1) A corporation declares $25 million in net income, $1 million in preferred stock
dividends, and $7 million in common stock dividends. By how much will shareholders’
equity increase on the balance sheet?
A.$17 million
B.$18 million
C.$19 million
D.$25 million
2) One of the problems inherent in sensitivity analysis is that:
A.NPVs do not change once a project is introduced
B.most projects are equally sensitive to all variables
C.it can be difficult to define the range of outcomes
D.the cost of conducting the analysis is excessive
3) Those economists feeling that low dividend payouts will increase share price focus
on:
A.the difficulty in predicting earnings
B.superior reinvestment opportunities
C.tax differentials between dividends and capital gains
D.the cost of borrowing to maintain high payouts
4) Firm B’s 1 million shares of stock currently sell for $12 each, but firm A is preparing
an $18 per share tender offer. Firm A estimates the gain of the merger to be $6 million.
What percentage of the merger gains will be captured by firm B’s stockholders?
A.33.33%
B.50.00%
C.66.67%
D.75.00%
5) What approximate value should a firm put on being able to permanently reduce the
length of its collection period by 1 day if annual sales (all on credit) are $5,000,000 and
the appropriate opportunity cost is 10% annually?
A.$1,370
B.$15,068
C.$13,700
D.$50,000
6) If you purchase a 3-year, 9% coupon bond for $950, how much could it be sold for 2
years later if interest rates have remained stable?
A.$964.95
B.$981.56
C.$983.33
D.$1,000.00
7) The purpose of a margin account for a futures contract is to:
A.guarantee a minimum margin of profit for the contract holder
B.allow futures traders to have more than one contract at once
C.provide a cushion for the exchange against defaults on the contract
D.hold interest payments until expiration
8) Relative to its assets, a firm with a large volume of retained earnings and a high
ROE:
A.will have a larger than average net income
B.can generate a higher growth rate by raising more capital
C.should increase its payout ratio
D.can generate a higher growth rate without raising additional capital
9) If a two-stock portfolio is equally invested in stocks with betas of 1.4 and 0.7, then
the portfolio beta is:
A.0.70
B.1.05
C.1.40
D.2.10
10) How much must the stock be worth at expiration in order for a call holder to break
even if the exercise price is $50 and the call premium was $4?
A.$46
B.$50
C.$52
D.$54
11) Outputs from a financial plan would include such items as:
A.sales growth forecasts
B.a percentage of sales planning model
C.a pro forma statement of sources and uses of cash
D.the firm’s current financial statements
12) When underwriters issue securities on a best efforts basis, they:
A.sell as much of the stock as possible, but with no guarantee
B.submit a bid for purchase, which the issuer compares to other bids
C.buy the entire issue from the firm
D.guarantee that the issuer will receive the spread
13) Apex Corp. has current liabilities of $2 million, a current ratio of 3.0, a quick ratio
of 2.0, and a cash ratio of .75 . Given this information, answer the following about the
firm’s liquidity:
a. What is the value of inventory?
b. What is the value of receivables?
c. What will happen to each of the three ratios if $1 million in current liabilities is
refunded with long-term debt?
14) If sensitivity analysis indicates none of the individual variables will cause a
negative NPV under pessimistic conditions, then the:
A.project is ensured to be successful
B.project’s discount rate should be reduced
C.economic forecasts are possibly overly optimistic
D.interaction of the variables should be considered
15) What would you expect to occur if the rate of expected inflation in the United States
is considerably lower than expected inflation in Germany?
A.The expected spot rate of /$ will increase
B.The current spot rate of /$ will increase
C.The dollar should appreciate against the euro
D.The dollar should depreciate against the euro
16) You now own 84 shares of XYZ stock which is selling for $40 each, 4 of which you
just received from the XYZ corporation. XYZ has declared a:
A.stock dividend of 5%
B.cash dividend of $4
C.stock dividend of 4.76%
D.cash dividend of $160
17) A tax shield is equal to the reduction in:
A.tax liability resulting from a deductible expense
B.taxable income resulting from a deductible expense
C.cash flow from an expense
D.net income
18) Which of the following is not an advantage to incorporating a business?
A.Easier access to financial markets
B.Limited liability
C.Becoming a permanent legal entity
D.Profits taxed at the corporate level and the shareholder level
19) What price would you expect to pay for a stock with 13% required rate of return,
4% rate of dividend growth, and an annual dividend of $2.50 which will be paid
tomorrow?
A.$27.78
B.$30.28
C.$31.10
D.$31.39
20) A stock’s risk premium is equal to the:
A.expected market return times beta
B.Treasury bill yield plus expected market return
C.risk-free rate plus expected market risk premium
D.expected market risk premium times beta
21) In 2010, U.S. corporate equities totaled:
A.less than $6 trillion
B.about $10 trillion
C.about $16 trillion
D.more than $20 trillion
22) What should occur when a project’s net present value is determined to be negative?
A.The discount rate should be decreased
B.The profitability index should be calculated
C.The present value of the project cost should be determined
D.The project should be rejected
23) A two-for-one stock split will result in:
A.the firm acquiring new assets
B.a decrease in the stock price, but an increase in shareholder wealth
C.an increase in the stock price, and an increase in shareholder wealth
D.a decrease in the stock price and no change to shareholder wealth
24) Which of the following guarantees is offered to common stock investors?
A.Guaranteed to receive dividends
B.Guaranteed to receive capital gains
C.Guaranteed only to receive a refund of principal
D.No guarantees of any form
25) Which of the following risk types can be diversified by adding stocks to a portfolio?
A.Systematic risk
B.Unique risk
C.Market risk
D.All of these
26) Under which of the following conditions will a future value calculated with simple
interest exceed a future value calculated with compound interest at the same rate?
A.The interest rate is very high
B.The investment period is very long
C.The compounding is annually
D.This is not possible with positive interest rates
27) TSI Inc. has enough liquid assets to finance its operations for 67 days and cash,
marketable securities, and receivables totaling $1,000. TSI’s average daily expenditures
from operations are:
A.$6.70
B.$8.23
C.$14.93
D.$22.28
28) When riskier corporations issue bonds that include a default premium, the promised
yield will sometimes be:
A.less than the actual yield
B.greater than the actual yield
C.less than the yield on a default-free bond
D.greater than the face value of the bond
29) Which of the following forms of compensation is most likely to align the interests
of managers and shareholders?
A.A fixed salary
B.A salary that is linked to company profits
C.A salary that is paid partly in the form of the company’s shares
D.A salary that is linked to the company’s total market value
30) If the statement of sources and uses of cash shows a decrease in cash balance,
which of the following changes might have eliminated that decrease?
A.Increase in cash dividends paid
B.Increase in accounts payable
C.Increase in accounts receivable
D.Increase in inventories
31) What is the expected growth rate in dividends for a firm in which shareholders
require an 18% rate of return and the dividend yield is 10%?
A.1.8%
B.5.2%
C.8.0%
D.28.0%
32) If Microsoft acquires Dell Computer, it will be an example of a:
A.vertical merger
B.horizontal merger
C.conglomerate merger
D.distribution-channel merger
33) Why can it be incorrect to evaluate all capital budgeting proposals at the firm’s
current weighted-average cost of capital?
34) Why do firms need to invest in net working capital?
35) What is the difference between the internal and sustainable growth rates, both in
definition and in calculation? Under what condition will the rates be equal?
36) Discuss the premise of accrual accounting. Why is it considered preferable over
cash-basis accounting?
37) What are the standard measures of a firm’s leverage, liquidity, efficiency, and
profitability? What is the significance of each of these measures?