FIN/571 Corporate Finance Final Exam Answers


1) Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes __________
A. an irrelevant consideration for a cost of capital.
B. the relevant consideration for a cost of capital.
C. important only if the firm faces financial distress.
D. none of these

2) An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?
A. Each stock in the portfolio will have a beta greater than one.
B. Selling any stock in this portfolio will lower the beta of the portfolio.
C. An investor cannot change the risk of this portfolio by her choice about personal leverage (lending or borrowing).
D. Each stock in the portfolio has its own beta.

3) An all-equity-financed firm would __________.
A. not pay any income taxes because interest would exactly offset its taxable income.
B. pay corporate income taxes if its taxable income is positive.
C. pay corporate income taxes because it would have interest expense.
D. not pay corporate income taxes because it would have no interest expense.

4)  The capital budgeting process can be broken down into five steps. These steps include which of the following?
A. Generate ideas for capital budgeting projects
B. Prepare proposals
C. Review existing projects and facilities
D. all of these

5) Projects can be classified into various categories. These include:
A. maintenance expenditures projects that involve replacing worn-out or damaged equipment.
B. that include improvements in production technology to realize cost savings and marketing campaigns to achieve revenue enhancement.
C. capacity expansion projects that involve expanding the current business by adding new equipment and facilities.
D. all of these

6) Boeing Corporation is a world leader in commercial aircraft. In the face of competition, Boeing often faces a critical decision: whether to develop a new generation of passenger aircraft.
A. dividend
B. payback
C. capital budgeting
D. present value

7) A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in any particular industry with respect to __________.
A. tax position.
B. size.
C. competitive position.
D. all of these

8) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________.
A. hiring and firing practices.
B. the availability of tax shelter provided by things other than debt, such as accelerated depreciation, investment tax credit, and operating tax loss carryforwards.
C. what the arbitrage pricing theory tells us.
D. none of these

9) Studies show systematic differences in capital structures across industries. These are due mostly to differences in the availability of tax shelter provided by things other than debt, such as __________.
A. accelerated depreciation.
B. operating tax loss carryforwards.
C. investment tax credit.
D. all of these

10) Preferred stock payment obligations are typically
A. viewed like debt obligations.
B. issued with a maturity date.
C. valued as an annuity.
D. none of these

11) If the yield to maturity for a bond is less than the bond's coupon rate, then the market value of the bond is __________.
A. greater than the par value.
B. equal to the par value.
C. cannot tell
D. less than the par value.

12) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?
A. The current yield was a lot less than 9% when the bond was first issued
B. The market value of the bond is more than $1,000
C. The market value of the bond is less than $1,000
D. The current yield was a lot greater than 9% when the bond was first issued

13) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.
A. non-listing of foreign securities on U.S. stock exchanges.
B. foreign tax considerations.
C. efficiency in converting currencies.
D. all of these

14) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.
A. lower transaction costs.
B. expropriation risk.
C. firm-specific risk.
D. all of these

15) According to the CAPM, the expected return for a portfolio is determined by the portfolio's.
A. variance.
B. beta.
C. standard deviation.
D. none of these

16) Which of these investments would you expect to have the highest rate of return for the next 20 years?
A. U.S. Treasury bills
B. intermediate-term U.S. government bonds
C. anybody’s guess
D. long-term corporate bonds

17) The Principle of __________ implies that the expected return for an asset equals its required return.
A. Capital Market Efficiency
B. Comparative Advantage
C. Signaling
D. Risk-Return Trade-Off

18) According to the Principle of Risk-Return Trade-Off, investors require a higher return to compensate for __________.
A. lack of diversification
B. less risk
C. greater risk
D. diversification


19) Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is Stony's cash conversion cycle (CCC)?
A. about 66 days
B. about 68 days
C. about 69 days
D. about 67 days

20) Suppose the Ruskin Oil Corporation has $150,000 for both its book balance and its bank balance. It takes 4 days for a check to clear. If Ruskin writes a $3,000 check, which of the following statements is false?
A. If Ruskin writes a $3,000 check that takes 4 days to clear, during this period, $3,000 of disbursement float has been created.
B. Ruskin’s available balance is $150,000, its book balance is $147,000, and its disbursement float is $3,000.
C. After the check clears, the book and bank balances will both be $147,000 and there is no more disbursement float.
D. Ruskin’s book balance declines by the amount of the check, from $150,000 to $147,000, but the bank balance is unchanged until the check clears.

21) Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?
A. about 30.42 days
B. about 56.50 days
C. about 60.83 days
D. none of these

22) __________ says to look for opportunities to develop asset-based financing arrangements that offer new positive-NPV financing mechanisms.
A. The Principle of Comparative Advantage
B. The Principle of Valuable Ideas
C. The Principle of Self-Interested Behavior
D. The Time Value of Money Principle

23) __________ says to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide.
A. The Principle of Incremental Benefits
B. The Options Principle
C. The Principle of Comparative Advantage
D. The Capital Market Efficiency

24) __________ says to transfer the tax benefits of ownership to other parties if they are willing to pay for benefits your firm cannot use.
A. The Capital Market Efficiency Principle
B. The Principle of Two-Sided Transactions
C. The Principle of Comparative Advantage
D. The Principle of Incremental Benefits

25) Which of the following favors a high dividend payout policy?
A. no legal restrictions
B. policy restrictions affecting trust and endowment funds
C. higher taxes
D. all of these

26) The weighted average cost of capital (WACC) can be computed using the formula: WACC = (1 - L)re + L(1 - T)rd. Which of the following statements is true?
A. L is debt divided by firm value.
B. T is the personal tax rate.
C. rd is the required return on equity.
D. none of these

27) You are considering the capital budgeting project j with a life expectancy of 20 years. The short-term government rate (rf) is 5%, the beta of firms that produce products similar to project j is 1.2, and the return on the market (rm) the last 20 years has been 10%. What is the cost of capital for this project?
A. 9.00%
B. 10.00%
C. 11.00%
D. cannot tell

28) Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes__________.
A. an irrelevant consideration for a cost of capital.
B. the relevant consideration for a cost of capital.
C. important only if the firm faces financial distress.
D. none of these

29) An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?
A. Selling any stock in this portfolio will lower the beta of the portfolio.
B. An investor cannot change the risk of this portfolio by her choice about personal leverage (lending or borrowing).
C. Each stock in the portfolio will have a beta greater than one.
D. Each stock in the portfolio has its own beta.

30) Calculate the IRR for the following investment project: initial investment is $75,000; inflows are $20,000 for the next five years; required rate of return is 15%. (Round your answer to the nearest whole percentage)
A. 10%
B. 11%
C. 12%
D. 13%

31) Your firm uses the payback method but does not discount any of the cash flows. Calculate the payback for the following investment: A machine costs $200,000 with after-tax installation costs of $15,000. After-tax cash inflows are expected to be 36,000 per year for the next seven years.
A. greater than 6
B. 5.85 years
C. 5.14 years
D. 4.42 years

32) Compute the NPV for the following project. The initial cost is $5,000. The net cash flows are $1,900 for four years. The net salvage value is $1,000 when the project terminates. The cost of capital is 10%.
A. $1,705.76
B. $5,000.00
C. $6,705.76
D. none of these

33) Each year for eight years, an investment will generate incremental sales of $8,000 and cash operating expenses of $2,500. The applicable tax rate is 30% and depreciation is $2,000. What is the net cash flows for each of the eight years?
A. $8,000
B. $6,500
C. $4,500
D. none of these

34) The __________ method breaks down when evaluating projects in which the sign of the cash flow changes.
A. PI
B. IRR
C. Payback
D. NPV

35) In practice, the __________ rule is preferred.
A. PI
B. IRR
C. Payback
D. NPV

36) Net present value ( NPV) is the difference between __________.
A. what a capital budgeting project costs and what it is worth (its market value)
B. what a capital budgeting project produces and what it is pays
C. cash flows before taxes and cash flows after taxes
D. what a capital budgeting project produces and what it is worth (its market value)

