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BUSI 530 Corporate Finance Exam 2 Help
Q1. The APR on a loan must be equal to the effective annual rate when:
- compounding occurs monthly.
- compounding occurs annually.
- the loan is for less than one year.
- the loan is for more than one year.
Q2. The concept of compound interest refers to:
- earning interest on the original investment.
- payment of interest on previously earned interest.
- investing for a multiyear period of time.
- determining the APR of the investment.
Q3. What is the APR on a loan that charges interest at the rate of 1.4% per month?
- 10.20%
- 14.00%
- 16.80%
- 18.16%
APR = 1.4% × 12 = 16.80%
Q4. The more frequent the compounding, the higher the future value, other things equal.
- True
- False
Q5. What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period?
- 7.36%
- 7.50%
- 7.64%
- 8.01%
1 + nominal rate = (1 + real rate)(1 + inflation rate); Nominal rate = (1.04 × 1.035) − 1; Nominal rate = 7.64%
Q6. When a bond matures, the issuer repays the bond’s face value.
- True
- False
Q7. What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?
- 6.0%
- 8.5%
- 10.0%
- 12.5%
Since the bond is selling at par, the yield to maturity must equal the coupon rate which is: Coupon rate = $100 / $1,000 = 0.10, or 10%
Q8. When the yield curve is upward-sloping, then:
- short-maturity bonds offer the highest coupon rates.
- long-maturity bonds are priced above par value.
- short-maturity bonds yield less than long-maturity bonds.
- long-maturity bonds increase in price when interest rates increase.
Q9. Which of these bond ratings is the lowest of Moody’s investment-grade ratings?
- A
- Ba
- Aa
- Baa
Q10. What are the conditions imposed on a debt issuer that are designed to protect bondholders ?
- Collateral agreements
- Vanilla wrappers
- Protective covenants
- Default provisions
Q11. If it proves possible to make abnormal profits based on information regarding past stock prices, then the market is:
- weak-form efficient.
- not weak-form efficient.
- semi strong-form efficient.
- strong-form efficient.
Q12. What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%?
- $0
- $4.86
- $34.56
- $30.24
P = $4.32/0.125 = $34.56
Q13. A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant-growth rate of:
- 4%
- 9%
- 21%
- 25%
g = 0.15 × 0.60 = 0.09, or 9%
Q14. Which of the following values treats the firm as a going concern?
- Market value
- Book value
- Liquidation value
- Both market and book values
Q15. If the market is efficient, stock prices should be expected to react only to new information.
- True
- False
Q16. When using a profitability index to select projects, a high value is preferred over a low value.
- True
- False
Q17. Projects with an NPV of zero decrease shareholders’ wealth by the cost of the project.
- True
- False
Q18. Which one of the following changes will increase the NPV of a project?
- A decrease in the discount rate
- A decrease in the size of the cash inflows
- An increase in the initial cost of the project
- A decrease in the number of cash inflows
Q19. A risky dollar is worth more than a safe one.
- True
- False
Q20. As the discount rate is increased, the NPV of a specific project will:
- increase
- decrease
- remain constant
- decrease to zero, then remain constant.
Q21. Which one of the following changes in working capital is least likely if sales increase?
- An increase in inventories
- An increase in accounts payable
- A decrease in accounts receivable
- An increase in notes payable
Q22. Corporate income statements are designed primarily to show:
- cash flows during a period.
- account balances at the end of a period.
- performance during a period.
- market values of assets and liabilities.
Q23. A tax shield is equal to the reduction in a firm’s:
- total tax liability resulting from a tax deductible expense.
- taxable income resulting from depreciation.
- taxable income resulting from a decrease in long-term debt.
- net income caused by depreciation.
Q24. Which of the following statements regarding investment in working capital is incorrect?
- An investment in working capital, unlike an investment in plant and equipment, represents a positive cash flow when the investment is made.
- Net working capital cash flow is measured by the change in working capital, not the level of working capital.
- Net working capital may change during the life of a project.
- Working capital is generally recovered at the end of a project.
Q25. The statement “We’ve got too much invested in that project to pull out now” possibly illustrates the need to:
- switch to an accelerated method of depreciation.
- recognize sunk costs.
- reduce net working capital assigned to the project.
- reduce discount rates to improve NPV.
Q26. A capital budget shows a proposed list of investments.
- True
- False
Q27. If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then:
- fixed costs should be traded for variable costs.
- variable costs should be traded for fixed costs.
- the project should not be undertaken.
- additional marketing analysis may be beneficial before proceeding.
Q28. Which one of the following appears to be a more likely result from using sensitivity analysis?
- Agreement on the appropriate discount rate
- Determination of whether to finance with debt or equity
- Isolation of the pivotal factor in project profitability
- Selection of the best capital budgeting project
Q29. “What-if” questions ask what will happen to a project in various circumstances.
- True
- False
Q30. Which of the following correctly describes sensitivity analysis?
- recalculation of project NPV by changing several inputs to new but consistent values.
- measures the degree to which fixed costs magnify the effect on profits of a shortfall in sales.
- analysis of how project NPV changes if different assumptions are made about key variables.
- measures the future level of sales at which NPV equals zero.