1) Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011, appear
below.
Estimate FM’s after-tax cost of equity capital.
A.4.50%
B.6.92%
C.7.93%
D.12.20%
E.17.48%
2) Which one of the following relates to a negative change in net working capital?
A.Increase in the inventory level
B.Sale of net fixed assets
C.Purchase of net fixed assets
D.Increase in current assets and decrease in current liabilities for the period
E.Increase in current liabilities with no change in current assets for the period
3) Which one of the following accurately orders the rate of return on financial securities
from highest to lowest over most of recorded market history (the 1900-2010 period)?
A.Short-term government bills, long-term corporate bonds, long-term government
bonds, common stocks
B.Long-term corporate bonds, long-term government bonds, common stocks,
short-term government bills
C.Common stocks, long-term government bonds, long-term corporate bonds, short-term
government bills
D.Common stocks, long-term corporate bonds, long-term government bonds,
short-term government bills
E.Long-term corporate bonds, common stocks, short-term government bills, long-term
government bonds
4) Which one of the following statements is correct?
A.If the debt-to-assets ratio is greater than 0.50, then the debt-to-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 assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio
D.To realize the best risk and reward profile, financial leverage should be maximized
E.None of the above is correct
5) Claus Enterprises has 174,000 shares of common stock outstanding at a current price
of $46 a share. The firm also has two bond issues outstanding. The first bond issue has
a total face value of $250,000, pays 7.7 percent interest annually, and currently sells for
102.5 percent of face value. The second bond issue consists of 5,000 bonds that are
selling for $993 each. These bonds pay 6.5 percent interest annually and mature in 8
years. The tax rate is 34 percent. What is the capital structure weight of the firm’s
common stock?
A.47.78 percent
B.51.39 percent
C.55.50 percent
D.60.52 percent
E.71.86 percent
6) Fischer’s Furniture sells 2,400 sofas a year at an average price per sofa of $1,250.
The carrying cost per unit is $11.60. The company orders 80 sofas at a time and has a
fixed order cost of $52 per order. The sofas are sold out before they are restocked. What
is the economic order quantity?
A.147 sofas
B.162 sofas
C.171 sofas
D.188 sofas
E.211 sofas
7) Last year, a firm earned $31,200 in net income on sales of $217,600. The company
paid $7,500 in dividends. What is the dividend payout ratio?
A.3.45 percent
B.4.71 percent
C.14.34 percent
D.22.85 percent
E.24.04 percent
8) To estimate Missed Places, Inc.’s (MP) external financing needs, the CFO needs to
figure out how much equity her firm will have at the end of next year. At the end of the
most recent fiscal year, MP’s retained earnings were $158,000. The Controller has
estimated that over the next year, gross profits will be $360,700, earnings after tax will
total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained
earnings at the end of next year?
A.$169,000
B.$170,400
C.$181,400
D.$506,300
E.$518,700
9) Cookies and More has 8,000 shares of stock outstanding at a market price of $13.60
per share. What will the price per share be after the firm declares a 10 percent stock
dividend? Ignore taxes and market imperfections.
A.$12.24
B.$12.36
C.$13.60
D.$14.96
E.$15.00
10) On which one of the following dates is the principal amount of a bond repaid?
A.Coupon date
B.Issue date
C.Discount date
D.Maturity date
E.Face date
11) A call provision grants the bond issuer the:
A.right to contact each bondholder to determine if he or she would like to extend the
term of his or her bonds
B.option to exchange the bonds for equity securities
C.right to automatically extend the bond’s maturity date
D.right to repurchase the bonds on the open market prior to maturity
E.option of repurchasing the bonds prior to maturity at a pre-specified price
12) Which one of the following is the length of time that a retailer owes its supplier for
an inventory purchase?
A.Inventory period
B.Accounts receivable period
C.Accounts payable period
D.Operating cycle
E.Cash cycle
13) Which one of the following is a special post office mailbox that is used to speed up
the collection of accounts receivable payments?
A.Separation box
B.Cash box
C.Concentration account
D.Lockbox
E.Float box
14) The average net income of a project divided by the project’s average book value is
referred to as the project’s:
A.required return
B.market rate of return
C.internal rate of return
D.average accounting return
E.discounted rate of return
15) What is the name given to a subsidiary of a firm that exists solely to handle the
credit functions of the parent company?