37) Compute the IRR for the following project. The initial cost is $10,000. The net cash flows are 3,800 for four years. The net salvage value is $2,000 when the project terminates. The cost of capital is 10%.
A. 13.91%
B. 18.91%
C. 23.91%
D. 25.91%

38) Suppose you purchase a zero coupon bond for $214.55 with a face value of $1,000 maturing in twenty years. If the yield to maturity (YTM) on the bond is 8.00%, what will the price of the bond be at the end of five years from now?
A. $315.24
B. $387.52
C. $410.91
D. none of these

39) A bond for J. Morris, Inc. a coupon rate of 6%. The yield to maturity is 7%. The bond has a remaining life of 20 years and makes semi-annual coupon payments? What is the present value of the bond’s face value?
A. $252.57
B. $640.65
C. $893.22
D. $1,000.00

40) You own a stock that will start paying $0.50 annually at the end of the year. It will then grow each year at a constant annual rate of 5%. If the required rate of return is 14%, what should you pay per share?
A. $5.56
B. $4.27
C. $3.57
D. $0.50

41) What is the present value of a zero coupon bond that will pay $1,000 in two years if the applicable discount rate equals 8 percent?
A. $827.35
B. $847.34
C. $857.34
D. $1,000.00

42) Some countries have __________ in which shareholders' returns are not fully taxed twice.
A. an imputation tax system
B. a split tax system
C. a two-tier tax system
D. none of these

43) The Time Value of Money Principle says __________.
A. to look for the most advantageous ways to finance the firm, such as the lowest-cost debt alternative
B. to set a price and other terms that investors will find acceptable when issuing securities C. that announcing the firm's decision to issue securities conveys information about the firm
D. to use discounted cash flow analysis to compare the costs and benefits of financing decisions, such as alternative securities to sell, lease versus borrow and buy, and bond refunding

44) Conditional sales contracts __________.
A. are seldom issued to finance the purchase of aircraft
B. are similar to equipment trust certificates
C. enable the borrower to obtain title to the assets only before it fully repays the debt ALL

45) You own a stock that is currently selling for $50. You expect a dividend of $1.50 next year and you require a 12% rate of return.. What is the dividend growth rate for your stock assuming constant growth?
A. 6.00%
B. 9.00%
C. 12.00%
D. 15.00%

46) The true risk of any investment is which of the following?
A. the variance of the investment's return
B. the uncertainty that cannot be diversified away
C. the expected part of any announcement
D. b & c

47) The capital asset pricing model .
A. provides a risk-return trade off with risk is measured in terms of the market returns.
B. provides a risk-return trade off in which risk is measured in terms of beta.
C. measures risk as the coefficient of variation between security and market rates of return.
D. depicts the total risk of a security.

48) The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 4.5 million loaves in the next five years. What additional revenues minus expenses will be generated from expansion?
A. $1,102,000
B. $1,000,500
C. $912,500
D. $1,012,500

49) The wholesale price for Captain John’s is $3.00 per loaf. One million loaves will be sold in the next year. What is the contribution margin?
A. $3,000,000
B. $3,000,000 minus fixed costs
C. $3.00
D. cannot tell

50) The wholesale price for Captain John’s is $1.00 per loaf, and the variable cost of production is $0.50 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 5.0 million loaves in the next year. What additional revenues minus expenses will be generated from expansion?
A. $25,000
B. $250,000
C. $550,000
D. none of these

51) You are thinking about abandoning your business. If you do, then you will receive $168,000 on an after-tax basis from the land associated with your business. Abandoning your business would bring $15,000 on an after-tax basis from sale of equipment; also, you would not have to repair equipment at a cost of $10,800 per year on an after-tax basis. The before-tax cash flows from your business are $60,000 per year. Your tax rate is 25% and your required return is 12%. If you abandon your business, you will be able to spend your time earning wages that are equivalent to receiving an annuity of $16,000 per year on an after-tax basis until you retire in 12 years. At that time you could sell your land but would only realize what you could receive today. Should you abandon your business if you can make more money doing that?
A. No. The NPV from abandoning is negative.
B. Yes. The NPV is greater than $100,000
C. Yes. Abandon the business.
D. No. The NPV from abandoning is smaller than -$5,000

52) In efficient markets, as in the United States, you should think long and hard before you conclude that a market price is __________.
A. wrong.
B. fair.
C. followed by many analysts.
D. all of these

53) Under capital rationing, a good tool to use is the __________.
A. PI method.
B. payback method.
C. IRR method.
D. NPV method.

54) Which of the following statements is true?
A. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sources.
B. Hard capital rationing refers to the rationing imposed internally by the firm.
C. A post audit is a set of procedures for evaluating a capital budgeting decision after the fact.
D. all of these

55) ___________ says to use both bottom-up and top-down processes to increase the chance of uncovering valuable ideas.
A. The Principle of Two-Sided Transactions
B. The Principle of Comparative Advantage
C. The Behavioral Principle
D. The Principle of Valuable Ideas

56) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of alternative decisions.
A. The Principle of Incremental Benefits
 B. The Time Value of Money Principle
C. The Signaling Principle
D. The Principle of Risk-Return Trade-Off

57) __________ says to use common industry practices as a good starting place for the planning process.
A. The Principle of Self-Interested Behavior
B. The Principle of Valuable Ideas
C. The Principle of Incremental Benefits
D. The Behavioral Principle


Exam : 2

1. What is the portfolio beta if 75% of the portfolio is invested in a stock mutual fund (that has the same beta as a market portfolio) and the rest invested in a riskless asset?
a. 0.25
b. 0.50
c. 0.75
d. 1.00

2. Suppose that the required rate of return to a diversified investor is 10%, while the required rate of return to a non-diversified investor is 14%. If D1 = $2, and g = 5%, how would diversified and non-diversified investors value this stock?
a. The diversified investor is willing to pay $17.78 more.
b. The diversified investor will never pay more because they do not have to.
c. The nondiversified investor will pay $16.78 more.
d. The nondiversified investor will always pay more because they can afford to.

3. The rate on six-month T-bills is currently 5%. ABC Company's stock has a beta of 1.69 and a required rate of return of 15.5%. According to the CAPM, what is the return on the market?
a. 11.21%
b. 11.63%
c. 11.93%
d. none of these

4. Firms make short-term financial decisions just about every day solving such questions as .
a. Where should we borrow?
b. Where should we invest our cash?
c. How much liquidity should we have?
d. all of these

5. Firms use several devices and procedures to manage float including .
a. lockboxes
b. zero balance accounts
c. controlled disbursing
d. all of these

6.This technique may use disbursing accounts at several banks in addition to the master account at the firm's lead bank.
a. Available balance
b. Controlled disbursing
c. Disbursement float
d. Zero balance accounts

7. The Principle of Capital Market Efficiency says that market prices of financial assets that are traded regularly in the capital markets reflect:
A. all available information and adjust partially and quickly to “new” information.
B. all available information and adjust fully but slowly to “new” information.
C. most available information and adjust fully and quickly to “new” information.
D. all available information and adjust fully and quickly to “new” information

8.A yield curve or term structure of interest rates is .
A. upward sloping if yields increase with maturity
B. downward sloping if yields decrease with maturity
C. upward sloping if yields decrease with maturity
D. both a & b are correct

9. Which of the following statements is false?
a. Ethical behavior implies that people makes correct personal judgments about right and wrong for the good of society and the environment.
b. Ethical behavior leads to fines and legal expenses.
c. Ethical behavior requires the principals and agents comply with rules and regulations that govern behavior.
d. Ethical behavior attracts and keeps high-quality employees and managers.

