1、Which type of business organization has all the respective rights and privileges of a legal person? A、Sole proprietorship B、Corporation C、General partnership D、Limited partnership
2、The Principal-Agent Problem arises A、because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest. B、because of the separation of ownership and control in a corporation. C、Both A and B D、None of the above
3、In the management buyout, the managers of the firm buy out the existing stockholders and make the company a private firm. Is this a way of reducing of conflict of interests between stockholders and managers? A、Yes，managers now also become the lead stockholders in the firm. B、Yes, managers will feel happy. C、No，managers now also become the lead stockholders in the firm. D、No, managers will feel happy.
4、In a corporation, the ultimate decisions regarding business matters are made by A、the Board of Directors B、debt holders C、shareholders D、investors
5、Which is not the advantages of a corporation? A、Easy transfer of ownership B、Limited life C、Easy to get financing D、Entitled to sign contracts
6、Which of the following statements is false? A、In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders. B、Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default. C、As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders. D、If the corporation fails to satisfy debt holdersʹ claims, debt holders may lose control of the firm.
7、Which of the following assumptions would you need for stock maximization to be the “right” objective for a business to adopt? A、There are no social costs B、Managers act in the best interests of stockholders C、Lenders to the firm are fully protected from expropriation D、All of the above
8、Which one is not the character a good goal should possess? A、The goal should be very clear. B、The goal should be measurable. C、The goal should not bring costs to other businesses or groups. D、The goal should be easily changeable and adjustable.
9、Which one is not the assumption on which the maximization of stock price is based? A、The manager can control the issuing amount of bonds B、The manager does not consider his own interests. C、The creditor is completely protected in order to avoid wealth being exploited by shareholders. D、Business managers will not use their own unique information to mislead financial markets.
10、If shareholders are unhappy with a CEOʹs performance, they are most likely to A、buy more shares in an effort to gain control of the firm. B、file a shareholder resolution. C、replace the CEO through a grassroots shareholder uprising. D、sell their shares.
2. Introduction of Investment Decisions
Quiz 2
1、At an annual interest rate of 7%, the future value of $5,000 in five years is closest to: A、$3,565 B、$6,750 C、$7,015 D、$7,035
2、At an annual interest rate of 7%, the present value of $5,000 received in five years is closest to: A、$3,565 B、$6,750 C、$7,015 D、$7,035
3、Which of the following statements is FALSE? A、The process of moving a value or cash flow forward in time is known as compounding. B、The effect of earning interest on interest is known as compound interest. C、It is only possible to compare or combine values at the same point in time. D、A dollar in the future is worth more than a dollar today.
4、Which of the following statements is FALSE? A、Finding the present value and compounding are the same. B、A dollar today and a dollar in one year are not equivalent. C、If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. D、The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.
5、Which of the following statements regarding arbitrage is the most correct? A、Any situation in which it is possible to make a profit without taking any risk is known as an arbitrage opportunity. B、Any situation in which it is possible to make a profit without making any investment is known as an arbitrage opportunity. C、We call a competitive market in which there are no arbitrage opportunities an arbitrage market. D、The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage.
6、Which of the following statements regarding the Law of One Price is INCORRECT? A、At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. B、One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value, we can use any competitive price to determine a cash value, without checking the price in all possible markets. C、If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. D、An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.
7、A McDonald's Big Mac value meal consists of a Big Mac Sandwich ($2.99), Large Coke ($1.39), and a Large Fry ($1.09). Assuming that there is a competitive market for McDonald's food items, at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the law of one price? A、$4.08 B、$4.38 C、$5.47 D、$5.77
8、Walgreen Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreen Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on a block trade of 100 shares? A、No, no arbitrage opportunity exists. B、Yes, buy on NASDAQ and sell on NYSE, make $25. C、Yes, buy on NYSE and sell on NASDAQ, make $25. D、Yes, buy on NASDAQ and sell on NYSE, make $250.
