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BUSINESS BMAL 590 ALC 5.2
1. Which of the following assets is the most liquid?
b. Treasury bills
c. Corporate bonds
2. The ____ premium is compensation for the possibility that the borrower will not be able to pay the debt’s interest and principal on time.
a. inflation risk
b. maturity risk
c. liquidity risk
d. default risk
3. Which of the following statements is correct?
a. Large costs occur at the end of nuclear power plants’ lives because these plants have to be closed down, and shutdown costs are high due to the difficulty of handling radioactive materials. For this reason, it is possible that a nuclear plant project could have two IRRs.
b. If the Federal Reserve Board lowered interest rates, this would, other things held constant, tend to favor short-term as opposed to long-term projects.
c. For NPV versus IRR ranking conflicts to occur, the projects under consideration must have NPV profiles which cross one another. Crossing profiles can occur only if the two projects differ in the size of the required investment outlay.
d. All of the above statements are false.
4. Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project?
a. Risk premium method.
b. Pure play method.
c. Accounting beta method.
d. CAPM method.
5. ____ projects are a set of projects where the acceptance of one project means that other projects cannot be accepted.
a. Mutually exclusive
6. Which of the following capital budgeting techniques does not adjust for the riskiness of the cash flows?
7. Uncertainty regarding the domestic flows that result from converting foreign cash flows is what type of risk?
c. Exchange Rate
8. Most experts think that in the United States the real risk-free rate fluctuates between ____.
a. One to two percent
b. Two to four percent
c. Four to seven percent
d. Eight to twelve percent
9. The one fixed asset that is not depreciated is ______.
10. Return on total assets (ROA) is equal to ______.
a. Net profit margin x total assets
b. The product of the components of the DuPont System
c. Earnings available to common shareholders/ total assets
d. Operating profit margin x total assets
11. A(n) ______ is a cash outlay that already has been incurred and that cannot be recovered regardless of whether the project is accepted or rejected.
a. Sunk cost
b. Opportunity cost
d. Incremental cash flow
12. The preemptive right is important to shareholders because it ______.
a. Allows management to sell additional shares below the current market price
b. Protects the current shareholders against dilution of ownership interests
c. Is included in every corporate charter
d. Will result in higher dividends per share
13. Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project?
a. Risk premium method
b. Pure play method
c. Accounting beta method
d. CAPM method
14. Which of the following statements is most correct?
a. Sunk costs should be ignored in capital budgeting.
b. Opportunity costs should be ignored in capital budgeting
c. Externalities should be ignored in capital budgeting.
d. The tax effects from depreciation should be ignored in capital budgeting
15. ____ are decisions about whether to purchase capital projects and add them to existing assets so as to increase existing operations.
a. Replacement decisions
b. Expansion decisions
c. Independent decisions
d. Mutually exclusive decisions
16. An American Depository Receipt (ADR) ______.
a. Is debt sold by a foreign borrower that is denominated in the currency of the country where it is sold
b. Is a certificate that represents ownership in stocks of foreign companies that are held in trust by a bank located in the country where the stock is traded
c. Represents equity instrument of one country that are sold in another country
d. Is a certificate that represents ownership in foreign companies that are sold in the United States
17. Your Aunt Agatha purchased a call option a few months ago. Today is the expiration date, so she must decide whether to exercise the option. Which of the following statements is correct? Do not consider brokers’ commissions in your answer.
a. Aunt Agatha doesn’t need to make a decision about exercising the option today; in fact, it would be better if she waited until after the option expires.
b. Aunt Agatha should exercise the option if the price of the stock is less than the exercise, or strike, price.
c. Aunt Agatha should exercise the option if the price of the stock is greater than the exercise, or strike, price.
d. Aunt Agatha should exercise the option, regardless of the current stock price.
18. A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should ______.
a. Increase the required rate of return used to evaluate the project to reflect the higher risk of the project
b. Increase the NPV of the asset to reflect the greater risk
c. Reject the asset, since its acceptance would increase the risk of the firm
d. Ignore the risk differential if the asset to be accepted would comprise only a small fraction of the total assets of the firm
19. Which of the following statements concerning common stock and the investment banking process is false?
a. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.
b. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market.
c. Listening a large firm’s stock is often considered to be beneficial to stockholders because the increases in liquidity and status probably outweigh the additional costs to the firm.
d. Stockholders have the right to elect the firm’s directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management’s performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a margin call.
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