MBA 702 Final Exam Prep 2026/2027 | Questions & Correct
Answers | Graded A+
1. Describe how furnishing financial statements to lenders can be considered a
positive covenant.
Furnishing financial statements to lenders restricts the firm's ability to
incur additional debt.
Furnishing financial statements to lenders limits the firm's ability to pay
dividends.
Furnishing financial statements to lenders ensures transparency and
allows lenders to assess the firm's financial health.
Furnishing financial statements to lenders requires the firm to sell
assets.
2. What is the Geometric Average Return?
The Geometric Average Return is the total return divided by the
number of periods.
The Geometric Average Return is a measure of the average rate of
return of an investment over a specified period, calculated by
multiplying the returns and taking the nth root, where n is the
number of periods.
The Geometric Average Return is the simple average of returns over a
period.
The Geometric Average Return is a measure of risk associated with an
investment.
3. The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1
per share and a market value of $8 per share. The balance sheet shows
$10,000 in the common stock account, $60,000 in the capital in excess of par
account, and $94,300 in the retained earnings account. The firm just
, announced a 100 percent stock dividend. What will be the value of the
common stock account after the dividend?
$10,000
$15,000
$20,000
$11,000
$5,000
4. If a company decides to increase its debt ratio significantly, what effect
would this have on its cost of equity according to MM Proposition II?
The cost of equity would only increase if the firm also increases its
dividends.
The cost of equity would increase due to higher financial risk.
The cost of equity would remain unchanged regardless of the debt
ratio.
The cost of equity would decrease as the firm becomes more
leveraged.
5. Interpret the significance of having two risky securities in a portfolio that do
not provide diversification benefits.
It means that the risks associated with both securities are similar,
leading to no reduction in overall portfolio risk.
It suggests that the portfolio is well-diversified despite the securities
being risky.
It indicates that one security is a safe asset while the other is risky.
It implies that the expected returns of the portfolio will be maximized.
,6. What does MM Proposition I state about a firm's value in the absence of
taxes?
A firm's value is determined solely by its assets.
A firm's value increases with higher debt levels.
A firm's value is unaffected by its capital structure.
A firm's value is maximized with equity financing.
7. According to the clientele effect, firms can only boost their stock price:
if an unsatisfied clientele group exists.
by increasing the dividend payout ratio.
by setting their dividend to the level expected by the highest-
dividend-receiving satisfied clientele group.
by increasing their regular cash dividends.
by commencing dividend payments if they are a non-dividend-paying
firm.
8. A general rule for managers to follow is to establish a firm's capital structure
such that the firm's:
value is maximized.
cost of equity is minimized.
dividend payout is maximized.
assets are minimized.
bondholders are fully secured.
, 9. Which of the following categories has the highest volatility over the period
1926-2010:
U.S. Treasury Bills
Corporate bonds
US. government bonds
Large company stocks
Small company stocks
10. The Cameron Co. is paying a dividend of $.82 a share today. There are
120,000 shares outstanding with a par value of $1 per share. As a result of this
dividend, the:
retained earnings will decrease by $98,400.
common stock account will decrease by $98,400.
capital in excess of par value account will decrease by $21,600.
retained earnings will decrease by $120,000.
common stock account will increase by $120,000.
11. If an investor is considering two portfolios, one with a standard deviation of
5% and another with a standard deviation of 15%, how might this influence
their choice?
The investor may choose the portfolio with a 5% standard deviation
for lower risk.
The investor will choose the portfolio with a 15% standard deviation
for higher returns.
The investor is indifferent to the standard deviation of the portfolios.
The investor will select both portfolios equally.
Answers | Graded A+
1. Describe how furnishing financial statements to lenders can be considered a
positive covenant.
Furnishing financial statements to lenders restricts the firm's ability to
incur additional debt.
Furnishing financial statements to lenders limits the firm's ability to pay
dividends.
Furnishing financial statements to lenders ensures transparency and
allows lenders to assess the firm's financial health.
Furnishing financial statements to lenders requires the firm to sell
assets.
2. What is the Geometric Average Return?
The Geometric Average Return is the total return divided by the
number of periods.
The Geometric Average Return is a measure of the average rate of
return of an investment over a specified period, calculated by
multiplying the returns and taking the nth root, where n is the
number of periods.
The Geometric Average Return is the simple average of returns over a
period.
The Geometric Average Return is a measure of risk associated with an
investment.
3. The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1
per share and a market value of $8 per share. The balance sheet shows
$10,000 in the common stock account, $60,000 in the capital in excess of par
account, and $94,300 in the retained earnings account. The firm just
, announced a 100 percent stock dividend. What will be the value of the
common stock account after the dividend?
$10,000
$15,000
$20,000
$11,000
$5,000
4. If a company decides to increase its debt ratio significantly, what effect
would this have on its cost of equity according to MM Proposition II?
The cost of equity would only increase if the firm also increases its
dividends.
The cost of equity would increase due to higher financial risk.
The cost of equity would remain unchanged regardless of the debt
ratio.
The cost of equity would decrease as the firm becomes more
leveraged.
5. Interpret the significance of having two risky securities in a portfolio that do
not provide diversification benefits.
It means that the risks associated with both securities are similar,
leading to no reduction in overall portfolio risk.
It suggests that the portfolio is well-diversified despite the securities
being risky.
It indicates that one security is a safe asset while the other is risky.
It implies that the expected returns of the portfolio will be maximized.
,6. What does MM Proposition I state about a firm's value in the absence of
taxes?
A firm's value is determined solely by its assets.
A firm's value increases with higher debt levels.
A firm's value is unaffected by its capital structure.
A firm's value is maximized with equity financing.
7. According to the clientele effect, firms can only boost their stock price:
if an unsatisfied clientele group exists.
by increasing the dividend payout ratio.
by setting their dividend to the level expected by the highest-
dividend-receiving satisfied clientele group.
by increasing their regular cash dividends.
by commencing dividend payments if they are a non-dividend-paying
firm.
8. A general rule for managers to follow is to establish a firm's capital structure
such that the firm's:
value is maximized.
cost of equity is minimized.
dividend payout is maximized.
assets are minimized.
bondholders are fully secured.
, 9. Which of the following categories has the highest volatility over the period
1926-2010:
U.S. Treasury Bills
Corporate bonds
US. government bonds
Large company stocks
Small company stocks
10. The Cameron Co. is paying a dividend of $.82 a share today. There are
120,000 shares outstanding with a par value of $1 per share. As a result of this
dividend, the:
retained earnings will decrease by $98,400.
common stock account will decrease by $98,400.
capital in excess of par value account will decrease by $21,600.
retained earnings will decrease by $120,000.
common stock account will increase by $120,000.
11. If an investor is considering two portfolios, one with a standard deviation of
5% and another with a standard deviation of 15%, how might this influence
their choice?
The investor may choose the portfolio with a 5% standard deviation
for lower risk.
The investor will choose the portfolio with a 15% standard deviation
for higher returns.
The investor is indifferent to the standard deviation of the portfolios.
The investor will select both portfolios equally.
