Question 1 Starting to invest early for retirement increases the
benefits of compound interest. True False Question 2 Which of the following statements is CORRECT, assuming
positive interest rates and holding other things constant? A. Banks A and B offer the same nominal annual rate of
interest, but A pays interest quarterly and B pays semiannually. Deposits in
Bank B will provide the higher future value if you leave your funds on deposit. B. The present value of a 5-year, $250 annuity due will be
lower than the PV of a similar ordinary annuity. C. If an investment pays 10% interest, compounded annually,
its effective annual rate will be less than 10%. D. A bank loan’s nominal interest rate will always be equal
to or less than its effective annual rate. E. A 30-year, $150,000 amortized mortgage will have larger
monthly payments than an otherwise similar 20-year mortgage. Question 3 If a firm raises capital by selling new bonds, it is
called the “issuing firm,” and the coupon rate is generally set equal
to the required rate on bonds of equal risk. True False Question 4 Which of the following statements is CORRECT? A. An example of an externality is a situation where a bank
opens a new office, and that new office causes deposits in the bank’s other
offices to increase. B. An externality is a situation where a project would have
an adverse effect on some other part of the firm’s overall operations. If the
project would have a favorable effect on other operations, then this is not an
externality. C. Both the NPV and IRR methods deal correctly with
externalities, even if the externalities are not specifically identified.
However, the payback method does not. D. The NPV method automatically deals correctly with externalities,
even if the externalities are not specifically identified, but the IRR method
does not. This is another reason to favor the NPV. E. Identifying an externality can never lead to an increase
in the calculated NPV. Question 5 Amram Company’s current ratio is 1.9. Considered alone,
which of the following actions would reduce the company’s current ratio? A. Borrow using short-term notes payable and use the
proceeds to reduce accruals. B. Use cash to reduce short-term notes payable. C. Use cash to reduce accounts payable. D. Use cash to reduce accruals. E. Borrow using short-term notes payable and use the
proceeds to reduce long-term debt. Question 6 An option is a
contract that gives its holder the right to buy or sell an asset at a
predetermined price within a specified period of time. True False Question 7 As a firm’s sales grow, its current assets also tend to
increase. For instance, as sales increase, the firm’s inventories generally
increase, and purchases of inventories result in more accounts payable. Thus,
spontaneous liabilities that reduce AFN arise from transactions brought on by
sales increases. True False Question 8 The cash flows
associated with common stock are more difficult to estimate than those related
to bonds because stock has a residual claim against the company versus a
contractual obligation for a bond. True False Question 9 Which of the following statements is most CORRECT? A. The coupon rate on convertible debt is normally set below
the coupon rate that would be set on otherwise similar straight debt even
though investing in convertibles is more risky than investing in straight debt. B. One important difference between warrants and
convertibles is that convertibles bring in additional funds when they are
converted, but exercising warrants does not bring in any additional funds. C. Warrants have an option feature but convertibles do not. D. Warrants can sometimes be detached and traded separately
from the debt with which they were issued, but this is unusual. E. The value of a warrant to buy a safe, stable stock should
exceed the value of a warrant to buy a risky, volatile stock, other things held
constant. Question 10 The “preferred” feature of preferred stock
means that it normally will provide a higher expected return than will common
stock.True False Question 11 If a firm’s goal is to maximize its earnings per share,
this is the best way to maximize the price of the common stock and thus
shareholders’ wealth. True False Question 12 If an investment project would make use of land which the
firm currently owns, the project should be charged with the opportunity cost of
the land. True False Question 13 Which of the following could explain why a business might
choose to operate as a corporation rather than as a sole proprietorship or a
partnership? A. Corporate shareholders escape liability for the firm’s
debts, but this factor may be offset by the tax disadvantages of the corporate
form of organization. B. Less of a corporation’s income is generally subjected to
taxes than would be true if the firm were a partnership. C. Corporations generally find it relatively difficult to
raise large amounts of capital. D. Corporate investors are exposed to unlimited liability. E. Corporations generally face relatively few regulations. Question 14 Which of the following statements is CORRECT? A. A portfolio with a large number of randomly selected
stocks would have less market risk than a single stock that has a beta of 0.5. B. If a stock has a negative beta, its expected return must
be negative. C. If the returns on two stocks are perfectly positively
correlated (i.e., the correlation coefficient is +1.0) and these stocks have
identical standard deviations, an equally weighted portfolio of the two stocks
will have a standard deviation that is less than that of the individual stocks. D. According to the CAPM, stocks with higher standard
deviations of returns must also have higher expected returns. E. A portfolio with a large number of randomly selected
stocks would have more market risk than a single stock that has a beta of 0.5,
assuming that the stock’s beta was correctly calculated and is stable. Question 15 A firm’s AFN must come from external sources. Typical
sources include short-term bank loans, long-term bonds, preferred stock, and
common stock. True False Question 16 To finance the construction of a new plant, Pietersen
Corporation must raise an additional $10,000,000 of equity capital through the
sale of common stock. The firm currently has an EPS of $5.40 and a P/E ratio of
10, with 1,200,000 shares outstanding. If the firm wants its ex-rights price to
be $50, what subscription price must it set on the new shares? A. $33.78 B. $29.55 C. $41.80 D. $39.28 E. $50.00 Question 17 A stock is
expected to pay a dividend of $0.75 at the end of the year. The required rate
of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%.
