Final Exam Study

The discounted payback method: A. considers the time value of money. B. discounts the cutoff point. C. discounts the initial cost. D. is preferred to the NPV method. E. ignores project risks.

A. considers the time value of money.

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates. A. real B. nominal C. effective D. stripped E. coupon

A. real

Which one of the following statements is correct concerning ratio analysis? A. A single ratio is often computed differently by different individuals. B. Ratios do not address the problem of size differences among firms. C. Only a very limited number of ratios can be used for analytical purposes. D. Each ratio has a specific formula that is used consistently by all analysts. E. Ratios cannot be used for comparison purposes over periods of time.

A. A single ratio is often computed differently by different individuals.

When the debt-to-value ratio changes over time, the best method(s) to use when evaluating a project is: A. APV. B. FTE. C. WACC. D. either APV or WACC. E. either FTE or WACC.

A. APV.

Which one of the following statements is correct? A. An equity carve-out generates cash for the parent firm. B. A split-up frequently follows a spin-off. C. An equity carve-out is a specific type of acquisition. D. A spin-off involves an initial public offering. E. A divestiture means that the original firm ceases to exist.

A. An equity carve-out generates cash for the parent firm.

Which one of the following depicts a correct relationship? A. Dividend payout ratio = 1 - Retention ratio B. Total asset turnover = 1 + Capital intensity ratio C. ROA = ROE × (1 + Debt-equity ratio) D. ROE = 1 - ROA E. Equity multiplier = 1 - Debt-equity ratio

A. Dividend payout ratio = 1 - Retention ratio

A firm's net cash flow is calculated as: A. EBIT - Taxes + Depreciation - Capital spending - Increases in net working capital. B. EBIT + Taxes + Depreciation - Capital spending - Increases in net working capital. C. EBIT - Taxes - Depreciation - Capital spending + Increases in net working capital. D. EBIT - Taxes - Depreciation + Capital spending - Increases in net working capital. E. EBIT + Taxes + Depreciation - Capital spending + Increases in net working capital.

A. EBIT - Taxes + Depreciation - Capital spending - Increases in net working capital.

An option that may be exercised only on the expiration date is called a(n) _____ option. A. European B. American C. Bermudan D. futures E. Asian

A. European

Which one of the following statements concerning mergers and acquisitions is correct? A. Generally, two-thirds of the shareholders in each firm must approve a merger. B. Acquisitions always result in at least one firm being dissolved. C. The net present value of an acquisition should have no bearing on whether or not the acquisition occurs. D. Acquisitions of assets are generally quite simple and inexpensive from a legal and accounting perspective. E. At least one-half of the shareholders must vote to approve an acquisition of stock.

A. Generally, two-thirds of the shareholders in each firm must approve a merger.

The concept of homemade leverage is most associated with: A. MM Proposition I with no tax. B. MM Proposition II with no tax. C. MM Proposition I with tax. D. MM Proposition II with tax. E. no MM Proposition.

A. MM Proposition I with no tax.

The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as: A. MM Proposition I with no tax. B. MM Proposition II with no tax. C. MM Proposition I with tax. D. MM Proposition II with tax. E. both MM I with and without tax..

A. MM Proposition I with no tax.

The return on equity can be calculated as: A. ROA × Equity multiplier. B. Profit margin × ROA. C. Profit margin × ROA × Total asset turnover. D. ROA ×(Net income / Total assets). E. ROA × Debt-equity ratio.

A. ROA × Equity multiplier.

Which one of these is an example of erosion that should be included in project analysis? A. The anticipated loss of current sales when a new product is launched. B. The expected decline in sales as a new product ages. C. The reduction in your sales that occurs when a competitor introduces a new product. D. The sudden loss of sales due to a major employer in your community implementing massive layoffs. E. The reduction in sales price that will most likely be required to sell inventory that has aged.

A. The anticipated loss of current sales when a new product is launched.

Which one of the following is an argument in favor of a low dividend policy? A. The tax on capital gains is deferred until the gain is realized. B. Few, if any, positive net present value projects are available to the firm. C. A preponderance of stockholders have minimal taxable income. D. A majority of stockholders have other investment opportunities that offer higher rewards with similar risk characteristics. E. Corporate tax rates exceed personal tax rates.

A. The tax on capital gains is deferred until the gain is realized.

Which one of the following statements is true? A. You must know the discount rate to compute the NPV but you can compute the IRR without having a discount rate. B. You must have a discount rate to compute, NPV, IRR, PI, and discounted payback. C. Payback uses the same discount rate as that applied in the NPV calculation. D. Financing projects can only ever have one IRR. E. Discounted payback is a better method than payback and is more frequently used in practice.

A. You must know the discount rate to compute the NPV but you can compute the IRR without having a discount rate.

The sustainable growth rate will be equivalent to the internal growth rate when, and only when,: A. a firm has no debt. B. the growth rate is positive. C. the plowback ratio is positive but less than 1. D. a firm has a debt-equity ratio equal to 1. E. the retention ratio is equal to 1.

A. a firm has no debt.

The APV method to value a project should be used when: A. a project's level of debt is known over the life of the project. B. a project's target debt-to-value ratio is constant over the life of the project. C. a project's debt financing is unknown over the life of the project. D. there are no subsidies to debt financing. E. level of market interest rates is expected to vary over the project's life.

A. a project's level of debt is known over the life of the project.

Which one of the following is most likely a good candidate for an acquisition that could benefit from the use of complementary resources? A. a sports arena that is home only to an indoor hockey team B. a hotel in a busy downtown business district of a major city C. a day care center located near a major route into the main business district of a large city D. an amusement park located in a centralized Florida location E. a fast food restaurant located near a major transportation hub

A. a sports arena that is home only to an indoor hockey team

Stock splits are often used to: A. adjust the market price of a stock such that it falls within a preferred trading range. B. decrease the excess cash held by a firm. C. increase both the number of shares outstanding and the market price per share. D. increase the total equity of a firm. E. adjust the debt-equity ratio such that it falls within a preferred range.

A. adjust the market price of a stock such that it falls within a preferred trading range.

The shareholders of a target firm benefit the most when: A. an acquiring firm has the better management team and replaces the target firm's managers. B. the management of the target firm is more efficient than the management of the acquiring firm which replaces them. C. the management of both the acquiring firm and the target firm are as equivalent as possible. D. their current management team is kept in place even though the managers of the acquiring firm are more suited to manage the target firm's situation. E. their management team is technologically knowledgeable yet ineffective.

A. an acquiring firm has the better management team and replaces the target firm's managers.

Financial managers: A. are reluctant to cut dividends. B. tend to ignore past dividend policies. C. tend to prefer cutting dividends every time quarterly earnings decline. D. prefer cutting dividends over incurring flotation costs. E. place little emphasis on dividend policy consistency.

A. are reluctant to cut dividends.

A manager should attempt to maximize the value of the firm by changing the capital structure if and only if the value of the firm increases: A. as a result of the change. B. to the sole benefit of the managers. C. to the sole benefit of the debtholders. D. while also decreasing shareholder value. E. while holding stockholder value constant.

A. as a result of the change.

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

A. asset management

Selling a covered call is equivalent to: A. buying a zero coupon bond and selling a put. B. selling a put and buying an offsetting call. C. buying the stock and selling the call. D. selling a zero coupon bond and buying a put. E. buying a zero coupon bond and buying a call.

A. buying a zero coupon bond and selling a put.

In order to value a project which is not scale enhancing you typically need to: A. calculate the equity cost of capital using the risk-adjusted beta of another firm. B. double the firm's beta value when computing the project WACC. C. apply the firm's current WACC to the project's cash flows. D. discount the project's cash flows using the market rate of return since the project will diversify the firm's operations. E. replace the risk-free rate with the market rate of return when computing the project's discount rate.

A. calculate the equity cost of capital using the risk-adjusted beta of another firm.

At expiration, the maximum price of a ____ is the greater of the: A. call; stock price minus the exercise price, or 0. B. call; the exercise price or 0. C. put; stock price minus the exercise price, or 0. D. put; stock price or 0. E. put; exercise price or the stock price.

A. call; stock price minus the exercise price, or 0.

Changes in the net working capital: A. can affect the cash flows of a project every year of the project's life. B. only affect the initial cash flows of a project. C. are included in project analysis only if they represent cash outflows. D. are generally excluded from project analysis due to their irrelevance to the total project. E. affect the initial and the final cash flows of a project but not the cash flows of the middle years.

A. can affect the cash flows of a project every year of the project's life.

The acquisition of a firm whose business is not related to that of the bidder is called a _____ acquisition. A. conglomerate B. forward C. backward D. horizontal E. vertical

A. conglomerate

A project's operating cash flow will increase when the: A. depreciation expense increases. B. sales projections are lowered. C. interest expense is lowered. D. net working capital requirement increases. E. earnings before interest and taxes decreases.

A. depreciation expense increases.

The internal rate of return for an investment project is best defined as the: A. discount rate that causes the NPV to equal zero. B. difference between the market rate of interest and the discount rate. C. market rate of interest less the risk-free rate. D. minimum project acceptance rate set by management. E. maximum rate that can be earned for a project to be accepted.

A. discount rate that causes the NPV to equal zero.

Payments made out of a firm's earnings to its owners in the form of cash or stock are called: A. dividends. B. distributions. C. share repurchases. D. payments-in-kind. E. stock splits.

A. dividends.

Ignore commissions, taxes, and other imperfections. If a firm substitutes a repurchase for a cash dividend, the primary difference will be an increase in the A. earnings per share. B. total value received by each investor. C. total earnings of the firm. D. excess cash reserves of the firm. E. number of shares outstanding.

A. earnings per share.

The internal rate of return tends to be: A. easier for managers to comprehend than the net present value. B. extremely accurate even when cash flow estimates are faulty. C. ignored by most financial managers. D. used primarily to differentiate between mutually exclusive projects. E. utilized in project analysis only when multiple net present values apply.

A. easier for managers to comprehend than the net present value.

For every positive net present value project that a firm undertakes, the equity in the firm will increase the most if the delta of the call option on the firm's assets is: A. equal to one. B. between zero and one. C. equal to zero. D. between zero and minus one. E. equal to minus one.

A. equal to one.

The CAPM has an advantage over DDM because the CAPM: A. explicitly adjusts for risk. B. applies to firms that pay dividends. C. is more simplistic. D. specifically considers a firm's degree of operating leverage. E. ignores changes in the overall market over time.

A. explicitly adjusts for risk.

The equity multiplier measures: A. financial leverage. B. returns to stockholders. C. operating efficiency. D. management efficiency. E. asset use efficiency.

A. financial leverage.

In a merger or acquisition, an asset should be acquired if it: A. generates a positive net present value to the shareholders of the acquiring firm. B. is a firm in the same line of business in which the acquirer has expertise. C. is a firm in a totally different line of business which will diversify the firm. D. pays a large dividend which will provide a cash pass through to the acquirer. E. increases the firm's market share.

A. generates a positive net present value to the shareholders of the acquiring firm.

An independent investment is acceptable if the profitability index (PI) of the investment is: A. greater than one. B. less than one. C. greater than the internal rate of return. D. less than the internal rate of return. E. greater than a pre-specified rate of return.

A. greater than one.

An in-the-money put option is one that: A. has an exercise price greater than the underlying stock price. B. has an exercise price less than the underlying stock price. C. expires today. D. should not be exercised at expiration. E. should not be exercised at any time.

A. has an exercise price greater than the underlying stock price.

If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm: A. has no debt of any kind. B. is using its assets as efficiently as possible. C. has no net working capital. D. also has a current ratio of 15. E. has an equity multiplier of 2.

A. has no debt of any kind.

MM Proposition II with taxes: A. has the same general implications as MM Proposition II without taxes. B. reveals how the interest tax shield relates to the value of a firm. C. supports the argument that business risk is determined by the capital structure employed by a firm. D. supports the argument that the cost of equity decreases as the debt-equity ratio increases. E. reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.

A. has the same general implications as MM Proposition II without taxes.

A firm's WACC can be correctly used to discount the expected cash flows of a new project when that project: A. has the same level of risk as the firm's current operations. B. will be financed solely with new debt and internal equity. C. will be managed by the firm's current managers. D. will be financed with the same proportions of debt and equity as those currently used by the overall firm. E. will be financed solely with internal equity.

A. has the same level of risk as the firm's current operations.

Suppose that Ford and General Motors were to merge. Ignoring potential antitrust problems, this merger would be classified as a(n): A. horizontal merger. B. vertical merger. C. conglomerate merger. D. tax inversion merger. E. equity carve-out merger.

A. horizontal merger.

The top-down approach to computing the operating cash flow: A. ignores all noncash items. B. applies only if a project produces sales. C. can only be used if the entire cash flows of a firm are included. D. is equal to Sales −Costs −Taxes + Depreciation. E. includes the interest expense related to a project.

A. ignores all noncash items.

Shareholders in a levered firm might wish to accept a negative net present value project if it: A. increases the standard deviation of the returns on the firm's assets. B. lowers the variance of the returns on the firm's assets. C. lowers the firm's volatility. D. diversifies the cash flows of the firm. E. decreases the risk that a firm will default on its debt.

A. increases the standard deviation of the returns on the firm's assets.

The market's reaction to the announcement of a change in the firm's dividend payout is referred to as the: A. information content effect. B. clientele effect. C. efficient markets hypothesis. D. MM Proposition I. E. MM Proposition II.

A. information content effect.

The tax savings of the firm derived from the deductibility of interest expense is called the: A. interest tax shield. B. depreciable basis. C. financing umbrella. D. current yield. E. tax-loss carry forward savings.

A. interest tax shield.

An investment is acceptable if the payback period: A. is less than some pre-specified period of time. B. exceeds the life of the investment. C. is negative. D. is equal to or greater than some pre-specified period of time. E. is equal to, and only if it is equal to, the investment's life.

A. is less than some pre-specified period of time.

The higher the inventory turnover, the: A. less time inventory items remain on the shelf. B. higher the inventory as a percentage of total assets. C. longer it takes a firm to sell its inventory. D. greater the amount of inventory held by a firm. E. lesser the amount of inventory held by a firm.

A. less time inventory items remain on the shelf.

The reason that MM Proposition I does not hold in the presence of corporate taxation is because: A. levered firms pay less taxes compared with identical unlevered firms. B. bondholders require higher rates of return than stockholders do. C. earnings per share are no longer relevant with taxes. D. dividends become a tax shield. E. debt is more expensive than equity.

A. levered firms pay less taxes compared with identical unlevered firms.

A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a: A. liquidating dividend. B. regular cash dividend. C. special dividend. D. extra cash dividend. E. share repurchase.

A. liquidating dividend.

Enterprise value is based on the: A. market value of interest bearing debt plus the market value of equity minus cash. B. book values of debt and assets, other than cash. C. market value of equity plus the book value of total debt minus cash. D. book value of debt plus the market value of equity. E. book values of debt and equity less cash.

A. market value of interest bearing debt plus the market value of equity minus cash.

The complete absorption of one company by another, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity, is called a: A. merger. B. consolidation. C. tender offer. D. spinoff. E. divestiture.

A. merger.

The difference between the present value of an investment's future cash flows and its initial cost is the: A. net present value. B. internal rate of return. C. payback period. D. profitability index. E. discounted payback period.

