The maturity matching principle says that the maturity of financing should generally
match the length of the project it supports.
The economic order quantity model attempts to minimize total inventory cost by
recognizing the tradeoff between carrying and ordering costs.
A U.S. firm expecting a future cash inflow denominated in a foreign currency could
hedge in the forward exchange market by buying that currency for future delivery.
If two portfolios are formed, one with only one stock and another with 20 stocks, the
portfolio with more stocks will always be the less risky.
Taxes are important in capital investment evaluation because they affect the accounting
profits generated by an investment.
The signaling effect of dividends implies that a modification of dividend policy makes a
strong statement about the direction of earnings which tends to dramatically reinforce
or reducing investor confidence.
The most common time horizon for strategic plans is ten years.
EBIT shows the profitability of operations after considering financing.
The signaling effect implies that dividends do indeed affect stock prices.
The results of an NPV or IRR analysis are only as accurate as the cash flows used as
inputs.
Among the advantages of going public is ownership dilution and increased liquidity for
shareholders.
EPS, and not Net Income, is the measure of firm returns that stockholders normally use
in determining whether financial leverage is favorable or unfavorable.
The differential between the yields on high and low quality bonds is an indicator of the
health of the economy.
Our industrialized economy consists of the following three sectors: consumption,
savings and production.
Storage USA is considering expanding their operations. The company owns a lot near
the present facility on which a new building can be constructed. The land was
purchased 10 years ago for $50,000 and now has a market value of $180,000. Assuming
a tax rate of 35%, calculate the opportunity cost of the land.
A.$130,000
B.$134,500
C.$ 84,500
D.$180,000
The principal function of financial statements is to:
A.convey information to managers, investors, and creditors.
B.provide benchmark information for projecting the firm’s future performance.
C.inform the firm’s shareholders of its likely prospects for growth and cash flows.
D.All of the above
You have borrowed $130,000 to buy a new motor home. Your loan is to be repaid over
15 years at 8% compounded monthly. How much total interest will you save over the
life of the loan by paying an extra $200 per month loan?
A.$24,247
B.$41,872
C.$69,418
D.$81,763
Which tends to have the longest planning horizon?
A.Budgeting
B.Cash forecasting
C.Operational planning
D.Strategic planning
In the CAPM the characteristic line for stock X is:
A.another name for the SML.
B.the regression line relating X’s return with the market return from which X’s beta is
developed.
C.a line between any two data points on a historical plot of X’s return against market
return.
D.a line of reasoning that characterizes portfolio theory.
A _____ bond pays no interest during its life, but imputed interest is still taxable.
A.convertible
B.zero coupon
C.callable
D.seasoned
The U. S. dollar:
A.is the world€s leading reserve currency.
B.has been weakening against other currencies for most of the 2000s.
C.has diminished in stature due to the financial crisis of 2008.
D.All of these are correct.
Joshua Trucking leased a set of special-use trailers for six years at an annual rental of
$30,000, payable at the end of each year. At the end of these six years the trailers are
expected to be essentially worthless. Joshua Trucking’s cost of financing is nine percent.
What would be the change in Joshua Trucking’s balance sheet as a result of leasing this
equipment?
A.Add $40,000 to the Leased Trailers and Lease Obligations account.
B.Add $40,000 to the Leased Trailers account and $134,578 to the Lease Obligations
account.
C.Add $134,578 to the Leased Trailers and Lease Obligations account.
D.Make no change in the balance sheet accounts.
Which of the following is not a short-term debt instrument?
A.Commercial paper
B.Common stock
C.Money market securities
D.Treasury bills
The Earth Shoe Company, whose stock has a market value of $20, has the following
common equity accounts on its balance sheet:
If the firm declares a 5% stock dividend, what will be the retained earnings figure after
the dividend is paid?
A.$1,000,000
B.$51,000,000
C.$14,950,000
D.None of the above
Which of the following capital budgeting techniques might not consider the terminal
value of a project?
A.Net Present Value
B.Internal Rate of Return
C.Profitability Index
D.Payback Period
An S-type corporation is different from a C-type corporation in the following way(s):
A.the way they are taxed.
B.liability.
C.ability to sell stock.
