1) Projects with an NPV of zero decrease shareholders’ wealth by the cost of the
project.
2) Expenditure on new capital equipment is a cash payment.
3) The most common benchmarks of bank loans are the London Interbank Offered Rate
(LIBOR), the federal funds rate, or the bank’s prime rate.
4) When you deposit a check, there is a delay before it gets credited to your bank
account. This reduces your available balance compared to your ledger balance. Your net
float is the difference between the balance in your company ledger and the balance
recognized by your bank.
5) Financial leverage describes debt financing’s amplification of the effects of changes
in operating income on the returns to stockholders.
6) Under MM II assumptions, the expected return on equity is equal to the expected
return on assets for a levered firm.
7) Investors expect aggressive stocks to outperform the market in periods of strong
economic activity.
8) Once the firm has sold its receivables, the factor bears all the responsibility for
collecting on the account.
9) Financial futures contracts are available through the Chicago Board of Trade and
guaranteed by the Federal Reserve.
10) Agency cost occurs when managers or directors take actions adverse to
shareholders’ interest.
11) When financial managers are asked the key reason for choosing short-term rather
than long-term debt, they often say that they try to “match” the maturities of the firm’s
assets and liabilities.
12) When firms retain cash, they are generating funds internally by increasing
shareholder investment.
13) A warrant is a long-term call option that is “in the money” at the time of issuance.
14) The stock repurchase champion is ExxonMobil, which has repurchased more than
$125 billion of its shares since 2002 .
15) The evidence indicates that industrial stock prices decrease by approximately 3%,
on average, when new equity issues are announced.
16) Financial planning just means formulating the company’s response to the most
likely events.
17) A 50% stock dividend provides the same return to an investor as a 50% cash
dividend.
18) Market risk premium, also known as the risk premium of market portfolio, is
defined as the difference between market return and return on risk-free Treasury bills.
19) U.S. corporations are likely to prefer dividends over capital gains on their own
investments.
20) A perpetuity is a special form of an annuity.
21) If the coupon rate is lower than current interest rates, then the yield to maturity will
be:
A.lower than current interest rates
B.equal to the coupon rate
C.higher than the coupon rate
D.lower than the coupon rate
22) Assume your uncle recorded his salary history during a 40-year career and found
that it had increased 10-fold. If inflation averaged 4% annually during the period, how
would you describe his purchasing power, on average?
A.His purchasing power remained on par with inflation
B.He “beat” inflation by nearly 1% annually
C.He “beat” inflation by slightly below 2% annually
D.He “beat” inflation by 5% annually
23) When most of the elements of a financial plan are related to sales levels, the plan is:
A.less likely to be effective
B.using sales as a plug figure
C.a percentage of sales model
D.not adjusted for inflation
24) What is the expected rate of return to equityholders if the firm has a 35% tax rate, a
10% rate of interest paid on debt, a 15% WACC, and a 60% debt-asset ratio?
A.12.50%
B.21.25%
C.22.50%
D.27.75%
25) U.S. bonds and other debt securities are mostly held by:
A.institutional investors
B.households
C.foreign investors
D.state and local governments
26) According to the expectations theory of exchange rates, what change is expected in
the future spot exchange rate if the current spot rate is 8% lower than the forward
exchange rate?
A.Future spot rate is expected to increase by 8%
B.Future spot rate is expected to decrease by 8%
C.Future spot rate is expected to decrease by 4%
D.No change is expected in the future spot rate
27) Which of the following typically results from using straight-line depreciation in the
set of books for shareholders?
A.Net income appears higher during the early periods of depreciation
B.Less money is paid to the Internal Revenue Service
C.Financial managers have more funds from operations available
D.Depreciable assets last for a longer period of time
28) Which mutually exclusive project would you select, if both are priced at $1,000 and
your discount rate is 15%: Project A with three annual cash flows of $1,000; or project
B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?
A.Project A
B.Project B
C.You are indifferent since the NPVs are equal
D.Neither project should be selected
29) If the company cost of capital is 20% and a proposed project’s cost of capital is
15%, then discounting the projects’ cash flows at 20% would:
A.determine where the project plots in relation to the security market line
B.make the project look more attractive
C.be correct from a theoretical perspective
D.be incorrect
30) If you were willing to bet that the overall stock market was heading up on a
sustained basis, it would be logical to invest in:
A.high beta stocks
B.low beta stocks
C.stocks with large amounts of unique risk
D.stocks that plot below the security market line
31) The option to abandon a project inexpensively is likely to have more value when
the product:
A.incurs high fixed costs of production
B.incurs high variable costs of production
C.generates a positive NPV
D.has a steady degree of operating leverage
32) A firm has an expected return on equity of 16% and an after-tax cost of debt of 8%.
What debt-equity ratio should be used in order to keep the WACC at 12%?
A..50
B..75
C.1.00
D.1.50
Let x = debt/asset ratio. Then
.12 = .08x + (1 – x).16
= .08x + .16 – .16x
.08x/.08 = .04/.08
x = .50
debt = 50%, equity = 50%, and debt-equity ratio = 1 .
33) What is the option buyer’s total profit or loss per share if a call option is purchased
for a $5 premium, has a $50 exercise price, and the stock is valued at $53 at expiration?
A.-$5
B.-$2
C.$3
D.$8
34) Which of the following would not be expected to affect the decision of whether to
undertake an investment?
A.Income tax rates
B.Estimates of inflation rates
C.Sales reductions in other products caused by this investment
D.Cost of the feasibility study that was conducted for this project
35) Which account would be preferred by a depositor: an 8% APR with monthly
compounding or 8.5% APR with semiannual compounding?
