1) Exchange rate risk is the risk that exchange rates will be lower in the future than they
are today.
2) Other things equal, management should retain profits only if the company’s
investments within the firm are at least as attractive as the stockholders’ other
investment opportunities.
3) The Beta of a T-bill is one.
4) A bond with a coupon rate of 8% will also have a yield to maturity of 8%.
5) Trade credit is a source of spontaneous financing.
6) Because poor credit-worthy customers may cause bad debt losses, credit sales to
them should not be allowed.
7) The payback period may be more appropriate to use for companies experiencing
capital rationing.
8) Other things equal, individuals in high-income tax brackets should have a preference
for firms that retain their earnings rather than pay dividends.
9) The firm’s best financial structure is determined by finding the capital structure that
minimizes the firm’s cost of capital.
10) The astute financial manager will seek to attain the highest current ratio possible.
11) Economic Value Added attempts to measure a firm’s economic profit rather than its
accounting profit.
12) A floating lien, chattel mortgage, or terminal warehouse receipt have which of the
following in common?
A) They all pledge accounts receivables as security
B) They have nothing in common
C) They are all unsecured forms of financing
D) They all use inventory to secure a loan
13) You are analyzing the purchase of new equipment. Since you are not an expert on
this type of equipment, you hire a consulting firm to make recommendations. The
consultant charged you $1,500 and recommended the purchase of the latest model from
ACME Corp. of America. The equipment costs $80,000, and it will cost another
$10,000 to modify it for special use by your firm. The equipment will be depreciated on
a straight-line basis over six years with no salvage value. You expect the equipment will
be sold after three years for $28,000. Use of the equipment will require an increase in
your company’s net working capital of $4,000, but this $4,000 will be recovered at the
end of year three. The use of the equipment will have no effect on revenues, but it is
expected to save the firm $50,000 per year in before-tax operating costs. Your
company’s marginal tax rate is 35%. What is the incremental free cash flow for the first
year of the project?
A) $23,800
B) $29,850
C) $32,440
D) $37,750
14) The investment banker does NOT underwrite the securities to be issued in which of
the following?
A) initial public offering
B) primary market transaction
C) firm commitment
D) best efforts
15) Which of the following is a limitation of the “percent of sales method” of preparing
pro forma financial statements?
A) A firm’s investment in accounts receivable is seldom related to sales volume
B) Not all assets and liabilities increase or decrease as a constant percent of sales
C) Inventory levels are seldom affected by changes in sales volume
D) The dividend payout ratio may change from one year to the next
16) DYI Construction Co. is considering a new inventory system that will cost
$750,000. The system is expected to generate positive cash flows over the next four
years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year
three, and $180,000 in year four. DYI’s required rate of return is 8%. What is the
modified internal rate of return of this project?
A) 10.87%
B) 11.57%
C) 13.68%
D) 15.13%
17) Sinkmaster Corp. settled a large lawsuit that caused earnings to be negative for the
quarter. This quarterly loss was the first in 22 years. In addition, the company has a
record of 48 consecutive quarters of dividend payments. Which of the following is
correct?
A) The company cannot pay dividends this quarter since the company had no earnings
B) The company can use cash generated through prior retention of earnings, or
borrowed funds to pay the dividend
C) The company can omit the dividend; shareholders are always understanding about
the riskiness of business
D) The clientele effect says that investor choice of investment vehicle is independent of
dividend policy and therefore the payment/omission of the dividend is immaterial
18) Based on the security market line, Robo-Tech stock has a required return of 14%
and Friendly Insurance Company has a required return of 10%. Robo-Tech has a
standard deviation of returns of 18%. Therefore
A) Friendly must have a standard deviation of returns of less than 18% because
Friendly is less risky than Robo-Tech
B) all rational investors will prefer Friendly over Robo-Tech
C) for a well-diversified investor, Friendly is less risky than Robo-Tech
D) the beta for Friendly must be greater than the beta for Robo-Tech because Friendly
is the better buy for a risk-averse investor
19) A life insurance company purchases $1 billion of corporate bonds from premiums
collected on its life insurance policies. Therefore
A) the corporate bonds are indirect securities and the life insurance policies are direct
securities
B) the corporate bonds are indirect securities and the life insurance policies are indirect
securities
C) the corporate bonds are direct securities and the life insurance policies are indirect
securities
D) the corporate bonds are direct securities and the life insurance policies are direct
securities
20) The Boyles Ceramics, Inc. established a line of credit with a local bank. The
maximum amount that can be borrowed under the terms of the agreement is $1,000,000
at an annual rate of 8 percent. A compensating balance averaging 25 percent of the
amount borrowed is required. Prior to the agreement, Boyles had no deposit with the
bank. Shortly after signing the agreement, Boyles needed $240,000 to pay off a note
that was due. Boyles decides to borrow an amount sufficient to pay the $240,000 note
and also to cover the compensating balance. How much must Boyles Glass borrow?
