1 : Capital structure decisions refer to the:
     a. dividend yield of the firm's stock.
     b. blend of equity and debt used by the firm.
     c. capital gains available on the firm's stock.
     d. maturity date for the firm's securities.


 2 : Why is debt financing said to include a tax shield for the company?
     a. Taxes are reduced by the amount of the debt.
     b. Taxes are reduced by the amount of the interest.
     c. Taxable income is reduced by the amount of the debt.
     d. Taxable income is reduced by the amount of the interest.


 
3 : How much is added to a firm's weighted average cost of capital for
45% debt financing with a required rate of return of 10% and with a
tax rate of 35%?
     a. 1.29%
     b. 2.93%
     c. 3.50%
     d. 4.50%
 
4 : Stock value is always increased whenever earnings are plowed back
into the firm.
     a. True
     b. False
 
5 : What dividend yield would be reported in the financial press for a
stock that currently pays a $1 dividend per quarter and the most
recent stock price was $40?
     a. 2.5%
     b. 4.0%
     c. 10.0%
     d. 15.0%
 
6 : If a stock is purchased for $25 per share and held one year,
during which time a $3.50 dividend is paid and the price climbs to
$28.25, the nominal rate of return is:
     a. 13.00%
     b. 14.00%
     c. 23.01%
     d. 27.00%
 
7 : Capital budgeting analysis focuses on profits as opposed to cash flows.
     a. True
     b. False


 
8 : Projects that are calculated as having negative NPVs should be:
     a. depreciated over a longer time period.
     b. charged less in overhead costs.
     c. discounted using lower rates.
     d. rejected or abandoned.
 
9 : When is it appropriate to include sunk costs in the evaluation of a project?
     a. Include sunk costs when they are relatively large.
     b. Include sunk costs if it improves the project's NPV.
     c. Include sunk costs if they are considered to be overhead costs.
     d. It is never appropriate to include sunk costs.


10 : If a project is expected to increase inventory by $15,000,
increase accounts payable by $10,000, and decrease accounts receivable
by $1,000, what effect does working capital have during the life of
the project?
     a. Increases investment by $4,000.
     b. Increases investment by $5,000.
     c. Increases investment by $6,000.
     d. Working capital has <i>no effect</i> during the life of the project.


 
11 : Which of the following methods will provide a correct analysis
for capital budgeting purposes?
     a. Discounting real cash flows with real rates.
     b. Discounting real cash flows with nominal rates.
     c. Discounting nominal cash flows with real rates.
     d. All of the above methods will provide similar results.


 
12 : What is the amount of the operating cash flow for a firm with
$500,000 profit before tax, $100,000 depreciation expense, and a 35%
marginal tax rate?
     a. $260,000
     b. $325,000
     c. $360,000
     d. $425,000


 
13 : When a depreciable asset is ultimately sold, the sales price is:
     a. fully taxable.
     b. non-taxable.
     c. not taxable only if accelerated depreciation was used.
     d. taxable if sales price exceeds book value.


 14 : Net present value is the present value of the cash flows
subtracted from the initial investment.
     a. True
     b. False
 
15 : Which of the following statements is correct for a project with a
positive NPV?
     a. IRR exceeds the cost of capital.
     b. Accepting the project has an indeterminate effect on shareholders.
     c. The discount rate exceeds the cost of capital.
     d. The profitability index equals one.
 
16: What is the NPV of a project that costs $100,000 and returns
$45,000 annually for three years if the opportunity cost of capital is
14%?
     a. $3,397.57
     b. $4,473.44
     c. $16,100.00
     d. $35,000.00


 
17 : When managers cannot determine whether to invest now or wait
until costs decrease later, the rule should be to:
     a. postpone until costs reach their lowest.
     b. invest now to maximize the NPV.
     c. postpone until the opportunity cost reaches its lowest.
     d. invest at the date that gives the highest NPV today.
 
18 : Which of the following investment criteria does not take the time
value of money into consideration?
     a. Book rate of return
     b. Net present value
     c. Profitability index
     d. Internal rate of return for borrowing projects


 
19 : What happens when a bond's expected cash flows are discounted at
a rate lower than the bond's coupon rate?
     a. The price of the bond increases.
     b. The coupon rate of the bond increases.
     c. The par value of the bond decreases.
     d. The coupon payments will be adjusted to the new discount rate.


 
20: When an investor purchases a $1,000 par value U.S. Treasury bond
that was quoted at
      97.16, the investor:
     a. receives 97.5% of the stated coupon payments.
     b. receives $975 upon the maturity date of the bond.
     c. pays 97.5% of face value for the bond.
     d. pays $1,025 for the bond.

1. b. "The firm's mix of different securities is known as its capital
structure." p. 397

2. d. "The interest that a company pays is a tax-deductible expense." p. 422

3. b.  The formula is rd(1-Tc)D/V.  0.1(1-0.35)0.45*100 = 2.93%. p. 465

4. b. If a company's return from growth opportunities is less than
what investors can achieve through other investments, retaining
earnings can reduce stock value. p. 60

5. c. $4/$40 = 10%.  Dividend yield = Annual Dividends Per Share/Price
Per Share "Dividend Yield" Investopedia.com (2005)
http://www.investopedia.com/terms/d/dividendyield.asp

6. d. ($28.25+$3.50-$25)/$25*100 = 27.00%.  "The nominal rate of
return is the selling price ? the buying price + dividends. For
example, if you sell a stock for $4800 and buy it for $4000 the
difference is a capital gain of $800. Adding dividends of $80 will
give you a nominal total return of $880 or 22%." "Investment Basics"
by Cindy Diccianni, Advance for Providers of Post-Acute Care (2005)
http://post-acute-care.advanceweb.com/Common/editorial/editorial.aspx?CC=51435

7. b. False "For most sizable firms, the first step in the investment
process is the preparation of an annual capital budget, which is a
list of planned investment outlays by plant and division." p. 261

8. d.  "Accept investments that have positive net present values." p. 14

9. d.  "Forget Sunk Costs" p. 97

10. a. Inventory uses $15,000 in WC.  Increase in A/P returns $10,000
in WC.  Decrease in A/R returns $1,000 in WC.  Net change in WC is a
$4,000 increase in investment.

11. a. "Should I use real or nominal cash flows? 
? If discounting real cash flows -> real cost of capital 
? If nominal cash flows -> nominal cost of capital" "V. Beyond Inputs:
Choosing and Using the Right Model" by Aswath Damodaran
http://www.stern.nyu.edu/~adamodar/pdfiles/model.pdf

12. c. Depreciation is not a cash flow, but it is deductible from
taxes.  Therefore:  ($500,000-$100,000) (1-0.35)+$100,000 = operating
cash flow = $360,000.

13. d. The surplus of salvage vs. book value is taxable as a capital gain.

14. b. The opposite is true: "Net present value is found by
subtracting the required investment..." from the present value of its
associated cash flows. p. 13.

15. a. "Intuitively, if the project?s IRR exceeds its cost of capital,
the expected return from the project exceeds the required return."
"FINA180 Business Investment Criteria Lecture 8" by Prof. W. J. Hunter
http://classwork.busadm.mu.edu/Hunter/FINA180/slides/fina180-7.ppt

16. b.  P = A [(1+i)^n-1/i(1+i)^n] = $45,000 [(1.14)^3-1/0.14(1.14)^3]
= $104,473.44.

NPV = $104,473.44 - $100,000 = $4473.44

17. d. Goal is to maximize NPV today. "Chapter 7 Quiz, Net Present
Value and Other Investment Criteria"
http://eschool.cyu.edu.tw/eschool/wanchenlee/cont/onlinetest/Chapter07.htm

18. a. "Chapter 7 Quiz, Net Present Value and Other Investment
Criteria" http://eschool.cyu.edu.tw/eschool/wanchenlee/cont/onlinetest/Chapter07.htm

19. a. The bond's coupon rate, par value, and coupon payments are
unchanged.  However, because the bond pays a higher rate than the
discount rate, it is worth more than par value, so its value
increases.

20. c.  "Quotes for corporate and government bonds are represented
either by a percentage of the bond's face value or as a dollar value.
Corporate bonds are quoted in 1/8th increments, so a quote of 99 1/8
represents 99.125% of par ($1,000), or $991.25. Government bonds are
typically quoted in 1/32nds. Municipal bonds may be quoted on a dollar
basis or on a yield-to-maturity basis." "Bond Quote" Invesopedia.com
(2005) ://www.google.com/url?sa=U&start=1&q=http://www.investopedia.com/terms/b/bondquote.asp&e=747

Page references above refer to:  "Principles of Corporate Finance" 4th
Edition, by Brealey & Myers, McGraw-Hill, Inc. (1991)

Sincerely,

Wonko

Thanks so much!  I'm so crunched for time these days!