10. Select the true statement(s).
a. Capital gain is the difference between what an asset is sold for and its book value, typically referring to an asset that has been owned at least a year.
b. Tax-timing option is the option to sell an asset and claim a loss for tax purposes or not to sell the asset and defer a capital gain tax.
c. Progressive tax system is a tax system wherein the average tax rate rises for some increases in income but never decreases with an increase in income.
d. all of these

11. Select the false statement(s).
a. Net working capital is the difference between what an asset is sold for and its book value.
b. Progressive tax system is the option to sell an asset and claim a loss for tax purposes or not to sell the asset and defer a capital gain tax.
c. Net income is the difference between what an asset is sold for and its book value, typically referring to an asset that has been owned for at least a year.
d. all of these

12.Which of the following is a use of cash that would appear on the statement of cash flows?
a. accumulated depreciation
b. purchase of marketable securities
c. receipt of interest payments
d. decrease in accounts receivable

13. Compute EPS, given the following information: interest expense: $40,000; net income: $400,000; preferred dividends paid: $65,000; common dividends paid: $100,000; common stock outstanding: 100,000 shares.
a. $1.95
b. $3.35
c. $2.35
d. $3.60

14. Firms make short-term financial decisions just about every day solving such questions as __________.
A. Where should we borrow?
B. Where should we invest our cash?
C. How much liquidity should we have?
D. all of these


15. Credit-policy decisions involve all aspects of receivables management. The decision does NOT include which of the following?
A. setting evaluation methods and credit standards
B. the choice of credit terms
C. monitoring receivables and avoiding actions for slow payment
D. controlling and administering the firm's credit functions

16. Which of the following statements is (are) true?
A. The "dating 120" or the "60 extra" mean that the clock does not start until 120 or 60 days after the invoice date.
B. Prox or proximate refers to the next month.
C. Invoices with "10th prox" must be paid by the 10th of the next month.
D. all of these

17. Which (if any) of the following statements is false?
A. When invoices are numerous, a firm may use statement billing instead of invoice billing.
B. With statement billing, all of the sales for a period such as a month (for which a customer receives invoices, too) are collected into a single statement and sent to the customer as one bill.
C. CIA (cash in advance) refers to when the shipper collects the payment (on behalf of the seller) upon delivery.
D. none of these

18. __________ says to calculate the incremental after-tax cash flows connected with working capital decisions.
A. The Signaling Principle
B. The Principle of Incremental Benefits
C. The Principle of Time Value of Money
D. The Options Principle

19. Firms make short-term financial decisions just about every day solving such questions as __________.
A. Where should we borrow?
B. Where should we invest our cash?
C. How much liquidity should we have?
D. all of these

20. Bank term loans represent __________.
A. long-term loans that looks like short-term debt
B. loans for specified amounts that require borrowers to repay them according to specified schedules
C. the pledge of receivables
D. all of these

21. Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is Stony's cash conversion cycle (CCC)?
A. about 66 days
B. about 67 days
C. about 68 days
D. about 69 days

22. Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?
A. about 30.42 days
B. about 56.50 days
C. about 60.83 days
D. none of these

23. __________ says to calculate the incremental after-tax cash flows connected with working capital decisions.
A. The Signaling Principle
B. The Principle of Incremental Benefits
C. The Principle of Time Value of Money
D. The Options Principle

24. Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?
a. The current yield was a lot less than 9% when the bond was first issued
b. The current yield was a lot greater than 9% when the bond was first issued
c. The market value of the bond is more than $1,000
d. The market value of the bond is less than $1,000

25. Compute EPS, given the following information: interest expense: $40,000; net income: $400,000; preferred dividends paid: $65,000; common dividends paid: $100,000; common stock outstanding: 100,000 shares.
a. $1.95
b. $3.35
c. $2.35
d. $3.60

26. A bond for J. Morris, Inc. a coupon rate of 6%. The yield to maturity is 7%. The bond has a remaining life of 20 years and makes semi-annual coupon payments? What is the present value of the bond’s face value?
a. $252.57
b. $640.65
c. $893.22
d. $1,000.00

27. What is the present value of a zero coupon bond that will pay $1,000 in two years if the applicable discount rate equals 8 percent?
a. $827.35
b. $847.34
c. $857.34
d. $1,000.00

28. Suppose that the required rate of return to a diversified investor is 10%, while the required rate of return to a nondiversified investor is 14%. If D1 = 2, and g = 5%, how would diversified and nondiversified investors value this stock?
a. The diversified investor is willing to pay $17.78 more.
b. The diversified investor will never pay more because they do not have to.
c. The nondiversified investor will pay $16.78 more.
d. The nondiversified investor will always pay more because they can afford to.

29. A firm's latest 12 months' EBIT is $50M (M = million), and its interest expense for the same period is $20M. It also had $15M of rental expense during the latest 12 months. Calculate the firm's fixed-charge coverage ratio.
a. 2.20
b. 2.50
c. 2.67
d. 3.50

30. Suppose a firm is unleveraged and has an unleveraged required return, r, of 15%. The firm borrows 30% of the value of the firm at rd = 8%. Because of the financial leverage, re becomes 18%. The firm pays corporate taxes at a rate of 35% but otherwise operates in perfect capital market. What is the firm's WACC?
a. 14.16%
b. 15.00%
c. 15.26%
d. 16.00%

31. Jonathan's Tidbits is an entertainment service. It has an unleveraged required return of r = 23%. Jonathan's rebalances its leverage each year to a target of L = 0.52 and T* = 0.20. Jonathan can borrow currently at a rate of rd = 16%. What is Jonathan's WACC?
a. about 19.54%
b. about 21.24%
c. about 21.54%
d. about 22.24%

32. Studies show systematic differences in capital structures across industries. These are due mostly to differences in the availability of tax shelter provided by things other than debt, such as a. accelerated depreciation.
b. operating tax loss carryforwards.
c. investment tax credit.
d. all of these

33. Due to asymmetric information, the market fears that a firm issuing securities will do so when the stock is ___________.
 A.  caught up in a bear market.
 B.  being sold by insiders.
 C.  overvalued.
 D.  undervalued.

34. Which of these investments would you expect to have the highest rate of return for the next 20 years?
a. long-term corporate bonds
b. intermediate-term U.S. government bonds
c. anybody’s guess
d. U.S. Treasury bills

35. Dimensions of risk include __________.
a. the certainty of a negative outcome
b. the impossibility of the same return
c. uncertainty about yesterday’s outcome
d. uncertainty about the future outcome

36.  Mortgage bonds are
A. secured by a lien on general assets of the issuer
B. secured by a lien on specific assets of the issuer
C. usually secured by assets such as common shares of one of the issuer's subsidiaries
D. none of these


37. Stated maturity is
A. usually a fixed rate, but it can be a variable rate that's adjusted according to a specified formula
B. the date the borrower must repay the money it borrowed
C. the amount the borrower must repay

38. The Time Value of Money Principle says
A. that announcing the firm's decision to issue securities conveys information about the firm
B. to look for the most advantageous ways to finance the firm, such as the lowest-cost debt alternative
C. to use discounted cash flow analysis to compare the costs and benefits of financing decisions, such as alternative securities to sell, lease versus borrow and buy, and bond refunding
D. to set a price and other terms that investors will find acceptable when issuing securities

39. Some countries have __________ in which shareholders' returns are not fully taxed twice.
A. an imputation tax system
B. a split tax system
C. a two-tier tax system
D. none of these

40. There can be a variety of motives for stock repurchases including
A. a buyback of overvalued stock.
B. an increase in leverage.
C. a decrease in anticipated earnings.
D. all of these

41. There can be a variety of motives for stock repurchases including
A. all of these
B. a decrease in leverage.
C. a buyback of undervalued stock.
D. a decrease in anticipated earnings

42. Whenever projects are both independent and conventional, then the IRR and NPV methods agree. Which of the following statements is true?
A. A mutually exclusive project is one that can be chosen independently of other projects.
B. When undertaking one project prevents investing in another project, and vice versa, the projects are said to have a positive payback.
C. A conventional project is a project with an initial cash outflow that is followed by one or more expected future cash inflows.
D. all of these

