Finance Concept Questions

Which one of the following changes in working capital is least likely, given an increase in the overall level of sales? A decrease in accounts receivable An increase in inventories An increase in accounts payable An increase in notes payable

A decrease in accounts receivable

Which one of the following changes will increase the NPV of a project? A decrease in the discount rate An increase in the initial cost of the project A decrease in the size of the cash inflows A decrease in the number of cash inflows

A decrease in the discount rate

Which one of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project? An increase in the discount rate A decrease in the fixed costs A decrease in the estimated annual sales An increase in the initial investment

A decrease in the fixed costs

You are evaluating a new project that will introduce a revolutionary new product that will be produced by a new, highly efficient machine. Which one of these will lower the net present value of that project? The increase in annual depreciation resulting from the asset purchase A reduction in the firm's total variable costs due to the purchase of the new machine A loss of current sales due to the introduction of the new product The sale of the machine after it is fully depreciated

A loss of current sales due to the introduction of the new product

Which of the following forms of compensation is most likely to align the interests of managers and shareholders? A fixed salary A salary linked to company profits A salary that is paid partly in the form of the company's shares

A salary that is paid partly in the form of the company's shares

How does a bond dealer generate profits when trading bonds? By lowering the bond's coupon rate upon resale By maintaining bid prices higher than ask prices By maintaining bid prices lower than ask prices By retaining the bond's next coupon payment

By maintaining bid prices lower than ask prices

Which one of the following best illustrates the problem imposed by capital rationing? Accepting projects with the highest IRRs first Bypassing projects that have positive NPVs Accepting projects with the highest NPVs first Bypassing projects that have zero IRRs

Bypassing projects that have positive NPVs

Which one of the following security classes has the highest standard deviation of returns? Treasury bills Corporate bonds Long-term Treasury bonds Common stocks

Common stocks

Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Other things equal, which company would experience the greatest variation in earnings?

Company A

Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Which company's compensation would most help to mitigate conflicts of interest between managers and shareholders?

Company B

Has limited liability (Partnership or Corporation)

Corporation

Which one of the following is fixed for the life of a given bond? Current price Yield to maturity Current yield Coupon rate

Coupon rate

Which one of the following methods will provide a correct analysis for capital budgeting purposes? Discounting nominal cash flows with real rates. Discounting nominal cash flows with either real or nominal rates. Discounting real cash flows with real rates. Discounting real cash flows with nominal rates.

Discounting real cash flows with real rates.

True or False A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

False

True or False The current yield measures the bond's total rate of return. True False

False

A bank loan (Real asset or Financial asset)

Financial asset

Is the following a real asset or a financial asset? A bank loan agreement

Financial asset

Is the following a real asset or a financial asset? A personal IOU

Financial asset

Is the following a real asset or a financial asset? A share of stock

Financial asset

Is the following a real asset or a financial asset? The balance in the firm's checking account

Financial asset

Which of the following are investment decisions, and which are financing decisions? Alternatively, we can use the savings to repay some of our long-term debt.

Financing decision

Which of the following are investment decisions, and which are financing decisions? Do we need a bank loan to help buy the inventory?

Financing decision

Which of the following are investment decisions, and which are financing decisions? With the savings we make from our new inventory system, it may be possible to increase our dividend.

Financing decision

Which one of these represents a cash outflow for a project? Accrued expenses A sunk cost Depreciation Increase in accounts receivable

Increase in accounts receivable

Expenditure on research and development (Financial decision or Investment decision)

Investment decision

Which of the following are investment decisions, and which are financing decisions? Should we develop a new software package to manage our inventory?

Investment decision

Which of the following are investment decisions, and which are financing decisions? Should we stock up with inventory ahead of the holiday season?

Investment decision

Which of the following are investment decisions, and which are financing decisions? With a new automated inventory management system, it may be possible to sell off our Birdlip warehouse.

Investment decision

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues? This cannot be determined without knowing the length of the investment horizon. It reduces the break-even level. It has no effect on the break-even level. It raises the break-even level.

It has no effect on the break-even level.

Which one of the following must be correct for a bond currently selling at a premium? Its current yield is lower than its coupon rate. Its yield to maturity is higher than its coupon rate. Its coupon rate is lower than the current market rate on similar bonds. Its coupon rate is variable.