A. net present value.

Which account is least apt to vary directly with sales? A. notes payable B. inventory C. cost of goods sold D. accounts payable E. accounts receivable

A. notes payable

A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _____ contract. A. option B. futures C. forward D. swap E. straddle

A. option

The term (RBB) represents the: A. pretax cost of debt interest payments per period. B. pretax cost of equity dividend payments per year. C. average pretax cost of debt. D. average pretax cost of equity. E. weighted average cost of capital.

A. pretax cost of debt interest payments per period.

The financial ratio measured as net income divided by sales is known as the firm's: A. profit margin. B. return on assets. C. return on equity. D. asset turnover. E. earnings before interest and taxes.

A. profit margin.

The relationship between the prices of the underlying stock, a call option, a put option, and a riskless asset is referred to as the _____ relationship. A. put-call parity B. covered call C. protective put D. straddle E. strangle

A. put-call parity

Which one of the following is a liquidity ratio? A. quick ratio B. cash coverage ratio C. total debt ratio D. EV multiple E. times interest earned ratio

A. quick ratio

Assume personal tax rates are lower than corporate tax rates. From a tax-paying shareholder point of view, how should a firm spend its excess cash once it has funded all positive net present value projects? A. repurchase shares B. acquire another firm C. purchase financial assets D. increase cash dividends E. increase executive compensation

A. repurchase shares

Assume BGL Enterprises increases its operating efficiency by lowering its costs while holding its sales constant. As a result, given all else constant, the: A. return on equity will increase. B. return on assets will decrease. C. profit margin will decline. D. equity multiplier will decrease. E. price-earnings ratio will increase.

A. return on equity will increase.

A firm with cyclical earnings is characterized by: A. revenue patterns that vary with the business cycle. B. high levels of debt in its capital structure. C. high fixed costs. D. high costs per unit. E. low contribution margins.

A. revenue patterns that vary with the business cycle.

The owner of a European call option has the: A. right but not the obligation to buy a stock at a specified price on a specified date. B. right but not the obligation to buy a stock at a specified price during a specified period of time. C. obligation to buy a stock on a specified date but only at the specified price. D. obligation to buy a stock sometime during a specified period of time at the specified price. E. obligation to buy a stock at the lower of the exercise price or the market price on the expiration date.

A. right but not the obligation to buy a stock at a specified price on a specified date.

Jillian owns an option which gives her the right to purchase shares of WAN stock at a price of $20 a share. Currently, WAN stock is selling for $24.50. Jillian would like to profit on this option but is not permitted to exercise it for another two weeks. She believes the stock will decline in value before the two weeks is up. What should she do? A. sell her option today B. put in an order to exercise her option on its expiration date C. convert her European option into an American option D. put in an order to exercise her option as soon as she is permitted to do so E. convert her American option into a European option

A. sell her option today

A payment made by a firm to its owners in the form of new shares of stock is called a _____ dividend. A. stock B. normal C. special D. extra E. liquidating

A. stock

An industry is likely to have a low beta if the: A. stream of revenues within that industry is less volatile than the market. B. economy is in a recessionary period. C. market for its goods is highly affected by the market cycle. D. number of firms within the industry is fairly constant. E. industry tends to use a lot of debt financing.

A. stream of revenues within that industry is less volatile than the market.

A change in the corporate charter making it more difficult for the firm to be acquired by increasing the percentage of shareholders that must approve a merger offer is called a: A. supermajority amendment. B. standstill agreement. C. greenmail provision. D. poison pill amendment. E. white knight provision.

A. supermajority amendment.

No matter how many forms of investment analysis you employ: A. the actual results from a project may vary significantly from the expected results. B. the internal rate of return will always produce the most reliable results. C. a project will never be accepted unless the payback period is met. D. the initial costs will generally vary considerably from the estimated costs. E. only the first three years of a project ever affect its final outcome.

A. the actual results from a project may vary significantly from the expected results.

The introduction of personal taxes may reveal a disadvantage to the use of debt if the personal tax rate on: A. the distribution of income to stockholders is less than the personal tax rate on interest income. B. the distribution of income to stockholders is greater than the personal tax rate on interest income. C. the distribution of income to stockholders is equal to the personal tax rate on interest income. D. interest income is zero. E. dividends and interest are equal.

A. the distribution of income to stockholders is less than the personal tax rate on interest income.

Assume you purchase one share of a stock and sell a call on a single share of that same stock with an exercise price of $25. What is the maximum payoff you can realize on this combination? A. the exercise price of $25 B. an amount equal to the stock price on the option expiration date C. an amount equal to $25 minus the stock price on the option expiration date D. an amount equal to the stock price on the expiration date plus $25 E. an amount equal to the sum of the exercise price and the stock price on the option expiration date

A. the exercise price of $25

The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to: A. the firm's ratios from prior time periods and to the ratios of firms with similar operations. B. the average ratios of all firms within the same country over a period of time. C. those of other firms located in the same geographic area that are similarly sized. D. the average ratios of the firm's international peer group. E. those of the largest conglomerate that has operations in the same industry as the firm.

A. the firm's ratios from prior time periods and to the ratios of firms with similar operations.

The internal rate of return for a project will increase if: A. the initial cost of the project can be reduced. B. the total amount of the cash inflows is reduced. C. each cash inflow is moved such that it occurs one year later than originally projected. D. the required rate of return is reduced. E. the discount rate is increased.

A. the initial cost of the project can be reduced.

If a project is assigned a required rate of return of zero, then: A. the timing of the project's cash flows has no bearing on the value of the project. B. the project will always be accepted. C. the project will always be rejected. D. whether the project is accepted or rejected will depend on the timing of the cash flows. E. the project can never add value for the shareholders.

A. the timing of the project's cash flows has no bearing on the value of the project.

MM Proposition I with taxes supports the theory that: A. there is a positive linear relationship between the amount of debt in a levered firm and its value. B. the value of a firm is inversely related to the amount of leverage used by the firm. C. the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield. D. a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm. E. a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises.

A. there is a positive linear relationship between the amount of debt in a levered firm and its value.

The primary reason that company projects with positive net present values are considered acceptable is that: A. they create value for the owners of the firm. B. the project's rate of return exceeds the rate of inflation. C. they return the initial cash outlay within three years or less. D. the required cash inflows exceed the actual cash inflows. E. the investment's cost exceeds the present value of the cash inflows.

A. they create value for the owners of the firm.

Assume LK Metals is similar to its industry with one exception, it has low fixed costs relative to all other firms in that industry. Given this, you should expect LK Metals: A. to have a lower beta than its industry. B. the same beta as the industry but a lower beta than the other firms in the industry. C. a higher beta than its industry. D. a higher beta than the industry or the firms within that industry. E. the same beta as the industry but a higher beta than the other firms in the industry.

A. to have a lower beta than its industry.

The pecking order states that firms should: A. use internal financing first. B. always issue debt then the market won't know when management thinks the security is overvalued. C. issue new equity first. D. issue debt first. E. always issue equity to avoid financial distress costs.

A. use internal financing first.

The value of a target firm to the acquiring firm is equal to the: A. value of the target firm as a separate entity plus the synergy derived from the acquisition. B. purchase cost of the target firm. C. value of the merged firm minus the value of the target firm as a separate entity. D. purchase cost plus the incremental value derived from the acquisition. E. incremental value derived from the acquisition.

A. value of the target firm as a separate entity plus the synergy derived from the acquisition.

The cost of equity should be lowest when the debt to equity ratio is: A. zero. B. .20 C. .25 D. .50 E. 1.00

A. zero.

Internal equity is: A. assumed to be cost-free. B. assumed to have a beta of 1. C. assigned a cost equal to the aftertax cost of equity. D. assigned the same cost as common stock. E. assigned a cost equal to the risk-free rate.

A. assumed to be cost-free.

If a project's debt level is known over the life of the project, one should use A. WACC. B. APV. C. FTE. D. either APV or FTE. E. either FTE or WACC.

B. APV.

Hi-Tech announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price. How will these two market reactions affect the value of call options on Hi-Tech stock? A. Both reactions decrease the value of the call options. B. Both reactions increase the value of the call options. C. Neither reaction will affect call option values. D. The reactions will have offsetting effects on call option prices. E. The change in volatility will not affect call option values while the increased stock price will increase the call option values.

B. Both reactions increase the value of the call options.

The beta of a security is calculated as: (_____ of a security's return with the return on the market portfolio / _______). A. Variance; Covariance of the market return B. Covariance; Variance of the market return C. Covariance; Standard deviation of the market return D. Variance; Covariance of the security return E. Covariance; Variance of the security return

B. Covariance; Variance of the market return

Which of these methods discount levered cash flows? A. APV B. FTE C. WACC D. both APV and WACC E. both APV and FTE

B. FTE

Graham and Harvey (2001) found that _____ were the two most popular capital budgeting methods. A. IRR and payback B. IRR and NPV C. NPV and PI D. IRR and modified IRR E. discounted payback and NPV

B. IRR and NPV

Comparing the NPV profile of an investment project to that of a financing project demonstrates why the: A. incremental IRR varies with changes in the market rate of interest. B. IRR decision rule for investment projects is the opposite of the rule for financing projects. C. life span of a project affects the decision as to which project to accept. D. NPV rule for financing projects is the opposite of the rule for investment projects. E. profitability index and the net present value are related.

B. IRR decision rule for investment projects is the opposite of the rule for financing projects.

Leslie purchased 100 shares of GT stock on Wednesday, June 7th. Marti purchased 100 shares of GT stock on Thursday, July 8th. GT declared a dividend on June 20th to shareholders of record on July 12th that is payable on August 1st. Which one of the following statements concerning the dividend paid on August 1st is correct given this information? A. Neither Leslie nor Marti are entitled to the dividend. B. Leslie is entitled to the dividend but Marti is not. C. Marti is entitled to the dividend but Leslie is not. D. Both Marti and Leslie are entitled to the dividend. E. Both Marti and Leslie are entitled to one-half of the dividend amount.

B. Leslie is entitled to the dividend but Marti is not.

The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called _____ depreciation. A. FIFO B. MACRS C. straight-line D. sum-of-years digits E. curvilinear

B. MACRS

The proposition that the value of the firm is independent of its capital structure is called: A. the capital asset pricing model. B. MM Proposition I (no taxes). C. MM Proposition II (no taxes). D. the law of one price. E. the efficient markets hypothesis.

B. MM Proposition I (no taxes).

The DuPont identity can be computed as: A. Net income × Profit margin × (1 + Debt-equity ratio). B. Profit margin × (1 / Capital intensity) × (1 + Debt-equity ratio). C. Net income × Total asset turnover × Equity multiplier. D. Profit margin × Total asset turnover × Debt-equity ratio. E. Return on equity × Profit margin × Total asset turnover.

B. Profit margin × (1 / Capital intensity) × (1 + Debt-equity ratio).

Given the all-equity cost of capital, the cost of levered equity can be computed as: A. RS = (B /S)(R0) + (1 - tc)B. B. RS = R0 + (B / S)(1 - tc)(R0 - RB). C. RS = R0 + (1 - tc)B. D. R0 = Rs + (B / S)(1 - tc)(R0 - RB). E. R0 = Rs + (1 - tc)B.

B. RS = R0 + (B / S)(1 - tc)(R0 - RB).

Which one of the following statements concerning call option writers is false? A. Writers promise to deliver shares if the call option is exercised by the buyer. B. The writer has the option to sell shares but not an obligation. C. The writer's payoff is zero if the option expires out-of-the-money. D. The writer receives a cash payment when the option is purchased. E. The writer incurs a loss if the market price rises substantially above the exercise price.

B. The writer has the option to sell shares but not an obligation.

Which one of the following combinations of firms would benefit the most through the use of complementary resources? A. a ski resort and a travel trailer sales outlet B. a golf resort and a ski resort C. a hotel and a home improvement center D. a swimming pool distributor and a kitchen designer E. a fast food restaurant and a dry cleaner

B. a golf resort and a ski resort

15. The increase in risk to shareholders when financial leverage is introduced is best evidenced by: A. higher EPS as EBIT increases. B. a higher variability of EPS with debt than with all-equity financing. C. increased use of homemade leverage. D. the increase in taxes. E. decreasing earnings as EBIT increases.

B. a higher variability of EPS with debt than with all-equity financing.

If a firm issues debt and includes protective covenants in the indenture then the firm's debt will probably be issued at _____ similar debt without thecovenants. A. a variable interest rate rather than the fixed rate paid on B. a lower interest rate than C. a significantly higher interest rate than D. an interest rate equal to that of E. a slightly higher interest rate than

B. a lower interest rate than

To calculate the adjusted present value, you should: A. multiply the additional effects of debt by the all-equity project value. B. add the additional effects of debt to the all-equity project value. C. divide the project's levered cash flow by the risk-free rate. D. divide the project's levered cash flow by the risk-adjusted rate. E. add the pretax cost of debt to the project's all-equity NPV.

B. add the additional effects of debt to the all-equity project value.

Flotation costs: A. are amortized using a declining-balance method over the life of the loan. B. are amortized using the straight-line method over the life of the loan. C. are deducted as a business expense in the year incurred. D. cannot be deducted as a business expense. E. are deducted as a business expense at the time the loan is repaid in full.

B. are amortized using the straight-line method over the life of the loan.

The MM theory with taxes implies that firms should issue maximum debt. In practice, this does not occur because: A. debt is more risky than equity. B. bankruptcy is a disadvantage to debt. C. the weighted average cost of capital is inversely related to the debt-equity ratio. D. the weighted average cost of capital is directly related to the debt-equity ratio. E. U.S. regulations require the debt-equity ratio of publicly-traded firms to be in the range of .3 to .7.

B. bankruptcy is a disadvantage to debt.

Assume a merger of two levered firms produced no synergy. In this case, the: A. acquiring firm shareholders would neither gain nor lose any value. B. bondholders probably benefit at shareholders' expense. C. diversification effect would only benefit the acquired firm's shareholders. D. combined shareholders would benefit at the expense of all debt holders. E. shareholders and bondholders would fail to realize any benefits or losses.

B. bondholders probably benefit at shareholders' expense.

A _____ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time. A. futures contract B. call option C. put option D. swap E. forward contract

B. call option

A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit? A. current B. cash C. debt-equity D. quick E. total debt

B. cash

From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts? A. times interest earned ratio B. cash coverage ratio C. cash ratio D. quick ratio E. interval measure

B. cash coverage ratio

The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the: A. information content effect. B. clientele effect. C. efficient markets hypothesis. D. MM Proposition I. E. MM Proposition II.

B. clientele effect.

A merger in which an entirely new firm is created and both the acquired and acquiring firms cease to exist is called a: A. divestiture. B. consolidation. C. tender offer. D. spinoff. E. conglomeration.

B. consolidation.

In calculating NPV using the flow-to-equity approach the discount rate is the: A. all-equity cost of capital. B. cost of equity for the levered firm. C. all-equity cost of capital minus the weighted average cost of debt. D. weighted average cost of capital. E. all-equity cost of capital plus the weighted average cost of debt.

B. cost of equity for the levered firm.

The APV method is comprised of the all-equity NPV of a project plus the NPV of financing effects. The four financing side effects are: A. tax subsidy of dividends, cost of issuing new securities, subsidy of financial distress, and cost of debt financing. B. cost of issuing new securities, cost of financial distress, tax subsidy of debt, and other subsidies to debt financing. C. cost of issuing new securities, cost of financial distress, tax subsidy of dividends, and cost of debt financing. D. subsidy of financial distress, tax subsidy of debt, cost of other debt financing, and cost of issuing new securities. E. cost of financial distress, tax subsidy of debt, increased cost of equity capital, and cost of issuing new securities.

