1) The inflation premium:
A.increases the real return
B.is inversely related to the time to maturity
C.remains constant over time
D.rewards investors for accepting interest rate risk
E.compensates investors for expected price increases
2) Bruce Moneybags owns several restaurants and hotels near a local interstate. One
restaurant, Beef and More, needs modernized. He is trying to decide whether to accept
an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the
restaurant himself. The projected renovation cost is $1.3 million. The restaurant would
need to be shut down completely during the renovation which would cause a net
operating cash flow loss of $210,000 in today’s dollars. The estimated present value of
the cash inflows from the renovated restaurant are $3.2 million. When analyzing the
renovation project, what opportunity cost, if any should be included for the current
restaurant? Assume the restaurant is totally paid for and any future costs will be paid in
cash.
A.There is no opportunity cost since the current restaurant is owned free and clear
B.The opportunity cost is the value of the current offer to buy the restaurant
C.The opportunity cost is the cost of the needed improvements
D.The opportunity cost is the present value of the loss of operating cash flows while the
restaurant is closed for renovation
E.The opportunity cost is the cost of the renovations plus the loss of the operating cash
flows during the renovation
3) Glass Growers has no debt. Its cost of capital is 8.7 percent. Suppose the firm
converts to a debt-equity ratio of 0.65. The interest rate on the debt is 6.9 percent. What
is its new WACC?
A.7.99 percent
B.8.13 percent
C.8.36 percent
D.8.44 percent
E.8.61 percent
4) Which one of the following is most apt to align management’s priorities with
shareholders’ interests?
A.Increasing employee retirement benefits
B.Compensating managers with shares of stock that must be held for 3 years before the
shares can be sold
C.Allowing a manager to decorate his or her own office once he or she has been in that
office for a period of 3 years or more
D.Increasing the number of paid holidays that long-term employees are entitled to
receive
E.Allowing employees to retire early with full retirement benefits
5) Sam wants to invest $5,000 for 5 years. Which one of the following rates will
provide him with the largest future value?
A.5 percent simple interest
B.5 percent interest, compounded annually
C.6 percent interest, compounded annually
D.7 percent simple interest
E.7 percent interest, compounded annually
6) Given the following information, what is the standard deviation of the returns on a
portfolio that is invested 40 percent in stock A, 35 percent in stock B, and the remainder
in stock C?
A.11.86 percent
B.12.72 percent
C.13.16 percent
D.13.43 percent
E.13.57 percent
7) Global Ventures has a return on equity of 9.8 percent, a retention ratio of 60 percent,
and a profit margin of 4.5 percent. The company paid $378 in dividends and has net
working capital of $100. Net fixed assets are $18,550 and current liabilities are $520.
What is the total equity of the firm?
A.$6,457
B.$6,890
C.$7,360
D.$9,643
E.$11,480
8) Northern Wear stock has an expected return of 14.6 percent. Given the information
below, what is the expected return on this stock if the economy is normal?
A.13 percent
B.16 percent
C.18 percent
D.21 percent
E.23 percent
9) Which one of the following statements is correct?
A.All secondary markets are dealer markets
B.All secondary markets are broker markets
C.All stock trades between existing shareholders are secondary market transactions
D.All stock transactions are secondary market transactions
E.All Dutch auction sales are secondary market transactions
10) Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while
holding the amount of inventory on hand at a constant level. Assume that both the cost
per unit and the selling price per unit also remained constant. All else held constant,
how will this accomplishment be reflected in the firm’s financial ratios?
A.decrease in the fixed asset turnover rate
B.decrease in the financial leverage ratio
C.increase in the inventory turnover rate
D.increase in the day’s sales in inventory
E.no change in the total asset turnover rate
11) Based on the most recent survey information presented in your textbook, CFOs tend
to use which two methods of investment analysis the most frequently?
A.Payback and net present value
B.Payback and internal rate of return
C.Internal rate of return and net present value
D.Net present value and profitability index
E.Profitability index and internal rate of return
12) How quickly can a bank receive payment once it transmits a copy of a check to the
bank on which the check was drawn?
A.Immediately
B.In 1 day
C.Between 1 and 2 days
D.2 days
E.Between 2 and 3 days
13) The spot rate for the pound is 0.6789 = $1 and for the Canadian dollar is C$1.2381
= $1. What is the /C$ cross rate?
A.0.5483/1
B.0.6627/1
C.1.0333/1
D.1.5090/1
E.01.8238/1
14) Which of the following characteristics apply to a perpetuity?
I. Constant cash flow dollar amount
II. Unequal cash flow dollar amount
III. Limited time period
IV. Infinite time period
A.I and III only
B.I and IV only
C.II and III only
D.II and IV only
E.I plus either III or IV
15) Which one of the following is the quoted price of a bond?
A.Par value
B.Discount price
C.Face value
D.Dirty price
E.Clean price
16) Which one of the following terms is used to describe international bonds issued in a
single country and generally denominated in that country’s currency?
A.Eurobonds
B.American Depositary Receipts
C.Foreign bonds
D.Swaps
E.Gilts
17) If you have three thousand euros, how many dollars do you have given the
following exchange rates?
A.$2,261.42
B.$2,608.14
C.$3,211.09
D.$3,979.80
E.$4,216.50
18) Which one of the following can be classified as an annuity but not as a perpetuity?
A.Increasing monthly payments forever
B.Increasing quarterly payments for 6 years
C.Unequal payments each year for 9 years
D.Equal annual payments for life
E.Equal weekly payments forever
19) An efficient capital market is best defined as a market in which security prices
reflect which one of the following?
