FIN622 Online Quiz - Pdfa

Fall 2010
Quizzes & MCQs
FIN622
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Rana Muhammad Safdar (rana.sfdr@gmail.com) Bilal Farooq (bilal.zaheem@gmail.com) Muhammad Afaaq (afaaq_tariq@yahoo.com)
Fall 2010
Quizzes
1. Diversification eliminates unique risk. But there is some risk that diversification can not eliminates. This is called as: 1. Market Risk 2. Systematic Risk 3. Unsystematic Risk 4. All of the given options
1.
_____________ arises due to internal factors. 1. Hard Rationing 2. Soft Rationing 3. Single period rationing 4. All of the given options
1. _____________ is a technique which indicates how much a projects NPV will change in response to a given change in an input variable, other things held constant. 1. Break Even Analysis 2. Degree of Operating Leverage 3. Sensitivity analysis 4. Scenario analysis
1. Which of the following is advance tool of Project Evaluation? 1. Net Present value NPV 2. Internal Rate of Return IRR 3. Pay Back Period Method 4. Sensitivity analysis
1. In case of more than one project, the project with ______ NPV can be undertaken. 1. Low 2. Higher 3. Moderate 4. zero For the statement of cash flows, which of the following is considered a cash flow item from investing activities?
Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)
Fall 2010
A) Cash inflow from borrowing B) Cash outflow to acquire fixed assets C) Cash outflow to government for taxes D) Cash inflow from dividend income
Quizzes
2. Expected changes in capital expenditures and firm dividend policy during the next year are both likely to influence ________. A) Cash receipts of the firm B) Cash disbursements of the firm C) Earned (receipts) from Treasury bills held by the firm D) Disbursements to holders of the firm's 10-year, 8% fixed rate bonds
3. The key to the accuracy of the cash budget is: A) The sales forecast. B) The expenses forecast. C) The inventory control method used. D) The seasonality of cash flows. 4. When working capital management is discussed, ________ and ________ tend to be thought of as forms of spontaneous financing. A) Short-term debt, cash B) Accounts payable, accruals C) Accounts payable, short-term debt D) Accruals, cash 5. Short-term financing is riskier than long-term financing because: A) Short-term interest rates fluctuate; long-term rates do not. B) Short-term debt must be refunded more frequently than long-term debt. C) Short-term interest rates are usually higher than long-term interest rates. D) The amount of money that can be raised by short-term borrowing is much less than the amount that can be raised long-term. 6. Which of the following describes the hedging approach to financing?
Fall 2010
Quizzes
A) Maturity dates of financing instruments are staggered so that they mature in a steady, predictable fashion. B) Each asset is offset with a financing instrument of the same approximate maturity. C) Each asset is offset with a put or call. D) The firm takes out insurance to protect itself against uneven cash flows. 7. When the firm considers working capital management, the trade off between risk and return is affected by all of the following except A) The pattern of cash borrowing needs of the firm. B) The difference between long-term and short-term interest rates. C) The ratio of cash to marketable securities. D) The debt maturity schedule. 8. Firms with more certain cash flow patterns can operate with: A) A higher level of accounts receivable to inventories. B) A lower proportion of long-term to short-term debt. C) A lower proportion of liquid to total assets. D) A higher proportion of liquid to total assets. 9. An increase in the firm's receivable turnover ratio means that ________. A) It has initiated more liberal credit terms with no increase in sales B) It is collecting credit sales more quickly than before C) Cash sales have decreased D) Inventories have increased 10. The largest single source of short-term financing for businesses collectively is A) Commercial paper. B) Trade credit. C) Bank loans. D) Trade acceptances.
1. Which of the following statements is TRUE regarding Profitability Index?
Fall 2010
a. b. c. d. It ignores time value of money It ignores return on investment It ignores future cash flows It ignores the scale of investment
Quizzes
2. Which of the following terms refers to the process of systematic investigation of the effects on estimates or outcomes of changes in data or parameter inputs or assumptions to evaluate a capital project? a. Sensitivity Analysis b. Fundamental Analysis c. Technical Analysis d. Trend Analysis 3. Holding everything else constant, increasing fixed costs ________ the firm's break-even point. a. Decreases b. Increases c. Increases the covariance of d. Does not affect 4. A company has fixed costs of $50,000 and variable costs per unit of output of $8. If its sole product sells for $18, what is the break-even quantity of output? a. 2,500 b. 1,500 c. 5,000 d. 7,500 5. If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then which of the following recommendations should be considered? a. Fixed costs should be traded for variable costs b. Variable costs should be traded for fixed costs c. The project should not be undertaken d. Additional marketing analysis may be beneficial before proceeding
6. Which of the following best illustrates the problem imposed by capital rationing? a. Bypassing projects that have positive NPVs b. Accepting projects with the highest NPVs first c. Accepting projects with the highest IRRs first d. Bypassing projects that have positive IRRs 7. Which of the following may be a major reason for hard capital rationing?
Fall 2010
a. b. c. d. Dilution of earning per share (EPS) High interest rate High interest expense Company own policies
Quizzes
8. The percentage change in a firm's operating profit (EBIT) resulting from a 1% change in output (sales) is known as the ________. a. Degree of profit leverage b. Degree of operating leverage c. Degree of total leverage d. Degree of financial leverage 9. Which of the following is a major limitation of Linear Programming Technique of capital projects selection? a. Time value of money is not considered b. Ignores the relative size of the Investment c. Project cash flows are ignored d. Project profitability is ignored 10. Which of the following methods would be most suitable for selecting capital project(s) in case of multi-period capital rationing? a. Simple payback period b. Linear Programming c. Discounted payback period d. Multiple Internal Rate of Return
11. What is the main purpose of constructing a portfolio of financial assets? a. b. c. d. To maximize risk and minimize the return To maximize the return and minimize the risk To minimize the risk and minimize the return To minimize the return and minimize the risk
12. Suppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on the stock? a. 2% b. 3% c. 4% d. 5%
Fall 2010
Quizzes
13. Which of the following measures systematic risk of a firms common stock? a. CAPM b. Beta c. MM-Model d. SML 14. Which of the following is known as market portfolio? a. A portfolio consists of all risk free securities available in the market b. A portfolio consists of all securities available in the market c. A portfolio consists of securities of the same industry d. A portfolio consists of all aggressive securities available in the market 15. A market portfolio has a beta equal to: a. 0 b. 1 c. 2 d. 3 16. Which of the following shows the reward to risk ratio of a security A? a. Expected return of A (rA) Risk free return / required return of A b. Expected return of A (rA) Risk free return / Beta of A c. Expected return of A (rA) Beta of A / Risk free return d. Risk free return - Expected return of A (rA)/ Beta of A 17. In which of the following conditions a stock is said to be overvalued? a. If the stock has market value less than the expected value b. If the stock has market value equal to the expect value c. If the stock has market value more than the expected value d. If the stock has market value less than its intrinsic value 18. Which of the following statements applies to Dividend Growth Model? a. It is difficult to understand and use b. It do not consider risk level of a security c. It is used for non-listed companies d. It is used for debt securities also 19. Which of the following is the principal advantage of high debt financing? a. Low bankruptcy costs b. Tax savings c. Minimum financial risk d. Low financial leverage 20. Which of the following is a disadvantage of Capital Asset Pricing model?
Fall 2010
a. b. c. d. It consider market risk It is based on past data It can be used for listed companies It can be used for non-listed companies
Quizzes
1-Which of the following is the principal advantage of high debt financing? Select correct option: Tax savings Low bankruptcy costs Minimum financial risk Low financial leverage 2-Which of the following is tax deductible? Select correct option: Dividend on preferred shares Dividend on common stocks Coupon payments on bonds Capital gain on common stocks 3-Which of the following describes the hedging approach to financing? Select correct option: Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion Each asset is offset with a financing instrument of the same approximate maturity. Each asset is offset with a put or call option. The firm takes out insurance to protect itself against uneven cash flows. http://wps.pearsoned.co.uk/wps/media/objects/1669/1709919/0273685988_ch0 8.ppt 4-Which one of the following transactions take place in a primary financial market? Select correct option: Initial Public Offering Buying Mutual Funds Certificates Selling old shares Buying Bonds issued in previous year 5-Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year. Which of the following could explain this performance?
Fall 2010
Select correct option: The companys taxes increased. The companys depreciation expense declined. The companys operating income declined. All of the given statements are correct
Quizzes
6-Which of the following changes will increase the Net Present Value (NPV ) of a project? Select correct option: A decrease in the discount rate A decrease in the size of the cash inflows An increase in the initial cost of the project A decrease in the number of cash inflows 7-Which of the following technique of stock evaluation considers quantitative factors as well as qualitative factors for valuation? Select correct option: Technical Analysis Fundamental Analysis Constant Growth Model No Growth Model 8-The formula for the break-even quantity of output (QBE), given the price per unit (P), fixed costs (FC), and variable cost per unit (V), is: Select correct option: QBE = (P - V)/FC. QBE = (P/FC) - V. QBE = (FC/P) - V. QBE = FC/ (P - V). 9-With respect to Cash flow statement, Decrease in current liability would be considered as a: Select correct option: Cash outflow Cash inflow Sometimes as cash inflow and sometimes as cash outflow Cannot be determined 10-Which of the following statement is CORRECT regarding residual dividend policy? Select correct option: Shareholders are paid dividend from capital
Fall 2010
Quizzes
Dividend are paid after meeting all the financial needs of the firm The management sets a fixed payout ratio Shareholders are paid fixed dividend every year 11-Which of the following focuses on long-term decision-making regarding the acquisition of projects? Select correct option: Working Capital Management Capital Budgeting Cash Budgeting None of the given options 12-Which of the following is determined by variance of an investment's returns? Select correct option: Volatility of the rates of return. Probability of a negative return. Historic return over long periods. Average value of the investment
1. A firm collects 70 percent of its credit sales in 30 days, 20 percent in 60 days, and 10 percent in 90 days. The average collection period is: A) 33 days. B) 56 days. C) 47 days. D) 42 days. 2. A more aggressive financing policy by a firm would lead to ________ profitability and ________ risk. A) higher, lower B) higher, higher C) lower, higher D) lower, lower 3. Financial data for three firms is presented below. Each differs only with respect to philosophy on an aggressive vs. a conservative approach to current asset management. FIRM A FIRM B FIRM C
Fall 2010
Sales $2,000,000 $2,000,000 $2,000,000 EBIT 200,000 200,000 200,000 Current Assets 600,000 500,000 400,000 Fixed Assets 500,000 500,000 500,000 Total Assets 1,100,000 1,000,000 900,000
Quizzes
The firm with the least aggressive philosophy has an asset turnover of A) 3.33-to-1. B) 2.22-to-1. C) 5.00-to-1. D) 1.82-to-1. 4. Temporary working capital A) Varies with seasonal requirements. B) is the constant component of working capital. C) excludes inventories. D) should be financed with bonds or common stock. 5. Which of the following would be consistent with a more aggressive (i.e., a high risk-profitability) approach to financing working capital? A) Financing permanent inventory buildup with long-term funds. B) Financing seasonal needs with short-term funds. C) Financing short-term needs with short-term funds. D) Financing some long-term needs with short-term funds 6. When the firm considers working capital management, the trade off between
risk and return is affected by all of the following except A) The pattern of cash borrowing needs of the firm. B) The difference between long-term and short-term interest rates. C) The ratio of cash to marketable securities. D) The debt maturity schedule.
7. A good cash management system involves properly managing A) Collections, disbursements, cash balances, and capital investment. B) Collections, disbursements, cash balances, and marketable securities investment. C) Only collections, disbursements, and cash balances. D) Only collections and disbursements. 8. The International Co. is holding cash as a buffer in case of an unexpected
Fall 2010
Quizzes
need with operations. This is an example of the ________ motive for holding cash. A) Precautionary B) Speculative C) Transactions D) Capital needs 9. A competing firm has made a hostile offer for your corporation. You have invited a second firm to make a friendly counter-bid to thwart the unwelcome hostile offer from the original bidding firm. The second firm is known as a (an) ________. A) White knight B) Entrenchment firm C) Pure-play firm D) Counter-offer firm 10. A leveraged buyout A) is an ownership transfer financed largely by debt. B) is facilitated by rising interest rates. C) usually involves a labor-intensive business. D) results in a publicly held corporation.
1. A firm wants to acquire another firm by purchasing its assets. Which of the following method could the firm use to evaluate the financial aspects of this deal? a. b. c. d. Breakup value method Dividend valuation method Present value method Price earning ratio method
2. Which of the following is a major limitation of an income based method of share valuation? a. b. c. d. Future growth assumptions Estimation of future cash flows Future cash flow valuation Future cash flow discounting
3. All of the following are related to an income based method of shares valuation EXCEPT?
Fall 2010
a. b. c. d. Future cash flows Future growth Discount rate Book values
Quizzes
4. Which of the following statement applies to employees buyout? a. b. c. d. Employees are promoted to the higher positions Employees are given more responsibilities Employees buy majority shares in the firm Employees buy shares of a competing firm
5. Management of a firm prefers buyout because of the following reason? a. b. c. d. The company is selling at below the market price The company has good future prospects Company offers good product Companys management could change
6. Which of the following could be a major disadvantage of an LBO? a. b. c. d. The acquired firm would have a high interest expense The acquired firm would have a high operating cost The acquired firm would have a high manufacturing cost The acquired firm would have a high operating risk
7. In which of the following acquisition strategy, a purchaser has complete knowledge of the acquiring firm? a. b. c. d. Management Buy-In Management buyout Consolidation Amalgamation
8. Which of the following would be an example of an MBO? a. b. c. d. Management of a firm-A purchases majority shares from the shareholders Management of a firm-A acquires majority shares in another firm-B Management sale out some assets of the firm Management buy some new plants and machinery
9. All of the following could be an outcome of financial distress of a firm EXCEPT?
Fall 2010
a. b. c. d. Employees are leaving the firm Suppliers refuse to supply on credit Banks do not provide loans Financial markets become instable
Quizzes
10. Choose the correct statement? a. The price at which a FX dealer will sell a variable currency is called offer price b. The price at which an FX dealer will buy the base currency is called bid price c. The price at which an FX dealer will sell a variable currency is called bid price d. The price at which an FX dealer will sell a base currency is called bid price 1. According to the Capital Asset Pricing Model (CAPM), which of the following represent the amount of compensation the investor needs for taking on additional risk? a. b. c. d. ( rM - rF) ( rM-+rF) rF (rM - rF)
2. Which of the following is measured by Beta ( ) of a security. a. b. c. d. Systematic risk of the security Unsystematic risk of the security Market risk premium of the security Expected return of the security
3. If the risk-free rate is 3%, the beta (risk measure) of a stock is 2 and the expected market return over the period is 10%, according to the CAPM the expected return of the stock would be a. b. c. d. 17% 20% 29% 15%
4. Which of the following statement is correct with respect to a company heavily financed by debt? a. The company has a higher level of risk b. The company has high cost of capital
Fall 2010
c. The company is unable to meet its debt obligations d. The company can not issue common shares
Quizzes
5. Which of the following represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership? a. b. c. d. Market risk Premium A firms Cost of debt Risk free rate of return A firms Cost of equity
6. Which of the following will decrease the cost of debt? a. b. c. d. 7. a. b. c. d. A decrease in the tax rate A decrease in Current Liability An increase in the tax rate An increase in Current Assets The purpose of Weighted Average Cost of Capital is to measure: The cost of debt The cost of equity The cost of capital The cost of sales
8. A companys after-tax cost of debt is 3%, if the companys marginal tax rate were 40% what would be its before-tax cost of debt? a. b. c. d. 5% 3% 1.80% 2%
9. Which of the following is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm? a. b. c. d. Cost of Debt Cost of Equity Weighted Average Cost of Capital Cost of Retained earning
Fall 2010
Quizzes
10. Which of the following measure compares the risk of an unlevered company to the risk of the market? a. b. c. d. Ungeared Beta Geared Beta Portfolio Beta Stock Beta
In which of the following dividend policy, the amount of dividend is relatively fixed? Constant payout ratio policy Hybrid Dividend policy Residual Dividend policy Stable dividend policy The present value of Rs.5,000 received at the end of 5 years, discounted at 10 percent, is closest to: Rs.3,105. Rs.823. Rs.620. Rs.3,403.
Which of the following is the correct definition for "spread" in cash management? The difference between optimal cash balance and Nominal Cash balance The difference between opining cash balance and ending cash balance. The difference between upper limit and lower limit of cash balances The difference between optimal cash balance and ending cash balance Which of the following method can be used to forecast the sales of a firm? Price earning ratio
Fall 2010
Cash flow estimation Fundamental Analysis Regression Analysis
Quizzes
Suppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on the stock? Select correct option: 2% 3% 4% 5%
Which of following are two most likely motives in explaining why firms hold cash? Speculative motive and the precautionary motive Transactions motive and the speculative motive. Precautionary motive and the managerial entrenchment motive. Transactions motive and the precautionary motive.
Suppose you wish to set aside Rs.2,000 at the beginning of each of the next 10 years (the first Rs.2,000 deposit would be made now) in an account paying 12 percent compounded annually. Approximately how much will you accumulate at the end of 10 years? Select correct option: Rs.22,863 Rs.35,097 Rs.39,310 Rs.25,151 Which of the following condition if exist will make the diversification more effective?
Fall 2010
Securities contained in a portfolio are positively correlated Securities contained in a portfolio are negatively correlated Securities contained in a portfolio have high market values Securities contained in a portfolio have low market values
Quizzes
Which of the following methods would be most suitable for selecting capital project (s) in case of multi-period capital rationing? Simple payback period Discounted payback period Multiple Internal Rate of Return Linear Programming Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1 percent? 20-year, zero coupon bond. 10-year, zero coupon bond. 20-year, 10 percent coupon bond 20-year, 5 percent coupon bond.
Please choose one Which of the following is TRUE regarding optimal capital structure? An optimal capital structure refers to the mix of debt and equity level where the firm has minimum cost of capital An optimal capital structure refers to the mix of debt and equity level where the firm has minimum financial leverage An optimal capital structure refers to the mix of debt and equity level where the firm has maximium cost of capital An optimal capital structure refers to the mix of debt and equity level where the firm has high financial leverage Which of the following statement is true? WACC of a levered firm is greater than that of an un-levered firm WACC of a levered firm is lesser than that of an un-levered firm WACC of a levered firm is equal to that of an un-levered firm An Un-levered firm has zero WACC.
Fall 2010
Which of the following is a measure of risk of an asset? Weighted average Standard deviation Probability distribution Geometric mean Which of the following would NOT improve the current ratio? Borrow short term to finance additional fixed assets. Issue long-term debt to buy inventory Sell common stock to reduce current liabilities. Sell fixed assets to reduce accounts payable.
Quizzes
Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back ___________ to the analysis. The cost of fixed assets The cost of accounts payable Investments Depreciation A dividend payment made in the form of additional shares, rather than a cash payout is known as: Stock Dividend Cum Dividend Ex Dividend Extra Dividend In inventory management, the storage cost of inventory is considered as: Carrying cost Reorder cost Stock out cost Safety cost (DOUBTED)
Fall 2010
Quizzes
Question # 11 of 15 ( Start time: 06:13:11 PM ) Total Marks: 1 All of the following factors must be considered, while making short-term investment EXCEPT: Liquidity Safety Profitability Inventory
According to the Miller Orr Model, upper limit for cash balance is equal to: Lower limit + Spread Spread Lower limit Optimal limit + Lower limit Lower limit Spread (zh,www.Expertss.net) Which of the following firm may be considered as a pure play in the beverages industry in Pakistan? Coca Cola Pepsi Shezan All of the given options
Suppose you have a 2-stocks portfolio, which consists of Stock A and Stock B. If stock A has a beta value of 1.8 and stock B has a beta value of 0.68, and your investment in stock A and stocks B is equal, then the beta of this 2-stock portfolio would be equal to: Select correct option: 1.20 1.24 1.30 1.45
A Pure Play method of selecting a discount rate is most suitable in which of the following situations?
Fall 2010
Quizzes
When the intended investment project belongs to industry other than the firms operating in When the intended investment project has a conventional stream of cash flows When the intended investment project has a Non-conventional stream of cash flows When the intended investment project is a replacement project
Which one of the following statements describes the relationship between Interest rates and bond prices? Move in the same direction. Move in opposite directions Sometimes move in the same direction, sometimes in opposite directions Have no relationship with each other (i.e., they are independent).
The formula for the break-even quantity of output (QBE), given the price per unit (P), fixed costs (FC), and variable cost per unit (V), is: QBE = (P - V)/FC. QBE = (P/FC) - V. QBE = (FC/P) - V. QBE = FC/ (P - V).
Which one of the following statements best describes the intrinsic value of a stock? Intrinsic value of a stock is the future value of all expected future dividends, discounted at the dividend growth rate. Intrinsic value of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. Intrinsic value of a stock is the future value of all expected future dividends, discounted at the investors required return. Intrinsic value of a stock is the present value of all expected future dividends, discounted at the investors required return.
Fall 2010
A risk free asset has a Beta value equal to: 0 1 2 3
Quizzes
Which of the following is the average time period between buying inventory and receiving cash proceeds from its eventual sale? Operating Cycle Cash Cycle Inventory period Inventory Turnover
Spread variation does NOT depend on which of the following factors? Variance of cash flows Transaction cost (not sure) Interest rate Expected cash flow
You have calculated that the required rate of return on a particular common stock is less than the expected rate of return. Therefore, you would conclude: Select correct option: That the stock is more risky than the market portfolio. Page 57 That an investor should buy the stock. That the stock has a high dividend payout ratio. That an investor should sell the stock.
If the Internal Rates of Return of two, mutually exclusive options are both greater than the cost of capital, which option should be selected under the Internal Rate of Return method? Select correct option: The one with the largest Internal Rate of Return. The one with the smallest Internal Rate of Return. The one with the highest Net Present Value at the firms cost of capital. None of the given options
Fall 2010
Quizzes
The decision rule for net present value is to: Select correct option: Accept all projects with cash inflows exceeding initial cost. Reject all projects with rates of return exceeding the opportunity cost of capital. Accept all projects with positive net present values. Reject all projects lasting longer than 10 years.
Which of the following is determined by variance of an investment's returns? Select correct option: Volatility of the rates of return. Probability of a negative return. Historic return over long periods. Average value of the investment
If you deposit $12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%, what will your account be worth at the end of 16 years? Select correct option: $82,168.44 $71,450.82 $768,901.12 $668,609.67
Virgo Airlines will pay Rs.4.00 dividend next year on its common stock, which is currently selling at Rs.100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever? Select correct option: 4 percent. 5 percent. 7 percent. 9 percent.
Which of the following shows the reward to risk ratio of a security A ? Select correct option: Expected return of A (rA) Risk free return / Beta of A Expected return of A (rA) Risk free return / required return of A
Fall 2010
Expected return of A (rA) Beta of A / Risk free return Risk free return - Expected return of A (rA)/ Beta of A
Quizzes
If two projects are independent, that means that _________. Select correct option: Selection of one precludes selection of the other. You should analyze the projects independently. Both the given options may apply None of the given options
When the firm considers working capital management, the trade off between risk and return is NOT affected by which of the following? The pattern of cash borrowing needs of the firm. The difference between long-term and short-term interest rates. The ratio of cash to marketable securities. The debt maturity schedule.
If you invest Rs.400 today in a savings account paying 8 percent interest per year, how much will you have in the account at the end of three years if the interest is compounded annually? Select correct option: Rs.325 Rs.1,299 Rs.504 Rs.609
A dividend payment made in the form of additional shares, rather than a cash payout is known as:
Fall 2010
Select correct option: Stock Dividend Cum Dividend Ex Dividend Extra Dividend
Quizzes
Which of the following describes the hedging approach to financing? Select correct option: Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion Each asset is offset with a financing instrument of the same approximate maturity. Each asset is offset with a put or call option. The firm takes out insurance to protect itself against uneven cash flows.
Suppose that market now requires an 8 percent return for a bond that was issued some years ago with a 10 percent coupon. This bond will currently be priced: Select correct option: At a premium over face value. At par value. At a discount from face value. At face value.
In the formula rE = (D1/P0) + g, what does the symbol "g" represent? The expected price appreciation yield from a common stock. The expected dividend yield from a common stock. The dividend yield from a preferred stock. The interest payment from a bond.
Which of the following focuses on long-term decision-making regarding the acquisition of projects? Working Capital Management Capital Budgeting Cash Budgeting None of the given options
Fall 2010
Initial Public Offering Buying Mutual Funds Certificates Selling old shares Buying Bonds issued in previous year
Quizzes
Which one of the following transactions take place in a primary financial market?
Which of the following factor determines the financial viability of a project? Future Profits Future Cash flows (not sure) Sunk Cost None of the given option
Which of the following is the Dividend Payout ratio for a common stock? Select correct option: Dividend per share: Market value per share Earning per share: Intrinsic value per share Dividend per share: Earning per share (not sure) Market value per share: intrinsic value per share
Which of the following best define the term 'Capital Structure'? Select correct option: The proportion of debt and equity capital used by a firm The proportion of long-term liabilities used by a firm The proportion of equity used by a firm The proportion of short-term bank loan used by a firm
Holding everything else constant, increasing fixed costs ______ the firm's breakeven point. Select correct option: Decreases Increases the covariance of Increases Does not affect
Fall 2010
Increase if the interest rate increases. Remains unchanged if the interest rate changes Decrease if the interest rate increases All of the given options are correct (not sure)
Quizzes
Which one of the following statements is TRUE regarding future value of a single sum?
1. When calculating a project's annual cash flows, which of the following is not directly included? A) The reduction in taxes attributable to sale of an asset for less than its book value B) The tax incurred when the trade-in value of the old asset exceeds its book value C) The reduction in taxes attributable to depreciation charges D) Depreciation expense 2. The basic characteristics of relevant project flows include all of the following except A) After-tax flows. B) Cash flows. C) Incremental flows. D) Financing flows. 3. Project GROW will require $250,000 to purchase new machinery. Capitalized expenditures total $40,000. The new machine will require that the firm purchase some additional inventory which will result in an increase in net working capital of $50,000. What is the initial cash outflow? A) $300,000 B) $350,000 C) $270,000 D) None of the above are correct. 4 In analyzing a long-term investment proposal, A) Include opportunity costs. B) Include before-tax interest payments. C) Include after-tax interest payments.
Fall 2010
D) Include sunk costs.
Quizzes
5.The Pink Pussycat Lounge is considering replacing its lighting system. The new lights will cost $16,000 and can be installed for $2,500. The old light fixtures were depreciated to zero but can be sold to Secondhand Sam for $1,000. If the Pink Pussycat has a 35 percent tax rate, the initial cash outflow for the new lighting system is A) $18,500. B) $16,000. C) $17,500. D) $17,850.
6. A company is considering a project costing $50,000. The hurdle rate is 9 percent and the project is expected to yield an ordinary annuity for 10 years. The annual annuity must be at least ________ for the project to be accepted. A) $9,231 B) $8,321 C) $8,667 D) $7,791 7. Your firm is considering two mutually exclusive projects, code-named A and B, that would each require an initial cash outflow of $10,000. They would generate the following incremental, after-tax, operating cash flows: Project A Year 1 $5,000 Year 2 4,000 Year 3 3,000 Project B $3,000 4,000 6,000
If the firm's required rate of return is 14 percent, which would you select? A) Neither project because neither adds value to the firm. B) Project A because it has the higher net present value. C) Project B because it has the higher internal rate of return. D) Project A because it has the shorter payback period.
8. A proposed investment project requires an initial cash outflow of $82,650 and has an economic life of three years, with no salvage value. It is expected to generate before tax cash flows of $45,000 for each of the three years. The firm's tax
Fall 2010
Quizzes
rate is 30 percent. Which of the following is closest to the project's internal rate of return? A) 30 percent B) 7 percent C) 40 percent D) 12 percent 9.The initial cost of a conventional project is $14,000. The present value of the project's cash inflows, discounted at 12 percent, is $12,500. The internal rate of return is A) Less than 12 percent. B) Greater than 12 percent. C) Equal to 12 percent. D) Cannot tell without additional information 10. Hi Lighter, Inc., is considering a project with an initial investment of $25,000 that generates cash-inflows of $10,000 per year for 8 years starting today. What is the net present value of this project if the firm requires a 15% rate of return on this project? (Choose the nearest figure.) A) $22,854 B) $19,873 C) $1,152 D) $55,000 The employment of fixed costs associated with the actual production of goods or services is known as: Financial leverage Volume discounting Operating leverage Covariance
Which of the following is a planning tool? A budget A balance sheet An income statement A Cash flow statement
Which of the following would lower a firm's operating break-even point?
Fall 2010
An increase in the cost of goods sold An increase in selling price An increase in wages paid to employees An increase in total sales
Quizzes
Which of the following is a disadvantage of Capital Asset Pricing model? It consider market risk It can be used for listed companies It can be used for Non-listed companies It is based on Past data
Which of the following statements applies to Dividend Growth Model? It is difficult to understand and use It is used for non-listed companies It is used for debt securities also It do not consider risk level of a security
Which of the following changes will occur if a bond's yield-to-maturity increases, keeping other things equal? Its price will rise
Fall 2010
Its price will remain unchanged Its price will fall. Can not be determined
Quizzes
A company has fixed costs of $50,000 and variable costs per unit of output of $8. If its sole product sells for $18, what is the break-even quantity of output? Select correct option: 2,500 5,000 1,500 7,500 REF: BEQ= FC/P-VC =50000 / 18-8 = 50000 / 10 = 5000
Which of the following is included in the cost of capital of a firm?
Cost of sales Depreciation cost Depletion cost Cost of retained earnings
Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year. Which of the following could explain this performance? The companys taxes increased. The companys depreciation expense declined. The companys operating income declined. All of the given statements are correct.
A market portfolio has a beta equal to:
Fall 2010
1 2 3
Quizzes
A Levered firm has a lower weighted average cost of capital as compare to an Un-levered firm because of: Interest tax shield Low level of financial risk Low level of business risk Low level of systematic risk
A dividend payment made in the form of additional shares, rather than a cash payout is known as: Stock Dividend Cum Dividend Ex Dividend Extra Dividend
Which of the following method can be used to forecast the sales of a firm? Price earning ratio Cash flow estimation Fundamental Analysis Regression Analysis
not sure
Dividend discount Model states that todays price of a stock is equal to: The Present Value of all future dividends of the stock The Present Value of the face value of the stock The Present Value of the Sales price of the stock The Present Value of the book value of the stock page 115
The decision rule for net present value is to: Accept all projects with cash inflows exceeding initial cost.
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Quizzes
Reject all projects with rates of return exceeding the opportunity cost of capital. Accept all projects with positive net present values. Reject all projects lasting longer than 10 years.
Which of the following capital budgeting technique ignores profitability and time value of money? Net Present Value Internal Rate of Return Discounted Pay Back period Simple Pay Back Period
Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back ___________ to the analysis. The cost of fixed assets The cost of accounts payable Investments Depreciation
Which of the following is an objective of an optimal capital structure? Select correct option: To minimize the cost of capital To minimize cost of equity To minimize cost of debt not sure To minimize cost of sales
Fall 2010
Quizzes
If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then which of the following recommendations should be considered? Fixed costs should be traded for variable costs Variable costs should be traded for fixed costs. The project should not be undertaken. Additional marketing analysis may be beneficial before proceeding.
Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in an account paying 12 percent compounded annually. You accumulate at the end of 10 years an amount closest to: Select correct option: Rs.22,456 Rs.35,098 Rs.28,324. Rs.20,324
Which of the following investment criteria does not take the time value of money into consideration? Simple payback method page 35 Net present value Profitability index Internal rate of return for borrowing projects
WWhich of the following would be consistent with a more aggressive (i.e., a high risk profitability) approach to financing working capital? Financing permanent inventory buildup with long-term funds. Financing seasonal needs with short-term funds. Financing short-term needs with short-term funds. Financing some long-term needs with short-term funds
If a creditor wanted to know if a potential customer paid its bills on time, the creditor could look at the potential customer's:
Fall 2010
Current ratio. Acid ratio. Average age of accounts payable. Average age of accounts receivable
Quizzes
Which of the following best illustrates the problem imposed by capital rationing? Select correct option: Accepting projects with the highest NPVs first Accepting projects with the highest IRRs first Bypassing projects that have positive NPVs Bypassing projects that have positive IRRs
Present value of Rs.5, 000 received at the end of 5 years, discounted at 10 percent, is closest to: Rs.3, 105. Rs.823. Rs.620. Rs.3, 403.
Which of the following statement best describe the term Market Correction? Market Correction refers to the situation where equilibrium of supply & demand of shares occurs in the market Market correction occurs when shares intrinsic values becomes equal to face values Market Correction occurs when there is a boom in the economy Market Correction occurs when inflation rate is above the market interest rate
Which of the following is the average time period between buying inventory and receiving cash proceeds from its eventual sale?
Operating Cycle Cash Cycle
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Inventory period Inventory Turnover
Quizzes
Operating cycle Average time period between buying inventory and receiving cash proceeds from its eventual sale. It is determined by adding the number of days inventory is held and the collection period for accounts receivable.
current assets of company exceed its current liabilities, then the company will have: A positive net working capital A negative working capital A net working capital of less than zero A net working capital equal to zero
Which one of the following is a major limitation of Linear Programming Technique of capital projects selection? Ignores the relative size of the Investment Time value of money is not considered Project cash flows are ignored Project profitability is ignored
Which of the following is tax deductible? Select correct option: Dividend on preferred shares Dividend on common stocks Coupon payments on bonds Capital gain on common stocks
Which of the following focuses on long-term decision-making regarding the acquisition of projects? Select correct option: Working Capital Management Capital Budgeting
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Cash Budgeting None of the given options
Quizzes
Question No: 1 ( Marks: 1 ) - Please choose one Which of the following statements is TRUE regarding Profitability Index? It ignores time value of money It ignores future cash flows It ignores the scale of investment It ignores return on investment Question No: 2 ( Marks: 1 ) - Please choose one Which of the following is a tool that identifies the strengths, weaknesses, opportunities and threats of an organization? SWOT Analysis Trend Analysis Fundamental Analysis Technical Analysis Question No: 3 ( Marks: 1 ) - Please choose one Which of the following statements applies to intrinsic value of a security? Intrinsic value of a security always exceeds its book value. Intrinsic value of a security rises when the liquidation value falls. Intrinsic value of a security is the price around which its market value should closely fluctuate. Intrinsic value of a security is its closing market value when it is actively traded. Intrinsic Value (also known as fundamental value) refers to the actual value of a security based on an underlying perception of its true value due to both tangible and intangible factors. The value may defer from the current market value. As a result, value investors use an array of analytical techniques to estimate the value of the security in the hope finding investments where the true value of the investment exceeds its current market value. It can be calculated by summing the future income generated by the assets, and discounting it to the present value. Question No: 4 ( Marks: 1 ) - Please choose one A Company's common stock is currently selling at Rs.3.00 per share, its quarterly dividend is Rs.0.07, and the stock is expected to rise to Rs.3.30 in a year. What is its expected rate of return?
Fall 2010
9.3% 19.3% 10.0% 11.0%
Quizzes
Question No: 5 ( Marks: 1 ) - Please choose one For a firm with a Degree of Operating Leverage of 3.5, an increase in sales of 6% will: Increase pre-tax profits by 3.5% Decrease pre-tax profits by 3.5%. Increase pre-tax profits by 21.0%. Increase pre-tax profits by 1.71%. Question No: 6 ( Marks: 1 ) - Please choose one Which of the following best illustrates the problem imposed by capital rationing? Accepting projects with the highest NPVs first Accepting projects with the highest IRRs first By passing projects that have positive NPVs Bypassing projects that have positive IRRs Capital Rationing occurs when a company has more amounts of capital budgeting projects with positive net present values than it has money to invest in them. Therefore, some projects that should be accepted are excluded because financial capital is limited. Question No: 7 ( Marks: 1 ) - Please choose one A project would be financially feasible in which of the following situations? If Internal Rate of Return of a project is greater than zero If Net Present Value of a project is less than zero If the project has Profitability Index less than one If the project has Profitability Index greater than one The PI would be larger than 1 for positive NPV projects and less than 1 for negative NPV projects. Question No: 8 ( Marks: 1 ) - Please choose one Suppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on this stock? 2% 3% 4% 5% Dividend yield = Annual dividends per share / price per share = 2 / 35 = 0.057 = 5% Question No: 9 ( Marks: 1 ) - Please choose one
Fall 2010
Quizzes
Which of the following is considered as a risk free financial asset? Government T-bills Junk bonds Preferred stock Secured bonds Question No: 10 ( Marks: 1 ) - Please choose one Which of the following is a necessary condition for issuing shares through Initial Public Offerings (IPOs)? The firm must have a stable dividend policy The firm must have a low cost of capital The firm must have a low level of debt The firm must be listed on the stock exchange Question No: 11 ( Marks: 1 ) - Please choose one Which one of the following statements applies to Dividend Growth Model? It is difficult to understand and use It is used for non-listed companies It is used for debt securities also It do not consider risk level of a security Question No: 12 ( Marks: 1 ) - Please choose one Which of the following best define the term 'Capital Structure'? The proportion of equity used by a firm The proportion of debt and equity capital used by a firm The proportion of long-term liabilities used by a firm The proportion of short-term bank loan used by a firm In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. Question No: 13 ( Marks: 1 ) - Please choose one A Pure Play method of selecting a discount rate is most suitable in which of the following situations? When the intended investment project has a Non-conventional stream of cash flows When the intended investment project is a replacement project When the intended investment project belongs to industry other than the firms operating in When the intended investment project has a conventional stream of cash flows
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Quizzes
Question No: 14 ( Marks: 1 ) - Please choose one Which of the following is a dividend that is paid in the form of additional shares, rather than a cash payout? Stock Dividend Cum Dividend Ex Dividend Extra Dividend Question No: 15 ( Marks: 1 ) - Please choose one Which of the following is a proposition of Miller and Modigliani theory of Capital structure? Value of a firm is independent of its capital structure Value of a firm is independent of its level of debt Value of a firm is dependent of its cost of capital Value of a firm is independent on its level of equity finances Question No: 16 ( Marks: 1 ) - Please choose one Which of the following transactions would occur in a primary financial market? Initial public offering Buying mutual funds certificates Selling old shares Buying bonds issued in previous year Question No: 17 ( Marks: 1 ) - Please choose one What will be the effect of reduction in the cost of capital on the accounting breakeven level of revenues? It raises the break-even level. It reduces the break-even level. It has no effect on the break-even level. This cannot be determined without knowing the length of the investment horizon. Question No: 18 ( Marks: 1 ) - Please choose one Which of the following statements is TRUE regarding Balance Sheet of a firm? It reports how much of the firms earnings were retained in the business rather than paid out in dividends. It reports the impact of a firms operating, investing, and financing activities on cash flows over an accounting period. It shows the firms financial position at a specific point in time. It summarizes the firms revenues and expenses over an accounting period. Question No: 19 ( Marks: 1 ) - Please choose one
Fall 2010
Quizzes
All of the following are the disadvantages of a Corporate form of an organization EXCEPT: Double taxation Limited liability Legal restrictions None of the given options Question No: 20 ( Marks: 1 ) - Please choose one Which of the following would be a consequence of a high Inventory Turnover Ratio? Low level of inventory and frequent stock-outs Seasonal elements peculiar to the business Efficient inventory management Any of the given option Question No: 21 ( Marks: 1 ) - Please choose one Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a year, compounded annually. How much amount your account will have at the end the end of four years? Rs.10,208 Rs.9,728 Rs.10,880 Rs.9,624 Question No: 22 ( Marks: 1 ) - Please choose one Which of the following is the main source of income for the buyer of a zerocoupon bond? Price appreciation A rate of return equal to zero over the life of the bond Variable dividends instead of a fixed interest payment annually All interest payments in one lump sum at maturity Zero coupon bonds, also called strip coupons, residuals, sentinels or just strips, are innovative fixed income products offering compound interest and a guaranteed future value if held to maturity. Zero coupon bonds are bonds which do not pay periodic coupons, or so-called "interest payments". These bonds are purchased at a discount from what they will be worth when they mature. The holder of a zero coupon bond is entitled to receive a single payment, usually of a specified sum of money at a specified time in the future An investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures. Question No: 23 ( Marks: 1 ) - Please choose one Which of the following techniques of stock evaluation considers quantitative factors as well as qualitative factors for valuation?
Fall 2010
Quizzes
Technical Analysis Fundamental Analysis Constant Growth Model No Growth Model The biggest part of fundamental analysis involves delving into the financial statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company. Fundamental analysts look at this information to gain insight on a company's future performance. A good part of this tutorial will be spent learning about the balance sheet, income statement, cash flow statement and how they all fit together. But there is more than just number crunching when it comes to analyzing a company. This is where qualitative analysis comes in - the breakdown of all the intangible, difficult-to-measure aspects of a company. Finally, we'll wrap up the tutorial with an intro on valuation and point you in the direction of additional tutorials you might be interested in. Question No: 24 ( Marks: 1 ) - Please choose one Which of the following statements is CORRECT regarding the fundamental analysis? Fundamental analysts use only Economic indicators to evaluate a stock Fundamental analysts use only financial information to evaluate a companys stocks Fundamental analysts use financial and non-financial information to evaluate a companys stocks Fundamental analysts use only non-financial information to evaluate a companys stocks fundamental information that is analyzed can include a company's financial reports, and non-financialinformation such as estimates of the growth of demand for competing products, industry comparisons, analysis of the effects of new regulations or demographic changes, and economy-wide changes Question No: 25 ( Marks: 1 ) - Please choose one Which of the following could be used to calculate the cost of common equity? Interpolation method Dividend discount model YTM (Yield-to-Maturity) method Capital structure valuation Capital structure of a typical company may consist of ordinary shares, preference stock, short term and long-term loan, bonds and leases. These components in capital structure have their own cost and if we add all the individual components cost after adjusting with the weight age of each, the resultant value is known as weighted cost of capital. In order to compute the WACC we need to calculate the
Fall 2010
Quizzes
individual components cost. First of all we take up the Equity part of the capital and will see how we can compute the cost of equity. Question No: 26 ( Marks: 1 ) - Please choose one Which of the following is a long-term source of financing for a firm? Corporate bonds Money market instruments Trade credit Accounts payables A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. [1]The term is usually applied to longer-term debt instruments, Question No: 27 ( Marks: 1 ) - Please choose one Since the capital budgeting techniques use cash flows instead of accounting flows, therefore, the financial manager must add back which one of the following to the analysis? The cost of fixed assets The cost of accounts payable Investments Depreciation Page 83 Profit before interest and income taxes xx,xxx Add back depreciation xx,xxx Add back amortization of goodwill Question No: 28 ( Marks: 1 ) - Please choose one Which of the following statements is correct for a project with a positive Net Present Value (NPV)? Internal rate of return (IRR) exceeds the cost of capital Accepting the project has an indeterminate effect on shareholders The discount rate exceeds the cost of capital The profitability index equals one
Which of the following is the last step in the financial planning process ? Providing feedback Taking corrective measures Implementing the plan Controlling
Fall 2010
Quizzes
A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the companys stock? 14% 13% 12% 10%
Which of the following methods would be most suitable for calculating the return on stocks of a non-listed company? Dividend Growth model Capital Asset Pricing Model Security Market Line Characteristics line
Which of the following statements is true regarding Weighted Average Cost of Capital (WACC)?
WACC of a levered firm is greater than that of an un-levered firm WACC of a levered firm is lesser than that of an un-levered firm WACC of a levered firm is equal to that of an un-levered firm An Un-levered firm has zero WACC
An un-geared beta refers to the beta of a firm with: 100% Debt financed 100% Equity financed 50% Equity and 50% Debt financed 60% Equity and 40% Debt financed
not sure
With respect to a Cash flow statement, which of the following would be considered as a cash inflow?
Fall 2010
Increase in current assets Decrease in current liability Increase in current liability Can not be determined
Quizzes
If you deposit $12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%, what will your account be worth at the end of 16 years? $82,168.44 $71,450.82 $768,901.12 $668,609.67
Question # 1 of 15 Which of the following investment criteria does not take the time value of money into consideration?
Simple payback method (page#34) Net present value Profitability index Internal rate of return for borrowing projects
Question # 2 of 15 Which of the following is the Dividend Payout ratio for a common stock?
Dividend per share: Market value per share
Fall 2010
Earning per share: Intrinsic value per share Dividend per share: Earning per share Market value per share: intrinsic value per share Ref: http://en.wikipedia.org/wiki/Dividend_payout_ratio
Quizzes
Question # 3 of 15 Cash discounts are offered by the seller to buyer in order to improve which of the following?
Operating cycle Sales turnover Company goodwill Credit worthiness Ref: Operating Cycle = age of inventory + collection period. The operating cycle is the number of days from cash to inventory to accounts receivable to cash. And http://www.slideshare.net/sagar_sjpuc/working-capital-managementpresentation-775445 in slide #3
Question # 4 of 15 Average beta has value equal to:
1 Slid # 16
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2 3 4
Quizzes
Question # 5 of 15 Which of the following may be a major reason for hard capital rationing?
Dilution of earning per share (EPS) High interest expense High interest rate (SLIDE 13 BOOK PAGE 44) Company own policies
Question # 6 of 15 In inventory management, the storage cost of inventory is considered as:
Carrying cost Page#97 Reorder cost Stock out cost Safety cost Ref: What Is Inventory Carrying Cost? The cost to carry inventory measures the overhead that an organization carries to support its inventory. In addition to the money originally spent to purchase it, more money will be spent on upkeep while inventory sits in your possession. The longer the inventory is there, the more it will cost in upkeep. Carrying cost is usually expressed as a percentage that represents the cents per dollar that will be spent on inventory overhead per year. Or
Fall 2010
Question # 7 of 15
Quizzes
Which of the following statement is TRUE regarding temporary working capital?
Temporary working capital varies with seasonal requirements Temporary working capital is the constant component of working capital Temporary working capital excludes inventories Temporary working capital should be financed with bonds or common stock Ref: Temporary Working capital The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working capital required from time to time over and above the permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans OR http://www.tutorsonnet.com/homework_help/working_capital_management/pe rmanent_and_temporary_working_capital_online_tutoring.htm
Question # 8 of 15 Which of the following describes the hedging approach to financing?
Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion
Fall 2010
Quizzes
Each asset is offset with a financing instrument of the same approximate maturity
Each asset is offset with a put or call option.
The firm takes out insurance to protect itself against uneven cash flows.
Question # 9 of 15 If the Internal Rates of Return of two, mutually exclusive options are both greater than the cost of capital, which option should be selected under the Internal Rate of Return method?
The one with the largest Internal Rate of Return. (Damn sure) The one with the smallest Internal Rate of Return. The one with the highest Net Present Value at the firms cost of capital. None of the given options
Question # 10 of 15 Which of the following measures systematic risk of a firms common stock?
Beta
(PAGE 50)
CAPM MM-Model SML
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Question # 11 of 15 Which of the following is closely related to a sales budget?
Quizzes
Miscellaneous income Future profits Cash outflow Cash inflow
The master budget has two major parts including the operating budget and the financial budget (See Exhibit 9-4). The operating budget begins with the sales budget and ends with the budgeted income statement. The financial budget includes the capital budget as well as a cash budget, and a budgeted balance sheet
Fall 2010
Quizzes
Question # 12 of 15 Which of the following is the correct definition for "spread" in cash management?
The difference between optimal cash balance and Nominal Cash balance The difference between opining cash balance and ending cash balance. The difference between upper limit and lower limit of cash balances The difference between optimal cash balance and ending cash balance Ref: Page#96 Graph
Question # 13 of 15 Which of the following statement is CORRECT regarding residual dividend policy?
Shareholders are paid dividend from capital Dividend are paid after meeting all the financial needs of the firm The management sets a fixed payout ratio Shareholders are paid fixed dividend every year Ref: Page#76 Residual Dividend Policy If a company does not pay all the profit to shareholders in the form of dividend then the debt equity ratio will change. In this section we will assume that company do have some potential opportunities and will
Fall 2010
will be held constant
Quizzes
finance these opportunities first and any remainder profit will be paid as dividend and the debt equity ratio
Question # 14 of 15 Total Marks: 1 Since companies in some industries typically have high fixed costs, but have stable and predictable revenues. Which of the following statement would be TRUE about these companies?
