What is the amount of the cash flow from investment activity for 2012?
A. $18,100
B. $24,800
C. $29,300
D. $32,000
E. $39,400
Answer:
Recently, you discovered a putable income bond that is convertible. If you purchase this
bond, you will have the right to do which of the following?
I. force the issuer to repurchase the bond prior to maturity
II. choose when you wish to receive interest payments
III. convert the bond into a TIPS
IV. convert the bond into equity shares
A. I and III only
B. I and IV only
C. II and III only
D. III and IV only
E. I, II, and IV only
Answer:
Which of the following values will be equal to zero when a firm is producing the
accounting break-even level of output?
I. operating cash flow
II. internal rate of return
III. net income
IV. payback period
A. I only
B. III only
C. II and III only
D. I and IV only
E. I, II, and III only
Answer:
The Du Pont identity can be used to help managers answer which of the following
questions related to a firm’s operations?
I. How many sales dollars has the firm generated per each dollar of assets?
II. How many dollars of assets has a firm acquired per each dollar in shareholders’
equity?
III. How much net profit is a firm generating per dollar of sales?
IV. Does the firm have the ability to meet its debt obligations in a timely manner?
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III and IV only
E. I, II, III, and IV
Answer:
The dollar amount of a bond’s par value that is exchangeable for one share of stock is
called the:
A. conversion premium.
B. par value.
C. conversion value.
D. conversion price.
E. conversion ratio.
Answer:
Which one of the following inventory items is probably the most liquid?
A. a custom made set of kitchen cabinets
B. metal cabinets for dishwashers
C. wheat stored in a grain silo
D. a customized drilling press
E. a partially built modular home
Answer:
Morris Motors just purchased some MACRS 5-year property at a cost of $216,000.
Which one of the following will correctly give you the book value of this equipment at
the end of year 2?
A. $216,000/(1 + 0.20 + 0.32)
B. $216,000 × (1 – 0.20 – 0.32)
C. $216,000 × (0.20 + 0.32)
D. [$216,000 × (1 – 0.20)] × (1 – 0.32)
E. $216,000/[(1 + 0.20)(1 + 0.32)]
Answer:
How many dollars of sales are being generated from every dollar of net fixed assets?
(Use 2012 values.)
A. $0.88
B. $1.87
C. $2.33
D. $2.59
E. $3.09
Answer:
Suppose a financial manager buys call options on 45,000 barrels of oil with an exercise
price of $31 per barrel. She simultaneously sells a put option on 45,000 barrels of oil
with the same exercise price of $31 per barrel. Her net profit per barrel is _____ if the
price per barrel is $29 and _____ if the price per barrel is $35.
A. -$4; $2
B. -$2; $0
C. $0; -$2
D. $0; $2
E. -$2; $4
Answer:
Sensitivity analysis determines the:
A. range of possible outcomes given that most variables are reliable only within a stated
range.
B. degree to which the net present value reacts to changes in a single variable.
C. net present value range that can be realized from a proposed project.
D. degree to which a project relies on its fixed costs.
E. ideal ratio of variable costs to fixed costs for profit maximization.
Answer:
You own a classic automobile that is currently valued at $150,000. If the value
increases by 6.5 percent annually, how much will the automobile be worth ten years
from now?
A. $244,035.00
B. $251,008.17
C. $270,013.38
D. $281,570.62
E. $291,480.18
Answer:
Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units,
plus or minus 2 percent. The expected variable cost per unit is $11 and the expected
fixed costs are $287,000. The fixed and variable cost estimates are considered accurate
within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax
rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent.
What is the net income under the worst case scenario?
A. $8,578
B. $18,228
C. $15,846
D. $20,704
E. $24,696
Answer:
Assume the euro is selling in the spot market for $1.33. Simultaneously, in the 3-month
forward market the euro is selling for $1.35. Which one of the following statements
correctly describes this situation?
A. The spot market is out of equilibrium.
B. The forward market is out of equilibrium.
C. The dollar is selling at a premium relative to the euro.
D. The euro is selling at a premium relative to the dollar.
E. The euro is expected to depreciate in value.
Answer:
The Harvester collects 25 percent of sales in the month of sale, 60 percent of sales in
the month following the month of sale, and 15 percent of sales in the second month
following the month of sale. During the month of April, the firm will collect:
A. 60 percent of February sales.
B. 15 percent of April sales.
C. 60 percent of March sales.
D. 15 percent of March sales.
E. 25 percent of February sales.
Answer:
The Mish Mash Store has a beginning cash balance of $440 on March 1. The firm has
projected sales of $610 in February, $680 in March, and $740 in April. The cost of
goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the
month of sale. The accounts payable period is 30 days and the accounts receivable
period is 10 days. The firm has monthly cash expenses of $125. What is the projected
ending cash balance at the end of March? Assume every month has 30 days.
