1. The payback method fails to consider

1 The timing of the cash inflow of an investment

2 The cost of an investment

3 The return on alternative investment

a. 1 and 2

b 1 and 3

c 2 and 3

d 1,2 and 3

2. Why is our reserve banking system an independent federal agency? Why do many people believe we should not have a independent reserve system?

3. The dividend growth model may be applied only if it is assumed that the growth in dividends will be constant? T/F

4. Business risk refers to

1 Use of accelerated depreciation

2 The risk inherent in the nature of the business

3 The sources of the firm’s finances.

a 1 and 2

b 1 and 3

c 2 and 3

d Only 2

5. Studies of rates of return on large stocks suggest

a The average return is about 7.4 percent annually

b Over a period of years, the rate is approximately 10 percent

c Equity investors rarely sustain loses

d Dividends account for over half the return

6. Corporate federal income tax rates

a Decrease as income increase

b Are the same for all level of corporate income

c Phase out the benefit of lower tax bracket as corporate income

d Reach a high of 50 percent for earnings over 18,300,000

7. As the prices of stock rises, the probability a convertible bond will be called declines. T/F

8. The shares of closed end investment companies generally sell for a premium and rarely sell for a discount from their net asset value. T/F

9. If a firm needs additional equity financing through the retention of earnings, it may be advantageous to incorporate. T/F

10. All debentures are bonds but not all bonds are debentures. T/F

11. Why are Municipal Bonds exempt from Federal Tax? What could happen if they were not?

12. A investor may anticipate that a bond will be called if interest rates have risen. T/F

13. When risk analysis is introduced into the dividend growth model, the required rate of return considers

a The firms growth rate

b The firms dividend

c The firms beta coefficient

d The firms past dividends

14. If an investment requires the firm to carry more current assets, that increases the investments net present value. T/F

15. An upward shift in the fixed cost curve or a downward shift in the total revenue curve will increase the break- even level of output. T/F

16. Preferred stock and bonds are similar because

a The both have voting power

b interest and dividend payment are legal

c Either interest nor dividends are tax deductible

d Both are a source of financial leverage.

17. The cost of preferred stock is greater than the cost of debt primarily of the difference in a tax treatment of dividends and interest. T/F

18.  Debt financing is more risky for firms than preferred stock financing because

a Preferred dividend payments are legal obligations

b Interest payments are legal obligations

c Preferred stock must be retired

d Debt need not be refinanced

19. Convertible bonds have a call feature to

a Protect stockholders from early conversions

b Protect bondholders from conversions by stockholders

c Force stockholders to convert

d Force bondholders to convert

20. If a firm’s fixed costs rise relative to variable costs,______and______.

a Operating leverage, risk increase

b Operating leverage, financial leverage increase

c Financial leverage, risk increase

d Operating leverage increases, financial risk decreases.

21. One measure of the safety of a preferred stock’s dividend is the ratio of dividends to earnings before interest and taxes. T/F

22. As the price of common stock rises,

a The value of convertible bonds and convertible preferred stock declines

b The value of convertible bonds falls but convertible stock rises

c The value of convertible bonds rises but convertible preferred stock falls

d The value of convertible bonds and convertible preferred stock rises.

23. The internal rate of return will be higher if

a. The cost of capital is lower

b The cost of capital is higher

c The cost of the investment is lower

d The cost of investment is higher

24. Interest is exempt from federal income taxation on

a Equipment trust certificates

b Zero coupon bonds

c Federal bonds such as savings bonds

d State of Florida bonds

25. The dividend paid by a preferred stock is usually

a Tax deductible

b Variable

c Paid in stock

d Fixed

26. The portfolios of balanced funds

a Exclude American stocks

b Reduce systematic and purchasing power risks

c Are well diversified

d Generate the highest returns

27. Advantages of the corporate form of business include

a Limited liability for stockholders

b Avoidance of state taxation

c Limited life

d Deductibility of dividends

28. An investment internal rate of return equates

a Dividend payments and capital gains

b Initial cost and subsequent cash inflows

c Initial cash outflow and the sale price

d Dividend payments and the investment’s cost

29. The net present value will be larger if

a The cost of capital is higher

b There is no salvage value

c The cost of the investment is lower

d The firm uses straightline depreciation

30. An index fund

a Seeks to match the market

b Seeks to outperform the market

c Is illustrative of a no load fund

d Is illustrative of a closed end fund.

31.Preferred stock increases common stockholders return

a. more than an equal dollar amount of debt

b. less than an equal dollar amount of debt

c. more than an equal dollar amount retained earnings

d. less than an equal dollar amount of retained earnings

32. If a company defaults on its bonds,

a Subordinated debt is redeemed before senior debt

b Equipment trust certificates have an inferior position to income bonds

c Interest continues to accrue but may not be paid

d Debentures have a superior position to other bonds