1) A firm has sales of $5 million, average total assets of $1.6 million, average fixed
assets of $1 million, and average current liabilities of $300,000. Given this information,
answer the following about the firm’s efficiency:
a. Calculate asset turnover, fixed asset turnover, and NWC turnover ratios.
b. Can the fixed asset turnover be considered appropriate and yet the total asset turnover
be considered low by industry standards? How?
c. What in general might improve NWC turnover?
2) For purposes of computing the WACC, if the book value of equity exceeds the
market value of equity, then:
A.the book value of equity should be used
B.the book value of equity less retained earnings should be used
C.the market value of equity should be used
D.the market value of equity less retained earnings should be used
3) Which of the following is not a method of changing the management of a firm?
A.Proxy contest
B.Merger and acquisition
C.LBO
D.MBO
4) What should be the beta of a replacement stock if an investor wishes to achieve a
portfolio beta of 1.0 by replacing stock C in the following equally weighted portfolio:
stock A = .9 beta; stock B = 1.1 beta; stock C = 1.35 beta?
A..93 beta
B.1.00 beta
C.1.08 beta
D.1.15 beta
5) Increases in sales are typically accompanied by:
A.more than proportionate increases in fixed assets
B.less than proportionate decreases in debt
C.more than proportionate decreases in dividends
D.less than proportionate increases in working capital
6) Ignoring taxes, a firm’s weighted-average cost of capital is equal to:
A.its expected return on assets
B.its expected return on equity
C.the sum of expected return on equity and expected return on debt
D.its expected return on assets times the debt-equity ratio
7) What will happen to a stock that offers a lower risk premium than predicted by the
CAPM?
A.Its beta will increase
B.Its beta will decrease
C.Its price will decrease until yield is increased
D.Its price will increase until the yield is reduced
8) What is the equivalent annual cost for a project that requires a $40,000 investment at
time-period zero, and a $10,000 annual expense during each of the next 4 years, if the
opportunity cost of capital is 10%?
A.$20,000.00
B.$21,356.95
C.$22,618.83
D.$25,237.66
9) A stock is held one year, during which time its dividend yield was greater than its
capital gains yield. For this stock, the percentage return:
A.is zero
B.is negative
C.equals the dividend yield
D.cannot be determined
10) The set of rules that determines whether or not to extend credit is known as:
A.credit analysis
B.credit policy
C.multiple discriminate analysis
D.the terms of trade credit
11) If prices in the United States rise less rapidly than in Canada, which of the
following would be expected according to purchasing power parity?
A.The value of the Canadian dollar will decline, relative to the U.S. dollar
B.The value of the U.S. dollar will decline, relative to the Canadian dollar
C.Inflation will increase in Canada
D.The price of gold will decline
12) With risky debt and MM II, the expected return on assets _____ as the debt-equity
ratio ____.
A.increases; increases
B.decreases; increases
C.increases; decreases
D.is constant; increases
13) For U.S. firms, what source of capital is used the least?
A.Debt issues
B.Internal funds
C.Net equity issues
D.Bond issues
14) How much will accumulate in an account with an initial deposit of $100, and which
earns 10% interest compounded quarterly for 3 years?
A.$107.69
B.$133.10
C.$149
D.$313.84
15) If the owner of a call option with a strike price of $35 finds the stock to be trading
for $42 at expiration, then the option:
A.expires worthless
B.will not be exercised
C.is worth $7 per share
D.cost too much initially
16) The use of debt in the firm’s capital structure will increase ROE if the firm:
A.has more debt than equity
B.pays less in taxes than in interest
C.earns a higher return than the rate paid on debt
D.has a times interest earned greater than 1.0
17) A firm has $1 million in current sales volume and an internal growth rate of 15%. If
sales are expected to increase by $100,000, then:
A.the firm’s forecast will not be met
B.dividends will have to be reduced
C.retained earnings will increase by $50,000
D.external funding will not be required
18) A copper producer is worried about the copper prices going down. The risk of
downward movement in prices can be hedged by:
A.buying call options on copper
B.selling copper futures
C.buying copper futures
D.selling copper call options
19) The project cost of capital is:
A.equal to the company cost of capital
B.less than the company cost of capital
C.greater than the company cost of capital
D.not necessarily related to the company cost of capital
20) What is the maximum gain after two coin tosses for a person who starts with $1 if
the occurrence of a head produces a 50% gain while the occurrence of a tail produces a
50% loss?