A. $461
B. $496
C. $507
D. $567
E. $621
Answer:
Consider a project with the following data: accounting break-even quantity = 29,000
units; cash break-even quantity = 16,250 units; life = 10 years; fixed costs = $203,000;
variable costs = $24 per unit; required return = 14 percent; depreciation = straight line.
Ignoring the effect of taxes, what is the financial break-even quantity?
A. 38,723 units
B. 39,201 units
C. 39,458 units
D. 39,624 units
E. 40,693 units
Answer:
The market rate of return is 11 percent and the risk-free rate of return is 3 percent.
Lexant stock has 3 percent less systematic risk than the market and has an actual return
of 12 percent. This stock:
A. is underpriced.
B. is correctly priced.
C. will plot below the security market line.
D. will plot on the security market line.
E. will plot to the right of the overall market on a security market line graph.
Answer:
Down Bedding has an unlevered cost of capital of 14 percent, a cost of debt of 7.8
percent, and a tax rate of 32 percent. What is the target debt-equity ratio if the targeted
cost of equity is 15.51 percent?
A. .24
B. .29
C. .36
D. .52
E. .71
Answer:
Theta measures an option’s:
A. intrinsic value.
B. volatility.
C. rate of time decay.
D. sensitivity to changes in the value of the underlying asset.
E. sensitivity to risk-free rate changes.
Answer:
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an
expected return of 13 percent and Stock Y with an expected return of 8 percent. Your
goal is to create a portfolio with an expected return of 12.4 percent. All money must be
invested. How much will you invest in stock X?
A. $800
B. $1,200
C. $4,600
D. $8,800
E. $9,200
Answer:
Wilderness Adventures specializes in back-country tours and resort management. Travel
Excitement specializes in making travel reservations and promoting vacation travel.
Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel
Excitement has an aftertax cost of capital of 11 percent. Both firms are considering
building wilderness campgrounds complete with man-made lakes and hiking trails. The
estimated net present value of such a project is estimated at $87,000 at a discount rate
of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either,
should accept this project?
A. Wilderness Adventures only
B. Travel Excitement only
C. both Wilderness Adventures and Travel Excitement
D. neither Wilderness Adventures nor Travel Excitement
E. cannot be determined without further information
Answer:
Public offerings of debt and equity must be registered with which one of the following?
A. New York Board of Governors
B. Federal Reserve
C. NYSE Registration Office
D. Securities and Exchange Commission
E. Market Dealers Exchange
Answer:
A proposed project has fixed costs of $9,800, depreciation expense of $2,550, and a
sales quantity of 2,100 units. The total variable costs are $5,607. What is the
contribution margin per unit if the projected level of sales is the accounting break-even
point?
A. $3.28
B. $4.07
C. $5.88
D. $6.16
E. $7.11
Answer:
Which one of the following statements is correct?
A. Funds received via automated clearinghouse transfers are available that day.
B. A depository transfer check is the most costly means of transferring funds into a cash
concentration account.
C. The means selected to transfer funds into a concentration account depends primarily
upon the size of the transfers.
D. Concentration accounts are used to transfer funds to lockbox locations as needed.
E. The most expedient means of transferring funds into a concentration account is a
wire transfer.
Answer:
Sunset United is analyzing a proposed project. The company expects to sell 15,000
units, plus or minus 4 percent. The expected variable cost per unit is $120 and the
expected fixed costs are $311,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 3 percent range. The depreciation expense is $74,000.
The tax rate is 35 percent. The sales price is estimated at $170 a unit, plus or minus 2
percent. What is the contribution margin per unit for a sensitivity analysis using a
variable cost per unit of $125?
A. $30
B. $45
C. $50
D. $24
E. $27
Answer:
Which one of the following obligates you only on the expiration date to sell an asset at
the strike price if the option is exercised?
A. American call
B. American put
C. European call
D. European put
E. European swap
Answer:
Which one of the following states that the current forward rate is an unbiased predictor
of the future spot exchange rate?
