Finance Prep Manual

PREP MANUAL FOR FINC 302:
BUSINESS FINANCE II
2022/2023 Academic Year
August 6, 2023
Akuoko K. Angelo
Table of Contents (Click to Section)
Bond Valuation ....................................................................................................................... 2
Stock Valuation ...................................................................................................................... 9
Capital Budgeting................................................................................................................. 16
Risk and Return .................................................................................................................... 25
Mergers & Acquisitions ....................................................................................................... 32
Dividend Policy .................................................................................................................... 44
Capital Structure................................................................................................................... 51
2021/2022 Examination Questions ...................................................................................... 54
Answers To 2021/2022 Examination Questions .................................................................. 74
Akuoko K. Angelo, MPhil. akuokoangelo@gmail.com Page 1 of 74

BOND VALUATION
1. What is a bond?
A. a type of debt a company issues to investors
B. an agreement or friendship
C. something that binds, fastens, confines, or holds together
D. binding security
2. What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your
required rate of return is 15 percent?
A. More than its face value.
B. Less than its face value.
C. $1,000.
D. Inadequate information to determine
3. When the market's required rate of return for a particular bond is much less than its coupon
rate, the bond is selling at:
A. a premium.
B. a discount.
C. cannot be determined without more information.
D. face value.
4. If an investor may have to sell a bond prior to maturity and interest rates have risen since
the bond was purchased, the investor is exposed to
A. the coupon effect.
B. interest rate risk.
C. perpetuity.
D. an indefinite maturity.
5. If a bond sells at a high premium, then which of the following relationships hold true? (P0
represents the price of a bond and YTM is the bond's yield to maturity)
A. P0 < par and YTM > the coupon rate.
B. P0 > par and YTM > the coupon rate.
C. P0 > par and YTM < the coupon rate.
D. P0 < par and YTM < the coupon rate.
6. Interest rates and bond prices

A. move in the same direction.
B. move in opposite directions.
C. sometimes move in the same direction, sometimes in opposite directions.
D. have no relationship with each other (i.e., they are independent

7. In the United States, most bonds pay interest ………… a year, while many European bonds
pay interest …………. a year.
A. once; twice
B. twice; once
C. once; once
D. twice; twice
8. The expected rate of return on a bond if bought at its current market price and held to
maturity.
A. yield to maturity
B. current yield
C. coupon yield
D. capital gains yield
9. The value of a bond is calculated using the present value of discounted cash flows. What is
the discount rate?
A. The discount rate is the rate of return required for an investor to purchase the
bond.
B. The discount rate is the difference between the face value and the purchase price
expressed as a percentage.
C. The discount rate is the amount above the face value an investor is willing to pay for
the bond.
D. The discount rate is the interest paid to the investor.
10. When the coupon rate is above the discount rate, the bond value is _____ the face value
and is considered to be at a _____.
A. Above; discount
B. Below; discount
C. Below; premium
D. Above; premium
11. Smith Darby has issued a five-year bond with a coupon rate of 8% and a face value of
$5,000. As a personal investor, you require a rate of return of 10%. What is the value of the
bond?
A. $5,000.00
B. $5,399.37
C. $4,620.94
D. $3,050.00
12. The annual interest payment divided by the present or current price of a bond is termed as
A. Yield to Maturity
B. Current Yield
C. Maturity yield
D. Earnings Yield

13. The price of an outstanding bond increases when the market rate
A. Never changes
B. Increases
C. Decreases
D. Changes
14. Bonds that may be exchanged for common stock at the option of the bondholders are called
A. options.
B. stock bonds.
C. convertible bonds.
D. callable bonds.
15. Long-term bonds are …….... than short-term bonds.

A. subject to more uncertainty
B. less risky
C. less sensitive to interest rate changes
D. more liquid
16. If a bond's yield to maturity is lower than its coupon rate, the bond will sell at a discount.
A. False
B. True
C. Inadequate information to decide
D. It depends
17. Generally, as a bond approaches its maturity date, its price approaches par value.
A. False
B. True
C. Inadequate information to decide
D. It depends
18. When you purchase a municipal bond, you are:

A. diversifying your portfolio
B. buying a portion of a municipality
C. loaning money to a municipality
D. investing in an index fund
19. A bond issued by a corporation is called a ________

A. share of stock
B. market share
C. corporate bond
D. stock option
20. The rate of interest on a bond is called the ________

A. interest rate
B. coupon rate
C. discount rate
D. bond rate
21. A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently yielding
8%, what is the market value of the bond?
A. Under $1,000
B. Over $1,200
C. Not enough information to tell
D. Equal $1,000
22. What is the value of a zero-coupon bond with 800 face value, which matures in 7 years
with a discount rate of 14%?
A. 1000
B. 450
C. 5600
D. 320
23. What is a coupon?

A. the interest rate on a bond at the time it is issued
B. an asset bought in the stock market
C. something you use in a supermarket to decrease your cost
D. used in the stock market to lessen the initial cost of stocks
24. If a coupon rate is 10%, how much would a semi-annual coupon payment be?
A. $100
B. $1000
C. $25
D. $50
25. What will happen to the market value of a bond if interest rates rise?
A. market value will increase
B. market value will decrease
C. No idea
D. Stay the same
26. What is usually the relationship between a bond's rating and the interest rate?
A. there is no relationship
B. the rating is the same as the rate
C. higher ratings mean higher interest
D. Higher ratings mean lower interest
27. The value of a bond is the present value of the

A. dividends and maturity value.
B. interest and dividend payments.
C. interest payments and maturity value.
D. maturity value
28. The _____ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
A. Call
B. Conversion
C. Put
D. Capitalization
29. These are corporate bonds where the coupon can be adjusted at pre-determined intervals
A. Foreign bonds
B. Floating rate notes
C. Junk bonds
D. Index-linked bond
30. An investor or the owner of debt securities that are typically issued by corporations and
governments and are essentially lending money to the bond issuers.
A. Broker
B. Agent
C. Bondholder
D. Bank
31. Since a puttable bond gives its holder the right to “put the bond” at specified times or
actions by the firm, the bond’s yield is lower than that of a non-puttable bond.
A. True
B. False
C. Maybe
D. None
32. A firm has an issue of $1,000 par value bonds with a 9 percent 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 percent, the firm's bond will sell for
________ today.
A. $851.50
B. $1,000
C. $1,268.40
D. $805.20
33. Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual
coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of
similar risk are currently selling to yield a 12 percent rate of return. The current value of
each Hewitt bond is ________.

A. $1,000
B. $791.00
C. $1,113.00
D. $1,052.24
34. A bond with a coupon rate of 7% and a discount rate of 6% is trading ...
A. Par
B. Discount
C. Premium
D. None of the above
35. Which of the following is not a characteristic of a zero-coupon bond?

A. can sell for more than the par value
B. The entire YTM comes from the difference between the par value and the purchase
price.
C. coupon rate = zero
D. There are no periodic payments
36. Which of the following are characteristics of a bond when traded at a premium?
i. YTM = coupon rate
ii. YTM < coupon rate
iii. Bond traded at a price below face value
iv. Bond traded at a price above face value
A. i and ii
B. i and iii only.
C. ii and iv only
D. ii and iii
37. Which of the following bonds have a higher coupon (all else equal)?
A. senior debt
B. A bond without a sinking fund
C. callable bond
D. debenture
38. The market price of a bond changes according to which of the following reasons?
A. Market price changes due to the supply-demand of the bond in the market.
B. Market price changes due to investors’ perceptions.
C. Market price changes due to changes in the interest rate.
D. All of the above.

39. The long-term bonds issued by the government are called
A. Corporate bonds
B. Junk bonds
C. Zero coupon bonds
D. Treasury bonds
40. The expected rate of return on a bond if bought at its current market price and held to
maturity
A. Yield to maturity
B. Current yield
C. Coupon yield
D. Capital gains yield

STOCK VALUATION
41. What are the earning distributions to shareholders by a corporation called?

A. retained earnings
B. net income
C. dividends
D. capital payments
E. diluted profit
42. The secondary market is best defined by which one of the following.
A. A market in which subordinated shares are issued and resold
B. A market conducted solely by brokers
C. A market dominated by dealers
D. A market where outstanding shares of stock are resold
E. A market where warrants are offered and sold
43. An agent who arranges a transaction between a buyer and a seller of equity securities is
called a:
A. broker.
B. floor trader.
C. capitalist.
D. principal.
E. dealer.
44. An agent who maintains an inventory from which he or she buys and sells securities is
called a:
A. broker.
B. trader.
C. capitalist.
D. principal.
E. dealer.
45. An increase in which of the following will increase the current value of a stock according
to the dividend growth model?
I. dividend amount
II. number of future dividends provided the current number is less than infinite
III. discount rate
IV. dividend growth rate
A. I and II only
B. III and IV only
C. I, II, and III only

D. I, II, and IV only
E. I, II, III, and IV
46. What is the model called that determines the present value of a stock based on its next
annual dividend, the dividend growth rate, and the applicable discount rate?
A. zero growth
B. dividend growth
C. capital pricing
D. earnings capitalization
E. discounted dividend
47. Which one of the following is computed by dividing next year's annual dividend by the
current stock price?
A. yield to maturity
B. total yield
C. dividend yield
E. growth rate
48. Which one of the following is the rate at which a stock's price is expected to appreciate?
A. current yield
B. total return
C. dividend yield
E. coupon rate
49. Which one of the following types of stock is defined by the fact that it receives no
preferential treatment with respect to either dividends or bankruptcy proceedings?
A. dual-class
B. cumulative
C. non-cumulative
D. preferred
E. common
50. You cannot attend the shareholder's meeting for Alpha United so you authorize another
shareholder to vote on your behalf. What is the granting of this authority called?
A. altering
B. cumulative voting
C. straight voting
D. indenture agreement
E. voting by proxy
51. Which one of the following is a type of equity security that has a fixed dividend and a
priority status over other equity securities?

A. senior bond
B. debenture
C. warrant
D. common stock
E. preferred stock
52. Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new
equity shares for sale to the general public. This sale will occur in which one of the
following markets?
A. private
B. auction
C. exchange floor
D. secondary
E. primary
53. National Trucking has paid an annual dividend of $1.00 per share on its common stock for
the past fifteen years and is expected to continue paying a dollar a share long into the future.
Given this, one share of the firm's stock is:
A. basically worthless as it offers no growth potential.
B. equal in value to the present value of $1 paid one year from today.
C. priced the same as a $1 perpetuity.
D. valued at an assumed growth rate of one percent.
E. worth $1 a share in the current market.
54. The dividend growth model:

I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return.
A. I and III only

B. II and IV only
C. I, III, and IV only
55. Which one of the following is an underlying assumption of the dividend growth model?
A. A stock has the same value to every investor.
B. A stock's value is equal to the discounted present value of the future cash flows
which it generates.
C. A stock's value changes in direct relation to the required return.
D. Stocks that pay the same annual dividend have equal market values.
E. The dividend growth rate is inversely related to a stock's market price.

56. Which one of the following represents the capital gains yield as used in the dividend growth
model?
A. D1
B. D1/P0
C. P0
D. g
E. g/P0
57. Which one of the following rights is never directly granted to all shareholders of a publicly-
held corporation?
A. electing the board of directors
B. receiving a distribution of company profits
C. voting either for or against a proposed merger or acquisition
D. determining the amount of the dividend to be paid per share
E. having the first chance to purchase any new equity shares that may be offered
58. Hardy Lumber has a capital structure which includes bonds, preferred stock, and common
stock. Which of the following rights has most likely been granted to the preferred
shareholders?
I. right to share in company profits prior to other shareholders
II. right to elect the corporate directors
III. right to vote on proposed mergers
IV. right to all residual income after the common dividends have been paid
A. I only
B. I and III only
C. I and IV only
D. II, III, and IV only
59. Which one of the following transactions occurs in the primary market?
A. purchase of 500 shares of GE stock from a current shareholder
B. gift of 100 shares of stock to a charitable organization
C. gift of 200 shares of stock by a mother to her daughter
D. a purchase of newly issued stock from AT&T
E. IBM's purchase of GE stock
60. Which statement about common stockholders is incorrect?

