1) The separation of ownership and management is one distinctive feature of both
corporations and sole proprietors.
2) More often than not, the announcement of a stock split does result in a rise in the
market price of the stock.
3) Underwriters usually play a triple rolefirst providing the company with procedural
and financial advice, then buying the stock, and finally reselling it to the public.
4) A stock split will affect the stock’s price while a stock dividend will not.
5) When you have to choose between projects with different lives, you should put them
on an equal footing by computing the equivalent annual annuity or benefit of the two
projects.
6) In high-tech industries an acrimonious takeover battle may cause many of the target’s
most valued staff to leave.
7) If a firm increases its accounts payable period, other things equal, it increases the
cash conversion cycle.
8) A U.S. importer of Japanese product should sell Japanese yen forward to avoid the
risk of an appreciation of the yen.
9) A typical poison pill may give existing shareholders the right to buy the company’s
shares at half price as soon as a bidder acquires more than 15% of the shares. The
bidder is not entitled to the discount.
10) All companies work hard to hedge their exposure to price fluctuations.
11) Exchange traded futures contracts allow the seller to choose the place of delivery
for the commodity.
12) To calculate the cash produced by the business it is necessary to add back the
depreciation charge and to subtract the expenditure on new capital equipment.
13) One way to check the correctness of the expected return on bonds is through the
bond discount model.
14) What is the approximate standard deviation of returns for a one-year project that is
equally likely to return 100% as it is to provide a 100% loss?
A.0%
B.50%
C.71%
D.100%
15) The decision rule for net present value is to:
A.accept all projects with cash inflows exceeding initial cost
B.reject all projects with rates of return exceeding the opportunity cost of capital
C.accept all projects with positive net present values
D.reject all projects lasting longer than 10 years
16) How does net working capital affect the NPV of a 5-year project if working capital
is expected to increase by $25,000 and the firm has a 15% cost of capital?
A.NPV will increase by $9,322
B.NPV will increase by $12,571
C.NPV will decrease by $25,000
D.NPV will decrease by $12,571
17) With a tax rate of 35%, calculate the WACC for a firm that pays 10% on its debt,
requires an 18% rate of return on its equity, and finances 45% of assets with debt.
A.12.83%
B.14.00%
C.14.40%
D.18.20%
18) Suppose that:
What rate do you think a Japanese bank would quote for buying or selling Swiss francs?
A.81.01 yen
B.83.01 yen
C.85.01 yen
D.87.01 yen
19) The 6-month forward quote for the euro is 1.6/US$, and the spot price of the euro is
1.7/US$. Which of the following statements is true?
A.Forward discount on the euro is 6.25%
B.Forward premium on the euro is 6.25%
C.Forward discount on US$ is 6.25%
D.Forward premium on US$ is 6.25%
20) What is the approximate IRR for a project that costs $100,000 and provides cash
inflows of $30,000 for 6 years?
A.19.9%
B.30.0%
C.32.3%
D.80.0%
21) A balance sheet may be considered backward-looking from the perspective that:
A.it works backward, starting with net income
B.it records historic, not current values
C.it cannot forecast the future
D.it records costs over many previous periods
22) When financial disaster is looming, management may borrow to invest in projects
having a negative expected NPV because:
A.the firm’s beta is now negative
B.taxes are no longer a concern
C.the interest tax shield will cover the loan costs
D.the lender bears all the risk
23) One strategy that appears to be used by certain underwriters to reduce the risk of
marketing a stock is to:
A.offer a firm commitment on the issue
B.set the initial stock price below its true value
C.sell the securities in foreign countries
D.offer price rebates on the stock purchases
24) How many cases of microwave popcorn are sold annually by a firm that has total
annual order costs of $32,000, orders in units of 100 cases, and is charged $90 per order
in addition to the $72 per case product cost?
