##### Reference no: EM131421709

Finance Multiple Choice Questions

1. Portfolio managers who seek superior performance will __________ portfolio duration when interest rates are expected to fall, and __________ duration in the face of rising rates.

a. reduce; extend

b. extend; reduce

c. extend; maintain the same

d. reduce; maintain the same

e. maintain the same; extend

2. We are given the following information on a bond issue:

Terms

Amount of issue $200 million

Issue date 3/1/08

Maturity date 3/1/38

Face value $1000

Annual coupon 6.85%

Yield to maturity 6.87%

Coupon payment Semi-annual; 3/1 and 9/1

Security Unsecured

What is the price on this bond?

a. $1,000

b. $997.47

c. $997.14

d. $996.97

e. $996.67

3. A bond whose price is the same as its face value is called a

a. discount bond.

b. par bond.

c. level coupon bond.

d. premium bond.

e. debenture.

4. Interest rate risk depends on

a. time to maturity and coupon rate.

b. yield to maturity and time to maturity.

c. face value and coupon rate.

d. face value and yield to maturity.

e. yield to maturity and coupon amount.

5. A mortgage that pledges all the real property owned by a firm is called

a. a chattel mortgage.

b. a blanket mortgage.

c. an indentured mortgage.

d. collateral.

e. debenture.

6. Protective covenants are designed to reduce ____________ faced by the bondholders.

a. liquidity risk

b. interest rate risk

c. risk of theft

d. transaction costs

e. agency costs

7. When interest rates ________, the prices of currently outstanding bonds ___________.

a. rise; fall because they are now trading at a premium

b. rise; rise because they are now trading at a premium

c. fall; rise because they are now trading at a premium

d. fall; fall because they are now trading at a premium

e. fall; remain unchanged because their yields are fixed

8. A firm has a bond issue with face value of $1,000, 9% coupon rate, and 9 years to maturity. The bond makes coupon payments every 6 months, and is currently priced at $1,135.38. What is the yield to maturity on this bond?

a. 3.48%

b. 4.50%

c. 5.51%

d. 6.95%

e. 7.07%

9. What is the duration of a 5-year bond with coupon rate of 8%, yield to maturity of 9%, semi-annual coupon payment, and face value of $1,000?

a. 3.8 years

b. 3.9 years

c. 4.2 years

d. 5.4 years

e. 8.4 years

10. The yield on a 5-year bond is 11%. The 30-day T-bill yield is 6%, while the inflation rate is estimated to be 5.5%. What is the real rate of return on the bond based on the Exact Fisher Effect formula?

a. 4.72%

b. 5.00%

c. 5.21%

d. 5.50%

e. 6.00%

11. Historically, preferred share yields have been lower than bond yields. Even so, preferred shares are popular to some investors because

a. they pay constant dividends forever.

b. they are safe securities.

c. they provide 100% tax exclusion on their dividends to other corporations.

d. they rank higher than common stockholders in the event that the firm is liquidated.

e. their dividends are cumulative and must be paid before common stock dividends.

12. A coattail provision in shareholder rights is the right of a non-voting shareholder to

a. share proportionally in dividends paid.

b. vote for directors at annual meetings.

c. sell his or her shares.

d. be given first offer on new shares issued.

e. vote during a takeover bid.

13. We observe a stock selling for $20 per share. The next dividend is expected to be $1 per share. We think that the dividend will grow by 10% indefinitely. What is the dividend yield on this stock?

a. 5%

b. 10%

c. 15%

d. 20%

e. 25%

14. A company is not currently paying any dividends, but is expected to start paying dividends in 5 years. The first dividend will be $0.50 per share, and is expected to grow at a rate of 10% per year indefinitely. The required return on this company's equity is 20%. What is the price of this stock today?

a. $2.01

b. $2.21

c. $2.41

d. $5.00

e. $5.50

15. Consider the following statement: In the dividend growth model, if the discount rate r is lower than the growth rate g, we could get a negative stock price.

a. This statement is true because r - g would be less than zero.

b. This statement is false because r - g would be less than zero.

c. This statement is false because the growth rate should be used as the discount rate in this case.

d. This statement is false because if g is greater than r, the stock price is infinitely large.

e. This statement is true because if g is greater than r, the stock price is infinitely small.

