1) The WACC is the rate of return that the firm must expect to earn on its average-risk
investments in order to provide an acceptable return to its security holders.
2) The inputs that are most worth refining before you commit to a project are the ones
that have the greatest potential to alter project NPV.
3) When inflation is expected to be low, the risk premium on common stocks is
expected to be low.
4) EVA is the net profit of the firm adjusted for the cost of capital.
5) Shareholders welcome higher short-term profits even when they damage long-term
profits.
6) An individual can save and invest in a corporation only by lending money to it or by
purchasing additional shares.
7) For mutually exclusive projects, the project with the higher IRR (and not the number
of profitable years) is the correct selection.
8) The term “constant dollars” refers to equal payments for amortizing a loan.
9) The cost of capital is the minimum acceptable rate of return for capital investment.
10) Dividend policy may be defined as the trade-off between retaining earnings on the
one hand and paying out cash and issuing shares on the other.
11) A project will always generate extra overhead costs.
12) At expiration a put option will have no value if the stock price is greater than the
exercise price.
13) A typical horizon for long-term planning is 5 years.
14) In mergers financed by cash, the merger cost is not affected by the size of the
merger gain.
15) Unlike call options, the option to abandon a real asset project does not become
more valuable as time to expiration increases.
16) The dividend discount model should not be used to value stocks in which the
dividend does not grow.
17) In return for providing funds, venture capitalists receive:
A.long-term bonds of the firm
B.short-term bonds of the firm
C.an equity position in the firm
D.ownership of the entire firm
18) How would you interpret an inventory turnover ratio of 10.7?
A.It takes 50 days on average to collect receivables
B.Inventory is converted into sales every 50 days
C.The firm has sufficient inventories to maintain sales for 34.1 days
D.Assets are converted into sales every 50 days
19) Which of the following situations will improve the current ratio if it is initially less
than 1.0?
A.Using cash to repay accounts payable
B.Purchasing inventory on credit terms
C.Selling finished goods inventory on credit
D.Purchasing marketable securities for cash
20) Which of the following expenses cannot be used to reduce taxable corporate
income?
A.Cash dividends
B.Depreciation expense
C.Interest expense
D.Administrative expenses
21) What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on
its debt?
A.5.25%
B.9.75%
C.12.17%
D.20.25%
22) Which of the following statements is most likely correct for a project costing
$50,000 and returning $14,000 per year for 5 years?
A.NPV = $3,071.01
B.NPV = $20,000
C.IRR = 2.8%
D.IRR is greater than 10%
23) General Mills bought September call options for wheat with an exercise price of
$2.80 at a price of $0.10 per bushel. If the price of wheat at the expiration is $2.90,
what is the net cost of one bushel of wheat for General Mills?
A.$2.70
B.$2.80
C.$2.90
D.$3.00
24) A hedger who buys a futures contract is betting that prices will _____ at the
expiration of the contract.
A.decrease
B.increase
C.remain constant
D.guarantee high profits
25) Which of the following conditions would make a lock-box system potentially more
attractive to a firm?
A.The interest rate declines
B.Mail time saved is lower
C.Payment size is higher
D.Processing time saved is lower
26) Realizing the benefits of merger is easier when the merging companies:
A.have different computer systems
B.have different pay structures
C.have different resources
D.have different company cultures
27) A real estate developer buys 70 acres of land in a rural area, planning to build a
subdivision on the land if and when the population from the city begins to expand into
the area. If population growth is less than anticipated, the developer believes that the
land can be sold to a country club that would build a golf course on the property.
a. In what way does the possibility of sale to the country club provide a put option to
the developer?
b. What is the exercise price of the option? The asset value?
c. How does the golf course option increase the NPV of the land project to the
developer?
28) Stock A has 10 million shares issued and stock B has 5 million shares issued. What
is their relative weighting if both stocks are represented in the S&P 500?
A.They have equal weighting, like all S&P 500 stocks
B.B has twice the weighting, to account for having fewer shares
C.A has twice the weighting, to account for having more shares
D.They are weighted according to their expected performance
29) What dividend yield would be reported in the financial press for a stock that
currently pays a $1 dividend per quarter and the most recent stock price was $40?
A.2.5%
B.4.0%
C.10.0%
D.15.0%
30) Which of the following is correct for a bond priced at $1,100 that has 10 years
remaining until maturity, and a 10% coupon, with semiannual payments?
A.Each payment of interest equals $50
B.Each payment of interest equals $55
C.Each payment of interest equals $100
D.Each payment of interest equals $110
31) What amount of debt should a firm include in its financing mix in order to achieve a
sustainable growth rate of 9% while maintaining a 40% dividend payout, a 10% profit
margin, and an asset turnover of 1.5?
