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1. The following are examples of intangible assets except ______. (Points: 5) building
trade marks patents technical expertise
2. The following are advantages of separation of ownership and management of
corporations except ______. (Points: 5) corporations can exist forever facilitate transfer
of ownership without affecting the operations of the firm hire professional managers
incur agency costs
3. The financial goal of a corporation is to _______. (Points: 5) maximize profits
maximize sales maximize the value of the firm for the shareholders maximize
managers' benefits
4. Conflicts of interest between shareholders and managers of a firm result in ______.
(Points: 5) principal-agent problem increased agency costs both A and B managers
owning the firm
5. An initial investment of $400,000 will produce an end of year cash flow of $480,000.
What is the NPV of the project at a discount rate of 20%? (Points: 5) $176,000 $80,000
$0 (zero) None of the above
6. 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 (Points: 5) $372,431.81 $450,000
$405,950.68 none of the above
7. A perpetuity is defined as ______. (Points: 5) equal cash flows at equal intervals of
time for a specific number of periods equal cash flows at equal intervals of time
forever unequal cash flows at equal intervals of time forever none of the above
8. What is the present value of $1000 per year annuity for five years at an interest rate of
12%? (Points: 5) $6,352.85 $3,604.78 $567.43 none of the above
9. An annuity is defined as ______. (Points: 5) equal cash flows at equal intervals of
time for a specified period of time equal cash flows at equal intervals of time forever
unequal cash flows at equal intervals of time forever none of the above
10. If you invest $100 at 12% APR for three years, how much would you have at the end
of 3 years using compound interest? (Points: 5) $136 $140.49 $240.18 none of the above
11. A 5-year bond with a coupon rate of 4% has a face value of $1000. What is the
annual interest payment? (Points: 5) $80 $40 $100 none of the above
12. The value of a common stock today depends on ______. (Points: 5) number of shares
outstanding and the number of shareholders the expected future dividends and the
discount rate the Wall Street analysts present value of the future earnings per share
13. Casino Inc. is expected to pay a dividend of $6 per share at the end of year one and
these dividends are expected to grow at a constant rate of 6% per year forever. If the
required rate of return on the stock is 18%, what is current value of the stock today?
(Points: 5) $30 $50 $100 $54
14. Dividend growth rate for a stable firm can be estimated as ______. (Points: 5) Plow
back rate / the return on equity (ROE) Plow back rate * the return on equity (ROE)
Plow back rate + the return on equity (ROE) Plow back rate - the return on equity (ROE)
15. Great Motor Company is currently paying a dividend of $1.50 per year. The
dividends are expected to grow at a rate of 20% for the next three years and then a
constant rate of 6 % thereafter. What is the expected dividend per share in year 5?
(Points: 5) $2.91 $2.59 $2.00 $1.50
16. Company X has a P/E ratio of 10 and a stock price of $50 per share. Calculate
earnings per share of the company. (Points: 5) $6 per share $10 per share $0.20 per share
$5 per share
17. Which of the following investment rules may not use all possible cash flows in its
calculations? (Points: 5) NPV payback period IRR all of the above
18. Given the following cash flows for project A: C0 = -2000, C1 = +600 , C2 = +1400
and C3 = +5000, calculate the payback period. (Points: 5) three years two years one year
none of the above
19. Muscle Company is investing in a giant crane. It is expected to cost 6.0 million in
initial investment and it is expected to generate an end of year cash flow of 3.0 million
each year for three years. Calculate the NPV at 12% (approximately). (Points: 5) 2.4
million 1.2 million 0.80 million 0.20 million
20. Net Working Capital should be considered in project cash flows because ______.
(Points: 5) firms must invest cash in short-term assets to produce finished goods they
are sunk costs firms need positive NPV projects for investment none of the above
21. Money that a firm has already spent or committed to spend regardless of whether a
project is taken is called ______. (Points: 5) fixed cost opportunity cost sunk cost none
of the above
22. A firm has a general-purpose machine, which has a book value of $400,000 and is
sold for $600,000 in the market. If the tax rate is 30%, what is the opportunity cost of
using the machine in a project? (Points: 5) $600,000 $540,000 $400,000 none of the
above
23. Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5
years. If the straight line depreciation method is used, what is the book value of the
equipment at the end of two years? (Points: 5) $200,000 $170,000 $140,000 $50,000
24. Spill Oil Company's stocks had -10%, 13% and 27% rates of return during the last
three years respectively; calculate the average rate of return for the stock. (Points: 5)
10% per year 8% per year 12% per year none of the above
25. The portion of the risk that can be eliminated by diversification is called _____.
(Points: 5) market risk unique risk interest rate risk default risk
26. The "beta" is a measure of ______. (Points: 5) unique risk total risk market risk none
of the above
27. If the standard deviation of returns of the market is 20% and the beta of a welldiversified portfolio is 1.5, calculate the standard deviation of the portfolio ______.
(Points: 5) 30% 20% 10% none of the above
28. The efficient portfolios: (I) have only unique risk (II) provide highest returns for a
given level of risk (III) provide the least risk for a given level of returns (IV) have no risk
at all (Points: 5) I only II and III only IV only II only
29. Suppose you borrow at the risk-free rate an amount equal to your initial wealth and
invest in a portfolio with an expected return of 20% and a standard deviation of returns of
16%. The risk-free asset has an interest rate of 4%; calculate the expected return on the
resulting portfolio ______. (Points: 5) 20% 40% 36% none of the above
30. If the beta of Microsoft is 1.7, risk-free rate is 3% and the market risk premium is 8%,
calculate the expected return for Microsoft. (Points: 5) 16.6% 15.6% 13.9% 11.3%
31. The cost of capital for a project depends on ______. (Points: 5) the company's cost of
capital the use to which the capital is put, i.e. the project the industry cost of capital all
of the above
32. Cost of capital is the same as cost of equity for firms ______. (Points: 5) financed
entirely by debt financed by both debt and equity financed entirely by equity none of
the above
33. 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.)