9、Suppose the risk free interest rate is 3.9%. The price per $100 face value of a three-year, zero-coupon, risk-free bond is closest to: A、$93.80 B、$90.06 C、$89.16 D、$86.39
10、NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 12%, then the value of a share of NoGrowth's stock is closest to: A、$10.00 B、$15.00 C、$14.00 D、$12.50
3.Methods of Investment Decisions
Quiz 3
1、Which of the following statements is FALSE? A、About 75% of firms surveyed used the NPV rule for making investment decisions. B、If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. C、To decide whether to invest using the NPV rule, we need to know the cost of capital. D、NPV is positive only for discount rates greater than the internal rate of return.
2、Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. Assume that she was unable to fulfill her media commitments of appearing on TV news as a political commentator or give speeches. while she was writing the book. Assuming that Palin's cost of capital is 10%, then the NPV of her book deal is closest to: A、$2.00 million B、$2.20 million C、$3.00 million D、$3.75 million
3、Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. Assume that she was unable to fulfill her media commitments of appearing on TV news as a political commentator or give speeches. while she was writing the book. The IRR of Palin's book deal is closest to: A、-27.25% B、-37.50% C、27.25% D、37.50%
4、The NPV profile A、shows the payback period - the point at which NPV is positive. B、shows the internal rate of return - the point at which NPV is zero. C、shows the NPV over a range of discount rates. D、B and C are correct.
5、Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance. The number of potential IRRs that exist for Rearden's mining operation is equal to: A、0 B、1 C、2 D、12
6、Which of the following statements is FALSE? A、The IRR investment rule will identify the correct decision in many, but not all, situations. B、By setting the NPV equal to zero and solving for r, we find the IRR. C、If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D、The simplest investment rule is the NPV investment rule.
7、When using the internal rate of return (IRR) investment rule, we compare: A、the average return on the investment opportunity to returns on all other investment opportunities in the market. B、the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity. C、the NPV of the investment opportunity to the average return on the investment opportunity. D、the average return on the investment opportunity to the risk-free rate of return.
8、Consider the following two projects: Alpha -79 20 25 30 35 40 N/A N/A Beta -80 25 25 25 25 25 25 25 Which of the following statements is correct if both are mutually exclusive? Suppose the discount rate is 10%. A、You should invest in project Beta since NPVBeta > NPVAlpha. B、You should invest in project Alpha since IRRAlpha > IRRBeta. C、Your should invest in project Alpha since NPVAlpha < 0. D、You should invest in project Beta since EAABeta > EAAAlpha.
9、The internal rate of return rule can result in the wrong decision if the projects being compared have: A、differences in scale. B、differences in timing. C、differences in NPV. D、A and B are correct.
10、Which of the following statements is FALSE? A、When using the incremental IRR rule, you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative. B、Picking one project over another simply because it has a larger IRR can lead to mistakes. C、Problems arise using the IRR method when the mutually exclusive investments have differences in scale. D、When the risks of two projects are different, only the NPV rule will give a reliable answer.
4. Applications of Investment Decisions
Quiz 4
1、Which of the following statements is FALSE? A、Many projects use a resource that the company already owns. B、When evaluating a capital budgeting decision, we generally include interest expense. C、Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. D、As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.
2、Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in? A、The tax savings brought about by the project's depreciation expense. B、The cost of a marketing survey you conducted to determine demand for the proposed project C、Interest payments on debt used to finance the project D、Research and Development expenditures you have made
3、Which of the following statements is FALSE? A、Sales will ultimately decline as the product nears obsolescence or faces increased competition. B、Managers sometimes continue to invest in a project that has a negative NPV because they have already invested a large amount in the project and feel that by not continuing it, the prior investment will wasted. C、With straight-line depreciation the asset's cost is divided equally over its life. D、A projects unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on an pre-tax basis.
4、Which of the following statements is FALSE? A、Most projects will require the firm to invest in net working capital. B、The main components of net working capital are cash, inventory, receivables, and property, plant and equipment. C、ΔNWCt = NWCt - NWCt - 1 D、In the final year of a project, the firm ultimately recovers the investment in net working capital.
5、Which of the following statements is FALSE? A、Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project. B、Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis. C、Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation. D、When computing the incremental earnings of an investment decision, we should include all changes between the firm's earnings with the project versus without the project.
