1) An investor who pays no tax would be more likely to accept the view that high
dividends increase stock values rather than the view that low dividends increase stock
values.
2) Managers should not be concerned with business ethics because ethical behavior is
inconsistent with the primary goal of maximizing shareholder value.
3) If a bond is selling below its face value, then its yield to maturity must be less than
the bond’s coupon rate.
4) A company that sells common stock and uses the money to pay off a loan is
increasing its use of financial leverage.
5) Investors require higher rates of return to compensate for purchasing power losses
resulting from inflation.
6) Cash flows is the most relevant variable to measure the returns on debt instruments,
while GAAP net income is the most relevant variable to measure the returns on
common stock.
7) Primary market transactions cannot be undertaken in over the counter markets.
8) The cost of preferred stock is equal to the preferred stock dividend divided by the net
proceeds per preferred share.
9) To determine the periodic interest payments that a bond makes, multiply the bond’s
stated coupon rate by its par value and divide by the number of coupon payments per
year.
10) In theory, shareholders select the board of directors, but in reality, management
effectively selects the directors.
11) The value of the Euro floats against other major international currencies, but has a
fixed value when compared to the currencies of the countries in the European Union,
such as the French Franc and the German Mark.
12) The capital budgeting manager for XYZ Corporation, a very profitable high
technology company, completed her analysis of Project A assuming 5-year depreciation.
Her accountant reviews the analysis and changes the depreciation method to 3-year
depreciation. This change will
A) increase the present value of the NCFs
B) decrease the present value of the NCFs
C) have no effect on the NCFs because depreciation is a non-cash expense
D) only change the NCFs if the useful life of the depreciable asset is greater than 5
years
13) The recapture of net working capital at the end of a project will
A) increase terminal year free cash flow
B) decrease terminal year free cash flow by the change in net working capital times the
corporate tax rate
C) increase terminal year free cash flow by the change in net working capital times the
corporate tax rate
D) have no effect on the terminal year free cash flow because the net working capital
change has already been included in a prior year
14) Southeast Wood Products, Inc. reports sales of $20,000,000 and inventory of
$4,000,000. Southeast’s inventory possesses significant economies of scale. Therefore,
if the firm’s sales increase by 10%, Southeast’s inventory will ________ and if
Southeast’s sales decrease by 10%, Southeast’s inventory will ________.
A) increase by more than 10%, increase by more than 10%
B) decrease by more than 10%, decrease by more than 10%
C) increase by more than 10%, decrease by less than 10%
D) increase by less than 10%, decrease by less than 10%
15) A trade credit discount such as 2/10 net 40 means
A) a 2 percent penalty is due after 40 days
B) a 2 percent discount if payment is made within 10 days, otherwise, the total amount
is due in 40 days
C) a 2 percent discount for payment within 10 days, and a 3 percent penalty if payment
is made after 40 days
D) 10 percent discount for cash on delivery and a 2 percent discount for payment within
40 days
16) Which of the following would be an example of the “transactions motive” for a firm
holding cash balances?
A) investing “excess cash balances”
B) anticipating a downturn in the economy
C) purchase of inventory
D) take advantage of an anticipated decline in the price of raw materials
17) Which of the following statements concerning liquidity and debt is true?
A) The greater the use of short-term debt, the lower the risk of illiquidity
B) Long-term debt is generally less costly than short-term debt
C) A firm can reduce its risk for illiquidity by shifting from short-term debt to long-term
debt
D) The risk of illiquidity does not depend on the mix of short-term versus long-term
debt
18) Your company is considering the replacement of an old delivery van with a new one
that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The
old van is being depreciated using the simplified straight-line method over a useful life
of 8 years. The old van could be sold today for $7,000. The new van has an invoice
price of $80,000, and it will cost $6,000 to modify the van to carry the company’s
products. Cost savings from use of the new van are expected to be $28,000 per year for
5 years, at which time the van will be sold for its estimated salvage value of $18,000.
The new van will be depreciated using the simplified straight-line method over its
5-year useful life. The company’s tax rate is 35%. Working capital is expected to
increase by $5,000 at the inception of the project, but this amount will be recaptured at
the end of year five. What is the incremental free cash flow for year one?
A) $18,875
B) $19,985
C) $22,305
D) $24,220
19) Which of the following transactions will decrease a corporation’s retained earnings?
A) The corporation declares and pays a $2 per share cash dividend
B) The company completes a 2 for 1 stock split
C) The company pays a 20% stock dividend
D) Both A and C
20) HomeCraft makes wooden play sets. The company pays annual rent of $400,000
per year and pays administrative salaries totaling $150,000 per year. Each play set
requires $400 of wood, ten hours of labor at $70 per hour, and variable overhead costs
of $100. Fixed advertising expenses equal $100,000 per year. Each play set sells for
$3,200. What is Homecraft’s break-even output level?
A) 340 play sets
B) 325 play sets
C) 297 play sets
D) 258 play sets
21) XYZ, Inc. has developed a project which results in additional accounts receivable
of $400,000, additional inventory of $180,000, and additional accounts payable of
$70,000. What is the additional investment in net working capital?
A) $580,000
B) $510,000
C) $270,000
D) $150,000
22) If the NPV (Net Present Value) of a project with one sign reversal is positive, then
the project’s IRR (Internal Rate of Return) ________ the required rate of return.
A) must be less than
B) must be greater than
C) could be greater or less than
D) cannot be determined without actual cash flows
23) We compute the profitability index of a capital budgeting proposal by
A) multiplying the internal rate of return by the cost of capital
B) dividing the present value of the annual after tax cash flows by the cost of capital
C) dividing the present value of the annual after tax cash flows by the cash investment
in the project
D) multiplying the cash inflow by the internal rate of return
24) XRT, Inc. is issuing a $1,000 par value bond that pays 8.5% interest annually.
