TEST

1) If a person’s required return decreases for an increase in risk, that person is said to be

risk-seeking.

risk-indifferent.

risk-adverse.

risk-aware.

2) Last year Mike bought 100 shares of Dallas Corp. common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year?

11.7%

13.2%

14.1%

15.9%

3) A(n) ____________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.

efficient

coefficient

continuous

risk-indifferent

4) An investment advisor has recommended a $50,000 portfolio containing assets A, B, and C: $25,000 will be invested in A with an expected return of 12%; $10,000 will be invested in B with an expected return of 18%; and $15,000 will be invested in C with an expected annual return of 8%. The expected annual return of this portfolio is

12.67%

12%

10%

unable to be determined from the information given.

5) The purpose of adding an asset with a negative or low positive beta is to

reduce profit.

reduce risk.

increase profit.

increase risk.

6) The relevant portion of an asset’s risk attributable to market factors that affect all firms is called

unsystematic risk.

diversifiable risk.

systematic risk.

interest rate risk.

7) The _________ describes the relationship between nondiversifiable risk and return for all assets.

EBIT-EPS approach to capital structure

supply-demand function for assets

capital asset pricing model

Gordon model

8) Asset Y has a beta of 1.2. The risk-free rate of return is 6%, while the return on the market portfolio of assets is 12%. The asset’s market risk premium is

7.2%.

6%.

13.2%.

10%.

9) The __________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds.

nominal

real

risk-free

inflationary

10) The nominal rate of interest is composed of

the real rate plus an inflationary expectation.

the real rate plus a risk premium.

the risk-free rate plus an inflationary expectation.

the risk-free rate plus a risk premium.

11) All of the following are examples of restrictive debt covenants EXCEPT

prohibition on selling accounts receivable.

supplying the creditor with audited financial statements.

constraint on subsequent borrowing.

prohibition on entering certain types of lease agreements.

12) The less certain a cash flow, the _________ the risk, and the ___________ the value of the cash flow.

lower; higher

lower; lower

higher, lower

higher; higher

13) Corporate bonds typically have

a face value of $5,000.

a market price of $1,000.

a specified coupon rate paid annually.

a par value of $1,000.

14) The value of a bond is the present value of the

dividends and maturity value.

interest and dividend payments.

maturity value.

interest payments and maturity value.

15) The ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 15%

Bond D will have a greater change in price.

Bond E will have a greater change in price.

the price of the bonds will be constant.

the price change for the bonds will be equal.

16) A firm has an issue of $1,000 par value bonds with a 9% stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11%, the firm’s bond will sell for _________ today.

$1,000

$716.67

$840.67

$1,123.33

17) Equity capital can be incresed through

the money market.

The NYSE bond market.

retained earnings and issuance of stock.

a private placement with an insurance company as the creditor.

18) An 8% preferred stock with a market price of $110 per share and a par value of $100 per share pays a cash dividend of _________ per share.

$4.00

$8.00

$8.80

$80.00

19) The opportunity for management to purchase a certain number of shares of their firm’s common stock at a specified price over a certain period of time is a

stock option.

warrant.

pre-emptive right.

stock right.

20) Shares of stock currently owned by the firm’s shareholders are called

authorized.

issued.

outstanding.

treasury shares.

21) A firm has an expected dividend next year of $1.20 per share., a zero growth rate of dividends, and a required return of 10%. The value of a share of the firm’s common stock is __________.

$120

$10

$12

$100

22) Nico Corporation’s common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return?

10%

12%

13%

14%

23) You are planning to purchase the stock of Ted’s Sheds Inc. and you expect it to pay a dividend of $3 in year 1, $4.25 in year 2 and $6.00 in year 3. You expect to sell the stock for $100 in year 3. If your required return for purchasing the stock is 12%, how much would you pay for the stock today?

$75.45

$77.24

$81.52

$85.66

24) Advantages of issuing common stock versus long-term debt include all of the following EXCEPT

the effects of dilution on earnings and voting power.

no maturity.

increases firm’s borrowing power.

no fixed payment obligation.

25)

A $60,000 outlay for a new machine with a usable life of 15 years is called

capital expenditure

operating expenditure.

replacement expenditure.

current asset expenditure.

26) ___________ is a series of equal annual cash flows.

A mixed stream

A conventional stream

A non conventional stream

An annuity

27) The change in net working capital when evaluating a capital budgeting decision is

current assets minus current liabilities.

the increase in current assets.

the increase in current liabilities.

the change in current assets minus the change in current liabilities.

28) The book value of an asset is equal to

fair market value minus the accounting value.

original purchase price minus annual depreciation expense.

original purchase price minus accumulated depreciation.

depreciated value plus recaptured depreciation.

29) Benefits expected from proposed capital expenditures must be on an after-tax basis bacause

taxes are cash outflows.

no benefits may be used by the firm until tax claims are satisfied.

there may also be tax benefits to be evaluated.

it is common accepted practice to do so.

30) The ordering of capital expenditure projects on the basis of some predetermined measure such as the rate of return is called

the ranking approach.

an independent investment.

the accept-reject approach.

a mutually exclusive investment.

31) All of the following are steps in the capital budgeting process except

implementation.

follow-up.

transformation.

decision-making.

32) The portion of an asset’s sale price that is above its book value and below its initial purchase price is called

a capital gain.

recaptured depreciation.

a capital loss.

book value.

33) The __________ is the exact amount of time it takes the firm to recover its initial investment.

average rate of return

net present value

internal rate of return

payback period

34) Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because

it explicitly considers the time value of money.

it can be viewed as a measure of risk exposure.

the determination of payback is an objectively determined criteria.

it can take the place of the net present value approach.

35) A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is

1 year.

2 years.

between 1 and 2 years.

between 2 and 3 years.

36) The __________ is the discount rate that equates the present value of the cash inflows with the initial investment.

payback period

average rate of return

cost of capital

internal rate of return

37) A firm with a cost of capital of 13% is evaluating three capital projects. The internal rates of return are as follows: Project 1, 12%; Project 2, 15%; Project 3, 13%. The firm should

accept Project 2 and reject Projects 1 and 3.

accept Projects 2 and 3 and reject Project 1.

accept Project 1 and reject Projects 2 and 3.

accept project 3 and reject Projects 1 and 2.

38) In comparing the internal rate of return and net present value methods of evaluation,

internal rate of return is theoretically superior, but financial managers prefer net present value.

net present value is theoretically superior, but financial managers prefer to use internal rate of return.

financial managers prefer net present value, because it is presented as a rate of return.

financial managers prefer net present value, because it measures benefits relative to the amount invested.

39) Which of the following capital budgeting techniques ignores the time value of money?

Payback period.

Net present value.

Internal rate of return.

All of those listed.

40) Consider the following projects: X and Y, where the firm can choose only one. Project X costs $600 and has cash flows of $400 in each of the next two years. Project Y also costs $600 and generates cash flows of $500 and $275 for the next two years respectively. Which investment should the firm choose if the cost of capital is 10%?

Project X

Project Y

Neither project

Not enough information to make a decision.

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