Midterm 3310
TB 01-14 Managers are spurred on by incentive schemes…
Managers are spurred on by incentive schemes that provide big returns if shareholders gain but are valueless if they do not.
True or False
TB 03-15 An increase in inventories uses cash, reduci…
An increase in inventories uses cash, reducing the firm’s net cash balance.
True or False
TB 07-09 Holding risk constant, an increase in divide…
Holding risk constant, an increase in dividend yield will tend to decrease a firm’s rate of growth.
True or False
TB 07-07 Securities with the same expected risk shoul…
Securities with the same expected risk should offer the same expected rate of return.
True or False
TB 07-04 An excess of market value over the book valu…
An excess of market value over the book value of equity can be attributed to going concern value.
True or False
TB 01-15 If employee compensation plans are not desig…
If employee compensation plans are not designed properly, they can create incentives for errant behaviour by management.
True or False
TB 03-16 A reduction in accounts receivable uses cash…
A reduction in accounts receivable uses cash, reducing the firm’s net cash balance.
True or False
TB 02-03 Smaller businesses are especially dependent …
Smaller businesses are especially dependent upon internally generated funds.
True or False
TB 02-09 Apple Computer is well known for its product…
Apple Computer is well known for its product innovations. Access to financing was vital to Apple’s growth and profitability.
True or False
TB 01-10 The primary goal of any company should be to…
The primary goal of any company should be to maximize current period profit.
True or False
TB 06-09 A long-term investor would more likely be in…
A long-term investor would more likely be interested in a bond’s current yield rather than its yield to maturity.
True or False
TB 07-06 A high P/E ratio indicates high level of ris…
A high P/E ratio indicates high level of risk.
True or False
TB 07-10 According to the dividend discount model, a …
According to the dividend discount model, a stock’s price today depends on the investor’s horizon for holding the stock.
True or False
TB 01-11 Maximizing profits is the same as maximizing…
Maximizing profits is the same as maximizing the value of the firm.
True or False
TB 02-22 The opportunity cost of capital is the expec…
The opportunity cost of capital is the expected rate of return that shareholders can obtain in the financial markets on investments with the same risk as the firm’s capital investments.
True or False
TB 03-25 A company may deduct the interest paid to de…
A company may deduct the interest paid to debtholders and the dividends paid to shareholders when calculating its taxable income.
True or False
TB 02-13 Hedge fund managers, unlike mutual fund mana…
Hedge fund managers, unlike mutual fund managers, do not receive fund-performance-related fees.
True or False
TB 03-20 If net income is positive, then cash flow fr…
If net income is positive, then cash flow from operations must be positive for that period.
True or False
TB 06-12 Speculative-grade bonds have default risk; i…
Speculative-grade bonds have default risk; investment grade bonds do not.
True or False
TB 06-08 A bond’s rate of return
A bond’s rate of return is equal to its coupon payment divided by the price paid for the bond.
True or False
TB 01-07 As your firm grows, you may decide to form a…
As your firm grows, you may decide to form a corporation. You may incorporate your firm federally, under the Canadian Business Corporation Act, or provincially, under the relevant provincial laws.
True or False
TB 07-14 Stock value is always increased whenever ear…
Stock value is always increased whenever earnings are plowed back into the firm.
True or False
TB 03-10 The payment of interest expense is considere…
The payment of interest expense is considered a cash flow by a financing activity on the statement of cash flows.
True or False
TB 03-08 Dividends paid are treated as a financing ac…
Dividends paid are treated as a financing activity on the statement of cash flows.
True or False
TB 02-11 Financing for public corporations must flow …
Financing for public corporations must flow through financial markets.
True or False
TB 03-106 Accrual accounting, which attempts to match …
Accrual accounting, which attempts to match sales revenues and the expenses associated with the production of the goods, is conducted in an attempt to:
Multiple Choice
- reduce bias in reported profitability measures.
- reduce the time necessary to depreciate assets.
- reduce income-tax liability.
- speed up the receipt of accounts receivable.
TB 05-38 A loan officer states, Thousands of dollars…
A loan officer states, “Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage.” Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest. Both mortgages are for $100,000 and have monthly payments. What is the difference in total dollars that will be paid to the lender under each loan? (Round the monthly payment amounts to 2 decimal places. Both interest rates are compounded monthly.)
Multiple Choice
- $124,300
- $89,211
- $98,406
- $112,410
TB 06-23 By how much will a bond increase in price ov…
By how much will a bond increase in price over the next year if it currently sells for $925.16, has 5 years until maturity, and an annual coupon rate of 7%? (Do not round intermediate calculations.)
Multiple Choice
- $8.26
- $12.53
- $8.92
- $11.98
TB 07-31 What is the value of the expected dividend p…
What is the value of the expected dividend per share for a stock that has a required return of 16 percent, a price of $45, and a constant growth rate of 10 percent?
Multiple Choice
- $7.20
- $3.60
- $4.50
- $2.70 Correct
Explanation
$45 = DIV./(.16 – .10) | $45 × .06 = DIV. | $2.70 = DIV.
TB 07-61 Which of the following should increase the f…
Which of the following should increase the firm’s sustainable growth rate?
Multiple Choice
- increase the dividend payout ratio
- decrease the required return
- increase the plowback ratio
- decrease the ROE
TB 07-68 Which of the following is least likely to co…
Which of the following is least likely to contribute to going concern value?
Multiple Choice
- high liquidation value
- intangible assets
- future investment opportunities
- extra earning power
TB 02-28 Which one of these assists in shifting an in…
Which one of these assists in shifting an individual’s consumption forward in time?
Multiple Choice
- a bank savings account
- a bank line of credit
- a life insurance policy
- a retirement savings plan
TB 06-41 You purchased a 6% annual coupon bond at par…
You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?
Multiple Choice
- 7.52%Correct
- 6.15%
- 6.07%
- 4.48%
TB 07-29 What should be the current price of a stock …
What should be the current price of a stock if the expected dividend is $5, the stock has a required return of 20 percent, and a constant dividend growth rate of 6 percent?
Multiple Choice
- $25.00
- $37.86
- $19.23
- $35.71
Explanation
P = 5.00/(.20 -.06) | P = 5.00/.14 | P = $35.71.
TB 02-33 Which one of the following funds not provide…
Which one of the following funds not provides a tax advantage to individual investors?
Multiple Choice
- bond funds
- pension funds
- balanced funds
- funds that are invested in foreign countries
TB 03-29 Calculate the EBIT (Operating Income) for a …
Calculate the EBIT (Operating Income) for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense.
Multiple Choice
- $500,000
- $380,000
- $0
- ($120,000)
Explanation
Operating Income is now more commonly used, not EBIT.
TB 06-77 If a bond offers a current yield of 5% and a…
If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:
Multiple Choice
- promised yield is not likely to materialize.
- bond has a high default premium.
- bond must be a Treasury Inflation-Protected Security.
- bond is selling at a discount.
TB 06-32 How much should you be prepared to pay for a…
How much should you be prepared to pay for a $1,000 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%?
Multiple Choice
- $897.04
- $985.00
- $1,000.00
- $411.84
TB 06-76 When an investor purchases a $1,000 par valu…
When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor:
Multiple Choice
- pays 97.162% of face value for the bond.
- receives 97.162% of the stated coupon payments.
- pays $10,971.62 for a $10,000 face value bond.
- receives $971.62 upon the maturity date of the bond.
TB 07-84 What happens to a firm that reinvests its ea…
What happens to a firm that reinvests its earnings at a rate equal to the firm’s required return?
Multiple Choice
- its stock price will decline unless dividend payout ratio is zero
- its stock price will decline unless plowback rate exceeds required return
- its stock price will increase by the sustainable growth rate
- its stock price will remain constant
TB 03-70 If a firm’s net income
If a firm’s net income is positive and its noncash expenses are positive, which of the following could account for a negative amount of cash provided by operations?
Multiple Choice
- a large addition is made to plant and equipment.
- current assets increase more than current liabilities increase.
- current assets decrease more than current liabilities increase.
- current assets decrease more than current liabilities decrease.
TB 05-91 Real interest rates:
Real interest rates:
Multiple Choice
- traditionally exceed nominal rates.
- can decline to zero but no lower.
- always exceed inflation rates.
- can be negative, zero, or positive.
TB 03-99 Suppose Dee’s just acquired
Suppose Dee’s just acquired the assets of Flo’s Flowers. The book value of Flo’s Flowers assets was $68,000 but Dee’s paid a total of $75,000. The additional $7,000 paid by Dee’s will be recorded on Dee’s balance sheet as:
Multiple Choice
- accounts payable.
- property, plant, and equipment.
- other current assets.
- goodwill.
TB 05-46 $50,000 is borrowed, to be repaid in three e…
$50,000 is borrowed, to be repaid in three equal, annual payments with 10% interest. Approximately how much principal is amortized with the first payment?
Multiple Choice
- $5,000.00
- $15,105.74
- $20,105.74
- $2,010.60
TB 07-47 What constant growth rate in dividends is ex…
What constant growth rate in dividends is expected for a stock valued at $32.00 if next year’s dividend is forecast at $2.00 and the appropriate discount rate is 13 percent?
Multiple Choice
- 5.00 percent
- 6.75 percent
- 6.25 percent
- 15.38 percent
TB 07-30 ABC common stock is expected to have extraor…
ABC common stock is expected to have extraordinary growth of 20 percent per year for two years, at which time the growth rate will settle into a constant 6 percent. If the discount rate is 15 percent and the most recent dividend was $2.50, what should be the current share price?
Multiple Choice
- $37.39
- $33.23
- $47.77
- $31.16
TB 03-51 Increases to Retained earnings result from:
Increases to Retained earnings result from:
Multiple Choice
- income not paid to shareholders.
- market values that exceed book values.
- an excess of assets over liabilities.
- the sale of additional shares of stock to investors.
TB 07-46 A company with a return on equity of 15 perc…
A company with a return on equity of 15 percent and a plowback ratio of 60 percent would expect a constant growth rate of:
Multiple Choice
- 21 percent
- 4 percent
- 25 percent
- 9 percent
Explanation
g = .015 × .60 = .09 = 9%.
TB 01-35 One continuing problem with managerial incen…
One continuing problem with managerial incentive-compensation plans is that:Multiple Choice
- the plans do not reward shareholders.
- effectiveness of the plans is difficult to evaluate.
- the plans increase agency problems.
- managers prefer guaranteed salaries.
TB 05-103 A cash-strapped young professional offers to…
A cash-strapped young professional offers to buy your car with four, equal end of year annual payments of $3,000, beginning 2 years from today (the first payment will be made on the last day of year 2). Assuming you’re indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9,000 for the car, should you accept?
Multiple Choice
- Yes; present value is $11,372.67
- Yes; present value is $9,510.08
- No; present value is $7,461.17
- No; present value is $8,645.09
Solution – Midterm 3310
TB 01-14 Managers are spurred on by incentive schemes…
Managers are spurred on by incentive schemes that provide big returns if shareholders gain but are valueless if they do not.
Correct Answer – True
TB 03-15 An increase in inventories uses cash, reduci…
An increase in inventories uses cash, reducing the firm’s net cash balance.
Correct Answer – True
TB 07-09 Holding risk constant, an increase in divide…
Holding risk constant, an increase in dividend yield will tend to decrease a firm’s rate of growth.
Correct Answer – True
TB 07-07 Securities with the same expected risk shoul…
Securities with the same expected risk should offer the same expected rate of return.
Correct Answer – True
TB 07-04 An excess of market value over the book valu…
An excess of market value over the book value of equity can be attributed to going concern value.
Correct Answer – True
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