Question 1
Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
Answer
Targeted share repurchases.
Shareholder rights provisions.
Restricted voting rights.
Poison pills.
Abnormally high executive compensation.
Question 2
Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
Answer
To enable the firm to borrow at a below-market interest rate.
To make it easier to grant stock options to employees.
To help prevent a hostile takeover.
To help retain valued employees.
To increase worker productivity.
Question 3
Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?
Answer
$205,000
$500,000
$950,000
$2,550,000
$3,050,000
Question 4
If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that
Answer
the dividend payout ratio is increasing.
no dividends were paid during the year.
the dividend payout ratio is decreasing.
the dollar amount of investments has decreased.
the dividend payout ratio has remained constant.
Question 5
Which of the following statements is correct?
Answer
Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
Very often, a company’s stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
Stock repurchases increase the number of outstanding shares.
The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.
If a company has a 2-for-1 stock split, its stock price should roughly double.
Question 6
Which of the following actions will best enable a company to raise additional equity capital?
Answer
Declare a stock split.
Begin an open-market purchase dividend reinvestment plan.
Initiate a stock repurchase program.
Begin a new-stock dividend reinvestment plan.
Refund long-term debt with lower cost short-term debt.
Question 7
Which of the following statements is correct?
Answer
One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.
Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.
Question 8
Poff Industries’ stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?
Answer
You will have 200 shares of stock, and the stock will trade at or near $60 a share.
You will have 100 shares of stock, and the stock will trade at or near $60 a share.
You will have 50 shares of stock, and the stock will trade at or near $120 a share.
You will have 50 shares of stock, and the stock will trade at or near $60 a share.
You will have 200 shares of stock, and the stock will trade at or near $120 a share.
Question 9
Which of the following statements is NOT correct?
Answer
After a 3-for-1 stock split, a company’s price per share should fall, but the number of shares outstanding will rise.
Investors can interpret a stock repurchase program as a signal that the firm’s managers believe the stock is undervalued.
Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends.
Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
Stock repurchases can be used by a firm as part of a plan to change its capital structure.
Question 10
Which of the following statements is CORRECT?
Answer
The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
The capital structure that maximizes the stock price is also the capital structure that maximizes the firm’s times interest earned (TIE) ratio.
Increasing a company’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company’s WACC.
If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).
Question 11
Which of the following statements is CORRECT?
Answer
The capital structure that minimizes a firm’s weighted average cost of capital is also the capital structure that maximizes its stock price.
The capital structure that minimizes the firm’s weighted average cost of capital is also the capital structure that maximizes its earnings per share.
If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.
Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.
A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.
Question 12
Which of the following statements is CORRECT?
Answer
The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.
As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS
Question 13
Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?
Answer
An increase in the personal tax rate.
An increase in the company’s operating leverage.
The Federal Reserve tightens interest rates in an effort to fight inflation.
The company’s stock price hits a new high.
An increase in the corporate tax rate.
Question 14
Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its basic earning power is 15%. The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company’s common stock, paying book value. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged. Which of the following is most likely to occur as a result of the recapitalization?
Answer
The ROA would remain unchanged.
The basic earning power ratio would decline.
The basic earning power ratio would increase.
The ROE would increase.
The ROA would increase.
Question 15
Two operationally similar companies, HD and LD, have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also HD’s basic earning power (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT?
Answer
HD should have a higher times interest earned (TIE) ratio than LD.
HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD’s.
Given that BEP > rd, HD’s stock price must exceed that of LD.
Given that BEP > rd, LD’s stock price must exceed that of HD.
HD should have a higher return on assets (ROA) than LD.
Question 16
Which of the following statements is CORRECT?
Answer
If a firm lowered its fixed costs while increasing its variable costs, holding total costs at the present level of sales constant, this would decrease its operating leverage.
The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price.
If a company were to issue debt and use the money to repurchase common stock, this action would have no impact on its basic earning power ratio. (Assume that the repurchase has no impact on the company’s operating income.)
If changes in the bankruptcy code made bankruptcy less costly to corporations, this would likely reduce the average corporation’s debt ratio.
Increasing financial leverage is one way to increase a firm’s basic earning power (BEP).
Question 17
Which of the following statements is most consistent with efficient inventory management? The firm has a
Answer
low incidence of production schedule disruptions.
below average total assets turnover ratio.
relatively high current ratio.
relatively low DSO.
below average inventory turnover ratio.
Question 18
A lockbox plan is
Answer
used to identify inventory safety stocks.
used to slow down the collection of checks our firm writes.
used to speed up the collection of checks received.
used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
used to protect cash, i.e., to keep it from being stolen.
Question 19
A lockbox plan is most beneficial to firms that
Answer
have widely dispersed manufacturing facilities.
have a large marketable securities portfolio and cash to protect.
receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
have customers who operate in many different parts of the country.
have suppliers who operate in many different parts of the country.
Question 20
Other things held constant, which of the following would tend to reduce the cash conversion cycle?
Answer
Place larger orders for raw materials to take advantage of price breaks.
Take all discounts that are offered.
Continue to take all discounts that are offered and pay on the net date.
Offer longer payment terms to customers.
Carry a constant amount of receivables as sales decline.
Question 21
Firms generally choose to finance temporary current operating assets with short-term debt because
Answer
short-term interest rates have traditionally been more stable than long-term interest rates.
a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
the yield curve is normally downward sloping.
short-term debt has a higher cost than equity capital.
matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
Question 22
Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
Answer
Depreciation.
Cumulative cash.
Repurchases of common stock.
Payment for plant construction.
Payments lags.
Question 23
Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?
Answer
1 British pound equals 3.2400 Swiss francs
1 British pound equals 2.6244 Swiss francs
1 British pound equals 1.8588 Swiss francs
1 British pound equals 1.0000 Swiss francs
1 British pound equals 0.3810 Swiss francs
Question 24
Suppose Yates Inc., a U.S. exporter, sold a consignment of antique American muscle-cars to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Yates agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Yates actually receive after it exchanged yen for U.S. dollars?
Answer
$1,075,958
$1,025,000
$1,000,000
$975,610
$929,404
Question 25
If it takes $0.71 U.S. dollars to purchase one Swiss franc, how many Swiss francs can one U.S. dollar buy?
Answer
0.50
0.71
1.00
1.41
2.81
Question 26
A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?
Answer
1 U.S. dollar equals 0.69 Swiss francs
1 U.S. dollar equals 0.85 Swiss francs
1 U.S. dollar equals 1.21 Swiss francs
1 U.S. dollar equals 1.29 Swiss francs
1 U.S. dollar equals 1.44 Swiss francs
Question 27
Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
Answer
$14.79
$63.00
$74.55
$85.88
$147.88
Question 28
If 1.64 Canadian dollars can purchase one U.S. dollar, how many U.S. dollars can you purchase for one Canadian dollar?
Answer
0.37
0.61
1.00
1.64
3.28
Question 29
Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
Answer
155.5 yen
144.0 yen
133.5 yen
78.0 yen
72.0 yen
Question 30
Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor’s required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?
Answer
9.00%
10.20%
11.28%
12.50%
13.57%