1) Making good investment and financing decisions is the chieftask of the financial
manager.
2) The “trade-off theory” of capital structure suggests that firms have an optimal level
of debt.
3) The total depreciation tax shield equals the product of depreciation and the tax rate.
4) Contrary to logic, firms that enjoy complementary resources in the production
process are rarely good candidates for merger.
5) A mortgage loan is an example of an amortizing loan. “Amortizing” means that part
of the monthly payment is used to pay interest on the loan and part is used to reduce the
amount of the loan.
6) Scenario analysis allows managers to look at different but consistent combinations of
interrelated variables.
7) All items in the common-size balance sheet are expressed as a percentage of total
assets.
8) Bonds rated Ba by Moody’s have the same safety rating as the bonds rated BB by
Standard & Poor’s.
9) When you finance a project partly with debt, you should still view the project as if it
were all equity-financed, treating all cash outflows required for the project as coming
from stockholders, and all cash inflows as going to them.
10) MM’s proposition I states that the required rate of return on equity increases as the
firm’s debt-equity ratio increases.
11) The effect of a stock repurchase is not equivalent to that of a cash dividend.
12) The profit from a futures contract is the difference between the initial futures price
and the spot price at expiration.
13) When a loan is secured by receivables, the firm assigns the receivables to the bank.
If the firm fails to repay the loan, the bank can collect the receivables from the firm’s
customers and use the cash to pay off the debt.
14) The value of a call option increases as the strike price increases.
15) A firm’s inventory period can be estimated by the ratio of inventory to daily output.
16) When using the WACC as a discount rate, it is often adjusted upward for riskier
projects and downward for safer projects.
17) How much must be invested today in order to generate a 5-year annuity of $1,000
per year, with the first payment 1 year from today, at an interest rate of 12%?
A.$3,604.78
B.$3,746.25
C.$4,037.35
D.$4,604.78
18) A board of directors is elected as a representative of the corporation’s:
A.top management
B.stakeholders
C.shareholders
D.customers
19) The basic difference between speculators and hedgers in futures contracts is that
speculators:
A.will profit regardless of the direction of price change
B.are not protecting their commodity holdings
C.are concerned only with long-term price movements
D.take a position in more than one commodity at a time
20) Long-term financing arrangements occur in the:
A.money markets
B.capital markets
C.secondary markets
D.tertiary markets
21) Which of the following terms is out of place as a typical form of inventory?
A.Raw materials inventory
B.Current goods inventory
C.Finished goods inventory
D.Work in process
22) What return should be expected from investing in the market portfolio that is
expected to yield 18% if the investment includes all of the investor’s funds plus 30% of
additional funds borrowed at the risk-free rate of 6%?
A.18.6%
B.19.6%
C.21.6%
D.24.0%
23) Additional paid-in capital refers to:
A.a firm’s retained earnings
B.a firm’s treasury stock
C.the difference between the issue price and the par value
D.funds borrowed from a bank or bondholders
24) The opportunity cost of capital is equal to:
A.the discount rate that makes project NPV equal zero
B.the return offered by other projects of equal risk
C.a project’s internal rate of return
D.the average rate of return for a firm’s projects
25) Suppose that:
What is the annualized percentage discount or premium of the Canadian dollar on the
U.S. dollar?
A.1.10% premium
B.1.10% discount
C.2.20% premium
D.2.20% discount
26) Which statement is correct about the tax treatment of dividend income and capital
gains for pension funds?
A.Dividends are taxable while capital gains are not taxable
B.Capital gains are taxable while dividends are not taxable
C.Both dividends and capital gains are taxable
D.Neither dividends nor capital gains are taxable
27) Calculate the ratio of variable costs to sales for a firm with $3,000,000 accounting
break-even revenues, $1.2 million fixed costs, and $450,000 depreciation.
A.40%
B.45%
C.55%
D.60%
28) The derivatives market is characterized by:
A.stability
B.innovation
C.riskiness
D.private deals
29) What was the market price of a share of stock before a rights issue if one share of
new stock could be purchased at $100 for every four shares that were previously
owned? The stock price after the successful rights issue was $200.
