Loans are said to be self-liquidating if the project the funds support automatically
generates the cash to repay the loan.
The traditional income statement is intended to measure profits by identifying cash
flows in and out of the firm over an accounting period.
The corporate tax table seems dissimilar to individual tax tables in that corporate rates
are not always increased as income increases.
An annuity is a finite stream of equal payments occurring at regular or irregular time
intervals
Mergers are accomplished only with the approval of the acquired firm’s management.
A major responsibility of the financial analyst is to ensure that only reasonable cash
flow estimates are used in capital budgeting.
In the calculation of a firm’s cost of capital, the component cost of debt is expressed on
a pre-tax basis.
In a vertical merger or combination, the firms involved are in supplier-customer
relationships.
Subjective benefits are based on opinions and can be easily quantified without any kind
of biases.
The optimum credit policy is one at which the incremental profits and expenses
connected with a policy change exactly offset each other.
As is true of financial investments, the cash flow patterns on different capital budgeting
projects tend to be very similar.
A large manufacturer needs a $100,000 loan to finance inventory. It can open a line of
credit with a local bank at a 13 percent interest rate. However, it must also maintain a
10 percent minimum compensating balance. The effective interest rate on the loan is:
A.13 percent.
B.13.13 percent.
C.14.44 percent.
D.23 percent.
It is important to understand that business-specific (unsystematic) risk is not included in
the capital asset pricing model, because beta measures only market (systematic) risk.
The underlying assumption is that:
A.we don’t need to worry about business-specific risk in portfolios because it’s
diversified away.
B.we can’t measure business-specific risk so it’s useless to worry about it.
C.business-specific risk is usually small compared with market risk.
D.All of the above
A perpetuity is a stream of:
A.regular payments that go on forever.
B.irregular payments for a period of time.
C.payments for their present value.
D.payments tomorrow.
Sentry Oil Inc. is considering two mutually exclusive projects as follows:
Sentry’s a cost of capital is 14%. It can spend no more than $350,000 on capital projects
this year, which of the following statements is applicable when evaluating the projects
by the NPV method?
A.Both projects add shareholder wealth and should be undertaken.
B.Project B appears to add more shareholder wealth than project A and should be done.
C.Project A appears to add more shareholder wealth than project B and should be done.
D.Project B should be undertaken because it requires a smaller investment.
Which of the following is true of a congeneric merger?
A.The combining companies sell the same product or service.
B.The merger is likely to improve the acquirer’s competitive position.
C.The combining companies are in completely different industries.
D.The level of competition in the acquirer’s industry is drastically reduced.
The coupon payment is determined by:
A.the coupon rate applied to the future value.
B.the coupon rate applied to the face value, generally divided by 2 for semiannual
compounding.
C.the bond€s yield and its term.
D.the market rate applied to the face value of the bond.
A firm has projected next year’s sales at $678 million of which 60 percent will be for
cash, and 40 percent will be on credit. Forecast the year-end accounts receivable
balance if the firm expects an average collection period of 45 days (assume a 360-day
year and calculate using year-end balance).
A.$9.0 million.
B.$13.6 million.
C.$22.6 million.
D.$33.9 million.
Which of the following is true of the sustainable growth rate concept?
A.It is an empirical measure of a firm€s strength.
B.It assumes that the financial ratios change at a constant rate.
C.It assumes that the firm doesn€t raise any new equity by selling stock.
D.It is the growth in assets created by additional external funding.
An insurance company offers you an end of year annuity of $48,000 per year for the
next 20 years. They claim your return on the annuity is 9 percent. What should you be
willing to pay today for this annuity?
A.$429,600
B.$438,144
C.$408,672
D.None of the above
The Eurodollar Market consists of:
A.European businesses purchasing US dollars in foreign exchange markets located in
Europe.
B.American banks lending US dollars to European businesses or governments.
C.US banks lending deposits of US dollars to international companies and foreign
governments.
D.Foreign banks lending deposits of US dollars to international companies and foreign
governments.
Which of the following best describes the reinvestment assumptions implicit in the
internal rate of return (IRR) method and the net present value (NPV) method?
A.Both NPV and IRR assume cash flows are reinvested at the cost of capital.
B.NPV assumes cash flows are reinvested at the cost of capital, while IRR assumes
reinvestment at the IRR.
C.IRR assumes cash flows are reinvested at the cost of capital, while NPV assumes
reinvestment at the IRR.
D.Both NPV and IRR assume cash flows are reinvested at the IRR.
E.None of the above describes the reinvestment assumptions used by NPV and IRR.
How much must be invested today to have $1,000 in two years if the interest rate is
5%?
A.$909.09
B.$900.00
C.$907.00
D.$950.00
Why are bond ratings so important to companies?
A firm is planning to increase its inventory turnover by 1.5 turns next year. This year’s
inventory is $40M on revenues of $850M. Revenues are planned to grow at 10% next
year. The firm’s cost ratio (COGS as a percent of sales) is 40%, and is not expected to
change in the near future. Calculate the inventory figure that should be included in next
year’s plan. Calculate using the cost of goods sold (COGS) formulation of inventory
turnover and using year-end balances only.
Explain marketable securities. How are they useful to companies?
The New York Pasta Company invested $8.5 million in a new plant in Mexico when the
exchange rate was 8 pesos to the dollar. At the end of the year, the rate was 9.5 pesos to
the dollar. What was the exchange rate gain or loss at year end? What kind of exchange
rate gain or loss was it? What was the tax impact if New York’s marginal tax rate is
40%?
The SML represents a state of stable equilibrium at which expected and required returns
are at least equal. Suppose a stock is displaced so that its expected return is below its
required return. Describe the market forces that tend to push the returns back together.
You have the option of purchasing a $1,000, 6% coupon bond with interest payable
semiannually and a remaining term of 10 years, or an annually compounded $1,000,
zero coupon bond with a remaining term of 10 years. The nominal market yield is 8%
for both bonds, what would you pay for each bond ($1,000 face value)?
You have the option of purchasing a $1,000, 6% coupon bond with interest payable
semiannually and a remaining term of 10 years for $900, or a $1,000 zero coupon bond
with a remaining term of 10 years for $500. Interest on the zero is also compounded
semiannually. Which bond should you buy? Why?
When retained earnings are exhausted, the MCC breaks upward. What happens if the
firm continues to raise capital after that? Does the MCC remain flat or move further
upward? In either case, why?