43. The __________ method breaks down when evaluating projects in which the sign of the cash flow changes.
A. Payback
B. PI
C. NPV
D. IRR

44.  An entertainment service has an unleveraged required return of r = 23%. Jonathan's rebalances its leverage each year to a target of L = 0.52 and T* = 0.20. Jonathan can borrow currently at a rate of rd = 16%. What is the WACC?
a. about 19.54%
b. 21.24%
c. 21.54%
d. 22.24%

45. A debt limitation covenant prohibits a borrower from issuing additional long term debt if it would cause the issuer's interest coverage ratio (EBIT to total interest) to fall below 3.00 times. Suppose the firm's earnings before interest and taxes are $78Million, and interest is $20M. How much additional 8% debt can the firm incur without reducing the interest coverage ratio of below 3.00?
a.$50 million of debt
b.$65 million of debt
c.$70 million of debt
d.$75 million of debt

46. Bravo Care sales last year were $6,000,000. They expected an increase in sales of 14% for the coming year. How much will this year’s retained earnings provide for Bravo’s expected future growth?
a $650000
b $650800
c $640000
d $684000

47. What is the portfolio beta if 75% of the portfolio is invested in a stock mutual fund (that has the same beta as a market portfolio) and the rest invested in a riskless asset?
a. 0.25
b. 0.50
c. 0.75
d. 1.00

48. Suppose that the required rate of return to a diversified investor is 10%, while the required rate of return to a nondiversified investor is 14%. If D1 = $2, and g = 5%, how would diversified and nondiversified investors value this stock?
a. The diversified investor is willing to pay $17.78 more.
b. The diversified investor will never pay more because they do not have to.
c. The nondiversified investor will pay $16.78 more.
d. The nondiversified investor will always pay more because they can afford to.

49. The rate on six-month T-bills is currently 5%. ABC Company’s stock has a beta of 1.69 and a required rate of return of 15.5%. According to the CAPM, what is the return on the market?
a. 11.21%
b. 11.63%
c. 11.93%
d. none of these


Exam 3




Multiple Choice Questions

1. What is the primary goal of financial management?
A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm


2. The partnership form of organization
A) avoids the double taxation of earnings and dividends found in the corporate form of organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.


3. Increased productivity due to technology has
A) increased corporations' reliance on debt for capital expansion needs.
B) created larger asset values on the firm's historical balance sheet.
C) made it cheaper (in terms of interest costs) for firms to borrow money.
D) helped to keep corporate costs in check.



4. Insider trading occurs when
A) someone has information not available to the public which they use to profit from trading in stocks.
B) corporate officers buy stock in their company.
C) lawyers, investment bankers, and others buy common stock in companies represented by their firms.
D) any stock transactions occur in violation of the Federal Trade Commissions restrictions on monopolies.

Chapter 2 Review of Accounting



5. When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will:
A) remain the same
B) go up
C) go down
D) could go either up or down


6. The net worth of a firm
A) is usually the same as the firm's market value.
B) is based on current asset costs.
C) is based on current liabilities.
D) none of the above.


7. A statement of cash flows allows a financial analyst to determine
A) whether a cash dividend is affordable.
B) how increases in asset accounts have been financed.
C) whether long-term assets are being financed with long-term or short-term financing.
D) all of the above


8. A firm has $200,000 in current assets, $400,000 in long-term assets, $80,000 in current liabilities, and $200,000 in long-term liabilities. What is its net working capital?
A) $120,000
B) $320,000
C) $520,000
D) none of the above

Chapter 3 Financial Analysis


Multiple Choice Questions



9. The ______________ method of inventory costing is least likely to lead to inflation-induced profits.
A) FIFO
B) LIFO
C) Weighted average
D) Lower of cost or market

10. The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket its after-tax profit margin is:
A) 5%
B) 12%
C) 20%
D) 25%

11. XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. The average collection period is 90 days (3 months). What was the sales figure for the year?
A) $60,000
B) $6,000,000
C) $24,000,000
D) none of the above

12. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The stockholders equity is $900,000. What is the total debt to asset ratio?
A) 45%
B) 40%
C) 55%
D) none of the above

Chapter 4 Financial Forecasting


13. Required production during a planning period will depend on the
A) beginning inventory of products.
B) sales during the period.
C) desired level of ending inventory.
D) all of the above

14. XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production?
A) 1100 units
B) -0- units
C) 500 units
D) 400 units

15. The difference between total receipts and total payments referred to as
A) cumulative cash flow.
B) beginning cash flow.
C) net cash flow.
D) cash balance.

16. In developing the pro forma income statement we follow four important steps:
1) compute other expenses,
2) determine a production schedule,
3) establish a sales projection,
4) determine profit by completing the actual pro forma statement.

What is the correct order for these four steps?
A) 1,2,3,4
B) 4,3,2,1
C) 2,1,3,4
D) 3,2,1,4

Chapter 5 Operating and Financial Leverage

17. In break-even analysis the contribution margin is defined as
A) sales minus variable costs.
B) sales minus fixed costs.
C) variable costs minus fixed costs.
D) fixed costs minus variable costs.

18. Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?
A) A has a lower break-even point than B, but A's profit grows faster after the break-even.
B) A has a higher break-even point than B, but A's profit grows slower after the break-even.
C) B has a lower break-even point than A, but A's profit grows faster after break-even.
D) B has a lower break-even point than A, and profit grows the same rate for both companies after the breakeven point.

19. Heavy use of long-term debt may be beneficial in an inflationary economy because
A) the debt may be repaid in more "expensive" dollars.
B) nominal interest rates exceed real interest rates.
C) inflation is associated with the peak of a business cycle.
D) the debt may be repaid in "cheaper" dollars.



20. Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A) Stable industry
B) Cyclical demand for the firm's products.
C) Upswing of business cycle.
D) Low interest cost compared to return on assets

Chapter 6 Working Capital and the Financial Decision

21. Risk exposure due to heavy short-term borrowing can be compensated for by
A) carrying highly liquid assets.
B) carrying illiquid assets.
C) carrying longer term, more profitable current assets.
D) carrying more receivables to increase cash flow.

22. When actual sales are greater than forecasted sales
A) inventory will decline.
B) production schedules might have to be revised upward.
C) accounts receivable will rise.
D) all of the above

23. Yield curves change daily to reflect
A) changing conditions in the money and capital markets.
B) new inflation expectations.
C) changing conditions in the overall economy.
D) all of the above.

24. Retail companies like Target and Limited Brands are more likely to have
A) stable sales and earnings per share.
B) cyclical sales but less volatile earnings per share.
C) cyclical sales and more volatile earnings per share.
D) cyclical sales but stable accounts receivable and inventory.

Chapter 7 Current Asset Management

25. When using the economic order quantity model
A) ordering costs increase as the level of inventory increases.
B) carrying costs decrease as the level of inventory increases.
C) costs are minimized when total carrying costs and total ordering costs are equal.
D) none of the above

26. Hedging
A) is a way to protect your accounts receivable position.
B) increases risk.
C) is a legal agreement to buy or sell a financial futures contract.
D) can be carried out with a futures contract.

27. Which of the following is not a true statement about commercial paper?
A) Finance paper is sold directly to the lender by the finance company.
B) Finance paper is also referred to as direct paper.
C) Dealer paper is sold directly to the lender by a finance company.
D) Industrial companies, utility firms or finance companies too small to sell direct paper sell dealer paper.

28. Which of the following best describes the benefits to the borrower of selling asset backed securities?
A) Due to the portfolio effect, the borrower can package up low quality accounts receivable and sell them for a premium price.
B) The borrower trades future cash flows for current cash flows.
C) The asset-backed security is likely to carry a high credit rating of AA or better.
D) b and c are correct.

29. Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts is 3.5% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales?
A) $5,554.50
B) $9,660.00
C) $7,245.00
D) none of the above.

Chapter 8 Sources of Short-Term Financing

30. Mr. Jones borrows $2,000 for 90 days and pays $35 interest. What is his effective rate of interest?
A) 9.3%
B) 7.0%
C) 11.7%
D) None of the above

31. The prime rate
A) is the effective rate of interest for banks' best customers.
B) has been quite volatile during the past two decades, moving as much as 8 percentage points in a 12-month period.
C) is usually lower than treasury bill rates.
D) none of the above

32. Accounts receivable may be used as a source of financing by
A) pledging the receivables as loan collateral.
B) factoring the receivables to a finance company.
C) selling securities backed by the receivables.
D) all of the above

33. The required compensating balance is usually computed as a
A) percentage of customer loans outstanding.
B) factor of accounts receivable.
C) percentage of the bank's commitments toward future loans.
D) a and c are correct

Chapter 9 The Time Value of Money


34. The concept of time value of money is important to financial decision making because
A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes $1 worth more today than $1 received in the future.
C) it can be applied to future cash flows in order to compare different streams of income.
D) all of the above

35. Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period?
A) $2,915
B) $3,570
C) $6,254
D) $8,570

36. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?
A) Between 11% and 12%
B) Between 8% and 9%
C) 17%
D) None of the above

Chapter 10 Valuation and Rates of Return


37. A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, What is the market value of the bond? Use annual analysis.
A) over $1,000
B) under $1,000
C) over $1,200
D) not enough information given to tell


38. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm's common stock is 14%. What is the preferred stock price if the required rate of return is 11%?
A) $45.45
B) $41.67
C) $35.71
D) none of the above

39. Which of the following does not influence the yield to maturity for a security?
A) required real rate of return
B) risk free rate
C) business risk
D) yields of similar securities

40. The cost of common stock is usually greater than the simple dividend yield because
A) investors perceive risk in common stock.
B) investors expect both a current dividend and future growth.
C) dividends are not tax-deductible.
D) the company must make profits before it can pay dividends.

41. The dividend valuation model stresses the
A) importance of earnings per share.
B) importance of dividends and legal rules for maximum payment.
C) relationship of dividends to market prices.
D) relationship of dividends to earnings per share.

Chapter 11 Cost of Capital

42. Although debt financing is usually the cheapest component of capital, it cannot be used to excess because
A) interest rates may change.
B) the firm's stock price will increase and raise the cost of equity financing.
C) the financial risk of the firm may increase and thus drive up the cost of all sources of financing.
D) underwriting costs may change.

43. Each project should be judged against
A) the specific means of financing used to support its implementation.
B) the going interest rate at that point in time.
C) the cost of new common stock equity.
D) none of the above.

44. The cost of debt is determined by taking the
A) present value of the interest payments and principal times one minus the tax rate.
B) historical yield on bonds times one minus the tax rate
C) estimated yield on new bond issues of the same risk times one minus the shareholder marginal tax rate.
D) none of the above

45. The pre-tax cost of debt for a new issue of debt is determined by
A) the investor's required rate of return on issued stock.
B) the coupon rate of existing debt.
C) the yield to maturity of outstanding bonds.
D) all of the above.

Chapter 14 Capital Markets


46. During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from
A) Russia's difficulty in transforming its economy into a capitalistic one.
B) Japan's prolonged recession and banking crisis.
C) The Euro-zone countries comprising the European Monetary Union and a single currency.
D) The huge Chinese economy and its billion plus people.

47. With respect to the United States and its relationship with the rest of the world, it can be said that
A) the U.S. has invested more dollars in the rest of the world than foreign countries have invested in the U.S.
B) the U.S. has actively helped foreign countries finance the government deficits.
C) foreign investors hold large positions in U.S. government securities.
D) All of the above.

48. Financial instruments in the capital markets generally fall under what category in the Balance Sheet?
A) Short-term liabilities and equities.
B) Long-term liabilities and equities.
C) Near cash assets.
D) None of the above.

Chapter 16 Long-Term Debt and Lease Financing


49. With regard to interest rates and bond prices it can be said that
A) a 1% change in interest rates will cause a greater change in long-term bond prices than short-term prices.
B) a 1% change in interest rates will cause a greater change in short-term bond prices than long-term prices.
C) long-term rates are more volatile than short-term rates.
D) a decrease in interest rates will cause bond prices to fall.

50. Which one of these conditions must be met for a lease to qualify as a capital lease?
A) The lease contains a bargain purchase price at the end of the lease.
B) The lease must have a value of at least $10 million.
C) The lease must have a life of 10 years.
D) All of the above.

Chapter 17 Common and Preferred Stock Financing

51. Which of the following is not a true statement?
A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock.

52. Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The dividend is $6.50 per share and has not been paid for 3 years. If Kuhns earned $3 million this year, what could be the maximum payment to the preferred stockholders on a per share basis?
A) $19.50 per share
B) $15.00 per share
C) $13.00 per share
D) $6.50 per share

53. When comparing common stock of the same company it is fair to say that
A) all shares, no matter how many classes, are all created with the same equal rights.
B) companies sometimes have two different classes of shares with unequal rights to dividends and votes.
C) the Securities and Exchange Commission allows only one class of common stock.
D) investors are indifferent between class A and class B shares.

54. Dr. J. wants to buy an IBM personal computer which will cost $2,788 four years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside?
A) $697.00
B) $627.93
C) $823.15
D) $531.81

Problems to be solved-Chapter 2


55. The following is the December 31, 2003 balance sheet for the Epics Corporation.

Assets Liabilities
Cash $ 70,000 Accounts Payable $ 100,000
Accounts Receivable 150,000 Notes Payable 120,000
Inventory 280,000 Bonds Payable 300,000
Total Current Assets $ 500,000 Total Liabilities $ 520,000
Plant and Equipment $1,250,000 Equity
Less: Accum. Deprec. 250,000 Common Stock 300,000
Net plant and Equipment $1,000,000 Paid In Capital 200,000
Retained Earnings 480,000
Total Assets $1,500,000 Total Equity $ 980,000
Total Liab. & Equity $1,500,000

Sales for 2003 were $2,000,000, with the cost of goods sold being 55% of sales. Depreciation expense was 10% of the gross plant and equipment at the beginning of the year. Interest expense was 9% on the notes payable and 11% on the bonds payable. Selling and administrative expenses were $200,000 and the firm's tax rate is 40%.

Prepare an income statement.

Difficulty: Medium
Answer:

Income Statement
Sales $2,000,000
Less: Cost of Goods Sold 1,100,000
Gross Profit 900,000
Less: Selling and Administrative Expense 200,000
Depreciation expense 125,000
EBIT 575,000
Less: Interest Expense (10,800 + 33,000) 43,800
EBT 531,200
Less: Taxes (40%) 212,480
Net Earnings $ 318,720



56. Given the financial information for the A.E. Neuman Corporation,

a) Prepare a Statement of Cash Flows for the year ended December 31, 2002.
b) What is the dividend payout ratio for 2003?
c) If we increased the dividend payout ratio to 100%, what would happen to retained earnings?




Exam 4

9) Book value (or Net book value) refers to:
 A.  the length of an asset’s life when it is issued.
 B.  the statement of a firm's financial position at one point in time, including its assets and the claims on those assets by creditors (liabilities) and owners (stockholders' equity).
 C.  the price for which something could be bought or sold in a reasonable length of time, where “reasonable length of time” is defined in terms of the item’s liquidity.
 D.  the net amount shown in the accounting statements.

