1)Which of the following statements is true? 

A. A security is a claim issued by a firm that      pays owners interest, not dividends.

B. A call option analyzes conflicts of interest and behavior in a     principal-agent relationship.

C. An agent-manager can never make bad decisions.

D. The difference between the value of one action     and the value of the best alternative is called an opportunity cost. 

2) Book value, or net book value, refers to 

A. the statement of a firm’s financial position      at one point in time, including its assets and the claims on those assets      by creditors and owners

C. an agent-manager never making bad decisions

D. the net       of assets less liabilities shown in the accounting statements

3) Assume that the par value of a bond is $1,000.     Consider a bond where the coupon rate is 9% and the current yield is 10%.     Which of the following statements is true? 

A. The current yield was less than 9% when the bond        was first issued.

B. The current yield was greater than 9% when the       bond was first issued.

C. The market value of the bond is more than $1,000.

D. The       market value of the bond is less than $1,000.

4) If the yield to maturity for a bond is less than the     bond’s coupon rate, the market value of the bond is __________. 

A.        greater than the par value

B. less than the par value

C. equal to the par value

D. cannot tell

5)For investors the       proper measure of a stock’s risk is its __________. 

A. nondiversifiable risk

B. specific risk

C. nonsystematic risk

D. standard deviation

6) A company’s beta is -1.5. If the overall stock     market decreases by 5%, what is the expected change in the firm’s stock     price? 

A. Share price decreases by 5%

B. Share price decreases by 6.5%

C. Share       price increases by 7.5%

D. Share price decreases by 7.5%

7) Which of these investments would you expect to have     the highest rate of return for the next 20 years? 

A. U.S. Treasury bills

B.       Long-term corporate bonds

C. Intermediate-term U.S. government bonds

D. Money market funds

8) Dimensions of risk include __________. 

A. uncertainty about the future outcome

B. the certainty of a negative outcome

C. the impossibility of the same return

D. uncertainty about yesterday’s outcome

9) One problem with using negative values for       the proportion invested in the riskless asset to represent a borrowed       amount is that the implied borrowing rate of interest is the same as the       __________. 

A. prime rate of interest

B. current rate of interest

C. lending rate of interest

D. nominal rate of interest

10) If you were willing to bet that the overall       stock market was heading up on a sustained basis, it would be logical to       invest in 

A. high beta stocks

B. low beta stocks

C. stocks with large amounts of unique risk

D. stocks that plot below the security market         line

11) Stony Products has an inventory conversion         period (ICP) of about 70 days. The receivables collection period (RCP)         is 30 days. The payables deferral period (PDP) is about 40 days. What         is Stony’s cash conversion cycle (CCC)? 

A. 100 days

B. 60           days

C. 140 days

D. 70 days

CCC =           ICP + RCP − PDP = 70 days + 30 days − 40 days = 60 days

12) The main source of short-term operating capital         is _________. 

A.            trade credit

B. bank loans

C. bonds

D. sale of treasury stock

13) An investor’s risky portfolio is made up of         individual stocks. Which of the following statements about this         portfolio is true? 

A.            Each stock in the portfolio has its own beta.

B. Selling any stock in this portfolio will lower           the beta of the portfolio.

C. An investor cannot change the risk of this           portfolio by her choice about personal leverage.

D. Each stock in the portfolio will have a beta           greater than 1. 

14) An all-equity-financed firm would __________. 

A. not pay any income taxes, because interest            would exactly offset its taxable income.

B. pay corporate income taxes, because it would           have interest expense.

C. not pay corporate income taxes, because it           would have no interest expense. 

D. pay           corporate income taxes if its taxable income is positive.

15) If a firm wants to lower its weighted average         cost of capital (WACC), one way to do so would be to 

A. sell more common shares

B.           sell more bonds

C. Pay           a cash dividend

D. dividend

17) Ideas for capital budgeting projects come from         all levels within an organization. The bottom-up process results in         ideas moving __________ through the organization. 

