Reference no: EM131286893

Part 1

Question 1

As a legal entity a corporation can perform the following functions except: I) borrow money; II) lend money; III) sue and be sued; IV) vote
A.I and II only
B.I, II, and III only
C.IV only
D.I, II, III and IV

Question 2

A firm's investment decision is also called the:
A. Financing decision
B. Liquidity decision
C. Capital budgeting decision
D. None of the above

Question 3

The following are important functions of financial markets: I) Source of financing; II) Provide liquidity; III) Reduce risk; IV) Source of information
A.I only
B.I and II only
C.I, II, III, and IV
D.IV only

Question 4

The mixture of debt and equity, used to finance a corporation is also known as:
A. Capital budgeting
B. Capital structure
C. Investing
D. Treasury

Question 5

The following are some of the actions shareholders can take if the corporation is not performing well:
A. Replace the board of directors in an election.
B. Force the board of directors to change the management team.
C. Sell their shares of stock in the corporation.
D. Any of the above

Question 6

Major disadvantages of the Sarbanes-Oxley Act of 2002 (SOX) are the following except:
A. good investor protection
B. increase in compliance costs
C. that it constrains managers' ability to run the firm
D. that it may discourage development of human capital in the firm

Question 7

Present Value is defined as:
A. Future cash flows discounted to the present at an appropriate discount rate
B. Inverse of future cash flows
C. Present cash flow compounded into the future
D. None of the above

Question 8

Present Value of $100,000 that is, expected, to be received at the end of one year at a discount rate% per year is:
A.$80,000
B.$125,000
C.$100,000
D.None of the above

Question 9

If the present value of a cash flow generated by an initial investment of $200,000 is $250,000, what is the NPV of the project?
A.$250,000
B.$50,000
C.$200,000
D. None of the above

Question 10

According to the net present value rule, an investment in a project should be made if the:
A.Net present value is greater than the cost of investment
B.Net present value is greater than the present value of cash flows
C.Net present value is positive
D.Net present value is negative

Question 11

An annuity is defined as
A. Equal cash flows at equal intervals of time for a specified period of time
B. Equal cash flows at equal intervals of time forever
C. Unequal cash flows at equal intervals of time forever
D. None of the above

Question 12

The concept of compound interest is most appropriately described as:
A. Interest earned on an investment
B. The total amount of interest earned over the life of an investment
C. Interest earned on interest
D. None of the above

Question 13

The following entities issue bonds to raise long-term loans except:
A. The federal government
B. State and local governments
C. Companies
D. Individuals

Question 14

A 5-year treasury bond with a coupon rate of 8% has a face value of $1000. What is the semi-annual interest payment?
A.$80
B.$40
C.$100
D. None of the above

Question 15

A bond with durationyears has yield to maturity of 10%. This bond's volatility is:
A.9.09%
B.6.8%
C.14.6%
D.6.0%

Part 2

Question 1
If the Wall Street Journal Quotation for a company has the following values close: 55.14; Net chg: = + 1.04; then the closing price for the stock for the previous trading day was?
A.$56.18
B.$54.10
C.$55.66
D. None of the above.

Question 2
The value of a common stock today depends on:
A. Number of shares outstanding and the number of shareholders
B. The expected future dividends and the discount rate
C. The Wall Street analysts
D. Present value of the future earnings per share

Question 3
Company X has a P/E ratioand a stock price of $50 per share. Calculate earnings per share of the company.
A.$6 per share
B.$10 per share
C.$0.20 per share
D.$5 per share

Question 4
Which of the following stocks is/are a growth stock(s)?
A. Unilever
B. Cummins, Inc
C. Starbucks
D. All of the above are growth stocks

Question 5
Universal Air is a no growth firm and has two million shares outstanding. It is expected to earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the current price per share for the stock.
A.$200
B.$150
C.$100
D.$50

Question 6
Which of the following investment rules does not use the time value of the money concept?
A. Net present value
B. Internal rate of return
C. The payback period
D. All of the above use the time value concept

Question 7
The following are measures used by firms when making capital budgeting decisions except:
A. Payback period
B. Internal rate of return
C. P/E ratio
D. Net present value

