1) Fixed assets are assets whose balances will remain the same throughout the year.
2) Lower asset turnover ratios are generally indicative of more efficient asset
management.
3) Other things equal, higher net profit margins mean higher discretionary financing
needed.
4) Bonds issued in a country different from the one in which the currency of the bond is
denominated are called Eurobonds.
5) In order to be conservative, accrual accounting requires that expenses be recorded
when incurred, but revenues are recorded only after the cash has been received.
6) Calculating the cost of capital for divisions within a company is not recommended
because the data is too fragmented and all divisions are part of the same company in
any case.
7) The common stock of a constant-growth firm is valued in the same manner as its
preferred stock.
8) Interest expenses are not included as incremental free cash flows because the cost of
funds is recognized as cash flows are discounted back to present value.
9) Each financial decision made by a corporate manager can be evaluated by its direct
impact on the corporation’s stock price.
10) Accrued taxes and salaries payable are both sources of spontaneous financing.
11) The hedging principle implies that permanent asset investments not financed by
spontaneous sources should be financed with permanent sources, and temporary
investments not financed by spontaneous sources should be financed with temporary
sources.
12) Financial markets exist in order to allocate savings in the economy to the
demanders of those savings.
13) A budget is a forecast of future events.
14) The present value of a single future sum of money is inversely related to both the
number of years until payment is received and the discount rate.
15) If the cash flows of an accepted investment project are negatively correlated with
the average cash flow of the firm’s existing assets, then the company’s total exposure to
risk can decrease.
16) One advantage of being listed on the NYSE is that all trades are made in an auction
setting with face-to-face trading between individuals on the floor of the stock exchange.
17) Corporations utilize external financing either because they do not have sufficient
earnings to reinvest or they want to rebalance their capital structures.
18) Liquidation value is of primary importance to investors because it represents the
TRUE amount of cash that an investor is likely to receive.
19) The viewpoint that high dividends increase stock values 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
20) Grainery Distillers, Inc. is experiencing high demand for its products and high
growth rates. The company just reported earnings per share of $5 for the most recent
year and has many positive NPV projects to fund. One vice president wants to pay a
dividend of $5 per share, arguing that this will maximize shareholder value. You argue
that a much smaller dividend will maximize value. Your argument may be based on
A) the bird-in-the-hand theory
B) the residual dividend theory
C) the information effect
D) the very high agency costs of the corporation
21) The New York Stock Exchange (NYSE) is
A) an automated electronic trading platform
B) an auction market with face-to-face trading on the floor of the stock exchange in
addition to automated, electronic trading
C) a hybrid market, allowing for face-to-face trading on the floor of the stock exchange
in addition to automated, electronic trading
D) primarily a futures market
22) The difference between the capital gains tax rate and the income tax rate is an
incentive for
A) firms never to split their stock
B) firms to declare more stock dividends
C) firms to pay more earnings as dividends
D) firms to retain more earnings
23) A lock-box system reduces
A) mail float
B) transit float
C) disbursing float
D) A and B
24) A corporation’s operating profit margin is equal to
A) net income divided by sales
B) EBIT divided by sales
C) EBIT divided by net income
D) sales divided by EBIT
25) Which of the following is NOT an important consideration in measuring risk for a
capital budgeting project for a well-diversified firm?
A) systematic risk
B) contribution to firm risk
C) total project risk
D) None of the aboveall may be important in measuring project risk
26) A company with a bond rating of BBB is more likely to have which of the following
qualities compared to a company with a bond rating of B?
A) greater reliance on equity financing
B) high variability in past earnings
C) little use of subordinated debt
D) small firm size
27) Examples of uses of cash include
A) paying cash dividends to stockholders
B) borrowing an additional amount using a secured loan
C) selling machinery
D) all of the above
28) When the intrinsic value of an asset exceeds the market value
A) the asset is undervalued to the investor
B) the asset is overvalued to the investor
C) market value and intrinsic value are always the same; therefore, this could not
happen
D) liquidation value must be higher than book value
29) An investor currently holds the following portfolio:
Amount
Invested
4,000 shares of Stock H$8,000Beta = 1.3
7,500 shares of Stock I$24,000Beta = 1.8
12,500 shares of Stock J$48,000Beta = 2.2
The beta for the portfolio is
A) 1.99
B) 1.77
C) 1.45
D) 1.27
30) The risk-free rate of interest is 4% and the market risk premium is 9%. Howard
Corporation has a beta of 2.0, and last year generated a return of 16% with a standard
deviation of returns of 27%. The required return on Howard Corporation stock is
A) 36%
B) 34%
C) 26%
D) 22%
31) Which of the following is TRUE regarding the correct price of the forward
contract?
