1) Which of the following is least likely to contribute to the positive-NPV investments
found in product markets?
A.Patented-production processes
B.Positive-NPV financing strategies
C.Brand-name product recognition
D.Lack of competition
2) Financial plans draw out the connections between:
A.the firm’s plans for growth and the financing requirements
B.profit margins and sales growth
C.accounting ratios and operational business decisions
D.all of these
3) For a company that pays no corporate taxes, its WACC will be equal to:
A.the expected return on it assets
B.the expected return on its debt
C.the total value of its assets
D.the expected return on its equity
4) The addition of a negative risk asset to a portfolio of assets will:
A.increase the portfolio’s expected return
B.decrease the portfolio’s expected return
C.increase the portfolio’s expected volatility
D.decrease the portfolio’s expected volatility
5) A cash-strapped young professional offers to buy your car with four, equal annual
payments of $3,000, beginning 2 years from today. Assuming you’re indifferent to cash
versus credit, that you can invest at 10%, and that you want to receive $9,000 for the
car, should you accept?
A.Yes; present value is $9,510
B.Yes; present value is $11,372
C.No; present value is $8,645
D.No; present value is $7,461
6) When corporations default on their debt:
A.bondholders may receive the firm’s assets
B.bondholders will suffer a loss
C.the Board of Directors is liable for the payments
D.the corporation is forced to default on its stock also
7) Private placement of debt securities occurs more frequently in:
A.smaller-sized firms
B.larger-sized firms
C.firms that are using venture capitalists
D.combination with convertible bonds
8) Dividends that are expected to be paid far into the future have:
A.great impact on current stock price due to their expected size
B.equal impact on current stock price as near-term dividends
C.lesser impact on current stock price due to discounting
D.no impact on current stock price because they are uncertain
9) When taxes are ignored, which of the following can be used to calculate the
weighted-average cost of capital?
A.Ratio of expected operating income to book value of all securities
B.The expected return on equity times the debt-equity ratio
C.Ratio of expected operating income to market value of all securities
D.The required return on equity plus the required return on debt
10) What happens to an all-equity firm’s EPS when $1 million of 20% debt is issued
and proceeds used to repurchase two-thirds of the stock if operating income equals $1.5
million and EPS were $2 when the firm was all-equity-financed? Ignore taxes.
A.EPS increase to $2.60
B.EPS increase to $3.00
C.EPS increase to $4.80
D.EPS increase to $5.20
11) According to MM II, as a firm’s debt-equity ratio decreases:
A.its financial risk increases
B.its operating risk increases
C.the required rate of return on equity increases
D.the required rate of return on equity decreases
12) What is the minimum amount that shareholders should expect to receive in the
event of a complete corporate liquidation?
A.Market value of equity
B.Book value of equity
C.Zero
D.Shareholders may be required to pay to be liquidated
13) With respect to the proposition that dividend policy does not matter, in order to
raise an additional $5,600 in cash by issuing stock, the stock sold must be worth:
A.more than $5,600
B.$2,800
C.$5,600
D.need to know the number of shares issued to calculate
14) Companies making smaller security issues may prefer to issue them through:
A.a private placement because lower rates of return can be offered
B.a private placement because it is cheaper than a public issue
C.a public issue because it is cheaper than a private placement
D.a public issue because more exposure will be achieved
15) Arbitrageurs are said to look for riskless profits by:
A.contracting in the forward exchange markets
B.buying at the spot rate and selling at the forward rate
C.buying in one market and selling in another to take advantage of different prices for
the same good
D.buying short-term bonds and converting them to long-term bonds
16) Which statement is correct concerning macro risk exposure?
A.All firms face equal macro risk exposure
B.Only portfolios of stocks face macro risk exposure
C.Macro risk exposure affects the cost of capital
D.Macro risk exposure is less important to diversified investors than micro risk
exposure
17) What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a
price of $750?
A.6.0%
B.8.0%
C.12.0%
D.14.7%
18) Under what circumstance will the buyer of a put option be asked to perform her
obligation?
A.When the stock price has declined below the strike price
B.When the stock price has increased above the strike price
C.The put buyer has an equal obligation regardless of the relationship between stock
and strike prices
D.The put buyer has no obligation whatsoever
19) How much of a stock’s $30 price is reflected in PVGO if it expects to earn $4 per
share, has an expected dividend of $2.50, and a required return of 20%?
A.$0
B.$6.00
C.$8.00
D.$10.00
P = $4/.2 if all earnings paid as dividends
P = $20; therefore, stock price is $10 per share above “no growth” value.
20) How much must be deposited today in an account earning 6% annually to
accumulate a 20% down payment to use in purchasing a car one year from now,
assuming that the car’s current price is $20,000, and inflation will be 4%?
