Chapter 13: Risk and Capital Budgeting
Q1) Using progressively higher discount rates:
A) tends to reduce early and late cash flows equally.
B) tends to penalize early flows more than late flows.
C) tends to lower net present value.
D) reflects the decreasing nature of risk in the discount rate.
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Q2) A correlation coefficient of zero indicates:
A) the projects have the same expected value.
B) there is no correlation and no risk reduction between combined projects.
C) there is no correlation,but some risk reduction when the projects are combined.
D) the projects have the same standard deviation.
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Q3) Which of the following is a false statement?
A) Risky investments may produce large losses.
B) Risky investments may produce large gains.
C) The coefficient of variation is a risk measure.
D) Risk-averse investors cannot be induced to invest in risky assets.
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Chapter 4: Financial Forecasting
Q1) An increase in sales and profits generates the necessary cash required for economic
growth.
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Q2) In order to estimate production requirements,we:
A) add beginning inventory to projected sales in units and subtract desired ending
inventory.
B) add projected sales in units to desired ending inventory and subtract beginning
inventory.
C) add beginning inventory to desired ending inventory and divide by two.
D) add beginning inventory to desired ending inventory and subtract projected sales in
units.
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Q3) The value of ending inventory should be equal to beginning inventory plus total
production costs minus cost of goods sold.
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Chapter 19: Convertibles, Warrants and Derivatives
Q1) The conversion premium is the greatest and the downside risk the smallest when:
A) the conversion value equals the pure bond value.
B) the conversion value is greater than the pure bond value.
C) the conversion value is less than the pure bond value.
D) the stock price is expected to go up drastically.
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Q2) Lucky Dog Pet Food has a $1,000 convertible bond outstanding with a conversion
price of $18.00 per [Link] bond pays an interest payment of $50 semiannually and
matures in 20 years unless converted into common shares earlier or called by the
[Link] common shares currently sell for $14.70 per [Link] the bond sold at its
theoretical bond value it would be priced competitively to yield 12% with bonds of the
same risk class.
A)How many shares of common stock are received on conversion?
B)What is the conversion value?
C)What is the pure bond value?
D)How much downside protection has the pure bond value provided to investors?
(answer in dollars)
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Q3) In general the average size of a convertible issue is small compared to normal bond
issues.
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Chapter 7: Current Asset Management
Q1) A lockbox is used to safeguard the corporation's marketable securities.
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Q2) The investment of excess short-term funds is usually diversified between short-and
long-term marketable securities.
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Q3) You anticipate selling 10,000 units of Wonder Soap in the next [Link] cost $3.50 per
order and total carrying costs are $1.50 per [Link] is the minimum order quantity for
this new product?
A) 216 units
B) 342 units
C) 1,000 units
D) 100 units
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Chapter 10: Valuation and Rates of Return
Q1) Washington Corporation has a $1,000 par value bond outstanding paying annual
interest of 8%.The bond matures in 20 [Link] the present yield to maturity for this bond
is 10%,calculate the current price of the bond.
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Q2) A 10-year bond pays 12% interest on a $1,000 face value [Link] it currently sells
for $1,100,what is its approximate yield to maturity?
A) 10.35%
B) 10.91%
C) 11.00%
D) 12.00%
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Q3) If expected dividends grow at 8% and the appropriate discount rate is 11%,what is the
value of a share with an expected dividend of $2.50?
A) $22.73
B) $31.25
C) $13.16
D) $83.33
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Chapter 14: Capital Markets
Q1) A random walk:
A) suggests patterns from market cycles.
B) allows for abnormal returns.
C) suggests markets are not efficient.
D) suggests non correlation between past and future price movements.
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Q2) Over-the-counter markets trade:
A) securities that have not met the listing requirements for an exchange.
B) investor information on high quality securities.
C) blue chip securities.
D) private issues to high net worth investors.
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Q3) Between 2001 and 2013 common stock accounted for an insignificant proportion of
long-term funds issued.
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Chapter 5: Operating and Financial Leverage
Q1) Which of the following questions does break-even analysis not attempt to address?
A) How much do changes in volume affect costs and profits?
B) At what point does the firm break even?
C) What is the most efficient level of capital assets to employ?
D) Percentage change in earnings per share.
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Q2) Doug Robinson is considering the possibility of opening his own manufacturing
facility. He expects first-year sales to be $800,000, and he feels that his variable costs will
be approximately 40% of sales. His fixed costs in the first year will be $200,000.
Doug is considering two ways of financing the firm: (a) 40% equity financing and 60%
debt at 10%, or (b) 100% equity financing. He can sell common stock to his relatives for
$10 per share. Either way, he will need to raise $1,000,000.
Compute his break-even point in dollars.
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Q3) A plant relying mostly on manual labour would generally have:
A) more variable than fixed costs.
B) more fixed than variable costs.
C) all fixed costs.
D) all variable costs.
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Chapter 20: External Growth Through Mergers
Q1) By using cash instead of stock,a company may diminish the perceived dilutive
effects of a merger.
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Q2) Most mergers are horizontal in nature in order to avoid the potential complications
involved with the elimination of competition.
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Q3) Selling shareholders may receive a price well above current market value.
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Chapter 18: Dividend Policy and Retained Earnings
Q1) Which of the following balance sheet accounts will be affected by a stock dividend
but not by a stock split?
A) Retained earnings
B) Cash
C) Common stock
D) Dividends-in-arrears
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Q2) The marginal principle of retained earnings states that the corporation must be able
to earn a higher return on retained earnings than shareholders could receive for
themselves after paying taxes on the distributed dividends.
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Q3) Management may repurchase shares of stock in the market:
A) if they believe the shares are considerably underpriced.
B) for shareholder stock options.
C) to use in a stock split.
D) to reduce the market price of the shares.
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Chapter 1: The Goals and Activities of Financial
Management
Q1) The higher the profit of a firm,the higher the value the firm is assured of receiving in
the market.
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Q2) Capital structure is:
A) the relative mix of capital and intangible assets held by the firm.
B) the relative importance of debt and equity in the firm's financing.
C) the relative importance of long-term investment decisions.
D) the terms required to borrow money.
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Q3) Agency theory would imply that conflicts are more likely to occur between
management and shareholders when:
A) the company is owned and operated by the same person.
B) management acts in the best interests of maximizing shareholder wealth.
C) the chairman of the board is also the chief executive officer (CEO).
D) the board of directors exerts strong and involved oversight of managers.
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Page 10