1) An oil producer would sell, rather than buy, crude oil futures for protection from
falling prices.
2) The sum of the payout ratio and the plowback ratio will always equal 1.0 .
3) A long-term investor would more likely be interested in current yield than internal
rate of return.
4) Previously issued securities are traded among investors in the secondary markets.
5) Subordinated debt is an example of short-term debt for a firm.
6) Under current tax law, the longer an investor waits to sell an inflated stock, the lower
is the present value of the tax liability.
7) While sensitivity analysis is forward-looking, scenario analysis attempts to
reconstruct and analyze the past.
8) If the stock prices follow a random walk, successive stock price changes are not
related.
9) In 2007 the SEC investigated a number of instances where companies had backdated
the stock options that they granted to senior executives.
10) When money is invested at compound interest, the growth rate is the interest rate.
11) During the Financial Crisis of 2007-2009, the U.S. government bailed out all firms
in danger of failing.
12) A company that borrows $1 million long term and invests the proceeds in inventory
will see a $1 million increase in its net working capital.
13) Project cost of capital and company cost of capital are synonymous terms.
14) Like a general cash offering, a rights issue is an offer to buy shares made to existing
and potential shareholders.
15) The level of sales at which project NPV is zero is referred to as the accounting
break-even point.
16) In 2002, the U.S. inflation rate was below 2% and a few countries were even
experiencing deflation.
17) Blue-sky laws exist in order to:
A.protect stock underwriters from fraudulent firms
B.restrict the amount of profit from IPOs
C.control the amount of stock owned by one investor
D.protect investors from deceptive firms
18) The present value of an annuity stream of $100 per year is $614 when valued at a
10% rate. By approximately how much would the value change if these were annuities
due?
A.An increase of $10
B.An increase of $61
C.An increase of $100
D.Unknown without knowing number of payments
19) An American investor buys 100 shares of London Enterprises at a price of £50
when the exchange rate is $1.60/£. A year later the shares are selling at £52. No
dividends have been paid.
a. What is the rate of return to the American investor if the exchange rate is still
$1.60/£?
b. What if the exchange rate is $1.70/£?
c. What if the exchange rate is $1.50/£?
20) According to the trade-off theory, the capital structure is a trade-off between:
A.tangible and intangible asset risk
B.high and low target debt ratios
C.tax savings and financial distress costs
D.tax shields and equity financing
21) Which of the following is correct when contracting ahead in the forward exchange
market?
A.At contract close you pay either the forward rate that was contracted or the
then-current rate
B.Contracting ahead is always cheaper than waiting to pay spot rates
C.Your cost is locked in from the beginning of the contract, regardless of market
changes
D.Paying spot price is safer than contracting forward
22) Stock underwriters are:
A.investors seeking low prices
B.regulatory agencies that evaluate equity offerings
C.the firm’s founders who guarantee a stock’s performance
D.investment banking firms that coordinate equity offerings
23) Should credit be granted to a customer wishing to purchase a $2,000 item that has
been marked up 50% over cost if the probability of collection is only 65%? Assume all
cash flows are discounted to present value.
A.No; the expected loss is $33.33
B.No; the expected loss is $150.00
C.Yes; the expected profit is $33.33
D.Yes; the expected profit is $150.00
24) The purpose of sensitivity analysis is to show:
A.the optimal level of the capital budget
B.how price changes affect break-even volume
C.seasonal variation in product demand
D.how variables in a project affect profitability
25) In the MACRS depreciation schedules, the depreciation percentage is lower in the
first year than in the second year. This is due to the fact that:
A.the depreciation percentage increases each year
B.assets are assumed to be acquired at midyear
C.depreciation expense increases at the rate of inflation
D.MACRS depreciation is less attractive than straight-line depreciation
26) What is the yield to maturity of a bond with the following characteristics? Coupon
rate is 8% with semiannual payments, current price is $960, 3 years until maturity.