A. Common stockholders have a residual claim on the firm’s cash flows.
B. Common stockholders have first claim on the firm’s assets during bankruptcy
C. Common stockholders have a voting right.
D. Common stockholders are the ultimate owners of a corporation
E. They are all correct

61. Most preferred stocks have a feature that requires all past unpaid preferred dividend
payments to be paid before any common stock dividends can be paid. What is the name of
this feature?
A. participating
B. cumulative
C. provisional
D. convertible
E. assertive
62. If the intrinsic value of a stock is greater than its market value, which of the following is a
reasonable conclusion?
A. The stock has a low level of risk.
B. The stock offers a high dividend payout ratio.
C. The market is undervaluing the stock.
D. The market is overvaluing the stock
63. The Pancake House pays a constant annual dividend of $1.25 per share. How much are you
willing to pay for one share if you require a 15 percent rate of return?
A. $7.86
B. $8.33
C. $10.87
D. $11.04
E. $11.38
64. Healthy Foods just paid its annual dividend of RM1.45 a share. The firm recently
announced that all future dividends will be increased by 2.8 percent annually. What is one
share of this stock worth to you if you require a 14 percent rate of return?
A. RM12.56
B. RM12.95
C. RM13.31
D. RM13.68
E. RM14.07
65. Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid
annually at the end of the year. Determine the price of this issue if its return is 12%.
A. $3.25
B. $39
C. $12
D. $27.08
E. $16.43
66. The required return on equity security is comprised of a:

A. dividend yield and ROE
B. current yield and a terminal value

C. sustainable growth rate and a plow back yield
D. dividend yield and a capital gains yield
67. In a valuation of a nonconstant dividend growth stock, the terminal value represents the:
A. point at which the present value of future dividends equals zero.
B. maturity date of the stock
C. present value of future dividends from that point on
D. highest value that the stock will attain
68. The expected rate of return on a share of common stock whose dividends are growing at a
constant rate (g) is which of the following, where D1 is the next dividend and Vc is the
current value of the stock?
A. (D1 + g)/Vc
B. D1/Vc + g
C. D1/g
D. D1/g + Vc
69. The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay
$1.35 per share next year when the annual dividend is distributed. The firm has established
a pattern of increasing its dividends by 3 percent annually and expects to continue doing
so. What is the market rate of return on this stock?
A. 7.42 percent
B. 7.79 percent
C. 19.67 percent
D. 20.14 percent
E. 20.86 percent
70. Sessler Manufacturers made two announcements concerning its common stock today. First,
the company announced that the next annual dividend will be $1.75 a share. Secondly, all
dividends after that will decrease by 1.5 percent annually. What is the maximum amount
you should pay to purchase a share of this stock today if you require a 14 percent rate of
return?
A. $11.29
B. $12.64
C. $13.27
D. $14.00
E. $14.21
71. Show Boat Dinner Theatres has paid annual dividends of $0.32, $0.48, and $0.60 a share
over the past three years, respectively. The company now predicts that it will maintain a
constant dividend since its business has levelled off and sales are expected to remain
relatively flat. Given the lack of future growth, you will only buy this stock if you can earn
at least a 16 percent rate of return. What is the maximum amount you are willing to pay for
one share of this stock today?

A. $3.43
B. $3.75
C. $4.43
D. $4.69
E. $4.82
72. The Bell Weather Company is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 20% a year for the next four years and then
decreasing the growth rate to 5% per year. The company just paid its annual dividend of $1
per share. What is the current value of one share if the required rate of return is 9.25%?
A. $7.86
B. $18.33
C. $32.87
D. $41.5
E. $11.38

Capital Budgeting
73. What is capital budgeting?

A. Budgeting for capital expenditures
B. Budgeting for operational expenses
C. Budgeting for marketing activities
D. Budgeting for employee salaries
74. Which of the following is not a capital budgeting technique?

A. Payback period
B. Net present value (NPV)
C. Return on investment (ROI)
D. Debt-to-equity ratio
75. The payback period is the time it takes to:

A. Recover the initial investment
B. Achieve a positive net present value
C. Calculate the internal rate of return
D. Estimate the future cash flows
76. The net present value (NPV) method is based on the principle of:
A. Time value of money
B. Profitability index
C. Accounting rate of return
D. Opportunity cost
77. The modified internal rate of return (MIRR) method addresses a drawback of the IRR
method by:
A. Incorporating the time value of money
B. Including all cash flows in the calculation
C. Considering the profitability index
D. Adjusting for unequal project durations
78. The profitability index is a ratio of:

A. Present value of cash inflows to the present value of cash outflows
B. Net income to the initial investment
C. Net present value to the accounting rate of return
D. Payback period to the net present value
79. The discount rate used in the net present value (NPV) method is often referred to as the:
A. Risk-free rate
B. Required rate of return

C. Accounting rate of return
D. Profitability index
80. The length of time a firm must wait to recoup the money it has invested in a project is called
the:
A. internal return period.
B. payback period.
C. profitability period.
D. discounted cash period.
E. valuation period.
81. The internal rate of return is defined as the:

A. the maximum rate of return a firm expects to earn on a project.
B. rate of return a project will generate if the project is financed solely with internal funds.
C. the discount rate that equates the net cash inflows of a project to zero.
D. the discount rate which causes the net present value of a project to equal zero.
E. the discount rate that causes the profitability index for a project to equal zero
82. You are viewing a graph that plots the NPVs of a project to various discount rates that could
be applied to the project's cash flows. What is the name given to this graph?
A. project tract
B. projected risk profile
C. NPV profile
D. NPV route
E. present value sequence
83. If a firm accepts Project A it will not be feasible to also accept Project B because both
projects would require the simultaneous and exclusive use of the same piece of machinery.
These projects are considered to be:
A. independent.
B. interdependent.
C. mutually exclusive.
D. economically scaled.
E. operationally distinct
84. The present value of an investment's future cash flows divided by the initial cost of the
investment is called the:
A. net present value.
B. internal rate of return.
C. average accounting return.
D. profitability index.
E. profile period

85. A project has a net present value of zero. Which one of the following best describes this
project?
A. The project has a 0% rate of return.
B. The project requires no initial cash investment.
C. The project has no cash flows.
D. The summation of all of the project's cash flows is zero.
E. The project's cash inflows equal its cash outflows in current dollar terms
86. Which one of the following will decrease the net present value of a project?
A. increasing the value of each of the project's discounted cash inflows
B. moving each of the cash inflows back to a later period
C. decreasing the required discount rate
D. increasing the project's initial cost at time zero
87. Which one of the following methods determines the amount of change a proposed project
will have on the value of a firm?
A. net present value
B. discounted payback
C. internal rate of return
D. profitability index
E. payback
88. If a project has a net present value equal to zero, then:

A. the project earns a return exactly equal to the discount rate.
B. a decrease in the project's initial cost will cause the project to have a negative NPV.
C. any delay in receiving the projected cash inflows will cause the project to have a
positive NPV.
D. the project's PI must also be equal to 1
89. Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the
project ends, those assets are expected to have an after-tax salvage value of $45,000. How
is the $45,000 salvage value handled when computing the net present value of the project?
A. reduction in the cash outflow at time zero
B. cash inflow in the final year of the project
C. cash inflow for the year following the final year of the project
D. cash inflow prorated over the life of the project
E. not included in the net present value
90. Samuelson Electronics has a required payback period of three years for all of its projects.
Currently, the firm is analyzing two independent projects. Project A has an expected
payback period of 2.8 years and a net present value of $6,800. Project B has an expected
payback period of 3.1 years with a net present value of $28,400. Which projects should be
accepted based on the payback decision rule?
A. Project A only

B. Project B only
C. Both A and B
D. Neither A nor B
E. The answer cannot be determined based on the information given
91. A project has a required payback period of three years. Which one of the following
statements is correct concerning the payback analysis of this project?
A. The cash flows in each of the three years must exceed one-third of the project's initial
cost if the project is to be accepted.
B. The cash flow in year three is ignored.
C. The project's cash flow in year three is discounted by a factor of (1 + R)3.
D. The cash flow in year two is valued just as highly as the cash flow in year one.
E. The project is acceptable whenever the payback period exceeds three years
92. Which one of the following is an advantage of the average accounting return method of
analysis?
A. easy availability of information needed for the computation
B. inclusion of time value of money considerations
C. the use of a cutoff rate as a benchmark
D. the use of pre-tax income in the computation
E. use of real, versus nominal, average income
93. Which of the following are considered weaknesses in the average accounting return method
of project analysis?
I. exclusion of time value of money considerations
II. need for a cut-off rate
III. easily obtainable information for computation
IV. based on accounting values
A. I only
B. I and IV only
C. II and III only
94. Roger's Meat Market is considering two independent projects. The profitability index
decision rule indicates that both projects should be accepted. This result most likely does
which one of the following?
A. conflicts with the results of the net present value decision rule
B. assumes the firm has sufficient funds to undertake both projects
C. agrees with the decision that would also apply if the projects were mutually exclusive
D. bases the accept/reject decision on the same variables as the average accounting return
E. fails to provide useful information as the firm must reject at least one of the projects

95. Mutually exclusive projects are best defined as competing projects which:
A. would commence on the same day.
B. have the same initial start-up costs.
C. both require the total use of the same limited resource.
D. both have negative cash outflows at time zero.
E. have the same lifespan
96. Which two methods of project analysis are the most biased towards short-term projects?
A. net present value and internal rate of return
B. internal rate of return and profitability index
C. payback and discounted payback
D. net present value and discounted payback
E. discounted payback and profitability index
97. It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a year
for three years. After three years, the cart is expected to be worthless as the expected life of
the refrigeration unit is only three years. What is the payback period?
A. 1.48 years
B. 1.67 years
C. 1.82 years
D. 1.95 years
E. 2.00 years
98. You are considering a project with an initial cost of $7,800. What is the payback period for
this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next
four years, respectively?
A. 3.21 years
B. 3.28 years
C. 3.36 years
D. 4.21 years
E. 4.29 years
99. A project produces annual net income of $46,200, $51,800, and $62,900 over its 3-year
life, respectively. The initial cost of the project is $675,000. This cost is depreciated
straight-line to a zero book value over three years. What is the average accounting rate of
return if the required discount rate is 14.5%?
A. 15.89%
B. 16.67%
C. 18.98%
D. 20.25%
E. 23.84%

100. An investment project has an installed cost of $518,297. The cash flows over the 4-year
life of the investment are projected to be $287,636, $203,496, $103,802, and $92,556,
respectively. What is the NPV of this project if the discount rate is 0%?
A. $47,306
B. $72,418
C. $91,110
D. $128,415
E. $169,193
101. The length of time a firm must wait to recoup, in present value terms, the money it has
invested in a project is referred to as the:
A. net present value period.
B. internal return period.
C. payback period.
D. discounted profitability period.
E. discounted payback period
102. A project's average net income divided by its average book value is referred to as the
project's average:
C. accounting rate of return.
E. payback period
103. Which one of the following increases the net present value of a project?
A. an increase in the required rate of return
B. an increase in the initial capital requirement
C. a deferment of some cash inflows until a later year
D. an increase in the after-tax salvage value of the fixed assets
E. a reduction in the final cash inflow
104. Applying the discounted payback decision rule to all projects may cause:
A. some positive net present value projects to be rejected.
B. the most liquid projects to be rejected in favour of the less liquid projects.
C. projects to be incorrectly accepted due to ignoring the time value of money.
D. a firm to become more long-term focused.
E. some projects to be accepted which would otherwise be rejected under the payback rule.
105. Which of the following statements related to the internal rate of return (IRR) are
correct?
I. The IRR method of analysis can be adapted to handle non-conventional cash flows.
II. The IRR that causes the net present value of the differences between two project's cash
flows to equal zero is called the crossover rate.

