1) The creation of a portfolio by combining two assets having perfectly positively
correlated returns cannot reduce the portfolio’s overall risk below the risk of the least
risky asset.
2) Mutually exclusive projects are those whose cash flows compete with one another;
the acceptance of one eliminates the others from further consideration.
3) Unsystematic risk is the relevant portion of an asset’s risk attributable to market
factors that affect all firms.
4) If a project’s IRR is greater than zero, the project should be accepted.
5) If a firm’s earnings remain constant and total cash dividends do not increase, a stock
dividend results in a lower per-share market value for the firm’s stock.
6) Popular takeover defense methods include white knights, poison pills, greenmail,
golden parachutes, and shark repellents.
7) The payback period is the amount of time required for a firm to dispose a replaced
asset.
8) A discount loan is a loan on which interest is paid in advance by deducting it from
the loan so that the borrower actually receives less money than is requested.
9) Total leverage measures the effect of fixed costs on the relationship between
________.
A) sales and EBIT
B) sales and EPS
C) EBIT and EPS
D) EBIT and dividend
10) How many years would it take for Jughead to save an adequate amount for
retirement if he deposits $2,000 per month into an account beginning today that pays 12
percent per year if he wishes to have a total of $1,000,000 at retirement?
A) 13 years
B) 16 years
C) 15 years
D) 12 years
11) Tangshan Mining has common stock at par of $200,000, paid-in capital in excess of
par of $400,000, and retained earnings of $280,000. In states where the firm’s legal
capital is defined as the total of par value and paid-in capital in excess of par, the firm
could pay out ________ in cash dividends without impairing its capital.
A) $280,000
B) $400,000
C) $480,000
D) $600,000
12) Which of the following is typically a feature of preferred stocks?
A) They are settled prior to common stocks during liquidation
B) They are mostly noncumulative in nature
C) They are paid dividends that grow at a constant rate
D) They carry voting rights and have maturity date
13) Table 9.2
A firm has determined its optimal structure which is composed of the following sources
and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A
flotation cost of 2 percent of the face value would be required in addition to the
premium of $50.
Common Stock: A firm’s common stock is currently selling for $75 per share. The
dividend expected to be paid at the end of the coming year is $5. Its dividend payments
have been growing at a constant rate for the last five years. Five years ago, the dividend
was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2
per share and the firm must pay $1 per share in flotation costs. Additionally, the firm
has a marginal tax rate of 40 percent.
The firm’s before-tax cost of debt is ________. (See Table 9.2)
A) 7.7 percent
B) 10.6 percent
C) 11.2 percent
D) 12.7 percent
14) In economic conditions characterized by short-term interest rates which exceed
long-term interest rates, the financing strategy which would maximize profits is
________ strategy.
A) the aggressive
B) the conservative
C) the trade-off
D) a seasonal
15) A firm issued 5,000 shares of $1 par-value common stock, receiving proceeds of
$20 per share. The amount recorded for the paid-in capital in excess of par account is
________.
A) $5,000
B) $95,000
C) $100,000
D) $0
16) A firm has just ended its calendar year making a sale in the amount of $200,000 of
merchandise purchased during the year at a total cost of $150,500. Although the firm
paid in full for the merchandise during the year, it is yet to collect at year end from the
customer. The possible problem this firm may face is ________.
A) high taxes
B) lack of cash flow
C) inability to receive credit
D) high leverage
17) Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment
proposals for the year beginning in 2014. For each investment proposal, the relevant
cash flows and other relevant financial data are summarized in the table below. In the
case of a replacement decision, the total installed cost of the equipment will be partially
offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.
________________________________________________________
*Not applicable
For Proposal 1, the initial outlay equals ________. (See Table 11.2)
A) $1,380,000
B) $1,440,000
C) $1,500,000
D) $1,620,000
18) In the basic valuation model, risk is generally incorporated into the ________.
A) cash flows
B) timing
C) discount rate
D) total value
19) Most firms employ ________ funding strategy if their sales and investments in
operating assets are constant.
A) aggressive
B) conservative
C) permanent
D) seasonal
20) One of the main goals of divestiture is ________.
A) expanding operations
B) economies of scale
C) employee stock option
D) raising funds
21) ________ is the extent of an asset’s risk. It is found by subtracting the pessimistic
outcome from the optimistic outcome.
A) Variance
B) Standard deviation
C) Probability distribution
D) Range
22) What is the expected risk-free rate of return if Asset X, with a beta of 1.5, has an
expected return of 20 percent, and the expected market return is 15 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
23) The ________ is the time period that elapses from the point when a firm sells a
finished good on account to the point when the receivable is collected.
A) cash conversion cycle
B) average payment period
C) average age of inventory
D) average collection period
24) A corporation is selling an existing asset for $1,000. The asset, when purchased,
cost $10,000, was being depreciated under MACRS using a five-year recovery period,
and has been depreciated for four full years. If the assumed tax rate is 40 percent on
ordinary income and capital gains, the tax effect of this transaction is ________.
A) $0 tax liability
B) $1,100 tax liability
C) $3,600 tax liability
D) $280 tax benefit
25) The ________ of a firm is the amount of time required for a company to convert
cash invested in its operations to cash received as a result of its operations.
A) cash turnover
B) cash conversion cycle
C) average age of inventory
D) average collection period
26) Tangshan Mining is considering issuing long-term debt. The debt would have a 30
year maturity and a 12 percent coupon rate and make semiannual coupon payments. In
order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of
face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face
value. The firm’s tax rate is 33 percent. Given this information, the after-tax cost of debt
for Tangshan Mining would be ________.
A) 6.38%
B) 12.76%
C) 4.98%
D) 8.48%
27) In a Dutch auction, ________.
A) a firm offers to repurchase a fixed number of shares, at a discount
B) a firm offers to repurchase a fixed number of shares, at a premium
C) a firm specifies a range of prices at which it is willing to repurchase shares and the
quantity of shares that it desires
D) a firm enables stockholders to use dividends received on the firm’s stock to acquire
additional shares
28) Janice would like to send her parents on a cruise for their 25th wedding anniversary.
She has priced the cruise at $15,000, and she has 5 years to accumulate this money.
How much must Janice deposit annually in an account paying 10 percent interest in
order to have enough money to send her parents on the cruise?
A) $1,862
B) $2,457
C) $3,000
D) $2,234