A. unbiased forward rates
B. uncovered interest rate parity
C. international Fisher effect
D. purchasing power parity
E. interest rate parity
Answer:
A market maker who acts as a dealer in one or more securities on the floor of the NYSE
is called a:
A. floor trader.
B. floor post.
C. specialist.
D. floor broker.
E. commission broker.
Answer:
Kaiser Marketing recently conducted a survey on behalf of Health Products. The
primary purpose of the survey was to illustrate to Health Products that it was relying on
results of previous studies that, according to Kaiser, were unreliable due to the wording
of the survey questions. To prove this point, Kaiser conducted a two-prong survey. In
the first prong, the survey questions were worded such that the answers tended to sound
positive. In the second prong, the survey questions were re-worded such that the
answers tended to convey a negative feeling. Both sets of survey questions should have
resulted in similar results as the information solicited was essentially identical.
However, the survey results varied significantly. This survey best illustrates which one
of the following?
A. mental accounting
B. overconfidence
C. self attribution bias
D. confirmation bias
E. frame dependence
Answer:
Which one of the following statements is correct concerning the lease versus buy
decision?
A. The lessor is primarily concerned with returning the asset at the end of the lease term
without incurring any additional charges.
B. The lessor is primarily concerned about the use of the asset.
C. If Dell Computer became a lessor of its own computers it would be engaging in
direct leasing.
D. A firm should always purchase, rather than lease, any asset that has a projected
positive salvage value at the end of the relevant period of use.
E. Lessors provide a source of financing for lessees.
Answer:
Inflation has remained low for the past three years but you have come to the conclusion
that trend is ending and inflation will increase significantly over the next 18 months.
Assume you have reached this conclusion prior to other investors reaching the same
conclusion. What adjustments should you make to your bond portfolio in light of your
conclusions?
Answer:
Pete is the CFO of Dexter International. He would like to increase the debt-equity ratio
of the firm but is concerned that the firm’s shareholders may not be willing to accept
additional financial leverage. Pete has come to you for advice. What is your
recommendation?
Answer:
Compensating balances are frequently a part of revolving lending arrangements with
banks, yet they add to the cost of financing for the borrower. Why, then, would
borrowers agree to such terms? What other types of alternative financing are available?
Answer:
Identify the four primary determinants of a firm’s growth and explain how each factor
could either add to or limit the growth potential of a firm.
Answer:
Nelson’s Landscaping Services just completed a pro forma statement using the
percentage of sales approach. The pro forma has a projected external financing need of
-$5,500. What are the firm’s options in this case?
Answer:
Provide an example of a managerial decision that illustrates each one of the following
behaviors:
Behavior: Overconfidence
Example:
Behavior: Affect heuristic
Example:
Behavior: Loss aversion
Example:
Answer:
How does the net present value (NPV) decision rule relate to the primary goal of
financial management, which is creating wealth for shareholders?
Answer:
What conditions are necessary for absolute purchasing power parity (PPP) to exist? Is it
realistic to believe PPP can exist within a country let alone across national borders?
Answer:
Draw the following two graphs, one above the other: In the top graph, plot firm value
on the vertical axis and total debt on the horizontal axis. Use this graph to illustrate the
value of a firm under M & M without taxes, M & M with taxes, and the static theory of
capital structure. On the lower graph, plot the WACC on the vertical axis and the
debt-equity ratio on the horizontal axis. Use this second graph to illustrate the value of
the firm’s WACC under M & M without taxes, M & M with taxes, and the static theory.
Briefly explain what the two graphs reveal about firm value and its cost of capital under
the three different theories.
Answer:
Explain how the floor and the ceiling prices for a convertible bond are determined.
Answer:
Describe the relationships that exist between the coupon rate, the yield to maturity, and
the current yield for both a discount bond and a premium bond.
Answer:
Why do financial managers need to understand the implications of both the internal and
the sustainable rates of growth?
Answer:
What are some “good” reasons for opting to lease rather than purchase an asset?
Answer:
A financial lease:
A.is generally called a capital lease by accountants.
B. requires the lessor to maintain the asset.
C. is a partially amortized lease.
D. is often called a single net lease.
E. can generally be cancelled without penalty.
Answer:
Explain what a zero-balance account is, how it is used, and how it affects cash
management.
Answer: