issues just enough of its own shares to ensure its $2.67 earnings per share objective.
a. Complete the above table for the merged firm.
b. How many shares of World Enterprises are exchanged for each share of Axle?
c. What is the cost of the merger to World Enterprises?
d. What is the change in the total market value of those World Enterprises shares that
were outstanding before the merger?
47) The theory that goods in a foreign country should be priced approximately equal
after currency translation to goods in a host country is referred to as the law of:
A.exchange rates
B.large numbers
C.spot rates
D.one price
48) If the projected growth rate is smaller than the firm’s sustainable growth rate:
A.it should increase its projected growth rate
B.the firm will be required to decrease its plowback ratio
C.its debt-equity ratio will decrease
D.the firm will be required to increase borrowing
49) Circular File stock is selling for $25 a share. You see that call options on the stock
with exercise price of $20 are selling at $3. What should you do? What will happen to
the option price as investors identify this opportunity? Then you observe that put
options on Circular File with exercise price $30 are selling for $4. What should you do?
50) Discuss the statement, “Changes in working capital necessitated by a project
represent only an opportunity cost to the firm.”
51) Calculate the expected rate of return for the following portfolio, based on a
Treasury bill yield of 4% and an expected market return of 13%:
52) Under what conditions can the use of options actually be detrimental to the firm’s
profitability?
53) The Green Transfer Co. utilizes a concentration banking system and is determining
whether to request wire transfers or depository transfer checks. What would you
suggest, given the following: wire transfer saves 3 days of float but increases costs by
$45. The current interest rate is 10% annually. Next year, however, technological
changes will occur that reduce the float savings to 2 days from 3, and the incremental
costs will be reduced to $35.
54) Why do companies hedge to reduce risk?
55) What are some simple strategies to protect the firm against exchange rate risk?
56) Why does diversification reduce risk?
57) With rates of return so low on money market instruments, does it actually benefit a
firm to pay close attention to cash balances?
58) After reading the fine print in your credit card agreement, you find that the “low”
interest rate is actually an 18% APR, or 1.5% per month. Now, to make you feel even
worse, calculate the effective annual interest rate.