1.

For two conventional projects whose cumulative cash flows are identical, the higher the discount rate,
the more valuable will be the proposal with the early cash flows - True

2. A firm short of cash might well give greater emphasis to the payback period in evaluating a project -
True

3. The net present value of a project generally decreases as the required rate of return increases - True

4. A mutually exclusive project is one whose acceptance does not preclude the acceptance of alternative
projects - False

5. An investment with a short payback period is almost certain to have a positive net present value -
False

6. Use of the IRR method implicitly assumes that the project's intermediate cash inflows are reinvested
at the required rate of return used under the NPV method - False

7. If a project's cash flows are discounted at the internal rate of return, the NPV will be zero - True

8. All three major discounted cash flow methods of evaluation will consistently give the same desirability
ranking to a series of projects - False

9. Capital rationing occurs when funds are unlimited - False

10. For graduation you've been offered your choice of receiving either a Maserati or a Porsche. This is an
example of INDEPENDENT projects - False

11. Sensitivity analysis provides useful knowledge about the sensitivity of a project's NPV to a change in
one (or more) input variables - True

12. Sensitivity analysis indicates whether a project should be accepted or rejected – False

13. The Counting House, Inc., purchased 5-year property class equipment for $60,000. It uses the
MACRS method of depreciation. What is tax depreciation for the second year of the asset's life? 19,200

14. A 30-year bond issued by Gary's Plaid Pants Warehouse, Inc., in 1997 would now trade in the –
Secondary Capital Market

15. The purpose of financial markets is to: allocate savings efficiently.

16. Assume that a "temporary" additional (US federal tax related) first-year bonus depreciation of 50
percent applies to a new, $100,000 piece of equipment purchased by Bellemans Chocolatier, Inc. The
asset has a $10,000 estimated final salvage value. If this asset is fully depreciated for tax purposes over
its useful life, the overall amount that Bellemans will have depreciated for tax purposes is Rs.100,000
17. You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years. You
expect annual interest rates will be 8 percent over that time period. The maximum price you would be
willing to pay for the annuity is closest to 39,372 (PVA = $4,000 (PVIFA at 8% for 20 periods)

PVA = $4,000 (9.818) = $39,272)

18. With continuous compounding at 10 percent for 30 years, the future value of an initial investment of
$2,000 is closest to 40,171

19. In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value
of that future amount to you would fall

20. You are considering investing in a zero-coupon bond that sells for $250. At maturity in 16 years it
will be redeemed for $1,000. What approximate annual rate of growth does this represent? 9 percent

21. To increase a given present value, the discount rate should be adjusted – Downward

22. For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly payment of $263.80
for 5 years. The compound annual interest rate implied by this arrangement is closest to – 10 Percent

23. For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly payment of $263.80
for 5 years. The compound annual interest rate implied by this arrangement is closest to – 10 Percent

24. You are considering borrowing $10,000 for 3 years at an annual interest rate of 6%. The loan
agreement calls for 3 equal payments, to be paid at the end of each of the next 3 years. (Payments
include both principal and interest.) The annual payment that will fully pay off (amortize) the loan is
closest to – Rs.3741

25. When n = 1, this interest factor equals one for any positive rate of interest. – FVIFA

26. (1 + i)n 1- FVIF

27. You can use          to roughly estimate how many years a given sum of money must earn at a given
compound annual interest rate in order to double that initial amount - rule of 72

28. In a typical loan amortization schedule, the dollar amount of interest paid each period - decreases
with each payment

29. In a typical loan amortization schedule, the total dollar amount of money paid each period - remains
constant with each payment

30. What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your required
rate of return is 15 percent - Less than its face value
31. If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable
conclusion - The market is undervaluing the stock

32. When the market's required rate of return for a particular bond is much less than its coupon rate,
the bond is selling at: a premium

33. If an investor may have to sell a bond prior to maturity and interest rates have risen since the bond
was purchased, the investor is exposed to – Interest Rate Risk

34. Virgo Airlines will pay a $4 dividend next year on its common stock, which is currently selling at $100
per share. What is the market's required return on this investment if the dividend is expected to grow at
5% forever? - 9 Percent

35. If a bond sells at a high premium, then which of the following relationships hold true? (P 0 represents
the price of a bond and YTM is the bond's yield to maturity - P 0 > par and YTM < the coupon rate.

36. Interest rates and bond prices – Move in opposite direction

37. In the formula ke = (D1/P0) + g, what does g represent - the expected price appreciation yield from a
common stock.

38. The expected rate of return on a bond if bought at its current market price and held to maturity –
Yield To Maturity

39. This type of risk is avoidable through proper diversification - unsystematic risk

40. A statistical measure of the degree to which two variables (e.g., securities' returns) move together –
Covarience

41. An "aggressive" common stock would have a "beta" – Greater than one

42. A line that describes the relationship between an individual security's returns and returns on the
market portfolio – Characteristic Line

43. According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal
to the risk-free rate plus a premium - based on the systematic risk of the security.

44. The risk-free security has a beta equal to                     , while the market portfolio's beta is equal to     
. – Zero, one

45. Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than the gamble's
expected value. Carrie shows – Risk Aversion

46. Beta is the slope of - a characteristic line

47. A measure of "risk per unit of expected return." - coefficient of variation

48. The greater the beta, the            of the security involved - greater the unavoidable risk

49. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock
has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent.
According to the capital-asset pricing model (CAPM) and making use of the information above, the
required return on Plaid Pants' common stock should be         , and the required return on Acme's
common stock should be         . - 9.6 percent; 13.2 percent

50. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The market
beta is, of course, 1.00 and the beta of the industry of which the company is a part is 1.10. If Merrill Lych
were to calculate an "adjusted beta" for Espinosa's common stock, that adjusted beta would most likely
be - more than 0.75, but less than 1.10

51. Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets
are $8 million, and ROI is 8 percent – 1.60

52. Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit
margin of 5 percent. What are its sales? 480,000

53. Which of the following would NOT improve the current ratio? - Borrow short term to finance
additional fixed assets.

54. The gross profit margin is unchanged, but the net profit margin declined over the same period. This
could have happened if - the U.S. Congress increased the tax rate.

55. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This
means that the company - has greater than average financial risk when compared to other firms in its
industry.

56. Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average
collection period was 36 days, its ending accounts receivable balance is closest to         . (Assume a 365-
day year.) - $23.7 million

57. A company can improve (lower) its debt-to-total assets ratio by doing which of the following? - Sell
common stock.

58. Which of the following statements (in general) is correct? - The lower the total debt-to-equity ratio,
the lower the financial risk for a firm.

59. Retained earnings for the "base year" equals 100.0 percent. You must be looking at - an indexed
balance sheet.

60. Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio? .667
61. A firm's operating cycle is equal to its inventory turnover in days (ITD) - plus its receivable turnover in
days (RTD)

62. When doing an "index analysis," we should expect that changes in a number of the firm's current
asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly
together with          for a normal, well-run company. – net Sales

63. According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow
from a "financing" activity? - cash outflow to shareholders as dividends.

64. If the following are balance sheet changes:

         $5,005 decrease in accounts receivable
         $7,000 decrease in cash
        $12,012 decrease in notes payable
        $10,001 increase in accounts payable
a "use" of funds would be the: $12,012 decrease in notes payable.

65. On an accounting statement of cash flows an "increase(decrease) in cash and cash equivalents"
appears as – none

66. Which of the following would be included in a cash budget? – Dividends

67. An examination of the sources and uses of funds statement is part of: - Fund Flow Analysis

68. Which of the following is NOT a cash outflow for the firm? Depreciation

69. Which of the following would be considered a use of funds? - an increase in cash.

70. The cash flow statement in the United States is most likely to appear using – Indirect Method

71. For a profitable firm, total sources of funds will always          total uses of funds – be Equal to

72. Which of the following would be consistent with a more aggressive approach to financing working
capital? - Financing some long-term needs with short-term funds.

73. Which asset-liability combination would most likely result in the firm's having the greatest risk of
technical insolvency? Reducing current assets, increasing current liabilities, and reducing long-term
debt.

74. Which of the following illustrates the use of a hedging (or matching) approach to financing? -
Permanent working capital financed with long-term liabilities - Permanent working capital financed with
long-term liabilities.

75- In deciding the appropriate level of current assets for the firm, management is confronted with - a
trade-off between profitability and risk.
76.                varies inversely with profitability – Liquidity

77. Spontaneous financing includes – Accounts Payable

78. Financing a long-lived asset with short-term financing would be - an example of "high risk -- high
(potential) profitability" asset financing.

79. Net working capital refers to - current assets minus current liabilities.

80. Marketable securities are primarily - short-term debt instruments

81. Which would be an appropriate investment for temporarily idle corporate cash that will be used to
pay quarterly dividends three months from now? - Ninety-day commercial paper with a current annual
yield of 6.2 percent.

82. Which of the following marketable securities is the obligation of a commercial bank? - Negotiable
certificate of deposit

83. That portion of a firm's total marketable securities portfolio held to take care of probable
deficiencies in the firm's cash account - Ready cash segment

84. A non-negotiable check payable to a company account at a concentration bank - Depository transfer
check (DTC)

85. According to the Bond Equivalent Yield (BEY) method, the yield on a $1,000, 13-week US Treasury bill
purchased for $960 would be closest to          - 16.7 percent

86. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000. If the IT is
improved to 8 times while the COGS remains the same, a substantial amount of funds is released from
or additionally invested in inventory. In fact, - $60,000 is released.

87. Ninety-percent of Vogel Bird Seed's total sales of $600,000 is on credit. If its year-end receivables
turnover is 5, the average collection period (based on a 365-day year) and the year-end receivables are,
respectively - 73 days and $108,000.

88. If EOQ = 360 units, order costs are $5 per order, and carrying costs are $.20 per unit, what is the
usage in units? - 2,592 units

89. Costs of not carrying enough inventory include: - All of these

90. Which of the following relationships hold true for safety stock? - the higher the profit margin per
unit, the higher the safety stock necessary.

91. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the
discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would
receivables be if all customers took the cash discount? - Lower than the present level.
92. EOQ is the order quantity that          over our planning horizon - minimizes total inventory costs

93. If credit terms of "2/10, net 40" are offered, the approximate cost of not taking the discount and
paying at the end of the credit period would be closest to which of the following? (Assume a 365-day
year.) – 24.8%

94. If MetroPulse Media receives an invoice for purchases dated 10/21/X5 subject to credit terms of
"3/10, net 30 EOM," what is the last possible day the payment should be made (1) if the discount is
taken and (2) if the discount is not taken? - November 10 and November 30, respectively.

95. The Houser Company has negotiated a $500,000 revolving credit agreement with Chitwood National
Bank. The agreement calls for an interest rate of 10% on fund used, a 15% compensating balance, and a
commitment fee of 1% on the unused amount of the credit line. Assuming that the compensating
balance would not otherwise be maintained, the effective annual interest cost if the firm borrows
$200,000 for one year is closest to - 13.53 percent.

96. A formal, legal commitment to extend credit up to some maximum amount over a stated period of
time - Revolving credit agreement

97. The type(s) of collateral generally used for a secured short-term loan is(are)          - inventory and/or
receivables

98.All of the following influence capital budgeting cash flows EXCEPT: method of project financing used

99. In proper capital budgeting analysis we evaluate incremental – Cash Flow

100 - The estimated benefits from a project are expressed as cash flows instead of income flows
because: it is cash, not accounting income, that is central to the firm's capital budgeting decision.

101. In estimating "after-tax incremental operating cash flows" for a project, you should include all of
the following EXCEPT: SUNK COSTS

102. Adam Smith is considering automating his pin factory with the purchase of a $475,000 machine.
Shipping and installation would cost $5,000. Smith has calculated that automation would result in
savings of $45,000 a year due to reduced scrap and $65,000 a year due to reduced labor costs. The
machine has a useful life of 4 years and falls in the 3-year property class for MACRS depreciation
purposes. The estimated final salvage value of the machine is $120,000. The firm's marginal tax rate is
34 percent. The incremental cash outflow at time period 0 is closest to - 480,000.

103. (See information in Question #7 above.) The "cost" of this asset that, by law, may be written off
over time "for tax purposes" is closest to - 480,000.
104. In general, if a depreciable asset used in business is sold for more than its depreciated (tax) book
value, any amount realized in excess of book value but less than the asset's depreciable basis is
considered a - recapture of depreciation" and is taxed at the firm's ordinary income tax rate.

105. Under the Modified Accelerated Cost Recovery System (MACRS), an asset in the "5-year property
class" would typically be depreciated over          years. – Six

106. A profitability index of .85 for a project means that: the project returns 85 cents in present value for
each current dollar invested.

107. BackInSoon, Inc., has estimated that a proposed project's 10-year annual net cash benefit, received
each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the tenth year.
Assuming that these cash inflows satisfy exactly BackInSoon's required rate of return of 8 percent,
calculate the initial cash outlay. (Hint: With a desired IRR of 8%, use the IRR formula: ICO = discounted
cash flows.) - $19,090

108. Woatich Windmill Company is considering a project that calls for an initial cash outlay of $50,000.
The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the
project? [(Hint: The cash f lows from the project are an annuity so you can solve for i in the equation
PVA = R(PVIFAi,10).] - 9 Percent

109. Which of the following statements is correct? - If the PI of a project is less than 1, its NPV should be
less than 0.

110. Assume that a firm has accurately calculated the net cash flows relating to an investment proposal.
If the net present value of this proposal is greater than zero and the firm is not under the constraint of
capital rationing, then the firm should: accept the proposal, since the acceptance of value-creating
investments should increase shareholder wealth.

111. A project's profitability index is equal to the ratio of the          of a project's future cash flows to the
project's         . - present value; initial cash outlay

112. The discount rate at which two projects have identical          is referred to as Fisher's rate of

intersecti - net present values

113. Two mutually exclusive investment proposals have "scale differences" (i.e., the cost of the projects
differ). Ranking these projects on the basis of IRR, NPV, and PI methods          give contradictory results –
MAY

114. If capital is to be rationed for only the current period, a firm should probably first consider selecting
projects by descending order of         . - profitability index

115. The          method provides correct rankings of mutually exclusive projects, when the firm is n ot
subject to capital rationing - net present value
116. In an NPV sensitivity graph, a steep sensitivity line for a particular input variable means that a         
in that variable results in a          in NPV - small percentage change; large change

117. The investment proposal with the greatest relative risk would have - the highest coefficient of
variation of net present value.

118. Probability-tree analysis is best used when cash flows are expected to be - related to the cash flows
in previous periods.

119. You are considering two mutually exclusive investment proposals, project A and project B. B's
expected value of net present value is $1,000 less than that for A and A has less dispersion. On the basis
of risk and return, you would say that - Project A dominates project B

120. If two projects are completely independent (or unrelated), the measure of correlation between
them is: 0

121. When using a probability tree approach, we discount the various cash flows to their present value
at - the risk-free rate.

122. A single, overall cost of capital is often used to evaluate projects because: it avoids the problem of
computing the required rate of return for each investment proposal.

123. The cost of equity capital is all of the following EXCEPT: generally lower than the before-tax cost of
debt.

124. In calculating the proportional amount of equity financing employed by a firm, we should use: the
current market price per share of common stock times the number of shares  outstanding.

125. To compute the required rate of return for equity in a company using the CAPM, it is necessary to
know all of the following EXCEPT: the earnings for the next time period.

126. In calculating the costs of the individual components of a firm's financing, the corporate tax rate is
important to which of the following component cost formulas? DEBT

127. The common stock of a company must provide a higher expected return than the debt of the same
company because - there is more systematic risk involved for the common stock.

128. A quick approximation of the typical firm's cost of equity may be calculated by - adding a 5 percent
risk premium to the firm's before-tax cost of debt.

129. For an all-equity financed firm, a project whose expected rate of return plots            should be
rejected. – Below the security market line

130. Some projects that a firm accepts will undoubtedly result in zero or negative returns. In light of this
fact, it is best if the firm - does not adjust its hurdle rate up or down regardless of this fact.
131. The Tchotchke Knick-Knack Company relies on preferred stock, bonds, and common stock for its
long-term financing. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax
component costs of the Tchotchke Company's long-term financing. - 1 = bonds; 2 = preferred stock; 3 =
common stock.

132. Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual dividend. The
preferred stock has a current market price of $96 a share. The firm's marginal tax rate (combined federal
and state) is 40 percent, and the firm plans to maintain its current capital structure relationship into the
future. The component cost of preferred stock to Lei-Feng, Inc. would be closest to          - 10.4 Percent

133. David Ding is evaluating two conventional, independent capital budgeting projects (X and Y) by
making use of the risk-adjusted discount rate (RADR) method of analysis. Projects X and Y have internal
rates of return of 16 percent and 12 percent, respectively. The RADR appropriate to Project X is 18
percent, while Project Y's RADR is only 10 percent. The company's overall, weighted-average cost of
capital is 14 percent. David should         . reject Project X and accept Project Y.

134. One way to visualize the RADR approach is to make (new) use of an "old friend," the          . NPV
profile

135. If I believe in the basic principle of a risk-reward relationship, my conclusion regarding security
ratings and yields between an Aaa bond and a Baa bond would be that: the Aaa bond would have the
lower yield.

136. A firm's degree of operating leverage (DOL) depends primarily upon its - closeness to its operating
break-even point.

137. An EBIT-EPS indifference analysis chart is used for            examining EPS results for alternative
financing plans at varying EBIT levels

138. EBIT is usually the same thing as: Operating Profit

139. In the context of operating leverage break-even analysis, if selling price per unit rises and all other
variables remain constant, the operating break-even point in units will: FALL

140. If a firm has a DOL of 5 at Q units, this tell us that: if sales rise by 1%, EBIT will rise by 5%.

141. This statistic can be used as a quantitative measure of relative "financial risk." - (CV EPS - CVEBIT)

142. A firm's degree of total leverage (DTL) is equal to its degree of operating leverage            its degree
of financial leverage (DFL). – MULTIPLIED BY

143. The further a firm operates above its operating break-even point, the closer its degree of operating
leverage (DOL) measure approaches            - ONE

144. The term "capital structure" refers to: long-term debt, preferred stock, and common stock equity.
145. A critical assumption of the net operating income (NOI) approach to valuation is: that k o remains
constant regardless of changes in leverage.

146. The traditional approach towards the valuation of a company assumes: that there is an optimum
capital structure.

147. Two firms that are virtually identical except for their capital structure are selling in the market at
different values. According to M&M - this will not continue because arbitrage will eventually cause
the firms to sell at the same value.

148. What is the value of the tax shield if the value of the firm is $5 million, its value if unlevered would
be $4.78 million, and the present value of bankruptcy and agency costs is $360,000? - $580,000

149. According to the concept of financial signaling, management behavior results in new debt issues
being regarded as "         news" by investors. – GOOD

150. The cost of capital for a firm -- when we allow for taxes, bankruptcy, and agency costs -- first
declines and then ultimately rises with increasing levels of financial leverage.

151 - When sequential long-term financing is involved, the choice of debt or equity influences the future
financial          of the firm. – FLEXIBILITY

152. All of the following are true of stock splits EXCEPT: retained earnings are changed

153. If Ian O'Connor Enterprises, Inc., repurchased 50 percent of its outstanding common stock from the
open (secondary) market, the result would be - a decrease in total assets

154. On May 7, Melbourne Mining declared a $.50-per-share quarterly dividend payable June 28 to
stockholders of record on Friday, June 7. What is the latest date by which you could purchase the stock
and still get the recently declared dividend? – JUNE 4

155. The dividend-payout ratio is equal to - dividends per share divided by earnings per share.

156. Letter stock is – Privately placed common stock

157. The actual market value of a right will differ from its theoretical value for all of the following
reasons EXCEPT for: the size of the firm's marginal tax rate.

158. In a common stock rights offering the subscription price is generally: set below the current market
price of the stock.

159. When the investment banker bears the risk of not being able to sell a new security at the
established price, this is known as: underwriting.

160. To say that there is "asymmetric information" in the issuing of common stock or debt means that -
management has more accurate information than investors have
161. In calculating the value of one right when the stock is selling "rights-on," the analyst needs to know
the number of rights needed to buy one share of stock and: the subscription price per share.

162. A best efforts offering is sometimes used in connection with a          of new, long-term securities –
Public Issue

163. permits what is known as a shelf registration. – Rule 415

164. A company can ensure the complete success of a rights offering by making use of a – Standby
Arrangement

165. The market price of K-T-Lew Corporation's common stock is $60 per share, and each share gives its
owner one subscription right. Four rights are required to purchase an additional share of common stock
at the subscription price of $54 per share. If the common stock is currently selling "rights-on," the
theoretical value of a right is closest to - $1.20

166. The theoretical value of one share of K-T-Lew common stock when it goes "ex-rights" is closest to –
58.80

167. Financial intermediaries          - include insurance companies and pension funds

168. Protective covenants are: To protect bondholders

169. Which of the following bonds offer the investor the most protection? – First Mortgage Bonds

170. A company refunds its bonds for any of the following reasons EXCEPT for: to issue new bonds at
higher rate of interest.

171. The call-option value of a callable bond is likely to be high when - interest rates are volatile.

172. Treasury stock is: Common stock that has been repurchased and is being held by the issuing
company.

173. A call provision, a sinking fund, and/or conversion are used to retire - bonds and preferred stock.

174. Preferred shareholders' claims on assets and income of a firm come          those of creditors         
those of common shareholders - after; but before

175. Dual classes of          are common in new ventures where promotional          usually goes to the
founders

176. Dual classes of          are common in new ventures where promotional          usually goes to the
founders - Common Stock

177. One difference between a financial lease and operating lease is that: an operating lease is often
cancellable by the lessee.
178. A way to analyze whether debt or lease financing would be preferable is to: compare the net
present values under each alternative, using the after-tax cost of borrowing as the discount rate.

179. The type of lease that includes a third party, a lender, is called a(n): Leveraged Lease

180. A direct lease, a sale and leaseback, and a leveraged lease are all examples of – financial Leases

181. A $500 par-value convertible debenture is selling at $520. If the conversion ratio is 20, what is the
conversion price? 25.00

182. A company has just issued convertible bonds with $1,000 par value and a conversion ratio of 40.
Which of the following is most likely to be the market price per share of the company's common stock at
present? - Under $25

183. If a warrant carries a right to buy one share of common stock and is exercisable at $20 per common
share while the market price of a share is $30, the theoretical value of the warrant is: $10

184. An exchangeable bond: involves the common stock of another company.

185. The call price of a convertible bond is generally - greater than the face value of the bond.

186. A(n)          is a bond that may be exchanged for common stock of the same corporation. –
Convertible

187. A warrant is a relatively          option to purchase          at a specified exercise price over a specified
period of time. - long-term; common stock

188. Some options have a current theoretical value          and yet          - of zero; sell for positive
prices

189. Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X
offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices
would be: 1.125

190. Which of the following is a legitimate reason for international investment?- There are possible
benefits from international diversification.

191. Interest-rate parity refers to the concept that, where market imperfections are few, - there is an
offsetting relationship between interest rate differentials and differentials    in the forward spot
exchange market.

192. The forward market is especially well-suited to offer hedging protection against - transactions risk
exposure.

193. Suppose that the Japanese yen is selling at a forward discount in the forward-exchange market.
This implies that most likely - interest rates are higher in Japan than in the United States.
194. Following FASB Statement No. 52, gains or losses from currency translation are shown: on the
balance sheet as an adjustment to owners' equity.

195. All of the following are hedges against exchange-rate risk EXCEPT – Use of Spot Market

196. A multinational can centralize cash management and attempt to reduce exchange rate risk
exposure through the use of – Reinvoicing Center

197. Forfaiting most closely resembles – Export Factoring

198. Assume that a Big Mac hamburger is selling for £1.99 in the United Kingdom, the same hamburger
is selling for $2.71 in the United States, and the actual exchange rate (to buy $1.00 with British pounds)
is 0.63. According to         , the British pound is          the US dollar. Purchase Power Parity, Overvalued

199. The goal of the firm should be to maximize earnings per share – False

200. A security is an instrument that represents a financial liability to the holder and a financial asset to
the issuer – False

201. Under MACRS depreciation, an estimated salvage value for an asset being depreciated must first be
subtracted from the asset's cost in order to determine the asset's depreciable basis for tax purposes –
False

202. Finding the present value is simply the reverse of compounding. True

The present value interest factor (PVIF) is the reciprocal of the future value interest factor (FVIF). True

If the discount rate decreases, the present value of a given future amount decreases. False

The present value interest factor for a dollar on hand today is 0 – F

If you would like to double your money in 8 years, the approximate compound annual return you need is
9 percent (Rule of 72) – T

A saving account at Bank A pays 6 percent interest, compounded annually. Bank B's savings account
pays 6 percent compounded semiannually. Bank B is paying twice as much interest – F

For a given nominal interest rate, the more numerous the compounding periods, the less the effective
annual interest rate – F

All other things remaining the same, an annuity received at the beginning of each period has more
present value than does one received at the end of each period – T

The liquidation value of a firm is based on its future cash flows –F

The book value of a firm is equal to the common stock equity account on its balance sheet – T
The book value of a firm and the market value of a firm are generally identical – F

In valuing a security, we only need to know what the future cash flows will be – F

Long-term debt securities and bonds are equivalent terms – T

The amount a bond actually sells for may be higher or lower than the value printed on it -- its face value
–T

Common stocks that pay no dividends are generally priced lower than dividend-paying stocks – F

There is more uncertainty associated with the future returns of common stocks than with the returns of
bonds and preferred stock – T

When interest rates go up, the market price of a bond goes up – F

The yield on common stock comes from two sources: the dividend yield and the capital gains yield – T

Buying common stock is no more risky than buying a U.S. Treasury bill – F

The one-period return on common stock is a combination of income paid to the shareholder plus any
appreciation in stock price, divided by the beginning price – T

Combining securities that are not perfectly positively correlated helps to reduce the risk of a portfolio –T

The expected return on a risk-free security is zero _F

You can reduce systematic risk by adding more common stocks to your portfolio – F

Investors can expect to be compensated with higher returns for bearing avoidable or unsystematic risk –
F

The opposite of "risk seeking" is "risk neutral" – F

The one-period rate of return on a security that was bought a year ago for $50, that paid a dividend of
$2 for the year, and is now selling at $55, is 14% - True

The security market line (SML) describes the relationship between a security's expected return and
systematic risk – T

Beta is an index measure of systematic risk – T

Beta is the slope of a security's characteristic line – T

There appears to be a tendency for measured betas of individual securities to revert toward the beta of
the market portfolio or the beta of the industry of which the company is a part – T

The income statement summarizes the assets, liabilities and owners' equity of a company at a moment
in time – F
The current ratio is never larger than the quick ratio – F

Assets are listed in order of increasing liquidity on the balance sheet – F

A problem with a balance sheet based on historical costs is that in a period of inflation a company with
old fixed assets will show a much better return on investment than a similar firm with new fixed assets –
T

A short average collection period assures us that accounts receivable are being efficiently managed – F

A firm's operating cycle is equal to its inventory turnover in days (ITD) plus its receivable turnover in
days (RTD) – T

All companies should have at least a 1.5 to 1 current ratio.- F

The shareholders' equity figure on a balance sheet represents what the firm is worth to shareholders – F

A common-size balance sheet analysis compares the firm's performance with the consumer price index
–F

The United States and a few European Union (EU) countries all adhere to US Generally Accepted
Accounting Principles (US GAAP) – F

"Funds" (as in "flow of funds") always means cash and near-cash equivalents – F

A flow of funds statement (showing sources and uses of funds) is no longer useful to financial managers
–F

A major deficiency of the statement of cash flows is that it doesn't explicitly consider non-cash
transactions – T

A company with profits which increase yearly is, by definition, successful – F

An increase in an asset is a source of funds – F

Depreciation is a use of funds – F

The statement of cash flows, in the US, is divided into three required categories: operating, investing,
and financing activities – T

A forecast balance sheet could be estimated based on a firm's past financial ratios – T

The cash budget is only as useful as the accuracy of the forecasts used in preparing it – T

The basic information needed to construct a flow of funds statement is found on the income statement
–F

From a financial analyst's viewpoint, "working capital" simply refers to current assets – T
The optimal level of working capital is that which provides a 2:1 ratio of current assets to current
liabilities – F

Current liabilities (such as trade credit from suppliers) is an important source of financing for many small
firms – T

The hedging approach to financing involves matching maturities of debt with specific financing needs – T

In general, long-term debt costs less than short-term debt – F

All other things equal, reducing a firm's current assets will decrease profitability as measured by ROI – F

In working capital management we find that profitability varies inversely with liquidity – T

Generally, a greater margin of safety would be provided by more current assets and fewer current
liabilities – T

An aggressive working capital policy would have low liquidity, higher risk, and higher profitability
potential – T

Permanent working capital includes fixed assets –F

A firm should hold a cash balance roughly equal to its future need for cash – F

One objective of cash management is to obtain reasonable interest income on any temporarily idle
funds – T

A lock box is a post-office box maintained by a firm's bank that is used as a receiving point for customer
remittances - T

"Playing the float" involves writing checks when there are no actual funds in the account but having the
money available when the checks are presented for payment – T

A zero-balance account (ZBA) is one in which checks "bounce" due to insufficient funds available to
cover checks presented – F

A problem with T-bills is that costs involved in selling them in the secondary market are quite high – F

Commercial paper offers a higher yield than Treasury securities of the same maturity – T

The Eurodollar is the official unit of currency of the European Union – F

In general, the longer the maturity of a security, the less the yield – F

Longer-term, less marketable securities can be an appropriate choice for the free cash segment (F$) of a
firm's securities portfolio – T
There are several methods commonly used to calculate the yield on US Treasury bills including the Bond
Equivalent Yield (BEY) method and the Effective Annual Yield (EAY) method – T

A "substitute check" (also called an image replacement document (IRD)) is a paper copy of an electronic
image of an original check, both front and back, including all endorsements – T

In the US, "Check 21" requires banks to convert checks into an electronic image – F

The best credit standard policy is one that minimizes bad debt losses – F

To accelerate the turnover of receivables, a firm may either shorten the discount period or increase the
discount offered –T

The risk-return trade-off involved in a less strict credit policy means additional sales, but as a result the
new customers tend to be slower in paying – T

The expression "3/10, net 45" means that the customers receive a 10 percent discount if they pay within
3 days; otherwise, they must pay within 45 days with no discount – F

The carrying costs of inventory are those combined costs of storing, handling, and insurance and do not
include the opportunity cost of funds – F

Uncertainty in demand for inventory as well as in lead time creates the need for a safety stock – T

Determining the EOQ involves a trade-off between the economies of a large quantity per order and the
costs of carrying a larger inventory – T

Trade credit is a system of barter or exchange of "credits" instead of cash – F

A firm wanting trade credit must pledge collateral – F

The most common type of spontaneous financing is a commercial bank loan – F

More frequently than not, the effective cost of a secured short-term loan is higher than the effective
cost of an unsecured short-term loan – T

As sales increase, labor costs and thus accrued wages generally increase almost proportionately – T

Stretching accounts payable is a cost-free method of financing a business – F

Money-market credit and short-term loans are forms of negotiated (or external) short-term financing –
T

A cleanup provision is an environmental protection policy commitment often attached to a bank line of
credit – F

Accounts payable and inventory are the principal assets used to secure short-term business loans – F
A secured loan provides the lender two sources of loan repayment: the cash-flow ability of the firm and
the collateral value of the security – T

Capital budgeting is the process of identifying, analyzing, and selecting investment projects whose cash
flows will all be received within one year – F

A capital investment involves making a current cash outlay in the expectation of future benefits – T

It could be said that a firm's future success depends on its capital investments – T

A project's contributions to net income over time constitute the primary potential benefits of
investment in the project - F

All anticipated cash coming into or going out of the firm as a result of a capital investment should be
used in capital budgeting decisions – F

Depreciation is the allocation of the cost of a capital asset over time -- as it "wears out" or depreciates in
value – T

Depreciation increases taxable income – F

The value of a capital (long-lived) asset depends on the stream of cash flows produced by the asset – T

For tax purposes, firms generally prefer the straight line to an accelerated depreciation method –F

One step in calculating cash flows often involves adding depreciation to net income – T

For two conventional projects whose cumulative cash flows are identical, the higher the
discount rate, the more valuable will be the proposal with the early cash flows – T

2. A firm short of cash might well give greater emphasis to the payback period in evaluating a
project - T

3. An investment with a short payback period is almost certain to have a positive net present
value.- F

4. The net present value of a project generally decreases as the required rate of return increases
–T

5. A mutually exclusive project is one whose acceptance does not preclude the acceptance of
alternative projects - F

6. Use of the IRR method implicitly assumes that the project's intermediate cash inflows are
reinvested at the required rate of return used under the NPV method - F
7. If a project's cash flows are discounted at the internal rate of return, the NPV will be zero –
T

8. All three major discounted cash flow methods of evaluation will consistently give the same
desirability ranking to a series of projects - F

9. Capital rationing occurs when funds are unlimited - F

10. For graduation you've been offered your choice of receiving either a Maserati or a
Porsche. This is an example of INDEPENDENT projects - F

11. Sensitivity analysis provides useful knowledge about the sensitivity of a project's NPV to
a change in one (or more) input variables - T

12. Sensitivity analysis indicates whether a project should be accepted or rejected. – F

An investment project whose expected returns have a standard deviation of zero would be considered
very risky – F

There is approximately a 95% probability that the actual value (outcome) will be within two standard
deviation of the expected value of a normal distribution – T

The greater the variability of a project's cash flows, the riskier the project -- considered by itself -- is said
to be - T

"Independent cash flows" means that the outcome in time period t is not dependent upon the outcome
of the t-1 flow – T

When using a probability-tree approach to calculate "expected NPV," we typically use the risk-free rate
to discount the cash flows – T

By accepting projects with relatively high degrees of positive correlation with other company projects, a
firm may be able to lower its risk – F

The variance of the portfolio's probability distribution of possible net present values is just the sum of
the variances of the individual projects – F

Even though a project is profitable, it may make sense to abandone it if its abandonment value is
sufficiently high – T

A managerial option is simply the flexibility of management to change a previously made decision – T

If the calculated net present value of a project is less than zero, this is a clear signal to reject the project,
regardless of whether or not managerial options are present - F
The MINIMUM required rate of return for accepting any investment proposal should be the one that
keeps the common stock price (at the least) unchanged – T

A firm's overall cost of capital is simply the sum of the firm's cost of equity, cost of debt, and cost of
preferred stock – F

A firm's overall cost of capital is simply the sum of the firm's cost of equity, cost of debt, and cost of
preferred stock – T

The cost of preferred stock formula is not adjusted for the tax effect because the payment of preferred
dividends occurs after taxes are paid – T

The tax advantage that comes from debt financing is of special benefit to a firm that is losing money –F

The complexity of the CAPM is offset by the fact that it gives an exact measure of the cost of equity
capital – F

A good proxy for E(Rm), the expected return for the market, is the expected return on a broad-based
stock market index such as Standard and Poor's 500 – T

In calculating financing weights, the book values of the various financing components should be used, as
they are consistent with the goal of maximizing shareholders' wealth – F

The critical assumption in any cost of capital weighting system is that the firm will raise funds in the
future in the weighting proportions specified – T

A sometimes questionable assumption underlying the capital-asset pricing model approach to project
evaluation is that only the systematic risk of the firm is important – T

If by taking on additional debt the firm's securities rating is likely to be lowered, the firm should never
take on additional debt – F

The operating break-even point is the point at which operating profits equal revenues minus operating
costs - F

All other things being the same, if the firm raises funds by selling common stock, it will increase its
degree of financial leverage – F

Preferred stock, like debt, could provide financial leverage to a firm – T

If EBIT were to remain constant while the firm incurred additional interest expense, the degree of
financial leverage would increase – T

Two firms X and Z, have the same EBIT, but X has a $5 million annual debt-service burden and Z has a $2
million annual debt-service burden. The probability of cash insolvency is greater with X than with Z – F

If a company has no fixed costs, its DOL equals 1 – T

The EBIT-EPS indifference point between a 100-percent common stock equity alternative and a mix of
common stock equity and preferred stock cannot be calculated. – F

A firm has a DOL (at a certain level of output) of 1.75 and a DFL of 2. The degree of total leverage for the
firm is 3.5 - T

The greater and more stable the firm's expected future cash flows, the greater its debt capacity – T

The key issue in the whole capital structure discussion is whether a firm can affect its total valuation and
its cost of capital by changing its financing mix – T

According to the NOI approach to valuation, the total value of the firm is not affected by changes in its
capital structure – T

According to the traditional approach, an optimal capital structure would probably not be a financing
mix consisting entirely of debt – T

With corporate taxes, the value of the tax shield is the value of a leveraged firm less its value as an
unleveraged firm - T

According to the NOI approach, a firm can increase its total valuation and lower its cost of capital as it
increases the use of financial leverage – F

With corporate taxes, the use of any financial leverage will have an unfavorable impact on a company's
total valuation – F

The traditional approach to capital structure implies that beyond some point, ke rises at an
increasing rate with leverage – T

The lower a firm's cost of capital, ko, the higher the total valuation of the firm – T

Financial signaling occurs when capital structure changes convey information to security holders – T

In a world of taxes, bankruptcy costs, and other market imperfections, there is likely to be an
optimal capital structure for the firm – T

Financial timing simply means the extent to which today's financing decision will keep open future
financing options – F

Modigliani and Miller maintain that it doesn't matter if a firm pays dividends or not; the effect of
payments on shareholder wealth is offset exactly by other means of financing – T

Companies with high growth rates tend to have high dividend-payout ratios because they want to
attract more investors – F
When dividends are treated as a passive residual, the percent of earnings paid out as dividends is based
solely on the availability of acceptable investment opportunities – T

The critical question in dividend policy is whether dividends have an influence upon the value of the
firm, given the firm's investment decision – T

The repurchase of common stock is viewed as an investment decision by some and as a dividend
decision by others – T

Cash dividends and earnings retention have a reciprocal relationship –T

Most states do not object to the payment of dividends as long as it does not impair the company's
capital – T

After a stock repurchase there are fewer shares of common stock outstanding and therefore, all other
things equal, earnings per share is increased – T

A reverse stock split results in an increase in the number of shares of outstanding common stock and a
decrease in the par value per share – F

