1) Investors usually give some companies with good track records the benefit of the
doubt when the companies’ performance fails to meet the market expectation.
2) The Sarbanes-Oxley Act sought to prevent a repeat of the corporate scandals that
brought about the collapse of Enron and WorldCom.
3) Put options can be thought of as insurance policies for commodity producers.
4) 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. The risk of default on the receivables is
now borne by the bank.
5) The difference between the market values of assets and liabilities is the market value
of the shareholders’ equity claim.
6) The company cost of capital is the expected rate of return that investors demand from
the company’s assets and operations.
7) The separation of ownership and management is one distinctive feature of
corporations.
8) Suppose you finance a project partly with debt. You should neither subtract the debt
proceeds from the required investment, nor would you recognize the interest and
principal payments on the debt as cash outflows.
9) Market value added is the difference between the market value of the firm’s equity
and its book value.
10) Many companies are finding it more efficient to outsource many of their activities
than to integrate vertically.
11) The proliferation of junk bonds in the 1980s greatly increased the feasibility of
LBOs.
12) It would be realistic to read an asked price listed as 100:16 and a bid price of
100:18 .
13) Upon the sale of equipment at the end of its useful life, tax liability will be incurred
whenever the book value of the equipment exceeds the sales price.
14) Accrual accounting aims to provide a fairer measure of the firm’s profitability.
15) The higher the times interest earned ratio, the higher the interest expense.
16) In 2007, the spread between the yields on commercial paper and Treasury bills
increased to over 100 basis points (1.00%).
17) To the company, the cost of interest payments on bonds (issued debt) is reduced by
the amount of tax savings.
18) An increase in accounts payable is a source of cash.
19) A company that pays $5,000 previously owed to one of its suppliers will see a
$5,000 decrease in cash.
20) If a project has multiple IRRs, the highest one is assumed to be correct.
21) A firm intends to hedge against exchange loss, a large future payment that must be
made in a foreign currency. Which of the following identifies the cost of such a hedge?
A.Difference between expected and current spot rates
B.Difference between expected and current forward rates
C.Difference between the forward premium and the forward discount
D.Difference between the forward rate and the expected future spot rate
22) Calculate the firm’s expected return on its assets if its expected return on debt is
10%, its expected return on equity is 20%, and its WACC is 14%.
A.14%
B.15%
C.16%
D.Cannot be calculated
23) In theory, the “market portfolio” should contain:
A.the securities of the S&P 500
B.the securities of the Dow
C.the securities of the S&P 500 and Treasury bills
D.all risky assets
24) Which of the following is true for an investor who owns a share of stock and has
purchased a put option on the stock?
A.The investor profits when the stock decreases in value
B.Maximum loss is the price of the option premium
C.The investor is protected against upside potential
D.Increases in stock value go to the seller of the put
25) Which of the following balance-sheet accounts will not be affected when there is a
reduction in the number of outstanding shares?
A.Retained earnings
B.Additional paid-in capital
C.Common shares (valued at par value)
D.Treasury shares at cost
26) A forecast using a percentage of sales model expects sales to increase by 5%
annually over the next 4 years. If costs are proportional to sales at 80%, and last year’s
sales were $1,000, the net income in the fourth year will be:
A.$48.62
B.$145.86
C.$227.60
D.$243.10
27) Calculate the accounts receivable period for a firm with an annual sales of $10
million and average accounts receivable of $2 million.
A.18.25 days
B.20.00 days
C.51.00 days
D.73.00 days
28) What is the present value of the following payment stream, discounted at 8%
annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end
of year 3?
A.$5,022.11
B.$5,144.03
C.$5,423.87
D.$5,520.00
29) Which of the following statements regarding stock dividends and stock splits is
true?
A.A two-for-one stock split is equivalent to a 50% stock dividend
B.A three-for-one stock split is equivalent to a 66% stock dividend
C.A three-for-two stock split is equivalent to a 100% stock dividend
D.A 50% stock dividend is equivalent to a three-for-two stock split
30) Which of the following is not typically a characteristic of commercial paper
borrowing?
A.Maturity is short-term
B.Banks are not the lenders
C.The loans are secured
D.Borrowers have high credit quality
31) If the direct exchange rate between U.S. dollars and pounds sterling is 1.50/1, how
much should you be willing to pay to receive 350 pounds?
A.$175.00
B.$233.33
C.$367.50
D.$525.00
32) What two elements are represented in security returns?
A.A premium for market risk and for unique risk
B.A premium for unique risk and a premium for firm-specific risk
C.A premium for diversification and a premium for portfolio risk
D.A premium for time value of money and a premium for market risk
33) When the annual rate of return on U.S. Treasury bills is historically high, investors
expect the risk premium on the stock market to be:
A.considerably lower than normal
B.considerably higher than normal
C.approximately normal
D.approximately equal to zero
34) A project’s opportunity cost of capital is:
A.the forgone return from investing in the project
B.the return earned by investing in the project
C.equal to the average return on all company projects
D.designed to be less than the project’s IRR
35) Which of the following would not be included in the five Cs of credit?
A.Character
B.Condition
C.Charges
D.Capital
36) For most corporations, net working capital is:
A.negative during the inventory period of the cash conversion cycle
B.equal to the amount of current assets
C.positive to provide liquidity during the cash conversion cycle
D.present only during slack periods of the year
37) A project that has zero EVA:
A.has a positive NPV
B.has an NPV of zero
C.has a negative NPV
D.all of these
38) What is the present value of the tax shields for a firm that anticipates a perpetual
debt level of $10 million at an interest rate of 7% and a tax rate of 35%?
