The positive incremental net gain associated with the combination of two firms through
a merger or acquisition is called:
A. the agency conflict.
B. goodwill.
C. the merger cost.
D. the consolidation effect.
E. synergy.
Answer:
The basic assumption of the ABC approach to inventory management is that:
A. inventory should be divided dependent on the type of cash or credit sale anticipated.
B. most items are ordered, stocked, and sold in a relatively short period of time.
C. firms should receive A customer’s order Before incurring inventory Costs.
D. a small portion of inventory represents a large portion of inventory costs.
E. firms should Always Be Consistent in the amount of inventory ordered.
Answer:
Gonzalez Mercantile has an inventory turnover of 8.3, days’ sales in receivables of 57,
and an average payables turnover of 7.2. What is the cash cycle given a 365-day year?
A. 50.28 days
B. 58.04 days
C. 55.00 days
D. 49.29 days
E. 61.37 days
Answer:
The APV method is least useful in which one of these situations?
A. leveraged buyout
B. project involving interest subsidies
C. project based on a target debt-to-value ratio
D. project with flotation costs
E. lease-versus-purchase decision
Answer:
A branching tree depicting the binomial model of a projected investment:
A. should capture all possible futures paths the investment could take.
B. will have more up-branches than down-branches if there are two or more time
intervals.
C. can only have one final point that has an option value of zero.
D. only depicts paths that will lead to acceptable project decisions.
E. should lead to the same result if you take an up-branch followed by a down-branch
or a down-branch followed by an up-branch.
Answer:
Looper Industries has 400,000 shares of stock outstanding with a market price of $32 a
share. The firm also has 10,000 bonds outstanding with a face value of $1,000 and a
conversion price of $40. The bonds mature tomorrow. You currently own 25,000 shares
of this stock and no bonds. What percent ownership in the firm should you expect to
have after tomorrow? A. 3.52%
A. 3.85%
B. 4.25%
C. ANSD. 6.25%
D. 3.13%
Answer:
A change in dividend policy does not affect the value of a share of stock as long as:
A. the dividend payout ratio remains constant.
B. the following dividends are changed by the same amount.
C. all of the distributable cash flow is paid out.
D. there is an offsetting change in stock repurchases.
E. shareholders are given ample warning.
Answer:
Sisler’s sells 382,000 units a year and orders 10,000 units at a time. The cost of placing
an order is $24.90. What is the firm’s annual total restocking cost?
A. $909.09
B. $984.23
C. $951.18
D. $1,023.02
E. $811.19
Answer:
Hu’s has 25,000 shares of common stock outstanding with a beta of 1.4, a market price
of $32 a share, and a dividend yield of 5.7 percent. Dividends increase by 4.2 percent
annually. The firm also has $450,000 of debt outstanding that is selling at 102 percent
of par that has a yield to maturity of 6.8 percent. The tax rate is 35 percent. The firm is
considering a project that has the same risk level as the firm’s current operations, an
initial cost of $328,000 and cash inflows of $52,500, $155,000, and $225,000 for Years
1 to 3, respectively. What is the NPV of the project?
A. $48,515
B. $61,492
C. $46,511
D. $57,006
E. $32,899
Answer:
The length of time required for a project’s discounted cash flows to equal the initial cost
of the project is called the:
A. net present value.
B. discounted net present value.
C. payback period.
D. discounted profitability index.
E. discounted payback period.
Answer:
Wilson’s Antiques is considering a project with an initial cost today of $10,000. The
project has a 2-year life with cash inflows of $6,500 a year. Should Wilson’s decide to
wait one year to commence this project, the initial cost will increase by 5 percent, and
the cash inflows will increase to $7,500 a year. What is the value of the option to wait if
the applicable discount rate is 10 percent?
A. $1,006.76
B. $1,235.54
C. $1,509.28
D. $1,606.76
E. $1,735.54
Answer:
The range of possible correlations between two securities is defined as:
A. 0 to +1.
B. 0 to”1.
C. 0.≧
D. 1.≦
E. +1 to “1.
Answer:
The beta of a security is calculated by dividing the:
A. covariance of the security return with the market return by the variance of the
market.