6、The value of currently unused warehouse space that will be used as part of a new capital budgeting project is: A、an opportunity cost. B、irrelevant to the investment decision. C、an overhead expense. D、a sunk cost.
7、Which of the following statements is FALSE? A、Sales will ultimately decline as the product nears obsolescence or faces increased competition. B、Managers sometimes continue to invest in a project that has a negative NPV because they have already invested a large amount in the project and feel that by not continuing it, the prior investment will wasted. C、With straight-line depreciation the asset's cost is divided equally over its life. D、A projects unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on an pre-tax basis.
8、Which of the following statements is FALSE? A、The simplest method used to calculate depreciation is the straight-line method. B、A sunk cost is any unrecoverable cost for which the firm is already liable. C、Unlevered Net Income = EBIT × tc D、The decision to continue or abandon should be based only on the incremental costs and benefits of the project going forward.
9、Use the following information to answer the question(s) below. Beta Volatility "Eenie" 0.45 20% "Meenie"0.75 18% "Miney"1.05 35% "Moe" 1.20 25% Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%. The equity cost of capital for "Miney" is closest to: A、6.30% B、7.50% C、9.30% D、9.75%
10、Based on above information, the risk premium for "Meenie" is closest to: A、4.50% B、7.50% C、9.30% D、9.75%
5.Theory of Financing Decisions I
Quiz 5
1、Equity in a firm with no debt is called: A、levered equity. B、unlevered equity. C、riskless equity. D、risky equity.
2、Which of the following statements is FALSE? A、Leverage decreases the risk of the equity of a firm. B、Because the cash flows of the debt and equity sum to the cash flows of the project, by the Law of One Price the combined values of debt and equity must be equal to the cash flows of the project. C、Franco Modigliani and Merton Miller argued that with perfect capital markets, the total value of a firm should not depend on its capital structure. D、It is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity.
3、Which of the following statements is FALSE? A、As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise. B、If securities are fairly priced, then buying or selling securities has an NPV of zero and, therefore, should not change the value of a firm. C、The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front. D、An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio.
4、Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%. Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect capital markets. If Taggart borrows until they achieved a debt -to-equity ratio of 50%, then Rearden's levered cost of equity would be closest to: A、10.0% B、12.0% C、15.0% D、16.0%
5、Consider the following equation: E + D = U = A The U in this equation represents: A、the value of the firm's equity. B、the market value of the firm's assets. C、the value of the firm's unlevered equity. D、the value of the firm's debt.
6、Which of the following statements is FALSE? A、Holding cash has the opposite effect of leverage on risk and return. B、We use the market value of the firm's net debt when computing its WACC and unlevered beta to measure the cost of capital and market risk of the firm’s business assets. C、Since the WACC does not change with the use of leverage, the value of the firm's free cash flow evaluated using the WACC does not change, and so the enterprise value of the firm does not depend on its financing choices. D、Even if the firm's capital structure is more complex, the WACC is calculated by computing the weighted average cost of only the firm’s debt and equity.
7、The following equation: X = E/(E+D) rE +D/(E+D) rD can be used to calculate all of the following EXCEPT: A、the cost of capital for the firm's assets. B、the levered cost of equity. C、the unlevered cost of equity. D、the weighted average cost of capital.
8、Galt Industries has no debt, total equity capitalization of $600 million, and an equity beta of 1.2. Included in Galt's assets is $90 million in cash and risk-free securities. Assume the risk-free rate is 4% and the market risk premium is 6%. Galt's enterprise value is closest to: A、$90 million B、$510 million C、$600 million D、$690 million
9、Which of the following statements is FALSE? A、As long as investors can borrow or lend at the same interest rate as the firm, homemade leverage is a perfect substitute for the use of leverage by the firm. B、When investors use leverage in their own portfolios to adjust the leverage choice made by the firm, we say that they are using homemade leverage. C、The value of the firm is determined by the present value of the cash flows from its current and future investments. D、The investor can re-create the payoffs of unlevered equity by borrowing and using the proceeds to purchase the equity of the firm.