B. cost of issuing new securities, cost of financial distress, tax subsidy of debt, and other subsidies to debt financing.

The current ratio is measured as: A. current assets minus current liabilities. B. current assets divided by current liabilities. C. current liabilities minus inventory, divided by current assets. D. cash on hand divided by current liabilities. E. current liabilities divided by current assets.

B. current assets divided by current liabilities.

Covenants restricting additional borrowings primarily protect the: A. shareholders' residual interests in the firm. B. debtholders from the added risk of dilution of their claims. C. debtholders from changes in market interest rates. D. managers by avoiding agency costs. E. shareholders from agency costs.

B. debtholders from the added risk of dilution of their claims.

If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the: A. return on the stock minus the risk-free rate. B. difference between the return on the market and the risk-free rate. C. beta times the market risk premium. D. beta times the risk-free rate. E. market rate of return.

B. difference between the return on the market and the risk-free rate.

Which of the following methods of project analysis are biased towards short-term projects? A. profitability index and internal rate of return B. discounted payback and payback C. net present value and payback D. payback and profitability index E. profitability index and discounted payback

B. discounted payback and payback

If an acquisition does not create value, then the: A. earnings per share of the acquiring firm must be the same both before and after the acquisition. B. earnings per share can change but the stock price of the acquiring company should remain constant. C. price per share of the acquiring company should increase because of the growth of the firm. D. earnings per share will most likely increase while the price-earnings ratio remains constant. E. price-earnings ratio should remain constant regardless of any changes in the earnings per share.

B. earnings per share can change but the stock price of the acquiring company should remain constant.

One purpose of identifying all of the incremental cash flows related to a proposed project is to: A. isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm. B. eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project. C. make each project appear as profitable as possible for the firm. D. include both the proposed and the current operations of a firm in the analysis of the project. E. identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.

B. eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.

To compute the value of a put using the Black-Scholes option pricing model, you: A. first have to apply the put-call parity relationship. B. first have to compute the value of both N(-d1) and N(-d2). C. compute the value of an equivalent call and then subtract that value from one. D. compute the value of an equivalent call and then subtract that value from the market price of the stock. E. compute the value of an equivalent call and then multiply that value by e-RT.

B. first have to compute the value of both N(-d1) and N(-d2).

The lower bound on a call's value is defined as the: A. greater of the strike price or zero. B. greater of the stock price minus the exercise price or zero. C. lesser of the strike price or the stock price. D. lesser of the strike price or zero. E. lesser of the stock price minus the exercise price or zero.

B. greater of the stock price minus the exercise price or zero.

Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Alfred's: A. has a higher market price than one share of stock in Turner's. B. has a higher market price per dollar of earnings than does one share of Turner's. C. sells at a lower price per share than one share of Turner's. D. represents a larger percentage of firm ownership than does one share of Turner's stock. E. earns a greater profit per share than does one share of Turner's stock.

B. has a higher market price per dollar of earnings than does one share of Turner's.

When firms issue more debt, the present value of the tax shield on debt _____ while the present value of financial distress costs: A. decreases; decreases. B. increases; increases. C. decreases; remains constant. D. decreases; increases. E. increases; remains constant.

B. increases; increases.

MM Proposition I with taxes states that: A. capital structure does not affect firm value. B. increasing the debt-equity ratio increases firm value. C. firm value is maximized when the firm is all-equity financed. D. the cost of equity rises as the debt-equity ratio increases. E. the unlevered cost of equity is equal to RWacc.

B. increasing the debt-equity ratio increases firm value.

The discount rate that makes the net present value of an investment exactly equal to zero is called the: A. external rate of return. B. internal rate of return. C. average accounting return. D. profitability index. E. equalizer.

B. internal rate of return.

From a tax-paying investor's point of view, a stock repurchase: A. is equivalent to a cash dividend. B. is more desirable than a cash dividend. C. has the same tax effects as a cash dividend. D. is more highly taxed than a cash dividend. E. creates a tax liability even if the investor does not sell any of the shares he owns.

B. is more desirable than a cash dividend.

Net present value: A. cannot be used when deciding between two mutually exclusive projects. B. is more useful than the internal rate of return when comparing different sized projects. C. is rarely used by small firms according to the Graham and Harvey survey. D. is not as widely used in practice as payback and discounted payback. E. ignores the risk of a project.

B. is more useful than the internal rate of return when comparing different sized projects.

For investment projects, the internal rate of return (IRR): A. rule indicates acceptance of an investment when the IRR is less than the discount rate. B. is the rate generated solely by the cash flows of the investment. C. is used primarily to rank projects of varying sizes. D. is the rate that causes the net present value of a project to equal the project's initial cost. E. can effectively be used to compare all types of projects.

B. is the rate generated solely by the cash flows of the investment.

Financial executives place the greatest importance on which one of these factors when setting dividend policy? A. setting a high-dividend payout ratio even when earnings are unstable B. maintaining a consistent dividend policy C. increasing dividends even if they need to be lowered in the near future D. reducing dividends anytime future earnings are in doubt E. attracting institutional investors

B. maintaining a consistent dividend policy

Of the following factors, which one is considered to be the primary factor affecting a firm's dividend decision? A. considering the personal taxes of company stockholders B. maintaining a consistent dividend policy C. attracting retail investors D. attracting institutional investors E. avoiding flotation costs

B. maintaining a consistent dividend policy

In the financial planning model, the external financing needed (EFN) as shown on a pro forma balance sheet is equal to the changes in assets: A. plus the changes in liabilities minus the changes in equity. B. minus the changes in both liabilities and equity. C. minus the changes in liabilities. D. plus the changes in both liabilities and equity. E. minus the change in retained earnings.

B. minus the changes in both liabilities and equity.

The weighted average cost of capital for a firm is the: A. discount rate which the firm should apply to all of the projects it undertakes. B. overall rate which the firm must earn on its existing assets to maintain its value. C. rate the firm should expect to pay on its next bond issue. D. maximum rate which the firm should require on any projects it undertakes. E. rate of return that the firm's preferred stockholders should expect to earn over the long term.

B. overall rate which the firm must earn on its existing assets to maintain its value.

If you consider stockholders to be the owners of a firm, then those stockholders: A. own a call option on the firm with an exercise price equal to the firm's total equity. B. own a put option on the firm with an exercise price equal to the firm's total debt. C. have written a put option on the firm with an exercise price equal to the firm's total equity. D. have written a call option on the firm with an exercise price equal to the firm's total debt. E. own a put option on the firm with an exercise price equal to the firm's total assets.

B. own a put option on the firm with an exercise price equal to the firm's total debt.

If the risk of an investment project differs from the overall firm's risk then the: A. market rate of return should be used as the project's discount rate. B. project's discount rate must be adjusted based on the risks of the project's cash flows. C. project's discount rate must be adjusted based on the sources of project financing. D. average rate used for all prior projects should be used as the new project's discount rate. E. project's initial cost should be increased/decreased to account for the increase/decrease in risk.

B. project's discount rate must be adjusted based on the risks of the project's cash flows.

An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to replace the current board of directors is called a: A. tender offer. B. proxy contest. C. going-private transaction. D. leveraged buyout. E. consolidation.

B. proxy contest.

According to MM Proposition II with no taxes, the: A. return on assets is determined by financial risk. B. required return on equity is a linear function of the firm's debt-equity ratio. C. cost of equity in inversely related to the firm's debt-equity ratio. D. cost of debt must equal the cost of equity. E. required return on assets exceeds the weighted average cost of capital.

B. required return on equity is a linear function of the firm's debt-equity ratio.

The total asset turnover ratio measures the amount of: A. total assets needed for every $1 of sales. B. sales generated by every $1 in total assets. C. fixed assets required for every $1 of sales. D. net income generated by every $1 in total assets. E. net income than can be generated by every $1 of fixed assets.

B. sales generated by every $1 in total assets.

A levered firm is a company that has: A. accounts payable as its only liability. B. some debt in its capital structure. C. an all-equity capital structure. D. a tax loss carry forward. E. taxable income.

B. some debt in its capital structure.

A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a: A. supermajority amendment. B. standstill agreement. C. greenmail provision. D. poison pill amendment E. white knight provision.

B. standstill agreement.

An increase in a firm's number of shares outstanding without any change in owners' equity is called a: A. special dividend. B. stock split. C. share repurchase. D. tender offer. E. liquidating dividend.

B. stock split.

Indirect costs of bankruptcy are born principally by: A. bondholders. B. stockholders. C. managers. D. the federal government. E. the firm's suppliers.

B. stockholders.

One of the indirect costs of bankruptcy is the incentive toward underinvestment. Underinvestment generally would result in: A. the firm selecting all projects with positive NPVs. B. the firm turning down positive NPV projects that would clearly be accepted if the firm were all-equity financed. C. bondholders contributing the full amount of any new investment, but both stockholders and bondholders sharing in the benefits of those investments. D. shareholders making decisions based on the best interests of the bondholders. E. the firm accepting more projects than it would if the probability of bankruptcy was ignored.

B. the firm turning down positive NPV projects that would clearly be accepted if the firm were all-equity financed.

The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because: A. there is greater risk with a LBO. B. the future reductions in debt are known at the time of the LBO. C. there is no interest tax shield with the WACC. D. the value of the levered and unlevered firms are equal in an LBO. E. WACC only applies to unlevered projects.

B. the future reductions in debt are known at the time of the LBO.

The bottom-up approach to computing the operating cash flow applies only when: A. both the depreciation expense and the interest expense are equal to zero. B. the interest expense is equal to zero. C. the project is a cost-cutting project. D. no fixed assets are required for the project. E. taxes are ignored and the interest expense is equal to zero.

B. the interest expense is equal to zero.

Corporations in the U.S. tend to: A. minimize taxes. B. underutilize debt. C. rely less on equity financing than they should. D. have extremely high debt-equity ratios. E. rely more heavily on bonds than stocks as the major source of financing.

B. underutilize debt.

A general rule for managers to follow is to set the firm's capital structure such that the firm's: A. size is maximized. B. value is maximized C. bondholders are secured. D. suppliers of raw materials are satisfied. E. dividend payout is maximized.

B. value is maximized

Suppose that Arby's acquired a meat packing house. This merger would be classified as a: A. monopolistic merger. B. vertical merger. C. conglomerate merger. D. horizontal merger. E. spin off.

B. vertical merger.

Which one of the following is most apt to cause a firm to have a higher price-earnings ratio? A. slow industry outlook B. very low current earnings C. low market share D. low prospect of firm growth E. low investor opinion of firm

B. very low current earnings

The pro forma income statement for a cost reduction project: A. will reflect a reduction in the sales of the firm. B. will generally reflect no incremental sales. C. has to be prepared reflecting the total sales and expenses of the entire firm. D. cannot be prepared due to the lack of any project related sales. E. will always reflect a negative project operating cash flow.

B. will generally reflect no incremental sales.

When calculating the weighted average flotation cost, the weights should be based on the: A. mix of debt and equity that will be used to finance the specific project. B. firm's target capital structure. C. percentages of internal and external financing that will be used for the project. D. firm's current mix of debt and equity. E. average amounts of external capital raised during the past twelve months.

B. firm's target capital structure.

Projected future financial statements are called: A. plug statements. B. pro forma statements. C. reconciled statements. D. aggregated statements. E. comparative statements.

B. pro forma statements

When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where: A. the increase in the present value of distress costs from an additional dollar of debt is greater than the increase in the present value of the debt tax shield. B. the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield. C. the increase in the present value of distress costs from an additional dollar of debt is less than the increase of the present value of the debt tax shield. D. distress costs as well as debt tax shields are zero. E. distress costs as well as debt tax shields are maximized.

B. the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield.

A situation in which accepting one investment prevents the acceptance of another investment is called the: A. net present value profile. B. operational ambiguity decision. C. mutually exclusive investment decision. D. issues of scale problem. E. multiple rates of return decision.

C. mutually exclusive investment decision.

Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using: A. net present value only. B. both net present value and the internal rate of return. C. their equivalent annual costs. D. the depreciation tax shield approach. E. the replacement parts approach.

C. their equivalent annual costs.

A firm currently has debt outstanding with a coupon rate of 7 percent. The firm is obtaining subsidized financing for a new project at a rate of 5.5 percent. The current market rate is 6.8 percent and the firm's tax rate is 35 percent. What discount rate should be used to compute the NPV of the loan? A. 5.5 percent B. 3.575 percent C. 6.8 percent D. 4.42 percent E. 7 percent

C. 6.8 percent

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero? A. American call B. European call C. American put D. European put E. either an American or a European put

C. American put

Jeff opted to exercise his August option on August 10 and received $2,500 in exchange for his shares. Jeff must have owned a(an): A. warrant. B. American call. C. American put. D. European call. E. European put.

C. American put.

Why do managers suggest that ignoring all cash flows following the assigned payback period is not a major flaw of the payback method of capital budgeting analysis? A. Payback is never used in real practice so it makes no difference how academics apply the method in their studies B. All cash flows after the first two years are highly inaccurate so including them lessens the reliability of the resulting decision. C. If the cash flows after the required payback period are significant, managers will use their discretion to override the payback rule. D. All cash flows after the assigned payback period are relatively worthless in today's dollars so ignoring them has no consequence. E. The results of including the cash flows after the required payback period rarely have any effect on the accept/reject decision.

C. If the cash flows after the required payback period are significant, managers will use their discretion to override the payback rule.

Which one of the following statements is correct? A. If an acquisition is made with cash, then the cost of that acquisition is dependent upon the acquisition gains. B. Acquisitions made by exchanging shares of stock are normally taxable transactions. C. Shareholders of the acquired firm must realize capital gains/losses in a cash acquisition. D. The stockholders of the acquiring firm will be better off when an acquisition results in losses if the acquisition was made with cash rather than with stock. E. Acquisitions based on legitimate business purposes are not taxable transactions regardless of the means of financing used.

C. Shareholders of the acquired firm must realize capital gains/losses in a cash acquisition.

Assume you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs. A. An increase in the stock price will increase the value of your put and decrease the value of your call. B. Both a May 45 put and a May 45 call will have higher values than your May 40 options. C. The time premiums on both your put and call are less than the time premiums on equivalent June options. D. A decrease in the stock price will decrease the value of both of your options. E. You can never profit on your positions as your profits on one option will be offset by losses on the other option.

C. The time premiums on both your put and call are less than the time premiums on equivalent June options.

____ can provide a potential tax gain from an acquisition. A. A reduction in the level of debt B. An increase in surplus funds C. The use of net operating losses D. A decreased use of leverage E. Increased diseconomies of scale

C. The use of net operating losses

Which one of the following statements is correct concerning in-the-money option values? A. The value of a put decreases as the exercise price increases. B. The value of a put increases as the price of the underlying stock increases. C. The value of a call decreases as the exercise price increases. D. An increase in the underlying stock price decreases both the value of a put and a call. E. The value of a call decreases as the price of the underlying stock increases.