A.$150
B.$225
C.$241
D.$250
30) In general, which stocks should be combined in a portfolio if the goal is the greatest
reduction in overall risk?
A.Stocks with returns that are positively correlated
B.Stocks with returns that are negatively correlated
C.Stocks with returns that are not correlated
D.Stocks that have the highest expected returns
31) What is the total return to an investor who buys a bond for $1,100 when the bond
has a 9% coupon rate and 5 years remaining until maturity, then sells the bond after 1
year for $1,085?
A.6.82%
B.6.91%
C.7.64%
D.9.00%
32) What happens when a bond’s expected cash flows are discounted at a rate lower
than the bond’s coupon rate?
A.The price of the bond increases
B.The coupon rate of the bond increases
C.The par value of the bond decreases
D.The coupon payments are adjusted to the new discount rate
33) In an interest rate swap, borrowers typically exchange fixed-rate payments in one
currency for:
A.fixed-rate payments in another currency
B.variable-rate payments in another currency
C.fixed-rate payments in the same currency
D.variable-rate payments in the same currency
34) Some investors believe that the decision by management to issue equity as opposed
to issuing debt is a signal that:
A.the stock is currently undervalued
B.the stock is currently overvalued
C.the firm will avoid dilution of stock value
D.a shelf registration of securities will occur
35) An investor who is buying a put option is expecting:
A.stock prices to go up
B.stock prices to go down
C.interest rates to go up
D.interest rates to go down
36) Which of the following is least likely to represent an agency problem?
A.Lavish spending on expense accounts
B.Plush remodeling of the executive suite
C.Excessive investment in ‘safe” projects
D.Executive incentive compensation plans
37) A miller can hedge the price risk on wheat by:
A.buying put options on wheat
B.selling call options on wheat
C.buying wheat futures
D.selling wheat futures
38) Which of the following financial intermediaries has shown a preference for
investing in long-term financial assets?
A.Commercial banks
B.Insurance companies
C.Finance companies
D.Savings banks
39) Ignoring the time value of money, how much does a firm lose on a $2,000 sale that
has a 30% profit margin if the 20% probability of default occurs?
A.$120
B.$280
C.$600
D.$1,400
40) If 100 million shares of common stock are issued with a par value of $2 and
additional paid-in capital of $800 million, the total par value of the issued shares is:
A.$200 million
B.$600 million
C.$800 million
D.$1 billion
41) Which of the following statements more accurately describes the controller than the
treasurer?
A.Likely to be the only financial executive in small firms
B.Monitors capital expenditures to make sure that they are not misappropriated
C.Responsible for investing the firm’s spare cash
D.Responsible for arranging any issue of common stock
42) If a share of stock provided a 14.0% nominal rate of return over the previous year
while the real rate of return was 6.0%, then the inflation rate was:
A.1.89%
B.7.55%
C.8.00%
D.9.12%
43) When managers’ compensation plans are tied in a meaningful manner to the profits
of the firm, agency problems:
A.can be reduced
B.will be created
C.are shifted to other stakeholders
D.are eliminated entirely from the firm
44) Determine the break-even probability of collection for the following seller: $2,000
average invoice, 64% costs, 1% per month opportunity cost of capital. Assume that
production costs were just paid and that receivables are outstanding an average of 2
months.
45) Define and briefly explain the relationship between the value of a call option and
the following five factors: stock price, exercise price, interest rate, time to expiration,
volatility of stock price.
46) Explain why an insurance company is willing to sell life insurance to individuals,
but will be more reluctant to issue policies insuring against earthquake damage to
residents living along fault lines. Why don’t insurance companies simply charge the
residents a premium that reflects the actuarial probability of damage from earthquakes?
47) What are some new types of bonds? List and describe at least two of them.
48) What are the three methods to calculate operating cash flow?
49) What are the benefits of shelf registration to corporations?
50) Sometimes, comparing project NPVs properly can be surprisingly tricky. What are
three important, but often challenging decisions of such?
51) Why should interest rate parity mean that the forward premium should equal the
interest rate differential between countries?