Finance Exam 6 Multiple Choice Questions 2015

If the financial markets are efficient, then investors should expect their investments in those markets to:

[removed]produce arbitrage opportunities on a routine basis.

[removed]earn extraordinary returns on a routine basis.

[removed]have zero net present values.

[removed]generally have positive net present values.

[removed]produce negative returns on a routine basis.


If behavioral finance holds, this implies:

[removed]some investors are irrational all of the time.

[removed]all investors are rational all of the time.

[removed]all investors are irrational some of the time.

[removed]all investors are irrational all the time.

[removed]some investors are irrational some of the time


Which one of these would generally be considered the most rational action for a tax-paying investor?

[removed]Throwing darts to select their portfolio holdings

[removed]Holding a less than fully diversified portfolio of securities

[removed]Trading frequently

[removed]Ignoring taxes when making investment decisions

[removed]Selling their losing and holding their winning securities

Keim s research presents evidence that the difference in performance between small capitalization stocks and large capitalization stocks is largest in the month of:







Which of these help prevent arbitrage from totally correcting market mispricings?

I. Trading costs
II. Market domination by rational professionals
III. Number of amateur investors
IV. Near-term risk

[removed]III and IV only

[removed]I and II only

[removed]I, III, and IV only

[removed]I, II, III, and IV

[removed]I only


If the market is fully efficient, then an announcement by a firm of a new product with a high net present value will cause the market price of that firm’s stock to:

[removed]decline gradually over the next few days.

[removed]rise gradually over the next few days.

[removed]remain constant.

[removed]immediately decline to a new level equivalent to the decreased value of the firm.

[removed]immediately increase to a new level equivalent to the increased value of the firm.


Based on the efficient market hypothesis, a stock’s abnormal return at Time t is an indicator of:

[removed]cumulative market expectations.

[removed]semistrong form inefficiency.


[removed]weak form inefficiency.

[removed]a release of information at Time t.


Your firm has a $295,000 bond issue outstanding. These bonds have a 6.35 percent coupon, pay interest semiannually, and have a current market price equal to 101 percent of face value. What is the amount of the annual interest tax shield given a tax rate of 35 percent?







DL Trucking has a cost of equity of 14.4 percent and an unlevered cost of capital of 13 percent. The company has $20,000 in debt that is selling at par value. The levered value of the firm is $46,000 and the tax rate is 35 percent. What is the pretax cost of debt?







The interest tax shield has no value for a firm when the:

I. the tax rate is equal to zero.
II. the debt-equity ratio is exactly equal to 1.
III. the firm is unlevered.
IV. a firm elects an all-equity capital structure.

[removed]I, III, and IV only

[removed]I, II, and IV only

[removed]I and III only

[removed]II, III, and IV only

[removed]II and IV only


Durbin, Inc., is an unlevered firm with a total market value of $365,000 with 20,000 shares of stock outstanding. The firm has expected EBIT of $24,000 if the economy is normal and $28,000 if the economy booms. The firm is considering a $73,000 bond issue with an attached interest rate of 5.5 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms?









JL Lumber has a debt-equity ratio of .62. The firm’s required return on assets is 12 percent and its current cost of equity is 15.60 percent. What is the firm’s pretax cost of debt? Ignore taxes.






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An unlevered firm has a cost of capital of 14.6 percent and earnings before interest and taxes of $223,000. Assume the firm borrows $700,000 at a 7 percent rate of interest. The applicable tax rate is 34 percent. What is the value of the levered firm?







Which of these proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?

[removed]MM Proposition II with tax

[removed]MM Proposition II without tax

[removed]MM Proposition I with tax

[removed]MM Proposition I with and without taxes

[removed]MM Proposition I without tax


Leverage becomes a disadvantage to a firm as soon as the firm’s earnings before interest:

[removed]exceed the break-even point.

[removed]are taxed.

[removed]fall below the break-even point.

[removed]become negative.

[removed]exceed the firm’s unlevered earnings.


A firm is technically insolvent when:

[removed]it is unable to meet its financial obligations.

[removed]it files the legal forms petitioning for bankruptcy protection.

[removed]it has a negative net worth on its balance sheet.

[removed]the value of the firm’s assets is less than the value of the firm’s liabilities.

[removed]the value of its stock declines by more than 50 percent in any given 12-month period.


Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?

[removed]Both bondholders and stockholders will encourage the firm to take on new high risk projects.

[removed]Stockholders have an incentive to underinvest in new projects to the detriment of bondholders.

[removed]Bondholders tend to milk the property at the expense of stockholders.

[removed]Both parties tend to work together for the common good of the firm.

[removed]Bondholders will tend to lower their required rate of interest so the firm can afford additional financing until its financial status improves.


A firm that has a negative net worth is said to be:

[removed]in legal bankruptcy.

[removed]experiencing accounting insolvency.

[removed]experiencing a business failure.

[removed]experiencing technical insolvency.

[removed]in Chapter 11 bankruptcy reorganization.


Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.

[removed]Paying the semiannual bond interest

[removed]Cutting a regular dividend

[removed]Paying an extra dividend

[removed]Repaying a bond that matured

[removed]Paying a regular dividend


The complete termination of a firm as a going business concern is called a:



[removed]repurchase program.




Which one of these relationships will exist if a firm is operating under its optimal capital structure?

[removed]The firm will be financed with equal amounts of long-term debt and equity.

[removed]The net present value of the firm will equal zero.

[removed]The value of the firm equal the maximum value obtainable according to the MM theories.

[removed]The firm’s cost of capital will equal the risk-free rate.

[removed]The present value of the financial distress costs will equal the present value of the tax shield on debt.


ATC has a value of $70,000 in a good economy and $55,000 in a recession. The firm has $60,000 of debt. The probability of a recession is 50 percent. The firm is considering a project that would change the firm values to $73,000 in a good economy and $50,000 in a recession. If the firm accepts this project, the firm value will ______ and shareholder value will ______.

[removed]decrease by $1,000; increase by $1,500

[removed]decrease by $1,000; decrease by $1,000

[removed]decrease by $2,000; decrease by $2,000

[removed]increase by $1,500; decrease by $1,000

[removed]increase by $1,500; increase by $1,500









Quick Mart has been paying a quarterly dividend of $1.20 a share. Which of the following are valid reasons for the firm to reduce or eliminate these dividends?

I. The firm is on the verge of violating a bond restriction.
II. The firm wants to save cash for an acquisition with a 40 percent premium.
III. The firm can raise new capital easily at a very low cost.
IV. Congress just changed the tax laws eliminating all taxes on capital gains.

[removed]I, II, III, and IV

[removed]I and IV only

[removed]II, III, and IV only

[removed]II and IV only

[removed]I, II, and IV only


A stock currently sells for $8.40 a share. What type of stock split does the firm need to do if it wants to increase the price so that it trades around $25 a share?

[removed]2-for-3 reverse stock split

[removed]3-for-1 stock split

[removed]5-for-2 stock split

[removed]1-for-3 reverse stock split

[removed]2-for-5 reverse stock split


Robinson’s has 18,500 shares of stock outstanding with a par value of $1 per share and a market price of $36 a share. The balance sheet shows $18,500 in the common stock account, $315,000 in the capital in excess of par value account, and $189,000 in the retained earnings account. The firm just announced a 3-for-2 stock split. What will be the value of the common stock account after the split?






Of the following factors, which one is considered to be the primary factor affecting a firm’s dividend decision?

[removed]Maintaining consistency with the historical dividend policy

[removed]Attracting institutional…

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