Their degree of operating leverage is relatively low. Their bond issues would tend to have a speculative rating. Their overall business risk is relatively low. (Doubt) They are unable to take on much additional financial risk.
Question # 15 of 15 Which of the following changes will occur if a bond's yield-to-maturity increases, keeping other things equal ?
Its price will rise Its price will remain unchanged Its price will fall. (Sure) Can not be determined
Question # 1 of 15 Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing:
Fall 2010
A zero growth common stock. A positive growth common stock A short-term bond An option.
Quizzes
Question # 2 of 15 Which one of the following statements is TRUE regarding future value of a single sum?
Increase if the interest rate increases. Remains unchanged if the interest rate changes Decrease if the interest rate increases All of the given options
Example: You can afford to put $10,000 in a savings account today that pays 6% interest compounded annually. How much will you have 5 years from now if you make no withdrawals? PV = 10,000 i = .06 n=5 FV = 10,000 (1 + .06)5 = 10,000 (1.3382255776) = 13,382.26 End of Year 1 2 3 4 5
Principal
10,000.00 10,600.00 11,236.00 11,910.16 12,624.77
Fall 2010
Interest 600.00 636.00 674.16 714.61
Quizzes
757.49
Total
10,600.00 11,236.00 11,910.16 12,624.77 13,382.26
Question # 3 of 15 All of the following are the methods to evaluate the credit worthiness in business EXCEPT:
Market reputation Previous payment record Production plant capacity Financial strength Ref: Page#104 credit worthiness in business Financial statements of vendor Market reputation Banks Previous payment record Financial strength Capacity General economic conditions in vendors industry
Question # 4 of 15
Fall 2010
Quizzes
What is the main purpose of constructing a portfolio of financial assets?
To maximize risk and minimize the return To minimize the risk and minimize the return To maximize the return and minimize the risk To minimize the return and minimize the risk
Question # 5 of 15 Which of the following is tax deductible?
Dividend on preferred shares Dividend on common stocks Coupon payments on bonds Capital gain on common stocks
Question # 6 of 15 Inventory between various stages of production is known as:
Work in Process inventory Finished goods inventory Balanced goods inventory Raw materials inventory(Doubt)
Question # 7 of 15 Which of the following effects should be considered by a firm if it allows credit to its customers?
Fall 2010
Cost of discount Arrange loans to finance short term operations Prices of goods All of the given options Ref: page#104
Quizzes
Question # 8 of 15 Which of the following is most relevant to a companys ability to pay off its shortterm obligation?
Dividend Policy Net working capital Operating Cycle Profitability Ref: Working Capital Working Capital is simply the amount that current assets exceed current liabilities. Here it is in the form of the equation: Working Capital = Current Assets - Current Liabilities This formula is very similar to the current ratio. The only difference is that it gives you a dollar amount rather than a ratio. It too is calculated to determine a firm's ability to pay its short-term obligations. Working Capital can be viewed as somewhat of a security blanket. The greater the amount of Working Capital, the more security an investor can have that they will be able to meet their financial obligations. OR
Fall 2010
Quizzes
Question # 9 of 15 Which of the following is prepared by combining all the functional budgets?
A production budget A cash budget A sales budget A master budget Ref:
Fall 2010
Question # 10 of 15
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Which of the following should be ignored, while evaluating the financial viability of a project?
Initial cost Equipment cost Cost of capital Sunk cost
Question # 11 of 15 A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the companys stock?
14% 13% 12% 10%
Ref: r = DIV1/P0 + g = 8% + 5% = 13%
Question # 12 of 15 Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets are $8 million, and ROI is 8 percent.
Fall 2010
1.60 2.05 2.50 4.00
Quizzes
Ref: (ROI) / (NPM) = TAT (.08) / (.05) = 1.6
Question # 13 of 15 Which of the following condition if exist will make the diversification more effective?
OR The most effective portfolio diversification will come from making investments that show negative correlation to each other. However, simply by investing in companies who show returns that are not correlated perfectly to each other, the risk in the portfolio will be lower than the associated risk of any individual stock.
Question # 14 of 15 Which one of the following is a major limitation of Linear Programming Technique of capital projects selection?
Fall 2010
Ignores the relative size of the Investment (slide 14) Time value of money is not considered Project cash flows are ignored Project profitability is ignored
Quizzes
Question # 15 of 15 Holding everything else constant, increasing fixed costs ________ the firm's breakeven point.
Decreases Increases the covariance of Increases(Doubt) Does not affect .
The employment of fixed costs associated with the actual production of goods or services is known as: Financial leverage Volume discounting Operating leverage Covariance
Which of the following is a planning tool? A budget A balance sheet
Fall 2010
An income statement A Cash flow statement
Quizzes
Which of the following would lower a firm's operating break-even point? An increase in the cost of goods sold An increase in selling price An increase in wages paid to employees An increase in total sales
Which of the following is a disadvantage of Capital Asset Pricing model? It consider market risk It can be used for listed companies It can be used for Non-listed companies It is based on Past data
Which of the following statements applies to Dividend Growth Model? It is difficult to understand and use It is used for non-listed companies It is used for debt securities also It do not consider risk level of a security
Fall 2010
Quizzes
Which of the following changes will occur if a bond's yield-to-maturity increases, keeping other things equal? Its price will rise Its price will remain unchanged Its price will fall. Can not be determined
A company has fixed costs of $50,000 and variable costs per unit of output of $8. If its sole product sells for $18, what is the break-even quantity of output? Select correct option: 2,500 5,000 1,500 7,500 REF: BEQ= FC/P-VC =50000 / 18-8 = 50000 / 10 = 5000
Which of the following is included in the cost of capital of a firm?
Cost of sales Depreciation cost Depletion cost Cost of retained earnings
Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year. Which of the following could explain this performance? The companys taxes increased. The companys depreciation expense declined. The companys operating income declined. All of the given statements are correct.
Fall 2010
A market portfolio has a beta equal to:
Quizzes
0 1 2 3
A Levered firm has a lower weighted average cost of capital as compare to an Un-levered firm because of: Interest tax shield Low level of financial risk Low level of business risk Low level of systematic risk
A dividend payment made in the form of additional shares, rather than a cash payout is known as: Stock Dividend Cum Dividend Ex Dividend Extra Dividend
Which of the following method can be used to forecast the sales of a firm? Price earning ratio Cash flow estimation Fundamental Analysis Regression Analysis
not sure
Dividend discount Model states that todays price of a stock is equal to: The Present Value of all future dividends of the stock The Present Value of the face value of the stock The Present Value of the Sales price of the stock The Present Value of the book value of the stock page 115
Fall 2010
The decision rule for net present value is to:
Quizzes
Accept all projects with cash inflows exceeding initial cost. Reject all projects with rates of return exceeding the opportunity cost of capital. Accept all projects with positive net present values. Reject all projects lasting longer than 10 years.
Which of the following capital budgeting technique ignores profitability and time value of money? Net Present Value Internal Rate of Return Discounted Pay Back period Simple Pay Back Period
Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back ___________ to the analysis. The cost of fixed assets The cost of accounts payable Investments Depreciation
Which of the following is an objective of an optimal capital structure? Select correct option: To minimize the cost of capital To minimize cost of equity
Fall 2010
To minimize cost of debt To minimize cost of sales not sure
Quizzes
If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then which of the following recommendations should be considered? Fixed costs should be traded for variable costs Variable costs should be traded for fixed costs. The project should not be undertaken. Additional marketing analysis may be beneficial before proceeding.
Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in an account paying 12 percent compounded annually. You accumulate at the end of 10 years an amount closest to: Select correct option: Rs.22,456 Rs.35,098 Rs.28,324. Rs.20,324
Which of the following investment criteria does not take the time value of money into consideration? Simple payback method page 35 Net present value Profitability index Internal rate of return for borrowing projects
WWhich of the following would be consistent with a more aggressive (i.e., a high risk profitability) approach to financing working capital? Financing permanent inventory buildup with long-term funds. Financing seasonal needs with short-term funds. Financing short-term needs with short-term funds. Financing some long-term needs with short-term funds
Fall 2010
Quizzes
If a creditor wanted to know if a potential customer paid its bills on time, the creditor could look at the potential customer's: Current ratio. Acid ratio. Average age of accounts payable. Average age of accounts receivable
Which of the following best illustrates the problem imposed by capital rationing? Select correct option: Accepting projects with the highest NPVs first Accepting projects with the highest IRRs first Bypassing projects that have positive NPVs Bypassing projects that have positive IRRs
Present value of Rs.5, 000 received at the end of 5 years, discounted at 10 percent, is closest to: Rs.3, 105. Rs.823. Rs.620. Rs.3, 403.
Which of the following statement best describe the term Market Correction? Market Correction refers to the situation where equilibrium of supply & demand of shares occurs in the market Market correction occurs when shares intrinsic values becomes equal to face values Market Correction occurs when there is a boom in the economy Market Correction occurs when inflation rate is above the market interest rate
Which of the following is the average time period between buying inventory and receiving cash proceeds from its eventual sale?
Fall 2010
Operating Cycle Cash Cycle Inventory period Inventory Turnover
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Operating cycle Average time period between buying inventory and receiving cash proceeds from its eventual sale. It is determined by adding the number of days inventory is held and the collection period for accounts receivable.
current assets of company exceed its current liabilities, then the company will have: A positive net working capital A negative working capital A net working capital of less than zero A net working capital equal to zero
Which one of the following is a major limitation of Linear Programming Technique of capital projects selection? Ignores the relative size of the Investment Time value of money is not considered Project cash flows are ignored Project profitability is ignored
Which of the following is tax deductible? Select correct option: Dividend on preferred shares Dividend on common stocks Coupon payments on bonds Capital gain on common stocks
Which of the following focuses on long-term decision-making regarding the acquisition of projects?
Fall 2010
Select correct option: Working Capital Management Capital Budgeting Cash Budgeting None of the given options
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Question No: 1 ( Marks: 1 ) - Please choose one Which of the following statements is TRUE regarding Profitability Index? It ignores time value of money It ignores future cash flows It ignores the scale of investment It ignores return on investment Question No: 2 ( Marks: 1 ) - Please choose one Which of the following is a tool that identifies the strengths, weaknesses, opportunities and threats of an organization? SWOT Analysis Trend Analysis Fundamental Analysis Technical Analysis Question No: 3 ( Marks: 1 ) - Please choose one Which of the following statements applies to intrinsic value of a security? Intrinsic value of a security always exceeds its book value. Intrinsic value of a security rises when the liquidation value falls. Intrinsic value of a security is the price around which its market value should closely fluctuate. Intrinsic value of a security is its closing market value when it is actively traded. Intrinsic Value (also known as fundamental value) refers to the actual value of a security based on an underlying perception of its true value due to both tangible and intangible factors. The value may defer from the current market value. As a result, value investors use an array of analytical techniques to estimate the value of the security in the hope finding investments where the true value of the investment exceeds its current market value. It can be calculated by summing the future income generated by the assets, and discounting it to the present value.
Fall 2010
Quizzes
Question No: 4 ( Marks: 1 ) - Please choose one A Company's common stock is currently selling at Rs.3.00 per share, its quarterly dividend is Rs.0.07, and the stock is expected to rise to Rs.3.30 in a year. What is its expected rate of return? 9.3% 19.3% 10.0% 11.0% Question No: 5 ( Marks: 1 ) - Please choose one For a firm with a Degree of Operating Leverage of 3.5, an increase in sales of 6% will: Increase pre-tax profits by 3.5% Decrease pre-tax profits by 3.5%. Increase pre-tax profits by 21.0%. Increase pre-tax profits by 1.71%. Question No: 6 ( Marks: 1 ) - Please choose one Which of the following best illustrates the problem imposed by capital rationing? Accepting projects with the highest NPVs first Accepting projects with the highest IRRs first By passing projects that have positive NPVs Bypassing projects that have positive IRRs Capital Rationing occurs when a company has more amounts of capital budgeting projects with positive net present values than it has money to invest in them. Therefore, some projects that should be accepted are excluded because financial capital is limited. Question No: 7 ( Marks: 1 ) - Please choose one A project would be financially feasible in which of the following situations? If Internal Rate of Return of a project is greater than zero If Net Present Value of a project is less than zero If the project has Profitability Index less than one If the project has Profitability Index greater than one The PI would be larger than 1 for positive NPV projects and less than 1 for negative NPV projects. Question No: 8 ( Marks: 1 ) - Please choose one Suppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on this stock? 2% 3% 4% 5%
Fall 2010
Quizzes
Dividend yield = Annual dividends per share / price per share = 2 / 35 = 0.057 = 5% Question No: 9 ( Marks: 1 ) - Please choose one Which of the following is considered as a risk free financial asset? Government T-bills Junk bonds Preferred stock Secured bonds Question No: 10 ( Marks: 1 ) - Please choose one Which of the following is a necessary condition for issuing shares through Initial Public Offerings (IPOs)? The firm must have a stable dividend policy The firm must have a low cost of capital The firm must have a low level of debt The firm must be listed on the stock exchange Question No: 11 ( Marks: 1 ) - Please choose one Which one of the following statements applies to Dividend Growth Model? It is difficult to understand and use It is used for non-listed companies It is used for debt securities also It do not consider risk level of a security Question No: 12 ( Marks: 1 ) - Please choose one Which of the following best define the term 'Capital Structure'? The proportion of equity used by a firm The proportion of debt and equity capital used by a firm The proportion of long-term liabilities used by a firm The proportion of short-term bank loan used by a firm In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. Question No: 13 ( Marks: 1 ) - Please choose one A Pure Play method of selecting a discount rate is most suitable in which of the following situations? When the intended investment project has a Non-conventional stream of cash flows When the intended investment project is a replacement project
Fall 2010
Quizzes
When the intended investment project belongs to industry other than the firms operating in When the intended investment project has a conventional stream of cash flows Question No: 14 ( Marks: 1 ) - Please choose one Which of the following is a dividend that is paid in the form of additional shares, rather than a cash payout? Stock Dividend Cum Dividend Ex Dividend Extra Dividend Question No: 15 ( Marks: 1 ) - Please choose one Which of the following is a proposition of Miller and Modigliani theory of Capital structure? Value of a firm is independent of its capital structure Value of a firm is independent of its level of debt Value of a firm is dependent of its cost of capital Value of a firm is independent on its level of equity finances Question No: 16 ( Marks: 1 ) - Please choose one Which of the following transactions would occur in a primary financial market? Initial public offering Buying mutual funds certificates Selling old shares Buying bonds issued in previous year Question No: 17 ( Marks: 1 ) - Please choose one What will be the effect of reduction in the cost of capital on the accounting breakeven level of revenues? It raises the break-even level. It reduces the break-even level. It has no effect on the break-even level. This cannot be determined without knowing the length of the investment horizon. Question No: 18 ( Marks: 1 ) - Please choose one Which of the following statements is TRUE regarding Balance Sheet of a firm? It reports how much of the firms earnings were retained in the business rather than paid out in dividends. It reports the impact of a firms operating, investing, and financing activities on cash flows over an accounting period.
Fall 2010
Quizzes
It shows the firms financial position at a specific point in time. It summarizes the firms revenues and expenses over an accounting period. Question No: 19 ( Marks: 1 ) - Please choose one All of the following are the disadvantages of a Corporate form of an organization EXCEPT: Double taxation Limited liability Legal restrictions None of the given options Question No: 20 ( Marks: 1 ) - Please choose one Which of the following would be a consequence of a high Inventory Turnover Ratio? Low level of inventory and frequent stock-outs Seasonal elements peculiar to the business Efficient inventory management Any of the given option Question No: 21 ( Marks: 1 ) - Please choose one Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a year, compounded annually. How much amount your account will have at the end the end of four years? Rs.10,208 Rs.9,728 Rs.10,880 Rs.9,624 Question No: 22 ( Marks: 1 ) - Please choose one Which of the following is the main source of income for the buyer of a zerocoupon bond? Price appreciation A rate of return equal to zero over the life of the bond Variable dividends instead of a fixed interest payment annually All interest payments in one lump sum at maturity Zero coupon bonds, also called strip coupons, residuals, sentinels or just strips, are innovative fixed income products offering compound interest and a guaranteed future value if held to maturity. Zero coupon bonds are bonds which do not pay periodic coupons, or so-called "interest payments". These bonds are purchased at a discount from what they will be worth when they mature. The holder of a zero coupon bond is entitled to receive a single payment, usually of a specified sum of money at a specified time in the future An investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures.
Fall 2010
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Question No: 23 ( Marks: 1 ) - Please choose one Which of the following techniques of stock evaluation considers quantitative factors as well as qualitative factors for valuation? Technical Analysis Fundamental Analysis Constant Growth Model No Growth Model The biggest part of fundamental analysis involves delving into the financial statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company. Fundamental analysts look at this information to gain insight on a company's future performance. A good part of this tutorial will be spent learning about the balance sheet, income statement, cash flow statement and how they all fit together. But there is more than just number crunching when it comes to analyzing a company. This is where qualitative analysis comes in - the breakdown of all the intangible, difficult-to-measure aspects of a company. Finally, we'll wrap up the tutorial with an intro on valuation and point you in the direction of additional tutorials you might be interested in. Question No: 24 ( Marks: 1 ) - Please choose one Which of the following statements is CORRECT regarding the fundamental analysis? Fundamental analysts use only Economic indicators to evaluate a stock Fundamental analysts use only financial information to evaluate a companys stocks Fundamental analysts use financial and non-financial information to evaluate a companys stocks Fundamental analysts use only non-financial information to evaluate a companys stocks fundamental information that is analyzed can include a company's financial reports, and non-financialinformation such as estimates of the growth of demand for competing products, industry comparisons, analysis of the effects of new regulations or demographic changes, and economy-wide changes Question No: 25 ( Marks: 1 ) - Please choose one Which of the following could be used to calculate the cost of common equity? Interpolation method Dividend discount model YTM (Yield-to-Maturity) method Capital structure valuation
Fall 2010
Quizzes
Capital structure of a typical company may consist of ordinary shares, preference stock, short term and long-term loan, bonds and leases. These components in capital structure have their own cost and if we add all the individual components cost after adjusting with the weight age of each, the resultant value is known as weighted cost of capital. In order to compute the WACC we need to calculate the individual components cost. First of all we take up the Equity part of the capital and will see how we can compute the cost of equity. Question No: 26 ( Marks: 1 ) - Please choose one Which of the following is a long-term source of financing for a firm? Corporate bonds Money market instruments Trade credit Accounts payables A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. [1]The term is usually applied to longer-term debt instruments, Question No: 27 ( Marks: 1 ) - Please choose one Since the capital budgeting techniques use cash flows instead of accounting flows, therefore, the financial manager must add back which one of the following to the analysis? The cost of fixed assets The cost of accounts payable Investments Depreciation Page 83 Profit before interest and income taxes xx,xxx Add back depreciation xx,xxx Add back amortization of goodwill Question No: 28 ( Marks: 1 ) - Please choose one Which of the following statements is correct for a project with a positive Net Present Value (NPV)? Internal rate of return (IRR) exceeds the cost of capital Accepting the project has an indeterminate effect on shareholders The discount rate exceeds the cost of capital The profitability index equals one
Which of the following is the last step in the financial planning process ? Providing feedback Taking corrective measures
Fall 2010
Implementing the plan Controlling
Quizzes
A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the companys stock? 14% 13% 12% 10%
Which of the following methods would be most suitable for calculating the return on stocks of a non-listed company? Dividend Growth model Capital Asset Pricing Model Security Market Line Characteristics line
Which of the following statements is true regarding Weighted Average Cost of Capital (WACC)?
WACC of a levered firm is greater than that of an un-levered firm WACC of a levered firm is lesser than that of an un-levered firm WACC of a levered firm is equal to that of an un-levered firm An Un-levered firm has zero WACC
An un-geared beta refers to the beta of a firm with: 100% Debt financed 100% Equity financed 50% Equity and 50% Debt financed 60% Equity and 40% Debt financed
not sure
Fall 2010
Increase in current assets Decrease in current liability Increase in current liability Can not be determined
Quizzes
With respect to a Cash flow statement, which of the following would be considered as a cash inflow?
If you deposit $12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%, what will your account be worth at the end of 16 years? $82,168.44 $71,450.82 $768,901.12 (Azeem ans) $668,609.67 fv = p * (((1 + i) ^ n - 1) / i) * (1 + i) 12000*(((1.15)^16-1)/0.15)*(1+0.15) 768901.1
Q#1 Determining the mix of debt and equity to be used to finance a firm is which type of a decision? A) B) C) capital budgeting working capital capital structure
Fall 2010
Q#2
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Which one of the following statements concerning partnerships is correct?
A) All partners enjoy limited liability if they create a general partnership of equal shares.
B) A limited partner actively participates in running the partnership on a daily basis.
C) A general partnership terminates whenever one general partner decides to sell her share of the business.
D)
A general partnership has an unlimited life while a limited partnership has a limited life.
Q#3 Which one of the following statements concerning corporations is correct?
A) The rules describing how a corporation regulates its own existence are set forth in the bylaws. B) The procedures to be followed for electing corporate directors are included in the articles of incorporation. C) Corporate income is taxed only when the corporate earnings are distributed to shareholders. D) A corporation is the easiest form of business entity to create.
Fall 2010
Q#4 The goal of financial management is to maximize the current:
Quizzes
A) B) C) D)
net income per share. dividends per share. total assets. market value per share.
Q#5 Which one of the following statements concerning the financial markets is correct?
A) B) C) D)
Shareholders exchange shares with each other in the primary market. The New York Stock Exchange is an auction market. Dealer markets have a physical trading floor. Stocks traded in auction markets are said to trade over-the-counter.
Q#6 Which one of the following provides limited liability for all of its owners?
A) B) C) D)
sole proprietorship partnership with only general partners partnership with both general and limited partners corporation
Fall 2010
Quizzes
Q#7 Which one of the following represents a potential agency problem?
A) B) stock C) managed D) dividends
adherence to the Sarbanes-Oxley Act in 2002 hiring a manager and compensating her with shares of company paying a management bonus based on the number of employees paying all company earnings out to shareholders in the form of
Q#8 Firms that "went dark" following the enactment of the Sarbanes-Oxley Act in 2002:
A)
must still comply with all the terms of that act.
B) did not meet the requirements of the act and were involuntarily delisted by the SEC. C) generally did so to avoid the high cost of compliance.
D) now trade on NASDAQ where previously the firm's shares were traded on the NYSE.
Q#9 Which one of the following is found in the corporate bylaws?
Fall 2010
A) B) C) D) intended life of the corporation the state of residence the number of shares that can be issued the procedures for electing the directors
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Q#10 Which one of the following statements concerning financial markets is correct?
A) B)
The NYSE is an auction market. All dealer markets require a physical trading floor.
C) Corporations initially sell shares of stock in the secondary market, which is an auction market. D) All private sales of stock must first be registered with the SEC.
Q#1 Use these financial statements to answer the question.
What is the amount of the change in net working capital?
A) -$800
B) $100
Fall 2010
C) $16,700
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D) $8,900
What is the net capital spending for 2009?
A) $700
B) $7,100
C) $8,500
D) $2,400
What is the total amount of stockholders' equity for 2009?
Fall 2010
A) $20,000
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B) $14,000
C) $11,400
D) $25,400
What are the earnings per share for 2009 if the par value per share is $1?
A) $0.11
B) $0.15
C) $0.08
D) $0.06
Fall 2010
Quizzes
How much was paid out to shareholders in the form of dividends during 2009?
A) $1,600
B) $5,100
C) $1,700
D) $5,200
What is the amount of the operating cash flow?
A) -$2,100
B) $1,600
C) $11,900
D) $8,700
Fall 2010
Quizzes
What is the cash flow from assets?
A) $3,800
B) $4,200
C) $4,900
D) $5,100
What is the cash flow to creditors?
A) $2,500
B) -$100
C) $5,100
Fall 2010
D) $600
Quizzes
Q#9 Which one of the following assets is most liquid?
A) inventory
B) equipment
C) land
D) accounts receivable
Q#10 A firm has $2,100 in net income, a tax rate of 35 percent, and interest expense of $700. What is EBIT?
A) $3,535
B) $4,100
C) $6,700
Fall 2010
D) $3,931
Quizzes
Q#1 Use the following financial statements to answer the question.
What is the total debt ratio?
A) 0.65
B) 0.47
C) 0.52
D) 0.61
How many days on average does it take the firm to sell its inventory?
A) 77.19 days
Fall 2010
B) 84.59 days
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C) 103.95 days
D) 96.07 days
Q#3
Use the following financial statements to answer the question.
What is the cash coverage ratio?
A) 4.08
B) 5.92
C) 8.41
D) 7.47
Fall 2010
Quizzes
What is the profit margin?
A) 6.67%
B) 7.08%
C) 7.29%
D) 7.47%
What is the price-sales ratio is the price per share is $8 and the par value per share is $1?
A) 1.48
Fall 2010
B) 1.91
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C) 2.11
D) 2.36
What is the total asset turnover?
A) 1.06
B) 1.15
C) 1.21
D) 0.87
If the long-term debt had a balance of $50,800 last year, then long-term debt is a _____ of cash this year.
Fall 2010
A) source
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B) use
If the accounts receivable account had a balance of $12,500 last year, then the accounts receivable is a _____ of cash this year.
A) source
B) use
Q#9 Use the following financial statements to answer the question. What is the price-earnings ratio if the par value per share is $1 and the market price per share is $7.50?
A) 18.01
B) 25.34
C) 22.16
Fall 2010
D) 19.97
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Q#10 Use the following financial statements to answer the question. What is the common-size ratio of the net fixed assets?
A) 0.56
B) 0.48
C) 0.62
D) 0.67
Assume this firm is operating at 84 percent of capacity. What is the capital intensity ratio at full capacity sales?
Fall 2010
A) 0.62
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B) 0.91
C) 0.79
D) 0.84
Assume this firm has a constant dividend payout ratio and a constant debt-equity ratio. What is the maximum growth rate the firm can achieve without any external equity financing? Assume the firm is currently operating at full capacity.
A) 27.7%
B) 25.4%
Fall 2010
C) 28.2%
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D) 31.0%
Assume this firm is currently operating at 96 percent capacity. What is the required increase in fixed assets if sales are projected to increase by 12 percent?
A) $2,006
B) $4,929
C) $3,294
D) $1,507
Q#4
Fall 2010
Use the following financial statements to answer the question.
Quizzes
Assume this firm has a constant dividend payout ratio and a projected sales increase of 3 percent. All costs, assets, and current liabilities vary directly with sales. The firm is currently at full production. What is the external financing need?
A) -$2,511
B) $4,263
C) $1,919
D) -$5,592
Fall 2010
Quizzes
Assume the profit margin and dividend payout ratio are expected to remain constant. Sales are expected to increase by 6 percent next year. What is the projected total retained earnings at the end of next year?
A) $27,122
B) $28,832
C) $30,333
D) $34,625
Q#6 The plowback ratio is best defined as:
A) the profit margin minus the dividend payout ratio.
B) annual dividends paid divided by net income.
Fall 2010
C) the change in retained earnings from one year to the next.
Quizzes
D) one minus the dividend payout ratio.
Q#7 The internal rate of growth assumes which one of the following?
A) 100 percent retention ratio
B) constant debt-equity ratio
C) additional debt financing but not equity financing
D) no new external financing of any kind
Q#8 You want to compile pro forma statements for your business. Which one of the following account values should you estimate first?
A) cash
B) sales
Fall 2010
C) taxes
Quizzes
D) external financing need
Q#9 The capital intensity ratio should be computed based on which one of the following sales figures?
A) current year sales
B) pro forma year sales
C) full-capacity sales
D) average of current year and pro forma year sales
Q#10 A negative external financing need indicates that the firm:
A) will need to issue both debt and equity if it wants to achieve its desired level of growth.
Fall 2010
Quizzes
B) can grow at the expected rate without obtaining any additional external financing.
C) the firm will need to decrease in size during the pro forma period.
D) will be unable to achieve its maximum rate of growth during the pro forma period
Q#1 Gloria wants to have $20,000 in her investment account ten years from now. Currently, she has nothing saved. How much would she have to deposit today to reach her goal if this is the only amount she invests? She expects to earn 8.5 percent, compounded annually. How much must she deposit today?
A) B) C) D)
$11,520.74 $9,684.28 $8,845.71 $14,705.88
Q#2 Four years ago, your baseball card collection was worth $1,200. You have not added any cards to the collection over the past four years, but the collection has still increased in value. Today, it is worth $1,500. What rate of return are you earning on this collection?
A)
5.74 percent
Fall 2010
B) C) D) 6.23 percent 4.98 percent 5.25 percent
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Q#3 Amy invested $1,500 in a stock that has returned 12 percent, compounded annually. Today, that investment is worth $3,600. How long has Amy owned this stock?
A) B) C) D)
5.92 years 6.54 years 7.18 years 7.73 years
Q#4 When your parents got married 38 years ago, they purchased a house for $31,900. They have taken good care of the house but have not invested any more money into it. Today, their house is valued at $149,900. What rate of return have your parents earned on their home?
A) B) C) D)
3.92 percent 4.16 percent 4.58 percent 5.39 percent
Q#5 Which one of the following statements is correct, assuming all else is constant?
Fall 2010
A) B) C) D)
Quizzes
The discount rate increases as the present value increases. The future value decreases as the present value increases. The time period increases as the interest rate increases. The present value increases as the discount rate decreases.
Q#6 You invested $5,000 at 6 percent simple interest for five years. How much total interest will you earn over these five years?
A) B) C) D)
$300.00 $742.97 $1,500.00 $1,691.13
Q#7 Scott and Todd are twins. Scott invests $50 a month for ten years starting on his 20th birthday. Todd invests $50 a month for ten years starting on his 25th birthday. Both Scott and Todd earn 7 percent. Which one of the following statements is correct based on this information? Assume they never withdraw any money from their accounts.
A) Both Scott and Todd will have the same amount saved when they turn 60 if the 7 percent is simple interest.
B) Scott and Todd will earn the same amount of interest during the year of their 40th birthday if the 7 percent is simple interest.
Fall 2010
Quizzes
C) Todd will have more money saved than Scott when they are 70 years old if the 7 percent is compounded annually.
D) Scott and Todd will earn the same amount of interest during the year of their 50th birthday if the 7 percent is compounded annually.
Q#8 Flo deposited $5,000 into her retirement account today. How much money will she have 40 years from now if this is the only deposit she makes and she earns an average of 13 percent, compounded annually?
A) B) C) D)
$597,264 $648,306 $663,908 $671,909
Q#9 You have been offered a business opportunity that will pay you $57,000 in six years if you invest $25,000 today. What is the expected rate of return on this investment?
A) B) C) D)
Q#10
Fall 2010
Quizzes
According to the Rule of 72, how long will it take you to double your money is you can earn a 6 percent rate of return?
A) B) C) D)
6 years 7.2 years 9 years 12 years
Q#1 What is the interest rate per period multiplied by the number of periods per year called?
A) B) C) D)
effective annual yield compounded effective yield periodic rate annual percentage rate
Q#2 Your employer has offered to contribute $50 a week to your retirement savings account. Assume you work for this employer for another 15 years and earn an average return of 8.5 percent, compounded weekly, on your savings. What is this offer worth to you today?
A) B)
$39,000 $42,315
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C) D) $78,764 $81,309
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Q#3 This morning, you purchased some stereo equipment costing $2,659. You charged this purchase on your credit card. This card charges 16.9 percent interest, compounded monthly. How long will it take you to pay off this purchase if this is the only charge on your credit card and you make monthly payments of $40?
A) B) C) D)
15.13 years 12.95 years 14.82 years 16.40 years
Q#4 Every month for the past eight years you have invested $50 in a mutual fund. Today, your account is valued at $6,419. What rate of return have you been earning on this investment?
A) B) C) D)
Q#5 You just purchased a home and agreed to a mortgage payment of $1,264 a month for 30 years at 7.5 percent interest, compounded monthly. How much interest will you pay over the life of this mortgage assuming that you make all payments as agreed?
Fall 2010
A) B) C) D) $181,267 $274,266 $387,280 $455,040
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Q#6 You are going to receive $6,000 at the end of each quarter for the next five years. What is the net present value of these payments at a discount rate of 7 percent, compounded quarterly?
A) B) C) D)
$63,564 $100,517 $102,276 $103,012
Q#7 What is the effective annual rate of 10.75 percent compounded continuously?
A) B) C) D)
Q#8 A preferred stock pays annual dividends of $1.80 per share. What is this stock worth to you today if you desire a 14.5 percent return on this investment?
Fall 2010
A) B) C) D) $11.87 $12.41 $25.98 $26.10
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Q#9 A project will produce cash flows of $2,400, $2,800, and $4,100 a year for the next three years, respectively. What is the net value of these cash flows today if the applicable discount rate is 12 percent?
A) B) C) D)
$7,778.80 $8,056.16 $7,293.30 $8,303.57
Q#10 Sue plans to save $100 at the beginning of each month for the next five years. Scott plans to save $100 at the end of each month for the next five years. Assume that both Sue and Scott earn 4.5 percent on their savings. Which one of the following statements is correct given this information?
A)
Sue will have $6,721.68 at the end of the five years.
B) Sue will have $25.17 more in her account than Scott will have in his account at the end of the five years.
Fall 2010
Quizzes
C) Scott will have $8.67 more in his account than Sue will have in her account after the first three years.
D)
Both Sue and Scott will have the same amount of money in their accounts after five years.
Q#1 Christine earned 7.5 percent on her investments last year. Her real rate of return was 4.6 percent. What was the inflation rate for the year?
A) B) C) D)
Q#2 A zero coupon bond has a yield to maturity of 9.26 percent and 8 years until it fully matures. What is the current price of this bond if the face value is $1,000? Assume semiannual compounding.
A) B) C) D)
$458.80 $471.20 $484.73 $503.72
Q#3
Fall 2010
Which one of the following bonds has the most interest rate risk?
Quizzes
A) B) C) D)
6%, 20 year 6%, 10 year 0%, 10 year 0%, 20 year
Q#4 Of the following ratings, which one is the lowest investment-quality bond rating by Standard & Poor's?
A) B) C) D)
Baa A BBB B
Q#5 A semi-annual coupon bond is currently selling for $747 and has a yield to maturity of 8.13 percent. The bond matures in 7 years. What is the coupon rate of this bond if the face value is $1,000?
A) B) C) D)
0 percent 3.32 percent 8.47 percent 16.60 percent
Q#6
Fall 2010
Quizzes
Miller Stores bonds are currently quoted at 97.54 percent of par and mature in 11 years. The bonds pay a $30 semiannual coupon and have a $1,000 face value. What is the current yield on these bonds?
A) B) C) D)
Q#7 Which one of the following is the price you will pay if you buy a bond from a dealer?
A) B) C) D)
bid yield call asked
Q#8 Which one of the following terms is most associated with the ranking of a debt should a firm declare bankruptcy?
A) B) C) D)
seniority indenture sinking fund positive covenant
Fall 2010
Q#9
Quizzes
Delta Pipe offers a 6 percent coupon bond with a yield to maturity of 6.5 percent. The bond pays interest annually and matures in 12 years. What is the market price of one of these bonds if the face value is $1,000?
A) B) C) D)
$959.21 $958.78 $947.27 $946.39
Q#10 The Kandy Store has 7.5 percent semiannual bonds outstanding with 16 years to maturity. What is the yield to maturity if the bonds are currently selling for $1,012.50 each?
A) B) C) D)
Q#1 The common stock of Wells Moving Co. is selling for $28.95 a share and offers a 7.9 percent rate of return. If the dividend growth rate is constant at 2.5 percent, what is the next dividend expected to be?
A)
$1.25
Fall 2010
B) C) D) $1.38 $1.43 $1.56
Quizzes
Q#2 Concrete Rail Ties recently announced that it will pay its first annual dividend next year in the amount of $0.45 a share. The dividend will be increased by 4 percent annually thereafter. How much are you willing to pay today for one share of this stock if you require a 10 percent rate of return?
A) B) C) D)
$6.50 $6.80 $7.50 $8.65
Q#3 A market maker who operates at a post on the floor of the NYSE is called a:
A) B) C) D)
specialist. floor broker. floor trader. commission broker.
Q#4 Dry Goods and More is expected to pay annual dividends of $1.15, $1.20, and $1.35 a share over the next three years, respectively. After that, the dividend is expected to increase by 2.5 percent annually. What is one share of this stock worth today if similar stocks are yielding a 9.5 percent return?
Fall 2010
A) B) C) D) $18.14 $18.78 $19.26 $19.73
Quizzes
Q#5 Which one of the following is used to appoint an individual to vote on your behalf at a shareholder's meeting?
A) B) C) D)
post proxy DOT yield
Q#6 You own 100 shares of noncumulative, nonvoting, 8 percent preferred stock. Which one of the following statements is correct given this information?
A)
The stock pays 8 percent of $1,000 as the annual dividend.
B) You are guaranteed to receive $800 of dividend income each year that you own these shares.
C) If the issuer skips multiple dividend payments, you may receive voting rights.
Fall 2010
Quizzes
D) If the issuer skips one or more dividend payments, you will receive those payments prior to any common stock dividends being distributed.
Q#7 Dixie South just paid an annual dividend of $1.20 per share. The firm is expected to increase its dividend by 4 percent per year for the next 3 three years. After that, the dividend is expected to increase by 2.5 percent each year indefinitely. What is one share of this stock worth today at a discount rate of 12 percent?
A) B) C) D)
$12.21 $12.54 $13.01 $13.48
Q#8 Bennington Brothers has 175,000 shares of stock outstanding with a market price of $12.70 a share. You currently own 40,000 of these shares. The company has 3 open positions on its board of directors and uses cumulative voting. You realize that no one else will vote for you but you still want to be elected to the board. How much must you spend to purchase sufficient shares to guarantee your election?
A) B) C) D)
$0 $47,638 $232,846 $555,638
Q#9
Fall 2010
Quizzes
The Hen's Nest just paid an annual dividend of $0.82 a share. What will the dividend be in year 4 if the dividend growth rate is 3 percent?
A) B) C) D)
$0.88 $0.92 $0.96 $1.00
Q#10 Which one of the following statements related to equity securities is correct?
A) Preferred shareholders generally receive two votes for every one vote granted to a common shareholder.
B) If a dividend payment is missed on a cumulative preferred stock, the issuer must pay the missed dividend prior to paying any common stock dividends.
C) taxation.
Dividend income received by an individual is exempt from federal
D)
The dividend growth model can be used to determine the value of any individual stock.
1 Q#1 You are analyzing a proposed project and have compiled the following information:
Fall 2010
Quizzes
What is the net present value of this proposed project?
A)
-$1,980
B)
-$611
C)
$867
D)
$2,011
Fall 2010
Quizzes
Should the proposed project be accepted based on its internal rate of return? Why or why not?
A)
yes; IRR = 12.28 percent
B)
yes; IRR = 11.79 percent
C)
no; IRR = 12.28 percent
D)
no; IRR = 11.79 percent
Q#3 You are analyzing a proposed project and have compiled the following information:
Should the proposed project be accepted based on its payback period? Why or why not?
A)
yes; PB = 2.49 years
B)
yes; PB = 2.51 years
Fall 2010
C) no; PB = 2.49 years
Quizzes
D)
no; PB = 2.51 years
What is the profitability index of the proposed project?
A)
0.97
B)
0.99
C)
1.01
D)
1.03
Fall 2010
Quizzes
Q#5 The Even Cut Co. is considering opening a new plant to produce lawn mowers. The initial cost of the project is $6 million. This cost will be depreciated straightline to a zero book value over the 15-year life of the project. The net income of the project is expected to be $137,000 a year for the first four years and $538,000 for years 5 through 15, respectively. What is the average accounting return on this project?
A)
12.47 percent
B)
13.17 percent
C)
14.37 percent
D)
15.87 percent
Q#6 Which one of the following indicates an accept decision for a project?
A)
NPV = -$318
B)
PI = 0.92
Fall 2010
C) IRR = 15.6 percent; Required return = 15 percent
Quizzes
D)
Payback = 3.31 years; Required payback = 3 years
Q#7 The point where the net present values of two mutually exclusive projects are equal is referred to as the:
A)
profitability point.
B)
crossover point.
C)
payback point.
D)
internal rate of return.
Q#8 For an independent project, the NPV:
A)
is the difference between the project's cost and its market value.
Fall 2010
Quizzes
B) generally indicates an accept/reject decision that conflicts with the internal rate of return accept/reject decision.
C)
is the least favored method of project analysis from a finance perspective.
D)
indicates an accept decision when it is negative.
Q#9 Which one of the following statements correctly applies to the modified internal rate of return (MIRR)?
A) The MIRR is preferable to the IRR when a project has conventional cash flows.
B)
The MIRR is used to evaluate projects that have negative NPVs.
C)
The MIRR is another means of computing an accounting rate of return.
D) The MIRR depends upon an external discount rate, an external compounding rate, or both.
Fall 2010
Quizzes
Q#10 Which one of the following statements related to the profitability index (PI) is correct?
A) PI should be used to determine which one of two mutually exclusive projects should be accepted.
B)
PI is the discount rate that makes the net present value equal zero.
C)
There can be multiple PIs if the cash flows are unconventional.
D) PI is used to rank positive NPV projects when the available funds are limited
Q#1 Treynor Trucking owns some equipment which cost $459,000 originally. The equipment is classified as 7-year property for MACRS. What will the book value of this equipment be if the firm sells it at the end of year 5?
Fall 2010
A) $61,414
Quizzes
B)
$87,381
C)
$102,403
D)
$145,549
Q#2 A proposed project is expected to increase accounts receivable by $10,000, decrease inventory by $4,000, and increase accounts payable by $6,000. What is the project's initial requirement for net working capital?
A) B) C) D)
+$20,000 $0 -$12,000 -$20,000
Q#3 Last year, Bottlers, Inc. paid cash to purchase land located beside its factory at a price of $1.89 million. Today, the land has a market value of $1.95 million. The company is now considering building a new warehouse on that site. The construction cost of the warehouse is estimated at $1.1 million. In addition, $450,000 worth of grading, draining, utility work, and paving will be required. What is the initial cash flow of this project?
Fall 2010
A) B) C) D) -$2.99 million -$3.44 million -$3.50 million -$1.55 million
Quizzes
Q#4 You are analyzing a proposed 4-year project. You expect to sell 20,000 units per year at an average selling price of $5 per unit. The initial cash outlay for fixed assets will be $120,000. These assets will be depreciated straight-line to a zero book value over the life of the project. The fixed assets will be worthless at the end of the project. Fixed costs are expected to be $8,000 and variable costs will be $1.90 per unit. The project requires an initial investment in net working capital of $10,000 which will be recovered in full at the end of the project's life. What is the project's cash flow for year 4 if the tax rate is 35 percent?
A) B) C) D)
$24,000 $34,000 $45,600 $55,600
Q#5 You purchased some fixed assets six years ago at a cost of $165,700. You have been depreciating these assets using straight-line depreciation to a zero book value over 10 years. Today, you are selling these assets for $62,500. What is the aftertax cash flow from this sale if the applicable tax rate is 35 percent?
A) B) C)
$61,177 $62,500 $63,823
Fall 2010
D) $66,280
Quizzes
Q#6 You are considering a project that will generate sales of $89,000, costs of $56,000, and annual depreciation of $26,000. What is the value of the operating cash flow if the tax rate is 34 percent?
A) B) C) D)
$28,380 $30,620 $47,780 $59,000
Q#7 You need a new oven for your bakery. Your current oven is worn out so you are trying to decide which one of two ovens to buy as a replacement. Whichever oven you purchase will be replaced after its useful life. Oven A costs $25,000 and costs $3,000 a year to operate over an 8-year life. Oven B costs $20,000 and costs $4,500 a year to operate over a 6-year life. Given this information, which one of the following statements is correct if the applicable discount rate is 10 percent?
A) B) C) D)
The equivalent annual cost of oven A is -$7,481. The equivalent annual cost of oven B is -$8,209. Oven A lowers the annual cost by $1,406 as compared to oven B. Oven B lowers the annual cost by $1,598 as compared to oven A.
Q#8 Which one of the following is a correct method of computing operating cash flow (OCF)? Assume there is no interest expense.
Fall 2010
A) B) C) D) EBIT + Taxes Depreciation (Sales Costs) (1 T) + (Depreciation) (T) Net income Depreciation Sales Costs + Taxes
Quizzes
Q#9 Which one of the following is an example of erosion?
A) loss of sales due to a temporary ban on curbside parking in front of a retail establishment
B) a store's decline in wool sweater sales because the store started selling fleece jackets
C) declining sales for a fast food restaurant because a competitor opened across the street
D)
declining fast food sales because customers became more health conscious
Q#10 Which one of the following should be excluded from the cash flows of a project?
A) B)
sunk costs taxes
Fall 2010
C) D) salvage value erosion effects
Quizzes
Q#1 Which one of the following conditions exists at the accounting break-even point?
A) B) C) D)
The payback period equals the life of the project. The NPV is negative and exactly equal to the initial cash outlay. The IRR is -100 percent. The IRR is equal to the required rate of return.
Q#2 The lower the degree of operating leverage, the _____ the potential danger from _____ risk.
A) B) C) D)
greater; capital greater; forecasting lower; capital lower; forecasting
Q#3 The analysis of a project that combines scenario and sensitivity analysis is called _____ analysis.
A)
simulation
Fall 2010
B) C) D) rationing break-even degree of operating leverage (DOL)
Quizzes
Q#4 Which one of the following determines the level of output required for a project to have a zero net present value?
A) B) C) D)
sensitivity analysis cash break-even analysis financial break-even analysis scenario analysis
Q#5 Cotter Pins, Inc. is trying to determine what the selling price of a new product should be if the project is to break-even on a cash basis at a quantity of 1,900 units. The projections include fixed costs of $3,800, variable costs per unit of $8.64, and a depreciation expense of $620. What is the price they should charge?
A) B) C) D)
$10.64 $10.97 $11.57 $11.74
Q#6 Northern Technology manufactures a product with a degree of operating leverage of 2.5. If the fixed costs are $800 and the depreciation expense is $430 what is the operating cash flow of this project?
Fall 2010
A) B) C) D) $246.67 $320.00 $533.33 $820.00
Quizzes
Q#7 Gibson Mfg., Inc. is considering the introduction of a new product. Company management has prepared the following estimates related to the project as well as the related range of values, where applicable. The project under consideration has a five-year life and initial costs of $15,000. Assume the tax rate is 34 percent, there is no salvage value, and the project requires a 12 percent rate of return.
What is the contribution margin under the pessimistic scenario?
A)
$2.40
B)
$3.80
C)
$4.00
D)
$5.60
Fall 2010
Quizzes
What is the projected best-case net income?
A)
$702
B)
$904
C)
$2,687
D)
$3,904
Fall 2010
Quizzes
What are the projected base-case earnings before interest and taxes?
A)
-$6,616
B)
-$3,000
C)
$1,920
D)
$362
What is the projected optimistic net present value?
Fall 2010
A) -$1,654
Quizzes
B)
-$1,064
C)
$1,064
D)
$1,654
Q#1 Over the period 1926-2007, small-company stocks produced an average annual return of 17.1 percent with a standard deviation of 32.6 percent. Based on this information, what is the range of returns an investor can expect to earn in any one year given a 95 percent probability range?
A) B) C) D)
-48.1 to 82.3 percent -36.2 to 70.5 percent -80.7 to 114.9 percent -15.5 to 49.7 percent
Q#2 Over the period 1926-2007, intermediate-term government bonds had an average annual return of 5.5 percent, U.S. Treasury bills returned 3.8 percent, and inflation averaged 3.1 percent. What was the average risk premium on intermediate-term government bonds for this time period?
A)
0.07 percent
Fall 2010
B) C) D) 1.7 percent 2.4 percent 5.5 percent
Quizzes
Q#3 Which one of the following statements is correct?
A) The standard deviation of the returns on large- company stocks exceeded the standard deviation of the returns on small-company stocks for the period 19262007.
B) For the period of 1926-2007, the average annual rate of inflation exceeded the average annual return on U.S. Treasury bills.
C) The standard deviation of the returns on U.S. Treasury bills was zero percent for the period 1926-2007.
D) The frequency distribution of the returns on large- company stocks is wider than the frequency distribution of the returns on long-term corporate bonds for the period 1926-2007.
Q#4 Which one of the following best describes the information reflected in market prices if the financial markets are semistrong form efficient?
A) B)
only historical price information all private information
Fall 2010
C) D) all public information all information of any kind
Quizzes
Q#5 Over a 25-year period, a security had an arithmetic average return of 9.8 percent and a geometric average return of 8.7 percent. Based on Blume's formula, what is the projected average rate of return on this security for the next 5 years?
A) B) C) D)
Q#6 One year ago, you purchased a stock at a price of $36.24 a share. You received an annual dividend of $1.80 a share and sold the stock today for $32.12 a share. What was your capital gains rate of return?
A) B) C) D)
-11.28 percent -11.37 percent -12.76 percent -12.83 percent
Q#7 You purchased 100 shares of Plum's, Inc. stock at a price of $35.87 a share exactly one year ago. You have received dividends totaling $1.05 a share. Today, you sold your shares at a price of $46.26 a share. What is your total dollar return on this investment?
Fall 2010
A) B) C) D) $10.39 $11.44 $1,039 $1,144
Quizzes
Q#8 A stock has produced annual returns of 11 percent, 15 percent, -6 percent, and 4 percent over the past four years, respectively. What is the 68 percent probability range of returns?
A) B) C) D)
-2.8 to 14.8 percent -12.4 to 24.4 percent -9.9 to 21.9 percent -3.2 to 15.2 percent
Q#9 A stock has produced average annual returns of 7 percent, 12 percent, 19 percent, 8 percent, and 5 percent over the past five years. What is the geometric average rate of return?
A) B) C) D)
Q#10
Fall 2010
Quizzes
You previously owned 200 shares of AMG Co. stock. This stock earned a dividend yield of 3.75 percent and a total return of 10.74 percent. If you purchased the stock at $43.90, approximately what price did you receive when you sold it one year later?
A) B) C) D)
$45.55 $46.97 $48.62 $50.05
Q#1 Which one of the following is another name for market risk?
A) B) C) D)
diversifiable systematic total unique
Q#2 Which one of the following bests describes how an underpriced stock will plot on a security market line graph?
A) B) C) D)
to the right of the overall market to the left of the overall market above the security market line below the security market line
Fall 2010
Q#3 Diversification reduces which type of risk?
Quizzes
A) B) C) D)
market total asset specific systematic
A) B)
Beta measures total risk. The higher the beta, the lower the expected rate of return.
C) The standard deviation of a portfolio could be lower than lowest standard deviation of any one security held within the portfolio. D) Correctly-priced securities will have a reward-to-risk ratio of 1.0.
Q#5 U.S. Treasury bills are yielding 4.6 percent while the market is returning 14.8 percent. What is the expected return on a security that has a beta of 0.86?
A) B) C) D)
Fall 2010
Q#6
Quizzes
Stock A has a beta of 1.52 and a return of 18.9 percent. Stock B has a beta of 2.26 and a return of 24.3 percent. What is the risk-free rate of return if both stock A and stock B are correctly priced?
A) B) C) D)
Q#7 A portfolio is equally comprised of five stocks. The betas of four of those stocks are 0.82, 1.16, 1.09, and 1.78. What is the beta of the fifth stock if the portfolio beta is equal to the market beta?
A) B) C) D)
-0.05 0.15 0.25 0.38
Q#8 A portfolio consists of the following: $4,000 of stock A with beta of 1.2, $3,000 of stock B with beta of 1.41, and $8,000 of U.S. Treasury bills. What is the portfolio beta?
A) B)
0.55 0.60
Fall 2010
C) D) 0.71 1.31
Quizzes
Q#9 A portfolio consists of 60 percent of stock A and 40 percent stock B. What is the expected return on this portfolio given the following information?
A)
3.83 percent
B)
0.54 percent
C)
5.29 percent
D)
4.08 percent
Q#10 A portfolio consists of 30 percent of stock A and 70 percent of stock B. What is the standard deviation of this portfolio given the following information?