III. The IRR tends to be used more than net present value simply because its results are
easier to comprehend.
IV. Both the timing and the amount of a project's cash flows affect the value of the project's
IRR.
A. I and II only
B. III and IV only
C. I, II, and III only
D. II and IV only
106. When the present value of the cash inflows exceeds the initial cost of a project, then the
project should be:
A. accepted because the internal rate of return is positive.
B. accepted because the profitability index is greater than 1.
C. accepted because the profitability index is negative.
D. rejected because the internal rate of return is negative.
E. rejected because the net present value is negative.
107. What is the net present value of a project with the following cash flows if the required
rate of return is 12%?
Year Cashflow
0 -$42,398
1 13,407
2 21,219
3 17,800
A. -$1,574.41
B. -$1,208.19
C. -$842.12
D. $729.09
E. $1,311.16
108. What is the net present value of a project that has an initial cash outflow of $34,900 and
the following cash inflows? The required return is 15.35%.
Year Cashflow
1 $12,500
2 19,700
3 0
4 10,400

A. A-$3,383.25
B. -$2,784.62
C. -$2,481.53
D. $52,311.08
E. $66,416.75
109. An investment project provides cash flows of $1,190 per year for 10 years. If the initial
cost is $8,000, what is the payback period?
A. 3.36 years
B. 5.28 years
C. 6.72 years
D. 8.13 years
E. never
110. You are considering the following two mutually exclusive projects. The required rate
of return is 14.6% for Project A and 13.8% for Project B. Which project should you accept
and why?
Year Project A Project B

0 -$50,000 -$50,000
1 24,800 41,000
2 36,200 20,000
3 21,000 10,000
A. project A; because it has the higher required rate of return

B. project A; because its NPV is about $4,900 more than the NPV of Project B
C. project B; because it has the largest total cash inflow
D. project B; because it has the largest cash inflow in year one
E. project B; because it has the lower required return
111. Based on the profitability index rule, should a project with the following cash flows be
accepted if the discount rate is 14%? Why or why not?
Year Project A
0 -$26,200
1 11,800
2 0
3 24,900
A. Yes; The PI is 0.96.

B. Yes; The PI is 1.04.
C. Yes; The PI is 1.08.
D. No; The PI is 0.96.

E. No; The PI is 1.04.
112. Which capital budgeting technique ignores the time value of money?
A. Payback period
B. Net present value (NPV)
C. Internal rate of return (IRR)
D. Profitability index
113. A profitability index of less than 1 indicates that the project is:
A. Profitable
B. Risky
C. Not financially viable
D. Value-adding
114. The internal rate of return (IRR) is the discount rate that:
A. Equates the present value of cash inflows to the present value of cash outflows
B. Minimizes the payback period
C. Maximizes the accounting rate of return
D. Maximizes the profitability index
115. The payback period method is criticized for ignoring:

A. Risk associated with the project
B. Cash flows after the payback period
C. Time value of money
D. All of the above

RISK AND RETURN
116. This type of risk is avoidable through proper diversification.

A. portfolio risk
B. systematic risk
C. unsystematic risk
D. total risk
117. A statistical measure of the degree to which two variables (e.g., securities' returns) move
together.
A. coefficient of variation
B. variance
C. covariance
D. certainty equivalent
118. An "aggressive" common stock would have a "beta"

A. equal to zero.
B. greater than one.
C. equal to one.
D. less than one
119. According to the Capital Asset Pricing Model (CAPM), a security's expected (required)
return is equal to the risk-free rate plus a premium
A. equal to the security's beta.
B. based on the unsystematic risk of the security.
C. based on the total risk of the security.
D. based on the systematic risk of the security.
120. The risk-free security has a beta equal to ……, while the market portfolio's beta is
equal to ……...
A. one; more than one.
B. one; less than one.
C. zero; one.
D. less than zero; more than zero.
121. A measure of "risk per unit of expected return."

A. standard deviation
B. coefficient of variation
C. correlation coefficient
D. Beta
122. The greater the Beta, the ……………. of the security involved.

A. greater the unavoidable risk
B. greater the avoidable risk
C. less the unavoidable risk
D. less the avoidable risk
123. Plaid Pants, Inc.'s common stock has a Beta of 0.90, while Acme Dynamite Company's
common stock has a Beta of 1.80. The expected return on the market is 10 percent, and the
risk-free rate is 6 percent. According to the Capital Asset Pricing Model (CAPM) and
making use of the information above, the required return on Plaid Pants' common stock
should be …….., and the required return on Acme's common stock should be …….
A. 3.6 percent; 7.2 percent
B. 9.6 percent; 13.2 percent
C. 9.0 percent; 18.0 percent
D. 14.0 percent; 23.0 percent
124. Which of the following is an example of systematic risk?

A. BHP Billiton posts lower-than-expected earnings.
B. Woolworths announces record earnings.
C. The government raises interest rates unexpectedly.
D. Coca-Cola announces higher than expected earnings
125. Investors can eliminate what type of risk by diversifying ………

A. Systematic risk
B. Unsystematic risk
C. Beta risk
D. Total risk
126. What is the expected rate of return on investment with the following details?
Probability = 15%; Return = -5%
Probability = 20%; Return = 10%
A. 15.4%
B. 14.5%
C. 15.5%
D. 16%
127. Below are all types of returns except:

A. Actual return
B. Expected return
C. Possible return
D. Required return
128. Which of the following statements about risk is TRUE?

A. Risk is about how uncertain your returns could be.
B. Risk is about how much money you can lose.
C. A risky asset is more likely to deliver a higher return than a less risky asset.
D. If an asset's risk increases, its price will also increase.
129. From the probability distribution provided below, the expected return of the asset is
closest to:
State Return Probability
1 -10% 20%
2 10% 50%
3 20% 30%
A. A.9%
B. 6.7%
C. 10%
D. 20%
130. Investment A has an expected return of 15% per year, while Investment B has an
expected return of 12% per year. A rational investor will choose
A. Investment A because of the higher expected return.
B. Investment B because a lower return means lower risk.
C. Investment A, if A and B are of equal risk.
D. Investment A only if the standard deviation of returns for A is higher than the standard
deviation of returns for B.
131. You are considering investing in Ford Motor Company. Which of the following are
examples of diversifiable risk?
I. Risk resulting from the possibility of a stock market crash.
II. Risk resulting from uncertainty regarding a possible strike against Ford.
III. Risk resulting from an expensive recall of a Ford product.
IV. Risk resulting from interest rates decreasing.
A. I only
B. I and IV
C. I, II, III, IV
D. II, III
132. The wider the dispersion of returns on a stock, the:

A. lower the expected rate of return
B. higher the standard deviation
C. lower the real rate of return
D. lower the variance

133. A stock is expected to return 11% in a normal economy, 19% if the economy booms,
and lose 8% if the economy moves into a recessionary period. Economists predict a 65%
chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession.
What is the expected return on the stock?
A. 11.10%
B. 12.06%
C. 11.98%
D. 11.23%
134. What risk does the standard deviation measure?

A. Specific
B. Market
C. Total
D. It doesn't - it measures return, not risk
135. Between 1990 and 2000, the standard deviation of the returns for the NIKKEI and the
DJIA indexes were 0.18 and 0.16, respectively, and the covariance of these index returns
was 0.003. What was the correlation coefficient between the two market indicators?
A. 9.6
B. 0.0187
C. 0.1042
D. 0.0166
136. What is the expected return of the three-stock portfolio described below?
Common Stock Market Value Expected Return

Ando Inc. 95,000 12.0%
Bee Co. 32,000 8.75%
Cool Inc. 65,000 17.7%
A. 18.45%
B. 12.82%
C. 13.39%
D. 15.27%
137. The positive square root of the variance is called the:

A. standard deviation
B. means.
C. probability range.
D. alpha.
138. A portfolio is a(n):

A. type of risk-free asset.
B. security that has a beta equal to the market beta.

C. asset that has a beta greater than 1.0.
D. group of assets held by an investor.
139. Systematic risk is:

A. a risk that affects a large number of assets.
B. the total risk inherent in an individual security.
C. also called diversifiable risk.
D. also called asset-specific risk.
140. Unsystematic risk:

I. is also called unique risk.
II. is also called asset-specific risk.
III. affects a limited number of assets.
IV. affects a large number of assets.
A. I and III only
B. II and IV only
C. I and IV only
D. I, II, and III only
141. The concept of investing in a variety of diverse assets to reduce risk is referred to as:
A. beta measuring.
B. split investing.
C. the principle of diversification.
D. the principle of elimination.
142. The goal of diversification is to eliminate:

A. all investment risk.
B. the market risk premium.
C. systematic risk.
D. unsystematic risk.
143. Diversifying a portfolio across various sectors and industries will tend to:
A. reduce the beta of the portfolio to zero.
B. increase the security's risk premium.
C. eliminate the market risk.
D. reduce the firm-specific risk.
144. Between 1980 and 1990, the standard deviation of the returns for the NIKKEI and the
DJIA indexes were 0.19 and 0.06, respectively, and the covariance of these index returns
was 0.0014. What was the correlation coefficient between the two market indicators?
A. 8.1428
B. 0.0233
C. 0.0073
D. 0.1228

Use the following information for the next two problems
Asset (A) Asset (B)
E(RA) = 25% E(RB) = 15%
(σA) = 18% (σB) = 11%
WA = 0.75 WB = 0.25
COVA,B = -0.0009
145. What is the expected return of a portfolio of two risky assets if the expected return
E(Ri), standard deviation (σi), covariance (COVi,j), and asset weight (Wi) are as shown
above?
A. 18.64%
B. 20.0%
C. 22.5%
D. 13.65%
146. What is the standard deviation of this portfolio?

A. 18.64%
B. 20.0%
C. 22.5%
D. 13.65%
Use the following information for the next two problems

Asset 1 Asset 2
E(R1) = .12 E(R2) = .16
E(σ1) = .04 E(σ2) = .06
147. Calculate the expected return and expected standard deviation of a two-stock portfolio
when r1,2 = - .60 and w1 = .75.
A. .13 and .024
B. .13 and .0455
C. .12 and .0585
D. .12 and .5585
148. Calculate the expected returns and expected standard deviations of a two-stock portfolio
when r1,2 = .80 and w1 = .60.
A. .144 and .0002
B. .144 and .0018
C. .136 and .0045
D. .136 and .0455
149. The ……………. is a line drawn on a chart that serves as a graphical representation
of the capital asset pricing model (CAPM)
A. Capital Market Line

B. Security Market Line
C. Beta Line
D. Coefficient of Variation Statistic
150. The ………… represents portfolios that optimally combine risk and return
A. Capital Market Line
B. Security Market Line
C. Beta Line
D. Coefficient of Variation Statistic

MERGERS & ACQUISITIONS
151. An acquisition is different from a merger because:

A. An acquisition involves a hostile takeover, while a merger is a friendly deal
B. In an acquisition, only one company survives, while a merger results in a new
entity (Correct)
C. The terms "acquisition" and "merger" are used interchangeably
D. In an acquisition, both companies cease to exist
152. Which of the following is NOT a common motive for a merger or acquisition?
A. Diversification
B. Tax avoidance
C. Financial distress (Correct)
D. Synergy
153. A horizontal merger involves the combination of companies that:

A. Operate in the same industry and at the same production stage (Correct)
B. Operate in different industries
C. Are located in different countries
D. Have no strategic fit
154. A merger between a car manufacturer and an electric vehicle battery producer is an
example of what type of merger?
A. Vertical merger (Correct)
B. Conglomerate merger
C. Congeneric merger
D. Market extension merger
155. When one company acquires another by purchasing its shares directly from the target's
shareholders, it is called:
A. A tender offer
B. A friendly takeover
C. A stock swap
D. A hostile acquisition (Correct)
156. What is a leveraged buyout (LBO)?

