1) Bond ratings measure the bond’s credit risk.
2) Both the seller and the buyer in a futures contract are required to put up margins.
3) Percentage of sales models are planning models in which the sales forecasts are the
driving variables and most other variables are proportional.
4) The break-even probability of collection is positively related to the firm’s percentage
of profit margin.
5) ROE is equal to ROA when the firm has no debt.
6) The Excel function for present value is PV (rate, nper, pmt, FV).
7) A bond’s rate of return is equal to its coupon payment divided by the price paid for
the bond.
8) Economies of scale are apparent in the issuance of securities.
9) For most healthy firms, the YTM on their bonds is the rate of return investors expect
from holding their bonds to maturity.
10) Repos are long-term unsecured loan agreements.
11) Investors forego the right to the dividend if they purchase on or after the
ex-dividend date.
12) The “information content of dividends” says that dividend increases send good
news about cash flow and earnings, while dividend cuts send bad news.
13) Bonds rated BBB or above by Standard & Poor’s are called investment grade.
14) If the stock prices follow a random walk, successive stock prices are not related.
15) Investment banks like Merrill Lynch or Goldman Sachs:
A.collect deposits and relend the cash to corporations and individuals
B.help companies sell their securities to investors
C.design and sell insurance policies for businesses
D.lend to corporations and investors in commercial real estate
16) The following information is provided to you:
What is the 1-year interest rate for the Swiss franc?
A.2.00%
B.1.67%
C.1.50%
D.1.33%
17) What would you expect to be the relationship between real rates of interest in Japan
and the United States if inflation is expected to be 3% in Japan and 6% in the United
States?
A.Japan’s real interest rate should be 3% higher than in the United States
B.Japan’s real interest rate should be 3% lower than in the United States
C.Japan’s real interest rate should be half as high as in the United States
D.Real interest rates should be equal in both countries
18) Alternative “what if?” scenarios can be easily accommodated in financial planning
by use of:
A.sustainable growth models
B.planning outputs
C.spreadsheet programs
D.bond covenants
19) If Dotte’s Doors Corporation merges with its supplier, Wally’s Wood, its profit
margin will:
A.most likely decrease
B.most likely increase and continue to increase in the future
C.most likely increase but be offset by an increase in the turnover ratio
D.most likely increase but be offset by a decrease in the turnover ratio
20) Firms that continually invest in nontrivial amounts of marketable securities may be
guilty of:
A.excessive short-term borrowing
B.not matching their sources and uses of cash
C.incurring excessive shortage costs
D.not maximizing shareholder returns
21) If you feel strongly that a stock price will move, but are unsure of the direction, you
could buy the stock and:
A.buy both a put and a call
B.sell both a put and a call
C.buy a put and sell a call
D.buy two puts
22) Bonds that have been sold only to a limited number of institutional investors are
considered:
A.secured bonds
B.convertible bonds
C.private placements
D.indexed bonds
23) How can financial ratios be used to predict bankruptcy?
A.As early as 4 years before they went bankrupt, failing firms were earning a much
lower return on assets (ROA) than firms that survived
B.On average, failing firms also had a high ratio of liabilities to assets
C.EBITDA (earnings before interest, taxes, depreciation, and amortization) was low
relative to the firms’ total liabilities
D.All of these. In each case, these indicators of the firms’ financial health steadily
deteriorated as bankruptcy approached
24) An example of how financial intermediaries can assist in shifting an individual’s
consumption to the future is:
A.lending money to the individual
B.providing a checking account
C.opening a savings account
D.requiring purchases to be in cash
25) The correct opportunity cost for a project is determined to be 15% and the project is
expected to generate $1 million in cash flows at the end of the next 4 years after an
initial outlay of $3 million. Based on this information, the project would plot:
A.above the security market line
B.below the security market line
C.on the security market line
D.on the security market line, with a beta of 1.0
26) Which of the following is not a typical reason for differences between profit and
cash flow?
A.Depreciation expense
B.Income taxes
C.Changing levels of accounts receivable
D.Accrual accounting practices
27) When the overall market is up by 10%, an investor with a portfolio of defensive
stocks will probably have:
A.negative portfolio returns less than 10%
B.negative portfolio returns greater than 10%
C.positive portfolio returns less than 10%
D.positive portfolio returns greater than 10%
28) An APR will be equal to an effective annual rate if:
A.compounding occurs monthly
B.compounding occurs continuously
C.compounding occurs annually
D.an error has occurred; these terms cannot be equal
29) What will be the effect of using book value of debt in WACC decisions if interest
rates have decreased substantially since a firm’s long-term bonds were issued?
A.The debt-to-value ratio will be overstated
B.The debt-to-value ratio will be understated
C.There will be no effect on WACC decisions
D.It cannot be determined without knowing interest rates
30) Diversification is often a poor motive for mergers because:
A.vertical integration is rarely successful
B.investors can diversify on their own account
C.it does not produce economies of scale
D.the increase in taxes overcomes gains in earnings
31) A merger is expected to produce cost savings of $50 million and the acquired firm’s
shareholders will receive a premium of 20% over the $150 million value of their firm.
