CHAPTER 01 - GOALS AND GOVERNANCE OF THE FIRM

Medium
Question 22:
The treasurer is usually responsible the following functions of a corporation:
I) Tax obligations; II) Investor relationships; III) Cash management; IV) raising new capital
*a/ II, III and IV only
Question 23:
The controller usually oversees the following functions of a corporation:
I) Preparation of financial statements; II) Internal accounting; III) Cash management and IV)
Taxes
*a/ I, II and IV only
Question 24:
The controller is usually responsible for the following functions of a corporation except:
I) Preparation of financial statements; II) Internal accounting; III) Cash management; IV) Taxes
*a/ III only
Question 25:
Of the following list, which is a stakeholder?
I) Employee; II) Customer; III) Community; IV) Supplier
*a/ All of the answers are correct
Question 26:
The following are examples of financial assets except:
*a/ Buildings
Question 27:
The following are examples of real assets:
I) Machinery; II) Office buildings; III) Warehouse; IV) Common stock
*a/ I, II, and III only
Question 28:
The following are examples of tangible assets except:
I) Machinery; II) Office buildings; III) Warehouse; IV) Training for employees
*a/ IV only
Question 29:
The following are examples of intangible assets except:
*a/ Building
Question 30:
The following are examples of tangible assets except:
*a/ Trademarks
Question 31:
The treasurer usually oversees the following functions of a corporation except:
I) Preparation of financial statements; II) Investor relationships; III) Cash management; IV)
raising new capital
*a/ I only
Question 32:
The following are some of the actions that shareholders can take if the corporation is not
performing well:
*a/ All of the answers are correct
Question 33:
Which one of the following is a capital budgeting decision?
*a/ Deciding whether or not to open a new store
Question 34:
The process of planning and managing a firm's long-term investments is referred to as:
*a/ capital budgeting
Question 35:
Capital structure refers to:
*a/ decisions related to long-term debt and equity financing
Question 36:
Managers' actions are monitored by:
*a/ All the answers are correct
Question 37:
Which one of the following statements is correct concerning the organizational structure of a
corporation?
*a/ The chief executive officer reports to the board of directors.
CHAPTER 02 - HOW TO CALCULATE PRESENT VALUES
Medium
Question 24:
What is the present value of the following cash flow at a discount rate of 9%?
Year -1 Year - 2 Year - 3
$100,000 $150,000 $200,000
*a/ $372,431.81
Question 25:
At an interest rate of 10%, which of the following cash flows should you prefer?
Option Year 1 Year 2 Year 3
A 500 300 100
B 100 300 500
C 300 300 300
D Any of the above as they all add up to $900
*a/ Option A
Question 26:
What is the net present value of the following cash flow at a discount rate of 11%?
Year 0 1 2
CF ($) -120,000 300,000 -100,000
*a/ $69,108.03
Question 27:
What is the present value of the following cash flow at a discount rate of 16% APR?
Year 1 2
CF ($) -100,000 300,000
*a/ $136,741.97
Question 28:
What is the net present value (NPV) of the following cash flows at a discount rate of 9%?
Year 0 1 2 3
CF ($) -250,000 100,000 150,000 200,000
*a/ $122,431.81
Question 29:
What is the present value of $1,000 per year annuity for five years at an interest rate of 12%?
*a/ $3,604.78
Question 30:
What is the present value of $5,000 per year annuity at a discount rate of 10% for 6 years?
*a/ $16,760.78
Question 31:
According to the net present value rule, an investment in a project should be made if the:
*a/ Net present value is positive
Question 32:
A perpetuity is defined as:
*a/ Equal cash flows at equal intervals of time forever
Question 33:
What is the present value of $10,000 per year perpetuity at an interest rate of 10%?
*a/ $100,000
Question 34:
You would like to have enough money saved to receive $80,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save in
your retirement fund to achieve this goal (assume that the perpetuity payments start one year from
the date of your retirement. The interest rate is 8%)?
*a/ $1,000,000
Question 35:
After retirement, you expect to live for 25 years. You would like to have $75,000 income each
year. How much should you have saved in the retirement to receive this income, if the interest is
9% per year (assume that the payments start on the day of retirement)?
*a/ $802,995.88
Question36:
You would like to have enough money saved to receive $100,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save in
your retirement fund to achieve this goal (assume that the perpetuity payments start one year from
the date of your retirement. The interest rate is 12.5%)?
*a/ $800,000
Question 37:
After retirement, you expect to live for 25 years. You would like to have $75,000 income each
year. How much should you have saved in the retirement to receive this income, if the interest is
9% per year (assume that the payments start one year after the retirement)?
*a/ $736,693.47
b/ $6,352,567.22
c/ $1,875,000
d/ $3,500,000
Question 38:
John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If the
mortgage calls for twenty equal annual payments, what is the amount of each payment?
*a/ $21,796.14
Question 39:
If the present value annuity factor at 8% APR for 10 years is 6.71, what is the equivalent future
value annuity factor?
*a/14.487
Question 40:
Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in his retirement
fund by that time. If the interest rate is 10% per year, how much should Mr. Hopper put into the
retirement fund each year in order to achieve this goal? [Assume that the payments are made at
the end of each year]
*a/ $7,626.05
Question 41:
Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000 in his
retirement fund by that time. If the interest rate is 12% per year, how much should Mr. Hopper
put into the retirement fund each year in order to achieve this goal?
*a/ $4,143.66
Question 42:
You would like to have enough money saved to receive a $50,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save
in your retirement fund to achieve this goal (assume that the perpetuity payments starts on the
day of retirement. The interest rate is 8%)?
*a/ $675,000
Question 43:
You would like to have enough money saved to receive an $80,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save
in your retirement fund to achieve this goal (assume that the perpetuity payments starts on the
day of retirement. The interest rate is 10%)?
*a/ $880,000
Question 44:
An investment at 10.47% effective rate compounded monthly is equal to a nominal (annual) rate
of:
*a/ 10%
Question 45:
An investment at 12% nominal rate compounded monthly is equal to an annual rate of:
*a/ 12.68%
Question 46:
An investment at 10% nominal rate compounded continuously is equal to an equivalent annual
rate of:
*a/ 10.517%
CHAPTER 03 - VALUING BONDS
Medium
Question 7:
A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and
maturing in five years. The interest payments are made annually. Calculate the price of the bond
(in euros) if the yield to maturity is 3.5%.
*a/ 106.77
Question 8:
A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and
maturing in five years. The interest payments are made annually. Calculate the yield to maturity
of the bond (in euros) if the price of the bond is 106 euros.
