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1) Debt financing affects neither the business risk nor the financial risk of the firm.
2) Engaging itself in a swap contract, a firm might agree to make a series of regular
payments in one currency in return for receiving a series of payments in another
currency.
3) Since defaults can be costly, it is cost-effective to undertake a full credit analysis of
all customers.
4) If a large proportion of costs is fixed, a shortfall in sales has a magnified effect on
profits. From the previous statement we know that the risk of a project is affected by the
degree of operating leverage.
5) Capital structure in essence is a firm's mix of long-term financing.
6) Market value, unlike book value and liquidation value, treats the firm as a going
concern.
7) On October 28, 1988, the board of directors of RJR Nabisco revealed that the
company's CEO had formed a group of investors prepared to buy all the firm's stock for
$75 per share in cash and take the company private. RJR's share price immediately
moved to about $75 from $56.
8) Just-in-time inventory management is suitable for an aircraft manufacturer, like
Boeing, whose production schedules are known well in advance.
9) A project's payback period is the length of time necessary to generate an NPV of
zero.
10) Purchases of marketable securities are not considered to be cash used by
investments on the statement of cash flows.
11) The CAPM is a theory of the relationship between risk and return that states that the
expected risk premium on any security equals its beta times the market return.
12) Competitive advantage is an important element of many successful capital
budgeting proposals.
13) The Excel function for interest rate is RATE (nper, pmt, PV, FV).
14) If the marginal reduction in order costs exceeds the marginal carrying cost of
inventory, then:
A.the firm has minimized its total carrying costs
B.the firm should increase its order size
C.the firm should decrease its order size
D.the firm has maximized its order costs
15) (Abandonment Option) Hit or Miss Sports is introducing a new product this year. If
its see-at-night soccer balls are a hit, the firm expects to be able to sell 50,000 units a
year at a price of $60 each. If the new product is a bust, only 30,000 units can be sold at
a price of $55. The variable cost of each ball is $30, and fixed costs are zero. The cost
of the manufacturing equipment is $6 million, and the project life is estimated at 10
years. The firm will use straight-line depreciation over the 10-year life of the project.
The firm's tax rate is 35% and the discount rate is 12%.
a. If each outcome is equally likely, what is expected NPV? Will the firm accept the
project?
b. Suppose now that the firm can abandon the project and sell off the manufacturing
equipment for $5.4 million if demand for the balls turns out to be weak. The firm will
make the decision to continue or abandon after the first year of sales. Does the option to
abandon change the firm's decision to accept the project?
16) According to the current U.S. tax code, the marginal tax rate for personal taxpayers
in the highest levels of income is:
A.25.0%
B.28.0%
C.35.0%
D.39.6%
17) ABC Corp. shows a ledger balance of $50,000 prior to writing a check for $5,000
and depositing $1,000 in checks. What is the amount of its net float?
A.$1,000
B.$4,000
C.$5,000
D.$6,000
18) "Give me $5,000 today and I'll return $20,000 to you in 5 years," offers the
investment broker. To the nearest percent, what annual interest rate is being offered?
A.25%
B.29%
C.32%
D.60%
19) The study of published financial information on a company in order to make
investment decisions is known as:
A.technical analysis
B.fundamental analysis
C.efficiency analysis
D.random pricing analysis
20) What is the minimum value of the call option on a convertible bond (with face
value of $1,000) with a conversion ratio of 30 if the bond offers a 9% coupon, has 10
years until maturity, and market interest rates are 9% for comparable bonds? The stock
is currently priced at 35 .
A.$0
B.$5
C.$50
D.$65
21) Ethical decision making by management has a payoff for shareholders in terms of:
A.improved capital structure
B.enhanced reputation value
C.increased managerial benefits
D.higher dividend payments
22) The cost of a merger equals the:
A.cash paid for the target firm
B.increase in total earnings less price paid
C.premium paid over the target's value as a separate entity
D.sum of cash and stock paid for the target firm
23) A bond's par value can also be called its:
A.coupon payment
B.present value
C.default value
D.face value
24) How does competition in financial markets compare to the competition that can be
found in product markets?
A.Financial markets are much more competitive
B.Financial markets are much less competitive
C.Both markets are similar in competition
D.Financial markets are not competitive, due to regulation
25) A decrease in the possible range of percentage stock returns can be achieved by:
A.a decrease in the firm's financial leverage
B.an increase in the firm's asset risk
C.an increase in the firm's business risk
D.a decrease in the firm's debt beta
26) In a firm commitment, the underwriter:
A.encounters virtually no risk because the spread is fixed
B.is allowed to sell the shares at any price they choose
C.is protected against being stuck with unsold shares
D.is allowed to sell the shares at a price slightly higher than the price it paid to the
company
27) Market-value balance sheets differ from book-value balance sheets in that market
values:
A.are higher than book values
B.are lower than book values
C.conform more to GAAP accounting
D.conform to investors' expectations
28) A producer that is worried about the future price that will be available when the
product is to be sold can hedge this price risk by:
A.buying a futures contract
B.selling a futures contract
C.buying a put option
D.selling a call option
29) A firm has borrowed $1 million and assigned its receivables to the lender. Because
of defaults, the receivables prove insufficient to cover the debt. In this case, the:
A.lender bears the risk of default
B.firm bears the risk of default
C.default risk is shared between lender and firm
D.insurance carrier will bear the risk
30) Which of the following is not an example of market imperfections that make
dividend policy relevant?
