1. Stock cash dividend will __________ Increase the total wealth of stockholders. Reduce retained earnings. Increase the number of shares to stockholders. Decrease the number of shares to stockholders. 2. Generally, the variability in both ROE and EPS increase when a firm increases its financial leverage. _______ True. False. 3. A portfolio weight is defined as the total number of shares in a particular asset divided by the total number of shares held in a portfolio.______ True. False. 4. Which of the following statements about portfolio is true? ______ The expected return of a portfolio is the weighted average of the expected returns of all individual stocks in the portfolio. The standard deviation of a portfolio is the weighted average of the standard deviations of all individual stocks in the portfolio. Portfolio beta is the weighted average of the beta values of all individual stocks in the portfolio. Both Statement (A) and Statement (C) are correct. 5. If preferred stock pays a $5 annual dividend and sells for $100. The cost of preferred stock financing is _______ if we don't consider floatation costs. 5% 10% 25% 50% 6. A well-diversified portfolio can diversify the company-unique risk, but it cannot diversify the market risk ______ True. False 7. The cost of debt must be adjusted for corporate taxes and this is accomplished by multiplying by (1 - T c ), where T c is corporate tax rate. ______ True. False. 8. Operating cash flow is equal to _____ Net income plus depreciation minus taxes. Net income minus depreciation minus interest expense. EBIT minus taxes minus depreciation. EBIT minus taxes plus depreciation. 9. Which of the following transactions will NOT affect a firm's retained earnings? _____ quarterly dividend payments special dividend payments stock dividend All of the above 10. Using the tax shield approach, a(n) _____ will increase the operating cash flow. decrease in depreciation decrease in sales increase in costs increase in depreciation 11. A company's cost of capital is equal to the weighted average of its investors' required returns even when we consider floatation costs and taxes._________ True False 12. Which one of the following can be completely ignored when analyzing a project?______ depreciation taxes net working capital sunk cost 13. Working capital includes all of the following items except: Accounts receivable. Cash. Long-term debt. Account payables. 14. Which of the following statements about Capital Asset Pricing Model (CAPM) equation "E(R A ) = R f + A (E(R M ) - R f ) " is NOT true ______ E(R A ) is the required rate of return for stock A. R f is the nominal risk-free rate. E(R M ) is the required rate of return on the individual security. BA is the beta coefficient for the individual security. 15. If a stock has beta 0.8, how to interpret it? ______ The stock is riskier than average. The stock has average risk. The stock is less ri.

1. 1.
Stock cash dividend will __________
Increase the total wealth of stockholders.
Reduce retained earnings.
Increase the number of shares to stockholders.
Decrease the number of shares to stockholders.
2.
Generally, the variability in both ROE and EPS increase when a
firm increases its financial leverage. _______
True.
False.
3.
A portfolio weight is defined as the total number of shares in a
particular asset divided by the total number of shares held in a
portfolio.______
True.
False.
4.
Which of the following statements about portfolio is true?
______
The expected return of a portfolio is the weighted average of the
expected returns of all individual stocks in the portfolio.

2. The standard deviation of a portfolio is the weighted average of
the standard deviations of all individual stocks in the portfolio.
Portfolio beta is the weighted average of the beta values of all
individual stocks in the portfolio.
Both Statement (A) and Statement (C) are correct.
5.
If preferred stock pays a $5 annual dividend and sells for $100.
The cost of preferred stock financing is _______ if we don't
consider floatation costs.
5%
10%
25%
50%
6.
A well-diversified portfolio can diversify the company-unique
risk, but it cannot diversify the market risk ______
True.
False
7.
The cost of debt must be adjusted for corporate taxes and this is
accomplished by multiplying by (1 - T
c
), where T
c

3. is corporate tax rate. ______
True.
False.
8.
Operating cash flow is equal to _____
Net income plus depreciation minus taxes.
Net income minus depreciation minus interest expense.
EBIT minus taxes minus depreciation.
EBIT minus taxes plus depreciation.
9.
Which of the following transactions will NOT affect a firm's
retained earnings? _____
quarterly dividend payments
special dividend payments
stock dividend
All of the above
10.
Using the tax shield approach, a(n) _____ will increase the
operating cash flow.
decrease in depreciation
decrease in sales

4. increase in costs
increase in depreciation
11.
A company's cost of capital is equal to the weighted average of
its investors' required returns even when we consider floatation
costs and taxes._________
True
False
12.
Which one of the following can be completely ignored when
analyzing a project?______
depreciation
taxes
net working capital
sunk cost
13.
Working capital includes all of the following items except:
Accounts receivable.
Cash.
Long-term debt.
Account payables.

