1) The goal of the firm should be
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A. maximization of profits |
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B. maximization of shareholder wealth |
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C. maximization of consumer satisfaction |
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D. maximization of sales |
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2) An example of a primary market transaction is
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A. a new issue of common stock by AT&T |
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B. a sale of some outstanding common stock of AT&T |
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C. AT&T repurchasing its own stock from a stockholder |
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D. one stockholder selling shares of common stock to another individual |
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3) According to the agency problem, _________ represent the principals of a corporation.
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A. shareholders |
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B. managers |
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C. employees |
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D. suppliers |
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4) Which of the following is a principle of basic financial management?
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A. Risk/return tradeoff |
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B. Derivatives |
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C. Stock warrants |
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D. Profit is king |
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5) Another name for the acid test ratio is the
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A. current ratio |
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B. quick ratio |
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C. inventory turnover ratio |
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D. average collection period |
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6) The accounting rate of return on stockholders investments is measured by
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A. return on assets |
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B. return on equity |
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C. operating income return on investment |
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D. realized rate of inflation |
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7) If you are an investor, which of the following would you prefer?
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A. Earnings on funds invested compound annually |
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B. Earnings on funds invested compound daily |
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C. Earnings on funds invested would compound monthly |
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D. Earnings on funds invested would compound quarterly |
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8) The primary purpose of a cash budget is to
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A. determine the level of investment in current and fixed assets |
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B. determine accounts payable |
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C. provide a detailed plan of future cash flows |
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D. determine the estimated income tax for the year |
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9) Which of the following is a non-cash expense?
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A. Depreciation expenses |
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B. Interest expense |
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C. Packaging costs |
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D. Administrative salaries |
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10) The break-even model enables the manager of a firm to
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A. calculate the minimum price of common stock for certain situations |
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B. set appropriate equilibrium thresholds |
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C. determine the quantity of output that must be sold to cover all operating costs |
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D. determine the optimal amount of debt financing to use |
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11) A zero-coupon bond
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A. pays no interest |
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B. pays interest at a rate less than the market rate |
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C. is a junk bond |
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D. is sold at a deep discount at less than the par value |
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12) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years?
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A. $3,525.62 |
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B. $5,008.76 |
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C. $3,408.88 |
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D. $2,465.78 |
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| 13) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
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14) The present value of a single future sum
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A. increases as the number of discount periods increase |
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B. is generally larger than the future sum |
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C. depends upon the number of discount periods |
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D. increases as the discount rate increases |
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15) Which of the following is considered to be a spontaneous source of financing?
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A. Operating leases |
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B. Accounts receivable |
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C. Inventory |
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D. Accounts payable |
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| 16) Compute the payback period for a project with the following cash flows, if the company s discount rate is 12%.
Initial outlay = $450
Cash flows:
Year 1 = $325
Year 2 = $65
Year 3 = $100
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A. 3.43 years |
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B. 3.17 years |
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C. 2.88 years |
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D. 2.6 years |
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17) For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.
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A. less than zero, greater than the required return |
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B. greater than zero, greater than one |
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C. greater than one, greater than zero |
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D. greater than zero, less than one |
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18) Which of the following is considered to be a deficiency of the IRR?
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A. It fails to properly rank capital projects. |
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B. It could produce more than one rate of return. |
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C. It fails to utilize the time value of money. |
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D. It is not useful in accounting for risk in capital budgeting. |
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19) The firm should accept independent projects if
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A. the payback is less than the IRR |
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B. the profitability index is greater than 1.0 |
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C. the IRR is positive |
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D. the NPV is greater than the discounted payback |
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20) The most expensive source of capital is
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A. preferred stock |
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B. new common stock |
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C. debt |
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D. retained earnings |
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21) The cost associated with each additional dollar of financing for investment projects is
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A. the incremental return |
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B. the marginal cost of capital |
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C. risk-free rate |
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D. beta |
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22) The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?
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A. 14.0% |
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B. 9.0% |
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C. 10.6% |
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D. 11.5% |
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23) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt 10%; preferred stock 11%; and common stock 18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
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A. 18.0% |
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B. 13.0% |
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C. 10.0% |
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D. 14.2% |
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24) Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever Brothers present EBIT is $3 million, and profits available to common shareholders are $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?
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A.$1.75 |
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B. $2.00 |
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C. $3.25 |
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D. $4.50 |
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25) Zybeck Corp. projects operating income of $4 million next year. The firm s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will be the projected EPS next year?
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A. $4.94 |
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B. $2.96 |
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C. $5.33 |
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D. $3.20 |
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26) _________ risk is generally considered only a paper gain or loss.
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A. Transaction |
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B. Translation |
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C. Economic |
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D. Financial |
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27) Capital markets in foreign countries
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A. offer lower returns than those obtainable in the domestic capital markets |
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B.provide international diversification |
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C. in general are becoming less integrated due to the widespread availability of interest rate and currency swaps |
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D. have been getting smaller in the past decade |
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28) Buying and selling in more than one market to make a riskless profit is called
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A. profit maximization |
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B. arbitrage |
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C. international trading |
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D. an efficient market |
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29) What keeps foreign exchange quotes in two different countries in line with each other?
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A. Cross rates |
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B. Forward rates |
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C. Arbitrage |
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D. Spot rates |
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30) One reason for international investment is to reduce
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A. portfolio risk |
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B. price-earnings (P/E) ratios |
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C. advantages in a foreign country |
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D. exchange rate risk |
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