C. The value of a call decreases as the exercise price increases.

Which one of these best exemplifies "milking the property"? A. a firm paying a premium to acquire a competitor B. a firm demanding a premium to be acquired without a proxy fight C. a firm with high financial distress paying additional dividends D. an all-equity firm repurchasing shares E. a firm with high financial distress using expected dividends to repay debt

C. a firm with high financial distress paying additional dividends

MM Proposition II is the proposition that: A. supports the argument that the capital structure of a firm is irrelevant to the value of the firm. B. the cost of levered equity depends solely on the return on debt, the debt-equity ratio, and the tax rate. C. a firm's cost of equity capital is a positive linear function of the firm's capital structure. D. the cost of equity is equivalent to the required return on the total assets of a levered firm. E. supports the argument that the size of the pie does not depend on how the pie is sliced.

C. a firm's cost of equity capital is a positive linear function of the firm's capital structure.

A change in dividend policy does not affect the value of a share of stock as long as: A. the dividend payout ratio remains constant. B. the following dividends are changed by the same amount. C. all of the distributable cash flow is paid out. D. there is an offsetting change in stock repurchases. E. shareholders are given ample warning.

C. all of the distributable cash flow is paid out.

All of the following represent potential gains from an acquisition except: A. the replacement of ineffective managers. B. lower costs per unit produced. C. an increase in production size such that diseconomies of scale are realized. D. increased asset utilization. E. spreading of overhead costs.

C. an increase in production size such that diseconomies of scale are realized.

In a tax-free acquisition, the shareholders of the target firm: A. receive income that is considered to be tax-exempt. B. gift their shares to a tax-exempt organization and therefore have no taxable gain. C. are viewed as having exchanged their shares. D. sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes. E. sell their shares at cost thereby avoiding the capital gains tax.

C. are viewed as having exchanged their shares.

One characteristic of the payback method of project analysis is the: A. use of variable discount rates. B. standardized cutoff point for cash flow consideration. C. bias towards liquidity. D. consideration of the risk level of each project. E. discounting of all cash flows.

C. bias towards liquidity.

The flow-to-equity approach to capital budgeting involves all of the following except: A. calculating the levered cost of equity. B. determining the amount of the investment that is not borrowed. C. computing the PV of the cash flows using the cost of equity for an all-equity firm. D. discounting the levered cash flows using the levered cost of equity. E. computing the project's NPV.

C. computing the PV of the cash flows using the cost of equity for an all-equity firm.

The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the: A. ex-rights date. B. ex-dividend date. C. date of record. D. date of payment. E. declaration date.

C. date of record.

You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put will: A. also finish in the money. B. finish at the money. C. finish out of the money. D. either finish at the money or in the money. E. either finish at the money or out of the money.

C. finish out of the money.

A firm with high operating leverage has: A. low fixed costs in its production process. B. high variable costs in its production process. C. high fixed costs in its production process. D. high costs per unit. E. low costs per unit.

C. high fixed costs in its production process.

Assume you use all available methods to evaluate projects. If there is a conflict in the indicated decision between two mutually exclusive projects due to the IRR-based indicator, you should: A. accept both projects since both are acceptable based on some method. B. combine both projects into one larger project. C. ignore the IRR and rely on the decision indicated by the NPV method. D. base the final decision on the payback method. E. reject both projects due to ambiguity in the decision making process.

C. ignore the IRR and rely on the decision indicated by the NPV method.

The cash flows of a project should: A. be computed on a pretax basis. B. include all sunk costs and opportunity costs. C. include all incremental and opportunity costs. D. be applied to the year when the related expense or income is recognized by GAAP. E. include all financing costs related to new debt acquired to finance the project.

C. include all incremental and opportunity costs.

When evaluating an acquisition, you should: A. concentrate on book values and ignore market values. B. focus on the total cash flows of the merged firm. C. include synergies. D. ignore any one-time acquisition fees or transaction costs. E. ignore any potential changes in management.

C. include synergies.

Subsidized financing ________ the APV ___________. A. has no impact on; as the lower interest rate is offset by the lower discount rate B. decreases; by decreasing the NPV of the loan C. increases; by increasing the NPV of the loan D. has no impact on; as the interest tax deduction is not allowed for subsidized loans E. increases; because subsidies offset all tax payments.

C. increases; by increasing the NPV of the loan

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs. A. flotation B. direct bankruptcy C. indirect bankruptcy D. financial solvency E. capital structure

C. indirect bankruptcy

Ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as: A. asset management ratios. B. long-term solvency measures. C. liquidity measures. D. profitability ratios. E. market value ratios.

C. liquidity measures.

The information content of a dividend increase generally signals that: A. the firm has a one-time surplus of cash. B. the firm has several net present value projects to pursue. C. management believes the future earnings of the firm will be strong. D. the firm has more cash than it needs due to sales declines. E. future dividends will be lower.

C. management believes the future earnings of the firm will be strong.

The optimal capital structure of a firm _____ the marketable claims and _____ the nonmarketable claims against the cash flows of the firm. A. minimizes; minimizes B. minimizes; maximizes C. maximizes; minimizes D. maximizes; maximizes E. equates; (leave blank)

C. maximizes; minimizes

For the acquiring firm, diversification: A. will automatically produce gains. B. will reduce both risk and debt capacity. C. may provide financial benefits. D. will provide risk reduction for all shareholders' portfolios. E. may result in a risk-free firm.

C. may provide financial benefits.

All of the following are anticipated effects of a proposed project. Which of these should be considered when computing the cash flow for the final year of a project? A. operating cash flow and salvage values B. salvage values and net working capital recovery C. operating cash flow, net working capital recovery, salvage values D. net working capital recovery and operating cash flow E. operating cash flow only

C. operating cash flow, net working capital recovery, salvage values

A public firm's market capitalization is equal to the: A. total book value of assets less book value of debt. B. par value of common equity. C. price per share multiplied by number of shares outstanding. D. firm's stock price multiplied by the number of shares authorized. E. the maximum value an acquirer would pay for the firm in an acquisition.

C. price per share multiplied by number of shares outstanding.

A dissident group solicits votes in an attempt to replace existing management. This is called a: A. tender offer. B. shareholder derivative action. C. proxy contest. D. management freeze-out. E. shareholder's revenge.

C. proxy contest.

A _____ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time. A. futures contract B. call option C. put option D. swap E. forward contract

C. put option

A cash payment made by a firm to its owners in the normal course of business is called a: A. share repurchase. B. liquidating dividend. C. regular cash dividend. D. special dividend. E. extra cash dividend.

C. regular cash dividend.

Which one of the following is the best example of two mutually exclusive projects? A. planning to build a warehouse and a retail outlet side by side B. buying sufficient equipment to manufacture both desks and chairs simultaneously C. renting out a company warehouse or selling it outright D. using the company sales force to promote sales of both shoes and socks E. buying both inventory and fixed assets using funds from the same bank loan

C. renting out a company warehouse or selling it outright

The payback method: A. determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. B. determines a cutoff point equal to the point where all initial capital investments have been fully depreciated. C. requires an arbitrary choice of a cutoff point. D. varies the cutoff point with the market rate of interest. E. is rarely used in actual practice.

C. requires an arbitrary choice of a cutoff point.

If stockholders want to know how much profit the firm is making on their entire investment in that firm, the stockholders should refer to the: A. profit margin. B. return on assets. C. return on equity. D. equity multiplier. E. earnings per share.

C. return on equity.

The salvage value of an asset creates an aftertax cash flow in an amount equal to the: A. sales price of the asset. B. sales price minus the book value. C. sales price minus the tax due based on the sales price minus the book value. D. sales price plus the tax due based on the sales price minus the book value. E. sales price plus the tax due based on the book value minus the sales price.

C. sales price minus the tax due based on the sales price minus the book value.

You can realize the same value as that derived from stock ownership if you: A. sell a put option and invest at the risk-free rate of return. B. buy a call option and write a put option on a stock and also borrow funds at the risk-free rate. C. sell a put and buy a call on a stock as well as invest at the risk-free rate of return. D. lend out funds at the risk-free rate of return and sell a put option on the stock. E. borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options.

C. sell a put and buy a call on a stock as well as invest at the risk-free rate of return.

When comparing levered versus unlevered capital structures, leverage works to increase EPS for high levels of EBIT because interest payments on the debt: A. vary with EBIT levels. B. stay fixed, leaving less income to be distributed over fewer shares. C. stay fixed, leaving more income to be distributed over fewer shares. D. stay fixed, leaving less income to be distributed over more shares. E. stay fixed, leaving more income to be distributed over more shares.

C. stay fixed, leaving more income to be distributed over fewer shares.

One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy: A. the firm will rank all projects and select the project which results in the highest expected firm value. B. bondholders expropriate value from stockholders by selecting high-risk projects. C. stockholders expropriate value from bondholders by selecting high-risk projects. D. the firm will always select the lowest-risk project available. E. the firm will select only all-equity financed projects.

C. stockholders expropriate value from bondholders by selecting high-risk projects.

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's: A. opening price. B. intrinsic value. C. strike price. D. market price. E. time value.

C. strike price.

A cost that has already been paid, or the liability to pay has already been incurred, is a(n): A. salvage value expense. B. net working capital expense. C. sunk cost. D. opportunity cost. E. erosion cost.

C. sunk cost.

The delta of a call measures the: A. time remaining to expiration compared to the option's original maturity. B. change between an option's original value and its current value. C. swing in the price of the call relative to the swing in the underlying stock price. D. ratio of the change in the option price to the change in the time to expiration. E. volatility of the underlying security.

C. swing in the price of the call relative to the swing in the underlying stock price.

A public offer by one firm to directly buy the shares of another firm is called a: A. merger. B. consolidation. C. tender offer. D. spinoff. E. divestiture.

C. tender offer.

The free cash flow hypothesis states: A. that firms with greater free cash flow will pay more in dividends thereby reducing the risk of financial distress. B. that firms with greater free cash flow should issue new equity to help minimize the wasting of resources by managers. C. that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources. D. that firms will higher levels of free cash flow should reduce their debt levels. E. that firms with higher levels of free cash flow should reward their managers with bonuses.

C. that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources.

The interest tax shield has no value for a firm when: A. the firm's debt-equity ratio is exactly equal to 1. B. the firm's debt-equity ratio is exactly .5. C. the firm is unlevered. D. shareholders fully utilize homemade leverage. E. RWACC equals R0.

C. the firm is unlevered.

According to the pecking-order theory, a firm's leverage ratio is determined by: A. the value of the tax benefit of debt. B. equating the tax benefit of debt to the financial distress costs of debt. C. the firm's financing needs. D. the market rate of interest. E. the profitability of the firm.

C. the firm's financing needs.

The interest tax shield is a key reason why: A. the required rate of return on assets rises when debt is added to the capital structure. B. the value of an unlevered firm is equal to the value of a levered firm. C. the net cost of debt to a firm is generally less than the cost of equity. D. the cost of debt is equal to the cost of equity for a levered firm. E. firms prefer equity financing over debt financing.

C. the net cost of debt to a firm is generally less than the cost of equity.

Put-call parity can be used to show: A. how far in-the-money put options can be. B. how far in-the-money call options can be. C. the precise relationship between put and call prices given equal exercise prices and equal expiration dates. D. that the value of a call option is always twice that of a put given equal exercise prices and equal expiration dates. E. that the value of a call option is always half that of a put given equal exercise prices and equal expiration dates.

C. the precise relationship between put and call prices given equal exercise prices and equal expiration dates.

The debt-equity ratio is measured as: A. total equity divided by long-term debt. B. total equity divided by total debt. C. total debt divided by total equity. D. long-term debt divided by total equity. E. total assets minus total debt, divided by total equity.

C. total debt divided by total equity.

It is easier to evaluate a firm using its financial statements when the firm: A. is a conglomerate. B. is global in nature. C. uses the same accounting procedures as other firms in its industry. D. has a different fiscal year than other firms in its industry. E. tends to have one-time events such as asset sales and property acquisitions.

C. uses the same accounting procedures as other firms in its industry.

If the All-Star Fuel Filling Company, a chain of gasoline stations, acquires the Mid-States Refining Company, a refiner of oil products, this would be an example of a: A. conglomerate acquisition. B. white knight. C. vertical acquisition. D. going-private transaction. E. horizontal acquisition.

C. vertical acquisition.

A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a: A. golden suitor. B. poison put. C. white knight. D. shark repellent. E. crown jewel.

C. white knight.

Which one of these ratios is commonly used to compute the horizon value of a firm? A. PE B. Price/Sales C. EV/EBITDA D. Book equity/ROE E. Market value of equity/ROE

C. EV/EBITDA

Studies have found that firms with large investments in tangible assets tend to have: A. the same capital structure as the average firm in the overall market. B. zero debt. C. high leverage. D. less debt. E. about the same debt-equity ratios and firms with small investments in tangible assets.

C. high leverage.

The distribution of shares in a subsidiary to existing parent company stockholders is called a(n): A. lockup transaction. B. bear hug C. equity carve-out. D. spin-off. E. split-up.

D. spin-off.

The quick ratio is measured as: A. current assets divided by current liabilities. B. cash on hand plus current liabilities, divided by current assets. C. current liabilities divided by current assets, plus inventory. D. current assets minus inventory, divided by current liabilities. E. current assets minus inventory minus current liabilities.

D. current assets minus inventory, divided by current liabilities.

A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every: A. $1 in total equity. B. $.53 in total assets. C. $1 in current assets. D. $.53 in total equity. E. $1 in fixed assets.

D. $.53 in total equity.

A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at the various prices. This process is called a: A. homemade dividend. B. tender offer. C. free market sale. D. Dutch auction. E. targeted repurchase.

D. Dutch auction.

The effects of financial leverage depend on the operating earnings of the company. Based on this relationship, assume you graph the EPS and EBI for a firm, while ignoring taxes. Which one of these statements correctly states a relationship illustrated by the graph? A. Financial leverage decreases the slope of the EPS line. B. Below the break-even point unlevered structures have a lower EPS for every dollar of EBI than levered structures do. C. Above the break-even point the increase in EPS for unlevered structures is greater than that of levered structures for every dollar increase in EBI. D. Leverage only provides value above the break-even point. E. Above the break-even point, the unlevered structure is preferred.

D. Leverage only provides value above the break-even point.

Joe's has old, fully depreciated equipment. Moe's just purchased all new equipment which will be depreciated over eight years. If Joe's and Moe's have the same sales, costs, tax rate, and enterprise value, then: A. Joe's will have a lower profit margin. B. Joe's will have a lower return on equity. C. Moe's will have a higher net income. D. Moe's and Joe's will have the same EV multiple. E. Moe's will have a lower EV multiple.

D. Moe's and Joe's will have the same EV multiple.

The cost of equity for an all-equity firm is designated as: A. Rs B. RD C. RS(1 - tC) D. R0 E. R0(1 - tC)

D. R0

Which one of the following statements is correct if a firm has a receivables turnover of 10? A. It takes the firm 10 days to collect payment from its customers. B. It takes the firm 36.5 days to sell its inventory and collect the payment from the sale. C. It takes the firm an average of 36.5 days to sell its items. D. The firm collects on its sales in an average of 36.5 days. E. The firm has ten times more in accounts receivable than it does in cash.

D. The firm collects on its sales in an average of 36.5 days.

How should a profitability index of zero be interpreted? A. The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow). B. The project has an internal rate of return equal to the discount rate. C. The project produces a net income of zero for every year of its life. D. The project's cash flows subsequent to the initial cash flow have a present value of zero. E. The project also has a net present value of zero.