A) If the quote is less than the computed price, the forward contract is undervalued
B) If the quote is greater than the computed price, the forward contract is overvalued
C) Both A and B
D) Neither A nor B
32) Which of the following statements is TRUE regarding convertible bonds?
A) The holder has the right to sell these bonds back to the issuer if the bonds don’t
perform well
B) The holder can convert these bonds into an equal number of new bonds if they
choose to do so
C) These bonds are convertible into common stock of the issuing firm at a prespecified
price
D) These bonds have a variable interest rate
33) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%. The equivalent annual annuity amount for project B,
rounded to the nearest dollar, is
A) $17,385
B) $20,936
C) $22,789
D) $26,551
34) An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely
to indicate that
A) the firm has higher sales than the industry average
B) the firm is selling a product mix that includes more high margin items
C) the firm is managing its inventory inefficiently
D) the firm’s products are in inventory for fewer days before they are sold than is
average for the industry
35) Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $4). The
dividend is expected to grow at a constant rate of 8% per year. The price of Sentry
Manufacturing’s stock today is $29 per share. If Sentry Manufacturing decides to issue
new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing’s
marginal tax rate is 35%. Based on the above information, the cost of new common
stock is
A) 28.38%
B) 24.12%
C) 26.62%
D) 31.40%
36) Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years.
Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years. If
interest rates go down, then
A) the value of Andre’s bond will decrease and the value of Ruth’s bond will increase
B) the value of both bonds will increase
C) the value of Ruth’s bond will decrease more than the value of Andre’s bond due to
the longer time to maturity
D) the value of both bonds will remain the same because they were both purchased in
an earlier time period before the interest rate changed
37) RBW Corp. has cash of $48,000; short-term notes payable of $35,000, accounts
receivable of $100,000; accounts payable of $120,000; inventories of $200,000; and
accruals of $90,000. What is RBW’s current ratio?
A) 1.57
B) 2.71
C) 1.42
D) 0.64
38) Which of the following categories of owners have unlimited liability?
A) general partners in a limited partnership
B) sole proprietors
C) shareholders of a corporation
D) both A and B
39) If the exchange rate quotes in two different countries were out of line with each
other, an enterprising trader could make a profit by buying in the market where the
currency was cheaper and simultaneously selling it in the market where the currency
was more expensive. Such a person would be known as a
A) spot trader
B) arbitrageur
C) cross trader
D) capitalist
40) The term “lumpy asset” means
A) the same thing as assets that exhibit scale economies
B) assets that can be purchased in incremental units
C) assets that have economies of scale but not economies of scope
D) assets that must be purchased in discrete quantities
41) In capital budgeting analysis, when computing the weighted average cost of capital,
the CAPM approach is typically used to find which of the following?
A) market value weight of equity
B) pretax component cost of debt
C) after-tax component cost of debt
D) component cost of internal equity
42) Your grandparents deposit $2,000 each year on your birthday, starting the day you
are born, in an account that pays 7% interest compounded annually. How much will you
have in the account on your 21st birthday, just after your grandparents make their
deposit?
A) $101,802
B) $98,016
C) $86,058
D) $79,640
43) The income statement for Simpson, Inc. indicates that tax expense was $30,000.
The balance sheet indicates that taxes payable for the same year increased by $5,000.
What amount did Simpson, Inc. actually pay in taxes during this year?
A) $15,000
B) $20,000
C) $25,000
D) Cannot be determined without the cash balance
44) Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $4). The
dividend is expected to grow at a constant rate of 8% per year. The price of Sentry
Manufacturing’s stock today is $29 per share. If Sentry Manufacturing decides to issue
new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing’s
marginal tax rate is 35%. Based on the above information, the cost of retained earnings
is
A) 28.38%
B) 24.12%
C) 26.62%
D) 31.40%