1. Which one of the following is a capital budgeting decision?

A. determining how much debt should be borrowed from a particular lender

*B. deciding whether or not to open a new store

C. deciding when to repay a long-term debt

D. determining how much inventory to keep on hand

E. determining how much money should be kept in the checking account

2. What is the taxable income for 2008?

2008

Cost of goods sold $3,210

Interest $215

Dividends $160

Depreciation $375

Change in retained $360

earnings

Tax rate 35%

A. $360

B. $520

C. $640

D. $780

E. $800

3. You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 9%, which offer should you accept and why?

A. You should accept the $189,000 today because it has the higher net present value.

B. You should accept the $189,000 today because it has the lower future value.

C. You should accept the second offer because you will receive $200,000 total.

You should accept the second offer because you will receive an extra $11,000.

E. You should accept the second offer because it has a present value of $194,168.00.

4. What is the net present value of a project with the Following cash flows and a required return of 12%?

Year Cash How

0 -$28,900

1 $12,450

2 $ 9,630

3 $ 2,750

A. -$287.22

B. -$177.62

C. $177.62

D. $204.36

E. $287.22

5. Kay's Nautique is considering a project which will require additional inventory of $128,000 and will also increase accounts payable by $45,000 as suppliers are willing to finance part of these purchases. Accounts receivable are currently $80,000 and are expected to increase by 10% if this project is accepted. What is the initial project cash flow needed for net working capital?

A. $75,000

B. $91,000

C. $99,000

D. $136,000

E. $181,000

6. To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably' conduct analysis.

A. leverage

B. scenario

C. break-even

D. sensitivity

E. cash flow

7. Next year's annual dividend divided by the current stock price is called the:

A. yield to maturity.

B. total yield.

C. dividend yield.

D. capital gains yield.

E. earnings yield.

8. You bought 100 shares of stock at $20 each. At the end of the year, you received a total of $400 in dividends, and your stock was worth $2,500 total. What was your total return?

A. 20%

B.45%

C. 50%

D. 90%

E. None of the above

9. The principle of diversification tells us that:

A. concentrating an investment in two or three large stocks will eliminate all of your risk.

B. concentrating an investment in three companies all within the same industry will greatly reduce your overall risk.

C. spreading an investment across five diverse companies will not lower your overall risk at all.

D. spreading an investment across many diverse assets will eliminate all of the risk.

E. spreading an investment across many diverse assets will eliminate some of the risk.

10. You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return on this stock will:

A. be equal to one-half of 8% if there is a 50% chance of an economic boom.

B. vary inversely with the growth of the economy.

C. increase as the probability of a recession increases.

D. be equal to 75% of 8% if there is a 75% chance of a boom economy.

E. increase as the probability of a boom economy increases.

11. The expected return on a stock that is computed using economic probabilities is:

A. guaranteed to equal the actual average return on the stock for the next five years.

B. guaranteed to be the minimal rate of return on the stock over the next two years.

C. guaranteed to equal the actual return for the immediate twelve month period.

D. a mathematical expectation based on a weighted average and not an actual anticipated outcome.

E. the actual return you will receive.

12. The risk premium for an individual security is computed by:

A. multiplying the security's beta by the market risk premium.

B. multiplying the security's beta by the risk-free rate of return.

C. adding the risk-free rate to the security's expected return.

D. dividing the market risk premium by the quantity (1 - beta).

E. dividing the market risk premium by the beta of the security.

13. Beta measures:

A. the ability to diversify risk.

B. how an asset covaries with the market.

C. the actual return on an asset.

D. the standard deviation of the assets' returns.

E. All of the above.

14. The use of debt is called:

A. operating leverage.

B. production leverage.

C. financial leverage.

D. total asset turnover risk.

E. business risk.

.

15. The weighted average cost of capital for a firm is the:

A. discount rate which the firm should apply to all of the projects it undertakes.

B. overall rate which the firm must earn on its existing assets to maintain the value of its stock.

C. rate the firm should expect to pay on its next bond issue.

D. maximum rate which the firm should require on any projects it undertakes.

E. rate of return that the firm s preferred stockholders should expect to earn over the long term.

16. A firm with cyclical earnings is characterized by:

A. revenue patterns that vary with the business cycle.

B. high levels of debt in its capital structure.

C. high fixed costs.

D. high price per unit.

E. low contribution margins.

17. A firm with high operatint2, leverage has

A. low fixed costs in its production process.

B. high variable costs in its production process.

C. high fixed costs in its production process.

D. high price per unit.

E. low price per unit.

18. Jack's Construction Co. has 8000 bonds outstanding that are selling at par value. Bonds with similar characteristics are Yielding, 8.5%. The company also has 4 million shares of common stock outstanding.. The stock has a beta of 1.1 and sells for $40 a share. The U.S. "Treasury hill is yielding 4% and the market risk premium is 8%. jack's tax rate is 35%. What is Jack's weighted average cost of capital?

A. 7.10%

B. 7.39%

C. 10.38%

D. 10.65%

E. 11.37%

19. Shares of stock that have been repurchased by the corporation are called:

A. treasury stock.

B undistributed capital stock.

C. retained equity.

D. capital surplus shares.

E. None of the above.

20. Unsecured corporate debt is called a(n):

A. indenture.

B. debenture.

C. bond.

D. mortgage.

E. None of the above.

21. Debt that may be extinguished before maturity is referred to as:

A. sinking-fund debt.

B. debentures.

C. callable debt.

D. indenture debt.

E. None of the above.

22. The unlevered cost of capital is:

A. the cost of capital for a firm with no equity in its capital structure.

B. the cost of capital for a firm with no debt in its capital structure.

C. the interest tax shield times pretax net income.

D. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure.

E. equal to the profit margin for a firm with some debt in its capital structure.

23. The firrn's capital structure refers to:

A. the way a firm invests its assets.

B. the amount of capital in the firm.

C. the amount of dividends a firm pays.

D. the mix of debt and equity used to finance the firm's assets.

E. how much cash the firm holds.

24. A levered firm is a company that has:

A. Accounts Payable as the only liability on the balance sheet.

B. some debt in the capital structure.

C. all equity in the capital structure.

D. All of the above.

E. None of the above.

25. Financial leverage impacts the performance of the firm by:

A. maintaining the same level of volatility of the firm's EBIT.

B. decreasing the volatility of the firm's EBIT.

C. decreasing the volatility of the firm's net income.

D. increasing the volatility of the firm's net income.

E. None of the above.

26. Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

A. $20.0 million

B. $20.8 million

C. $21.0 million

D. $21.2 million

E. $21.3 million

27. The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend, is called the _____ date.

A. ex-rights

B. ex-dividend

C. record

D. payment

E. declaration

28. The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the:

A. ex-rights date.

B. ex-dividend date.

C. date of record.

D. date of payment.

E. declaration date.

29. An increase in a firm's number of shares outstanding without any change in owners' equity is called a:

A. special dividend.

B. stock split.

C. share repurchase.

D. tender offer.

E. liquidating dividend.

30. A firm has a market value equal to its book value. Currently, the firm has excess cash of $500 and other assets of $9,500. Equity is worth $10,000. The firm has 250 shares of stock outstanding and net income of $1,400. What will the stock price per share be if the firm pays out its excess cash as a cash dividend?

A. $36

B. $38

C. $40

D. $42

E. $44

31. The common stock of Margot, Inc. is selling for $56 a share. The par value per share is $1. Currently, the firm has a total market value of $89,600. How many shares of stock will be outstanding if the firm does a 2-for-1 stock split?

A. 800 shares

B. 1,200 shares

C. 1,600 shares

D. 3,200 shares

E. 4,800 shares

32. The first public equity issue made by a company is a(n):

A. initial private offering.

B. initial public offering.

C. secondary offering.

D. seasoned new issue.

E. None of the above.

33. Dilution refers to:

A. the increase in stock value due to wider ownership of stock.

B. the loss in existing shareholder