A.$245,000
B.$700,000
C.$3,500,000
D.$10,000,000
39) Why is accelerated depreciation often favored for the corporation’s set of tax books?
A.It increases the total depreciation tax shield over the project’s life
B.It reduces the total amount of taxes paid over the project’s life
C.It increases net accounting profits over the project’s life
D.It impacts favorably with the time value of money
40) Which of the following statements about depreciation is correct?
A.Depreciation is subtracted from cost of goods sold to calculate net income
B.When depreciation expense is incurred, cash balances are reduced
C.Depreciation expense does not affect net income
D.Depreciation reduces the book value of assets
41) What form of hedging would you suggest for a producer that wishes to be protected
from future price decreases but wants to benefit from any future price increases?
A.Buy a call option on the asset
B.Sell a call option on the asset
C.Buy a put option on the asset
D.Sell a put option on the asset
42) Which of the following is a major reason for firms to engage in currency swaps?
A.They will be required to repay only the interest
B.They can obtain more favorable borrowing terms in a different currency
C.The debt will not show on their balance sheets
D.Borrowing in a foreign currency offers lucrative tax breaks
43) New projects or products can have an indirect effect on the firm as well as a direct
effect. Which of the following appears to be an indirect effect of launching a new
product?
A.Additional working capital is required
B.Sales force will need to be increased
C.Sales of a similar product of your firm’s will decline
D.Additional machinery must be purchased
44) One of the drawbacks of using forward contracts to hedge foreign exchange risk
from payables is that the:
A.transaction costs in the forward market are high
B.forward rates are always lower than spot rates
C.hedged currency could appreciate during the period
D.hedged currency could depreciate during the period
45) Which of the following statements is correct concerning the sustainable growth
rate?
A.It increases as ROE decreases
B.It increases as the payout ratio decreases
C.It is maximized when the plowback ratio equals zero
D.It is always less than the internal growth rate
46) Using market values rather than book values for cost of capital computations
ensures that the firm:
A.does not ignore the value of retained earnings
B.gets the full value of the debt tax shield
C.uses expected rates of return
D.will not invest in positive NPV projects
47) Which of the following is the order in which key dividend dates occur?
A.Declaration, record, ex-dividend, payment
B.Declaration, ex-dividend, record, payment
C.Record, declaration, payment, ex-dividend
D.Ex-dividend, record, declaration, payment
48) Of the following four put options that can be purchased on a stock, which would
you expect to have the highest price?
A.September put; $65 exercise price
B.September put; $75 exercise price
C.December put; $65 exercise price
D.December put; $75 exercise price
49) Excess cash held by a firm should be:
A.reinvested by the firm in projects offering the highest rate of return
B.reinvested by the firm in projects offering rates of return higher than the cost of
capital
C.reinvested by the firm in the financial markets
D.distributed to bondholders in the form of extra coupon payments
50) The value of a callable bond equals the value of a straight bond:
A.plus the value of the bondholder’s call option
B.minus the value of the bondholder’s call option
C.plus the value of the issuer’s call option
D.minus the value of the issuer’s call option
51) If purchasing power parity is holding, what will happen to the currency of a country
with high inflation?
A.Currency will appreciate
B.Currency will depreciate
C.There will be no significant change in exchange rate
D.Currency will sell at a forward premium
52) One of the reasons why proxy fights are rarely successful is that:
A.management is always viewed as performing its job well
B.management can use corporate resources to defend against the fight
C.mergers are a cheaper form of changing management
D.shareholders are unconcerned with corporate management
53) When the real rate of interest is less than the nominal rate of interest, then:
A.inflation must be added to the nominal rate
B.investment returns do not increase purchasing power
C.nominal flows should be discounted with real rates
D.inflation is expected to occur
54) Capital gains may be preferred by investors over dividends even if their tax rates
are equal because:
A.taxes on dividends are withheld from paychecks
B.taxes on capital gains are paid annually
C.taxes on capital gains can be timed
D.after-tax dividends are less certain than capital gains
55) What is the ROA of a firm with $150,000 in average receivables, which represents
60 days sales, average assets of $750,000, and a profit margin of 9%?
A.7.50%
B.9.00%
C.10.95%
D.16.70%
56) The stock of Newmont Mining, the world’s largest gold producer, has
above-average volatility but relatively low beta.
57) One common explanation for the success of MBOs is the incentive effect of
leverage. Explain.
58) Professor Diehard found an effective antibiotic for the DEPRESS virus, and
patented the drug. He believes that he can sell the patent for $20 million. He then
formed a corporation and invested $400,000 in setting up a production plant. If the
professor’s belief is correct, what are the book and market values of the firm? If there
are 2 million shares of stock in the firm, what would be the price per share and the book
value per share?
59) Why do investors pay attention to bond ratings and demand a higher interest rate for
bonds with low ratings?
60) Disregarding issues of risk and return, why might it be important to shareholders
and management alike as to what class of equity is issued (e.g., common, preferred,
etc.)?
61) Why does private placement of securities appear to be more popular with small- or
medium-sized firms?
62) Discuss reasons why a market-value balance sheet may be distinctly different from
a book-value balance sheet.
63) What was the unsuccessful attempt at resuscitation at Eastern Airlines in 1989?
What was the cost to Eastern’s creditors of that attempt?