A. A buyout where the acquiring company uses significant debt to finance the
acquisition (Correct)
B. A buyout that involves the issuance of new shares to the target's shareholders
C. A buyout that takes place in a highly competitive market
D. A buyout where the target company acquires the acquiring company

157. A merger between two companies that have similar products but serve different markets
is an example of a:
A. Conglomerate merger
B. Market extension merger (Correct)
C. Vertical merger
D. Horizontal merger
158. The golden parachute in an acquisition refers to:

A. A lucrative deal offered to the target company's employees
B. A financial compensation package for key executives if there is a change in
control (Correct)
C. A clause in the acquisition agreement to terminate the deal
D. The premium paid for the target company's shares
159. Which of the following statements about synergies in mergers and acquisitions is true?
A. Synergies always lead to a decrease in shareholder value
B. Synergies are most commonly achieved through operational inefficiencies
C. Synergies can be either revenue-enhancing or cost-saving (Correct)
D. Synergies are irrelevant for the success of a merger
160. In a horizontal merger, the main aim is to:

A. Achieve economies of scale and cost savings (Correct)
B. Diversify the business portfolio
C. Gain access to new technologies
D. Enter a new market segment
161. Which of the following is a common antitrust concern related to mergers?

A. Decreased market competition
B. Higher stock prices for shareholders
C. Enhanced product innovation
D. Monopoly power (Correct)
162. In a friendly merger, the acquiring company typically offers:

A. A higher purchase price than the target company's market value
B. A portion of its stock as payment (Correct)
C. Only cash as payment
D. No premium to the target company's shareholders
163. What is a reverse merger?

A. A merger where the acquiring company is smaller than the target company
B. A merger where the target company acquires the acquiring company
C. A merger that involves two companies of equal size
D. A merger where a private company acquires a publicly listed company
(Correct)

164. Which financial statement is crucial for conducting due diligence in an acquisition?
A. Balance sheet
B. Income statement
C. Cash flow statement (Correct)
D. Statement of retained earnings
165. In a tender offer, the acquiring company:

A. Offers to purchase shares from the target company's employees
B. Invites the target company's shareholders to submit their shares at a specified
price (Correct)
C. Proposes a merger directly to the target company's board of directors
D. Engages in hostile actions to acquire the target company
166. In a merger or acquisition, the letter of intent (LOI) is:

A. The legal document that finalizes the deal
B. The initial offer made by the acquiring company to the target company
C. The announcement of the merger to the public
D. A non-binding agreement that outlines the key terms of the deal (Correct)
167. What is the main advantage of a cash acquisition for the target company's shareholders?
A. Reduced tax implications
B. More potential for future growth
C. Immediate liquidity (Correct)
D. Retained ownership in the merged entity
168. The "poison pill" defence is a strategy used by the target company to:
A. Increase the offer price of the acquiring company
B. Issue more shares to existing shareholders
C. Make the acquisition prohibitively expensive (Correct)
D. Pay a large dividend to shareholders
Which type of merger can lead to diversification for the acquiring company?
A. Horizontal merger
B. Vertical merger
C. Conglomerate merger (Correct)
D. Market extension merger
169. A synergy is achieved when the combined value of two merging companies is:
A. Equal to the sum of their individual values
B. Less than the sum of their individual values
C. More than the sum of their individual values (Correct)
D. Irrelevant to the overall value of the merged entity

170. What is a stock swap in a merger or acquisition?
A. A transaction in which both companies exchange a portion of their shares to
complete the deal (Correct)
B. A transaction where the acquiring company pays cash to the target company's
shareholders
C. A transaction where the acquiring company issues new shares to finance the
acquisition
D. A transaction that involves a hostile takeover
171. The integration process after a merger or acquisition involves:

A. Selling off non-core assets
B. Streamlining operations and combining the two entities (Correct)
C. Keeping the two entities completely separate
D. Paying off all debts of the target company
172. Which of the following is a disadvantage of a merger?

A. Enhanced competitive position
B. Increased market share
C. Cultural integration challenges (Correct)
D. Improved economies of scale
173. A merger between a pharmaceutical company and a research and development firm is
an example of what type of merger?
A. Market extension merger
B. Vertical merger
C. Congeneric merger (Correct)
D. Conglomerate merger
174. Which of the following factors can impact the success of a merger or acquisition?
A. Industry trends and economic conditions
B. Regulatory environment
C. Cultural alignment and integration (Correct)
D. All of the above
175. What is the primary concern for regulators when reviewing an acquisition?
A. Profitability of the acquiring company
B. Impact on market competition (Correct)
C. Ability to create synergies
D. Potential cost savings for the target company
176. Which type of synergy is most likely to result in cost-saving opportunities for the
merged entity?
A. Revenue synergy
B. Financial synergy

C. Operational synergy (Correct)
D. Cultural synergy
177. What is the main advantage of a cash acquisition for the target company's shareholders?
A. Reduced tax implications
B. More potential for future growth
C. Immediate liquidity (Correct)
D. Retained ownership in the merged entity
178. If one company takes over another company (the purchase of one company by another)
and establishes itself as the new owner (no new company is formed) what is type of the
corporate's strategy?
A. joint venture
B. merger
C. acquisition
D. new opening
179. Occurs when a firm acquires former suppliers or customers

A. Horizontal Merger
B. Vertical Merger
C. Product Extension Merger
D. Market Extension Merger
180. The acquisition of a former competitor

A. Vertical Merger
B. Horizontal Merger
C. Market Extension Merger
D. Conglomerate Merger
181. Firms use defensive tactics to fight off undesired mergers. These tactics include
A. Raising antitrust issues.
B. Taking poison pills.
C. Getting a white knight to bid for the firm.
D. Repurchasing their own stock.
E. All of the statements above are correct.
182. Which of the following statements concerning mergers is most correct?

A. A conglomerate merger is a merger of firms in the same general industry, but for which
no customer or supplier relationship exists.
B. A horizontal merger is a combination of two firms that produce the same type of
good or service.
C. A congeneric merger is a merger of companies in totally different industries.
D. Statements a and c are correct.
E. None of the statements above is correct.

183. Which of the following actions assist managers in defending against a hostile takeover?
A. Establishing a poison pill provision.
B. Granting lucrative golden parachutes to senior managers.
C. Establishing a super-majority provision in the company’s bylaws that raises the
percentage of the board of directors that must approve an acquisition from 50
percent to 75 percent.
D. All of the statements above are correct.
E. None of the statements above is correct.
184. Which of the following statements is most correct?

A. A conglomerate merger occurs when a firm combines with another firm in the same
industry.
B. Regulations in the United States prohibit acquiring firms from using common stock
to purchase another firm.
C. Defensive mergers are designed to make a company less vulnerable to a
takeover.
D. Statements a and b are correct.
E. All of the statements above are correct
185. A firm engages in a(n) ________ when it purchases a second firm.

A. acquisition
B. joint venture
C. strategic alliance
D. equity alliance
186. When one firm acquires a(n) ________ of another firm, it has acquired enough of that
firm's assets so that the acquiring firm is able to make all the management and strategic
decisions in the target firm.
A. market stake
B. equity share
C. controlling share
D. equity stake
187. A(n) ________ acquisition occurs when the management of a target firm wants to be
acquired.
A. hostile
B. admirable
C. strategic
D. friendly
188. When a firm has not sold shares on the public stock market, it is known as
A. closely held.
B. privately held.

C. publicly traded.
D. a small cap stock.
189. The difference between the current market price of a target firm's shares and the price
a potential acquirer offers to pay for those shares is known as an
A. acquisition premium.
B. acquisition discount.
C. acquisition margin.
D. acquisition price.
190. When Sears and Kmart, two retail firms of relatively equal size in the United States,
agreed to combine their assets, this was an example of a(n)
A. joint venture.
B. acquisition.
C. merger.
D. equity agreement.
191. The price of each of a firm's shares multiplied by the number of shares outstanding
represents the firm's
A. total equity base.
B. current market value.
C. total market share.
D. current market share.
192. In an unrelated acquisition, if 5 firms are interested in acquiring a firm and each of the
bidding firms had a current market value of $30,000 while the current market value of the
target firm is $20,000, this acquisition is likely to generate economic profits of ________
for the acquiring firm.
A. $10,000
B. $20,000
C. $50,000
D. $0.00
193. If an electronics manufacturer were to acquire a chain of retail electronic stores to sell
its products, this would be an example of a ________ merger.
A. vertical
B. horizontal
C. market extension
D. product extension
194. If eBay were to acquire a smaller online auction company, this would be an example of
a ________ merger.
A. conglomerate
B. vertical

C. market extension
D. horizontal
195. In a ________ merger, firms acquire complementary products through their merger and
acquisition activities.
A. vertical
B. market extension
C. product extension
D. horizontal
196. When eBay acquired Baaze.com, an Indian auction firm, in order to enter the Indian
online auction market, this was an example of a ________ merger.
A. product extension
B. market extension
C. conglomerate
D. vertical
197. If there are no vertical, horizontal, product extension, or market extension links between
firms, the FTC defines the merger or acquisition activity between firms as a ________
merger.
A. conglomerate
B. vertical
C. horizontal
D. product extension
198. ________ economies are scale economies that occur when the physical processes inside
a firm are altered so that the same amounts of input produce a higher quantity of outputs.
A. Answer
B. Pecuniary
C. Diversification
D. Technical
E. Vertical
199. Which of the following is a source of diversification economies?

A. marketing
B. production
C. scheduling
D. portfolio management
200. ________ economies are achieved by the ability of firms to dictate prices by exerting
market power.
A. Pecuniary
B. Technical
C. Diversification

D. Production
E.
201. ________ economies are achieved by improving a firm's performance relative to its risk
attributes or lowering its risk attributes relative to its performance.
A. Technical
B. Diversification
C. Pecuniary
D. Market
202. Which of the following is a financial motivation for why bidding firms might want to
engage in merger and acquisition strategies?
A. to increase leverage opportunities
B. to capture economies of scale
C. to adopt more efficient production or organizational technology
D. to engage in vertical integration
203. Which one of the following is not one of the reasons that Jensen and Ruback listed as
to why bidding firms might want to engage in merger and acquisition strategies?
A. to reduce production or distribution costs
B. to gain market power in product markets
C. to expand individual managers' power within an organization
D. to eliminate inefficient target management
204. In a related acquisition, if there is one target firm and ten bidding firms, and the value
of each of the bidding firms as a stand-alone entity is $50,000 and the value of the target
firm as a stand-alone entity is $30,000, the market value of the combined entity will be
A. $0.00.
B. less than $80,000.
C. more than $80,000.
D. $80,000.
205. Wealthy individuals who provide capital to entrepreneurs to help them grow their
businesses are known as
A. business angels.
B. venture capitalists.
C. stockholders
D. CEOs.
206. ________ firms typically raise money from numerous smaller investors, which they
then invest in a portfolio of entrepreneurial firms.
A. Business angel
B. Venture capital
C. Closely held

D. Private equity
207. In a(n) ________, a firm, typically working with an investment banker, sells its equity
to the public at large.
A. FTC
B. merger
C. IPO
D. Acquisition
208. Entrepreneurs must rely on capital generated from their ongoing operations or
________ and debt capital provided by banks.
A. initial public offering
B. retained earnings
C. venture capital firms
D. operating budgets
209. Managers of bidding firms continue to engage in merger or acquisition strategies even
though they usually do not generate profits for bidding firms in order to
A. ensure survival.
B. improve firm reputation.
C. reduce agency problems.
D. reduce managerial hubris.
210. Which of the following actions should bidding firm managers take to help earn superior
performance in an acquisition strategy?
A. Share information with other bidders.
B. Delay the closing of the deal.
C. Avoid winning bidding wars.
D. Operate in competitive acquisition markets.
211. A thinly traded market is a market where

A. there are only a small number of buyers and sellers, where information about
opportunities in this market is not widely know, and where interests besides
purely maximizing the value of a firm can be important.
B. many firms are implementing acquisition strategies.
C. information about opportunities in this market is widely known.
D. the only important interest is to maximize the value of a firm.
212. To ensure that the owners of target firms appropriate whatever value is created by a
merger or acquisition, managers in these target firms should
A. create a thinly traded market for their firm.
B. seek information from bidders.
C. close the acquisition deal quickly.
D. limit the number of bidders involved in the bidding competition.

