An analysis of the change in a project’s NPV when a single variable is changed is called
_____ analysis.
A. forecasting
B. scenario
C. sensitivity
D. simulation
E. break-even
The final decision on which one of two mutually exclusive projects to accept ultimately
depends upon which one of the following?
A. initial cost of each project
B. timing of the cash inflows
C. total cash inflows of each project
D. required rate of return
E. length of each project’s life
Assume the spot rate for the Japanese yen currently is 98.48 per $1 and the one-year
forward rate is 97.62 per $1. A risk-free asset in Japan is currently earning 2.5 percent.
If interest rate parity holds, approximately what rate can you earn on a one-year risk-
free U.S. security?
A. 1.63 percent
B. 2.11 percent
C. 3.37 percent
D. 3.96 percent
E. 4.01 percent
The operating cash flow for a project should exclude which one of the following?
A. taxes
B. variable costs
C. fixed costs
D. interest expense
E. depreciation tax shield
The Corner Hardware has succeeded in increasing the amount of goods it sells while
holding the amount of inventory on hand at a constant level. Assume that both the cost
per unit and the selling price per unit also remained constant. This accomplishment will
be reflected in the firm’s financial ratios in which one of the following ways?
A. decrease in the inventory turnover rate
B. decrease in the net working capital turnover rate
C. no change in the fixed asset turnover rate
D. decrease in the day’s sales in inventory
E. no change in the total asset turnover rate
Individuals who continually monitor the financial markets seeking mispriced securities:
A. earn excess profits over the long-term.
B. make the markets increasingly more efficient.
C. are never able to find a security that is temporarily mispriced.
D. are overwhelmingly successful in earning abnormal profits.
E. are always quite successful using only historical price information as their basis of
evaluation.
The aftertax cost of debt:
A. varies inversely to changes in market interest rates.
B. will generally exceed the cost of equity if the relevant tax rate is zero.
C. will generally equal the cost of preferred if the tax rate is zero.
D. is unaffected by changes in the market rate of interest.
E. has a greater effect on a firm’s cost of capital when the debt-equity ratio increases.
Which of the following are definite indicators of an accept decision for an independent
project with conventional cash flows?
I. positive net present value
II. profitability index greater than zero
III. internal rate of return greater than the required rate
IV. positive internal rate of return
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
Northern Warehouses wants to raise $11.4 million to expand its business. To
accomplish this, it plans to sell 40-year, $1,000 face value, zero-coupon bonds. The
bonds will be priced to yield 8.75 percent. What is the minimum number of bonds it
must sell to raise the $11.4 million it needs?
A. 210,411
B. 239,800
C. 254,907
D. 326,029
E. 350,448
On average, your firm receives 62 checks a day from customers. These checks, on
average, are worth $39.90 each and clear the bank in 1.5 days. In addition, your firm
disburses 38 checks a day with an average amount of $89.50. These checks clear your
bank in 2 days. What is the average amount of the collection float?
A. $2,473.80
B. $3,401.00
C. $3,710.70
D. $5,101.50
E. $6,802.00
The forward rate market is dependent upon:
A. current forward rates exceeding current spot rates.
B. current spot rates exceeding current forward rates over time.
C. current spot rates equaling current forward rates, on average, over time.
D. forward rates equaling the actual future spot rates on average over time.
You are working on a bid to build two apartment buildings a year for the next 5 years
for a local college. This project requires the purchase of $750,000 of equipment that
will be depreciated using straight-line depreciation to a zero book value over the
project’s life. The equipment can be sold at the end of the project for $325,000. You will
also need $140,000 in net working capital over the life of the project. The fixed costs
will be $628,000 a year and the variable costs will be $1,298,000 per building. Your
required rate of return is 14.5 percent for this project and your tax rate is 35 percent.
What is the minimal amount, rounded to the nearest $100, you should bid per building?
A. $1,423,700
B. $1,489,500
C. $1,733,000
D. $2,780,600
E. $3,465,900
Stacy owns 38 percent of The Town Centre. She has decided to retire and wants to sell
all of her shares in this closely held, all equity firm. The other shareholders have agreed
to have the firm borrow $650,000 to purchase her shares of stock. What is the total
market value of The Town Centre? Ignore taxes.
A. $1,710,526
B. $1,748,219
C. $1,771,089
D. $1,801,406
E. $1,808,649
Jones & Co. is funded by a group of individual investors for the sole purpose of
providing funding for individuals who are trying to convert their new ideas into viable
products. What is this type of funding called?
A. green shoe funding
B. tombstone underwriting
C. venture capital
D. red herring funding
E. life cycle capital
Which one of the following statements is correct?
A. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than
1.0.
B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than
1.5.
C. The debt-equity ratio can be computed as 1 plus the equity multiplier.
D. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E. An increase in the depreciation expense will not affect the cash coverage ratio.
Consider the following information on three stocks:
A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock
C. What is the expected risk premium on the portfolio if the expected T-bill rate is 3.8
percent?
A. 11.47 percent
B. 12.38 percent
C. 16.67 percent
D. 24.29 percent
E. 29.99 percent
The Motor Works is considering an expansion project with estimated annual fixed costs
of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated
sales price of $28 per unit. How many units must the firm sell to break-even on a cash
basis?
A. 6,521 units
B. 7,030 units
C. 7,510 units
D. 9,667 units
E. 10,842 units
Which one of the following is a correct method for computing the operating cash flow
of a project assuming that the interest expense is equal to zero?
A. EBIT + D
B. EBIT – T
C. NI + D
D. (Sales – Costs) × (1 – D) × (1- T)
E. (Sales – Costs) × (1 – T)
If you ignore taxes and costs, a stock repurchase will:
I. reduce the total assets of a firm.
II. decrease the earnings per share.
III. reduce the PE ratio more so than an equivalent stock dividend.
IV. reduce the total equity of a firm.
A. I and III only
B. I and IV only
C. II and IV only
D. I, III, and IV only
E. II, III, and IV only
Which of the following relationships apply to a par value bond?
I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. II, III, and IV only
Home Furnishings Express is expanding its product offerings to reach a wider range of
customers. The expansion project includes increasing the floor inventory by $430,000
and increasing its debt to suppliers by 70 percent of that amount. The company will also
spend $450,000 for a building contractor to expand the size of its showroom. As part of
the expansion plan, the company will be offering credit to its customers and thus
expects accounts receivable to rise by $90,000. For the project analysis, what amount
should be used as the initial cash flow for net working capital?
A. -$39,000
B. -$70,000
C. -$156,000
D. -$219,000
E. -$391,000
National Exporters deals strictly with two customers. The average amount each
customer pays per month along with the collection delay associated with each payment
is shown below. Given this information, what is the amount of the average daily
receipts? Assume that every month has 30 days.
A. $2,653.33
B. $3,006.33
C. $5,306.67
D. $7,811.67
E. $8,600.00
Rose’s Gift Shop borrows money on a short-term basis by pledging its inventory as
collateral. This is an example of a(n):
A. debenture.
B. line of credit.
C. banker’s acceptance.
D. working loan.
E. inventory loan.
Miller Motors has decided to sell 1,600 shares of stock through a Dutch auction. The
bids received are as follows:
How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all
transaction and flotation costs.
A. $30,400
B. $33,400
C. $33,600
D. $35,400
E. $38,600
Which form of business structure is most associated with agency problems?
A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company
The Farmer’s Market just paid an annual dividend of $5 on its stock. The growth rate in
dividends is expected to be a constant 5 percent per year indefinitely. Investors require a
13 percent return on the stock for the first 3 years, a 9 percent return for the next 3
years, a 7 percent return thereafter. What is the current price per share?
A. $212.40
B. $220.54
C. $223.09
D. $226.84
E. $227.50
Which one of the following represents the capital gains yield as used in the dividend
growth model?
A. D1
B. D1/P0
C. P0
D. g
E. g/P0
The owner of a put option has the _____ an asset at a fixed price during a stated period
of time.
A. right to sell
B. right to buy
C. obligation to sell
D. obligation to buy
E. obligation to trade
The Securities and Exchange Commission:
A. verifies the accuracy of the information contained in the prospectus.
B. verifies the accuracy of the information contained in the red herring.
C. examines the registration statement during the Green Shoe period.
D. is concerned only that an issue complies with all rules and regulations.
E. determines the final offer price once they have approved the registration statement.
The Timken Company has announced a rights offer to raise $25 million for a new
journal, the Journal of Financial Excess. This journal will review potential articles after
the author pays a nonrefundable reviewing fee of $2,500 per page. The stock currently
sells for $48 per share, and there are 2.6 million shares outstanding. The subscription
price is set at $43 per share. What is the ex-rights price per share?
A. $45.58
B. $47.09
C. $48.15
D. $48.80
E. $49.42
Alfredo has a non-cancelable, five year lease on an industrial-grade sewing machine for
stitching upholstery. For accounting purposes, this is considered to be a capital lease.
The life of the sewing machine is five years. Alfredo must pay all taxes and insurances
related to this lease. Which type of lease does Alfredo have on this sewing machine?
A. open
B. straight
C. operating
D. financial
E. tax-oriented