Fall 2010
A) 9.92 percent
Quizzes
B)
10.64 percent
C)
11.38 percent
D)
9.79 percent
Q#1 Alpha Enterprises is considering a new project. Alpha's management has determined that the required return for this new project should be based on the weighted average cost of capital for Beta Co. What approach did Alpha's managers use to determine the project's required rate of return?
A) B) C) D)
subjective objective pure play alternate play
Q#2 Which one of the following will increase a firm's aftertax cost of debt financing?
A) B) C)
decrease in the corporate tax rate increase in the dividend yield increase in a bond's current market price
Fall 2010
D) decrease in the market rate of interest
Quizzes
Q#3 The 7 percent preferred stock for Madden, Inc. is currently selling for $68 a share. What is the cost of preferred stock?
A) B) C) D)
Q#4 Kaylor & Stewart issued 20-year bonds 3 years ago. The bonds have a face value of $1,000, a market price of $989, a 6 percent coupon, and pay interest semi-annually. The firm's tax rate is 34 percent. What is the aftertax cost of debt?
A) B) C) D)
Q#5 Pete's Garden House has a cost of equity of 15.6 percent, an aftertax cost of debt of 7.1 percent, a debt-equity ratio of 0.45, and a tax rate of 35 percent. What is the firm's weighted average cost of capital?
Fall 2010
A) B) C) D) 12.19 percent 12.27 percent 12.77 percent 12.96 percent
Quizzes
Q#6 Lester's Feed Mill just paid its annual dividend of $1.34 per share. The firm has a policy of increasing its dividend by 2.5 percent annually. What is the cost of equity if the firm's stock is currently selling for $22.82 per share?
A) B) C) D)
Q#7 Traveler's Rest has 12,000 shares of common stock outstanding at a market price of $31.16 a share, 4,500 shares of preferred stock outstanding at $45 a share, and 500 bonds outstanding that are selling for 89 percent of their $1,000 face value. The firm's pre-tax cost of debt is 8.9 percent. The cost of equity is 14.7 percent and the cost of preferred is 8.8 percent. What is the firm's weighted average cost of capital if the tax rate is 34 percent?
A) B) C) D)
Fall 2010
Q#8
Quizzes
Charleston Mills has a debt-equity ratio of 0.62 and a tax rate of 35 percent. The firm has a $500,000 bond issue outstanding that is currently valued at 94 percent of par value. The bond carries a 7 percent, semiannual coupon and matures in 14.5 years. The common stock is selling for $56 a share and has a beta of 1.08. The firm is analyzing a project that it feels is riskier than the company's current operations and thus the firm's managers have assigned an adjustment factor of 1.5 percent to the project. What is the project's required rate of return if the market rate is 10.8 percent and Treasury bills are yielding 2.7 percent?
A) B) C) D)
Q#9 A firm has a cost of equity of 14 percent, a cost of preferred of 9.5 percent, and a pre-tax cost of debt of 8.7 percent. The capital structure of the firm is 55 percent common, 15 percent preferred, and 30 percent debt. The tax rate is 34 percent. What is the firm's weighted average cost of capital?
A) B) C) D)
Q#10 Jasper's, Inc. is expected to pay an annual dividend of $1.21 per share next year. This dividend is expected to increase by 3.5 percent annually. Jasper's also pays a 6 percent, annual coupon on its outstanding bonds. These bonds mature in 12.5 years and have a face value of $1,000. The firm's stock has a beta of 1.38 and a
Fall 2010
Quizzes
market price of $42.60 a share. The bonds are priced at $1,064 each. The market risk premium is 9.5 percent, the risk-free rate is 3.7 percent, and the tax rate is 32 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is 0.36?
A) B) C) D)
Q#1 The federal regulations that apply to all new interstate security issues are set forth in the:
A) B) C) D)
Securities Law of 1929. Securities Act of 1933. Securities Exchange Act of 1934. NASD Guidelines for the Financial Markets.
Q#2 The newspaper advertisement of a new securities issue is called a:
A) B) C) D)
letter of comment. registration statement. prospectus. tombstone.
Fall 2010
Quizzes
Q#3 Circus Town is offering 700 shares of stock in a Dutch auction. The bids include:
How much cash will Circus Town receive from this stock offering? Ignore all costs.
A)
$9,800
B)
$10,700
C)
$9,100
D)
$10,300
Q#4 Internet Ideas, Inc. is offering 20,000 shares in an initial public offering. The underwriters have agreed upon a best efforts offering with an offer price of $27 and a 5 percent spread. The underwriters were able to sell 18,500 shares to the general public. The stock opened at a price of $31 a share on its first day of trading. How much did Internet Ideas, Inc. receive from this offering?
A)
$474,525
Fall 2010
B) C) D) $499,500 $513,000 $589,000
Quizzes
Q#5 The Computer Co. wants to raise $4 million through a rights offering. Currently, the company has 1.5 million shares outstanding and plans on issuing one right for each share. The current market price is $50 and the subscription price is $40. What do shareholders have to submit to receive one new share of stock under this rights offering?
A) B) C) D)
15 rights + $40 15 rights + $50 18.75 rights + $40 18.75 rights + $50
Q#6 TES, Inc. currently has 700,000 shares of stock outstanding at a market price of $35 a share. The company wants to raise $3 million in a rights offering. The subscription price is $30 a share. One right will be granted for every share of outstanding stock. What is the value of one right?
A) B) C) D)
$0.92 $0.38 $0.70 $0.63
Q#7
Fall 2010
Quizzes
You currently own 8 percent of the 200,000 shares of outstanding stock in Jones, Inc. The firm has announced it is offering an additional 40,000 shares to the public. What will your new ownership position be if you opt to not participate in the additional stock offering? Assume the issue is fully subscribed.
A) B) C) D)
Q#8 The decline in the price of the currently outstanding shares of stock that frequently occurs when a new issue of stock is announced is referred to as the:
A) B) C) D)
gross spread. underpricing. abnormal return. indirect expense.
Q#9 Which one of the following allows the underwriters to purchase additional shares at the offer price to cover overallotments?
A) B) C) D)
Green Shoe option Red Herring statement White Knight provision Small-issues exemption
Fall 2010
Q#10
Quizzes
The ex-rights date is defined as _____ trading days prior to the holder-of-record date.
A) B) C) D)
1 2 3 5
Q#1 M&M Proposition I with taxes implies that a firm's weighted average cost of capital:
A) B) C) D)
remains constant regardless of a firm's debt-equity ratio. increases as the debt-equity ratio increases. decreases as the debt-equity ratio increases. varies independently of a firm's debt-equity ratio.
Q#2 Homemade leverage refers to the:
A) ability of an individual investor to control the amount of leverage to which he or she is exposed.
B)
ability of a firm to self-determine the amount of leverage it prefers.
Fall 2010
C) amount of debt a small firm arranges with its local bank.
Quizzes
D)
ability of a business to borrow money from an individual investor.
Q#3 The static theory advocates borrowing to the point where:
A)
the pre-tax cost of debt is equal to the cost of equity.
B)
the cost of equity is equal to the interest tax shield.
C) the tax benefit from debt is equal to the cost of the increased probability of financial distress.
D)
the debt-equity ratio equals 1.0.
Q#4 The value of an unlevered firm is equal to:
A) B) C) D)
[EBIT + (1 TC)] / RU. [EBIT (1 TC)] / RU. VL + TC D. VL (TC / D).
Fall 2010
Q#5
Quizzes
Gilbert & Sons is a levered firm. It has 300,000 shares of stock outstanding with a market price of $32 per share. The company also has $6.6 million of debt outstanding that sells at par. The pre-tax cost of debt is 9 percent and the unlevered cost of capital is 12 percent. What is the cost of equity if the tax rate is 35 percent?
A) B) C) D)
Q#6 Best Foods, Inc. has an unlevered cost of capital of 12 percent. The company generates earnings before interest and taxes of $6,000 per year and has a tax rate of 35 percent. What will the value of the firm be if the firm adds $20,000 of debt to its capital structure?
A) B) C) D)
$32,500 $39,500 $45,500 $57,000
Q#7 The order of claims in a bankruptcy is set forth in the:
A)
Bankruptcy Act of 1932.
Fall 2010
B) C) D) absolute priority rule. Securities Act of 1933. initial bankruptcy filing.
Quizzes
Q#8 Your firm has 5,000 bonds outstanding with a face value of $1,000 each. These bonds have a 9 percent coupon, pay interest annually, and are currently selling for 99 percent of par value. What is the present value of the interest tax shield if the tax rate is 34 percent?
A) B) C) D)
$44,550 $45,000 $1,683,000 $1,700,000
Q#9 Blue Ridge Tours has a cost of equity of 14.28 percent and a pre-tax cost of debt of 8.1 percent. The debt-equity ratio is 0.60 and the tax rate is 34 percent. What is the firm's unlevered cost of capital?
A) B) C) D)
Q#10
Fall 2010
Quizzes
The Plains Dealer has a cost of equity of 15.2 percent and a pre-tax cost of debt of 7.6 percent. The required return on the assets is 12.6 percent. What is the firm's debt-equity ratio base on M&M II without taxes?
A) B) C) D)
0.38 0.41 0.52 0.63
Q#1 Berkley Industrial Supply declared a dividend on Monday, August 3 to holders of record on Monday, August 17. The dividend is payable on Friday, September 4. The last day you can purchase shares of this stock and receive the September 4 dividend is:
A) B) C) D)
August 12. August 13. September 1. September 2.
A) B) C)
A cash dividend has no effect on the market value per share. A stock repurchase increases the market value per share. Stock repurchases are more tax advantageous than are cash dividends.
Fall 2010
D)
Quizzes
A stock repurchase increases the book value of shareholders' equity.
Q#3 Which type of transaction reduces the number of shares of stock outstanding but does not affect the value of owners' equity?
A) B) C) D)
stock dividend rights offering stock split reverse stock split
Q#4 Which one of the following dividend types represents a truly unusual, one-time dividend payment?
A) B) C) D)
special regular homemade extra cash
Q#5 Which one of the following favors a high dividend payout?
A) B) C)
flotation costs dividend restrictions high personal tax rate on dividend income
Fall 2010
D) uncertainty resolution
Quizzes
Q#6 Angie's just declared a 5 percent (small) stock dividend. Prior to the dividend, the stock had a $1 par value per share, a $15 book value per share and a $15 market value per share. As a result of this dividend, the:
A) B) C) D)
common stock account will remain constant. common stock account will decrease in value. retained earnings account will increase in value. capital in excess of par value account will increase in value.
Q#7 Which one of the following values will not change when a firm declares a large stock dividend?
A) B) C) D)
common stock account balance par value per share market price per share retained earnings account balance
Q#8 The common stock of Hoestetler Supply is currently selling for $8 a share. The company just declared a 2-for-5 reverse stock split. As a result of the split, the market price per share will be _____, all else constant.
A)
$16
Fall 2010
B) C) D) $20 $32 $40
Quizzes
Q#9 BLK, Inc. has 12,000 shares of stock outstanding with a market price per share of $60. The net aftertax earnings of the firm are $45,000. The firm has just declared a 3-for-1 stock split. What will the price-earnings ratio be after the stock split?
A) B) C) D)
5.33 12.50 16.00 48.00
Q#10 Smythe Tool has 18,000 shares of stock outstanding with a par value of $1 per share and a market value of $41 per share. The company just declared a 2-for-1 stock split. As a result of this split:
A) B) C) D)
the total value of the owners' equity will be cut in half. the number of shares outstanding will increase to 36,000. market price per share will increase to $82 a share. par value per share will remain at $1 per share.
Q#1 An increase in which one of the following is a use of cash?
Fall 2010
A) B) C) D) accounts payable long-term debt inventory owners' equity
Quizzes
Q#2 A firm has an accounts payable period of 54 days, an inventory period of 69 days, and an accounts receivable period of 37 days. What is the length of the cash cycle?
A) B) C) D)
54 days 52 days 106 days 86 days
Q#3 The Corner Market has sales of $898,000 and cost of goods sold equal to 70 percent of sales. The beginning inventory is $64,000 and the ending inventory is $71,000. What is the length of the inventory period?
A) B) C) D)
39.2 days 13.3 days 27.4 days 9.3 days
Q#4 All else equal, which one of the following will decrease the operating cycle?
Fall 2010
A) B) C) D) decrease in the cash cycle decrease in the inventory turnover rate increase in the accounts receivable turnover rate increase in the payables turnover rate
Quizzes
Q#5 Money deposited in a bank in a low-interest or non-interest-bearing account to fulfill a requirement in a loan agreement is called a:
A) B) C) D)
compensating balance. credit deposit. line of credit. cash reserve.
Q#6 A restrictive short-term financial policy:
A) B) C) D)
results in relatively low inventory levels. involves more long-term financing than a flexible policy does. results in high accounts receivable balances. has a relatively high ratio of current assets to sales.
Q#7 Tri-State Movers has projected quarterly sales of $1,800, $2,400, $2,800, and $1,200 for quarters one through four, respectively. The accounts receivable period is 30
Fall 2010
Quizzes
days. How much will the firm collect in Quarter 3? Assume each quarter has 90 days.
A) B) C) D)
$2,600 $2,400 $2,533 $2,667
Q#8 A firm has projected monthly sales of $800, $900, $1,100, and $1,400 for the months of January through April, respectively. The cost of goods sold is 60 percent of the selling price and the accounts payable period is 60 days. Goods are purchased one month prior to the month of sale. What is the amount of the March cash disbursements?
A) B) C) D)
$480 $520 $540 $600
Q#9 Waterfront Yachts maintains a large inventory of unique yachts for sale to discriminating buyers. Which one of the following is the most appropriate form of financing this firm's inventory?
A) B) C)
commercial paper trust receipt field warehousing
Fall 2010
D) blanket inventory lien
Quizzes
Q#10 Russell's of Townville needs to borrow $48,000 for one year. The bank requires a 5 percent compensating balance on any amount borrowed and an annual interest rate of 9 percent. What is the effective interest rate on this loan?
A) B) C) D)
Q#1 Which one of the following is the motive to hold cash for activities such as making bargain purchases?
A) B) C) D)
float transaction precautionary speculative
Q#2 Which one of the following represents the present value of eliminating float?
A) B) C)
one day's float daily float / risk-free rate total float
Fall 2010
D) average daily float
Quizzes
Q#3 Which one of the following will decrease collection float?
A) B) C) D)
issuing checks to your suppliers from a remote location installing a lockbox system for customer payments paying your suppliers electronically increasing the processing delay
A) float. B) C)
The Check Clearing Act for the 21st Century increases disbursement Providing early payment discounts to customers increases collection float. Payroll checking accounts always require a safety stock.
D) Cash concentration accounts tend to simplify cash management systems.
Q#5 Which one of the following affects your disbursement float?
A) time it takes for your bank to make funds available once you make a deposit B) C) time for your staff to process and deposit checks time for your customers' checks to reach your office once they are mailed
Fall 2010
D) time for your staff to verify and pay invoices
Quizzes
Q#6 When you reconciled your checkbook to the bank, you had outstanding deposits of $7,219 and outstanding checks of $4,511. Your adjusted check book balance is $2,029. What is the amount of the collection float?
A) B) C) D)
$2,029 $4,737 $4,511 $7,219
Q#7 A firm has only four customers. Shown below is the average amount of the monthly check received from each customer along with the average collection delay. What is the amount of the average daily receipts assuming that each month has 30 days?
A)
$7,933
B)
$6,667
C)
$15,867
Fall 2010
D) $59,500
Quizzes
Q#8 On average, High Tower Insurance receives 75 checks each day. The average amount of each check is $1,300. The firm is considering installing a lockbox system which will reduce the average collection time by 3 days. The bank will charge $0.25 a check for the lockbox arrangement. The daily interest rate on Treasury bills is 0.01 percent. What is the net present value of the lockbox arrangement?
A)
$97,500
B) $105,000 C) $112,500 D) $95,000
Q#9 Burlington Company receives an average of 426 checks each day that have an average value of $420 per check. If the firm decides to install a lockbox system it can reduce the average collection time by 2 days. The cost of the lockbox system is $0.32 per check. The daily interest rate on Treasury bills is 0.0125 percent. What is the daily cost of the lockbox system?
A) B)
$45 $134
C) $136 D) $273
Q#10
Fall 2010
Quizzes
You are analyzing a firm that receives an average of 330 checks each day with an average amount of $49 per check. These checks clear the bank on average in 1.38 days. The applicable daily interest rate is 0.015 percent. What is the present value of the float assuming that each month has 30 days?
A) B)
$9,200 $3,593
C) $19,240 D) $22,315
Q#1 The conditions under which a firm sells its goods for cash or credit are called:
A) B) C) D)
the terms of sale. credit analysis. credit scoring. the invoice.
Q#2 Which one of the following factors tends to decrease the credit period for a sale?
A) B) C) D)
new product low credit risk buyer highly competitive market inexpensive product
Fall 2010
Q#3 Credit terms of 2/5, net 15 means that a customer:
Quizzes
A)
receives a 2/5 percent discount if the invoice is paid within 15 days.
B)
is entitled to a 2 percent discount if the invoice is paid within 5 days.
C) must pay the invoice in full within 5 days and the invoice is considered delinquent after 15 days.
D) .
must pay in full within 10 days
Q#4 The optimal amount of credit is determined by equating which of the following costs?
A) B) C) D)
variable; fixed carrying; opportunity marginal; total marginal; opportunity
Q#5 A set of tires represents which type of inventory for Toyota?
A)
raw materials
Fall 2010
B) C) D) floor plan work-in-progress finished goods
Quizzes
Q#6 All of the following are included in the 5 Cs of Credit except:
A) B) C) D)
conditions. collateral. character. credit score.
Q#7 Carlisle Motors sells 2,600 electric motors each year. The fixed costs per order are $189 and the average variable cost per motor is $897. The carrying cost per motor is $22. What is the economic order quantity?
A) B) C) D)
211 units 223 units 231 units 236 units
Q#8 Wellington United has current monthly sales of 311 units at an average price of $69 a unit. The variable cost per unit is $47 and the monthly interest rate is 0.8 percent. Currently, the firm has a cash only sales policy. How many additional units per month must the company sell to break even on a switch to a net 30 credit policy?
Fall 2010
A) B) C) D) 6.5 units 7.0 units 7.5 units 7.9 units
Quizzes
Q#9 Your company may have the opportunity to make a one-time sale provided it grants a new customer one month's credit. The sales price of the item is $129, the variable cost is $74, and the relevant interest rate is 0.9 percent per month. What is the net present value of this sale if there is a 25 percent chance the customer will default on payment?
A) B) C) D)
-$32.75 $40.39 $21.89 $14.76
Q#10 Which one of the following inventory systems involves the separation of inventory items into various categories based solely on the cost per unit?
A) B) C) D)
EOQ ABC JIT MRP
Fall 2010
Q#1
Quizzes
International bonds issued in multiple countries but denominated in a single currency are called:
A) B) C) D)
Eurobonds. foreign bonds. gilts. American Depository Receipts
Q#2 Agreements to exchange two securities or currencies are called:
A) B) C) D)
cross-rates. ADRs. swaps. gilts.
Q#3 The notion that a commodity costs the same regardless of where it is purchased or what currency is used to pay for the purchase is known as:
A) B) C) D)
the international Fisher effect. the home currency approach. relative purchasing power parity. absolute purchasing power parity.
Fall 2010
Q#4
Quizzes
Interest rate parity is the condition that states that the interest rate differential between two countries is equal to the percentage difference between the:
A) B) C) D)
the real rates in each country. inflation rates in each country. spot exchange rates in each country. forward exchange rate and the spot exchange rate.
Q#5 The U.S. dollar ($) equivalent of the Japanese yen () is 0.01015. The U.S. dollar equivalent of the Australian dollar (A$) is 0.67069. Which one of the following statements is correct given this information?
A) B) C) D)
$750 is worth about 7.62. $300 is worth about A$201.21. 400 is worth about $4.06. A$200 is worth about $298.20.
Q#6 You can exchange $1 (US dollar) for either C$1.21 (Canadian dollar) or 0.78 (Euro). Given these rates, which one of the following correctly defines the crossrate between the Canadian dollar and the Euro?
A) B) C)
C$1 = 1.551 C$1 = 1.628 1 = C$1.628
Fall 2010
D) 1 = C$1.551
Quizzes
Q#7 The current spot rate between the U.S. and the U.K. is $1.00 = 0.62. If absolute purchasing power parity holds, what is the price per bushel of potatoes in the U.S. given that the same bushel costs 3.30 in theU.K.?
A) B) C) D)
$2.05 $2.38 $5.32 $5.46
Q#8 The current spot rate on the Euro is 0.7836 per $1. U.S. Treasury bills are yielding 2.5 percent. The rate on a risk-free European asset is 3 percent. What is the approximate 2-year forward rate if interest rate parity exists?
A) B) C) D)
0.7915 = $1 0.7874 = $1 0.7072 = $1 0.7319 = $1
Q#9 The spot rate between the Mexican peso and the U.S. dollar is Ps12.88 per $1. The expected inflation rate in the U.S. is 1.6 percent and the U.S. Treasury bill is yielding 3.4 percent. The risk-free rate of return in Mexico is 4.2 percent. What is the rate of inflation in Mexico?
Fall 2010
A) B) C) D) 1.8 percent 2.2 percent 2.4 percent 2.8 percent
Quizzes
Q#10 Your company is considering an expansion project in India. The project has an initial cost of Rs 1,250,000. The project will return Rs 400,000 a year for 5 years. The applicable discount rate in India is 8 percent. The inflation rate in the U.S. is 2 percent while it is 5 percent in India. The spot rate is Rs 49.46 per $1. What is the net present value of this project in dollars?
A) B) C) D)
$5,270 $5,491 $6,294 $7,017
Q#1 Suzie is the manager of a small retail store. She thinks that the store should expand in size and so is currently considering doing so. Suzie seems to prefer discussing her plans with those employees who agree with her idea while tending to ignore those employees who disagree with her. Suzie can best be used as an example of which one of the following?
A) B) C) D)
overoptimism overconfidence frame dependence confirmation bias
Fall 2010
Q#2
Quizzes
Bill loves to day trade stocks. However, while observing his trades, you noticed that he appears unaffected whenever he loses any of his prior gains but tends to pout when he loses any of the money he earned from his regular job. Bill can best be used to illustrate of which one of the following?
A) B) C) D)
heuristics house money clustering confirmation bias
Q#3 Kate is a marketing manager. She has recently noticed that any men's shirts that she displays sell faster if the displayed shirt is blue. Thus, she has decided that all displays of clothing, men's, women's and children's, should feature blue items. Which one of the following is most likely affecting this decision by Kate?
A) B) C) D)
frame dependence randomness affect heuristic representative heuristic
Q#4 June tends to believe that others agree with her opinions even when no one has expressed their agreement. June can best be used as an example of which one of the following?
A) B)
false consensus anchoring
Fall 2010
C) D) recency bias availability bias
Quizzes
Q#5 Which one of the following tends to encourage arbitrage trading rather than hindering it?
A) B) C) D)
firm-specific risk well-capitalized traders noise traders costs of implementation
Q#6 The stock market in 1929 is the best example of which one of the following?
A) B) C) D)
bubble GEF crash clustering illusion
Q#7 The performance of professional money managers over time tends to support the argument that financial markets tend to be:
A) B)
efficient. inefficient.
Fall 2010
C) D) heuristic. non-heuristic.
Quizzes
Q#8 Jeff never wants to make a decision as he's always afraid that he might later wish that he had made a different choice. Jeff suffers most from which one of the following?
A) B) C) D)
self-attribution bias myopic loss aversion regret aversion money illusion
Q#9 Assume Kris has two choices. She can either keep a $1 bill or buy a lottery ticket that costs $1. The grand prize for the lottery drawing is $1 million. Kris does not know what her chances are for winning the lottery and thus, she opts to keep the $1 bill. Which one of the following best applies to Kris?
A) B) C) D)
aversion to ambiguity law of small numbers availability bias gambler's fallacy
Q#10 Ted and Fred both own very similar homes on the same street. Ted feels that his house is worth $200,000 while Fred's house is only worth $175,000. Fred feels exactly the opposite. Both Ted and Fred display which one of the following behaviors?
Fall 2010
A) B) C) D) regret aversion endowment effect money illusion house money
Quizzes
Q#1 A financial asset that represents a claim to another financial asset is called a:
A) B) C) D)
hedged asset. subordinated asset. dual security. derivative security.
Q#2 The primary purpose of a hedge is to:
A) B) C) D)
reduce rate or price fluctuations. lock in a future exchange rate. increase the potential maximum rate of return. guarantee interest rate parity.
Q#3 The short-run financial risk related to the need to buy or sell at uncertain prices in the near future is referred to as:
Fall 2010
A) B) C) D) economic exposure. transactions exposure. exchange exposure. demand and supply exposure.
Quizzes
A) Marking-to-market is the term that applies to the daily resettlement feature found in all forward contracts.
B)
A futures contract is exactly the same as a forward contract.
C) Using a contract on a related, but not identical, asset as a means of hedging is called cross-rating.
D)
The gains or losses on a futures contract are realized on a daily basis.
Q#5 Which one of the following creates an obligation to sell?
A) B) C)
buying a call buying a put writing a call
Fall 2010
D) writing a put
Quizzes
Q#6 Which of the following positions will be profitable if the price of ABC stock rises? I. II. III. buying ABC stock buying a put on ABC stock writing a call on ABC stock IV. buying a call on ABC stock
A)
I and III only
B)
II and IV only
C)
I and IV only
D)
I, II, and III only
Q#7 An agreement between two firms to exchange specified cash flows at specified intervals in the future is called a:
A) B) C) D)
swap contract. futures contract. multiple exchange. multiple put.
Fall 2010
Q#8
Quizzes
Alpha Co. can borrow at 8 percent fixed or prime plus 2 percent. Beta Co. can borrow at 8.5 percent fixed or prime plus 1 percent. Which one of the following swaps is most apt to occur if Alpha Co. wants a variable rate and Beta Co. wants a fixed rate?
A) B) C) D)
8 percent fixed for prime plus 2 percent 8.5 percent fixed for prime plus 1 percent 8.25 percent fixed for prime plus 1.5 percent 8.25 percent fixed for prime plus 0.5 percent
Q#9 Use this information to answer question.
What is the closing value on one oats May futures contract?
A)
$21,463
B)
$19,678
C)
$20,200
D)
$21,550
Fall 2010
Quizzes
Q#10 Use this information to answer question.
Last week, you purchased three May futures contracts on oats at a quoted price of 4284. What is your total profit or loss on this position as of today's close?
A)
-$3,675
B)
-$3,660
C)
-$3,550
D)
-$3,475
Q#1 You would like to have the option to buy 100 shares of TC Toys stock at $45 a share anytime during the next three months. You should buy a (an):
A) B)
American call. American put.
Fall 2010
C) D) European call. European put.
Quizzes
Q#2 Last month, you purchased a put option on Deltona stock with an exercise price of $30 per share and an option premium of $0.20 per share. Today, the price of Western Wear stock is $29.60 per share. What is the current intrinsic value of your option per share?
A) B) C) D)
$0 $0.20 $0.40 $0.60
Q#3 You purchased two call option contracts on Webster stock at a time when the stock was selling for $31.20 a share and the option premium was $1.60 per share. The exercise price is $30 per share. What will be your total profit or loss if the price of Webster stock is $30.40 per share when the options expire?
A) B) C) D)
-$240 -$160 -$280 -$320
Q#4 If you sell (write) an American put option contract you have the:
Fall 2010
Quizzes
A) right to sell 100 shares of stock at a specified price during a specified period of time.
B)
obligation to sell 100 shares of stock if the option is exercised.
C) right to buy 100 shares of stock at a specified price during a specified period of time.
D)
obligation to buy 100 shares of stock if the option is exercised.
Q#5 Which of the following are basically call options? I. employee stock option II. warrant III. debt in a leveraged firm IV. equity in a leveraged firm
A)
I and III only
B)
II and IV only
C)
I and II only
D)
I, II, and IV only
Q#6
Fall 2010
Quizzes
The October 25 put on Langley Industries, Inc. stock is quoted at $1.10 per share. The stock has a current market price of $24.50 per share. What is the current intrinsic value per share of this put?
A) B) C) D)
-$1.10 -$0.60 $0 $0.50
Q#7 You purchased two call option contracts on Neiger Mills, Inc. stock at an option premium of $0.30 per share and an exercise price of $32.50 per share. What will be your total profit or loss on this investment on the expiration date if Neiger Mills, Inc. stock is valued at $31.30 per share at that time? Ignore trading costs and taxes.
A) B) C) D)
-$60 -$30 $0 $180
Q#8 Currently, the U.S. Treasury bill is yielding 3.6 percent while the common stock of TL Movers, Inc. is selling for $31.20 a share. What is the current value of a one-year call option on this stock if the exercise price of the option is $30.00 per share?
A) B) C)
$0 $1.20 $1.24
Fall 2010
D) $2.24
Quizzes
Q#9 The assets of Newmont Stores are currently valued at $410,000. The assets are expected to be worth either $375,000 or $450,000 one year from now. The company has a pure discount loan outstanding that matures in one year. The face value of the loan is $400,000. The risk-free rate of return is 4 percent and the inflation rate is 2.5 percent. What is the value of the equity in Newmont Stores?
A) B) C) D)
$9,615 $25,385 $32,949 $36,891
Q#10 If you commence a project today, you will have initial costs of $51,000 and annual cash inflows of $17,000 for 4 years. If you wait until next year to start this project, your initial costs will increase to $55,000 and the annual cash inflow for each of the 4 years will be $19,000. What is the value of the option to wait if the applicable discount rate is 12 percent?
A) B) C) D)
$1,316 $1,784 $2,611 $3,571
Q#1 The benefits of owning a share of stock and a put option can be duplicated by:
Fall 2010
A) B) C) D)
Quizzes
investing in a risk-free security and buying a call option. writing a put option and investing in a risk-free security. selling a share of stock and writing a call option. selling both a put option and a risk-free security.
A) An American style option is worth more than a comparable European style option.
B) The sensitivity of an option's value to the passage of time is called the option's vega.
C) The value of an option is equal to the option's intrinsic value minus the time premium.
D)
Increasing the risk-free rate has a negative impact on call values.
Q#3 Increasing which one of the following will decrease the value of a put?
A) B) C)
strike price standard deviation of the returns on the stock time to expiration
Fall 2010
D) risk-free rate
Quizzes
A) Rho measures an option's value relative to a small price change in the underlying asset. B) C) D) The Black-Scholes option pricing model applies only to American options. European options can only be exercised on the expiration date. All five factors in the Black-Scholes model can be directly observed.
Q#5 Which one of the following relates the change in the value of a firm's equity to the change in the value of the firm's assets?
A) B) C) D)
vega rho delta theta
Q#6 A share of stock is selling for $41.30 a share. A six-month call option with a $40 strike price sells for $2.10 per share. The risk-free rate is 0.3 percent per month. What is the price per share of a six-month put option with a $40 strike price?
A) B)
$0.09 $0.14
Fall 2010
C) D) $0.20 $0.26
Quizzes
Q#7 You recently purchased one share of Wexler stock at a price of $36.15 per share. You also purchased a one-year put option on Wexler stock with a $32.50 strike price. The cost of the put was $0.10 per share. What is the maximum amount per share you can lose during the one-year option period?
A) B) C) D)
-$3.75 -$3.55 -$0.10 $0
Q#8 Today, you purchased a one-year risk-free asset which pays 4% interest at a cost of $48.08. You also purchased a one-year call option on Jasper stock with a strike price of $35 and a cost of $1.45. How much total profit will you earn on these investments if the stock is worth $37.10 one year from now?
A) B) C) D)
$0.65 $2.57 $3.19 $4.02
Q#9 DL stock has a current market price of $38.60 per share. The one-year call on this stock with a strike price of $35 is priced at $4.80 per share. The one-year put on this
Fall 2010
Quizzes
stock with a strike price of $35 is priced at $0.05 per share. What is the risk-free rate of return?
A) B) C) D)
Q#10 A stock is selling for $41.70 a share and has a standard deviation of 52 percent. A 3month European option on the stock has an exercise price of $40. The risk-free rate is 3.5 percent, compounded continuously. N(d1) is 0.62693 and N(d2) is 0.52541. What is the value of the 3-month, $40 call option?
A) B) C) D)
$3.38 $3.59 $4.68 $5.31
Q#1 Which one of the following terms best fits a merger between two firms whereby a totally new firm is created and both of the existing firms cease to exist as independent firms?
A) B) C)
joint venture consolidation buyout
Fall 2010
D) strategic alliance
Quizzes
Q#2 If a food wholesaler purchases a grocery store, it has made a _____ acquisition.
A) B) C) D)
proxy horizontal vertical lateral
Q#3 Jack is a major shareholder of Lexington Homes stock. Currently, he is quite upset with the firm's management and thus has decided to try and gain control of the firm by soliciting enough shareholder votes to replace the current managers. Which one of the following terms is used to describe this attempt?
A) B) C) D)
going-private proxy contest stock swap leveraged buyout
Q#4 The difference between the purchase price of a firm and the estimated fair market value of the firm's net assets is called:
A) B)
goodwill. synergy.
Fall 2010
C) D) excess capital. merger revenue.
Quizzes
Q#5 Firm A is worth $10,000. Firm B is worth $10,000. The combined Firm AB is worth $22,000. The additional $2,000 of value that is created by combining Firms A and B is called:
A) B) C) D)
goodwill. excess capital. synergy. the pooling effect.
Q#6 Which one of the following statements is true?
A) The value of a merger to the acquiring firm increases as the merger premium increases.
B)
Stock acquisitions tend to be less complicated than cash acquisitions.
C) If the managers of the acquiring firm do not wish to lose any of their managerial control, they should acquire other firms with cash, rather than stock . D) An acquisition completed by exchanging shares of stock is generally a taxable transaction.
Fall 2010
Q#7
Quizzes
Johnston Mfg. is purchasing Delta Tools for $21.5 million in cash. The fixed assets of Delta Tools were recently appraised at $16.9 million. In addition, Delta Tools has $2.6 million in working capital and no debt. Johnston Mfg. will use the purchase accounting method to record this acquisition. What is the amount of the goodwill that will be shown on the books of Johnston Mfg. after the acquisition?
A) B) C) D)
$0 $2.0 million $3.4 million $4.6 million
Q#8 Miller Sporting Goods is acquiring Town Line Sports for $327,000 in cash. Currently, Miller Sporting Goods has 12,500 shares of stock outstanding at a market price of $54 a share. Town Line Sports has 12,000 shares outstanding at a price of $26 a share. Neither firm has any debt. The incremental value of the acquisition is estimated to be $16,500. What is the merger premium per share?
A) B) C) D)
$1.25 $3.75 $14.00 $28.00
Q#9 JT's is being acquired by Bruno's for $15,000 of Bruno's stock. JT's has 600 shares of stock outstanding at a price of $12 per share. Bruno's has 5,000 shares outstanding at a price of $38 a share. The incremental value of the acquisition is $1,500. What is the value of JT's to Bruno's? A) $16,500
Fall 2010
B) C) D) $5,700 $7,200 $8,700
Quizzes
Q#10 Denver Mines is merging with Mountain Glory. Denver Mines will pay the shareholders of Mountain Glory the current value of their stock in shares of Denver Mines. Currently, Mountain Glory has 1,500 shares outstanding at a price of $23 a share. Denver Mines has 6,500 shares outstanding at a price of $41 a share. How many shares of stock will be outstanding in the merged firm? A) B) C) D) 6,829 shares 7,341 shares 7,558 shares 8,000 shares
Q#1 A lease where the payments are insufficient to cover the total cost of the leased asset and the lessor is responsible for the taxes and insurance is called a(n) ______ lease.
A) B) C) D)
operating capital financial purchase
Q#2 A lease in which the lessor borrows money on a nonrecourse basis to finance the cost of the leased asset is called a(n) _____ lease.
Fall 2010
A) B) C) D) capital financial leveraged sale and leaseback
Quizzes
Q#3 Which of the following discount rates should be used when computing the net advantage to leasing?
A) B) C) D)
lessor's pre-tax lessor's aftertax lessee's pre-tax lessee's aftertax
Q#4 Which one of the following is a correct description of a standard used to determine if a lease is valid for IRS purposes?
A) The term of the lease must be less than 75 percent of the economic life of the asset.
B) The payments at the beginning of the lease period must be significantly higher than those at the end of the lease period.
C) The asset must be sold to the lessee for less than fair market value at the end of the lease term.
Fall 2010
D) profit.
Quizzes
The lessor must have a reasonable expectation of making a pre-tax
Q#5 When computing the net advantage to leasing, the cash flow at time zero is equal to:
A) B) C) D)
the cost of the asset. (the cost of the asset) (1 tax rate). the aftertax lease payment plus the lost depreciation tax shield. the amount of the annual lease payment.
Q#6 High Tower Bakery is debating whether to lease or to buy an asset. The asset costs $36,000, has a 3-year life, and will be worthless after the 3 years. Leasing the asset will cost $13,500 a year. The firm uses straight-line depreciation and has a tax rate of 35 percent. What is the incremental cash flow for year 2 if the firm decides to lease rather than buy?
A) B) C) D)
-$16,575 -$17,580 -$11,840 -$12,975
Q#7 An asset costs $52,000, has a 4-year life and will be worthless after the 4 years. The firm uses straight-line depreciation, has a pre-tax cost of capital of 12 percent, and
Fall 2010
Quizzes
a tax rate of 35 percent. The asset can be leased for $14,750 a year. What is the net advantage to leasing?
A) B) C) D)
$2,515 $4,966 $7,208 $9,059
Q#8 Moon River Tours is considering either purchasing or leasing some new equipment. The equipment costs $69,000 and has a 5-year life. At the end of the 5 years the equipment will have an estimated value of $4,000. The cost of leasing is $15,000 a year. The firm uses straight-line depreciation, has a pre-tax cost of capital of 14 percent, and has a 34 percent tax rate. What is the incremental cash flow in year 5 if the firm opts to lease rather than buy the equipment?
A) B) C) D)
-$13,930 -$17,232 -$19,408 -$22,560
Q#9 Chester's Chicken House has a cost of capital of 13 percent, a tax rate of 32 percent, and uses straight-line depreciation. The company is considering buying some equipment for $27,000. The equipment has a 3-year life and no salvage value. The equipment can be leased for $9,700 a year. Chester's Chicken House has accumulated net operating losses so does not expect to owe any taxes for the next 4 years. What is the net advantage to leasing?
A)
$3,627
Fall 2010
B) C) D) $2,829 $3,411 $4,097
Quizzes
Q#10 Al's Bait Shop is considering either purchasing or leasing some new equipment. The equipment costs $17,000 and has a 4-year life. At the end of the 4 years the equipment should be worth $1,500. The cost of leasing is $4,900 a year. Al's Bait Shop uses straight-line depreciation, has a cost of capital of 12.5 percent, and has a 30 percent tax rate. What is the amount of the aftertax salvage value?
A) B) C) D)
$450 $1,050 $1,500 $1,950
Q#1 Business finance includes determining which long-term assets a firm should purchase. A) B) Q#2 True False
Fall 2010
Quizzes
The board of directors has the power to act on behalf of the shareholders to hire and fire the operating managers of the firm. In a legal sense, the directors are "principals" and the shareholders are "agents." A) B) Q#3 In capital budgeting, the financial manager tries to identify investment opportunities that will increase the value of the firm. A) B) Q#4 Three advantages of the corporate form of organization are the ease of transfer of ownership, limited liability for the shareholders and an unlimited life for the business entity. A) B) Q#5 The intent of the Sarbanes-Oxley Act of 2002 is to protect the public from accounting fraud and financial malpractice. A) B) Q#6 Financial managers are responsible for determining: True False True False True False True False
I. how suppliers will be paid. II. the appropriate level of debt for a firm. III. which projects a firm should undertake. IV. how to invest the firm's cash.
Fall 2010
A) B) C) D) E) Q#7 I and II only II and III only I, II and III only II, III and IV only I, II, III and IV
Quizzes
Ann is interested in purchasing Ted's factory. Since Ann is a poor negotiator, she hires Mary to negotiate a purchase price. Identify the parties to this transaction. A) B) C) D) E) Q#8 Which of the following apply to dealer markets? Mary is the principal and Ann is the agent. Ted is the principal and Ann is the agent. Ted is the agent and Ann is the principal. Ann is the principal and Mary is the agent. Mary is the principal and Ted is the agent.
I. over-the-counter trading II. individuals buying and selling for themselves, at their own risk III. a market with a physical location IV. the matching of buyers with sellers A) B) C) D) E) Q#9 I and II only II and III only III and IV only I, II and IV only I and IV only
Fall 2010
Quizzes
At least one of the owners has unlimited liability under which of the following forms of business organization?
I. sole proprietorship II. general partnership III. limited partnership IV. limited liability company A) B) C) D) E) Q#10 Tasks related to tax management, cost accounting, financial accounting, and data processing are the responsibility of which corporate officer? A) B) C) D) E) Q#11 All stocks that trade on the New York Stock Exchange are: A) B) C) D) over-the-counter securities. primary market securities. AMEX securities. listed securities. treasurer chief executive officer controller chairman of the board chief operations officer I and II only II and III only I, II and IV only I, II and III only I, II, III and IV
Fall 2010
E) Q#12 privately placed securities.
Quizzes
Which of the following statements regarding agency problems and costs are correct?
I. An agency problem exists when there is a conflict of interest between the stockholders and the management of a firm. II. An agency problem exists when there is a conflict of interest between a principal and an agent. III. An agency cost occurs when firm management avoids risky projects that would favorably affect the stock price because the managers are worried about keeping their jobs. IV. An agency cost occurs when management chooses an action that benefits the shareholders but reduces management compensation. A) B) C) D) E) Q#13 Which of the following are stakeholders in a firm? I and II only II and III only I, III and IV only I, II and III only II, III and IV only
I. employees II. customers III. stockholders IV. government A) B) I and II only III only
Fall 2010
C) D) E) Q#14 I and III only II and IV only I, II and IV only
Quizzes
Which one of the following statements concerning the financial markets is correct? A) There are about three times as many companies listed on NASDAQ as on the NYSE. B) publicly. C) In general, stocks listed on NASDAQ trade more actively than those listed on the NYSE. D) on the NYSE. E) Q#15 Under which of the following forms of business organization are the losses to an owner limited to the amount which he or she has invested in the organization? The trading floor for NASDAQ is located in Chicago. All large firms, such as General Electric and Microsoft, trade The NYSE lists about 85 percent of all firms that trade
I. common stockholder II. limited partner III. general partner IV. sole proprietor A) B) C) D) E) I only I and II only I, II and IV only II, III and IV only II and III only
Fall 2010
Quizzes
Financial Statements, Taxes, and Cash Flow
Q#1 According to Generally Accepted Accounting Principles (GAAP), assets are carried on the financial statements at the higher of current market value or historical cost. A) B) Q#2 Suppose KLM, Inc., just received a patent on a new anti-cholesterol drug. This patent is an intangible fixed asset. A) B) Q#3 A noncash item is an expense charged against revenues that does not directly affect the cash flow. A) B) Q#4 Operating cash flow is the cash generated from a firm's normal business activities related to production and sales. A) B) Q#5 A highly liquid asset is an asset that can be converted into cash quickly by greatly reducing the selling price. True False True False True False True False
Fall 2010
A) B) Q#6 Net capital spending is equal to: True False
Quizzes
A) ending net fixed assets minus beginning net fixed assets plus depreciation. B) depreciation. C) ending net fixed assets minus beginning net fixed assets minus depreciation plus taxes. D) ending net fixed assets minus beginning net fixed assets plus depreciation minus taxes. E) depreciation. Q#7 Which one of the following statements is true? A) B) market value. Accounting income is generally equal to operating cash flow. Assets are usually listed on the balance sheet at current beginning net fixed assets minus ending net fixed assets plus beginning net fixed assets plus ending net fixed assets minus
C) Accounting statements are usually prepared to match the timing of income and expenses. D) The balance sheet equity account represents the market value of the firm to shareholders. E) worth. Q#8 Which one of the following is generally considered the most liquid? A) B) accounts receivable inventory The balance sheet tells investors exactly what the firm is
Fall 2010
C) D) E) Q#9 Cash flow to creditors is equal to: A) B) C) D) E) Q#10 Intangible assets: A) B) C) D) E) Q#11 Paid-in surplus is part of: A) B) C) D) E) Q#12 net working capital. long-term debt. net fixed assets. owners' equity short-term debt. are generally considered highly liquid. the interest paid. net fixed assets intangible assets tangible assets
Quizzes
operating cash flow minus net new borrowing. interest paid plus changes in short-term debt. interest paid plus total new debt. interest paid minus net new borrowing.
are listed on the balance sheet just before accounts receivable. include such things as patents and trademarks. include any fixed asset that exists physically. are expensed when acquired.
Fall 2010
Which one of the following statements is correct? A) liabilities. B) current assets.
Quizzes
Stockholders' equity is equal to total assets plus total Net working capital is equal to current liabilities minus
C) Cash flow from assets is equal to cash flow to creditors minus cash flow to stockholders. D) Additions to net working capital are equal to ending net working capital minus beginning net working capital plus depreciation. E) minus taxes. Q#13 Use the following tax table to answer this question. Operating cash flow is equal to EBIT plus depreciation
Taxable Income $0-50,000 $50,001-75,000 $75,001-100,000 $100,001-335,000
Tax Rate 15% 25% 34% 39%
Pools, Inc., has taxable income of $77,000 for the year. Which one of the following statements is correct concerning Pools' tax situation? A) B) C) D) E) Q#14 Pools' average tax rate is 18.74 percent. Pools' average tax rate is 34.00 percent. Pools' marginal tax rate is 15.00 percent. Pools' marginal tax rate is 18.74 percent. Pools' marginal tax rate is 39.00 percent.
Fall 2010
A) B) C) D) E) Q#15 -$31,000 -$29,000 $31,000 $60,000 $91,000
Quizzes
Wise, Inc., paid $31,000 in interest last year while long-term debt decreased from $310,000 to $250,000. What was the cash flow to creditors?
LaMont Industries had cash flow from operations of $19,300 last year. The depreciation expense was $2,300, interest expense was $600, and taxes were $1,400. They have 40,000 shares of stock outstanding. What is the earnings per share for last year? A) B) C) D) E) $0.31 $0.37 $0.41 $0.46 $0.48
Working with Financial Statements
Q#1 If a firm uses cash to purchase inventory, its quick ratio will increase. A) B) Q#2 Asset utilization ratios are intended to describe how efficiently a firm uses its assets to generate sales. True False
Fall 2010
A) B) Q#3 True False
Quizzes
The Du Pont identity breaks ROE into three components, which are the profit margin, the current ratio, and the equity multiplier. A) B) Q#4 When analyzing a financial statement, it is difficult to determine which ratios are most important and what the appropriate range for each ratio should be. A) B) Q#5 Market value ratios are measures of financial performance that can be computed for both private and public companies. A) B) Q#6 A comparison of the financial statements of two firms in the same general industry may be difficult if: True False True False True False
I. the firm's financial statements are prepared using different fiscal year-ends. II. one or both firms have international operations. III. the size of the two firms' operations are different. A) B) C) I only II and III only I and III only
Fall 2010
D) E) Q#7 I and II only I, II, and III
Quizzes
Which of the following are incorporated into the calculation of the Du Pont identity?
I. return on assets II. equity multiplier III. total asset turnover IV. profit margin A) B) C) D) E) Q#8 A very short-term creditor, such as a supplier who grants credit for only 30 days, is likely to be most interested in a firm's: A) B) C) D) E) Q#9 A firm is having difficulty controlling its operating expenses. Which one of the following ratio categories will most directly reflect this problem? A) liquidity current ratio. quick ratio. cash coverage ratio. cash ratio. times interest earned ratio. III and IV only I, II, and III only I, III, and IV only II, III, and IV only I, II, III, and IV
Fall 2010
B) C) D) E) Q#10 profitability market value turnover long-term solvency
Quizzes
Golf, Inc., and Swing, Inc., are close competitors. Last year, both had the same amount of cost of goods sold, but Golf turned its inventory 5 times during the year while Swing turned its inventory every 65 days. Which one of the following statements is true if the objective of both firms is to keep average inventory as low as possible? A) B) lower. C) D) E) Q#11 CatchaTan Co. had net sales of $750,000 over the past year. During that time, average receivables were $150,000. Assuming a 365-day year, what was the average collection period? A) B) C) D) E) Q#12 Which of the following is (are) a measure of profitability? 4 days 5 days 36 days 48 days 73 days Golf did a better job since its days' sales in inventory is lower. Swing did a better job since its inventory turnover is lower. Golf did a better job since its level of inventory is lower. Golf did a better job since its inventory turnover is lower. Swing did a better job since its days' sales in inventory is
Fall 2010
I. return on assets II. return on equity III. market-to-book ratio IV. profit margin A) B) C) D) E) Q#13 I only III only I and II only III and IV only I, II, and IV only
Quizzes
Delta, Inc., has a times interest earned ratio of 3.0. Based on this ratio, a creditor knows that Delta's EBIT must decline by more than ______ percent before Delta will be unable to cover its interest expense. A) B) C) D) E) Q#14 A firm has sales of $750, total assets of $400, and a debt-equity ratio of 1.50. If the return on equity is 10 percent, what is the firm's net income? A) B) C) D) E) Q#15 $16 $20 $32 $40 $75 33 40 67 75 80
Fall 2010
Quizzes
The sustainable growth rate illustrates the relationship among which of the following areas?
I. operating efficiency II. asset utilization III. dividend policy IV. financial policy A) B) C) D) E) I, II, and IV only I, II, and III only II, III, and IV only I, III, and IV only I, II, III, and IV
Introduction to Valuation: The Time Value of Money
Q#1 The future value is the amount an investment is worth after one or more periods. A) B) Q#2 Compounding is the process of accumulating interest in an investment over time to earn more interest. A) B) Q#3 If a lump sum of $5,000 is invested for four years at 10 percent compounded annually, it will earn total simple interest of $2,320.50 over that period. True False True False
Fall 2010
Quizzes
All else equal, the higher the interest rate, the lower the present value of an amount to be received at some point in the future. A) B) Q#5 Most investments, whether they involve real assets or financial assets, can be analyzed using the discounted cash flow (DCF) approach. A) B) Q#6 The present value discount factor: A) B) C) D) E) Q#7 You will receive a $50,000 inheritance in 13 years. You could invest that money today at 5.75 percent compounded annually. What is the present value of your inheritance? A) B) C) D) $23,798.46 $24,172.70 $24,928.03 $25,562.63 is greater than 1.0. is equal to zero when the discount rate is zero. increases as the time period increases. decreases as the discount rate increases. increases as the amount invested increases. True False True False
Fall 2010
E) Q#8 $50,000.00
Quizzes
What is the total future value six years from now of $125 received in one year, $250 received in two years, and $500 received in six years if the discount rate is 9.00 percent? A) B) C) D) E) Q#9 All else equal, the: $1,045.22 $1,047.93 $1,145.57 $1,237.21 $1,269.15
I. present value increases as the discount rate increases. II. present value increases the further away in time the future value is. III. present value is always less than the future value when both the interest rate and the number of years are positive. A) B) C) D) E) Q#10 Assuming a 3 percent annual increase in the price of automobiles, how much will a new BMW cost you 5 years from now if today's price is $42,000? A) B) $36,230 $40,779 I only II only III only I and II only II and III only
Fall 2010
C) D) E) Q#11 $46,575 $48,300 $48,690
Quizzes
Five years ago, $1,200 was deposited into a savings account paying 4.5 percent interest. Today, the balance in the account is $1,495. If interest paid on the account was compounded annually, how much interest on interest was earned? A) B) C) D) E) Q#12 Given the following end-of-year cash flows, what is the future value at the end of year 3 of the second cash flow if the interest rate is 6 percent? $25.00 $93.10 $102.39 $130.28 $295.00
Year 1 2 3
Cash Flow $450 $625 $550
A) B) C) D) E) Q#13
$589.62 $618.35 $662.50 $698.00 $744.39
Fall 2010
Quizzes
A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. If the account earned a total of $300 in simple interest over its life, how much was earned in interest on interest? A) B) C) D) E) Q#14 You have $90,000 saved today and want to purchase a new yacht when your money grows to $250,000. If you can earn 8 percent on your investments, how long do you have to wait to buy your yacht? A) B) C) D) E) Q#15 You just paid $14,960 for a rare model car. You hope to resell the car in three years and earn 15 percent annually on your investment. What selling price will you have to place on the model car? (Round to the nearest whole dollar) A) B) C) D) E) $17,204 $19,785 $20,988 $21,038 $22,752 11.29 years 12.18 years 13.27 years 14.11 years 16.67 years $25 $50 $75 $100 $125
Fall 2010
Quizzes
Discounted Cash Flow Valuation
Q#1 An example of an annuity is a stream of payments of $4,000 each at the end of every year for 20 years. A) B) Q#2 The stated interest rate is the same thing as the effective annual rate. A) B) Q#3 If interest is compounded annually, the effective annual rate and the annual percentage rate will be the same. A) B) Q#4 As a general rule, the effective annual rate is more appropriate for financial decision making than is the annual percentage rate. A) B) Q#5 In almost all present and future value computations, it is implicitly assumed that the cash flows occur at the beginning of each period. A) True True False True False True False True False
Fall 2010
B) Q#6 False
Quizzes
In order to compare different investment opportunities (each with the same risk) with interest rates reported in different manners you should: A) B) C) D) E) Q#7 You have $1,500 to invest. You have 2 choices: savings account A, which earns 8.75 percent compounded annually or savings account B, which earns 8.50 percent compounded monthly. Which account should you choose and why? A) B) C) D) E) Q#8 What is the effective annual rate of 7 percent compounded quarterly? A) B) C) D) E) Q#9 7.00 percent 7.12 percent 7.19 percent 7.23 percent 7.25 percent B; because it has a higher effective annual rate A; because it has the higher stated rate A; because it has a higher effective annual rate B; because the quoted rate is higher A; because it has the higher quoted rate convert each interest rate to an effective annual rate. convert each interest rate to a monthly nominal rate. convert each interest rate to an annual nominal rate. compare the published annual rates. convert each interest rate to an APR.
Fall 2010
Quizzes
You are planning to save your annual bonuses from work and are comparing savings accounts: Account A compounds semiannually, while Account B compounds monthly. If both accounts have the same effective annual rate of interest and you place only the bonuses in the account, you should: A) B) C) D) E) two. Q#10 You are going to withdraw $600 at the end of each year for the next four years from an account that pays interest at a rate of 6 percent compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much interest will you earn on the account over the four-year life? A) B) C) D) E) Q#11 You borrowed $2,500 at 9.2 percent compounded annually. Your payments are $500 at the end of each year. How many years will you make payments on the loan? A) B) C) D) E) 5 years 6 years 7 years 8 years 9 years $180.00 $240.00 $320.94 $420.19 $433.33 choose account A because it has a higher APR. choose account B because it has a higher APR. choose account B because it is compounded more often. choose account A because you will pay less in taxes. choose either since you would be indifferent between the
Fall 2010
Q#12
Quizzes
