Finance
A public offering in which the investment banker is compensated based on the number of securities sold is called A. best efforts B. underwriting C. private placement D. syndication
A
All of the following represent non cash charges and must be added back to net profits after taxes to determine the firm's cash flows EXCEPT A. interest expense B. depreciation C. depletion allowances D. amortization
A
Calculate the yield to maturity (YTM) of a 3-year bond with an annual coupon rate of 10%, a par value of $1,000, and a current market value of $1,051.54. A. 8% B. 10% C. 12% D. 9%
A
Common-size income statements are a popular tool to measure the profitability of a firm by dividing every item on the income statement by: A. sales B. assets C. profits D. income taxes
A
John is 45 and needs to start saving for retirement. If he saves $2,000 per year for the next 20 years, how much will he have in 20 years if he can earn 10% annual interest rate? (assume end of year deposits) A. $114,548 B. $40,000 C. $83957 D. $44,000
A
Systemic risk is measured by which of the following: A. beta B. standard deviation C. variance D. coefficient of variation
A
The DuPont system looks at all the following components of profitability EXCEPT A. efficiency of financing in generating sales B. profitability on sales C. efficiency of assets in generating sales D. the impact of debt or leverage
A
The bond indenture is the legal document specifying the duties of the corporation issuing the bonds. All of the following are standard provisions found in most bond indentures EXCEPT A. sell fixed assets to raise cash B. maintain satisfactory accounting records in accordance with GAAP C. pay taxes and other liabilities when due D. remain a going concern (maintain all facilities in good working order)
A
The relevant cash flows for a replacement capital budgeting project include all of the following EXCEPT A. cost of original project (asset being replaced) B. initial investment in new asset & liquidation of old asset C. net operating cash inflows D. terminal cash flows (difference between old & new asset)
A
This financial security has the highest risk and therefore the highest expected return A. common stock B. preferred stock C. convertible bonds D. bond
A
This financial statement provides a financial summary of the firm's operating results for a specified time period, such as a year A. income statement B. balance sheet C. statement of cash flows D. statement of retained earnings
A
Use the following information for questions 91-93. A capital budgeting project has the following projected cash flows: Initial investment: $50,000 Cash inflow year 1: $15,540 Cash inflow year 2: $21,000 Cash inflow year 3: $18,000 Cash inflow year 4: $19,000 Calculate the net present value (NPV) for this project. The firm has a cost of capital of 14%. A. $3,189.41 B. $14,508.77 C. $23,540 D. $20,649.12
A
Using the information in question 73 (72. Determine the current value for a 2-year bond paying 8% annually with a $1,000 par value when interest rates are currently 10%), determine the current value of the bond assuming the coupon interest payments are made semiannually. A. $964.54 B. $1,000 C. $943.07 D. $1,030.72
A
When a firm has limited funds that it can invest in capital projects, the firm is forced into a situation called ____. A. capital rationing B. accept/reject approach C. unlimited funds D. limited funds
A
Your uncle promised to give you $1,000 when you graduate from college in 2 years. How much should your uncle invest today if he can earn 7%? A. $873 B. $1,000 C. $800 D. $935
A
____ is the theory that says that the added benefits must exceed the added costs in order to take a certain course of action. A. Marginal analysis B. Agency C. Financial analysis D. Risk aversion
A
_____ are long-term debt instruments issued by businesses and governments to raise money. A. Bonds B. Common stock C. Preferred stock D. Eurocurrency
A
All of the following represent advantages of a corporation EXCEPT A. limited liability B. double taxation C. ownership is readily transferable D. greater access to financing
B
Ann Logan purchased 100 shares of XYZ stock one year ago for $22.50 a share. One year later, the stock has a market price of $20 a share. During the year, Ann received dividends of $1 per share. Which is Ann's actual annual rate of return? A. -11.1% B. -6.7% C. 15.6% D. -7.5%
B
Determine the value for a common stock that is expected to pay a dividend of $1.50 next year, has a constant dividend growth rate of 6%, and a required return of 13%. A. $11.54 B. $21.42 C. $22.71 D. $25
B
From a technical standpoint, which method (payback period, NPV, IRR) is the best method? A. IRR, because it gives a rate of return. B. NPV, because of its reinvestment rate assumption. C. IRR, because of its reinvestment rate assumption. D. payback period, because it measure the liquidity of the project.