213. ________ is (are) a maneuver in which a target firm's management purchases any of
the target firm's stock owned by a bidder and does so for a price that is greater than the
current market value of that stock.
A. Standstill agreements
B. Poison pills
C. Shark repellents
D. Greenmail
214. Firms using ________ fend off an acquisition by taking over the firm or firms bidding
for them.
A. shark repellents
B. a crown jewel sale
C. the Pac Man defence
D. a golden parachute
215. A ________ is a compensation arrangement between a firm and its senior management
team that promises these individuals substantial cash payment if their firm is acquired and
they lose their jobs in the process.
A. white knight agreement
B. greenmail agreement
C. shark repellent
D. golden parachute
216. The most significant challenge in integrating bidding and target firms has to do with
A. accounting differences.
B. cultural differences.
C. operational differences.
D. logistic differences.
217. A ________ is another bidding firm that agrees to acquire a particular target in the place
of the original bidding firm.
A. golden parachute
B. greenmail
C. white knight
D. crown jewel
218. ________ include a variety of relatively minor corporate governance changes that, in
principle, are supposed to make it more difficult to acquire a target firm.
A. Shark repellents
B. White knights
C. Greenmail
D. Poison pills
219. Supermajority voting rules are an example of a

A. poison pill.
B. white knight.
C. golden parachute.
D. shark repellent.
220. ________ does not affect the wealth of target firm equity holders.
A. Blue Man defence
B. Pac Man defence
C. Golden parachute
D. Silver parachute
221. ________ is an example of an ineffective and inconsequential response with the idea
that sometimes a bidding firm is interested in just a few of the businesses currently being
operated by the target firm.
A. A Pac Man defence
B. A Blue Man defence
C. A crown jewel sale
D. A golden parachute defence
222. If Gillette's total market value on the day the deal was announced was $48.30 billion,
P&G's $57 billion offer would represent a(n)
A. 18% acquisition premium.
B. 82% acquisition discount.
C. 82% acquisition premium.
D. 18% acquisition discount.
223. Since both P&G and Gillette are consumer products firms, this acquisition is best
described as a
A. vertical merger.
B. horizontal merger.
C. market extension merger.
D. conglomerate merger.
224. If one of the reasons P&G acquired Gillette was to gain greater market power in key
industries, this would be an example of ________ economies.
A. technical
B. pecuniary
C. diversification
D. vertical

DIVIDEND POLICY
225. Dividend policy primarily deals with:

A. The company's capital structure
B. The company's investment decisions
C. The distribution of profits back to shareholders (Correct)
D. The management of the company's retained earnings
226. Which of the following is NOT a form of dividends?

A. Stock dividends
B. Cash dividends
C. Bonus shares
D. Loan repayment (Correct)
227. The dividend payout ratio is calculated as:

A. Dividends per share / Earnings per share (Correct)
B. Dividends per share / Market price per share
C. Earnings per share / Dividends per share
D. Market price per share / Dividends per share
228. The residual dividend policy involves:

A. Paying a fixed percentage of earnings as dividends
B. Retaining all earnings for reinvestment
C. Paying dividends only after all investment needs are met (Correct)
D. Distributing all earnings as dividends
229. The dividend irrelevance theory, proposed by Modigliani and Miller, assumes:
A. Perfect capital markets
B. No taxes
C. Rational investor behavior
D. All of the above (Correct)
230. A company that follows a stable dividend policy:

A. Changes its dividends frequently
B. Pays a consistent dividend per share (Correct)
C. Only pays dividends when it has excess cash
D. Never pays dividends
231. Stock dividends result in:

A. An increase in the company's cash
B. An increase in the company's liabilities

C. An increase in the company's stockholder's equity (Correct)
D. A decrease in the company's stockholder's equity
232. Which of the following would NOT be a reason for a company to adopt a low dividend
payout policy?
A. The company has high growth prospects
B. The company has high capital expenditure needs
C. The company's shareholders are primarily income-oriented (Correct)
D. The company has high financial leverage
233. A company declares a stock dividend to:

A. Distribute excess cash to shareholders
B. Increase the number of outstanding shares (Correct)
C. Increase the market price of the shares
D. Decrease the company's retained earnings
234. The "dividend clientele effect" suggests that:

A. All investors prefer companies that pay high dividends
B. The tax treatment of dividends is irrelevant for investors
C. Investors are indifferent about the company's dividend policy
D. Investors choose companies with the dividend policies that best meet their
needs (Correct)
235. A stock repurchase is essentially similar to a cash dividend because:

A. Both result in a decrease in the company's stockholder's equity
B. Both distribute cash back to shareholders (Correct)
C. Both increase the number of outstanding shares
D. Both require approval from the company's board of directors
236. Dividend yield is calculated as:

A. Dividends per share / Earnings per share
B. Dividends per share / Market price per share (Correct)
237. In the presence of taxes, a company may prefer stock repurchases over dividends
because:
A. Dividends are not tax-deductible
B. Stock repurchases are fully tax-deductible
C. Stock repurchases can result in lower tax liabilities for shareholders (Correct)
D. Stock repurchases increase the company's tax liabilities
238. The bird-in-hand theory suggests that investors:

A. Prefer capital gains over dividends

B. Are indifferent between dividends and capital gains
C. Prefer dividends over capital gains (Correct)
D. Prefer companies that retain all earnings
239. A company that has a dividend payout ratio of 100% essentially:

A. Retains all earnings for reinvestment
B. Pays out all earnings as dividends (Correct)
C. Does not have any earnings
D. Distributes all cash as dividends
240. The primary disadvantage of a high dividend payout policy is:

A. Lower returns for shareholders
B. Decreased stock price
C. Reduced funds available for growth (Correct)
D. Increased tax liabilities for the company
241. A stock split is similar to a stock dividend because both:

A. Increase the company's cash
B. Increase the number of outstanding shares (Correct)
C. Decrease the company's retained earnings
D. Require approval from the company's creditors
242. The signaling theory of dividends suggests that:

A. Dividends are irrelevant for a company's value
B. Companies can signal their future prospects through their dividend policies
(Correct)
C. Companies should always retain all earnings
D. Investors prefer lower dividends
243. Which of the following is NOT a key consideration when setting a dividend policy?
A. The company's growth prospects
B. The stability of the company's earnings
C. The current market price of the company's shares (Correct)
D. The tax treatment of dividends
244. The date on which a company finalizes the list of shareholders to receive dividends is
known as the:
A. Declaration date
B. Record date (Correct)
C. Ex-dividend date
D. Payment date
245. A company with a high degree of financial leverage is likely to:

A. Pay high dividends

B. Adopt a residual dividend policy
C. Have a low dividend payout ratio (Correct)
D. Distribute all earnings as dividends
246. Dividends are typically paid to shareholders on a:

A. Daily basis
B. Weekly basis
C. Monthly basis
D. Quarterly basis (Correct)
247. The "information content" or "signaling" effect of dividends refers to:

A. The message conveyed by a company's dividend policy about its future
earnings prospects (Correct)
B. The preference of investors for high dividend payments
C. The effect of dividends on a company's stock price
D. The tax implications of dividends for shareholders
248. Which of the following is a key disadvantage of stock dividends?

A. They decrease the company's retained earnings
B. They dilute the ownership interest of existing shareholders (Correct)
C. They require a cash outflow from the company
D. They increase the company's liabilities
249. In terms of dividend policy, a "dividend trap" refers to:

A. A company that consistently pays high dividends
B. A company with a high dividend yield and poor financial health (Correct)
C. A company that retains all earnings
D. A company that pays dividends irregularly
250. The "agency cost" theory of dividends suggests that high dividend payouts:
A. Can reduce potential conflicts of interest between shareholders and
management (Correct)
B. Increase the value of a company
C. Are irrelevant for a company's value
D. Always result in lower stock prices
251. A scrip dividend is essentially:

A. A cash dividend
B. A stock dividend
C. A promise to pay a future cash dividend (Correct)
D. A reduction in the dividend payout ratio
252. The date on which the stock price adjusts for the payment of a dividend is known as
the:

A. Declaration date
B. Record date
C. Ex-dividend date (Correct)
D. Payment date
253. The clientele effect refers to the idea that:

A. Investors prefer dividends over capital gains
B. Companies should cater to the preferences of their shareholders with regards
to dividend policy (Correct)
C. Companies with stable dividend policies are always preferred by investors
D. Dividend policy has no impact on a company's value
254. The Dividend Discount Model (DDM) is a valuation method that values a stock based
on:
A. The company's market capitalization
B. The company's dividend payout ratio
C. The present value of expected future dividends (Correct)
D. The company's earnings per share
255. The dividend capture strategy involves:

A. Buying stocks just before the ex-dividend date and selling them immediately after
the record date
B. Selling stocks just before the ex-dividend date and buying them immediately
after the record date (Correct)
C. Buying stocks just before the declaration date and selling them immediately after
the payment date
D. Selling stocks just before the declaration date and buying them immediately after
the payment date
256. A company that follows a zero-dividend policy:

A. Does not have any earnings
B. Retains all earnings for reinvestment
C. Pays no dividends (Correct)
D. Pays dividends inconsistently
257. Which of the following dividend policies is most likely to appeal to income-oriented
investors?
A. Low-dividend payout policy
B. Stable-dividend policy (Correct)
C. Residual-dividend policy
D. Irregular-dividend policy
258. A stock buyback is an example of:

A. A cash dividend

B. A stock dividend
C. A stock repurchase (Correct)
D. A bonus share issuance
259. The tax treatment of dividends affects:

A. A company's dividend policy
B. A company's retained earnings
C. A shareholder's after-tax return (Correct)
D. The company's stock price
260. The Dividend Discount Model (DDM) is based on the assumption that dividends:
A. Are irrelevant for a company's value
B. Will grow at a constant rate indefinitely (Correct)
C. Will decrease over time
D. Will be paid out as a fixed percentage of earnings
261. A company with a low dividend payout ratio is likely to:

A. Have high financial leverage
B. Have a high dividend yield
C. Retain a large portion of earnings for growth (Correct)
D. Pay a high dividend
262. Which of the following factors would NOT typically affect a company's dividend
policy?
A. Interest rates
B. Industry growth rate
C. Company's historical dividend payments (Correct)
D. Company's profitability
263. The ex-dividend date is the date:

A. The company's board declares the dividend
B. Shareholders must be on record to receive the dividend (Correct)
C. The company's financial statements are finalized
D. The dividend is paid to shareholders
264. The residual dividend policy is also known as the:

A. Stable dividend policy
B. Low dividend policy
C. Hybrid dividend policy
D. Financing constraint dividend policy (Correct)
265. The clientele effect suggests that a company's dividend policy should be determined
based on:

A. Tax implications for shareholders
B. The preferences of its shareholders (Correct)
C. The company's retained earnings
D. The company's earnings per share
266. Which of the following is a reason for a company to repurchase its own shares?
A. To decrease the number of outstanding shares (Correct)
B. To increase the dividend payout ratio
C. To increase the number of shareholders
D. To distribute excess cash to shareholders
267. A company that follows a residual dividend policy is likely to pay:

A. A stable dividend per share
B. A high dividend per share
C. A low dividend per share
D. An irregular dividend per share (Correct)
268. Which of the following is NOT an argument in favor of paying dividends?

A. Dividends reduce agency costs
B. Dividends are a tax-efficient way to distribute cash to shareholders (Correct)
C. Dividends provide income to shareholders
D. Dividends signal a company's financial health
269. The Dividend Discount Model (DDM) is most appropriate for valuing:
A. Start-up companies with no earnings
B. Companies with irregular dividend payments
C. Mature companies with stable dividends (Correct)
D. Companies with high growth prospects
270. The dividend yield is calculated as:

A. Dividends per share / Market price per share (Correct)
B. Dividends per share / Earnings per share
271. A company with a low dividend payout ratio is likely to:

A. Have high financial leverage
B. Have a high dividend yield
C. Retain a large portion of earnings for growth (Correct)
D. Pay a high dividend
272. The payout ratio is calculated as:

A. Dividends per share / Market price per share
B. Dividends per share / Earnings per share (Correct)

CAPITAL STRUCTURE
273. What does capital structure refer to in finance?

