1) A project’s net present value profile is a graph that plots a project’s NPV for various
discount rates.
2) A bond with short maturity has less “interest rate risk” than a bond with long maturity
when all other featurescoupon interest rate, par value, and interest payment
frequencyare the same.
3) The widely shared expectations of hard times ahead tend to cause investors to
become less risk-averse.
4) The payment of a stock dividend is a shifting of funds between stockholders’ equity
accounts rather than an outflow of funds.
5) A constant-payout-ratio dividend policy is based on the payment of a certain
percentage of earnings to owners in each dividend period.
6) Yield to call represents the rate of return that investors earn if they buy a callable
bond at a specific price and hold it until it is called back and they receive the call price,
which would be set above the bond’s par value.
7) The ________ is the lowest rate of interest charged on business loans by the nation’s
leading banks to their best business borrowers.
A) prime rate
B) commercial paper rate
C) federal funds rate
D) treasury bill rate
8) A market that establishes correct prices for the securities that firms sell and allocates
funds to their most productive uses is called a(n) ________.
A) future market
B) forex market
C) efficient market
D) weak-form market
9) What is the rate of return on an investment of $16,278 if the company expects to
receive $3,000 per year for the next 10 years?
A) 18 percent
B) 13 percent
C) 8 percent
D) 3 percent
10) Financing that matures in one year or less and has specific assets pledged as
collateral is called ________.
A) unsecured long-term financing
B) unsecured short-term financing
C) secured short-term financing
D) secured long-term financing
11) As risk aversion increases ________.
A) a firm’s beta will remain neutral
B) investors’ required rate of return will increase
C) a firm’s beta will decrease
D) investors’ required rate of return will remain unchanged
12) In April, a firm had an ending cash balance of $35,000. In May, the firm had total
cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash
balance required by the firm is $25,000. At the end of May, the firm had ________.
A) an excess cash balance of $25,000
B) an excess cash balance of $0
C) required financing of $10,000
D) required financing of $25,000
13) The present value of $100 received at the end of year 1, $200 received at the end of
year 2, and $300 received at the end of year 3, assuming an opportunity cost of 13
percent, is ________.
A) $ 453
B) $ 416
C) $1,181
D) $ 500
14) Table 11.5
Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The
gluing machine costs $50,000 and requires installation costs of $2,500. This outlay
would be partially offset by the sale of an existing gluer. The existing gluer originally
cost $10,000 and is four years old. It is being depreciated under MACRS using a
five-year recovery schedule and can currently be sold for $15,000. The existing gluer
has a remaining useful life of five years. If held until year 5, the existing machine’s
market value would be zero. Over its five-year life, the new machine should reduce
operating costs (excluding depreciation) by $17,000 per year. Training costs of
employees who will operate the new machine will be a one-time cost of $5,000 which
should be included in the initial outlay. The new machine will be depreciated under
MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and
a 40 percent tax on ordinary income and capital gains.
The initial outlay for this project is ________. (See Table 11.5)
A) $42,820
B) $40,320
C) $47,820
D) $35,140
15) Which of the following is true of risk premium?
A) T-bills have a have a higher risk premium than that of Treasury bonds
B) The government bonds have a higher risk premium than that of corporate bonds
C) The speculative corporate issues have a lower risk premium than that of the higher
rated corporate issues
D) The lower-rated corporate issues have a higher risk premium than that of the higher
rated corporate issues
16) The tax treatment regarding the sale of existing assets that are sold for more than
the book value but less than the original purchase price results in a(n) ________.
A) ordinary tax benefit
B) capital gain tax liability
C) recaptured depreciation taxed as ordinary income
D) capital gain tax liability and recaptured depreciation taxed as ordinary income
17) International short-term financing opportunities are available in ________.
A) future markets
B) bond markets
C) forward markets
D) Eurocurrency markets
18) Cash flows and risk are the key determinants in share price. Increased cash flow
results in ________, other things remaining the same.
A) a lower share price
B) a higher share price
C) an unchanged share price
D) an undetermined share price
19) A firm has outstanding convertible preferred stock with a $50 par value which is
convertible into three shares of common stock. The conversion value is $45. What is the
current market price of a share of common stock?
A) $15.00
B) $16.67
C) $17.33
D) $20.00
20) Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2013
Balance Sheet
Dana Dairy Products
December 31, 2013
If Dana Dairy Products has credit terms which specify that accounts receivable should
be paid in 25 days, the average collection period ________ since 2012. (See Table 3.2)
A) has deteriorated
B) has remained the same
C) has improved
D) cannot be determined
21) An involuntary petition for reorganization may be filed against a firm if ________.
A) the firm has past-due debts of $5,000 or more
B) the firm’s solvency ratio is greater than 20%
C) the firm’s current ratio is 2:1
D) the book value of the firm’s assets is less than the stated liabilities