B
On the Statement of Cash Flows, the ____ flows are the cash flows resulting from a debt and equity transactions. A. investment B. financing C. operating D. asset
B
The ____ market is the market in which savers and investors trade existing securities. A. primary B. secondary C. buyers D. money
B
The cash flows from ____ projects are unrelated and the acceptance of one does not affect that acceptance of others. A. mutually exclusive B. independent C. nonconventional D. conventional
B
The final cash flow that must be considered for a capital budgeting project includes all of the following EXCEPT A. tax on sale of asset B. installation of asset C. proceeds from sale of asset D. change in net working capital
B
There are only two banks in your town. Bank 1 is offering 8.2% compounded annually. Bank 2 is offering 8% compounded monthly. Which bank would you choose? A. Bank 1 because the effective rate is greater than Bank 2 B. Bank 2 because the effective rate is greater than Bank 1 C. Both Bank 1 and 2 have the same effective rate D. You are indifferent since the nominal rates are the same
B
There are three common ways for firms to raise funds externally. Which of the following is not one of those ways? A. through financial institutions B. through the federal government C. through private placement D. through financial markets
B
This financial statement accounts for the firm's assets as compared to the firm's financing at a given point in time A. income statement B. balance sheet C. statement of cash flows D. statement of retained earnings
B
Use the following information for questions 91-93. A capital budgeting project has the following projected cash flows: Initial investment: $50,000 Cash inflow year 1: $15,540 Cash inflow year 2: $21,000 Cash inflow year 3: $18,000 Cash inflow year 4: $19,000 Calculate the payback period for this project A. 3 years B. 2.75 years C. 3.2 years D. 3.4 years
B
Which of the following is a measure of the relative dispersion of an asset? This measure also measures the risk per unit of return. A. standard deviation B. the coefficient of variation C. variance D. beta
B
Which of the following ratios measures the amount of time it takes for the fir's customers to pay? A. average payment periods B. average collection period C. total asset turnover D. current ratio
B
With respect to sales and net profits, which form of business organization is the dominant form? A. sole proprietorship B. corporation C. general partnership D. limited partnership
B
____ is a type of ratio analysis in which the firm's ratios are compared to those of a key competitor A. Cross-sectional analysis B. Benchmarking C. Time-series analysis D. Industry analysis
B
____ represent(s) the number of common stock shares that a firm can issue without further stockholder approval. A. Outstanding shares B. Authorized shares C. Treasury stock D. Issued shares
B
A ____ requirement is a provision for the systematic retirement of bonds prior to their maturity. A. trust B. security interest B. sinking-fund D. subordination
C
All of the following are examples of secondary markets where outstanding securities are resold EXCEPT A. NYSE B. AMEX C. LIBOR D. OTC
C
All of the following are ways to assess the risk of a capital budgeting project EXCEPT A. sensitivity analysis B. decision trees C. mutually exclusive D. simulation
C
Calculate the standard deviation for the following asset Possible outcome / probability / returns Pessimistic / .30 / 13% Most likely / .50 / 18% Optimistic / .20 / 23% A. 17.5% B. 12.25% C. 3.5% D. 1.225%
C
Capital budgeting involved five steps. Which of the following accurately describes the capital budgeting process? A. review & analysis, decision making, implementation, proposal generation, follow-up B. decision making, implementation, review & analysis, proposal generation, follow-up C. proposal generation, review & analysis, decision making, implementation, follow-up D. implementation, decision making, review & analysis, follow-up, proposal generation
C
Congratulations! You just won the CT Big Bucks lottery worth $100,000,000. You have chosen to take the money as a payout over 20 years of $5,000,000 each year. How much must the state of CT put aside today to fund these payments if they can earn 9% interest? (assume the payments are made at the end of the year) A. $100,000,000 B. $5,000,000 C. $45,645,000 D. $91,743,119
C
Determine the current value for a preferred stock paying a $4 stated annual dividend with a 9% required return. A. $4 B. $40 C. $44.44 D. $2.25
C
If the risk-free rate is 4%, the return on the market portfolio is 28%, and the beta of the stock is 1.2, what is the required return for the stock? A. 24% B. 28% C. 32.8% D. 28.8%
C
The goal of the financial manager is to A. maximize profits B. maximize earnings per share (EPS) C. maximize stockholder wealth D. maximize investments
C
The key activites of the financial manager are all of the following EXCEPT A. performing financial analysis and planning B. making investment decisions C. preparing and developing financial data D. making financing decisions
C
To determine the value of any asset, we must know all of the following EXCEPT A. risk B. cash flow C. return for the last 50 years D. timing
C
Use the following information for questions 91-93. A capital budgeting project has the following projected cash flows: Initial investment: $50,000 Cash inflow year 1: $15,540 Cash inflow year 2: $21,000 Cash inflow year 3: $18,000 Cash inflow year 4: $19,000 Calculate the internal rate of return (IRR) for this project. A. 13% B. 15% C. 17% D. 19%
C
Which of the following represents a use of cash? A. decrease in any asset B. increase in any liability C. net loss D. sale of stock
C
Which of the following types of ratio comparisons is used to evaluate the firm's financial performance from year to year A. cross-sectional analysis B. benchmarking C. time-series analysis D. industry analysis
C
You are given $10,000 by your grandmother. You plan to invest this money for 5 years at 8% annual interest. How much will you have in 5 years? A. $10,000 B. $11,664 C. $14,693 D. $14,859
C
____ are unsecured bonds that are supported by the credit worthiness of the firm and have no claim on specific assets. A. Equipment trust certificate B. Income bonds C. Debentures D. Mortgage bonds
C
A Statement of Cash Flows can be used for all the following reasons EXCEPT A. assess any developments that are contrary to the company's financial policies B. evaluate progress toward projected foals C. evaluate planned actions in light of resulting cash flows D. evaluate the profitability of the firm
D
A firm has estimated that it could sell its assets for only $6 million even though they have a book value of $8 million. The firm has a total liabilities of $4 million. The firm has 100,00 shares of common stock outstanding. The firm's liquidation value per share is: A. $40 B. $60 C. $80 D. $20
D
All of the following affect the cost of bond financing EXCEPT A. the cost of money B. the maturity of the bond (length of time outstanding) C. the issuer risk D. all of the above affect the cost of bond financing
D
All of the following represent cautions for doing ratio analysis EXCEPT A. the financial data being compared should be developed using similar accounting treatments B. audited financial statements should be used C. groups of ratios rather than a single ratio should be used D. ratios are a relative measure
D
Although it dose not have a physical location, like an exchange, the _____ market exists to bring together suppliers and demanders of short-term funds. A. capital B. auction C. stock D. money
D
Although the ____ method for dealing with risk in capital budgeting is the theoretically preferred approach, the ____ method is used in practice. A. cost of capital; sensitivity analysis B. sensitivity analysis; cost of capital C. risk adjusted discount rate; certainty equivalent D. certainty equivalent; risk adjusted discount rate
D
By combining assets in a portfolio, which risk can be virtually eliminated? A. total risk B. nondiversifiable risk C. systemic risk D. unsystemic risk
D
Determine the current value for a 2-year bond paying 8% annually with a $1,000 par value when interest rates are currently 10% A. $1,000 B. $943.07 C. $1,035.67 D. $965.29
D
Finding the initial investment of a capital budgeting project includes all of the following costs EXCEPT A. net outflow to acquire new asset B. installation costs associated with new asset C. after-tax proceeds from sale of old asset D. change in stockholders' equity
D
Managerial finance is concerned with which area of finance? A. investments B. commercial banks C. insurance companies D. finances of the business firm
D
Maximizing corporate profits is inconsistent with maximizing shareholder wealth due to which of the following: A. it ignores the timing of cash flows B. it ignores the risk of those cash flows C. it ignored the relevant cash flows for stockholders D. all of the above
D
Sandra wants to have $5,000,000 when she retires in 30 years. If she can earn 11%, how much does she need to set aside each year to reach her goal? A. $166,667 B. $77,823 C. $65,000 D. $25,123
D
The operating cash inflows of a capital budgeting project are most accurately described as A. independent cash inflows B. after-tax cash inflows C. incremental cash inflows D. incremental after-tax cash inflows
D
The voting system in which each common stock is allotted a number of votes equal to the total number of corporate directors to be elected is: A. supervoting system B. proxy system C. majority voting system D. cumulative voting system
D
This theory of the term structure states that long-term interest rates will be higher than short-term rates because long-term securities are more responsive to change in interest rates. A. expectation hypothesis B. market segmentation C. interest rate volatility D. liquidity preference
D
To avoid triple taxation, ____ received by a corporation for common and preferred stock owned in other corporations are completed or partially excluded from income. A. revenues B. interest C. depreciation D. dividends
D
Using the information in question 51 (grandmother gives you $10,000), assume that you are able to earn interest compounded quarterly rather than annually. With this scenario, how much will you have in 5 years? A. $10,000 B. $11,664 C. $14,693 D. $14,859
D
Which category of financial ratios measures the firm's ability to meets its short-term obligations? A. profitability B. activity C. debt D. liquidity
D
Which of the following financial securities has the most risk? A. 2-year US Treasury bond B. 3-year US Treasury bill C. 5-year AT&T bond D. Amazon.com common stock
D
Which of the following gives the correct decision criteria for capital budgeting? A. accept when the cost > IRR B. accept when the payback period > maximum acceptable payback C. accept when the NPV < 0 D. reject when the NPV < 0
D
True or false: A sunk cost represents the cost of the next best alternative.
