1) Which of the following is false?
A) preferred stock has some characteristics of both common stock and bonds
B) common stockholders are essentially creditors of the firm
C) the pre-emptive right on common stock protects the shareholder from dilution in ownership and value
2) The less-risky investment is always the more desirable choice. A) True B) False
3) Which of the following statements best represents the “Agency Problem”?
A) Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders.
B) The agency problem results from the separation of management and the ownership of the firm.
C) The agency problem may interfere with the implementation of maximizing shareholder wealth.
D) all of the above
4) You are considering investing in a project with the following year-end after tax cash flows Year l: $5,000 Year 2: $3,200 Year 3: $7,800 If the initial outlay for the project is $12,113, compute the project’s internal rate of return. A) 14% B) 10% C) 32% D) 24%
5) Emery Inc. has a beta equal to 1.5 and a required return of 14% based on the CAPM. If the risk free rate of return is 2%, the expected return on the market portfolio is: A) 10%. B) 9%. C) 8%. D) 6%.
6) Company A and Company B have the same profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from
A) Company B has more common stock.
B) Company A has a higher debt ratio.
C) Company A has a higher return on assets.
D) Company B has a higher return on assets.
7) As business goals go, maximization of profits is worthy but it does not adequately consider which of the following? A) income taxes B) time frame over which profits are to be measured C) increases in the cost of raw materials D) changes in sales revenues
8) All of the following would result in an increase in stockholders equity except
A) The company sold common stock at par value. B) The company sold common stock above par value.
C) The company purchased treasury stock. D) The company had positive net income greater than dividends paid.
9) The calculation of incremental free cash flows over a project’s life should include
A) labor and material saving. B) additional revenue. C) interest to bondholders. D) A and B.
10) All of the following are equity accounts on a balance sheet except:
A) retained earnings. B) cash. C) common stock. D) paid-in capital.