You own a bond issued by the CP railroad that promises to pay the holder $100 annually forever. You plan to sell the bond three years from now. If similar investments yield 6 percent at that time, how much will the bond be worth? A) B) C) D) E) Q#13 The preferred stock of Jay's Comics currently sells for $23.25 per share. The annual dividend of $1.50 is fixed. Assuming a constant dividend forever, what is the rate of return on this stock? A) B) C) D) E) Q#14 You deposit $500 in an account today. You will deposit $550 at the end of each month for the next 12 months and $700 at the end of each month for the following 12 months. How much interest will you have earned in 2 years if the account pays 4.5 percent compounded monthly? A) B) C) D) E) $669.80 $727.65 $749.42 $862.57 $879.00 3.49 percent 6.45 percent 8.06 percent 8.50 percent 10.00 percent $918.79 $1,333.34 $1,666.67 $1,789.42 $1,958.20
Fall 2010
Q#15
Quizzes
You are borrowing $6,000 today. The loan is an amortized 6-year loan with an APR of 8 percent. The loan requires that $1,000 of the principal amount be repaid each year. Payments are to be made annually. What is the amount of the interest for the third year of the loan? A) B) C) D) E) $80 $160 $240 $320 $400
Interest Rates and Bond Valuation
Q#1 For a bond, the required return is equal to the yield-to-maturity which is equal to the market rate. A) B) Q#2 A premium bond is a bond that sells for less than its par value. A) B) Q#3 In common usage, "short-term" debt refers to debt with a maturity of one year or less. A) B) Q#4 True False True False True False
Fall 2010
Bond yields and prices move inversely with one another. A) B) Q#5 True False
Quizzes
The term structure of interest rates is the relationship between real interest rates on default-free, pure discount securities and time to maturity. A) B) Q#6 A bond sold five weeks ago for $1,098. The bond is worth $1,047 in today's market. Assuming no changes in risk, which one of the following is true? A) B) C) ago. D) E) Q#7 If a 10-year bond's coupon rate is less than the required rate, then: A) the holder of the bond is guaranteed a profit when the bond is sold, regardless of when it is sold. B) a portion of the return a buyer of this bond will earn will come from buying the bond at a discount. C) the bond sells at par because the required rate of return is adjusted to reflect the discrepancy. D) E) Q#8 the bond sells at a premium because it is a long-term bond. the bond will be repaid by the issuer at a discounted price. The bond's current yield has increased from five weeks ago. The coupon payment of the bond must have increased. The face value of the bond must be $1,100. The bond must be within one year of maturity. Interest rates must be lower now than they were five weeks True False
Fall 2010
Quizzes
Which of the following statements about bond ratings is (are) accurate?
I. Bond ratings are typically paid for by a company's bondholders. II. Bond ratings are based solely on information acquired from sources other than the bond issuer. III. Bond ratings represent an independent assessment of the credit-worthiness of bonds. A) B) C) D) E) Q#9 Which of the following risks do debt ratings specifically attempt to assess? I only III only I and II only I and III only II and III only
I. interest rate II. default III. call A) B) C) D) E) Q#10 All else equal, the existence of a _____ will increase the required return on a bond. A) call provision I only II only I and II only II and III only I, II, and III
Fall 2010
B) C) D) E) Q#11 Which of the following statements is (are) true? conversion feature put provision trust deed protective covenant
Quizzes
I. All else equal, the value of a perpetual bond will remain unchanged from one year to the next, unless market interest rates change. II. All else equal, bond prices and coupon rates are inversely related. III. All else equal, given two bonds identical but for coupon, the market price of the lower coupon bond will change more (in percentage terms) than that of the higher coupon bond for a given change in market interest rates. A) B) C) D) E) Q#12 The _____ is known as the term structure of interest rates. A) B) C) D) E) Q#13 Which one of the following is true? inflation premium interest rate risk premium Fisher effect relationship between short and long-term interest rates municipal bond yield curve I only I and II only I and III only II and III only I, II, and III
Fall 2010
Quizzes
A) If the rate of inflation is expected to decline by a small amount, there cannot be an upward-sloping term structure of interest rates. B) Investors demand an extra yield on a nontaxable bond as compensation for the unfavorable tax treatment. C) The compensation investors demand for bearing interest rate risk adds a downward slope to the term structure of interest rates. D) The compensation investors demand for buying bonds that don't trade very often is called a default premium. E) A bond's yield is typically calculated assuming that all of the promised coupon and principal payments will be made.
Q#14 You earn a 5 percent real return. If the inflation rate is 4 percent, what is your nominal return? A) B) C) D) E) 0.96 percent 1.09 percent 9.05 percent 9.20 percent 10.92 percent
Q#15 A Treasury bond is quoted at a price of 101:23. What is the price of this bond? A) B) C) D) E) $987.85 $1,010.23 $1,012.30 $1,017.19 $1,178.75
Fall 2010
Equity Markets and Stock Valuation
Quizzes
Q#1 A firm must make its dividend payments to preferred shareholders before it makes any interest payments to its bondholders. A) B) Q#2 Most preferred stock has dividends that are cumulative. A) B) Q#3 According to the constant growth model, the dividend yield is equal to the required return minus the dividend growth rate. A) B) Q#4 The NASDAQ acts as both a primary market and a secondary market for shares of stock. A) B) Q#5 A broker and a dealer are the same thing. A) B) Q#6 True False True False True False True False True False
Fall 2010
Quizzes
Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20, and $1.30 respectively. This pattern is expected to continue into the future. This is an example of a company paying a: A) B) C) D) E) Q#7 You are considering investing in a firm and wish to place a value on the common stock. The dividend on the firm's stock has not changed in the last five years. Absent any information suggesting future changes in the dividend rate, the most appropriate stock valuation model would be the _____ model. A) B) C) D) E) Q#8 The dividend yield on a stock is similar to the current yield on a bond in that both: A) year. B) C) D) incorporate the par value into their computation. represent the security's annual income divided by its price. are quarterly yields that must be annualized. represent how much each security's price will increase in a zero growth constant growth nonconstant growth growing perpetuity bond pricing dividend that grows by 10 percent each year. dividend that grows at a constant rate. dividend that grows by a decreasing amount. dividend that grows at a decreasing rate. preferred stock dividend.
E) are an accurate representation of the annual return an investor can expect to earn by owning the security.
Fall 2010
Q#9
Quizzes
Which one of the following is true about the differences between debt and common stock? A) B) Debt is ownership in a firm but equity is not. Creditors have voting power while stockholders do not.
C) Periodic payments made to either class of security are tax deductible for the issuer. D) are not. E) Both stockholders and bondholders have voting privileges. Interest payments are promised while dividend payments
Q#10 Which one of the following is a violation of the rights of one or more classes of a firm's stakeholders? A) arrears B) a liquidation C) allowing preferred shareholders to place members on the board of directors when their dividends have not been paid for some time D) allowing common shareholders to vote by proxy when they are unable to attend a shareholders' meeting in person E) paying creditors before preferred shareholders in a liquidation paying preferred shareholders before common shareholders in paying common dividends when preferred dividends are in
Q#11 Which one of the following has lost the most importance in recent years because of the SuperDOT system of trading?
Fall 2010
A) B) C) D) E) commission broker specialist floor broker floor trader market maker
Quizzes
Q#12 Suppose you own 250 shares of MIKO common stock. Two directors are to be elected. Since the firm uses cumulative voting, you can cast as many as _____ votes for a single director. A) B) C) D) E) 125 250 500 750 1,000
Q#13 ABC's common stock dividend yield is 2.1 percent. The company just paid a dividend of $1, it is expected to pay a dividend of $1.07 one year from now, and dividends are expected to grow at this same rate indefinitely. What is the required rate of return on ABC's stock? A) B) C) D) E) 9.0 percent 9.1 percent 9.3 percent 10.6 percent 11.2 percent
Fall 2010
Q#14
Quizzes
Boomer Products, Inc., manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 3 percent annually forever. The firm just paid a dividend of $1.50. Given a required return of 12 percent, the stock should sell for: A) B) C) D) E) $9.70. $10.50. $15.00. $17.17. $32.50.
Q#15 A web site which allows investors to trade directly with each other is referred to as: A) B) C) D) E) the SuperDot system. an electronic communications network, or ECN. the NASDAQ. the order flow. the Philadelphia Exchange
Net Present Value and Other Investment Criteria
Q#1 A firm that only accepts projects for which the internal rate of return (IRR) is equal to the firm's required return will, on average, neither create nor destroy wealth for its shareholders.
Fall 2010
Quizzes
The net present value (NPV) decision rule is considered the best in theory. A) B) Q#3 An advantage of the payback rule is that it is easy to understand. A) B) Q#4 Two projects that are mutually exclusive are said to be independent. A) B) Q#5 If a project has conventional cash flows, it may also have more than one IRR. A) B) Q#6 Which of the following is (are) correct? True False True False True False True False
I. Net present value (NPV) is one of the two or three most important concepts in finance. II. NPV is the difference between the market value of an investment and its cost. III. The financial manager acts in the shareholders' best interests by identifying and taking positive NPV projects.
Fall 2010
IV. NPVs can normally be directly observed in the market. A) B) C) D) E) Q#7 I and II only II and III only I and IV only I, II, and III only I, III, and IV only
Quizzes
Which one of the following statements accurately describes an advantage of the average accounting return (AAR) method of analysis? A) computations. The AAR method incorporates time value of money
B) The estimation of the appropriate cutoff rate for AAR is straightforward and easy. C) D) E) Q#8 A project should be accepted according to the average accounting return (AAR) whenever the AAR: A) B) C) D) E) Q#9 Your firm's CFO presents you with two capital budgeting proposals: one that involves buying a new delivery truck and one that involves building additional exceeds the firm's required AAR. exceeds the IRR. is greater than 100 percent. is positive. is less than the IRR. AAR relies on net income and not cash flows. AAR relies on book values and not market values. AAR is relatively easy to compute.
Fall 2010
A) B) C) D) E) Q#10 mutually exclusive projects. crossover rates. interdependent projects. independent projects. longitudinal projects.
Quizzes
warehouse space. You are to determine which, if either, or both, of these projects should be accepted. This is an example of a decision involving:
The management of a firm wishes to accept projects with a high degree of liquidity; wishes to avoid the higher forecasting error associated with cash flows a long way into the future; and wishes to avoid projects that require a large amount of research and development. The firm would be justified in using the _____ to evaluate its projects. A) B) C) D) E) Q#11 A project that requires an initial cash outlay and for which all remaining cash flows are inflows is said to be: A) B) C) D) E) Q#12 independent. conventional. mutually exclusive. value-creating. short term. internal rate of return (IRR) net present value (NPV) average accounting return (AAR) payback method profitability index (PI)
Fall 2010
A) B) C) D) E) Q#13 prefers to talk in terms of rates of return. can accurately forecast future cash flows. dislikes the payback analysis. also prefers use of payback analysis. is considering mutually exclusive projects.
Quizzes
A manager will prefer the internal rate of return (IRR) rule over the net present value (NPV) rule if the manager:
You undertake a project that requires an initial investment of $9,000. You expect to receive $3,100 a year for the next 4 years. If the required return is 15 percent, what is the net present value (NPV)? A) B) C) D) E) Q#14 You are trying to choose between two projects as you do not have sufficient funding to accept both projects. Each project costs $80,000. Project A pays $25,000 a year for 4 years and project B pays $20,000 a year for 5 years. If your required return is 14 percent, which project should you choose and why? A) B) C) D) A; because it pays back sooner A; because it has a higher IRR B; because it has a higher NPV You should reject both projects. -$235.26 -$149.57 -$7.58 $4.63 $9.44
E) You are indifferent between the two projects because each project pays back the same amount.
Fall 2010
Q#15
Quizzes
A project requires an initial investment of $220,000, which will be depreciated on a straight-line basis over 4 years to a zero book value. A 20 percent average accounting return (AAR) and a 15 percent internal rate of return (IRR) have been assigned to the project. The estimated annual net income from the project is $18,100, $20,500, $21,500, and $22,500, respectively. Which one of the following statements is correct concerning this project? A) accepted. B) The average book value that should be used in the AAR computation is $55,000. C) method selected. D) requirement. E) information. The project should be rejected based on the available The AAR will be the same regardless of the depreciation The project should be accepted because the IRR exceeds the The AAR exceeds the requirement, so the project should be
Making Capital Investment Decisions
Q#1 Assume a project requires additions to net working capital in each year of its life, all of which will be recovered at the end of the project. In this case, the present value of the net working capital recovery will equal the total dollar outlays for net working capital. A) B) Q#2 To accurately reflect the costs associated with a project, you should exclude interest expenses in the computation of operating cash flows. True False
Fall 2010
A) B) Q#3 Sunk costs and opportunity costs are often the same thing. A) B) Q#4 True False True False
Quizzes
If net working capital grows from $1,000 to $1,500 as a result of taking on a new project, the $500 increase should be included in the initial outlay for the new project. A) B) Q#5 For a cost cutting project, the net present value will generally be negative, but the project should still be accepted. A) B) Q#6 A company that has a policy of making only cash sales is considering allowing customers to buy on credit. Which one of the following will probably occur? A) B) C) The accounts receivable will likely increase. The change will provide a source of funds. Total sales will likely decrease. True False True False
D) Net working capital will decrease if funding needs are met with long-term liabilities. E) efforts. Expenses will decrease due to monthly billing and collection
Fall 2010
Q#7
Quizzes
It is important to identify and use only incremental cash flows in capital investment decisions: A) B) because they are the simplest to identify. only when the stand-alone principle fails to hold.
C) because ultimately it is the change in a firm's overall future cash flows that matter. D) occur. E) Q#8 You are advising Peter who is attempting to decide whether or not to drop one of the college courses he is currently enrolled in. If he drops the course, he will forfeit half of the money spent on tuition. If he stays in the class, he will have to give up his part-time job. His textbook is being replaced by a new edition, so is worthless at this time. Which of the following conclusions is consistent with capital budgeting principles? whenever sunk costs are involved. in order to accommodate unforeseen changes that might
I. Remaining in the class incurs an opportunity cost. II. The entire tuition is irrelevant because it is a sunk cost. III. The cost of the book is a sunk cost. A) B) C) D) E) Q#9 Consider a $10,000 machine that will reduce pretax operating costs by $3,000 per year over a 5-year period. Assume no changes in net working capital and a zero scrap value after five years. For simplicity, assume straight-line depreciation to I only I and II only I and III only II and III only I, II, and III
Fall 2010
A) B) C) D) E) Q#10 $83. $449. $689. $827. $1,235.
Quizzes
zero, a marginal tax rate of 34 percent, and a required return of 10 percent. The net present value of acquiring this machine is:
Given the following information and assuming straight-line depreciation to zero, what is the payback period for this project? The project requires an initial investment of $900,000; has a life of 6 years; produces cost savings of $190,000 per year; has a tax rate of 35 percent; and a discount rate of 9 percent. The fixed assets will be sold for $50,000 at the end of year 6. A) B) C) D) E) Q#11 Your firm needs a computerized line-boring machine that costs $90,000 and requires $16,000 in maintenance costs for each year of its 3-year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. The MACRS percentages for each year are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent, respectively. Assume a tax rate of 35 percent and a discount rate of 10 percent. Assume the machine can be sold for $12,000 at the end of year 3. What is the aftertax salvage value of the machine? A) B) C) D) $5,633 $7,800 $7,920 $10,134 2.54 years 3.67 years 3.93 years 5.10 years The project never pays back.
Fall 2010
E) Q#12 $10,678
Quizzes
Your company just bought a new distillation unit for $175,000 to be used for research and development. Such equipment has a 3-year MACRS classification. The MACRS percentages are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent, respectively. What is the book value of the distillation unit at the end of year 2? A) B) C) D) E) Q#13 A condominium developer buys three times as much land as is needed to build a planned 50-unit development so that, if things go well, two additional 50-unit developments can be built without having to acquire additional land. The developer is prepared to exercise the option to: A) B) C) D) E) Q#14 The Sedgwick Company estimates sales of a new product at 5,000 units and $3.00 per unit. Management feels the sales quantity is accurate within a 10 percent plusor-minus range while the sales price is accurate within a 5 percent plus-or-minus range. What dollar amount should the company use for total sales in their worstcase scenario analysis of this product? A) B) $12,150 $12,825 quit. expand. abandon. wait. rebuild. $12,968.00 $38,902.50 $49,833.50 $77,770.00 $116,673.50
Fall 2010
C) D) E) Q#15 $13,500 $14,250 $15,000
Quizzes
Options for future, related business products or strategies are known as: A) B) C) D) E) strategic options. capital rationing options. options to expand. options to wait. contingent options
Some Lessons from Capital Market History
Q#1 If insiders were allowed to profit on their inside information without penalty, financial markets would be more efficient. A) B) Q#2 Investors shouldn't count capital gains as a part of their total return until a security is sold, since the capital gain is really only a "paper gain" up to that point. A) B) True False True False
Fall 2010
Q#3
Quizzes
Your classmate just made $10,000 in a single day by trading in the stock market. It is reasonable to conclude, therefore, that the efficient market hypothesis cannot be true. A) B) Q#4 In general, the greater the potential reward, the greater the risk. A) B) Q#5 A normal distribution is a symmetric, bell-shaped frequency distribution that is completely defined by its average and standard deviation. A) B) Q#6 When calculating your return on investment you should ignore: True False True False True False
A)
paper gains.
B) losses you avoided by not buying a stock that has since decreased in price.
C) dividends that have been declared on a stock you own if you have not yet received the dividend.
D)
paper capital losses.
Fall 2010
E)
Quizzes
fees you are charged in the process of purchasing a security.
Q#7 Which one of the following is true about risk and return?
A) B) deviation. C)
Riskier assets will, on average, earn lower returns. The reward for bearing risk is known as the standard Based on historical data, there is no reward for bearing risk.
D) An increase in the risk of an investment will result in a decreased risk premium. E) risk. Q#8 After careful analysis of previous stock prices, you discover you can make above normal returns on your investments if you buy oil company stocks just before noon on any given trading day and then sell them immediately before the market closes that day. This is: A) B) C) D) E) Q#9 The lessons from capital market history tell us that: not a violation of market efficiency. a violation of weak form efficiency. a violation of semistrong form efficiency. a violation of strong form efficiency. a violation of all forms of market efficiency. In general, the higher the expected return, the higher the
I. there is a reward for bearing risk. II. the greater the potential reward from a risky asset, the greater is the risk.
Fall 2010
III. the NYSE stock exchange is an inefficient market. A) B) C) D) E) Q#10 I only II only I and II only I and III only I, II, and III
Quizzes
Over the 1926 to 2004 period, the nominal risk premium on long-term government bonds has averaged _____ percent per year. A) B) C) D) E) Q#11 Which one of the following asset classes has displayed the flattest and widest distribution of returns over the 1926-2004 period? Assume that annual security returns are normally distributed. A) B) C) D) E) Q#12 An investment earned the following returns over a four-year period: 28 percent, 21 percent, 1 percent, and -36 percent. What is the variance of the returns on this investment? large company stocks long-term corporate bonds small company stocks long-term government bonds U.S. Treasury bills 0.0 2.0 2.2 8.8 13.4
Fall 2010
A) B) C) D) E) Q#13 Given the following historical returns, what is the variance? 0.0618 0.0824 0.1400 0.1739 0.2473
Quizzes
Year 1 2 3 4 5
Return 7 percent 3 percent 19 percent -11 percent -1 percent
A) B) C) D) E) Q#14
.009664 .012080 .034018 .039644 .048322
Suppose you purchased 500 shares of Jet-Electro Corporation stock at a price of $22.50 per share. One year later, the shares are selling for $21 each. In addition, a dividend of $1.50 per share was paid at the end of the period. What is the percentage return on the investment? A) B) -7.1 percent -6.7 percent
Fall 2010
C) D) E) Q#15 0.0 percent 6.7 percent 7.1 percent
Quizzes
You own a stock which has produced annual returns of 11 percent, 3 percent, 8 percent, and 14 percent over the past four years, respectively. The arithmetic rate of return is _____ percent and the geometric rate of return is _____ percent. A) B) C) D) E) 8.50; 8.92 8.50; 18.92 9.00; 8.92 9.00; 9.92 9.00; 18.92
Risk and Return
Q#1 If the total risk of firm X is greater than that of firm Y, then the beta of firm X must be greater than that of firm Y. A) B) Q#2 No matter how much total risk an asset has, only the unsystematic portion is relevant in determining the expected return on that asset. A) B) Q#3 If world events cause investors to become more risk-averse, you would expect the market risk premium to increase. True False True False
Fall 2010
Quizzes
The projected risk premium is defined as the sum of the expected return on a risky investment and the return on a risk-free investment. A) B) Q#5 The security market line is based on the principle that the reward-to-risk ratio must be constant for all assets in the market. A) B) Q#6 Which one of the following is an accurate statement? True False True False
A) To calculate an expected risk premium you need to compute the expected return on an average risky asset and the return on a risk-free asset. B) The risk premium is the difference between the return on a risky asset and the return on a market portfolio. C) risk increases. The expected return on an asset decreases as the firm-specific
D) A comparison of two different risky assets can not be simplified by computing the expected return on each asset. E) The expected return on a security depends on the expected states of the economy but not on the associated probabilities of those states occurring. Q#7 Diversification works because:
Fall 2010
I. unsystematic risk exists.
Quizzes
II. combining stocks into a portfolio reduces the standard deviation of each stock in the portfolio. III. firm-specific risk can be dramatically reduced if not eliminated. A) B) C) D) E) Q#8 You are looking at two different stocks. Stock A has a beta of 1.25 and stock B has a beta of 1.30. Which one of the following statements is true about these investments? A) B) C) D) E) B. Q#9 Which one of the following portfolios would have the least systematic risk? A) B) a portfolio of the common stocks of 100 different companies a market portfolio Stock A is a better addition to your portfolio. Stock B is a better addition to your portfolio. The expected return on stock A will exceed that of stock B. Stock B has a higher standard deviation than stock A. Stock A should have the same reward-to-risk ratio as stock I only III only I and II only I and III only I, II, and III
C) a portfolio half invested in the market portfolio and half invested in Treasury bills D) a portfolio half invested in the market portfolio and half invested in stocks with betas of 1.50 E) a portfolio made up entirely of Treasury bills
Fall 2010
Q#10
Quizzes
The expected return on a risky asset depends only on that asset's _____ risk. A) B) C) D) E) Q#11 Suppose you have a portfolio comprised of two securities. You have 60 shares of the stock X valued at $10 per share and 40 shares of stock Y valued at $3 per share. What is the weight of stock X in the portfolio? A) B) C) D) E) Q#12 Which of the following is (are) true? 23 percent 40 percent 60 percent 77 percent 83 percent diversifiable asset-specific surprise unique systematic
I. Systematic risk is all that matters to a well-diversified investor. II. The amount of systematic risk in an asset relative to an average risky asset is measured by beta. III. Spreading a portfolio across a number of assets will eliminate all of the risk. IV. On average, the standard deviation of a portfolio declines as the number of assets in the portfolio is increased but it can not decline to zero. A) B) II and III only I and II only
Fall 2010
C) D) E) Q#13 I, II, and III only I, II, and IV only I, III, and IV only
Quizzes
You hold four stocks (A, B, C, and D) in your portfolio. The portfolio beta is 1.20. Stock C constitutes 40 percent of the dollar value of your holdings and has a beta of 1.60. If you sell all of your holdings in stock C, and replace them with an equal investment in stock E (which has a beta of 1.25), your new portfolio beta will be: A) B) C) D) E) Q#14 There are two expected states of the economy. The probability of a normal economy is 70 percent and the probability of a recession is 30 percent. If the economy is normal, Security A is expected to earn 20 percent and Security B is expected to earn 6 percent. If the economy goes into a recession, Security A is expected to earn 4 percent and Security B is expected to earn 24 percent. What is the expected return on a portfolio that is invested 60 percent in A and 40 percent in B? A) B) C) D) E) Q#15 There are two expected states of the economy. The probability of a boom is 60 percent and the probability of a bust is 40 percent. If the economy booms, stock A is expected to earn 15 percent and stock B is expected to earn 8 percent. If the 10.89 percent 11.07 percent 13.68 percent 14.28 percent 14.79 percent 1.00. 1.06. 1.12. 1.25. 1.32.
Fall 2010
Quizzes
economy goes bust, stock A is expected to earn 5 percent and stock B is expected to earn 18 percent. What is the expected return on a portfolio that is equally divided among stock A, stock B, and a risk-free asset? The expected return on the risk-free asset is 4 percent regardless of the state of the economy. A) B) C) D) E) 8.97 percent 9.00 percent 10.11 percent 11.82 percent 13.88 percent
Cost of Capital
Q#1 For a profitable firm, an increase in the marginal tax rate increases the cost of debt. A) B) Q#2 For the purpose of estimating a firm's cost of debt for a project, you can observe the yield-to-maturity on recently issued bonds with a similar rating and term-tomaturity. A) B) Q#3 Suppose that new information regarding future inflation in the U.S. causes investors to become less risk averse. The security market line (SML) approach indicates that, all else equal, most firms will see their cost of capital increase. A) True True False True False
Fall 2010
B) Q#4 False
Quizzes
The cost of capital depends primarily on the source of funds, not the use. A) B) Q#5 A firm that uses its weighted average cost of capital (WACC) to evaluate all projects, regardless of their risk level, will tend to become riskier over time. A) B) Q#6 The appropriate discount rate to use when analyzing an investment project is: True False True False
A) value (NPV). B) C) D) E) Q#7
the rate of return that will result in the highest net present the internal rate of return (IRR) on that investment. equal to the cost of capital based on the firm's existing assets. the rate of return relevant to the risk level of the project. the rate of interest the firm would pay if it sold bonds.
Which of the following statements are accurate concerning the security market line (SML) approach?
I. The SML applies only to firms with stable dividend growth rates. II. Like the dividend growth model, the SML generally relies on using the past to predict the future. III. Unlike the dividend growth model, the SML estimate is adjusted for risk.
Fall 2010
A) B) C) D) E) Q#8 I and III only II and IV only II and III only II, III, and IV only I, II, III, and IV
Quizzes
IV. The quality of the estimate from the SML approach is sensitive to the quality of the estimates of the variables in the model.
Suppose a firm uses a constant weighted average cost of capital (WACC) in determining the value of capital budgeting projects rather than using the security market line. The firm will tend to: A) high-risk projects. B) high-risk projects. C) accept profitable, low-risk projects and reject unprofitable, accept profitable, low-risk projects and accept unprofitable, reject unprofitable, high-risk projects.
D) become more risky over time due to the continual acceptance of high-risk projects. E) Q#9 Which of the following can be a problem when estimating the cost of equity? accept profitable, low-risk projects.
I. a beta based on historical information II. dividend growth rate III. market risk premium IV. risk-free rate of interest A) B) I and II only I and IV only
Fall 2010
C) D) E) Q#10 II and III only I, II, and III only I, II, III, and IV
Quizzes
The bonds of Topstone Industries are currently selling for 103.3 percent of their face value. These bonds mature in 14 years and pay an annual coupon of 7 percent of face value. What is Topstone's pre-tax cost of debt? A) B) C) D) E) Q#11 KCE Corporation is currently operating at its target capital structure with market values of $140 million of equity and $155 million of debt. KCE plans to finance a new $25 million project while maintaining the current debt-equity ratio. How much new debt must be issued to fund the project? A) B) C) D) E) Q#12 A firm has 1 million shares of common stock outstanding with a market price of $5.00 each. It has 2,500 bonds outstanding, each with a market value of $1,100. The bonds mature in 13 years, have a coupon rate of 10 percent, and pay coupons annually. The firm's beta is 1.3, the risk-free rate is 4.5 percent, the market risk premium is 7 percent, and the tax rate is 34 percent. What is the weighted average cost of capital (WACC)? A) 5.45 percent $13.1 million $18.5 million $19.6 million $24.8 million $32.0 million 6.63 percent 7.35 percent 7.84 percent 8.60 percent 9.45 percent
Fall 2010
B) C) D) E) Q#13 6.53 percent 9.49 percent 10.81 percent 11.65 percent
Quizzes
Suppose that two firms, A and B, are considering the same project. The project is in the same risk class as firm A's overall operations. The project has an IRR of 13.0 percent. Firm A has a beta of 1.2, while firm B's beta is 0.9. The risk-free rate is 4.5 percent and the market risk premium is 7.0 percent. Which firm(s) should accept the project? A) B) C) D) E) Q#14 Given the following information, what is the market value of XYZ Corporation? firm A only firm B only both firms A and B neither firm A nor B The answer cannot be determined without more information.
Common stock
13.6 million shares outstanding, selling at $31 per share
Bond issue 1 $600 million total face value, selling at 98 percent of par Bond issue 2 $150 million total face value, selling at $950 per bond
A) B) C) D) E)
$697.52 million $874.82 million $987.24 million $1,049.43 million $1,152.10 million
Fall 2010
Q#15
Quizzes
Hartley Psychiatric, Inc., needs to purchase office equipment for its 2,000 drive-in therapy centers nationwide. The total cost of the equipment is $2,000,000. It is estimated that the aftertax cash inflows from the project will be $210,000 annually forever. Hartley has a debt-to-value ratio of 60 percent. The firm's cost of equity is 13 percent and its pre-tax cost of debt is 8 percent. The tax rate is 34 percent. What is Hartley's weighted average cost of capital (WACC)? A) B) C) D) E) 6.09 percent 8.37 percent 8.95 percent 9.05 percent 9.91 percent
Leverage and Capital Structure
Q#1 A firm becomes bankrupt when the value of its debt equals the value of its assets. A) B) Q#2 When a firm files for bankruptcy, the firm often must hire appraisers to determine the fair value of the firm's assets. This is an example of an indirect cost of bankruptcy. A) B) Q#3 For a levered firm, the cost of equity, RE, is equal to the required return on the firm's assets, RA. True False True False
Fall 2010
Quizzes
Homemade leverage is the use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed. A) B) Q#5 According to the static theory of capital structure, there is an optimal capital structure because financial distress costs exist. A) B) Q#6 Which one of the following will increase the debt-equity ratio? True False True False
A) A firm issues common stock and uses the proceeds to repurchase an equal amount of preferred stock. B) A firm issues preferred stock and uses the proceeds to repurchase an equal amount of bonds. C) A firm with positive additions to retained earnings uses the cash it generates to retire existing debt. D) A firm uses excess cash to repurchase common stock in an amount equal to additions to retained earnings for the year. E) short-term assets. Q#7 Which of the following statements is (are) correct? A firm issues bonds and uses the proceeds to purchase
Fall 2010
II. Financial risk comes from the use of debt. III. Most firms in the U.S. maintain high debt-to-equity ratios.
Quizzes
I. The total systematic risk of the firm's equity has two parts: business risk and financial risk.
IV. The costs of bankruptcy decrease the attractiveness of debt financing. A) B) C) D) E) Q#8 All else equal, which of the following claims to a firm's cash flows will tend to increase with decreases in the debt-equity ratio, assuming there are taxes? II and III only I and IV only I, II, and IV only II, III, and IV only I, II, III, and IV
I. government's claim in the form of taxes II. claims from bankruptcy attorneys III. claims of stockholders IV. claims of bondholders A) B) C) D) E) Q#9 Consider a graph depicting earnings per share (EPS) and earnings before interest and taxes (EBIT) for a firm both with and without debt. At EBIT levels below the break-even point, the firm's EPS will: I and III only I and IV only II and IV only I, II, and III only I, II, and IV only
Fall 2010
A) B) C) D) E) debt. Q#10 benefit from additional debt.
Quizzes
not be affected by changes in the level of debt. either benefit or be unaffected by a change in the level of debt. decrease if debt is increased. either decrease or be unaffected by a change in the level of
The equity risk that arises from the capital structure of a firm is called _____ risk. A) B) C) D) E) Q#11 _____ suggests that value-maximizing financial managers will look to the asset side of the balance sheet to increase firm value, since the mix of debt and equity employed is unlikely to affect firm value. A) B) C) D) E) Q#12 A firm has 10,000 bonds outstanding, each with a face value of $1,000, and a coupon payment of $55 every six months. If the corporate tax rate is 34 percent, what is the annual interest tax shield? A) B) $187,000 $374,000 M&M Proposition I, with taxes M&M Proposition I, without taxes the static theory of capital structure M&M Proposition II, without taxes M&M Proposition II, with taxes systematic business unsystematic financial diversifiable
Fall 2010
C) D) E) Q#13 $748,000 $976,000 $1,240,000
Quizzes
ABC, Inc., has a debt-equity ratio of 1.2. The firm has a cost of equity of 12 percent and a cost of debt of 8 percent. What will the cost of equity be if the target capital structure becomes 67 percent debt and 33 percent equity? The cost of debt will not change. Ignore taxes. A) B) C) D) E) Q#14 Which one of the following sequences is the correct order of events in a Chapter 7 bankruptcy? 10.56 percent 11.12 percent 13.51 percent 13.64 percent 14.45 percent
I. a trustee-in-bankruptcy is elected by the creditors II. proceeds of the liquidation are distributed to shareholders III. a petition is filed in federal court IV. proceeds of the liquidation are used to pay both costs and creditors A) B) C) D) E) Q#15 I, II, III, IV II, I, IV, III III, I, II, IV I, III, IV, II III, I, IV, II
Fall 2010
Which one of the following is an advantage of a "prepack"? A) B) C) bankruptcy D) they are owed E) plan the ability to avoid filing for bankruptcy
Quizzes
protection of the interests of the current shareholders a reduction in the time it takes a firm to emerge from a guarantee that all creditors will be paid the full value which the granting of an extension of time for filing a reorganization
Dividends and Dividend Policy
Q#1 A firm that follows a strict residual dividend policy is likely to maintain a stable pattern of dividends over time. A) B) Q#2 Suppose the personal tax rate on dividend income increases. All else equal, one would expect the cost of equity for high-dividend firms to decrease. A) B) Q#3 Suppose a firm wishes to transfer cash to its shareholders. The only way to do so is to pay a dividend. A) B) True False True False True False
Fall 2010
Q#4
Quizzes
Dividend stability is usually viewed as a desirable objective for a firm. A) B) Q#5 In a world with no taxes or transaction costs, dividend policy matters, but dividends do not. A) B) Q#6 A common stock dividend that results in a distribution of capital is called a(n) _____ dividend. A) B) C) D) E) Q#7 Which one of the following is given as a possible reason for a reverse stock split? A) respectability B) exchange C) D) E) Q#8 to force out minority shareholders to increase the number of shares outstanding to increase the transaction costs of shareholders to fall below the minimum listing requirements of a stock to decrease the stock price and, thereby, increase the stock's regular extra special liquidating stock distribution True False True False
Fall 2010
A) B) C) D) E) Q#9 stock special residual regular liquidating
Quizzes
When a firm makes a cash payment to shareholders, as the firm has done at the end of each quarter for the past 20 years, it is called a _____ dividend.
Which one of the following would increase the desirability of a high-dividend payout, from the viewpoint of the shareholder?
A) dividend income. B) C) gains income. D) of shares.
The imposition of a tax exemption on the first $100 of The imposition of a reduced tax rate on capital gains income. The imposition of a tax exemption on the first $100 of capital A reduction in brokerage commissions on purchases and sales
E) An increase in the number of positive net present value projects available to the firm.
Q#10 Which of the following will result from a 2-for-1 stock split?
I. Total shareholders' equity will decrease by 50 percent. II. The price per share will fall by 50 percent. III. The number of shares outstanding will double. IV. The number of shares owned by each individual investor will double.
Fall 2010
A) B) C) D) E) Q#11 I and II only II and III only I, III, and IV only II, III, and IV only I, II, III, and IV
Quizzes
You own stock in a firm that has 1.25 million shares outstanding. The current stock price is $13.50 per share. If the company issues a 10 percent stock dividend, what would you expect the stock price to be after the dividend? A) B) C) D) E) Q#12 Suppose you purchase 100 shares of stock for $3.00 per share cum dividend just before the market closes on Friday. The-ex dividend date is the following Monday and the dividend is $0.25 per share. All else equal and ignoring taxes, your total wealth just after the market opens on Monday morning will be: A) B) C) D) E) Q#13 Rocky Ground Camping Supply has 200,000 shares of stock outstanding, each with a par value of $5 and a market value of $15. In addition, there is additional paid in capital of $950,000 and retained earnings of $1,450,000. Suppose the firm declares a $250. $275. $300. $325. $350. $12.27 per share $12.82 per share $13.30 per share $13.49 per share $13.71 per share
Fall 2010
A) B) C) D) E) Q#14 $7.50 $9.25 $10.00 $12.50 $13.25
Quizzes
20 percent (small) stock dividend. What is the stock's new price per share? Assume there are no taxes or transaction costs.
Sesame Sweet, Inc., has 220,000 shares outstanding with a par value of $1 per share and a market price of $12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no treasury stock and there are no transaction costs. Suppose Sesame Sweet declares a 10 percent (small) stock dividend. What is the stock's new price per share after the dividend? A) B) C) D) E) Q#15 If you consider taxes, then the price of a stock tends to _____ when the stock goes ex-dividend. A) B) C) D) E) increase by the aftertax dividend amount increase by the pre-tax dividend amount remain costant decrease by the aftertax dividend amount decrease by the pre-tax dividend amount $10.48 per share $10.91 per share $11.24 per share $12.09 per share $13.00 per share
Fall 2010
Raising Capital
Quizzes
Q#1 Venture capitalists frequently hold voting convertible preferred stock giving them various priorities in the event the company is sold or liquidated. A) B) Q#2 At each stage of financing for a firm, the value of the founder's stake typically grows and the probability of success rises. A) B) Q#3 The risk that new securities will be sold at a loss is transferred from the issuing firm to the underwriter in a best efforts underwriting. A) B) Q#4 More than half of new corporate debt is raised through private placements. A) B) Q#5 A seasoned equity offering (SEO) occurs when a firm first issues securities to the public. A) B) Q#6 True False True False True False True False True False
Fall 2010
A) B) C) D) E) Q#7 Which one of the following is true about underwriting? initial public offering rights offering general cash offering seasoned issue private issue
Quizzes
A(n) _____ is an issue of securities to the general public on a first come, first served basis.
A) The issuing firm, not the underwriter, bears all the risk from adverse price movements in a firm commitment sale. B) The method of marketing securities to the public is usually specified by the issuing firm, not the underwriter. C) The company, not the underwriter, will generally set the price for a security issue. D) The spread, or income received by the underwriter, is the difference between the price paid by the investor and the price the underwriter pays to the issuing firm. E) It is common for a number of underwriters to form a syndicate so that the risk in marketing a security issue falls on the lead manager.
Q#8 The legal fees a firm pays in the process of issuing securities are classified as a(n): A) B) C) D) direct expense. spread cost. abnormal return cost. indirect cost.
Fall 2010
E) Q#9 Green Shoe option cost.
Quizzes
The _____ are the most apt to sue the underwriters if an initial public offering (IPO) is significantly underpriced. A) B) C) day of trading original owners of the firm issuing the securities investors who purchase shares directly from the underwriters investors who purchase shares in the aftermarket on the first
D) investors who purchase shares in the aftermarket on the second day of trading E) Q#10 Which one of the following occurs if new shares are sold at an offering price that is too low? Assume a firm commitment offering. A) Underwriters suffer a financial loss because they are more likely to be unable to sell all of the shares offered. B) inefficiency. C) Investors suffer a financial loss because they purchase shares at a price less than their true value. D) The investors who purchased these shares are less likely to purchase shares in later IPOs. E) opportunity loss. The original shareholders of the issuing firm suffer an Markets in general suffer because this is a sign of market investors who purchase shares during the waiting period
Q#11 The average first-day return on initial public offerings was highest in the year: A) B) 1975. 1984.
Fall 2010
C) D) E) Q#12 1994. 1999. 2002.
Quizzes
Which of the following is (are) required for a firm to use Rule 415?
I. The issuer must not have had a violation of the Securities Act of 1934 in the past two years. II. The company must be rated as investment grade. III. The aggregate market value of the firm's outstanding stock must be more than $150 million. IV. The firm can not have defaulted on its debt in the past three years. A) B) C) D) E) Q#13 Which of the following is (are) important in choosing a venture capitalist? I only II only I and III only II, III, and IV only I, II, III, and IV
I. financial strength of the venture capitalist II. references regarding how successful the venture capitalist has been in the past III. venture capitalist's exit strategy A) B) C) I only I and III only I and II only
Fall 2010
D) E) Q#14 II and III only I, II, and III
Quizzes
The venture capital used to build a prototype would most likely be: A) B) C) D) E) Q#15 Based on the information provided in the textbook, the largest average initial return on IPOs during the recent past have occurred in: A) B) C) D) E) Thailand. France. China. Canada. Switzerland first-stage financing. second-stage financing. exit financing. mezzanine level financing. late-stage financing.
Short-Term Financial Planning
Q#1 Most firms have a negative cash cycle. A) B) Q#2 Increases in liability accounts are activities that decrease cash. True False
Fall 2010
A) B) Q#3 The longer the cash cycle, the more financing a firm requires. A) B) Q#4 True False True False
Quizzes
The optimal investment in current assets occurs when the carrying costs are just equal to the shortage costs. A) B) Q#5 Short-term financing for a firm can either be secured or unsecured. A) B) Q#6 Which of the following would fall under the heading of short-term financial planning? True False True False
I. increasing inventory to better meet the demands of customers II. making it easier for customers to purchase on credit III. paying an accounts payable within 10 days to get a discount IV. purchasing new equipment for the production assembly line A) B) C) I and III only II and III only II, III, and IV only
Fall 2010
D) E) Q#7 I, II, and IV only I, II, and III only
Quizzes
Which one of the following would decrease the length of the cash cycle, all else equal? A) B) C) D) E) Q#8 Which one of the following is true? A) A line of credit is an agreement which authorizes a firm to borrow up to a specified amount and which frequently requires a cleanup period. B) A noncommitted line of credit is a formal lending agreement between a borrower and a lender. C) As a business owner and regular short-term borrower, it would generally be less comforting to have a committed line of credit than an uncommitted one. D) basis. E) In a factoring arrangement, the default risk on the accounts remains with the selling firm. A revolving credit arrangement is evaluated on an annual increasing the inventory period decreasing the inventory turnover rate increasing the accounts receivable turnover rate increasing the accounts payable turnover rate granting customers another 15 days to pay their accounts
Q#9 Which one of the following questions falls under the heading of short-term finance? A) Should a manufacturing plant be expanded to increase production capacity?
Fall 2010
B) C) dividends? D) E) paper? Should a firm issue debt or equity securities?
Quizzes
How much of a firm's current income should be paid out as Should a firm offer straight bonds or convertible bonds? How much money should a firm raise by issuing commercial
Q#10 The _____ is the period of time between the purchase of inventory and the payment for the purchase. A) B) C) D) E) Q#11 A firm with a flexible short-term financial policy will have: A) B) C) D) E) Q#12 Suppose the inventory period is 50 days, the accounts receivable period is 40 days, and the accounts payable period is 35 days. What is the cash cycle? A) B) 25 days 45 days a relatively low ratio of current assets to sales. relatively few marketable securities. a relatively low ratio of short-term debt to long-term debt. a relatively high amount of short-term debt. a relatively low level of inventory. accounts receivable period inventory period accounts payable period cash cycle operating cycle
Fall 2010
C) D) E) Q#13 55 days 90 days 135 days
Quizzes
On May 15, your firm receives 20 cases of designer pens. On June 30, your firm pays $3,250 for the pens. On July 15, the pens are sold on credit for $10,500. On September 10, your firm collects the receivable in full. How many days are in the operating cycle, assuming there are 30 days in each month? A) B) C) D) E) Q#14 Juno, Inc., had sales of $8,000 in November and $14,000 in December. The firm projects sales of $10,000 in January, $12,000 in February, and $8,000 in March. Purchases are 70 percent of the next month's sales. The firm collects its receivables in 60 days and pays its payables in 30 days. All sales and purchases are on credit. What is Juno's accounts payable balance at the end of January? Assume each month has 30 days. A) B) C) D) E) Q#15 Which of the following statements are accurate concerning a short-term financial plan? $5,600 $7,000 $8,400 $9,200 $11,100 45 days 60 days 70 days 90 days 115 days
Fall 2010
II. Firms generally maintain a minimal level of cash. III. Interest on short-term debt is a source of cash.
Quizzes
I. A short-term financial plan helps project the short-term borrowing needs of a firm.
IV. Compiling a short-term financial plan provides time for managers to arrange financing. A) B) C) D) E) I and II only III and IV only I, II, and IV only II, III, and IV only I, II, III, and IV
Working Capital Management Q#1 The only benefit of a lockbox system is a reduction in processing time. A) B) Q#2 Float is the difference between book cash and bank cash. A) B) Q#3 The financial manager of a firm is mostly interested in the company's book balance of cash, not its available balance. A) True True False True False
Fall 2010
B) Q#4 False
Quizzes
In accounts receivable management, credit analysis is the process of determining the probability that customers will not pay. A) B) Q#5 Most trade credit is offered on open account although, at times, a firm may require the customer to sign a promissory note. A) B) Q#6 Which one of the following is true regarding cash management? True False True False
A) The basic objective in cash management is to keep the investment in cash as low as possible while still operating efficiently and effectively. B) A cost of holding cash is the liquidity it gives the firm.
C) A cost of holding cash is the interest income earned on the outstanding cash balance. D) A firm should decrease its cash holdings as long as the net present value (NPV) of doing so is negative. E) Effective cash management results in minimization of the total interest earnings involved with holding cash.
Q#7 Which one of the following is true regarding a lockbox arrangement? A) Lockboxes are one of the most widely used devices to speed up the disbursement of cash.
Fall 2010
C) time. D)
Quizzes
A lockbox arrangement increases mail delay by reducing mail A lockbox arrangement increases processing time.
B) A large corporation may maintain more than 20 lockboxes across the country.
E) The payments are usually removed from the lockbox by company employees and then taken to the bank.
Q#8 Money market securities generally have the following characteristics: short ______, low ______, and high: A) B) C) D) E) Q#9 Big Toys, Inc., has a 34 day inventory period and a 23 day receivables period. The company purchases the toys which it sells from The Toy Co. under a 45 day payment arrangement. The Toy Co: A) should expect payment within 34 days. maturities; default risk; marketability. maturities; marketability; default risk. marketability; maturities; default risk. marketability; default risk; maturities. default risk; marketability; maturities.
B) receives payment for each shipment prior to Big Toys reselling the toys in the shipment. C) can be assured that Big Toys will be able to convert its inventory into cash before having to pay for that inventory. D) E) Q#10 will have no need to offer a discount period. finances a portion of Big Toys' receivables period.
Fall 2010
Quizzes
ABC Co. is considering granting credit to a new corporate customer but is concerned about the customer's credit history. Which of the following would provide useful information to ABC as they decide whether or not to grant credit to this customer?
I. the customer's financial statements II. an Experian report III. a credit report from the customer's bank IV. a Dun and Bradstreet report A) B) C) D) E) Q#11 Upon graduation as a finance major, you accept a position with a medium-sized manufacturing firm. Early in your tenure with the firm, you realize that there are several inventory items required in the manufacturing process that make up a small percentage of the overall physical inventory, but represent a large percentage of the inventory value. Anxious to impress your boss, you suggest that the firm start using the _____ of inventory management. A) B) C) D) E) Q#12 Consider a roll of sheet steel. This represents _____ inventory to a farm machinery manufacturer and _____ inventory to a rolled steel mill. EOQ model derived demand model shortage cost model inventory depletion model ABC model III only I and III only II and IV only I, II, and III only I, II, III, and IV
Fall 2010
A) B) C) D) E) Q#13 raw material; work-in-progress finished goods; work-in-progress work-in-progress; raw material finished goods; raw material raw material; finished goods
Quizzes
Which one of the following is NOT a consideration included in an EOQ model of inventory management? A) B) C) D) E) Q#14 Your company purchased $10,000 worth of inventory on January 2nd on credit. The terms of the sale were 3/15, net 45. What is the effective annual interest rate if you pay the full amount in 45 days? A) B) C) D) E) Q#15 Karloff's Medical Supply maintains an average inventory of 2,000 imitation human hands for sale to medical schools. The carrying cost per hand per year is estimated to be $1.25. Karloff places an order for 4,000 hands on the first of each quarter and the order cost is $80. What will Karloff's total carrying costs be if the firm switches to the EOQ method of inventory? 3.1 percent 28.0 percent 37.6 percent 44.9 percent 74.3 percent shortage costs carrying costs kanban reorder points safety stocks
Fall 2010
A) B) C) D) E) $894 $1,215 $2,500 $160,000 $320,000
Quizzes
International Aspects of Financial Management
Q#1 The foreign exchange market is an example of an organized exchange with a specific physical location for trading. A) B) Q#2 A Eurobond is an international bond issued in multiple countries but denominated in a single currency. A) B) Q#3 There is no mechanism that allows a foreign firm's shares to be traded on an exchange in the U.S. A) B) Q#4 True False True False True False
Fall 2010
Quizzes
The U.S. Treasury bill rate is the rate most international banks charge one another for overnight Eurodollar loans.
A spot trade in the foreign currency market is an agreement to trade currencies based on the exchange rate today for settlement within two business days. A) B) Q#6 A(n) _____ is a security issued in the U.S. which represents a claim on shares of a foreign stock. A) B) C) D) E) Q#7 The rate that most international banks charge one another for loans of Eurodollars overnight is called the: A) B) C) D) E) Q#8 The _____ will tell you the price of agreeing today to take delivery of a Canadian dollar 60 days from now. Treasury rate. Samurai rate. European Currency Unit. London Interbank Offer Rate. Eurobond rate. American Depositary Receipt Samurai bond Eurobond swap gilt True False
Fall 2010
A) B) C) D) E) Q#9 cross-rate spot exchange rate forward exchange rate London Interbank Offer Rate (LIBOR) swap rate
Quizzes
A Japanese firm builds a manufacturing plant in the U.S. to avoid transportation charges in bringing its goods to the U.S. market. The Japanese firm is apparently willing to bear the _____, which would result from changes in the relative economic conditions between the U.S. and Japan. A) B) C) D) E) Q#10 Assume that you can exchange $1.00 U.S. for $1.55 Canadian today. This is a: A) B) C) D) E) Q#11 If the percentage difference between the forward exchange rate and the spot exchange rate is equal to the interest rate differential between two countries, then _____ holds. A) B) inflation rate parity interest rate parity backward rate. forward rate. spot rate. triangle arbitrage. fixed rate. long-run exchange rate risk remitted cash flow risk short-run exchange rate risk translation exposure risk nationalization risk
Fall 2010
C) D) E) Q#12 relative purchasing power parity absolute purchasing power parity the cross-rate
Quizzes
Suppose that the current exchange rate is 104 per $1. The inflation rate in the U.S. is expected to be 3 percent per year for the next 4 years. During that same time period, the inflation rate in Japan is expected to be 4 percent per year. Based on relative purchasing power parity, the exchange rate in 4 years should be approximately: A) B) C) D) E) Q#13 The current spot rate between Switzerland and the U.S. is SF1.27 per $1.00. Expected inflation in Switzerland is 9 percent per year and expected inflation in the U.S. is 4 percent per year. If relative purchasing power parity holds, what is the expected exchange rate in 3 years? A) B) C) D) E) Q#14 The U.S. risk-free rate is 5 percent. The British risk-free rate is 2 percent. The spot rate is .5528. What is the approximate 3-year forward rate if interest rate parity holds? A) .5045 per $1.00 SF1.285 per $1.00 SF1.388 per $1.00 SF1.470 per $1.00 SF1.572 per $1.00 SF2.179 per $1.00 108 per $1. 110 per $1. 112 per $1. 114 per $1. 116 per $1.
Fall 2010
B) C) D) E) Q#15 .5362 per $1.00 .5414 per $1.00 .5562 per $1.00 .5649 per $1.00
Quizzes
The following quotes are given as the U.S. $ equivalent: Canada (dollar) 0.7196, Hong Kong (dollar) 0.1291, Sweden (krona) 0.1400. What is the cross-rate of Canadian dollars per Swedish krona?
A) B) C) D) E)
C$0.1946 C$0.2612 C$0.2800 C$0.3985 C$0.4918
When evaluating a project in which a firm might invest, both the size and the timing of the cash flows are important.
A) B)
True False
Fall 2010
Quizzes
Milo, Inc. spends approximately $3 million annually to hire auditors to review the firm's financial statements. This is an example of an indirect agency cost.
A) B)
True False
3 The board of directors has the power to act on behalf of the shareholders to hire and fire the operating management of a firm. In a legal sense, the directors are "principals" and the shareholders are "agents."
A) B)
True False
4 The vice-president of finance generally reports directly to the chairman of the board.
A) B)
True False
5 A manager in charge of working capital determines:
Fall 2010
A) B) C) D) E) how to raise the money required to fund a project. how much inventory a firm should maintain.
Quizzes
how many additional shares of stock should be sold. which projects a firm should undertake. which fixed assets a firm should purchase.
6 Which one of the following is the best description of the goal of a financial manager in a corporation where shares are publicly traded?
A) B) C) D) E)
maximize sales growth over the short-term maximize profits over the short-term avoid financial distress maintain steady earnings growth maximize the current value per share of the existing stock
7 The duties of a financial manager include determining:
I. II. III. IV.
which marketing strategy to use to promote a product. the most appropriate mix of long-term debt and equity. which projects a firm should undertake. how much short-term debt to utilize.
Fall 2010
A) B) C) D) E) I and II only I, II, and III only II and III only II, III, and IV only I, II, III, and IV
Quizzes
8 Ann is interested in purchasing Ted's factory. Since Ann is a poor negotiator, she hires Mary to negotiate a purchase price. Identify the parties to this transaction.
A) B) C) D) E)
Mary is the principal and Ann is the agent. Ted is the principal and Ann is the agent. Ted is the agent and Ann is the principal. Ann is the principal and Mary is the agent. Ann is the principal and Ted is the agent.
9 A financial manager is responsible for deciding whether or not new manufacturing equipment should be purchased to replace existing equipment. The firm has sufficient cash available to make the purchase. The new equipment would reduce labor expenses and would allow the firm to reduce its investment in inventory. Which of the financial management areas would be involved in this decision?
I. capital budgeting II. capital structure
Fall 2010
III. working capital
Quizzes
A) B) C) D) E)
I only I and II only II and III only I and III only I, II, and III
10 Capital budgeting is the process of:
A) B) C) D) E)
determining how to raise the money required to fund a project. choosing how much cash to keep on hand. deciding the amount of earnings that a firm should retain. planning and managing a firm's long-term investments. deciding what marketable securities to purchase.
Financial Statements, Taxes, and Cash Flow
1 According to Generally Accepted Accounting Principles (GAAP), assets are generally shown on the financial statements at the higher of current market value or historical cost.
Fall 2010
A) B) True False
Quizzes
2 There is a tradeoff between the advantages of liquidity and forgone potential profits.
A) B)
True False
Feedback: This statement is true.
3 Suppose Nu-Drugs, Inc. just received a patent on a new drug for diabetes. This patent is considered an intangible fixed asset.
A) B)
True False
4 You are to determine the level of net capital spending by a firm. If you have the balance sheet and income statements, how would you go about your task?
A) ending net fixed assets minus beginning net fixed assets plus depreciation
Fall 2010
Quizzes
B) beginning net fixed assets plus ending net fixed assets minus depreciation C) ending net fixed assets minus beginning net fixed assets minus depreciation plus taxes D) ending net fixed assets minus beginning net fixed assets plus depreciation minus taxes E) beginning net fixed assets minus ending net fixed assets plus depreciation
5 Balance sheet assets:
I. II. III.
always have a value equal to total liabilities minus shareholders' equity. are listed in order of increasing liquidity. represent items acquired with the use of liabilities and equity.
A) B) C) D) E)
I only II and III only III only I and II only I, II, and III
6 Which one of the following statements is true?
Fall 2010
A) B) Accounting income is generally equal to cash flow.
Quizzes
Assets are usually listed on the balance sheet at market value.
C) Accounting statements are usually prepared to match the timing of income and expenses. D) The balance sheet equity account represents the market value of the firm to the stockholders. E) The balance sheet tells investors exactly what the firm is worth.
7 The changes in current assets relative to current liabilities over a period of time are called the:
A) B) C) D) E)
net capital spending. change in net working capital. operating cash flow. change in asset cash flow. cash flow from assets.
8 Which one of the following statements is generally true regarding liquidity?
A) Liquidity is detrimental to a firm because it allows the firm to pay its bills more easily, thereby avoiding financial distress. B) Liquidity is valuable to a firm because liquid assets can be sold quickly without much loss in value.
Fall 2010
Quizzes
C) Liquidity is valuable to a firm because a firm can borrow money using its liquid assets, such as a warehouse, as collateral. D) Assets are generally listed on a firm's balance sheet in the order of increasing liquidity. E) Liquid assets generally earn a large return, especially in comparison to illiquid assets.
9 Additions to net working capital over the course of a year can be computed by: A) subtracting depreciation from the difference between ending NWC and beginning NWC. B) adding depreciation to the difference between ending NWC and beginning NWC. C) adding interest paid to the difference between ending NWC and beginning NWC. D) subtracting interest paid from the difference between ending NWC and beginning NWC. E) subtracting beginning NWC from ending NWC.
10 Last year, HD Corporation had $1 million in operating cash flow, $500,000 in net capital spending, and a decrease in net working capital of $25,000. What was the firm's cash flow from assets?
A) B) C)
$475,000 $525,000 $1,000,000
Fall 2010
D) E) $1,475,000 $1,525,000
Quizzes
Working with Financial Statements
1 Another name for return on equity is return on total capitalization.
A) B)
True False
2 Asset utilization ratios are intended to measure how efficiently or intensively a firm uses its assets to generate sales.
A) B)
True False
3 The profit margin appears on a common-size income statement.
A) B)
True False
Fall 2010
4
Quizzes
While financial statements have many uses outside of the company, they are not useful internally.
A) B)
True False
5 Which one of the following correctly identifies the activity categories found on a statement of cash flows?
A) B) C) D) E)
operating, income statement, financing investment, purchasing, operating financing, operating, income statement operating, financing, investment noncash, financing, investment
6 _____ ratios are designed to determine a firm's long-run ability to meet its obligations.
A) B) C) D) E)
Liquidity Asset-utilization Profitability Financial leverage Market value
Fall 2010
7
Quizzes
Which of the following are directly incorporated into the calculation of the Du Pont identity?
I. debt-equity ratio II. equity multiplier III. total asset turnover IV. profit margin
A) B) C) D) E)
I and III only II and III only I, II, and III only I, III, and IV only II, III, and IV only
8 Which one of the following is frequently used as a measure of the cash flow available to meet the financial obligations of a firm?
A) B) C) D) E)
earnings before taxes earnings before taxes and depreciation earnings before interest, taxes, and depreciation net income taxable income
Fall 2010
9 Which of the following formulas use sales as the numerator?
Quizzes
I. accounts receivable turnover II. inventory turnover III. fixed asset turnover IV. accounts payable turnover
A) B) C) D) E)
I and II only I and III only II, III, and IV only I, II, and III only I, III, and IV only
10 CatchaTan Co. had net sales of $900,000 and average accounts receivables of $60,000 last year. How long on average does it take its credit customers to pay their bills?
A) B) C) D) E)
6.0 days 15.0 days 15.3 days 24.0 days 24.3 days
Fall 2010
Long-Term Financial Planning and Growth
Quizzes
1 Conventional wisdom holds that financial plans don't work, but financial planning does.
A) B)
True False
2 All else equal, a firm that utilizes assets efficiently will have a higher sustainable growth rate than a firm that does not.
A) B)
True False
3 To reduce the amount of external financing needed, a firm may need to lower its rate of growth.
A) B)
True False
Fall 2010
Quizzes
Actions that increase a firm's ability to generate funds internally decrease its ability to grow without obtaining external financing.
A) B)
True False
5 A firm has a capital intensity ratio of 2.0. Total assets are expected to increase by the same percentage as sales. Given this, then:
I. assets and sales must increase by identical dollar amounts. II. there will be no need for external funding. III. the firm is probably operating at full capacity.
A) B) C) D) E)
I only III only I and III only II and III only I, II, and III
6 When doing financial planning, the _____ of a firm provide a guide for changes in liabilities and equity.
A) B) C)
sales growth expectations financing and dividend policies sustainable growth rate expectations
Fall 2010
D) E) pro forma income statements working capital policies
Quizzes
7 Which of the following factors affect a firm's ability to grow at its maximum sustainable rate of growth?
I. total asset turnover II. financial policy III. dividend policy IV. profit margin
A) B) C) D) E)
II and III only I and II only I, III, and IV only I, II, and III only I, II, III, and IV
8 Why is it important to determine if a firm is operating at full capacity?
A) A firm that is operating at less than full capacity will not need any external financing. B) If a firm is operating at less than full capacity, fixed assets will typically increase at the same percent as sales.
Fall 2010
Quizzes
C) A firm with excess capacity has some room to expand sales without increasing the investment in fixed assets. D) For a given increase in sales, firms operating at less than full capacity will experience more rapid asset growth than that experienced by firms that are operating at full capacity. E) Only firms operating at full capacity can grow rapidly.
9 Which one of the following statements regarding financial planning is accurate?
A) Financial planning ensures a firm will not be surprised by unforeseen future events. B) By using financial planning, a firm can clearly identify its options for the coming 15 years. C) The use of financial planning allows a firm to eliminate the interactions between its operating policies and its financing policies. D) Financial planning allows a firm to plan for the future in a systematic fashion. E) Financial planning takes the burden of managing the firm off of the financial manager and places it all on the operations manager.
10 Suppose a firm is working at full capacity and that assets and costs are tied directly to the level of sales. Also assume the firm pays out all its earnings as dividends. The sales are expected to increase by 10 percent next period. The external funding needed to support this level of growth:
A)
is zero since no liabilities are tied directly to the level of sales.
Fall 2010
B) C) D) E) depends on the profit margin. depends on the ratio of fixed assets to total sales. depends on the current debt-equity ratio. is equal to the growth rate times total assets.
Quizzes
Introduction to Valuation: The Time Value of Money
1 Interest on interest is interest earned on the reinvestment of previous interest payments.
A) B)
True False
2 Simple interest is interest earned only in the first year of an investment.
A) B)
True False
3 If a lump sum of $10,000 is invested for three years at 10 percent compounded annually, it will earn a total of $3,310 in interest over that period.
Fall 2010
A) B) True False
Quizzes
4 All else equal, the higher the interest rate, the higher the future value of an investment will be.
A) B)
True False
5 Suppose you are trying to find the present value of two different cash flows using the same interest rate for each cash flow. The first cash flow is $1,000 ten years from now. The second is $800 seven years from now. Which one of the following is true about the discount factors used to value the cash flows?
A) The factor for the cash flow 10 years away is always less than or equal to the factor for the cash flow that is received seven years from now. B) Both factors are greater than 1.
C) Regardless of the interest rate, the discount factors are such that the present value of the $1,000 will always be higher than the present value of the $800. D) Since the payments are different, no statement can be made regarding the factors to be used. E) The astute investor will factor in the time differential and choose the payment that arrives the soonest.
6 You just won the lottery and want to put some money away for your child's college education. When your child goes to college 18 years from now, the cost will
Fall 2010
Quizzes
be $65,000. You can earn 8 percent compounded annually. How much do you need to invest today?
A) B) C) D) E)
$9,828.18 $11,763.07 $13,690.82 $15,258.17 $16,266.19
7 You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5 percent compounded annually, how long will you have to wait to buy the stereo?
A) B) C) D) E)
6.58 years 8.42 years 14.58 years 15.75 years 18.78 years
8 You are going to receive $100 four years from today. If the discount rate is 5 percent compounded annually, what will be the present value of the $100 two years from today?
A) B) C)
$67.68 $68.30 $82.27
Fall 2010
D) E) $82.64 $90.70
Quizzes
9 Your best friend gave you $100 as a present six years ago. You invested this money at a 7 percent rate of interest. How much will this money be worth 10 years from today?
A) B) C) D) E)
$150.07 $196.72 $248.09 $295.22 $303.03
10 In a growing Midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 143; Year 2 = 149; Year 3 = 162; Year 4 = 171; Year 5 = 178. If the number of eating establishments is expected to grow in year 6 at the same rate as the percentage increase in year 5, how many new eating establishments will be added in year 6?
A) B) C) D) E)
4 6 7 9 10
Fall 2010
Discounted Cash Flow Valuation
Quizzes
1 An annuity is a level stream of cash flows for a fixed period of time.
A) B)
True False
2 A perpetuity is the same thing as an annuity due.
A) B)
True False
3 The stated interest rate is the same thing as the effective annual rate.
A) B)
True False
4 An interest rate quoted as 6 percent compounded monthly means interest is paid at a rate of 6 percent each month.
A)
True
Fall 2010
B) False
Quizzes
5 Which of the following can be computed?
I. present value of a perpetuity II. future value of a perpetuity III. present value of an annuity due IV. future value of an annuity due
A) B) C) D) E)
I and III only II and III only II, III, and IV only I, III, and IV only I, II, III, and IV
6 You have won a prize which will pay you or your heirs $25,000 a year for 50 years. The first payment is due immediately. What is the present value of this prize given an 8 percent discount rate?
A) B) C) D) E)
$300,000 $305,837 $309,650 $312,500 $330,304
Fall 2010
7 Which of the following statements are true?
Quizzes
I. There is an inverse relationship between present values and interest rates. II. The effective annual rate will be higher than the annual percentage rate for a loan that compounds interest monthly. III. There is an inverse relationship between future values and periods of time. IV. All else equal, the more frequently interest is compounded on a loan, the more interest you will have to pay.
A) B) C) D) E)
I and II only III and IV only II, III, and IV only I, II, and IV only I, II, III, and IV
8 Suppose you invest $10 for one year, and at the end of the year you receive back $12. Which of the following statements must be true concerning your investment?
I. The quoted rate must have been greater than 20 percent. II. To figure the quoted rate, you would need to know how often the investment was compounded. III. The effective annual rate was 20 percent. IV. The continuously compounded effective annual rate has to be 20 percent.
Fall 2010
A) B) C) D) E) I and III only. II and III only I and IV only II, III, and IV only I, II, and III only
Quizzes
9 Bernie just won a contest with a grand prize of $250,000. The contest stipulates that the winner will receive $100,000 immediately plus $15,000 at the end of each of the next 10 years. If Bernie can earn 5 percent on his money, how much is this prize worth to him today?
A) B) C) D) E)
$114,285.71 $166,175.62 $189,345.45 $215,826.02 $250,000.00
10 You obtain a $100,000, 30-year fixed-rate mortgage at 8.25 percent compounded monthly. Although you get a 30-year mortgage, you plan to prepay the loan by making an additional payment each month along with your regular payment. How much extra must you pay each month if you wish to pay off the loan in 20 years?
A) B) C)
$24.56 $54.88 $100.80
Fall 2010
D) E) $103.28 $106.86
Quizzes
Interest Rates and Bond Valuation
1 Considering the time period since the Great Depression, the real push to raise capital by issuing junk bonds really began in the late 1970s.
A) B)
True False
2 The call premium typically starts at 10 percent of par and decreases to zero with the passage of time.
A) B)
True False
3 A call provision, but not a sinking fund, allows a company to retire its debt early.
A) B)
True False
Fall 2010
4
Quizzes
An upward sloping yield curve reflects investors' desire for compensation for interest rate risk.
A) B)
True False
5 If you multiply a bond's current yield by its market price you get the:
A) B) C) D) E)
yield to maturity. investors' required rate of return. annual coupon rate. cost of capital. annual coupon payment.
6 You want to own equity in a foreign oil company, but no shares of stock are currently being offered for sale. If there are _____ for sale, you could purchase these and then trade them in for shares of stock.
A) B) C) D) E)
convertible bonds put bonds debentures zero coupon bonds subordinated debentures
Fall 2010
7
Quizzes
Which of the following bonds can be terminated prior to maturity by the issuer?
I. callable bond II. bond with sinking fund provision III. convertible bond IV. put bond
A) B) C) D) E)
I and II only II and III only III and IV only I, II, and IV only I, II, and III only
8 Which one of the following items does NOT generally appear in a Wall Street Journal corporate bond quote?
A) B) C) D) E)
estimated spread over a Treasury security market price yield-to-maturity coupon rate maturity date
Fall 2010
Quizzes
Which of the following factors affect the term structure of interest rates?
I. expected rate of inflation II. interest rate risk premium III. real rate of interest
A) B) C) D) E)
I only II only I and II only I and III only I, II, and III
10 HomeSafe Cab Co. wants to issue new 10-year bonds to finance its expansion plans. Currently the company has 9 percent semiannual bonds selling for $1,067.95 that mature 10 years from now. What must the coupon rate of the new bonds be in order for the issue to sell at par if interest is paid semiannually?
A) B) C) D) E)
4.00 percent 4.21 percent 7.72 percent 7.99 percent 8.00 percent
Stock Valuation
Fall 2010
1 Most preferred stock has dividends that are cumulative.
Quizzes
A) B)
True False
2 For income tax purposes, preferred stock is more like debt than common stock.
A) B)
True False
3 If you use the constant growth model to value stock, you assume that P1 = P0 x (1 + g).
A) B)
True False
4 The effect of cumulative voting is to permit minority participation.
A) B)
True False
Fall 2010
5
Quizzes
As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a:
A) B) C) D) E)
capital gains yield and a dividend growth rate. capital gains growth rate and a dividend growth rate. dividend yield and a required rate of return. dividend yield and the expected price next year. dividend yield and a capital gains yield.
6 Which one of the following terms is typically associated with both preferred stock and common stock?
A) B) C) D) E)
proxy voting rights dividend yield arrearage cumulative voting
7 Which one of the following statements is true about the differences between debt and common stock?
A) B)
Debt is ownership in a firm but equity is not. Creditors have voting power while stockholders do not.
Fall 2010
D) E) bonds.
Quizzes
C) Periodic payments made to either class of security are tax deductible for the issuer. Interest payments are promised while dividend payments are not. Bondholders can also own equity, but shareholders can not own
8 A _____ is a NYSE member who is a dealer assigned as a market maker for a particular security.
A) B) C) D) E)
broker dealer member floor trader specialist
9 A _____ maintains an inventory and stands ready to buy and sell at any time.
I. dealer II. specialist III. broker
A) B) C) D)
I only III only I and II only I and III only
Fall 2010
E) II and III only
Quizzes
10 There is an election being held to fill two seats on the board of directors of a firm in which you hold stock. There is a total of 420 shares outstanding. If the election is conducted under cumulative voting and you own 120 shares, how many more shares must you buy to be assured of earning a seat on the board?
A) B) C) D) E)
0 2 21 91 141
Net Present Value and Other Investment Criteria
1 A firm that only accepts projects for which the IRR is equal to the firm's required return will, on average, neither create nor destroy wealth for its shareholders.
A) B)
True False
Fall 2010
Quizzes
The profitability index is computed using accounting income and accounting book Values.
A) B)
True False
3 An advantage of the payback rule is that it is easy to understand.
A) B)
True False
4 For projects with conventional cash flows and positive discount rates, the payback period will be shorter than the discounted payback period.
A) B)
True False
5 Which of the following consider the time value of money in their computation?
I. payback II. average accounting return III. profitability index
Fall 2010
A) B) C) D) E) I only II only III only I and III only II and III only
Quizzes
6 The average accounting return (AAR) decision rule states that a project should be accepted whenever the AAR:
A) B)
is positive. exceeds the internal rate of return (IRR).
C) indicates that a project has more than recaptured its initial cost in terms of net income. D) E) exceeds the target AAR. is less than the IRR.
7 Which of the following questions are addressed in the capital budgeting process?
I. What products or services will we offer or sell? II. In what markets will we compete? III. What new products will we introduce?
A) B)
I only III only
Fall 2010
C) D) E) I and II only I and III only I, II, and III
Quizzes
8 Which one of the following factors can cause a project to have multiple IRRs?
A)
a large initial cash outlay
B) an initial cash investment followed by positive cash flows for three years and a negative cash flow in the final year C) negative cash flows in the first three years of a project but positive cash flows thereafter D) E) conventional cash flows mutually exclusive investments
9 You run a small bagel shop and are considering replacing your four sales clerks with automated machines that allow customers to buy their bagels without any human interaction. Of the following, the most difficult task you face in computing the net present value of this project is estimating the:
A) B) C) D) E)
proposed reduction in wages. tax shield of the new project. cost of the new equipment that will be required. cost of installing the new equipment. total change in sales.
Fall 2010
10
Quizzes
You are going to choose one of two mutually exclusive investments. Investment A pays $35,000 a year for four years and has an initial cost of $80,000. Investment B pays $60,000 a year for five years and has an initial cost of $170,000. If your required return is 13 percent, which investment should you choose and why?
A) B) C) D) E)
A; because it costs less initially A; because its IRR exceeds 13 percent A; because it has a higher IRR B; because its IRR exceeds 13 percent B; because it has a higher NPV
Making Capital Investment Decisions
1 To accurately reflect the costs associated with a project, you should exclude interest expenses in the computation of the operating cash flows.
A) B)
True False
2 Side effects such as erosion should be considered in a capital budgeting decision.
Fall 2010
A) B) True False
Quizzes
3 The idea behind setting a bid price is to determine the minimum price at which the net present value of a project will still be zero or positive.
A) B)
True False
4 An opportunity cost is the most valuable alternative that is given up if a particular investment is undertaken.
A) B)
True False
5 A taxable gain occurs when an asset is sold for more than its book value. For capital budgeting purposes, the taxes on the sale are treated as a:
A) B) C) D) E)
reduction in cash and added to operating cash flow. noncash event similar to depreciation. reduction in cash and deducted from the book value of the asset. reduction in cash and deducted from the taxable gain. reduction in cash and deducted from the sale price.
Fall 2010
6 Pro forma statements:
Quizzes
A) B) project. C) D) project. E)
are generally created by first estimating production costs. for a proposed project generally consider only the first year of the recap a firm's activities for the past year. should only be prepared when considering a capital budgeting should use realistic assumptions.
7 You are advising a friend who is attempting to decide whether or not to drop one of the courses they are currently enrolled in. If they do, they will forfeit half of the money spent on tuition. Which of the following conclusions drawn by your friend is consistent with capital budgeting principles?
I. Remaining in the class incurs opportunity cost because they have to reduce the number of hours they are gainfully employed. II. The tuition is irrelevant to the decision because it is a sunk cost. III. The time and energy put into the course thus far is a sunk cost.
A) B) C) D) E)
I only I and II only I and III only II and III only I, II, and III
Fall 2010
8
Quizzes
A firm moves into a higher tax bracket. All else equal, the depreciation tax shield will:
A) B) C)
be more valuable. be less valuable. remain unchanged since depreciation doesn't change.
D) remain unchanged because changes in tax rates don't matter once a project is in place. E) be either more valuable, less valuable, or unchanged, but it is impossible to tell which without more information.
9 Your company may introduce a new line of tennis shoes. You have been given the following projections: sales = 35,000 units at $40 per unit; variable costs = $25 per unit; fixed costs = $125,000 per year; initial investment = $1,000,000; project life = 10 years. What is the net income for this project if the corporate tax rate is 34 percent? You may assume straight-line depreciation to a zero book value and a discount rate of 12 percent.
A) B) C) D) E)
$119,000 $165,000 $198,000 $264,000 $297,000
10 You are considering investing in a cost cutting proposal. Net income from the project is expected to equal $27.50 each of the three years of the project's life. The process has an initial cost of $125 and will be depreciated straight-line over 3 years
Fall 2010
Quizzes
to a salvage value of $0. Assume a 34 percent tax bracket and a discount rate of 15 percent. Suppose the equipment is sold at the end of year 3 for $20, pretax. What is the internal rate of return?
A) B) C) D) E)
Project Analysis and Evaluation
1 The degree of operating leverage is equal to the percentage change in the operating cash flow divided by the percentage change in sales quantity.
A) B)
True False
2 A project that just breaks even on a cash basis must have a zero net present value.
A) B)
True False
Fall 2010
3
Quizzes
A project that just breaks even on an accounting basis has a discounted payback period equal to its life.
A) B)
True False
4 If a division of a firm finds an exceptionally worthwhile positive net present value project they still will not be able to obtain funding if they are under hard rationing.
A) B)
True False
5 Which of the following statements are true concerning scenario analysis?
I. A positive net present value for a project's worst case scenario guarantees you a positive return from the project. II. The base case scenario generally represents an average estimate of the net present value. III. If the net present value of the best case scenario is negative then it is probably unnecessary to create base and worst case scenarios. IV. Scenario analysis is less apt than sensitivity analysis to determine which variable has the greatest impact on the projected net present value.
A) B)
I and II only II and IV only
Fall 2010
C) D) E) III and IV only I, II, and III only II, III, and IV only
Quizzes
6 Any time a manager replaces a variable cost with a fixed cost, the firm's _____ effectively increases.
A) B) C) D) E)
operating leverage managerial options projected cash flow sensitivity contribution total variable cost
7 Which of the following describe(s) variable costs?
I. costs that can be forecasted with a high degree of accuracy II. costs that are equal to zero when production is zero III. costs that change with the quantity of output
A) B) C) D) E)
II only I and II only I and III only II and III only I, II, and III only
Fall 2010
8
Quizzes
Which of the following requires finding the point at which the net present value of a project is equal to zero?
I. finding the project's internal rate of return II. finding the point at which the internal rate of return is equal to zero III. finding the point at which the project pays back on a discounted basis IV. finding the financial break-even point
A) B) C) D) E)
I and III only II and IV only I, II, and III only I, III, and IV only I, II, III, and IV
9 Which of the following is (are) true about a project that just breaks even on an accounting basis?
I. The project has an internal rate of return that is equal to zero. II. The project has an internal rate of return that is equal to 100 percent. III. The project has a negative net present value. IV. The project has a zero net present value.
A)
I and III only
Fall 2010
B) C) D) E) I and IV only II and III only II and IV only IV only
Quizzes
10 Which of the following is (are) true about a project that breaks even on a financial basis?
I. The project has a zero internal rate of return. II. The project has a negative net present value. III. The project has a zero net present value. IV. The project has an internal rate of return equal to the firm's required return.
A) B) C) D) E)
I only III only II and IV only I and III only III and IV only
Some Lessons from Capital Market History
Fall 2010
Quizzes
Capital market efficiency is attributable largely to the lack of competition among market participants for information.
A) B)
True False
2 Investors should not count capital gains as part of total returns until the security is sold since the capital gain is really only a paper gain up to that point.
A) B)
True False
3 Your classmate just made $10,000 in a single day by trading in the stock market. It is reasonable to conclude, therefore, that the efficient market hypothesis cannot be true.
A) B)
True False
4 In general, there is a reward for bearing risk.
A) B)
True False
Fall 2010
5
Quizzes
The normal distribution is so useful in analyzing security returns because:
A) B) C) the mean.
we frequently deal with finite data sets. of its bell-shaped appearance. 95 percent of all observations fall within two standard deviations of
D) the distribution of security returns varies so much from a normal distribution. E) it can be completely described by its mean and standard deviation.
6 Which one of the following investments was the least risky over the period 19262003?
A) B) C) D) E)
small-company stocks large-company stocks U.S. Treasury bills long-term government bonds long-term corporate bonds
7 Which one of the following statements is accurate regarding market efficiency?
A) In an efficient market, prices adjust quickly and correctly to new information. B) Asset prices in an efficient market are usually too high or too low.
Fall 2010
Quizzes
C) When stock prices move in an overreaction and correction pattern as a result of the release of new information, the market for this stock is efficient. D) A market is weak form efficient if all information of every kind is reflected in the stock prices. E) You cannot make money by trading on inside information in a market that is semistrong form efficient.
8 Over the 1926-2003 period, the standard deviation of the returns on long-term corporate bonds has averaged ______ percent per year.
A) B) C) D) E)
3.1 8.6 9.4 20.4 33.3
9 Over the last three years you earned 5 percent, 7 percent, and 9 percent. What is the standard deviation of your returns?
A) B) C) D) E)
Fall 2010
10
Quizzes
Compute the incremental reward for bearing the risk of owning small-company stocks rather than large-company stocks given the following average returns from 1926-2003: large-company stocks = 12.4 percent, small-company stocks = 17.5 percent, long-term government bonds = 5.8 percent, and U.S. Treasury bills = 3.8 percent.
A) B) C) D) E)
Return, Risk, and the Security Market Line
1 A unique risk is a risk that affects a relatively large number of the assets in the market.
A) B)
True False
2 Both the variance and the standard deviation are expressed in percentage terms.
Fall 2010
A) B) True False
Quizzes
3 The projected risk premium is defined as the sum of the expected return on a risky investment and the return on a risk-free investment.
A) B)
True False
4 An example of systematic risk would be an unexpected change in interest rates by the Federal Reserve.
A) B)
True False
5 Which one of the following statements is true regarding the beta coefficient?
A) B) market. C) return. D)
Beta is a measure of unsystematic risk. A beta greater than one represents less systematic risk than the Generally speaking, the higher the beta the higher the expected A beta of one indicates an asset is totally risk-free.
Fall 2010
E) decreases.
Quizzes
The risk premium of an asset will increase if the beta of that asset
6 Given the following notation, what is the equation for the security market line?
E(Ri)= expected return on risky asset i Rm= return on the market portfolio E(Rm)= expected return on the market portfolio bi= risky asset i's beta m= market portfolio's beta Rf= risk-free rate of return
A) B) C) D) E)
E(Ri) = Rm + [E(Rm) Rf] m E(Rm) = Rf + [E(Rm) Rf] i E(Ri) = Rm + [E(Rm) Rf] i E(Ri) = Rf + [E(Rm) Rf] m E(Ri) = Rf + [E(Rm) Rf] i
7 Which of the following have been eliminated from a well-diversified portfolio?
I. market risk II. asset specific risk III. unsystematic risk IV. systematic risk
Fall 2010
A) B) C) D) E) I only II only I and IV only II and III only I, II and III only
Quizzes
8 Which of the following pairs of terms are synonymous?
I. systematic risk and unique risk II. market risk and systematic risk III. unsystematic risk and asset-specific risk
A) B) C) D) E)
I only II only III only II and III only I, II, and III
9 What is the risk premium on the following stock if the risk-free rate is 5 percent? The boom state has a probability of occurring of 15 percent and an expected return of 60 percent; the good state has a 50 percent chance of occurring and an expected return of 20 percent; the recession state has a 25 percent chance of occurring and an expected loss of 10 percent; and the depression state has a 10 percent chance of occurring and an expected loss of 30 percent.
Fall 2010
A) B) C) D) E) 0.085 0.100 0.125 0.135 0.175
Quizzes
10 Security X has a standard deviation of returns of 35 percent and a beta of 1.45. Security Y has a standard deviation of returns of 28 percent and a beta of 1.06. Security Z has a standard deviation of returns of 44 percent and a beta of 1.22.
Given this, which one of the following statements is correct?
A) Security Z has the greatest total risk because it has the largest standard deviation. B) C) beta. D) Security Y has the lowest total risk because it has the lowest beta. Security X has the greatest total risk because it has the largest beta. Security X has the greatest diversifiable risk because it has the largest
E) An equally weighted portfolio of the three will have the same systematic risk as the market portfolio.
Options and Corporate Finance
Fall 2010
1
Quizzes
Warrants are usually issued as sweeteners with public bond issues.
A) B)
True False
2 The higher the exercise price, the greater the value of a call option, all else equal.
A) B)
True False
3 A call option can be worth more than its underlying asset.
A) B)
True False
4 The value of a call option is equal to the stock price minus the present value of the exercise price.
A) B)
True False
Fall 2010
Quizzes
All else equal, which of the following statements is (are) true for a firm with positive earnings?
I. Earnings per share will increase when bonds are converted into shares of common stock. II. Earnings per share decrease when warrants are exercised. III. Fully diluted earnings per share will be less than the undiluted earnings per share if either convertible bonds or warrants are involved. IV. Exercising a warrant decreases the number of shares of common stock outstanding.
A) B) C) D) E)
I and III only II and IV only I and IV only II and III only I and II only
6 Which one of the following statements is true?
A) option. B) C) D)
The lower the underlying share price, the higher the value of a call The lower the exercise price, the lower the value of a call option. The longer the time to expiration, the lower the value of a call option. The greater the interest rate, the lower the value of a call option.
E) The lower the risk of the underlying security, the lower the value of a call option.
Fall 2010
7
Quizzes
The bonds of DEF are convertible into shares of the firm's common stock at $50 per share. The current price of the common stock is $45 per share. The bonds have a $1,000 par value and currently sell for $950 apiece. What is the conversion ratio of these bonds?
A) B) C) D) E)
20 22 25 45 50
8 What is the time value per share of the March put?
A) B) C) D) E)
$0.00 $1.00 $1.50 $2.00 $4.00
9 What is the conversion ratio for this bond?
A) B) C)
9.8 12.3 15.4
Fall 2010
D) E) 16.7 22.2
Quizzes
10 What is the minimum value of this bond if the current stock price is $69.50 a share and the conversion ratio used is 15.4?
A) B) C) D) E)
$778.43 $867.39 $939.00 $1,034.32 $1,070.30
Cost of Capital
1 For a profitable firm, an increase in its marginal tax rate will increase its weighted average cost of capital if the firm has debt in its capital structure.
A) B)
True False
2 For the purpose of estimating the firm's cost of capital, one cannot look only at the coupon rate on the firm's existing debt.
Fall 2010
A) B) True False
Quizzes
3 The return on equity is the return that equity investors require on their investment in the firm.
A) B)
True False
4 One method of computing a divisional cost of capital is to use the pure-play approach.
A) B)
True False
5 All else equal, a higher corporate tax rate will:
A) structure. B) C) D)
increase the WACC of a firm with debt and equity in its capital decrease the WACC of a firm with debt in its capital structure. not affect the WACC of a firm with debt in its capital structure. decrease the WACC of a firm with only equity in its capital structure.
Fall 2010
Quizzes
E) change the WACC of a firm with debt in its capital structure, but the direction of the change cannot be determined without more information.
6 Which one of the following is a disadvantage of the dividend growth model presented in the text for estimating the cost of equity?
A) The dividend growth model only applies to firms whose dividend growth rate fluctuates widely. B) The dividend growth model only applies to companies that are not currently paying any dividends. C) The dividend growth model explicitly considers risk.
D) The estimated cost of equity computed using the dividend growth model is highly sensitive to the estimated growth rate. E) Historical dividends can be used as a basis for future dividends unless the firm has undergone a major change or revised its dividend policy.
7 Ignoring taxes, if a firm issues debt at par, then the cost of debt:
I. is equal to its coupon rate. II. is equal to its yield-to-maturity. III. differs from its current yield.
A) B) C) D)
I only I and II only II only I and III only
Fall 2010
E) I, II, and III
Quizzes
8 A project has the same risk as the firm's overall operations and must be financed externally. Equity costs 15 percent and debt costs 4 percent after-tax. The firm's debt/equity ratio is .8. The tax rate is 34 percent. What is the minimal internal rate of return the project must earn to be accepted?
A) B) C) D) E)
51 percent 10.1 percent 6 percent 2 percent 5 percent
9 Hartley Psychiatric, Inc. needs to purchase office equipment for its 2,000 drive-in therapy centers nationwide. The total cost of the equipment is $2 million. It is estimated that the after-tax cash inflows from the project will be $210,000 annually forever. Hartley has a debt-to-value ratio of 40 percent based on market values. The firm's cost of equity is 13 percent and its pre-tax cost of debt is 8 percent. The flotation costs of debt and equity are 2 percent and 8 percent, respectively. Assume the firm's tax rate is 35 percent. Ignoring flotation costs, what is the NPV of the proposed project?
A) B) C) D) E)
$33,966 $65,990 $98,542 $125,506 $128,034
Fall 2010
10
Quizzes
Hartley Psychiatric, Inc. needs to purchase office equipment for its 2000 drive-in therapy centers nationwide. The total cost of the equipment is $2 million. It is estimated that the after-tax cash inflows from the project will be $210,000 annually forever. Hartley has a debt-to-value ratio of 40 percent based on market values. The firm's cost of equity is 13 percent and its pre-tax cost of debt is 8 percent. The flotation costs of debt and equity are 2 percent and 8 percent, respectively. Assume the firm's tax rate is 35 percent. After considering flotation costs, what is the NPV of the proposed project?
A) B) C) D) E)
-$72,957 $428 $2,091 $6,862 $178,675
Raising Capital
1 Large rights offerings are more common in industrialized nations other than the United States.
A) B)
True False
Fall 2010
Quizzes
According to the textbook, the market value of a firm's outstanding shares will most likely fall upon the announcement of a new equity offering.
A) B)
True False
3 Empirical evidence suggests that, on average, the shares in initial public offerings have not been significantly underpriced.
A) B)
True False
4 Central Maine Power Company, a regional electric utility, sells 500,000 shares of common stock to investors at large. This is most likely to be a best efforts offering.
A) B)
True False
5 The option giving the underwriter the ability to purchase additional shares of stock at the offer price is called:
A) B) C)
a shelf registration. a Green Shoe provision. dilution.
Fall 2010
D) E) standby underwriting. a firm commitment offering.
Quizzes
6 Which one of the following parties will probably benefit the most from the overpricing of a new IPO of common stock handled on a firm-commitment basis?
A) B)
existing bondholders the underwriter
C) new shareholders who purchase stock in the open market during the aftermarket D) E) the issuing firm new shareholders who purchase stock from the syndicate
7 If the underwriter wishes to have the option to make additional profits if an IPO is oversubscribed, they may ask that the underwriting contract contain a:
A) B) C) D) E)
protective covenant. tombstone clause. preemptive right provision. Regulation A provision. Green Shoe provision.
8 According to the figures in the text, on average, IPOs:
Fall 2010
A) B) C) D) are brought to the market in waves. are overpriced. have the same flotation costs as seasoned issues. produce negative first-day returns.
Quizzes
E) are a profitable investment and you should buy shares in any IPO that hits the market.
9 Which of the following is (are) correct regarding flotation costs?
I. On average, there are substantial economies of scale in issuing securities. II. The costs of issuing debt securities are greater than the costs of issuing equity securities. III. On average, it costs more to float a seasoned offering than an IPO. IV. Convertible bonds are cheaper to issue than straight bonds.
A) B) C) D) E)
I only IV only I and IV only I, II, and IV only II and III only
10 Unique Auto Parts, Inc., a manufacturer of reproduction parts for classic automobiles, needs to raise $2 million via a rights offering. The subscription price is $4 per share. The firm currently has 1,000,000 shares outstanding with a current market price per share of $5. What will the value of a right be?
Fall 2010
A) B) C) D) E) $.25 $.33 $.40 $.50 $1.20
Quizzes
Financial Leverage and Capital Structure Policy
1 If the static theory of capital structure is true, then the optimal level of debt for a given firm increases as its marginal tax rate increases and decreases as the costs of financial distress increase.
A) B)
True False
2 Direct bankruptcy costs are those costs that are directly associated with bankruptcy, such as legal and administrative expenses.
A) B)
True False
Fall 2010
3
Quizzes
Business risk is a positive function of the systematic risk of a firm's assets.
A) B)
True False
4 Because investors can use homemade leverage to create any level of financial leverage they desire, the capital structure of a firm does not matter to them.
A) B)
True False
5 All else equal, the financial leverage of a firm will:
A) B) C) D) E)
decrease as the amount of debt increases relative to equity. decrease as the firm's retained earnings account grows. increase by the amount of equity it issues in a given year. decrease if the firm has negative net income. decrease as the firm uses debt to fund expansion projects.
6 Which of the following is (are) true regarding observed capital structures?
I. Drug companies appear to use less debt than electric utility companies do.
Fall 2010
Quizzes
II. It appears that many firms choose to pay substantial taxes rather than increase debt to further benefit from the interest tax shield. III. It appears that, for whatever reason, capital structures vary quite a bit across industry groups.
A) B) C) D) E)
I only III only I and III only I and II only I, II, and III
7 Which of the following statements concerning leverage are correct?
I. Shareholders can offset the financial leverage of a firm through the use of homemade leverage. II. The effect of financial leverage depends on a company's earnings before interest and taxes. III. The use of leverage by a firm does not affect the earnings per share. IV. Homemade leverage involves the use of personal borrowing or personal lending.
A) B) C) D) E)
I and III only II and IV only I, III, and IV only I, II, and IV only I, II, III, and IV
Fall 2010
8
Quizzes
A firm with no debt has 200,000 shares outstanding valued at $20 each. Its cost of equity is 12 percent. The firm is considering adding $1,000,000 in debt to its capital structure. The coupon rate would be 8 percent and the firm's tax rate is 34 percent. What would the firm be worth after adding the debt?
A) B) C) D) E)
$4.033 million $4.180 million $4.340 million $4.660 million $5.000 million
9 A firm has an unlevered cost of capital of 10 percent, a cost of debt of 9 percent, and a tax rate of 34 percent. If it desires a cost of equity of 14 percent, what must its target debt/equity ratio be?
A) B) C) D) E)
2.49 3.89 4.68 5.14 6.06
10 Given the following information, what is GEM Corporation's WACC? EBIT = $2 million; tax rate = 34 percent; market value and book value of debt = $4 million; unlevered cost of capital = 14 percent; cost of debt = 9 percent.
Fall 2010
A) B) C) D) E) 11.4 percent 11.9 percent 12.2 percent 12.6 percent 13.1 percent
Quizzes
Dividends and Dividend Policy
1 If stock issuance costs are high, investors will prefer low-dividend stocks to highdividend stocks, all else equal.
A) B)
True False
2 Once it is declared, a common stock dividend becomes a legal financial obligation of the firm.
A) B)
True False
Fall 2010
3
Quizzes
Suppose a firm wishes to pay cash to its shareholders. The only way to do so is to pay a dividend.
A) B)
True False
4 A reverse split is a stock split in which a firm's number of shares outstanding is reduced.
A) B)
True False
5 All else equal, which of the following are correct concerning stock splits and stock dividends? All of the statements refer to book values, not market values.
I. The par value of the stock will change only with the stock split. II. Total owners' equity will not change with either a stock split or a stock dividend. III. The primary effect of either is to increase the number of shares outstanding. IV. Earnings per share will likely decrease only with the stock dividend.
A) B) C)
I and III only II and IV only I and II only
Fall 2010
D) E) I, II and III only I, II, III and IV
Quizzes
6 Which of the following are accurate regarding share repurchases?
I. In a world without imperfections, there is essentially no difference between a share repurchase and a cash dividend. II. Share repurchases cannot be undertaken for the sole purpose of avoiding taxes. III. Repurchasing shares is a useful method of stabilizing cash dividends. IV. Share repurchases result in an increase in earnings per share.
A) B) C) D) E)
IV only I and III only II and IV only I, II, and IV only I, II, III, and IV
7 Which of the following are consistent with the existence of an information content effect of dividends?
I. IBM's share price rises upon the announcement of unexpectedly high earnings and a larger than expected increase in its current quarterly dividend. II. GM's share price falls on the same day the firm announces a stock dividend. III. Con Ed's share price drops by 33 percent after it announces it is omitting its regular quarterly dividend payment.
Fall 2010
A) B) C) D) E) I only II only III only I and II only I and III only
Quizzes
8 Stansfield, Inc. currently has 400,000 shares of stock outstanding, each with a market price of $20 and a par value of $2. The firm would prefer to have its stock trade at a value of between $30 and $35 per share. Of the following choices, which one would allow the firm to achieve its objective?
A) B) C) D) E)
2-for-1 stock split 50 percent stock dividend 2-for-3 reverse stock split 1-for-2 reverse stock split $2 per share cash dividend
9 Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of $12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 10 percent (small) stock dividend. What happens to total owners' equity on the balance sheet?
A) B)
It remains unchanged. The account increases by $22,000.
Fall 2010
C) D) E) The account increases by $44,000. The account increases by $242,000. The account increases by $264,000.
Quizzes
10 Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of $12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 3-for-1 stock split. What is the market price of a share of the company's stock after the split?
A) B) C) D) E)
$4.00 per share $5.75 per share $6.00 per share $8.00 per share $36.00 per share
Short-Term Finance and Planning
1 A firm is not considered healthy unless its accounts payable period exceeds its operating cycle.
A)
True
Fall 2010
B) False
Quizzes
2 An increase in an asset account is an activity that decreases cash.
A) B)
True False
3 Carrying costs are costs that rise with decreases in the level of investment in current assets.
A) B)
True False
4 A firm that sets liberal credit terms for its customers is likely following a flexible short-term financial policy.
A) B)
True False
5 Which one of the following is true?
A) The inventory period of the operating cycle ends when the receivable it creates is actually paid by the customer.
Fall 2010
Quizzes
B) The length of the operating cycle is always greater than or equal to the length of the cash cycle. C) The accounts receivable period is always greater than or equal to the length of the cash cycle. D) The inventory period plus the accounts receivable period is equal in length to the operating cycle plus the cash cycle. E) The accounts payable period ends when the inventory is sold.
6 Which of the following activities increase cash, all else equal?
I. reducing long-term debt II. acquiring inventory III. selling fixed assets IV. factoring accounts receivable
A) B) C) D) E)
I only II only I and IV only I, II, and III only III and IV only
7 According to the text, which of the following managers have a direct influence on the firm's accounts payable balance?
I. credit manager
Fall 2010
II. production manager III. payables manager IV. controller
Quizzes
A) B) C) D) E)
I only II only I, III, and IV only II, III, and IV only I and IV only
8 Suppose that the inventory period is 50 days, the accounts receivable period is 40 days, and the accounts payable period is 35 days. What is the cash cycle?
A) B) C) D) E)
25 days 45 days 55 days 90 days 135 days
9 On May 15, your firm receives 20 cases of designer pens. On June 30, your firm pays $3,250 for the pens. On July 15, the pens are sold on credit for $10,500. On September 10, your firm collects the receivable in full. If each transaction occurs at the end of the business day, how many days are in the accounts receivable period?
A)
46 days
Fall 2010
B) C) D) E) 57 days 61 days 72 days 118 days
Quizzes
10 Jumbo, Inc. had sales of $8,000 in November, $14,000 in December, and projects sales of $10,000 in January, $12,000 in February, and $8,000 in March. The firm's COGS in any given month is equal to 70 percent of the next month's sales. The firm collects its receivables in 60 days and pays its payables in 30 days. The firm begins January 1 with $10,000 in cash. All sales and purchases are on credit. There are no other costs or revenues. What are Jumbo's total cash collections in March? Assume there are 30 days in every month.
A) B) C) D) E)
$10,000 $11,000 $11,600 $12,100 $13,000
Cash and Liquidity Management
1 The BAT model is more useful than the Miller-Orr model because the Miller-Orr model is too complex for most firms.
Fall 2010
A) B) True False
Quizzes
2 The opportunity cost of holding cash is inversely related to the level of market interest rates.
A) B)
True False
3 Cash and liquidity management are essentially the same thing.
A) B)
True False
4 A lockbox system is one method a firm can use to accelerate collections of cash.
A) B)
True False
5 The difference between a firm's available cash balance and its book cash balance is called:
Fall 2010
A) B) C) D) E) a firm's compensating balance. float. the target cash level. the adjustment cost. the average cash balance.
Quizzes
6 In an ideal world, all creditors would require that you pay them on exactly the same day you get paid. If this were true, then the level of cash you would need to hold to meet your _____ needs would be relatively low during the month.
A) B) C) D) E)
speculative transactions precautionary Keynesian float
7 According to your checkbook, you have a $3,000 balance in your account. You write checks totaling $4,500 and make a deposit of $3,500. What is your collection float?
A) B) C) D)
-$1,500 -$3,500 -$3,000 -$4,500
Fall 2010
E) -$8,000
Quizzes
8 Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65 per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance limit is $40,000. Assume the applicable annual interest rate is 5%. Using the BAT model, what is the total trading cost?
A) B) C) D) E)
$3,117 $4,596 $5,580 $7,664 $9,192
9 O'Pinion Manufacturing estimates that it disburses $900,000 weekly in order to pay bills. The fixed cost of transferring money is $75 per transfer. Based on historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance limit is $300,000. Using the Miller-Orr model, and assuming the interest rate is 0.094% per week, what is the optimum initial cash balance?
A) B) C) D) E)
$173,332 $203,835 $405,592 $473,332 $493,835
10
Fall 2010
Quizzes
O'Pinion Manufacturing estimates that it disburses $900,000 weekly in order to pay bills. The firm's annual opportunity rate is 5%. The fixed cost of transferring money is $75 per transfer. Based on historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance limit is $300,000. Using the Miller-Orr model, and assuming the interest rate is 0.094% per week, what is the average cash balance?
A) B) C) D) E)
$413,250 $521,339 $531,109 $598,712 $631,773
Credit and Inventory Management 1 The fact that auto parts stores face shorter credit periods than florists is consistent with the factors listed as influences on credit period in the text.
A) B)
True False
2 One of the most important factors influencing the length of the credit period offered by the seller is the operating cycle of the seller.
A) B)
True False
Fall 2010
3
Quizzes
In accounts receivable management, a firm's collection policy details the procedures it will follow in collecting accounts receivable.
A) B)
True False
4 Most trade credit is offered on open account although, at times, a firm may require the customer sign a promissory note.
A) B)
True False
5 There is a saying in banking that states when a business is experiencing financial problems, trade creditors are the first to know. Why would this be true?
A) B) banks.
Trade creditors perform credit checks less often than banks do. Trade creditors get all of their information about credit risks from the
C) Trade creditors can always take back the merchandise they sold the borrower if they don't get paid. D) Trade creditors extend credit only to the most creditworthy businesses while banks extend short-term loans to almost any borrower. E) Trade creditors typically extend credit more often and for a shorter maturity to a business than other creditors such as banks.
Fall 2010
6
Quizzes
If you close your dry cleaning store to open a fruit stand, you will likely find the length of the credit period you get from your suppliers to be relatively:
A) B) C) D) E)
long due to the risks involved. long if your account is a small one for your supplier. short because fruit is highly perishable. short because fruit is a high cost item. short if there is a high degree of competition among your suppliers.
7 A firm was turned down for credit because it had demonstrated an unwillingness to make payments in a timely fashion in the past despite its solid financial performance. This denial was based on credit:
A) B) C) D) E)
capacity. character. capital. collateral. economic condition.
8 Law 'N' Order Industries recently changed the terms offered its customers from 2/10, net 30 to 3/10 net 21. The firm has changed its:
I. cash discount.
Fall 2010
II. net credit period. III. cash discount period.
Quizzes
A) B) C) D) E)
I only II only III only I and II only I, II, and III
9 Your company is considering granting credit to a new customer. The price per unit is $165 and the variable cost per unit is $150. The monthly interest rate is 0.8 percent. The customer will pay in 30 days if they do not default. If the customer does not default, they will buy one unit every month forever. What is the breakeven default percent?
A) B) C) D) E)
10 Proposed credit policy, price = $50, variable cost = $35, quantity = 885 units per month, the monthly interest rate is 1.0 percent, and the terms of credit are net 30. What is the cost of switching?
A)
$35,125
Fall 2010
B) C) D) E) $38,225 $41,125 $43,725 $53,000
Quizzes
International Corporate Finance
1 The use of local financing for a project located in a foreign country increases the political risk of that project.
A) B)
True False
2 You live in New York City. You open the Wall Street Journal and find a quote of 1.3468 Canadian dollars for one U.S. dollar. This is an example of an indirect quote.
A) B)
True False
3 There is no mechanism that allows a foreign firm's shares to be traded on an exchange in the United States.
Fall 2010
A) B) True False
Quizzes
4 A spot trade in the foreign currency market is an agreement to trade currencies based on the exchange rate today for settlement within two business days.
A) B)
True False
5 The rate that most international banks charge one another for loans of Eurodollars overnight in the London market is called the:
A) B) C) D) E)
American Depository rate. Samurai rate. European Currency Unit. London Interbank Offer Rate. Eurobond rate.
6 According to today's Wall Street Journal, the direct quote for the euro has gone from $1.2186 to $1.2191. In other words; the value of the U.S. dollar has:
