1) Beginning in 2007 the United States experienced its most severe financial crisis since
the
Great Depression of the 1930s.
2) Lockbox arrangements may reduce mail float, processing float, and transit float.
3) Expected dividends and share repurchases are the cash flow that underlies stock
valuation.
4) One advantage of zero balance accounts is an increase in disbursing float.
5) If preferred stock pays a $5 annual dividend and sells for $50 the cost of preferred
stock financing is 10% since dividends are not tax deductible and preferred stock is sold
without flotation costs.
6) If a firm’s tax rate increases then its weighted average cost of capital increases also.
7) The tax shield on interest is calculated by multiplying the interest rate paid on debt
by the principal amount of the debt and the firm’s marginal tax rate.
8) The profitability index can be helpful when a financial manager encounters a
situation where capital rationing is required.
9) Discretionary financing needed (DFN) is equal to projected total assets minus
projected total liabilities minus projected owners’ equity.
10) For a typical firm expecting higher sales, external financing needed will be greater
than discretionary financing needed.
11) The expected yield on junk bonds is higher than the yield on AAA-rated bonds
because of the higher default risk associated with junk bonds.
12) Working capital refers to investment in current assets, while net working capital is
the difference between current assets and current liabilities.
13) Lower asset turnover ratios are generally indicative of more efficient asset
management.
14) In the percent of sales method, a company’s asset requirements are based on the
company’s projected sales level.
15) Minimum levels of inventory and accounts receivable that will be maintained
throughout the year are current assets, and therefore considered temporary investments.
16) One example of the hedging principle is to reduce a company’s foreign exchange
risk by purchasing futures contracts, which are called hedges.
17) Marketable securities are only those security investments the firm can convert into
cash balances within one year.
18) The information effect hypothesis implies that increasing dividends provides a more
credible signal of higher future earnings than does management’s assertion that future
earnings will be higher.
19) Synergistic benefits from an investment project include cannibalism.
20) The expected return on a riskless asset is greater than zero due to
A) an expected return for delaying consumption
B) an expected return for opportunity costs
C) an expected return for taxes
D) irrational investors who believe risk is always present
21) Which of the following statements concerning preferred stock is MOST correct?
A) Preferred stock is valued the same as zero coupon bonds because the cash flow
patterns are similar
B) If a corporation issues 4% preferred stock with a par value of $100, the dividend will
increase by 4% per year
C) Preferred stock dividends are typically the same each year, allowing a preferred
stock to be valued as a perpetuity
D) Preferred stock dividends are calculated as a percentage of common stock dividends,
although the preferred stock dividends must be paid first
22) Johnson Production Company paid a dividend yesterday of $3.50 per share. The
dividend is expected to grow at a constant rate of 10% per year. The price of KayCee’s
common stock today is $40 per share. If KayCee decides to issue new common stock,
flotation costs will equal $4.00 per share. KayCee’s marginal tax rate is 35%. Based on
the above information, the cost of new common stock is
A) 26.41%
B) 20.09%
C) 19.63%
D) 17.55%
23) Whistle Corp. has a preferred stock that pays a dividend of $2.40. If you are willing
to purchase the stock at $11, what is your required rate of return (round your answer to
the nearest .1% and assume that there are no transaction costs)?
A) 21.8%
B) 11.0%
C) 9.1%
D) 20.1%
24) Stock W has an expected return of 12% with a standard deviation of 8%. If returns
are normally distributed, then approximately two-thirds of the time the return on stock
W will be
A) between 12% and 20%
B) between 8% and 12%
C) between -4% and 28%
D) between 4% and 20%
25) Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new
ships. The bonds pay 4.85% interest, semiannually. Today’s required rate of return is
9.7%. How much should these bonds sell for today? Round off to the nearest $1.
A) $771.86
B) $732.93
C) $660.45
D) $598.33
26) A company calculates its discretionary financing needed and determines this
amount of capital cannot be raised at a reasonable cost. Which of the following would
reduce the amount of discretionary financing needed?
A) reduce the company’s net profit margin
B) reduce the company’s sales growth rate
C) increase the company’s dividend payout ratio
D) increase the proportion of the company’s sales that are made on credit
27) Under what condition would you NOT accept a project that has a positive net
present value?
