Limited liability companies are primarily designed to:
A. allow a portion of their owners to enjoy limited liability while granting the other
portion of their owners control over the entity.
B. provide the benefits of the corporate structure to foreign-based entities.
C. spin off a wholly owned subsidiary.
D. allow companies to reorganize themselves through the bankruptcy process.
E. provide limited liability while avoiding double taxation.
Which one of the following portfolios will have a beta of zero?
A. A portfolio that is equally as risky as the overall market
B. A portfolio that consists of a single stock
C. A portfolio comprised solely of U. S. Treasury bills
D. A portfolio with a zero variance of returns
E. No portfolio can have a beta of zero.
Which one of the following is most apt to cause a wise manager to increase a projects
cost of capital? Assume the firm is levered.
A. Management decides to issue new stock to finance the project.
B. The initial cash outlay requirement is reduced.
C. She learns the project is riskier than previously believed.
D. The aftertax cost of debt just decreased.
E. The projects life is shortened.
Which one of the following statements is correct?
A. An increase in the market value of preferred stock will increase a firms weighted
average cost of capital.
B. The cost of preferred stock is unaffected by the issuers tax rate.
C. Preferred stock is generally the cheapest source of capital for a firm.
D. The cost of preferred stock remains constant from year to year.
E. Preferred stock is valued using the capital asset pricing model.
You can exchange $1 for either Can$1.2512 or 100.37. What is the cross-rate between
the Canadian dollar and the Japanese yen?
A. Can$0.0125/ 1
B. Can$0.013723/ 1
C. Can$0.014582/ 1
D. Can$80.2191/ 1
E. Can$131.0818/ 1
The Five and Dime Store has a cost of equity of 15.8 percent, a pretax cost of debt of
7.7 percent, and a tax rate of 35 percent. What is the firms weighted average cost of
capital if the debt-equity ratio is 0.40?
A. 10.18 percent
B. 11.72 percent
C. 12.72 percent
D. 13.49 percent
E. 14.93 percent
Anne plans to save $40 a week for the next five years. She expects to earn 3 percent for
the first two years and 5 percent for the last three years. How much will her savings be
worth at the end of the five years?
A. $10,215.60
B. $10,684.29
C. $10,983.58
D. $11,014.88
E. $11,708.15
Jims Hardware is adding a new product line to its sales lineup. Initially, the firm will
stock $41,000 of the new inventory, which will be purchased on 30 days credit from a
supplier. The firm will also invest $6,000 in accounts receivable and $4,000 in
equipment. What amount should be included in the initial project costs for net working
capital?
A. -$41,000
B. -$37,000
C. -$10,000
D. -$6,000
E. -$2,000
A project has the following cash flows. What is the internal rate of return?
A. 12.21 percent
B. 12.47 percent
C. 13.72 percent
D. 14.09 percent
E. 14.19 percent
Which one of the following statements is correct?
A. Peer group analysis is easier when a firm is a conglomerate versus when it has only a
single line of business.
B. Peer group analysis is easier when seasonal firms have different fiscal years.
C. Peer group analysis is simplified when firms use varying methods of depreciation.
D. Comparing results across geographic locations is easier since all countries now use a
common set of accounting standards.
E. Adjustments have to be made when comparing the income statements of firms that
use different methods of accounting for inventory.
Use the following tax table to answer this question:
Bait and Tackle has taxable income of $411,562. How much does it owe in taxes?
A. $128,603.33
B. $134,611.27
C. $138,542.79
D. $139,931.08
E. $141,354.82
Tri-City Grocers is a chain of grocery stores that just hired a new CFO. Which of the
following actions would you expect this CFO to adopt given her statement that she
wants to implement a more flexible financing policy for the firm?I. easing the credit
terms given to customersII. increasing the amount of inventory carried by each grocery
storeIII. borrowing funds to keep more cash available for store operationsIV. decreasing
the firms investments in marketable securities
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
Which one of the following will increase the operating cycle?
A. Decreasing the days sales in inventory
B. Decreasing the accounts payable period
C. Increasing the accounts receivable turnover rate
D. Decreasing the inventory turnover rate
E. Decreasing the accounts payable turnover rate
If you put up $46,000 today in exchange for a 6.75 percent 15-year annuity, what will
the annual cash flow be?
A. $4,519.27
B. $4,666.67
C. $4,971.10
D. $5,203.16
E. $5,338.09
Bermuda Cruises issues only common stock and coupon bonds. The firm has a
debt-equity ratio of 0.65. The cost of equity is 18.3 percent and the pretax cost of debt is
9.9 percent. What is the capital structure weight of the firms equity if the firms tax rate
is 34 percent?
A. 46.75 percent
B. 49.97 percent
C. 52.93 percent
D. 59.08 percent
E. 60.61 percent
Blazer Sports Store is preparing to pay its quarterly dividend of $2.20 a share this
quarter. The stock closed at $70 a share today. What will the ex-dividend stock price be
if the relevant tax rate is 15 percent and all else is held constant?
A. $55.28
B. $55.50
C. $55.83
D. $55.94
E. $57.70
The Road House Diner is offering 10,000 shares of stock to the general public on a cash
basis. Which one of the following terms best applies to this offer?
A. Rights offer
B. General cash offer
C. Green Shoe
D. Red herring
E. Prospectus
Which one of the following is the theory that a firm should borrow up to the point
where the additional tax benefit from an extra dollar of debt equals the additional costs
associated with financial distress from that additional debt?
A. M&M Proposition I, with taxes
B. M&M Proposition II, with taxes
C. M&M Proposition I, without taxes
D. Homemade leverage proposition
E. Static theory of capital structure
Builders Outlet just hired a new chief financial officer. To get a feel for the company,
she wants to compare the firms sales and costs over the past three years to determine if
any trends are present and also determine where the firm might need to make changes.
Which one of the following statements will best suit her purposes?
A. Income statement
B. Balance sheet
C. Common-size income statement
D. Common-size balance sheet
E. Statement of cash flows
How are preferred stock dividends treated for tax purposes by the issuer, an individual
shareholder, and a corporate shareholder?
Identify some of the specific costs firms incur if their current asset levels are either too
high or too low.
Explain why the DuPont identity is so useful to a financial manager.
Miller Tool is a successful manufacturer of both consumer and industrial hand tools and
is publicly owned. The firm has several positive net present value projects that it would
like to pursue and thus decided to issue additional shares of common stock. As a result
of this stock issue, the firms stock price declined. Explain why this occurred when the
proceeds of the issue are being used to fund positive net present value projects.
Give an example of a potential agency problem for a corporation and identify means by
which the firm can help reduce or eliminate that problem.
Explain the basic structure and workings of a disbursement system that utilizes
zero-balance accounts.
There are regulations that prohibit “insider trading,” which is the use of nonpublic
information about a security to earn abnormal profits from trading that security. Which
form of market efficiency would make these laws unnecessary? Explain why.
How can a firm determine if its level of liquidity is appropriate?