Fin Man 2
The change in revenue that occurs when one more unit of output is sold is referred to as: Multiple Choice erosion. scenario revenue. total revenue. average revenue. marginal revenue.
marginal revenue.
A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42? The coupon rate has increased to 7 percent. The bond is selling at par value. The current yield exceeds the coupon rate. The bond is currently selling at a premium. The current yield exceeds the yield to maturity.
The current yield exceeds the coupon rate.
A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? Callable Floating-rate Zero coupon Debenture Junk
Zero coupon
The interest rate risk premium is the: Multiple Choice difference between the coupon rate and the current yield. difference between the yield to maturity and the current yield. compensation investors demand for accepting interest rate risk. difference between the market interest rate and the coupon rate. additional compensation paid to investors to offset rising prices.
compensation investors demand for accepting interest rate risk.
A Treasury yield curve plots Treasury interest rates relative to: Multiple Choice market rates. comparable corporate bond rates. the risk-free rate. inflation rates. time to maturity.
time to maturity.
Your portfolio is comprised of 22 percent of Stock X, 32 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.04, Stock Y has a beta of .96, and Stock Z has a beta of 1.24. What is the beta of your portfolio? Multiple Choice 1.127 1.178 1.106 1.163 1.092
1.106
The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 3.3 percent, the operating cash flow increases by 4.6 percent. What is the degree of operating leverage if the contribution margin per unit is $47? Multiple Choice 1.18 .72 1.39 .85 1.75
1.39
The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as ________ stocks. Multiple Choice 75 2 40 5 10
10
MentonCo has 7 percent, semiannual coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? Multiple Choice 25.05 years 12.53 years 12.26 years 18.49 years 24.37 years
12.53 years
Cool Shades manufactures biotech sunglasses. The variable materials cost is $1.38 per unit, and the variable labor cost is $.92 per unit. Suppose the firm incurs fixed costs of $348,000 during a year in which total production is 136,000 units and the selling price is $19.50 per unit. What is the cash break-even point? Multiple Choice 18,907 units 14,768 units 20,233 units 22,435 units 16,453 units
20,233 units
Andrea is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently. Multiple Choice Decrease the sales quantity Decrease the sales price Decrease the labor hours per unit produced Increase the amount of the initial investment in net working capital
Decrease the labor hours per unit produced
An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. Multiple Choice break-even sensitivity scenario forecasting simulation
sensitivity
Alcid Manufacturing is analyzing a project with anticipated sales of 8,400 units, ±2 percent. The variable cost per unit is $72, ±2 percent, and the expected fixed costs are $243,000, ±1 percent. The sales price is estimated at $119 per unit, ±3 percent. The depreciation expense is $34,200 and the tax rate is 21 percent. What is the earnings before interest and taxes under the base-case scenario? Multiple Choice $216,400 $242,600 $117,600 $394,800 $151,800
$117,600
A project has a contribution margin per unit of $12.07, fixed costs of $67,840, depreciation of $14,310, variable costs per unit of $14.09, and a financial break-even point of 15,624 units. What is the operating cash flow at this level of output? Multiple Choice $122,500 $117,673 $102,309 $120,742 $0
$120,742
You own a portfolio equally invested in a risk-free asset and two different stocks. One of the stocks has a beta of 1.32. The total portfolio is equally as risky as the market. What is the beta of the second stock? Multiple Choice 1.94 1.68 .88 1.46 1.54
1.68
Which one of the following is least apt to help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. Threat of a company takeover Increasing managers' base salaries Compensation based on the value of the stock Stock option plans Threat of a proxy fight
Increasing managers' base salaries
________ risk is measured using the standard deviation. Multiple Choice Total Unsystematic Nondiversifiable Economic Systematic
Total
A ________ is the market's measure of systematic risk. Multiple Choice beta of 0 variance of 1 standard deviation of 1 standard deviation of 0 beta of 1
beta of 1
The ________ is a positively sloped linear function that plots securities' expected returns against their betas. Multiple Choice security market line portfolio weight graph normal distribution reward-to-risk matrix market real returns
security market line
Financial managers should primarily focus on the interests of: their immediate supervisor. the vice president of finance. themselves. the board of directors. shareholders.
shareholders.