B. correlation of the security return with the market return by the variance of the
market.
C. variance of the market by the covariance of the security return with the market
return.
D. variance of the market return by the correlation of the security return with the market
return.
E. covariance of the security return with the market return by the correlation of the
security and market returns.
Answer:
Determining the appropriate cash balance involves assessing the trade-off between:
A. income and diversification.
B. the benefits and costs of liquidity.
C. balance sheet strength and transaction needs.
D. short-term and long-term investment returns.
E. cash needs and cash preferences.
Answer:
A corporate bond is currently quoted at 101.633. What is the market price of a bond
with a $1,000 face value?
A. $1,000.28
B. $1,002.77
C. $1,016.33
D. $1,102.77
E. $1,276.70
Answer:
Based on empirical studies, firms tend to call convertible bonds when the conversion
value is:
A. less than the conversion price.
B. greater than the straight bond value.
C. greater than the call price.
D. less than the face value.
E. equal to the straight bond value.
Answer:
An industry is likely to have a low beta if the:
A. stream of revenues within that industry is less volatile than the market.
B. economy is in a recessionary period.
C. market for its goods is highly affected by the market cycle.
D. number of firms within the industry is fairly constant.
E. industry tends to use a lot of debt financing.
Answer:
The EOQ model considers all of the following except the:
A. cost of the inventory.
B. carrying cost.
C. fixed cost of an order.
D. restocking cost.
E. annual sales units.
Answer:
The income statement:
A.measures performance for one specific day.
B.ignores any income other than operating revenues.
C.excludes deferred tax expense.
D.treats dividends paid as a cash expense.
E.includes noncash expenses.
Answer:
Anne is considering two independent projects with 2-year lives. Both projects have
been assigned a discount rate of 13 percent. She has sufficient funds to finance one or
both projects. Project A costs $38,500 and has cash flows of $19,400 and $28,700 for
Years 1 and 2, respectively. Project B costs $41,000, and has cash flows of $25,000 and
$22,000 for Years 1 and 2, respectively. Which project, or projects, if either, should you
accept based on the profitability index method and what is the correct reason for that
decision?
A. You should accept both projects since both of their PIs are positive.
B. You should accept Project A since it has the higher PI and you can only select one.
C. You should accept both projects since both of their PIs are greater than 1.
D. You should only accept project A since it has the largest PI and the PI exceeds one.
E. Neither project is acceptable.
Answer:
The value of an executive stock option will be lowered if:
A. the volatility of the firm’s stock returns increases.
B. the executive improves firm performance causing the stock price to rise.
C. a freeze-out period is required.
D. the firm extends the expiration date.
E. the strike price is lowered.
Answer:
A portfolio contains two securities and has a beta of 1.08. The first security comprises
54 percent of the portfolio and has a beta of 1.27. What is the beta of the second
security?
A. .79
B. .86
C. .62
D. .82
E. .93
Answer:
If the correlation between two stocks is -1, the returns on the stocks:
A. generally move in the same direction.
B. move perfectly opposite to one another.
C. are unrelated to one another.
D. have standard deviations of equal size but opposite signs.
E. totally offset each other producing a rate of return of zero.
Answer:
Nathan is buying a $1,000 face value bond at a quoted price of 101.364. The bond
carries a coupon rate of 7.75 percent, with interest paid semiannually. The next interest
payment is two months from today. What is the dirty price of this bond?
A. $1,039.47
B. $1,042.15
C. $1,056.02
D. $1,028.18
E. $1,026.56
Answer:
If a firm purchases a cap at 10 percent this will:
A. limit the amount of a firm’s borrowing to 10 percent of assets.
B. pay the firm 10 percent of their asset purchases.
C. pay the firm the LIBOR interest rate less 10 percent on the principal amount.
D. pay the firm the LIBOR interest plus 10 percent on the principal amount.
E. reimburse the firm for all losses below a 10 percent rate of return.
Answer:
In order to value a project which is not scale enhancing you typically need to:
A. calculate the equity cost of capital using the risk-adjusted beta of another firm.
B. double the firm’s beta value when computing the project WACC.
C. apply the firm’s current WACC to the project’s cash flows.
D. discount the project’s cash flows using the market rate of return since the project will
diversify the firm’s operations.