D. The project's cash flows subsequent to the initial cash flow have a present value of zero.

Hi-Tech announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price. How will these two market reactions affect the value of put options on Hi-Tech stock? A. Both reactions decrease the value of the put options. B. Both reactions increase the value of the put options. C. Neither reaction will affect put option values. D. The reactions will have offsetting effects on put option prices. E. The change in volatility will not affect put option values while the increased stock price will decrease the put option values.

D. The reactions will have offsetting effects on put option prices.

An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a specified price is called: A. either an American or a European option. B. an American call. C. an American put. D. a European put. E. a European call.

D. a European put.

Firm A and Firm B join to create Firm AB. This is an example of: A. a tender offer. B. an acquisition of assets. C. an acquisition of stock. D. a consolidation. E. a merger.

D. a consolidation.

All else held constant, which one of these is most apt to increase the WACC of a leveraged firm? A. an increase in the weight of debt B. a decrease in a firm's equity beta C. a decrease in the dividend growth rate D. a decrease in the tax rate E. an increase in the risk-free rate when the equity beta > 1

D. a decrease in the tax rate

A financial device designed to make unfriendly takeover attempts financially unappealing, if not impossible, is called: A. a golden parachute. B. a standstill agreement. C. greenmail. D. a poison pill. E. a white knight.

D. a poison pill.

The acronym APV stands for: A. applied present value. B. all-purpose variable. C. accepted project verified. D. adjusted present value. E. applied projected value.

D. adjusted present value.

When computing WACC, you should use the: A. pretax cost of debt because most corporations pay taxes at the same tax rate. B. pretax cost of debt because it is the actual rate the firm is paying bondholders. C. current yield because it is based on the current market price of debt. D. aftertax cost of debt because interest is tax deductible. E. pretax yield to maturity because it considers the current market price of debt.

D. aftertax cost of debt because interest is tax deductible.

The discounted payback period of a project will decrease whenever the: A. discount rate applied to the project is increased. B. initial cash outlay of the project is increased. C. time period of the project is increased. D. amount of each project cash inflow is increased. E. costs of the fixed assets utilized in the project increase.

D. amount of each project cash inflow is increased.

If a project has a net present value equal to zero, then: A. the initial cost of the project exceeds the present value of the project's subsequent cash flows. B. the internal rate of return exceeds the discount rate. C. the project produces cash inflows that exceed the minimum required inflows. D. any delay in receiving the projected cash inflows will cause the project's NPV to be negative. E. the discount rate exceeds the internal rate of return.

D. any delay in receiving the projected cash inflows will cause the project's NPV to be negative.

The payback method: A. is the most frequently used method of capital budgeting analysis. B. is a more sophisticated method of analysis than the profitability index. C. considers the time value of money. D. applies mainly to projects where the actual results will be known relatively soon. E. generally results in decisions that conflict with the decision suggested by NPV analysis.

D. applies mainly to projects where the actual results will be known relatively soon.

Which combination is referred to as a protective put? Assume all sales and purchases refer to ABC stock and its options. A. buying 100 shares of stock and writing one put B. selling a put and buying an offsetting call C. buying 300 shares and selling three call option contracts D. buying a put and buying 100 shares of stock E. buying a put and selling a call with the same strike price and expiration date

D. buying a put and buying 100 shares of stock

A project will have more than one IRR if, any only if, the: A. primary IRR is positive. B. primary IRR is negative. C. NPV is zero. D. cash flow pattern exhibits more than one sign change. E. cash flow pattern exhibits exactly one sign change.

D. cash flow pattern exhibits more than one sign change.

If you discount a project's unlevered aftertax cash flows by the _____ and then subtract the initial investment you will calculate the: A. cost of capital for the unlevered firm; adjusted present value. B. cost of equity capital; project NPV. C. weighted cost of capital; project NPV. D. cost of capital for the unlevered firm; all-equity net present value. E. cost of equity capital for the levered firm; all-equity net present value.

D. cost of capital for the unlevered firm; all-equity net present value.

A key reason for acquisitions is synergy. Synergy includes all of the following except: A. revenue enhancements. B. cost reductions. C. decreased taxes. D. decreased cash flows. E. increased efficiency.

D. decreased cash flows.

For a profitable firm, an increase in which one of the following will increase the operating cash flow? A. employee salaries B. office rent C. building maintenance D. depreciation E. equipment rental

D. depreciation

Financial planning, when properly executed: A. ignores the normal restraints encountered by a firm. B. is based on the internal rate of growth. C. reduces the necessity of daily management oversight of the business operations. D. ensures internal consistency among the firm's various goals. E. eliminates the need to plan more than one year in advance.

D. ensures internal consistency among the firm's various goals.

All else held constant, the value of a call decreases when the: A. time to expiration increases. B. risk-free rate of return increases. C. stock price increases. D. exercise price increases. E. volatility of the price of the underlying stock increases.

D. exercise price increases.

The last day on which an owner of an option can elect to exercise is the _____ date. A. ex-payment B. ex-option C. opening D. expiration E. intrinsic

D. expiration

When the officers of a firm purchase all of the equity shares and the shares of the firm are delisted and no longer publicly available, this action is known as a(n): A. consolidation. B. vertical acquisition. C. proxy contest. D. going-private transaction. E. equity carve-out.

D. going-private transaction.

The intrinsic value of a put is equal to the: A. lesser of the strike price or the stock price. B. lesser of the stock price minus the exercise price or zero. C. lesser of the stock price or zero. D. greater of the strike price minus the stock price or zero. E. greater of the stock price minus the exercise price or zero.

D. greater of the strike price minus the stock price or zero.

If you consider bondholders to be the owners of a firm, then those bondholders: A. own a call option on the firm with an exercise price equal to the firm's total equity. B. own a put option on the firm with an exercise price equal to the firm's total debt. C. have written a put option on the firm with an exercise price equal to the firm's total equity. D. have written a call option on the firm with an exercise price equal to the firm's total debt. E. own a put option on the firm with an exercise price equal to the firm's total assets.

D. have written a call option on the firm with an exercise price equal to the firm's total debt.

Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a: A. lower dividend policy. B. constant dividend policy. C. zero-dividend policy. D. higher dividend policy. E. restrictive dividend policy.

D. higher dividend policy.

The acquisition of a firm in the same industry as the bidder is called a _____ acquisition. A. conglomerate B. forward C. backward D. horizontal E. vertical

D. horizontal

If a call has a positive intrinsic value at expiration the call is said to be: A. funded. B. unfunded. C. at the money. D. in the money. E. out of the money.

D. in the money.

A financing project is acceptable if its IRR is: A. exactly equal to its net present value (NPV). B. exactly equal to zero. C. greater than the discount rate. D. less than the discount rate. E. negative.

D. less than the discount rate.

The maximum value of a call option is equal to the: A. strike price minus the initial cost of the option. B. exercise price plus the price of the underlying stock. C. strike price. D. price of the underlying stock. E. purchase price.

D. price of the underlying stock.

The amount that investors are willing to pay for each dollar of annual earnings is reflected in the: A. return on assets. B. return on equity. C. debt-equity ratio. D. price-earnings ratio. E. DuPont identity.

D. price-earnings ratio.

Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as _______ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

D. profitability

he present value of an investment's future cash flows divided by the initial cost of the investment is called the: A. net present value. B. internal rate of return. C. average accounting return. D. profitability index. E. profile period.

D. profitability index.

Which one of the following sets of ratios would generally be of the most interest to stockholders? A. return on assets and profit margin B. quick ratio and times interest earned C. price-earnings ratio and debt-equity ratio D. return on equity and price-earnings ratio E. cash coverage ratio and equity multiplier

D. return on equity and price-earnings ratio

In a reverse stock split: A. the number of shares outstanding increases and owners' equity decreases. B. the firm buys back existing shares of stock on the open market. C. the firm sells new shares of stock on the open market. D. the number of shares outstanding decreases but owners' equity is unchanged. E. shareholders make a cash payment to the firm.

D. the number of shares outstanding decreases but owners' equity is unchanged.

The beta of the stock of an individual firm is primarily affected by: A. the overall trend of the firm's use of financial leverage. B. the overall direction of the market's movements. C. variance of the market and the stock, but not their co-movement. D. the operating and financial leverage of the firm as well as the cyclical nature of the firm's revenues. E. the growth rate and changes of the firm's revenues and profits.

D. the operating and financial leverage of the firm as well as the cyclical nature of the firm's revenues.

MM Proposition I with taxes is based on the concept that: A. the optimal capital structure is the one that is totally financed with equity. B. the capital structure of the firm does not matter because investors can use homemade leverage. C. the firm is better off with debt based on the weighted average cost of capital. D. the value of the firm increases as total debt increases because of the interest tax shield. E. the cost of equity increases as the debt-equity ratio of a firm increases.

D. the value of the firm increases as total debt increases because of the interest tax shield.

A capital intensity ratio of 1.03 means a firm has $1.03 in: A. total debt for every $1 in equity. B. equity for every $1 in total debt. C. sales for every $1 in total assets. D. total assets for every $1 in sales. E. long-term assets for every $1 in short-term assets.

D. total assets for every $1 in sales.

When a building supply store acquires a lumber mill it is making a ______ acquisition. A. horizontal B. longitudinal C. conglomerate D. vertical E. complementary resources

D. vertical

The value of a firm is maximized when the: A. cost of equity is maximized. B. tax rate is zero. C. levered cost of capital is maximized. D. weighted average cost of capital is minimized. E. debt-equity ratio is minimized.

D. weighted average cost of capital is minimized.

The cost of preferred stock: A. should be adjusted for taxes when computing WACC. B. is ignored by all firms when computing WACC. C. is generally calculated using the overall firm's beta. D. is equal to the stock's dividend yield. E. is set equal to the pretax cost of debt since it is a fixed income security.

D. is equal to the stock's dividend yield.

The financial ratio days' sales in inventory is measured as: A. inventory turnover plus 365 days. B. inventory times 365 days. C. inventory plus cost of goods sold, divided by 365 days. D. 365 days divided by the inventory. E. 365 days divided by the inventory turnover.

E. 365 days divided by the inventory turnover.

An option that may be exercised at any time up to and including its expiration date is called a(n) _____ option. A. futures B. Asian C. Bermudan D. European E. American

E. American

Which one of these statements is true? A. Dividends are irrelevant. B. Shareholders are unable to personally adjust the dividend policy set by the firm. C. According to Miller and Modigliani, a firm should alter its investment policy whenever a change is made in its dividend policy. D. Dividend policy is relevant. E. Firms should never give up a positive NPV project to increase a dividend.

E. Firms should never give up a positive NPV project to increase a dividend.

Which one of the following is true? A. A firm with low anticipated profits will likely take on a high level of debt. B. A successful firm will probably be all-equity financed. C. Rational firms raise debt levels when profits are expected to decline. D. Rational investors are likely to infer a firm is more valuable when its debt level declines. E. Investors will generally view an increase in debt as a positive sign for the firm's value.

E. Investors will generally view an increase in debt as a positive sign for the firm's value.

Which one of these statements is correct? A. In the U.S. economy, dividends are quite insignificant. B. Over the last few decades, the percentage of U.S. firms paying dividends has increased. C. The tax law change in May 2003 is cited as one reason why the percentage of dividend payers has decreased in the U.S. D. Dividends are more tax-advantaged than capital gains. E. Much of the dividend income paid in the U.S. is related to a small number of firms.

E. Much of the dividend income paid in the U.S. is related to a small number of firms.

You are considering a project with the following data: Internal rate of return 8.7% Profitability ratio .98 Net present value −$393 Payback period 2.44 years Required return 9.5% Which one of the following is correct given this information? A. The discount rate used in computing the net present value must have been less than 8.7%. B. The discounted payback period will have to be less than 2.44 years. C. The discount rate used to compute the profitability ratio was equal to the internal rate of return. D. This project should be accepted based on the profitability ratio. E. This project should be rejected based on the internal rate of return.

E. This project should be rejected based on the internal rate of return.

Which one of the following statements correctly describes your situation as the owner of an American call option? A. You are obligated to buy at a set price at any time up to and including the expiration date. B. You have the right to sell at a set price at any time up to and including the expiration date. C. You have the right to buy at a set price only on the expiration date. D. You are obligated to sell at a set price if the option is exercised. E. You have the right to buy at a set price at any time up to and including the expiration date.

E. You have the right to buy at a set price at any time up to and including the expiration date.

Which one of the following is cited as an argument for a high dividend payout? A. flotation costs involved with a new securities issue B. high personal tax rates relative to corporate rates C. desire to maintain constant dividends over time D. restrictive covenant contained in a bond indenture agreement E. agency costs related to excess cash reserves

E. agency costs related to excess cash reserves

Which one of these is a characteristic of a sensible payout policy? A. over time pay out half of all free cash flows B. set the current regular dividend consistent with a 100 percent payout ratio C. increase regular dividends to distribute transitory cash flow increases D. set the dividends high even if it means acquiring expensive external financing E. avoid rejecting positive NPV projects to increase dividends or buyback shares

E. avoid rejecting positive NPV projects to increase dividends or buyback shares

Share repurchases: A. reduce a firm's demand for external financing. B. offer less tax advantages to shareholders than do cash dividends. C. tend to increase agency costs. D. are always positive net present value investments. E. can be difficult to verify.

E. can be difficult to verify.

The lower bound of a call option: A. can be a negative value regardless of the stock or exercise prices. B. can be a negative value but only when the exercise price exceeds the stock price. C. can be a negative value but only when the stock price exceeds the exercise price. D. must be greater than zero. E. can be equal to zero.

E. can be equal to zero.

The difference between an American call and a European call is that the American call: A. has a fixed exercise price while the European exercise price can vary within a small range. B. is a right to buy while a European call is an obligation to buy. C. has an expiration date while the European call does not. D. is written on 100 shares of the underlying security while the European call covers 1,000 shares. E. can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.

E. can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.

Which statement expresses all accounts as a percentage of total assets? A. pro forma balance sheet B. common-size income statement C. statement of cash flows D. pro forma income statement E. common-size balance sheet

E. common-size balance sheet

The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date. A. ex-rights B. ex-dividend C. record D. payment E. declaration

E. declaration

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the: A. net present value. B. discounted net present value. C. payback period. D. discounted profitability index. E. discounted payback period.

E. discounted payback period.

The annual dividend per share stated as a percentage of the annual earnings per share is called the: A. dividend yield. B. dividend per share. C. annual yield. D. dividend rate. E. dividend payout.

E. dividend payout.

A firm may want to divest itself of some of its assets for all of these reasons except to: A. raise cash. B. eliminate unprofitable operations. C. eliminate some recently acquired assets. D. cash in on profitable operations. E. eliminate some synergy.

E. eliminate some synergy.

The annual annuity stream of payments with the same present value as a project's costs is called the project's _____ cost. A. incremental B. sunk C. opportunity D. erosion E. equivalent annual

E. equivalent annual

A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as: A. salvage value expenses. B. net working capital expenses. C. sunk costs. D. opportunity costs. E. erosion costs.