Rodriguez Millwork is analyzing a proposed project that is expected to sell 1,450 units, ±3 percent. The expected variable cost per unit is $139 and the expected fixed costs are $123,000. Cost estimates are considered accurate within a ±1 percent range. The depreciation expense is $39,000. The sales price is estimated at $349 per unit, ±3 percent. What is the contribution margin per unit under the best-case scenario? Multiple Choice $187.42 $137.03 $148.13 $194.33 $221.86
$221.86
Jenkins Ceiling Fans is analyzing a project with expected sales of 5,700 units, ±5 percent. The expected variable cost per unit is $168 and the expected fixed costs are $424,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $156,000. The sales price is estimated at $339 per unit, ±5 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis with fixed costs of $425,000. What is the OCF given this analysis? Multiple Choice $394,874 $416,511 $385,350 $421,300 $467,023
$467,023
Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 3.5 years. How much will you receive for your bond if the market yield to maturity is currently 6.19 percent? Ignore any accrued interest. Assume semiannual compounding. $896.60 $798.09 $756.14 $807.86 $741.08
$807.86
Levrier Lighting has 5.75 percent coupon bonds outstanding that mature in 10 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 8.32 percent? Multiple Choice $830.01 $663.44 $1,193.40 $827.81 $896.60
$827.81
Werden Drilling offers 5.5 percent coupon bonds with semiannual payments and a yield to maturity of 7 percent. The bonds mature in 10 years. What is the market price per bond if the face value is $1,000? Multiple Choice $1,114.20 $893.41 $937.63 $894.65 $671.36
$893.41
Plantowsky Homes is analyzing a new type of insulation for interior walls. The initial fixed asset requirement is $1.62 million, which would be depreciated straight-line to zero over the 7-year life of the project. Projected fixed costs are $287,400 and the anticipated operating cash flow is $136,300. What is the degree of operating leverage for this project? Multiple Choice 3.11 3.66 1.92 2.27 2.49
3.11
A 3.25 percent Treasury bond is quoted at a price of 99.04. The bond pays interest semiannually. What is the current yield? Multiple Choice 3.23% 3.28% 2.99% 2.94% 3.33%
3.28%
An investment offers a total return of 13.8 percent over the coming year. You believe the total real return will be only 9.4 percent. What do you believe the exact inflation rate will be for the next year? Multiple Choice 3.52% 4.02% 3.89% 4.14% 3.67%
4.02%
The yield to maturity on a bond is currently 8.76 percent. The real rate of return is 4.48 percent. What is the rate of inflation? Multiple Choice 5.64% 7.24% 13.63% 4.10% 12.04%
4.10%
Taeyun is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease his concerns? 5-year TIPS 20-year coupon bonds 7-year income bonds 5-year municipal bonds 6-year coupon bonds
5-year TIPS
The expected return on Cerrato, Incorporated, stock is 16.28 percent while the expected return on the market is 11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return? Multiple Choice 4.50% 2.42% 5.13% 2.22% 4.31%
5.13%
Four years ago, Lallana Properties issued $1,000 par value, 7-year bonds. Today, the bonds are yielding 8.27 percent per year. The annual inflation rate is 2.24 percent. What is the real rate of return on the bonds? Multiple Choice 9.44% 10.70% 6.66% 5.90% 11.49%
5.90%
You would like to combine a risky stock with a beta of 1.48 and U.S. Treasury bills in such a way that the risk level of the portfolio will be equivalent to the risk level of the overall market. What percentage of the portfolio should you invest in the risky stock? Multiple Choice 65.79% 63.32% 52.0% 67.57% 56.8%
67.57%
Norris Fasteners is considering a new project with estimated depreciation of $38,200, fixed costs of $84,600, and total sales of $211,000 at the accounting break-even level. The variable costs per unit are estimated at $9.64. What is the accounting break-even level of production? Multiple Choice 10,415 units 6,871 units 7,248 units 9,333 units 9,149 units
9,149 units
Which of the following actions would be considered an agency problem? A shareholder in a corporation sells shares of the company's stock when the price rises An owner of a sole proprietorship takes company office supplies for personal use A manager in a corporation makes online personal travel arrangements during work hour A manager in a corporation buys shares of the company's stock when the price falls Both partners in a general partnership close the office early one day to go skiing
A shareholder in a corporation sells shares of the company's stock when the price rises
Of the options listed below, which is the best measure of systematic risk? Multiple Choice The arithmetic average Beta The geometric average The standard deviation The weighted average standard deviation
Beta
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? Senior Unsecured Par value Callable Subordinated
Callable
Which form of business would be the best choice if it were necessary to raise large amounts of capital? Sole proprietorship Limited partnership Limited liability company Corporation
Corporation
Which one of the following statements regarding corporations is correct? Shareholders directly elect the chief financial officer. Undistributed corporate profits are taxable income to the shareholders. The majority of firms in the U.S. are structured as corporations. Shareholders are protected from all potential losses. Corporations can have an unlimited life.