A.4.78%
B.5.48%
C.9.57%
D.12.17%
27) Credit scoring systems can be used to:
A.reduce the effective cost of trade
B.determine the cost of goods sold
C.evaluate Dun and Bradstreet reports
D.evaluate credit risk based on the borrower’s characteristics
28) The “winner’s curse” is a reminder that:
A.successful bidders may often overpay for an object
B.underwriters charge excessive fees
C.stocks are much riskier than bonds
D.underpricing an issue is a cost to existing owners
29) Under the MACRS:
A.all assets are depreciated over 5 years
B.depreciable percentages decline throughout the asset’s class life
C.straight-line depreciation percentages are doubled
D.assets are assumed to be purchased and sold midyear
30) The capital structure for the CR Corporation includes: bonds $5,500 and common
stock $11,000. If CR has an after-tax cost of debt of 6%, and a 16% cost of common
stock, what is its WACC?
A.9.33%
B.12.67%
C.13.33%
D.14.67%
31) ABC Corp.’s balance sheet shows its long-term debt to be $20 million. The debt was
issued with a 10% interest rate, and the current interest rate is 7%. Based on this
information alone, the market value of this debt is most likely:
A.less than $20 million
B.more than $20 million
C.equal to $20 million
D.unknown without knowing the maturity of the debt
32) Assume that sales revenues are increasing more rapidly than product costs, but that
a project’s cash flows have been represented as an annuity when calculating NPV.
Which of the following problems may occur?
A.Nominal cash flows are possibly being discounted with a real rate
B.Real cash flows are possibly being discounted with a nominal rate
C.Nominal cash flows are possibly being discounted with a nominal rate
D.Real cash flows are possibly being discounted with a real rate
33) Preauthorized payments allow customers to:
A.pay the bills using a credit card
B.arrange with their bank to have the account debited directly
C.allow creditors to charge their credit card directly
D.agree to pay the loan in fixed installments, with interest
34) A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable. The
net effect of these transactions on the firm’s net working capital is a decrease of:
A.$1,700,000
B.$1,000,000
C.$700,000
D.$300,000
35) The modified accelerated cost recovery system (MACRS) allows an increase:
A.in total depreciation over the asset’s life
B.in annual depreciation during earlier years
C.in real but not nominal depreciation expense
D.in the number of years in each recovery class
36) An investor exercises the right to buy one additional share at $20 for every five
shares held. How much should each share be worth after the rights issue if they
previously sold for $50 each?
A.$35.00
B.$41.67
C.$45.00
D.$46.00
37) If forecasted sales exceed the break-even level but are less than the economic
break-even level, the project has a:
A.positive NPV but earns less than the discount rate
B.negative NPV but earns more than the discount rate
C.net loss on the income statement
D.net profit on the income statement
38) What return would be expected by an investor whose portfolio was 25% market
portfolio and 75% Treasury bills if the risk-free rate was 7% and the market risk
premium was 8%?
A.8.00%
B.9.00%
C.10.75%
D.13.00%
39) What happens in the case of a bond selling for $1,000 that can be converted to 20
shares of stock that are currently selling for $55 per share?
A.All the bondholders will choose to convert
B.The stock will go down to $50 per share
C.The bond’s price will go down to $900
D.Some of the bondholders will choose to convert
40) If financial markets were not efficient, it would be more likely for producers to:
A.finance investments in a zero-NPV transaction
B.finance investments in a positive NPV transaction
C.avoid the need for financing investments
D.find desirable securities for financing investments
41) Which of the following balance-sheet accounts will be affected when the company
buys back some of its outstanding shares?
A.Retained earnings
B.Additional paid-in capital
C.Treasury shares at cost
D.All of these
42) A common problem for closely held corporations is:
A.lack of access to substantial amounts of capital
B.that shareholders receive only one vote each
C.the separation of ownership and management
D.an abundance of agency problems
43) How does long-term financing policy affect short-term financing requirements?
44) Where will the following projects plot in relation to the security market line if the
risk-free rate is 6% and the market risk premium is 9%? Which projects should be
undertaken?
45) Assist the holder of a $1,000 par value convertible bond in determining whether to
convert, given that the conversion ratio is 15.5 and that the stock is currently selling for
$70 per share. Calculate both the bond value and conversion value.
46) If interest tax shields are valuable, why don’t all tax-paying firms borrow as much
as possible?
47) What are mortality bonds?