1) A note is a(n):
A.unsecured debt that is generally payable within the next 10 years
B.formal type of loan that is secured by real estate
C.long-term debt secured by part, or all, of the assets of the borrower
D.debt that is secured by a borrower’s accounts receivable
E.written agreement that details the information relative to a bond issue
2) The possibility that more than one discount rate can cause the net present value of an
investment to equal zero is referred to as:
A.duplication
B.the net present value profile
C.multiple rates of return
D.the AAR problem
E.the dual dilemma
3) Ben & Terry’s has an expected return of 12.9 percent and a beta of 1.25 . The
expected return on the market is 11.7 percent. What is the risk-free rate?
A.3.87 percent
B.4.24 percent
C.4.61 percent
D.6.29 percent
E.6.92 percent
4) You expect the inflation rate to be 3.8 percent and the U.S. Treasury bill yield to be
3.9 percent for the next year. The risk premium on small-company stocks is 12.6
percent. What nominal rate of return do you expect to earn on small-company stocks
next year?
A.15.5 percent
B.16.5 percent
C.16.8 percent
D.9.2 percent
E.8.8 percent
5) Payback is best used to evaluate which type of projects?
A.Low-cost, short-term
B.High-cost, short-term
C.Low-cost, long-term
D.High-cost, long-term
E.Any size of long-term project
6) Chasteen, Inc. is considering an investment with an initial cost of $185,000 that
would be depreciated straight-line to a zero book value over the life of the project. The
cash inflows generated by the project are estimated at $76,000 for the first two years
and $30,000 for the following two years. What is the internal rate of return?
A.6.44 percent
B.6.94 percent
C.7.43 percent
D.7.55 percent
E.8.11 percent
7) Over the past four years, large-company stocks and U.S. Treasury bills have
produced the returns stated below. During this period, inflation averaged 2.8 percent.
Given this information, the average real rate of return on large-company stocks was ___
percent as compared to _____ percent for Treasury bills.
A.6.47; 0.92
B.6.47; 1.08
C.7.98; 0.92
D.7.98; 1.08
E.7.98; 1.22
8) Dover Wholesalers sells products exclusively to Benn Retailer. Benn Retailer buys
exclusively from Dover Wholesalers. Dover Wholesalers has a receivables period of 44
days, an inventory period of 8 days, and a payables period of 63 days. Benn Retailer has
an inventory period of 15 days, a receivables period of 22 days, and a payables period
of 44 days. Which one of the following statement is correct given this information?
A.Dover Wholesalers has a shorter operating cycle than does Benn Retailer
B.Benn Retailer has an operating cycle of 81 days
C.It takes Benn Retailer less time to collect payment on a sale than it does for the firm
to sell its inventory
D.Dover Wholesalers is financing 100 percent of Benn Retailer’s operating cycle
E.Dover Wholesalers has a cash cycle of 11 days
9) During the year, The Dalton Firm had sales of $3,210,000. Cost of goods sold,
administrative and selling expenses, and depreciation expenses were $2,540,000,
$389,000, and $112,000, respectively. In addition, the company had an interest expense
of $118,000 and a tax rate of 34 percent. (Ignore any tax loss carryback or carryforward
provisions.) What is its operating cash flow?
A.$263,660
B.$271,420
C.$273,330
D.$285,400
E.$287,700
10) Which one of the following best exemplifies unsystematic risk?
A.Unexpected economic collapse
B.Unexpected increase in interest rates
C.Unexpected increase in the variable costs for a firm
D.Sudden decrease in inflation
E.Expected increase in tax rates
11) Margie opened a used bookstore and is both the 100 percent owner and the store’s
manager. Which type of business entity does Margie own if she is personally liable for
all the store’s debts?
A.Sole proprietorship
B.Limited partnership
C.Corporation
D.Joint stock company
E.General partnership
12) The After Life has sales of $428,300, total assets of $389,100, and a profit margin
of 7.2 percent. What is the return on assets?
A.6.30 percent
B.6.54 percent
C.6.83 percent
D.7.01 percent
E.7.93 percent
13) Delfino’s expects to pay an annual dividend of $1.50 per share next year. What is
the anticipated dividend for year 5 if the firm increases its dividend by 2 percent
annually?
A.$1.50 (1.02)1
B.$1.50 (1.02)2
C.$1.50 (1.02)3
D.$1.50 (1.02)4
E.$1.50 (1.02)5
14) Which one of the following best defines cash concentration?
