MC-questions

Question 1

The four stocks A, B, C, and D have standard deviations, respectively, of 5%, 10%, 15% and 20%. Which one is the riskiest?

1. Stock A
2. Stock B
3. Stock C
4. Stock D

Question 2

According to the Pecking Order Hypothesis: less probable companies in an asymmetric world will need more ________; they will first seek ________ and will avoid ________.

1. internal funding; the use of retained earnings; equity market
2. internal funding; the use of retained earnings; debt market
3. external funding; equity funding; debt market
4. external funding; debt financing; equity market

Question 3

Consider the following sales:

• May: €50,000
• June: €80,000
• July: €120,000

For any month the following percentages are received over time in cash: 40% in cash from that same month of sales, 50% in cash from the previous month's sales and 10% in cash from the sales from two months ago. What amount of cash will be received during July?

1. €93,000
2. €97,500
3. €108,000
4. €120,000

Question 4

Which model shows how soon one will recover from an initial investment?

1. Payback period
2. NPV
3. IRR
4. Profitability index

Question 5

Consider the following information from a balance sheet: the value of common stock is €60,000, preferred stock has a value of €10,000, retained earnings are €40,000, long-term debt is €120,000. For the purpose of estimating the WACC of the firm,what are the weights of long-term debt, preferred stock and equity? (Note: D = debt, PS= preferred stock, E = equity and V = total value).

1. D/V = 52.17%, PS/V = 4.35% and E/V = 43.48%
2. D/V = 52.17%, PS/V = 43.48% and E/V = 4.35%
3. D/V = €120,000, PS/V = €10,000 and E/V = €100,000
4. There is not enough information to answer this question.

Question 6

Which of the following types of securities cannot be issued by a large public firm?

1. common stock
2. bonds
3. preferred stock
4. t-bills

Question 7

A company that offers a credit discount to its customers is trying to ________, and a company that pays a credit in time rather than take a discount and paying it early is attempting to ________.

1. speed up cash outflow; slow down cash outflow
2. speed up cash outflow; slow down cash inflow
3. speed up cash inflow; slow down cash outflow
4. speed up cash inflow; slow down cash inflow

Question 8

Assume you have signed a call option contract for an asset. The premium of this option is €0.90 and expires in 2 months. The asset is currently sold on the market at €25 (current spot price). The strike price of the option is €26. What are the intrinsic and time value components of the premium for this call option?

1. the intrinsic value is €0.90 and the time value is €0
2. the intrinsic value is €1.0 and the time value is €0.10
3. the intrinsic value is €0 and the time value is €0.90
4. the intrinsic value is €0.10 and the time value is €1.0

Question 9

The sale of used securities is the sale where the financial asset is being traded from one individual to another and proceeds do not go to the original issuer of the security. In what kind of market does such a sale take place?

1. primary market
2. secondary market
3. money market
4. capital market

Question 10

The annual salary of John fifteen years ago was €52,500. Today he earns an annual salary of €191,205. What is the average annual rate of growth of John's salary?

1. around 7%
2. around 8%
3. around 9%
4. around 10%

Question 11

Toyota has €1,000 par value bonds with a coupon rate of 8% per year with semi-annual coupon payments. Assume that there are ten years remaining prior to maturity and that these bonds are selling for €1,000. What would be the annual yield to maturity of these bonds?

1. lower than 4%
2. lower than 8%, but higher than 4%
3. exactly 8%
4. higher than 8%

Question 12

Janette works for a firm that is expanding into a new line of business. She has been asked to determine tan appropriate WACC for an average risk project in the expansion division. There are two publicly traded standalone firms that produce the same products as the new division. The average beta of these is 1.25. The expected return on the market portfolio is 13% and the risk-free rate of return is 4%. The firm where Janette works finances 50% of its project with equity and 50% with debt. The firm has a before-tax cost of debt of 9% and a corporate tax rate of 30%. What is the WACC for the new line of business?

1. about 13.00%
2. about 12.64%
3. about 11.29%
4. about 10.78%

Question 13

Managing the relationship between current liabilities and current assets of the firm in order to improve the flow of funds is called:

1. working capital management
2. the production cycle
3. the business operating cycle
4. the cash conversion cycle

Question 14

The current exchange rate is $1.2963/€. The anticipated annual inflation rate is 5% in the Euro zone and 3% in the United States. What is the forward exchange rate?

