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?
Q4. The more frequent the compounding, the higher the future value, other things equal.
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?
Q6. When a bond matures, the issuer repays the bond’s face value.
Q7. What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?
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?
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%?
Q13. A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant-growth rate of:
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.
Q16. When using a profitability index to select projects, a high value is preferred over a low value.
Q17. Projects with an NPV of zero decrease shareholders’ wealth by the cost of the project.
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.
Q20. As the discount rate is increased, the NPV of a specific project will:
- 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.
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.
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.
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