A.20,250 cases
B.35,556 cases
C.44,444 cases
D.49,383 cases
25) Projects that are calculated as having negative NPVs should be:
A.depreciated over a longer time period
B.charged less in overhead costs
C.discounted using lower rates
D.rejected or abandoned
26) Private placement of securities involves:
A.selling only to the firm’s current investors
B.nondisclosure of the issuing firm’s name until after the sale
C.the exchange of convertible bonds for equity
D.nonpublic sale of securities to a limited number of investors
27) The net income figure on an income statement is calculated before deducting:
A.interest expense
B.depreciation expense
C.cash dividends
D.tax liability
28) As a firm’s debt-equity ratio approaches zero, the firm’s expected return on equity
approaches:
A.the expected return on debt
B.the expected return on assets
C.its maximum
D.zero
29) At current prices and a 13% cost of capital, a project’s NPV is $100,000. By what
minimum amount must the initial cost of the project decrease (revenues will be
unchanged) before you would wait 2 years to invest?
A.$21,685
B.$26,000
C.$27,690
D.$29,380
30) What return should be expected from investing in the market portfolio that is
expected to yield 18% if the investment includes all of the investor’s funds plus 100%
of additional funds borrowed at the risk-free rate of 6%?
A.18.6%
B.19.6%
C.21.6%
D.30.0%
31) At the expiration of a futures contract, the futures price will be:
A.greater than spot price
B.equal to the spot price
C.less than the spot price
D.more than the forward price
32) Countries with high inflation will have the:
A.weakest currency
B.highest nominal interest rate
C.strongest currency
D.highest real interest rate
33) When valuing stock with the dividend discount model, the present value of future
dividends will:
A.change depending on the time horizon selected
B.remain constant regardless of the time horizon selected
C.remain constant regardless of growth rate
D.always equal the present value of the terminal price
34) If a stock’s P/E ratio is 13.5 at a time when earnings are $3 per year, what is the
stock’s current price?
A.$4.50
B.$18.00
C.$22.22
D.$40.50
35) What is the relationship between an annually compounded rate and the annual
percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring
monthly payments?
A.The APR is lower than the annually compounded rate
B.The APR is higher than the annually compounded rate
C.The APR equals the annually compounded rate
D.The answer depends on the interest rate
36) Financing for public corporations flows through:
A.the financial markets only
B.financial intermediaries only
C.derivatives markets
D.the financial markets, financial intermediaries, or both
37) The stockholders in a sole proprietorship are represented by:
A.the owner of the firm
B.the general partner of the firm
C.the board of directors of the firm
D.no one; sole proprietorships have no stockholders
38) The present value of a perpetual tax shield increases as the firm’s tax rate _____ and
the amount of principal ____.
A.increases; increases
B.increases; decreases
C.decreases; decreases
D.decreases; increases
39) According to decision-tree analysis, investment projects should be discontinued
when:
A.the probability of success is less than 50%
B.NPV is calculated to be negative
C.DOL increases from previous levels
D.the possibility of a failing outcome exists
40) What happens when firms cannot pay their creditors?
41) A new machine will cost $100,000 and generate after-tax cash inflows of $35,000
for 4 years. Find the NPV if the firm uses a 12% opportunity cost of capital. What is the
IRR? What is the payback period?
42) Firms are often known to pay commitment fees to banks for the privilege of
receiving a line of credit. Does it make sense for a firm to pay for something that, at
least at the present time, it does not know whether it will use?
43) Who are the financial managers in large corporations?
44) Briefly discuss each of the chronological ‘steps” in the process of paying a dividend.
45) A firm sells its accounts receivables to a factor at a 1.5% discount. The average
collection period is 1 month. What is the implicit effective annual interest rate on the
factoring arrangement? Suppose the average collection period is 1.5 months. How does
this affect the implicit effective annual interest rate?
46) Calculate the sustainable growth rate for a firm with an 8% profit margin, an asset
turnover of 1.25, a total debt ratio of 45%, and a plowback ratio of 65%. Assuming that
the ROE remains constant, how large can the sustainable growth rate become?