Corporations can have an unlimited life.
Which one of the following statements is accurate? Multiple Choice Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. Beta measures the level of unsystematic risk inherent in an individual security. Eliminating unsystematic risk is the responsibility of the individual investor. Standard deviation is a measure of unsystematic risk. An investor should expect to be rewarded for assuming unsystematic risk.
Eliminating unsystematic risk is the responsibility of the individual investor.
Which one of the following questions involves a capital structure decision? How much debt should the firm incur to fund a project? Which one of two project proposals should the firm implement? How much funding should be allocated to financing customer purchases of a new product? How should the firm allocate its limited available funds among acceptable projects? How much inventory will be needed to support a project?
How much debt should the firm incur to fund a project?
Which one of the following actions by a financial manager is most apt to create an agency problem? Increasing current profits when doing so lowers the value of the company's equity Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales Refusing to expand the company if doing so will lower the value of the equity Refusing to borrow money when doing so will create losses for the firm Refusing to lower selling prices if doing so will reduce the net profits
Increasing current profits when doing so lowers the value of the company's equity
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? Multiple Choice Long-term; zero coupon Long-term; low coupon Long-term; high coupon Short-term; high coupon Short-term; low coupon
Long-term; zero coupon
Last year, Lagunes Outdoor issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? Note Trust deed Collateralized Semiannual coupon Discount bond
Note
Which one of the following is a primary market transaction? Gift of stock from one shareholder to a previous non-shareholder Repurchase of stock by a corporation from a shareholder Sale of currently outstanding stock by a dealer to an individual investor Transfer of stock ownership from one shareholder to another shareholder Sale of a new share of stock from a corporation to an individual investor
Sale of a new share of stock from a corporation to an individual investor
Symone sold shares of Naraghi Corporation stock to Aleena. The stock is listed on the NYSE. This trade occurred in which one of the following? Secondary, dealer market Primary, auction market Secondary, auction market Secondary, OTC market Primary, dealer market
Secondary, auction market
Which one of the following statements concerning stock exchanges is correct? Most debt securities are traded on the NYSE. Some large companies are listed on Nasdaq. The exchange with the strictest listing requirements is Nasdaq. Nasdaq is a broker market. The NYSE is a dealer market.
Some large companies are listed on Nasdaq.
Which one of the following statements concerning bond ratings is correct? Multiple Choice A "fallen angel" is a term applied to all "junk" bonds. Investment grade bonds are rated BB or higher by Standard & Poor's. Bond ratings assess both interest rate risk and default risk. The highest rating issued by Moody's is AAA. Split-rated bonds are called crossover bonds.
Split-rated bonds are called crossover bonds.
Which of the following statements best describes the principle of diversification? Multiple Choice Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. Spreading an investment across many diverse assets will eliminate all of the systematic risk. Spreading an investment across multiple diverse companies will not lower the total risk. Spreading an investment across many diverse assets will eliminate some of the total risk.
Spreading an investment across many diverse assets will eliminate some of the total risk.
Which one of the following statements is correct concerning the NYSE? The NYSE is the largest dealer market for listed securities in the United States. The publicly traded shares of an NYSE-listed firm must be worth at least $250 million. Any corporation desiring to be listed on the NYSE can do so for a fee. The listing requirements for the NYSE are more stringent than those of Nasdaq. The NYSE is an OTC market functioning as both a primary and a secondary market.
The listing requirements for the NYSE are more stringent than those of Nasdaq.
Which one of the following characteristics relates to the cash break-even point for a given project? Multiple Choice The project never pays back. The NPV is equal to zero. The OCF is equal to the depreciation expense. The discounted payback period equals the project's life. The IRR equals the required rate of return.
The project never pays back.
Assume you are an analyst monitoring Okello stock. Which one of the following would be reflected in Okello's expected return? Multiple Choice The labor union representing Okello's employees unexpectedly called a strike. The chief financial officer of Okello unexpectedly resigned. This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year. The price of Okello stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.
This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year.
Which one of the following involves a working capital management decision? How many hours of overtime should manufacturing employees be allowed to work? What is the most efficient process for producing a product? When is the appropriate time to replace the delivery fleet? Should a newly available parcel of land be acquired? What is the maximum level of cash to be kept in the firm's bank account?