Both stock dividends and stock splits appear to send positive signals to the market about the company
and often result in positive stock-price reactions – T

Shelf registration offers increased flexibility, allowing a company to time its sale of securities to market
conditions – T

A privileged subscription is one offered only to the privileged few who have a net worth of over $100
million – F

Standby arrangements are used to ensure the success of a rights offering – T

Rule 144a makes it tougher to resell privately placed securities – F

When stocks are bought "rights-on," the buyer is generally entitled to receive one right for each share of
stock owned – T

Private placements typically do not have to be registered with the SEC – T

Registration with the SEC is not required if the new stock issue is intended for investors only in 2 states,
say Oregon and California only – F

The issuing of a security can be interpreted as giving some information about the issuing company – T

An IPO is sold in the secondary market – F

The shareholder may dispose of rights issued in a rights offering simply by doing nothing – T
The US Securities and Exchange Commission (SEC) does not evaluate the investment value or merit of
the securities it reviews – T

An indenture is an unsecured bond – F

A sinking fund is a poorly performing mutual fund whose net asset value is declining – F

A call provision allows the purchaser of a security to demand repayment of the principal – F

A bond callable at 105 means that a 5 percent call premium will be paid on the face value if the
bond is ever called – T

Dual-class common stock can enable company founders or management to have voting control of the
corporation – T

From an investor's standpoint, a debenture issued by the Acme Aglet Company will appear "riskier" than
a share of preferred stock issued by the Acme Aglet Company – F

If you were a common shareholder with minority interests, you would prefer a majority-rule rather than
a cumulative voting system – F

Most preferred stocks have a noncumulative feature – F

The book value and the market value of common stock are usually the same – F

The participating feature allows preferred shareholders to share in increasing dividends with the
common shareholders – T

Preferred stockholders have a prior claim on the assets of the firm as compared to the claims of the
lenders - F

Term financing is short-term debt, typically used to purchase short-term assets (such as seasonal
inventories) that tend to be self-liquidating – F

All other things equal, the interest rate on a term loan is higher than the rate on a short-term loan – T

he before-tax cost of debt is lower than the after-tax cost of debt because taxes add an additional
burden over and above interest payments F

In a sale and leaseback arrangement, the seller is the lessee and the buyer is the lessor – T

Under a conditional sales contract, the title passes to the buyer when the first installment payment is
made – F

The minimum working-capital requirement is probably the most commonly used loan covenant in a loan
agreement – T
A term loan agreement containing a prepayment penalty clause is more likely to have an insurance
company rather than a bank as the lender – T

A lender in a chattel mortgage contract is forbidden to sell the movable property when the borrower
defaults – F

Renting a car for a week through Jack's Rent-a-Lemon is an example of a financial lease – F

The discount rate to be used in evaluating lease financing versus debt financing is the firm's overall cost
of capital – F

To "force" conversion, companies issuing convertible securities must usually raise the dividend on their
common stock – F

The theoretical value of a warrant may be said to be its floor value – T

As the conversion value increases, the company will increase the annual dollar interest paid on the
convertible security – F

Convertible securities are often an indirect way of raising equity capital – T

A warrant is a relatively long-term option to purchase common stock, while a right is a relatively short-
term option to do the same thing – T

As the warrant approaches its maturity period, the difference between its market value and its
theoretical value increases – F

Diluted earnings per share are earnings available to common shareholders divided by the actual number
of shares of common stock outstanding – f

The conversion value establishes a floor for the price of a convertible bond- F

The value of a convertible is twofold -- its value as a bond or preferred stock, and its potential value as a
common stock – T

The greater the growth potential of the company's common stock, the higher the premium over
conversion value the company can demand at the time of issuing a convertible security – T

Historically, the shareholders of selling companies have benefited more in a merger than have the
shareholders of the buying companies – T

In leveraged buyouts, very little debt and considerable equity are used to make a cash purchase – F

A service company would be a good candidate for an LBO – F

If an acquisition is paid for with common or voting preferred stock, the transaction is not taxable at the
time of sale – T
If management is primarily concerned with the long-term value of a merger, it is more likely to
use the earnings-per-share approach to analyzing the merger's benefits – F

A divestiture implies the forced sale of a portion of a company or of the company as a whole – F

A company may be acquired either by the purchase of its assets or its common stock – T

Free cash flow is the cash flow in excess of that required to fund all projects with a positive NPV when
discounted at appropriate rates of return – T

The higher the P/E ratio of the acquiring company in relation to the selling company and the larger the
earnings of the selling company in relation to the acquiring company, the greater the increase in
earnings per share of the acquiring company – T

An example of value creation through synergy is an increase of earnings per share due to
"bootstrapping. – F

In the US, goodwill must be tested at least annually for impairment (or decline) – T

When the dollar rises in value relative to a foreign currency, the current assets and current liabilities of a
U.S. foreign subsidiary increase in dollar value – F

A strong third-party guarantee is vital to the process of forfaiting.- T

Since there is a time value to money, the spot exchange rate of a currency is always lower than the
forward exchange rate – F

A firm's total portfolio risk may be reduced by investing in more than one country – T

The spot rate is simply the exchange rate between two currencies as determined by the respective
governments – F

The international-trade draft is a document of title used in shipping goods from the exporter to the
importer – F

A bill of lading is an agreement by a bank to honor a draft drawn on the importer – F

If a company believed that a nation was preparing to devalue its currency, the company should reduce
monetary assets and borrow extensively in that particular currency – T

A foreign currency swap is simply an agreement between two parties to exchange one currency for
another at a yet-to-be-determined future date but at a specified exchange ratio - F

Purchasing-power parity implies that a standardized good should sell for the same price internationally
after adjusting for exchange rates - T