A.$3,774
B.$3,782
C.$3,925
D.$4,080
21) Assuming no market imperfections, which of the following will not be affected by a
repurchase of shares?
A.Assets of the firm
B.Equity of the firm
C.Shares outstanding
D.Price per share
22) Which of the following appears to be the most appropriate goal for corporate
management?
A.Maximizing market value of the company’s shares
B.Maximizing the company’s market share
C.Maximizing the current profits of the company
D.Minimizing the company’s liabilities
23) Which of the following characteristics is similar in both futures and forward
contracts?
A.Future asset transactions are conducted at an agreed price
B.Contracts are sold through organized exchanges
C.Contract terms are standardized
D.Price changes are settled daily
24) The greater the ratio of variable costs to sales, the:
A.more each additional sale contributes to coverage of fixed costs
B.lower the level of profitability
C.more units must be sold to cover fixed charges
D.lower the benefit of conducting a sensitivity analysis
25) How much interest can be accumulated during one year on a $1,000 deposit paying
continuously compounded interest at an APR of 10%?
A.$100.00
B.$105.17
C.$110.50
D.$115.70
Interest = $1,000 e.1 – $1,000
26) If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth
$904.90, how much will it be worth 1 year from now if interest rates are constant?
A.$904.90
B.$925.39
C.$947.93
D.$1,000.00
27) Which of the following represents a financing decision?
A.A decision to borrow $10 million through a bank loan
B.A decision to invest in the common stock of another corporation
C.A decision to buy a new mainframe computer
D.A decision to pay $1 million of accounts payable
28) What happens to a firm with high operating leverage when the overall level of sales
is very high?
A.The firm will have higher levels of fixed costs
B.The firm will enjoy high profits
C.The firm will not break even in accounting terms
D.The firm will have a reduced level of fixed costs
29) The appropriate opportunity cost of capital is the return that investors give up on
alternative investments with:
A.the same risk
B.the risk-free return
C.the expected return on the S&P 500 index
D.the normal, common stock risk premium
30) Field warehousing can be an important source of:
A.additional storage space for cash-strapped firms
B.investing for those who follow the “relaxed cash strategy”
C.cash management for those who factor receivables
D.short-term financing with low risk to the lender
31) If interest rates are higher in Italy than in the United States, the market expects that
the Euro will:
A.appreciate against the dollar
B.depreciate against the dollar
C.offer a higher real rate of return than the dollar
D.be selling at a forward discount
32) Property insurance companies protect themselves against the extensive damage
caused by hurricanes and earthquakes by:
A.selling thousands of policies to different homeowners
B.factoring the cost into the price of the policies
C.buying reinsurance against such catastrophes
D.declaring bankruptcy when the need arises
33) The first step in determining managerial objectives is to:
A.develop appropriate compensation policies
B.eliminate agency problems
C.serve the needs of the customer
D.select an appropriate capital structure
34) XYZ Company issues common stock that is expected to pay a dividend over the
next year of $4 at a price of $25 per share. If its expected growth rate is 5%, what is
XYZ’s cost of common equity?
A.9.0%
B.11.0%
C.16.0%
D.21.0%
35) When hard capital rationing exists, projects may be accurately evaluated by use of:
A.payback period
B.mutually exclusive IRRs
C.a profitability index
D.borrowing, rather than lending, projects
36) All of the following are part of the financial planning process except:
A.deciding which risks are worth taking
B.analyzing investment and financing options
C.projecting the future
D.minimizing risk
37) What is the amount of the annual coupon payment for a bond that has 6 years until
maturity, sells for $1,050, and has a yield to maturity of 9.37%?
A.$87.12
B.$93.70
C.$100.00
D.$105.00
38) What information is contained in the balance sheet, income statement, and
statement of cash flows?
39) If 4 years of college are expected to cost $150,000 18 years from now, how much
must be deposited now into an account that will average 8% annually in order to save
the $150,000? By how much would your answer change if you expected 11% annually?
40) If depreciation is a method of allocating cost rather than an actual cash flow, discuss
how depreciation impacts the income statement and overall cash flows.
41) What are some potential pitfalls of ratio analysis based on accounting data?
42) How can the cash flows of a project be computed from standard financial
statements?
43) Who is (are) typically the primary beneficiary(ies) in a merger?
44) How are dividends paid and how do companies decide on dividend payments?
45) Discuss the basic difference between an accounting break-even point analysis and
an economic break-even analysis. Which would you consider more reliable? Which
would you consider more common?
46) Why is it uncommon to expect assets to change proportionately with sales?
47) Why does it make sense for corporations to maximize their market value?