1. $1.2402/€
2. $1.2593/€
3. $1.2963/€
4. $1.3344/€

Question 15

Consider the fact that the pricing of stocks is more than difficult than the pricing of bonds. Which of the below statements is FALSE?

1. Cash dividends, unlike coupons for bonds, typically change from year to year.
2. Because a stock has no maturity date, the number of its payments are unknown.
3. The ending price of the stock at any point in time is not fixed like the par value of the principal.
4. A stock's final sale is fixed in time on its maturity date.

Question 16

A water company is considered a liquid company because of its generous dividend policy. The ex-dividend date is May 15th. Prior to this date the firm's stock is selling for a price of €23.18 per share. If you purchase the stock prior to May 15th, you will receive a dividend of €1.15. If you would wait until May 16th to buy the stock, and there was no other event that would change the price of the stock what would be the expected stock price be?

1. €23.18
2. €22.03
3. €18.58
4. unknown

Question 17

Suppose that a Dutch company recently has bought 210,000 worth of computers from a U.S.Supplier with payment to be made in 90 days.The current spot exchange rate at the time of the sale is 1.20/€. The current market developments led to an appreciation of the Euro against the US dollar. If this company wants to minimize foreign exchange risk, which of the followings will the company need to sign?

1. Since the Euro is expected to appreciate against the US dollar, the change in exchange rate will not create a problem.
2. A forward contract on selling US dollars
3. a call option on US dollars
4. a put option on US dollars

Question 18

What kind of discount rates should be used to evaluate higher risk projects?

1. there is no relationship between risk and discount rate
2. the same
3. lower
4. higher

Question 19

Which statement below is FALSE?

1. Projects are mutually exclusive if picking one project eliminates the ability to pick the other project.
2. If a company has constrained capital, then it can only take on a limited number of projects.
3. The NPV decision criterion is true when all projects are independent and the company has a sufficient source of funds to accept all positive NPV projects.
4. Two projects are mutually exclusive if the accepting of one project has no bearing on the accepting or rejecting of the other project.

Question 20

List financial management decisions that a business might make in the following statement: When a company chooses a new product to introduce into the market this is a ___________ decision, to sell a bond to finance the new product is a ___________ decision, and to set production and inventory levels on the new product is a __________ decision.

1. capital structure; capital budgeting; net working capital
2. capital budgeting; capital structure; net working capital
3. capital structure; net working capital; capital budgeting
4. net working capital; capital structure; capital budgeting

Question 21

Assume that revenues are €40,000, the costs of goods sols is €26,000, the selling, general and administrative expenses are €7,000, depreciation is €3,000 and interest expense is €2,000. What is the EBIT?

1. €14,000
2. €7,000
3. €4,000
4. €2,000

Question 22

Which of the following factors has little or no impact on the initial coupon rate tassigned to a new bond?

1. bond rating
2. market rates of interest
3. stock price
4. current capital structure

Question 23

A company is considering a project that has an initial after-tax outlay/cost of €250,000. The respective cash inflows from the ten year project for years 1-10 are €39,000 each year. The firm uses the IRR method and has a WACC of 10%. Will the company accept this project?

1. The company rejects the project because its IRR is less than 10%.
2. The company accepts the project because its IRR is between 8% and 10%.
3. The company accepts the project because its IRR is greater than 10%.
4. There is not enough information to answer this question.

Question 24

To compute the total cash outflow that is needed to start a project we must include:

1. any change in working capital
2. any change in dividends
3. any change in earnings
4. any change in net income

Question 25

A residual dividend policy is a policy in which:

1. a conservative dividend payment is made each period to stockholders.
2. bondholders receive extra cash flows when available after paying dividends to shareholders.
3. no dividends are paid to stockholders because they will reap their benefits when the firm ceases operations.
4. leftover funds are paid out to stockholders as dividends after all other capital requirements are met.

Question 26

The primary goal of a financial manager is to:

1. ensure that the firm maintains its level of employment within the community so that people are not laid off.
2. maximize the current share price or equity value of the firm.
3. improve relations with the community even at the expense of corporate profits.
4. provide for the economic growth of the community in which the firm resides.

Question 27

Which of the following statements is FALSE?

1. Like a bond, common stock entitles the owner to some of the cash flow of a company.
2. An equity claim is a claim to all the assets and cash flows of a company once debt claimants have been paid.
3. Bond ownership gives the right to participate in the management of the company.
4. For common stock, there is no maturity date and the promised cash flow is not stated on the asset, but is determined at a later date by the board of directors.

Question 28

At year 0 a company paid a dividend of €1.80. The growth rate is 6% and the required rate of return is 12%. What is the stock price according to the constant dividend model?

1. €15.00
2. €30.00
3. €30.80
4. €31.80

Question 29

What is the primary benefit of diversification?

1. a reduction in risk
2. an increase in expected return
3. diversification has no real benefit; it is a shell game promoted by investment advisors who are the only real winners
4. an equal reduction in risk and return

Question 30

When a depreciable asset is sold, a tax gain or loss on disposal is calculated based on the book value of the asset at the time of disposal. If a ________ has occurred, ________ are incurred.

1. gain, tax credits
2. gain, tax reductions
3. gain, taxes
4. loss, taxes

Question 31

The optimal debt-to-equity ratio reflects the maximum benefit of leverage. At this optimal ration the firm value is:

1. irrelevant
2. at the midpoint
3. lowest
4. highest

Question 32

When markets react instantaneously to the release of new information it is a sign of:

1. illegal trading
2. agency problems
3. market segmentation
4. market efficiency

Question 33

If the current ratio (current assets / current liabilities) of a company is greater than one this tells us that the company:

1. should be able to keep away from short-term cash problems
2. may have too much capital tied up in current assets
3. should be able to cover the current liabilities
4. all of the above

Question 34

A company has issues 10-year annual coupon bonds with a face value of €1,000. If the current yield to maturity is 12% and the annual coupon rate is 10%, what is the current price per bond?

1. between €1,101 and €1,150
2. between €1,051 and €1,100
3. between €851 and €900
4. between €801 and €850

Question 35

You want to invest in a stock that will pay for the next six years an annual cash dividend of €3.50. At the end of these six years you will sell the stock for €22.50. If you want to earn 12% on this investment, what is a fair price for this stock if you buy it today?

1. about €14.40
2. about €17.50
3. about €25.80
4. about €26.00

Question 36

Beta is:

1. the appropriate measure of risk for a well-diversified portfolio
2. a measure of systematic risk
3. a measure of nondiversifiable risk
4. all of the above

Question 37

Consider the M&M proposition with corporate taxes. An unlevered, all equity, firm value is €500 million. By adding debt, the annual interest expense is €100 million. The discount rate on the tax shield is 8% and the corporate tax rate is 30%. If the gain to leverage or the value added from issuing debt is the present value of the annual tax debt shield, what is levered firm value?

1. €500 million
2. €875 million
3. €938 million
4. €1,000 million

Question 38

Which model incorporates the time-value of money but still ignores cash flows after the cutoff date?

1. IRR
2. Discounted Payback period
3. Payback period
4. Modified internal rate of return

Question 39

The degree to which a firm or individual utilizes borrowed money to make money is called:

1. operating leverage
2. fixed leverage
3. financial leverage
4. variable leverage

Question 40

A company is considering a project that has an initial after-tax outlay/cost of €250,000. The respective future cash inflow from the ten year project for years 1-10 are €37,500 each year. The company expects an additional cash flow of €45,000 in year 10. The net present value method is used by the firm and the firm's discount rate is 10%. Will this company accept the project?

1. the project is accepted because it has an NPV greater than €0
2. the project is rejected because it has an NPV greater than €0 but less than €500
3. the project is rejected because it has an NPV less than €0
4. there is not enough information to make a decision

Answer indication MC-questions

1. D

2. D

3. A

4. A

5. A

6. D

7. C

8. C

9. B

10. C

11. C

12. D

13. A

14. B

15. D

16. B

17. C

18. D

19. D

20. B

21. C

22. C

23. A

24. A

25. D

26. B

27. C

28. D

29. A

30. C

31. D

32. D

33. D

34. C

35. C

36. D

37. B

38. B

39. C

40. C