External funding requirements can be estimated using an equation called the EFR
relationship. The simple concept behind this equation is that funds will be needed to the
extent of forecasted:
A.growth in assets minus new retained earnings.
B.growth in sales minus all current liabilities minus all retained earnings.
C.assets minus current liabilities minus new retained earnings.
D.growth in assets minus growth in current liabilities minus new retained earnings.
Assume you want to pay off your $10,000, 30-month car loan after only the first 12
months of payments. With interest at 12% compounded monthly, how much will you
need pay off the loan in full at the end of the first year?
A.$5,639
B.$6,354
C.$4,361
D.$7,425
The clientele argument in dividend theory implies that:
A.investors are indifferent between dividends and capital gains.
B.firms should pay out dividends only after accepting all capital budgeting projects
with positive NPVs.
C.the stock of low-payout firms will be held by investors seeking capital gains.
D.the dividend payout should be set equal to the industry average.
If a project has an initial cost of $50,000.00 and no other costs throughout the life of the
project, what is the PI for the project given the NPV is $3,620.00?
A.1.150
B.1.072
C.0.920
D.Cannot be determined
Which of the following is not considered a relevant factor in estimating the incremental
cash flows of a proposed capital project?
A.Pre-startup expenditures
B.Financing costs
C.Incremental working capital requirements
D.Taxes on incremental expenses and earnings
Which of the following sections of a business plan is likely to contain information on
why a business is likely to succeed against its competitors?
A.Market analysis
B.Mission and strategy statement
C.Executive Summary
D.Red herring prospectus
Project Alpha has an NPV of $10 million and a standard deviation based on risk
analysis of $3 million. Project Beta has an NPV of $8 million and a standard deviation
based on risk of $2 million. Which project should be selected and why?
A.Select Alpha because it has the higher NPV.
B.Select Beta because it has the lower risk as represented by standard deviation.
C.Select either project because both have positive NPVs and relatively low risk
compared to their NPVs.
D.Don’t select either project because there is too much risk associated with both
projects.
E.There is no clear decision rule, the choice depends on management’s degree of risk
aversion.
The internal rate of return (IRR) is simply the return on a project viewed as an
investment. Therefore any project whose IRR exceeds the cost of capital:
A.should be undertaken if the company has the resources to do it.
B.contributes to wealth because it earns more than the cost of the money used to do it.
C.should not be undertaken because IRR isn’t as good as NPV.
D.a and b
Although NPV is the best capital budgeting technique, most executives prefer to use:
A.payback because the calculations are easy.
B.profitability index because they are familiar with ratios.
C.IRR because people are more comfortable with rates of return than with the
somewhat abstract notion of a present valued dollar.
D.NPV adjusted for inflation because it overcomes the difficulties they have with the
method.
Assume that the pure interest rate is expected to be 3% for the foreseeable future, and
inflation is expected to be 3%, 4% and 5% for each of the next three years and 6%
thereafter. What is the base rate component for a 10-year bond?
A.6.00%
B.7.40%
C.8.00%
D.8.20%
E.9.00%
Which of the following is FALSE regarding the business plans of small business?
A.Covers the broadest and most basic strategic issues
B.Similar to annual plans of large business
C.Provides thorough rationale for concrete actions
D.Includes elements of strategic planning
Prior to 1960, most overseas business was done in the form of ____.
A.direct investments in foreign countries
B.multinational corporations
C.portfolio investments in foreign stocks
D.import/export businesses
XYZ Inc. has taxable income of $14,000,000 in 20xx.
Terminal value assumptions can lead to bad capital budgeting decisions because:
A.the mathematics are tricky and difficult to understand.
B.almost any project can be made to look good with an aggressive terminal value
assumption.
C.nothing lasts forever.
D.almost all growth assumptions are unreasonable.
Cash flow from operating activities is decreased by:
A.depreciation and amortization.
B.a decrease in accounts receivable.
C.a decrease in inventory.
D.a decrease in accounts payable.
E.All of the above
An unsecured bond is referred to as a(n):
A.indenture.
B.debenture.
C.mortgage bond.
D.subordinated mortgage bond.
Holding all other variables constant, as market interest rates increase, bond prices ____.
A.decrease
B.increase
C.remain unchanged
D.None of the above
If a firm that’s doing very well pays the same return to equity and debt shareholders,
and needs to raise more money, it may be wise to use debt because:
A.interest is tax deductible resulting in a lower cost to the firm.
B.Equity is the less desirable source of capital.
C.borrowing is always less of an effort than raising additional equity capital.
D.All of the above
If an 8-year annuity due has a Future Value (FV) of $10,000 and the interest rate is 7%,
what is the amount of each annuity payment?
A.Less than $900
B.$901 – $925
C.$926 – $950
D.$951 – $975
E.More than $975
The dividend controversy is whether paying or not paying dividends affects:
A.retired stockholders.
B.stock price.
C.young, affluent stockholders.
D.dividend reinvestment.