10) The return expected by equity investors is called the __________.
 A.  market capitalization rate.
 B.  dividend yield.
 C.  average cost of capital.
 D.  none of these



11) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?
 A.  The market value of the bond is more than $1,000
 B.  The current yield was a lot less than 9% when the bond was first issued
 C.  The current yield was a lot greater than 9% when the bond was first issued 
 D.  The market value of the bond is less than $1,000



12) Preferred stock payment obligations are typically __________.
 A.  viewed like debt obligations.
 B.  issued with a maturity date.
 C.  valued as an annuity.
 D.  none of these



13) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.
 A.  lower transaction costs.
 B.  less political risk.
 C.  costs of converting currencies.
 D.  all of these



14) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.
 A.  non-listing of foreign securities on U.S. stock exchanges.
 B.  foreign tax considerations.
 C.  efficiency in converting currencies.
 D.  all of these



15) For diversified investors, the proper measure of a stock's risk is __________.
 A.  its nonsystematic risk.
 B.  its nondiversifiable risk.
 C.  its specific risk.
 D.  its standard deviation.



16) One problem with using negative values for w1 (the proportion invested in the riskless asset) to represent a borrowed amount is that the implied borrowing rate of interest is the same as __________.
 A.  the lending rate of interest
 B.  the prime rate of interest
 C.  the current rate of interest
 D.  the nominal rate of interest



17) Which of these investments would you expect to have the highest rate of return for the next 20 years?
 A.  intermediate-term U.S. government bonds
 B.  U.S. Treasury bills
 C.  long-term corporate bonds
 D.  anybody’s guess



18) According to the Principle of Risk-Return Trade-Off, investors require a higher return to compensate for __________.
 A.  less risk
 B.  lack of diversification
 C.  diversification
 D.  greater risk

19) Suppose the Ruskin Oil Corporation has $150,000 for both its book balance and its bank balance. It takes 4 days for a check to clear. If Ruskin writes a $3,000 check, which of the following statements is false?
 A.  Ruskin’s available balance is $150,000, its book balance is $147,000, and its disbursement float is $3,000.
 B.  If Ruskin writes a $3,000 check that takes 4 days to clear, during this period, $3,000 of disbursement float has been created.
 C.  Ruskin’s book balance declines by the amount of the check, from $150,000 to $147,000, but the bank balance is unchanged until the check clears.
 D.  After the check clears, the book and bank balances will both be $147,000 and there is no more disbursement float.



20) Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?
 A.  about 30.42 days
 B.  about 56.50 days
 C.  about 60.83 days
 D.  none of these



21) Stony Products has a receivables turnover of ten times. What is Stony’s receivables collection period (RCP)?
 A.  about 35.42 days
 B.  about 36.50 days
 C.  about 40.83 days
 D.  none of these



22) __________ says to calculate the incremental after-tax cash flows connected with working capital decisions.
 A.  The Principle of Time Value of Money
 B.  The Signaling Principle
 C.  The Principle of Incremental Benefits
 D.  The Options Principle



23) __________ says to compare the benefits and costs of alternative uses and sources of money using after-tax APYs.
 A.  The Principle of Incremental Benefits
 B.  The Principle of Time Value of Money
 C.  The Signaling Principle
 D.  The Options Principle



24) Bank term loans represent __________.
 A.  long-term loans that looks like short-term debt
 B.  loans for specified amounts that require borrowers to repay them according to specified schedules
 C.  the pledge of receivables
 D.  all of these



25) Which (if any) of the below statements is false?
 A.  Higher collection costs reduce the NPV and but cannot cause it to be negative.
 B.  A customer who is likely to make late payments is also more likely to default and to require extra collection efforts.
 C.  Credit bureau reports give information about any legal judgments against the firm.
 D.  none of these



26) Credit-policy decisions involve all aspects of receivables management. The decision does NOT include which of the following?
 A.  monitoring receivables and avoiding actions for slow payment
 B.  setting evaluation methods and credit standards
 C.  the choice of credit terms
 D.  controlling and administering the firm’s credit functions



27) Most credit sales are made on an open account basis, which means __________.
 A.  that customers cannot simply purchase what they want.
 B.  that customers simply purchase what they want.
 C.  that suppliers dictate the terms of the purchase.
 D.  that suppliers cannot dictate the terms of the purchase.

28) An all-equity-financed firm would __________.
 A.  not pay corporate income taxes because it would have no interest expense.
 B.  not pay any income taxes because interest would exactly offset its taxable income.
 C.  pay corporate income taxes because it would have interest expense.
 D.  pay corporate income taxes if its taxable income is positive.



29) A profitable firm would __________.
 A.  pay corporate income taxes because it would have interest expense.
 B.  pay corporate income taxes because it would not have interest expense.
 C.  pay corporate income taxes if it had a positive taxable income.
 D.  none of these



30) Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes __________.
 A.  an irrelevant consideration for a cost of capital.
 B.  the relevant consideration for a cost of capital.
 C.  important only if the firm faces financial distress.
 D.  none of these



31) There are two important tax considerations for a capital budgeting project. These include which (if any) of the following?
 A.  It is indeed cash flow that’s irrelevant.
 B.  The standard cash flow estimation does not explicitly identify the financing costs. 
 C.  The Principle of Incremental Benefits reminds us that it is the incremental cash flow that’s relevant.
 D.  none of these



32) Projects can be classified into various categories. These include:
 A.  maintenance expenditures projects that involve replacing worn-out or damaged equipment.
 B.  cost savings and revenue enhancement projects that include improvements in production technology to realize cost savings and marketing campaigns to achieve revenue enhancement.
 C.  capacity expansion projects that involve expanding the current business by adding new equipment and facilities.
 D.  all of these



33) Ideas for capital budgeting projects come from all levels within an organization. The bottom up process results in ideas percolating through the organization.
 A.  sideways
 B.  downward
 C.  upward
 D.  any way



34) In practice, the __________ rule is preferred.
 A.  IRR
 B.  NPV
 C.  PI
 D.  Payback



35) Whenever projects are both independent and conventional, then the IRR and NPV methods agree. Which of the following statements is true?
 A.  A mutually exclusive project is one that can be chosen independently of other projects.
 B.  When undertaking one project prevents investing in another project, and vice versa, the projects are said to have a positive payback.
 C.  A conventional project is a project with an initial cash outflow that is followed by one or more expected future cash inflows.
 D.  all of these



36) The __________ method breaks down when evaluating projects in which the sign of the cash flow changes.
 A.  IRR
 B.  NPV
 C.  PI
 D.  Payback

37) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________.
 A.  hiring and firing practices.
 B.  the availability of tax shelter provided by things other than debt, such as accelerated depreciation, investment tax credit, and operating tax loss carryforwards.
 C.  what the arbitrage pricing theory tells us.
 D.  none of these



38) A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in any particular industry with respect to __________.
 A.  tax position.
 B.  size.
 C.  competitive position.
 D.  all of these



39) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________.
 A.  the ability of assets to support borrowing.
 B.  the firm’s inventory turnover ratio.
 C.  accounting practices.
 D.  management’s attitude toward what other industries are doing.



40) Which of the following favors a high dividend payout policy?
 A.  no legal restrictions
 B.  policy restrictions affecting trust and endowment funds
 C.  higher taxes
 D.  all of these



41) There can be a variety of motives for stock repurchases including __________.
 A.  a decrease in anticipated earnings.
 B.  a buyback of undervalued stock.
 C.  a decrease in leverage.
 D.  all of these



42) Some countries have __________ in which shareholders' returns are not fully taxed twice.
 A.  an imputation tax system
 B.  a split tax system
 C.  a two-tier tax system
 D.  none of these



43) Conditional sales contracts __________.
 A.  are seldom issued to finance the purchase of aircraft
 B.  are similar to equipment trust certificates
 C.  enable the borrower to obtain title to the assets only before it fully repays the debt
 D.  all of these



44) The Time Value of Money Principle says __________.
 A.  to set a price and other terms that investors will find acceptable when issuing securities
 B.  to use discounted cash flow analysis to compare the costs and benefits of financing decisions, such as alternative securities to sell, lease versus borrow and buy, and bond refunding
 C.  to look for the most advantageous ways to finance the firm, such as the lowest-cost debt alternative
 D.  that announcing the firm's decision to issue securities conveys information about the firm



45) Stated maturity is __________.
 A.  usually a fixed rate, but it can be a variable rate that’s adjusted according to a specified formula
 B.  the amount the borrower must repay
 C.  the date the borrower must repay the money it borrowed



46) The Time Value of Money Principle says to __________.
 A.  recognize that the cancellation option in a lease is valuable to the lessee.
 B.  use discounted cash flow analysis to compare the costs and benefits of leasing, relative to the alternative of borrowing and buying.
 C.  look for profitable opportunities to lease (or rent) an asset, rather than borrow and buy it.
 D.  look for profitable opportunities to arrange project financing or limit partnership financing for an asset you wish to purchase.



