Incremental cash flows associated with capital budgeting projects can include:

a. reductions in fuel and maintenance costs.

b. reductions in labor costs.
c. increased profitability.
d. All of the above

If a company has fixed costs of $40,000, a unit selling price of $12, and variable costs of $4 per unit,
how many units will it have to sell to make a profit of $20,000?
a. 2,500 units
b. 5,000 units
c. 3,600 units
d. 7,500 units

When comparing two equal-sized investments, the ____ is an appropriate measure of total risk.
a. disjointed variance
b. correlation
c. standard deviation
d. coefficient of variation

Zero-Sum Enterprise pays an annual dividend of $1.40 per share and neither earnings nor dividends
are expected to grow in the future. What is the value of Zero-Sum's stock to an investor who requires
a 14 percent rate of return?
a. $20.00
b. 0
c. $14.00
d. $10.00

Metromat has the following equity accounts on its balance sheet:

Common stock ($2 par, 2.4 million shares)
Paid in excess
Retained earnings
Total common stockholders' equity

4,800,000
33,600,000
134,400,000
$172,800,000

The current market price of Metromat's shares is $16. If the firm declares a 15% stock dividend and a
$.15 per share cash dividend, what will be the impact on the paid in excess account? Assume a
marginal tax rate of 40%.
a. Decreases $2.56 million
b. Does not change
c. Increases $5.04 million
d. Increases $5.76 million

Dittmar Corp. is considering an operational change that will increase its DOL from 2.0 to 3.0. It will
be funding this change with debt so that its DFL will increase from 1.2 to 1.5. Analysts believe that
the overall change could increase sales by as much as 10% if it is successful, but could decrease sales
by 6% if it is not successful. What is the range of possible changes in EPS based on this information?
a. Decrease of 6% to an increase of 10%
b. Decrease of 9% to an increase of 15%
c. Decrease of 24% to an increase of 40%
d. Decrease of 27% to an increase of 45%
e. Decrease of 18% to an increase of 30%

What is the internal rate of return for a project that requires an initial outlay of $92,000 and
generates a single cash inflow of $25,750 in 5 years?
a. 10%
b. 15.3%
c. 13.1%
d. 12%

Estimating cash flows is the _____ and error-prone part of capital budgeting.
a. least difficult
b. least likely
c. most likely
d. most difficult

Porter Productions sells video tapes for $15.00 each. Their variable cost per unit is $9.00. In
addition, they incur $180,000 in fixed costs each year. What is the Porter's annual breakeven point
in sales revenue?
a. $180,000
b. $720,000
c. $300,000
d. $30,000
e. $450,000

The coefficient of variation is a:

a. continuous random variable.
b. relative measure of variation.
c. measure of return.
d. ratio of standard deviation to variance.

What entity within the firm has the discretion to issue dividends?
a. CEO

b. Board of directors
c. Vice President of Finance
d. CFO

If a firm adopts a large proportion of above-average-risk projects that are not offset by belowaverage-risk projects:
a. its risk premium will decline.
b. its cost of capital will rise.
c. the risk-free rate will increase as more risk is added.
d. None of the above

If a company sells 20,000 units at $20 each, has fixed costs of $50,000 and a variable cost of $10 per
unit, what is their degree of operating leverage (DOL)?
a. 1.6
b. 1.33
c. 2.5
d. 1.7

An agreement between a commercial bank and a corporate customer to exchange an exact amount of
one currency for another on a specific future date is called a:
a. spot contract.
b. forward contract.
c. optional contract.
d. deferred contract.

A bond with an annual coupon payment of $100 originally sold at par for $1,000. Market interest
rates are currently 12%. This bond would be selling at a ____ in order to compensate ____.
a. discount; the seller for the below market coupon rate
b. discount; the purchaser for the below market coupon rate
c. premium; the purchaser for the below market coupon rate
d. premium; the seller for the below market coupon rate

The money that a business spends in the course of business can be divided into two categories:
a. short- and long-term funds.
b. inventory and expenses.
c. research and development.
d. capital improvements and new ventures.

Most Eurobonds are denominated in:

a. British pounds.
b. European euros.
c. American dollars.

d. Swiss francs.

Which of the following is true of the breakeven diagrams?

a. Cost is plotted along the vertical axis and unit sales (Q for quantity) along the horizontal axis.
b. Fixed cost is plotted along the horizontal axis and variable cost along the vertical axis.
c. Revenue is plotted along the horizontal axis and unit sales (Q for quantity) along the vertical.
d. Cost is plotted along the horizontal axis and unit sales (Q for quantity) along the vertical axis.

Which of the following is not usually a restriction on the payment of dividends?

a. If preferred stock has a cumulative feature, no common stock dividends may be paid until cumulative preferred
stock dividends are current.
b. Dividends must be paid from the current year's net income.
c. Dividends may not be paid if a company is insolvent.
d. Bond indentures may restrict the payment of dividends.
e. All of the above are restrictions on the payment of dividends.

