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What is the profitability index for an investment with the following cash flows given a
14.5 percent required return?
A. 0.94
B. 0.98
C. 1.02
D. 1.06
E. 1.11
Which one of the following terms is used to describe a loan that calls for periodic
interest payments and a lump sum principal payment?
A. amortized loan
B. modified loan
C. balloon loan
D. pure discount loan
E. interest-only loan
Travis invested $9,250 in an account that pays 6 percent simple interest. How much
more could he have earned over a 7-year period if the interest had compounded
annually?
A. $741.41
B. $773.58
C. $802.16
D. $833.33
E. $858.09
Which one of the following is indicative of a short-term restrictive financial policy?
A. purchasing inventory on an as-needed basis
B. granting credit to all customers
C. investing heavily in marketable securities
D. maintaining a large accounts receivable balance
E. keeping inventory levels high
Cross Town Express has sales of $132,000, net income of $12,600, total assets of
$98,000, and total equity of $45,000. The firm paid $7,560 in dividends and maintains a
constant dividend payout ratio. Currently, the firm is operating at full capacity. All costs
and assets vary directly with sales. The firm does not want to obtain any additional
external equity. At the sustainable rate of growth, how much new total debt must the
firm acquire?
A. $0
B. $4,311
C. $5,989
D. $6,207
E. $6,685
Marti owns an option that allows him to purchase ABC stock at $50 a share. The $50
price is referred to as the:
A. opening price.
B. intrinsic value.
C. strike price.
D. market price.
A company currently has a 48 day cash cycle. Assume the firm changes its operations
such that it decreases its receivables period by 2 days, increases its inventory period by
3 days, and increases its payables period by 4 days. What will the length of the cash
cycle be after these changes?
A. 42 days
B. 43 days
C. 45 days
D. 47 days
E. 49 days
You own three January futures contracts on gold. What is the total value of your
position as of the end of this day's trading?
Gold - 100 troy oz.: U.S. dollars and cents per troy oz.
A. $66,050
B. $66,740
C. $66,820
D. $198,150
E. $200,460
A year ago, you deposited $30,000 into a retirement savings account at a fixed rate of
5.5 percent. Today, you could earn a fixed rate of 6.5 percent on a similar type account.
However, your rate is fixed and cannot be adjusted. How much less could you have
deposited last year if you could have earned a fixed rate of 6.5 percent and still have the
same amount as you currently will when you retire 38 years from today?
A. $2,118.42 less
B. $3,333.33 less
C. $5,417.09 less
D. $7,274.12 less
E. $9,234.97 less
What is Major Manuscripts, Inc.'s retention ratio?
A. 33 percent
B. 40 percent
C. 50 percent
D. 60 percent
E. 67 percent
Which of the following are benefits derived from short-term financial planning?
I. having advance notice of when your firm will require external financing
II. being able to determine the extent of time for which a loan is required
III. having the ability to time capital expenditures in order to place the least financial
burden possible on a firm
IV. knowing for certain what your cash balance will be six months in advance
A. I and III only
B. I, II, and III only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
Steve is fairly cautious when analyzing a new project and thus he projects the most
optimistic, the most realistic, and the most pessimistic outcome that can reasonably be
expected. Which type of analysis is Steve using?
A. simulation testing
B. sensitivity analysis
C. break-even analysis
D. rationing analysis
E. scenario analysis
George's Equipment is planning on merging with Nelson Machinery. George's will pay
Nelson's shareholders the current value of their stock in shares of George's Equipment.
George's currently has 4,600 shares of stock outstanding at a market price of $31 a
share. Nelson's has 1,600 shares outstanding at a price of $38 a share. What is the value
per share of the merged firm?
A. $30.77
B. $31.00
C. $31.29
D. $31.74
E. $32.06
Charlie's Chicken has a debt-equity ratio of 2.05. Return on assets is 9.2 percent, and
total equity is $560,000. What is the net income?
A. $105,616
B. $148,309
C. $157,136
D. $161,008
E. $164,909
A project's average net income divided by its average book value is referred to as the
project's average:
A. net present value.
B. internal rate of return.
C. accounting return.
D. profitability index.
E. payback period.
A financial lease in which the lessor is the owner for tax purposes is called a(n) _____
lease.