16. Constant G Inc. will pay a dividend of $4.00 per share in 1 year's time. The required return on this company's shares is 16%, and the dividends are expected to increase by 6% per year. What is the value of Constant G's stock in 6 years?

a. $33.46

b. $35.46

c. $40.00

d. $53.53

e. $56.74

17. You just bought a share of stock in ABC Corporation. You plan to sell the stock in 1 year. You know that the stock will be worth $70 in 1 year's time, and that the stock will pay a dividend of $10 per share at the end of the year. If you require a 25% return on your investment, what is the most you would pay for the stock?

a. $40

b. $56

c. $64

d. $80

e. $288

18. JKL Corporation has recently paid a dividend of $1.50 per share. Due to its investment in a high-risk, high-growth project, the company is projecting supernormal growth rates of 35%, 30%, and 25% in the next 3 years, before returning to the normal growth rate of 8% per year after that. What is JKL's stock price given that the required return on its equity is 15%?

a. $7.95

b. $28.93

c. $33.38

d. $39.30

e. $50.77

19. Which of the following is NOT a basic right of a shareholder?

a. to vote for directors at annual meetings

b. to share proportionally in any new stock sold

c. to share proportionally in assets remaining after liabilities if the firm is liquidated

d. to participate in a proxy contest

e. All of the above are basic rights of shareholders.

20. MNO Company common stocks are currently selling for $5 per share, with 1 million shares outstanding. The company has just paid a dividend recently. Its shares have a required rate of return of 20% and an estimated constant growth rate of 12%. How much dividend per share did the company just pay?

a. $0.36

b. $0.40

c. $0.45

d. $1.00

e. $4.17

21. Assuming no taxes and straight-line depreciation, the internal rate of return at the accounting break-even point is equal to.

a. +100%.

b. 0%.

c. -100%.

d. positive infinity.

e. negative infinity.

22. The _________ the degree of operating leverage, the higher the danger from __________ risk.

a. lower; operating

b. higher; forecasting

c. lower; forecasting

d. higher; financial

e. lower; financial

23. A project that always breaks even on a cash basis has

1. a payback exactly equal to its life

2. a negative NPV

3. an IRR of zero

4. a payback of infinity

5. an NPV equal to its initial outlay

6. an IRR of -100%

7. a zero NPV

8. a discounted payback equal to its life

9. an IRR equal to its required return

a. I, II, and III only

b. II, IV, V, and VI only

c. VII, VIII, and IX only

d. I, II, and VI only

e. I, VI, and VII only

24. A situation in which units in a company are allocated a specified amount of financing for capital budgeting is called

a. capital management.

b. discounted cash flow budgeting.

c. soft rationing.

d. hard rationing.

e. managerial option.

25. A new project requires variable cost of $3 and fixed cost of $100,000. Sales per year are estimated to be 100,000 units at $7 per unit. Depreciation is straight-line at $50,000 per year. Ignoring taxes, what is the operating cash flow for this project?

a. $250,000

b. $300,000

c. $340,000

d. $350,000

e. $400,000

26. Given the following information, calculate the accounting break-even sales quantity. Assume straight-line depreciation and ignore taxes.

Initial investment = $250,000

Project life = 5 years

Unit price = $200

Unit variable cost = $125

Annual Fixed cost = $60,000

Required return = 12%

a. 667

b. 800

c. 1,200

d. 1,467

e. 1,725

27. Given the following information, calculate the financial break-even sales quantity. Assume straight-line depreciation and ignore taxes.

Initial investment = $250,000

Project life = 7 years

Unit price = $200

Unit variable cost = $125

Annual Fixed cost = $60,000

Required return = 12%

a. 800

b. 1,277

c. 1,467

d. 1,531

e. 1,725

28. Given the following information, calculate the cash break-even sales quantity. Assume straight-line depreciation and ignore taxes.