6.Theory of Financing Decisions II
Quiz 6
1、Which of the following statements is FALSE? A、Equity holders expect to receive dividends and the firm is legally obligated to pay them. B、A firm that fails to make the required interest or principal payments on the debt is in default. C、In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy. D、After a firm defaults, debt holders are given certain rights to the assets of the firm.
2、Which of the following statements is FALSE? A、When a firm fails to make a required payment to debt holders, it is in bankruptcy. B、With perfect capital markets, the risk of bankruptcy is not a disadvantage of debt—bankruptcy simply shifts the ownership of the firm from equity holders to debt holders without changing the total value available to all investors. C、Bankruptcy is a long and complicated process that imposes both direct and indirect costs on the firm and its investors that the assumption of perfect capital markets ignores. D、Bankruptcy is rarely simple and straightforward—equity holders don’t just "hand the keys" to debt holders the moment the firm defaults on a debt payment.
3、Which of the following statements is FALSE? A、Whether paid by the firm or its creditors, the indirect costs of bankruptcy increase the value of the assets that the firm’s investors will ultimately receive. B、In addition to the money spent by the firm, the creditors may incur costs during the bankruptcy process. C、The bankruptcy code is designed to provide an orderly process for settling a firm’s debts. D、To ensure that their rights and interests are respected, and to assist in valuing their claims in a proposed reorganization, creditors may seek separate legal representation and professional advice.
4、Which of the following statements is FALSE? A、The costs of selling assets below their value are greatest for firms with assets that lack competitive, liquid markets. B、Firms in financial distress tend to have difficulty collecting money that is owed to them. C、Suppliers may be unwilling to provide a firm with inventory if they fear they will not be paid. D、The loss of customers is likely to be large for producers of raw materials (such as sugar or aluminum), as the value of these goods, once delivered, depends on the seller's continued success.
5、Which of the following is NOT an indirect cost of bankruptcy? A、Loss of suppliers B、Fire sales of assets C、Costs of appraisers D、Loss of employees
6、Which of the following is NOT a direct cost of bankruptcy? A、Costs to creditors B、Investment banking costs C、Costs of accounting experts D、Legal costs and fees
7、Which of the following statements is FALSE? A、When a firm faces financial distress, shareholders have an incentive not to invest and to withdraw money from the firm if possible. B、Because top managers often hold shares in the firm and are hired and retained with the approval of the board of directors, which itself is elected by shareholders, managers will generally make decisions that increase the value of the firm’s equity. C、An over-investment problem occurs when shareholders have an incentive to invest in risky positive-NPV projects. D、A negative-NPV project destroys value for the firm overall.
8、Which of the following statements is FALSE? A、One disadvantage of using leverage is that it does not allow the original owners of the firm to maintain their equity stake. B、The separation of ownership and control creates the possibility of management entrenchment; facing little threat of being fired and replaced, managers are free to run the firm in their own best interests. C、Managers also have their own personal interests, which may differ from those of both equity holders and debt holders. D、The costs of reduced effort and excessive spending on perks are another form of agency cost.
9、The idea that claims in one's self-interest are credible only if they are supported by actions that would be too costly to take if the claims were untrue is known as the: A、pecking order hypothesis B、credibility principle. C、lemons principle. D、signaling theory of debt.
10、Which of the following influences a firm's choice of capital structure? A、Taxes B、Agency costs and benefits of leverage C、Signaling and adverse selection D、All of the above influence capital structure decisions.
7.Capital Budgeting and Valuation with Leverage
Quiz 7
1、1. Which of the following is NOT one of the simplifying assumptions made for the three main methods of capital budgeting? A、The firm pays out all earnings as dividends. B、The project has average risk. C、Corporate taxes are the only market imperfection. D、The firm’s debt-equity ratio is constant.
2、2. Which of the following statements is FALSE? A、Because the WACC incorporates the tax savings from debt, we can compute the levered value of an investment, which is its value including the benefit of interest tax shields given the firm's leverage policy, by discounting its future free cash flow using the WACC. B、The WACC incorporates the benefit of the interest tax shield by using the firm's before-tax cost of capital for debt. C、When the market risk of the project is similar to the average market risk of the firm's investments, then its cost of capital is equivalent to the cost of capital for a portfolio of all of the firm's securities; that is, the project's cost of capital is equal to the firm’s weighted average cost of capital (WACC). D、A project's cost of capital depends on its risk.
3、3. Which of the following is NOT a step in the WACC valuation method? A、Compute the value of the investment, including the tax benefit of leverage, by discounting the free cash flow of the investment using the WACC. B、Compute the weighted average cost of capital. C、Determine the free cash flow of the investment. D、Adjust the WACC for the firm's current debt/equity ratio.
4、4.Which of the following statements is FALSE? A、To determine the project's debt capacity for the interest tax shield calculation, we need to know the value of the project. B、To compute the present value of the interest tax shield, we need to determine the appropriate cost of capital. C、Because we don’t value the tax shield separately, with the APV method we need to include the benefit of the tax shield in the discount rate as we do in the WACC method. D、A target leverage ratio means that the firm adjusts its debt proportionally to the project’s value or its cash flows.
5、5. Suppose Luther Industries is considering divesting one of its product lines. The product line is expected to generate free cash flows of $2 million per year, growing at a rate of 3% per year. Luther has an equity cost of capital of 10%, a debt cost of capital of 7%, a marginal tax rate of 35%, and a debt-equity ratio of 2. This product line is of average risk and Luther plans to maintain a constant debt-equity ratio. Luther's Unlevered cost of capital is closest to: A、8.0% B、8.5% C、9.0% D、6.4%
6、6. Which of the following statements is FALSE? A、The project's free cash flow to equity shows the expected amount of additional cash the firm will have available to pay dividends (or conduct share repurchases) each year. B、The value of the project’s FCFE should be identical to the NPV computed using the WACC and APV methods. C、The value of the project’s FCFE represents the gain to shareholders from the project. D、Because interest payments are deducted before taxes, we adjust the firm's FCF by their before-tax cost.
7、7. Which of the following is NOT a step in valuation using the flow to equity method? A、Determine the equity cost of capital, rE. B、Compute the equity value, E, by discounting the free cash flow to equity using the equity cost of capital. C、Determine the free cash flow to equity of the investment. D、Determine the before-tax cost of capital, rU.
8、8. Which of the following statements is FALSE? A、For capital budgeting purposes, the project’s financing is the incremental financing that results if the firm takes on the project. B、Projects with safer cash flows can support more debt before they increase the risk of financial distress for the firm. C、If the positive free cash flow from a project will increase the firm's cash holdings, then this growth in cash is equivalent to a reduction in the firm’s leverage. D、The incremental financing of a project corresponds directly to the financing that is directly tied to the project.
9、9. Which of the following questions is FALSE? A、Sometimes management may believe that the securities they are issuing are priced at less than (or more than) their true value. If so, the NPV of the transaction, which is the difference between the actual money raised and the true value of the securities sold, should not be included in the value of the project. B、An alternative method of incorporating financial distress and agency costs is to first value the project ignoring these costs, and then value the incremental cash flows associated with financial distress and agency problems separately. C、When the debt level—and, therefore, the probability of financial distress—is high, the expected free cash flow will be reduced by the expected costs associated with financial distress and agency problems. D、If the financing of the project involves an equity issue, and if management believes that the equity will sell at a price that is less than its true value, this mispricing is a cost of the project for the existing shareholders.
10、10. Which of the following statements is FALSE? A、When we relax the assumption of a constant debt-equity ratio, the FTE method is relatively straightforward to use and is therefore the preferred method with alternative leverage policies. B、When debt levels are set according to a fixed schedule, we can discount the predetermined interest tax shields using the debt cost of capital, rD. C、With a constant interest coverage policy, the value of the interest tax shield is proportional to the project's unlevered value. D、When the firm keeps its interest payments to a target fraction of its FCF, we say it has a constant interest coverage ratio.