A. The physical assets of a company
B. The mix of a company's long-term debt, preferred equity, and common equity
(Correct)
C. The daily financial operations of a company
D. The amount of cash held by a company
274. The combination of debt and equity used to finance a company's operations is known
as:
A. Capital budgeting
B. Working capital management
C. Capital structure (Correct)
D. Financial leverage
275. The optimal capital structure for a company is one that:

A. Minimizes the cost of debt
B. Maximizes the cost of equity
C. Minimizes the overall cost of capital (Correct)
D. Maximizes the financial leverage
276. The cost of debt is typically lower than the cost of equity because:
A. Debt is riskier for investors
B. Equity holders have voting rights
C. Equity has a lower priority in case of bankruptcy
277. The Modigliani-Miller theorem (1958) without taxes suggests that, in a perfect market,
the value of a company is:
A. Unaffected by its capital structure
B. Maximized when the company has no debt
C. Maximally leveraged
D. Minimized when the company has no equity
278. The Modigliani-Miller theorem (1958) with taxes suggests that:

A. A company should be maximally leveraged to benefit from tax shields
(Correct)
B. A company should avoid debt to reduce taxes

C. Taxes have no impact on the company's capital structure
D. Taxes reduce the value of a company
279. The process of raising capital by selling shares to public investors is known as:
A. Debt financing
B. Equity financing (Correct)
C. Internal financing
D. Hybrid financing
280. The concept of financial leverage refers to:

A. The use of debt to magnify returns to shareholders (Correct)
B. The use of equity to reduce financial risk
C. The use of assets to increase revenue
D. The use of cash to finance business operations
281. The debt-to-equity ratio measures:

A. The proportion of current assets to current liabilities
B. The proportion of debt relative to equity in a company's capital structure
(Correct)
C. The total assets of a company relative to its total liabilities
D. The market value of equity relative to the book value of equity
282. Which of the following statements is true regarding financial leverage?

A. Financial leverage only benefits common shareholders
B. Financial leverage reduces the risk of bankruptcy
C. Financial leverage magnifies both returns and risks to shareholders (Correct)
D. Financial leverage has no impact on a company's profitability
283. A company's capital structure is influenced by factors such as:

A. Industry characteristics
B. Economic conditions
C. Company size
D. All of the above (Correct)
284. The pecking order theory suggests that companies prefer to fund investments using:
A. Internal financing first, followed by equity, and finally debt (Correct)
B. Debt first, followed by equity, and finally internal financing
C. Equity first, followed by internal financing, and finally debt
D. Debt first, followed by internal financing, and finally equity
285. The term "WACC" stands for:

A. Weighted Average Cost of Capital (Correct)
B. Weighted Asset Cost of Capital
C. Working Asset Cost of Capital

D. Working Average Cost of Capital
286. The higher the financial leverage, the:

A. Lower the variability in earnings per share (EPS)
B. Higher the risk to shareholders (Correct)
C. Lower the return on equity (ROE)
D. Lower the cost of debt
287. The pecking order theory implies that companies prefer to issue securities:
A. In a predictable pattern over time
B. To maintain a stable capital structure
C. Based on the availability of internal funds (Correct)
D. To match the level of retained earnings
288. The trade-off theory of capital structure suggests that:

A. Companies should use only equity financing to minimize risk
B. There is an optimal level of debt that balances tax benefits with financial
distress costs (Correct)
C. Companies should avoid using equity financing due to high costs
D. The cost of debt is irrelevant in determining the capital structure
289. The static theory of capital structure focuses on:

A. Changes in a company's debt over time
B. The impact of financial leverage on a company's value
C. The determination of the optimal capital structure (Correct)
D. The factors influencing a company's financial leverage
290. In a leveraged recapitalization, a company:

A. Increases its equity capital by issuing new shares
B. Reduces its equity capital by repurchasing shares
C. Increases its debt while using the proceeds to repurchase shares (Correct)
D. Decreases its debt while using the proceeds to issue new shares
291. A high credit rating for a company is likely to result in:

A. Higher interest rates on debt
B. Lower interest rates on debt (Correct)
C. An increase in financial leverage
D. An increase in the cost of equity
292. The optimal capital structure for a company is one that:

A. Minimizes the cost of debt
B. Maximizes the cost of equity
C. Minimizes the overall cost of capital (Correct)
D. Maximizes the financial leverage

2021/2022 EXAMINATION QUESTIONS
1. This merger refers to two firms operating in same industry and producing identical products
combining.
A. Horizontal
B. Vertical
C. Conglomerate
D. Concentric
E. None of the above
2. ABC Ltd. acquired substantial number of equity shares in XYZ ltd. This is referred to as
a/an ………..
A. Merger
B. Acquisition
C. Amalgamation
D. Absorption
3. An acquirer offers to buy shares directly from the shareholders of the target firm. This is
known as
A. Poison pill
B. White knight
C. Tender offer
D. Direct Profit
E. Cash Merger
4. Which of the following is not an anti-takeover defence?

A. Poison pill
B. Golden parachute
C. Greenmail
D. Pac-Man defence
5. It refers to expected cost savings, growth opportunities and other financial benefits that
occur as a result of the combination of two companies
A. Value creation
B. Acceleration
C. Synergies
D. Speculation
6. Which of the following is not a benefit of synergy from merger?

A. Revenue enhancement

B. Cost reductions
C. Transfer of technology
D. No tax benefits
E. All the above
7. If an acquisition is made using cash payment, then the acquisition is:

A. Not taxable
B. Viewed as exchanging of shares and is not taxed
C. A tax-free transaction as no capital gains or losses are recognized
D. All the above
8. During mergers through stock acquisition,

A. No stockholder vote required
B. The acquirer can deal directly with stockholders, even if management is unfriendly
C. May be delayed if some target shareholders hold out for more money
D. All the above
9. All the following are dubious reasons for a merger, except

A. Bootstrapping
B. Diversification
C. Manager's personal incentives
D. Increasing market power
10. An offer made by one company to buy the shares of another for a much higher per-share
price than what that company is worth is referred to as
A. Bear Hug
B. White Squire
C. Crown Jewel
D. Golden Parachute
11. If PVAB = Value of the combined firm

PVA = Value of the Acquirer
PVB = Value of the Target firm
Which of the following best describes the gain from a merger?
A. Gain = (PVA+ PVB) - PVAB
B. Gain = PVAB - (PVA + PVB)
C. Gain = (PVA + PVB) + PVAB
D. Gain = (PVAB - PVA) + PVB
E. Gain = (PVAB + PVA) + PVB

12. All the following are merger-related activities of investment bankers, except?
A. Identifying targets
B. Arranging mergers
C. Developing defensive tactics
D. Establishing a fair value
13. ........... of a merger is the premium that the acquiring firm pays over and above the value of
the firm being acquired.
A. Economic Cost
B. Net Present Value
C. Gain
D. Synergy
E. Discount
14. Firm A has a value of GHS 100 million and Firm B has a value of GHS 70 million. If Firm
A acquires Firm B, the present value of the new firm, Firm AB, will be GHS 200 million.
Calculate the gain from the merger.
A. GHS 30 million
B. GHS 100 million
C. GHS 130 million
D. GHS 270 million
E. GHS 370 million
15. A/An ............... is a corporation formed for the sole purpose of owning the stocks of other
companies.
A. underwriter
B. angel investor
C. holding company
D. venture capitalist
16. Combination of computer system manufacturer with a UPS manufacturer is an example of

…………….. merger.
A. Horizontal
B. Vertical
C. Conglomerate
D. Concentric
17. All the following are methods of paying for a merger except
A. Cash
B. Securities
C. Combination of Cash and Securities

D. Promissory note
18. One year ago, you purchased a stock at a price of GHS 47.50 a share. Today, you sold the
stock and realized a total loss of 22.11 percent. Your capital gain was -GHS 12.70 a share.
What was your dividend yield?
A. 4.63 percent
B. 4.88 percent
C. 5.02 percent
D. 12.67 percent
E. 14.38 percent
19. A year ago, you purchased 400 shares of Stellar Wood Products, Inc. stock at a price of
GHS 8.62 per share. The stock pays an annual dividend of GHS 0.10 per share. Today, you
sold all of your shares for GHS 4.80 per share. What is your total dollar return on this
investment?
A. -GHS 382
B. -GHS 372
C. -GHS 1,528
D. -GHS 1,488
E. -GHS 1,360
20. One year ago, you purchased 500 shares of Best Wings, Inc. stock at a price of GHS 9.60
a share. The company pays an annual dividend of GHS 0.10 per share. Today, you sold all
of your shares for GHS 15.60 a share. What is your total percentage return on this
investment?
A. 38.46 percent
B. 39.10 percent
C. 39.72 percent
D. 62.50 percent
E. 63.54 percent
21. A stock had returns of 11 percent, -18 percent, -21 percent, 5 percent, and 34 percent over
the past five years. What is the standard deviation of these returns?
A. 18.74 percent
B. 20.21 percent
C. 20.68 percent
D. 22.60 percent
E. 23.49 percent
22. A stock had returns of 12 percent, 16 percent, 13 percent, 19 percent, 15 percent, and -6
percent over the last six years. What is the geometric average return on the stock for this
period?
A. 10.90 percent

B. 11.18 percent
C. 13.56 percent
D. 14.76 percent
E. 15.01 percent
23. Last year, T-bills returned 2 percent while your investment in large-company stocks earned
an average of 5 percent. Which one of the following terms refers to the difference between
these two rates of return?
A. risk premium
B. geometric return
C. arithmetic
D. standard deviation
E. variance
24. The expected return on a stock given various states of the economy is equal to the:
A. highest expected return given any economic state.
B. arithmetic average of the returns for each economic state.
C. summation of the individual expected rates of return.
D. weighted average of the returns for each economic state.
E. return for the economic state with the highest probability of occurrence.
25. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected
return of 8.7 percent. Stock A has an expected return of 11.4 percent while stock B is
expected to return 6.4 percent. What is the portfolio weight of stock A?
A. 39 percent
B. 46 percent
C. 54 percent
D. 61 percent
E. 67 percent
26. Which one of the following is an example of unsystematic risk?

A. income taxes are increased across the board
B. a national sales tax is adopted
C. inflation decreases at the national level
D. an increased feeling of prosperity is felt around the globe
E. consumer spending on entertainment decreased nationally
27. You want your portfolio beta to be 0.95. Currently, your portfolio consists of GHS 4,000
invested in stock A with a beta of 1.47 and GHS 3,000 in stock B with a beta of 0.54. You
have another GHS 9,000 to invest and want to divide it between an asset with a beta of 1.74
and a risk-free asset. How much should you invest in the risk-free asset?
A. GHS 4,316.08
B. GHS 4,425.29
C. GHS 4,902.29

D. GHS 4,574.71
E. GHS 4,683.92
28. According to CAPM, the amount of reward an investor receives for bearing the risk of an
individual security depends upon the:
A. amount of total risk assumed and the market risk premium.
B. market risk premium and the amount of systematic risk inherent in the security.
C. risk free rate, the market rate of return, and the standard deviation of the security.
D. beta of the security and the market rate of return.
E. standard deviation of the security and the risk-free rate of return.
29. The stand-alone principle advocates that project analysis should be based solely on which
one of the following costs?
A. sunk
B. total
C. variable
D. incremental
E. fixed
30. Which one of the following is an example of a sunk cost?