A) B)
fallen against the value of euro. risen against the value of the euro.
Fall 2010
C)
Quizzes
remained unchanged relative to the value of the euro.
D) changed but there is not enough information to make a statement about the relative change of the U.S. dollar versus the euro. E) fallen against most of the world's major currencies.
7 Suppose the nominal risk-free rate of interest in the United States is 5 percent. The nominal risk-free rate in Germany is 8 percent with inflation of 6 percent. What is the approximate inflation rate in the United States?
A) B) C) D) E)
8 Suppose absolute purchasing power parity holds. The exchange rate between Indian rupees and U.S. dollars is Rs .2312 per $1.00. If an automobile costs $35,000 in the United States, how much should the same car cost in India?
A) B) C) D) E)
Rs161 Rs763 Rs1606 Rs7,630 Rs1,604,785
Fall 2010
9
Quizzes
A U.S. firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost 16 million and will generate cash inflows of 7.6 million per year at the end of each of the next three years. After that, the company will be worthless. The current exchange rate is 0.83 British pounds per $1.00. The U.S. inflation rate is expected to be 4 percent over this period. The current risk-free rate of interest in the United States is 5 percent and the risk-free rate in Great Britain is 8 percent. Assume the cost of capital for this project is 15 percent on dollar investments. What is the NPV of this project using the foreign currency approach?
A) B) C) D) E)
$294,405 $489,269 $524,963 $631,896 $832,095
10 The following quotes are given as the U.S. $ Equivalent: Canada (Dollar) 0.7196, Hong Kong (Dollar) 0.1291, Sweden (Krona) 0.1400. The following quotes are given as Currency per $: Canada (Dollar) 1.3897, Hong Kong (Dollar) 7.7459, Sweden (Krona) 7.1429. How many Hong Kong dollars are there per Swedish Krona?
A) B) C) D) E)
HK$0.9222 HK$1.0844 HK$1.3256 HK$1.5649 HK$2.4981
Fall 2010
Risk Management: An Introduction to Financial Engineering
Quizzes
1 The main difference between a futures contract and a forward contract is that with the former, buyers and sellers realize gains or losses on the settlement date, while the latter requires that gains or losses are realized daily.
A)
True
B)
False
2 The prices of goods and services have remained relatively stable over the last three decades, but the year-to-year rate of change in those prices has increased dramatically.
A)
True
B)
False
3 Immunization is another term for hedging.
Fall 2010
A) True
Quizzes
B)
False
4 Economic exposure is the long-run financial risk arising from permanent changes in prices or other economic fundamentals.
A)
True
B)
False
5 A call option is:
A) the right, but not the obligation, to sell an asset for a specified price on or before a specified date in the future.
B) a legally binding agreement to sell an asset for a specified price on a specified date.
C) the right, but not the obligation, to purchase an asset for a specified price by a specified date in the future.
Fall 2010
D)
Quizzes
an agreement to exchange cash flows within the next two days.
E) an agreement to sell an asset for a specified price on a specified date with gains and losses recognized daily.
6 Which of the following are generally correct about financial engineering?
I. Financial engineering is frequently used to create financial hedges. II. Financial engineering is using available financial instruments to create new ones. III. In a world where prices are very stable, there would be very little demand for financial engineering. IV. Financial engineering is a growth industry because the world is becoming less risky.
A)
I and III only
B)
II and IV only
C)
I, II, and III only
D)
II, III, and IV only
E)
I, III, and IV only
Fall 2010
Quizzes
7 You think the price of GM stock is going to fall. In order to make money, you could _____ option on GM stock.
I. buy a call II. sell a call III. buy a put IV. sell a put
A)
I and IV only
B)
II and III only
C)
I and III only
D)
I and IV only
E)
III only
8 Based on these quotes, what is the lowest contract price at which 15,000 lbs. of orange juice for delivery in July traded during the day?
Fall 2010
Orange Juice (CTN) 15,000 lbs.; cents per lb. Open Open Interest High Low Settle Change Lifetime High
Quizzes
Lifetime Low
July Sept Nov Jan
74.90 17,832 77.50 6,379 80.50 3,149 83.50 1,397
82.30 83.00 85.75 88.00
74.90 77.50 80.50 83.00
82.20 83.00 85.75 88.50
+6.80 +5.00 +5.00 +5.00
128.50 121.30 113.25 119.75
73.00 77.10 79.80 82.75
A)
$11,235
B)
$11,625
C)
$12,330
D)
$12,075
E)
$12,345
Fall 2010
Quizzes
9 Based on the following quotes, for the purposes of marking to market, the current value of the June contract is: S&P 500 INDEX (CME) $500 times index Open Open Interest High Low Settle Change Lifetime High Lifetime Low
June Sept Dec
829.5 844.2 183,158 839.3 8,621 851.4 3,338 852.8 862.2
828.6 839.0 851.0
841.35 849.90 859.35
+11.70 +11.75 +11.70
844.20 852.80 862.20
629.05 707.50 753.00
A)
$314,525.
B)
$412,235.
C)
$414,300.
D)
$420,675.
E)
$423,100.
Fall 2010
Quizzes
10 Based on the following quotes, which of the futures contracts set lifetime highs on this particular day? S&P 500 INDEX (CME) $500 times index Open Open Interest High Low Settle Change Lifetime High Lifetime Low
June Sept Dec
829.5 844.2 183,158 839.3 8,621 851.4 3,338 852.8 862.2
828.6 839.0 851.0
841.35 849.90 859.35
+11.70 +11.75 +11.70
844.20 852.81 862.20
629.05 707.50 753.00
I. June II. September III. December
A)
None of them did
B)
I only
C)
II only
Fall 2010
D) I and III only
Quizzes
E)
I, II, and III
Option Valuation
1 The put-call parity condition for options is only valid for American, and not European, option types.
A) B)
True False
2 An American call option always has the same value as a European call option, assuming the underlying stock does not pay dividends.
A) B)
True False
3 All else the same, as the volatility of the stock increases, both call and put options decrease in value.
Fall 2010
A) B) True False
Quizzes
4 The sensitivity of an option's price to a change in its time to expiration is called the option's "vega."
A) B)
True False
5 European put-call parity says the difference in price for call options less put options, both with exercise price E and time to maturity T, is equal to the stock price:
A) B) C) D) E)
minus the future value of the exercise price. plus the future value of the exercise price. minus the present value of the exercise price. plus the present value of the exercise price. plus the exercise price.
6 The sensitivity of an option's value to a change in the time to expiration is called the option's:
A) B)
delta. theta.
Fall 2010
C) D) E) vega. rho. gamma.
Quizzes
7 A put option with a $30 exercise price and three months to expiration sells for $1.55. The continuously compounded risk-free rate is 6 percent annually. The stock sells for $35. How much must a call option sell for with the same exercise price and expiration?
A) B) C) D) E)
$3.45 $5.00 $7.00 $8.55 $9.25
8 Given the following information, what is the price of a European put option?
Stock price $58 Exercise price $55 Time to expiration three months Risk-free rate 8 percent per year, compounded continuously Standard deviation 25 percent annually
A)
$0.00
Fall 2010
B) C) D) E) $1.21 $1.90 $2.56 $3.53
Quizzes
9 ABC Company has zero coupon bonds outstanding with a total face value of $250 million. These bonds mature in two years. The current market value of the firm's assets is $285 million with a standard deviation of 30 percent per year. The riskfree rate is 6 percent per year compounded continuously. What is the market value of the firm's debt?
A) B) C) D) E)
$18.016 million $81.286 million $203.714 million $221.730 million $250.000 million
10 ABC Company has zero coupon bonds outstanding with a total face value of $250 million. These bonds mature in two years. The current market value of the firm's assets is $285 million with a standard deviation of 30 percent per year. The riskfree rate is 6 percent per year compounded continuously. What is the firm's continuously compounded cost of debt?
A) B) C) D)
Fall 2010
E) 15.67 percent
Quizzes
Mergers and Acquisitions
1 Stockholders like mutual funds; therefore, they will pay a premium for the shares of a firm that is a conglomerate because the firm is essentially a mutual fund.
A) B)
True False
2 A spin-off involves the distribution of shares in a subsidiary to existing parent company stockholders.
A) B)
True False
3 The possible benefits of an acquisition include revenue enhancement and cost reductions.
A) B)
True False
Fall 2010
4
Quizzes
A joint venture is a formal arrangement where two separate firms put up money to establish a new firm.
A) B)
True False
5 Which of the following is (are) accurate with regards to advantages or disadvantages in using a merger as a method of acquisition?
I. An advantage of a merger is that it is legally complex. II. A disadvantage of a merger is that it requires the approval of the shareholders of each firm. III. An advantage of a merger is that there is no need to transfer title to the individual assets of the acquired firm to the acquiring firm.
A) B) C) D) E)
I only III only I and II only II and III only I, II, and III
6 _____ it is impossible for a tax-free acquisition to take place.
Fall 2010
A) B) equity If an acquisition is for business purposes
Quizzes
If the purchasing firm exchanges its own stock for the selling firm's
C) If an acquisition is being undertaken with the express purpose of avoiding taxes D) the bidder If the stockholders in the target firm will retain an equity interest in
E) If the selling shareholders will be considered to have exchanged their old shares for new ones of equal value
7 In a(n) _____, the managers of the firm purchase the outstanding shares and take the firm private.
A) B) C) D) E)
proxy contest tender offer vertical acquisition management buyout asset acquisition
8 Suppose you have the following information concerning an acquiring firm (Firm A) and a target firm (Firm B). Neither firm has any debt. The incremental value of the acquisition is estimated to be $250,000. Firm B is willing to be acquired for $540,000 worth of Firm A's stock. Firm A has 50,000 shares outstanding, Firm B has 18,000. The price per share of Firm A's stock is $50 and the price per share of Firm B's stock is $22.50. What is the value of Firm B to A in this case?
A) B)
$138,000 $250,000
Fall 2010
C) D) E) $405,000 $655,000 $920,000
Quizzes
9 Firm A has 10,000 shares of stock outstanding, each with a market price of $25 per share. Firm B has 7,500 shares of stock outstanding, each with a market value of $10 per share. Firm A can acquire Firm B for $82,500 in either cash or stock. Both firms are totally financed with equity. Total synergy from the acquisition is $12,500. What is the merger premium over B's stock price?
A) B) C) D) E)
10 Firm A has 10,000 shares of stock outstanding, each with a market price of $25 per share. Firm B has 7,500 shares of stock outstanding, each with a market value of $10 per share. Firm A can acquire Firm B for $82,500 in either cash or stock. Both firms are totally financed with equity. Total synergy from the acquisition is $12,500. What is the NPV of acquiring Firm B with stock?
A) B) C) D) E)
$3,746 $3,925 $4,122 $5,000 $5,510
Fall 2010
Quizzes
Explanation: To begin, you must first find the new price per share (it is $25.38) and the number of new shares that must be issued (3,300). Use this information along with the value of Firm B to Firm A to compute the NPV.
Leasing
1 According to IRS regulations, the existence of a bargain purchase option will not affect the ability of the lessee to deduct the lease payments from taxable income.
A) B)
True False
2 Bondo Manufacturing has just signed a lease agreement with MIPS Computers. Bondo agreed to pay $15,000 per month for 12 months. The purchase price of the equipment is $400,000. According to the lease agreement, MIPS will pay property taxes and insurance on the equipment. This lease is most likely a financial lease.
A) B)
True False
Fall 2010
Quizzes
The decision to lease or purchase an asset is best characterized as a financing decision rather than an investment decision.
A) B)
True False
4 A tax-oriented lease is a financial lease in which the lessor is the owner for tax purposes.
A) B)
True False
5 A sale and leaseback is a:
A) lease in which the lessor borrows a large fraction of the cost of the leased asset. B) long-term, fully amortized lease in which the lessee is responsible for asset upkeep. C) back. D) short-term lease in which the lessor is responsible for the insurance, taxes and upkeep. E) payments. lease in which the lessee borrows a substantial portion of the lease lease in which a firm sells an asset to the lessor and then leases it
Fall 2010
Which of the following statements are good reasons for leasing?
Quizzes
I. Taxes may be reduced by leasing. II. Leasing transfers uncertainty about the future value of the leased asset to the lessor. III. Leasing may encumber fewer assets than borrowing. IV. Leasing may incur less transaction costs than buying.
A) B) C) D) E)
I and II only III and IV only II, III, and IV only I, II, and III only I, II, III, and IV
7 Poncho Parts, Inc. manufactures reproduction parts for classic cars. The firm needs a computer-operated turret lathe that costs $440,000. It can borrow at 9.5 percent. The lathe will be used for six years, after which it will be worthless. Enterprising Leasing, Inc. will lease the equipment to the firm for $100,000 per year. The firm's tax rate is 34 percent. Using straight-line depreciation, what is the net advantage to leasing (NAL)?
A) B) C) D) E)
-$3,379 -$1,130 $7,230 $8,563 $11,235
Fall 2010
8
Quizzes
Dog Chew Products needs to replace its rawhide tanning and molding equipment. It can be used for four years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9 percent. The firm's tax rate is 39 percent. The three year ACRS depreciation schedule is: year 1 = 33.33 percent, year 2 = 44.44 percent, year 3 = 14.82 percent, and year 4 = 7.41 percent. What is the depreciation tax shield for year 3?
A) B) C) D) E)
$26,876 $53,752 $62,023 $84,074 $120,888
9 Dog Chew Products needs to replace its rawhide tanning and molding equipment. It can be used for four years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9 percent. The three year ACRS depreciation schedule is: year 1 = 33.33 percent, year 2 = 44.44 percent, year 3 = 14.82 percent, and year 4 = 7.41 percent. Assume your company will not pay taxes for the next four years. Now what is the net advantage to leasing?
A) B) C) D) E)
$79,102 $88,132 $136,269 $138,706 $152,062
Fall 2010
10
Quizzes
Dog Chew Products needs to replace its rawhide tanning and molding equipment. It can be used for four years. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9 percent. The firm's tax rate is 39 percent. The three year ACRS depreciation schedule is: year 1 = 33.33 percent, year 2 = 44.44 percent, year 3 = 14.82 percent, and year 4 = 7.41 percent. The equipment will be worth $100,000 in four years. What is the net advantage to leasing?
A) B) C) D) E)
$29,843 $31,132 $36,269 $138,706 $152,062
Question No: 1
( Marks: 1 )
- Please choose one
Which of the following statements is TRUE regarding Profitability Index? It ignores time value of money It ignores future cash flows It ignores the scale of investment It ignores return on investment
Fall 2010
Question No: 2 ( Marks: 1 ) - Please choose one
Quizzes
Which of the following is a tool that identifies the strengths, weaknesses, opportunities and threats of an organization?
SWOT Analysis Trend Analysis Fundamental Analysis Technical Analysis
Question No: 3
( Marks: 1 )
- Please choose one
If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then which of the following recommendations should be considered?
Fixed costs should be traded for variable costs Variable costs should be traded for fixed costs. The project should not be undertaken. Additional marketing analysis may be beneficial before proceeding.
Question No: 4
( Marks: 1 )
- Please choose one
The employment of fixed costs associated with the actual production of goods or services is known as:
Financial leverage Volume discounting Operating leverage Covariance
Fall 2010
Question No: 5 ( Marks: 1 ) - Please choose one
Quizzes
Which one of the following terms refers to the variability of return on stocks or portfolios, associated with changes in return on the market as a whole?
Unsystematic risk Unique risk Systematic risk Company specific risk
Question No: 6
( Marks: 1 )
- Please choose one
What will be the taxable income of an Un-levered firm, if it has Earning Before Interest and Tax (EBIT) equal to Rs.50,000, and its tax rate is 35%?
Rs.25,000 Rs.45,000 Rs.50,000 Rs.60,000 because Un-levered firm means a firm have no debts financing
Question No: 7
( Marks: 1 )
- Please choose one
Which of the following statements is TRUE regarding temporary working capital?
Temporary working capital varies with seasonal requirements. Temporary working capital is the constant component of working capital. Temporary working capital excludes inventories.
Fall 2010
Quizzes
Temporary working capital should be financed with bonds or common stock
Question No: 8
( Marks: 1 )
- Please choose one
Which of the following describes the hedging approach to financing?
Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion. Each asset is offset with a financing instrument of the same approximate maturity. Each asset is offset with a put or call option. The firm takes out insurance to protect itself against uneven cash flows.
Question No: 9
( Marks: 1 )
- Please choose one
According to the Miller Model, upper limit for cash balance is equal to which of the following?
Lower limit + Spread Spread Lower limit Optimal limit + Lower limit Lower limit Spread
Question No: 10
( Marks: 1 )
- Please choose one
Suppose that the sale (usage rate) on an item gets doubled. The EOQ (Economic Order Quantity) for that item should be: Halved Unaffected
Fall 2010
Decreased Increased
Quizzes
Question No: 11
( Marks: 1 )
- Please choose one
A firm wants to acquire another firm by purchasing its assets. Which of the following methods firm can use to evaluate the financial aspects of this deal?
Replacement cost method Dividend valuation method Present value method Price earning ratio method
Question No: 12
( Marks: 1 )
- Please choose one
In which of the following acquisition strategies, a purchaser has complete knowledge of the acquiring firm?
Management Buy-In Management buyout Consolidation Amalgamation
Question No: 13
( Marks: 1 )
- Please choose one
Which one of the following statements is CORRECT regarding exercise price? Exercise price is the price mentioned in the option at which the holder exercises his right Exercise price is the price mentioned in the option at which the holder exercises his obligation
Fall 2010
Quizzes
Exercise price is the price mentioned in the option at which the option seller exercises his right Exercise price is the price mentioned in the option at which the option writer exercises his right
Question No: 14
( Marks: 1 )
- Please choose one
Which one of the following statements is CORRECT regarding Options Contacts?
A put option gives the holder a right to sell underlying item at a specified price A put option gives its writer the right to sell underlying item at a specified price A call option gives its writer a right to sell underlying item A call option gives its holder a right to sell underlying item
Question No: 15
( Marks: 1 )
- Please choose one
If market interest rate increases above the agreed rate in an interest rate option, the effective interest rate for the option holder would be: Less than the market rate Greater than market rate Equal to the market rate Zero
Question No: 16
( Marks: 1 )
- Please choose one
Which one of the following techniques can reduce the risks and disadvantages of share purchase method in mergers and acquisitions?
Spin-off
Fall 2010
Hive-down Hubris Off-shoot
Quizzes
Question No: 17
( Marks: 1 )
- Please choose one
The financial consideration to be paid to target company in mergers can be classified in to the following categories EXCEPT:
Cash Assets Share ordinary or preference Debt
Question No: 18
( Marks: 1 )
- Please choose one
Which of the following types of dividend policies results in the most volatile dividend payments and stockholder discomfort?
Target dividend-payout policy Low-regular-and-extra dividend policy Regular dividend policy Constant payout-ratio dividend policy
Question No: 19
( Marks: 1 )
- Please choose one
Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a year, compounded annually. How much amount your account will have at the end the end of four years?
Fall 2010
Rs.10,208 Rs.9,728 Rs.10,880 Rs.9,624
Quizzes
FV = PV(1-I)n = 8000(1-.05)4 = 9728
Question No: 20
( Marks: 1 )
- Please choose one
If you deposit Rs. 12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%, what will your account be worth at the end of 16 years?
Rs. 82,168.44 Rs. 71,450.82 Rs. 768,901.12 Rs. 668,609.67
FVA = PMT[(1+I)n-1/i] = 12000[(1+.15)16-1/.15] = 668,609.67
Question No: 21
( Marks: 1 )
- Please choose one
Which of the following statements would be CORRECT regarding nominal interest rate when inflations is expected to occur over the foreseeable future? Nonimal interest rate would be equal to real interest rate
Fall 2010
Nonimal interest rate would be more than real interest rate Nonimal interest rate would be half of real interest rate
Quizzes
Nonimal interest rate would be less than the real interest rate
Question No: 22
( Marks: 1 )
- Please choose one
Which of the following is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume?
Technical analysis Fundamental analysis Common size analysis Ratio analysis
Question No: 23
( Marks: 1 )
- Please choose one
Which of the following statements best describes the term Market Correction?
Market Correction refers to the situation where equilibrium of supply & demand of shares occurs in the market Market correction refers to the situation where shares intrinsic values becomes equal to face values Market Correction refers to the situation when there is a boom in the economy Market Correction refers to the situation where inflation rate is above the market interest rate
Question No: 24
( Marks: 1 )
- Please choose one
Which of the following statements is CORRECT regarding the fundamental analysis?
Fall 2010
Quizzes
Fundamental analysts use only Economic indicators to evaluate a stock Fundamental analysts use only financial information to evaluate a companys stocks Fundamental analysts use financial and non-financial information to evaluate a companys stocks Fundamental analysts use only non-financial information to evaluate a companys stocks
fundamental information that is analyzed can include a company's financial reports, and non-financial information such as estimates of the growth of demand for competing products, industry comparisons, analysis of the effects of new regulations or demographic changes, and economy-wide changes
Question No: 25
( Marks: 1 )
- Please choose one
Which of the following could be used to calculate the cost of common equity?
Interpolation method Dividend discount model YTM (Yield-to-Maturity) method Capital structure valuation
Question No: 26
( Marks: 1 )
- Please choose one
When faced with mutually exclusive options, which project should be accepted under the 'Payback Method'?
The one with the longest payback period The one with the shortest Payback period
Fall 2010
None of the given options
Quizzes
It doesnt matter because the payback method is not theoretically correct
Question No: 27
( Marks: 1 )
- Please choose one
Which of the following IAS (International Accounting Standard) deals with cash flow statement? IAS 1 IAS 7 IAS 16 IAS 28
Question No: 28
( Marks: 1 )
- Please choose one
Mr. Joseph Steve has changed the working capital policy of his company recently. As a result, the liquidity for the company has decreased but an increase in profitability has been observed alongside. From this information we can conclude that the company must have changed his working capital policy from ________ to ________. Conservative; Aggressive Aggressive; Moderate Aggressive; Conservative None of the given options
Question No: 29
( Marks: 1 )
- Please choose one
The firm has very little net working capital sometimes even negative net working capital that can be very risky. The above statement belongs to:
Aggressive working capital policy
Fall 2010
Conservative working capital policy Moderate working capital policy
Quizzes
The statement is not related to any of the working capital policies
Question No: 30
( Marks: 1 )
- Please choose one
The amount of current assets that varies with seasonal requirements is referred to as __________ working capital. Permanent Net Temporary Gross
Question No: 31
( Marks: 1 )
- Please choose one
Under which of the following concepts, each asset is offset with a financing instrument of the same maturity? M&M proposition Clientele effect Hedging approach Baumol Model Current Assets Financing Hedging Approach Under this approach each asset would be offset with a financing instrument of the same maturity.
Question No: 32
( Marks: 1 )
- Please choose one
Which of the following is NOT one of the common motives of holding cash? Personal Motives Safety Motives
Fall 2010
Transactions Motives Speculative Motives
Quizzes
Motives for Cash holding Transactions Motive ensures that the firm has enough funds to transact its routine, day-to-day business affairs. Safety Motive protects the firm against being unable to meet unexpected demands for cash. Speculative Motive allows the firm to take advantage of unexpected opportunities that may arise
Question No: 33
( Marks: 1 )
- Please choose one
Which of the following is equal to Stock out cost? Carrying cost Safety stock Holding cost Carrying cost Reordering cost Safety stock Carrying cost Reordering cost
Question No: 34
( Marks: 1 )
- Please choose one
Which of the following statement is INCORRECT regarding Just-In-Time (JIT)? The inventories are kept near zero level. The inventory is acquired in such quantity on daily basis that can support the daily production level. The entire inventory acquired move to the production hall. Inventory level is necessarily kept at zero level. JIT does not necessarily mean zero inventory level. The objective is to minimize the inventories but to increase the productivity, quality and flexibility. Question No: 35 ( Marks: 1 ) - Please choose one
Fall 2010
Stock-out Buffer Stock Holding Stock Safety Stock
Quizzes
Which of the following term refers to the minimum inventory amount needed for an item?
Safety stock is the minimum inventory amount needed for an item, based on anticipated usage and expected delivery time of materials.
Question No: 36
( Marks: 1 )
- Please choose one
Which of the following is NOT an objective of Just-In-Time (JIT)? To increase the productivity To increase the inventories To increase the quality To increase the flexibility
JIT objective is to minimize the inventories but to increase the productivity, quality and flexibility.
Question No: 37
( Marks: 1 )
- Please choose one
If the people are not able to work together, the merger will not succeed. Which of the following cause(s) of failure is(are) being depicted in this statement? Lack of planning Corporate culture Talent departure All of the given options
Fall 2010
Corporate culture
Quizzes
. It is not enough for two companies to appear to fit well on paper; at the end of the day, if the people are not able to work together, the merger will not succeed.
Question No: 38
( Marks: 1 )
- Please choose one
Which of the following is an anti takeover strategy in which the target company make significant efforts to resist a takeover bid e.g. by a major acquisition, issue new shares?
Shark repellent Pac-man Poison pill Political pressure Pac-Man: The Pac-Man defense is a defensive option to stave off a hostile takeover. It is when a company that is under a hostile takeover acquires its would-be buyer.
Question No: 39
( Marks: 1 )
- Please choose one
Corporate restructuring involves the restructuring of: All of the given options The assets and liabilities of the company The debt to equity structures of the company Cost minimization by the company
CORPORATE Restructuring involves restructuring the assets and liabilities of corporations, including their debt-to-equity structures, in line with their cash flow needs to promote efficiency, restore growth, and minimize the cost to taxpayers.
Fall 2010
Quizzes
Question No: 40
( Marks: 1 )
- Please choose one
Which of the following terms refer to the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition? Management Buyout Management Buy-In Leverage Buyout None of the given options A leveraged buyout is accomplished with borrowed money or by issuing more stock.
Question No: 41
( Marks: 1 )
- Please choose one
Which of the following is NOT among the categories of foreign risk? Transaction exposure Translation exposure Local exposure Economic exposure
Question No: 42
( Marks: 1 )
- Please choose one
Which of the following is NOT an external method to reduce the transaction exposure? Invoicing in home currency Money market hedges Currency futures Currency swaps
Fall 2010
External methods: - Forward contract - Money market hedges - Currency futures - Currency options - Currency swaps
Quizzes
Question No: 43
( Marks: 1 )
- Please choose one
Which of the following is the purpose of a Forward Interest Rate Agreement? To fix the interest rate To estimate the exchange rate To estimate the interest rate To fix the foreign exchange rate
Question No: 44
( Marks: 1 )
- Please choose one
Which of the following statements is INCORRECT regarding forward contracts? Reversing forward contract is difficult. Parties have to put an initial margin in forward contracts. No size restriction is placed in forward contract. Forward contract is made between parties and each party needs to confirm the credit worthiness of each other.
Question No: 45
( Marks: 1 )
- Please choose one
If the exercise price of an option is not favorable than the market price of the underlying item, an option would be termed as:
Fall 2010
In the money Out of money At the money None of the given options
Quizzes
If the strike price is not favorable than the current market price of underlying asset or item, the option is called out-of-money. Question No: 46 ( Marks: 1 ) - Please choose one
An investor buys 5 options on shares of at a price of Rs 50 per share. Each option consists of 100 shares and premium paid is Rs. 2 per share. What would be the total option cost for investor if the share price is Rs. 55 at the expiry of option? Rs. 1,000 Rs. 1,500 Rs. 2,500 Rs. 25,000 5 option each option have 100 share total share is 5 *100 =500 total cost of option is 50*500=25,000
Question No: 47
( Marks: 1 )
- Please choose one
An investor buys 5 options on shares at a price of Rs 50 per share. Each option consists of 100 shares and premium paid is Rs. 2 per share. What would be the net gain for investor if the share price is Rs. 55 at the expiry of option? Rs. 1,500 Rs. 2,500 Rs. 1,000 Rs. 25,000
Question No: 48
( Marks: 1 )
- Please choose one
Fall 2010
Quizzes
Which of the following is the CORRECT statement regarding the Law of One Price?
The law of one price applies to only tradable goods The law of one price applies to all goods The law of one price applies to immovable goods The law of one price applies to services only
Page 145 : (3) The law of one price only applies to tradable goods; Question No: 49 ( Marks: 3 )
Explain the main features of a forward rate agreement.
A.
Features of FRAs: It is in between bank and client for fixing future interest rate on notional amount of loan. The loan is for an affirmed period starting on a particular time in future. The size of the notional loan or deposit is decided between the bank and the client. FRAs are cash settled. On settlement date buyer and seller must settle the agreement. The FRA rate for three months loan/deposit starting in a 6 months time is normally expressed as 6v9 FRA. The buyer of a FRA agrees to pay fixed interest rate on notional loan. At the same buyer will receive interest on notional loan at standard rate of interest. On the other side, seller of FRA agrees to pay interest on the notional amount at benchmark rate and receives interest at a fixed rate.
Fall 2010
Question No: 50 ( Marks: 3 )
Quizzes
Differentiate between Management Buyout and Management Buy-In.
Management Buyouts Management buyouts are similar in all major legal aspects to any other acquisition of a company. The particular nature of the MBO lies in the position of the buyers as managers of the company and the practical consequences that follow from that. In particular, the due diligence process is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is also unlikely to give any but the most basic warranties to the management, on the basis that the management knows more about the company than the sellers do and therefore the sellers should not have to warrant the state of the company. In many cases, the company will already be a private company, but if it is public then the management will take it private.
Management Buy In (MBI): Management Buy in (MBI) occurs when a manager or a management team from outside the company raises the necessary finance buys it and becomes the company's new management. A management buy-in team often competes with other purchasers in the search for a suitable business. Usually, a manager will lead the team with significant experience at managing director level. The difference to a management buy-out is in the position of the purchaser: in the case of a buy-out, they are already working for the company. In the case of a buy-in, however, the manager or management team is from another source.
Question No: 51
( Marks: 5 )
Assume that a bookstore uses up cash at a steady rate of Rs.300,000 per year. The interest rate is 3% and each sale of securities costs Rs.20. Determine the optimal cash balance for the bookstore.
ECQ = [(2 Conversion Cost Demand for Cash) / Opportunity Cost] = [(2 20 300,000) / 0.0025]
Fall 2010
= [12000000 / 0.0025] = 4800000000 = Rs. 69282
Quizzes
Question No: 52
( Marks: 5 )
Firm A wants to acquire a private limited company operating in the same industry. What procedure would be followed by the Firm A to acquire the target company?
Question No: 53
( Marks: 5 )
Why exchange rates of two currencies fluctuate? Explain briefly
Following are some factors for fluctuation:
Relative interest rates: One factor that affects exchange rates is the size of the differential between the real interest rates available to investors in the respective countries. The real interest rate is simply the nominal interest rate available to an investor in a high quality short-term investment subtracted by the country's inflation rate.
Trade imbalances: The size of any trade deficit between two countries will also affect those countries' currency exchange rates. This is because they result in an imbalance of currency reserves among the trading partners.
Political stability: If a country's government becomes unstable due to political gridlock, votes of no confidence, revolution or civil war, confidence can quickly be lost. People become less willing to accept paper currency in exchange for their goods and services, primarily because they're
Fall 2010
Question # 1 of 15 Total Marks: 1
Quizzes
You plan to deposit Rs.400 at the end of each year for 16 years in an account that pays 9 percent compounded annually. The terminal value at the end of the 16 year period is closest to: Select correct option: Rs.13,201 Rs.17,667 Rs.9,634 Rs.19,329. Question # 2 of 15 Total Marks: 1 Which one of the following statements describes the relationship between Interest rates and bond prices? Select correct option: Move in the same direction. Move in opposite directions Sometimes move in the same direction, sometimes in Have no relationship with each other (i.e., they are i Ref: PAGE # 19 Remember that as general current interest rates increase, the price of a bond will decrease and its yield will increase. Question # 3 of 15 Total Marks: 1 Which of the following is generally the objective of the firms behind offering discount to customers? Select correct option: To improve the cash flow To increase the bad debts
Fall 2010
To improve return on equity To improve the PE ratio Ref: PAGE # 106
Quizzes
The motive behind offering discount to customers may have different secondary meaning to the firm. However, the main objective is to improve the cash flow. Question # 4 of 15 Total Marks: 1 A firm can lower its breakeven level by doing which of the following actions? Select correct option: Lowering direct cost Increasing variable cost Increasing direct cost Lowering sales price Ref: PAGE #39 Ways to Lower Break-Even: There are three ways to lower your break-even volume, only two of them involve cost controls (which should always be your goal on an ongoing basis). 1. Lower direct costs, which will raise the gross margin. Be more diligent about purchasing material, controlling inventory, or increasing the productivity of your labor by more cost effective scheduling or adding more efficient technology Question # 5 of 15 Total Marks: 1 Which of the following is a necessary condition for issuing shares through IPOs? Select correct option: The firm must have a stable dividend policy The firm must have a low cost of capital The firm must have l low level of debt The firm must be listed on the stock exchange Ref: PAGE # 61
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Quizzes
There are some rules and regulations for raising capital for each of the above categories. We shall discuss here some of the issues relating to Equity capital issuing shares through IPOs and subsequent issue of shares like right issue. Company must be listed on stock exchange Question # 6 of 15 Total Marks: 1 With respect to a Cash flow statement, which of the following would be considered as a cash outflow? Select correct option: Increase in current assets(Doubt) Decrease in current assets Increase in current liability Can not be determined Ref:
Question # 7 of 15 Total Marks: 1 The variance of an investment's returns is a measure of the: Select correct option: Volatility of the rates of return. Probability of a negative return. Historic return over long periods. Average value of the investment. Ref: PAGE # 48 VARIANCE OF RETURN: The variance essentially measures the average squared difference between the actual returns and the average return. Question # 8 of 15 Total Marks: 1 Virgo Airlines will pay Rs.4.00 dividend next year on its common stock, which is
Fall 2010
investment if the dividend is expected to grow at 5% forever? Select correct option: 4 percent. 5 percent. 7 percent. 9 percent. 4% + 5% = 9% Question # 9 of 15 Total Marks: 1
Quizzes
currently selling at Rs.100 per share. What is the market's required return on this
Which of the following is not related to an "asset based method" of share valuation in Mergers & Aquisitions? Select correct option: Identification of individual assets Identification of liabilities Discount rates Book values Ref: PAGE # 118 Book Values: These figures are bases on past or historical costs and are meaningless and useless to be used for merger transaction valuations. Question # 10 of 15 Total Marks: 1 Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back _____________ to the analysis. Select correct option: The cost of fixed assets The cost of accounts payable
Fall 2010
Investments Depreciation Ref:
Quizzes
http://highered.mcgrawhill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html Question # 11 of 15 Total Marks: 1 Suppose you have a 2-stocks portfolio, which consists of Stock A and Stock B. If stock A has a beta value of 1.8 and stock B has a beta value of 0.68, and your investment in stock A and stocks B is equal, then the beta of this 2-stock portfolio would be equal to: Select correct option: 1.20 1.24 1.30 1.45 Question # 12 of 15 Total Marks: 1 If common stocks of a company have beta value equal to 1, then such stocks are known as: Select correct option: Normal stocks Aggressive stocks Defensive stocks Income stocks Aggressive Stocks have beta value > 1 Defensive Stocks have beta value < 1
Fall 2010
Normal Stocks have beta value = 1 Question # 13 of 15 Total Marks: 1
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The term structure of interest rates refers to the relationship between yield and: Select correct option: Rating, for securities with the same maturity. Marketability, for securities with the same tax status Maturity, for the same security class. Risk, for securities with the same maturity. Ref: http://www.investopedia.com/university/advancedbond/advancedbond4.asp Question # 14 of 15 Total Marks: 1 In currency futures, a tick refers to which of the following? Select correct option: Minimum price movement in the exchange rate Maximum price movement in the exchange rate Maximum price movement of a future contract Minimum price movement of a future contract Ref: PAGE # 133 Ticks: A tick is the minimum price movement of a contract. Question # 15 of 15 Total Marks: 1 Which of the following situation may arise due to overtrading by a firm? Select correct option: Liquidity of the firm deteriorates Liquidity of the firm improve
Fall 2010
Risk of the firm decreases Long-term capital of the firm increases Ref: PAGE # 93 The major signs leading to overtrading are as follows: - There is significant increase in turnover. - Increase in current assets is rapid.
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- Stock turnover the debtors turnover might slow down, in which case the rate of increase in stocks and debtors would be even greater than the increase in sales. - Payment to creditors is pushed to increase length. - Short term loans are exceeding the limits and firm tries to negotiate increased limits. - The current and quick ratio falls - The firm leads to liquid deficit situation where current liabilities are greater than current assets.
Question # 1 of 15 Total Marks: 1 An un-geared beta refers to the beta of a firm with: Select correct option: 100% Debt financed 100% Equity financed 50% Equity and 50% Debt financed 60% Equity and 40% Debt financed Ref: PAGE # 66 Example:
Fall 2010
Quizzes
We need to un-gear the beta. Why? Note that the beta of the industry in which the proposed project falls has D/E ratio of 40:60 but the new project shall be all equity financed. We un-gear the beta that means the financial risk element needs to be removed from the geared beta
Question # 2 of 15 Total Marks: 1 When a firm places a budgetary constraint on the projects it invests in, this is called: Select correct option: Capital rationing Working capital management Cash budgeting None of the above Ref: http://highered.mcgrawhill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html Question # 3 of 15 Total Marks: 1 In which of the following dividend policy, the amount of dividend is relatively fixed? Select correct option: Constant payout ratio policy Hybrid Dividend policy Residual Dividend policy Stable dividend policy Ref: A constant payout ratio policy is a policy of paying a FIXED percentage of a firms earnings as dividends in each period. Such a policy is likely to result in wildly fluctuating dividends. As a result, only a small percentage of dividend paying firms follow such a policy
Fall 2010
Quizzes
If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then which of the following recommendations should be considered? Select correct option: Fixed costs should be traded for variable costs Variable costs should be traded for fixed costs. The project should not be undertaken. Additional marketing analysis may be beneficial before proceeding Ref: http://www.investopedia.com/terms/s/sensitivityanalysis.asp
Question # 5 of 15 Total Marks: 1 If a creditor wanted to know if a potential customer paid its bills on time, the creditor could look at the potential customer's: Select correct option: Current ratio. Acid ratio. Average age of accounts payable. Average age of accounts receivable ACID RATIO: Accounts Receivable + cash \ Total Current Liabilities
Question # 6 of 15 Total Marks: 1 What we get after subtracting operating costs and capital expenditures necessary to at least sustain cash flows from total firm revenues? Select correct option:
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Free cash flows Strategic cash flows Net income Earnings before interest and taxes (EBIT)
Quizzes
Question # 7 of 15 Total Marks: 1 Which of the following situation may arise due to overtrading by a firm? Select correct option: Liquidity of the firm deteriorates Liquidity of the firm improve Risk of the firm decreases Long-term capital of the firm increases Ref: PAGE # 93 The major signs leading to overtrading are as follows:
- There is significant increase in turnover. - Increase in current assets is rapid. - Stock turnover the debtors turnover might slow down, in which case the rate of increase in stocks and debtors would be even greater than the increase in sales. - Payment to creditors is pushed to increase length. - Short term loans are exceeding the limits and firm tries to negotiate increased limits. - The current and quick ratio falls - The firm leads to liquid deficit situation where current liabilities are greater than current assets.
Fall 2010
Select correct option: The cost of being out of stock The cost of placing an order The uncertainty associated with forecasted demand The cost of carrying additional inventory Ref: PAGE # 100 Question # 9 of 15 Total Marks: 1
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The proper amount of safety stock, to be maintained, depends on all of the following EXCEPT:
A firm is holding cash to take advantage of any temporary business opportunity. This is an example of the ________ motive for holding cash. Select correct option: Capital needs Precautionary Transaction Speculative Ref:
Question # 10 of 15 Total Marks: 1 A dividend payment made in the form of additional shares, rather than a cash payout is known as: Select correct option: Stock Dividend Cum Dividend Ex Dividend Extra Dividend Ref: PAGE # 75
Fall 2010
Dividend:
Quizzes
A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property.
Question # 11 of 15 Total Marks: 1 Virgo Airlines will pay Rs.4.00 dividend next year on its common stock, which is currently selling at Rs.100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever? Select correct option: 4 percent. 5 percent. 7 percent. 9 percent. 4% + 5% = 9% Question # 12 of 15 Total Marks: 1 A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the companys stock? Select correct option: 14% 13% 12% 10% Ref: r = DIV1/P0 + g = 8% + 5% =
Fall 2010
13%
Quizzes
Question # 13 of 15 Total Marks: 1 You have calculated that the required rate of return on a particular common stock is less than the expected rate of return. Therefore, you would conclude: Select correct option: That the stock is more risky than the market portfolio That an investor should buy the stock. That the stock has a high dividend payout ratio. That an investor should sell the stock. Ref: PAGE # 57 Question # 14 of 15 Total Marks: 1 Economies of scale can best be realized with a ________ merger. Select correct option: Horizontal Vertical Financial Conglomerate Ref:
Question # 15 of 15 Total Marks: 1 The greater the proportion of permanent current assets financed with short-term debt, the: Select correct option: Riskier would be the working capital policy of the firm(Doubt) Lower would be the safety margin needed to protect
Fall 2010
Less likely that the firm will try to lengthen the mature Lower would be the firm's potential return on total in Ref: for further reading see PAGE # 92 (Aggressive Policy )
Quizzes
Quiz #4 MC080200629 : Imtiaz Sarwar Quiz
Question # 1 of 15 Which of the following investment criteria does not take the time value of money into consideration?
Question # 2 of 15 Which of the following is the Dividend Payout ratio for a common stock?
Dividend per share: Market value per share Earning per share: Intrinsic value per share Dividend per share: Earning per share Market value per share: intrinsic value per share Ref:
Fall 2010
http://en.wikipedia.org/wiki/Dividend_payout_ratio
Quizzes
Question # 3 of 15 Cash discounts are offered by the seller to buyer in order to improve which of the following?
Operating cycle Sales turnover Company goodwill Credit worthiness Ref: Operating Cycle = age of inventory + collection period. The operating cycle is the number of days from cash to inventory to accounts receivable to cash. And http://www.slideshare.net/sagar_sjpuc/working-capital-managementpresentation-775445 in slide #3
Question # 4 of 15 Average beta has value equal to:
1 Slid # 16 2 3 4
Fall 2010
Question # 5 of 15
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Which of the following may be a major reason for hard capital rationing?
Question # 6 of 15 In inventory management, the storage cost of inventory is considered as:
Carrying cost Page#97 Reorder cost Stock out cost Safety cost Ref: What Is Inventory Carrying Cost? The cost to carry inventory measures the overhead that an organization carries to support its inventory. In addition to the money originally spent to purchase it, more money will be spent on upkeep while inventory sits in your possession. The longer the inventory is there, the more it will cost in upkeep. Carrying cost is usually expressed as a percentage that represents the cents per dollar that will be spent on inventory overhead per year. Or www.ism.ws/files/Pubs/Proceedings/BCHarding.pdf
Question # 7 of 15 Which of the following statement is TRUE regarding temporary working capital?
Fall 2010
Temporary working capital varies with seasonal requirements
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Temporary working capital is the constant component of working capital Temporary working capital excludes inventories Temporary working capital should be financed with bonds or common stock Ref: Temporary Working capital The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working capital required from time to time over and above the permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans OR http://www.tutorsonnet.com/homework_help/working_capital_management/pe rmanent_and_temporary_working_capital_online_tutoring.htm
Question # 8 of 15 Which of the following describes the hedging approach to financing?
Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion
Each asset is offset with a financing instrument of the same approximate maturity
Fall 2010
Each asset is offset with a put or call option.
Quizzes
The firm takes out insurance to protect itself against uneven cash flows.
Ref: provided by Zubair (Slide#17 of following link) http://wps.pearsoned.co.uk/wps/media/objects/1669/1709919/0273685988_ch08.pp t
Question # 9 of 15 If the Internal Rates of Return of two, mutually exclusive options are both greater than the cost of capital, which option should be selected under the Internal Rate of Return method?
The one with the largest Internal Rate of Return. (Damn sure) The one with the smallest Internal Rate of Return. The one with the highest Net Present Value at the firms cost of capital. None of the given options
Question # 10 of 15 Which of the following measures systematic risk of a firms common stock?
Beta
(PAGE 50)
CAPM MM-Model SML
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Question # 11 of 15 Which of the following is closely related to a sales budget?
Quizzes
Miscellaneous income Future profits Cash outflow Cash inflow
The master budget has two major parts including the operating budget and the financial budget (See Exhibit 9-4). The operating budget begins with the sales budget and ends with the budgeted income statement. The financial budget includes the capital budget as well as a cash budget, and a budgeted balance sheet
Question # 12 of 15 Which of the following is the correct definition for "spread" in cash management?
The difference between optimal cash balance and Nominal Cash balance The difference between opining cash balance and ending cash balance. The difference between upper limit and lower limit of cash balances The difference between optimal cash balance and ending cash balance Ref: Page#96 Graph
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Question # 13 of 15
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Which of the following statement is CORRECT regarding residual dividend policy?
Shareholders are paid dividend from capital Dividend are paid after meeting all the financial needs of the firm The management sets a fixed payout ratio Shareholders are paid fixed dividend every year Ref: Page#76 Residual Dividend Policy If a company does not pay all the profit to shareholders in the form of dividend then the debt equity ratio will change. In this section we will assume that company do have some potential opportunities and will finance these opportunities first and any remainder profit will be paid as dividend and the debt equity ratio will be held constant
Question # 14 of 15 Total Marks: 1 Since companies in some industries typically have high fixed costs, but have stable and predictable revenues. Which of the following statement would be TRUE about these companies?
Their degree of operating leverage is relatively low. Their bond issues would tend to have a speculative rating. Their overall business risk is relatively low. (Doubt)
Fall 2010
They are unable to take on much additional financial risk.
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Question # 15 of 15 Which of the following changes will occur if a bond's yield-to-maturity increases, keeping other things equal ?
Its price will rise Its price will remain unchanged Its price will fall. (Sure) Can not be determined
MC080204590 : Mudasar Ahmed Quiz
Question # 1 of 15 Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing:
A zero growth common stock. A positive growth common stock A short-term bond An option.
Ref: http://www.wattpad.com/73486?p=2
Question # 2 of 15 Which one of the following statements is TRUE regarding future value of a single sum?
Fall 2010
Increase if the interest rate increases. Remains unchanged if the interest rate changes Decrease if the interest rate increases All of the given options
Quizzes
Ref: http://www.getobjects.com/Components/Finance/TVM/fv.html
Example: You can afford to put $10,000 in a savings account today that pays 6% interest compounded annually. How much will you have 5 years from now if you make no withdrawals? PV = 10,000 i = .06 n=5 FV = 10,000 (1 + .06)5 = 10,000 (1.3382255776) = 13,382.26 End of Year 1 2 3 4 5
Principal
10,000.00 10,600.00 11,236.00 11,910.16 12,624.77
Interest
600.00
636.00
674.16
714.61
757.49
Total
10,600.00 11,236.00 11,910.16 12,624.77 13,382.26
Question # 3 of 15
Fall 2010
Quizzes
All of the following are the methods to evaluate the credit worthiness in business EXCEPT:
Market reputation Previous payment record Production plant capacity Financial strength Ref: Page#104 credit worthiness in business Financial statements of vendor Market reputation Banks Previous payment record Financial strength Capacity General economic conditions in vendors industry
Question # 4 of 15 What is the main purpose of constructing a portfolio of financial assets?
To maximize risk and minimize the return To minimize the risk and minimize the return To maximize the return and minimize the risk To minimize the return and minimize the risk
Fall 2010
Question # 5 of 15 Which of the following is tax deductible?
Quizzes
Dividend on preferred shares Dividend on common stocks Coupon payments on bonds Capital gain on common stocks
Question # 6 of 15 Inventory between various stages of production is known as:
Work in Process inventory Finished goods inventory Balanced goods inventory Raw materials inventory(Doubt)
Question # 7 of 15 Which of the following effects should be considered by a firm if it allows credit to its customers?
Cost of discount Arrange loans to finance short term operations Prices of goods All of the given options Ref: page#104
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Question # 8 of 15
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Which of the following is most relevant to a companys ability to pay off its shortterm obligation?
Dividend Policy Net working capital Operating Cycle Profitability Ref: Working Capital Working Capital is simply the amount that current assets exceed current liabilities. Here it is in the form of the equation: Working Capital = Current Assets - Current Liabilities This formula is very similar to the current ratio. The only difference is that it gives you a dollar amount rather than a ratio. It too is calculated to determine a firm's ability to pay its short-term obligations. Working Capital can be viewed as somewhat of a security blanket. The greater the amount of Working Capital, the more security an investor can have that they will be able to meet their financial obligations. OR http://sites.google.com/site/sumitdeole2/analysis
Question # 9 of 15 Which of the following is prepared by combining all the functional budgets?
A production budget
Fall 2010
A cash budget A sales budget A master budget Ref:
Quizzes
Question # 10 of 15 Which of the following should be ignored, while evaluating the financial viability of a project?
Initial cost Equipment cost Cost of capital Sunk cost
Ref: http://www.scribd.com/doc/18688564/A-Note-on-the-Financial-Evaluationof-Projects
Question # 11 of 15 A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the companys stock?
14% 13% 12% 10%
Fall 2010
Ref: r = DIV1/P0 + g = 8% + 5% = 13%
Quizzes
Question # 12 of 15 Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets are $8 million, and ROI is 8 percent.
1.60 2.05 2.50 4.00
Ref: (ROI) / (NPM) = TAT (.08) / (.05) = 1.6
Question # 13 of 15 Which of the following condition if exist will make the diversification more effective?
Fall 2010
Ref:
Quizzes
http://www.stockexchangesecrets.com/portfolio-diversification.html OR The most effective portfolio diversification will come from making investments that show negative correlation to each other. However, simply by investing in companies who show returns that are not correlated perfectly to each other, the risk in the portfolio will be lower than the associated risk of any individual stock.
Question # 14 of 15 Which one of the following is a major limitation of Linear Programming Technique of capital projects selection?
Ignores the relative size of the Investment (slide 14) Time value of money is not considered Project cash flows are ignored Project profitability is ignored
Question # 15 of 15 Holding everything else constant, increasing fixed costs ________ the firm's breakeven point.
Decreases Increases the covariance of Increases(Doubt) Does not affect
Fall 2010
Constant payout ratio policy Hybrid Dividend policy Residual Dividend policy Stable dividend policy
Quizzes
In which of the following dividend policy, the amount of dividend is relatively fixed?
The present value of Rs.5,000 received at the end of 5 years, discounted at 10 percent, is closest to: Rs.3,105. Rs.823. Rs.620. Rs.3,403.
Which of the following is the correct definition for "spread" in cash management? The difference between optimal cash balance and Nominal Cash balance The difference between opining cash balance and ending cash balance. The difference between upper limit and lower limit of cash balances The difference between optimal cash balance and ending cash balance Which of the following method can be used to forecast the sales of a firm? Price earning ratio Cash flow estimation Fundamental Analysis Regression Analysis
Suppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on the stock? Select correct option: 2% 3%
Fall 2010
4% 5%
Quizzes
Which of following are two most likely motives in explaining why firms hold cash? Speculative motive and the precautionary motive Transactions motive and the speculative motive. Precautionary motive and the managerial entrenchment motive. Transactions motive and the precautionary motive.
