A security’s value is equal to the present value of its expected future cash flows
discounted by an appropriate rate of return.
A merger for diversification is unnecessary from the perspective of stockholders,
because they can accomplish the same diversification by selling some of the acquirer’s
stock and buying some of the target’s.
Increasing debt only increases the risk of bondholders and does not affect the risk of
stockholders.
EBIT-EPS analysis plots EPS as a function of EBIT at different leverage levels.
Both accounting and finance are concerned primarily with the creation of financial
statements and their use as tools for evaluating the firm’s future prospects.
Insider trading is the exploitation for profit of information available to executives that is
not available to the general public.
Top-down planning tends to reflect more excessive and aggressive optimism than
bottom-up planning.
Sunk costs, but not taxes, are irrelevant to the evaluation of a capital budgeting project.
The decision rules for IRR are:
The certainty equivalent approach makes risky projects more acceptable by weighting
the cash flow estimates.
Coupon rates and payments are generally fixed throughout the life of a bond regardless
of the economic or market conditions.
It’s important to keep the distinction between earnings and cash flows in mind when
doing project projections. Managers invariably want to know the net income impact of
projects as well as the results of the capital budgeting analysis.
Financial leverage is more controllable than operating leverage in that management can
choose the amount of debt it uses but fixed costs are often dictated by technology.
If you can exchange one U.S. dollar for 100 Japanese yen, then 100 yen per dollar is
the:
A.direct spot rate.
B.indirect quote.
C.direct forward rate.
D.direct quote.
E.None of the above
A stand-alone capital project has the following projected cash flows:
If the firm’s cost of capital is 14%, which of the following statements is true?
A.the IRR is greater than the cost of capital and the project should be undertaken
B.the project should be rejected because the IRR is 12%, which is less than the project’s
cost of capital
C.the IRR is less than 12% and the project should be undertaken
D.the NPV of the project is positive and the project should be undertaken
The market value of common stock is primarily based on:
A.the firm’s future earnings.
B.book value.
C.total assets.
D.retained earnings.
A firm projects next year’s after-tax earnings at $300,000 and proposes capital
budgeting expenditures of $300,000 for new projects. If the target capital structure is
30% debt and 70% equity, what should the dividend payout ratio be if the firm adheres
strictly to the residual dividend theory?
A.0.0%
B.20.0%
C.30.0%
D.70.0%
The matching principle says:
A.assets costs should be recorded in the period in which they are purchased.
B.recognition of an asset€s cost should match its service life.
C.the customer should be invoiced as soon as merchandise is produced.
D.only cash transactions should be recorded in the accounting records.
Which of the following is the most difficult step in the capital budgeting process?
A.Estimating cash flows
B.Applying the capital budgeting techniques
C.Interpreting the results
D.Determining how to finance the project
Which of the following would not usually be a section of a business plan?
A.Management and staffing
B.Mission and strategy statement
C.Dividend policy
D.Contingencies
Which of the following is a tax deductible expense?
A.Repayment of the principle portion of a loan
B.Dividends
C.The purchase of inventory
D.Depreciation
If the IRR is 10% APR for two projects, then ____.
A.the projects have equally risky cash flows
B.the projects have the same discount rate
C.the NPVs of the projects are the same
D.the expected cash flows of the projects may be the same despite having different
values for variance
Which of the following techniques gives an estimate of capital budgeting project risk in
terms of the standard deviation of a project’s NPV or IRR?
A.Computer simulation
B.Sensitivity/scenario analysis
C.Decision tree analysis
D.Both a and c
E.All of the above
Morell Corp has a callable bond outstanding. The call provision guarantees that the
bond won’t be called in the first ten years of its life, and if it is called thereafter the
bondholder will be compensated with an extra year’s interest at the 12% coupon rate.
The bond is now five years into its 25 year life. The market interest rate has fallen to
6%, so it is likely that the bond will be called as soon as the contract allows. What
should the bond sell for today?
A.$1,255.91
B.$1,345.20
C.$1,693.44
D.$1,120.00
A perpetuity has a cash flow of $20 and a discount rate of 10%. What is the value of the
perpetuity?
A.$22
B.$500
C.$200
D.none of the above
Which of the following bank loans/agreements requires a fee even if no money is
borrowed?
A.Promissory note
B.Line of credit
C.Revolving credit agreement
D.Compensating balance
E.None of the above has fees if no money is borrowed.
The risks associated with owning a single stock are called:
A.systematic risk because all stocks in the system are affected.
B.market risk because the stocks are purchased in the stock market.
C.stand-alone risk because the stock stands alone outside of any portfolio.
D.business risk because the stocks represent businesses.
The profitability index is a variation of the ____ method.
A.NPV
B.IRR
C.payback
D.Both a & c
Investor reaction to a decrease in dividends following a period of deteriorating earnings
and declining stock price is likely to be:
A.they take it in stride, assuming earnings and dividends will return to normal shortly,
and are unlikely to either sell the stock or buy more.
B.they take it as a very bad omen, a statement that management doesn’t think the
downturn in earnings is temporary, and so they tend to sell the stock forcing its price
down further.
C.they see it as an opportunity to get more of the stock while its price is temporarily
depressed, and their purchases tend to drive the price back up.
D.they tend to sell just enough stock to make up the lost dividend income, but no more.
Determine the beta of a portfolio consisting of equal investments in the following
common stocks
A.1.05
B.1.00
C.1.10
D.0.95