TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
(Worth .25 points each or 2.5 points for this section)
1) For a given positive interest rate, the future value of $100 increases with the passage of time. Thus,
the longer the period of time, the greater the future value.
2) Future value is the value of a future amount at the present time, found by applying compound
interest over a specified period of time.
3) The aggressive financing strategy is a strategy by which the firm finances its current assets with
short-term funds and its fixed assets with long-term funds.
4) Combining negatively correlated assets can reduce the overall variability of returns.
5) A portfolio that combines two assets having perfectly positively correlated returns cannot reduce
the portfolio's overall risk below the risk of the least risky asset.
6) In general, exchange rate risk is easier to protect against than political risk.
7) In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the
length of the projects lives is not critical.
8) The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than maximization
of owners' wealth.
9) The three basic types of risk associated with international cash flows are 1) business and financial
risks, 2) inflation and foreign exchange risks, and 3) political risks.
10) Accounts payable result from transactions in which merchandise is purchased but no formal note is
signed to show the purchaser's liability to the seller.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
(Worth .50 points each or 9.5 points for this section)
11) When the amount earned on a deposit has become part of the principal at the end of a specified
time period the concept is called
A) future value. B) discount interest.
C) compound interest. D) primary interest.
12) The future value of $100 received today and deposited at 6 percent for four years is
A) $126. B) $124. C) $ 79. D) $116.
13) As the interest rate increases for any given period, the future value interest factor will
A) decrease. B) increase.
C) move toward 1. D) remain unchanged.
14) The present value of $100 to be received 20 years from today, assuming an opportunity cost of 8
A) $ 42.24. B) $ 75. C) $23.60. D) $21.45.
15) The ________ financing strategy requires the firm to pay interest on excess funds borrowed but not
needed throughout the entire year.
A) seasonal B) conservative C) permanent D) aggressive
16) Strikes, lawsuits, regulatory actions, and increased competition are all examples of
A) nondiversifiable risk. B) economic risk.
C) systematic. D) diversifiable risk.
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:
Asset Name Annual
Asset Return Probability Beta Proportion
X 10% .50 1.2 .333
Y 8% .25 1.6 .333
Z 16% .25 2.0 .333
17) Given the information in Table 5.2, what is the expected annual return of this portfolio?
A) 10.0% B) 11.7% C) 11.0% D) 11.4%
18) The beta of the portfolio in Table 5.2, containing assets X, Y, and Z, is
A) 1.6. B) 2.4. C) 1.5. D) 2.0.
19) If the required return is greater than the coupon rate, a bond will sell at
A) book value. B) a premium. C) a discount. D) par.
20) A firm has an issue of $1,000 par value bonds with a 10 percent stated interest rate outstanding. The
issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk
are currently earning 8 percent, the firm's bond will sell for ________ today.
A) $851.50 B) $1,134.20 C) $805.20 D) $1,268.20
21) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The
issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk
are currently earning 11 percent, the firm's bond will sell for ________ today.
A) $840.67 B) $1,123.33 C) $1,000 D) $716.67
22) A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and
a required return of 10 percent. The value of a share of the firm's common stock is ________.
A) $100 B) $10 C) $12 D) $120
23) A firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock
and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on
similar risk involvements. The value of the firm's common stock is ________.
A) $9/share B) $90/share C) $22.50/share D) $30/share
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.
Year Project A Project B
0 $350,000 $425,000
Cash Inflows (CF)
1 $140,000 $175,000
2 165,000 150,000
3 190,000 125,000
24) The NPVs of projects A and B are ________. (See Table 10.6):
A) $45,805 and -$19,312 respectively. B) $95,066 and $56,386, respectively.
C) -$45,805 and $19,312 respectively. D) none of the above.
25) In the EBIT-EPS approach to capital structure, risk is represented by
A) shifts in the cost of debt capital. B) the slope of the capital structure line.
C) shifts in the cost of equity capital. D) shifts in the times-interest-earned ratio.
26) A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and
50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is
expected to be $200,000, two EBIT-EPS coordinates for the firm's existing capital structure are
A) ($152,000, $3.50) and ($150,000, $1.82). B) ($36,000, $0) and ($200,000, $3.04).
C) ($48,000, $0) and ($200,000, $1.82). D) ($0, $48,000) and ($200,000, $1.82).
Flum Packages, Inc.
Assets Liabilities & Equity
Current assets $12,000 Current Liabilities $ 5,000
Fixed assets 20,000 Long-term debt 12,000
Total $30,000 Total $30,000
27) The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
The firm's initial net working capital is ________. (See Table 14.2)
A) $ 5,000. B) $10,000. C) $7,000. D) -$ 5,000.
28) The beta of the market
A) is less than 1. B) is greater than 1.
C) is 1. D) cannot be determined.
29) XYZ Corporation borrowed $100,000 for six months from the bank. The rate is prime plus 2
percent. The prime rate was 8.5 percent at the beginning of the loan and changed to 9 percent after
two months. This was the only change. How much interest must XYZ corporation pay?
A) $2,476. B) $5,417. C) $21,500. D) $18,212.
ESSAY. Write your answer on the answer key.
(Worth 3 points)
30) Congratulations! You have just won the lottery! However, the lottery bureau has just informed you that you can take your winnings in one of two ways. Choice X pays $1,500,000 today. Choice Y pays $2,000,000 at the end of seven years from now. Using a discount rate of 10 percent, based on present values, which would you choose? Using the same discount rate of 10 percent, based on future values, which would you choose? What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.)