A.$1.00
B.$1.25
C.$1.75
D.$2.25
21) The spot exchange rate of British pound(£) is $1.6000/£. The annual inflation rate
in US$ is 4% and 8% in the United Kingdom. What will be the anticipated exchange
rate at the end of the year if PPP is valid?
A.$1.5407/£
B.$1.6466/£
C.$1.6000/£
D.$1.6480/£
22) A company with bond debt of 80, lease obligations of 20, total assets of 1,000, and
total liabilities of 350 has a:
A.total debt ratio of approximately .10
B.total debt ratio of approximately .23
C.long-term debt ratio of approximately .15
D.debt-to-equity ratio of approximately .15
23) What proportion of a firm is equity financed if the WACC is 14%, the before-tax
cost of debt is 10.77%, the tax rate is 35%, and the required return on equity is 18%?
A.54.00%
B.63.64%
C.70.26%
D.77.78%
24) An analyst who relies on past cycles of stock pricing to make investment decisions
is:
A.performing fundamental analysis
B.relying on strong-form market efficiency
C.assuming that the market is not weak-form efficient
D.relying on the random walk of stock prices
25) Which of the following is not typically included among the three major components
of a financial planning model?
A.Inputs: current financial statements, forecasts of key variables
B.Planning model: equations specifying key relationships
C.Outputs: pro formas, financial ratios, sources and uses of cash
D.Intuitions: common sense, guesses
26) One continuing problem with managerial incentive compensation plans is that:
A.the plans increase agency problems
B.managers prefer guaranteed salaries
C.their effectiveness is difficult to evaluate
D.the plans do not reward shareholders
27) Which of the following statements is correct for a 10% coupon bond that has a
current yield of 7%?
A.The face value of the bond has decreased
B.The bond’s maturity value exceeds the bond’s price
C.The bond’s internal rate of return is 7%
D.The bond’s maturity value is lower than the bond’s price
28) What is the minimum nominal rate of return that you should accept if you require a
4% real rate of return and the rate of inflation is expected to average 3.5% during the
investment period?
A.7.36%
B.7.50%
C.7.64%
D.8.01%
29) If the opportunity cost of capital for a project exceeds the project’s IRR, then the
project has a(n):
A.positive NPV
B.negative NPV
C.acceptable payback period
D.positive profitability index
30) What is the required return for a stock that has a 6% constant-growth rate, a price of
$25, an expected dividend of $2, and a P/E ratio of 10?
A.5%
B.10%
C.14%
D.22%
31) Show the capital accounts at the end of the first year of operation for a firm that, at
the beginning of the year, issued 50,000 shares of $1.50 par value common stock for
$15 per share, repurchased 5,000 shares during the year at $20 per share, and paid out
(at the end of the year) 40% of earnings as dividends with a 50 cent per share dividend.
32) What are catastrophe (or Cat) bonds?
33) Provide at least three examples each of real and financial assets that might appear
on the balance sheet of General Motors.
34) In 2004 there was widespread dismay as the price of unleaded gasoline climbed to
$2.03 a gallon. Motorists looked back longingly to 20 years earlier when they were
paying just $1.19 a gallon. But how much had the real price of gasoline changed over
this period, if the consumer price index was 1.81 times itself in 1984?
35) Determine the current yield, yield to maturity, and price of the following bond as of
the date of purchase and on each anniversary date of its purchase until maturity: 3-year
bond with a 12% coupon and a purchase price of $1,100.
36) Discuss decision trees, including how they can be useful and how they can be risky.
37) Discuss the potential agency issue with managers’ issuance of new equity.
38) How do corporations ensure that managers’ and stockholders’ interests coincide?
39) Discuss the concept of dividend signaling.
40) What are the four main ways to implement stock repurchase?