A.66.67% debt
B.60.00% debt
C.50.00% debt
D.Zero debt
32) When a firm’s management takes the firm private with the aid of substantial debt it
is known as a(n):
A.tender offer
B.greenmail offer
C.MBO
D.hostile takeover
33) What happens to the equivalent annual cost of a project as the opportunity cost of
capital decreases?
A.It increases
B.It decreases
C.It is not affected
D.It depends on whether or not the projects are mutually exclusive
34) Which of the following is correct when a firm’s pro forma statements project a net
income of $5,000 and an external financing requirement of $2,000?
A.Dividends cannot exceed $3,000
B.Total assets cannot grow by more than $3,000
C.Retained earnings cannot grow by more than $5,000
D.The internal growth rate is 60%
35) How many dollars will it take for a U.S. citizen to purchase a Japanese product
priced at 60,000 yen if the indirect exchange rate is 104/1?
A.$577
B.$700
C.$5,769
D.$62,400
36) If a bond is priced at par value, then:
A.it has a very low level of default risk
B.its coupon rate equals its yield to maturity
C.it must be a zero-coupon bond
D.the bond is quite close to maturity
37) A company may choose to repurchase stock rather than pay out dividends when:
A.the company wants to distribute excess cash, by making a regular commitment to its
investors
B.the company wants to give its investors a bumper dividend
C.the company does not want to make a commitment to distribute more cash
D.the company does not want to embark on unprofitable ventures
38) Which of the following is not a cost to the firm of increasing debt financing?
A.Investors will demand a higher interest rate on debt
B.The risk to common stockholders will increase
C.Stockholders will demand a higher return
D.The cost of common equity will decrease
39) If a firm has twice as much equity as debt in its capital structure, then the firm has:
A.75.0% debt
B.66.7% equity
C.40.0% debt
D.33.3% equity
40) For a corporation in the 25% marginal tax bracket that incurs $70.00 in labor and
materials expense, plus $15.00 in depreciation expense while generating an incremental
revenue of $100.00, tax liability will increase by:
A.$3.75
B.$7.50
C.$13.75
D.$25.00
41) A decrease of debt in the capital structure tends to reduce a firm’s EPS when the
firm:
A.faces high interest rates
B.faces strong growth in business conditions
C.pays taxes
D.does not reinvest its earnings
42) Interest rate swaps allow both counterparties to:
A.reduce interest expenses
B.avoid repayment of the notional principal
C.rearrange the balance sheet
D.pay a floating rate of interest on their debt
43) Stock returns can be explained by the stock’s _________ and the stock’s
_________.
A.beta; unique risk
B.beta; market risk
C.unique risk; firm-specific risk
D.aggressive risk; defensive risk
44) Under the assumptions necessary for MM I, if investors can borrow or lend at the
same terms as the firm, they will:
A.invest in debt only and ignore equity investments
B.not be willing to pay more for a restructured firm
C.require a higher rate of return on equity
D.accept a lower rate of return on equity
45) The current yield tends to understate a bond’s total return when the bond sells for a
discount because:
A.increases in interest rates will increase the current yield
B.the bond’s price will increase each year
C.current yields show only nominal returns
D.the bond may have a higher face value
46) A sign that a firm is efficient is a:
A.high average collection period
B.high day’s sales in inventories
C.low asset turnover
D.high inventory turnover
47) A decision tree shows a 30% probability of $2 million in returns and a 70% chance
of $1 million in returns. What is the maximum you would invest today in this project if
the cash inflow occurs one year in the future and the discount rate is 10%?
A.$818,182
B.$1,181,818
C.$1,300,000
D.$1,363,636
48) A major difference between financial planning and forecasting is that financial
planning:
A.is forward-looking
B.relies on the viewpoints of management
C.determines the rate of profitability
D.is equally concerned with less likely outcomes
49) Empirical studies show that the operating efficiency of firms having undergone a
leverage buyout ______ over the following 3 years.
A.increases
B.decreases
C.does not change
D.shows no clear trend
50) Which of the following statements is correct concerning sensitivity analysis?
A.It ignores interrelationships between variables
B.Several variables are allowed to change concurrently
C.It considers all feasible variable combinations
D.Its results are free from ambiguity
51) One way in which control of a corporation can be removed from the current board
of directors is to:
A.take away the directors’ stock
B.give voting power to management
C.remove the Board’s voting power
D.fight a proxy contest
52) There is perhaps a negative connotation about the term ‘speculators.” Discuss the
essential purpose that they serve in providing the ability to hedge.
53) What is the overall change in working capital resulting from the following changes?
$300 increase in inventories, $150 increase in accounts payable, $120 decrease in
accounts receivable, $60 decrease in other current assets, $150 decrease in other current
liabilities.
54) Calculate the expected return, variance, and standard deviation for the following
portfolio of four stocks, equally weighted:
55) What are the determinants of option values?
56) Although the rule seems very straightforward, why is it stated that financial
managers often make the mistake of discounting real cash flows with nominal rates?
Mention one common example, and state the effect that this has on project evaluation.