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Sample Final Exam Multiple-Choice Questions

1. Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?

1. Borrow using short-term notes payable and use the proceeds to reduce accruals.
2. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
3. Use cash to reduce accruals.
4. Use cash to reduce short-term notes payable.

2. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

1. 4.42%
2. 4.66%
3. 4.89%
4. 5.13%

3. Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

1. 20-year, 10% coupon bond.
2. 20-year, 5% coupon bond.
3. 1-year, 10% coupon bond.
4. 20-year, zero coupon bond.

4. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a fixed nominal interest rate of 10% is CORRECT?

1. The monthly payments will increase over time.

2. A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment.

3. The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity.

4. The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.

5. Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT?

1. Company A trades at a higher P/E ratio.
2. Company A probably has fewer growth opportunities.
3. Company A is probably judged by investors to be riskier.
4. Company A must have a higher market-to-book ratio.
5. Company A must pay a lower dividend.

6. Which of the following statements is most correct?
   1. All else equal, if a bond’s yield to maturity increases, its current yield will fall.
   2. All else equal, if a bond’s yield to maturity increases, its price will fall.

3. If a bond’s yield to maturity exceeds the coupon rate, the bond will sell at a premium over par.

4. All of the statements are correct.

7. Which of the following statements is CORRECT?

1. One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC whereas IRR assumes that cash flows are reinvested at the IRR, and the NPVs assumption is generally more likely to be appropriate.

2. One advantage of the NPV over the IRR method is that NPV takes account of cash flows over a project’s full life whereas IRR does not.

3. One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project’s full life whereas MIRR does not.

4. One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.

8. Assume a project has normal cash flows (i.e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

1. All else equal, a project's NPV increases as the cost of capital declines.
2. All else equal, a project's IRR increases as the cost of capital declines.
3. All else equal, a project's MIRR is unaffected by changes in the cost of capital.
4. All of the answers are correct.

9. If easing a firm’s credit policy lengthens the collection period and results in a worsening of the A/R aging schedule, then why do firms take such actions?

1. It normally stimulates sales.
2. To improve the firm’s DSO.
3. To increase the firm’s deferral period for payables.
4. All of the statements above are correct.

10. All of the following are capital budgeting methods, except:
    1. The NPV calculation.
    2. The IRR method.
    3. The Capital Asset Pricing method.
    4. The Discounted Payback method
    5. All of these are capital budgeting methods.

11. Which of the following alternatives could potentially result in a net increase in a company's free cash flow for the current year?
    1. Decreasing the accounts payable balance.
    2. Increasing the number of years over which fixed assets are depreciated.
    3. Reducing the days-sales-outstanding (DSO) ratio.
    4. All of the answers are correct.

12. The “capital intensity ratio” generally refers to:

1. The percentage of liabilities that increase spontaneously as a percentage of sales.
2. The ratio of total liabilities over sales.
3. The ratio of current assets over sales.
4. The ratio of operating assets over sales.
5. Sales divided by total assets.

13. Which of the following statements is most correct?

1. The WACC is a measure of the before-tax cost of capital.

2. Typically, the after-tax cost of debt financing exceeds the after-tax cost of equity financing.

3. The WACC measures the marginal after-tax cost of capital.

4. In estimating a company’s WACC, accounts payable and accruals are usually considered as components of permanent capital.

14. Which of the following would cause the amount of Additional Funds Needed (AFN) to decrease, everything else remaining equal?

1. The company’s Accounts Payable are expected to increase.
2. The company’s Accounts Receivable are expected to increase.
3. The company’s capital intensity ratio is expected to increase.
4. The company’s net profit margin is expected to decrease.

15. The beta of stock i represents

1. The relevant risk-free rate associated with stock i.
2. The amount of risk that stock i contributes to the market portfolio.
3. The additional return over the risk-free rate required by an average investor to invest in the market portfolio.
4. The required rate of return on stock i.

Answer 1

(1) option b would reduce the current ratio as the current liabilities increase, but there is no change in current assets. This is the only option where the denominator in current ratio (current liabilities) is increased without an equal change in the numerator (current assets). The money borrowed is used up to pay off long-term debt, which is not a component of current assets or current liabilities.

(2) dividend yield for coming year = D₁ / P₀

D1 = 2.25 * 1.035 ==> 2.33

dividend yield = 2.33 / 50 ==> 0.0466, which is 4.66%

the answer is option b

(3) the answer is option d

The duration of zero coupon bond is the time left to maturity. A coupon bond of the same maturity will always have lower duration as it has intermediate cash flows (coupon payments) which reduce its interest rate risk

Hence the zero coupon bond will have highest duration, and therefore the highest percentage increase in value

(4) the answer is option b

In a monthly payment amortizing loan, the monthly payment will remain equal every month and will not change over the life of the loan

In any loan with equal repayments, the initial payments will consist of more interest portion and less principal repayment. Towards the end of the loan, the interest component will decrease, and the principal portion will increase until the entire principal is paid off.

Hence option b is correct and option c is incorrect.

option d is incorrect as higher interest rates will result in higher interest payments

(5) The answer is option a

PE ratio = price of share / EPS

If both companies have same EPS but company A has a higher price, the PE ratio of company A will be higher

Growth stocks usually have a higher PE ratio compared to value stocks, so option b is incorrect

option c is a wrong conclusion as higher perceived risk cannot be compared by simply comparing the PE ratios

option d is wrong as price-to-book ratio is computed using the book value per share

option e is a wrong conclusion as we cannot determine the dividend payment from this information