A.8.0% with monthly compounding
B.8.5% with semiannual compounding
C.The depositor would be indifferent
D.The time period must be known to select the preferred account
36) What is the break-even probability of collection when the present value of revenues
from a sale is $100,000 and the present value of cost is $87,000?
A.1.00
B.0.87
C.0.74
D.0.13
37) When high growth is expected in the economy, an investor should receive higher
returns from:
A.cyclical investments
B.countercyclical investments
C.stocks with negative correlations
D.stocks with low standard deviations
38) If the level of sales is less than that calculated as the economic break-even level,
then the:
A.project will break even only in accounting terms
B.project’s EVA will be greater than zero but less than the opportunity cost of capital
C.project will have a negative EVA
D.discount rate should be reduced
39) Corporate managers are expected to make corporate decisions that are in the best
interest of:
A.top corporate management
B.the corporation’s board of directors
C.the corporation’s shareholders
D.all corporate employees
40) Corporations that do not issue financial securities such as stock or debt obligations:
A.will not be able to increase sales
B.cannot be profitable
C.may not be able to generate sufficient funds to fulfill their needs
D.do not face double taxation of their profits
41) Junk bonds represent debt that was issued to:
A.finance the acquisition of used manufacturing equipment
B.firms in countries with high rates of inflation
C.offer higher yields and less security than other debt
D.firms that have defaulted on their dividend payments
42) For a firm with a DOL of 3.5, an increase in sales of 6% will:
A.increase pretax profits by 3.5%
B.decrease pretax profits by 3.5%
C.increase pretax profits by 21.0%
D.increase pretax profits by 1.71%
43) Real rates of return will be positive as long as:
A.the nominal return is positive
B.the inflation rate is positive
C.the nominal return exceeds the inflation rate
D.the inflation rate exceeds the real return
44) Money market securities usually have a maturity of:
A.more than 1 year
B.less than 1 year
C.1 to 3 years
D.less than 91 days
45) What is the maximum rate that can be paid on debt and maintain a 14% WACC
with a 19% expected return on equity in a firm with a 60% debt-to-asset ratio? Ignore
taxes.
A.6.50%
B.9.90%
C.10.67%
D.11.14%
46) A furniture store is offering free credit on purchases over $1,000. You observe that a
big-screen television can be purchased for nothing down and $4,000 due in one year.
The store next door offers an identical television for $3,650 but does not offer credit
terms. Which statement below best describes the “free” credit?
A.The “free” credit costs about 8.75%
B.The “free” credit costs about 9.13%
C.The “free” credit costs about 9.59%
D.The “free” credit effectively costs zero%
47) A corporation with funded fixed-rate debt might prefer floating-rate debt if it
thought that:
A.interest rates would be declining
B.interest rates would be increasing
C.its bond rating might be lowered
D.its bonds were going to be converted into equity
48) How much depreciation expense exists in a firm that has a break-even level of
revenues of $2 million, fixed costs of $400,000, and a 60% ratio of variable costs to
sales?
A.$144,000
B.$266,667
C.$400,000
D.$666,667
49) If an investor’s portfolio is allocated 75% to the market portfolio and 25% to
Treasury bills, then the investor should expect to receive:
A.the risk-free rate plus 75% of the expected return on the market
B.the risk-free rate plus 75% of the expected market risk premium
C.75% of the expected return on the market
D.25% of the risk-free rate plus 75% of the expected market risk premium
50) If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered
engines), the merger would be:
A.a conglomerate
B.a divestiture
C.horizontal
D.vertical
51) Firm B’s 1 million shares of stock currently sell for $20 each. Firm A estimates the
economic gain from the merger to be $10 million and is prepared to offer $22 cash for
each share of B. What percentage of the merger gain will be captured by firm B’s
shareholders?
A.20.00%
B.33.33%
C.50.00%
D.60.00%
52) An amortizing loan is one in which:
A.the principal remains unchanged with each payment
B.accrued interest is paid regularly
C.the maturity of the loan is variable
D.the principal balance is reduced with each payment
53) Why do stock market investors appear not to be concerned with unique risks when
calculating expected rates of return?
A.There is no method to quantify unique risks
B.Unique risks are assumed to be diversified away
C.Unique risks are compensated by the risk-free rate
D.Beta includes a component to compensate unique risk
54) Suppose that the inflation rate in the United States is 4% and in Canada it is 5%.
What would you expect is happening to the exchange rate between the U.S. and
Canadian dollars?
55) The cash flows of the superstore project in each year will depend on sales as
follows:
What level of sales per year is needed for the investment to have a zero NPV?
56) Is value maximization always ethical?
57) Discuss generally the idea of bond ratings, including the difference between
investment grade and junk bonds.
58) Why is it important to use market values rather than book values when determining
the weighted-average cost of capital?
59) Prizes are often not “worth” as much as claimed. Place a value on a prize of
$5,000,000 which is to be received in equal payments over 20 years, with the first
payment beginning today. Assume an interest rate of 7% over the 20 years.
60) For firms in a mature stage of life with free cash flow, do you accept the charge that
there might be some actual incentive to waste cash?
61) Determine earnings before interest and taxes, net income, and also the cash flow
from operations for the following firm: $500,000 sales, $10,000 cash dividends,
$300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation
expense, $40,000 interest expense, $10,000 purchase of productive equipment, no
changes in working capital, and a tax rate of 35%.
62) In what ways can companies change the composition of their ownership or
management?