A.Institutional restrictions on stock holdings
B.Differences in dividend-payout ratios
C.Transaction costs such as brokerage fees
D.Differences among investors in marginal tax rates
31) A firm considers a project with the following cash flows: time-zero = +20,000,
years 1-5 = -4,500. Should the project be accepted if the cost of capital is 10%?
A.Yes, the IRR of the project is 4.06%
B.Yes, the IRR of the project is 12.5%
C.No, the IRR of the project is 4.06%
D.No, the IRR of the project is 12.5%
32) An implicit cost of adding debt to the capital structure is that it:
A.adds interest expense to the operating statement
B.increases the required return on equity
C.reduces the expected return on assets
D.decreases the firm's beta
33) What new investment is required for a firm that projects 12% growth, has $400,000
in assets, and retained earnings of $40,000?
A.$0
B.$4,800
C.$8,000
D.$66,667
34) Which of the following risks is most important to a well-diversified investor in
common stocks?
A.Market risk
B.Unique risk
C.Idiosyncratic risk
D.Diversifiable risk
35) Which of the following statements best describes the real interest rate?
A.Real interest rates exceed inflation rates
B.Real interest rates can decline only to zero
C.Real interest rates can be negative, zero, or positive
D.Real interest rates traditionally exceed nominal rates
36) Joe sold a put option on ZZZ Corp. with an exercise price of $40. The option
expires tomorrow and ZZZ is currently trading at $28 per share. The option premium
was $4 per share. What is Joe's profit or loss per share if the option is exercised
tomorrow?
A.- $16
B.- $8
C.$8
D.$16
37) What is the worst-case profitability scenario for an investor who sold a call on the
firm's stock for a premium of $10 and a strike price of $100?
A.$90 per share profit
B.$10 per share profit
C.$0 per share profit (break-even)
D.Unlimited losses
38) A project will generate $1 million net cash flow annually in perpetuity. If the project
costs $7 million, what is the lowest WACC shown below that will make the NPV
negative?
A.10%
B.12%
C.14%
D.16%
39) What is the beta of a portfolio with an expected return of 12% if Treasury bills yield
6% and the market risk premium is 8%?
A.0.50
B.0.75
C.0.90
D.1.50
40) What is the APR on a loan that charges interest at the rate of 1.4% per month?
A.10.20%
B.14.00%
C.16.80%
D.18.16%
41) Conservative economists feel that high dividend payouts will increase share price
because:
A.capital gains are less certain than dividends
B.dividends signal higher future retained earnings
C.stocks are priced using dividend discount models
D.higher dividend payouts translate into higher investment returns
42) A chief financial officer would typically:
A.report to the treasurer, but supervise the controller
B.report to the controller, but supervise the treasurer
C.report to both the treasurer and controller
D.supervise both the treasurer and controller
43) A credit card company charges its customers an annual interest of 21.0% on the
outstanding monthly balance. The effective annual rate for the customer will be:
A.21.00%
B.21.20%
C.23.14%
D.37.93%
44) Which of the following values treats the firm as a going concern?
A.Market value
B.Book value
C.Liquidation value
D.None of these
45) Which of the following is correct for a fully depreciated asset?
A.Market value is zero
B.Market value is greater than book value
C.Book value is greater than market value
D.The relationship between market and book values is indeterminable
46) If a firm's sales increased by 12%, and it has no spare capacity, it must increase
fixed assets by:
A.0%
B.6%
C.9%
D.12%
47) When a corporation engages in a 10% stock repurchase, it:
A.offers shareholders 110 shares for every 100 they currently own
B.purchases for cash 10% of the outstanding shares
C.sells treasury stock at a 10% discount to investors
D.purchases 10% of previously issued stock dividends
48) A public offer to purchase the shares of existing stockholders in order to take the
firm over is called a:
A.tender offer
B.carve-out
C.spin-off
D.divestiture
49) The market for corporate control suggests that:
A.management and ownership make a large difference in a firm's results
B.it is rare for mergers to show economic benefits over a sustained period
C.hostile takeovers generate the most in additional value
D.LBOs cost more than they are worth
50) Which of the following statements is incorrect?
A.Companies may take advantage of structural changes (e.g., Marriott) to evade the
constraints of protective covenants
B.Bonds with protective covenants sell at a higher price than otherwise equivalent
bonds without such protection for their investors
C.Protective covenants are offered for the benefit of common stockholders
D.Protective covenants are offered for the benefit of bondholders
51) How will your investment in Acme Corp. change if you currently own 100 shares
valued at $10 each and Acme has just declared a 10% stock dividend? Before the stock
dividend there were 2,000 shares outstanding.
52) You have bid for a possible export order that would provide a cash inflow of 1
million in 1 year. The spot exchange rate is $.9644/ and the 1-year forward rate is
$.9503/. There are two sources of uncertainty: (1) the euro could appreciate to $1.00/ or
depreciate to $.90/, and (2) you may or may not receive the export order. Illustrate in
each case the profits or losses that you would make if you sell 1 million forward.
53) Why would dividend policy not affect firm value in an ideal world?
54) What are the largest institutional investors in bonds? In stocks?
55) What is the best level of long-term financing relative to the total capital
requirement?