Suppose you wish to set aside Rs.2,000 at the beginning of each of the next 10 years (the first Rs.2,000 deposit would be made now) in an account paying 12 percent compounded annually. Approximately how much will you accumulate at the end of 10 years? Select correct option: Rs.22,863 Rs.35,097 Rs.39,310 Rs.25,151 Which of the following condition if exist will make the diversification more effective? Securities contained in a portfolio are positively correlated Securities contained in a portfolio are negatively correlated Securities contained in a portfolio have high market values Securities contained in a portfolio have low market values
Which of the following methods would be most suitable for selecting capital project (s) in case of multi-period capital rationing? Simple payback period Discounted payback period Multiple Internal Rate of Return Linear Programming
Fall 2010
Quizzes
Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1 percent? 20-year, zero coupon bond. 10-year, zero coupon bond. 20-year, 10 percent coupon bond 20-year, 5 percent coupon bond.
Please choose one Which of the following is TRUE regarding optimal capital structure? An optimal capital structure refers to the mix of debt and equity level where the firm has minimum cost of capital An optimal capital structure refers to the mix of debt and equity level where the firm has minimum financial leverage An optimal capital structure refers to the mix of debt and equity level where the firm has maximium cost of capital An optimal capital structure refers to the mix of debt and equity level where the firm has high financial leverage Which of the following statement is true? WACC of a levered firm is greater than that of an un-levered firm WACC of a levered firm is lesser than that of an un-levered firm WACC of a levered firm is equal to that of an un-levered firm An Un-levered firm has zero WACC. Which of the following is a measure of risk of an asset? Weighted average Standard deviation Probability distribution Geometric mean Which of the following would NOT improve the current ratio? Borrow short term to finance additional fixed assets. Issue long-term debt to buy inventory Sell common stock to reduce current liabilities. Sell fixed assets to reduce accounts payable.
Fall 2010
Quizzes
Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back ___________ to the analysis. The cost of fixed assets The cost of accounts payable Investments Depreciation A dividend payment made in the form of additional shares, rather than a cash payout is known as: Stock Dividend Cum Dividend Ex Dividend Extra Dividend In inventory management, the storage cost of inventory is considered as: Carrying cost Reorder cost Stock out cost Safety cost (DOUBTED)
Question # 11 of 15 ( Start time: 06:13:11 PM ) Total Marks: 1 All of the following factors must be considered, while making short-term investment EXCEPT: Liquidity Safety Profitability Inventory
According to the Miller Orr Model, upper limit for cash balance is equal to: Lower limit + Spread Spread Lower limit
Fall 2010
Optimal limit + Lower limit Lower limit Spread (zh,www.Expertss.net)
Quizzes
Which of the following firm may be considered as a pure play in the beverages industry in Pakistan? Coca Cola Pepsi Shezan All of the given options
A Pure Play method of selecting a discount rate is most suitable in which of the following situations?
When the intended investment project belongs to industry other than the firms operating in When the intended investment project has a conventional stream of cash flows When the intended investment project has a Non-conventional stream of cash flows When the intended investment project is a replacement project
Which one of the following statements describes the relationship between Interest rates and bond prices?
Fall 2010
Quizzes
Move in the same direction. Move in opposite directions Sometimes move in the same direction, sometimes in opposite directions Have no relationship with each other (i.e., they are independent).
The formula for the break-even quantity of output (QBE), given the price per unit (P), fixed costs (FC), and variable cost per unit (V), is: QBE = (P - V)/FC. QBE = (P/FC) - V. QBE = (FC/P) - V. QBE = FC/ (P - V).
Which one of the following statements best describes the intrinsic value of a stock? Intrinsic value of a stock is the future value of all expected future dividends, discounted at the dividend growth rate. Intrinsic value of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. Intrinsic value of a stock is the future value of all expected future dividends, discounted at the investors required return. Intrinsic value of a stock is the present value of all expected future dividends, discounted at the investors required return.
A risk free asset has a Beta value equal to: 0 1 2 3
Which of the following is the average time period between buying inventory and receiving cash proceeds from its eventual sale? Operating Cycle Cash Cycle Inventory period Inventory Turnover
Fall 2010
Quizzes
Spread variation does NOT depend on which of the following factors? Variance of cash flows Transaction cost (not sure) Interest rate Expected cash flow
You have calculated that the required rate of return on a particular common stock is less than the expected rate of return. Therefore, you would conclude: Select correct option: That the stock is more risky than the market portfolio. Page 57 That an investor should buy the stock. That the stock has a high dividend payout ratio. That an investor should sell the stock.
If the Internal Rates of Return of two, mutually exclusive options are both greater than the cost of capital, which option should be selected under the Internal Rate of Return method? Select correct option: The one with the largest Internal Rate of Return. The one with the smallest Internal Rate of Return. The one with the highest Net Present Value at the firms cost of capital. None of the given options
Which of the following is determined by variance of an investment's returns? Select correct option: Volatility of the rates of return. Probability of a negative return.
Fall 2010
Historic return over long periods. Average value of the investment
Quizzes
If you deposit $12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%, what will your account be worth at the end of 16 years? Select correct option: $82,168.44 $71,450.82 $768,901.12 $668,609.67
Virgo Airlines will pay Rs.4.00 dividend next year on its common stock, which is currently selling at Rs.100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever? Select correct option: 4 percent. 5 percent. 7 percent. 9 percent.
Which of the following shows the reward to risk ratio of a security A ? Select correct option: Expected return of A (rA) Risk free return / Beta of A Expected return of A (rA) Risk free return / required return of A Expected return of A (rA) Beta of A / Risk free return Risk free return - Expected return of A (rA)/ Beta of A
If two projects are independent, that means that _________. Select correct option: Selection of one precludes selection of the other. You should analyze the projects independently. Both the given options may apply None of the given options
Fall 2010
The pattern of cash borrowing needs of the firm. The difference between long-term and short-term interest rates. The ratio of cash to marketable securities. The debt maturity schedule.
Quizzes
When the firm considers working capital management, the trade off between risk and return is NOT affected by which of the following?
If you invest Rs.400 today in a savings account paying 8 percent interest per year, how much will you have in the account at the end of three years if the interest is compounded annually? Select correct option: Rs.325 Rs.1,299 Rs.504 Rs.609
A dividend payment made in the form of additional shares, rather than a cash payout is known as: Select correct option: Stock Dividend Cum Dividend Ex Dividend Extra Dividend
Which of the following describes the hedging approach to financing? Select correct option: Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion Each asset is offset with a financing instrument of the same approximate maturity.
Fall 2010
Quizzes
Each asset is offset with a put or call option. The firm takes out insurance to protect itself against uneven cash flows.
Suppose that market now requires an 8 percent return for a bond that was issued some years ago with a 10 percent coupon. This bond will currently be priced: Select correct option: At a premium over face value. At par value. At a discount from face value. At face value.
Which of the following focuses on long-term decision-making regarding the acquisition of projects? Working Capital Management Capital Budgeting Cash Budgeting None of the given options
Which one of the following transactions take place in a primary financial market? Initial Public Offering Buying Mutual Funds Certificates Selling old shares Buying Bonds issued in previous year
Which of the following factor determines the financial viability of a project? Future Profits Future Cash flows
(not sure)
Fall 2010
Sunk Cost None of the given option
Quizzes
Which of the following is the Dividend Payout ratio for a common stock? Select correct option: Dividend per share: Market value per share Earning per share: Intrinsic value per share Dividend per share: Earning per share (not sure) Market value per share: intrinsic value per share
Which of the following best define the term 'Capital Structure'? Select correct option: The proportion of debt and equity capital used by a firm The proportion of long-term liabilities used by a firm The proportion of equity used by a firm The proportion of short-term bank loan used by a firm
Holding everything else constant, increasing fixed costs ______ the firm's breakeven point. Select correct option: Decreases Increases the covariance of Increases Does not affect
Which one of the following statements is TRUE regarding future value of a single sum? Increase if the interest rate increases. Remains unchanged if the interest rate changes Decrease if the interest rate increases All of the given options are correct (not sure)
Quiz 04 Spring Semester 2009 solved by Expertss team
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1. a. b. c. d.
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Which of the following statements is TRUE regarding Profitability Index? It ignores time value of money It ignores return on investment It ignores future cash flows It ignores the scale of investment
2. Which of the following terms refers to the process of systematic investigation of the effects on estimates or outcomes of changes in data or parameter inputs or assumptions to evaluate a capital project? a. Sensitivity Analysis b. Fundamental Analysis c. Technical Analysis d. Trend Analysis 3. Holding everything else constant, increasing fixed costs ________ the firm's break-even point. a. Decreases b. Increases c. Increases the covariance of d. Does not affect 4. A company has fixed costs of $50,000 and variable costs per unit of output of $8. If its sole product sells for $18, what is the break-even quantity of output? a. 2,500 b. 1,500 c. 5,000 d. 7,500 5. If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then which of the following recommendations should be considered? a. Fixed costs should be traded for variable costs b. Variable costs should be traded for fixed costs c. The project should not be undertaken d. Additional marketing analysis may be beneficial before proceeding
6. Which of the following best illustrates the problem imposed by capital rationing? a. Bypassing projects that have positive NPVs b. Accepting projects with the highest NPVs first c. Accepting projects with the highest IRRs first d. Bypassing projects that have positive IRRs
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7. a. b. c. d.
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Which of the following may be a major reason for hard capital rationing? Dilution of earning per share (EPS) High interest rate High interest expense Company own policies
8. The percentage change in a firm's operating profit (EBIT) resulting from a 1% change in output (sales) is known as the ________. a. Degree of profit leverage b. Degree of operating leverage c. Degree of total leverage d. Degree of financial leverage 9. Which of the following is a major limitation of Linear Programming Technique of capital projects selection? a. Time value of money is not considered b. Ignores the relative size of the Investment c. Project cash flows are ignored d. Project profitability is ignored 10. Which of the following methods would be most suitable for selecting capital project(s) in case of multi-period capital rationing? a. Simple payback period b. Linear Programming c. Discounted payback period d. Multiple Internal Rate of Return
for more contents visit http://groups.google.com/group/Expertss 11. What is the main purpose of constructing a portfolio of financial assets? a. b. c. d. To maximize risk and minimize the return To maximize the return and minimize the risk To minimize the risk and minimize the return To minimize the return and minimize the risk
12. Suppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on the stock?
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a. b. c. d. 2% 3% 4% 5%
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13. Which of the following measures systematic risk of a firms common stock? a. CAPM b. Beta c. MM-Model d. SML 14. Which of the following is known as market portfolio? a. A portfolio consists of all risk free securities available in the market b. A portfolio consists of all securities available in the market c. A portfolio consists of securities of the same industry d. A portfolio consists of all aggressive securities available in the market 15. A market portfolio has a beta equal to: a. 0 b. 1 c. 2 d. 3 16. Which of the following shows the reward to risk ratio of a security A? a. Expected return of A (rA) Risk free return / required return of A b. Expected return of A (rA) Risk free return / Beta of A c. Expected return of A (rA) Beta of A / Risk free return d. Risk free return - Expected return of A (rA)/ Beta of A 17. In which of the following conditions a stock is said to be overvalued? a. If the stock has market value less than the expected value b. If the stock has market value equal to the expect value c. If the stock has market value more than the expected value d. If the stock has market value less than its intrinsic value 18. Which of the following statements applies to Dividend Growth Model? a. It is difficult to understand and use b. It do not consider risk level of a security c. It is used for non-listed companies d. It is used for debt securities also 19. Which of the following is the principal advantage of high debt financing? a. Low bankruptcy costs b. Tax savings
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c. Minimum financial risk d. Low financial leverage
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20. Which of the following is a disadvantage of Capital Asset Pricing model? a. It consider market risk b. It is based on past data c. It can be used for listed companies d. It can be used for non-listed companies
1-Which of the following is the principal advantage of high debt financing? Select correct option: Tax savings Low bankruptcy costs Minimum financial risk Low financial leverage 2-Which of the following is tax deductible? Select correct option: Dividend on preferred shares Dividend on common stocks Coupon payments on bonds Capital gain on common stocks 3-Which of the following describes the hedging approach to financing? Select correct option: Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion Each asset is offset with a financing instrument of the same approximate maturity. Each asset is offset with a put or call option. The firm takes out insurance to protect itself against uneven cash flows. http://wps.pearsoned.co.uk/wps/media/objects/1669/1709919/0273685988_ch0 8.ppt 4-Which one of the following transactions take place in a primary financial market? Select correct option: Initial Public Offering Buying Mutual Funds Certificates Selling old shares Buying Bonds issued in previous year
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5-Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year. Which of the following could explain this performance? Select correct option: The companys taxes increased. The companys depreciation expense declined. The companys operating income declined. All of the given statements are correct 6-Which of the following changes will increase the Net Present Value (NPV ) of a project? Select correct option: A decrease in the discount rate A decrease in the size of the cash inflows An increase in the initial cost of the project A decrease in the number of cash inflows 7-Which of the following technique of stock evaluation considers quantitative factors as well as qualitative factors for valuation? Select correct option: Technical Analysis Fundamental Analysis Constant Growth Model No Growth Model 8-The formula for the break-even quantity of output (QBE), given the price per unit (P), fixed costs (FC), and variable cost per unit (V), is: Select correct option: QBE = (P - V)/FC. QBE = (P/FC) - V. QBE = (FC/P) - V. QBE = FC/ (P - V). 9-With respect to Cash flow statement, Decrease in current liability would be considered as a: Select correct option: Cash outflow Cash inflow Sometimes as cash inflow and sometimes as cash outflow Cannot be determined
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10-Which of the following statement is CORRECT regarding residual dividend policy? Select correct option: Shareholders are paid dividend from capital Dividend are paid after meeting all the financial needs of the firm The management sets a fixed payout ratio Shareholders are paid fixed dividend every year 11-Which of the following focuses on long-term decision-making regarding the acquisition of projects? Select correct option: Working Capital Management Capital Budgeting Cash Budgeting None of the given options 12-Which of the following is determined by variance of an investment's returns? Select correct option: Volatility of the rates of return. Probability of a negative return. Historic return over long periods. Average value of the investment Rationale:Standard deviation is calculated as the square root of variance.Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.
1. A firm wants to acquire another firm by purchasing its assets. Which of the following method could the firm use to evaluate the financial aspects of this deal? a. b. c. d. Breakup value method Dividend valuation method Present value method Price earning ratio method
2. Which of the following is a major limitation of an income based method of share valuation? a. Future growth assumptions b. Estimation of future cash flows
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c. Future cash flow valuation d. Future cash flow discounting
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3. All of the following are related to an income based method of shares valuation EXCEPT? a. b. c. d. Future cash flows Future growth Discount rate Book values
4. Which of the following statement applies to employees buyout? a. b. c. d. Employees are promoted to the higher positions Employees are given more responsibilities Employees buy majority shares in the firm Employees buy shares of a competing firm
5. Management of a firm prefers buyout because of the following reason? a. b. c. d. The company is selling at below the market price The company has good future prospects Company offers good product Companys management could change
6. Which of the following could be a major disadvantage of an LBO? a. b. c. d. The acquired firm would have a high interest expense The acquired firm would have a high operating cost The acquired firm would have a high manufacturing cost The acquired firm would have a high operating risk
7. In which of the following acquisition strategy, a purchaser has complete knowledge of the acquiring firm? a. b. c. d. Management Buy-In Management buyout Consolidation Amalgamation
8. Which of the following would be an example of an MBO? a. Management of a firm-A purchases majority shares from the shareholders
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b. Management of a firm-A acquires majority shares in another firm-B c. Management sale out some assets of the firm d. Management buy some new plants and machinery 9. All of the following could be an outcome of financial distress of a firm EXCEPT? a. b. c. d. Employees are leaving the firm Suppliers refuse to supply on credit Banks do not provide loans Financial markets become instable
10. Choose the correct statement? a. The price at which a FX dealer will sell a variable currency is called offer price b. The price at which an FX dealer will buy the base currency is called bid price c. The price at which an FX dealer will sell a variable currency is called bid price d. The price at which an FX dealer will sell a base currency is called bid price 1. According to the Capital Asset Pricing Model (CAPM), which of the following represent the amount of compensation the investor needs for taking on additional risk? a. b. c. d. ( rM - rF) ( rM-+rF) rF (rM - rF)
2. Which of the following is measured by Beta ( ) of a security. a. b. c. d. Systematic risk of the security Unsystematic risk of the security Market risk premium of the security Expected return of the security
3. If the risk-free rate is 3%, the beta (risk measure) of a stock is 2 and the expected market return over the period is 10%, according to the CAPM the expected return of the stock would be a. b. c. d. 17% 20% 29% 15%
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4. Which of the following statement is correct with respect to a company heavily financed by debt? a. b. c. d. The company has a higher level of risk The company has high cost of capital The company is unable to meet its debt obligations The company can not issue common shares
5. Which of the following represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership? a. b. c. d. Market risk Premium A firms Cost of debt Risk free rate of return A firms Cost of equity
6. Which of the following will decrease the cost of debt? a. b. c. d. 7. a. b. c. d. A decrease in the tax rate A decrease in Current Liability An increase in the tax rate An increase in Current Assets The purpose of Weighted Average Cost of Capital is to measure: The cost of debt The cost of equity The cost of capital The cost of sales
8. A companys after-tax cost of debt is 3%, if the companys marginal tax rate were 40% what would be its before-tax cost of debt? a. b. c. d. 5% 3% 1.80% 2%
9. Which of the following is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm?
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a. b. c. d. Cost of Debt Cost of Equity Weighted Average Cost of Capital Cost of Retained earning
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10. Which of the following measure compares the risk of an unlevered company to the risk of the market? a. b. c. d. Ungeared Beta Geared Beta Portfolio Beta Stock Beta
1. For the statement of cash flows, which of the following is considered a cash flow item from investing activities? A) Cash inflow from borrowing B) Cash outflow to acquire fixed assets C) Cash outflow to government for taxes D) Cash inflow from dividend income
2. Expected changes in capital expenditures and firm dividend policy during the next year are both likely to influence ________. A) Cash receipts of the firm B) Cash disbursements of the firm C) Earned (receipts) from Treasury bills held by the firm D) Disbursements to holders of the firm's 10-year, 8% fixed rate bonds
3. The key to the accuracy of the cash budget is: A) The sales forecast. B) The expenses forecast. C) The inventory control method used. D) The seasonality of cash flows.
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4. When working capital management is discussed, ________ and ________ tend to be thought of as forms of spontaneous financing. A) Short-term debt, cash B) Accounts payable, accruals C) Accounts payable, short-term debt D) Accruals, cash 5. Short-term financing is riskier than long-term financing because: A) Short-term interest rates fluctuate; long-term rates do not. B) Short-term debt must be refunded more frequently than long-term debt. C) Short-term interest rates are usually higher than long-term interest rates. D) The amount of money that can be raised by short-term borrowing is much less than the amount that can be raised long-term. 6. Which of the following describes the hedging approach to financing? A) Maturity dates of financing instruments are staggered so that they mature in a steady, predictable fashion. B) Each asset is offset with a financing instrument of the same approximate maturity. C) Each asset is offset with a put or call. D) The firm takes out insurance to protect itself against uneven cash flows. 7. When the firm considers working capital management, the trade off between risk and return is affected by all of the following except A) The pattern of cash borrowing needs of the firm. B) The difference between long-term and short-term interest rates. C) The ratio of cash to marketable securities. D) The debt maturity schedule. 8. Firms with more certain cash flow patterns can operate with: A) A higher level of accounts receivable to inventories. B) A lower proportion of long-term to short-term debt. C) A lower proportion of liquid to total assets. D) A higher proportion of liquid to total assets.
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9. An increase in the firm's receivable turnover ratio means that ________. A) It has initiated more liberal credit terms with no increase in sales B) It is collecting credit sales more quickly than before C) Cash sales have decreased D) Inventories have increased 10. The largest single source of short-term financing for businesses collectively is A) Commercial paper. B) Trade credit. C) Bank loans. D) Trade acceptances.
1. Diversification eliminates unique risk. But there is some risk that diversification can not eliminates. This is called as: 1. Market Risk 2. Systematic Risk 3. Unsystematic Risk 4. All of the given options
1.
_____________ arises due to internal factors. 1. Hard Rationing 2. Soft Rationing 3. Single period rationing 4. All of the given options
1. _____________ is a technique which indicates how much a projects NPV will change in response to a given change in an input variable, other things held constant. 1. Break Even Analysis 2. Degree of Operating Leverage 3. Sensitivity analysis 4. Scenario analysis
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1. Which of the following is advance tool of Project Evaluation? 1. Net Present value NPV 2. Internal Rate of Return IRR 3. Pay Back Period Method 4. Sensitivity analysis
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1. In case of more than one project, the project with ______ NPV can be undertaken. 1. Low 2. Higher 3. Moderate 4. zero 1. A firm collects 70 percent of its credit sales in 30 days, 20 percent in 60 days, and 10 percent in 90 days. The average collection period is: A) 33 days. B) 56 days. C) 47 days. D) 42 days. 2. A more aggressive financing policy by a firm would lead to ________ profitability and ________ risk. A) higher, lower B) higher, higher C) lower, higher D) lower, lower 3. Financial data for three firms is presented below. Each differs only with respect to philosophy on an aggressive vs. a conservative approach to current asset management. FIRM A FIRM B FIRM C Sales $2,000,000 $2,000,000 $2,000,000 EBIT 200,000 200,000 200,000 Current Assets 600,000 500,000 400,000 Fixed Assets 500,000 500,000 500,000 Total Assets 1,100,000 1,000,000 900,000 The firm with the least aggressive philosophy has an asset turnover of A) 3.33-to-1. B) 2.22-to-1.
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C) 5.00-to-1. D) 1.82-to-1. 4. Temporary working capital A) Varies with seasonal requirements. B) is the constant component of working capital. C) excludes inventories. D) should be financed with bonds or common stock.
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5. Which of the following would be consistent with a more aggressive (i.e., a high risk-profitability) approach to financing working capital? A) Financing permanent inventory buildup with long-term funds. B) Financing seasonal needs with short-term funds. C) Financing short-term needs with short-term funds. D) Financing some long-term needs with short-term funds 6. When the firm considers working capital management, the trade off between
risk and return is affected by all of the following except A) The pattern of cash borrowing needs of the firm. B) The difference between long-term and short-term interest rates. C) The ratio of cash to marketable securities. D) The debt maturity schedule.
7. A good cash management system involves properly managing A) Collections, disbursements, cash balances, and capital investment. B) Collections, disbursements, cash balances, and marketable securities investment. C) Only collections, disbursements, and cash balances. D) Only collections and disbursements. 8. The International Co. is holding cash as a buffer in case of an unexpected need with operations. This is an example of the ________ motive for holding cash. A) Precautionary B) Speculative C) Transactions D) Capital needs 9. A competing firm has made a hostile offer for your corporation. You have invited a second firm to make a friendly counter-bid to thwart the unwelcome
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hostile offer from the original bidding firm. The second firm is known as a (an) ________. A) White knight B) Entrenchment firm C) Pure-play firm D) Counter-offer firm 10. A leveraged buyout A) is an ownership transfer financed largely by debt. B) is facilitated by rising interest rates. C) usually involves a labor-intensive business. D) results in a publicly held corporation.
1. When calculating a project's annual cash flows, which of the following is not directly included? A) The reduction in taxes attributable to sale of an asset for less than its book value B) The tax incurred when the trade-in value of the old asset exceeds its book value C) The reduction in taxes attributable to depreciation charges D) Depreciation expense 2. The basic characteristics of relevant project flows include all of the following except A) After-tax flows. B) Cash flows. C) Incremental flows. D) Financing flows. 3. Project GROW will require $250,000 to purchase new machinery. Capitalized expenditures total $40,000. The new machine will require that the firm purchase some additional inventory which will result in an increase in net working capital of $50,000. What is the initial cash outflow? A) $300,000 B) $350,000 C) $270,000 D) None of the above are correct. 4 In analyzing a long-term investment proposal, A) Include opportunity costs. B) Include before-tax interest payments. C) Include after-tax interest payments. D) Include sunk costs.
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5.The Pink Pussycat Lounge is considering replacing its lighting system. The new lights will cost $16,000 and can be installed for $2,500. The old light fixtures were depreciated to zero but can be sold to Secondhand Sam for $1,000. If the Pink Pussycat has a 35 percent tax rate, the initial cash outflow for the new lighting system is A) $18,500. B) $16,000. C) $17,500. D) $17,850.
6. A company is considering a project costing $50,000. The hurdle rate is 9 percent and the project is expected to yield an ordinary annuity for 10 years. The annual annuity must be at least ________ for the project to be accepted. A) $9,231 B) $8,321 C) $8,667 D) $7,791 7. Your firm is considering two mutually exclusive projects, code-named A and B, that would each require an initial cash outflow of $10,000. They would generate the following incremental, after-tax, operating cash flows: Project A Year 1 $5,000 Year 2 4,000 Year 3 3,000 Project B $3,000 4,000 6,000
If the firm's required rate of return is 14 percent, which would you select? A) Neither project because neither adds value to the firm. B) Project A because it has the higher net present value. C) Project B because it has the higher internal rate of return. D) Project A because it has the shorter payback period.
8. A proposed investment project requires an initial cash outflow of $82,650 and has an economic life of three years, with no salvage value. It is expected to generate before tax cash flows of $45,000 for each of the three years. The firm's tax rate is 30 percent. Which of the following is closest to the project's internal rate of return? A) 30 percent B) 7 percent
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C) 40 percent D) 12 percent
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9.The initial cost of a conventional project is $14,000. The present value of the project's cash inflows, discounted at 12 percent, is $12,500. The internal rate of return is A) Less than 12 percent. B) Greater than 12 percent. C) Equal to 12 percent. D) Cannot tell without additional information 10. Hi Lighter, Inc., is considering a project with an initial investment of $25,000 that generates cash-inflows of $10,000 per year for 8 years starting today. What is the net present value of this project if the firm requires a 15% rate of return on this project? (Choose the nearest figure.) A) $22,854 B) $19,873 C) $1,152 D) $55,000
Question No: 1 Which of the following is an expected rate of return on a bond if bought at its current market price and held to maturity? Yield to maturity Current yield Coupon yield Capital gains yield Reference: PAGE # 18 Yield to Maturity: The yield to maturity (YTM) is the discount rate which returns the market price of the bond. It is thus the internal rate of return of an investment in the bond made at the observed price. YTM can also be used to price a bond, where it is used as the required return on the bond. OR http://web.utk.edu/~jwachowi/mcquiz/mc4.html
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Lowering direct cost Increasing variable cost Increasing direct cost Lowering sales price Reference: PAGE #39 Ways to Lower Break-Even:
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Question No: 2 A firm can lower its breakeven level by doing which of the following actions?
There are three ways to lower your break-even volume, only two of them involve cost controls (which should always be your goal on an ongoing basis). 1. Lower direct costs, which will raise the gross margin. Be more diligent about purchasing material, controlling inventory, or increasing the productivity of your labor by more cost effective scheduling or adding more efficient technology. 2. Exercise cost controls on your fixed expense, and lower the necessary total dollars. Be caReferenceul when cutting expenses that you do so with an overall plan in mind. You can cut too deeply as well as too little and cause distress among workers, or you may pull back marketing efforts at the wrong time, which will give out the wrong signal. 3. Raise prices! Most entrepreneurs are reluctant to raise prices because they think that overall business will fall off. More often than not that doesnt happen unless you are in a very price-sensitive market, and if you are, you really have already become volume driven. Question No: 3 Which one of the following statements applies to Dividend Growth Model? It is difficult to understand and use It is used for non-listed companies It is used for debt securities also It do not consider risk level of a security Reference: PAGE # 60 This approach does not take into account the risk level. There is no direct adjustment for the risky ness of the investment. For instance, there is no adjustment for the degree of certainty or uncertainty in estimated growth rate for dividends
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Question No: 4 Which of the following Referenceers to a stock issuance process where a company offers its shares to a limited number of investor?(Expertss) Initial Public Offering Private Placement Direct Public Offering Primary Offering Reference: The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market OR http://www.investopedia.com/terms/p/privateplacement.asp Question No: 5 Which of the following is the principal advantage of high debt financing? Tax savings Low Bankruptcy costs Minimum financial risk Low financial leverage Reference: PAGE # 72 M & M model says that debt financing increases the value of firm due to tax shield. Question No: 6 Which of the following firms would have the highest financial leverage? A firm having debt-to-equity ratio of 30:70 A firm having debt-to-equity ratio of 40:60 A firm having debt-to-equity ratio of 50:50 A firm having debt-to-equity ratio of 60:40 Reference:
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In above McQ Debt = 60 and Equity = 40 Financial Leverage
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The amount of debt in capital structure of a firm is known as financial leverage. In other words, how a firm utilizes the amount of debt. The more debt in capital structure, there is greater financial leverage. The debt-to-equity ratio is total debt divided by total equity: Debt-to-Equity Ratio = Total Debt/Total Equity Question No: 7 In which of the following dividend policies, the amount of dividend is relatively fixed? Constant payout ratio policy Hybrid dividend policy Residual dividend policy Stable dividend policy Reference: A constant payout ratio policy is a policy of paying a FIXED percentage of a firms earnings as dividends in each period. Such a policy is likely to result in wildly fluctuating dividends. As a result, only a small percentage of dividend paying firms follow such a policy Question No: 8 Which of the following serves as a starting point for preparing functional budgets of a firm? Sales budget Master budget Production cost budget Cash budget Reference:
The master budget has two major parts including the operating budget and the financial budget (See Exhibit 9-4). The operating budget begins with the sales budget and ends with the budgeted income statement. The financial budget
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includes the capital budget as well as a cash budget, and a budgeted balance sheet Question No: 9 A company is holding cash as a buffer in case of an unexpected need with operations. This is an example of the ________ motive for holding cash.(Expertss) Precautionary Speculative Transactions Capital needs Reference: PAGE # 94 Motives for Cash holding Transactions Motive ensures that the firm has enough funds to transact its routine, day-to-day business affairs. Safety Motive protects the firm against being unable to meet unexpected demands for cash. Speculative Motive allows the firm to take advantage of unexpected opportunities that may arise Note: Precautionary = Safety Motive OR
Three Motives for Holding Cash In his publication on The General Theory of Employment, Interest, & Money, Keynes outlined three reasons, or motives, for holding money or cash: Transaction Motive - cash is held to pay for goods or services. It is useful for conducting our everyday transactions or purchases. Precautionary Motive - cash is a relatively safe investment. Cash investments rarely lose value (as can stocks or bonds) and are theReferenceore held for safety reasons in a balanced portfolio. Asset or Speculative Motive - cash investments provide a return to their holders. http://www.money-zine.com/Investing/Investing/Holding-Cash/
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OR Below Referenceerence is provided by Ijaz http://www.theglobaltutors.com/HomeworkHelp/subjects.aspx?topic=575&cateid=19
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Question No: 10 Which of the following is an "income based method" for share valuation of a target firm? Replacement cost method Break up value method Dividend valuation method Accumulated depreciation method Reference: PAGE #115 We may employ following valuation methods for unquoted shares. We divide them into two Broad categories: Income based approach: - Present value method - Dividend valuation - P/E ratio Question No: 11 Which of the following is a re-structuring strategy in which employees buy a majority share in their own firm? Employee Dividend Scheme Employee Buyout Employee Empowerment Leverage Buyout Reference: PAGE # 124 Employee Buyout EBO A restructuring strategy in which employees buy a majority stake in their own firms. This form of buyout is often done by firms looking for an alternative to a
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leveraged buyout. Companies being sold can be either healthy companies or ones that are in significant financial distress. Question No: 12 All of the following could be the reasons for a subsidiary buyout EXCEPT: The parent company is in financial distress The parent company needs cash The parent company pReferenceers to sell the firm rather that liquidation The parent company wants liquidation Reference: PAGE # 124 The existing parent company of the victim firm may wish to dispose of it. The parent company may be caught up in financial distress and is in acute need of cash and liquidity. The subsidiary on the other hand, is not strategically fit with parents overall business strategy. Question No: 13 A firm has to pay $10,000 to an American company after three months. The firm enters into a contract with a foreign exchange dealer to buy $10,000 after three months at Rs.61/US$. This contract would be beneficial for the firm if: After three months the exchange rate is Rs.60/US$ After three months the exchange rate is Rs.61/US$ After three months the exchange rate is Rs.62/US$ After three months the exchange rate is Rs.59/US$ Reference: Explanation A company enters into a contract to buy x dollars after 3 months at an exchange rate of Rs 61/ US $ decided now. At the maturity date both parties have to honor their respective commitments of buying and selling of US $ at agreed rates. Now if on the maturity date, the spot ex rate is Rs 62/US $, (PKR weakened against US $), then the company has actually eliminated the loss and benefited financially. However, if the spot rate on maturity date is Rs. 60/US $, (contrary to its estimation of weak local currency, local currency strengthened) then the company has missed the opportunity to benefit from this favorable sport rate.
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Question No: 14 A firm can fix effective interest rate on short-term borrowings by doing which of the following? Buying a forward rate agreement Selling a forward rate agreement Borrowing local currency Borrowing base currency Reference: PAGE # 137 Forward rate agreement (FRA) FRA offer companies the facility to fix future interest today either on short-term borrowing or deposit for an agreed future period. An effective interest rate can be fixed on future short-term borrowing by buying an FRA. Alternatively, An effective interest rate can be fixed on short-term deposit or investment by selling FRA. Question No: 15 A firm can fix effective interest rate on its short-term investment to be made at some future date by doing which of the following? Borrowing local currency Borrowing base currency Selling a forward rate agreement Buying an forward rate agreement Reference: PAGE # 137 Forward rate agreement (FRA) FRA offer companies the facility to fix future interest today either on short-term borrowing or deposit for an agreed future period. An effective interest rate can be fixed on future short-term borrowing by buying an FRA. Alternatively,
Fall 2010
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An effective interest rate can be fixed on short-term deposit or investment by selling FRA Question No: 16 A company may create a hedge through interest rate futures if it intends to make some investment for a short-term at some future date, because of: Fall in short-term interest rates (Doubt) Fall in short-term deposit rates Increase in short-term interest rates Increase in short-term deposit rates Reference: PAGE # 139 The hedge can be created by buying short-term interest future. Future position should be closed when actual deposit period begins by selling the same number of interest rate futures. If interest rate rise, price will fall, loss will incur. If interest rate fall, price will rise, profit will be generated. Question No: 17 Which one of the following statements is CORRECT regarding Option? An option creates an obligation for the holder An option creates a right and not the obligation for the holder Option seller is the option holder Option writer is the option holder Reference: PAGE # 139 Options: An option is a contract that confers a right to buy or sell a specific quantity or asset but not the obligation, at agreed price on or before the specified future date. Question No: 18 Which one of the following statements is CORRECT regarding Options Contacts? A put option gives the holder a right to sell underlying item at a specified price A put option gives its writer the right to sell underlying item at a specified price A call option gives its writer a right to sell underlying item
Fall 2010
A call option gives its holder a right to sell underlying item Reference: PAGE # 139 Features of Options: It is a contractual agreement.
Quizzes
The holder of option exercises his/her right only if it is in his/her favors. Option writer is seller and must honor his side of contract. (Sell or buy at agreed price). Options like futures are standardized transaction in terms of size & duration. Options are Exchange traded These agreements are easy to buy & sell Options either are call options or put options. The option purchase price is called option premium. Call option gives its holder a right (not obligation) to buy underlying item at the specified price. Put option gives its holder a right (not obligation) to sell underlying item at specified price. Question No: 19 Which of the following could be used as a hedging tool against unfavorable movement in interest rate? Currency option Currency futures Interest rate option Currency SWAP Reference: PAGE # 143 Interest Rate Caps and Floor Firms may borrow from a bank or deposit funds at variable rate of interest connected to some benchmark rate like KIBOR in Pakistan or LIBOR (London Inter Bank Offered Rate) in international money markets. When borrowing on variable interest rates, a firm may want to utilize option as hedging tool against the unfavorable interest rate movements over the full term of loan or deposit Question No: 20
Fall 2010
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The credit policy of a public company is 1/10, net 30. At present 25% of the customers take the discount. What would accounts receivable be if all customers took the cash discount? Account receivable would be lower than the present level No change from the present level Account receivable would be higher than the present level Unable to determine without more information Reference: Example term of 1/10, net 30 means that discount of 1% is available only if the payment is received within first ten days of delivering goods otherwise, full invoice value will be payable by the debtor on 30th day. Theres a cost of credit for seller. By availing a discount for early payment the buyer is often not in all position to ignore the cash discount. Question No: 21 In the long run, a successful acquisition is one that: Enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage Enables the acquirer to diversify its asset base Increases the market price of the acquirer's stock over what it would have been without the acquisition Increases the financial leverage of the firm Reference: Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. http://en.wikipedia.org/wiki/Mergers_and_acquisitions Question No: 22 The efficiency enhancing effect resulting from a strategic merger is called which of the following? Merger effect Acquisition effect Synergy effect Efficiency effect
Fall 2010
Reference: Page # 108
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Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. Question No: 23 How much debt financing is used by a firm whose beta is un-geared? 100% debt financed 100% equity financed 50% equity and 50% debt financed 60% equity and 40% debt financed Reference: PAGE # 66 Example: We need to un-gear the beta. Why? Note that the beta of the industry in which the proposed project falls has D/E ratio of 40:60 but the new project shall be all equity financed. We un-gear the beta that means the financial risk element needs to be removed from the geared beta Question No: 24 Which of the following is more appropriate to use while comparing investment alternatives with different compounding periods? Quoted Interest Rate Annual Percentage Rate Effective Annual Interest Rate Nominal Interest Rate Reference: Page # 15 Effective Annual Rate EAR The Effective Annual Rate (EAR) is the interest rate that is annualized using compound interest. The EAR is the annualized equivalent of interest with shorter compounding periods. It can be calculated from the following formula: EAR = (1 + i/n) n - 1
Question No: 25
Fall 2010
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An investor would be exposed to which of the following risks, if he may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased? The coupon effect risk Interest rate risk Inflation risk Unique risk Reference: Page # 136 If a company is planning to borrow at variable rate of interest, the interest amount charged each time varying according to whether short-term interest rates have risen or fallen since the previous payment. To quote another example how interest rate fluctuations affect the financials of the company, a company may have invested in bonds and any change in interest rate will affect the value of investment in balance sheet. Examples of interest rate risk short term investments, investment in bonds, borrowings in short term variation in short term interest rate. Question No: 26 Which of the following focuses on long-term investment decision-making process? Working Capital Management Capital Budgeting Cash Budgeting None of the given options Reference: PAGE # 24 Capital budgeting: Capital Budgeting is the planning process used to determine a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research and development projects. Capital budgeting process is carried out for projects involving heavy initial upfront cost. Question No: 27 According to the reinvestment rate assumption, which method of capital budgeting assumes that the cash flows are reinvested at the project's rate of return? Payback period Net present value
Fall 2010
Internal rate of return None of the given options Reference: PAGE # 27 Net present value (NPV)
Quizzes
There are two aspects of NPV method of project evaluation. First is the initial investment or upfront cost and second, is the benefits (like cash flow) emerging from the project. First aspect is pretty simple. As it is incurred in the current or present time, there are no issues associated with its measurement. On the other side, benefits shall be reaped in future and involves time value of money, making the measurement complex and difficult. Question No: 28 Which of the following statements is correct for a project with a positive Net Present Value (NPV)? Internal rate of return (IRR) exceeds the cost of capital Accepting the project has an indeterminate effect on shareholders The discount rate exceeds the cost of capital The profitability index equals one Reference: PAGE # 29 Question No: 29 While calculating cash flow from operating activities through indirect method, an increase in current assets is __________ whereas an increase in current liabilities is ___________ net income? added to; added to added to; deducted from deducted from; added to deducted from; deducted from Reference: PAGE # 83 Cash flow Performa OR below image
Question No: 30 Which of the following holds true regarding aggressive working capital policy? High liquidity; high profitability; high risk
Fall 2010
High liquidity; low profitability; low risk Low liquidity; low profitability; high risk Low liquidity; high profitability; high risk Reference: PAGE # 89
Quizzes
Question No: 31 Which of the following holds TRUE regarding conservative working capital policy? High liquidity; high profitability; high risk High liquidity; low profitability; low risk Low liquidity; low profitability; high risk Low liquidity; high profitability; high risk Reference: PAGE # 89
Question No: 32 The firm has very little net working capital sometimes even negative net working capital that can be very risky. The above statement belongs to: Aggressive working capital policy Conservative working capital policy Moderate working capital policy The statement is not related to any of the working capital policies Reference: PAGE # 88 AGGRESSIVE WORKING CAPITAL POLICY; Low level of investment More short-term financing is used to finance current assets. Support low level of production & sales Borrowing short-term is considered more risky than borrowing long term. Firm risk increases, due to the risk of fluctuating interest rates, but the potential for higher Returns increases because of the generally low-cost financing.
Fall 2010
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This approach involves the use of short-term debt to finance at least the firms temporary assets, some or all of its permanent current assets, and possibly some of its long-term fixed assets. (Heavy reliance on short term debt) The firm has very little net working capital. It is more risky. May be a negative net working capital. It is very risky Question No: 33 The firm has a reasonable amount of net working capital that leads to a low-risk position. The above statement belongs to: Aggressive working capital policy Conservative working capital policy Moderate working capital policy The statement is not related to any of the working capital policies Reference: PAGE # 88 CONSERVATIVE WORKING CAPITAL POLICY; High level of investment in current assets support any level of sales and production High liquidity level Avoid short-term financing to reduce risk, but decreases the potential for maximum value Creation because of the high cost of long-term debt and equity financing. Borrowing long-term is considered less risky than borrowing short-term. This approach involves the use of long-term debt and equity to finance all longterm fixed Assets and permanent assets, in addition to some part of temporary current assets. The firm has a large amount of net working capital. It is a relatively low-risk position. The safety of conservative approach has a cost. Long-term financing is generally more expensive than short-term financing.
Fall 2010
Quizzes
Question No: 34 Financial data for three firms is presented below. Each differs only with respect to philosophy on an aggressive vs. a conservative approach to current asset management. FIRM A FIRM B FIRM C Sales Rs.2,000,000 Rs.2,000,000 Rs.2,000,000 EBIT 200,000 200,000 200,000 Current Assets 600,000 500,000 400,000 Fixed Assets 500,000 500,000 500,000 Total Assets 1,100,000 1,000,000 900,000 What will be the rate for the firm with the most aggressive philosophy? 18.2 percent (Doubt) 33.3 percent 25.5 percent 22.2 percent Question No: 35 Which of the following is equal to Stock out cost? Carrying cost Safety stock Holding cost Carrying cost Reordering cost Safety stock Carrying cost Reordering cost Reference: PAGE # 100 Doubt in answer for further confirmation see PAGE#100 Question No: 36 Which of the following statement is INCORRECT regarding Just-In-Time (JIT)? The inventories are kept near zero level. The inventory is acquired in such quantity on daily basis that can support the daily production level. The entire inventory acquired move to the production hall. Inventory level is necessarily kept at zero level. Reference: PAGE # 100 Just In Time (JIT): The idea explains that inventories are kept near zero level. This means that inventory is acquired in such quantity on daily basis that can support the daily
Fall 2010
Quizzes
production level. TheReferenceore, theres no inventory lying in store room rather all the inventory acquired move to production hall. The philosophy is to pull inventory through the production processes on as asneeded basis rather than pushing inventory through the processes on an asproduces basis. This requires extreme accurate estimates and there no chance of an error. For example, theres a high probability of running out of stock and that could be disastrous. JIT does not necessarily mean zero inventory level. The objective is to minimize the inventories but to increase the productivity, quality and flexibility. Question No: 37 Which of the following type of mergers occurs when one firm purchases other firms that produce similar or competing products? Horizontal Vertical Financial Conglomerate Reference: PAGE # 109 Horizontal merger: Two companies that are in direct competition and share the same product lines and markets. Question No: 38 Which of the following valuation approach allows for specific and direct estimation of future benefits to the owners, which is consistent with the theory of value? Asset-based method Income-based method Hybrid method None of the given options Reference: PAGE # 119 Hybrid Methods The income and asset-based approaches to valuation have relative strengths as well as obvious limitations.
Fall 2010
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Example, the income approach allows for specific and direct estimation of future benefits to the owners, which is consistent with the theory of value. Question No: 39 The experts hired in evaluation stage of a public take over process DO NOT include which of the following? Legal consultants Accountants Shareholders Stock Brokers Reference: PAGE # 119 Acquisition Procedures: Procedure for public takes over: Growth / expansion is decided Predator company appoints experts legal consultants, banks, accountants and stock brokers Decision regarding contact with target firm approach before the bid or hostile takeover Purchase of certain % age of shares of target Establish an offer and communicate target Includes offer document, offer validity, predator may revise offer if declined by target Acquisition of private company: Limited consultancy services from expert are required. internal evaluation is normally enough. Detailed investigation is conducted before the transaction. Offer price is negotiated by both parties Finalization of deal by entering into a contract Payment of price finishes the deal.
Fall 2010
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Question No: 40 In which of the following forms of acquisition, a company's existing managers acquire a large part or all of the company? Management Buyout Management Buy-In Leverage Buyout None of the given options Reference: PAGE # 123 Management Buyouts Management buyouts are similar in all major legal aspects to any other acquisition of a company. The particular nature of the MBO lies in the position of the buyers as managers of the company and the practical consequences that follow from that. In particular, the due diligence process is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is also unlikely to give any but the most basic warranties to the management, on the basis that the management knows more about the company than the sellers do and the Reference ore the sellers should not have to warrant the state of the company. In many cases, the company will already be a private company, but if it is public then the management will take it private. Question No: 41 Recession in economy is related to which of the following levels of financial distress of a firm? Firm Level Industry Level Macro-Level All of the given options Reference: PAGE # 127 We can divide the sources of financial distress into three categories: a- Firm level causes of financial distress b- Industry level causes c- Macro level factors causing financial distress Question No: 42
Fall 2010
The seller of the FRA makes a cash payment to the buyer. Both buyer and seller make payments to each other. The buyer of the FRA makes a cash payment to the seller. Neither buyer nor seller makes any payment to each other. Reference: PAGE # 137 Decision Rule:
Quizzes
Which of the following would be the outcome if the fixed rate in the forward rate agreement (FRA) is lower than the Referenceerence rate?