E. erosion costs.

The two fatal flaws of the internal rate of return decision rule are the: A. arbitrary determination of a discount rate and the failure to consider initial expenditures. B. arbitrary determination of a discount rate and the failure to correctly analyze mutually exclusive investment projects. C. arbitrary determination of a discount rate and the multiple rate of return problem. D. failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects. E. failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

E. failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

The explicit and implicit costs associated with corporate default are referred to as the _____ costs of a firm. A. flotation B. default beta C. direct bankruptcy D. indirect bankruptcy E. financial distress

E. financial distress

The payback method of analysis: A. discounts cash flows. B. ignores the initial cost. C. always uses all project cash flows. D. applies an industry-standard recoupment period. E. has a timing bias.

E. has a timing bias.

The least problem encountered when comparing the financial statements of one firm with those of another firm occurs when the firms: A. are in different lines of business. B. have geographically diverse operations. C. use different methods of depreciation. D. are both classified as conglomerates. E. have the same fiscal year-end.

E. have the same fiscal year-end.

The behavioral finance concept of self-control is an argument in favor of: A. frequent stock splits. B. low cash dividends. C. stock dividends. D. reverse stock splits. E. high cash dividends.

E. high cash dividends.

The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is referred to as: A. the perfect foresight model. B. MM Proposition I. C. capital structure irrelevancy. D. homemade leverage. E. homemade dividends.

E. homemade dividends.

In the absence of taxes, the capital structure chosen by a firm doesn't really matter because of: A. taxes. B. the interest tax shield. C. the relationship between dividends and earnings per share. D. the effects of leverage on the cost of equity. E. homemade leverage.

E. homemade leverage.

The terminal value of a firm is also commonly referred to as the: A. final value. B. cash value. C. non-constant value. D. estimated value. E. horizon value.

E. horizon value.

According to the clientele effect, firms can only boost their stock price: A. by increasing the dividend payout ratio. B. by increasing their regular cash dividends. C. by setting their dividend to the level expected by the highest-dividend-receiving satisfied clientele group. D. by commencing dividend payments if they are a non-dividend-paying firm. E. if an unsatisfied clientele group exists.

E. if an unsatisfied clientele group exists.

One of the primary weaknesses of many financial planning models is that they: A. rely too much on financial relationships and too little on accounting relationships. B. are iterative in nature. C. ignore the goals and objectives of senior management. D. ignore cash payouts to stockholders. E. ignore the size, risk, and timing of cash flows.

E. ignore the size, risk, and timing of cash flows.

Indirect costs of financial distress: A. effectively limit the amount of equity a firm issues. B. serve as an incentive to increase the financial leverage of a firm. C. include costs such as legal and accounting fees. D. tend to increase as the debt-equity ratio decreases. E. include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.

E. include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.

In a world with taxes and financial distress, when a firm is operating with the optimal capital structure the: A. debt-equity ratio will be less than optimal. B. weighted average cost of capital will be maximized. C. firm will be all-equity financed. D. required return on assets will be at its maximum point. E. increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

E. increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

You are trying to determine whether to accept Project A or Project B. These projects are mutually exclusive. As part of your analysis, you should compute the incremental IRR by determining the: A. internal rate of return for the cash flows of each project. B. net present value of each project using the internal rate of return as the discount rate. C. discount rate that equates the discounted payback periods for each project. D. discount rate that makes the net present value of each project equal to one. E. internal rate of return for the differences in the cash flows of the two projects.

E. internal rate of return for the differences in the cash flows of the two projects.

The value of an option if it were to immediately expire, that is, its lower pricing bound, is called an option's _____ value. A. strike B. market C. volatility D. time E. intrinsic

E. intrinsic

Accepting a positive net present value (NPV) project: A. indicates the project will pay back within the required period of time. B. means the present value of the expected cash flows is equal to the project's cost. C. ignores the inherent risks within the project. D. guarantees all cash flow assumptions will be realized. E. is expected to increase the stockholders' value by the amount of the NPV.

E. is expected to increase the stockholders' value by the amount of the NPV.

In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized, normally distributed random variable is: A. less than or equal to N(d2). B. less than one. C. equal to one. D. equal to d1. E. less than or equal to d1.

E. less than or equal to d1.

The market-to-book ratio is measured as the: A. market price per share divided by the par value per share. B. net income per share divided by the market price per share. C. market price per share divided by the net income per share. D. market price per share divided by the dividends per share. E. market value per share divided by the book value per share.

E. market value per share divided by the book value per share.

The pretax salvage value of an asset is equal to the: A. book value if straight-line depreciation is used. B. book value if MACRS depreciation is used. C. market value minus the book value. D. book value minus the market value. E. market value.

E. market value.

The possibility that more than one discount rate will make the NPV of an investment equal to zero presents the problem referred to as: A. net present value profiling. B. operational ambiguity. C. the mutually exclusive investment decision. D. issues of scale. E. multiple rates of return.

E. multiple rates of return.

A put option with a $35 exercise price on ABC stock expires today. The current price of ABC stock is $36. The put is: A. funded. B. unfunded. C. at the money. D. in the money. E. out of the money.

E. out of the money.

The profitability index of an investment project is the ratio of the: A. average net income to the average investment. B. internal rate of return to the current market rate of interest. C. net present value of the project's cash outflows divided by the net present value of its inflows. D. net present value of every project cash flow to the initial cost. E. present value of the Time 1 and subsequent cash flows to the initial cost.

E. present value of the Time 1 and subsequent cash flows to the initial cost.

The net present value method of capital budgeting analysis does all of the following except: A. incorporate risk into the analysis. B. consider all relevant cash flow information. C. use all of a project's cash flows. D. discount all future cash flows. E. provide a specific anticipated rate of return.

E. provide a specific anticipated rate of return.

A purely financial merger: A. increases shareholder value but does not affect bondholders. B. decreases both bondholder and shareholder values. C. transfers bondholder value to shareholders. D. increases bondholder value but does not affect shareholder value. E. reduces shareholder value while increasing bondholder value.

E. reduces shareholder value while increasing bondholder value.

The extended version of the percentage of sales method: A. assumes that all net income will be paid out in dividends to stockholders. B. assumes that all net income will be retained by the firm and offset by a reduction in debt. C. is based on a capital intensity ratio of 1.0. D. requires that all financial statement accounts change at the same rate. E. separates accounts that vary with sales from those that do not vary with sales.

E. separates accounts that vary with sales from those that do not vary with sales.

A _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders. A. merger B. acquisition C. payment-in-kind D. stock split E. share repurchase

E. share repurchase

The discounted payback rule may cause: A. projects with discounted payback periods in excess of the project's life to be accepted. B. the most liquid projects to be rejected in favor of less liquid projects. C. projects to be incorrectly accepted due to ignoring the time value of money. D. some projects with negative net present values to be accepted. E. some positive net present value projects to be rejected.

E. some positive net present value projects to be rejected.

Which one of these is least associated with takeovers? A. leveraged buyouts B. management buyouts C. proxy contests D. acquisition of assets E. spin-offs

E. spin-offs

The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its: A. rate of return on assets. B. internal rate of growth. C. average historical rate of growth. D. rate of return on equity. E. sustainable rate of growth.

E. sustainable rate of growth.

The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called: A. the agency conflict. B. goodwill. C. the merger cost. D. the consolidation effect. E. synergy.

E. synergy.

Last year, Alfred's Automotive had a price-earnings ratio of 15 and earnings per share of $1.20. This year, the price earnings ratio is 18 and the earnings per share is $1.20. Based on this information, it can be stated with certainty that: A. the price per share decreased. B. the earnings per share decreased. C. investors are paying a lower price per share this year as compared to last year. D. investors are receiving a higher rate of return this year. E. the investors' outlook for the firm has improved.

E. the investors' outlook for the firm has improved.

Given an exercise price, time to maturity, and European put-call parity, the present value of the strike price plus the call option is equal to: A. the current market value of the stock. B. the present value of the stock minus a put option. C. a put option minus the market value of the share of stock. D. the value of a U.S. Treasury bill. E. the share of stock plus the put option.

E. the share of stock plus the put option.

In general, the capital structures used by U.S. firms: A. tend to overweigh debt in relation to equity. B. are easily explained in terms of earnings volatility. C. are easily explained by analyzing the types of assets owned by the various firms. D. tend to be those which maximize the use of the firm's available tax shelters. E. vary significantly across industries.

E. vary significantly across industries.

The acquisition of a firm involved with a different production process stage than the bidder is called a _____ acquisition. A. conglomerate B. forward C. backward D. horizontal E. vertical

E. vertical

The equivalent annual cost method is useful in determining: A. the annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended. B. the tax shield benefits of depreciation given the purchase of new assets for a project. C. operating cash flows for cost-cutting projects of equal duration. D. which one of two machines to acquire given equal machine lives but unequal machine costs. E. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

E. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows. A. incremental B. stand-alone C. opportunity D. net present value E. erosion

A. incremental

Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is: A. equal to the discount rate. B. greater than the discount rate. C. less than the discount rate. D. negative. E. positive.

B. greater than the discount rate.

When [(1 - tC) × (1 - tS) = (1 - tB)], then the: A. firm should hold no debt. B. value of the levered firm is greater than the value of the unlevered firm. C. cash flow to stockholders equals the cash flow to bondholders. D. tax shield on debt is exactly offset by higher levels of dividends. E. tax shield on debt is exactly offset by higher capital gains.

C. cash flow to stockholders equals the cash flow to bondholders.

The internal rate of return is: A. more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. B. equivalent to the discount rate that makes the net present value equal to one. C. computed using a project's cash flows as the only source of inputs. D. dependent on the interest rates offered in the marketplace. E. a better methodology than net present value when dealing with unconventional cash flows.

C. computed using a project's cash flows as the only source of inputs.

If Microsoft were to acquire an airline, the acquisition would be classified as a _____ acquisition. A. horizontal B. longitudinal C. conglomerate D. vertical E. complementary resources

C. conglomerate

The inventory turnover ratio is measured as: A. total sales minus inventory. B. inventory times total sales. C. cost of goods sold divided by inventory. D. inventory divided by cost of goods sold. E. inventory divided by sales.

C. cost of goods sold divided by inventory.

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the: A. aftertax depreciation savings. B. depreciable basis. C. depreciation tax shield. D. operating cash flow. E. aftertax salvage value.

C. depreciation tax shield.

The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs. A. flotation B. beta conversion C. direct bankruptcy D. indirect bankruptcy E. unlevered

C. direct bankruptcy

The flow-to-equity (FTE) approach in capital budgeting is defined as the: A. discounting of all project cash flows at the overall cost of capital. B. scale enhancing discount process. C. discounting of a project's levered cash flows to the equityholders at the required return on equity. D. dividends and capital gains that may flow to shareholders of a firm. E. discounting of a project's unlevered cash flows to the equityholders at the WACC.

C. discounting of a project's levered cash flows to the equityholders at the required return on equity.

A stock split: A. increases the total value of the common stock account. B. decreases the value of the retained earnings account. C. does not affect the total value of any of the equity accounts. D. increases the value of the capital in excess of par account. E. decreases the total owners' equity on the balance sheet.

C. does not affect the total value of any of the equity accounts.

Assume Uptown Markets just made a tender offer to purchase shares of its own stock. This offer was made to all its shareholders except for the largest outside shareholder. This offer is referred to as a(n): A. limited recapitalization. B. white knight offer. C. exclusionary self-tender. D. asset restructuring. E. greenmail offer.

C. exclusionary self-tender.

Which one of these is most related to a positive covenant? A. limiting the amount of the firm's dividends B. avoiding a merger while a debt remains unpaid C. furnishing financial statements to the firm's lenders D. not issuing any additional long-term debt E. ot selling any major assets without lender approval

C. furnishing financial statements to the firm's lenders

A business deal in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group is called a: A. tender offer. B. proxy contest. C. going-private transaction. D. acquisition. E. consolidation.

C. going-private transaction.

The payments made by a firm to repurchase shares of its outstanding stock from an individual investor in an attempt to eliminate a potential unfriendly takeover attempt are referred to as: A. a golden parachute. B. standstill payments. C. greenmail. D. a poison pill. E. a white knight.

C. greenmail.

Sunk costs include any cost that: A. will change if a project is undertaken. B. will be incurred if a project is accepted. C. has previously been incurred and cannot be changed. D. will be paid to a third party and cannot be refunded for any reason whatsoever. E. will occur if a project is accepted and once incurred, cannot be recouped.

C. has previously been incurred and cannot be changed.

A key underlying assumption of MM Proposition I without taxes is that: A. financial leverage increases risk. B. individuals can borrow at lower rates than corporations. C. individuals and corporations borrow at the same rate. D. managers always act to maximize the value of the firm. E. corporations are all-equity financed.

C. individuals and corporations borrow at the same rate.

An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio? A. accounts payable B. cash C. inventory D. accounts receivable E. fixed assets

C. inventory

The IRS is most apt to disallow an acquisition if it: A. moves the foreign operations of the acquired firm to the U.S. B. is totally financed with debt. C. is designed primarily to reduce federal taxes. D. is designed to transfer technology in a tax-free transfer. E. allows shareholders to avoid currently realizing their gains from a stock acquisition.

C. is designed primarily to reduce federal taxes.

MM Proposition I with no tax supports the argument that: A. business risk determines the return on assets. B. the cost of equity rises as leverage rises. C. it is completely irrelevant how a firm arranges its finances. D. a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress. E. financial risk is determined by the debt-equity ratio.

C. it is completely irrelevant how a firm arranges its finances.

Payback is frequently used to analyze independent projects because: A. it considers the time value of money. B. all relevant cash flows are included in the analysis. C. it is easy and quick to calculate. D. it is the most desirable of all the available analytical methods from a financial perspective. E. it produces better decisions than those made using either NPV or IRR.

C. it is easy and quick to calculate.

MM Proposition I without taxes proposes that: A. the value of an unlevered firm exceeds that of a levered firm. B. there is one ideal capital structure for each firm. C. leverage does not affect the value of the firm. D. shareholder wealth is directly affected by the capital structure selected. E. the value of a levered firm exceeds that of an unlevered firm.

C. leverage does not affect the value of the firm.

Tax shield refers to a reduction in taxes created by: A. a reduction in sales. B. an increase in interest expense. C. noncash expenses. D. a project's incremental expenses. E. opportunity costs.

C. noncash expenses.

The optimal capital structure: A. will be the same for all firms in the same industry. B. will remain constant over time unless the firm makes an acquisition. C. of a firm will vary over time as taxes and market conditions change. D. places more emphasis on the operations of a firm rather than the financing of a firm. E. is unaffected by changes in the financial markets.

C. of a firm will vary over time as taxes and market conditions change.

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: A. cash period. B. net working capital period. C. payback period. D. profitability index. E. discounted payback period.

C. payback period.

The APV method is least useful in which one of these situations? A. leveraged buyout B. project involving interest subsidies C. project based on a target debt-to-value ratio D. project with flotation costs E. lease-versus-purchase decision

C. project based on a target debt-to-value ratio

For a multi-product firm, if a project's level of risk differs from that of the overall firm, then the: A. CAPM can no longer be used to estimate the cost of equity as beta no longer applies. B. project should be discounted using the overall firm's beta. C. project should be discounted using a beta commensurate with the project's risks. D. project should be discounted at the market rate. E. project should be discounted at the T-bill rate.

C. project should be discounted using a beta commensurate with the project's risks.

The financial ratio that measures the accounting profit per dollar of book equity is referred to as the: A. profit margin. B. price-earnings ratio. C. return on equity. D. equity turnover. E. market profit-to-book ratio.

