1) A company that borrows $1 million long term and invests the proceeds in inventory
will see its cash position unchanged.
2) General partners have limited personal liability for business debts in a limited
partnership.
3) A prospectus certificate indicates equity ownership in a firm.
4) If security prices follow a random walk, then on any particular day the odds are that
an increase or decrease in price is equally likely.
5) Market risk can be eliminated in a stock portfolio through diversification.
6) Ethical decision making in business can be viewed as a long-term investment in
reputation.
7) If real interest rates are different across countries, investors will shift their money
into countries with high real interest rates.
8) What-if analysis can help identify the inputs that are most worth refining before you
commit to a project.
9) Regarding the profitability of options, it is impossible for a producer who sells put
options to lose more than the exercise price agreed on the option contract.
10) Financial planning focuses on the big picture.
11) An annual percentage rate (APR) is determined by annualizing the rate using
compound interest.
12) If the international Fisher effect is valid, then real interest rates in all countries
should be equal.
13) A corporation has promised to pay $1,000 20 years from today for each bond sold
now. No interest will be paid on the bonds during the 20 years, and the bonds are
discounted at a 7% interest rate. Approximately how much should an investor pay for
each bond?
A.$70.00
B.$258.42
C.$629.56
D.$857.43
14) Which of the following is a safe assumption for a firm in which the PV of the tax
shield is approximately equal to the costs of financial distress?
A.The tax shield has been calculated incorrectly
B.The firm is too heavily levered financially
C.The firm has reached its optimal debt level
D.The firm appears to have low risk of financial distress
15) Which of the following is the major difference between forward and futures
contracts?
A.Futures contracts are more expensive than forward contracts
B.Forward contracts are available only for foreign currencies
C.Futures contracts are always delivered
D.Forward contracts are not marked to market
16) The value of common stock will likely decrease if:
A.the investment horizon decreases
B.the growth rate of dividends increases
C.the discount rate increases
D.dividends are discounted back to the present
17) The purpose of a sinking fund is to:
A.reduce the par value of stock over time
B.take advantage of the tax break on preferred stock
C.periodically retire debt prior to final maturity
D.allow risky corporations to avoid bankruptcy
18) A firm offered 3/10, net 30 as terms of trade credit on a $1,000 invoice dated
January 1 . How much must the purchaser offer to pay in full on January 4?
A.$970.00
B.$971.16
C.$1,000.00
D.$1,030.00
19) Insurance companies can usually cover the claims of policyholders because:
A.the incidence of claims normally averages out
B.they issue thousands of insurance policies
C.the cost of paying for claims has already been factored into the price of the policies
D.all of these
20) How much should an investor pay now for a stock expected to sell for $30 one year
from now if the stock offers a $2 dividend, dividends are taxed at 40%, capital gains are
taxed at 20%, and a 15% after-tax return is expected on the investment?
A.$25.04
B.$26.53
C.$27.09
D.$27.50
21) Which of the following statements is correct about a corporation in the 35% tax
bracket that can invest either in a bond paying 8% interest or in the preferred stock of
another corporation that pays a 6% dividend?
A.The stock is preferred by approximately .17%
B.The stock is preferred by approximately .80%
C.The bond is preferred by approximately 1.30%
D.The after-tax yields are identical on each
22) What is the maximum dividend payout ratio consistent with not requiring external
funds for a firm with an ROE of 15%, a debt-equity ratio of 50%, and an annual sales
growth objective of 9%?
A.Approximately 1%
B.Approximately 10%
C.Approximately 12%
D.Approximately 20%
23) Risk factors that are expected to affect only a specific firm are referred to as:
A.market risk
B.diversifiable risk
C.systematic risk
D.risk premiums
24) Fixed costs:
A.are a constant percentage of sales revenues
B.vary with the level of depreciation expense
C.are constant with changes in the level of output
D.are inversely related to the level of output
25) When product demand is high, firms following a “middle of the road policy” for
long- versus short-term financing will:
A.borrow short term
B.borrow long term
C.hold marketable securities
D.sell marketable securities
26) The NPV of an investment made today is $10,000. If postponed for one year, the
NPV at that time will increase by $1,000. Which of the following is correct if the
opportunity cost of the investment is 12%?
A.Postpone; the NPV increases by a positive amount
B.Postpone; the NPV will be larger
C.Invest now; NPV does not grow at a sufficient rate
D.Invest now; always accept positive NPV projects
27) An increase in dividends might not increase price and may actually decrease stock
price if:
A.the dividend increase cannot be sustained
B.the firm does not maintain an exact dividend payout ratio
C.the firm has too much retained earnings
D.markets are weak-form efficient
28) What is the approximate variance of returns if over the past 3 years an investment
returned 8.0%, -12.0%, and 15.0%?
A.31
B.131
C.182
D.961
29) The security market line shows how expected rate of return depends on beta.
