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1. When considering a capital budgeting project the financial manager should consider the: I. size of the project. II. timing of the project's cash flows. III. risk associated with the project's cash flows. A. I only B. II only C. I and III only D. II and III only E. I, II, and III
Ross - Chapter 001 #25 SECTION: 1.1 TOPIC: CAPITAL BUDGETING TYPE: CONCEPTS
2. Which term relates to the cash flow which results from a firm's ongoing, normal business activities? A. operating cash flow B. capital spending C. net working capital D. cash flow from assets E. cash flow to creditors
Ross - Chapter 002 #11 SECTION: 2.4 TOPIC: OPERATING CASH FLOW TYPE: DEFINITIONS
3. A firm has net working capital of $820. Long-term debt is $3,260, total assets are $5,920 and fixed assets are $3,410. What is the amount of the total liabilities? A. $2,440 B. $4,080 C. $4,130 D. $4,230 E. $4,950
Current assets = $5,920 $3,410 = $2,510; Current liabilities = $2,510 $820 = $1,690; Total liabilities = $1,690 + $3,260 = $4,950
AACSB TOPIC: ANALYTIC Ross - Chapter 002 #49 SECTION: 2.1 TOPIC: TOTAL LIABILITIES TYPE: PROBLEMS
4. If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm: A. may have short-term, but not long-term debt. B. is using its assets as efficiently as possible. C. has no net working capital. D. has a debt-equity ratio of 1.0. E. has an equity multiplier of 1.0.
Ross - Chapter 003 #58 SECTION: 3.3 TOPIC: PROFITABILITY RATIOS TYPE: CONCEPTS
5. A firm has sales of $1,640, net income of $135, net fixed assets of $1,200, and current assets of $530. The firm has $280 in inventory. What is the common-size statement value of inventory? A. 15.01 percent B. 15.68 percent C. 16.18 percent D. 30.42 percent E. 52.83 percent
AACSB TOPIC: ANALYTIC Ross - Chapter 003 #75 SECTION: 3.2 TOPIC: COMMON-SIZE STATEMENTS TYPE: PROBLEMS
6. A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing.
The dividend payout ratio is constant at 40 percent. If the firm has a positive EFN, that need will be met by: A. accounts payable. B. long-term debt. C. fixed assets. D. retained earnings. E. common stock.
Ross - Chapter 004 #20 SECTION: 4.3 TOPIC: PRO FORMA STATEMENTS TYPE: CONCEPTS
7. Jed's Designer Clothes has $1,800 of sales and $1,630 of total assets. The firm is operating at 75 percent of capacity. What is the capital intensity ratio at full capacity? A. .54 B. .68 C. .85 D. 1.17 E. 1.47
Full-capacity sales = $1,800 / .75 = $2,400; Capital intensity ratio = $1,630 / $2,400 = .68
AACSB TOPIC: ANALYTIC Ross - Chapter 004 #48 SECTION: 4.3 TOPIC: CAPITAL INTENSITY RATIO TYPE: PROBLEMS
8. Twelve years ago, Jake invested $2,000. Six years ago, Tami invested $4,000. Today, both Jake's and Tami's investments are each worth $9,700. Assume that both Jake and Tami continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments? A. Three years from today, Jake's investment will be worth more than Tami's. B. One year ago, Tami's investment was worth more than Jake's. C. Jake has earned a higher rate of return than Tami. D. Tami has earned an average annual interest rate of 15.91 percent. E. Jake has earned an average annual interest rate of 15.47 percent.
Jake $9,700 = $2,000 (1 + r)12; r = 14.06 percent; Tami: $9,700 = $4,000 (1 + r)6; r =
15.91 percent; The correct answer states that Tami earned 15.91 percent interest.