A.Current inflation
B.A risk premium
C.Available information
D.The historical arithmetic rate of return
E.The historical geometric rate of return
20) Jones Brothers Farm Equipment owes $48,329 in tax on a taxable income of
$549,600. The company has determined that it will owe $56,211 in tax if its taxable
income rises to $575,000. What is the marginal tax rate at this level of income?
A.29.08 percent
B.30.00 percent
C.30.67 percent
D.31.03 percent
E.32.00 percent
21) JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The
book value of its equity is $1,750,000. If the company repurchases 20 percent of its
shares in the stock market, what will be the book value of equity if all else remains the
same?
A.$750,000
B.$1,250,000
C.$1,000,000
D.$1,400,000
E.$4,000,000
F.None of the above
22) Figure 9.1
In March of 2011, Macklemore Corp. considered an acquisition of Blue Scholar
Learning, Inc. (BSL), a privately-held educational software firm. As a first step in
deciding what price to bid for BSL, Macklemore’s CFO, Ryan Lewis, has prepared a
five-year financial projection for the company assuming the acquisition takes place.
Use this projection and BSL’s 2010 actual financial figures to answer the questions
below.
Estimate BSL’s value (in $ millions) at the end of 2010 assuming it is worth the book
value of its assets at the end of 2015. Macklemore’s WACC is 8.0 percent. BSL’s
WACC is 11.5 percent, and the average of the two companies’ WACCs, weighted by
sales, is 8.2 percent.
A.$628.24
B.$3,669.01
C.$4,297.25
D.$4,412.94
E.$4,984.28
23) Professional Properties is considering remodeling the office building it leases to
Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building
is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in
rent for the next 5 years. The discount rate is 15 percent. What is the benefit of the
remodeling project to Professional Properties?
A.-$651,233
B.-$489,072
C.$5,214
D.$128,399
E.$311,417
24) Assume a canned soft drink costs $1 in the U.S. and $1.30 in Canada. At the same
time, the currency per U.S. dollar is C$1.30. Which one of the following conditions
exists in this situation?
A.Absolute purchasing power parity
B.Interest rate parity
C.Relative purchasing power parity
D.Translation exposure
E.Equal spot and forward rates
25) The lower the standard deviation of returns on a security, the _____ the expected
rate of return and the _____ the risk.
A.lower; lower
B.lower; higher
C.higher; lower
D.higher; higher
E.You cannot determine anything about the expected rate of return from the standard
deviation
26) What is the probability associated with a return that lies in the upper tail when the
mean plus two standard deviations is graphed?
A.0.05 percent
B.0.5 percent
C.1.0 percent
D.2.5 percent
E.5.0 percent
27) Which one of the following will increase the cash flow from assets for a tax-paying
firm, all else constant?
A.An increase in net capital spending
B.A decrease in the cash flow to creditors
C.An increase in depreciation
D.An increase in the change in net working capital
E.A decrease in dividends paid
28) Assume the securities markets are strong-form efficient. Given this assumption, you
should expect which one of the following to occur?
A.The risk premium on any security in that market will be zero
B.The price of any one security in that market will remain constant at its current level
C.Each security in the market will have an annual rate of return equal to the risk-free
rate
D.The price of each security in that market will frequently fluctuate
E.The prices of each security will fall to zero because the net present value of the
investments will be zero
29) Total risk is measured by _____ and systematic risk is measured by ____.
A.beta; alpha
B.beta; standard deviation
C.WACC; beta
D.standard deviation; beta
E.standard deviation; variance
30) The possibility that more than one discount rate can cause the net present value of
an investment to equal zero is referred to as:
A.duplication
B.the net present value profile
C.multiple rates of return
D.the AAR problem
E.the dual dilemma
31) Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The
loan term is 6 years. Since he borrowed the money, Travis has been making annual
payments of $700 to the bank. Which type of loan does he have?
A.Interest-only
B.Pure discount
C.Compound
D.Amortized
E.Complex
32) Cash flow to creditors is defined as:
A.interest paid minus net new borrowing
B.interest paid plus net new borrowing
C.the operating cash flow minus net capital spending minus change in net working
capital
D.dividends paid plus net new borrowing
E.cash flow from assets plus net new equity
33) What is the market called that allows shareholders to resell their shares to other
investors?
A.Primary
B.Proxy
C.Secondary
D.Inside
E.Initial
34) Individuals who continually monitor the financial markets seeking mispriced
securities:
A.earn excess profits over the long-term
B.make the markets increasingly more efficient
C.are never able to find a security that is temporarily mispriced
D.are overwhelmingly successful in earning abnormal profits
E.are always quite successful using only historical price information as their basis of
evaluation
35) The potential conflict of interest between a firm’s owners and its managers is
referred to as which type of conflict?
A.Organizational
B.Structure
C.Formation
D.Agency
E.Territorial
36) Explain how the forward exchange market can help reduce short-run exposure to
exchange rate risk.
37) Suppose that your company’s weighted-average cost of capital is 9 percent. Your
company is planning to undertake a project with an internal rate of return of 12%, but
you believe that this project is not a good investment for the firm. What logical
arguments might you use to convince your boss to forego the project despite its high
rate of return? Is it possible that making investments with expected returns higher than
your company’s cost of capital will destroy value? If so, how?
38) Using a security market line graph, illustrate a security that is overpriced and has a
beta of 0.89. Label all relevant points, including those that represent the overall market.
Explain why the security plots as you have illustrated it.
39) Identify 4 ways that you can use annuity computations in your everyday life.
40) Playdough Products earned net income of $400,000 in 2011. The firm increased its
accounts receivable during the year by $250,000. The book value of its assets declined
by the year’s depreciation charge, which was $180,000, and the market value of its
assets increased by $20,000. Based only on this information, how much cash did
Playdough Products generate during the year? Please ignore taxes for this problem.
41) Explain the concept of the subjective approach to assigning a required return to a
project.