1) A stock has a geometric average return of 14.6 percent and an arithmetic average return of 15.5 percent based on the last 33 years. What is the estimated average rate of return for the next 6 years based on Blume’s formula?
A.14.79 percent
B.14.96 percent
C.15.28 percent
D.15.36 percent
E.15.42 percent
Answer:
2) Historical returns support which one of the following statements?
A.Financial markets are highly inefficient as suggested by behavioral finance
B.Professional money managers tend to outperform the Vanguard 500 index fund about 55 percent of the time on average
C.The longer the time span, the more apt a professional money manager is to outperform an index fund, such as the S&P 500
D.Historical data supports the statement that arbitrage is unlimited and results in a totally efficient market
E.The financial markets appear to be efficient because, on average, they outperform professional money managers
Answer:
3) You purchase a bond with an invoice price of $1,460. The bond has a coupon rate of 7.5 percent, and there are 3 months to the next semiannual coupon date. What is the clean price of this bond?
A.$1,441.25
B.$1,452.17
C.$1,460.00
D.$1,467.83
E.$1,483.50
Answer:
4) A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today?
A.$987.00
B.$994.50
C.$1,002.00
D.$1,011.25
E.$1,022.50
Answer:
5) Long-run financial risk:
A.can frequently be hedged on a permanent basis
B.is best hedged on a division by division basis within a conglomerate
C.is related more to near-term transactions than to advancements in technology
D.generally results from changes in the underlying economics of a business
E.can generally be hedged such that the financial viability of a firm is protected
Answer:
6) Under European put-call parity, the present value of the strike price is equivalent to:
A.the current value of the stock minus the call premium
B.the market value of the stock plus the put premium
C.the present value of a government coupon bond with a face value equal to the strike price
D.a U.S. Treasury bill with a face value equal to the strike price
E.a risk-free security with a face value equal to the strike price and a coupon rate equal to the risk-free rate of return
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7) A business formed by two or more individuals who each have unlimited liability for all of the firm’s business debts is called a:
A.corporation
B.sole proprietorship
C.general partnership
D.limited partnership
E.limited liability company
Answer:
8) Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?
A.Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market
B.The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved
C.Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio
D.The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified
E.Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero
Answer:
9) Depreciation:
A.reduces both taxes and net income
B.increases the net fixed assets as shown on the balance sheet
C.reduces both the net fixed assets and the costs of a firm
D.is a noncash expense which increases the net income
E.decreases net fixed assets, net income, and operating cash flows
Answer:
10) What is the value of d2 given the following information on a stock?
A.0.1218
B.0.1225
C.0.1313
D.0.1335
E.0.1340
Answer:
11) Your current sales consist of 45 units per month at a price of $390 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $410 a unit. The monthly interest rate is 1.4 percent. What is the break-even default rate of the proposed switch?
A.3.55 percent
B.3.68 percent
C.4.29 percent
D.4.71 percent
E.4.88 percent
Answer:
12) East Side, Inc. has no debt outstanding and a total market value of $136,000. Earnings before interest and taxes, EBIT, are projected to be $12,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 27 percent higher. If there is a recession, then EBIT will be 55 percent lower. East Side is considering a $54,000 debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,000 shares outstanding. Ignore taxes. If the economy enters a recession, EPS will change by ____ percent as compared to a normal economy, assuming that the firm recapitalizes.
A.-70.97 percent
B.-63.15 percent
C.-58.08 percent
D.-42.29 percent
E.-38.87 percent
Answer:
13) Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 6 percent per year?
A.28.33 years
B.29.98 years
C.30.23 years
D.31.29 years
E.32.08 years
Answer:
14) The party who owns a leased asset is called the:
A.lessee
B.lessor
C.guarantor
D.trustee
E.manager
Answer:
15) You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price?
A.$106.67
B.$108.18
C.$182.80
D.$221.50
E.$228.47
Answer:
16) Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
A.at par
B.in registered form
C.in street form
D.as debentures
E.as callable
Answer:
17) Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days’ sales in receivables?
A.21.90 days
B.27.56 days
C.33.18 days
D.35.04 days
E.36.19 days
Answer:
18) Frank’s Auto Repair can purchase a new machine for $136,000. The machine has a 4-year life and can be sold at the end of year 4 for $12,000. Frank’s uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment can be leased for $35,900 a year. The firm can borrow money at 7.5 percent and has a 32 percent tax rate. The company does not expect to owe any taxes for at least the next 4 years due to net operating losses. What is the incremental annual cash flow for year 4 if the company decides to lease rather than purchase the equipment?
