”

1. The prices of financial assets are based on the expected
value of future cash flows, discount rate, and past dividends. A. True B. False

2. By using different discount rates, the market allocates
capital to companies based on their risk, efficiency,
and expected returns. A.
True B. False

3. As time to maturity increases, bond price sensitivity
decreases. A. True B. False

4. Valuation of a common stock with no dividend growth potential
is treated in the same manner as preferred stock. A. True B. False

5. Valuation of financial assets requires knowledge of A. future
cash flows. B. appropriate discount rate. C. past asset performance. D. future cash flows and appropriate
discount rate.

6. Which of the following financial assets is likely to have the
highest
required rate of return based on risk? A. corporate bond B.
Treasury bill C. preferred share D.
common share

7. A bond which has a yield to maturity less than its coupon
interest rate will sell for a price A. below par. B. at par. C. above par. D. that is
equal to the face value of the bond plus the value of all
interest payments.

8. A 10-year bond pays 12% interest on a $1,000 face value
annually. If it currently sells for $1,100, what is its approximate yield to
maturity? A. 10.35% B. 10.91% C.
11.00% D.
12.00%

9. Companies prefer to maintain some financing flexibility in
order to choose the lowest cost source of funds at a single point in time. A. True B. False

10. A firm that does not earn the cost of capital in the long
run will not maximize shareholder
wealth. A. True B.
False

11. The use of the optimum capital structure minimizes the cost
of capital. A. True B. False

12. The discount rate that equates a future stream of expected
dividends to the current price is a good approximation of the cost of common
shares. A. True B.
False

13. Retained earnings has a cost associated with it because A.
new funds must be raised. B. there is an
opportunity cost associated with shareholder funds. C. Ke > g. D.
flotation costs increase the cost of funding.

14. Each project
should be judged against A. the specific means of
financing used to support its implementation. B. the going interest rate at
that point in time. C. the cost of new common stock equity. D. the weighted average cost of capital

15. When both the tax deductibility of
debt and the present value of potential bankruptcy costs are included, the cost
of capital for a firm tends to A. be constant regardless of the level of debt
usage. B. decrease as the level of debt increases. C. increase as the level of
debt increases.
D. decrease up to
some debt-value ratio, then increase as bankruptcy costs become significant.

16. A firm’s debt to equity ratio varies at times because A. a
firm will want to sell common stock when prices are low and bonds when interest
rates are high. B.
a firm will want to take advantage of timing its fund-raising in
order to minimize costs over the long run. C. the market allows extensive
leeway in the debt to equity ratio before penalizing the firm with a higher
cost of capital. D. all of the above answers
are correct

17. The internal rate of return is the interest rate that
equates the cash outflows of an investment with the subsequent inflows. A. True B. False

18. Under the net present value method, cash flows are assumed
to be reinvested at the firm’s weighted
average cost of capital. A,
True B. False

19. With nonmutually exclusive events and no capital rationing,
we will usually arrive at the same conclusions using either the net present
value or internal rate of return methods. A.
True B. False

20. The payback
period is easy to understand and places a heavy emphasis on
liquidity. A. True B. False

21. The longer the life of an investment A. the more significant the discount rate. B. the less significant
the discount rate. C. Makes no difference. D. None of these.

22. You buy a new piece of equipment for $7,360, and you receive
a cash inflow of $1,000 per year for 10 years. What is the internal rate of
return? A. 5% B. 6% C. 7% D. More
than 7%

23. Assume a project has earnings before amortization and taxes
of $15,000,
amortization of $25,000, and that the firm has a 30 percent tax
bracket. What are the after-tax cash flows for the project? A. $18,000 B. $19,000 C. A loss of
$21,000 D. None of these

24. The profitability index will give the same investment
decision as A.
the payback period. B. the average accounting return. C. the net present value. D. It can be
different from each of these techniques.

25. Risk is not only measured in terms of losses, but also in
terms of variability. A. True B.
False

26. Sensitivity analysis helps the financial planner to
determine how sensitive shareholders will be to changes in investment strategy.

A. True
B. False

27. Choosing projects with returns equal to the company norm but
having a higher level of risk will most likely lower the company’s share price.

A. True
B. False

28. Combining assets that have highly correlated returns will
reduce portfolio risk.
A. True
B. False

29. The concept of being risk averse means
A. for a given
situation investors would prefer relative certainty to uncertainty.
B. investors would prefer investments with low standard
deviations and greater opportunity for gain.
C. that the lower the risk the lower the expected return must
be.
D. all of the above answers are correct

30. Using the risk-adjusted discount rate approach, the cost of
capital is applied to projects with
A. normal risk.
B. high risk.
C. no risk.
D. low risk.