AACSB TOPIC: ANALYTIC Ross - Chapter 005 #29 SECTION: 5.3 TOPIC: INTEREST RATE FOR MULTIPLE PERIODS TYPE: PROBLEMS
9. You deposit $1,000 in a retirement account today at 8.5 percent interest. How much more money will you have if you leave the money invested for 40 years rather than 35 years? A. $7,714.91 B. $7,799.08 C. $7,839.73 D. $7,846.52 E. $8,753.38
Future value = $1,000 (1 + .085)40 = $26,133.02; Future value = $1,000 (1 + .085)35 = $17,379.64; Difference = $26,133.02 $17,379.64 = $8,753.38
AACSB TOPIC: ANALYTIC Ross - Chapter 005 #43 SECTION: 5.1 AND 5.3 TOPIC: FUTURE VALUE AND TIME CHANGES TYPE: PROBLEMS
10. How is an annuity due defined? A. a stream of cash flows occurring for less than one year B. an annuity stream of payments that are disbursed rather than received C. an annuity stream of payments that are received rather than disbursed D. a set of equal cash flows occurring at the end of each period E. a set of equal cash flows occurring at the beginning of each period
Ross - Chapter 006 #4 SECTION: 6.2 TOPIC: ANNUITIES DUE TYPE: DEFINITIONS
11. You are the beneficiary of a life insurance policy. The insurance company informs you
that you have two options for receiving the insurance proceeds. You can receive a lump sum of $150,000 today or receive payments of $1,627.89 a month for 10 years. You can earn 7.5 percent on your money. Which option should you take and why? A. You should accept the payments because they are worth $151,291.91 to you today. B. You should accept the payments because they are worth $153,417.68 to you today. C. You should accept the payments because they are worth $154,311.12 to you today. D. You should accept the $150,000 because the payments are only worth $137,141.17 to you today. E. You should accept the $150,000 because the payments are only worth $134,808.17 to you today.
AACSB TOPIC: ANALYTIC Ross - Chapter 006 #27 SECTION: 6.2 TOPIC: ORDINARY ANNUITY AND PRESENT VALUE TYPE: PROBLEMS
12. The stated interest payment, in dollars, made on a bond each period is called the bond's: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.
13. A $1,000 Treasury bond has an asked quote of 100:07 and a bid quote of 100:05. One bond: A. can be sold to a dealer at a price of $1,000.70. B. can be purchased from a dealer at a price of $1,001.56. C. has a spread of 200 basis points. D. is trading at a discount between 5 and 7 percent. E. provides the dealer a profit of $0.625.
14. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model. A. zero growth B. dividend growth C. capital pricing D. earnings capitalization E. discounted dividend
Ross - Chapter 008 #1 SECTION: 8.1 TOPIC: DIVIDEND GROWTH MODEL TYPE: DEFINITIONS
15. The Row Boat has paid annual dividends of $.48, $0.60, and $0.62 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least a 14 percent rate of return. What is the maximum amount you are willing to pay for one share of this stock today? A. $3.43 B. $4.29 C. $4.43 D. $5.05 E. $5.60
AACSB TOPIC: ANALYTIC Ross - Chapter 008 #64 SECTION: 8.1 TOPIC: STOCK VALUE TYPE: PROBLEMS
16. The difference between an investment's market value and its cost is the: A. net present value. B. internal rate of return. C. payback period.
Ross - Chapter 009 #1 SECTION: 9.1 TOPIC: NET PRESENT VALUE TYPE: DEFINITIONS
17. Which one of the following is a capital budgeting decision? A. deciding whether a bank loan should be secured or if bonds should be issued B. determining how many bonds versus how many shares of stock should be issued C. ascertaining the minimum amount of cash which should be kept on hand D. determining the optimal level of inventory to be maintained E. deciding whether or not a newly invented product should be produced
Ross - Chapter 009 #11 SECTION: CHAPTER 9 INTRODUCTION TOPIC: CAPITAL BUDGETING DECISIONS TYPE: CONCEPTS
18. You are considering the following two mutually exclusive projects. The required rate of return is 10.75 percent for project A and 12 percent for project B. Which project should you accept and why?
A. project A; because it has the lower required rate of return B. project A; because its NPV is about $796 more than the NPV of project B C. project B; because it has the largest total cash inflow D. project B; because it returns all its cash flows within two years E. project B; because it is the largest sized project
Difference in NPVs = $14,610.69 $13,814.92 = $795.77 The answer states that the NPV of Project A exceeds the NPV of project B by about $796.
AACSB TOPIC: ANALYTIC Ross - Chapter 009 #60 SECTION: 9.1 TOPIC: NET PRESENT VALUE TYPE: PROBLEMS
19. What is the internal rate of return on an investment with the following cash flows?
A. 6.00 percent B. 6.93 percent C. 12.00 percent D. 12.23 percent E. 12.70 percent
AACSB TOPIC: ANALYTIC Ross - Chapter 009 #62 SECTION: 9.5 TOPIC: INTERNAL RATE OF RETURN TYPE: PROBLEMS
20. The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows. A. incremental B. stand-alone C. after-tax D. net present value E. erosion
Ross - Chapter 010 #1 SECTION: 10.1 TOPIC: INCREMENTAL CASH FLOWS TYPE: DEFINITIONS
21. You spent $600 last week repairing the brakes on your car. Now, the starter is acting up and you are trying to decide whether to fix the starter or trade the car in for a newer model. In analyzing the starter situation, the $600 you spent fixing the brakes is a(n) _____ cost. A. opportunity B. fixed C. incremental D. erosion E. sunk
Ross - Chapter 010 #14 SECTION: 10.2 TOPIC: SUNK COST TYPE: CONCEPTS
22. You own a house that you rent for $1,600 a month. The maintenance expenses on the house average $300 a month. The house cost $110,000 when you purchased it six years ago. A recent appraisal on the house valued it at $295,000. If you sell the house you will incur $15,000 in real estate fees. The annual property taxes are $25,000. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office? A. $150,000 B. $255,000 C. $280,000 D. $293,100 E. $310,000
AACSB TOPIC: ANALYTIC Ross - Chapter 010 #52 SECTION: 10.2 TOPIC: OPPORTUNITY COST TYPE: PROBLEMS
23. You own some equipment which you purchased three years ago at a cost of $155,000. The equipment is 5-year property for MACRS. You are considering selling the equipment today for $41,500. Which one of the following statements is correct if your tax rate is 34 percent?
A. The tax due on the sale is $2,072.40. B. The book value today is $74,400. C. The book value today is $60,600. D. The taxable amount on the sale is $44,640. E. You will receive a tax refund of $1,067.60 as a result of this sale.
AACSB TOPIC: ANALYTIC Ross - Chapter 010 #67 SECTION: 10.4 TOPIC: SALVAGE VALUE TYPE: PROBLEMS
24. The sales level that results in a project's operating cash flow exactly equaling zero is called the _____ break-even. A. operational B. leveraged C. accounting D. cash E. financial
Ross - Chapter 011 #9 SECTION: 11.4 TOPIC: CASH BREAK-EVEN TYPE: DEFINITIONS
25. The percentage change in operating cash flow relative to the percentage change in quantity sold is called the: A. marginal profit. B. degree of operating leverage. C. gross profit. D. net profit. E. contribution margin.
Ross - Chapter 011 #12 SECTION: 11.5 TOPIC: DEGREE OF OPERATING LEVERAGE TYPE: DEFINITIONS
26. Which of the following variables will be at their highest expected level under a worst case scenario? I. fixed cost II. sales price III. variable cost IV. sales quantity A. I only B. III only C. II and III only D. I and III only
Ross - Chapter 011 #20 SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS
The Franklin Co. is analyzing a proposed project. The company expects to sell 3,500 units, give or take 15 percent. The expected variable cost per unit is $6 and the expected fixed costs are $15,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $6,000. The sales price is estimated at $21 a unit, give or take 3 percent. The company bases their sensitivity analysis on the base case scenario.
27. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $23. What are the earnings before interest and taxes? A. $38,000 B. $44,000 C. $50,000 D. $59,500 E. $65,000
AACSB TOPIC: ANALYTIC Ross - Chapter 011 #61 SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: PROBLEMS
28. The excess return required from a risky asset over that required from a risk-free asset is called the: A. risk premium. B. geometric premium. C. excess return. D. average return. E. variance.
Ross - Chapter 012 #1 SECTION: 12.3 TOPIC: RISK PREMIUM TYPE: DEFINITIONS
29. The notion that capital markets, such as the NYSE, price securities fairly based on available information is called the: A. efficient market hypothesis. B. zero profit hypothesis. C. open markets theorem. D. laissez-faire principle. E. pricing theorem.
Ross - Chapter 012 #8 SECTION: 12.6 TOPIC: EFFICIENT MARKETS HYPOTHESIS TYPE: DEFINITIONS
30. Six months ago, you purchased 50 shares of stock in First Place Co. at a price of $41.68 a share. First Place stock pays a quarterly dividend of $.40 a share. Today, you sold all of your shares for $44.12 per share. What is the total amount of your dividend income on this investment? A. $20 B. $40 C. $80 D. $100 E. $122
AACSB TOPIC: ANALYTIC Ross - Chapter 012 #55 SECTION: 12.1 TOPIC: DOLLAR RETURNS TYPE: PROBLEMS
31. Six months ago, you purchased a stock at a price of $31.88 a share. Today, you sold those shares for $37.51 a share. During the past six months, you have received dividends totaling $0.46 a share while inflation has averaged 3.3 percent. What is your approximate real rate of return on this investment? A. 14.4 percent
Nominal return = ($37.51 $31.88 + $.46) / $31.88 = 19.10 percent; Real return = 19.10 percent 3.3 percent = 15.8 percent
AACSB TOPIC: ANALYTIC Ross - Chapter 012 #66 SECTION: 12.1 TOPIC: REAL RETURN TYPE: PROBLEMS
32. Risk that affects at most a small number of assets is called _____ risk. A. portfolio B. nondiversifiable C. market D. unsystematic E. total
Ross - Chapter 013 #5 SECTION: 13.4 TOPIC: UNSYSTEMATIC RISK TYPE: DEFINITIONS
33. Standard deviation measures _____ risk. A. total B. nondiversifiable C. unsystematic D. systematic E. economic
Ross - Chapter 013 #16 SECTION: 13.1 TOPIC: STANDARD DEVIATION TYPE: CONCEPTS
34. The returns on the common stock of Cycles, Inc. are quite cyclical. In a boom economy, the stock is expected to return 27 percent in comparison to 13 percent in a normal economy and a negative 20 percent in a recessionary period. The probability of a recession is 30
percent while the probability of a boom is 5 percent. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on this stock? A. 11.40 percent B. 14.79 percent C. 15.87 percent D. 18.27 percent E. 22.46 percent
E(r) = (.05 .27) + (.65 .13) + (.30 .20) = .0135 + .0845 .06 = .038 Var = .05 (.27 .038)2 + .65 (.13 .038)2 + .30 (.20 .038)2 = .0026912 + .0055016 + . 0169932 = .025186 Std dev = .025186 = .1587 = 15.87 percent
AACSB TOPIC: ANALYTIC Ross - Chapter 013 #66 SECTION: 13.1 TOPIC: STANDARD DEVIATION TYPE: PROBLEMS
ValuePortfolio = $3,500 + $1,000 + $9,500 = $14,000 BetaPortfolio = ($3,500 / $14,000 1.12) + ($1,000 / $14,000 1.81) + ($9,500 / $14,000 . 84) = .28 + .1293 + .57 = .9793 = .98
AACSB TOPIC: ANALYTIC Ross - Chapter 013 #80 SECTION: 13.2 AND 13.6 TOPIC: BETA TYPE: PROBLEMS
36. A put option is the _____ an asset at a fixed price during a stated period of time.
A. right to sell B. right to buy C. obligation to sell D. obligation to buy E. obligation to trade
Ross - Chapter 014 #8 SECTION: 14.1 TOPIC: PUT OPTION TYPE: DEFINITIONS
37. A security that gives the holder the right to purchase shares of stock at a fixed price over a specified period of time is called a(n): A. convertible bond. B. warrant. C. initial public offering. D. seasoned equity offering. E. put.
Ross - Chapter 014 #16 SECTION: 14.7 TOPIC: WARRANT TYPE: DEFINITIONS
AACSB TOPIC: ANALYTIC Ross - Chapter 014 #58 SECTION: 14.1 TOPIC: OPTION QUOTES TYPE: PROBLEMS
39. You own one call option with an exercise price of $55 on Doo Little stock. The stock is currently selling for $55.20 a share but is expected to sell for either $54 or $62 a share in one year. The risk-free rate of return is 3 percent and the inflation rate is 2.5 percent. What is the current option price if the option expires one year from now? A. $0.55 B. $0.79 C. $1.67 D. $2.43 E. $2.72
Number of options needed = ($62 $54) (7 0) = 1.142857; $55.20 = (1.142857 C0) + [$54 (1 + .03)]; $55.20 = 1.142857C0 + $52.427184; 1.142857C0 = 2.772816; C0 = $2.426214 = $2.43
AACSB TOPIC: ANALYTIC Ross - Chapter 014 #77 SECTION: 14.3 TOPIC: CALL OPTION VALUE TYPE: PROBLEMS
40. When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach. A. subjective risk B. pure play C. divisional cost of capital D. capital adjustment E. security market line
Ross - Chapter 015 #4 SECTION: 15.5 TOPIC: PURE PLAY APPROACH TYPE: DEFINITIONS
41. The cost of capital primarily depends on the: A. debt-equity ratio. B. applicable tax rate. C. cost of equity financing. D. cost of debt.
Ross - Chapter 015 #7 SECTION: 15.1 TOPIC: COST OF CAPITAL TYPE: CONCEPTS
42. Sundial Enterprises common stock is currently priced at $33.20 a share. The company just paid $1.40 per share as their annual dividend. The dividends have been increasing by 3 percent annually and are expected to continue doing so. What is the cost of equity for Sundial Enterprises? A. 7.22 percent B. 7.34 percent C. 7.49 percent D. 7.61 percent E. 7.82 percent
AACSB TOPIC: ANALYTIC Ross - Chapter 015 #42 SECTION: 15.2 TOPIC: COST OF EQUITY TYPE: PROBLEMS
43. The Basket Weavers Company has 100,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 7.5 percent. The company also has 1 million shares of 10.5 percent preferred stock outstanding and 5 million shares of common stock outstanding. The preferred stock sells for $56 per share. The common stock has a beta of 1.2 and sells for $38 a share. The U.S. Treasury bill is yielding 3 percent and the return on the market is 12 percent. The corporate tax rate is 34 percent. What is Basket Weaver's weighted average cost of capital? A. 10.71 percent B. 12.04 percent C. 12.78 percent D. 14.02 percent E. 14.85 percent
AACSB TOPIC: ANALYTIC Ross - Chapter 015 #62 SECTION: 15.4 TOPIC: WEIGHTED AVERAGE COST OF CAPITAL TYPE: PROBLEMS
44. Choice Golf Equipment has a beta of 1.2 and a cost of equity of 13 percent. The riskfree rate of return is 4 percent. Choice is considering a project with a beta of .8. An appropriate discount rate for the project is: A. 7.2 percent. B. 8.0 percent. C. 9.0 percent. D. 10.0 percent. E. 10.8 percent.
.13 = .04 + (1.2 mrp); mrp = .075; RProject = .04 + (.8 .075) = .10 = 10.0 percent
AACSB TOPIC: ANALYTIC Ross - Chapter 015 #69 SECTION: 15.4 TOPIC: PROJECT COST OF CAPITAL TYPE: PROBLEMS
You have $50,000 to invest. If you invest $10,000 into asset A which has a standard deviation of 5%, $25,000 into asset B which has a standard deviation of 11%, and the remainder into the risk-free asset, what will be the standard deviation of the portfolio if the correlation between assets A and B is -0.6? 0.25 percent. 0.5 percent C. 5.0 percent 6.5 percent 8.0 percent
Standard Deviation = [(0.2)2 (0.05)2 + (0.5)2 (.11)2 + 2 0.2 0.5 0.05 0.11 (-0.6)]
TOPIC: COMMON-SIZE STATEMENTS TOPIC: COST OF CAPITAL TOPIC: COST OF EQUITY TOPIC: COUPON TOPIC: DEGREE OF OPERATING LEVERAGE TOPIC: DIVIDEND GROWTH MODEL TOPIC: DOLLAR RETURNS TOPIC: EFFICIENT MARKETS HYPOTHESIS TOPIC: FUTURE VALUE AND TIME CHANGES TOPIC: INCREMENTAL CASH FLOWS TOPIC: INTEREST RATE FOR MULTIPLE PERIODS TOPIC: INTERNAL RATE OF RETURN TOPIC: NET PRESENT VALUE TOPIC: OPERATING CASH FLOW TOPIC: OPPORTUNITY COST TOPIC: OPTION QUOTES TOPIC: ORDINARY ANNUITY AND PRESENT VALUE TOPIC: PRO FORMA STATEMENTS TOPIC: PROFITABILITY RATIOS TOPIC: PROJECT COST OF CAPITAL TOPIC: PURE PLAY APPROACH TOPIC: PUT OPTION TOPIC: REAL RETURN TOPIC: RISK PREMIUM TOPIC: SALVAGE VALUE TOPIC: SCENARIO ANALYSIS TOPIC: SENSITIVITY ANALYSIS TOPIC: STANDARD DEVIATION TOPIC: STOCK VALUE TOPIC: SUNK COST TOPIC: TOTAL LIABILITIES TOPIC: UNSYSTEMATIC RISK TOPIC: WARRANT TOPIC: WEIGHTED AVERAGE COST OF CAPITAL TYPE: CONCEPTS TYPE: DEFINITIONS TYPE: PROBLEMS
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