D.All of the above
Which of the following is used to determine the periodic future cash flows from a
bond?
A.Coupon rate
B.Current yield
C.Yield to maturity
D.Maturity
If a proposed investment’s payback period is 3 years, its initial cost is $50,000, and its
useful life is 10 years, which of the following must be true?
A.Cash inflows over the investment’s useful life total $150,000.
B.Cash inflows over the first three years total $50,000.
C.The accounting profits generated by the investment over the first three years total
$50,000.
D.None of the above
For the purpose of calculating the cost of capital, the capital components are:
A.long-term debt and common stock.
B.debt and preferred stock.
C.long term debt, common stock and preferred stock.
D.long-term and short-term debt.
According to the Capital Asset Pricing Model, a stock’s risk premium is the:
A.price premium on low risk stocks that investors buy for safety.
B.risk premium on an average stock factored by a measure of the stock’s market risk.
C.risk premium on an average stock factored by a measure of the stock’s total risk.
D.extra money paid for high risk stocks because of their high average returns.
Rapid City Motors Co. expects to grow at 20% for two years. After that it expects 8%
growth indefinitely. The firm recently declared a $4.00 annual dividend. Similar stocks
return about 12%. How much should a share of Rapid City be worth today?
A.$ 98.36
B.$155.50
C.$132.84
D.$147.89
Land is depreciated:
A.straight line over 27.5 years if they’re residential.
B.using MACRS.
C.straight line over 31.5 years for all property.
D.Land is never depreciated.
The federal tax system allows firms that have a tax loss in a year to apply the loss
against past and future earnings. The process is referred to as loss carrybacks and
carryforwards and permits the loss to be:
A.carried forward for 20 years after having been carried back evenly over the past two
years.
B.carried back or forward for as many as 20 years.
C.spread evenly over the last two years and evenly over the next 20 years.
D.carried back two years and forward as many as 20 years.
The chance of making more or less money on an international business transaction
because of exchange rate fluctuations is called:
A.international risk.
B.political risk.
C.exchange rate risk.
D.exchange rate profitability.
Kanick Corp is evaluating a new venture project and has developed the following
decision tree analysis ($M).
Kanick’s cost of capital is 12% but a pure play competitor in the new field has been
identified with a beta of 1.5. The average stock is returning 14% and treasury bills yield
6%. What is the venture’s expected NPV. Discuss its risk characteristics.
It is said that “ratio analysis doesn’t give answers, it helps you ask the right questions.”
Explain the rationale behind that statement as it relates to a company undergoing a
decline in its quick asset ratio while at the same time maintaining a stable current ratio.
Reading Inc. is contemplating a project represented by the following decision tree.
($000).
Reading is a small firm that is likely to be ruined by a project that loses more than $1.0
million. The firm’s cost of capital is 14%. Calculate the project’s expected NPV and
make a recommendation regarding acceptance.
Ballantine Inc. has the following financial statements ($omitted). Ballantine paid no
dividends and sold no new stock during the year.
Balance Sheets
a. Construct Ballantine’s statement of cash flows. Show supporting calculations and
display the result as it would appear on a Statement of Cash Flows.
b. Calculate the following ratios for Ballantine.
Quick Ratio
ACP
Total Asset Turnover
Inventory Turnover (COGS)
TIE
Justin Freez purchased a put option on General Auto’s common stock at $2.90. The put
has a striking price of $40 and General Auto’s common stock is priced at $42.00. What
is the most that Justin can lose on the put option purchase?
Are growth rate models such oversimplifications of reality that they’re useless?
A firm is considering the cost-saving project of replacing an existing copier with a new
copier. The existing copier was purchased 8 years ago for $100,000 and was expected to
last 20 years over which straight-line depreciation was used. This existing copier can
now be sold for $10,000. The new machine costs $120,000, will last 12 years, and is
expected to save the firm $20,000 each year before taxes. Assuming a tax rate of 34%, a
discount rate of 10% and zero salvage for the new machine at the end of its life, what is
the NPV for this project?
Stocks and bonds are traded in separate markets, and interest rates are set in bond (debt)
markets. Why then does there seem to be an inverse relationship between the
movements of stock prices and interest rates (they move in opposite directions)?