*a/ 3.80%
Question 9:
A 3-year bond with 10% coupon rate and $1000 face value yields 8% APR. Assuming annual
coupon payment, calculate the price of the bond.
*a/ $1051.54
Question 10:
A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on the
bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual coupon
interest payments.
*a/ $949.24
Question 11:
A four-year bond has an 8% coupon rate and a face value of $1000. If the current price of the
bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest
payments).
*a/ 12%
Question 12:
A 5-year bond with 10% coupon rate and $1000 face value is selling for $1123. Calculate the
yield to maturity on the bond assuming annual interest payments.
*a/ 7.0%
Question 13:
A bond with a face value of $1,000 has coupon rate of 7%, yield to maturity of 10%, and twenty
years to maturity. The bond's duration is:
*a/ 10.0 years
Question 14:
A bond with a face value of $1,000, coupon rate of 0%, yield to maturity of 9%, and ten years to
maturity. This bond's duration is:
*a/ 10.0 years
Question 15:
All else constant, a coupon bond that is selling at a premium, must have:
*a/ a yield to maturity that is less than the coupon rate
Question 16:
Antonio's offers a 10-year bond that has a coupon rate of 5 percent and semiannual payments.
The face value is $1,000 and the yield to maturity is 12.6 percent. What is the current value of
this bond?
*a/ $574.56
Question 17:
A Treasury bond matures in 17 years, pays interest semiannually, and carries a coupon rate of
3.5 percent. How much are you willing to pay for a $1,000 face value bond if you desire a rate of
return of 4.25 percent?
*a/ $909.86
Question 18:
A 20-year zero coupon bond has a $1,000 face value, a required rate of return of 5 percent, and
semiannually compounding. What is this bond worth today?
*a/ $372.43
Question 19:
The bonds issued by North & South bear a coupon rate of 7.5 percent, payable semiannually.
The bonds mature in 6.5 years, sell at par, and have a $1,000 face value. What is the yield to
maturity?
*a/ 7.50%
Question 20:
A General Co. bond has a coupon rate of 7 percent and pays interest annually. The face value is
$1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the
yield to maturity?
*a/ 6.81%
Question 21:
Webster's has a 12-year bond issue outstanding that pays a coupon rate of 6.5 percent. The bond
is currently priced at $938.76 and has a par value of $1,000. Interest is paid semiannually. What
is the yield to maturity?
*a/ 7.27%
CHAPTER 04 - THE VALUE OF COMMON STOCKS
Medium
Question 18:
Dirt Bikes just announced that its next annual dividend will be $1.42 a share and that all future
dividends are expected to increase by 2.5 percent annually. What is the market rate of return if
this stock is currently selling for $14.11 a share?
*a/ 12.56%
Question 19:
Will Co. is expected to pay a dividend of $2 per share at the end of year -1(D1) and the dividends
are expected to grow at a constant rate of 4% forever. If the current price of the stock is $20 per
share calculate the expected return or the cost of equity capital for the firm.
*a/ 14%
Question 20:
World-Tour Co. has just now paid a dividend of $2.83 per share (D0); the dividends are expected
to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is
16%, what is the current value on stock?
*a/ $70
Question 21:
The In-Tech Co. has just paid a dividend of $1 per share. The dividends are expected to grow at
25% per year for the next three years and at the rate of 5% per year thereafter. If the required rate
of return on the stock is 18%(APR), what is the current value of the stock?
*a/ $12.97
Question 22:
R&D Technology Corporation has just paid a dividend of $0.50 per share. The dividends are
expected to grow at 24% per year for the next two years and at 8% per year thereafter. If the
required rate of return in the stock is 16% (APR), calculate the current value of the stock.
*a/ $8.82
Question 23:
Wilton's Market just announced its next annual dividend will be $1.50 a share with future
dividends increasing by 1.8 percent annually. How much will one share of this stock be worth
five years from now if the required return is 15.5 percent?
*a/ $11.97
CHAPTER 05 - INTRODUCTION TO RISK AND RETURN
Easy
Question 1:
Which of the following portfolios have the least risk?
*a/ A portfolio of Treasury bills
Question 2:
The average squared difference between the actual return and the average return is called the:
*a/ variance
Question 3:
The standard deviation for a set of stock returns can be calculated as the:
*a/ positive square root of the variance.
Question 4:
Assume the market portfolio of common stocks earned 14.1 percent in one year while U.S.
Treasury bills earned 4.4 percent and inflation averaged 4.6 percent. What was the market risk
premium?
*a/ 9.7%
Question 5:
Long-term U.S. government bonds have:
*a/ Interest rate risk
Question 6:
Standard error measures:
*a/ Reliability of an estimate
Question 7:
Standard error is estimated as:
*a/ Standard deviation of returns divided by the square root of the number of observations
Question 8:
If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is 4.0%,
what is the market risk premium?
*a/ 7.7%
Question 9:
Given the following data: risk-free rate = 4%, average risk premium = 7.7%.
Calculate the required rate of return:
*a/ 11.7%
Question 10:
The range of values that correlation coefficients can take can be:
*a/ -1 to +1
Question 11:
The type of the risk that can be eliminated by diversification is called:
*a/ Unique risk
Question 12:
The "beta" is a measure of:
*a/ Market risk
Question 13:
The beta of market portfolio is:
*a/ + 1.0
Question 14:
The unique risk is also called the:
*a/ All of the answers are correct
Question 15:
Market risk is also called:
I) systematic risk, II) undiversifiable risk, III) firm specific risk.
*a/ I and II only
Question 16:
As the number of stocks in a portfolio is increased:
*a/ Unique risk decreases and approaches to zero
Question 17:
You recently purchased a stock that is expected to earn 15 percent in a booming economy, 9
percent in a normal economy and lose 5 percent in a recessionary economy. There is a 15 percent
probability of a boom, a 75 percent chance of a normal economy, and a 10 percent chance of a
recession. What is your expected rate of return on this stock?
*a/ 8.50%
Question 18:
A portfolio consists of $12,000 of stock K and $23,000 of stock L. Stock K will return 14
percent in a booming economy and 5 percent in a normal economy. Stock L will return 10
percent in a booming economy and 6 percent in a normal economy. The probability of the
economy booming is 22 percent. What is the expected rate of return on the portfolio if the
economy is normal?
*a/ 5.66%
Question 19:
A portfolio is expected to return 15 percent in a booming economy, 12 percent in a normal
economy, and lose 9 percent if the economy falls into a recession. The probability of a boom is
25 percent while the probability of a recession is 15 percent. What is the overall portfolio
expected return?