A.Internal credit organization
B.Bank
C.Credit association
D.Captive finance company
E.Credit union
16) Which one of the following is an example of a direct bankruptcy cost?
A.Operating at a debt-equity ratio that is less than the optimal ratio
B.Reducing the dividend payout ratio as a means of increasing a firm’s equity
C.Forgoing a positive net present value project to conserve current cash
D.Incurring legal fees for the preparation of bankruptcy filings
E.Losing a key customer due to concerns over a firm’s financial viability
17) Which one of the following states that the difference in interest rates between two
countries is equal to the percentage difference between the forward exchange rate and
the spot exchange rate?
A.Arbitrage equilibrium
B.Relative purchasing power parity
C.Absolute purchasing power parity
D.Interest rate parity
E.Cross rate parity
18) The sustainable growth rate:
A.assumes there is no external financing of any kind
B.assumes no additional long-term debt is available
C.assumes the debt-equity ratio is constant
D.assumes the debt-equity ratio is 1.0
E.assumes all income is retained by the firm
19) Great Lakes Packing has two bond issues outstanding. The first issue has a coupon
rate of 9 percent, matures in 3 years, has a total face value of $6 million, and is quoted
at 108 percent of face value. The second issue has a 7.5 percent coupon, matures in 16
years, has a total face value of $18 million, and is quoted at 97 percent of face value.
Both bonds pay interest semiannually. What is the firm’s weighted average aftertax cost
of debt if the tax rate is 35 percent?
A.4.78 percent
B.5.12 percent
C.5.63 percent
D.5.95 percent
E.6.08 percent
20) Bill just financed a used car through his credit union. His loan requires payments of
$275 a month for 5 years. Assuming that all payments are paid timely, his last payment
will pay off the loan in full. What type of loan does Bill have?
A.Amortized
B.Complex
C.Pure discount
D.Lump sum
E.Interest-only
21) Which one of the following terms applies to a bond that initially sells at a deep
discount and pays no interest payments?
A.Callable
B.Income
C.Zero coupon
D.Convertible
E.Tax-free
22) For the past six years, the price of Slate Rock stock has been increasing at a rate of
8.6 percent a year. Currently, the stock is priced at $47 a share and has a required return
of 14 percent. What is the dividend yield?
A.1.20 percent
B.2.87 percent
C.3.39 percent
D.4.28 percent
E.5.40 percent
23) A 6 percent bond has a yield to maturity of 6.5 percent. The bond matures in 7
years, has a face value of $1,000, and pays semiannual interest payments. What is the
amount of each coupon payment?
A.$30.00
B.$32.50
C.$60.00
D.$62.50
E.$65.00
24) You want to borrow $36,000 from your local bank to buy a new sailboat. You can
afford to make monthly payments of $750, but no more. Assuming monthly
compounding, what is the highest rate you can afford on a 60-month APR loan?
A.8.90 percent
B.8.95 percent
C.9.00 percent
D.9.15 percent
E.9.20 percent
25) A portfolio has an expected return of 12.3 percent. This portfolio contains two
stocks and one risk-free security. The expected return on stock X is 9.7 percent and on
stock Y it is 17.7 percent. The risk-free rate is 3.8 percent. The portfolio value is
$78,000 of which $18,000 is the risk-free security. How much is invested in stock X?
A.$18,600
B.$19,667
C.$21,375
D.$22,204
E.$24,800
26) Which one of the following indicators offers the best assurance that a project will
produce value for its owners?
A.PI equal to zero
B.Negative rate of return
C.Positive AAR
D.Positive IRR
E.Positive NPV
27) Which one of the following statements is correct concerning the taxation of
dividends and capital gains?
A.Seventy percent of capital gains derived from stock investments are tax exempt for
corporate investors
B.Dividends are a form of tax-exempt income for individual investors
C.All investors are subject to the same tax rate on dividend income
D.Individual investors can defer taxation on both dividends and capital gains
E.As of 2003, individual investors pay a 15 percent tax on both dividends and capital
gains
28) The Bread Basket needs to raise $38 million to expand its operations nationally. The
company will sell new shares of common stock using a general cash offering. The
underwriters charge a 7.65 percent spread, the administrative costs are $395,000, and
the offer price is $26 per share. How many shares of stock must be sold for The Bread
Basket to receive the total funds it desires?