Investors are expected to pay $1,100 for the 12-year bond. The firm will pay $50 per
bond in flotation costs. What is the after-tax cost of new debt if the firm is in the 35%
tax bracket?
A) 8.23%
B) 4.55%
C) 4.70%
D) 7.45%
25) Rogue Tire Masters has fixed costs of $220,000. Tires sell for $95 each and have a
unit variable cost of $45. What is Rogue’s break-even point in units?
A) 4,000
B) 4,400
C) 5,200
D) 5,500
26) Smith Corporation has earned a return on capital invested of 10% for the past two
years, but an investment analyst reviewing the company has stated the company is not
creating shareholder value. This may be due to the fact that
A) the risk free rate of interest is 3%
B) the corporation’s inventory turnover is high
C) investors’ required rate of return is 8%
D) investors’ required rate of return is 12%
27) Which of the following is NOT true regarding the use of short-term debt?
A) It must be rolled over more often than long-term debt
B) There is uncertainty connected with interest costs on short-term debt from year to
year
C) The firm is subjected to greater liquidity risk when using short-term credit
D) Interest rates are usually higher on short-term debt
28) CraftCo, Inc.’ projected sales for the first six months of 2012 are given below:
Jan.$500,000April$490,000
Feb.$740,000May$740,000
Mar.$380,000June$610,000
40% of sales are collected in cash at time of sale, 50% are collected in the month
following the sale, and the remaining 10% are collected in the second month following
the sale. Cost of goods sold is 60% of sales. Purchases are made in the month prior to
the sales, and payments for purchases are made in the month of the sale. Total other
cash expenses are $40,000/month. The company’s cash balance as of February 28, 2012
will be $25,000. Excess cash will be used to retire short-term borrowing (if any).
CraftCo, Inc. has no short term borrowing as of February 28, 2012. Assume that the
interest rate on short-term borrowing is 1% per month. The company must have a
minimum cash balance of $15,000 at the beginning of each month. What is CraftCo,
Inc.’ total cash receipts for April 2010?
A) $460,000
B) $490,000
C) $524,000
D) $560,000
29) The rate on T-bills is currently 2%. Environment Help Company stock has a beta of
1.5 and a required rate of return of 17%. According to CAPM, determine the return on
the market portfolio.
A) 27.5%
B) 19.0%
C) 14.0%
D) 12.0%
30) LRQ Inc. bonds on July 1, 2006. The bonds had a coupon rate of 5.5%, with interest
paid semiannually. The face value of the bonds is $1,000 and the bonds mature on July
1, 2021. What is the intrinsic value of an LRQ Corporation bond on July 1, 2012 to an
investor with a required return of 7%?
A) $901.08
B) $902.27
C) $1,000.00
D) $1,104.28
31) All of the following contributed to recent financial crises EXCEPT
A) Focusing on earnings instead of cash flow
B) Focusing on the short run
C) Relying on the efficiency of financial markets
D) Excessive risk taking due to underestimation of risk
32) An increase in flotation costs will most likely result in which of the following?
A) smaller dividend payments so that less external equity financing is needed
B) larger dividend payments so shareholders are able to earn their required returns
C) larger dividend payments to offset higher taxes paid by investors
D) no change in dividend policies because flotation costs are paid by purchasers of
common stock
33) The expected rate of return on a share of common stock whose dividends are
growing at a constant rate (g) is which of the following, where D1 is the next dividend
and Vc is the current value of the stock?
A) (D1 + g)/Vc
B) D1/Vc + g
C) D1/g
D) D1/g + Vc
34) Which of the following is the slope of the security market line?
A) beta
B) one
C) It varies, and is steeper for riskier securities
D) the market risk premium
35) Which of the following forms of business organization limits the liability of
owners?
A) sole proprietorship
B) general partnership
C) corporation
D) two person partnership
36) All of the following are true EXCEPT
A) Trade credit represents inventories sold to customers
B) Temporary investments are current assets that will be liquidated and not replaced
within the current year
C) Permanent investments are assets a firm expects to hold for longer than one year
D) Compensating balance requirements increase the cost of financing
37) Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company’s
dividends are expected to grow at a constant rate of 8.5% indefinitely. If the required
rate of return on this stock is 15.5%, compute the current value per share of Bensen Co.
stock.
A) $81.38
B) $76.43
C) $56.23
D) $43.90
38) A bond’s yield to maturity depends upon all of the following EXCEPT
A) the individual investor’s required return
B) the maturity of the bond
C) the coupon rate
D) the bond’s risk as reflected by the bond rating
39) Based on the information in Table 4-1, the total asset turnover ratio is
A) 1.11
B) 1.41
C) 2.33
D) 4.45
40) Payable through drafts
A) provides for effective control over field payments
B) are not legal instruments
C) cannot be cleared through the banking system
D) are a form of commercial paper
41) Which of the following is NOT considered to be a disadvantage of the sole
proprietorship form of business organization?
A) limited ability to raise capital
B) life is limited to that of the owner
C) unlimited liability of business owners
D) fewer regulations and reporting requirements
42) Which of the following statements about the net present value is true?
A) It produces a percentage result that is easy to describe
B) It has an inadequate reinvestment assumption
C) It is likely that there will be more than one NPV for a project
D) It may be used to select among projects of different sizes
43) Cumulative preferred stock
A) requires dividends in arrears to be carried over into the next period
B) has a right to vote cumulatively
C) has a claim to dividends before bonds
D) has a higher required return than common stock