Multiple Choice Answers

1. Among solutions to the agency problem in publicly-held corporations are all of the following EXCEPT
Answer
a. stock options.
b. performance shares.
c. cash bonuses tied to goal achievement.
d. bonuses based on short-term results.
2. A recent ethics survey indicated the opinion that maintaining high ethical standards
Answer
a. weakened a firm’s competitive position, particularly in foreign markets.
b. had no effect on a firm’s competitive position.
c. strengthened a firm’s competitive position.
d. was difficult to enforce.
3. A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger?
Answer
a. Increase accounts receivable while holding sales constant.
b. Increase EBIT while holding sales constant.
c. Increase accounts payable while holding sales constant.
d. Increase notes payable while holding sales constant.
e. Increase inventories while holding sales constant.

4. Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?
Answer
a. Adding additional restrictive covenants that limit management’s actions.
b. Adding a call provision.
c. The rating agencies change the bond’s rating from Baa to Aaa.
d. Making the bond a first mortgage bond rather than a debenture.
e. Adding a sinking fund.
5. Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond’s nominal yield to call?
Answer
a. 5.01%
b. 5.27%
c. 5.54%
d. 5.81%
e. 6.10%
6. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
Answer
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
7. If markets are in equilibrium, which of the following conditions will exist?
Answer
a. Each stock’s expected return should equal its realized return as seen by the marginal investor.
b. Each stock’s expected return should equal its required return as seen by the marginal investor.
c. All stocks should have the same expected return as seen by the marginal investor.
d. The expected and required returns on stocks and bonds should be equal.
e. All stocks should have the same realized return during the coming year.
8. On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?
Answer
a. If the company lost money in 2010, they must have paid dividends.
b. The company must have had zero net income in 2010.
c. The company must have paid out half of its earnings as dividends.
d. The company must have paid no dividends in 2010.
e. Dividends could have been paid in 2010.