1. Expected return on a project; it is the rate that makes net present value (NPV) break even.
A) Payback period
B) Cost of capital
C) Profitability index
D) Internal rate of return
2. The bond contract is known as the
A) Indenture
B) Debenture
C) Covenant
3. Which of the following cash flows would you exclude from the current analysis of a project?
A) Cannibalism of future sales in existing product lines
B) Additional use of electricity and water
C) Last year's survey of market demand
D) All of the above are included
4. When a stock trades in the secondary market, the firm gets additional cash.
A) True
B) False
5. Which of the following makes a market operate less efficiently?
A) Easier access to information
B) More inaccurate information
C) Lower trading costs
D) More competition
6. A seasoned stock offer is when the firm sells additional shares of already trading stock. Most seasoned stock offers are associated with a price decline. Why?
A) Economics: There is additional supply of stock with the same demand.
B) Behavior: Managers issue additional stock only when the price is undervalued.
C) Control: It is now harder for outsiders to gain control of the firm.
D) Liquidity: There is more liquidity in the market.
7. Most firms follow a ____ strategy in managing net working capital.
A) Aggressive
B) Conservative
C) Maturity matching
8. When the cost of capital is high, the firm prefers projects that
A) Are larger
B) Have a lower internal rate of return (IRR)
C) Use incremental cash flows
D) Have a faster payback
9. The yield rises by 2%. Which bond will have the smallest percentage change in price?
A) A 20-year, zero coupon bond
B) A 10-year, 5% coupon bond
C) A 5-year, 6% coupon bond
10. Manners Inc. has a required return of 16%. The return on equity is 20%. The PVGO will be
A) Positive
B) Negative
C) Zero
11. (6) You have the following information on Proctor & Gamble (PG) and Johnson & Johnson (JNJ):
PG: P-E (which is Price/EPS) = 22.42
JNJ: EPS = 3.14
a. Using PG as a comparable, estimate JNJ's price: ______________
b. The current price of JNJ is about $69.50 per share. How does your estimate compare to the current price (high, low or about the same)? ___________________________
c. What is one problem with using a comparable (such as PG) to estimate the price of another firm (such as JNJ)?