In general, price changes due to a given interest rate change will be:
a. smaller as the term of the bond extends farther in time.
b. larger as the term of the bond extends farther in time.
c. smaller as the maturity date nears.
d. b and c

If there are no taxes, would depreciation and opportunity costs be relevant in assessing a
projects cash flows? ANSWER D
a. Only depreciation would not be relevant.
b. Only opportunity costs would not be relevant.
c. Both would not be relevant.
d. Both would still be relevant.

(D0). The firm is expecting dividends to grow at 21% in years 1-2 and 10% in Year 3. After that
growth will be constant at 8% per year. Similar investments return 14%. Calculate the value of
the stock today.
a. $91.47
b. $71.49
c. $88.31
d. $116.10

Static Inc. has had a hard time recently. In order to help the firm survive a downturn in the
market for its products, management has announced that it doesn't plan to pay dividends for the
next three years. A modest dividend of $2.00 is projected for the fourth year after which
dividends are expected to grow at 5% indefinitely. Similar stocks return 10%. How much should
Static's stock sell for today?
a. $28.69

b. $20.00
c. $40.00
d. $30.05

The value of a foreign currency, such as the British pound, stated in American dollars is the:
a. forward rate.
b. indirect rate.
c. forward spot rate.
d. direct quote.

Multinational corporations (MNCs) are:

a. companies that trade in the securities of businesses from other countries.
b. corporations with major operations in several countries.
c. companies that have sales offices in other countries.
d. companies that have operations in only one country.

Management's propensity to overestimate the value of the target company in a merger can lead
to:
a. a financial windfall for the stockholders of the target company.
b. an irrational transfer of wealth from the shareholders of the acquirer to those of the target.
c. financial disaster for the acquiring company.
d. All of the above

Inflation, war, political upheaval, and other broad economic events cause:
a. non-diversifiable unsystematic risk.
b. business specific risk.
c. diversifiable risk.
d. market risk.

Most Eurobonds are denominated in:

a. IRR.
b. cost of capital.
c. average rate it pays investors.
d. Both b & c

Urguhart has just declared a 4-for-3 stock split. If the pre-split price of common stock was $54 a
share, what do you expect the post-split price will be?
a. $72.00
b. $40.50
c. $36.18
d. $42.23

Which statement is most consistent with the efficient markets hypothesis?

a. Information is reflected in security prices almost immediately.
b. Chartists have an advantage because the market is predictable.
c. Information in the market is always assessed correctly.
d. Investors cannot consistently earn a positive return on investment over time.

Which of the following statements is false?

a. A portfolio composed of only one stock will not be well diversified.
b. You can completely eliminate risk if you hold a well-diversified portfolio.
c. Beta is meaningful only if an investor holds a well-diversified portfolio.
d. A wise investor diversifies to capture the high average return of stocks while avoiding as much risk as possible.
e. All of the above statements are correct.

The profitability index is a variation of the ____ method.

a. NPV
b. IRR
c. payback
d. Both a & c

Which of the following is a reason why calculating the capital structure based on market prices is
considered tedious?
a. Accurate market prices can never be determined.
b. Dividend payout ratios on stocks are usually unpredictable.
c. The market-based structure is constantly changing.
d. The implied error in market-based structures is large.

EBIT, earnings before interest and taxes, is also called:

a. operating income.
b. financial income.
c. revenue.
d. net income.

Use the following information to calculate your company's expected return.

State

Probability

Return

Boom

20%

40%

Normal

60%

15%

Recession

20%

(20%)

a. 13%
b. 15%

c. 17%
d. 11%

Which of the following statements is not correct?ANSWER D

a. When a bond's yield to maturity is greater than the coupon rate, the bond sells above par.
b. When a bond's yield to maturity equals the coupon rate, the bond sells for par.
c. Bond prices and interest rates are inversely related.
d. When a bond's yield to maturity is
less than the coupon rate, the bond
sells above par.

Holding all other variables constant, which of the following

would DECREASE the Net Working Capital investment
required on a project?
a. Allowing customers a shorter time to pay for purchases
b. Taking a longer time to pay suppliers
c. Reducing inventory levels
d. Both a & c
e. All of the above

It is difficult to trade with a country that has a nonconvertible

currency because:
a. governments with nonconvertible currencies discourage international
trade.
b. a foreign business operating in the country can't convert profits earned
there into its own nation's currency at a reasonable rate.
c. it is impossible to either buy or sell its currency.
d. All of the above

Considering that a firm has a PE ratio of 71.4 and an EPS of 0.1, what is the price of a stock that
pays an annual dividend of $1.00?

a. 0.0714

b. 7.14

c. 71.4

d. 0.714