Typically, working capital assets are expected to be converted into cash within twelve
months while liabilities are expected to be paid within twelve months.
The existence of an abandonment option raises a project’s risk.
The principal purpose of most investors when buying stock is to participate in the
control of the company.
The quest for rapid growth is a major reason for which companies undertake
acquisitions.
When a call protection provision is written into the bond indenture, the issuing
company is prevented from calling the bond throughout the bond’s life.
Companies generally repurchase their stocks when the market price is high.
A firm that is subject to a lower marginal tax rate will have a lower after-tax cost of
debt and WACC.
Governments can affect exchange rates by encouraging or discouraging foreign
investment.
An increase in a firm’s operating risk will have no impact on its cost of capital.
Net working capital is the sum of all current assets.
A stock repurchase is an investment which is always profitable for a company.
Decision tree analysis let us approximate the NPV distribution if we can estimate the
probability of certain events within the project.
The more a foreign currency costs in U.S. dollars, the more expensive that nation’s
products are to American consumers regardless of their cost in the country of origin.
Ease of raising money by selling stock is the most significant financial advantage of the
sole proprietorship form.
A combination of companies in which neither competes with the other, no buyer-seller
relationship exists between them, and the firms’ businesses are unrelated is a:
A.conglomerate merger.
B.vertical merger.
C.horizontal merger.
D.takeover.
The ratio group most likely to be used to indicate a firm’s ability to meet short-term
financial obligations would be:
A.liquidity ratios.
B.financial leverage ratios.
C.activity ratios.
D.profitability ratios.
Riordan Manufacturing has taken out an $80,000 short-term bank loan that has a 10%
interest rate. The loan requires that Riordan maintain a compensating balance of 15% of
the amount borrowed. Calculate the effective interest rate on the loan.
A.10.0%
B.11.2%
C.11.8%
D.12.4%
E.12.8%
More frequent compounding results in ____ future values and ____ present values than
less frequent compounding at the same nominal interest rate.
A.higher, higher
B.lower, higher
C.higher, lower
D.lower, lower
What is the internal rate of return of a project that has an initial outlay of $150,000 and
net cash flows of $40,000 for 5 years?
A.Between 10% and 11%
B.Between 9% and 10%
C.Between 11% and 12%
D.Between 12% and 13%
The First National Bank has agreed to lend you $30,000 today, but you must repay
$42,135 in 3 years. What rate is the bank charging you?
A.10%
B.11%
C.12%
D.13%
The present value of five uneven cash flows is $2,145. At a nominal rate of 10%
compounded annually, what is the fifth payment if payment one is $500, payment two
is $600, and payments three and four are $400?
A.$245
B.$1,000
C.$500
D.$600
If a firm’s EBIT changes by 20% and it has a degree of financial leverage (DFL) of 2.5,
what is the expected change in earnings per share (EPS)?
A.20%
B.40%
C.50%
D.60%
Managers whose bonuses are based on the income of the firm tend to overstate the
value of accounts receivable and inventory with the following result:
A.the firm’s value is less than it is held out to be.
B.profit is more than it is held out to be.
C.the firm’s value is more than it is held out to be.
D.liabilities are less than they are held out to be.
Groves, Inc. pays an annual dividend of $1.22, which is expected to grow at a rate of 5
percent each year. The firm is in a fairly risky business and has a beta of 1.45. The
return on the market is 13.5 percent, and the risk-free rate is 9.3 percent. What is the
cost of Groves’ equity from retained earnings?
A.19.6%
B.13.5%
C.15.4%
D.6.1%
A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the
result of a(n) ____ increase in EBIT.
A.81%
B.3%
C.9%
D.6%
Historically, the field of finance was limited to:
A.accounting.
B.raising money.
C.activities of investors.
D.financial management.
Kaneb Services, Inc. has just declared a 3-for-2 stock split. If the pre-split price of
common stock was $42 a share, what will be the post-split price per share (assuming no
other changes occur)?
A.$31.50
B.$26.25
C.$25.15
D.$28.00
You have been offered Synergy Inc.’s preferred stock at a price of $31.50. It pays a
dividend of $4.41 per year. Calculate the return on the stock.
A.11%
B.12%
C.13%
D.14%
The ____ measures the promptness with which customers pay their credit obligations.
A.bad-debt loss ratio
B.average collection period
C.credit term
D.cash discount
Hatter Enterprise paid a dividend last year of $3.25, which is expected to grow at a
constant rate of 7%. Hatter has a beta of 1.5 and their stock is currently selling for $62.
If the market risk premium is 6% and the risk-free rate is 3%, should you purchase
Hatter’s stock?
A.No, because it is overvalued $7.55
B.Yes, because it is undervalued $7.55
C.No, because it is overvalued $18.95
D.Yes, because it is undervalued $18.95
A firm that has traditionally paid 70% of its earnings out in dividends has identified
some projects that are almost certain to lead to substantial growth but require a great
deal of cash. Management wants to raise the money by selling stock and suspending
dividend payments. Comment on this idea. (Hint: Do the two actions taken together
create a problem?)