1) Planners have determined that sales will increase by 20% next year, and that the
profit margin will remain at 10% of sales. Which of the following statements is correct?
A.Profit will grow by 20%
B.The profit margin will grow by 10%
C.Profit will grow proportionately faster than sales
D.Ten percent of the increase in sales will become net income
2) Soft capital rationing may be beneficial to a firm if it:
A.reduces a firm’s interest expense
B.weeds out proposals with weaker or biased NPVs
C.allows managers to select their favorite projects
D.increases funds to be used for other purposes
3) Which of the following represents a common reason for increases in net working
capital with new projects?
A.Inventory can now be held at lower levels
B.Accounts receivable are often not paid on time
C.Inventory increases more than accounts payable increase
D.Accounts payable must be increased
4) What will happen to the expected return on a stock with a beta of 1.5 and a market
risk premium of 9% if the Treasury bill yield increases from 3 to 5%?
A.The expected return will remain unchanged
B.The expected return will increase by 1.0%
C.The expected return will increase by 2.0%
D.The expected return will increase by 3.0%
5) Which of the following equity concepts would you expect to be least important to a
financial analyst?
A.Par value per share
B.Additional paid-in capital
C.Retained earnings
D.Net common equity
6) What is primarily responsible for the potential distortion among the ROA of different
firms when net income is used in the numerator of ROA?
A.Firms have different dividend payout ratios
B.Some firms use fully depreciated assets
C.Financial leverage varies among firms
D.Unprofitable firms will not have tax liability
7) What would you expect to be the market price of stock after a sold-out rights issue if
each existing shareholder purchases one new share at $60 for each three that he or she
currently holds and the current share price is $100?
A.$75.00
B.$80.00
C.$85.00
D.$90.00
8) A firm is said to be countercyclical if its returns:
A.continue to decrease, year after year
B.continue to increase, year after year
C.are better when most firms do poorly
D.are negative in real terms
9) Managers who ‘stretch their payables” are attempting to:
A.repay more recent charges prior to early charges
B.improve their current ratio prior to preparation of financial statements
C.offer finished goods at a discount for repayment
D.obtain a longer period of short-term financing
10) How does a soybean farmer lock in a price of $5.40 per bushel when the cash price
at harvest is only $4.90?
A.Profit in futures market to offset loss in cash market by selling futures contract at
$5.40/bushel
B.Break even in both markets by buying a futures contract at $5.40/bushel
C.Profit in cash market to offset loss in futures market by buying futures contract at
$5.40/bushel
D.Break even in both markets by selling a futures contract at $5.40/bushel
11) If a firm’s current ratio exceeds 1.0, what happens as a result of paying cash to
reduce accounts payable?
A.Net working capital increases
B.Net working capital decreases
C.Current ratio increases
D.Current ratio decreases
12) The DOL measures the percentage change in _____, given a percentage change in
____.
A.fixed costs; sales
B.profits; fixed costs
C.profits, sales
D.operating leverage; fixed costs
13) Which of the following may not show up as an expense in the financial statements?
A.Cash bonus for employees
B.Value of options given to employees to buy the firm’s stock
C.Allowance for bad debts
D.All of these
14) For mutually exclusive projects, the IRR can be used to select the best project:
A.by calculating the modified internal rate of return
B.by calculating the IRR based on incremental cash flows
C.by using the discount rate to calculate the IRR
D.never. IRR cannot be utilized for mutually exclusive projects
15) A firm can hedge the risk of upward movement in raw material prices by:
A.buying a call option
B.selling a put option
C.buying a put option
D.selling a futures contract
16) You enter into a forward contract to take delivery of 1 million euros 3 months from
now. What happens to the price you will pay at expiration if marks depreciate during
the contract?
A.Your price will increase
B.Your price will decrease
C.Your price was fixed at the onset of the contract
D.Your price was fixed, and you will receive correspondingly more marks due to the
depreciation
17) Why should a convertible bond always be valued at more than its bond value or its
conversion value up until maturity?
A.The bond holder is receiving higher interest rates
B.The conversion value does not have an upper bound
C.The conversion ratio may be decreased
D.The bond does not have to be given up to exercise the option
18) Assuming no market imperfections, which of the following processes would not be
expected to have an effect on share price?
