1.     Stock cash dividend will __________

		Increase the total wealth of stockholders.
		Reduce retained earnings.
		Increase the number of shares to stockholders.
		Decrease the number of shares to stockholders.

2.     Generally, the variability in both ROE and EPS increase when a firm increases its financial leverage. _______

		True.
		False.

3.     A portfolio weight is defined as the total number of shares in a particular asset divided by the total number of shares held in a portfolio.______

		True.
		False.

4.     Which of the following statements about portfolio is true? ______

		The expected return of a portfolio is the weighted average of the expected returns of all individual stocks in the portfolio.
		The standard deviation of a portfolio is the weighted average of the standard deviations of all individual stocks in the portfolio.
		Portfolio beta is the weighted average of the beta values of all individual stocks in the portfolio.
		Both Statement (A) and Statement (C) are correct.

5.     If preferred stock pays a $5 annual dividend and sells for $100. The cost of preferred stock financing is _______ if we don’t consider floatation costs.

		5%
		10%
		25%
		50%

6.     A well-diversified portfolio can diversify the company-unique risk, but it cannot diversify the market risk ______

		True.
		False

7.     The cost of debt must be adjusted for corporate taxes and this is accomplished by multiplying by (1 – T_c), where T_c is corporate tax rate. ______

		True.
		False.

8.     Operating cash flow is equal to _____

		Net income plus depreciation minus taxes.
		Net income minus depreciation minus interest expense.
		EBIT minus taxes minus depreciation.
		EBIT minus taxes plus depreciation.

9.     Which of the following transactions will NOT affect a firm’s retained earnings? _____

		quarterly dividend payments
		special dividend payments
		stock dividend
		All of the above

10.  Using the tax shield approach, a(n) _____ will increase the operating cash flow.

		decrease in depreciation
		decrease in sales
		increase in costs
		increase in depreciation

 

 

11.  A company’s cost of capital is equal to the weighted average of its investors’ required returns even when we consider floatation costs and taxes._________

True

False

12.  Which one of the following can be completely ignored when analyzing a project?______

		depreciation
		taxes
		net working capital
		sunk cost

13.  Working capital includes all of the following items except:

		Accounts receivable.
		Cash.
		Long-term debt.
		Account payables.

14.  Which of the following statements about Capital Asset Pricing Model (CAPM) equation “E(R_A) = R_f + _A(E(R_M) – R_f) ” is NOT true ______

		E(RA) is the required rate of return for stock A.
		Rf is the nominal risk-free rate.
		E(RM) is the required rate of return on the individual security.
		BA is the beta coefficient for the individual security.

15.  If a stock has beta 0.8, how to interpret it? ______

		The stock is riskier than average.
		The stock has average risk.
		The stock is less risky than average.
		Don’t know.

16.  A firm’s optimal capital structure ______

		is generally a mix of 40% debt and 60% equity.
		exists when the debt-equity ratio is 0.5.
		is the debt-equity ratio that exists at the point where the firm’s weighted after-tax cost of debt is minimized.
		is the debt-equity ratio that results in the lowest possible weighted average cost of capital and the largest firm value.

17.  Portfolio provides average return but much lower risk. The key is the positive correlations among individual stocks. ______

		True.
		False.

18.  Business risk is defined as the:______

		equity risk that comes from the nature of a firm’s operating activities.
		equity risk associated with the capital structure of a firm.
		probability that a firm will file bankruptcy.
		situation in which a firm causes its creditors to suffer a financial loss.

19.  The cost of equity is the rate of return the marginal stockholder requires on the firm’s common stock._____

		True.
		False

20.  M&M Proposition I, with taxes, states that the value of a levered (V_L) firm is equal to. _______

		VU + (TC × D)
		VU – (TC × D)
		VU ÷ (TC × D)
		None of the above is correct

 

21.  Announcements and news contain both an expected component and a surprise component. It is the surprise component that affects a stock’s price and therefore its return____

		True
		False

22.  The ex-dividend date is defined as _____ business days before the date of_____

		two; payment.
		three; payment.
		two; record.
		three; record.

23.  We want to choose the optimal capital structure for a firm that will maximize the firm’s earnings, not stockholder wealth _______

True

False

24.  If a firm maintains a constant debt-equity ratio and pays dividends only after meeting its investment needs, the firm is following a dividend policy which is defined as a(n): _______

		stable dividend policy.
		residual dividend approach.
		constant dividend policy.
		variable dividend approach.

25.  A company can NOT buy back its own shares of stock (stock repurchase) on the open market. But the company can make a tender offer to buy back its shares. _______

True

False

 

 

26.  Which one of the following is the prime objective of a residual dividend policy? _______

		Maintaining a stable dividend
		Increasing the dividend at a steady pace
		Meeting the firm’s investment needs
		Maintaining a stable dividend payout ratio

27.  Holding cash for normal collection and disbursement activities related to the daily ongoing operations of a firm is called the _____ motive.

		precautionary
		opportunity
		speculative
		transaction

28.  Float is defined as the difference between the.

		projected cash balance and the actual cash balance.
		available balance and the firm’s ledger balance.
		sales and the cash collections.
		collections and disbursements for any given period of time.

29.  Marshall’s Equipment has a book balance of $34,500. The $900 deposit which was made today will be added to the available balance tomorrow. There is $8,500 worth of outstanding checks. Which one of the following statements accurately reflects this situation.

		The $900 is the disbursement float.
		The firm’s current available balance = $34,500+$900-$8,500.
		The firm’s disbursement float exceeds its collection float.
		The firm’s net float is equal to $900 plus $8,500.

 

 

 

 

30.  Which of the following is money market security?

		Commercial paper
		U.S. treasure bonds.
		Preferred stocks
		Common stocks.

31.  To estimate the cost of capital, you have been provided with the following data: r_RF = 5.00%; RP_M = 6.00%; and Beta = 1.0. Based on the CAPM approach, what is the cost of equity? ________

		5.0%
		6.0%
		10.4%
		11.0%

32.  Assume that you have been provided with the following data: D₁ = $1.30; P₀ = $42.50; and g = 7.0% (constant). What is the cost of equity based on the Dividend Growth Model? ________

		9.52%
		10.06%
		11.41%
		12.0%

33.  A firm has 35,000 shares of stock outstanding at a price per share of $26. The company has decided to repurchase $130,000 worth of shares. After the repurchase, there will be _____ shares outstanding.

		5,000 shares
		30,000 shares
		35,000 shares
		40,000 shares

 

 

34.  Based on the information from Question 33, what is new market price of the stock after the repurchase?

		$22.5 per share
		$26.0 per share
		$28.5 per share
		$30.3 per share

35.  Based on the information from Question 33 and 34, does the total market value of the common stock change after the stock repurchase?

		Yes
		No

36.  Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9% and coupons are paid semiannually. The bond is currently selling for $908.72 per $1000 bond. What is the before-tax cost of debt (YTM)?

		5.0%
		9.0%
		10.0%
		15.0%

37.  Based on the information from Question 36, if the firm’s marginal tax rate is 30%. What’s the firm’s after-tax cost of debt?________

		3.5%
		5.0%
		6.3%
		7.0%

 

 

 

 

38.  A firm requires capital expenditure of $10 million, which will be raised by issuing $3 million of bonds, $1 million of preferred stock, and $6 million of new common stock. The firm estimates its after-tax cost of debt to be 6%, cost of preferred stock to be 8%, and cost of new common stock to be 15%. What is the weighted average cost of capital? _____

		9.67%
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