When a FRA reaches its maturity the settlement date, both the seller and buyer must settle the contract. If the fixed rate in the agreement is higher than the Referenceerence rate (may be KIBOR), the buyer of the FRA makes a cash payment to the seller. The payment is for the amount by which the FRA rate exceeds the Referenceerence rate. If the fixed rate in the agreement is lower than the Referenceerence rate, the seller of the FRA makes a cash payment to buyer exactly the reverse of above. The payment is for the amount by which the FRA rate is less than the Referenceerence rate. Question No: 43 If the strike price and current market price are equal, an option would be termed as: In the money Out of money At the money None of the given options Reference: PAGE # 139 Options pricing: The strike price may be higher, lower or equal to the current market price of underlying item. For example, A call option gives the right to its holder to buy x number of shares of y company at Rs 10 per share and the current price could be greater than Rs. 10/-, less than Rs. 10/- or exactly Rs 10/- per share. If the strike price is more favorable than the current market price of underlying asset or item, the option is termed as in-themoney. If the strike price is not favorable than the current market price of
Fall 2010
Quizzes
underlying asset or item, the option is called out-of-money. If the strike price and current market price are equal, then it is known as at-the-money. Question No: 44 Which of the following theories states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries? M&M theory Purchasing Power Parity theory Fisher effect theory Interest rate risk theory Reference: PAGE # 145 Purchasing Power Parity Theory: Purchasing power parity (PPP) is a theory, which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries should equal the ratio of the two countries' price level of a fixed basket of goods and services. When a country's domestic price level is increasing (i.e., a country experiences inflation), that country's exchange rate must depreciated in order to return to PPP. Question No: 45 A project would be financially feasible in which of the following situations? If Internal Rate of Return of a project is greater than zero If Net Present Value of a project is less than zero If the project has Profitability Index less than one If the project has Profitability Index greater than one Reference: (BOOK FM) PAGE # 42 Those projects with a profitability index ratio of more than one (PI >= 1.0) are considered Question No: 46 Which of the following statements is true regarding Weighted Average Cost of Capital (WACC)? WACC of a levered firm is greater than that of an un-levered firm (Doubt) WACC of a levered firm is lesser than that of an un-levered firm
Fall 2010
WACC of a levered firm is equal to that of an un-levered firm An Un-levered firm has zero WACC. Reference: PAGE # 71
Quizzes
The after tax cash flow of two identical firms in terms of EBIT but having different capital structure debt equity weight age will effect the value of firm. This is because debt in capital structure provides tax shield as interest on debt is tax deductible expense. Thus tax shield increases the value of firm: a levered firms value is greater than the un-levered firm. Question No: 47 Which of the following risks is independent of capital structure of a firm? Financial risk Systematic risk Business risk Total risk Reference: http://www.slideshare.net/piyooshtripathi/capital-structure-theory Slide number 16 of above link
Question No: 48 Which of the following is a dividend that is paid in the form of additional shares, rather than a cash payout? Stock Dividend Cum Dividend Ex Dividend Extra Dividend Reference: PAGE # 75 Dividend: A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Question No: 49
Fall 2010
If the company has a positive working capital If the company has a negative working capital If the company has a zero working capital None of the given option
Quizzes
In which of the following situations, a company has the ability to pay off its shortterm obligations easily?
Reference: http://www.ehow.com/how_4421978_calculate-working-capital.html Working capital is often used as a barometer to measure a company's over health and liquidity. If a company has negative working capital, it means that the current liabilities are greater than the current assets. This may mean that the company may have trouble paying off its short-term obligations. This can impact the overall efficiency of the company because the company may not be able to spend as aggressively as its competitors. Investors often watch working capital closely to check on the financial health of a company. And If a company has ample positive working capital, then they are in good shape with plenty of cash on hand to pay for everything they might need to buy. If a company has negative working capital, then their current liabilities are actually greater than their current assets and they lack the ability to spend http://www.fool.com/Features/1996/sp0708a.htm Question No: 50 In the formula Q = , I denotes which of the following? Initial cash out flow Interest cost of holding cash Investment required Initial investment Reference: PAGE # 95 Q = 2 FS / i Where: S = is the amount of cash to be used in each period F = fixed cost of obtaining new funds i = interest cost of holding cash
Fall 2010
Q = quantity of cash to be held per period.
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Question No: 51 Keeping all other things constant, an increase in storage cost will result ________ in the EOQ (Economic Order Quantity). A decrease No change An increase Cannot be told without additional information Note: Storage Cost = Carrying cost = Holding cost Reference: see below McQ from this link http://www.chatarea.com/ethiopia.m820054 42. Which of the following statements about the basic EOQ model is true? a. If the ordering cost were to double, the EOQ would rise. b. If annual demand were to double, the EOQ would increase. c. If the carrying cost were to increase, the EOQ would fall. d. If annual demand were to double, the number of orders per year would decrease. e. All of the above statements are true. Question No: 52 All of the following could be an outcome of financial distress of a firm EXCEPT: Employees are leaving the firm Suppliers Referenceuse to supply on credit Banks do not provide loans Financial markets become instable Reference: http://www.investorwords.com/7302/financial_distress.html Tight cash situation in which a business, household, or individual cannot pay the owed amounts on the due date. If prolonged, this situation can force the owing entity into bankruptcy or forced liquidation. It is compounded by the fact that banks and other financial institutions Reference use to lend to those in serious distress. When a firm is under financial distress, the situation frequently sharply reduces its market value, suppliers of goods and services usually insist on COD terms, and large customer may cancel their orders in anticipation of not getting deliveries on time Question No: 53
Fall 2010
Quizzes
Which of the following formulas can be used to calculate the value of the firm while considering merger/acquisition? Value of all-equity financed firm + FV of tax benefits + Expected Bankruptcy Costs Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy Costs Value of all-equity financed firm + tax benefits + Expected Bankruptcy Costs Value of all-equity financed firm + Expected Bankruptcy Costs Reference: PAGE # 116 Value of firm = Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy Costs Question No: 54 Which of the following effects should be considered by a firm if it allows credit to its customers? Cost of discount Arrange loans to finance short term operations Prices of goods All of the given options Reference: PAGE # 103 Analyzing Credit Policy: When a firm allows credit to its customers there are some effects that should be considered. First, allowing credit to customers means that the revenues to the firm will be delayed. A firm may charge higher prices to the customers for allowing them on credit and this will result in increased sales. Total revenues may increase but still the company will receive it late. Secondly, if the company allows credit to customers and then offers cash discounts for early payment from debtors it will incur cost of discount. In other words, it is reducing its profits. After allowing credit to parties the firm must arrange some loans to finance its short term operations. Such finances do carry a handsome interest rate and this need to be considered. Increasing sales by allowing generous credit to customers also increased the probability of default and thus may incur bad debts. Question No: 55 Which of the following is generally the objective of the firms behind offering discount to customers? To improve the cash flow
Fall 2010
To increase the bad debts To improve return on equity To improve the PE ratio Reference: PAGE # 106
Quizzes
The motive behind offering discount to customers may have different secondary meaning to the firm. However, The main objective is to improve the cash flow. Other may include increasing the sales as the discounts directly affect the cost of sales of customer and customer may place enhanced order, thus increasing the turnover. Question No: 56 Which of the following types of dividend policies results in the most volatile dividend payments and stock holder discomfort? Target dividend-payout policy Low-regular-and-extra dividend policy Regular dividend policy Constant payout-ratio dividend policy Reference: PAGE # 74 Constant dividend payout (div per share/Eps) A fixed %age is paid out as dividend. Under this policy the dividend amount will vary because the net income is not constant. Thus results in variability of return to investors. The dividends may drop to nil in case of loss. Market price of share will lower. Same McQ on web see below link http://wps.aw.com/aw_gitman_pmf_12/85/21795/5579564.cw/content/index.html Question No: 57 Which of the following shows the reward to risk ratio of a Security A? Expected return of A (rA) risk free return / beta of A Expected return of A (rA) risk free return / required return of A Expected return of A (rA) beta of A / risk free return Risk free return - expected return of A (rA)/ beta of A Reference: PAGE # 55 see formula
Fall 2010
Reward to Risk = (ER a - ER rf) / BETA a Question No: 58 Which of the following transactions affects the acid-test ratio? Receivables are collected Inventory is liquidated for cash New common stock is sold and used to retire a debt issue New common stock issue is sold and equipment purchased Reference: PAGE # 11
Quizzes
Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio. The current ratio is the ratio of current assets to current liabilities: Current Ratio = Current Assets/Current Liabilities One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows: Quick Ratio = (Current Assets Inventory)/ Current Liabilities Question No: 59 If you deposit Rs. 12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%, what will your account be worth at the end of 16 years? Rs. 82,168.44 Rs. 71,450.82 Rs. 768,901.12 Rs. 668,609.67 FVA = PMT[(1+I)n-1/i] = 12000[(1+.15)16-1/.15] = 668,609.67 Question No: 60 A 30-year corporate bond issued in 1985 would now be traded in which of the following markets? Primary capital market Primary money market
Fall 2010
Secondary money market Secondary capital market Reference:
Quizzes
Question No: 61 Which of the following is Referencelected by the price of a share of common stock? Earnings after tax divided by the number of shares outstanding (Doubt) The board of directors' assessment of the intrinsic value of the firm The book value of the firm's assets less the book value of its liabilities The market's evaluation of a firm's present and future performance Reference:
Question No: 62 You are considering buying common stock in Sumi Inc. The firm yesterday paid a dividend of Rs.7.80. You have projected that dividends will grow at a rate of 9% per year indefinitely. If you want an annual return of 24, what should you pay for the stock now? Rs.52.00 Rs.56.68 (Doubt) Rs.32.50 Rs.35.43 Question No: 63 Which of the following capital budgeting methods focuses on firm's liquidity? Internal Rate of Return Payback method Net Present Value None of the given options Reference: http://highered.mcgrawhill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html Question No: 64 In deciding the optimal level of current assets for the firm, management is confronted with __________. A trade-off between profitability and risk
Fall 2010
A trade-off between liquidity and risk A trade-off between equity and debt A trade-off between short-term versus long-term borrowing Reference: PAGE # 101
Quizzes
There are significant funds invested in accounts receivables and there must be some trade off between the profitability and risk. The optimal level of investment should be based on the benefit resulting from a specific level of investment in debtors. OR see below images
Question No: 65 Mr. Joseph Steve has changed the working capital policy of his company recently. As a result, the liquidity for the company has decreased but an increase in profitability has been observed alongside. From this information we can conclude that the company must have changed his working capital policy from ________ to ________. Conservative; Aggressive Aggressive; Moderate Aggressive; Conservative None of the given options Reference: PAGE # 89
Question No: 66 When the firm considers working capital management, the trade-off between risk and return is affected by all of the followingEXCEPT: The pattern of cash borrowing needs of the firm (Doubt) The difference between long-term and short-term interest rates The ratio of cash to marketable securities The debt maturity schedule Question No: 67 Cash management involves all of the following EXCEPT: Efficient disbursement of cash Efficient collection of cash Wise investment of temporarily surplus cash (Doubt)
Fall 2010
Raising cash through the sale of new stock and bonds Reference:
Quizzes
Question No: 68 Which of the following type of customers enjoy comparatively longer credit periods? Corporate customers Individual customers Both corporate and individual customers Neither corporate nor individual customers Reference: PAGE # 102 Customer type: Corporate customers enjoy longer credit periods compared to individual customers due to their business credibility. Question No: 69 Total credit cost curve consists of which of the following? Total of ordering cost and the opportunity cost of credit policy Total of carrying cost and the opportunity cost of credit policy Total of opportunity cost of credit policy and the bad debts Total of production cost and the cost of credit policy Reference: PAGE # 105 The total of carrying cost and the opportunity cost of credit policy is called the total credit cost curve. There is a point on the total cost curve where the total credit cost curve is minimized. This point corresponds to the optimal amount of credit or investment in receivables. Question No: 70 A firm has 30 days collection period and it is offering terms of 2/10, net 30. The estimations shows that around 70% customers will avail this opportunity by paying within 10 days whereas remaining will pay after 30 days. What would be the Average Collection Period (ACP) of the firm? 10 days 12 days 16 days
Fall 2010
18 days Reference: 70% x 10 days + 70% x 30 days = 12 days WORKING: i) 10 x 70% = 7 Days = 10 7 = 3 ii) 30 x 70% = 21 Days = 30 21 = 9 Hence, Average Collection Period (ACP) = 9 + 3 = 12 days
Quizzes
Question No: 71 Which of the following statement is CORRECT regarding Conglomerate mergers? A firm acquires another firm that is in the same industry but at another stage in the production cycle. It occurs when one firm purchases other firms that produce similar or competing products. It occurs when unrelated businesses merge. None of the given options Reference: PAGE # 110 Types of Mergers From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging: Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.
Fall 2010
Quizzes
Market-extension merger - Two companies that sell the same products in different markets. Product-extension merger - Two companies selling different but related products in the same market. Conglomeration - Two companies that have no common business areas. Question No: 72 Which of the following is(are) reason(s) for determining shares value in mergers and acquisitions? To set up the terms of takeovers To value the company for stock exchange listing To value shares for establishing value of share of retiring directors All of the given options Reference: PAGE # 114 Valuation of shares: When the consideration of merger transaction has been decided to be settled in shares, then comes the stage to determine the value of share. There are some reasons why we need to value the shares. - To set up the terms of takeovers - To value the company for stock exchange listing - For tax purposes - To value shares for establishing value of share of retiring directors Question No: 73 Value of firm = ___________________________________________ Value of all equity financed firm + PV of tax benefits + Expected Bankruptcy Costs Value of all equity financed firm PV of tax benefits + Expected Bankruptcy Costs Value of all equity financed firm + PV of tax benefits Expected Bankruptcy Costs
Fall 2010
Reference: PAGE # 114
Quizzes
Value of all equity financed firm PV of tax benefits Expected Bankruptcy Costs
Value of firm = Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy Costs Question No: 74 Which of the following statements is TRUE regarding the LBO (Leverage Buyout)? New common stocks are issued to acquire the firm Shareholders dividend is used to acquire the firm Companys reserves are used to acquire the firm Borrowed money is used to acquire the firm Reference: PAGE # 124 Leveraged Buyout LBO The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. Question No: 75 Which of the following terms Referenceer to the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition? Management Buyout Management Buy-In Leverage Buyout None of the given options Reference: PAGE # 124 Leveraged Buyout LBO The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. Question No: 76
Fall 2010
Reversal of currency future is simple. Parties have to put an initial margin in currency future. The size is pre-determined or fixed in currency future. Reversing of currency future requires original parties. Reference: PAGE # 136 Forward contract vs. Currency future
Quizzes
Which of the following statements is INCORRECT regarding currency future?
In currency futures, commodity exchanges are involved and credit risk is eliminated. However, a forward contract is made between parties and each party needs to confirm the credit worthiness of each other. Reversal of currency future is very simple. Large buyers and sellers exist. Reversing forward contract is difficult. Original parties have to set off the deal. Future currency contract become a commodity and reversing does not require original parties. Question No: 77 An option is termed as "out of money" if: The exercise price of an option is not favorable than the market price of the underlying item The exercise price mentioned in the option is favorable than the market price of the underlying commodity The exercise price mentioned in the option is equal to the market price of the underlying commodity The exercise price mentioned in the option is above the option cost Reference: PAGE # 139 Options pricing: The strike price may be higher, lower or equal to the current market price of underlying item. For example, A call option gives the right to its holder to buy x number of shares of y company at Rs 10 per share and the current price could be greater than Rs. 10/-, less than Rs. 10/- or exactly Rs 10/- per share. If the strike price is more favorable than the current market price of underlying asset or item, the option is termed as in-themoney. If the strike price is not favorable than the current market price of
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underlying asset or item, the option is called out-of-money. If the strike price and current market price are equal, then it is known as at-the-money. Question No: 78 Short-term Interest Futures (STIRs) are settled through which of the following? Cash Physical delivery Both cash and physical delivery Neither cash nor physical delivery Reference: PAGE # 138 Interest Rate Future: Interest rate futures are also contracts, which have following features: These contracts are similar to currency futures. These are traded in standardized form on future exchanges. Settlement dates on future exchanges are calendar quarters. Each future contract is for standardized quantity of underlying security. Price of the future is expressed in terms of underlying item. Interest rate future, like currency futures may be settled before the maturity date. Short Term Interest Rate futures STIRs are cash settled. Question No: 79 An option is termed as at the money if: The strike price and current market price are equal The strike price is higher than current market price The strike price is lower than current market price None of the given options Reference: PAGE # 139 Options pricing: The strike price may be higher, lower or equal to the current market price of underlying item. For example, a call option gives the right to its holder to buy x number of shares of y company at Rs 10 per share and the current price could be greater than Rs. 10/-, less than Rs.
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Quizzes
10/- or exactly Rs 10/- per share. If the strike price is more favorable than the current market price of underlying asset or item, the option is termed as in-themoney. If the strike price is not favorable than the current market price of underlying asset or item, the option is called out-of-money. If the strike price and current market price are equal, then it is known as at-the-money. Question No: 80 Which of the following is the CORRECT statement regarding the Law of One Price? The law of one price applies to only tradable goods The law of one price applies to all goods The law of one price applies to immovable goods The law of one price applies to services only Reference: PAGE # 145 There are three caveats with this law of one price. (1) As mentioned above, transportation costs, barriers to trade, and other transaction costs, can be significant. (2) There must be competitive markets for the goods and services in both countries. (3) The law of one price only applies to tradable goods; immobile goods such as houses, and many services that are local, are of course not traded between countries. Question No: 81 Companies may be stretching to other countries in search and import to the home country cheap raw materials. This statement depicts which of the following strategic motives of multinational companies for foreign investment? Market development Backward integration Political safety None of the given options Reference: PAGE # 149 Strategic Motives: Market Development: A MNC may invest in foreign country in order to expand to new markets. Such companies have very strong product line and have expertise
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in the field of sales and marketing. Car assembly plants in Pakistan are a good example of market development. Backward Integration: companies may be stretching to other countries in search and import to the home country cheap raw materials. Cheap inputs: labor and raw materials in developing countries provide MNCs an opportunity to reduce the cost of sales, as labor is expensive in developed countries. This results in larger profit margin. Political safety: Political stability and non-interference is what a MNC is looking for. Above all every company will ensure the safety of its investment. Question No: 82 Which of the following is a mutually controlled entity by two or more business enterprisers having a shared motive? Subsidiary Branch Joint Venture Licensing branch Reference: PAGE # 150 Joint venture: A jointly controlled entity by two or more venture having a joint motive. Normally one venture comes of local market or country of JV operations. Local venture is considered expert and knowledgeable person as far as local market is concerned. This will help managing the business like obtaining loans, statutory regulation compliance, local laws, taxes etc. Question No: 83 Between 1870 and 1914, the globally fixed exchange rate was accepted in which the currencies were linked to which of the following? Any commodity Diamond Gold Wheat Reference: Page # 147 Between 1870 and 1914, there was a global fixed exchange rate. Currencies were linked to gold, meaning that the value of a local currency was fixed at a set exchange rate to gold ounces. This was known as the gold standard. This
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allowed for unrestricted capital mobility as well as global stability in currencies and trade; however, with the start of World War I, the gold standard was abandoned. Question # 84 Which of the following investment criteria does not take the time value of money into consideration?
Question # 85 Which of the following is the Dividend Payout ratio for a common stock?
Dividend per share: Market value per share Earning per share: Intrinsic value per share Dividend per share: Earning per share Market value per share: intrinsic value per share Reference: http://en.wikipedia.org/wiki/Dividend_payout_ratio
Question # 86 Cash discounts are offered by the seller to buyer in order to improve which of the following?
Operating cycle
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Sales turnover Company goodwill Credit worthiness Reference: Operating Cycle = age of inventory + collection period.
Quizzes
The operating cycle is the number of days from cash to inventory to accounts receivable to cash. And http://www.slideshare.net/sagar_sjpuc/working-capital-managementpresentation-775445 in slide #3
Question # 87 Average beta has value equal to:
1 Slid # 16 2 3 4
Question # 88 Which of the following may be a major reason for hard capital rationing?
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Question # 89
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In inventory management, the storage cost of inventory is considered as:
Carrying cost Page#97 Reorder cost Stock out cost Safety cost Reference: What Is Inventory Carrying Cost? The cost to carry inventory measures the overhead that an organization carries to support its inventory. In addition to the money originally spent to purchase it, more money will be spent on upkeep while inventory sits in your possession. The longer the inventory is there, the more it will cost in upkeep. Carrying cost is usually expressed as a percentage that represents the cents per dollar that will be spent on inventory overhead per year. Or www.ism.ws/files/Pubs/Proceedings/BCHarding.pdf Question # 90 Which of the following statement is TRUE regarding temporary working capital? Temporary working capital varies with seasonal requirements Temporary working capital is the constant component of working capital Temporary working capital excludes inventories Temporary working capital should be financed with bonds or common stock Reference: Temporary Working capital The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working
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capital required from time to time over and above the permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans OR http://www.tutorsonnet.com/homework_help/working_capital_management/per manent_and_temporary_working_capital_online_tutoring.htm Question # 91 Which of the following describes the hedging approach to financing? Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion Each asset is offset with a financing instrument of the same approximate maturity Each asset is offset with a put or call option. The firm takes out insurance to protect itself against uneven cash flows. Reference: provided by Zubair (Slide#17 of following link) http://wps.pearsoned.co.uk/wps/media/objects/1669/1709919/0273685988_ch08.pp t Question # 92 If the Internal Rates of Return of two, mutually exclusive options are both greater than the cost of capital, which option should be selected under the Internal Rate of Return method? The one with the largest Internal Rate of Return. (Damn sure) The one with the smallest Internal Rate of Return. The one with the highest Net Present Value at the firms cost of capital. None of the given options Question # 93
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Beta (PAGE 50)
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Which of the following measures systematic risk of a firms common stock?
CAPM MM-Model SML Question # 94 Which of the following is closely related to a sales budget? Miscellaneous income Future profits Cash outflow Cash inflow The master budget has two major parts including the operating budget and the financial budget (See Exhibit 9-4). The operating budget begins with the sales budget and ends with the budgeted income statement. The financial budget includes the capital budget as well as a cash budget, and a budgeted balance sheet Question # 95 Which of the following is the correct definition for "spread" in cash management? The difference between optimal cash balance and Nominal Cash balance The difference between opining cash balance and ending cash balance. The difference between upper limit and lower limit of cash balances The difference between optimal cash balance and ending cash balance Reference: Page#96 Graph Question # 96 Which of the following statement is CORRECT regarding residual dividend policy?
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Shareholders are paid dividend from capital
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Dividend are paid after meeting all the financial needs of the firm The management sets a fixed payout ratio Shareholders are paid fixed dividend every year Reference: Page#76 Residual Dividend Policy If a company does not pay all the profit to shareholders in the form of dividend then the debt equity ratio will change. In this section we will assume that company do have some potential opportunities and will finance these opportunities first and any remainder profit will be paid as dividend and the debt equity ratio will be held constant Question # 97 Since companies in some industries typically have high fixed costs, but have stable and predictable revenues. Which of the following statement would be TRUE about these companies? Their degree of operating leverage is relatively low. Their bond issues would tend to have a speculative rating. Their overall business risk is relatively low. (Doubt) They are unable to take on much additional financial risk. Question # 98 Which of the following changes will occur if a bond's yield-to-maturity increases, keeping other things equal ? Its price will rise Its price will remain unchanged Its price will fall. (Sure) Can not be determined Question # 99
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A zero growth common stock. A positive growth common stock A short-term bond An option. Reference: http://www.wattpad.com/73486?p=2 Question # 100
Quizzes
Since pReferenceerred stock dividends are fixed, valuing pReferenceerred stock is roughly equivalent to valuing:
Which one of the following statements is TRUE regarding future value of a single sum? Increase if the interest rate increases. Remains unchanged if the interest rate changes Decrease if the interest rate increases All of the given options Reference: http://www.getobjects.com/Components/Finance/TVM/fv.html Example: You can afford to put $10,000 in a savings account today that pays 6% interest compounded annually. How much will you have 5 years from now if you make no withdrawals? PV = 10,000 i = .06 n=5 FV = 10,000 (1 + .06)5 = 10,000 (1.3382255776) = 13,382.26 End of Year 1 2 3 4 5
Principal
10,000.00 10,600.00 11,236.00 11,910.16 12,624.77
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Interest 600.00 636.00 674.16 714.61
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757.49
Total
10,600.00 11,236.00 11,910.16 12,624.77 13,382.26
Question # 101 All of the following are the methods to evaluate the credit worthiness in business EXCEPT: Market reputation Previous payment record Production plant capacity Financial strength Reference: Page#104 credit worthiness in business Financial statements of vendor Market reputation Banks Previous payment record Financial strength Capacity General economic conditions in vendors industry Question # 102 What is the main purpose of constructing a portfolio of financial assets? To maximize risk and minimize the return To minimize the risk and minimize the return
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To maximize the return and minimize the risk To minimize the return and minimize the risk Question # 103 Which of the following is tax deductible? Dividend on pReferenceerred shares Dividend on common stocks Coupon payments on bonds Capital gain on common stocks Question # 104 Inventory between various stages of production is known as: Work in Process inventory Finished goods inventory Balanced goods inventory Raw materials inventory (Doubt) Question # 105
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Which of the following effects should be considered by a firm if it allows credit to its customers? Cost of discount Arrange loans to finance short term operations Prices of goods All of the given options Reference: page#104 Question # 106 Which of the following is most relevant to a companys ability to pay off its shortterm obligation?
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Dividend Policy Net working capital Operating Cycle Profitability Reference: Working Capital
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Working Capital is simply the amount that current assets exceed current liabilities. Here it is in the form of the equation: Working Capital = Current Assets - Current Liabilities This formula is very similar to the current ratio. The only difference is that it gives you a dollar amount rather than a ratio. It too is calculated to determine a firm's ability to pay its short-term obligations. Working Capital can be viewed as somewhat of a security blanket. The greater the amount of Working Capital, the more security an investor can have that they will be able to meet their financial obligations. OR http://sites.google.com/site/sumitdeole2/analysis Question # 107 Which of the following is prepared by combining all the functional budgets? A production budget A cash budget A sales budget A master budget Reference: Question # 108 Which of the following should be ignored, while evaluating the financial viability of a project? Initial cost
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Equipment cost Cost of capital Sunk cost
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Reference: http://www.scribd.com/doc/18688564/A-Note-on-the-FinancialEvaluation-of-Projects Question # 109 A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the companys stock? 14% 13% 12% 10% Reference: r = DIV1/P0 + g = 8% + 5% = 13% Question # 110 Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets are $8 million, and ROI is 8 percent. 1.60 2.05 2.50 4.00 Reference: (ROI) / (NPM) = TAT (.08) / (.05) = 1.6 Question # 111
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Securities contained in a portfolio are positively correlated
Quizzes
Which of the following condition if exist will make the diversification more effective?
Securities contained in a portfolio are negatively correlated (Doubt) Securities contained in a portfolio have high market values Securities contained in a portfolio have low market values Reference: http://www.stockexchangesecrets.com/portfolio-diversification.html OR The most effective portfolio diversification will come from making investments that show negative correlation to each other. However, simply by investing in companies who show returns that are not correlated perfectly to each other, the risk in the portfolio will be lower than the associated risk of any individual stock. Question # 112 Which one of the following is a major limitation of Linear Programming Technique of capital projects selection? Ignores the relative size of the Investment (slide 14) Time value of money is not considered Project cash flows are ignored Project profitability is ignored Question # 113 Holding everything else constant, increasing fixed costs ________ the firm's breakeven point. Decreases Increases the covariance of Increases (Doubt) Does not affect Question # 114
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If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then which of the following recommendations should be considered? Fixed costs should be traded for variable costs Variable costs should be traded for fixed costs. The project should not be undertaken. Additional marketing analysis may be beneficial before proceeding Reference: http://www.investopedia.com/terms/s/sensitivityanalysis.asp Question # 115 If a creditor wanted to know if a potential customer paid its bills on time, the creditor could look at the potential customer's: Current ratio. Acid ratio. Average age of accounts payable. Average age of accounts receivable ACID RATIO: Accounts Receivable + cash \ Total Current Liabilities Question # 116 What we get after subtracting operating costs and capital expenditures necessary to at least sustain cash flows from total firm revenues? Free cash flows Strategic cash flows Net income (Doubt) Earnings before interest and taxes (EBIT) Question # 117 Which of the following situation may arise due to overtrading by a firm? Liquidity of the firm deteriorates
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Liquidity of the firm improve Risk of the firm decreases Long-term capital of the firm increases Reference: PAGE # 93 The major signs leading to overtrading are as follows: - There is significant increase in turnover. - Increase in current assets is rapid.
Quizzes
- Stock turnover the debtors turnover might slow down, in which case the rate of increase in stocks and debtors would be even greater than the increase in sales. - Payment to creditors is pushed to increase length. - Short term loans are exceeding the limits and firm tries to negotiate increased limits. - The current and quick ratio falls - The firm leads to liquid deficit situation where current liabilities are greater than current assets. Question # 118 The proper amount of safety stock, to be maintained, depends on all of the following EXCEPT: The cost of being out of stock The cost of placing an order The uncertainty associated with forecasted demand The cost of carrying additional inventory Reference: PAGE # 100 Question # 119 A firm is holding cash to take advantage of any temporary business opportunity. This is an example of the ________ motive for holding cash. Capital needs
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Precautionary Transaction Speculative Reference:
Quizzes
Question # 120 A dividend payment made in the form of additional shares, rather than a cash payout is known as: Stock Dividend Cum Dividend Ex Dividend Extra Dividend Reference: PAGE # 75 Dividend: A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Question # 121 Virgo Airlines will pay Rs.4.00 dividend next year on its common stock, which is currently selling at Rs.100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever? 4 percent. 5 percent. 7 percent. 9 percent 4% + 5% = 9% Question # 122
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That the stock is more risky than the market portfolio That an investor should buy the stock. That the stock has a high dividend payout ratio. That an investor should sell the stock. Reference: PAGE # 57 Question # 123 Economies of scale can best be realized with a ________ merger. Horizontal Vertical Financial Conglomerate Reference:
Quizzes
You have calculated that the required rate of return on a particular common stock is less than the expected rate of return. TheReferenceore, you would conclude:
Question # 124 The greater the proportion of permanent current assets financed with short-term debt, the: Riskier would be the working capital policy of the firm(Doubt) Lower would be the safety margin needed to protect Less likely that the firm will try to lengthen the mature Lower would be the firm's potential return on total in Reference: for further reading see PAGE # 92 (Aggressive Policy) Question # 125 You plan to deposit Rs.400 at the end of each year for 16 years in an account that pays 9
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Rs.13,201 Rs.17,667 Rs.9,634 (Doubt) Rs.19,329. Question # 126
Quizzes
percent compounded annually. The terminal value at the end of the 16 year period is closest to:
Which one of the following statements describes the relationship between Interest rates and bond prices? Move in the same direction. Move in opposite directions Sometimes move in the same direction, sometimes in Have no relationship with each other (i.e., they are i Reference: PAGE # 19 Remember that as general current interest rates increase, the price of a bond will decrease and its yield will increase. Question # 127 Which of the following is generally the objective of the firms behind offering discount to customers? To improve the cash flow To increase the bad debts To improve return on equity To improve the PE ratio Reference: PAGE # 106 The motive behind offering discount to customers may have different secondary meaning to the firm. However, the main objective is to improve the cash flow. Question # 128
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The firm must have a stable dividend policy The firm must have a low cost of capital The firm must have l low level of debt The firm must be listed on the stock exchange Reference: PAGE # 61
Quizzes
Which of the following is a necessary condition for issuing shares through IPOs?
There are some rules and regulations for raising capital for each of the above categories. We shall discuss here some of the issues relating to Equity capital issuing shares through IPOs and subsequent issue of shares like right issue. Company must be listed on stock exchange Question # 129 With respect to a Cash flow statement, which of the following would be considered as a cash outflow? Increase in current assets(Doubt) Decrease in current assets Increase in current liability Can not be determined Reference:
Question # 130 The variance of an investment's returns is a measure of the: Volatility of the rates of return. Probability of a negative return. Historic return over long periods. Average value of the investment. Reference: PAGE # 48 VARIANCE OF RETURN:
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Question # 131
Quizzes
The variance essentially measures the average squared difference between the actual returns and the average return.
Which of the following is not related to an "asset based method" of share valuation in Mergers & Aquisitions? Identification of individual assets Identification of liabilities Discount rates Book values Reference: PAGE # 118 Book Values: These figures are bases on past or historical costs and are meaningless and useless to be used for merger transaction valuations. Question # 132 Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back _____________ to the analysis. The cost of fixed assets The cost of accounts payable Investments Depreciation Reference: http://highered.mcgrawhill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html Question # 133 Suppose you have a 2-stocks portfolio, which consists of Stock A and Stock B. If stock A has a beta value of 1.8 and stock B has a beta value of 0.68, and your investment in
Fall 2010
1.20 1.24 1.30 1.45 Reference: Provided by Ijaz P=XAA+XBB 1.8*50%+0.68*50% 0.9+0.34 1.24 Question # 134
Quizzes
stock A and stocks B is equal, then the beta of this 2-stock portfolio would be equal to:
If common stocks of a company have beta value equal to 1, then such stocks are known as: Normal stocks Aggressive stocks Defensive stocks Income stocks Aggressive Stocks have beta value > 1 Defensive Stocks have beta value < 1 Normal Stocks have beta value = 1 Question # 135 The term structure of interest rates Referenceers to the relationship between yield and: Rating, for securities with the same maturity. Marketability, for securities with the same tax status Maturity, for the same security class.
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Risk, for securities with the same maturity. Reference:
Quizzes
http://www.investopedia.com/university/advancedbond/advancedbond4.asp Question # 136 In currency futures, a tick Referenceers to which of the following? Minimum price movement in the exchange rate Maximum price movement in the exchange rate Maximum price movement of a future contract Minimum price movement of a future contract Reference: PAGE # 133 Ticks: A tick is the minimum price movement of a contract. Question # 137 Which of the following illustrates the use of a hedging (maturity matching) approach to financing? Permanent working capital financed with long-term liabilities. Short-term assets financed with equity. All assets financed with 50 percent equity, 50 percent long-term debt mixture. Short-term assets financed with long-term liabilities. Reference: Hedging approach: The term hedging can be said to Referenceer to a process of matching maturities of debt with the maturities of financial needs. According to this approach, the maturity of the sources of funds should match the nature of the assets to be financed. For the purpose of analysis, the assets can be broadly classified into two classes:
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Quizzes
Those assets which are required in a certain amount for a given level of operation and hence do not vary over time Those assets which fluctuate over time The hedging approach suggests that the long-term funds should be used to finance the fixed portion of current assets requirements. Purely temporary requirements, i.e., the seasonal variations over and above the permanent financing needs should be appropriately financed with short-term funds. And Reference: http://web.utk.edu/~jwachowi/mcquiz/mc8.html Question # 138 What is the future value of Rs.1 invested for 10 years if the 12 percent annual rate of interest is compounded quarterly? Rs.2.30 Rs.3.26 Rs.3.25 Rs.2.93 Reference: FV= PV. (1+I) n Question # 139 Which of the following methods would be most suitable for calculating the return on stocks of a non-listed company? Dividend Growth model Capital Asset Pricing Model Security Market Line Characteristics line Question # 140
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Quizzes
Suppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on the stock? 2% 3% 4% 5% Question # 141 If two projects are independent, that means that ___________. Selection of one precludes selection of the other. You should analyze the projects independently. Both the given options may apply None of the given options Question # 142 The variance of an investment's returns is a measure of the: Volatility of the rates of return. Probability of a negative return. Historic return over long periods. Average value of the investment. Question # 143 Juan is starting a software writing company. He is the owner and has only 3 employees. He wants a simple inexpensive form of ownership that leaves him in control and that he can quickly dissolve if he decides to change to another business. His best choice of form of ownership would be: S-corporation. Partnership. Corporation Sole proprietorship
Fall 2010
Question No: 144
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Spread variation does NOT depend on which of the following factors? Variance of cash flows Transaction cost Interest rate Expected cash flow Reference: PAGE # 96 Formula Spread = 3(0.75 x transaction cost x variance of daily cash flows / daily interest rate) ^ (1/3) Question No: 145 Which of the following statements is FALSE regarding buyout? The company may be liquidated The company may be sold to outside company The company management may save their jobs The company may be closed down Reference: PAGE # 124 Reasons for Buyouts: The existing parent company of the victim firm may wish to dispose of it. The parent company may be caught up in financial distress and is in acute need of cash and liquidity. The subsidiary on the other hand, is not strategically fit with parents overall business strategy. In case of loss making, selling the unit to its management may be the better option than to dispose or putting into liquidation, which has it own costs. The purpose of such a buyout from the managers' point of view may be to save their jobs, either if the business has been scheduled for closure or if an outside purchaser would bring in its own management team. Question No: 146 When a firm places a budgetary constraint on the projects it invests in, this is called: Capital rationing
Fall 2010
Working capital management Cash budgeting None of the above Reference: PAGE # 44 Reasons for Capital Rationing: There are basically two types of reasons of capital rationing. External Reasons
Quizzes
These arise when a firm is unable to borrow from the outside. For example if the firm is under financial distress, tight credit conditions, firm has a new unproven product. Borrowing limits are imposed by banks particularly in relation to smaller firms and individuals. Internal Reasons Private owned company: Owners might decide that expansion is a trouble not worth taking. For example there may that management fear to lose their control in the company. Divisional Constraints: Upper management allocates a fixed amount for each division as part of the overall corporate strategy. This arises from a point of view of a department, cost centre or wholly owned subsidiary, the budgetary constraints determined by senior management or head office. OR http://highered.mcgrawhill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html Question No: 147 Which of the following is an objective of an optimal capital structure? To minimize the cost of capital To minimize cost of equity To minimize cost of debt To minimize cost of sales Reference: PAGE # 72 Optimal capital structure Capital structure with a minimum weighted-average cost of capital and thereby maximizes the value of the firm's stock, but it does not maximize earnings per
Fall 2010
Quizzes
share (Eps). Greater leverage maximizes EPS but also increases risk. Thus, the highest stock price is not reached by maximizing EPS. The optimal capital structure usually involves some debt, but not 100% debt. Ordinarily, some firms cannot identify this optimal point precisely, but they should attempt to find an optimal range for the capital structure. Question # 148 Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing: A zero growth common stock. A positive growth common stock A short-term bond An option. Reference: http://www.wattpad.com/73486?p=2 Question # 149 Which of the following is a major advantage of the corporate form of organization? Reduction of double taxation. Limited owner liability. Legal restrictions. Ease of organization Reference: (Page 4)
Question # 150 The employment of fixed costs associated with the actual production of goods or services is known as: Financial leverage Volume discounting Operating leverage
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Covariance Reference: (SLIDE 13) Question # 151
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If two projects offer the same, positive NPV, then which of the following would be a reasonable conclusion? The projects would have the same IRR. The projects would have the same payback period. The projects are mutually exclusive. The projects would add the same amount to the value of the firm. Reference: http://highered.mcgrawhill.com/sites/0073012386/student_view0/chapter7/multiple_choice_quiz.html Question # 152 The effective annual rate of an investment with a nominal annual rate of 10% compounded monthly is closest to ________. 11.04% 10.47% 10.00% 10.12% Reference: http://webcache.googleusercontent.com/search?q=cache:KMwZsI7OdkoJ:www.f reewebs.com/fazilah_mm/Test%2520bank%2520%2520TVM1.doc+The+effective+annual+rate+of+an+investment+with+a+nomina l+annual+rate+of+10%25+compounded+monthly+is+closest+to+______.&cd=1&h l=en&ct=clnk&gl=pk&client=firefox-a Question # 153 Which one of the following statements describe "Shareholders wealth" in a firm?
Fall 2010
The number of people employed in the firm
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The book value of the firm's assets less the book value of its liabilities The market price per share of the firm's common stock The amount of salary paid to its employees Reference: http://wiki.answers.com/Q/Maximizing_shareholder_wealth_means_maximizin g_the_firms_what Question # 154 A company has fixed costs of $50,000 and variable costs per unit of output of $8. If its sole product sells for $18, what is the break-even quantity of output? 2,500 5,000 1,500 7,500 Reference: BEQ= FC/P-VC = 50000 / 18-8 = 50000 / 10 = 5000 Question # 155 The term structure of interest rates refers to the relationship between yield and: Rating, for securities with the same maturity. Marketability, for securities with the same tax status. Maturity, for the same security class. Risk, for securities with the same maturity. Reference: http://www.investopedia.com/university/advancedbond/advancedbond4.asp
Fall 2010
Question # 156
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Dividend discount Model states that todays price of a stock is equal to: The Present Value of all future dividends of the stock The Present Value of the face value of the stock The Present Value of the Sales price of the stock The Present Value of the book value of the stock Reference: (Page 115) Question # 157 Which of the following is a long-term source of financing for a firm? Corporate Bonds Money Market instruments Trade credit Accounts Payables Reference: Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure OR http://en.wikipedia.org/wiki/Bond_%28finance%29 Question # 158 A risk free asset has a Beta value equal to: 0 1 2 3 Reference: (PAGE 54)
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Question # 159
Quizzes
Which of the following stock would provide a regular income to the investors? Growth stock Income stock Aggressive stock Defensive stock Reference: http://www.investopedia.com/terms/i/incomestock.asp Question # 160 What is the future value of Rs.1 invested for 10 years if the 12 percent annual rate of interest is compounded quarterly? Select correct option: Rs.2.30 Rs.3.26 Rs.3.25 Rs.2.93 Reference: FV= PV. (1+I) n Question # 161 An un-geared beta refers to the beta of a firm with: 100% Debt financed 100% Equity financed 50% Equity and 50% Debt financed 60% Equity and 40% Debt financed Ref: PAGE # 66 Example:
Fall 2010
Quizzes
We need to un-gear the beta. Why? Note that the beta of the industry in which the proposed project falls has D/E ratio of 40:60 but the new project shall be all equity financed. We un-gear the beta that means the financial risk element needs to be removed from the geared beta ***************************************************** (These are Solved by Ijaz) Question # 162 Which of the following is the necessary condition for the completion of an employee buyout? Employees must have worked for 10 years in the firm Employees must have sufficient knowledge of operating the firm Employees must hire a consultant to evaluate the firm Employees must have bought 51% or above shares of the firm Ref: Page # 124 Question # 163 Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1 percent? 20-year, zero coupon bond. 10-year, zero coupon bond. 20-year, 10 percent coupon bond 20-year, 5 percent coupon bond. Ref: http://www.ehow.com/about_6468159_definition-zero-coupon-bond.html Potential The SEC also notes that zero coupon bonds fluctuate more in market value than bonds that pay coupon interest. Bond prices increase when interest rates fall. Zero coupon bonds become popular trading vehicles in a falling-rate environment to capture capital gains as the result of lower interest rates. Question # 164 In which of the following conditions a stock is said to be overvalued? If the stock has market value less than the expected value
Fall 2010
If the stock has market value more than the expected value If the stock has market value equal to the expect value If the stock has market value less than its intrinsic value Page # 57 Further Ref: http://syben401k.com/glossary_o.jsp ***************************************************** (These are Solved by Awan) Question # 165
Quizzes
Suppose that market now requires an 8 percent return for a bond that was issued some years ago with a 10 percent coupon. This bond will currently be priced:
At a premium over face value. At par value. At a discount from face value. At face value. http://www.wisegeek.com/what-is-a-premium-bond.htm Question # 166 Which of the following is a main purpose of the Sensitivity Analysis? To find out the optimal level of capital budget. To find out that how price changes affect break-even volume. To find out the seasonal variation in product demand. To find out that how variables in a project affect profitability Ref: http://www.coggan.com/profit-sensitivity.html Question # 167 Which of the following is NOT a reason for determining shares value in mergers and acquisitions? To impede the anti takeover bid of the predator company To set up the terms of takeovers To value the company for stock exchange listing To value shares for establishing value of share of retiring directors Valuation of shares: Page No. 114
Fall 2010
Quizzes
When the consideration of merger transaction has been decided to be settled in shares, then comes the stage to determine the value of share. There are some reasons why we need to value the shares. - To set up the terms of takeovers - to value the company for stock exchange listing - For tax purposes - To value shares for establishing value of share of retirng directors Question # 168 The proper amount of safety stock, to be maintained, depends on all of the following EXCEPT: The cost of being out of stock The cost of placing an order The uncertainty associated with forecasted demand The cost of carrying additional inventory http://inventorymanagementtalk.blogspot.com/2008/08/safety-stock-andinventory-management_21.html s

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Fall 2010

Quizzes & MCQs

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Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

1. Which of the following statements is TRUE regarding Profitability Index?

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Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

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9. All of the following could be an outcome of financial distress of a firm EXCEPT?

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Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Which of the following would lower a firm's operating break-even point?

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Which of the following is included in the cost of capital of a firm?

Cost of sales Depreciation cost Depletion cost Cost of retained earnings

A market portfolio has a beta equal to:

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Operating Cycle Cash Cycle

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Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

Collected and Composed by Bilal Farooq (bilal.zaheem@gmail.com)

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Dividend per share: Market value per share

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Question # 4 of 15 Average beta has value equal to:

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Question # 6 of 15 In inventory management, the storage cost of inventory is considered as:

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Which of the following statement is TRUE regarding temporary working capital?

Question # 8 of 15 Which of the following describes the hedging approach to financing?

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