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1) The primary distinction between securities sold in the primary and secondary
markets is the:
A.riskiness of the securities
B.price of the securities
C.previous issuance of the securities
D.profitability of the issuing corporation
2) When the yield curve is upward-sloping, then:
A.short-maturity bonds offer high coupon rates
B.long-maturity bonds are priced above par value
C.short-maturity bonds yield less than long-maturity bonds
D.long-maturity bonds increase in price when interest rates increase
3) How much money can be saved annually by setting up a lock-box system that will
process 500 checks per day at a cost of $0.20 per check if each check averages $220,
collection float is reduced by 3 days, and the annual interest rate is 8%?
A.-$27,700
B.-$10,100
C.$10,000
D.$16,400
4) If the future value of an annuity due = $25,000 and $24,000 is the future value of an
ordinary annuity that is otherwise similar to the annuity due, what is the implied
discount rate?
A.1.04%
B.4.17%
C.5.00%
D.8.19%
5) An example of how financial intermediaries can assist in shifting an individual's
consumption forward in time is:
A.providing a line of credit
B.opening a passbook account
C.starting a life insurance policy
D.starting an auto insurance policy
6) Which of the following is the least effective measure of operating performance?
A.ROC
B.ROA
C.ROE
D.All of these are equally ineffective measures of operating performance
7) As time draws closer to contract expiration, futures contract prices can be expected
to:
A.increase as the demand for delivery intensifies
B.decrease as speculators resolve the uncertainty of prices
C.move similarly to broad-based market indices, such as the S&P 500
D.converge upon the spot price
8) The current 1-year nominal interest in the United States is 7%. If the anticipated
inflation for the coming year in the United States is 2.5%, what is the real interest rate
in the U.S.?
A.4.21%
B.4.39%
C.4.50%
D.7.18%
9) If a project is expected to increase inventory by $17,000, increase accounts payable
by $10,000, and decrease accounts receivable by $1,000, what effect does working
capital have during the life of the project?
A.Increases investment by $4,000
B.Increases investment by $5,000
C.Increases investment by $6,000
D.Working capital has no effect during the life of the project
10) What is the WACC for a firm using 55% equity with a required return of 15%, 35%
debt with a required return of 8%, 10% preferred stock with a required return of 10%,
and a tax rate of 35%?
A.10.72%
B.11.07%
C.11.70%
D.12.05%
11) If a stock's returns are volatile, then the stock:
A.cannot be considered a negative risk asset
B.can still be considered a negative risk asset
C.has macro risk, but no unique risk
D.does not offer diversification potential
12) You're ready to make the last of four equal, annual payments on a $1,000 loan with
a 10% interest rate. If the amount of the payment is $315.47, how much of that payment
is accrued interest?
A.$28.68
B.$31.55
C.$100.00
D.$315.47
13) The primary goal of corporate management should be to:
A.maximize the number of shareholders
B.maximize the firm's profits
C.minimize the firm's costs
D.maximize the shareholders' wealth
14) The process of marking a futures contract to market means that:
A.the profitability of the contract is locked in from the onset of the contract
B.the amount of commodity to be delivered changes as prices change
C.contracts are closed out as soon as they become unprofitable
D.profits or losses are posted to the contract daily
15) If market values of equity exceed book values of equity, then:
A.equity has been depreciated too rapidly
B.the firm uses accrual-based accounting
C.profit potential is expected to be attractive
D.the firm is holding too much cash
16) A firm can achieve a higher growth rate without raising external capital if:
A.it plows back a high proportion of its earnings
B.it has a high return on equity (ROE)
C.it has a low debt-to-asset ratio
D.all of these
17) What happens to a firm's net worth as it uses cash to repay accounts payable?
A.Net worth increases
B.Net worth decreases
C.Net worth remains constant
D.Net worth decreases temporarily, until cash is replenished
18) Which group of investors is capable of earning consistent, superior profits if
financial markets are strong-form efficient?
A.Only technical analysts will be able to profit
B.Only fundamental analysts will be able to profit
C.Only inside traders will be able to profit
D.No one will be capable of sustained, superior profits
19) Given the CAPM's noted empirical difficulties, which of the following statements
may be correct concerning a low price-earnings ratio stock?
A.The stock has too much systematic risk
B.The stock plots above the security market line
C.The stock plots below the security market line
D.The stock has a zero beta
20) Banks cover the costs of the service they provide primarily via:
A.a management fee
B.a service charge
C.an interest rate differential
D.an operating fee
21) What happens to the NPV of a one-year project if fixed costs are increased from
$400 to $600, the firm is not profitable, has a 35% tax rate, and employs a 12% cost of
capital?
A.NPV decreases by $200.00
B.NPV decreases by $178.57
C.NPV decreases by $130.00
D.NPV decreases by $113.04
22) If the market for corn futures has more prospective sellers than buyers, then one
would expect:
A.the price of corn futures to decrease
B.the price of corn futures to increase
C.some traders to change from seller to buyer
D.the market to cease operations until demand is rebalanced
23) Managers are alerted to projected cash shortages by way of the:
A.statement of sources and uses of cash
B.pro forma balance sheet
C.cash budget
D.monthly bank statements
24) The observation that additions to fixed assets are "lumpier" than additions to current
assets indicates that:
A.fixed assets depreciate over time
B.fixed assets can be acquired only through external funding
C.current assets can be acquired in smaller increments
D.dollar for dollar, fixed assets are more expensive than current assets
25) The Securities and Exchange Commission will not permit securities to be sold:
A.if they have been overpriced
B.prior to approval of the registration statement
C.unless the issuer guarantees their value
D.until a shelf registration exists
26) What is the goal of the capital structure decision? What is the financial manager
trying to do?
27) Why do nonfinancial corporations need modern financial markets and institutions?
28) What are some of the ways that companies receive and make payments?
29) In December 2007 a call option on Google stock with a June 2008 expiration and an
exercise price of $720 sold for $80.50. If you bought this call, and find that Google
share is sold for $840 in June, what would be the proceeds and return from exercising
the call?
30) Why is it likely that venture capital is disbursed in installments, rather than issuing
all necessary funds at once?
31) A video rental store will cost $650,000 to open. Assuming annual sales of $1
million, variable costs of 35%, fixed costs of $300,000, depreciation of $100,000, and a
tax rate of 35%, calculate the NPV of the project over a 10-year horizon (no inflation or
salvage value assumed) with a 12% cost of capital. Conduct a sensitivity analysis by
allowing investment, sales, variable costs, and fixed costs to vary by 10% from their
original estimates. Which variable appears to affect profitability the most?
32) A silver mine can yield 10,000 ounces of silver at a variable cost of $8 per ounce.
The fixed costs of operating the mine are $10,000 per year. In half the years, silver can
be sold for $12 per ounce; in the other years, silver can be sold for only $6 per ounce.
Ignoring taxes, what is the average cash flow you will receive from the mine if it is
always kept in operation and the silver is always sold in the year it is mined? What
happens to the average cash flow from the mine if you can shut down the mine in years
of low silver prices?
33) What are the differences between the bond's coupon rate, current yield, and yield to
maturity?
34) One-year Treasury bonds yield 5% while 2-year bonds yield 6%. You are quite
confident that in 1 year's time 1-year bonds will yield 8%. Would the higher yield on
2-year bonds cause you to prefer them?
35) Spending $40,000 on a new truck would increase delivery revenues by $18,000
annually over the truck's 4-year life. Graph the relationship between NPV and discount
rate for this project. Hint: Assume for simplicity that the relationship is linear and find
two points on the line's graph. Would you accept this project if the discount rate were
16%?
