Both fluctuating exchange rates and deferred payment terms are necessary for foreign
exchange risk to exist.
By foregoing the prompt payment discount offered in terms of 1/10, net 30, the
customer is effectively borrowing at rate of 36.5%.
In order to receive the dividend on a common stock, an investor must purchase the
stock prior to its ex-dividend date.
The NPV decision rules are based on the following statements that follow from the
definition of NPV.
NPV > 0 ® adds shareholder wealth
NPV = 0 ® no change in shareholder wealth
NPV < 0 ® reduces shareholder wealth
Leverage means using borrowed money to enhance the return on an equity investment.
The financial plan is essentially a part of a broader activity known as business planning.
In a Chapter 11 bankruptcy, a firm voluntarily enters the procedure intending a
reorganization under which it can continue in business. A Chapter 7 bankruptcy, on the
other hand generally results in the firm’s liquidation.
More aggressive collection procedures will generally reduce credit sales.
Call features generally include a call premium paid to bondholders if issuers pay off
their indebtedness early.
Every financial planning problem ends with forecasting future income statement,
balance sheet, and statement of cash flows.
Although the long-term economic and political implications of the megamergers are as
yet unclear, the massive accumulation of economic power currently taking place has no
potential to change the open and competitive nature of the economy.
What is the role of a designated market maker?
A.The same role as a floor broker
B.The same role as a local broker
C.To trade securities that are not traded on an exchange
D.To supervise each stock traded in an auction-like processes
Jim Luster wants to have saved enough money by the time he is 65 to invest it and earn
a $60,000 annual income for the rest of his life. He wants to be able to leave that same
amount to his heirs, no matter how long he lives. If he can earn 8% on invested money,
how much does he need to have accumulated by the time he is 65?
A.$480,000
B.$600,000
C.$750,000
D.$900,000
E.Cannot be determined based on the information given.
Which of the following is not included in the calculation of current assets?
A.Accruals
B.Accounts Receivable
C.Allowance for Doubtful Accounts
D.Cash
E.Inventory
A financial intermediary sells shares in itself and invests the:
A.funds collectively on behalf of its investors.
B.shares with a fund manager.
C.funds exclusively on behalf of its shareholders.
D.shares with a broker.
In general, dividends are paid:
A.monthly.
B.semi-annually.
C.quarterly.
D.annually.
Which of the following is true of a strategic merger?
A.It is undertaken to make money by selling the acquired firm piece by piece.
B.It is undertaken to enhance the business position of the acquiring company.
C.It never has an effect on competition in the acquirer’s industry.
D.It usually involves business acquisitions in a completely different industry.
A 30 year corporate bond pays a higher interest rate than a 30 year federal government
bond. This is due to a higher ____ premium on the corporate bond.
A.inflation
B.default risk
C.maturity risk
D.Both a & b
E.All of the above
If a stock that has earnings per share of $1.50 is quoted in the Wall Street Journal as
having a price-earnings ratio of 13, the closing price on that day must be:
A.$13.50.
B.$15.50.
C.$17.50.
D.$19.50.
A project has a life of ten years starting today. What is the present value today of a
$1,000 annuity that begins at the end of the third year and continues until the end of the
tenth year, given a 12% discount rate.
A.$4,811
B.$3,248
C.$4,734
D.$5,650
E.$3,960
You have just calculated the present value of the expected cash flows of a potential
investment. Management thinks your figures are too low. Which of the following
actions would increase the present value of your cash flows?
A.Assume a longer stream of cash flows of the same amount
B.Increase the discount rate
C.Decrease the discount rate
D.a and c
What would you be willing to pay today to receive $5,000 at the end of each year for
the next 10 years if interest is earned at a rate of 8% compounded annually?
A.$34,656
B.$36,235
C.$33,551
D.$72,433
According to the ____ dividend policy a firm that has more funds than it needs should
pay a cash dividend to shareholders.
A.target payout ratio
B.stable dividend per share
C.residual
D.None of the above
More aggressive collection procedures usually increases:
A.average collection period.
B.percentage of bad debts.
C.credit sales.
D.b and c
E.None of the above
Red and Blue have EBIT of $20.0M and pay tax at a flat rate of 30%. Red is equity
financed and pays $1.2M in dividends while Blue is debt financed and pays 1.2M in
interest. How much will each company add to its retained earnings for the year. Explain
the difference.
The following information pertains to the capital structure of a firm:
Debt: One thousand bonds with a face value of $1000 and a 10-year term were issued
three years ago with a coupon rate of 10%. Today the bonds are selling to yield 10%.
Preferred stock: Ten thousand shares of preferred stock are outstanding with a $9
annual dividend and a $100 face value. Today the shares are selling to yield a 9%
return.
Common equity: 100 thousand shares of common stock are outstanding at a current
market price of $30 per share.
Develop the firm’s market value based capital structure.
The following information pertains to the capital structure of a firm:
Suppose a European importer is ready to pay for goods delivered from the US, but the
euro is currently very weak against the dollar. Describe the Eurodollar market and
explain how it might help the importer if he believes the euro’s value is only
temporarily depressed. Does your explanation only apply in Europe?
The Good Fairy has offered to give you $1,000,000 in 20 years. Because of your
incredulity, the GF has volunteered to deposit the present value of the $1,000,000 in a
trust managed by a bank or insurance company of your choice. How much must the GF
deposit if the investment earns 5 percent? 10 percent?