Initial investment = $1,000,000

Project life = 10 years

Unit price = $300

Unit variable cost = $150

Annual Fixed cost = $200,000

Required return = 15%

a. 667

b. 1,334

c. 1,667

d. 2,000

e. 2,662

29. XYZ Ltd. has a DOL of 2. What will happen to the firm's OCF if sales were to decrease by 15%?

a. OCF will increase by 15%

b. OCF will increase by 30%

c. OCF will decrease by 30%

d. OCF will decrease by 15%

e. OCF will remain unchanged

30. Marple Inc., is planning to invest in equipment to produce widgets. The equipment will cost $1.5 million, has a CCA rate of 30%, and will have no value by the end of the fifth year. The project is forecasted to yield sales of 10,000 units of widgets per year for the next 5 years. Each widget will cost $45 to produce and will sell for $100. Fixed costs of production will total $20,000 per year.

However, the marketing department reports that sales quantity may have forecasting error of plus or minus 10%. The production department reports that variable cost could vary by plus or minus 15%, and fixed costs could vary by plus or minus 5%.

If the required rate of return of similar projects is 13% and the marginal corporate tax rate is 35%, what is the NPV in the worst case scenario?

a. -$210,018

b. -$113,997

c. $10,600

d. $56,896

e. $159,204

31. Suppose we find that the returns on Stock A are perfectly and negatively correlated with returns on Stock B. If we plot the returns on A against the returns on B, all the points will plot on the same line. This line would have a slope of

a. 0.

b. 1.

c. 2.

d. -1.

e. negative infinity.

32. Suppose we know that the returns on two assets (Asset A and Asset B) are perfectly and positively correlated. The expected return on Asset A is 25% and the expected return on Asset B is 20%. The standard deviations of returns on Asset A and Asset B are 45% and 10%, respectively. If we want to form a portfolio with 40% in Asset A and the rest in Asset B, what is the standard deviation of this portfolio?

a. 5.76%

b. 22%

c. 24%

d. 28.5%

e. 48.99%

33. For a well-diversified portfolio, the ______________ risk is negligible.

a. systematic

b. unsystematic

c. default

d. forecasting

e. market

34. Given the information below, when we compare the two securities, Security B has

Standard Deviation Beta

Security A 40% 0.50

Security B 20% 1.50

a. a higher risk premium.

b. a lower risk premium.

c. a higher risk premium and higher total risk.

d. a lower risk premium and lower total risk.

e. none of the above.

35. Diversification reduces risk as long as

a. correlations between returns on individual assets are greater than one.

b. correlations between returns on individual assets are less than one.

c. covariances between returns on individual assets are greater than one.

d. covariances between returns on individual assets are less than one.

e. standard deviations of returns on individual assets are all positive.

36. If an asset plotted above the Security Market Line, its price would

a. remain the same.

b. go into free fall.

c. fall.

d. rise.

e. rise rapidly and then fall.

37. The characteristic line of a security relates the expected return on the security to

a. different returns on the market.

b. different returns on the risk-free asset.

c. its historical returns.

d. betas of different securities in the market.

e. historical standard deviations.

38. Suppose a stock has a beta of 1.3. The risk-free rate is 4%, and the market risk premium is 8.6%. Based on the Capital Asset Pricing Model, what is the expected return on this stock?

a. 5.2%

b. 5.98%

c. 9.98%

d. 12.6%

e. 15.18%

39. Which of the following events would lead to higher unsystematic risk?

1. Short-term interest rates increase unexpectedly.

2. The interest rate a company pays on its short-term debt borrowing is increased by its bank.

3. A manufacturer loses a multimillion dollar product liability suit.

a. I only

b. II only

c. III only

d. II and III

e. I, II, and III

40. You own a portfolio that has $700 invested in Stock A and $2,400 invested in Stock B. If the expected returns on Stock A is 11% and on Stock B is 18%, what is the expected return on the portfolio?

a. 12.58%

b. 14.50%

c. 16.25%

d. 16.42%

e. 29.00%

41. The cost of capital of a risky project must be

a. lower than the T-bill rate.

b. higher than the T-bill rate.

c. the same as the T-bill rate.

d. lower than the market risk-premium.

e. higher than the market rate.

42. The cost of capital associated with a project depends on

a. the whims of investors.

b. the management of the company that requires the funds.

c. the risk of the project.

d. the debt-equity ratio of the company that requires the funds.

e. the stability of the financial market.

43. Two methods of determining the cost of equity are the.

a. dividend growth method and the security market line method.

b. dividend growth method and the stock pricing method.

c. security market line method and the stock pricing method.

d. dividend growth method and the debt-equity method.

e. stock pricing method and the debt-equity method.

