1) The seller of a put option is betting that the market value of the stock will decrease.
2) The security market line sets a standard for other investmentsinvestors will be
willing to hold other investments only if they offer equally good prospects as shown by
the points on the line.
3) Financial planning is necessary because financing and investment decisions interact
and should not be made independently.
4) In project analysis, allocations of overhead should be limited to only those that
represent additional expense.
5) The effects of the financial crisis of 2007-2009 were confined to the U.S. and
domestic companies.
6) The capital asset pricing model (CAPM) assumes that the stock market is dominated
by well-diversified investors who are concerned only with market risk.
7) The total value of payments going through the Fedwire and CHIPS Payment systems
is nearly one thousand trillion dollars a year.
8) The income statement of a firm shows the value of its assets and liabilities over a
specified period of time.
9) Bond ratings are an inexpensive source of credit information on publicly traded
companies.
10) Both the dividends and interest payments that companies make to individuals are
subject to personal tax.
11) Issue costs for debt are considerably lower than issue costs for equity securities.
12) Dividend policy is determined by all of the following except:
A.the debt-equity ratio
B.the need for funds
C.forecasting
D.as a consequence of other planning decisions
13) What is the present value of a five-period annuity of $3,000 if the interest rate is
12% and the first payment is made today?
A.$9,655.65
B.$10,814.33
C.$12,112.05
D.$13,200.00
14) What will be the monthly payment on a home mortgage of $75,000 at 12% interest,
to be amortized over 30 years?
A.$771.46
B.$775.90
C.$1,028.61
D.$1,034.53
15) Which of the following best illustrates the problem imposed by capital rationing?
A.Accepting projects with the highest NPVs first
B.Accepting projects with the highest IRRs first
C.Bypassing projects that have positive NPVs
D.Bypassing projects that have positive IRRs
16) A stock that is considered to be a positive risk asset is added to a portfolio. As a
result, the portfolio will:
A.have lower average returns
B.have a lower variance of returns
C.have a higher volatility of returns
D.have a lower correlation of returns with stock market indexes
17) If a stock’s beta is .8 during a period when the market portfolio was down by 10%,
then, a priori, we could expect the return on this individual stock to:
A.lose more than 10%
B.lose, but less than 10%
C.gain more than 10%
D.gain, but less than 10%
18) Calculate the return on exercising a put option that was purchased for $10, with an
exercise price of $85. The stock price at expiration is $81.
A.- 60%
B.60%
C.30%
D.- 30%
19) What can be said about the spot exchange rate of dollars for pounds if nominal
interest rates are higher in the United States than in the United Kingdom?
A.It should exceed the forward rate of dollars for pounds
B.It should be less than the forward rate of dollars for pounds
C.It is expected to increase
D.It is expected to remain constant
20) Although commercial paper is unsecured, the companies that issue this short-term
security are:
A.typically known to repay all defaults
B.large firms of top credit quality
C.small firms of top credit quality
D.firms that have government-sponsored guarantees for the debt
21) Corporations pay regular cash dividends to their:
A.common shareholders
B.preferred bondholders
C.fixed-rate bondholders
D.convertible bondholders
22) What is the minimum cash flow that could be received at the end of year 3 to make
the following project “acceptable”? Initial cost = $100,000; cash flows at end of years 1
and 2 = $35,000; opportunity cost of capital = 10%.
A.$29,494
B.$30,000
C.$39,256
D.$52,250
23) Increased needs for net working capital are:
A.recognized in pro forma balance sheets
B.absorbed into the pro forma plug figures
C.typically financed with debt
D.ignored due to their great variability
24) The firm’s current financial statements would be included in:
A.the inputs of a financial plan
B.the planning model for the financial plan
C.the outputs of the financial plan
D.no part of the financial plan
25) A firm’s liquidation value is the amount:
A.necessary to repurchase all shares of common stock
B.realized from selling all assets and paying off its creditors
C.a purchaser would pay for the firm in bankruptcy
D.equal to the book value of equity
26) Which of the following statements is incorrect?
A.Real cash flows must be discounted at a real discount rate
B.(1 + real rate of interest) = (1 + nominal rate of interest )/(1 + inflation rate)
C.Real rate of interest almost equals “nominal rate of interest – inflation rate”
D.None of these
27) Why are most futures contracts not settled through delivery of the product?
