1) Capital budgeting projects that expand sales are more likely to involve increases in
working capital than are projects that involve the replacement of existing assets.
2) Capital structure is the mix of the long-term sources of funds used by the firm.
3) If two bonds have the same yield to maturity, they also have the same current yield.
4) The most relevant measure of risk for capital budgeting is project standing alone risk.
5) Operating return on assets captures the effect of taxes and financing costs, and hence
provides the broadest possible measure of profitability.
6) Because investors like dividends, the higher the company’s dividend growth rate, the
lower the company’s cost of common equity.
7) In general, a project’s free cash flows will fall into one of three categories: (1)
incremental costs, (2) sunk costs, and (3) opportunity costs.
8) Asset allocation is not recommended by financial planners because mixing different
types of assets, such as stocks with bonds, makes it more difficult to track performance
and adjust portfolios to changing market conditions.
9) A stock split is defined as a stock dividend exceeding 25%.
10) The cost of internal common equity is already on an after-tax basis since dividends
paid to common stockholders are not tax deductible.
11) Operating cash flow is equal to the change in EBIT less the change in interest
expense, less the change in taxes, plus the change in depreciation.
12) Unique security risk can be eliminated from an investor’s portfolio through
diversification.
13) Two factors that go into the determination of the appropriate order point are the
deliver-time stock and the safety stock required.
14) The value of a bond investment, which provides fixed interest payments, will
increase when discounted at a 8% rate rather than at a 11% rate.
15) One drawback of the payback method is that some cash flows may be ignored.
16) Business risk refers to the relative dispersion (variability) of a company’s net
income.
17) In order to be conservative, accrual accounting requires that expenses be recorded
when incurred, but revenues are recorded only after the cash has been received.
18) Using the percentage of sales method, forecasted retained earnings balance is equal
to
A) prior year retained earnings plus projected net income less projected dividends
B) the ratio of retained earnings to sales for the current year multiplied by projected
sales for next year
C) the retained earnings balance for the current year as no changes are made to this
financing account when using the percent of sales method
D) the ratio of retained earnings to sales for the current year multiplied by projected
sales for next year, minus dividends paid
19) Table 4-3
Emery Corporation
Based on the information in Table 4-3, the total asset turnover is
A) 2.10 times
B) 2.42 times
C) 2.87 times
D) 3.25 times
20) Flashbinder Guitars, Inc. is considering a lockbox system that will increase its
check processing cost by $.20 per check. The company estimates an average check size
of $900 and expects any funds freed up by the new lockbox system can be invested in
an account that earns 4% per year before taxes. What reduction in collection time is
necessary for the lockbox to be beneficial to Flashbinder Guitars Inc.?
A) 1.96 days
B) 2.03 days
C) 1.73 days
D) 2.15 days
21) The one-year interest rate is 4%. The interest rate for a two-year security is 6%.
According to the unbiased expectations theory, the one-year interest rate one year from
now must be equal to
A) 5.00%
B) 8.00%
C) 8.04%
D) 10.00%
22) Which of the following is the most valid reason to split a stock that has a market
price of $110 per share?
A) conserve cash
B) reduce the market price to a more popular trading range
C) obtain additional capital
D) increase investor’s net worth
23) A corporate financial manager trying to maximize shareholder value
A) is not concerned with ethics but rather with writing iron-clad contracts
B) can safely ignore ethics as long as no laws are broken
C) must behave ethically in order to stay out of jail
D) is concerned with ethics because unethical behavior destroys trust, and businesses
cannot function without a certain degree of trust
24) A bond matures in 20 years, at which time it pays the owner $1,000. It also pays
$70 at the end of each of the next 20 years. If similar bonds are currently yielding 7%,
what is the market value of the bond?
A) over $1,000
B) under $1,000
C) exactly $1,000
D) cannot be determined from the information given
25) Amalgamated Mining, Inc. has very high operating leverage due to the capital
intensive nature of the steel business. The firm’s CEO is concerned about the variability
in the firm’s EPS if sales should drop, and decides to take action. Which of the
following will reduce the variability in the firm’s EPS for a given change in sales?
