FIN320

The expected yield on junk bonds is lower than the yield on AAA-rated bonds because of the higher default
risk associated with junk bonds.
A) True B) False

Incremental cash flows refer to:
A) The difference between after-tax cash flows and before-tax accounting profits.
B) The cash flows of a project, minus financing costs.
C) The new cash flows that will be generated if a project is undertaken.
D) The cash flows that are foregone if a firm does not undertake a project.

The yield to maturity on a bond:
A) is fixed in the indenture. B) is lower for higher risk bonds.
C) is the required rate of return on the bond. D) is generally below the coupon interest rate.

Current assets would usually not include
A) plant and equipment B) marketable securities
C) accounts receivables D) inventories

AJAX Company paid a dividend today of $4 per share. The dividend is expected to grow at a constant rate
of 5% per year. If AJAX Company stock is selling for $56 per share, the stockholders’ expected rate
of return is:

A) 5.0%
B) 12.5%
C) 7.5%
D) 12.1%

The internal rate of return is:
A) The discount rate that makes the NPV positive.
B) The discount rate that equates the present value of the cash inflows with the present value of the cash
outflows.
C) The discount rate that makes NPV negative and the PI greater than one.
D) The rate of return that makes the NPV positive.

Changes in the general economy, like changes in interest rates or tax laws represent what type of risk?
A) Company-unique risk B) Market risk
C) Unsystematic risk D) Diversifiable risk

In order to maximize firm value, management should invest in new assets
A) so long as a project's IRR is positive
B) so long as a project's IRR is greater or equal to the firm's marginal cost of capital
C) so long as a project's accounting rate of return is greater or equal to the firm's marginal cost of
capital
D) b and c

The debt ratio is a measure of a firm's

A) profitability
B) coverage
C) leverage
D) liquidity

Increased depreciation expenses affect tax-related cash flows by
A) increasing taxable income, thus increasing taxes.
B) decreasing taxable income, with no effect on cash flow since depreciation is a non-cash expense.
C) pushing a corporation into a higher tax bracket.B
D) decreasing taxable income, thus reducing taxes.

Flotation costs cause a corporation's cost of capital to be lower than its investors' required returns.
A) True B) False

Which of the following is NOT considered in the calculation of incremental cash flows?
A) tax saving due to increased depreciation expense
B) interest payments if new debt is issued
C) B and C
D) increased dividend payments if additional preferred stock is issued

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

A) efficiency
B) leverage
C) profitability
D) liquidity

The discount rate used to value a bond is
A) the coupon interest rate B) determined by the issuing company
C) fixed for the life of the bond D) the market rate of interest

In general, the least expensive source of capital is:
A) preferred stock. B) new common stock.
C) debt. D) retained earnings.

Which of the following best describes why cash flows are utilized rather than accounting profits when
evaluating capital projects?
A) cash flows have a greater present value than accounting profits
B) cash flows reflect the timing of benefits and costs more accurately than accounting profits
C) cash flows are more stable than accounting profits
D) cash flows improve the tax position of a firm more than accounting profits
E) none of the above

A cash flow statement can be used to answer a variety of questions. Which of the following would this
statement not be likely to answer?
A) Why was money borrowed? B) Where did profits go?
C)What is the current level of inventory? D)Were there any new investment activities?

The present value of $1,000 to be received in 10 years is ________ if the discount rate is 7.3%.

A) $433
B) $270
C) $494
D) $370

Activities of the investment banker include
A) assuming the risk of selling a security issue. B) selling new securities to the ultimate investors.
C) providing advice to firms issuing securities. D) all of the above

Market risk refers to the tendency of a stock to move with the general stock market. A stock with
above-average market risk will tend to be more volatile than an average stock and it will also have a
beta which is greater than 1.0.
A) True B) False

Which of the following is false?
A) preferred stock has some characteristics of both common stock and bonds
B) common stockholders are essentially creditors of the firm
C) the pre-emptive right on common stock protects the shareholder from dilution in ownership and
value

The less-risky investment is always the more desirable choice.
A) True B) False

Which of the following statements best represents the "Agency Problem"?
A) Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of
shareholders.
B) The agency problem results from the separation of management and the ownership of the firm.
C) The agency problem may interfere with the implementation of maximizing shareholder wealth.
D) all of the above

You are considering investing in a project with the following year-end after tax cash flows
Year l: $5,000
Year 2: $3,200
Year 3: $7,800
If the initial outlay for the project is $12,113, compute the project's internal rate of return.

A) 32%
B) 24%
C) 14%
D) 10%

Emery Inc. has a beta equal to 1.5 and a required return of 14% based on the CAPM. If the risk free rate of return
is 2%, the expected return on the market portfolio is:

A) 8%.
B) 10%.
C) 9%.
D) 6%.

Company A and Company B have the same profit margin and the same total asset turnover, but company A has
a higher return on equity. This may result from
A) Company B has more common stock. B) Company A has a higher debt ratio.
C) Company A has a higher return on assets. D) Company B has a higher return on assets.

As business goals go, maximization of profits is worthy but it does not adequately consider which of the
following?
A) time frame over which profits are to be measured
B) increases in the cost of raw materials
C) income taxes
D) changes in sales revenues

All of the following would result in an increase in stockholders equity except
A) The company sold common stock at par value.
B) The company sold common stock above par value.
C) The company purchased treasury stock.
D) The company had positive net income greater than dividends paid.

The calculation of incremental free cash flows over a project's life should include
A) labor and material saving. B) additional revenue.
C) interest to bondholders. D) A and B.

All of the following are equity accounts on a balance sheet except:

A) common stock.
B) cash.
C) paid-in capital.
D) retained earnings.

Preferred dividends are tax deductible whereas common dividends are not.
A) True B) False

Choose the most correct answer for the following: (1) Which is the measure of risk for choosing an asset
which is to be held in isolation? (2) Which is the measure of risk for choosing an asset to be held as part
of a well-diversified portfolio?
A) Variance; variance. B) Standard deviation; beta.
C) Beta; beta. D) Standard deviation; standard deviation.

Higgins Office Corp. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred
stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as
follows: debt--8 percent; preferred stock--12 percent; common equity--16 percent. Assuming a 40 percent
marginal tax rate, what after-tax rate of return must Higgins Office Corp. earn on its investments if the value of
the firm is to remain unchanged?

A) 12.40 percent
B) 11.12 percent
C) 12.00 percent
D) 10.64 percent

Bill borrowed $100,000 today that he must repay in 10 annual end-of-year installments of $14,902. What annual
interest rate is Bill paying on his loan?

A) 5.4%
B) 4.9%
C) 8.0%
D) 7.5%

The appropriate measure for risk according to the capital asset pricing model is:
A) the standard deviation of a firm's cash flows. B) alpha.
C) the standard deviation of a firm's stock returns. D) beta.

Bobby's grandmother deposited $100 in a savings account for him when he was born. The money has
been earning an annual rate of 12% interest, compounded quarterly for the last 25 years. He is getting
married and would like to take his new bride on a fabulous honeymoon. How much does he have in this
account to use?

A) $4,165
B) $5,051
C) $1,700
D) $1,922

The risk-return relationship for each financial asset is shown on
A) the capital market line B) the security market line
C) the New York Stock Exchange market line D) none of the above

An IPO (Initial Public Offering) is an example of secondary market transaction.
A) True B) False

Savings are generally transferred to the business firms by
A) direct transfer of funds.
B) indirect transfer using the investment banker.
C) indirect transfer using the financial intermediary.
D) all of the above

Which of the following represents an attempt to measure the earnings of the firm's operations over a given
time period?
A) balance sheet B) cash flow statement
C) income statement D) none of the above

Kingsbury Associate's current assets are as follows:
Cash $3,000
Accounts Receivable $4,500
Inventories $8,000
If Kingsbury has a current ratio of 3.2, what is its quick ratio?

A) 2.07
B) l.55
C) 0.48
D) none of the above

Which of the following statements about the net present value is true?
A) It has an inadequate reinvestment assumption.
B) It is likely that there will be more than one NPV for a project.
C) It produces a percentage result that is easy to describe.
D) It may be used to select among projects of different sizes.

Emery Inc. had $5 million of gross income, operating expenses of $1 million, paid $1 million of interest on
borrowing of $10 million, and paid a dividend of $0.50 million. Emery Inc.'s taxable income is

A) $4 million.
B) $2.5 million.
C) $3 million.
D) $3.5 million.

Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 12% on these
bonds, they will be priced at:
A) Cannot be determined without knowing the number of years to maturity.
B) A premium to par value.
C) Par value.
D) A discount to par value.

Your company is considering an investment in a project which would require an initial outlay of
$300,000 and produce expected cash flows in years 1-5 of $87,385 per year. You have determined that
the current after-tax cost of the firm's capital (required rate of return) for each source of financing is as
follows
Cost of Debt 8%
Cost of Preferred Stock 12%
Cost of Common Stock 16%
Long term debt currently makes up 20% of the capital structure, preferred stock 10%, and common
stock 70%. What is the net present value of this project?

A) -$13,876
B) $1,568
C) $287,692
D) $0

Which of the following factors tend to encourage management to pursue stock price maximization as a
goal?
A) shareholders link management's compensation to company performance
B) managers' reactions to the threats of firing and takeover
C) managers do not have goals other than stock price maximization.
D) statements a and b are both correct
E) statements a, b, and c are all correct

Capital market instruments include
A) negotiable certificates of deposit. B) corporate equities.
C) commercial paper. D) Treasury bills.

You just purchased a parcel of land for $10,000. If you expect a 14% annual rate of return on your
investment, how much will you sell the land for in 10 years?

A) $45,000
B) $34,310
C) $31,060
D) $25,000
E) $37,072

All of the following are criticisms of the payback period criterion except:
A) Time value of money is not accounted for.
B) Cash flows occurring after the payback are ignored.
C) It deals with accounting profits as opposed to cash flows.
D) None of the above; they are all criticisms of the payback period criteria.

Casino Games Company preferred stock pays a perpetual annual dividend of 3.5% of its $100 par value. If
investors' required rate of return on this stock is 11%, what is the value per share?

A) $31.82
B) $35.00
C) $7.97
D) $3.18