1) Actual returns are always less than expected returns because actual returns are
determined at the end of the period and must be discounted back to present value.
2) The owners of a corporation enjoy limited liability.
3) Adding stocks to a bond portfolio will increase the riskiness of the portfolio because
stocks have higher standard deviations of returns than bonds.
4) Compounding effectively raises the cost of short-term credit.
5) A limited liability company (LLC) is taxed like a partnership but provides limited
liability for its owners similar to a corporation.
6) It is important to evaluate a corporate manager’s financial decision by measuring the
effect the decision should have on the corporation’s stock price if everything else were
held constant.
7) If the net present value of a project is zero, then the profitability index will equal one.
8) Monthly cash receipts in the cash budget are typically made up of cash sales during
the month and collections from credit sales from prior months.
9) The efficiency of foreign currency markets is assured, in large measure, by the
process of arbitrageurs.
10) Borrowing more money will always increase a company’s return on equity because
the company is using financial leverage, but it also adds to the riskiness of the company.
11) A group of investment bankers organized to distribute large securities issues is
known as a syndicate.
12) Earnings available to common shareholders represents income that may be
reinvested in the firm or distributed to its owners.
13) Motives for holding stocks of cash include transaction, precautionary, and
speculative.
14) Carrying inventory reduces the costs associated with periodic bad debt losses.
15) Accounting rules specify that assets on the balance sheet must be reported at current
market value, because this is the valuation most useful to potential investors.
16) Trade credit appears on a company’s balance sheet as accounts payable.
17) Long-term bonds have greater interest rate risk than shorter-term bonds.
18) Finance theory suggests that the IRR criterion is the most favorable capital
budgeting decision tool.
19) Investments in capital markets in foreign countries are motivated by the desire to
earn higher returns and reduce risk through international diversification.
20) A U.S. corporation investing in a foreign corporation by purchasing stock on a
foreign stock exchange is an example of direct foreign investment.
21) A corporation announces a significant increase in its annual dividend and its stock
price increases on the news. This could be explained most directly by
A) residual dividend theory
B) bird-in-the-hand theory
C) perfect capital markets
D) MM’s indifference theorem
22) Suppose interest rates have been at historically low levels the past two years. A
reasonable strategy for bond investors during this time period would be to
A) invest in long-term bonds to reduce interest rate risk
B) invest in short-term bonds to reduce interest rate risk
C) buy only junk bonds which have higher interest rates
D) invest in long-term bonds to lock in a bond position for when interest rates increase
in the future
23) Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a
line of credit with a bank that allows the company to borrow funds with an 8% interest
rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds
on deposit with the bank and will need the loan to cover the compensating balance as
well as their other financing needs. What is the annual percentage rate for this financing
assuming discounted interest?
A) 14.29%
B) 12.98%
C) 11.67%
D) 10.53%
24) Common examples of financial intermediaries include all of the following EXCEPT
A) Venture Capital Firms
B) Life Insurance Companies
C) Pension Funds
D) Mutual Funds
25) Bond A has a current yield of 6% and Bond B has a current yield of 8%. If the
market price of both bonds is the same, then the yield to maturity on Bond B must be
higher than the yield to maturity on Bond A.
26) You determine that LMN common stock has an expected return of 24%. LMN has a
Beta of 1.5. The risk-free rate is 5%, and the market expected return is 15%. Which of
the following is most likely to happen?
A) You and other investors will buy up LMN stock and its price will rise
B) You and other investors will sell LMN stock and its return will fall
C) You and other investors will buy up LMN stock and its return will rise
D) You and other investors will sell LMN stock and its price will fall
27) Predicting a firm’s future financial needs includes all of the following steps
EXCEPT
A) review of the firm’s sales revenues and expenses over all past planning periods
B) estimation of investment levels for current and fixed assets
C) determination of the firm’s financing needs for the period
D) estimation of projected sales and expenses
28) WSM Wine Importers, Inc. purchased 75,000 cases of French wine at a cost of
6,000,000 Euros. If the current exchange rate is 0.7576 Euros to the U.S. dollar, what is
the purchase price of the wine in U.S. dollars?