A.Dividend declaration and payment
B.Stock repurchase
C.Stock dividend
D.Stock split
19) Which of the following would not be included as a source of short-term financing?
A.Line of credit
B.Increase in the minimum operating cash balance
C.Sale of marketable securities
D.Stretching of accounts payable
20) What is the change in value for a firm with $1 million in equity, $1 million in
permanent debt at a 10% interest rate, and a 35% tax rate if MM I is modified to
recognize corporate taxes?
A.Value increases by $35,000
B.Value increases by $100,000
C.Value increases by $350,000
D.Value increases by $700,000
21) According to pecking order theory, managers will often choose to finance with:
A.new equity rather than debt, due to bankruptcy costs
B.debt rather than new equity, to avoid reduced share price
C.debt rather than retained earnings, to lower the WACC
D.new equity rather than debt, to strengthen EPS
22) A soybean oil contract calls for delivery of 60,000 pounds. What happens to the
seller of a soybean futures contract at 16 cents per pound if the futures price closes the
next day at 14 cents per pound?
A.The contract is marked to market with a $1,200 loss
B.The contract is marked to market with a $1,200 gain
C.Futures contracts are voided if price increases before expiration
D.Nothing happens until the expiration of the contract
23) Recognizing that it may be in managers’ best interests to be overly optimistic when
proposing projects, how might firms effectively control this impulse?
A.Employ capital rationing
B.Discontinue investment proposals
C.Fire managers after their first mistake
D.Fund all project proposals
24) By how much did the price of a $1,000 par-value bond decrease if The Wall Street
Journal shows a change of -12 from the previous day?
A.$0.88
B.$1.20
C.$3.75
D.$12.00
25) A line of credit would be considered:
A.an agreement to borrow up to a specific total amount on demand from a bank
B.a short-term unsecured loan with minimum interest expense
C.a secured loan to be amortized over three to five years
D.a long-term, permanent source of funding
26) One of the primary reasons for disbursing venture capital funds in installments is to:
A.avoid tax liability
B.identify and cut losses early
C.increase the importance of the venture capitalist
D.take advantage of the time value of money
27) If the slope of the line measuring a stock’s historic returns against the market’s
historic returns is positive, then the stock:
A.has a beta greater than 1.0
B.has no unique risk
C.has a positive beta
D.plots above the security market line
28) Which of the following investment criteria takes the time value of money into
consideration?
A.Net present value
B.Profitability index
C.Internal rate of return for borrowing projects
D.All of these
29) The five Cs of credit refer to the:
A.credit reports issued by Dun and Bradstreet
B.interpretation of numerical credit scoring systems
C.attributes that help determine creditworthiness
D.financial ratios used to determine Altman’s Z-score
30) Yesterday the spot exchange rate of yen-to-dollar was 105 . What is today’s spot
exchange rate if the yen has appreciated 10% against the dollar today?
A.94.5/$
B.94.5/$1.10
C.115.5/$
D.115.5/$1.10
31) Show numerically that a savings account with a current balance of $1,000 that earns
interest at 9% annually is precisely sufficient to make the payments on a 3-year loan of
$1,000 that carries equal annual payments at 9% interest.
32) Discuss the percentage of sales model and its potential pitfalls in the financial
planning process.
33) Suppose two equally risky shares, Div and Cap, offer the same expected return
before tax. Div shares pay a generous dividend but offer low expected capital gains.
Cap shares pay low dividends but offer high expected capital gains. Which of the two
shares would a pension fund prefer? An individual? A corporation? Explain your
answers.
34) For a firm with $3 million in total assets, $400,000 in net income, and $150,000 in
dividend payments, first calculate the maximum rate of growth in sales without tapping
external sources of funds. Next, show how that growth rate changes if the dividend
payout ratio is reduced to 20%. Do these two points suggest that shareholders must be
willing to trade dividends for growth?
35) How do auto manufacturers in United States, Europe, and Japan hedge the
economic risks?
36) Why may it be difficult to rely on profits to get an overall impression of the firm’s
cash flows?
37) What does “real asset” mean?
38) What is the international Fisher effect and how would you test it, knowing that 6%
inflation is expected in the United States but only 3% is expected in Spain. The nominal
U.S. interest rate is 9%.
39) Justify the historic ranking of returns for the following three categories of
investment, listed from highest to lowest return: common stocks, long-term Treasury
bonds, and Treasury bills.