A.1,599,059 shares
B.1,638,311 shares
C.1,647,222 shares
D.1,814,141 shares
E.1,833,333 shares
29) A project has an initial requirement of $261,000 for fixed assets and $27,000 for net
working capital. The fixed assets will be depreciated to a zero book value over the
4-year life of the project and have an estimated salvage value of $78,000. All of the net
working capital will be recouped at the end of the project. The annual operating cash
flow is $96,200 and the discount rate is 13 percent. What is the project’s net present
value if the tax rate is 35 percent?
A.$42,011
B.$43,333
C.$45,799
D.$47,880
E.$47,919
30) What is the advertisement, commonly found in financial newspapers, that
announces a public offering of securities and provides the name of the underwriters
called?
A.Prospectus
B.Red herring
C.Tombstone
D.GREEN Shoe
E.Underwriter’s ad
31) Tree Farms, Inc. currently has 45,000 shares of stock outstanding and no debt. The
price per share is $17.50. The firm is considering borrowing funds at 7.5 percent
interest and using the proceeds to repurchase 3,000 shares of stock. Ignore taxes. How
much is the firm borrowing?
A.$52,500
B.$75,000
C.$110,500
D.$125,000
E.$135,000
32) Which of the following combinations is assured to decrease the interest rate
sensitivity of a bond?
A.Increase in both the time to maturity and the coupon rate
B.Increase in the time to maturity and a decrease in the coupon rate
C.Decrease in both the time to maturity and the coupon rate
D.Decrease in the time to maturity and an increase in the coupon rate
E.A decrease in the time to maturity and an increase in the face value
33) When is a firm insolvent from an accounting perspective?
A.When the firm is unable to meet its financial obligations in a timely manner
B.When the firm’s debt exceeds the value of the firm’s equity
C.When the firm has a negative net worth
D.When the firm’s revenues cease
E.When the market value of the firm’s equity equals zero
34) What is the group of underwriters called who share both the risks and the marketing
responsibilities for a securities offering?
A.Syndicate
B.Underwriting cartel
C.Firm commitment group
D.Dutch auction group
E.Venture capitalists
35) An all-equity firm has a return on assets of 15.3 percent. The firm is considering
converting to a debt-equity ratio of 0.30. The pre-tax cost of debt is 8.1 percent.
Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital
structure?
A.15.57 percent
B.16.28 percent
C.16.67 percent
D.17.46 percent
E.18.19 percent
36) Morrison Motors has total equity of $289,100 and net income of $64,500. The
debt-equity ratio is 0.45 and the total asset turnover is 1.6. What is the profit margin?
A.3.10 percent
B.5.23 percent
C.5.67 percent
D.8.21 percent
E.9.62 percent
37) New Century Products is a company that was founded last year. While the outlook
for the company is positive, it currently has negative earnings. If you wanted to
measure the progress of this firm, which one of the following ratios would probably be
best to monitor given the firm’s current situation?
A.Price-sales ratio
B.Market-to-book ratio
C.Profit margin
D.ROE
E.ROA
38) The stated interest rate is the interest rate expressed:
A.as if it were compounded one time per year
B.as the quoted rate compounded by 12 periods per year
C.in terms of the rate charged per day
D.in terms of the interest payment made each period
E.in terms of an effective rate
39) The balance sheet of a firm shows beginning net fixed assets of $348,200 and
ending net fixed assets of $371,920. The depreciation expense for the year is $46,080
and the interest expense is $11,460. What is the amount of the net capital spending?
A.-$22,360
B.-$4,780
C.$23,720
D.$58,340
E.$69,800
40) Explain the differences between total risk, unsystematic risk, and systematic risk.
Identify which risk is measured by standard deviation and which is measured by beta.
41) How can a firm determine if its level of liquidity is appropriate?
42) You are trying to compare the financial performance of your firm to that of similar
firms. What are some of the key problems you might encounter in doing this
comparison?
43) Assume a firm follows a policy of using its weighted average cost of capital as the
required return for all of its proposed projects. Evaluate this policy. How will this policy
affect the overall risk level of the firm over time?
44) There are regulations that prohibit “insider trading”, which is the use of non-public
information about a security to earn abnormal profits from trading that security. Which
form of market efficiency would make these laws unnecessary? Explain why.
45) What is the significance of the slope of the security market line? Should investors
prefer a steeper slope or a flatter slope?
46) You are having a discussion with one of your classmates on dividend policy. Your
classmate states that dividend policy is totally irrelevant. Write a response to this
statement justifying that in the real-world dividend policy does matter.