What is the maximum level of cash to be kept in the firm's bank account?
Corporate dividends represent: tax-free income for the recipient because they are distributions of pretax income. tax-free income for the recipient because they are distributions of aftertax income. taxable income for both the corporation and the shareholder, whether or not dividends are paid to shareholders. aftertax income from the corporation which becomes taxable income for the recipient. pretax income from the corporation which becomes taxable income for the recipient.
aftertax income from the corporation which becomes taxable income for the recipient.
Bonds issued by the U.S. government: are called "munis." are considered to be free of default risk. generally have higher coupons than comparable bonds issued by a corporation. are considered to be free of interest rate risk. pay interest that is exempt from federal income taxes.
are considered to be free of default risk.
The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk. Multiple Choice unsystematic risk equation market performance equation time value of money equation capital asset pricing model expected risk formula
capital asset pricing model
Gutierrez Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as: Multiple Choice capital rationing. project rejection. marginal rationing. soft rationing. financial rejection.
capital rationing.
Determining the number of shares of stock to issue is an example of a ______ decision. capital budgeting capital allocation capital rationing net working capital capital structure
capital structure
When the operating cash flow of a project is equal to zero, the project is operating at the: Multiple Choice minimum possible level of production. cash break-even point. accounting break-even point. maximum possible level of production. financial break-even point.
cash break-even point.
A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n): limited partnership. corporation. general partnership. unlimited liability company. sole proprietorship.
corporation.
Agency problems are most likely to be associated with: general partnerships. sole proprietorships. limited liability companies. corporations. limited partnerships.
corporations.
Sensitivity analysis determines the: Multiple Choice net present value range that can be realized from a proposed project. range of possible outcomes given that most variables are reliable only within a stated range. degree to which the net present value reacts to changes in a single variable. degree to which a project relies on its initial costs. ideal ratio of variable costs to fixed costs for profit maximization.
degree to which the net present value reacts to changes in a single variable.
The articles of incorporation: explain how corporate directors are to be elected and the length of their terms. describe the purpose of the firm and set forth the number of shares of stock that can be issued. are amended periodically especially prior to corporate elections. include only the corporation's name and intended life. set forth the procedures by which a firm regulates itself.
describe the purpose of the firm and set forth the number of shares of stock that can be issued.
While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: Multiple Choice expected return. historical return. arithmetic return. required return. geometric return.
expected return.
A sole proprietorship: can generally raise large sums of capital quite easily. is taxed the same as a C corporation. is the most regulated form of organization. has a limited life. transfer ownership of the firm more easily than a corporation can.
has a limited life.
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: Multiple Choice increases at a constant rate. increases at an increasing rate. decreases at a decreasing rate. decreases at an increasing rate. increases at a decreasing rate.
increases at a decreasing rate.
Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this information, you know that the project: Multiple Choice will never pay back. is lowering the total net income of the firm. is operating at a higher level than if it were operating at its cash break-even level. is operating at a higher level than if it were operating at its financial break-even level. has a zero net present value.
is operating at a higher level than if it were operating at its cash break-even level.
You are evaluating a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider: Multiple Choice lowering the contribution margin per unit. lowering the operating cash flow. increasing the initial cash outlay. lowering the degree of operating leverage. increasing the fixed costs per unit.
lowering the degree of operating leverage.
A project that has a projected IRR of negative 100 percent will also have a(n): Multiple Choice net present value that is equal to zero. payback period that is exactly equal to the life of the project. discounted payback period equal to the life of the project. net present value that is negative and equal to the initial investment. operating cash flow that is positive and equal to the depreciation.
net present value that is negative and equal to the initial investment.
Municipal bonds: pay interest that is free from federal taxation. generally have higher coupon rates than corporate bonds. are totally risk free. are free of default risk. are rarely callable.
pay interest that is free from federal taxation.
Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis. Multiple Choice complex forecasting simulation combined break-even
simulation
When evaluating the timing of a project's projected cash flows, a financial manager is analyzing: only the date of the final cash flow related to the project. when each cash flow is expected to occur. only the start-up costs that are expected to require cash resources. the amount by which cash receipts are expected to exceed cash outflows.
when each cash flow is expected to occur.
When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as: Multiple Choice best-case sensitivity analysis. worst-case sensitivity analysis. worst-case scenario analysis. base-case scenario analysis. best-case scenario analysis.
worst-case scenario analysis.