44. To estimate the cost of equity using the dividend growth model, we need which of the following pieces of information?

1. BE

2. D0

3. Rm

4. P1

5. Rf

6. P0

7. g

a. I, II, and III

b. I, II, III, and IV

c. II, VI, and VII

d. II, IV, and VII

e. All of the information is required.

45. According to the Security Market Line (SML) method, expected return on a risky asset depends on.

a. risk-free rate.

b. market risk-premium.

c. beta of the asset.

d. market rate of return.

e. All of the above

46. You are trying to estimate the cost of equity for XYZ Ltd. You know that the company has an estimated beta of 1.25. You have found the Government of Canada 30-day T-Bill rate of 4.5%, and the market risk premium of 5.5%. What is the cost of equity for XYZ Ltd.?

a. 11.38%

b. 11.13%

c. 10.13%

d. 17.00%

e. 5.50%

48. We have the following information on the capital structure of Harthaway Corporation. What is the market value weight of the firm's common equity?

Debt:

Number of bonds = 10,000

Par value = $1,000

Coupon rate = 9% (semi-annual coupons)

Time to maturity = 10 years

Market value = 98% of par

Common Equity:

Number of shares outstanding = 1,000,000

Par value = $1

Price per share = $3.50

Dividends per share = $0.70

Preferred Equity:

Number of shares outstanding = 50,000

Price per share = $20

Dividend yield = 5%

a. 7%

b. 8.5%

c. 14.5%

d. 24.5%

e. 68.5%

49. The Marquiz Inc., has an outstanding bond issue of 100,000 bonds with a par value of $1,000 each, coupon rate of 11% with semi-annual coupon payments, and 7 years to maturity. Each bond is currently valued at 102% of par. What is the yield to maturity on this bond?

a. 5.29%

b. 5.50%

c. 10.59%

d. 10.87%

e. 11.00%

50. Given the following information on XYZ Ltd., what is its WACC?

Debt:

Number of bonds = 10,000

Par value = $1,000

Coupon rate = 9% (semi-annual coupons)

Time to maturity = 10 years

Market value = 98% of par

Common Equity:

Number of shares outstanding = 1,000,000

Par value = $1

Price per share = $3.50

Dividends per share = $0.70

Preferred Equity:

Number of shares outstanding = 50,000

Price per share = $20

Dividend yield = 5%

Other information:

Tax rate = 40%

Equity beta = 1.2

Market risk premium = 16%

Risk-free rate = 5%

a. 9.07%

b. 10.10%

c. 11.63%

d. 12.65%

e. 24.20%

51. ABC Corp. has a debt-equity ratio of 2. Newly issued bonds by the company must have a yield to maturity of 8%, whilst newly issued equity will yield 18%. With newly issued debt and equity, the investment dealer's spreads will be 5% and 8%, respectively. The company's marginal tax rate is 38%. If ABC Corp. wants to raise money for a $1 million project, how much money must it raise in total?

a. $1,000,000

b. $1,060,000

c. $1,063,830

d. $1,086,957

e. $1,127,660

52. How a firm raises capital depends a great deal on which of the following factors?

Firm's reputation

1. Size of the firm

2. Reputation of the firm's investment dealers

3. Firm's life cycle stage

4. Firm's growth prospects

5. Capability of the firm's investment dealers

a. I, II, and III

b. I, III, and V

c. II, IV, and V

d. II, V, and VI

e. IV, V, and VI

53. What is the specialty of a venture capital firm?

a. seeking out entrepreneurs with new profitable ideas

b. investing shareholders' money in new businesses

c. pooling funds from various sources and investing them

d. setting up joint ventures

e. borrowing money from financial institutions and lending it to new entrepreneurs.

54. A seasoned new issue of equity refers to the

a. timed issue of new shares over a regular interval so as to reduce the effects on share prices.

b. issue of new shares by a firm that has already issued shares in the past.

c. issue of new shares accompanied by a preliminary prospectus.

d. purchase of new shares from the issuing company by an investment dealer for resale to the public.

e. issue of new shares during a particular season of the year.