Its current yield is lower than its coupon rate.

Which one of the following risks is most important to a well-diversified investor in common stocks? Unsystematic risk Diversifiable risk Market risk Unique risk

Market risk

Is the following an advantage in separating ownership and management in large corporations? Corporations, unlike sole proprietorships, do not pay tax; instead, shareholders are taxed on any dividends they receive.

No

Is the following an advantage in separating ownership and management in large corporations? Managers no longer have the incentive to act in their own interests.

No

Which of the following statements always apply to corporations? Unlimited liability Limited life Ownership can be transferred without affecting operations Managers can be fired with no effect on ownership

Ownership can be transferred without affecting operations Managers can be fired with no effect on ownership

Which of the following investment decision rules tends to improperly reject long-lived projects? Payback period Profitability index Net present value Internal rate of return

Payback period

Which of the following investment criteria takes the time value of money into consideration? Profitability index, internal rate of return, and net present value Internal rate of return and net present value only Profitability index and net present value only Net present value only

Profitability index, internal rate of return, and net present value

Listed on a stock exchange (Closely held corporation or Public corporation)

Public corporation

Is the following a real asset or a financial asset? A trademark

Real asset

Is the following a real asset or a financial asset? A truck

Real asset

Is the following a real asset or a financial asset? An experienced and hardworking sales force

Real asset

Is the following a real asset or a financial asset? Undeveloped land

Real asset

Which one of the following techniques may be more appropriate to analyze projects with interrelated variables? Scenario analysis DOL analysis Sensitivity analysis Break-even analysis

Scenario analysis

Analysis results indicate that a project's level of success is primarily dependent upon the firm controlling the variable costs. What type of analysis was conducted? Scenario analysis Sensitivity analysis Real option analysis Break-even analysis

Sensitivity analysis

Agency cost (The cost resulting from conflicts of interest between managers and shareholders or The amount charged by a company's agents such as the auditors and lawyers)

The cost resulting from conflicts of interest between managers and shareholders

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%? The coupon rate remains at 8%. The coupon rate increases to 10%. The coupon rate remains at 9%. The coupon rate decreases to 8%.

The coupon rate remains at 8%.

Which one of the following is a situation where a new project will require a cash investment in net working capital? Inventory levels will be reduced when the project is introduced. The project will require additional inventory which will be financed by a supplier. All sales related to the project will be cash sales to a subsidiary. The project will increase inventory more than accounts payable.

The project will increase inventory more than accounts payable.

Which one of the following capital budgeting proposals is most apt to be associated with a conflict of interests? The proposal to solve pollution problems cited by the EPA The proposal with the longest payback period The proposal with the highest IRR and quickest payback The proposal with the highest NPV

The proposal with the highest IRR and quickest payback

Responsible for bank relationships (The treasurer or The controller)

The treasurer

Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds. True False

True

True or False A Treasury bond's bid price will be lower than the ask price.

True

True or False A bond's payment at maturity is referred to as its face value. True False

True

True or False Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity. True False

True

Which one of these is considered to be the safest investment? U.S. Treasury bonds Common stock U.S. Treasury bill Preferred stock

U.S. Treasury bill

Is the following an advantage in separating ownership and management in large corporations? Shareholders can sell their holdings without disrupting the business.

Yes

Is the following an advantage in separating ownership and management in large corporations? The corporation survives even if managers are dismissed.

Yes

The coupon rate of a bond equals: its yield to maturity. the yield to maturity when the bond sells at a discount. a defined percentage of its face value. the annual interest divided by the current market price.

a defined percentage of its face value.

The internal rate of return is most reliable when evaluating: a single project with cash outflows at time 0 and the final year and inflows in all other time periods. a single project with alternating cash inflows and outflows over several years. mutually exclusive projects of differing sizes. a single project with only cash inflows following the initial cash outflow.

a single project with only cash inflows following the initial cash outflow.

We can imagine the financial manager doing several things on behalf of the firm's stockholders. For example, the manager might do the following: a. Make shareholders as wealthy as possible by investing in real assets. b. Modify the firm's investment plan to help shareholders achieve a particular time pattern of consumption. c. Choose high- or low-risk assets to match shareholders' risk preferences. d. Help balance shareholders' checkbooks. However, in well-functioning capital markets, shareholders will vote for only one of these goals. Which one will they choose?

a. Make shareholders as wealthy as possible by investing in real assets

The decision rule for net present value is to: reject all projects lasting longer than 10 years. reject all projects with rates of return exceeding the opportunity cost of capital. accept all projects with positive net present values. accept all projects with cash inflows exceeding the initial cost.

accept all projects with positive net present values.

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then: variable costs should be traded for fixed costs. fixed costs should be traded for variable costs. additional marketing analysis may be beneficial before proceeding. the project should not be undertaken.

additional marketing analysis may be beneficial before proceeding.

The variance of a stock's returns can be calculated as the: average value of squared deviations from the mean. average value of deviations from the mean. sum of the deviations from the mean. square root of the average value of deviations from the mean.

average value of squared deviations from the mean.

If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the: bond has a high default premium. bond is selling at a discount. promised yield is not likely to materialize. bond must be a Treasury Inflation-Protected Security.

bond is selling at a discount.

A bond's yield to maturity takes into consideration: price changes but not the current yield. neither the current yield nor any price changes. current yield but not any price changes. both the current yield and any price changes.

both the current yield and any price changes.

The opportunity cost of an asset: is typically ignored in capital budgeting. can differ depending on market conditions. should be depreciated annually. is important only for parcels of land.

can differ depending on market conditions.

Use of a profitability index to evaluate mutually exclusive projects in the absence of capital rationing: will provide the same rankings as an NPV criterion. will maximize NPV, but not IRR. is technically impossible. can result in misguided selections.

can result in misguided selections.

A project can have as many different internal rates of return as it has: changes in the sign of the cash flows. cash outflows. periods of cash flow. cash inflows.

changes in the sign of the cash flows.

The difference between an NPV break-even level of sales and an accounting break-even level of sales is the: consideration of opportunity cost. inclusion of income taxes. consideration of interest expense. allowance of the sales level to vary in response to changes in demand.

consideration of opportunity cost.

Periodic receipts of interest by the bondholder are known as: the coupon rate. a zero-coupon. the default premium. coupon payments.

coupon payments.

The current yield of a bond can be calculated by: dividing the price by the par value. multiplying the price by the coupon rate. dividing the annual coupon payments by the price. dividing the price by the annual coupon payments.

dividing the annual coupon payments by the price.

A bond's par value can also be called its: market value. face value. present value. coupon payment.

face value.

The accounting break-even level of sales represents the point where: variable costs are covered. fixed costs, variable costs, and depreciation are covered. fixed costs and variable costs are covered. fixed costs are covered.

fixed costs, variable costs, and depreciation are covered.

Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to their: greater exposure to interest rate risk. higher level of unique risk. greater default risk. illiquidity.

greater exposure to interest rate risk.

Firms that lack competitive advantages will: be forced to operate with a high degree of operating leverage. be forced to capture larger market shares to be profitable. have difficulty finding positive NPV projects for investment. avoid the need to conduct sensitivity analyses.

have difficulty finding positive NPV projects for investment.

The rationale for not including sunk costs in capital budgeting decisions is that they: have no incremental effect. reduce the project's net present value. revert at the end of the investment. are usually small in magnitude.

have no incremental effect.

If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in: low beta stocks. high beta stocks. stocks that plot below the security market line. stocks with large amounts of unique risk.

high beta stocks.

Investors who purchase bonds having lower credit ratings should expect: lower coupon payments. higher purchase prices. lower yields to maturity. higher default possibilities.

higher default possibilities.

The wider the dispersion of returns on a stock, the: lower the variance. lower the expected rate of return. lower the real rate of return. higher the standard deviation.

higher the standard deviation.

When projects are mutually exclusive, selection should be made according to the project with the: highest IRR. highest NPV. longer life. larger initial size.

highest NPV.

The purpose of sensitivity analysis is to show: how price changes affect break-even volume. seasonal variation in product demand. the optimal level of capital expenditures. how variables in a project affect profitability.

how variables in a project affect profitability.