5. 14.
Which of the following statements about Capital Asset Pricing
Model (CAPM) equation "E(R
A
) = R
f
+
A
(E(R
M
) - R
f
) " is NOT true ______
E(R
A
) is the required rate of return for stock A.
R
f
is the nominal risk-free rate.
E(R
M
) is the required rate of return on the individual security.
BA
is the beta coefficient for the individual security.
15.
If a stock has beta 0.8, how to interpret it? ______
The stock is riskier than average.
The stock has average risk.

6. The stock is less risky than average.
Don't know.
16.
A firm's optimal capital structure ______
is generally a mix of 40% debt and 60% equity.
exists when the debt-equity ratio is 0.5.
is the debt-equity ratio that exists at the point where the firm's
weighted after-tax cost of debt is minimized.
is the debt-equity ratio that results in the lowest possible
weighted average cost of capital and the largest firm value.
17.
Portfolio provides average return but much lower risk. The key
is the positive correlations among individual stocks. ______
True.
False.
18.
Business risk is defined as the:______
equity risk that comes from the nature of a firm's operating
activities.
equity risk associated with the capital structure of a firm.
probability that a firm will file bankruptcy.

7. situation in which a firm causes its creditors to suffer a
financial loss.
19.
The cost of equity is the rate of return the marginal stockholder
requires on the firm's common stock._____
True.
False
20.
M&M Proposition I, with taxes, states that the value of a
levered (V
L
) firm is equal to. _______
V
U
+ (T
C
× D)
V
U
- (T
C
× D)
V
U
÷ (T
C
× D)
None of the above is correct

8. 21.
Announcements and news contain both an expected component
and a surprise component. It is the surprise component that
affects a stock's price and therefore its return____
True
False
22.
The ex-dividend date is defined as _____ business days before
the date of_____
two; payment.
three; payment.
two; record.
three; record.
23.
We want to choose the optimal capital structure for a firm that
will maximize the firm's earnings, not stockholder wealth
_______
True
False
24.
If a firm maintains a constant debt-equity ratio and pays
dividends only after meeting its investment needs, the firm is
following a dividend policy which is defined as a(n): _______
stable dividend policy.

9. residual dividend approach.
constant dividend policy.
variable dividend approach.
25.
A company can NOT buy back its own shares of stock (stock
repurchase) on the open market. But the company can make a
tender offer to buy back its shares. _______
True
False
26.
Which one of the following is the prime objective of a residual
dividend policy? _______
Maintaining a stable dividend
Increasing the dividend at a steady pace
Meeting the firm's investment needs
Maintaining a stable dividend payout ratio
27.
Holding cash for normal collection and disbursement activities
related to the daily ongoing operations of a firm is called the
_____ motive.
precautionary
opportunity

10. speculative
transaction
28.
Float is defined as the difference between the.
projected cash balance and the actual cash balance.
available balance and the firm's ledger balance.
sales and the cash collections.
collections and disbursements for any given period of time.
29.
Marshall's Equipment has a book balance of $34,500. The $900
deposit which was made today will be added to the available
balance tomorrow. There is $8,500 worth of outstanding checks.
Which one of the following statements accurately reflects this
situation.
The $900 is the disbursement float.
The firm's current available balance = $34,500+$900-$8,500.
The firm's disbursement float exceeds its collection float.
The firm's net float is equal to $900 plus $8,500.
30.

11. Which of the following is money market security?
Commercial paper
U.S. treasure bonds.
Preferred stocks
Common stocks.
31.
To estimate the cost of capital, you have been provided with the
following data: r
RF
= 5.00%; RP
M
= 6.00%; and Beta = 1.0. Based on the CAPM approach, what
is the cost of equity? ________
5.0%
6.0%
10.4%
11.0%
32.
Assume that you have been provided with the following data: D
1
= $1.30; P
0
= $42.50; and g = 7.0% (constant). What is the cost of equity
based on the Dividend Growth Model? ________
9.52%

12. 10.06%
11.41%
12.0%
33.
A firm has 35,000 shares of stock outstanding at a price per
share of $26. The company has decided to repurchase $130,000
worth of shares. After the repurchase, there will be _____
shares outstanding.
5,000 shares
30,000 shares
35,000 shares
40,000 shares
34.
Based on the information from Question 33, what is new market
price of the stock after the repurchase?
$22.5 per share
$26.0 per share
$28.5 per share
$30.3 per share
35.

13. Based on the information from Question 33 and 34, does the
total market value of the common stock change after the stock
repurchase?
Yes
No
36.
Suppose we have a bond issue currently outstanding that has 25
years left to maturity. The coupon rate is 9% and coupons are
paid semiannually. The bond is currently selling for $908.72 per
$1000 bond. What is the before-tax cost of debt (YTM)?
5.0%
9.0%
10.0%
15.0%
37.
Based on the information from Question 36, if the firm's
marginal tax rate is 30%. What's the firm's after-tax cost of
debt?________
3.5%
5.0%
6.3%
7.0%

14. 38.
A firm requires capital expenditure of $10 million, which will
be raised by issuing $3 million of bonds, $1 million of preferred
stock, and $6 million of new common stock. The firm estimates
its after-tax cost of debt to be 6%, cost of preferred stock to be
8%, and cost of new common stock to be 15%. What is the
weighted average cost of capital? _____
9.67%
10.25%
12.85%
11.60%
39.
A firm sells 15,000 desks a year at an average price per desk of
$200. The carrying cost per unit is $2.80. The company orders
200 doors at a time and has a fixed order cost of $45 per order.
The desks are sold out before they are restocked. What is the
economic order quantity? ________
482 desks
694 desks
804 desks
919 desks
40.
A five-year project is expected to generate revenues of

15. $120,000, variable costs of $72,000, and fixed costs of $20,000.
The annual depreciation is $10,000 and the tax rate is 34%.
What is the annual operating cash flow?
$11,880
$18,480
$21,880
$24,480
41.
A company is considering a new inventory system that will cost
$120,000. The system is expected to generate positive cash
flows over the next four years in the amounts of $35,000 in year
one, $55,000 in year two, $65,000 in year three, and $40,000 in
year four. The firm's required rate of return is 9%. What is the
payback period of this project? _______
1.95 years
2.46 years
2.99 years
3.10 years
42.
A company is considering a new inventory system that will cost
$120,000. The system is expected to generate positive cash
flows over the next four years in the amounts of $35,000 in year
one, $55,000 in year two, $65,000 in year three, and $40,000 in
year four. The firm's required rate of return is 9%. What is the
net present value (NPV) of the project? _____

16. $28,830.29
$30,929.26
$36,931.43
$39,905.28
43.
A company is considering a new inventory system that will cost
$120,000. The system is expected to generate positive cash
flows over the next four years in the amounts of $35,000 in year
one, $55,000 in year two, $65,000 in year three, and $40,000 in
year four. The firm's required rate of return is 9%. What is the
internal rate of return (IRR) of this project?
14.03%
17.56%
19.26%
21.78%
44.
A company is considering a new inventory system that will cost
$120,000. The system is expected to generate positive cash
flows over the next four years in the amounts of $35,000 in year
one, $55,000 in year two, $65,000 in year three, and $40,000 in
year four. The firm's required rate of return is 9%. What is the
profitability index (PI) of this project?
0.87
1.11

17. 1.31
1.83.
45.
If you have 1 share of Berkshire Hathaway Inc. (BRKa). The
stock is traded at $173,000. We assume that the firm will
announce 1000:1 stock split. What's total number of share you
will have after the stock split? ______
100 shares
1,000 shares
10,000 shares
173,000 shares
46.
Based on the information in Question 45, what will be the total
value of your holdings of Berkshire Hathaway stock after the
stock split?______
$173,000
$1,730,000
$173,000,000
$1,730,000,000
47.
A firm has a $10 million bond outstanding with a coupon rate of
6%. The tax rate is 35%. What is the present value of the tax
shield?______

18. $3.5 million
0.18 million
$10 million
$13.5 million
48.
A company has after-tax earnings of $39,400 for the year. The
firm adheres to a residual dividend policy with a debt-equity
ratio of 0.7. The firm needs $56,300 for new investments. What
is the amount of the total dividends that will be paid?______
$6,282.35
$13,906.18
$16,218.00
$21,704.04
49.
A company purchased $25,000 worth of inventory. The terms of
sale were 2/5, net 45. What's the implicit interest if a buyer
does not take the cash discount? _____
$250
$300
$500
$800

19. 50.
Based on the information from Question 49, what's the effective
annual rate (EAR) if the buyer does not take the cash
discount?_____
10.12%.
18.36%.
10.12%.
20.24%.