55. A regular underwriting is

a. the purchase of securities from the issuing company by an investment banker for resale to the public.

b. the underwriter buying the entire issue and assuming full financial responsibility for any unsold shares.

c. the underwriter selling as much of the issue as possible without guaranteeing any particular amount of the money to the issuer.

d. one underwriter buying securities from an issuing firm and selling them directly to a small number of investors.

e. a syndicate buying the entire issue and assuming full financial responsibility for any unsold shares.

56. In a rights offering, the shareholders have three choices

1. exercise and subscribe to the entitled shares.

2. sell the rights.

3. do nothing and let the rights expire.

Which of these choice(s) would result in a decrease in a shareholder's wealth?

a. I only

b. III only

c. I and II

d. I and III

e. None of the choices

57. Cameron Camera has proposed a rights offering in which the stockholders will be allowed to buy one new share for every two that they own, at a subscription price of $35 per share. The stock is currently selling for $80 per share. What is the price of each right during the ex-rights period?

a. $15.00

b. $35.00

c. $50.00

d. $62.00

e. $65.00

58. Dilution of ownership of existing shareholders can be avoided by using a/an.

a. bond issue.

b. rights offering.

c. initial public offering.

d. investment dealer.

e. warranty.

59. Widget & Us Ltd. needs to raise $6.5 million for a new project via a rights offering. The company currently has 5 million shares of common stock outstanding that sell for $7.50 per share. Its underwriter has set a subscription price of $3 per share and will charge the company a 5% spread. If you currently own 1,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights?

a. $650.00

b. $939.76

c. $1,094.93

d. $1,409.64

e. $2,192.31

60. The Running Man Gym Equipment Inc., held a rights offering on January 2, 2011. Each right was valued at $0.50, while the cum-right share price was $3.00. Two rights were required to buy each new share. Before the rights offering, the firm had 10 million shares outstanding. If the company only received 90% of the total proceeds from the rights offering, what was the percentage flotation cost on the net proceeds?

a. 10%

b. 11.11%

c. 15%

d. 22.22%

e. $750,000

61. Texas-based Entech Solar Inc. held a rights offering to sell 2 million shares at a subscription price of $1.00 per share. The company had 10 million shares of common stock outstanding prior to the rights offering. The shares of the company were trading at a cum-right price of $2.00 per share. The net proceeds to the company were estimated to be $1,900,000 if the rights offer were fully subscribed. Suppose we own 100,000 shares in Entech Solar. How would our wealth change if we did nothing during this rights offering?

a. Wealth will decrease by $16,667.

b. Wealth will decrease by $18,333.

c. Wealth will decrease by $20,000.

d. Wealth will increase by $16,667.

e. Wealth will increase by $18,333.

62. A firm can consider its capital restructuring decisions in isolation from its investment decisions because

a. investment decisions affect operations while capital restructuring decisions affect financing decisions.

b. a company's assets are not directly affected by capital restructuring decisions.

c. investment decisions and capital restructuring decisions are mutually exclusive.

d. investors demand a separation of these two decisions due to agency conflicts.

e. investment and capital restructuring decisions use different sets of criteria and discount rates.

63. What is the guiding principle for financial managers in capital structure decisions?

a. Choose the capital structure that will minimize the cost of debt.

b. Choose the capital structure that will minimize corporate taxes.

c. Choose the capital structure that will maximize the value of the firm's shares.

d. Choose the capital structure that will minimize financial distress costs.

e. Choose the capital structure that will minimize the impacts on ownership proportions.

64. Calculate the degree of financial leverage for ABC Co., which has an EBIT of $3,000,000 and interest expense of $800,000. Ignore taxes

a. DFL = 0.27

b. DFL = 0.73

c. DFL = 1.36

d. DFL = 2.75

e. DFL = 3.75

65. The M&M Proposition II without taxes states that

a. the value of a firm is independent of its capital structure.

b. a firm's cost of equity is a positive linear function of its capital structure.

c. the riskiness of a firm's equity depends on its business risk and financial risk.

d. the value of a firm is equal to the value of an unleveraged firm with the same EBIT, plus the present value of the interest tax shield.

e. a firm's cost of equity is independent of its capital structure.

66. A measure of the systematic risk of the firm's assets is sometimes called the

a. unlevered beta.

b. total beta.

c. risk premium.

d. market beta.

e. equity beta.

67. Which of the following is not an indirect bankruptcy cost?

a. bondholders filing for bankruptcy protection

b. loss of asset value as management try to avoid bankruptcy

c. sales lost due to disruption in normal operations

d. loss of positive NPV projects due to lack of funding

e. lawyers' fees from bankruptcy filing and administration

68. In the Static Theory of Capital Structure, the difference between the static theory optimal value of the firm and the M&M value without taxes is

a. the loss in value from the possibility of financial distress.

b. the gain from leverage, net of financial distress costs.

c. the gain from leverage.

d. the financial distress costs.

e. the present value of tax shield on debt.

69. In a normal liquidation situation, ___________ are lower than common stockholders on the priority list of claims on liquidation proceeds.

a. preferred stockholders

b. contributions to employee benefit plans

c. consumer claims

d. unsecured creditors

e. no other claims

70. ABC Company expects an EBIT of $4,000 every year forever. It can borrow at 10%, but it currently has no debt. Its cost of equity is 14%, and the corporate tax rate is 30%. Suppose ABC borrows $6,000 and uses the proceeds to buy back stock. What is the value of ABC according to M&M Proposition I with taxes?

a. $21,800

b. $2,800

c. $20,000

d. $43,810

e. $18,200

71. Under which of the following conditions will financial leverage provide no benefits? (Note: TC = corporate tax rate, TS = personal tax rate on equity distributions, and Tb = personal tax rate on interest income.)

a. (1 - TS) x (1 - Tb) = 1 - TC

b. (1 - TC) x (1 - TS) > 1 - Tb

c. (1 - TC) x (1 - Tb) > 1 - TS

d. (1 - TC) x (1 - TS) = 1 - Tb

e. (1 - TC) x (1 - Tb) = 1 - TS

72. Which of the following is not a factor that induces a firm to pay higher dividends?

a. higher corporate tax rate

b. higher transaction costs on buying and selling shares

c. shareholders' desire for current income

d. more restrictive debt covenant

e. higher personal tax rates on interest income

73. Share repurchases

a. reduce earnings.

b. reduce EPS.

c. reduce the number of outstanding shares.

d. increase earnings.

e. have no effect on the firm.

74. When will the price on a company's shares change once it has declared a dividend?

a. on the record date

b. on the declaration date

c. two business days after the record date

d. two business days before the payment date

e. two business days before the record date

75. You own 1,000 shares of a firm's common stock. The firm has a total of 250,000 shares outstanding, with each share being priced at $2 per share. The firm has just declared a 5-for-4 stock split. How many shares will you end up with, and what will be the price per share after the stock split?

a. 800 shares; $2

b. 1,000 shares; $2

c. 1,250 shares; $2

d. 1,250 shares; $1.60

e. 1,500 shares; $1.60

76. Aunt Jemima owns 250 shares in Oohay Corporation common stock. Oohay has just declared a stock dividend. If Aunt Jemima ends up with 325 shares afterwards, what percentage stock dividend was declared?

a. 20%

b. 25%

c. 30%

d. 35%

e. 40%

77. Which of the following is NOT a feature of a cyclical dividend policy?

a. stable dividend payout

b. stable dividends per share

c. cyclical dividend yield

d. cyclical amount of dividends paid

e. none of the above

78. A cash dividend and stock repurchase will produce the same effect on

a. Equity value.

b. P/E ratio.

c. Net Income.

d. none of the above

e. all of the above

79. From the shareholders' point of view, which of the following may cause a change in percentage ownership?

a. a stock repurchase

b. a stock split

c. a stock dividend

d. a reverse stock split

e. a bond issue

80. PQR Inc. has a debt-equity ratio of 1.6 and 1 million shares outstanding. The firm's pro-forma Income Statement for the next year indicates that its Net Income will be $560,000. If the company proposes to invest 60% of its earnings in projects, what is the dividend per share?

a. $0.34

b. $0.43

c. $0.56

d. $0.90

e. $1.46

81. STU Mobility Inc. will pay $2 per share in cash dividends 1 year from now, and a liquidating dividend of $65 per share 2 years from now. The required return on similar common stocks is 15%. If you own 1,000 shares of the 100,000 total shares outstanding in STU, but you want to have constant dividend payout in the next 2 years, how much homemade dividends can you get in each year?

a. $3,130.23

b. $3,350.00

c. $32,500.00

d. $31,302.33

e. $33,500.00.