A.-$47,900
B.-$35,900
C.-$20,900
D.$15,900
E.$35,900
Answer:
19) The concept of homemade leverage is most associated with:
A.M & M Proposition I with no tax
B.M & M Proposition II with no tax
C.M & M Proposition I with tax
D.M & M Proposition II with tax
E.static theory proposition
Answer:
20) Big Falls Tours just paid a dividend of $1.55 per share. The dividends are expected to grow at 30 percent for the next 8 years and then level off to a 6 percent growth rate indefinitely. What is the price of this stock today given a required return of 15 percent?
A.$67.54
B.$69.90
C.$70.47
D.$71.07
E.$78.19
Answer:
21) You want to buy a bond from a dealer. Which one of the following prices will you pay?
A.call price
B.auction price
C.bid price
D.asked price
E.bid-ask spread
Answer:
22) Upper Crust Bakers just paid an annual dividend of $3.10 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 12 percent at the time of your purchase?
A.$37.33
B.$38.16
C.$38.83
D.$41.91
E.$42.00
Answer:
23) Which of the following are required for an acquisition to be considered tax-free?
I. continuity of equity interest
II. a business purpose, other than avoiding taxes, for the acquisition
III. payment in the form of equity shares for the acquired firm
IV. cash payment for the equity of the acquired firm
A.I and II only
B.II and III only
C.II and IV only
D.I, II, and III only
E.I, II, and IV only
Answer:
24) Wesleyville Markets stock is selling for $36 a share. The 9-month $40 call on this stock is selling for $2.23 while the 9-month $40 put is priced at $5.63. What is the continuously compounded risk-free rate of return?
A.0.87 percent
B.1.11 percent
C.1.38 percent
D.1.56 percent
E.2.02 percent
Answer:
25) Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does it can sell 375 of them. However, if the new spa is added, Class A sales are expected to decline to 225 units while the Class C sales are expected to decline to 200. The sales of the deluxe model will not be affected. Class A spas sell for an average of $12,000 each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000 each. The new mid-range spa will sell for $8,000. What is the value of the erosion?
A.$600,000
B.$1,200,000
C.$1,800,000
D.$2,400,000
E.$3,900,000
Answer:
26) Spot trades must be settled:
A.at the time of the trade
B.on the day following the trade date
C.within two business days
D.within three business days
E.within one week of the trade date
Answer:
27) A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. The current profit margin is 7 percent and the firm uses no external financing sources. What must the total asset turnover rate be?
A.0.87 times
B.0.90 times
C.1.01 times
D.1.15 times
E.1.86 times
Answer:
28) How many Euros can you get for $2,200 if one euro is worth $1.2762?
A.1,638.09
B.1,723.87
C.2,676.67
D.2,680.02
E.2,684.15
Answer:
29) A convertible bond has a face value of $5,000 and a conversion price of $80. The bond has a 6 percent coupon, pays interest semi-annually, and matures in 12 years. Similar bonds are yielding 7.5 percent. The current price of the stock is $42 per share. What is the conversion value of this bond?
A.$1,680
B.$2,575
C.$2,625
D.$4,651
E.$5,000
Answer:
30) Which one of the following statements concerning option payoffs is correct?
A.The buyer of a call profits when the exercise price exceeds the market price
B.The buyer of a call profits when the strike price exceeds the exercise price
C.A put will only be exercised if both the seller and the buyer can profit
D.Both the buyer and the seller profit when a call is exercised
E.The seller of a put incurs a loss when a put is exercised
Answer:
31) The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the:
A.operating cycle
B.inventory period
C.accounts receivable period
D.accounts payable period
E.cash cycle
Answer:
32) Which one of the following statements is correct concerning the foreign exchange market?
A.The trading floor of the foreign exchange market is located in London, England
B.The foreign exchange market is the world’s second largest financial market
C.The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the French franc, and the euro
D.Importers, exporters, and speculators are key players in the foreign exchange market
E.The U.S. created a communications network called SWIFT to facilitate currency trading
Answer:
33)
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Give some examples of ways in which manager’s goals can differ from those of shareholders. |
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34)
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Kristie owns a perpetuity which pays $12,000 at the end of each year. She comes to you and offers to sell you all of the payments to be received after the 10th year. Explain how you can determine the value of this offer. |
Answer: