Multiple Choice Answers

1) Which of the following statements is CORRECT?
a. Compensating managers with stock options can do nothing to help eliminate potential conflicts between stockholders and managers.
b. Restrictions can be included in credit agreements, but these restrictions can do nothing to protect bondholders from conflicts of interest between them and the firm’s managers and stockholders.
c. The threat of takeovers reduces conflict of interest problems, but only between bondholders and stockholders.
d. Compensating managers with stock options can help reduce conflicts of interest between stockholders and managers, but if the options are all exercisable on a specific date in the near future, this can motivate managers to do something other than try to maximize the stock’s intrinsic value.
e. Conflicts would not exist if the Security and Exchange Commission were abolished.

2) Which of the following statements is most correct?
a. Corporations are allowed to exclude 70% of their interest income from corporate taxes.
b. Corporations are allowed to exclude 70% of their dividend income from corporate taxes.
c. Individuals pay taxes on only 30% of the income realized from municipal bonds.
d. Individuals are allowed to exclude 70% of their interest income from their taxes.
e. Individuals are allowed to exclude 70% of their dividend income from their taxes

3) Which of the following statements is CORRECT?
a. Dividends are always paid by a corporation.
b. EBIT has already been taxed.
c. One way of using the excess cash is to pay the shareholders a dividend. Another way might be a firm buying its own stock back.
d. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.
e. For profit firms write large checks for depreciation expense.

4) The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
a. Nantell’s taxable income will be lower.
b. Nantell’s operating income (EBIT) will increase.
c. Nantell’s cash position will improve (increase).
d. Nantell’s reported net income for the year will be lower.
e. Nantell’s tax liability for the year will be lower.

 

 

5. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)
a. The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
b. Because the outstanding balance declines over time, the monthly payments will also decline over time.
c. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.
e. The outstanding balance declines at a faster rate in the later years of the loan’s life.

6. Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.
a. Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).
b. Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
c. Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
d. Investment D pays $2,500 at the end of 10 years (just one payment).
e. Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

7. Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?
a. $591.09
b. $622.20
c. $654.95
d. $689.42
e. $723.89

8. Last year Dania Corporation’s sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?
a. $845.03
b. $889.51
c. $936.33
d. $983.14
e. $1,032.30

9. Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?
a. $574,924
b. $605,183
c. $635,442
d. $667,214
e. $700,575

 

10. Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card’s EFF%?
a. 18.58%
b. 19.56%
c. 20.54%
d. 21.57%
e. 22.65%

11. Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)
a. When held in isolation, Stock A has more risk than Stock B.
b. Stock B must be a more desirable addition to a portfolio than A.
c. Stock A must be a more desirable addition to a portfolio than B.
d. The expected return on Stock A should be greater than that on B.
e. The expected return on Stock B should be greater than that on A.

12. Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
a. The periodic rate of interest is 2% and the effective rate of interest is 4%.
b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
e. The periodic rate of interest is 8% and the effective rate of interest is also 8%.