125.230 Business Finance Mock Exam Questions
and Answers 2024-2025
Which of the following is NOT true concerning corporate governance within a firm?
A. It defines the rights and responsibilities of the key corporate participants.
B. It sets the rules and procedures for making major corporate decisions.
C. It identifies the structure for setting objectives and strategic planning.
D. It establishes procedures for monitoring firm performance.
E. It is influenced more by individual investors than by institutional investors.
E
The New Zealand tax treatment regarding the sale of existing business assets which are sold for more
than the initial purchase price of the asset results in:
A. no tax benefit or liability.
B. a tax benefit.
C. recovered depreciation and capital gain taxed as ordinary income.
D. recovered depreciation taxed as ordinary income and no capital gain tax.
E. None of the above is correct.
D
What type of firm is characterized by a heavy reliance on retained earnings to take advantage of
profitable projects and therefore payment of only a small percentage of its earnings as dividends?
A. Growth firm
B. Stable firm
C. Cyclical firm
D. Mature firm
,E. All of the above are correct.
A
Which of the following statements is true?
A. If a stock has a beta equal to 1.0, its required rate of return will be unaffected by changes in the
market risk premium.
B. The slope of the security market line is beta.
C. A stock with a negative beta must in theory have a negative required return.
D. If a stock's beta doubles, its required rate of return must also double.
E. The beta coefficient of a stock is normally found by regressing past returns on a stock against past
market returns.
E
You plan to invest 75% of your funds in Heebie Ltd shares and 25% in Jeebie Ltd shares. The expected
return for Heebie is 10% and its standard deviation of
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returns is 5%. The expected return for Jeebie is 12% and its standard deviation of returns is 6%. The
correlation of the returns on the two assets is 0.75. The expected standard deviation of the portfolio is:
A. 6.00%
B. 5.50%
C. 5.15%
D. 5.04%
E. 4.97%
E
σp = √wA2σA2 + wB2σB2 + 2wAwBrA,BσAσB
σp = √0.7520.052 + 0.2520.062 + 2×0.75×0.25×0.75×0.05×0.06 = 0.0497
,The proposition that borrowers are willing to pay a higher rate for long term financing best reflects
which theory of term structure of interest rates?
A. expectations theory.
B. habitat theory.
C. liquidity preference theory.
D. market segmentation theory.
E. efficient markets theory.
C
The market price of outstanding bond issues often varies from par because:
A. old bonds sell for less than new bonds.
B. new bonds sell for less than old bonds.
C. the coupon rate has changed.
D. the maturity date has changed.
E. the market rate of interest has changed.
E
Zumwalt Ltd is expected to pay a dividend of $2.25 per share at the end of the year, and that dividend is
expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.15, the market
risk premium is 5.5%, and the risk-free rate is 4%. What is the company's current stock price?
A. $42.25
B. $43.31.
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C. $44.39
D. $45.50
E. $46.64
A
, rj = RF + β(rm - RF)
= .04 + 1.15(0.055) = .1033 = 10.33%
P0 = D1 /r - g
P0 = 2.25/ 0.1033 - .05=$42.25
Which of the following statements is true?
A. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred
stock dividends are tax deductible.
B. If all else is equal, an increase in a company's stock price will increase its cost of retained earnings.
C. If all else is equal, an increase in a company's stock price will increase its cost of new common stock.
D. Since the money is already available, the cost of retained earnings is usually much lower than the
after-tax cost of debt.
E. Higher flotation costs increase the cost of new common stock, and that leads to an increase in a
company's WACC.
E
Johnson Ltd optimal capital structure is 40% debt, 10% preferred stock, and 50% common stock. The
company can issue bonds at a yield to maturity of 8.4%, the cost of preferred stock is 9%, and the
company's common stock currently sells for $30 per share. The company's dividend is currently $2.00 a
share (D0 = $2.00), and is expected to grow at a constant rate of 6% per year. Assume that the flotation
cost on debt and preferred stock is zero, and no new stock will be issued. The company's tax rate is 30%.
What is the company's weighted average cost of capital?
A. 8.33%
B. 9.32%
C. 9.79%
D. 9.99%
E. 13.15%
C
and Answers 2024-2025
Which of the following is NOT true concerning corporate governance within a firm?
A. It defines the rights and responsibilities of the key corporate participants.
B. It sets the rules and procedures for making major corporate decisions.
C. It identifies the structure for setting objectives and strategic planning.
D. It establishes procedures for monitoring firm performance.
E. It is influenced more by individual investors than by institutional investors.
E
The New Zealand tax treatment regarding the sale of existing business assets which are sold for more
than the initial purchase price of the asset results in:
A. no tax benefit or liability.
B. a tax benefit.
C. recovered depreciation and capital gain taxed as ordinary income.
D. recovered depreciation taxed as ordinary income and no capital gain tax.
E. None of the above is correct.
D
What type of firm is characterized by a heavy reliance on retained earnings to take advantage of
profitable projects and therefore payment of only a small percentage of its earnings as dividends?
A. Growth firm
B. Stable firm
C. Cyclical firm
D. Mature firm
,E. All of the above are correct.
A
Which of the following statements is true?
A. If a stock has a beta equal to 1.0, its required rate of return will be unaffected by changes in the
market risk premium.
B. The slope of the security market line is beta.
C. A stock with a negative beta must in theory have a negative required return.
D. If a stock's beta doubles, its required rate of return must also double.
E. The beta coefficient of a stock is normally found by regressing past returns on a stock against past
market returns.
E
You plan to invest 75% of your funds in Heebie Ltd shares and 25% in Jeebie Ltd shares. The expected
return for Heebie is 10% and its standard deviation of
Page 3 of 26
returns is 5%. The expected return for Jeebie is 12% and its standard deviation of returns is 6%. The
correlation of the returns on the two assets is 0.75. The expected standard deviation of the portfolio is:
A. 6.00%
B. 5.50%
C. 5.15%
D. 5.04%
E. 4.97%
E
σp = √wA2σA2 + wB2σB2 + 2wAwBrA,BσAσB
σp = √0.7520.052 + 0.2520.062 + 2×0.75×0.25×0.75×0.05×0.06 = 0.0497
,The proposition that borrowers are willing to pay a higher rate for long term financing best reflects
which theory of term structure of interest rates?
A. expectations theory.
B. habitat theory.
C. liquidity preference theory.
D. market segmentation theory.
E. efficient markets theory.
C
The market price of outstanding bond issues often varies from par because:
A. old bonds sell for less than new bonds.
B. new bonds sell for less than old bonds.
C. the coupon rate has changed.
D. the maturity date has changed.
E. the market rate of interest has changed.
E
Zumwalt Ltd is expected to pay a dividend of $2.25 per share at the end of the year, and that dividend is
expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.15, the market
risk premium is 5.5%, and the risk-free rate is 4%. What is the company's current stock price?
A. $42.25
B. $43.31.
Page 4 of 26
C. $44.39
D. $45.50
E. $46.64
A
, rj = RF + β(rm - RF)
= .04 + 1.15(0.055) = .1033 = 10.33%
P0 = D1 /r - g
P0 = 2.25/ 0.1033 - .05=$42.25
Which of the following statements is true?
A. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred
stock dividends are tax deductible.
B. If all else is equal, an increase in a company's stock price will increase its cost of retained earnings.
C. If all else is equal, an increase in a company's stock price will increase its cost of new common stock.
D. Since the money is already available, the cost of retained earnings is usually much lower than the
after-tax cost of debt.
E. Higher flotation costs increase the cost of new common stock, and that leads to an increase in a
company's WACC.
E
Johnson Ltd optimal capital structure is 40% debt, 10% preferred stock, and 50% common stock. The
company can issue bonds at a yield to maturity of 8.4%, the cost of preferred stock is 9%, and the
company's common stock currently sells for $30 per share. The company's dividend is currently $2.00 a
share (D0 = $2.00), and is expected to grow at a constant rate of 6% per year. Assume that the flotation
cost on debt and preferred stock is zero, and no new stock will be issued. The company's tax rate is 30%.
What is the company's weighted average cost of capital?
A. 8.33%
B. 9.32%
C. 9.79%
D. 9.99%
E. 13.15%
C