A) The CEO may increase the firm’s financial leverage and hence reduce the variability
by using non-shareholder money to support the business
B) The CEO may decrease the firm’s financial leverage, thus lowering the firm’s total
leverage
C) The CEO may increase the firm’s total leverage by raising money from the sale of
common stock
D) The CEO may issue more corporate bonds and use the proceeds to pay off
short-term liabilities
26) A firm’s cash position would most likely be helped by
A) delaying payment of accounts payable
B) more liberal credit policies for their customers
C) purchasing land for investment purposes
D) holding larger inventories
27) The CFO of Twine Enterprises expects sales to increase from $8,000,000 in 2010 to
$12,000,000 in 2011. Current assets in 2010 are equal to $5,000,000. Using the percent
of sales method, projected current assets for 2011 are equal to
A) $5,500,000
B) $7,083,333
C) $9,000,000
D) $7,500,000
28) The CAPM designates the risk-return tradeoff existing in the market, where risk is
defined in terms of beta.
29) A significant disadvantage of the internal rate of return is that it
A) does not fully consider the time value of money
B) does not give proper weight to all cash flows
C) may have an unrealistic reinvestment assumption
D) is expressed as a percentage
30) Which of the following categories of owners have unlimited liability?
A) general partners in a limited partnership
B) sole proprietors
C) shareholders of a corporation
D) both A and B
31) In general, the least expensive source of capital is
A) debt
B) new common stock
C) preferred stock
D) retained earnings
32) You own an ordinary annuity contract that will pay you $3,000 per year for 12
years. You need money to pay back a loan in 6 years, and you are afraid if you get the
annuity payments annually you will spend the money and not be able to pay back your
loan. You decide to sell your annuity for a lump sum of cash to be paid to you five years
from today. If the interest rate is 8%, what is the equivalent value of your 12-year
annuity if paid in one lump sum five years from today?
A) $22,008
B) $18,000
C) $35,876
D) $38,880
33) The minimum rate of return necessary to attract an investor to purchase or hold a
security is referred to as the
A) stock’s beta
B) investor’s risk premium
C) investor’s required rate of return
D) risk-free rate
34) Which of the following statements is MOST correct concerning diversification and
risk?
A) Diversification is mainly achieved by the selection of individual securities for each
type of asset held in a portfolio
B) Diversification is mainly achieved by the asset allocation decision, not the selection
of individual securities within each asset category
C) Large company stocks and small company stocks together in a portfolio lead to
dramatic reductions in risk because their returns are negatively correlated
D) Asset allocation is important for pension funds but not for individual investors
35) Examples of uses of cash include
A) paying cash dividends to stockholders
B) borrowing an additional amount using a secured loan
C) selling machinery
D) all of the above
36) WRJ has a debt ratio of .4, current liabilities of $18,000, and total assets of
$120,000. What is the level of WRJ’s total liabilities?
A) $22,000
B) $48,000
C) $58,000
D) $63,934
37) When an investment banking firm “underwrites” an issue of securities, the firm is
performing which of the following?
A) agreeing to market the securities to investors for a fee
B) giving legal advice to the firm that is issuing the securities
C) offering to purchase the securities from the firm, thereby assuming the risk of resale
to investors
D) agreeing to provide insurance that the firm’s securities will sell for a price that is
established by the firm
38) Which of the following is the initial and most important step in the preparation of
pro forma financial statements?
A) Estimate the levels of investment in current and fixed assets
B) Determine the rate of interest that will be required for borrowed funds
C) Project the firm’s sales revenues for the planning period
D) Approximate the cost of raw materials
39) Facade Securities has an issue of $1,000 par value bonds with 18 years remaining to
maturity. The bonds pay 7.7% interest on a semiannual basis. The current market price
of the bonds is $1,175. What is the yield-to-maturity of the bonds?
A) 6.09%
B) 6.87%
C) 7.24%
D) 8.38%
40) ACME, Inc. reported the following income statement for 2009:
If ACME’s sales next year increase by 20%, ACME’s EBIT will increase
A) 20%, showing no operating leverage
B) 20%, showing no financial leverage
C) over 35%, due to operating leverage
D) over 35%, due to operating leverage and financial leverage
41) A stock repurchase may be viewed as
A) a dividend decision when the firm has excess cash
B) a financing decision when the firm wants to alter its capital structure
C) an operating leverage decision
D) both A and B
42) You purchased 500 shares of A.M.J. Inc. common stock one year ago for $50 per
share. You received a dividend of $2 per share today and decide to take your profits by
selling at $54.50 per share. What is your holding period return?