False
True or false: Combining assets in a portfolio that are perfectly positively correlated will reduce the overall risk of the portfolio.
False
True or false: Common stock simpler to value than bonds or preferred stock because the relevant cash flows are more certain.
False
True or false: Dividends paid to common and preferred stockholders are tax deductible for the firm.
False
True or false: If a corporation acts ethically, the value of the corporation will be lowered due to the added costs.
False
True or false: Inflation is an example of diversifiable risk.
False
True or false: Preferred stockholders generally have voting rights similar to common stockholders.
False
True or false: The DuPont system of analysis mergers two measures of profitability: return on equity (ROE) and gross profit margin.
False
True or false: The NPV greatest appeal is its computational simplicity.
False
True or false: The SEC requires that all companies whether publicly or privately owned provide their stockholders with an annual report.
False
True or false: The current ratio measures the liquidity of the firm by subtracting inventory from current assets and then dividing by current liabilities.
False
True or false: The investment banker purchases debt and equity securities with the intention of warehousing them.
False
True or false: The only additional consideration that must be made for capital budgeting involving international projects is the impact of currency risk.
False
True or false: Through diversification, investors are able to reduce their overall risk and therefor they are compensated for the total risk of an investment, not just the systemic risk.
False
True or false: Understanding the time value of money, you should be indifferent between receiving $10,000 today or $2,000 per year for the next 5 years regardless of the interest rate that you can earn.
False
True or false: When ranking projects, NPV and IRR can sometimes give conflicting ranking because the IRR assumes intermediate cash flows are reinvested at the cost of capital.
False
True or false: the strain-line depreciation method provides for the fastest write-off and the best cash flow effects for the profitable firm.
False
True or false: A bond with a short maturity has less interest rate risk than a bond with a longer maturity (everything else equal).
True
True or false: A perpetuity that will pay $500 per year is more valuable than an annuity of $500 per year for 20 years if the relevant interest rate is 10%.
True
True or false: Because capital budgeting involved the purchase of fixed assets requiring a large monetary investment and a long-term commitment, careful analysis must be made because of the potential risk and return of the decision.
True
True or false: For conventional capital budgeting projects, the risk that a project will prove unacceptable stems almost entirely from the uncertainty around the cash inflow projections.
True
True or false: For financial decision-making, the marginal not the average tax rate is the relevant tax rate.
True
True or false: Incentive plans, such as granting stock options to managers is an example of agency costs.
True
True or false: Preferred stock is considered quasi-debt because it has a fixed periodic payment.
True
True or false: Ratio analysis assesses the financial performance of a firm for stockholders, creditors, and the firm's management.
True
True or false: The agency problem arises because the managers may place their personal goals ahead of the goals of the corporation.
True
True or false: The risk-free asset is generally considered to be a 3-month US Treasury bill.
True
True or false: The risk-return tradeoff states that investors will trade higher risk for higher return.
True
True or false: The value of any asset is the present value of all future cash flows expected for the relevant time period.
True
True or false: a four-year, fully amortized loan of $10,000 with an 8% interest rate will require an annual payment of $3,019.32. In the first year, the principal payment will equal $2,219.32
True
