With which of the following statements would most people in business agree?
a. Although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.
b. Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.
c. The short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.
d. Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.
e. Government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.

Which of the following statements is NOT CORRECT?
a. It is possible for a firm to go public and yet not raise any additional new capital at the time.
b. Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the SEC.
c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
d. "Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares.
e. When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held."

You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:
a. A secondary market transaction.
b. A primary market transaction.
c. A futures market transaction.
d. An over-the-counter market transaction.
e. A money market transaction.

Which of the following statements is CORRECT?
a. Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.
b. The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.
c. Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted.
d. The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.
e. The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are identical for all corporations in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws.

If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.
True
False

Lucy's Music Emporium opened its doors on January 1, 2015, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 20 years, but in December 2015 management realized that the assets would last for only 15 years. The firm's accountants plan to report the 2015 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?
a. The firm's net liabilities would increase.
b. The firm's EBIT would increase.
c. The firm's reported net fixed assets would increase.
d. The firm's cash position in 2015 and 2016 would increase.
e. The firm's reported 2015 earnings per share would increase.

Which of the following statements is CORRECT?
a. Net cash flow (NCF) is often defined as follows:
Net Cash Flow = Net Income + Depreciation and Amortization Charges.
b. The more depreciation a firm reports, the higher its tax bill, other things held constant.
c. Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits
d. Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow.
e. People sometimes talk about the firm's net cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."

Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes
a. $4,022.48
b. $3,830.94
c. $3,639.39
d. $3,457.42
e. $3,284.55

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%. How much debt was outstanding?
a. $3,958,289
b. $4,166,620
c. $3,760,375
d. $3,393,738
e. $3,572,356

Which of the following statements is CORRECT?
a. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing."
b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."
c. Using some of the firm's cash to reduce long-term debt is an example of "window dressing."
d. "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value.
e. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing."

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.
a. The division's basic earning power ratio is above the average of other firms in its industry.
b. The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.
c. The division's inventory turnover is 6, whereas the average for its competitors is 8.
d. The division's debt ratio is above the average for other firms in the industry.
e. The division's total assets turnover ratio is below the average for other firms in its industry.

You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandmother just gave you a $25,000 graduation gift that you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?
a. $277,797
b. $250,712
c. $263,907
d. $291,687
e. $238,176

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?
a. 10.38%
b. 8.46%
c. 8.90%
d. 9.86%
e. 9.37%

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?
a. $16,035.88
b. $17,679.55
c. $16,837.67
d. $18,563.53
e. $15,234.08

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?
a. 20-year, 10% coupon bond.
b. 20-year, zero coupon bond.
c. 1-year, 10% coupon bond.
d. 20-year, 5% coupon bond.
e. 10-year, zero coupon bond.

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?
a. The prices of both bonds will increase by 7% per year.
b. The price of Bond A will decrease over time, but the price of Bond B will increase over time.
c. The prices of both bonds will remain unchanged.
d. The prices of both bonds will increase over time, but the price of Bond A will increase by more.
e. The price of Bond B will decrease over time, but the price of Bond A will increase over time.

Which of the following statements is CORRECT?
a. If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
b. If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
c. If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
d. If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
e. If a coupon bond is selling at par, its current yield equals its yield to maturity.

The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65. What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)
a. 9.27%
b. 8.83%
c. 9.74%
d. 9.51%
e. 9.05%

Which of the following statements is CORRECT?
a. There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
b. An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
c. If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
d. Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.
e. If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.

Data for Atwill Corporation is shown below. Now Atwill acquires some risky assets that cause its beta to increase by 30%. In addition, expected inflation increases by 2.00%. What is the stock's new required rate of return?
Initial beta 1.00
Initial required return (rs) 10.20%
Market risk premium, RPM 6.00%
Percentage increase in beta 30.00%
Increase in inflation premium, IP 2.00%
a. 16.21%
b. 17.02%
c. 14.70%
d. 15.44%
e. 14.00%

Kinkead Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be −$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?
a. $167
b. $184
c. $175
d. $193
e. $158

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?
a. 7.47%
b. 7.25%
c. 6.62%
d. 6.82%
e. 7.03%

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?
a. The two stocks must have the same dividend per share.
b. The two stocks must have the same dividend growth rate.
c. If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
d. The two stocks must have the same dividend yield.
e. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
a. The stock's price one year from now is expected to be 5% above the current price.
b. The stock's required return must be equal to or less than 5%.
c. The expected return on the stock is 5% a year.
d. The price of the stock is expected to decline in the future.
e. The stock's dividend yield is 5%.

If a company’s free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
a. The company’s value of operations one year from now is expected to be 5% above the current price.
b. The value of operations is expected to decline in the future.
c. The company’s stock's dividend yield is 5%.
d. The expected return on the company’s stock is 5% a year.
e. The company's WACC must be equal to or less than 5%.

With which of the following statements would most people in busines...