47) __________ says to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide.
 A.  The Principle of Comparative Advantage
 B.  The Principle of Incremental Benefits
 C.  The Options Principle
 D.  The Capital Market Efficiency



48) __________ says to look for opportunities to develop asset-based financing arrangements that offer new positive-NPV financing mechanisms.
 A.  The Principle of Self-Interested Behavior
 B.  The Principle of Comparative Advantage
 C.  The Principle of Valuable Ideas
 D.  The Time Value of Money Principle

49) The wholesale price for Captain John’s is $1.00 per loaf, and the variable cost of production is $0.50 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 5.0 million loaves in the next year. What additional revenues minus expenses will be generated from expansion?
 A.  $25,000
 B.  $250,000
 C.  $550,000
 D.  none of these



50) The wholesale price for Captain John’s is $3.00 per loaf. One million loaves will be sold in the next year. What is the contribution margin?
 A.  $3,000,000
 B.  cannot tell
 C.  $3,000,000 minus fixed costs
 D.  $3.00



51) The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 4.5 million loaves in the next five years. What additional revenues minus expenses will be generated from expansion?
 A.  $1,012,500
 B.  $1,102,000
 C.  $1,000,500
 D.  $912,500



52) In efficient markets, as in the United States, you should think long and hard before you conclude that a market price is __________.
 A.  wrong.
 B.  fair.
 C.  followed by many analysts.
 D.  all of these



53) Due to asymmetric information, the market fears that a firm issuing securities will do so when the stock is ___________.
 A.  caught up in a bear market.
 B.  being sold by insiders.
 C.  overvalued.
 D.  undervalued.



54) Which of the following statements is true?
 A.  Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sources.
 B.  Hard capital rationing refers to the rationing imposed internally by the firm.
 C.  A post audit is a set of procedures for evaluating a capital budgeting decision after the fact.
 D.  all of these



55) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of alternative decisions.
 A.  The Principle of Incremental Benefits
 B.  The Principle of Risk-Return Trade-Off
 C.  The Time Value of Money Principle
 D.  The Signaling Principle



56) __________ says to carefully evaluate and monitor the financial plan’s impact on the firm and its stakeholders.
 A.  The Principle of Capital Market Efficiency
 B.  The Principle of Self-Interested Behavior
 C.  The Principle of Diversification
 D.  The Principle of Risk-Return Trade-Off



57) __________ says to use common industry practices as a good starting place for the planning process.
 A.  The Principle of Self-Interested Behavior
 B.  The Principle of Valuable Ideas
 C.  The Behavioral Principle
 D.  The Principle of Incremental Benefits



Exam 5
1)  Refers to situations wherein the agent can take unseen actions for personal benefit even though such actions are costly to the principal.

A.
adverse selection

B.
The Behavioral Principle

C.
zero-sum game

D.
moral hazard








8) Book value (or Net book value) refers to:

A.
the length of an asset’s life when it is issued.

B.
the price for which something could be bought or sold in a reasonable length of time, where “reasonable length of time” is defined in terms of the item’s liquidity.

C.
the statement of a firm's financial position at one point in time, including its assets and the claims on those assets by creditors (liabilities) and owners (stockholders' equity).

D.
the net amount shown in the accounting statements.

9) The firm’s assets in the balance sheet refer to:

A.
the productive resources in the firm’s operations.

B.
the extent to which something can be sold for cash quickly and easily without loss of value.

C.
the statement of a firm's financial position at one point in time, including its assets and the claims on those assets by creditors (liabilities) and owners (stockholders' equity).

10) The return expected by equity investors is called the __________.

A.
market capitalization rate.

B.
dividend yield.

C.
average cost of capital.

D.
none of these

11) If the yield to maturity for a bond is less than the bond's coupon rate, then the market value of the bond is __________.

A.
equal to the par value.

B.
less than the par value.

C.
greater than the par value.

D.
cannot tell





12) Preferred stock payment obligations are typically __________.

A.
viewed like debt obligations.

B.
issued with a maturity date.

C.
valued as an annuity.

D.
none of these

13) According to the CAPM, the expected return for a portfolio is determined by the portfolio's.

A.
variance.

B.
beta.

C.
standard deviation.

D.
none of these

14) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.

A.
lower transaction costs.

B.
less political risk.

C.
costs of converting currencies.

D.
all of these

15) For diversified investors, the proper measure of a stock's risk is __________.

A.
its nondiversifiable risk.

B.
its standard deviation.

C.
its specific risk.

D.
its nonsystematic risk.







16) According to the Principle of Risk-Return Trade-Off, investors require a higher return to compensate for __________.

A.
lack of diversification

B.
greater risk

C.
diversification

D.
less risk

17) One problem with using negative values for w1 (the proportion invested in the riskless asset) to represent a borrowed amount is that the implied borrowing rate of interest is the same as __________.

A.
the prime rate of interest

B.
the nominal rate of interest

C.
the current rate of interest

D.
the lending rate of interest

18) The Principle of __________ implies that the expected return for an asset equals its required return.

A.
Capital Market Efficiency

B.
Signaling

C.
Risk-Return Trade-Off

D.
Comparative Advantage
19) Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?

A.
about 30.42 days

B.
about 56.50 days

C.
about 60.83 days

D.
none of these







20) Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is Stony's cash conversion cycle (CCC)?

A.
about 66 days

B.
about 69 days

C.
about 67 days

D.
about 68 days

21) Stony Products has a receivables turnover of ten times. What is Stony’s receivables collection period (RCP)?

A.
about 35.42 days

B.
about 36.50 days

C.
about 40.83 days

D.
none of these

22) __________ says to compare the benefits and costs of alternative uses and sources of money using after-tax APYs.

A.
The Principle of Time Value of Money

B.
The Options Principle

C.
The Signaling Principle

D.
The Principle of Incremental Benefits

23) Bank term loans represent __________.

A.
long-term loans that looks like short-term debt

B.
loans for specified amounts that require borrowers to repay them according to specified schedules

C.
the pledge of receivables

D.
all of these





24) __________ says to calculate the incremental after-tax cash flows connected with working capital decisions.

A.
The Signaling Principle

B.
The Options Principle

C.
The Principle of Incremental Benefits

D.
The Principle of Time Value of Money

25) Which (if any) of the following statements is false?

A.
When invoices are numerous, a firm may use statement billing instead of invoice billing.

B.
With statement billing, all of the sales for a period such as a month (for which a customer receives invoices, too) are collected into a single statement and sent to the customer as one bill.

C.
CIA (cash in advance) refers to when the shipper collects the payment (on behalf of the seller) upon delivery.

D.
none of these

26) Which of the following statements is (are) true?

A.
The "dating 120" or the "60 extra" mean that the clock does not start until 120 or 60 days after the invoice date.

B.
Prox or proximate refers to the next month.

C.
Invoices with "10th prox" must be paid by the 10th of the next month.

D.
all of these

27) Most credit sales are made on an open account basis, which means __________.