A.Combining all of a firm’s receipts into one bank deposit
B.Combining a week’s worth of cash receipts into one bank deposit
C.Combining cash from multiple banks into a firm’s main bank accounts
D.Using multiple lockboxes for collecting cash payments
E.Combining a firm’s bills so that disbursement checks are mailed only monthly
15) Which one of the following bonds is the least sensitive to changes in market interest
rates?
A.Zero coupon, 10 year
B.6 percent annual coupon, 10 year
C.Zero coupon, 4 year
D.8 percent annual coupon, 4 year
E.6 percent annual coupon, 4 year
16) Based on the period 1926-2011, what rate of return should you expect to earn over
the long-term if you are unwilling to bear risk?
A.Between 0 and 1 percent
B.Between 1 and 2 percent
C.Between 2 and 3 percent
D.Between 3 and 4 percent
E.Between 4 and 5 percent
17) Tim has been promoted and is now in charge of all fixed asset purchases. In other
words, Tim is in charge of:
A.capital structure management
B.asset allocation
C.risk management
D.capital budgeting
E.working capital management
18) A firm has $42,900 in receivables and $211,800 in total assets. The total asset
turnover rate is 1.40 and the profit margin is 5.2 percent. How long on average does it
take the firm to collect its receivables?
A.6.91 days
B.9.45 days
C.11.68 days
D.31.25 days
E.52.81 days
19) Which one of the following statements is correct?
A.All secondary markets are dealer markets
B.All secondary markets are broker markets
C.All stock trades between existing shareholders are secondary market transactions
D.All stock transactions are secondary market transactions
E.All Dutch auction sales are secondary market transactions
20) You’re trying to save to buy a new $210,000 Ferrari. You have $38,000 today that
can be invested at your bank. The bank pays 4.1 percent annual interest on its accounts.
How long will it be before you have enough to buy the car?
A.39.13 years
B.39.29 years
C.40.67 years
D.41.08 years
E.42.54 years
21) The owner of a trading license who trades on the floor of the NYSE for his or her
personal account is called a(n):
A.DMM
B.independent broker
C.floor trader
D.stand-alone agent
E.dealer
22) Kurt, who is a divisional manager, continually brags that his division’s required
return for its projects is 1 percent lower than the return required for any other division
of the firm. Which one of the following most likely contributes the most to the lower
rate requirement for Kurt’s division?
A.Kurt tends to overestimate the projected cash inflows on his projects
B.Kurt tends to underestimate the variable costs of his projects
C.Kurt has the most efficiently managed division
D.Kurt’s division is less risky than the other divisions
E.Kurt’s projects are generally financed with debt while the other divisions’ projects are
financed with equity
23) The net present value of an investment represents the difference between the
investment’s:
A.cash inflows and outflows
B.cost and its net profit
C.cost and its market value
D.cash flows and its profits
E.assets and liabilities
24) Which one of the following provides compensation to a bondholder when a bond is
not readily marketable at its full value?
A.Interest rate risk premium
B.Inflation premium
C.Liquidity premium
D.Taxability premium
E.Default risk premium
25) Baker’s Supply imposes a payback cutoff of 3.5 years for its international
investment projects. If the company has the following two projects available, should it
accept either of them?
A.Accept both Projects A and B
B.Accept Project A but not Project B
C.Accept Project B but not Project A
D.Both Project A and B are acceptable but you can select only one project
E.Reject both Projects A and B
26) A real rate of return is defined as a rate that has been adjusted for which one of the
following?
A.Inflation
B.Interest rate risk
C.Taxes
D.Liquidity
E.Default risk
27) Explain the relationships among the reward-to-risk ratio, risk-free rate of return,
market rate of return, market risk premium, beta, and the security market line.
28) Explain the concept of incremental cash flow analysis and its purpose.
29) For the period 1926-2011, small-company stocks had a risk premium of 12.6
percent. What does the term risk premium mean? Is the risk premium on these stocks
considered to be relatively high or relative low as compared to other investment
classes? Explain why.
30) In words, explain how the crossover rate is computed and why the net present value
profile is useful.
31) Consider an ordinary annuity and the variables that are related to that annuity. For
each of the following sets of variables, identify whether the relationship between the
two variables is direct (D) or inverse (I). Assume all other variables are held constant.