Practice Questions (Ch 9, 11, 12, 14) Flashcards
Practice Questions (Ch 9, 11, 12, 14)
A corporation donates a valuable painting from its private collection to an art museum.
Which of the following is incremental cash flow associated with the donation?
A. The current market value of the painting
B. The price the firm paid for the painting
C. The deduction from income that it declares for its charitable gift
D. The future price of the painting after one year
A. The current market value of the painting
A new project requires an increase in both current assets and current liabilities of $125,000
each. What is the overall impact on net working capital investment?
A. an increase of zero.
B. an increase of $125,000.
C. an increase of $250,000.
D. an increase of $62,500, when averaged over the life of the project.
A. an increase of zero.
When is it appropriate to include sunk costs in the evaluation of a project?
A. include sunk costs when they are relatively large
B. include sunk costs if it improves the project’s NPV
C. include sunk costs if they are considered to be overhead costs
D. it is never appropriate to include sunk costs
D. it is never appropriate to include sunk costs
Which of the following net working capital changes would increase a firm’s net cash flow?
A. A decrease in bank debt
B. An increase in accounts receivable
C. An increase in inventories
D. An increase in accounts payable
D. An increase in accounts payable
Which of the following companies would you expect to be least exposed to macro risks?
A. A luxury cruise line
B. An automobile manufacturer
C. An airline
D. An electric utility
D. An electric utility
Risk factors that are expected to affect only a specific firm are referred to as:
A. market risk.
B. diversifiable risk.
C. systematic risk.
D. risk premiums
B. diversifiable risk.
Which of the following risk types can be diversified by adding stocks to a portfolio?
A. systematic risk
B. unique risk
C. default risk
D. market risk
B. unique risk
In general, which stocks should be combined in a portfolio, if the goal is to reduce overall risk?
A. stocks with returns that are positively correlated.
B. stocks with returns that are negatively correlated.
C. stocks with returns that are not correlated.
D. stocks that have the highest expected returns.
B. stocks with returns that are negatively correlated.
Decreases in the risk-free rate will reduce:
A. the market risk premium.
B. the stock’s risk premium.
C. the stock’s Beta.
D. the stock’s expected return
D. the stock’s expected return
A stock’s Beta measures the:
A. average return on the stock.
B. variability in the stock’s returns compared to that of the market portfolio.
C. difference between the return on the stock and return on the market portfolio.
D. market risk premium on the stock.
B. variability in the stock’s returns compared to that of the market portfolio.
The graph showing the relationship between the market risk of the security (beta) and its expected return is called:
A. stock’s Beta.
B. security market line.
C. market risk premium.
D. stock’s unique risk.
B. security market line.
In practice, the market portfolio is often represented by:
A. a portfolio of Canadian Treasury securities.
B. a diversified stock market index.
C. an investor’s mutual fund portfolio.
D. the historic record of stock market returns.
B. a diversified stock market index.
A stock with a Beta greater than 1.0 would be termed:
A. an aggressive stock, expected to increase more than the market increases.
B. a defensive stock, expected to decrease more than the market increases.
C. an aggressive stock, expected to decrease more than the market increases.
D. a defensive stock, expected to increase more than the market decreases.
A. an aggressive stock, expected to increase more than the market increases.
Which of the following is true regarding convertible securities:
A. a convertible bondholder is forced to convert at a specific time.
B. the convertible option on a bond gives the owner the right to buy shares
from a company at a set price.
C. the owner of a warrant option will benefit if the firm’s stock does well.
D. the owner of a warrant option will benefit if the firm’s stock does poorly.
C. the owner of a warrant option will benefit if the firm’s stock does well.
A proxy contest is typically one in which:
A. the board attempts to gain control from the shareholders.
B. management attempts to gain control from the directors.
C. the board attempts to gain control from the directors.
D. outsiders attempt to gain control from management.
D. outsiders attempt to gain control from management.
Which of the following statements about floating-rate preferred stock is correct?
A. it is the only stock issued without a par value.
B. its dividends increase as interest rates increase.
C. its market price increases at a set rate annually.
D. its dividends are deductible for tax purposes by the paying corporation
B. its dividends increase as interest rates increase.
For Canadian non-financial firms, what source of capital is used the least?
A. debt issues
B. bond issues
C. net equity issues
D. internal funds
C. net equity issues
Junk bonds represent debt that was issued to:
A. offer higher yields and less security than other debt
B. finance the acquisition of used manufacturing equipment.
C. firms that have defaulted on their dividend payments
D. firms in countries with high rates of inflation.
A. offer higher yields and less security than other debt
The benchmark interest rate that banks charge to their best customers is termed:
A. Lease.
B. convertible.
C. private placement.
D. prime rate.
D. prime rate.
A warrant has an exercise price of $40, and the current stock price is $38. An
investor holding this option will purchase the stock only if:
A. the stock price falls to $20 or below.
B. the stock price rises above $40.
C. the dividend yield on the stock exceeds 10 %.
D. the stock price falls below $38.
B. the stock price rises above $40.
Which of the following equity concepts would you expect to be least
important to a financial analyst?
A. retained earnings
B. par value per share
C. additional paid-in capital
D. net common equity
B. par value per share
Eurobonds are long-term, corporate liabilities that:
A. are marketed in all countries.
B. are held outside the U.S.
C. are repaid in U.S. dollars.
D. are issued by European firms.
A. are marketed in all countries.
Preferred stockholders:
A. receive a fixed dividend.
B. have full voting rights.
C. have priority over debt holders if the company goes out of business.
D. All of the choices are correct.
A. receive a fixed dividend.
The correct method to handle overhead costs in capital budgeting is to:
A) ignore them in all cases.
B) ignore all except identifiable incremental amounts.
C) allocate a portion to each project.
D) allocate them to projects with the highest NPVs.
B) ignore all except identifiable incremental amounts.
When the real rate of interest is less than the nominal rate of interest, then:
A) inflation must be added to the nominal rate.
B) nominal flows should be discounted with real rates.
C) inflation is expected to occur.
D) investment returns do not increase purchasing power
C) inflation is expected to occur.
