QuestionQuestion 1Starting to invest early for retirement increases the

Question 1

Starting to invest early for retirement increases the benefits of compound interest.

True

False

Question 2

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

A.

Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

B.

The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

C.

If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

D.

A bank loan’s nominal interest rate will always be equal to or less than its effective annual rate.

E.

A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

Question 3

If a firm raises capital by selling new bonds, it is called the “issuing firm,” and the coupon rate is generally set equal to the required rate on bonds of equal risk.

True

False

Question 4

Which of the following statements is CORRECT?

A.

An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to increase.

B.

An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality.

C.

Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.

D.

The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.

E.

Identifying an externality can never lead to an increase in the calculated NPV.

Question 5

Amram Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce the company’s current ratio?

A.

Borrow using short-term notes payable and use the proceeds to reduce accruals.

B.

Use cash to reduce short-term notes payable.

C.

Use cash to reduce accounts payable.

D.

Use cash to reduce accruals.

E.

Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

Question 6

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

True

False

Question 7

As a firm’s sales grow, its current assets also tend to increase. For instance, as sales increase, the firm’s inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneous liabilities that reduce AFN arise from transactions brought on by sales increases.

True

False

Question 8

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

True

False

Question 9

Which of the following statements is most CORRECT?

A.

The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.

B.

One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.

C.

Warrants have an option feature but convertibles do not.

D.

Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.

E.

The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.

Question 10

The “preferred” feature of preferred stock means that it normally will provide a higher expected return than will common stock.

True

False

Question 11

If a firm’s goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders’ wealth.

True

False

Question 12

If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.

True

False

Question 13

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

A.

Corporate shareholders escape liability for the firm’s debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.

B.

Less of a corporation’s income is generally subjected to taxes than would be true if the firm were a partnership.

C.

Corporations generally find it relatively difficult to raise large amounts of capital.

D.

Corporate investors are exposed to unlimited liability.

E.

Corporations generally face relatively few regulations.

Question 14

Which of the following statements is CORRECT?

A.

A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.

B.

If a stock has a negative beta, its expected return must be negative.

C.

If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.

D.

According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.

E.

A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock’s beta was correctly calculated and is stable.

Question 15

A firm’s AFN must come from external sources. Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.

True

False

Question 16

To finance the construction of a new plant, Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock. The firm currently has an EPS of $5.40 and a P/E ratio of 10, with 1,200,000 shares outstanding. If the firm wants its ex-rights price to be $50, what subscription price must it set on the new shares?

A.

$33.78

B.

$29.55

C.

$41.80

D.

$39.28

E.

$50.00

Question 17

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock’s current price?

A.

$17.39

B.

$18.75

C.

$18.29

D.

$19.22

E.

$17.84

Question 18

The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.

True

False

Question 19

If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.

True

False

Question 20

Which of the following statements is CORRECT?

A.

Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.

B.

In the statement of cash flows, a decrease in inventories is reported as a use of cash.

C.

In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.

D.

In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.

E.

In the statement of cash flows, depreciation charges are reported as a use of cash.

Question 21

“Capital” is sometimes defined as funds supplied to a firm by investors.

True

Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.