A) If the project has a profitability index less than zero
B) If two or more projects are mutually inclusive
C) If the firm is limited in the capital it has available (capital rationing)
D) If a project has more than one sign reversal
28) Assuming no corporate taxes, the independence hypothesis suggests that a firm’s
weighted average cost of capital will
A) remain constant regardless of capital structure because the cost of debt and the cost
of equity are the same
B) remain constant because the cost of equity will be increasing as the amount of debt
increases due to the increased risk
C) increase proportionally with the increase in the amount of debt a firm uses
D) decrease proportionally with the increase in the amount of debt a firm uses
29) A firm that uses large amounts of debt financing in an industry characterized by a
high degree of business risk would have ________ earnings per share fluctuations
resulting from changes in levels of sales.
A) no
B) constant
C) large
D) small
30) Backford Company just paid a dividend yesterday of $2.25 per share. The
company’s stock is currently selling for $60 per share, and the required rate of return on
Backford Company stock is 16%. What is the growth rate expected for Backford
Company dividends assuming constant growth?
A) 9.47%
B) 9.89%
C) 10.87%
D) 11.81%
31) Beaver Corp preferred stock has a market price of $14.50. If it has a yearly
dividend of $3.50, what is your expected rate of return if you purchase the stock at its
market price?
A) 41.43%
B) 19.45%
C) 22.36%
D) 24.14%
32) A wealthy private investor providing a direct transfer of funds is called
A) a venture capitalist
B) an investment banker
C) a financial intermediary
D) an angel investor
33) Operating leverage refers to
A) financing a portion of the firm’s assets with securities bearing a fixed rate of return
B) the additional chance of insolvency borne by the common shareholder
C) the incurrence of fixed operating costs in the firm’s income stream
D) a high degree of variable costs of production
34) Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ’s
closing price on Monday is $20 per share. After the market closes on Monday, XYZ
makes a surprise announcement that it has obtained a major new customer. XYZ’s stock
will likely
A) open at $20 per share on Tuesday and then increase as more investors read the
announcement in the Wall Street Journal
B) remain at $20 per share because in efficient markets the price already reflects all
information
C) open above $20 because the positive news will result in a higher valuation even
though the stock has not yet traded
D) open below $20 because the surprise announcement creates more uncertainty
35) Which of the following accounts belongs on the asset side of a balance sheet?
A) depreciation expense
B) accounts payable
C) inventory
D) accruals
36) Assume that you have $100,000 invested in a stock whose beta is .85, $200,000
invested in a stock whose beta is 1.05, and $300,000 invested in a stock whose beta is
1.25. What is the beta of your portfolio?
A) 0.97
B) 1.02
C) 1.12
D) 1.21
37) The present value of $1,000 to be received in 5 years is ________ if the discount
rate is 12.78%.
A) $368
B) $494
C) $548
D) $687
38) Trevor Co.’s future earnings for the next four years are predicted below. Assuming
there are 500,000 shares outstanding, what will the yearly dividend per share be if the
dividend policy is
Trevor & Co.
1 $ 900,000
2 1,200,000
3 850,000
4 1,350,000
a.a constant payout ratio of 40%
b.stable dollar dividend targeted at 40% of the average earnings over the four-year
period
c.small, regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding
$1,000,000
39) Spontaneous sources of financing include
A) accounts payable and accrued expenses
B) notes payable and mortgages payable
C) long-term debt and capital leases
D) common stock and paid-in capital
40) Which of the following would normally occur if a firm increases its investment in
current assets?
A) The firm’s liquidity would be improved
B) The firm’s net working capital would decline
C) The firm’s liquidity would be worsened
D) The firm’s profit margin would improve
41) You discover an antique in your attic that you purchased at an estate sale 10 years
ago for $400. You auction it on eBay and receive $8,000 for your item. What annual
rate of return did you earn?
A) 200.00%
B) 34.93%
C) 30.47%
D) 20.00%
42) The viewpoint that low dividends increase stock value is based on which of the
following principles?
A) time value of money
B) risk-return trade-off
C) taxes bias business decisions
D) the agency problem
43) Which of the following is most likely to be a temporary source of financing?
A) commercial paper
B) preferred stock
C) long-term debt
D) common stock
44) DAS, Inc. declared a $0.50 per share dividend on June 1. The date of record is June
20th, the ex-dividend date is June 18th, and the payment date is June 31st. Andre owns
a share of stock on June 1. Andre sells his share to Brett on June 19th, and Brett sells
the share to LaMarcus on June 29th. Who will receive the dividend?
A) Andre
B) Brett
C) LaMarcus
D) no one, since the share was not owned consistently by one person over the period
45) New Jet Airlines plans to issue 14-year bonds with a par value of $1,000 that will
pay $60 every six months. The bonds have a market price of $1,220. Flotation costs on
new debt will be 4% of the selling price. If the firm has a 35% marginal tax bracket,
compute the following:
a.Yield to maturity of debt
b.After-tax cost of existing debt
c.After-tax cost of new debt
46) Total float consists of each of the following elements EXCEPT
A) mail float
B) processing float
C) transit float
D) audit float
47) Which of the following ratios would be the most useful to assess the risk associated
with a firm being able to pay off its short-term line of credit?
A) return on equity
B) the acid test ratio
C) the operating profit margin
D) the fixed asset turnover
48) Your company has received a $50,000 loan from an industrial finance company. The
annual payments are $6,202.70. If the company is paying 9 percent interest per year,
how many loan payments must the company make?
A) 15
B) 13
C) 12
D) 19
49) Cash and credit management are typically the responsibility of the
A) controller
B) vice president of production and operations
C) chief executive officer, or CEO
D) treasurer
50) Assume that liquid funds can be invested to yield 4.5 percent. If annual remittance
checks total $2 billion, what is it worth for the firm to reduce float by 1 day?
A) $388,349
B) $246,575
C) $257,534
D) $24,658
51) QRW Corp. needs to replace an old lathe with a new, more efficient model. The old
lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.
(The old machine is being depreciated on a straight-line basis over a ten-year useful
life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new
lathe to the factory and get it installed. The old machine will be sold as scrap metal for
$2,000. The new machine is also being depreciated on a straight-line basis over ten
years. Sales are expected to increase by $8,000 per year while operating expenses are
expected to decrease by $12,000 per year. QRW’s marginal tax rate is 40%. Additional
working capital of $3,000 is required to maintain the new machine and higher sales
level. The new lathe is expected to be sold for $5,000 at the end of the project’s ten-year
life. What is the incremental free cash flow during year 1 of the project?
A) $12,800
B) $14,400
C) $11,400
D) $15,200
52) The objectives of a zero balance account system for the firm include
A) reduce disbursing float
B) achieve better control over its cash payments
C) increase cash balances in regional rather than national banks
D) all of the above are correct
53) An investor currently holds the following portfolio:
Amount
Invested
8,000 shares of Stock A$16,000Beta = 1.3
15,000 shares of Stock B$48,000Beta = 1.8
25,000 shares of Stock C$96,000Beta = 2.2
The investor is worried that the beta of his portfolio is too high, so he wants to sell
some stock C and add stock D, which has a beta of 1.0, to his portfolio. If the investor
wants his portfolio to have a beta of 1.72, how much stock C must he replace with stock
D?
A) $18,000
B) $24,000
C) $31,000
D) $36,000
54) Nogrowth Corporation expects their dividend to stay at $0.50 per share each year
into the foreseeable future. Therefore
A) the stock will be valued at $0.50 times the number of years an investor plans to keep
it
B) the value of the stock can be estimated as $0.50 divided by an investor’s required
rate of return
C) the value of the stock can not be determined using the dividend valuation model
because the growth rate is zero
D) the value of the stock is positive only if the required return is negative
55) Which of the following parity conditions is (are) correct?
A) The interest-rate parity theory states that the forward premium/discount should be
equal and opposite in size to the national interest rate differential
B) The purchasing-power parity theory states that in the long run exchange rate changes
tend to reflect international differences in inflation rates
C) The international Fisher effect states that national interest rate differentials are the
result of inflation differentials
D) All of the above are correct
56) Which of the following is NOT a valid theory that attempts to explain the shape of
the term structure of interest rates?
A) the unbiased expectations theory
B) the liquidity preference theory
C) the market segmentation theory
D) the Fisher Effect theory