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Multiple Choice

12. What will happen to retained earnings when a corporation issues 1,000 shares of $1 par stock for $10 per share?
a. It will increase by $1000
b. It will increase by $9000
c. It will decrease by $9000
d. It will remain unchanged

13. Which of the following bonds is likely to be viewed by investors as the most risky?
a. Subordinated debt
b. Indexed bond
c. Secured bond
d. Asset-back bonds

14. 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 the shareholders
c. The discount rate exceeds the cost of capital
d. The profitability index equals one

15. If the IRR for a project is 15%, then the project's NPV would be:
a. Negative at a discount rate of 10%
b. Positive at a discount rate of 20%
c. Negative at a discount rate of 20%
d. Positive at a discount rate of 15%

16. 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
d. Internal rate of return for borrowing projects

17. Projects that are calculated as having negative NPV's should be:
a. Decpreciated over a longer time period
b. Charged less in overhead costs
c. Discounted using lower rates
d. Rejected or abandoned

18. In what manner does depreciation expense affect investment projects?
a. It reduces cash flows by the amount of the depreciation expense
b. It increases cash flows by the amount of the depreciation expense
c. It reduces taxable income by the amount of the depreciation expense
d. It reduces taxes by the amount of the depreciation expense

19. The purpose of sensitivity analysis is to show:
a. The optimal level of the capital budget
b. How price changes affect break-even volume
c. Seasonal variation in product demand
d. How variables in a project affect profitability

20. Which of the following techniques may be more appropriate to analyze projects with interrelated variables?
a. Sensitivity analysis
b. Scenario analysis
c. Break even analysis
d. DOL analysis

21. The appropriate opportunity cost of capital is the return that investors give up on alternative investments with
a. The same risk
b. The risk-free return
c. The expected return on the S&P 500 index
d. The normal, common stock risk premium

22. The major benefit of diversification is to
a. Increase the expected return
b. Remove negative risk assets from the portfolio
c. Reduce the portfolio's systematic risk
d. Reduce the expected risk

23. If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in:
a. High beta stocks
b. Low beta stocks
c. Stocks with large amounts of unique risk
d. Stocks that plot below the security market line

24. Financial plans will rarely succeed unless the forecasts are perfect
a. True
b. False

25. Financial planning models routinely adjust for present value and risk
a. True
b. False

26. On average, stockholders in target firms earn higher returns from mergers than stockholders from acquiring firms

a. True
b. false

27. The value of the target firm's bonds go down when a leveraged buy-out is announced
a. True
b. False

28. The difference in interest rates between countries is believed to be equal to the expected change in spot exchange rates
a. True
b. False

29. History has shown a positive relationship between higher interest rates and higher subsequent rates of inflation.
a. True
b. False

30. A dividend does NOT accompany stocks that are purchased on the ex-dividend date
a. True
b. False

Solution Preview

12. What will happen to retained earnings when a corporation issues 1,000 shares of $1 par stock for $10 per share?
a. It will increase by $1000
b. It will increase by $9000
c. It will decrease by $9000
d. It will remain unchanged

When common stock is issued, it increases the common stock account and the additional paid in capital account, if issued above par. There is no impact on the retained earnings.
Answer d.

13. Which of the following bonds is likely to be viewed by investors as the most risky?
a. Subordinated debt
b. Indexed bond
c. Secured bond
d. Asset-back bonds

The subordinated debt will be most risky since it will be paid after the senior debt is paid.
Answer a.

14. 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 the shareholders
c. The discount rate exceeds the cost of capital
d. The profitability index equals one

If the NPV is positive, the IRR will be higher than the cost of capital.
Answer a.

15. If the IRR for a project is 15%, then the project's NPV would be:
a. Negative at a discount rate of 10%
b. Positive at a discount rate of 20%
c. Negative at a discount rate of 20%
d. Positive at ...

Solution Summary

The solution explains various multiple choice question relating to finance

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