What is the stock’s current price? A. $17.39 B. $18.75 C. $18.29 D. $19.22 E. $17.84 Question 18 The cost of debt is equal to one minus the marginal tax
rate multiplied by the average coupon rate on all outstanding debt. True False Question 19 If the current price of a stock is below the strike
price, then an option to buy the stock is worthless and will have a zero value. True False Question 20 Which of the following statements is CORRECT? A. Dividends do not show up in the statement of cash flows
because dividends are considered to be a financing activity, not an operating
activity. B. In the statement of cash flows, a decrease in inventories
is reported as a use of cash. C. In the statement of cash flows, a decrease in accounts
receivable is reported as a use of cash. D. In the statement of cash flows, a decrease in accounts
payable is reported as a use of cash. E. In the statement of cash flows, depreciation charges are
reported as a use of cash. Question 21 “Capital” is sometimes defined as funds
supplied to a firm by investors. True False Question 22 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 its beta will be greater than
1.0. True False Question 23 The annual report contains four basic financial
statements: the income statement, balance sheet, statement of cash flows, and
statement of stockholders’ equity. True False Question 24 Two important issues in corporate governance are (1) the
rules that cover the board’s ability to fire the CEO and (2) the rules that
cover the CEO’s ability to remove members of the board. True False Question 25 Which of the following statements is CORRECT? A. If a coupon bond is selling at par, its current yield
equals its yield to maturity. B. If interest rates increase, the price of a 10-year coupon
bond will decline by a greater percentage than the price of a 10-year zero
coupon bond. C. If a bond’s yield to maturity exceeds its annual coupon,
then the bond will trade at a premium. D. If a coupon bond is selling at a premium, its current
yield equals its yield to maturity. E. If a coupon bond is selling at a discount, its price will
continue to decline until it reaches its par value at maturity. Question 26 The owner of a convertible bond owns, in effect, both a
bond and a call option.True False Question 27 On the balance
sheet, total assets must always equal total liabilities and equity. True False Question 28 The optimal
distribution policy strikes that balance between current dividends and capital
gains that maximizes the firm’s stock price. True False Question 29 A proxy is a document giving one party the authority to
act for another party, including the power to vote shares of common stock.
Proxies can be important tools relating to control of firms. True False Question 30 The common stock of Southern Airlines currently sells for
$33, and its 8% convertible debentures (issued at par, or $1,000) sell for
$850. Each debenture can be converted into 25 shares of common stock at any
time before 2025. What is the conversion value of the bond? A. $707.33 B. $866.25 C. $744.56 D. $825.00 E. $783.75 Question 31 Taylor Inc. estimates that its average-risk projects have
a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average
risk projects have a WACC of 12%. Which of the following projects (A, B, and C)
should the company accept? A. All of the projects should be accepted. B. None of the projects should be accepted. C. Project A, which is of average risk and has a return of
9%. D. Project B, which is of below-average risk and has a
return of 8.5%. E. Project C, which is of above-average risk and has a
return of 11%. Question 32 A firm should never accept a project if its acceptance
would lead to an increase in the firm’s cost of capital (its WACC). True False Question 33 Time lines can be constructed in situations where some of
the cash flows occur annually but others occur quarterly. True False Question 34 ESOPs were originally designed to help improve worker
productivity, but today they are also used to help prevent hostile takeovers. True False Question 35 Many leases written today combine the features of
operating and financial leases. Such leases are often called “combination
leases.” True False Question 36 Operating leases help to shift the risk of obsolescence
from the user to the lessor. True False Question 37 The form of organization for a business is not an
important issue, as this decision has very little effect on the income and
wealth of the firm’s owners. True False Question 38 A warrant is an option, and as such it cannot be used as
a “sweetener.” True False Question 39 Projects S and L are equally risky, mutually exclusive,
and have normal cash flows. Project S has an IRR of 15%, while Project L’s IRR
is 12%. The two projects have the same NPV when the WACC is 7%. Which of the
following statements is CORRECT? A. If the WACC is 10%, both projects will have positive
NPVs. B. Project S’s NPV is more sensitive to changes in WACC than
Project L’s. C. If the WACC is 10%, both projects will have a negative
NPV. D. If the WACC is 6%, Project S will have the higher NPV. E. If the WACC is 13%, Project S will have the lower NPV. Question 40 High current and quick ratios always indicate that a firm
is managing its liquidity position well. True False Question 41 Other things held constant, an increase in the cost of
capital will result in a decrease in a project’s IRR. True False Question 42 The desire for floating-rate bonds, and consequently
their increased usage, arose out of the experience of the early 1980s, when
inflation pushed interest rates up to very high levels and thus caused sharp
declines in the prices of outstanding bonds. True False Question 43 Convertible debentures for Kulik Corporation were issued
at their $1,000 par value in 2012. At any time prior to maturity on February 1,
2032, a debenture holder can exchange a bond for 25 shares of common stock.
What is the conversion price, Pc? A. $44.10 B. $42.00 C. $46.31 D. $48.62 E. $40.00 Question 44 BLW Corporation is considering the terms to be set on the
options it plans to issue to its executives. Which of the following actions
would decrease the value of the options, other things held constant? A. BLW’s stock price becomes more risky (higher variance). B. The exercise price of the option is increased. C. The Federal Reserve takes actions that increase the
risk-free rate. D. The life of the option is increased, i.e., the time until
it expires is lengthened. E. BLW’s stock price suddenly increases. Question 45 In the lease versus buy decision, leasing is often
preferable A. because lease obligations do not affect the firm’s risk
as seen by investors. B. because it has no effect on the firm’s ability to borrow
to make other investments. C. because the lessee owns the property at the end of the
least term. D. because, generally, no down payment is required, and
there are no indirect interest costs. E. because the lessee may have greater flexibility in
abandoning the project in which the leased property is used than if the lessee
bought and owned the asset. Question 46 Because of improvements in forecasting techniques,
estimating the cash flows associated with a project has become the easiest step
in the capital budgeting process.True False Question 47 Ratio analysis involves analyzing financial statements in
order to appraise a firm’s financial position and strength. True False Question 48 The tighter the probability distribution of its expected
future returns, the greater the risk of a given investment as measured by its
standard deviation. True False Question 49 Heavy use of off-balance sheet lease financing will tend
to A. affect a company’s cash flows but not its degree of risk. B. make a company appear more risky than it actually is
because its stated debt ratio will be increased. C. have no effect on either cash flows or risk because the
cash flows are already reflected in the income statement. D. make a company appear less risky than it actually is
because its stated debt ratio will appear lower. E. affect the lessee’s cash flows but only due to tax
effects. Question 50 The term “additional funds needed (AFN)” is
generally defined as follows: A. The amount of assets required per dollar of sales. B. The amount of internally generated cash in a given year
minus the amount of cash needed to acquire the new assets needed to support
growth. C. Funds that a firm must raise externally from
non-spontaneous sources, i.e., by borrowing or by selling new stock to support
operations. D. Funds that are obtained automatically from routine
business transactions. E. A forecasting approach in which the forecasted percentage
of sales for each balance sheet account is held constant.

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