A) $300,000
B) $320,000
C) $375,000
D) $400,000
21) One theory that is useful states that the forward premium or discount should be
equal and opposite in sign to the difference in the national interest rates for securities of
the same maturity. This theory is known as
A) the forward rate theory
B) the interest rate parity theory
C) the exchange rate theory
D) the covered interest arbitrage theory
22) All of the following are rationales given for a stock dividend or split EXCEPT
A) the price will not fall proportionately to the share increase
B) an optimum price range does not exist
C) there is positive informational content associated with the announcement
D) conservation of corporate cash
23) If you expect NoDiv Corporation to sell for $75 per share in three years while
paying no dividends along the way, and if your required rate of return is 16% per year,
how much is the stock worth today?
A) $42.68
B) $48.05
C) $51.10
D) $74.64
24) All of the following measure liquidity EXCEPT
A) current ratio
B) inventory turnover
C) acid-test ratio
D) operating return on assets
25) In order to reduce agency problems, managers may be provided compensation that
includes
A) a fixed salary so managers’ pay is not at risk, allowing managers to focus on the
company’s business
B) a bonus based on the level of profit achieved during the year
C) an option to buy the company’s stock
D) incentive pay for achieving higher sales than last year
26) The terminal warehouse agreement differs from the field warehouse agreement in
that
A) the cost of the terminal warehouse agreement is lower due to the lower degree of
risk
B) the borrower of the field warehouse agreement can sell the collateral without the
consent of the lender
C) the warehouse procedure differs for both agreements
D) the terminal agreement transports the collateral to a public warehouse
27) According to the moderate view of capital costs and financial leverage, as the use of
debt financing increases
A) the cost of capital continuously decreases
B) the cost of capital remains constant
C) the cost of capital continuously increases
D) there is an optimal level of debt financing
28) Kelly owns 10,000 shares in McCormick Spices, which currently has 500,000
shares outstanding. The stock sells for $86 on the open market. McCormick’s
management has decided on a two-for-one split.
a. Will Kelly’s financial position change after the split, assuming that the stock’s price
will fall proportionately?
Trevor Corporation – Stock Split
Market price$ 86.00
Split multiple 2
Shares outstanding500,000
b. Assuming only a 35% decrease in the stock price, what will be Kelly’s value after the
split?
29) A firm’s financing costs include
A) depreciation expense
B) interest exposure
C) costs of goods sold
D) both A and B
30) Table 4-4
Wes Donnell, Inc.
Balance Sheet
Wes Donnell, Inc.
Income Statement
For the year ended December 31, 2010
In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes
Donnell’s inventory turnover for 2010?
A) 0.13
B) 11.1
C) 9.3
D) 7.78
31) Optimal capital structure is
A) the mix of permanent sources of funds used by the firm in a manner that will
maximize the company’s common stock price
B) the mix of all items that appear on the right-hand side of the company’s balance
sheet
C) the mix of funds that will minimize the firm’s cost of equity capital
D) the mix of funds that will maximize the firm’s interest tax shield
32) You are considering investing in a project with the following possible outcomes:
Probability ofInvestment
StatesOccurrenceReturns
State 1: Economic boom18%20%
State 2: Economic growth42%16%
State 3: Economic decline30%3%
State 4: Depression10%-25%
Calculate the expected rate of return and standard deviation of returns for this
investment, respectively.
A) 8.72%, 12.99%
B) 7.35%, 12.99%
C) 3.50%, 1.69%
D) 2.18%, 1.69%
33) Strategies to counter exchange rate risk include all of the following EXCEPT
A) futures contracts
B) spot-market hedges
C) forward-market hedges
D) money-market hedges
34) Haroldson Inc. common stock is selling for $22 per share. The last dividend was
$1.20, and dividends are expected to grow at a 6% annual rate. Flotation costs on new
stock sales are 5% of the selling price. What is the cost of Haroldson Inc.’s new
common stock?
A) 5.73%
B) 11.45%
C) 11.78%
D) 12.09%
35) Suppose the current spot rate in New York is .0119 dollars per yen. Inflation for the
coming year in the United States is expected to be 3%, while inflation for the coming
year is Japan is expected to be only 1%. Using the purchasing power parity theory, what
is the expected spot rate at the end of the year should be
A) .0110147 dollars per yen
B) .0108159 dollars per yen
C) .0138373 dollars per yen
D) .0121356 dollars per yen
36) John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky
investment. One year later, Bill’s investment is worth $1,030. Which of the following
statements is MOST correct?
A) If John’s investment is worth less than $1,030, then John was irrational to invest in
the risky project
B) John’s investment must be worth more than $1,030 because of the risk-return
tradeoff, given that John’s investment was more risky
C) If John’s investment is worth more than $1,030, then Bill was irrational to invest in
the less risky investment
D) The worth of John’s investment cannot be determined with the information given