30) Assuming that the firm can either hold cash paying no interest or invest in
marketable securities, which of the following might induce the manager to hold higher
cash balances?
A.The cost of borrowing is high relative to interest rates on marketable securities
B.Future cash flows are relatively predictable
C.The cost of cash balances is relatively high
D.Bank interest rates are expected to increase
31) Compared to buying stocks and bonds directly, what are the advantages of investing
in a mutual fund?
A.Mutual funds are efficiently diversified and professionally managed
B.Investment returns are never taxed until withdrawn from the fund
C.You can buy additional shares in the fund or cash out at any time
D.All of these
32) A merger adds value by creating synergies. Which of the following is not a possible
source of synergy?
A.Economies of scale
B.Economies of vertical integration
C.Combined complementary resources
D.Diversification
33) What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46,
and a yield to maturity of 6%?
A.6%
B.8%
C.10%
D.11%
34) Although the value of an additional interest tax shield may be positive, firms may
restrict borrowing if:
A.the returns on the project are too high
B.their asset base is largely intangible
C.their asset beta is zero
D.the borrowing increases their WACC
35) Which of the following categories would be least likely to require annual
adjustments in a capital budgeting analysis due to the effects of inflation?
A.Sales
B.Expenses
C.Working capital
D.Depreciation expense
36) Which of the following statements is most likely correct for a firm with an average
collection period of 90 days?
A.Its average daily sales are low
B.Its average daily sales are high
C.Its current ratio will be high
D.It is providing financing for approximately 25% of its annual sales
37) Leverage will __________ shareholders’ expected return and _________ their risk.
A.increase; decrease
B.decrease; increase
C.increase; increase
D.increase; do nothing to
38) When a firm finances long-term assets with short-term sources of funding, it:
A.reduces the risk of cash shortage
B.will have lower interest expense
C.improves the leverage ratio
D.ignores the principle of matched maturities
39) Assuming that a credit decision has been analyzed and credit refused due to a
negative expected profit, which of the following changes, if of sufficient magnitude,
might change the decision to one of approval?
A.Increase the percentage of profit margin
B.Decrease the probability of payment
C.Increase the discount rate
D.Reduce the expected profit
40) What will happen to retained earnings when a corporation issues 1,000 shares of $1
par stock for $10 per share?
A.It will increase by $1,000
B.It will increase by $9,000
C.It will decrease by $9,000
D.It will remain unchanged
41) A firm is said to be ‘smoothing” dividends if dividends:
A.are paid through an automatic dividend reinvestment plan
B.change more gradually than changes in earnings
C.increase by the same dollar amount each year
D.are paid only in even dollar amounts
42) Which of the following futures contract is written on a nondeliverable asset?
A.U.S. Treasury bills
B.Wheat
C.Standard and Poor’s index
D.British pounds
43) A firm’s internally generated funds are calculated by:
A.subtracting depreciation from net income
B.adding depreciation to net income
C.adding dividends to net income
D.subtracting dividends from net income plus depreciation
44) A financial manager facing a capital budgeting decision must decide whether to:
A.issue stock or debt securities
B.use the money market or capital market
C.use primary markets or secondary markets
D.buy new machinery or repair the old
45) In what manner does depreciation expense affect investment projects?
A.It reduces cash flows by the amount of the depreciation expense
B.It increases cash flows by the amount of the depreciation expense
C.It reduces taxable income by the amount of the depreciation expense
D.It reduces taxes by the amount of the depreciation expense
46) If a project’s IRR is 13% and the project provides annual cash flows of $15,000 for
4 years, how much did the project cost?
A.$44,617
B.$52,200
C.$60,000
D.$72,747
47) A financial intermediary provides financing for:
A.individuals
B.companies
C.other organizations
D.all of these
48) When will ROE = ROC?
A.If the firm has equal debt and equity financing
B.If the firm has no interest payments on debt
C.If the value of the firm’s assets exceed the value of its equity
D.ROE will never equal ROC
49) Which of the following statements is more likely to be correct concerning the
statement, “Stock A has a higher expected return than stock B”?
A.Stock A has more unique risk
B.Stock B plots below the security market line
C.Stock B is a cyclical stock
D.Stock A has a higher beta
50) How, in general, is value derived from options on real assets?
51) The exchange rate in 2007 was R6.8344/$. If the cost of living was the same in the
United States and South Africa, forecasting that inflation in 2008 would be about 8.5%
in South Africa and 3.5% in the United States. Calculate the expected exchange rate at
the end of 2008 .
52) How do you estimate expected rates of return in the constant-growth dividend
discount model?
53) Calculate the annual value of an interest tax shield under the assumption that a firm
maintains debt at a permanent $1,000,000 level and rate of 12%. The corporate tax rate
is 35%. If there is no chance of financial distress, how does the value of the firm change
as a result of this debt?
54) How would you develop a model to analyze the benefits and costs of stretching
payables? Assume that cash discounts will be forgone and that short-term bank funds
are usually available.