E. replace the risk-free rate with the market rate of return when computing the project’s
discount rate.
Answer:
Dexter’s has a fixed dividend payout ratio of 40 percent, current net income of $5,200,
total assets of $56,400, and total equity of $21,600. Given this information, what
estimate would you use as the dividend growth rate if the last dividend paid was $.464
per share?
A. 9.63%
B. 3.69%
C. 12.84%
D. 8.61%
E. 14.44%
Answer:
The Spartan Co. has an unlevered cost of capital of 11.6 percent, a cost of debt of 7.9
percent, and a tax rate of 35 percent. What is the target debt-equity ratio if the targeted
levered cost of equity is 12.6 percent?
A. .44
B. .49
C. .42
D. .56
E. .62
Answer:
You have a $1,250 portfolio which is invested in Stocks A and B plus a risk-free asset.
$350 is invested in Stock A which has a beta of 1.36 and Stock B has a beta of .84. How
much needs to be invested in Stock B if you want a portfolio beta of .95?
A. $803
B. $951
C. $782
D. $847
E. $791
Answer:
The written agreement between a corporation and its bondholders is called the:
A. collateral agreement.
B. note.
C. indenture.
D. conveyance.
E. legal understanding.
Answer:
Interest rates or rates of return on investments that have been adjusted for the effects of
inflation are called _____ rates.
A. real
B. nominal
C. effective
D. stripped
E. coupon
Answer:
Which one of the following accounts is included in stockholders’ equity?
A.long-term debt
B.deferred taxes
C.plant and equipment
D.accumulated retained earnings
E.intangible assets
Answer:
A company paid an annual dividend of $.40 a share last month and plans to increase the
dividend by 7 percent a year for the next 6 years and then increase it by 4 percent
annually thereafter. What is the value of this stock at the end of Year 6 if the discount
rate is 11 percent?
A. $10.63
B. $8.92
C. $9.68
D. $10.21
E. $9.37
Answer:
Answer:
Explain whether it is easier to find the required return on a publicly traded stock or a
publicly traded bond, and explain why.
Answer:
Explain why there is neither a “Free” nor “Expensive Lunch” when convertible bonds
are issued.
Answer:
Why should a financial decision maker such as a corporate treasurer or CFO be
concerned with market efficiency?
Good answers to this question might indicate that market efficiency is a necessary
condition for the ‘maximize shareholder wealth’ goal to apply. Unless we are confident
that the market price is an economically meaningful number, why should we seek to
maximize that price?
Answer:
What are venture capitalists and what is their role in raising capital for firms?
Answer:
When is it appropriate to use the equivalent annual cost (EAC) methodology, and how
do you make a decision using it?
Answer:
Explain why an ex-dividend date is a required step in the dividend payout process.
Answer:
Given the goal of maximization of firm value and shareholder wealth, we have stressed
the importance of net present value (NPV). And yet, many financial decision-makers at
some of the most prominent firms in the world continue to use less desirable measures
such as the payback method. Why do you think this is the case?
Answer:
In each of the theories of capital structure the cost of equity rises as the amount of debt
increases. So why don’t financial managers use as little debt as possible to keep the cost
of equity down? After all, isn’t the goal of the firm to maximize share value and
minimize shareholder costs?
Answer:
Normally, the Treasury yield curve is upward-sloping. Explain the conditions required
for a downward-sloping yield curve to exist.
Answer:
Marlene and Darlene are each the recipient of an annuity that pays $1,000 annual
payments at the end of each year for 12 years. They both received their first payment on
the same day. Explain how Marlene and Darlene could assign different present values to
their respective annuities.
Answer:
Suppose your cousin invests in the stock market and doubles her money in a single year
while the market, on average, earned a return of only about 15 percent. Is your cousin’s
performance a violation of market efficiency?
Answer:
Explain some of the means by which a select group of shareholders can retain control
over a corporation while still raising equity capital outside of their group.
Answer:
Explain the difference between product costs and period costs as they relate to the
income statement. Are these terms synonymous with short-run and long -run?
Answer:
Explain the net present value formula and also explain what the net present value
represents.
Answer: