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1. The value of a company depends upon all of its future expected free cash flows (FCF) defined as NOPAT minus increases in operating working capital and operating fixed assets.

a. True

b. False

2. Operating Current Assets consists of all of the following EXCEPT

a. A/R

b. Inventories

c. Short-term investments

d. Accruals

e. Cash

3. Is an investment in machinery an investment in operating capital?

a. Yes

b. No

4. High FCF can cause waste if:

a. Interest expense is too high

b. Bonds are called in at a premium

c. Managers fail to act in the best interests of shareholders

d. Managers buy more assets that generate returns above the cost of capital

5. At its core, what is FCF?

a. The cash available for distribution to investors.

b. A driver of the fundamental value of the firm.

c. All of the above

d. None of the above

6. A financial metric used to determine if growth is adding value is

a. ROE

b. ROA

c. ROIC

d. NOPAT

7. Economic Value Added (EVA) measures how effective managerial actions in a given period.

a. True

b. False

8. EVA = NOPAT - (WACC)(Capital). In this form of the EVA question, (WACC)(Capital) represents, what?

a. An opportunity cost, but nevertheless a real cost

b. The cost of debt

c. The cost of equity

d. None of the above.

9. An inverted yield curve doesnt happen much. When it does, short-term bonds yield more than long-term bonds, all else equal.

a. True

b. False

10. Market Value Added (MVA) = Market Value of the firm - Book value of the firm. This metric, represents what?

a. The value added by management since the inception of the firm.

b. The value added by management since last year.

c. The value added by management since last quarter.

d. None of the above.

11. YTM = Current Yield for a coupon bond selling at par.

a. True

b. False

12. What affects an investments value?

a. The amount of expected cash flows

b. The timing of cash flows

c. The risk of cash flows

d. All of the above

e. None of the above

13. The WACC is the weighted average cost of capital and is affected by what?

a. The capital structure of the firm

b. The current interest rate environment

c. The risk of the firm

d. All of the above

e. None of the above

14. A California Muni Bond yielding 5% or a corporate bond yielding 7%. Assuming all other factors are equal, which bond should you prefer if your marginal tax rate is 30%?

a. The muni bond

b. The corporate bond

c. Either. You would be indifferent to the two.

15. Dilbert Enterprises has issued $1 billion of bonds with a sinking fund provision. With 5 years left until maturity, Dilbert Enterprises does not retire bonds as provided for in the sinking fund provision. What is the consequence of this action on the company?

a. Nothing as long as it still pays interest on the bonds and pays them off at maturity.

b. The bonds are in default as a result of violating the sinking fund covenant.

c. It depends on the payment history of Dilbert Enterprises.

d. None of the above.

16. A bond that currently trades at a premium will see its price do what until maturity (assuming nothing else changes except the passage of time)?

a. Rise to par

b. Fall to par

c. Remain the same since prevailing interest rates have not changed

d. None of the above

17. You put $2,000 in a CD paying 6% for 10 years. How much money do you have at the end of 10 years?

18. What is the Current Yield on a 10-year bond with 9% annual coupon that is selling at $887? (Assume par value = $1,000 as we usually do in this class)?

a. 9.15%

b. 9.91%

c. 10.15%

d. 10.91%

19. You are considering purchasing a 10% coupon bond that matures in 11 years. YTM on similar bonds with like risk characteristics currently yield 11%. What price should you consider paying for this bond?

20. You put $10,000 in a company 401K each year. The company matches this investment. You expect to earn 8% each year on this money and you work for the company for 25 years before you retire. How much money do you have at retirement?

21. You have decided that you need $3 million to retire in 35 years. How much money should you save each month if you can earn 9% on this money?

22. You purchase a rental house for $100,000 with 20% down. The rental income pays for all expenses and the mortgage for the entire time you own it. You sell it 18 years after you purchase it. Assuming real estate prices increase 3.5% per year, at what price did you sell this rental house?

23. Assuming you owe $45,000 on this house when you sell it, what is your gain on the house above?

24. What is your rate of return on your equity investment given this gain?

25. Your company is evaluating a project. The project is expected to cost $500,000 and generate the following cash flows: 100,000 in year one, 300,000 in years two and three, & -50,000 in year four (end of life). If your cost of capital (WACC) is 10%, should you undertake this project?

a. Yes

b. No

c. Not enough information

26. What is the value of a bond with 10 years to maturity and a 10% coupon rate if current interest rates for similar bonds are currently 13%?

27. What is the value of a bond with 10 years to maturity and a 10% coupon rate if current interest rates for similar bonds are currently 7%?

28. At maturity a bonds value always equals its par value.

a. True

b. False

29. A normal yield curve is?

a. Sloping upward

b. Flat

c. Sloping downward

30. Given what you know about intrinsic value, please calculate the intrinsic value of one ounce of gold.

31. The shape of the yield curve is drive by

a. Expectations about future inflation

b. Expectations about future cash flow

c. Perceptions about the relative risk of securities with different maturities

d. All of the above

e. A & C only.

32. Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?

33. What is the YTM in #89?

34. What is the Current Yield in #89?

35. Based upon your answers to question 89-91, do you think the corporation will call this bond?

a. Yes

b. No

36. There are several advantages of a sole proprietorship business organization. What is its chief disadvantage?

a. It is expensive to form

b. Unlimited liability

c. It is heavily regulated

37. There are several advantages of a partnership business organization. What is its chief disadvantage?

a. It is expensive to form

b. Unlimited liability

c. It is heavily regulated

d. Double taxation

38. There are several advantages of a corporate business organization. What is its chief disadvantage?

a. It is expensive to form

b. Unlimited liability

c. It is heavily regulated

d. Double taxation

39. Figure 1-3 in the text illustrates that the Federal budget deficit reached a peak in 2009. Why might this be?

a. Obamacare.

b. A weak economy resulted in lower tax revenues for the government.

c. Poor fiscal policy.

d. Poor monetary policy.

40. Interest rates have steadily fallen since 1980. How might this have affected asset prices in that time frame?

a. Interest rates have nothing to do with asset prices.

b. Declining rates likely helped inflate asset prices.

c. Declining rates likely slowed the rate of asset price increases.

d. None of the above.

41. Money markets are the markets for?

a. Markets for securities with maturities less than a year.

b. Markets for securities with maturities more than a year.

c. Markets for debt securities with maturities less than a year.

d. Markets for debt securities with maturities less than a year.