Question 1: What will happen to retained earnings when a corporation issues 1,000 shares of $1 par stock for $10 per share?
a. It will increase by $1000
b. It will increase by $9000
c. It will decrease by $9000
d. It will remain unchanged
Question 2: Which of the following bonds is likely to be viewed by investors as the most risky?
a. Subordinated debt
b. Indexed bond
c. Secured bond
d. Asset-back bonds
Question 3: Which of the following statements is correct for a project with a positive NPV?
a. IRR exceeds the cost of capital
b. Accepting the project has an indeterminate effect on the shareholders
c. The discount rate exceeds the cost of capital
d. The profitability index equals one
Question 4: If the IRR for a project is 15%, then the project's NPV would be:
a. Negative at a discount rate of 10%
b. Positive at a discount rate of 20%
c. Negative at a discount rate of 20%
d. Positive at a discount rate of 15%
Question 5: Which of the following investment criteria does not take the time value of money into consideration?
a. Book rate of return
b. Net present value
c. Profitability
d. Internal rate of return for borrowing projects
Question 6: Projects that are calculated as having negative NPV's should be:
a. Decpreciated over a longer time period
b. Charged less in overhead costs
c. Discounted using lower rates
d. Rejected or abandoned
Question 7: In what manner does depreciation expense affect investment projects?
a. It reduces cash flows by the amount of the depreciation expense
b. It increases cash flows by the amount of the depreciation expense
c. It reduces taxable income by the amount of the depreciation expense
d. It reduces taxes by the amount of the depreciation expense
Question 8: The purpose of sensitivity analysis is to show:
a. The optimal level of the capital budget
b. How price changes affect break-even volume
c. Seasonal variation in product demand
d. How variables in a project affect profitability
Question 9: Which of the following techniques may be more appropriate to analyze projects with interrelated variables?
a. Sensitivity analysis
b. Scenario analysis
c. Break even analysis
d. DOL analysis
Question 10: The appropriate opportunity cost of capital is the return that investors give up on alternative investments with
a. The same risk
b. The risk-free return
c. The expected return on the S&P 500 index
d. The normal, common stock risk premium
Question 11: The major benefit of diversification is to
a. Increase the expected return
b. Remove negative risk assets from the portfolio
c. Reduce the portfolio's systematic risk
d. Reduce the expected risk
Question 12: If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in:
a. High beta stocks
b. Low beta stocks
c. Stocks with large amounts of unique risk
d. Stocks that plot below the security market line
Question 13: Financial plans will rarely succeed unless the forecasts are perfect
a. True
b. False
Question 14: Financial planning models routinely adjust for present value and risk
a. True
b. False
Question 15: On average, stockholders in target firms earn higher returns from mergers than stockholders from acquiring firms
a. True
b. false
Question 16: The value of the target firm's bonds go down when a leveraged buy-out is announced
a. True
b. False
Question 17: The difference in interest rates between countries is believed to be equal to the expected change in spot exchange rates
a. True
b. False
Question 18: History has shown a positive relationship between higher interest rates and higher subsequent rates of inflation.
a. True
b. False
Question 19:A dividend does NOT accompany stocks that are purchased on the ex-dividend date
a. True
b. False