Mutual funds, pension funds, banks, investment banking firms, and insurance
companies are institutional investors.
A stock’s total return is realized from two principal sources, its dividend yield and any
gain from the increase in its selling price over the original purchase price of the stock.
Registered bonds require that the names of owners be registered with a transfer agent.
Bearer bonds belong to the person who possesses them.
All capital budgeting cash flows must be stated after tax.
Federal government bonds have no risk premium because they carry no risk of any
kind.
A lockbox system that accelerates cash collections also decreases a firm’s receivables.
Many companies tolerate customers who take longer than the typical 30 days to pay
their bills. Therefore , it is not alarming, and is even acceptable, for a company to have
a 60 day ACP.
EBIT is a business’s profit before consideration of financing charges.
Governments of various countries promote free trade by forming groups of countries
that reduce or eliminate trade barriers among themselves.
The key to a successful repurchase is to buy when the market price of the stock is above
its intrinsic value.
If the direct quote shows Mexican pesos at $.1005, the indirect quote will show that
approximately ten U.S. dollars can be purchased with one peso.
Financing lease payments are expensed each period and therefore the lease is not
reflected on the balance sheet.
The terms “acquisition” and “takeover” are often used to refer to a merger because the
stock of the firm that goes out of existence is usually acquired by the continuing firm.
In case of two mutually exclusive projects, the project having the higher MIRR should
be preferred.
The fundamental benefit of offering trade credit is more sales.
You have the option of purchasing a $1,000, 6% coupon bond with interest payable
semiannually and a remaining term of 10 years, or a $1,000, zero coupon bond with a
remaining term of 10 years. With a market yield of 8%, what percentage of face value
would you pay for each bond?
A.46.32% for the zero and 86.58% for the coupon bond
B.45.64% for the zero and 86.41% for the coupon bond
C.46.32% for the zero and 86.58% for the coupon bond
D.None of the above
Calculate the WACC.
A.9.8%
B.10.0%
C.8.6%
D.10.4%
The higher the rate of interest:
A.the larger the present value of a future sum of money.
B.the smaller the future value of an amount invested today.
C.the smaller the present value of a future sum of money.
D.All of the above
A project has the following cash flows:
What is the project’s NPV if the interest rate is $6%?
A.($17.76)
B.$482.24
C.($537.78)
D.$22.44
Assume a firm has an average inventory of $25,000, sales of $250,000, gross profit of
$100,000, and net income of $25,000. The preferred formulation for an inventory
turnover results in an inventory turn of:
A.1 time
B.10 times
C.4 times
D.6 times
Williamson Trucking projects sales of $24,000. What ACP must it achieve to keep its
receivables at $1,000 (round to the nearest $)?
A.10 days
B.15 days
C.20 days
D.25 days
The future cash flows of a stand-alone capital project follow:
If the company’s cost of capital is 14%, what is the approximate NPV of the project?
A.$5,804
B.$1,217
C.$6,217
D.$804
Use the following information for the next four questions. Norlin Corporation is
considering an expansion project that will begin next year (Time 0). Norlin’s cost of
capital is 12%. The initial cost of the project will be $250,000, and it is expected to
generate the following cash flows over its five-year life:
a. What is the payback period for the expansion project?
a. 3.67 years
b. 4.00 years
c. 4.25 years
d. 4.67 years
e. 5.00 yearsb. What is the net present value (NPV) of for the expansion project?
a. ($45,197)
b. $ 5,871
c. $ 13,784
d. $ 25,726
e. $120,000c. What is the internal rate of return (IRR) for the expansion project?
a. 4.13%
b. 6.50%
c. 10.36%
d. 12.83%
e. 14.67%d. What is the Profitability Index (PI) for the expansion project?
a. 1.02
b. 1.05
c. 1.10
d. 1.48
e. Cannot be determined
If you deposit $250 each quarter in a bank account that pays interest at 16%
compounded quarterly, how much will you have at the end of five years?
A.$3397.58
B.$1354.08
C.$7444.53
D.$6074.25
Hatter Enterprises has just borrowed money at 12% for 3 years. The pure rate of interest
is 2%. Hatter’s default risk premium is 3%, its liquidity risk premium is 3%, and its
maturity risk premium is 1%. Inflation is expected to be 3% in the first year of the loan
and 4% in the second year. What does the lender expect the inflation rate to be in the
loan’s third year?
A.2%
B.4%
C.6%
D.8%
In estimating the net investment, an outlay that has already been made is known as a(n):
A.sunk cost.
B.cash outflow.
C.opportunity cost.
D.expansion cost.
What type of situation will result in a firm having temporary working capital needs?
A.A steady clientele of buyers for the firm’s product.
B.A specialized product for summer outdoor sports.
C.A product that is essential for a number of different manufacturing processes.
D.A routine service provided on the basis of long-term contracts.
Although the payback method suffers from several deficiencies, it is widely used
because it:
A.is quick.
B.is easy to apply and understand.
C.provides a rough screening device to eliminate poor projects.
D.All of the above