A. GHS 1,500 of lost sales because an item was out of stock
B. GHS 1,200 paid to repair a machine last year
C. GHS 20,000 project that must be forfeited if another project is accepted
D. GHS 4,500 reduction in current shoe sales if a store commences selling sandals
E. GHS 1 ,800 increase in comic book sales if a store commences selling puzzles
31. Which one of the following best illustrates erosion as it relates to a hot dog stand located
on the beach?
A. providing both ketchup and mustard for its customer's use
B. repairing the roof of the hot dog stand because of water damage
C. selling fewer hot dogs because hamburgers were added to the menu
D. offering French fries but not onion rings
E. losing sales due to bad weather
32. The top-down approach to computing the operating cash flow:

A. ignores noncash expenses.
B. applies only if a project increases sales.
C. applies only to cost cutting projects.
D. is equal to sales - costs - taxes + depreciation.
E. is used solely to compute a bid price.
33. Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is
being depreciated straight-line to zero over a 5-year period. Today, the project ended and

the machine was sold. Which one of the following correctly defines the after-tax salvage
value of that machine? (T represents the relevant tax rate)
A. Sale price + (Sales price - Book value) x T
B. Sale price + (Sales price - Book value) x (1 -T)
C. Sale price + (Book value - Sale price) x T
D. Sale price + (Book value - Sale price) x (1 - T)
E. Sale price x (1 - T)
34. Which one of the following best describes pro forma financial statements?
A. financial statements expressed in a foreign currency
B. financial statements where the assets are expressed as a percentage of total assets
and costs are expressed as a percentage of sales
C. financial statements showing projected values for future time periods
D. financial statements expressed in real dollars, given a stated base year
E. financial statements where all accounts are expressed as a percentage of last year's
values
35. The present value of an investment's future cash flows divided by the initial cost of the
investment is called the:
E. Cost-benefit ratio.
36. In evaluating independent projects using IRR, we accept a project ......

A. If IRR is less than cost of capital
B. If IRR is equal to the cost of capital
C. If IRR is equal to zero
D. IRR is greater than the cost of capital
E. only after comparing with the NPV.
37. The length of time a firm must wait to recoup, in present value terms, the money it has in
invested in a project is referred to as the:
A. Payback period.
B. net present value.
D. Discounted payback
E. internal rate of return.
38. If a project has a net present value equal to zero, then:

A. the total of the cash inflows must equal the initial cost of the project.
B. the project earns a return exactly equal to the discount rate.
C. a decrease in the project's initial cost will cause the project to have a negative NPV.

D. any delay in receiving the projected cash inflows will cause the project to have a
positive NPV.
E. the project's PI must also be equal to zero
39. Debright is considering a project that will produce cash inflows of GHS 2,100 a year for 4
years. The project has a 12 percent required rate of return and an initial cost of GHS 5,000.
What is the discounted payback period?
A. 2.97 years
B. 3.11 years
C. 3.26 years
D. 4.38 years
E. The project will never be paid off
40. You are the finance manager of NKHA Ltd with a budget of 70,000 for investments in the
year 2022. You are considering two mutually exclusive projects; Project A and Project B.
Your analysis indicates that Project A has an NPV of GHC 31,000 and B’s NPV is GHC
33,670. Your decision will be to ...........
A. Choose both project A & B
B. Choose Project B only
C. Choose Project A only
D. Base your decision on the IRR criteria
41. Greatdays Interiors is considering a project with the following cash flows. What is the IRR
of this project?
YEAR CASHFLOW
0 -GHS 114,600
1 35,900
2 50,000
3 45,000
A. 6.42%
B. 7.03%
C. 7.48%
D. 8.22%
E. 8.56%
Answer = 6.7%
42. Blacko Tech bought new machinery for GHC 5.6 million. This is expected to result in cash
flows of GHC 1 million over the next seven years. The payback period for this project is
……… If their acceptance period is five years, will this project be accepted?
A. 2.87 years; no
B. 5.60 years; yes
C. 2.87 years; yes

D. 5.60 years; no
E. 5 years; yes
43. Abby's Restaurant is analysing a project that requires GHS 180,000 of fixed assets. When
the project ends, those assets are expected to have an after-tax salvage value of GHS 45,000.
How is the GHS 45,000 salvage value handled when computing the net present value of
the project?
A. Deduct GHS 45,000 from the cash outflow at time zero
B. Add GHS 45,000 to cash inflow in the final year of the project
C. Add GHS 45,000 to cash inflow for the year following the final year of the project
D. The GHS 45,000 is treated as cash inflow prorated over the life of the project
E. The GHS 45,000 is not included in the net present value
44. A capital project will provide an annual cash flow GHC 3,000 for the next 5 years. If the
project cost GHC 9,000, which of the following statement is correct if the cost of capital is
10%?
A. The project has a payback period greater than 3 years and an NPV of GHC 2,372
B. The project has a payback period of 3 years and an NPV of GHC 0
C. The project has a payback period of 3 years and an NPV of -GHC 2,572
D. The project has a payback period of 3 years and an NPV of GHC 2,372
E. The project has a payback period less than 3 years and an NPV of -GHC 2,572
45. A company has just paid a dividend of GHC 2.50 per share on its common stock. The
company is expected to maintain a constant growth rate of 6% into the foreseeable future.
If the stock sells for GHC 50 a share, what is the company's cost of equity?
A. 12.46%
B. 8.56%
C. 11%
D. 11.3%
E. 6.5%
46. A company issued a 30 year, 8% GHC 1,000 bond 10 years ago. The bond is currently
selling at GHC 960. What is the company's cost of debt?
A. 8.4%
B. 12.12%
C. 9.2%
D. 13.33%
E. 8%
47. Stocks Pinnacle Holdings have a beta of 0.95. The market risk premium is 7.5% and
Treasury Bills are currently yielding 7%. What is the film's cost of equity?
A. 7.48%
B. 15.89%
C. 14.5%

D. 14.13%
E. 15.45%
48. The capital structure of ABC Ltd is made up of 60% equity and 40% debt. The cost of
equity and debt are 20% and 15% respectively. If the tax rate is 25%, the company's before
and after tax weighted average cost of capital are …….. and …….. respectively.
A. 13% and 17.5%
B. 18% and 35%
C. 35% and 60%
D. 18% and 16.5%
E. 35% and 16.5%
49. Holding all other things equal, as the relative amount of debt in the capital structure of the
firm increases, the cost of equity capital will
A. increase
B. decrease
C. remain the same
D. first increase and then decrease
E. cannot say
50. The theory that explains that a firm should borrow up to the point where the additional tax
benefit from an extra cedi of debt equals the additional costs associated with financial
distress from the additional debt?
A. M&M proposition II with taxation
B. Pecking order ·
C. Static trade-off theory
D. Benefit-cost theory
E. Traditional theory · .
51. A firm's business risk is largely determined by the financial characteristics of its industry,
especially by the amount of debt the average firm in the industry uses ………..
A. True
B. False
52. Financial risk refers to the extra risk stockholders bear as a result of using debt as compared
with the risk they would bear if no debt were used
A. True
B. False
53. Whenever a firm borrows money, it is using financial leverage

A. True
B. False
54. Business risk is not affected by increase in debt ratio

A. True
B. False
55. An increase in the debt ratio will not generally affect which of the following items?
A. Business Risk
B. Total Risk
C. Financial Risk
D. Market Risk
E. The firm's Beta
56. Which of the following events is likely to encourage a company to increase its target debt
ratio, all things being equal?
A. Increase in Corporate tax rate
B. Increase in Personal tax rate
C. Decrease in Corporate tax rate
D. Increase in Monetary Policy Rate
57. Which of the following states that the value of the firm is unrelated to its Capital Structure?
A. Capital Assets Pricing Model (CAPM)
B. M & M Proposition I
C. M & M Proposition II
D. Pecking order Theory .
58. Which of the following states that a firm's cost of equity is directly and proportionally
related to the firm's Capital Structure?
A. M & M Proposition I
B. M & M Proposition II
C. Capital Assets Pricing Model (CAPM)
D. Efficient Market Hypothesis
59. The unlevered cost of equity referred to cost of equity for a (an)
A. Private Firm
B. All-Equity Firm
C. Government Entity
D. Private Individual
60. The Optimal Capital Structure has been achieved when the
A. Debt-Equity Ratio is equal to 1
B. Weight of debt is equal to weight of equity
C. Cost of equity is maximized given a pre-tax cost of debt .
D. Debt-equity ratio results in the lowest possible weighted average cost of capital
ABC Company has a beta of 1.5 with the market value of its debt outstanding amounting
to be GHS 100m. The interest rate on its debt is 30% pa. The company has 1m in issued

shares and its currently trading at GHS 50 per share. The risk-free rate is 29% and the
market expects a return of 35%. ABC's marginal tax rate is 30%.
Use the information above to answer questions 61-63
61. What is ABC's after-tax cost of debt?

A. 21%
B. 22%
C. 23%
D. 29%
62. Calculate ABC's cost of Equity

A. 35%
B. 30%
C. 38%
D. 39%
63. What is ABC's weighted average cost of Capital (WACC)

A. 26.67%
B. 32.67%
C. 30.67%
D. 25.67%
64. The interest tax shield is a key reason why

A. the required rate of return on assets rises when debt is added to the capital structure
B. the value of an unlevered firm is equal to the value of a levered firm.
C. the net cost of debt to a firm is generally less than the cost of equity
D. the cost of debt is equal to the cost of equity for a levered firm
65. Based on M&M Proposition II with taxes, the weighted average cost of capital:
A. is equal to the after-tax cost of debt
B. has a linear relationship with the cost of equity capital
C. is unaffected by the tax rate
D. decreases as the debt-equity ratio increases
66. Which of the following is an example of cost of financial distress

A. Opportunity cost of not making optimal decisions
B. Inability to negotiate long-term supply contracts
C. Loss of customers
D. All of the above
67. Which of the following statements is CORRECT?

A. All else equal, long-term bonds have less interest rate price risk than short-term
bonds.

B. All else equal, low-coupon bonds have less interest rate price risk than high-coupon
bonds.
C. All else equal, short-term bonds have less reinvestment rate risk than long-term
bonds.
D. All else equal, long-term bonds have less reinvestment rate risk than short-term
bonds.
E. All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon
bonds.

A. Long-term bonds have less interest rate price risk but more reinvestment rate risk
than short-term bonds.
B. If interest rates increase, all bond prices will increase, but the increase will be
greater for bonds that have less interest rate risk.
C. Relative to a coupon-bearing bond with the same maturity, a zero-coupon bond has
more interest rate price risk but less reinvestment rate risk.
D. Long-term bonds have less interest rate price risk and also less reinvestment rate
risk than short-term bonds.
E. One advantage of a zero-coupon Treasury bond is that no one who owns the bond
has to pay any taxes on it until it matures or is sold.

A. If a 10-year, GHS 1,000 par, 10% coupon bond were issued at par, and if interest
rates then dropped to the point where rd = YTM = 5%, we could be sure that the
bond would sell at a premium above its GHS 1,000 par value.
B. Other things held constant; a corporation would rather issue noncallable bonds than
callable bonds.
C. Other things held constant; a callable bond would have a lower required rate of
return than a noncallable bond.
D. Reinvestment rate risk is worse from an investor's standpoint than interest rate price
risk if the investor has a short investment time horizon.
E. If a 10-year, GHS 1,000 par, zero coupon bond were issued at a price that gave
investors a 10% yield to maturity, and if interest rates then dropped to the point
where rd = YTM = 5%, the bond would sell at a premium over its GHS 1,000 par
value.

A. Liquidity premiums are generally higher on Treasury than corporate bonds.
B. The maturity premiums embedded in the interest rates on U.S. Treasury securities
are due primarily to the fact that the probability of default is higher on long-term
bonds than on short-term bonds.
C. Default risk premiums are generally lower on corporate than on Treasury bonds.
D. Reinvestment rate risk is lower, other things held constant, on long-term than on
short-term bonds.