Question 8
Which of the following investment rules has value adding-up property?
A. The payback period method
B. Net present value method
C. The book rate of return method
D. The internal rate of return method

Question 9
Internal rate of return (IRR) method is also called:
A. Discounted payback period method
B. Discounted cash-flow (DCF) rate of return method
C. Modified internal rate of return (MIRR) method
D. None of the above

Question 10
Profitability index is the ratio of:
A. Future value of cash flows to investment
B. Net present value of cash flows to investment
C.Net present value of cash flows to IRR
D. Present value of cash flows to IRR

Question 11
When a firm has the opportunity to add a project that will utilize excess factory capacity (that is currently not being used), which costs should be used to determine if the added project should be undertaken?
A. Opportunity cost
B. Sunk cost
C. Incremental costs
D. None of the above

Question 12
The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a (an):
A. Sunk cost
B. Opportunity cost
C. Working capital
D. None of the above

Question 13
Net Working Capital should be considered in project cash flows because:
A. Firms must invest cash in short-term assets to produce finished goods
B. They are sunk costs
C. Firms need positive NPV projects for investment
D. None of the above

Question 14
If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner requires that project:
I) cash flows be estimated in nominal terms
II) cash flows be estimated in real terms
III) accounting income be used
A.I only
B.II only
C.III only
D.None of the above

Question 15
For example, in the case of an electric car project, which of the following cash flows should be treated as incremental flows when deciding whether to go ahead with the project?
A. The cost of research and development undertaken for developing the electric car in the past three years
B. The annual depreciation charge
C. Tax savings resulting from the depreciation charges
D. Dividend payments

Part 3

Question 1
Which of the following portfolios have the least risk?
A.A portfolio of Treasury bills
B.A portfolio of long-term United States Government bonds
C. Portfolio of U.S. common stocks of small firms
D. None of the above

Question 2
If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is 4.0%, what is the market risk premium?
A.15.8%
B.4.1%
C.7.7%
D. None of the above

Question 3
Spill Oil Company's stocks had -8%, 11% and 24% rates of return during the last three years respectively; calculate the average rate of return for the stock.
A.8% per year
B.9% per year
C.11% per year
D. None of the above

Question 4
Given the following data: risk-free rate = 4%, average risk premium = 7.7%. Calculate the required rate of return:
A.5.6%
B.7.6%
C.11.7%
D. None of the given answers

Question 5
The unique risk is also called the:
A. Unsystematic risk
B. Diversifiable risk
C. Firm specific risk
D. All of the above

Question 6
Market risk is also called: I) systematic risk, II) undiversifiable risk, III) firm specific risk.
A.I only
B.II only
C.III only
D.I and II only

Question 7
Stock A has an expected return of 10% per year and stock B has an expected return of 20%. If 40% of the funds are invested in stock A, and the rest in stock B, what is the expected return on the portfolio of stock A and stock B?
A.10%
B.20%
C.16%
D. None of the above

Question 8
If the correlation coefficient between stock C and stock D is +1.0% and the standard deviation of return for stock C is 15% and that for stock D is 30%, calculate the covariance between stock C and stock D.
A.+45
B.-450
C.+450
D. None of the above

Question 9
The beta of market portfolio is:
A.+ 1.0
B.+0.5
C.0
D.-1.0

Question 10
The distribution of returns, measured over a short interval of time, like daily returns, can be approximated by:
A. Normal distribution
B. Lognormal distribution
C. Binomial distribution
D. none of the above

Question 11
Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%,15%, 20%; MC: 8%, 8%, 20%. If FC and MC are combined in a portfolio with 50% of the funds invested in each, calculate the expected return on the portfolio.
A.12%
B.10%
C.11%
D. None of the above.

Question 12
Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%; calculate the expected return on the resulting portfolio:
A.10%
B.4%
C.12%
D. none of the above

Question 13
Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%; calculate the standard deviation of the returns on the resulting portfolio:
A.8%
B.10%
C.20%
D. none of the above

Question 14
The correlation measures the:
A. Rate of movements of the return of individual stocks
B. Direction of movement of the return of individual stocks
C. Direction of movement between the returns of two stocks
D. Stock market volatility

Question 15
The security market line (SML) is the graph of:
A. Expected rate on investment (Y-axis) vs. variance of return
B. Expected return on investment vs. standard deviation of return
C. Expected rate of return on investment vs. beta
D.A and B

Part 4

Question 1
Using the company cost of capital to evaluate a project is:
I) Always correct
II) Always incorrect
III) Correct for projects that are about as risky as the average of the firm's other assets
A.I only
B.II only
C.III only
D.I and III only

Question 2
Which of the following type of projects has average risk?
A. Speculation ventures
B. New products
C. Expansion of existing business
D. Cost improvement

Question 3
The market value of Cable Company's equity is $60 million, and the market value of its risk-free debt is $40 million. If the required rate of return on the equity is 15% and that on the debt is 5%, calculate the company's cost of capital. (Assume no taxes.)
A.15%
B.10%
C.11%
D. None of the above

Question 4
The hurdle rate for capital budgeting decisions is:
A.The cost of capital
B.The cost of debt
C.The cost of equity
D.All of the above

Question 5
The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk premium is 10%. If the Treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.)
A.9.2%
B.14%
C.8.1%
D. None of the above

Question 6
On a graph with common stock returns on the Y- axis and market returns on the X-axis, the slope of the regression line represents the:
A. Alpha
B. Beta
C. R-squared
D. Adjusted beta

Question 7
Generally, postaudits are conducted for large projects:
A. shortly after the completion of the project
B. after several years after the completion of the project
C. shortly after the project has begun to operate
D. well before the start of the project

Question 8
You are given the following data for year-1.
Revenue = $43;
Total costs = $30;
Depreciation = $3;
Tax rate = 30%.
Calculate the operating cash flow for the project for year-1.
A.$7
B.$10
C.$13
D. None of the above

Question 9
The following are drawbacks of sensitivity analysis except:
A. it provides ambiguous results.
B. underlying variables are likely to be interrelated.
C. it provides additional information about the project that is useful.
D. all of the above statements are drawbacks of sensitivity analysis.

Question 10
The accounting break-even point occurs when:
A. the total revenue line cuts the fixed cost line
B. the present value of inflows line cuts the present value of outflows line
C. the total revenue line cuts the total cost line
D. none of the above

Part 5

Question 1
If the capital markets are efficient, then the sale or purchase of any security at the prevailing market price is:
A. Always a positive NPV transaction
B. Generally a zero NPV transaction
C. Is always a negative NPV transaction
D. None of the above

Question 2
Generally, a firm is able to find positive NPV opportunities with:
I) Financing decisions
II) Capital investment decisions
III) Short-term borrowing decisions
A.I only
B.I and III only
C.III only
D.II only

Question 3
Stock price cycles or patterns self-destruct as soon as investors recognize them through:
A. stock market regulation by the Securities and Exchange Commission (SEC)
B. price fixing by the specialists on New York Stock Exchange
C. trading by the investors
D. none of the above

Question 4
Which of the following is a statement of semi-strong form efficiency?
I) If the markets are efficient in the semi-strong form then prices will adjust immediately to public information
II) If the markets are efficient in the semi-strong form then prices reflect all information
III) If the markets are efficient in the semi-strong form then prices will adjust to newly published information after a long time delay
A.I only
B.II only
C.II and III only
D.III only

Question 5
Weak form efficiency implies that past stock price(s)
A. patterns tend to repeat itself in the future
B. are major inputs to the investors for forming trading strategies
C. do not matter
D. none of the above

Question 6
One important implication of the efficient markets hypothesis is that:
A. investors should hold a diversified portfolio and avoid active trading.
B. investors can benefit by engaging in day trading.
C. investors should trade actively help to ensure the highest overall gain in their portfolios.
D. all of the above.

Question 7
On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend?
A. February 5
B. February 6
C. February 7
D. February 8

Question 8
Firms can repurchase shares in the following ways:
I) Open market repurchase
II) Through a tender offer
III) Through a Dutch auction process
IV) Through direct negotiation with a major shareholder
A.I only
B.II only
C.III only
D.I, II, III, and IV

Question 9
Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, Calculate the stock price today. (The required rate of return is 10%)
A.$110
B.$90
C.$100
D. None of the above

Question 10
Capital structure of the firm can be defined as:
I) the firm's debt-equity ratio
II) the firm's mix of different securities used to finance assets
III) the market imperfection that the firm's manager can exploit
A.I only
B.II only
C.III only
D.I, II, and III

Question 11
If an investor buys "a" proportion of an unlevered firm's (firm U) equity then his/her payoff is:
A.(a) * (profits)
B.(a) * (interest)
C.(a) * (profits - interest)
D. none of the above

Question 12
If an individual wanted to borrow with limited liability he/she should:
A. Invest in the equity of an unlevered firm
B. Borrow on his/her own account
C. Invest in the equity of a levered firm
D. Invest in a risk-free asset like T-bills

Question 13
Capital structure is irrelevant if:
A. the capital markets are perfect
B. each investor holds a fully diversified portfolio
C. each investor holds the same proportion of debt and equity of the firm
D. all of the above

Question 14
The effect of financial leverage on the performance of the firm depends on:
A. The rate of return on equity
B. The firm's level of operating income
C. The current market value of the debt
D. The rate of dividend growth

Question 15
Minimizing the weighted average cost of capital (WACC) is the same as:
A. Maximizing the market value of the firm
B. Maximizing the book value of the firm
C. Maximizing the profits of the firm
D. Maximizing the liquidating value of the firm

Part 6

Question 1
The main advantage of debt financing for a firm is:
I) no SEC registration is required for bond issue
II) interest expense of a firm is tax deductible
III) unlevered firms have higher value than levered firms
A.I only
B.II only
C.III only
D.I and III only

Question 2
If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the tax rate is 30%)
A.$8.00 million
B.$5.6 million
C.$30 million
D.$26.67 million
E. None of the above

Question 3
In order to calculate the tax shields provided by debt, the tax rate used is the:
A. average corporate tax rate
B. marginal corporate tax rate
C. average of shareholders' tax rates
D. average of bondholders' tax rates

Question 4
The reason that MM Proposition I does not hold good in the presence of corporate taxes is because:
A. Levered firms pay lower taxes when compared with identical unlevered firms
B. Bondholders require higher rates of return compared with stockholders
C. Earnings per share are no longer relevant with taxes
D. Dividends are no longer relevant with taxes

Question 5
Assuming that bonds are sold at a fair price, the benefits from the tax shield go to the:
A. managers of the firm
B. bondholders of the firm
C. stockholders of the firm
D. lawyers of the firm

Question 6
The pecking order theory of capital structure predicts that:
A. If two firms are equally profitable, the more rapidly growing firm will borrow more, other things equal
B. Firms prefer equity to debt financing
C. Risky firms will end up borrowing less
D. Risky firms will end up borrowing more

Question 7
Capital budgeting decisions that include both investment and financing decisions can be analyzed by:
I) Adjusting the present value
II) Adjusting the discount rate
III) Ignoring financing mix
A.I only
B.II only
C.III only
D.I and II only

Question 8
The after-tax weighted average cost of capital is determined by:
A. Multiplying the weighted average after tax cost of debt by the weighted average cost of equity
B. Adding the weighted average before tax cost of debt to the weighted average cost of equity
C. Adding the weighted average after tax cost of debt to the weighted average cost of equity
D. Dividing the weighted average before tax cost of debt to the weighted average cost of equity

Question 9
In calculating the weighted average cost of capital, the values used for D, E and V are:
A. book values
B. liquidating values
C. market values
D. none of the above

Question 10
A firm has a total market value of $10 million and debt has a market value of $4 million. What is the after-tax weighted average cost of capital if the before - tax cost of debt is 10%, the cost of equity is 15% and the tax rate is 35%?
A.13%
B.11.6%
C.8.75%
D. None of the given answers

Question 11
Given the following data for year-1:
Profits after taxes = $20 millions;
Depreciation = $6 millions;
Interest expense = $4 millions;
Investment in fixed assets = $12 millions;
Investment in working capital = $4 millions.
Calculate the free cash flow (FCF) for year-1:
A.$4 millions
B.$6 millions
C.$10 millions
D. none of the above

Question 12
Lowering debt-equity ratio of a firm can change:
I) financing proportions
II) cost of equity
III) cost of debt
IV) effective tax rate
A.II and III only
B.I only
C.I, II, and III only
D.I, II, III and IV

Question 13
Floatation costs are incorporated into the APV framework by:
A. Adding them into the all equity value of the project.
B. Subtracting them from all equity value of the project.
C. Incorporating them into the WACC.
D. Disregarding them.

Question 14
Subsidized loans have the effect of:
A. Increasing the NPV of the loan, thereby reducing the APV.
B. Decreasing the NPV of the loan, thereby reducing the APV.
C. Decreasing the NPV of the loan, thereby increasing the APV.
D. Increasing the NPV of the loan, thereby increasing the APV.

Question 15
APV method is most useful in analyzing:
A. large international projects
B. domestic projects
C. small projects
D. none of the above

Part 7

Question 1
Assets are listed on the balance sheet in order of:
I) Decreasing liquidity
II) Decreasing size
III) Increasing size
IV) Relative life
A.I only
B.III and IV only
C.II only
D.IV only

Question 2
The difference between Total Assets of a firm and its Total Liabilities is called.
A.Net working capital
B.Net current assets
C.Net worth
D. None of the above

Question 3
The difference between Current Assets of a firm and its Current Liabilities is called.
A.Net worth
B.Net working capital
C. Gross working capital
D. None of the above

Question 4
Which of the following is an example of leverage ratios?
A. Debt-Equity ratio
B. Quick ratio
C. Payout ratio
D. Return on equity

Question 5
Which of the following is an example of liquidity ratios?
A. Times interest earned (TIE)
B.P/E ratio
C. Return on equity
D. Quick ratio

Question 6
Given the following data:
Current assets = 500
Current liabilities = 250
Inventory = 200
Account receivables = 200
Calculate the current ratio:
A.2.0
B.1.0
C.1.5
D. None of the above

Question 7
Given the following data:
Sales = 3200
Cost of goods sold = 1600
Average total assets = 1600
Average inventory = 200
Calculate the asset turnover ratio:
A.2.0
B.0.9375
C.1.33
D. None of the above

Question 8
Efficiency ratios indicate:
I) How productively is the firm utilizing its assets.
II) How liquid is the firm.
III) How profitable is the firm.
IV) How highly is the firm valued by investors.
A.I only
B.II only
C.III only
D.III and IV only

Question 9
Profitability ratios indicate:
I) How productively is the firm utilizing its assets.
II) How liquid is the firm.
III) How profitable is the firm.
IV) How highly is the firm valued by the investors.
A.I only
B.II only
C.III only
D.III and IV only

Question 10
Given the following assets;
I) Long-term assets
II) Inventories
III) Receivables
IV) Marketable securities
Which is the least liquid of these assets?
A.I
B.II
C.III
D.IV

Question 11
Given the following data:
Total current assets = $852
Total current liabilities = $406
Long-term debt = $442
Calculate the net working capital.
A.$446
B.$852
C.$410
D. None of the above

Question 12
The cash budget is the primary short-term financial planning tool. The key reasons a cash budget is created are:
I) To estimate your investment in assets
II) To estimate the size and timing of your new cash flows
III) To prepare for potential financing needs
A.I only
B.II and III only
C.II only
D.III only

Question 13
Net working capital is defined as:
A. The current assets in a business
B. The difference between current assets and current liabilities
C. The present value of all short-term cash flows
D. The difference between all assets and liabilities

Question 14
Cash inflow in cash budgeting comes mainly from:
A. Collection on accounts receivable
B. Short-term debt
C. Issue of securities
D. None of the above

Question 15
The firm's internal growth rate is defined as:
A. retained earnings/net income
B. retained earnings/net assets
C. retained earnings/total assets
D. none of the above

Part 8

Question 1

State the "rate of return rule."

Question 2

Using the company cost of capital to evaluate a project is:
I) Always correct
II) Always incorrect
III) Correct for projects that are about as risky as the average of the firm's other assets
A.I only
B.II only
C.III only
D.I and III only

Question 3

Net Working Capital should be considered in project cash flows because:
A. Firms must invest cash in short-term assets to produce finished goods
B. They are sunk costs
C. Firms need positive NPV projects for investment
D. None of the above

Question 4

Briefly explain the functions of financial markets.

Question 5

A firm's investment decision is also called the:
A. Financing decision
B. Liquidity decision
C. Capital budgeting decision
D. None of the above

Question 6

The following are some of the actions shareholders can take if the corporation is not performing well:
A. Replace the board of directors in an election.
B. Force the board of directors to change the management team.
C. Sell their shares of stock in the corporation.
D. Any of the above

Question 7

If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is 4.0%, what is the market risk premium?
A.15.8%
B.4.1%
C.7.7%
D. None of the above

Question 8

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%; calculate the standard deviation of the returns on the resulting portfolio:
A.8%
B.10%
C.20%
D. none of the above

Question 9

The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a (an):
A. Sunk cost
B. Opportunity cost
C. Working capital
D. None of the above

Question 10

If the NPV of project A is + $30 and that of project B is + $60, then the NPV of the combined project is:
A.+$30
B.-$60
C.-$30
D. None of the above.

Question 11

A firm's capital investment proposals should reflect:
I) Capital budgeting process
II) Strategic planning process
III) Middle managers' ideas and views
A.I only
B.I and II only
C.I, II, and III
D.III only

Question 12

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the: I) same as the NPV value obtained by discounting real cash flows using the real discount rate II) same as the NPV value obtained by discounting real cash flows using the nominal discount rate III) same as the NPV value obtained by discounting nominal cash flows using the real discount rate
A.I only
B.II only
C.III only
D.II and III only

Question 13

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%,15%, 20%; MC: 8%, 8%, 20%. If FC and MC are combined in a portfolio with 50% of the funds invested in each, calculate the expected return on the portfolio.
A.12%
B.10%
C.11%
D. None of the above.

Question 14

The value of a common stock today depends on:
A. Number of shares outstanding and the number of shareholders
B. The expected future dividends and the discount rate
C. The Wall Street analysts
D. Present value of the future earnings per share

Question 15

The market value of Cable Company's equity is $60 million, and the market value of its risk-free debt is $40 million. If the required rate of return on the equity is 15% and that on the debt is 5%, calculate the company's cost of capital. (Assume no taxes.)
A.15%
B.10%
C.11%
D. None of the above

Question 16

A bond with durationyears has yield to maturity of 10%. This bond's volatility is:
A.9.09%
B.6.8%
C.14.6%
D.6.0%

Question 17

If the correlation coefficient between stock C and stock D is +1.0% and the standard deviation of return for stock C is 15% and that for stock D is 30%, calculate the covariance between stock C and stock D.
A.+45
B.-450
C.+450
D. None of the above

Question 18

Present Value is defined as:
A. Future cash flows discounted to the present at an appropriate discount rate
B. Inverse of future cash flows
C. Present cash flow compounded into the future
D. None of the above

Question 19

Present Value of $100,000 that is, expected, to be received at the end of one year at a discount rate% per year is:
A.$80,000
B.$125,000
C.$100,000
D. None of the above

Question 20

A 5-year treasury bond with a coupon rate of 8% has a face value of $1000. What is the semi-annual interest payment?
A.$80
B.$40
C.$100
D. None of the above

Question 21

The correlation measures the:
A. Rate of movements of the return of individual stocks
B. Direction of movement of the return of individual stocks
C. Direction of movement between the returns of two stocks
D. Stock market volatility

Question 22

The security market line (SML) is the graph of:
A. Expected rate on investment (Y-axis) vs. variance of return
B. Expected return on investment vs. standard deviation of return
C. Expected rate of return on investment vs. beta
D.A and B

Question 23

The cost of capital for a project depends on:
A. The company's cost of capital
B. The use to which the capital is put, i.e. the project
C. The industry cost of capital
D. All of the above

Question 24

Briefly explain the difference between company and project cost of capital.
Question 25

An annuity is defined as
A. Equal cash flows at equal intervals of time for a specified period of time
B. Equal cash flows at equal intervals of time forever
C. Unequal cash flows at equal intervals of time forever
D. None of the above

Part 9

Question 1
The firm's internal growth rate is defined as:
A. retained earnings/net income
B. retained earnings/net assets
C. retained earnings/total assets
D. none of the above

Question 2

Briefly describe the traditional position on capital structure.

Question 3

Minimizing the weighted average cost of capital (WACC) is the same as:
A. Maximizing the market value of the firm
B. Maximizing the book value of the firm
C. Maximizing the profits of the firm
D. Maximizing the liquidating value of the firm

Question 4

The pecking order theory of capital structure predicts that:
A. If two firms are equally profitable, the more rapidly growing firm will borrow more, other things equal
B. Firms prefer equity to debt financing
C. Risky firms will end up borrowing less
D. Risky firms will end up borrowing more

Question 5

The cash budget is the primary short-term financial planning tool. The key reasons a cash budget is created are:
I) To estimate your investment in assets
II) To estimate the size and timing of your new cash flows
III) To prepare for potential financing needs
A.I only
B.II and III only
C.II only
D.III only

Question 6

Indirect costs of bankruptcy are borne principally by:
A. Bondholders
B. Stockholders
C. Managers
D. The federal government

Question 7

Which of the following lists events in the chronological order from earliest to latest?
A. Record date, declaration date, ex-dividend date
B. Declaration date, record date, ex-dividend date
C. Declaration date, ex-dividend date, record date
D. None of the above

Question 8

Cash inflow in cash budgeting comes mainly from:
A. Collection on accounts receivable
B. Short-term debt
C. Issue of securities
D. None of the above

Question 9

APV method is most useful in analyzing:
A. large international projects
B. domestic projects
C. small projects
D. none of the above

Question 10

Briefly explain the information content of share repurchase.

Question 11

The after-tax weighted average cost of capital is determined by:
A. Multiplying the weighted average after tax cost of debt by the weighted average cost of equity
B. Adding the weighted average before tax cost of debt to the weighted average cost of equity
C. Adding the weighted average after tax cost of debt to the weighted average cost of equity
D. Dividing the weighted average before tax cost of debt to the weighted average cost of equity

Question 12
Dividends are decided by:
I) The managers of a firm
II) The government
III) The board of directors
A.I only
B.II only
C.III only
D.I and II only

Question 13

Why is liquidity relevant?

Question 14

In calculating the weighted average cost of capital, the values used for D, E and V are:
A. book values
B. liquidating values
C. market values
D. none of the above

Question 15

In order to find the present value of the tax shields provided by debt, the discount rate used is the:
A. cost of capital
B. cost of equity
C. cost of debt
D. none of the above

Question 16

How are "uses and sources" of funds are calculated?

Question 17

Given the following data:
Current assets = 500
Current liabilities = 250
Inventory = 200
Account receivables = 200
Calculate the current ratio:
A.2.0
B.1.0
C.1.5
D. None of the above

Question 18

What are the primary reasons for a company to use debt in its capital structure?

Question 19

The difference between Current Assets of a firm and its Current Liabilities is called.
A.Net worth
B.Net working capital
C. Gross working capital
D. None of the above

Question 20

Given the following data:
Total current assets = $852
Total current liabilities = $406
Long-term debt = $442
Calculate the net working capital.
A.$446
B.$852
C.$410
D. None of the above

Question 21

Which of the following investors have the strongest tax reason to prefer dividends over capital gains?
A. Pension funds
B. Financial institutions
C. Individuals
D. Corporations

Question 22
On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend?
A. February 5
B. February 6
C. February 7
D. February 8

Question 23

When weighted average cost of capital (WACC) is used to value a levered firm, the interest tax shield is:
A. ignored.
B. considered by deducting the interest payment from the cash flows.
C. automatically considered because the after-tax cost of debt is used in the WACC formula.
D. none of the above

Question 24

The main advantage of debt financing for a firm is:
I) no SEC registration is required for bond issue
II) interest expense of a firm is tax deductible
III) unlevered firms have higher value than levered firms
A.I only
B.II only
C.III only
D.I and III only

Question 25

What are the common ratios used to measure liquidity of a firm?