A) $9,684,148
B) $9,328,651
C) $8,350,012
D) $ 7,919,747
29) Which of the following goals of the firm are synonymous (equivalent) to the
maximization of shareholder wealth?
A) profit maximization
B) risk minimization
C) maximization of the total market value of the firm’s common stock
D) none of the above
30) Which of the following is the least liquid?
A) U.S. Treasury bills
B) commercial paper
C) money market mutual funds
D) federal agency securities
31) The slope of the characteristic line of a security is that security’s Beta.
32) A bond will sell at a premium (above par value) if
A) the market value of the bond is greater than the discount rate of the bond
B) investor’s current required rate of return is below the coupon rate of the bond
C) current market interest rates are moving in the same direction as bond values
D) the economy is in a recession
33) Interest costs for short-term debt are generally lower than interest costs for
long-term debt because
A) the term structure of interest rates generally reflects an upward sloping yield curve
B) short-term debt is more flexible, allowing a match of short-term needs with
short-term financing
C) both A and B
D) investors demand higher returns on short-term debt due to liquidity concerns
34) Your daughter is born today and you want her to be a millionaire by the time she is
35 years old. You open an investment account that promises to pay 12% per year. How
much money must you deposit each year, starting on her 1st birthday and ending on her
35th birthday, so your daughter will have $1,000,000 by her 35th birthday?
A) $2,317
B) $3,455
C) $5,777
D) $9,450
35) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects
its credit sales 30% in the month of sale, 60% one month after the sale, and 10% two
months after the sale.
Cash SalesCredit Sales
January$50,000$50,000
February$70,000$110,000
March$55,000$95,000
April$78,000$130,000
May$80,000$105,000
June$75,000$148,000
What are Matterhorn’s total cash receipts for the month of June?
A) $120,400
B) $147,000
C) $195,400
D) $213,000
36) Using the dividend valuation method, an analyst determines the value of Company
A’s stock to be $10 and the value of Company B’s stock to be $14. Based on this
information, which of the following statements is most accurate?
A) Company B must be riskier than Company A, and risk requires a reward
B) Other things being equal, if Company A and Company B have the same firm value,
Company B must have more debt, thus leveraging its returns for the benefit of
shareholders
C) Other things being equal, if Company A and Company B have the same firm value,
Company A may have more shares of stock outstanding than Company B
D) Company B’s required rate of return is higher than Company A’s required return
37) The primary goal of a publicly owned corporation is to ________.
A) maximize dividends per share
B) maximize shareholder wealth
C) maximize earnings per share after taxes
D) minimize shareholder risk
38) Discretionary financing needs will be lower if ________. Assume “all else equal.”
A) the dividend payout ratio is raised
B) the firm’s net profit margin increases
C) sales increase
D) fixed assets are currently at full capacity
39) The interest on corporate bonds is typically paid
A) semiannually
B) annually
C) quarterly
D) monthly
40) If you hold a portfolio made up of the following stocks:
Investment ValueBeta
Stock X$4,0001.5
Stock Y$5,0001.0
Stock Z$1,000.5
What is the beta of the portfolio?
A) 1.33
B) 1.24
C) 1.15
D) 1.00
41) A major corporation is considering a capital budgeting project that involves the
development of a new technology. The controller estimates the net present value to be
negative, yet argues that the company should invest in the project. Which of the
following statements is MOST correct?
A) The controller should be fired for making such a poor decision
B) The controller may be considering the option to expand or modify the project in the
future
C) The profitability index may be greater than one, giving an accept decision
D) Capital rationing may exist for the current year
42) You are a retired worker whose income is derived from your company pension plan
and social security. However, you are highly dependent upon the income generated
from your 401(k) plan, which is heavily weighted in stocks that pay substantial
dividends. Which of the following dividend policies would you prefer?