*a/ 9.60%
Question 20:
A portfolio consists of $10,500 of Stock A, $21,600 of Stock B, and $27,000 of Stock C. The
expected returns on Stocks A, B, and C are 7 percent, 11 percent and 5 percent, respectively.
What is the overall portfolio expected rate of return?
*a/ 7.55%
Medium
Question 21:
A stock had returns of 12 percent, 6 percent, 14 percent, and -3 percent annually for the past four
years. What is the mean and standard deviation of these returns?
*a/ 7.25%; 7.63%
Question 22:
A stock had returns of 14 percent, 3 percent, 9 percent, and -12 percent annually for the past four
years. What is the mean and variance of these returns?
*a/ 3.50%; .0127
Question 23:
Spill Oil Company's stocks had -8%, 11% and 24% rates of return during the last three years
respectively; calculate the average rate of return for the stock.
*a/ 9% per year
Question 24:
Stock A has an expected return of 10% per year and stock B has an expected return of 20%. If
40% of the funds are invested in stock A, and the rest in stock B, what is the expected return on
the portfolio of stock A and stock B?
*a/ 16%
Question 25:
A stock had annual returns of 8 percent, -2 percent, 4 percent, and 20 percent over the past four
years. What is the standard deviation of these returns?
*a/ 9.29%
Question 26:
A stock returned 13 percent, 18 percent, -16 percent and -1 percent annually for the past four
years. Based on this information, what is the 99.74 percent probability range for any one given
year?
*a/-42.4 to 49.4%
Question 27:
Mega Corporation has the following returns for the past three years: 8%, 12% and 10%.
Calculate the variance of the return and the standard deviation of the returns.
*a/ 0.0004 and 2%
Question 28:
Macro Corporation has had the following returns for the past three years, -10%, 10%, and 30%.
Calculate the standard deviation of the returns.
*a/ 20%
Question 29:
Sun Corporation has had returns of -6%, 16%, 18%, and 28% for the past four years. Calculate
the standard deviation of the returns.
*a/ 14.3%
Question 30:
Stock X has a standard deviation of return of 10%. Stock Y has a standard deviation of return of
20%. The correlation coefficient between stocks is 0.5. If you invest 60% of the funds in stock X
and 40% in stock Y, what is the standard deviation of a portfolio?
*a/ 12.2%
Question 31:
A portfolio consists of 40 percent of Stock S and 60 percent of Stock T. Stock S will return 13
percent if the economy booms and 8 percent if it is normal. Stock T will return 6 percent in a
boom and 10 percent in a normal economy. The probability of a boom is 50 percent. What is the
portfolio variance?
*a/ .000004
Question 32:
The Inferior Goods Co. stock is expected to earn 22 percent in a recession, 7 percent in a normal
economy, and lose 14 percent in a booming economy. The probability of a boom is 20 percent
while the probability of a normal economy is 55 percent. What is the expected rate of return on
this stock?
*a/ 6.55%
Question 33:
The rate of return on the common stock of Flowers by Flo is expected to be 15 percent in a boom
economy, 7 percent in a normal economy, and only 3 percent in a recessionary economy. The
probabilities of these economic states are 20 percent for a boom, 70 percent for a normal
economy, and 10 percent for a recession. What is the variance of the returns on this stock?
*a/ .001296
Question 34:
KNF stock is quite cyclical. In a boom economy, the stock is expected to return 30 percent in
comparison to 12 percent in a normal economy and a negative 17 percent in a recessionary
period. The probability of a recession is 25%. There is a 15% chance of a boom economy. What
is the standard deviation of the returns this stock?
*a/ 15.43%
Question 35:
The economy has a 14 percent chance of booming. Otherwise, the economy will be normal.
Stock G will return 15 percent in a boom and 8 percent in a normal economy. Stock H will return
9 percent in a boom and 6 percent in a normal economy. What is the variance of a portfolio
consisting of $2,500 of stock G and $7,500 of stock H?
*a/ .000193
Question 36:
Stock Q will return 18 percent in a boom and 9 percent in a normal economy. Stock R will return
9 percent in a boom and 5 percent in a normal economy. There is a 75 percent probability the
economy will be normal. What is the standard deviation of a portfolio that is invested 40 percent
in stock Q and 60 percent in stock R?
*a/ 2.60%
Question 37:
Stock A will return 15 percent in a normal economy and lose 14 percent in a recession. Stock B
deals with inferior goods and will return 7 percent in a normal economy and 18 percent in a
recession. There is a 20 percent chance of a recession occurring. What is the standard deviation
of a portfolio that is equally weighted between the two stocks?
*a/ 3.60%
Difficult
Question 38:
Stock M and Stock N have had the following returns for the past three years of -12%, 10%, 32%;
and 15%, 6%, 24% respectively. Calculate the covariance between the two securities.
*a/ +0.0099
Question 39:
Stock P and stock Q have had annual returns of -10%, 12%, 28% and 8%, 13%, 24%
respectively. Calculate the covariance of return between the securities.
*a/ +0.0149
Question 40:
If the correlation coefficient between stock C and stock D is +1.0% and the standard deviation of
return for stock C is 15% and that for stock D is 30%, calculate the covariance between stock C
and stock D.
*a/ +0.000450
Question 41:
If the covariance between stock A and stock B is 100, the standard deviation of stock A is 10%
and that of stock B is 20%, calculate the correlation coefficient between the two securities.
*a/ +0.5
Question 42:
For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient
between the two stocks is:
*a/ -1
Question 43:
The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual returns
for three years for the market portfolios are +6%, 18%, 24%. Calculate the beta for the stock.
*a/ 1.36
Question 44:
The correlation coefficient between stock B and the market portfolio is 0.8. The standard
deviation of the stock B is 35% and that of the market is 20%. Calculate the beta of the stock.
*a/ 1.4
Question 45:
You have a 2-stock portfolio with an expected return of 10.6 percent. Stock A has an expected
return of 12 percent while Stock B is expected to return 8 percent. What is the portfolio weight
of Stock A?
*a/ 65%
Question 46:
A portfolio consists of 600 shares of Stock A, 100 shares of Stock B, 200 shares of Stock C, and
500 shares of Stock D. The prices of these stocks are $27, $22, $38, and $16 for Stocks A
through D, respectively. What is the portfolio weight of stock C?