31. The firm’s highest risk-adjusted discount should be applied
to
A. the repair of old machinery.
B. a new product in a related field.
C. a new product in a
foreign market.
D. the purchase of new equipment.

32. Which investment has the least amount of risk?
A. standard deviation = $500, expected return = $5,000
B. standard deviation = $700, expected return = $500
C. standard deviation = $900, expected return = $800
D. standard deviation
= $400, expected return = $350

33. Foreign exchange risk is the risk that a person or business
will not be able to exchange currencies.
A. True
B. False

34. Multinational firms tend to have a lower level of portfolio
risk than comparable Canadian firms.
A. True
B. False

35. Expected future value of a currency is reflected in its spot
rate.
A. True
B. False

36. The purchasing power parity theory of exchange rates
suggests that exchange rates will adjust until the cost of equivalent goods is
approximately equal in each country.
A. True
B. False

37. If in 2011, the Canadian dollar’s exchange rate with the Sudanese
pound was .38433 dollars per pound and in 2014, the exchange rate was .20068
dollars per pound, it would indicate that in the period from 2011 to 2014, the
dollar
A. strengthened
against the pound.
B. weakened against the pound.
C. was unrelated to the value of the pound.
D. the answer cannot be determined without knowing the number of
pounds needed to buy a dollar

38. Eurodollars are
A. Canadian dollars
deposited in foreign banks.
B. foreign dollars deposited in Canadian banks.
C. investments of common market countries.
D. none of the other answers are correct

39. A portfolio of international stocks in comparison to purely
Canadian stocks generally shows
A. lower percentage
risk for a given number of stocks.
B. higher percentage risk for a given number of stocks.
C. the same percentage risk for a given number of stocks.
D. lower percentage return for a given number of stocks.

40. If prices double in Vancouver while the prices in San Paulo
remain the same, the purchasing power of the dollar relative to the real
A. should increase by 50%.
B. should increase by 100%.
C. should decrease by
50%.
D. should decrease by 100%.

41. In addition to comparison with industry ratios, it is also
helpful to analyze ratios using
A. trend analysis.
B. historical comparisons.
C. both of the above
answers are correct.
D. none of the above is correct; only industry ratios provide
valid comparisons.

42. Investors and financial analysts wanting to evaluate the
operating efficiency of a firm’s managers would probably look primarily at the
firm’s
A. debt utilization ratios.
B. liquidity ratios.
C. asset utilization
ratios.
D. profitability ratios.

47. (2 points) How long does it take $1,000 to quadruple in
value if you have an 11% annual return? Assume annual compounding, and express
your answer in years (to two decimals).

13.28 years

Please see the attached
excel sheet for calculations

48. (4 points) Assume the following spot and forward rates for
the euro ($/euro).

Spot rate = $1.6277
30-day forward rate = 1.6330
90-day forward rate = 1.6353
120-day forward rate = 1.6387

A) What is
the dollar value of one euro in the spot market?
B) Suppose
you issued a 120-day forward contract to exchange 200,000 euros into Canadian
dollars. How many dollars are involved?

C) How many
euros can you get for one dollar in the spot market?

D) What is
the 120-day forward premium?

Please see
calculations on the attached excel sheet

49. The MacHardee Plumbing Company has common stock outstanding.
The stock paid a dividend of $2.00 per share last year, but the company expects
that earnings and dividends will grow by 25% for the next two years before
dropping to a constant 9% growth rate afterward. The required rate of return on
similar common stocks is 13%.

What is the per-share value of the company’s common stock?

50- Defense Electronics Corporation is considering building an
overseas manufacturing facility to produce radar detection systems. As a
consultant to DEC, you have the contract to determine the appropriate discount
rate for evaluating this project.
Current information regarding DEC includes:
Debt: 25,000 bonds outstanding, each with a coupon rate of 6.5%
paid semi-annually, par value of $1,000, maturity of 20 years, and current
value of 96% of par.
Common Stock: 400,000 shares outstanding with a current value of
$89/share. An annual dividend of $4.74 has just been paid, and dividends are
expected to grow by 9% annually into the foreseeable future.
Preferred Stock: 35,000 shares of 6.5% stock with a par value of
$100/share, and a current value of $99/share.
Tax rate: DECs combined tax rate is 34%.
Other liabilities: DEC has the usual accounts payable and
accruals on its balance sheet, but does not regularly utilize any
interest-bearing debt other than the bonds described above.
Risk Adjustment: Since the new manufacturing facility is to be
built overseas, management is suggesting an adjustment factor of +2% to account
for the increased riskiness.

1. The prices of financial assets are based on the expected
value of future cash flows, discount rate, and past dividends. A. True B. False2. By using different discount rates, the market allocates
capital to companies based on their risk, efficiency,and expected returns. A.
True B. False 3. As time to maturity increases, bond price sensitivity
decreases. A. True B. False 4. Valuation of a common stock with no dividend growth potential
is treated in the same manner as preferred stock. A. True B. False5. Valuation of financial assets requires knowledge of A. future
cash flows. B. appropriate discount rate. C. past asset performance. D. future cash flows and appropriate
discount rate. 6. Which of the following financial assets is likely to have the
highestrequired rate of return based on risk? A. corporate bond B.
Treasury bill C. preferred share D.
common share 7. A bond which has a yield to maturity less than its coupon
interest rate will sell for a price A. below par. B. at par. C. above par. D. that isequal to the face value of the bond plus the value of all
interest payments. 8. A 10-year bond pays 12% interest on a $1,000 face value
annually. If it currently sells for $1,100, what is its approximate yield to
maturity? A. 10.35% B. 10.91% C.
11.00% D.12.00% 9. Companies prefer to maintain some financing flexibility in
order to choose the lowest cost source of funds at a single point in time. A. True B. False 10. A firm that does not earn the cost of capital in the long
run will not maximize shareholderwealth. A. True B.
False 11. The use of the optimum capital structure minimizes the cost
of capital. A. True B. False 12. The discount rate that equates a future stream of expected
dividends to the current price is a good approximation of the cost of commonshares. A. True B.
False 13. Retained earnings has a cost associated with it because A.
new funds must be raised. B. there is an
opportunity cost associated with shareholder funds. C. Ke > g. D.
flotation costs increase the cost of funding. 14. Each project
should be judged against A. the specific means of
financing used to support its implementation. B. the going interest rate at
that point in time. C. the cost of new common stock equity. D. the weighted average cost of capital
15. When both the tax deductibility of
debt and the present value of potential bankruptcy costs are included, the cost
of capital for a firm tends to A. be constant regardless of the level of debt
usage. B. decrease as the level of debt increases. C. increase as the level of
debt increases.D. decrease up to
some debt-value ratio, then increase as bankruptcy costs become significant. 16. A firm’s debt to equity ratio varies at times because A. a
firm will want to sell common stock when prices are low and bonds when interest
rates are high. B.a firm will want to take advantage of timing its fund-raising in
order to minimize costs over the long run. C. the market allows extensive
leeway in the debt to equity ratio before penalizing the firm with a higher
cost of capital. D. all of the above answersare correct 17. The internal rate of return is the interest rate that
equates the cash outflows of an investment with the subsequent inflows. A. True B. False 18. Under the net present value method, cash flows are assumed
to be reinvested at the firm’s weightedaverage cost of capital. A,
True B. False 19. With nonmutually exclusive events and no capital rationing,
we will usually arrive at the same conclusions using either the net present
value or internal rate of return methods. A.
True B. False 20. The paybackperiod is easy to understand and places a heavy emphasis on
liquidity. A. True B. False 21. The longer the life of an investment A. the more significant the discount rate. B. the less significant
the discount rate. C. Makes no difference. D. None of these.22. You buy a new piece of equipment for $7,360, and you receive
a cash inflow of $1,000 per year for 10 years. What is the internal rate of
return? A. 5% B. 6% C. 7% D. More
than 7% 23. Assume a project has earnings before amortization and taxes
of $15,000,amortization of $25,000, and that the firm has a 30 percent tax
bracket. What are the after-tax cash flows for the project? A. $18,000 B. $19,000 C. A loss of
$21,000 D. None of these 24. The profitability index will give the same investment
decision as A.the payback period. B. the average accounting return. C. the net present value. D. It can be
different from each of these techniques. 25. Risk is not only measured in terms of losses, but also in
terms of variability. A. True B.
False26. Sensitivity analysis helps the financial planner to
determine how sensitive shareholders will be to changes in investment strategy.
A. TrueB. False27. Choosing projects with returns equal to the company norm but
having a higher level of risk will most likely lower the company’s share price.
A. TrueB. False28. Combining assets that have highly correlated returns will
reduce portfolio risk.A. TrueB. False29. The concept of being risk averse meansA. for a given
situation investors would prefer relative certainty to uncertainty.B. investors would prefer investments with low standard
deviations and greater opportunity for gain.C. that the lower the risk the lower the expected return must
be.D. all of the above answers are correct30. Using the risk-adjusted discount rate approach, the cost of
capital is applied to projects withA. normal risk.B. high risk.C. no risk.D. low risk.31. The firm’s highest risk-adjusted discount should be applied
toA. the repair of old machinery.B. a new product in a related field.C. a new product in a
foreign market.D. the purchase of new equipment.32. Which investment has the least amount of risk?A. standard deviation = $500, expected return = $5,000B. standard deviation = $700, expected return = $500C. standard deviation = $900, expected return = $800D. standard deviation
= $400, expected return = $35033. Foreign exchange risk is the risk that a person or business
will not be able to exchange currencies.A. TrueB. False34. Multinational firms tend to have a lower level of portfolio
risk than comparable Canadian firms.A. TrueB. False35. Expected future value of a currency is reflected in its spot
rate.A. TrueB. False36. The purchasing power parity theory of exchange rates
suggests that exchange rates will adjust until the cost of equivalent goods is
approximately equal in each country.A. TrueB. False37. If in 2011, the Canadian dollar’s exchange rate with the Sudanese
pound was .38433 dollars per pound and in 2014, the exchange rate was .20068
dollars per pound, it would indicate that in the period from 2011 to 2014, the
dollarA. strengthened
against the pound.B. weakened against the pound.C. was unrelated to the value of the pound.D. the answer cannot be determined without knowing the number of
pounds needed to buy a dollar38. Eurodollars areA. Canadian dollars
deposited in foreign banks.B. foreign dollars deposited in Canadian banks.C. investments of common market countries.D. none of the other answers are correct39. A portfolio of international stocks in comparison to purely
Canadian stocks generally showsA. lower percentage
risk for a given number of stocks.B. higher percentage risk for a given number of stocks.C. the same percentage risk for a given number of stocks.D. lower percentage return for a given number of stocks.40. If prices double in Vancouver while the prices in San Paulo
remain the same, the purchasing power of the dollar relative to the realA. should increase by 50%.B. should increase by 100%.C. should decrease by
50%.D. should decrease by 100%.41. In addition to comparison with industry ratios, it is also
helpful to analyze ratios usingA. trend analysis.B. historical comparisons.C. both of the above
answers are correct.D. none of the above is correct; only industry ratios provide
valid comparisons.42. Investors and financial analysts wanting to evaluate the
operating efficiency of a firm’s managers would probably look primarily at the
firm’sA. debt utilization ratios.B. liquidity ratios.C. asset utilization
ratios.D. profitability ratios.47. (2 points) How long does it take $1,000 to quadruple in
value if you have an 11% annual return? Assume annual compounding, and express
your answer in years (to two decimals).13.28 years Please see the attached
excel sheet for calculations48. (4 points) Assume the following spot and forward rates for
the euro ($/euro).Spot rate = $1.627730-day forward rate = 1.633090-day forward rate = 1.6353120-day forward rate = 1.6387A) What is
the dollar value of one euro in the spot market?B) Suppose
you issued a 120-day forward contract to exchange 200,000 euros into Canadian
dollars. How many dollars are involved?C) How many
euros can you get for one dollar in the spot market?D) What is
the 120-day forward premium? Please see
calculations on the attached excel sheet49. The MacHardee Plumbing Company has common stock outstanding.
The stock paid a dividend of $2.00 per share last year, but the company expects
that earnings and dividends will grow by 25% for the next two years before
dropping to a constant 9% growth rate afterward. The required rate of return on
similar common stocks is 13%.What is the per-share value of the company’s common stock? 50- Defense Electronics Corporation is considering building an
overseas manufacturing facility to produce radar detection systems. As a
consultant to DEC, you have the contract to determine the appropriate discount
rate for evaluating this project.Current information regarding DEC includes:Debt: 25,000 bonds outstanding, each with a coupon rate of 6.5%
paid semi-annually, par value of $1,000, maturity of 20 years, and current
value of 96% of par.Common Stock: 400,000 shares outstanding with a current value of
$89/share. An annual dividend of $4.74 has just been paid, and dividends are
expected to grow by 9% annually into the foreseeable future.Preferred Stock: 35,000 shares of 6.5% stock with a par value of
$100/share, and a current value of $99/share.Tax rate: DECs combined tax rate is 34%.Other liabilities: DEC has the usual accounts payable and
accruals on its balance sheet, but does not regularly utilize any
interest-bearing debt other than the bonds described above.Risk Adjustment: Since the new manufacturing facility is to be
built overseas, management is suggesting an adjustment factor of +2% to account
for the increased riskiness.”