A) constant dividend payment ratio
B) stable dollar dividend per share
C) small, regular dividend plus a year-end extra
D) any of the above would be equally desirable
43) Kinard’s Kennels Inc. ROE is 20%. Their dividend payout ratio is 70%. The last
dividend, just paid, was $2.00. If dividends are expected to grow by the company’s
internal growth rate indefinitely, what is the current value of Kinard’s common stock if
its required return is 18%?
A) $17.67
B) $16.89
C) $14.92
D) $11.52
44) Current assets would usually NOT include
A) plant and equipment
B) marketable securities
C) accounts receivable
D) inventories
45) For a retailer with inventory to sell, the acid-test ratio will be
A) less than the current ratio, thus providing a more stringent measure of liquidity
B) greater than the current ratio, thus providing a more stringent measure of liquidity
C) greater than the current ratio, thus providing a less stringent measure of liquidity
D) unimportant because it doesn’t include inventory
46) A company trying to optimize the use of float will try to
A) increase its disbursing float
B) decrease its disbursing float
C) decrease processing float
D) Both A and C
47) Which of the following forms of organizations have earnings that are taxed twice,
once as business income and once as personal income as the earnings are distributed to
the owners in the form of dividends?
A) corporations
B) general partnerships
C) limited partnerships
D) both A and C
48) Fixed assets are often estimated incorrectly by the percent of sales method because
A) fixed assets remain constant and the percent of sales method assumes all assets
increase proportionally with sales
B) fixed asset are very expensive
C) fixed assets are typically purchased in “lumps” and therefore do not increase
proportionally with sales
D) fixed assets are part of the capital budgeting process
49) When a corporation designs an investment strategy for investing temporary excess
cash balances in marketable securities, it must consider a variety of factors. Which of
the following is the least important?
A) liquidity
B) financial risk
C) achieving the highest yield
D) maintaining the safety of principal
50) The risk-return trade-off in managing a firm’s working capital involves which of the
following?
A) a trade-off between liquidity and activity
B) a trade-off between debt and equity
C) a trade-off between the firm’s liquidity and its profitability
D) none of the above
51) Common-sized balance sheets
A) show data for companies in the same industry
B) show data for companies with approximately the same amount of assets
C) show each balance sheet account as a percentage of total sales
D) show each balance sheet account as a percentage of total assets
52) Assuming two investments have equal lives, a high discount rate tends to favor
A) the investment with large cash flow early
B) the investment with large cash flow late
C) the investment with even cash flow
D) neither investment since they have equal lives
53) Jackson Corp $1,000 par value bonds currently sell for $752.18. The coupon rate is
7 percent, paid semiannually. If the bonds have 6 years before maturity, what is the
yield to maturity on the bonds?
54) Gibson Industries is issuing a $1,000 par value bond with an 8% annual interest
coupon rate that matures in 11 years. Investors are willing to pay $972, and flotation
costs will be 9%. Gibson is in the 34% tax bracket. What will be the after-tax cost of
new debt for the bond?
55) The Dickerson PR Firm is considering two mutually exclusive projects with useful
lives of 3 and 6 years. The after-tax cash flows for projects S and L are listed below.
Calculate the equivalent annual annuity for each project assuming a required return of
15%. What decision should be made?
56) Given the rate information in the table below, estimate the nominal rate for a
AA-rated corporate bond. Assume a liquidity premium of 8 basis points. Identify as part
of your answer the inflation risk premium, the default risk premium, the maturity
premium, and the liquidity premium.
3-month T-bills2.0%
30-year Treasury Bonds 5.0%
AA-rated Corp. Bonds8.0%
Inflation Rate1.0%
57) One of the causes of the recent financial crisis in the United States has been
excessive risk taking due to underestimation of risk. How does this relate to financial
leverage? Can overestimation of risk also be detrimental?