Anytime Ted analyzes a proposed project, he always assigns a much higher probability
of success to the project than is warranted by the information he has gathered. Ted
suffers from which one of the following?
A. frame dependence
B. overconfidence
C. gambler’s fallacy
D. confirmation bias
E. overoptimism
Answer:
Phone Home, Inc. is considering a new 6-year expansion project that requires an initial
fixed asset investment of $5.876 million. The fixed asset will be depreciated
straight-line to zero over its 6-year tax life, after which time it will be worthless. The
project is estimated to generate $5,328,000 in annual sales, with costs of $2,131,200.
The tax rate is 32 percent. What is the annual operating cash flow for this project?
A. $1,894,318
B. $2,211,407
C. $2,487,211
D. $2,663,021
E. $2,848,315
Answer:
Hungry Howie’s is currently operating at full capacity. The profit margin and the
dividend payout ratio are held constant. Net working capital and fixed assets vary
directly with sales. Sales are projected to increase by 9 percent. What is the external
financing needed?
A. -$696.50
B. -$683.60
C. -$97.20
D. -$14.50
E. $26.80
Answer:
The cash coverage ratio directly measures the ability of a firm’s revenues to meet which
one of its following obligations?
A. payment to supplier
B. payment to employee
C. payment of interest to a lender
D. payment of principle to a lender
E. payment of a dividend to a shareholder
Answer:
Which one of the following is the primary determinant of a firm’s cost of capital?
A. debt-equity ratio
B. applicable tax rate
C. cost of equity
D. cost of debt
E. use of the funds
Answer:
An agreement that grants its owner the right, but not the obligation, to buy or sell a
specific asset at a specific price for a set period of time is called a(n) _____ contract.
A. option
B. forward
C. futures
D. swap
E. spot
Answer:
The articles of incorporation:
I. describe the purpose of the firm.
II. are amended periodically.
III. set forth the number of shares of stock that can be issued.
IV. detail the method that will be used to elect corporate directors.
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. I, III, and IV only
Answer:
You are viewing a graph that plots the NPVs of a project to various discount rates that
could be applied to the project’s cash flows. What is the name given to this graph?
A. project tract
B. projected risk profile
C. NPV profile
D. NPV route
E. present value sequence
Answer:
The Blue Marlin is owned by a group of 5 shareholders who all vote independently and
who all want personal control over the firm. What is the minimum percentage of the
outstanding shares one of these shareholders must own if he or she is to gain personal
control over this firm given that the firm uses straight voting?
A. 17 percent
B. 20 percent plus one vote
C. 25 percent plus one vote
D. 50 percent plus one vote
E. 51 percent
Answer:
A Treasury bond is quoted at a price of 101:14 with a current yield of 7.236 percent.
What is the coupon rate?
A. 7.20 percent
B. 7.28 percent
C. 7.30 percent
D. 7.34 percent
E. 7.39 percent
Answer:
Webster Iron Works started a new project last year. As it turns out, the project has been
operating at its accounting break-even level of output and is now expected to continue
at that level over its lifetime. Given this, you know that the project:
A. will never pay back.
B. has a zero net present value.
C. is operating at a higher level than if it were operating at its cash break-even level.
D. is operating at a higher level than if it were operating at its financial break-even
level.
E. is lowering the total net income of the firm.
Answer:
Which of the following represent cash outflows from a corporation?
I. issuance of securities
II. payment of dividends
III. new loan proceeds
IV. payment of government taxes
A. I and III only
B. II and IV only
C. I and IV only
D. I, II, and IV only
E. II, III, and IV only
Answer:
Which of the following statements related to financial risk are correct?
I. Financial risk is the risk associated with the use of debt financing.
II. As financial risk increases so too does the cost of equity.
III. Financial risk is wholly dependent upon the financial policy of a firm.
IV. Financial risk is the risk that is inherent in a firm’s operations.
A. I and III only
B. II and IV only
C. II and III only
D. I, II, and III only
E. I, II, III, and IV
Answer:
The interest tax shield is a key reason why:
A. the required rate of return on assets rises when debt is added to the capital structure.
B. the value of an unlevered firm is equal to the value of a levered firm.
C. the net cost of debt to a firm is generally less than the cost of equity.
D. the cost of debt is equal to the cost of equity for a levered firm.
E. firms prefer equity financing over debt financing.
Answer:
A company that utilizes the MACRS system of depreciation:
A. will have equal depreciation costs each year of an asset’s life.
B. will have a greater tax shield in year two of a project than it would have if the firm
had opted for straight-line depreciation, given the same depreciation life.
C. can depreciate the cost of land, if it so desires.
D. will expense less than the entire cost of an asset.
E. cannot expense any of the cost of a new asset during the first year of the asset’s life.
Answer:
Which of the following statements generally apply to the cash flows of a financing type
project?
I. nonconventional cash flows
II. cash outflows exceed cash inflows prior to any time value adjustments
III. cash for services rendered is received prior to the cash that is spent providing the
services
IV. the total of all cash flows must equal zero on an unadjusted basis
A. I only
B. I and III only
C. II and IV only
D. I, II, and III only
E. I, II, III, and IV
Answer:
The semiannual, 8-year bonds of Alto Music are selling at par and have an effective
annual yield of 8.6285 percent. What is the amount of each interest payment if the face
value of the bonds is $1,000?
A. $41.50
B. $42.25
C. $43.15
D. $85.00
E. $86.29
Answer:
You work for a nuclear research laboratory that is contemplating leasing a diagnostic
scanner (leasing is a very common practice with expensive, high-tech equipment). The
scanner costs $3 million and it would be depreciated straight-line to zero over 4 years.