*a/ 22.35%
CHAPTER 06: PORTFOLIO THEORY AND THE CAPITAL ASSET PRICING MODEL
Medium
Question 23:
Florida Company (FC) and Minnesota Company (MC) are both service companies. Their
historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. If FC and
MC are combined in a portfolio with 50% of the funds invested in each, calculate the expected
return on the portfolio.
*a/ 11%
Question 24:
If the beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is 8%, calculate
the expected return for Microsoft.
*a/ 12.04%
Question 25:
If the beta of Amazon.com is 2.2, risk-free rate is 5.5% and the market risk premium is 8%,
calculate the expected rate of return for Amazon.com stock:
*a/ 14.3%
Question 26:
If the beta of Exxon Mobil is 0.65, risk-free rate is 4% and the market rate of return is 14%,
calculate the expected rate of return from Exxon:
*a/ 10.5%
Question 27:
A portfolio is comprised of 30 percent of stock X, 55 percent of stock Y, and 15 percent of stock
Z. Stock X has a beta of .87, stock Y has a beta of 1.48, and stock Z has a beta of 1.04. What is
the portfolio beta?
*a/ 1.231
Question 28:
The market has an expected rate of return of 12.8 percent. The long-term government bond is
expected to yield 4.5 percent and the U.S. Treasury bill is expected to yield 3.4 percent. The
inflation rate is 3.1 percent. What is the market risk premium?
*a/ 9.4%
Question 29:
The risk-free rate of return is 3.3 percent and the market risk premium is 7.5 percent. What is the
expected rate of return on a stock with a beta of 1.62?
*a/ 15.45%
Question 30:
A stock has an expected return of 14.21 percent. The return on the market is 11.8 percent and the
risk-free rate of return is 3.2 percent. What is the beta of this stock?
*a/ 1.28
Question 31:
PPO stock has a beta of 1.12 and an expected return of 12.64 percent. The risk-free rate of return
is 3.85 percent. What is the expected return on the market?
*a/ 11.70%
Question 32:
The expected return on HiLo stock is 12.04 percent while the expected return on the market is
10.52 percent. The beta of HiLo is 1.28. What is the risk-free rate of return?
*a/ 5.09%
Question 33:
The stock of Martin Industries has a beta of 1.02. The risk-free rate of return is 3.7 percent and
the market risk premium is 6.85 percent. What is the expected rate of return on Martin Industries
stock?
*a/ 10.69%
Question 34:
Stock A has a beta of .92 and an expected return of 9.04 percent. Stock B has a beta of 1.04 and
an expected return of 9.51 percent. Stock C has a beta of 1.36 and an expected return of 11.68
percent. The risk-free rate is 3 percent and the market risk premium is 6.5 percent. Which of
these stocks are underpriced?
*a/ A only
Question 35:
Which one of the following stocks, if any, is correctly priced according to CAPM if the risk-free
rate of return is 6.5 percent and the market rate of return is 10.5 percent? Stock A with a beta of
.85 and an expected return of 9.22 percent; Stock B with a beta of 1.08 and an expected return of
11.90 percent; Stock C with a beta of 1.69 and an expected return of 15.38 percent; Stock D with
a beta of 1.45 and an expected return of 12.30 percent.
*a/ Stock D
Question 36:
Given the following data for a stock: beta = 1.5; risk-free rate = 4%; market rate of return = 12%;
and Expected rate of return on the stock = 15%. Then the stock is:
*a/ overpriced
Question 37:
Given the following data for a stock: beta = 0.5; risk-free rate = 4%; market rate of return = 12%;
and Expected rate of return on the stock = 10%. Then the stock is:
*a/ underpriced
Question 38:
Given the following data for a stock: beta = 0.9; risk-free rate = 4%; market rate of return = 14%;
and Expected rate of return on the stock = 13%. Then the stock is:
*a/ correctly priced
Question 39:
Florida Company (FC) and Minnesota Company (MC) are both service companies. Their
historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%.
Calculate the mean of returns for each company.
*a/ FC: 10%, MC: 12%
CHAPTER 07: RISK AND THE COST OF CAPITAL
Easy
Question 1:
The historical returns data for the past three years for Stock B and the stock market portfolio are:
Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. If the risk-free rate is 4%, calculate
the market risk premium.
*a/ 10%
Question 2:
Generally, the value to use for the risk-free interest rate is:
*a/ Short-term Treasury bill rate
Question 3:
Cost of capital is the same as cost of equity for firms:
*a/ financed entirely by equity
Question 4:
The cost of capital for a project depends on:
*a/ The use to which the capital is put, i.e. the project
Question 5:
The hurdle rate for capital budgeting decisions is:
*a/ The cost of capital
Question 6:
The company cost of capital when debt as well as equity is used for financing is:
*a/ the weighted average cost of capital (WACC)
Question 7:
The after-tax weighted average cost of capital (WACC) is calculated using the formula:
*a/ WACC = (rD) (1 - TC ) (D/V) + (rE) (E/V) where: V = D + E
Question 8:
Using the company cost of capital to evaluate a project is:
I) Always correct
II) Always incorrect
III) Correct for projects that are about as risky as the average of the firm's other assets
*a/ III only
Question 9:
Cost of equity can be estimated using:
*a/ All of the answers are correct
Question 10:
Cost of equity can be estimated using:
*a/ All of the answers are correct
Question 11:
The historical data for the past three years for the market portfolio are 10%, 10% and 16%. If the
risk-free rate of return is 4%, what is the market risk premium?
*a/ 8%
Question 12:
The historical returns data for the past three years for Stock B and the stock market portfolio are:
Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the expected return for
Stock B and the market portfolio.
*a/ Stock B 16%, Market Portfolio: 14%
Medium
Question 13:
An all-equity firm has a beta of .98. The firm is evaluating a project that will increase the output
of the firm's existing product. The market risk premium is 7.3 percent and the risk-free rate is 3.4
percent. What discount rate should be assigned to this expansion project?
*a/ 10.55%
Question 14:
The market value of Charter Cruise Company's equity is $15 million, and the market value of its
risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt
is 8%, calculate the company's cost of capital. (Assume no taxes.)
*a/ 17%
Question 15:
The market value of Cable Company's equity is $60 million, and the market value of its risk-free
debt is $40 million. If the required rate of return on the equity is 15% and that on the debt is 5%,
calculate the company's cost of capital. (Assume no taxes.)
*a/ 11%
Question 16:
The market value of Charcoal Corporation's common stock is $20 million, and the market value
of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the
market risk premium is 8%. If the Treasury bill rate is 5%, what is the company's cost of capital?
(Assume no taxes.)
