1) The conversion ratio is the ratio at which a convertible security can be exchanged for
a nonconvertible security.
2) Multinational companies are firms that have international assets but operations in
domestic markets only and draw part of their total revenue and profits from such
markets.
3) The appeal of the IRR technique is due to the general disposition of business people
to think in terms of rates of return rather than actual dollar returns.
4) Since individuals are always confronted with opportunities to earn positive rates of
return on their funds, the timing of cash flows does not have any significant economic
consequences.
5) A direct lease is a lease under which the lessee sells an asset for cash to a prospective
lessor and then leases back the same asset, making fixed periodic payments for its use.
6) The break even cash inflow is the minimum level of cash inflow necessary for a
project to be acceptable.
7) A joint venture is a partnership under which the participants have contractually
agreed to contribute specified amounts of money and expertise in exchange for stated
proportions of ownership and profit.
8) The original price per share received by the firm on a single issue of common stock
is equal to the sum of the common stock and paid-in capital in excess of par accounts
divided by the number of shares outstanding.
9) Payout policy refers to the decisions that firms make about whether to distribute cash
to shareholders, how much cash to distribute, and by what means the cash should be
distributed.
10) Opportunity costs should be included as cash outflows when determining a project’s
incremental cash flows.
11) The selling of some of a firm’s assets for various strategic motives is called
divestiture.
12) The constant growth model is an approach to dividend valuation that assumes that
dividends grow at a constant rate indefinitely.
13) The portion of an asset’s risk that is attributable to firm-specific, random causes is
called ________.
A) unsystematic risk
B) nondiversifiable risk
C) market risk
D) political risk
14) Which of the following basic variables must be considered in determining the initial
investment associated with a capital expenditure?
A) incremental annual savings produced by the new asset
B) cash flows generated by the new investment
C) proceeds from the sale of an existing asset
D) profits on the sale of an existing asset
15) If a manager prefers a higher return investment regardless of its risk, then he is
following a ________ strategy.
A) risk-seeking
B) risk-neutral
C) risk-averse
D) risk-aware
16) If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the
annual rate of inflation is 5 percent in the United States and 10 percent in Europe, what
will be U.S. dollar per Euro exchange rate in one year?
A) 1.050
B) 0.8730
C) 1.257
D) 0.7955
17) If the P/E paid for a target company is greater than the P/E of the acquiring
company, the effect on the earnings per share of the acquiring company will be
________.
A) positive
B) neutral
C) negative
D) uncorrelated
18) The purpose of nonvoting common stock is to ________.
A) limit the voting power of the management
B) allow the minority interest to elect one director
C) raise capital without giving up any voting control
D) give preference on distribution of earnings to those shareholders who own the stock
19) What effective annual rate of return (EAR) would Rayne need to earn if she
deposits $1,000 per month into an account beginning one month from today in order to
have a total of $1,000,000 in 30 years?
A) 5.98%
B) 6.55%
C) 4.87%
D) 6.14%
20) Repurchase of stock ________ the earnings per share and ________ the market
price of stock.
A) increases; increases
B) decreases; decreases
C) increases; decreases
D) decreases; increases
21) The legal contract setting forth the terms and provisions of a corporate bond is a(n)
________.
A) indenture
B) debenture
C) loan document
D) promissory note
22) An investor has $1,000 that she is interested in investing in ABC stock, which is
currently selling for $10 per share. ABC’s warrants are selling for $7 per warrant. Each
warrant entitles the holder to purchase three shares of ABC’s common stock for $8 per
share. The warrant premium is ________.
A) $1
B) $2
C) $3
D) $4
23) A firm has experienced a constant annual rate of dividend growth of 9 percent on its
common stock and expects the dividend per share in the coming year to be $2.70. The
firm can earn 12 percent on similar risk involvements. The value of the firm’s common
stock is ________.
A) $22.50/share
B) $9/share
C) $90/share
D) $30/share