The CAPM provides a model of determining expected security returns that is: excellent for high beta stocks. precise in its calculations of risk premiums. imprecise, but generally an acceptable guideline. excellent for all well-diversified portfolios.

imprecise, but generally an acceptable guideline.

Soft capital rationing is imposed upon a firm from _____ sources, while hard capital rationing is imposed from _____ sources. internal; internal external; external internal; external external; internal

internal; external

When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to: invest now to maximize the NPV. postpone until costs reach their lowest level. invest at the date that provides the highest NPV today. postpone until the opportunity cost reaches its lowest level.

invest at the date that provides the highest NPV today.

If a bond is priced at par value, then: it must be a zero-coupon bond. its coupon rate equals its yield to maturity. it has a very low level of default risk. the bond is quite close to maturity.

its coupon rate equals its yield to maturity.

The profitability index selects projects based on the: highest net discounted value at time zero. highest internal rate of return. largest return per dollar invested. largest dollar investment per rate of return.

largest return per dollar invested.

When the overall market experiences a decline of 8%, investors with portfolios of aggressive stocks will probably experience portfolio: losses of less than 8%. gains of less than 8%. gains greater than 8%. losses greater than 8%.

losses greater than 8%.

When mutually exclusive projects have different lives, the project that should be selected will have the: highest NPV, discounted at the opportunity cost of capital. lowest equivalent annual cost. highest IRR. longest life.

lowest equivalent annual cost.

The likely effect of discounting nominal cash flows with real interest rates will be to: make an investment's NPV appear more attractive. correctly calculate an investment's NPV, regardless of expected inflation. correctly calculate an investment's NPV if inflation is expected. make an investment's NPV appear less attractive.

make an investment's NPV appear more attractive.

If the opportunity cost of capital for a lending project exceeds the project's IRR, then the project has a(n): positive profitability index. positive NPV. acceptable payback period. negative NPV.

negative NPV.

When a project's internal rate of return equals its opportunity cost of capital, then the: project should be rejected. net present value will be positive. net present value will be zero. project has no cash inflows.

net present value will be zero.

If a security plots below the security market line, it is: offering too little return to justify its risk. underpriced, a situation that should be temporary. ignoring all of the security's unique risk. a defensive security, which expects to offer lower returns.

offering too little return to justify its risk.

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor: receives $971.62 upon the maturity date of the bond. pays 97.162% of face value for the bond. pays $10,971.62 for a $10,000 face value bond. receives 97.162% of the stated coupon payments.

pays 97.162% of face value for the bond.

The appropriate opportunity cost of capital is the return that investors give up on alternative investments that: earn the risk-free rate of return. are included in the S&P 500 index. earn the average market rate of return. possess the same level of risk.

possess the same level of risk.

Allocations of overhead should not affect a project's incremental cash flows unless the: overhead will not be recovered at the end of the project. project actually changes the total amount of overhead expenses. accountant is required to allocate costs to this project. overhead is not currently fully allocated to existing projects.

project actually changes the total amount of overhead expenses.

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the: soft capital rationing budget. project's initial cost. project's discounted cash inflows. project's NPV.

project's NPV.

When a depreciable asset is ultimately sold, the sales price is: nontaxable only if accelerated depreciation was used. taxable to the extent that the sales price exceeds book value. nontaxable. fully taxable.

taxable to the extent that the sales price exceeds book value.

A project's opportunity cost of capital is: equal to the average return on all company projects. the return earned by investing in the project. the foregone return from investing in the project. designed to be less than the project's IRR.

the foregone return from investing in the project.

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on: Treasury bills. the market portfolio minus the rate of return on Treasury bills. Treasury bonds plus a maturity premium. the market portfolio.

the market portfolio.

Macro events only are reflected in the performance of the market portfolio because: the unique risks have been diversified away. the market portfolio contains only risk-free securities. the firm-specific events would be too numerous to quantify. only macro events are tracked by economists.

the unique risks have been diversified away.

The return on a security includes premiums for: time value of money and market risk. unique risk and firm-specific risk. market risk and unique risk. diversification and portfolio risk.

time value of money and market risk.

Firms that make investment decisions based on the payback rule may be biased toward rejecting projects: with late cash inflows. with short lives. that have negative NPVs. with long lives.

with long lives.