A. downward

B.           upward

C. sideways

D. any way

18) Which of the following statements is true? 

A. A mutually exclusive project can be chosen            independently of other projects

B. When undertaking one         project prevents investing in another project, and vice versa, the         projects have a positive payback.

C. A conventional             project has an initial cash outflow followed by one or more             expected future cash inflows.

D. Whenever projects are             independent and conventional, the internal rate of return (IRR) and             net present value (NPV) methods will disagree

19) In practice, the __________ rule is the           preferred criteria to accept or reject a capital investment project. 


B. profitability index


D. payback

20) The Jerome Inc. western regional branch           has been looking to install a new distribution center. The analysts           have run the numbers on the distribution center costs and annual           inflow from the investment. The project will cost $5 million at the           beginning of the first year. The project will generate $1 million in           earnings before interest and taxes at the end of each year. Jerome is           in the 35% tax bracket and annual depreciation equates to $500,000           per year. The distribution center’s end of the fifth year’s salvage           equals its book value, or $2,500,000. Compute the project’s NPV,           assuming Jerome’s WACC equals 12%. 

A. -$1,238,328

B. $564,060

C. $1,825,731

D. -$66,776

21) The __________               method breaks down when evaluating projects in which the sign of               the cash flow changes. 




D. Payback

22) Studies show               systematic differences in capital structures across industries.               These are due primarily to differences in __________. 

A. a firm’s                  inventory turnover ratio

B. the ability of                 assets to support borrowing

C. accounting                 practices

D. management’s                 attitude toward what other industries are doing

23) Capital structure               decisions refer to the 

A. dividend yield                  of the firm’s stock

B. blend of equity                 and debt used by the firm

C. capital gains                 available on the firm’s stock

D. maturity date of                 firm’s securities

24) Which of the                   following statements concerning preferred stock is true? 

A. Preferred stockholders have a                      prior claim on the income and assets of the firm, as                      compared to the claims of lenders.

B. Preferred stock dividends per                     share are normally increased as the earnings of the firm                     increase.

C. Preferred dividends per share                     are usually not cut or suspended unless the firm is faced                     with serious financial problems. 

D. Preferred stockholders are the                     ultimate owners of the firm.

25) Mortgage bonds                   are __________. 

A. secured by a lien on the                      issuer’s general assets 

B. secured by the lien on the                     issuer’s specific, real assets 

C. usually secured by assets such                     as common shares of one of the issuer’s subsidiaries

D. a form of unsecured debt

26) __________                   says to calculate the net advantage of leasing based on the                   incremental after-tax benefits that leasing will provide. 

A. The capital market efficiency

B. The options principle

C. The principle of comparative advantage

D. The principle of incremental                     benefits

27) From the                   lessee’s viewpoint, the relevant discount rate for evaluating                   a lease versus buy decision is the __________. 

A. cost of issuing new common                      stock

B. pretax cost of issuing debt

C. after-tax cost of issuing debt

D. lessor’s cost of debt

28) The wholesale                   price for Captain John’s is $0.612 per loaf, and the variable                   cost of production is $0.387 per loaf. Captain John’s expects                   that expansion will allow them to sell an additional 4.5                   million loaves in the next 5 years. What additional revenues                   minus expenses will be generated from expansion? 

A. $912,500

B. $1,000,500

C. $1,012,500

D. $1,102,500

29) Which of the                   following statements is true? 

A. Soft capital rationing refers                      to the rationing imposed externally by limited funds for                      borrowing from outside sources.

B. Hard capital rationing refers                     to the rationing imposed internally by the firm. 

C. A post audit is a set of                     procedures for evaluating a capital budgeting decision                     after the fact.

D. Few firms will engage in                     capital rationing.

30) In efficient                   markets, as in the United States, market prices are not                   expected to be __________. 

A. wrong

B. fair

C. followed by many analysts

D. incorporate all information


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