C. return on equity.

Which one of the following industries tends to have the highest leverage ratio? A. natural gas distribution B. computer C. television broadcasting stations D. educational services E. biological products

C. television broadcasting stations

The last date on which you can purchase shares of stock and still receive the dividend is the date _____ business day(s) prior to the date of record. A. zero B. one C. three D. five E. seven

C. three

The beta of debt is commonly assumed to be: A. 1.0 B. .50 C. zero D. -1 E. -5

C. zero

A mutually exclusive project is a project whose: A. acceptance or rejection has no effect on other projects. B. NPV is always negative. C. IRR is always negative. D. acceptance or rejection affects other projects. E. cash flow pattern exhibits more than one sign change.

D. acceptance or rejection affects other projects.

The increase you realize in buying power as a result of owning an investment is referred to as the _____ rate of return. A. inflated B. realized C. nominal D. real E. risk-free

D. real

Which one of these statements is correct? A. Flotation costs increase the value of RS. B. The weighted average cost of capital is equal to B /S(RS)(1 - tc). C. The discount rate for levered equity is unaffected by the debt-equity ratio. D. The cost of equity for an all-equity firm is less than the cost of equity for a levered firm. E. The cost of levered equity is indirectly related to beta.

D. The cost of equity for an all-equity firm is less than the cost of equity for a levered firm.

Which one of the following will tend to increase the benefit of the interest tax shield given a progressive tax rate structure? A. a reduction in tax rates B. a large tax loss carryforward C. a large depreciation tax deduction D. a sizeable increase in taxable income E. a catastrophic loss

D. a sizeable increase in taxable income

Nu Tech, Inc. is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all of its available cash to fund its rapid growth. The market price of its stock is currently trading in the upper end of its preferred trading range. The firm could consider: A. a liquidating dividend. B. an extra cash dividend. C. a reverse stock split. D. a stock dividend. E. a cash distribution.

D. a stock dividend.

Conflicts of interest between stockholders and bondholders are known as: A. trustee costs. B. financial distress costs. C. dealer costs. D. agency costs. E. underwriting costs.

D. agency costs.

The book value of an asset is primarily used to compute the: A. annual depreciation tax shield. B. amount of cash received from the sale of an asset. C. amount of tax saved annually due to the depreciation expense. D. amount of tax due on the sale of an asset. E. change in depreciation needed to reflect the market value of the asset.

D. amount of tax due on the sale of an asset.

A trading opportunity that offers a riskless profit is called a(n): A. put option. B. call option. C. market equilibrium. D. arbitrage. E. cross-hedge.

D. arbitrage.

All else equal, the payback period for a project will decrease whenever the: A. initial cost increases. B. required return for a project increases. C. assigned discount rate decreases. D. cash inflows are moved earlier in time. E. duration of a project is lengthened.

D. cash inflows are moved earlier in time.

Suppose that General Motors makes an offer to acquire General Mills. Ignoring potential antitrust problems, this merger would be classified as a: A. monopolistic merger. B. horizontal merger. C. vertical merger. D. conglomerate merger. E. equity carve-out merger.

D. conglomerate merger.

The date on which the firm mails out its declared dividends is called the: A. ex-rights date. B. ex-dividend date. C. date of record. D. date of payment. E. declaration date.

D. date of payment.

If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the: A. fixed assets will have to increase at the same rate, even if the firm is currently operating at only 78 percent of capacity. B. number of common shares outstanding will increase at the same rate of growth. C. debt-equity ratio will have to increase. D. debt-equity ratio will remain constant while retained earnings increase. E. fixed assets, the debt-equity ratio, and number of common shares outstanding will all increase.

D. debt-equity ratio will remain constant while retained earnings increase.

Which one of the following lists dividend events in the correct chronological order from earliest to latest? A. date of record, declaration date, ex-dividend date B. date of record, ex-dividend date, declaration date C. declaration date, date of record, ex-dividend date D. declaration date, ex-dividend date, date of record E. ex-dividend date, date of record, declaration date

D. declaration date, ex-dividend date, date of record

The effect on an option's value of a small change in the value of the underlying asset is called the option: A. theta. B. vega. C. rho. D. delta. E. gamma.

D. delta.

When estimating the cost of equity using the DDM, which one of these is most apt to add error to this estimate? A. next year's dividend B. firm's tax rate C. beta D. dividend growth rate E. current stock price

D. dividend growth rate

If you consider the equity of a firm to be an option on the firm's assets then the act of paying off debt is comparable to _____ on the assets of the firm. A. purchasing a put option B. purchasing a call option C. exercising an in-the-money put option D. exercising an in-the-money call option E. selling a call option

D. exercising an in-the-money call option

Assume a risky firm has both bondholders and stockholders. If the firm obtains a government loan guarantee on its existing debt, who will gain from this guarantee? A. existing stockholders only B. both existing bondholders and stockholders in proportion to the firm's debt-equity ratio C. existing bondholders and stockholders on an equal basis D. existing bondholders only E. future stockholders only

D. existing bondholders only

A capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This interweaving is most apt to result in: A. firms rejecting positive NPV, all-equity projects because changing to a capital structure with debt will always create negative net present values. B. firms foregoing project analysis and just making decisions at random. C. corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing a project. D. firms accepting some negative NPV all-equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV. E. firms never changing their capital structure because all capital budgeting decisions will be overridden by capital structure decisions.

D. firms accepting some negative NPV all-equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV.

Comparing two otherwise equivalent firms, the beta of the common stock of a levered firm is _______ the beta of the common stock of an unlevered firm. A. roughly equivalent to B. significantly less C. slightly less D. greater than E. equal to

D. greater than

A one-for-four reverse stock split will: A. increase the par value by 25 percent. B. increase the number of shares outstanding by 400 percent. C. increase the market value but not affect the par value per share. D. increase a $1 par value to $4. E. increase a $1 par value by $4.

D. increase a $1 par value to $4.

Vinnie's Motors has a market-to-book ratio of 3.4. The book value per share is $34 and earnings per share are $1.36. Holding the market-to-book ratio and earnings per share constant, a $1 increase in the book value per share will: A. decrease the price-earnings ratio. B. decrease the EV multiple. C. decrease the market price per share. D. increase the price-earnings ratio. E. increase the return on equity.

D. increase the price-earnings ratio.

The use of leverage: A. increases both the asset and the equity betas. B. decreases both the asset and the equity betas. C. decreases the equity beta and increases the asset beta. D. increases the equity beta but does not affect the asset beta. E. decreases the equity beta but does not affect the asset beta.

D. increases the equity beta but does not affect the asset beta.

The modified internal rate of return: A. is used as the discount rate for all NPV calculations. B. applies only to profitability calculations. C. is used to make accept/reject decisions when no discount rate can be assigned. D. is computed by combining cash flows until only one change in sign remains. E. assumes all projects are financing projects.

D. is computed by combining cash flows until only one change in sign remains.

Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped by the end of the project. B. requirements generally, but not always, create a cash inflow at the beginning of a project. C. expenditures commonly occur at the end of a project. D. is frequently affected by the additional sales generated by a new project. E. is the only expenditure where at least a partial recovery can be made at the end of a project.

D. is frequently affected by the additional sales generated by a new project.

The discounted payback rule states that you should accept an investment project if its discounted payback period: A. exceeds some pre-specified period of time. B. is positive and rejected if it is negative. C. is less than the payback period. D. is less than some pre-specified period of time. E. exceeds the life of the investment.

D. is less than some pre-specified period of time.

A going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a: A. tender offer. B. proxy contest. C. merger. D. leveraged buyout. E. consolidation.

D. leveraged buyout.

The intrinsic value of a call equals the: A. exercise price minus the stock price. B. upper bound of the call's value. C. market price of the call option. D. lower bound of the call's value. E. premium paid to purchase the call.

D. lower bound of the call's value.

The optimal capital structure will tend to include more debt for firms with: A. the highest depreciation deductions. B. the lowest marginal tax rate. C. substantial tax shields from other sources. D. lower probability of financial distress. E. less taxable income.

D. lower probability of financial distress.

Which one of the following will cause the value of a call to decrease? A. lowering the exercise price B. increasing the time to expiration C. increasing the risk-free rate D. lowering the risk level of the underlying security E. increasing the stock price

D. lowering the risk level of the underlying security

Probably the best argument for a reverse stock split is to: A. decrease the liquidity of a stock. B. decrease the market value per share. C. increase the number of stockholders. D. maintain a minimum share price set by a stock exchange. E. raise additional capital from current stockholders.

D. maintain a minimum share price set by a stock exchange.

The firm's capital structure refers to the: A. mix of current and fixed assets a firm holds. B. amount of capital invested in the firm. C. amount of dividends a firm pays. D. mix of debt and equity used to finance the firm's assets. E. amount of cash versus receivables the firm holds.

D. mix of debt and equity used to finance the firm's assets.

The long-term debt ratio is probably of most interest to a firm's: A. credit customers. B. employees. C. suppliers. D. mortgage holder. E. stockholders.

D. mortgage holder.

Many firms base their capital structure decisions on which two factors? A. industry averages and tax rates B. interest and tax rates C. need for financial slack and current interest rates D. need for financial slack and industry averages E. types of assets held and current interest rates

D. need for financial slack and industry averages

Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either, you should rely most heavily on the _____ method of analysis. A. profitability index B. internal rate of return C. payback D. net present value E. discounted payback

D. net present value

The most valuable investment given up if an alternative investment is chosen is a(n): A. salvage value expense. B. net working capital expense. C. sunk cost. D. opportunity cost. E. erosion cost.

D. opportunity cost.

If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the _____ method of analysis. A. internal rate of return B. net present value C. modified internal rate of return D. payback E. profitability index

D. payback

A proposed acquisition may create synergy by doing all of the following except: A. increasing the market power of the combined firm. B. improving the distribution network of the acquiring firm. C. reducing the acquiring firm's distribution costs. D. reducing the utilization of the acquiring firm's assets. E. providing the combined firm with a strategic advantage.

D. reducing the utilization of the acquiring firm's assets.

Bryan invested in Bryco stock when the firm was financed solely with equity. The firm now has a debt-equity ratio of .3. To maintain the same level of leverage he originally had, Bryan needs to: A. borrow some money and purchase additional shares of Bryco stock. B. maintain his current position in Bryco stock. C. sell some shares of Bryco stock and hold the proceeds in cash. D. sell some shares of Bryco stock and loan out the proceeds. E. sell half of his Bryco stock and invest the proceeds in risk-free securities.

D. sell some shares of Bryco stock and loan out the proceeds.

The Black-Scholes option pricing model is dependent on which five parameters? A. stock price, exercise price, risk-free rate, probability, and time to maturity B. stock price, risk-free rate, probability, time to maturity, and variance C. stock price, risk-free rate, probability, variance, and exercise price D. stock price, exercise price, risk-free rate, variance, and time to maturity E. exercise price, probability, stock price, variance, and time to maturity

D. stock price, exercise price, risk-free rate, variance, and time to maturity

Wydex, Inc. stock is currently trading at $82 a share. The firm feels that its primary clientele can afford to spend between $2,000 and $2,500 to purchase a round lot of 100 shares. The firm should consider a: A. reverse stock split. B. liquidating dividend. C. stock dividend. D. stock split. E. special dividend.

D. stock split.

The cash flow from a project is computed as the: A. net operating cash flow generated by the project, less any sunk costs and erosion costs. B. sum of the incremental operating cash flow and aftertax salvage value of the project. C. net income generated by the project, plus the annual depreciation expense. D. sum of the incremental operating cash flow, capital spending, and net working capital cash flows incurred by the project. E. sum of the sunk costs, opportunity costs, and erosion costs of the project.

D. sum of the incremental operating cash flow, capital spending, and net working capital cash flows incurred by the project.

You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost. A. opportunity B. fixed C. incremental D. sunk E. relevant

D. sunk

Which one of the following should be excluded from the analysis of a project? A. erosion costs B. incremental fixed costs C. incremental variable costs D. sunk costs E. opportunity costs

D. sunk costs

Based on the concept of the clientele effect, which one of these combinations correctly aligns an investor group with its preferred type of stocks? A. low-tax-bracket individuals; zero-to-low payout stocks B. high-tax-bracket individuals; low-to-medium payout stocks C. corporations; low-to-medium payout stocks D. tax-free institutions; medium-payout stocks E. high-tax-bracket individuals; high-payout stocks

D. tax-free institutions; medium-payout stocks

Which three factors are generally considered to be the most important when determining a target debt-equity ratio? A. taxes, asset types, and inflation rate B. asset types, current operating income, and inflation rates C. taxes, current operating income, and future operating income D. taxes, asset types, and uncertainty of operating income E. interest rates, inflation rates, and tax rates

D. taxes, asset types, and uncertainty of operating income

The purchase accounting method for mergers requires that: A. the excess of the purchase price over the fair market value of the target firm be recorded as a one-time expense on the income statement of the acquiring firm B. goodwill be amortized on a yearly basis. C. the equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm. D. the assets of the acquired firm be recorded at their fair market value on the balance sheet of the acquiring firm. E. the excess amount paid for the target firm be recorded as a tangible asset on the books of the acquiring firm.

D. the assets of the acquired firm be recorded at their fair market value on the balance sheet of the acquiring firm.

All else constant, the net present value of a typical investment project increases when: A. the discount rate increases. B. each cash inflow is delayed by one year. C. the initial cost of a project increases. D. the rate of return decreases. E. all cash inflows occur during the last year instead of periodically throughout a project's life.

D. the rate of return decreases.

Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to: A. 35 percent of the internal rate of growth. B. 65 percent of the internal rate of growth. C. the internal rate of growth. D. the sustainable rate of growth. E. 65 percent of the sustainable rate of growth.

D. the sustainable rate of growth.

A company which uses the MACRS system of depreciation: A. will have equal depreciation costs each year of an asset's life. B. will expense the largest percentage of the cost during an asset's first year of life. C. can depreciate the cost of land, if it so desires. D. will write off the entire cost of an asset over the asset's class life. E. cannot expense any of the cost of a new asset during the first year of the asset's life.

D. will write off the entire cost of an asset over the asset's class life.

The beta of debt is commonly considered to be: A. equal to the market beta. B. one-half of the equity beta. C. the same as the asset beta. D. zero. E. one.

D. zero.

JR's is preparing to start a new project in an industry that differs significantly from its current operations. JR's has searched and found the beta of a firm that is a good fit as a good pure play for this new project. Given this good fit, why might JR's assign a higher beta to the project than the beta of the pure play? A. The generally accepted practice would be to assign a beta to the project that is based on the average of the firm's beta and the pure play's beta. B. The revenues of the project may be expected to be less cyclical than those of the pure play. C. The firm may use less debt in its operations than does the pure play. D. The new project may be more responsive to the economy than the pure play and thus represent a higher risk. E. The project may incur flotation costs so a higher beta is warranted to offset the additional cost.

D. The new project may be more responsive to the economy than the pure play and thus represent a higher risk.

Which one of these statements related to beta is correct? A. Firm betas have less error than industry betas. B. Firms should always rely on their own beta rather than their industry beta. C. Beta is unaffected by a firm's capital structure. D. The sample size used to compute beta may be too small to yield a reliable result. E. Firm betas rarely vary over time.