(Points: 5) 20% 17% 8.1% none of the above
34. You are given the following data for year-1. Revenue = $43; Total costs = $30;
Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for
year-1. (Points: 5) $7 $10 $13 none of the above
35. A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000;
C3 = 100,000. If the discount rate changes from 12% to 15%, what is the change in the
NPV of the project (approximately)? (Points: 5) 12,750 increase 12,750 decrease
122,650 increase 135,400 decrease
36. The final decision on a project should be from ______. (Points: 5) project analysis
break-even analysis NPV analysis sensitivity analysis
37. When a firm has no debt, then such a firm is known as: (I) an unlevered firm (II) a
levered firm (III) an all-equity firm (Points: 5) I only II only III only I and III only
38. When comparing levered vs. unlevered capital structures, leverage works to increase
EPS for high levels of operating income because ______. (Points: 5) interest payments on
the debt vary with EBIT levels interest payments on the debt stay fixed leaving less
income to be distributed over less shares interest payments on the debt stay fixed,
leaving less income to be distributed over more shares interest payments on the debt stay
fixed, leaving more income to be distributed over less shares
39. The beta of an all equity firm is 1.2. If the firm changes its capital structure to 50%
debt and 50% equity using 8% debt financing, what will be the beta of the levered firm?
The beta of debt is 0.2. (Assume no taxes.) (Points: 5) 1.2 2.2 2.4 none of the above
40. The M&M Company is financed by $4 million (market value) in debt and $6 million
(market value) in equity. The cost of debt is 5% and the cost of equity is 10%. Calculate
the weighted average cost of capital. (Assume no taxes.) (Points: 5) 10% 15% 8% none
of the above
41. Minimizing the weighted average cost of capital (WACC) is the same as ______.
(Points: 5) maximizing the market value of the firm maximizing the book value of the
firm maximizing the profits of the firm maximizing the liquidating value of the firm
42. The reason that MM Proposition I does not hold good in the presence of corporate
taxes is because ______. (Points: 5) levered firms pay lower taxes when compared
with identical unlevered firms bondholders require higher rates of return compared with
stockholders earnings per share are no longer relevant with taxes dividends are no longer
relevant with taxes
43. The MM theory with taxes implies that firms should issue maximum debt. In practice,
this is not true because ______. (I) Debt is more risky than equity (II) Bankruptcy and its
attendant costs is a disadvantage to debt (III) The payment of personal taxes may offset
the tax benefit of debt (Points: 5) I only II only III only II and III only
44. Indirect costs of bankruptcy are borne principally by ______. (Points: 5) bondholders
stockholders managers the federal government
45. The trade-off theory of capital structure predicts that _____. (Points: 5) unprofitable
firms should borrow more than profitable ones safe firms should borrow more than
risky ones rapidly growing firms should borrow more than mature firms increasing
leverage increases firm value
46. Capital budgeting decisions that include both investment and financing decisions can
be analyzed by _____. (I) Adjusting the present value (II) Adjusting the discount rate
(III) Ignoring financing mix (Points: 5) I only II only III only I and II only
47. The after-tax weighted average cost of capital (WACC) is calculated as ______.
(Points: 5) WACC = rD (D/V) + rE (E/V) WACC = rD (1-TC )(D/V) + rE (E/V)
WACC = rD (D/V) + rE(1-TC )(E/V) none of the above
48. The Cambridge Company is unlevered with assets of $30 million and EBIT of $6
million. If the firm's tax rate is 34%, calculate its after-tax cash flow. (Points: 5) $2.40
million $2.04 million $3.96 million $10.20 million
49. The Boston Company has total assets of $30 million, of which $10 million are
financed by debt and $20 million by equity. The EBIT is $6 million. If the firm's tax rate
is 34%, and the interest rate on debt is 10%, calculate it's after tax cash flow. (Points: 5)
$3.96 million $3.30 million $2.04 million $1.70 million
50. The value of a business is given by ______. (Points: 5) PV = PV(free cash flows) PV
= PV(free cash flows) + PV (horizon value) PV(free cash flows) – PV(horizon value)
none of the above
51. A currency forward contract is described by ______. (Points: 5) agreeing today to buy
or sell specified amount of a currency at a later date at a price set in the future agreeing
today to buy or sell specified amount of a currency today at its current price agreeing
today to buy or sell specified amount of a currency at a later date at a price set
today none of the above
52. If a Big Mac costs $2.90 in the USA and in Japan 250 Yens, according to PPP, what
is the implied exchange rate in Yens/US$? (Points: 5) 106 86.2069 125 none of the above
53. Large business combinations in Japan are normally carried out through reciprocal
ownership of common stock. These networks, or keiretsu, involve a large number of
diversified companies centered around a large bank, industrial firm, or trading firm. One
of the main benefits of this structure is argued to be _______. (Points: 5) the monopolistic
control of economic segments the reduction of financial distress costs large scale
diversification that cannot be done by individual shareholders greater efficiency in
management because the management skills are homogeneous even for
54. Conglomerates can be effective in ______. (Points: 5) the U.S.A. Great Britain
developing economies none of the above
55. The United States has a market-based financial system because ______. (I) it has a
large stock market (II) it has a large corporate bond market (III) it has financial
institutions (Points: 5) I only II only III only I and II only