*a/ 13%
Question 17:
The market value of XYZ Corporation's common stock is 40 million and the market value of the
risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected
market risk premium is 10%. If the Treasury bill rate is 6%, what is the firm's cost of capital?
(Assume no taxes.)
*a/ 9.2%
Question 18:
The historical returns data for the past three years for Stock B and the stock market portfolio are:
Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the required rate of
return (cost of equity) for Stock B using CAPM. (The risk-free rate of return = 4%)
*a/ 12.6%
Question 19:
The historical returns data for the past four years for Stock C and the stock market portfolio
returns are: Stock C: 10%, 30%, 20%, 20%; Market Portfolio: 5%, 15%, 25%, 15%. If the risk-
free rate of return is 5%, calculate the required rate of return on the Stock C using CAPM.
*a/ 10%
Question 20:
A firm has a beta of 1.3 and a debt-to-equity ratio of .4. The market rate of return is 11.6 percent,
the tax rate is 32 percent, and the risk-free rate is 3.3 percent. The pretax cost of debt is 7.2
percent. What is the firm's WACC?
*a/ 11.46%
Question 21:
Taylor's has a beta of .78 and a debt-to-equity ratio of .2. The market rate of return is 10.6
percent, the tax rate is 34 percent, and the risk-free rate is 1.4 percent. The pretax cost of debt is
6.1 percent. What is the firm's WACC?
*a/ 7.82%
Question 22:
A levered firm has a target capital structure of 30 percent debt and 70 percent equity. The after-
tax cost of debt is 6.5 percent, the tax rate is 34 percent, and the cost of equity is 12.3 percent.
The firm is considering a project that is equally as risky as the overall firm. The project has an
initial cash outflow of $1.1 million and annual cash inflows of $480,000 at the end of each year
for three years. What is the NPV of the project?
*a/ $82,018.07
Question 23:
Alaskan Markets has a target capital structure of 45 percent debt and 55 percent equity. The
pretax cost of debt is 6.5 percent, the tax rate is 34 percent, and the cost of equity is 13.7 percent.
The firm is considering a project that is equally as risky as the overall firm. The project has an
initial cash outflow of $1.8 million and annual cash inflows of $550,000 at the end of each year
for four years. What is the NPV of the project?
*a/ -$36,209.17
Difficult
Question 24:
Buster's target debt-to-equity ratio is .6, its cost of equity is 11.8 percent, and its beta is 1.2. The
after-tax cost of debt is 6.4 percent, the tax rate is 34 percent, and the risk-free rate is 3.2 percent.
What discount rate should be assigned to a new project the firm is considering if the project's
beta is estimated at .87?
*a/ 8.30%
Question 25:
A project has an internal rate of return of 11.76 percent and a beta of 1.22. The market rate of
return is 9.8 percent, the tax rate is 35 percent, and the risk-free rate is 3.4 percent. Should this
project be accepted according to the CAPM if the firm is all-equity financed? Why or why not?
*a/ Yes; The CAPM rate is 11.21 percent
Question 26:
The Red Hen currently has a debt-to-equity ratio of .45, its cost of equity is 13.6 percent, and its
beta is 1.49. The pretax cost of debt is 7.8 percent, the tax rate is 35 percent, and the risk-free
rate is 3.1 percent. The firm's target debt-to-equity ratio is .5. What discount rate should be
assigned to a new project the firm is considering if the project is equally as risky as the overall
firm and will be financed solely with debt?
*a/ 10.76%
Question 27:
The historical returns data for the past three years for Company A's stock is -6%, 15%, 15% and
that of the market portfolio is 10%, 10% and 16%. Calculate the beta for Stock A.
*a/ 1.75
Question 28:
The historical returns data for the past three years for Company A's stock is -6.0%, 15%, 15%
and that of the market portfolio is 10%, 10% and 16%. If the risk-free rate of return is 4%, what
is the cost of equity capital (required rate of return of company A's common stock) using
CAPM?
*a/ 18%
Question 29:
The historical returns data for the past three years for Stock B and the stock market portfolio are:
Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the covariance of returns
between Stock B and the market portfolio.
*a/ 0.0024
Question 30:
A project has an expected risky cash flow of $200, in year-1. The risk-free rate is 6%, the market
rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow
for year-1.
*a/ $175.21
Question 31:
A project has an expected risky cash flow of $500, in year-2. The risk-free rate is 4%, the market
rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent cash flow
for year-2.
*a/ $401.90
Question 32:
A project has an expected risky cash flow of $500, in year-3. The risk-free rate is 4%, the market
rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent cash flow
for year-3.
*a/ None of the answers are correct
Question 33:
A project has an expected risky cash flow of $500, in year-3. The risk-free rate is 5%, the market
risk premium is 8% and the project's beta is 1.25. Calculate the certainty equivalent cash flow for
year-3.
*a/ None of the answers are correct
CHAPTER 08 - FINANCIAL ANALYSIS
Easy
Question 1:
The following groups are stakeholders of a public company:
I) Shareholders
II) The government
III) Suppliers
IV) Employees
V) Bondholders
VI) Management
*a/ I, II, III, IV, V, and VI
Question 2:
Assets are listed on the balance sheet in order of:
I) Decreasing liquidity
II) Decreasing size
III) Increasing size
IV) Relative life
*a/ I only
Question 3:
The following are known as current assets:
I) Cash
II) Marketable securities
III) Receivables
IV) Inventories
V) Payables
*a/ I, II, III and IV only
Question 4:
The difference between Total Assets of a firm and its Total Liabilities is called.
*a/ Net worth
Question 5:
Inventory consists of:
*a/ raw material, work in process, and finished goods
Question 6:
The difference between Current Assets of a firm and its Current Liabilities is called.
*a/ Net working capital
Question 7:
Net working capital (NWC) is calculated as:
*a/ Current assets-current liabilities
Question 8:
If the debt ratio is 0.5 what is the debt-equity ratio? (assume no leases)
*a/ 1.0
Question 9:
Efficiency ratios indicate:
I) How productively is the firm utilizing its assets.
II) How liquid is the firm.
III) How profitable is the firm.
IV) How highly is the firm valued by investors.
*a/ I only
Question 10:
Profitability ratios indicate:
I) How productively is the firm utilizing its assets.
II) How liquid is the firm.
III) How profitable is the firm.
IV) How highly is the firm valued by the investors.
*a/ III only
Question 11:
Market value ratios indicate:
I) How productively is the firm utilizing its assets.
II) How liquid is the firm.
III) How profitable is the firm.
IV) How highly is the firm valued by the investors.
*a/ IV only
Question 12:
Given a book value per share of $10 and a market value of $24, what is the market capitalization
of a firm with 2,000,000 outstanding shares?
*a/ $48,000,000
Question 13:
Given a book value per share of $5 and a market value of $12, what is the market value added of
a firm with 2,000,000 outstanding shares?
*a/ $14,000,000
Question 14:
Which of the following is an example of liquidity ratios?
*a/ Quick ratio
Question 15:
When a firm improves (lowers) its days in inventories it generally:
*a/ Releases cash locked up in inventory
Question 16:
When a firm improves (lowers) its average collection period it generally:
*a/ Releases cash locked up in accounts receivables
Question 17:
Which of the following is an example of leverage ratios?
*a/ Debt-Equity ratio
Medium
Question 18:
Given the following data: Long term debt = 100; Value of leases = 20; Book value of equity =
80; Market value of equity = 100, calculate the debt ratio.
*a/ 0.60
Question 19:
Given the following data: Long term debt = 100; Value of leases = 20; Book value of equity =
80; Market value of equity = 100, calculate the debt-equity ratio.
*a/ 1.50
Question 20:
Given the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10;
calculate the Times Interest Earned (TIE) ratio.
*a/ 7.0
Question 21:
Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200;
Account receivables = 200; calculate the current ratio:
*a/ 2.0
Question 22:
Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200;
Account receivables = 200; calculate the quick ratio:
*a/ 1.2
Question 23:
Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200;
Account receivables = 200; calculate the cash ratio: (assume that the firm has no marketable
securities)
*a/ 0.4
Question 24:
Given the following data: Sales = 3200; Cost of goods sold = 1600; Average total assets = 1600;
Average inventory = 200, calculate the asset turnover ratio:
*a/ 2.0
Question 25:
Given the following data: Sales = 3200; Cost of goods sold = 1600; Average total assets = 1600;
Average inventory = 200, calculate the days in inventory:
*a/ 45.6
Question 26:
Given the following data: Sales = 3200; Cost of goods sold = 1600; Average receivables = 200,
calculate the average collection period:
*a/ 22.8
Question 27:
Given the following data: EBIT = 400; Tax = 100; Sales = 3000; Average Total Assets = 1500,
calculate net profit margin:
*a/ 10%
Question 28:
Given the following data: EBIT = 400; Tax = 100; Sales = 3000; Average Total Assets = 1500,
calculate the ROA (Return on Assets):
*a/ 20%
Question 29:
Given the following data: EBIT = 400; NI = 100; Average Equity = 1000, calculate the ROE
(Return on Equity):
*a/ 10%
Question 30:
Given the following data: Earnings per share = $6; Dividends per share = $3; Price per share =
$60, calculate the P/E ratio:
*a/ 10
Difficult
Question 31:
Given the following data: Earnings per share = $5; Dividends per share = $3; Price per share =
$50. calculate the dividend yield:
*a/ 5%
Question 32:
Given the following data: Earnings per share = $5; Dividends per share = $3; Price per share =
$50. Calculate the payout ratio:
*a/ 60%
Question 33:
Which measure would be most useful in comparing the operating profitability of two firms in
different industries?
*a/ Return on assets
CHAPTER 09 - WORKING CAPITAL MANAGEMENT
Easy
Question 1:
The following are the types of inventories firms keep:
*a/ All of the answers are correct
Question 2:
The costs of holding inventory are:
I) carrying cost
II) order cost
III) pilferage cost
*a/ I and II only
Question 3:
The economic order quantity (EOQ) is calculated using:
*a/ Q = [(2  sales  cost per order)/(carrying cost)]
Question 4:
In the EOQ inventory model, the optimal order size is achieved when:
*a/ carrying costs = order costs
Question 5:
When credit is granted to another firm this gives rise to a(n):
I) Accounts receivable
II) COD
III) CBD
*a/ I only
Question 6:
Accounts receivables include:
I) Trade credit
II) Consumer credit
III) Inventories
*a/ I and II only
Question 7:
Which of the following transactions involve credit?
I) COD
II) 2/30, net 60
III) 2/10 EOM, net 60
IV) CBD
*a/ II and III only
Question 8:
If a firm grants credit with terms of 3/10 net 30, the creditor:
*a/ Receives a discount of 3% when payment is made in less than 10 days after the sale
Question 9:
The net credit period for a company with terms of 3/10 net 60 is:
*a/ 50 days
Question 10:
The most important source of short-term financing is:
*a/ Bank loan
Medium
Question 11:
Supposing you purchase goods on terms of 1/10, net 30. Taking compounding into account, what
annual rate of interest is implied by the cash discount? (Assume a year has 365 days, sale is
$100)
*a/ 20.1%
Question 12:
Suppose you purchase goods on terms of 3/10, net 60. Taking compounding into account, what
annual rate of interest is implied by the cash discount? (Assume a year has 365 days, sale is
$100.)
*a/ 32%
Question 13:
Suppose you purchase goods on terms of 2/10, net 50. Taking compounding into account, what
annual rate of interest is implied by the cash discount? (Assume a year has 365 days, sale is
$100.)
*a/ 20.2%
Question 14:
High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the economic order quantity per order.
*a/ 2,000 tons
Question 15:
High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the optimal number of orders per year.
*a/ 200
Question 16:
High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the optimal annual order costs.
*a/. $100,000
Question 17:
High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the optimal carrying costs.
*a/ $100,000
Question 18:
High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the total costs of optimal inventory.
*a/ $200,000
Question 19:
A customer has ordered goods with a value of $800. The production cost is $600. Under what
conditions should you extend credit if there is no possibility of repeat orders?
*a/ If the probability of payment exceeds 0.75
Question 20:
A customer has ordered goods with a value of $2000. The production cost is $1800. Under what
conditions should you extend credit if there is no possibility of repeat orders?
*a/ If the probability of payment exceeds 0.90
Question 21:
A customer has ordered goods with a value of $1200. The production cost is $800. Under what
conditions should you extend credit if there is no possibility of repeat orders?
*a/ If the probability of payment exceeds 0.67
Question 22:
Brooke Industries has sales of $860,000 and cost of goods sold of $490,000. The firm had a
beginning inventory of $98,000 and an ending inventory of $112,000. What is the length of the
inventory period?
*a/ 78.21 days
Question 23:
Pat's Place has sales of $498,000 and cost of goods sold of $221,000. At the beginning of the
year, inventory was $36,400. At the end of the year, the inventory balance was $31,800. What is
the inventory turnover rate?
*a/ 6.48 times
Question 24:
A firm has sales of $710,000. The cost of goods sold is equal to 57 percent of sales. The firm has
an average inventory of $23,940. How many days on average does it take the firm to sell its
inventory?
*a/ 21.59 days
Question 25:
Super Mart has sales of $626,000. The cost of goods sold is equal to 68 percent of sales. The
beginning accounts receivable balance is $75,534 and the ending accounts receivable balance is
$76,209. How long on average does it take the firm to collect its receivables?
*a/ 44.24 days
Question 26:
Blackwell Co. has sales of $518,300, costs of goods sold of $308,200, and average accounts
receivable of $54,900. How long on average does it take the firm's credit customers to pay for
their purchases?
*a/ 38.66 days
Question 27:
The Down Towner has sales of $642,000 and average accounts payable of $56,400. The cost of
goods sold is equivalent to 68 percent of sales. How long does it take Down Towner to pay its
suppliers?
*a/ 47.16 days
Question 28:
True Blue Stores had a beginning accounts payable balance of $56,900 and an ending accounts
payable balance of $62,800. Sales for the period were $675,000 and costs of goods sold were
$448,000. What is the payables turnover rate?
*a/ 7.49 times
Question 28:
A firm has an inventory turnover rate of 16, a receivables turnover rate of 21, and a payables
turnover rate of 11. How long is the operating cycle?
*a/ 40.19 days
Question 29:
Dallas and More (D&M) sells its inventory in 87 days on average. Its average customer charges
their purchases on a credit card and payment is received in 10 days. D&M takes 56 days on
average to pay for its purchases. Given this information, what is the length of D&M's cash
cycle?
*a/ 41 days
Question 30:
Candy Corner has an inventory turnover rate of 13, an accounts payable period of 44 days, and
an accounts receivable period of 35 days. What is the length of the cash cycle?
*a/ 19.08 days
Question 31:
Dywer Metals has an inventory turnover of 16 and an accounts receivable turnover of 10. The
accounts payable period is 51 days. What is the length of the cash cycle?
*a/ 8.31 days
Question 32:
A supplier offers you credit terms of 1.5/10, net 30. What is the cost of forgoing the discount on
a $1,200 purchase?
*a/ 31.76%
Question 33:
A supplier offers you credit terms of 2/15, net 45. What is the cost of forgoing the discount on a
$218,400 purchase?
*a/ 27.86%
Difficult
Question 34:
The default rate of Demurrage Associates' new customers has been running at 10%. The average
sale for each new customer amounts to $800, generating a profit of $100 and a 40% chance of a
repeat order next year. The default rate on repeat orders is only 2%. If the interest rate is 9%,
what is the expected profit from each new customer?
*a/ $50.83
Question 35:
The default rate of Don's new customers has been running at 20%. The average sale for each new
customer amounts to $500, generating a profit of $200 and a 30% chance of a repeat order next
year. The default rate on repeat orders is only 5%. If the interest rate is 6%, what is the expected
profit from each new customer?
*a/ $149.53
Question 36:
Terry's Place is currently experiencing a bad debt ratio of 4%. Terry is convinced that, with
looser credit controls, this ratio will increase to 8%; however, she expects sales to increase by
10% as a result. The cost of goods sold is 80% of the selling price. Per $100 of current sales,
what is Terry's expected profit under the proposed credit standards?
*a/ $13.2
Question 37:
Tom's Toys is currently experiencing a bad debt ratio of 6%. Tom is convinced that, with tighter
credit controls, he can reduce this ratio to 2%; however, he expects sales to drop by 8% as a
result. The cost of goods sold is 75% of the selling price. Per $100 of current sales, what is
Tom's expected profit under the proposed credit standards?
*a/ $21.2
Question 38:
A large firm may hold substantial cash balances because:
*a/ These balances are required by the bank in the form of compensating balances
Question 39:
The market for short-term investments is called:
*a/ Money market
Question 40:
Bruceton Farm Markets currently has an operating cycle of 76 days. The firm is analyzing some
operational changes that are expected to decrease the accounts receivable period by 3 days and
decrease the inventory period by 8 days. The accounts payable turnover rate is expected to
increase from 7 to 9 times per year. If all of these changes are adopted, what will the firm's new
operating cycle be?
*a/ 65 days
Question 41:
Smiley and Sons has an inventory period of 33 days, an accounts payable period of 41 days and
an accounts receivable period of 27 days. Management is considering offering a 5 percent
discount if its credit customers pay for their purchases within 10 days. If the new discount is
offered the accounts receivable period is expected to decline by 13 days. If the new discount is
offered, the cash cycle will change from _____ days to _____ days.
*a/ 19; 6
Question 42:
A firm currently has a 36-day cash cycle. Assume the firm changes its operations such that it
decreases its receivables period by 3 days, increases its inventory period by 2 days, and
decreases its payables period by 3 days. What will the length of the cash cycle be after these
changes?
*a/ 38 days
Question 43:
As of the beginning of the quarter, a firm has a cash balance of $250. During the quarter the firm
pays its suppliers $310 and collects $420 from customers. It also pays an interest payment of $30
and a tax bill of $170. In addition, the firm borrows $135. What is the cash balance at the end of
the quarter?
*a/ $295
Question 44:
On April 1st, a firm had a beginning cash balance of $200. March sales were $460 and April
sales were $510. During April the firm had cash expenses of $150 and payments on accounts
payable of $210. The accounts receivable period is 30 days. What is the firm's beginning cash
balance on May 1st?
*a/ $300
Question 45:
Jupiter stores had a Quarter 2 beginning cash balance of $430. Sales for Quarters 1 through 3 are
estimated at $600, $800, and $900, respectively. The cost of goods sold is equal to 70 percent of
sales. Goods are purchased one quarter prior to the month of sale. The accounts payable period is
30 days and the accounts receivable period is 15 days. The firm had quarterly cash expenses of
$180. What was the cash balance at the end of Quarter 2? Assume a 360-day year.
*a/ $410.00
CHAPTER 10: FINANCIAL PLANNING
Easy
Question 1:
Short-term financial decisions:
I) involve short lived assets
II) involve short lived liabilities
III) are easily reversed
*a/ I, II, and III
Question 2:
The main difference between short-term and long-term finance is:
*a/ The timing of short-term cash flow being within a year or less
Question 3:
Cumulative capital requirement can be met by:
I) long-term financing
II) short-term financing
*a/ I and II
Question 4:
The sustainable growth rate is equal to:
*a/ plowback ratio  return on equity
Question 5:
Given the following assets;
I) Long-term assets
II) Inventories
III) Receivables
IV) Marketable securities
Which is the least liquid of these assets?
*a/ I
Question 6:
Given the following assets;
I) Long-term assets
II) Inventories
III) Receivables
IV) Marketable securities
Arrange the above assets in the order of liquidity. (The most liquid being first)
*a/ IV, III, II and I
Question 7:
Given the following data: Total current assets = $852; Total current liabilities = $406; Long-term
debt = $442, calculate the net working capital.
*a/ $446
Question 8:
Net working capital is defined as:
*a/ The difference between current assets and current liabilities
Medium
Question 9:
The following is the general formula for calculating the "Ending accounts receivable (AR):"
*a/ Ending (AR) = beginning (AR) + sales - collections
Question 10:
The cash cycle is represented by the following sequence:
*a/ Cash, raw materials, finished goods, and receivables, cash
Question 11:
The first step in the preparation of cash budget is:
*a/ sales forecast
Question 12:
Cash inflow in cash budgeting comes mainly from:
*a/ Collection on accounts receivable
Question 13:
A large part of cash outflow in cash budgeting is due to:
*a/ Payments on accounts payable
Difficult
Question 14:
A company has forecast sales in the first 3 months of the year as follows (figures in millions):
January, $60; February, $80; March, $100. 60% of sales are usually paid for in the month that
they take place and 40% in the following month. Receivables at the end of December were $24
million. What are the forecasted collections on accounts receivable in March?
*a/ $92 million
Question 15:
A company has forecast sales in the first 3 months of the year as follows (figures in millions):
January, $90; February, $20; March, $30. 70% of sales are usually paid for in the month that
they take place and 30% in the following month. Receivables at the end of December were $20
million. What are the forecasted collections on accounts receivable in March?
*a/ $27 million
Question 16:
A company has forecast sales in the first 3 months of the year as follows (figures in millions):
January, $80; February, $60; March, $40. 70% of sales are usually paid for in the month that
they take place, 20% in the following month, and the final 10% in the next month. Receivables at
the end of December were $23 million. What are the forecasted collections on accounts
receivable in March?
*a/ $48 million
Question 17:
A company has forecast sales in the first 3 months of the year as follows (figures in millions):
January, $200; February, $140; March, $100. 50% of sales are usually paid for in the month that
they take place, 30% in the following month, and the final 20% in the next month. Receivables at
the end of December were $100 million. What are the forecasted collections on accounts
receivable in March?
*a/ $132 million
CHAPTER 11 – PAYOUT POLICY
Easy
Question 1:
Firms can pay out cash to their shareholders in the following ways:
I) Dividends
II) Share repurchases
III) Interest payments
*a/ I and II only
Question 2:
Dividends are decided by:
I) The managers of a firm
II) The government
III) The board of directors
*a/ III only
Question 3:
Which of these dates occurs last in time (when arranged in the chronological order)?
*a/ Payment date
Question 4:
Which of the following lists events in the chronological order from earliest to latest?
*a/ Declaration date, ex-dividend date, record date
Question 5:
Which of the following dividends is never in the form of cash?
I) Regular dividend
II) Special dividend
III) Stock dividend
IV) Liquidating dividend
*a/ III only
Question 6:
The par value of the outstanding shares is defined as:
*a/ Legal capital
Question 7:
Which of the following is not true?
*a/ All of the answers are correct.
Question 8:
According to financial executives' views about dividend policy, the following statement is the
most frequently cited one:
I) we try to avoid reducing the dividend
II) we try to maintain a smooth dividend stream
III) we look at the current dividend level
IV) we are reluctant to make a change that may have to be reversed
*a/ I only
Medium
Question 9:
Generally, investors interpret the announcement of an increase in dividends as:
*a/ good news and the stock price increases
Question 10:
Generally, investors view the announcement of open-market repurchase of stocks as:
*a/ good news and the stock price increases
Question 11:
One key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that:
*a/ New shares are sold at a fair price
Question 12:
The indifference proposition regarding dividend policy:
*a/ Assumes that investors are indifferent about the timing of dividend payments
Question 13:
One key assumption of the Miller and Modigliani (MM) dividend irrelevance is that:
*a/ Capital markets are efficient
Question 14:
The dividend-irrelevance proposition of Miller and Modigliani depends on the following
relationship between investment policy and dividend policy.
*a/ The investment policy is set before the dividend decision and not changed by dividend policy
Question 15:
Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as
dividends. If the firm expects to maintain this dividend forever, Calculate the stock price today.
(The required rate of return is 10%)
*a/ $100
Question 16:
Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as
dividends. If the firm expects to maintain this dividend forever, Calculate the stock price after
the dividend payment. (The required rate of return is 10%)
*a/ $90
Question 17:
Company X has 100 shares outstanding. It earns $1,000 per year and expects repurchase its
shares in the open market instead of paying dividends. Calculate the number of shares
outstanding at the end of year-1, if the required rate of return is 10%.
*a/ 90
Difficult
Question 18:
One possible reason that shareholders often insist on higher dividends is:
*a/ They do not trust managers to spend retained earnings wisely
Question 19:
The rightist position is that the market will reward firms that:
*a/ Have high dividend yield.
Question 20:
According to behavioral finance investors prefer dividends because:
*a/ investors prefer the discipline that comes from spending only the dividends
Question 21:
If investors do not like dividends because of the additional taxes that they have to pay, how
would you expect stock prices to behave on the ex-dividend date?
*a/ Fall by more than the amount of the dividend
Question 22:
If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of
tax is different because:
*a/ Dividends are taxed when distributed while capital gains are deferred until the stock is sold
Question 23:
If dividends are taxed more heavily than capital gains, the investors:
*a/ Should be willing to pay more for stocks with low dividend yields
Question 24:
If investors have a marginal tax rate of 20% and a firm has announced a dividend of $5;
*a/ The price of stock should decrease by $4 on the ex-dividend date
Question 25:
Two corporations A and B have exactly the same risk and both have a current stock price of
$100. Corporation A pays no dividend and will have a price of $120 one year from now.
Corporation B pays dividends and will have price of $113 one year from now after paying the
dividend. The corporations pay no taxes and investors pay no taxes on capital gains but pay a tax
of 30% income tax on dividends. What is the value of the dividend that investors expect
corporation B to pay one year from today?
*a/ $10
Question 26:
A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share
(30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 30% tax
bracket. What is the amount of tax paid by the shareholder under the imputation tax system?
*a/ Zero