D. The sample size used to compute beta may be too small to yield a reliable result.

Assume a leveraged firm plans to raise new capital to finance a project. To properly account for the flotation costs, the firm should: A. subtract the pretax flotation cost from the project's NPV. B. deduct the amount of the flotation cost from the cash flows for Year 1 of the project. C. add the percentage of the flotation cost to the WACC when discounting the cash flows. D. divide the amount of project capital needed by (1 - Weighted average flotation cost). E. increase the target weights of both debt and equity to account for the flotation percentage.

D. divide the amount of project capital needed by (1 - Weighted average flotation cost).

A banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of _______ and a times interest earned ratio of _______. A. .50; .75 B. .50; 1.00 C. .45; 1.75 D. .40; .75 E. .40; 1.75

E. .40; 1.75

If a firm decreases its operating costs, all else constant, then the: A. profit margin will decrease. B. return on assets will decrease. C. total asset turnover rate will increase. D. cash coverage ratio will decrease. E. price-earnings ratio will decrease.

E. price-earnings ratio will decrease.

30. If you want to review a project from a benefit-cost perspective, you should use the _______ method of analysis. A. net present value B. payback C. internal rate of return D. discounted payback E. profitability index

E. profitability index

Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as: A. EBIT - Taxes. B. EBIT × (1 - Tax rate) + Depreciation × Tax rate. C. (Sales - Costs) × (1 - Tax rate). D. EBIT - Depreciation + Taxes. E. Net income + Depreciation.

E. Net income + Depreciation.

The adjusted present value method (APV), the flow to equity (FTE) method, and the weighted average cost of capital (WACC) method produce equivalent results, but each can have difficulties making computation impossible at times. Given this, which one of these is a correct statement? A. The WACC method is preferred when evaluating a leveraged buyout. B. The APV method is the most commonly used method in actual practice. C. Use the FTE method when the level of debt is known over a project's life. D. Use the WACC method when the level of debt is known over a project's life. E. The WACC method is appropriate when the target debt-to-value ratio applies over a project's life.

E. The WACC method is appropriate when the target debt-to-value ratio applies over a project's life.

The problem that results from using the overall firm's beta in discounting projects of differing risk levels is the: A. acceptance of too many high-risk projects. B. rejection of too many low risk projects. C. rejection of too many high-risk projects. D. acceptance of too many low risk projects. E. acceptance of too many high-risk projects and rejection of too many low risk projects.

E. acceptance of too many high-risk projects and rejection of too many low risk projects.

The equity multiplier is measured as total: A. equity divided by total assets. B. equity plus total debt. C. assets minus total equity, divided by total assets. D. assets plus total equity, divided by total debt. E. assets divided by total equity.

E. assets divided by total equity.

You own stock in a firm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this firm basically own a _____ option on the assets of the firm with a strike price of ______ A. put; $62,000. B. put; $50,000. C. warrant; $62,000. D. call; $62,000. E. call; $50,000.

E. call; $50,000.

Which one of the following is not a reason why firms choose repurchases rather than dividends? A. provide flexibility B. increase the value of existing stock options C. provide shareholders with a tax advantage D. offset dilution E. conserve cash

E. conserve cash

When computing the weighted average cost of capital, which of these are adjusted for taxes? A. cost of equity B. cost of preferred stock C. both the cost of equity and the cost of preferred stock D. the costs of all forms of financing E. cost of debt

E. cost of debt

The optimal capital structure has been achieved when the: A. debt-equity ratio is equal to 1. B. weight of equity is equal to the weight of debt. C. cost of equity is maximized given a pretax cost of debt. D. debt-equity ratio is such that the cost of debt exceeds the cost of equity. E. debt-equity ratio selected results in the lowest possible weighed average cost of capital.

E. debt-equity ratio selected results in the lowest possible weighed average cost of capital.

Issuing debt instead of new equity in a closely held firm is most apt to cause: A. the owner-manager to work less hard and shirk duties. B. the owner-manager to consume more perquisites because the cost is passed to the debtholders. C. both more shirking and perquisite consumption since the government provides a tax shield on debt. D. agency costs to fall as owner-managers do not need to worry about other shareholders. E. the owner-manager to reduce shirking and perquisite consumption.

E. the owner-manager to reduce shirking and perquisite consumption.

Generous compensation packages paid to a firm's top management in the event of a takeover are referred to as: A. golden parachutes. B. poison puts. C. white knights. D. shark repellents. E. bear hugs.

A. golden parachutes.

For a leveraged firm the equity beta is __________ the asset beta. A. greater than B. less than C. equal to D. sometimes greater than and sometimes less than E. unrelated to

A. greater than

The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called: A. homemade leverage. B. dividend recapture. C. the weighted average cost of capital. D. private debt placement. E. personal offset.

A. homemade leverage.

A firm can repurchase its shares in all of the following ways except through: A. a tender offer. B. a reverse stock split. C. a targeted repurchase. D. open market purchases. E. a Dutch auction.

B. a reverse stock split.

In a merger the: A. legal status of both the acquiring firm and the target firm is terminated. B. acquiring firm retains its name and legal status. C. acquiring firm acquires the assets but not the liabilities of the target firm. D. stockholders of the target firm have little, if any, say as to whether or not the merger occurs. E. target firm always continues to exist as a subsidiary of the acquiring firm.

B. acquiring firm retains its name and legal status.

One company wishes to acquire another. Which one of the following does not require a formal vote by the shareholders of the acquired firm? A. merger B. acquisition of stock C. horizontal acquisition of assets D. consolidation E. vertical acquisition of assets

B. acquisition of stock

Shareholders sometimes pursue selfish strategies such as taking large risks or paying excessive dividends. These actions generally result in: A. no action by debtholders since these are shareholder concerns. B. agency costs to bondholders. C. investments with risks similar to those of the current firm. D. undertaking scale-enhancing projects. E. lower agency costs, as shareholders have more control over the firm's assets.

B. agency costs to bondholders.

The legal proceeding for liquidating or reorganizing a firm operating in default is called a: A. tender offer. B. bankruptcy. C. merger. D. takeover. E. proxy fight.

B. bankruptcy.

The information content effect implies that stock prices will rise when dividends are increased provided that the dividend increase: A. is denoted as a one-time event. B. causes stockholders to increase their expectations of future cash flows. C. is greater than the average historical dividend increase. D. is substantial in both dollar amount and percentage terms. E. is combined with a stock repurchase.

B. causes stockholders to increase their expectations of future cash flows.

The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a(n): A. split-up. B. equity carve-out. C. counter-tender offer. D. white knight transaction. E. lockup transaction.

B. equity carve-out.

The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend, is called the _____ date. A. ex-rights B. ex-dividend C. record D. payment E. declaration

B. ex-dividend

Ignoring taxes and all else held constant, the market value of a stock should decrease by the amount of the dividend on the: A. dividend declaration date. B. ex-dividend date. C. date of record. D. date of payment. E. day after the date of payment.

B. ex-dividend date.

An increase in which one of the following will decrease the value of a call option? A. interest rate B. exercise price C. time to expiration D. stock volatility E. underlying asset price

B. exercise price

The act where an owner of an option buys or sells the underlying asset, as is his right, is called ______ the option. A. striking B. exercising C. opening D. splitting E. strangling

B. exercising

Companies will generally have a: A. low beta if their sales are directly related to the market cycle. B. high beta if their sales are highly dependent on the market cycle. C. high beta if sales are independent of the market cycle. D. high beta if their sales are highly variable but unrelated to the market cycle. E. low beta is their sales are highly cyclical.

B. high beta if their sales are highly dependent on the market cycle.

The beta of a firm is more likely to be high under which two conditions? A. high cyclical business activity and low operating leverage B. high cyclical business activity and high operating leverage C. low cyclical business activity and low financial leverage D. low cyclical business activity and low operating leverage E. low financial leverage and low operating leverage

B. high cyclical business activity and high operating leverage

All else equal, a stock dividend will _____ the number of shares outstanding and _____ the value per share. A. increase; increase B. increase; decrease C. not change; increase D. decrease; increase E. decrease; decrease

B. increase; decrease

The sustainable growth rate: A. assumes there is no external financing of any kind. B. is normally higher than the internal growth rate. C. assumes the debt-equity ratio is variable. D. is based on receiving additional external debt and equity financing. E. assumes the dividend payout ratio is equal to zero.

B. is normally higher than the internal growth rate.

The profitability index: A. rule often results in decisions that conflict with the decisions based on the net present value rule. B. is useful as a decision tool when investment funds are limited and all available funds are allocated. C. method is most commonly used when deciding between mutually exclusive projects of varying size. D. rule adjusts for a project's size when determining which one of two projects to accept. E. produces results which typically are difficult to comprehend.

B. is useful as a decision tool when investment funds are limited and all available funds are allocated.

Ratios that measure a firm's financial leverage are known as ________ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

B. long-term solvency

Erosion can be explained as the: A. additional income generated from the sales of a newly added product. B. loss of current sales due to a new project being implemented. C. loss of revenue due to employee theft. D. loss of revenue due to customer theft. E. loss of cash due to the expenses required to fix a parking lot after a heavy rain storm.

B. loss of current sales due to a new project being implemented.

A firm should select the capital structure which: A. produces the highest cost of capital. B. maximizes the value of the firm. C. minimizes taxes. D. is fully unlevered. E. has no debt.

B. maximizes the value of the firm.

The measure of net income returned from every dollar invested in total assets is the: A. profit margin. B. return on assets. C. return on equity. D. asset turnover. E. earnings before interest and taxes.

B. return on assets.

The receivables turnover ratio is measured as: A. sales plus accounts receivable. B. sales divided by accounts receivable. C. sales minus accounts receivable, divided by sales. D. accounts receivable times sales. E. accounts receivable divided by sales.

B. sales divided by accounts receivable.

An out-of-the-money call option is best defined as an option that: A. has an exercise price below the current market price of the underlying security. B. should not be exercised. C. has an exercise price equal to the current market price of the underlying security. D. has expired. E. qualifies as an American option.

B. should not be exercised.

The unlevered cost of capital is: A. the cost of capital for a firm with no equity in its capital structure. B. the cost of capital for a firm with no debt in its capital structure. C. the interest tax shield times pretax net income. D. the cost of preferred stock for an all-equity firm. E. equal to the profit margin for a firm with some debt in its capital structure.

B. the cost of capital for a firm with no debt in its capital structure.

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are referred to as the: A. discount rate and scale problems. B. timing and scale problems. C. discount rate and timing problems. D. scale and reversing flow problems. E. timing and reversing flow problems.

B. timing and scale problems.

When valuing a firm financed with debt and equity, the cash flows should be discounted using: A. the market rate of return. B. the average of the DDM and CAPM costs of equity. C. (1 + WACC)T. D. (1 + CAPM)T. E. (r - g).

C. (1 + WACC)T.

A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales revenue is referred to as a(n) _____ project. A. sunk cost B. opportunity C. cost-cutting D. revenue-cutting E. revenue-generating

C. cost-cutting

A small stock dividend is generally defined as a stock dividend of less than _____ percent. A. 10 to 15 B. 15 to 20 C. 20 to 25 D. 25 to 30 E. 30 to 35

C. 20 to 25

Which statement concerning the net present value (NPV) of an investment or a financing project is correct? A. A financing project should be accepted if, and only if, the NPV is exactly equal to zero. B. An investment project should be accepted only if the NPV is equal to the initial cash flow. C. Any type of project should be accepted if the NPV is positive and rejected if it is negative. D. Any type of project with greater total cash inflows than total cash outflows, should always be accepted. E. An investment project that has positive cash flows for every time period after the initial investment should be accepted.

C. Any type of project should be accepted if the NPV is positive and rejected if it is negative.

Which one of the following is not empirically correct? A. Some firms use no debt. B. Most corporations have relatively low debt-asset ratios C. Capital structures are fairly constant across industries. D. Debt levels across industries vary widely. E. Debt ratios in most countries are considerably less than 100 percent.

C. Capital structures are fairly constant across industries.

Which one of these is a con of paying dividends? A. Paying dividends reduces agency costs when excess cash is available. B. Dividends can be used to signal a firm's optimistic outlook. C. Dividends are frequently taxed as ordinary income. D. Dividends appeal to income-seeking investors. E. Managers can pay dividends to keep cash from bondholders.

C. Dividends are frequently taxed as ordinary income.

The proposition that the cost of equity is a positive linear function of capital structure is called: A. the capital asset pricing model. B. MM Proposition I (no taxes). C. MM Proposition II (no taxes). D. the law of one price. E. the efficient markets hypothesis.

C. MM Proposition II (no taxes).

The external funds needed (EFN) equation projects the addition to retained earnings as: A. PM × Δ Sales. B. PM ×Δ Sales× (1 - d). C. PM × Projected sales × (1 - d). D. Projected sales × (1 - d). E. PM ×Projected sales.

C. PM × Projected sales × (1 - d).

The dividend-irrelevance proposition of Miller and Modigliani depends on which one of the following relationships between investment policy and dividend policy? A. The level of investment does not influence or matter to the dividend decision. B. Once dividend policy is set the investment decision can be made. C. The investment policy is set ahead of time and not altered by changes in dividend policy. D. Since dividend policy is irrelevant there is no relationship between investment policy and dividend policy E. Miller and Modigliani were only concerned about capital structure.

C. The investment policy is set ahead of time and not altered by changes in dividend policy.

A classified board is: A. a communication network that identifies firms that are willing to be acquired. B. the inclusion a super majority provision to prevent a small number of directors from exerting total control over the board's decisions. C. a board where only a portion of the directors are elected in any one year. D. a communication network that distributes resumes for potential board candidates. E. a listing of criteria that a firm is seeking for a targeted purchase.

C. a board where only a portion of the directors are elected in any one year.

The net working capital of a firm will decrease if there is: A. a decrease in accounts payable. B. an increase in inventory. C. a decrease in accounts receivable. D. an increase in the firm's checking account balance. E. a decrease in fixed assets.

C. a decrease in accounts receivable.

13. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because: A. more shares are outstanding for the same level of EBI. B. the break-even point is higher with debt. C. a fixed interest charge must be paid even at low earnings. D. the amount of interest per share has only a positive effect on the intercept. E. the break-even point is lower with debt.

C. a fixed interest charge must be paid even at low earnings.

Puffy's Pastries generates five cents of net income for every $1 in equity. Thus, Puffy's has _______ of 5 percent. A. a return on assets B. a profit margin C. a return on equity D. an EV multiple E. a price-earnings ratio

C. a return on equity

The weighted average cost of capital is determined by _____ the weighted average cost of equity. A. multiplying the weighted average aftertax cost of debt by B. adding the weighted average pretax cost of debt to C. adding the weighted average aftertax cost of debt to D. dividing the weighted average pretax cost of debt by E. dividing the weighted average aftertax cost of debt by

C. adding the weighted average aftertax cost of debt to

The appropriate cost of debt to the firm is the: A. pretax market cost of debt. B. levered equity rate. C. aftertax market borrowing rate. D. pretax coupon rate. E. aftertax coupon rate.

C. aftertax market borrowing rate.

Firms generally: A. set high target payout ratios when they are relatively young. B. decrease their dividends as soon as they expect earnings to decline. C. allow their dividend changes to lag their earnings changes. D. set short-term target ratios of dividends to earnings. E. set the dividend growth rate equal to the firm's earnings growth rate.

C. allow their dividend changes to lag their earnings changes.

Which one of these parties holds a marketable claim on a firm's assets? A. customers B. employees C. bondholders D. Internal Revenue Service E. state tax authorities

C. bondholders