A.
that suppliers dictate the terms of the purchase.

B.
that customers simply purchase what they want.

C.
that customers cannot simply purchase what they want.

D.
that suppliers cannot dictate the terms of the purchase.





28) An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?

A.
Selling any stock in this portfolio will lower the beta of the portfolio.

B.
Each stock in the portfolio has its own beta.

C.
An investor cannot change the risk of this portfolio by her choice about personal leverage (lending or borrowing).

D.
Each stock in the portfolio will have a beta greater than one.

29) A profitable firm would __________.

A.
pay corporate income taxes because it would have interest expense.

B.
pay corporate income taxes because it would not have interest expense.

C.
pay corporate income taxes if it had a positive taxable income.

D.
none of these

30) Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes __________.

A.
an irrelevant consideration for a cost of capital.

B.
the relevant consideration for a cost of capital.

C.
important only if the firm faces financial distress.

D.
none of these

31) Projects can be classified into various categories. These include:

A.
maintenance expenditures projects that involve replacing worn-out or damaged equipment.

B.
cost savings and revenue enhancement projects that include improvements in production technology to realize cost savings and marketing campaigns to achieve revenue enhancement.

C.
capacity expansion projects that involve expanding the current business by adding new equipment and facilities.

D.
all of these


32) Ideas for capital budgeting projects come from all levels within an organization. The bottom up process results in ideas percolating through the organization.

A.
upward

B.
downward

C.
sideways

D.
any way

33) The capital budgeting process can be broken down into five steps. These steps include which of the following?

A.
Generate ideas for capital budgeting projects

B.
Prepare proposals

C.
Review existing projects and facilities

D.
all of these

34) Net present value ( NPV) is the difference between __________.

A.
what a capital budgeting project costs and what it is worth (its market value)

B.
what a capital budgeting project produces and what it is worth (its market value)

C.
what a capital budgeting project produces and what it is pays

D.
cash flows before taxes and cash flows after taxes

35) Whenever projects are both independent and conventional, then the IRR and NPV methods agree. Which of the following statements is true?

A.
A mutually exclusive project is one that can be chosen independently of other projects.

B.
When undertaking one project prevents investing in another project, and vice versa, the projects are said to have a positive payback.

C.
A conventional project is a project with an initial cash outflow that is followed by one or more expected future cash inflows.

D.
all of these

36) In practice, the __________ rule is preferred.

A.
PI

B.
NPV

C.
IRR

D.
Payback
37) A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in any particular industry with respect to __________.

A.
tax position.

B.
size.

C.
competitive position.

D.
all of these

38) Studies show systematic differences in capital structures across industries. These are due mostly to differences in the availability of tax shelter provided by things other than debt, such as __________.

A.
accelerated depreciation.

B.
operating tax loss carryforwards.

C.
investment tax credit.

D.
all of these

39) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________.

A.
accounting practices.

B.
the firm’s inventory turnover ratio.

C.
the ability of assets to support borrowing.

D.
management’s attitude toward what other industries are doing.








40) There can be a variety of motives for stock repurchases including __________.

A.
a decrease in leverage.

B.
a buyback of undervalued stock.

C.
a decrease in anticipated earnings.

D.
all of these

41) There can be a variety of motives for stock repurchases including __________.

A.
a buyback of overvalued stock.

B.
an increase in leverage.

C.
a decrease in anticipated earnings.

D.
all of these

42) Some countries have __________ in which shareholders' returns are not fully taxed twice.

A.
an imputation tax system

B.
a split tax system

C.
a two-tier tax system

D.
none of these

43) The Time Value of Money Principle says __________.

A.
to look for the most advantageous ways to finance the firm, such as the lowest-cost debt alternative

B.
to use discounted cash flow analysis to compare the costs and benefits of financing decisions, such as alternative securities to sell, lease versus borrow and buy, and bond refunding

C.
to set a price and other terms that investors will find acceptable when issuing securities

D.
that announcing the firm's decision to issue securities conveys information about the firm




44) Conditional sales contracts __________.

A.
are seldom issued to finance the purchase of aircraft

B.
are similar to equipment trust certificates

C.
enable the borrower to obtain title to the assets only before it fully repays the debt

D.
all of these

45) Stated maturity is __________.

A.
the amount the borrower must repay

B.
the date the borrower must repay the money it borrowed

C.
usually a fixed rate, but it can be a variable rate that’s adjusted according to a specified formula

46) The Principle of Self-Interested Behavior says __________.

A.
to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide.

B.
to look for profitable opportunities to lease (or rent) an asset, rather than borrow and buy it.

C.
to use discounted cash flow analysis to compare the costs and benefits of leasing, relative to the alternative of borrowing and buying.

D.
that leasing transfers the tax benefits of ownership from the lessee to the lessor.

47) __________ says to look for opportunities to develop asset-based financing arrangements that offer new positive-NPV financing mechanisms.

A.
The Principle of Valuable Ideas

B.
The Time Value of Money Principle

C.
The Principle of Self-Interested Behavior

D.
The Principle of Comparative Advantage





48) The Time Value of Money Principle says to __________.

A.
use discounted cash flow analysis to compare the costs and benefits of leasing, relative to the alternative of borrowing and buying.

B.
recognize that the cancellation option in a lease is valuable to the lessee.

C.
look for profitable opportunities to lease (or rent) an asset, rather than borrow and buy it.

D.
look for profitable opportunities to arrange project financing or limit partnership financing for an asset you wish to purchase.
49) The wholesale price for Captain John’s is $1.00 per loaf, and the variable cost of production is $0.50 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 5.0 million loaves in the next year. What additional revenues minus expenses will be generated from expansion?

A.
$25,000

B.
$250,000

C.
$550,000

D.
none of these

50) You are thinking about abandoning your business. If you do, then you will receive $168,000 on an after-tax basis from the land associated with your business. Abandoning your business would bring $15,000 on an after-tax basis from sale of equipment; also, you would not have to repair equipment at a cost of $10,800 per year on an after-tax basis. The before-tax cash flows from your business are $60,000 per year. Your tax rate is 25% and your required return is 12%. If you abandon your business, you will be able to spend your time earning wages that are equivalent to receiving an annuity of $16,000 per year on an after-tax basis until you retire in 12 years. At that time you could sell your land but would only realize what you could receive today. Should you abandon your business if you can make more money doing that?

A.
No. The NPV from abandoning is smaller than -$5,000

B.
No. The NPV from abandoning is negative.

C.
Yes. The NPV is greater than $100,000

D.
Yes. Abandon the business.

51) The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 4.5 million loaves in the next five years. What additional revenues minus expenses will be generated from expansion?

A.
$1,102,000

B.
$1,012,500

C.
$1,000,500

D.
$912,500

52) “Hard” capital rationing refers to the rationing __________.

A.
always imposed by debtholders.

B.
always imposed by competitors.

C.
imposed internally by the shareholders.

D.
imposed by external factors.

53) Which of the following statements is true?

A.
Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sources.

B.
Hard capital rationing refers to the rationing imposed internally by the firm.

C.
A post audit is a set of procedures for evaluating a capital budgeting decision after the fact.

D.
all of these

54) Under capital rationing, a good tool to use is the __________.

A.
NPV method.

B.
PI method.

C.
payback method.

D.
IRR method.





55) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of alternative decisions.

A.
The Principle of Risk-Return Trade-Off

B.
The Principle of Incremental Benefits

C.
The Time Value of Money Principle

D.
The Signaling Principle

56) __________ says to carefully evaluate and monitor the financial plan’s impact on the firm and its stakeholders.

A.
The Principle of Self-Interested Behavior

B.
The Principle of Capital Market Efficiency

C.
The Principle of Diversification

D.
The Principle of Risk-Return Trade-Off

57) __________ says to use common industry practices as a good starting place for the planning process.

A.
The Principle of Valuable Ideas

B.
The Principle of Self-Interested Behavior

C.
The Behavioral Principle

D.
The Principle of Incremental Benefits


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