E. lf the maturity risk premium were zero and interest rates were expected to decrease
in the future, then the yield curve for U.S. Treasury securities would, other things
held constant, have an upward slope.
71. FINC 2022 bonds currently sell for GHS 1,150. They have a 6-year maturity, an annual
coupon of GHS 85, and a par value of GHS 1,000. What is their current yield?
A. 7.39%
B. 7.76%
C. 8.15%
D. 8.56%
E. 8.98%
72. FINC 2022 bonds have an annual coupon payment of 7.25%. The bonds have a par value
of GHS 1,000, a current price of GHS 1,125, and they will mature in 13 years. What is the
yield to maturity on these bonds?
A. 5.56%
B. 5.85%
C. 6.14%
D. 6.45%
E. 6.77%
Answer = 5.92%
73. Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have
the same maturity, a face value of GHS 1,000, and an 8% yield to maturity. Which of the
following statements is CORRECT?
A. Bond A trades at a discount, whereas Bond B trades at a premium.
B. If the yield to maturity for both bonds remains at 8%, Bond A's price one year from
now will be higher than it is today, but Bond B's price one year from now will be
lower than it is today.
C. If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond
will have a larger percentage increase in value.
D. Bond A's current yield is greater than that of Bond B.
E. Bond A's capital gains yield is greater than Bond B's capital gains yield.
74. A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the
following statements is CORRECT?
A. The bond has a current yield greater than 8%.
B. The bond sells at a discount.
C. The bond's required rate of return is less than 7.5%.
D. If the yield to maturity remains constant, the price of the bond will decline over
time.
E. The bond sells at a price below par.

75. A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium.
Which of the following statements is CORRECT?
A. If the yield to maturity remains at 8%, then the bond’s price will decline over the
next year.
B. The bond's coupon rate is less than 8%.
C. If the yield to maturity increases, then the bond's price will increase.
D. If the yield to maturity remains at 8%, then the bond's price will remain constant
over the next year.
E. The bond's current yield is less than 8%.

A. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
B. All else equal, if a bond's yield to maturity increases, its price will fall.
C. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium
over par.
D. All else equal, if a bond's yield to maturity increases, its current yield will fall.
E. A zero-coupon bond's current yield is equal to its yield to maturity.
The following data apply to Garber Industries, Inc. (GII):

Value of operations GHS 1,000
Short-term investments GHS 100
Debt GHS 300
Number of shares 100
77. The company plans on distributing GHS 50 million as dividend payments. What will the
intrinsic per share stock price be immediately after the distribution?
A. GHS 6.32
B. GHS 6.65
C. GHS 7.00
D. GHS 7.35
E. GHS 7.72
Answer = 7.5
78. Which of the following does not constitute or form part of the dividend controversy?
A. Dividends are irrelevant to the value of the firm
B. Generous dividends add value to the firm
C. Generous dividends reduce the value of the firm
D. Generous dividend reduces the total assets of the firm
79. 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 to common stockholders.
B. dividends only out of funds raised by the sale of new common stock.

C. dividends only out of funds raised by borrowing money (i.e., issue debt).
D. dividends only out of funds raised by selling off fixed assets.
E. no dividends except out of past retained earnings.
80. Dividends: what are they?

A. Distribution of a company's after-tax earnings (or accumulated earnings) to
shareholders in proportion to the number of shares.
B. Distribution of a company's before-tax earnings (or accumulated earnings) to
shareholders in proportion to the number of shares.
C. Distribution of a company's Earnings before interest and tax (EBIT) (or
accumulated earnings) to shareholders in proportion to the number of shares.
E. All of the above
81. GBC's stock currently sells for GHS 120 a share. You own 100 shares of the stock. The
company is contemplating a 2-for-1 stock split. Which of the following best describes what
your position will be after such a split takes place?
A. You will have 200 shares of stock, and the stock will trade at or near GHS 60 a
share.
B. You will have 100 shares of stock, and the stock will trade at or near GHS 60 a
share.
C. You will have 50 shares of stock, and the stock will trade at or near GHS 120 a
share.
D. You will have 50 shares of stock, and the stock will trade at or near GHS 60 a share.
E. You will have 200 shares of stock, and the stock will trade at or near GHS 120 a
share.
82. Yesterday, FINC 302 Investments was selling for GHS 90 per share. Today, the company
completed a 7-for-2 stock split. If the total market value was unchanged by the split, what
is the price of the stock today?
A. GHS 23.21
B. GHS 24.43
C. GHS 25.71
D. GHS 27.00
E. GHS 28.35
83. In recent years, Ghaana PLC has suffered losses, …… and its stock currently sells for only
GHS 0.5 per share. Management wants to use reverse split to get the price up to a more
“reasonable” level, which it thinks is GHS 25 per share. How many of the old shares must
be given up for one new share to achieve the GHS 25 price, assuming this transaction has
no effect on total market value?
A. 47.50
B. 49.88
C. 50.00

D. 52.50
E. 55.13
84. What is the model called that determines the present value of a stock based on its next
annual dividend, the dividend growth rate, and the applicable discount rate?
A. zero growth
B. dividend growth
C. capital pricing.
D. earnings capitalization
E. discounted dividend.
85. Which of the following is computed by dividing next year's annual dividend by the current
stock price
A. Yield to maturity
B. Total yield
C. Dividend yield
E. Growth rate
86. Which of the following is the rate at which a stock's price is expected to appreciate?
A. Current yield
B. Total return
C. Dividend yield
E. Coupon rate
87. Which of the following is a type of equity security that has a fixed dividend and a priority
status over other equity?
A. Senior bond
B. Debenture
C. Warrant
D. Common stock
E. Preference stock
88. If the intrinsic value of a stock is greater than its market value, which of the following is a
reasonable conclusion?
A. The stock has a low level of risk
B. The stock offers a high dividend payout ratio
C. The market is undervaluing the stock
D. The market is overvaluing the stock
E. The stock is value-priced

89. Atlanta Airlines will pay a GHS 4 dividend next year on its common stock which is
currently selling at GHS 100 per share. What is the market's required rate of return on this
investment if the dividend is expected to grow at 5% forever?
A. 4 percent
B. 5 percent
C. 6 percent
D. 7 percent
E. 9 percent
90. The firm of Sun and Moon purchased a share of ABC.com common stock exactly one year
ago for GHS 45. During the past year, the common stock paid an annual dividend of GHS
2.40. The firm sold the security today for GHS 85. What is the rate of return the firm has
earned?
A. 84.2 percent
B. 92.4 percent
C. 94.2 percent
D. 82.4 percent
E. 98.2 percent
91. A preferred stock will pay a dividend of GHS 3.00 in the upcoming year, and every year
thereafter for three years. You require a return of 9 percent on this stock. Using the dividend
model, calculate the intrinsic value of the stock
A. GHS 33.33
B. GHS 10.27
C. GHS 31.82
D. GHS 21.10
E. GHS 38.12
92. Which one of the following statements is correct?

A. Preferred stocks have constant growth dividends
B. The capital gains yield is the annual rate of change in A stock's price
C. A constant dividend growth stock cannot be valued using the dividend growth
model
D. The dividend growth model can be used to compute the current value of any stock
E. An increase in the required return will decrease capital gains yield
93. Waterson Co. has a dividend paying stock with a total return for the year of -6.5 percent.
Which of the following must be true?
A. The dividend must be constant
B. The stock has negative capital gains yield
C. The stock has negative dividend yield
D. The required rate of return for the stock increased over the year
E. The firm is experiencing supernormal growth

94. A preferred stock that is GHS 100 par value pays 7% dividend annually. The current market
price is GHS 106.80. What is the intrinsic value of the preferred stock if the required return
is 6.5 percent?
A. GHS 115.02
B. GHS 107.69
C. GHS 106.80
D. GHS 106.97
E. GHS 109.67
95. ABC corp. is a tech company that is expected to experience a high growth of 14 percent for
the next 2 years, slowing to a perpetual growth rate of 6 percent thereafter. The company
just paid a dividend of GHS 3. Using the Gordon Growth Model, estimate the intrinsic
value of ABC's shares in two years’ time. Assume a required return of 11 percent.
A. GHS 82.68
B. GHS 78.00
C. GHS 67.10
D. GHS 61.70
E. GHS 87.10
96. A common stock pays an annual dividend per share of GHS 2.10. the risk-free rate is 7
percent and the risk premium for this stock is 4 percent. If the annual dividend is expected
to remain at GHS 2.10, the value of the stock is closest to
A. GHS 19.09
B. GHS 19.90
C. GHS 30.00
D. GHS 52.50
E. GHS 5S.20
97. Today, Madeolo Consult paid dividends on its common stock of GHS 1.25 per share. If
dividends per share are expected to increase to GHS 3.50 per share 6 years from now, what
is the percentage dividend growth rate?
A. 30.5 percent
B. 18.7 percent
C. 17.8 percent
D. 28.0 percent
E. 2.80 percent
98. Wilk productions wants its shareholders to earn a 12 percent return on their investment in
the company. At what value would Wilk stock be priced if the company paid GHS 2.75 per
share in constant annual dividend?
A. GHS 29.92
B. GHS 22.92
C. GHS 22.29
D. GHS 29.22

E. Insufficient data
99. If an investor's required rate of return increases and all other characteristics of a stock
remain the same, the value of the stock will ……………..
A. Remain the same
B. Increase
C. Decrease
D. Double
100. Coursera has just paid a dividend on its shares. This dividend is expected to grow at 20
percent for 2 years after which it settles into a 5 percent growth into the indefinite future.
Price in year 2 is expected to be GHS 35.23, reflecting the intrinsic value. If investors
expect to earn a 15 percent return on the stock, compute the value of the dividend just paid.
A. GHS3.52
B. GHS 3.35
C. GHS 2.33
D. GHS 3.23
E. Insufficient data

Answers to 2021/2022 Examination Questions
Question ANS Question ANS Question ANS Question ANS
1 A 26 E 51 B 76 B
2 B 27 D 52 A 77 7.5
3 C 28 B 53 A 78 E
4 E 29 D 54 A 79 A
5 C 30 B 55 A 80 A
6 D 31 C 56 A 81 A
7 E 32 A 57 B 82 C
8 D 33 C 58 B 83 C
9 D 34 C 59 B 84 B
10 A 35 D 60 D 85 C
11 B 36 D 61 A 86 D
12 E 37 D 62 C 87 E
13 A 38 B 63 A 88 C
14 A 39 A 64 C 89 E
15 C 40 B 65 B 90 C
16 B 41 6.7% 66 D 91 A
17 D 42 D 67 D 92 B
18 A 43 B 68 C/D 93 B
19 D 44 D 69 A 94 B
20 E 45 D 70 D 95 A
21 D 46 A 71 A 96 A
22 B 47 D 72 5.92% 97 B
23 A 48 D 73 D 98 B
24 D 49 A 74 D 99 C
25 B 50 C 75 A 100 3.495

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PREP MANUAL FOR FINC 302:

Stock Valuation ...................................................................................................................... 9

Risk and Return .................................................................................................................... 25

Mergers & Acquisitions ....................................................................................................... 32

Dividend Policy .................................................................................................................... 44

2021/2022 Examination Questions ...................................................................................... 54

Answers To 2021/2022 Examination Questions .................................................................. 74

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6. Interest rates and bond prices

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15. Long-term bonds are …….... than short-term bonds.

18. When you purchase a municipal bond, you are:

19. A bond issued by a corporation is called a ________

20. The rate of interest on a bond is called the ________

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23. What is a coupon?

27. The value of a bond is the present value of the

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35. Which of the following is not a characteristic of a zero-coupon bond?

ii. YTM < coupon rate

iii. Bond traded at a price below face value

iv. Bond traded at a price above face value

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41. What are the earning distributions to shareholders by a corporation called?

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54. The dividend growth model:

A. I and III only

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60. Which statement about common stockholders is incorrect?

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66. The required return on equity security is comprised of a:

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73. What is capital budgeting?

74. Which of the following is not a capital budgeting technique?

75. The payback period is the time it takes to:

78. The profitability index is a ratio of:

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81. The internal rate of return is defined as the:

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88. If a project has a net present value equal to zero, then:

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Year Project A Project B

A. project A; because it has the higher required rate of return

A. Yes; The PI is 0.96.

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115. The payback period method is criticized for ignoring:

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116. This type of risk is avoidable through proper diversification.

118. An "aggressive" common stock would have a "beta"

121. A measure of "risk per unit of expected return."

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124. Which of the following is an example of systematic risk?

125. Investors can eliminate what type of risk by diversifying ………

127. Below are all types of returns except: