1) Dividends are likely to shift up and down as earnings fluctuate so that managers can
maintain a stable payout ratio.
2) With a line of credit, a firm can borrow and repay whenever it wants so long as the
balance does not exceed the credit limit.
3) Google went public in 2004 at a price of $85 a share, putting a value on the
enterprise of $23 billion. China’s state-owned Industrial and Commercial Bank raised
even more capital in its 2006 IPO.
4) Carve-outs are similar to spin-offs except that shares in the new company are not
given to existing stockholders but instead are sold in a public offering.
5) When choosing among mutually exclusive projects, the choice is easy using the NPV
rule. As long as at least one project has positive NPV, simply choose the project with
the highest NPV.
6) If the market value of assets is high, then the market value of liabilities must be high
also.
7) Risk policies are the same across companies.
8) Changing the discount rate is equivalent to adjusting expected cash flows as a
method of accounting for risk.
9) At some debt-equity ratio, the costs of financial distress are expected to overcome the
value of the tax shield for a firm.
10) According to interest rate parity, the interest rate differential must be equal to the
differential between forward and spot exchange rates.
11) The IRR is the rate of return on the cash flows of the investment, also known as the
opportunity cost of capital.
12) Futures contracts are standardized to expire at one time each year.
13) Average returns on high-risk assets are higher than those on low-risk assets.
14) Soft rationing should never cost the firm anything.
15) Amendments to the corporate charter that attempt to circumvent mergers are known
as poison pills.
16) TIPS are unlike most bonds in that their cash flows increase when the national
unemployment rate increases.
17) The accounting break-even point is that level of sales where:
A.sales revenue equals variable costs
B.sales revenue equals variable plus fixed costs
C.EBIT equals depreciation expense, thus cash flow equals zero
D.EBIT equals zero
18) The bank’s ledger balance for a firm is equal to the:
A.firm’s ledger balance less payment float
B.available balance plus net float
C.firm’s ledger balance less availability float
D.available balance plus payment float
19) A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $5.00
per bushel at expiration. If soybean futures close at $5.10 the next day, the seller:
A.has a profit of $500 thus far on the contract
B.has a loss of $500 thus far on the contract
C.has no profit or loss, but is still obligated to deliver 5,000 bushels at $5.00
D.will receive a check for $500 from the buyer of the contract
20) What is the current price of a share of stock for a firm with $5 million in
balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio
of 4?
A.$2.50
B.$10.00
C.$20.00
D.$40.00
21) With respect to the WACC:
A.it is the proper discount rate for everything the company does
B.it is used to value all new projects
C.this benchmark discount rate is adjusted for the riskiness of the project
D.no adjustments need to be made when using it as the discount rate
22) In a firm having both a treasurer and a controller, which of the following would
most likely be handled by the controller?
A.Internal auditing
B.Credit management
C.Banking relationships
D.Insurance
23)
A bank loan has a quoted annual rate of 6%. However, the borrower must maintain a
balance of 25% of the amount of the loan, and the balance does not earn any interest.
a. What is the effective rate of interest if the loan is for 1 year and is paid off in one
payment at the end of the year?
b. What is the effective rate of interest if the loan is for 1 month?
24) Which of the following investment decision rules tends to improperly reject
long-lived projects?
A.Net present value
B.Internal rate of return
C.Payback period
D.Profitability index
25) You can buy silver in the:
A.capital markets
B.foreign exchange markets
C.commodities markets
D.option markets
26) You can value overseas investments using the NPV of the cash flows. Which of the
following adjustment is necessary to calculate the NPV?
A.Convert the opportunity cost of capital and cash flows into foreign currency
B.Convert the foreign cash flows into domestic currency and use the domestic
opportunity cost of capital for discounting
C.Use domestic discount rate to discount foreign cash flows
D.Convert the foreign cash flow into domestic currency and use the foreign cost of
capital for discounting
27) How much will Gamma Inc.’s equityholders earn given the following information:
total asset turnover is 0.85, profit margin is 0.15, and debt-equity ratio is 0.25?
A.9.56%
B.15.94%
C.16.96%
D.38.25%
28) The existence of goodwill on a corporate balance sheet indicates that the
corporation has:
A.been profitable in the past
B.depreciated its tangible assets
C.intangible assets from past acquisitions
D.retained earnings resulting from past income
29) If no price change occurs in a stock on the day that it announces its next dividend, it
can be assumed that:
A.the stock market is inefficient
B.the dividend was reduced
C.the market was expecting this information
D.technical analysts are not following this stock
30) A firm has $50 million and $60 million credit sales during the first two quarters of
the year. Eighty percent of the receivables are collected in the same quarter and the
balance in the next quarter. What will be the total collection for the firm in the second
quarter?
A.$55 million
B.$58 million
C.$88 million
D.$98 million
31) What constant-growth rate in dividends is expected for a stock valued at $32.00 if
next year’s dividend is forecast at $2.00 and the appropriate discount rate is 13%?
A.5.00%
B.6.25%
C.6.75%
D.15.38%
32) Which of the following conditions will typically be present when a firm calls a
bond prior to maturity?
A.The firm is in poor financial health
B.Interest rates have risen substantially since the bond was issued
C.Interest rates have fallen substantially since the bond was issued
D.The call option is ready to expire
33) If a company uses cash to pay off some of its accounts payables, what effect will
this have on its liquidity ratios, given that the ratios exceeded 1.0 before the payoff?
A.The quick ratio and current ratio will both increase
B.The quick ratio and current ratio will both decrease
C.The quick ratio will increase but the current ratio will remain unchanged
D.The current ratio will increase but the quick ratio will remain unchanged
34) An investor was expecting an 18% return on his portfolio with beta of 1.25 before
the market risk premium increased from 8 to 10%. Based on this change, what return
will now be expected on the portfolio?
A.20.0%
B.20.5%
C.22.5%
D.26.0%
35) A 5-year project requires an additional commitment of $100,000 in net working
capital. What is the opportunity cost associated with this investment?
A.$100,000
B.The present value of $100,000, discounted at the firm’s cost of capital
C.The present value of $100,000, discounted at the firm’s cost of capital, and
“borrowed” for the life of the project
D.No opportunity cost is involved
36) Which of the following financial markets is not located in one centralized location?
A.NYSE
B.LSE
C.NASDAQ
D.CBOT
37) Dividend changes are typically viewed by investors as signals of future changes in:
A.investment
B.the firm’s WACC
C.earnings
D.the clientele effect
38) In which of the following ways can the management teams of many corporations
influence the board of directors?
A.By merging with another firm
B.Through appointment of shareholders to replace current board members
C.Through management’s nomination of board candidates
D.By declaring a liquidating cash dividend
39) What is the effective annual interest rate on a 9% APR automobile loan that has
monthly payments?
A.9.00%
B.9.38%
C.9.81%
D.10.94%
40) As for the preparation of cash budgets, capital expenditures are:
A.not included because these items are depreciated
B.included as sources of operating cash
C.included as uses of cash and make the budget lumpy
D.traditionally offset as a use of cash by interest income
41) If changing discount rates from the company cost of capital to the project cost of
capital changes NPV from negative to positive, then the project should use the:
A.company cost of capital and be accepted
B.company cost of capital and be rejected
C.project cost of capital and be accepted
D.project cost of capital and be rejected
42) A financial analyst in a corporation may be involved in:
A.proposing a new investment project
B.collecting payments from customers
C.managing investment of the company’s cash
D.purchasing the firm’s plant and equipment
43) When large firms file for bankruptcy, they usually do so under an arrangement
called:
A.Chapter 9
B.Chapter 11
C.Chapter 13
D.Chapter 14
44) According to CAPM estimates, what is the cost of equity for a firm with beta of 1.5
when the risk-free interest rate is 6% and the expected return on the market portfolio is
15%?
A.19.5%
B.21.0%
C.22.5%
D.24.0%
45) What nominal annual return is required on an investment for an investor to
experience a 12% gain in purchasing power? Assume inflation to be 4%.
A.7.69%
B.9.29%
C.12.00%
D.16.48%
46) What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3
years if the opportunity cost of capital is 14%?
A.$3,397.57
B.$4,473.44
C.$16,085.00
D.$35,000.00
47) The major cost of a merger is the:
A.legal fees
B.cost of restructuring the acquired firm
C.premium the acquirer pays to the target firm
D.reduction in free cash flow
48) A stock split and/or a stock dividend will result in an:
A.increase in the number of shares outstanding
B.increase in the market value of the firm
C.increase in the total assets of the firm
D.increase in both the number of shares outstanding and the total assets of the firm
49) A firm has issued $20 million in long-term bonds that now have 10 years remaining
until maturity. The bonds carry an 8% annual coupon but are selling in the market for
$877.10. The firm also has $45 million in market value of common stock. For cost of
capital purposes, what portion of the firm is debt financed and what is the after-tax cost
of debt, if the tax rate is 35%?
50) Briefly discuss some of the more logical reasons for mergers to occur.
51) Discuss reasons why a firm may want to impose soft capital rationing.
52) A firm with 30% total debt ratio, total assets of $10 million, and an ROE of 14%
has been paying out 60% of earnings to shareholders in the form of dividends. Sales are
expected to increase by 10% this year, a faster growth rate than usual. Will external
funding be required under these conditions? Will the debt-equity ratio remain constant?
53) Compare and contrast share repurchases with dividend payouts.