The gain of the merger to the acquirer is:
A.$20 million
B.$30 million
C.$50 million
D.$130 million
32) Managers have been characterized as reluctant to increase dividends if:
A.dividends were increased in the preceding year
B.earnings have permanently increased
C.the dividend increase cannot be sustained
D.the dividend payout ratio exceeds 20%
33) Second stage financing:
A.involves a substantial increase in leverage
B.immediately proceeds first-stage financing for every new business
C.involves issuing more stock
D.occurs when the company is in danger of bankruptcy
34) If a firm’s dividend payout ratio is determined after achieving a specific capital
structure, then:
A.dividends are an input to the financial plan
B.the capital budget should be revised
C.dividends are being used as a plug item
D.dividend forecasts become crucial to planning
35) Empirical evidence suggested that over a long period of time returns did indeed
increase with beta.
36) Fixed costs including depreciation have increased at Leverage, Inc. from $4 million
to $6 million in an effort to reduce variable costs. What must the new variable cost
percentage be to leave break-even at $20 million?
A.60%
B.65%
C.70%
D.75%
37) In practice, the market portfolio is often represented by:
A.a portfolio of U.S. Treasury securities
B.a diversified stock market index
C.an investor’s mutual fund portfolio
D.the historic record of stock market returns
38) When the management of a business is conducted by individuals other than the
owners, the business is more likely to be a:
A.corporation
B.sole proprietorship
C.partnership
D.general partner
39) After the payment of a 25% stock dividend, an investor has 500 shares of stock and
$400. What did the investor have prior to the stock dividend?
A.300 shares of stock
B.400 shares of stock and $400
C.400 shares of stock and $320
D.625 shares of stock and $400
40) Who was responsible for the financial crisis of 2007-2009?
A.The U.S. Federal Reserve, for its policy of easy money
B.The U.S. government, for pushing banks to expand credit for low-income housing
C.Bankers, who aggressively promoted and resold subprime mortgages
D.All of these
41) If the line measuring a stock’s historic returns against the market’s historic returns
has a slope greater than 1.0, then the:
A.stock is currently underpriced
B.market risk premium is increasing
C.stock has a significant amount of unique risk
D.stock has a beta exceeding 1.0
42) When new information becomes available in the market, evidence suggests that:
A.insiders will be the only investors to gain
B.it takes at least 10 trading days for stock prices to adjust
C.stock prices will adjust to the information rapidly
D.transaction costs will erase any benefit of trading on the information
43) Which of the following statements is true for a corporation with $1 million market
value of equity, $2 million market value of assets, and 1,000 shares of outstanding
stock?
A.Market value of liabilities exceeds book value of liabilities
B.Market value of liabilities equals $1 million
C.Book value per share equals $1,000
D.Market value per share equals $2,000
44) The concept of compound interest refers to:
A.earning interest on the original investment
B.payment of interest on previously earned interest
C.investing for a multiyear period of time
D.determining the APR of the investment
45) According to credit experts, a full credit analysis should be conducted:
A.on each customer of a firm
B.only when payment is doubtful
C.only on customers that are delinquent
D.on all repeat customers
46) Debt may be the preferred form of external financing for many firms because:
A.most firms already have too much equity
B.tax rates on equity are lower
C.debt will not adversely affect the firm’s financial ratios
D.equity issuance is considered by investors to be a negative sign
47) Calculate the dividend per share that is paid when the earnings per share are $6.00
and plowback ratio is 0.85:
A.$0.51
B.$0.71
C.$0.90
D.$5.10
48) Which of the following appears to be a more likely result from using sensitivity
analysis?
A.Agreement on the appropriate discount rate
B.Determination of whether to finance with debt or equity
C.Isolation of the pivotal factor in project profitability
D.Selection of the best capital budgeting project
49) Investing borrowed funds in a stock portfolio will:
A.increase the beta of the portfolio
B.decrease the volatility of the portfolio
C.decrease the expected return on the portfolio
D.increase the market risk premium
50) Average daily expenses are $50.8 million. Average accounts payable are $3,743.5
million. The average number of days that it takes the company to pay its bills (the
average payment delay) is therefore:
A.63.7 days
B.73.7 days
C.83.7 days
D.93.7 days
51) When Treasury bills yield 7.0% and the expected return on the market is 16%, then
the risk premium on an asset is equal to:
A.9.0%
B.16.0%
C.9.0% times the asset’s beta
D.8.0% plus the risk-free rate
52) What happens when moving from net income to cash flows as the result of an
increase in inventory balances?
A.Cash flows increase
B.Cash flows decrease
C.Cash flows are unchanged
D.The change in cash flows cannot be determined
53) The opportunity cost of a resource should be considered in project analysis, unless:
A.negative cash flows result from its use
B.the resource was purchased in a prior time period
C.the resource has been fully depreciated
D.the resource has no identifiable market value
54) A firm has a legal obligation to pay FFr5 million 1 year from now and is wondering
how it can hedge the exchange risk. The spot exchange rate is FFr5.5/$ and the forward
rate is FFr5.6/$. The 1-year U.S. interest rate is 5% and the French rate is 5.5%. What
do you suggest?
55) Discuss the trade-off theory of capital structure, including the determination of an
optimal debt level.
56) Why do firms compute weighted-average costs of capital?
57) Why is managerial flexibility important in capital budgeting?
58) How is the company’s tax bill affected by depreciation and how does this affect
project value?
59) Show numerically that investment horizon has no bearing on current stock price.
For your illustration assume investment horizons of 3 versus 5 years and the following
facts: The stock is correctly priced at $40.00, has a required return of 17%, a growth
rate of 7%, and has just paid a $3.74 dividend.
60) Calculate the implied cost of trade credit for firms that do not take advantage of
cash discounts, based on terms of sale of 5/15, net 60 . By how much does this implied
cost change if the discount is increased by 1% and the net payment period is increased
to 90 days?