A) 13.0%
B) 9.0%
C) 6.5%
D) 4.0%
43) The New York Stock Exchange (NYSE) is
A) an automated electronic trading platform
B) an auction market with face-to-face trading on the floor of the stock exchange in
addition to automated, electronic trading
C) a hybrid market, allowing for face-to-face trading on the floor of the stock exchange
in addition to automated, electronic trading
D) primarily a futures market
44) Cary’s wonderful parents established a college savings plan for him when he was
born. They deposited $50 into the account on the last day of each month. The account
has earned 10% compounded monthly, tax-free. Now he’s off to State U. What equal
amount can they withdraw beginning today (his 18th birthday) and each year for three
additional years to spend on his education, assuming that the account now earns 7%
annually.
A) $8,285
B) $8,865
C) $9,486
D) $30,028
45) Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be
repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent.
What is the monthly payment?
A) $500.92
B) $543.79
C) $563.82
D) $597.24
46) Mr. Wizard’s Magic Shoppe had the following condensed balance sheet at the end
of operation for 2010:
Mr. Wizard’s Magic Shoppe
Balance Sheet
December 31, 2010
During 2011, the following occurred
a.Mr. Wizard’s sold some of its investments for $13,000 which resulted in a gain of
$300 after taxes. The gain (net of taxes) has been included in the company’s 2011 net
income.
b.Additional land for a plant expansion was purchased for $25,000.
c.Bonds payable were paid in the amount of $10,000.
d.An additional $35,000 in capital stock was issued.
e.Dividends of $15,000 were paid to stockholders.
f.Net income for 2011 was $48,000 after allowing for $15,000 in depreciation.
g.A second parcel of land was purchased through the issuance of $10,000 in bonds, and
$5,000 in long-term notes payable.
Required:
a. Prepare a statement of cash flows for the year ended 12/31/2011. (check figure:
ending cash balance = $72,500)
b. Prepare a condensed balance sheet for Mr. Wizard’s at December 31, 2011.
47) If you are an importer of goods and you need to make payment for the purchase of
inventory before the close of business today, which of the below is the correct term for
the exchange rate that you will use?
A) indirect rate
B) spot rate
C) direct rate
D) forward rate
48) If the variables in the EOQ inventory model are defined as: S = total units
demanded during the planning period, O = ordering costs per order, C = carrying costs
per unit and Q = inventory order size in units, then the average level of inventory which
a company should have during the planning period is
A) 2/3 Q
B) 1/2 Q
C) SO/C
D) 1/2 S
49) How much money must you pay into an account at the end of each of 20 years in
order to have $100,000 at the end of the 20th year? Assume that the account pays 6%
per year, and round to the nearest $1.
A) $1,840
B) $2,028
C) $2,195
D) $2,718
50) You are in charge of one division of Yeti Surplus Inc. Your division is subject to
capital rationing. Your division has 4 indivisible projects available, detailed as follows:
ProjectInitial OutlayIRRNPV
12 million18%2,500,000
21 million15%950,000
31 million10%600,000
43 million9%2,000,000
If you must select projects subject to a budget constraint of 5 million dollars, which set
of projects should be accepted so as to maximize firm value?
A) Projects 1, 2 and 3
B) Project 1 only
C) Projects 1 and 4
D) Projects 2, 3 and 4
51) pr Corporation just issued $1,000 par 20-year bonds. The bonds sold for $936 and
pay interest semiannually. Investors require a rate of 7.00% on the bonds. What is the
amount of the semiannual interest payment on the bonds?
A) $64.50
B) $55.00
C) $32.00
D) $21.75
52) Farrah owns 5,000 shares of stock in DAS, Inc. with a market value of
$15,000.DAS declares a 20% stock dividend. After the dividend is paid, Farrah owns
A) 6,000 shares with a market value of $18,000
B) 6,000 shares with a market value of $15,000
C) 5,100 shares with a market value of $15,300
D) 5,000 shares with a market value of $18,000