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1) when evaluating a potential capital budgeting decision, fixed asset expenditures
a.should be ignored
b.often appear as the initial cash outflow for a project
c.can be significantly increased due to the costs of installing the equipment
d.all of the above are true
e.only (b) and (c) are true
2) which of the following statements is true?
a.depreciation is a noncash expense and reduces taxable income thereby reducing the
cash outflow associated with tax payments
b.depreciations impact upon cash flows can be accounted for by adding depreciation
back to net income before interest and after taxes
c.depreciations impact upon cash flows can be accounted for by adding the tax savings
associated with the depreciation to net income before interest and after taxes
d.all of the above statements are true
e.only (a) and (b) are true
3) emma bonds will mature in 8 years, the coupon rate of the bond is 6% paid
semiannually, if the appropriate discount rate is 4%; what is the value of the bond?
a.$1,135.78
b.$1,293.02
c.$1,073.25
d.$1,543.11
4) you own a bond that pays a 12% annualized semiannual coupon rate. the bond has 10
years to maturity. if the discount rate suddenly moves from 14% to 16%, then what is
the dollar increase (decrease) in value for the bond?
a.($90.42)
b.($89.01)
c.$89.01
d.$90.42
5) if the spot rate for marsian spotlets (mrs) is 4 per u.s. dollar (usd) and the one-year
risk-free rate of return in the u.s. is 4%, then what should the risk free rate on mars be if
the 1-year forward rate be for mrs/usd is 5?
a.30.00%
b.20.19%
c.20.00%
d.none of the above
6) the value of any asset
a.is based upon the benefits provided by the asset in prior years
b.is based upon the benefits that the asset will provide the owner of the asset this year
c.equals the present value of future benefits accruing to the assets owner
d.is not described by any of the above
7) the board of directors of smith enterprises announced a dividend of $1.75 per share
on august 2. the dividend will be paid out to all shareholders of record as of august 10.
if you bought 100 shares of smith enterprises stock on august 10, how much dividend
are you going to receive?
a.$0
b.$175
c.$1.75
d.$350
8) future semiconductors is evaluating a new etching tool. the equipment costs $1.0m
and will generate after-tax cash inflows of $0.4m per year for six years. assume the firm
has a 15% cost of capital. whats the npv of the investment?
a.$0.51m
b.$0.45m
c.$1.51m
d.$1.69m
9) the main difference between an american and a european option is that
a.european options are priced in euros and american options are priced in dollars
b.american options can be exercised at any time until expiration while european options
can only be exercised on expiration date
c.european options can be exercised at any time until expiration while american options
can only be exercised on expiration date
d.american options are standardized contracts while european options are not
10) if a companys financial position is characterized by current liabilities greater than
current assets, it is
a.bankrupt
b.illiquid
c.insolvent
d.liquidated
11) the ebit for abc corporation for 2003 and 2004 is shown below. sales grew at a rate
of 10% for 2004. if 2003 sales were $25 million, what is the operating leverage for abc?
a.200%
b.225%
c.250%
d.275%
12) a green shoe option is:
a.the option of the issuing firm to buy back stock from a select group of stockholders
b.the option to sell more shares than were originally planned
c.the option to use a selling group to distribute shares of stock
d.the option to sell fewer shares than were originally planned
13) johnson chemicals is considering an investment project. the project requires an
initial $3 million outlay for equipment and machinery. sales are projected to be $1.5
million per year for the next four years. the equipment will be fully depreciated
straight-line by the end of year 4. cost of goods sold and operating expense (not
including depreciation) are predicted to be 30% of sales. the equipment can be sold for
$400,000 at the end of year 4. johnson chemicals also needs to add net working capital
of $100,000 immediately. the net working capital will be recovered in full at the end of
the fourth year. assume the tax rate is 40% and the cost of capital is 10%.
what is the npv of this investment?
a.$89,290
b.$80,199
c.$189,482
d.$72,909
14) you are trying to accumulate $2,000 at the end of 5 years by contributing a fixed
amount at the end of each year. you initially decide to contribute $300 per year but find
that you are coming up short of the $2,000 goal. what could you do to increase the
value of the investment at the end of year 5?
a.invest in an investment that has a lower rate of return
b.invest in an investment that has a higher rate of return
c.make a sixth year contribution
d.contribute a smaller amount each year
