1. Which of the following would increase the likelihood that a company would increase its
debt ratio, other things held constant?
A) An increase in costs incurred when filing for bankruptcy.
B) An increase in the corporate tax rate.
C) An increase in the personal tax rate.
D) The Federal Reserve tightens interest rates in an effort to fight inflation.
E) The company's stock price hits a new low.
2. A lease versus purchase analysis should compare the cost of leasing to the cost of
owning, assuming that the asset purchased
A) is financed with short-term debt.
B) is financed with long-term debt.
C) is financed with debt whose maturity matches the term of the lease.
D) is financed with a mix of debt and equity based on the firm’s target capital structure, i.e.,
at the WACC.
E) is financed with retained earnings.
3. Which of the following would be most likely to lead to a decrease in a firm’s dividend
A) Its earnings become more stable.
B) Its access to the capital markets increases.
C) Its R&D efforts pay off, and it now has more high-return investment opportunities.
D) Its accounts receivable decrease due to a change in its credit policy.
E) Its accounts receivable decrease due to a change in its credit policy.
4. Which of the following is NOT commonly regarded as being a credit policy variable?
A) Credit period.
B) Collection policy.
C) Credit standards.
D) Cash discounts.
E) Payments deferral period.
5. Which of the following assumptions is embodied in the AFN equation?
A) None of the firm's ratios will change.
B) Accounts payable and accruals are tied directly to sales.
C) Common stock and long-term debt are tied directly to sales.
D) Fixed assets, but not current assets, are tied directly to sales.
E) Last year’s total assets were not optimal for last year’s sales.
6. Elephant Books sells paperback books for $7 each. The variable cost per book is $5. At
current annual sales of 200,000 books, the publisher is just breaking even. It is estimated
that if the authors' royalties are reduced, the variable cost per book will drop by $1.
Assume authors' royalties are reduced and sales remain constant; how much more money
can the publisher put into advertising (a fixed cost) and still break even?
E) None of the above
7. Last year Godinho Corp. had $250 million of sales, and it had $75 million of fixed assets
that were being operated at 80% of capacity. In millions, how large could sales have been if
the company had operated at full capacity?
8. How do mutually exclusive and independent investment projects differ?
9. Which of the following are NOT ways risk management can be used to increase the value
of a firm?
A) Risk management can increase debt capacity.
B) Risk management can help a firm maintain its optimal capital budget.
C) Risk management can reduce the expected costs of financial distress
D) Risk management can help firms minimize taxes.
E) Risk management can allow managers to defer receipt of their bonuses and thus
postpone tax payments.
10. Which of the following is NOT normally regarded as being a good reason to establish an
A) To increase worker productivity.
B) To enable the firm to borrow at a below-market interest rate.
C) To make it easier to grant stock options to employees.
D) To help prevent a hostile takeover.
E) To help retain valued employees.
11. What are some of the disadvantages of the payback rule in capital budgeting?
12. How is a stock’s beta computed?
13. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward
rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a
________________ to the spot rate.
A) premium of 8%
B) premium of 18%
C) discount of 18%
D) discount of 8%
E) premium of 16%
14. Would you expect that a technology firm or a utility firm would have a higher
15. Which of the following statements is most consistent with efficient inventory
management? The firm has a
A) below average inventory turnover ratio.
B) low incidence of production schedule disruptions.
C) below average total assets turnover ratio.
D) relatively high current ratio.
E) relatively low DSO.
16. Operating leases often have terms that include
A) maintenance of the equipment by the lessor.
B) full amortization over the life of the lease.
C) very high penalties if the lease is cancelled.
D) restrictions on how much the leased property can be used.
E) much longer lease periods than for most financial leases.
17. An increase in the debt ratio will generally have no effect on which of these items?
A) Business risk.
B) Total risk.
C) Financial risk.
D) Market risk.
E) The firm's beta.
18. Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt
at 9%. Company B can issue floating-rate debt at LIBOR + 1.5%, and it can issue fixed-rate
debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which
they engage in the following swap: A will make a fixed 7.95% payment to B, and B will
make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of
A and B?
A) A pays a fixed rate of 9%, B pays LIBOR + 1.5%.
B) A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
C) A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
D) A pays a fixed rate of 7.95%, B pays LIBOR.
E) None of the above answers is correct.
19. Which of the following statements is most CORRECT?
A) One advantage of forward contracts is that they are default free.
B) Futures contracts generally trade on an organized exchange and are marked to market
C) Goods are never delivered under forward contracts, but are almost always delivered
under futures contracts.
D) There are futures contracts for currencies but no forward contracts for currencies.
E) Futures contracts don’t have any margin requirements but forward contracts do.
20. Which of the following is NOT a reason why companies move into international
A) To take advantage of lower production costs in regions where labor costs are relatively
B) To develop new markets for the firm’s products.
C) To better serve their primary customers.
D) Because important raw materials are located abroad.
E) To increase their inventory levels.
21. If a firm adheres strictly to the residual dividend policy, then if its optimal capital
budget requires the use of all earnings for a given year (along with new debt according to
the optimal debt/total assets ratio), then the firm should pay
A) no dividends except out of past retained earnings.
B) no dividends to common stockholders.
C) dividends only out of funds raised by the sale of new common stock.
D) dividends only out of funds raised by borrowing money (i.e., issue debt).
E) dividends only out of funds raised by selling off fixed assets.
22. Last year Emery Industries had $450 million of sales and $225 million of fixed assets,
so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity.
If the company had been able to sell off enough of its fixed assets at book value so that it
was operating at full capacity, with sales held constant at $450 million, how much cash (in
millions) would it have generated?
23. If one Swiss franc can purchase $0.71 U.S. dollars, how many Swiss francs can one U.S.
24. Which of the following does NOT always increase a company’s market value?
A) Increasing the expected growth rate of sales.
B) Increasing the expected operating profitability (NOPAT/Sales).
C) Decreasing the capital requirements (Capital/Sales).
D) Decreasing the weighted average cost of capital.
E) Increasing the expected rate of return on invested capital.
25. The Clayton Corporation has warrants outstanding that permits the holder to purchase
one share of common stock per warrant at $30. What is the expiration value of Clayton's
warrants if the common stock is currently selling at $20 per share? Please show the
method of arriving at the answer.
26. Does a bond’s time to maturity ever equal its duration? Please explain.