A.Most contracts are settled through the margin account
B.Most contracts expire with neither party having an obligation to the other party
C.Most participants cancel their futures contracts through purchase of an option
contract
D.It is easier and cheaper to settle in cash or by offset
28) The profitability index for a project costing $40,000 and returning $15,000 annually
for 4 years at an opportunity cost of capital of 12% is:
A.0.139
B.0.320
C.0.500
D.0.861
29) Which of the following factors is fixed and thus cannot change for a specific
perpetuity?
A.PV of a perpetuity
B.Cash payment of a perpetuity
C.Interest rate on a perpetuity
D.Discount rate of a perpetuity
30) U.S. corporate equities are mostly held by:
A.insurance companies
B.households
C.foreign investors
D.state and local governments
31) Which of the following statements is correct about investors in Ajax Industries,
which has just announced a three-for-one stock split?
A.Investors will triple their wealth after the split
B.Investors’ wealth will fall by two-thirds after the split
C.Percentage of ownership increases for the investors
D.Earnings per share will fall by two-thirds after the split
32) One method that can be used to increase the NPV of a project is to decrease the:
A.project’s payback
B.profitability index
C.time until receipt of cash inflows
D.number of project IRRs
33) Why might shareholders of an acquiring firm prefer to finance mergers with stock
rather than with cash?
A.Stock financing is always less costly due to tax consequences
B.EPS fall when mergers are financed with cash
C.Target-firm shareholders will bear part of the cost if merger benefits were
overestimated
D.All merger gains go to the acquirer when financed with stock
34) Two years ago bonds were issued with 10 years until maturity, selling at par, and a
7% coupon. If interest rates for that grade of bond are currently 8.25%, what will be the
market price of these bonds?
A.$917.06
B.$928.84
C.$987.50
D.$1,000.00
35) Which of the following is correct concerning callable bonds?
A.There is an upper bound on the bond’s price
B.Their prices are higher than for straight bonds
C.Their attraction to the issuer increases as interest rates increase
D.The bond investor owns the call option
36) Conglomerate mergers involve companies in:
A.similar lines of business
B.different stages of the corporate life cycle
C.unrelated lines of business
D.different countries
37) Which of the following statements is typically correct for a going-concern firm?
A.Book value of equity exceeds market value of equity
B.Market value of equity exceeds book value of equity
C.Book value of equity equals market value of equity
D.No typical relationship exists between book and market values of equity
38) When managers are continually short-term lenders they are said to follow a:
A.middle-of-the-road financing strategy
B.restrictive financing strategy
C.relaxed financing strategy
D.permanent working-capital strategy
39) Which of the following descriptions is representative of scenario analysis?
A.One variable at a time is allowed to change
B.It isolates the unknowns that belong in the model
C.Different combinations of variables are analyzed
D.It represents the “top-down” approach
40) A gasoline distributor buys a gasoline futures contract that requires acceptance of
42,000 gallons of gasoline at $0.94 per gallon. How is the account marked to market if
gasoline futures close the next day at $0.97?
A.A loss of $1,260 is posted to the account
B.A gain of $1,260 is posted to the account
C.A loss of $12,600 is posted to the account
D.A gain of $12,600 is posted to the account
41) If the effective annual rate of interest is known to be 16.08% on a debt that has
quarterly payments, what is the annual percentage rate?
A.4.02%
B.10.02%
C.14.50%
D.15.19%
42) What type of financing is typically instrumental in bringing about leveraged
buyouts?
A.Common-stock financing
B.Preferred-stock financing
C.Investment-grade bonds
D.Speculative-grade bonds
43) Who is the financial manager?
44) The use of NPV as an investment criterion is said to be more reliable than using
IRR. Discuss potential problems with the use of IRR.
45) The Quick Corp. has implemented procedures to cut 1.5 days from its cash
collection process. Annual sales (all charge sales) are $30 million and the opportunity
cost of funds is 9%. What is the value of the annual savings, and how much would the
savings be worth if the speed-up in collections can be considered permanent?
46) The liquidity of Baja Corporation has been decreasing, and it contemplates a rights
issue. There are currently 2 million shares outstanding with a market value of $60 each.
The firm needs to raise $24 million and wants you to design a rights issue that will
allow the new stock price to be no lower than $55 and for there to be no more than 2.5
million shares outstanding after the issue. How many shares must be held to obtain the
right to one new share, and what will be the price of the new share?
47) Briefly describe several factors that increase the difficulty in selecting appropriate
capital budgeting proposals.
48) Offer examples to confirm that firms do experience opportunity costs, even when
cash payments are not explicitly made.