Because of radiation contamination, it will actually be completely valueless in 4 years.
You can lease it for $750,000 per year for 4 years. Assume the tax rate is 31 percent.
You can borrow at 8 percent before taxes. Your company does not expect to pay taxes
for the next several years, but the leasing company will pay taxes. What range of lease
payments will allow the lease to be profitable for both parties?
A. $904,026 to $905,123
B. $904,026 to $905,481
C. $904,026 to $905,762
D. $905,123 to $906,417
E. $905,123 to $906,825
Answer:
Electronic Importers has a pure discount bond with a face value of $25,000 that matures
in one year. The risk-free rate of return is 3.8 percent. The assets of the business are
expected to be worth either $23,000 or $35,000 in one year. Currently, these assets are
worth $27,500. What is the current value of the bond?
A. $17,746
B. $19,207
C. $20,222
D. $22,549
E. $23,048
Answer:
Which one of the following is most indicative of a totally efficient stock market?
A. extraordinary returns earned on a routine basis
B. positive net present values on stock investments over the long-term
C. zero net present values for all stock investments
D. arbitrage opportunities which develop on a routine basis
E. realizing negative returns on a routine basis
Answer:
Which of the following represent potential tax benefits that can directly result from an
acquisition?
I. an increase in depreciation expense
II. an increase in surplus funds
III. the use of net operating losses
IV. an increased use of leverage
A. I and IV only
B. II and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Which one of the following statements concerning variable costs is correct?
A. Variable costs minus fixed costs equal marginal costs.
B. Variable costs are equal to fixed costs when production is equal to zero.
C. An increase in variable costs increases the operating cash flow.
D. Variable costs are inversely related to fixed costs.
E. Variable costs per unit are inversely related to the contribution margin per unit.
Answer:
A jumbo CD:
A. is issued by the federal government.
B. generally matures between 2 and 5 years.
C. is a loan of $100,000 or more to a municipality.
D. is a loan of $1 million or more on a short-term basis.
E. is a short-term loan of $100,000 or more to a commercial bank.
Answer:
The value of the risky debt of a firm is equal to the value of:
A. a call option plus the value of a risk-free bond.
B. a risk-free bond plus a put option.
C. the equity of the firm minus a put.
D. the equity of the firm plus a call option.
E. a risk-free bond minus a put option.
Answer:
Which one of the following statements related to the implied standard deviation (ISD)
is correct?
A. The ISD is an estimate of the historical standard deviation of the underlying security.
B. ISD is equal to (1 – D1).
C. The ISD estimates the volatility of an option’s price over the option’s lifespan.
D. The value of ISD is dependent upon both the risk-free rate and the time to option
expiration.
E. ISD confirms the observable volatility of the return on the underlying security.
Answer:
What is the net capital spending for 2011?
A. $117
B. $239
C. $257
D. $338
E. $421
Answer:
Cash flow to stockholders is defined as:
A. the total amount of interest and dividends paid during the past year.
B. the change in total equity over the past year.
C. cash flow from assets plus the cash flow to creditors.
D. operating cash flow minus the cash flow to creditors.
E. dividend payments less net new equity raised.
Answer:
The balance sheet for Apple Pie Corp. is shown here in market value terms. There are
5,000 shares of stock outstanding.
The company has declared a dividend of $1.80 per share. The stock goes ex-dividend
tomorrow. Ignore any tax effects. What will the price of the stock be tomorrow?
A. $18.90
B. $36.20
C. $39.60
D. $52.15
E. $71.80
Answer:
An indenture is:
A. another name for a bond’s coupon.
B. the written record of all the holders of a bond issue.
C. a bond that is past its maturity date but has yet to be repaid.
D. a bond that is secured by the inventory held by the bond’s issuer.
E. the legal agreement between the bond issuer and the bondholders.
Answer:
A flexible short-term financial policy:
A. increases a firm’s need for long-term financing.
B. minimizes net working capital.
C. avoids bad debts by only selling items for cash.
D. maximizes fixed assets and minimizes current assets.
E. is most appropriate for a firm with relatively high carrying costs and relatively low
shortage costs.
Answer:
Consider the following two mutually exclusive projects:
The required return is 15 percent for both projects. Which one of the following
statements related to these projects is correct?
A. Because both the IRR and the PI imply accepting Project B, that project should be
accepted.
B. The profitability rule implies accepting Project A.
C. The IRR decision rule should be used as the basis for selecting the project in this
situation.
D. Only NPV implies accepting Project A.
E. NPV, IRR, and PI all imply accepting Project A.
Answer:
How many diverse securities are required to eliminate the majority of the diversifiable
risk from a portfolio?
A. 5
B. 10
C. 25
D. 50
E. 75
Answer:
The internal growth rate of a firm is best described as the:
A. minimum growth rate achievable assuming a 100 percent retention ratio.
B. minimum growth rate achievable if the firm maintains a constant equity multiplier.
C. maximum growth rate achievable excluding external financing of any kind.
D. maximum growth rate achievable excluding any external equity financing while
maintaining a constant debt-equity ratio.
E. maximum growth rate achievable with unlimited debt financing.
Answer:
You are the buyer for a cereal company and you must buy 80,000 bushels of corn next
month. The futures contracts on corn are based on 5,000 bushels and are currently
quoted at 4150 cents per bushel for delivery next month. If you want to hedge your
cost, you should _____ contracts at a cost of _____ per contract.
A. buy 12; $2,075
B. buy 16; $20,750
C. buy 16; $2,075,000
D. sell 12; $2,075
E. sell 16; $2,075,000
Answer: