BAM 513 Financial Management
Unit 3 Examination
Multiple Choice Questions (Enter your answers on the enclosed answer sheet)
1. The ________ method provides the number of years required for a project to repay its initial
investment.
a.
b.
c.
d.
modified internal rate of return
internal rate of return
net present value
payback
2. Crater Lake Diagnostics Inc. is considering the purchase of a new piece of equipment that
has an initial investment of $75,000, has annual expenses associated with its operation of
$10,000 per year and has a six year life. What is the equivalent annual cost of this investment
if the firms considers the appropriate discount rate to be 11%?
a.
b.
c.
d.
$17,728
$19,551
$22,500
$27,728
3. The ________ method is a capital budgeting technique for evaluating projects of unequal lives.
a.
b.
c.
d.
equivalent annual cost
equal amortization
straight-line annuity
none of the above
4. The profitability index method of project evaluation provides an answer that is a ______.
a.
b.
c.
d.
rate of interest
dollar value.
time period
ratio
5. Which of the following statements regarding the MIRR and how it solves problems with the IRR
is not accurate?
a. The MIRR eliminates the problem of multiple IRRs.
b. The MIRR eliminates the problem of the assumption of always reinvesting at the IRR.
c. The MIRR eliminates the problem of arbitrarily choosing a required rate of return (AKA the
hurdle rate).
d. all of the above are accurate
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BAM 513 Financial Management
Unit 3 Examination
6. If a project has a ________ NPV, it should also have an IRR ________ the hurdle rate.
a.
b.
c.
d.
positive; greater than
positive; less than
negative; greater than
negative; equal to
7. The ________ measure is similar to the yield to maturity measure for bonds.
a.
b.
c.
d.
NPV
IRR
MIRR
payback
8. The decision rule for net present value declares that a project is acceptable if ______.
a.
b.
c.
d.
it pays back within a specified time period
the rate of return is greater than the firm’s cost of capital
the present value of the cash inflows exceeds the initial cash outflow
all of the statements above are true
9. Corporate bond yields are higher than similar maturity government bond yields due to ______.
a.
b.
c.
d.
higher overall tax rates on corporate bonds than on government bonds
Interest rates are deductible as expenses for tax purposes
they include a sinking fund feature
greater risk on the part of corporate bonds
10. Empirical evidence supports the notion that U.S. stock markets are generally _________ form
efficient.
a.
b.
c.
d.
weak
semi-strong
strong
The studies have shown mixed results.
11. The ________ is a regulatory document filed with the SEC that describes the details of the IPO
and is meant to help investors make informed decisions.
a.
b.
c.
d.
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red herring
prospectus
indenture
debenture
BAM 513 Financial Management
Unit 3 Examination
12. Which of the following interest rates would be inappropriate for use as a base rate for a
variable rate bond?
a.
b.
c.
d.
the prime rate
LIBOR
a rate determined by the bond issuer’s board of directors
the 10-year Treasury bond rate
13. Which of the following statements is NOT true?
a. Investments rated below BBB- are known as high quality bonds.
b. Investment grade securities should include those with a bond rating of AA.
c. A “fallen angel” is a bond that at one time was an investment grade security, but whose
bond ratings has subsequently dropped.
d. Another colorful term for non-investment grade bonds is “junk bonds.”
14. The least frequently issued capital financial instruments listed herein are ______.
a.
b.
c.
d.
preferred shares
common shares
bonds
all these instruments are issued in similar magnitude
15. The ________ feature found with many issues of preferred stock requires that all current
and past due preferred dividends must be paid prior to any dividend payout to common
shareholders.
a.
b.
c.
d.
cumulative
participating
convertible
historical
16. Firms must make regular payments to ________ but are under no contractual obligation to pay
dividends to ________.
a.
b.
c.
d.
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common stockholders; preferred stockholders
preferred stockholders; bondholders
bondholders; common stockholders
common stockholders, bondholders
BAM 513 Financial Management
Unit 3 Examination
17. ________ is a measure of dispersion and is one way of measuring the risk of securities and
portfolios.
a.
b.
c.
d.
Diversification
Expected return
Standard deviation
Statistics
18. Another name for market risk is ______.
a.
b.
c.
d.
systematic risk
standard deviation
unsystematic risk
total risk
19. If a firm has publicly traded debt then the yield to maturity is approximately the same as
______.
a.
b.
c.
d.
the
the
the
the
after-tax cost of debt
before-tax cost of debt
10-year Treasury bond rate
WACC
20. If a firm increases the amount of debt that it has this could lead to an increase in ______.
a.
b.
c.
d.
financial risk
the cost of equity
both the cost of equity and the financial risk
none of the above
21. ________ represent current investor expectations about a firm whereas ________ are
representations of historical costs.
a.
b.
c.
d.
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Book values; market values
Market values; book values
Regulators; investment bankers
Common equity holders; bondholders
BAM 513 Financial Management
Unit 3 Examination
22. A firm with a beta of 1.0 and when held in a well-diversified portfolio should be considered to
have ________ risk than the market portfolio.
a.
b.
c.
d.
less
neither more nor less
more
There is not enough information to answer this question.
23. Transit Design Inc. recently paid a $1.00 dividend, has a beta of 0.75, has determined that
the market risk premium is 10% and the current risk-free rate is 4%. What is the firm’s
required return on equity?
a.
b.
c.
d.
14.00%
14.50%
11.50%
8.50%
24. If a firm does not have publicly traded debt and therefore does not have a yield to maturity as
an estimate for its cost of debt, a common practice is to estimate the cost of debt by adding a
premium to the rate on ______.
a.
b.
c.
d.
the cost of accounts payable
equity
long-term government bonds
collateralized debt obligations
25. All else being equal, investors “like” ________ and “dislike” ________.
a.
b.
c.
d.
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risk; return
return; risk
standard deviation; risk
diversification; return

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