A. open
B. straight
C. operating
D. tax-oriented
E. tax-exempt
Based on the profitability index rule, should a project with the following cash flows be
accepted if the discount rate is 14 percent? Why or why not?
A. Yes; The PI is 0.96.
B. Yes; The PI is 1.04.
C. Yes; The PI is 1.08.
D. No; The PI is 0.96.
E. No; The PI is 1.04.
A hedge between which two of the following firms is most apt to reduce each firm's
financial risk exposure?
A. wheat farmer and bakery
B. oil producer and coal miner
C. wheat grower and pharmaceutical firm
D. pastry bakery and cotton farmer
E. shoe manufacturer and coat manufacturer
A bond that pays interest annually yielded 7.47 percent last year. The inflation rate for
the same period was 6.10 percent. What was the actual real rate of return on this bond
for last year?
A. 1.19 percent
B. 1.25 percent
C. 1.29 percent
D. 1.36 percent
E. 1.41 percent
You need some money today and the only friend you have that has any is your miserly
friend. He agrees to loan you the money you need, if you make payments of $25 a
month for the next six months. In keeping with his reputation, he requires that the first
payment be paid today. He also charges you 1.5 percent interest per month. How much
money are you borrowing?
A. $134.09
B. $138.22
C. $139.50
D. $142.68
E. $144.57
Suppose you observe the following situation:
Assume the capital asset pricing model holds and stock A's beta is greater than stock B's
beta by 0.21. What is the expected market risk premium?
A. 8.8 percent
B. 9.5 percent
C. 12.6 percent
D. 17.9 percent
E. 20.0 percent
The current market value of the assets of Cristopherson Supply is $46.5 million. The
market value of the equity is $28.7 million. The risk-free rate is 4.75 percent and the
outstanding debt matures in 4 years. What is the market value of the firm's debt?
A. $17.80 million
B. $19.80 million
C. $20.23 million
D. $22.66 million
E. $23.01 million
Which one of the following accounts is the most liquid?
A. inventory
B. building
C. accounts receivable
D. equipment
E. land
Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids
received are as follows:
How much cash will Bakers' Town Bread receive from selling these shares of stock?
Ignore all transaction and flotation costs.
A. $10,800
B. $12,000
C. $13,400
D. $14,400
E. $16,800
Which one of the following sets of dividend payments best meets the definition of two-
stage growth as it applies to the two-stage dividend growth model?
A. no dividends for 5 years, then increasing dividends forever
B. $1 per share annual dividend for 2 years, then $1.25 annual dividends forever
C. decreasing dividends for 6 years followed by one final liquidating dividend payment
D. dividends payments which increase by 2, 3, and 4 percent respectively for 3 years
followed by a constant dividend thereafter
E. dividend payments which increase by 10 percent per year for 5 years followed by
dividends which increase by 3 percent annually thereafter
Which one of the following formulas correctly describes the relative purchasing power
parity relationship?
A. E(St) = S0 × [1 + (hFC - hUS)]t
B. E(St) = S0 × [1 - (hFC - hUS)]t
C. E(St) = S0 × [1 + (hUS + hFC)]t
D. E(St) = S0 × [1 - (hUS - hFC)]t
E. E(St) = S0 × [1 + (hUS - hFC)]t
The Cycle Shoppe has decided to offer credit to its customers during the spring selling
season. Sales are expected to be 330 bicycles. The average cost to the shop of a bicycle
is $300. The owner knows that only 93 percent of the customers will be able to make
their payments. To identify the remaining 7 percent, she is considering subscribing to a
credit agency. The initial charge for this service is $540, with an additional charge of $6
per individual report. What is the amount of the net savings from subscribing to the
credit agency?
A. $3,790
B. $3,920
C. $4,080
D. $4,410
E. $4,950
A 6-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on
February 1 and August 1. Assume today is October 1. What will the difference, if any,
be between this bond's clean and dirty prices today?
A. no difference
B. one month's interest
C. two month's interest
D. four month's interest
E. five month's interest
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to
maturity.
A. a premium; less than
B. a premium; equal to
C. a discount; less than
D. a discount; higher than
E. par; less than
Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The
market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's
cost of equity?
A. 7.58 percent
B. 7.91 percent
C. 8.24 percent
D. 8.57 percent
E. 9.00 percent
Which one of the following statements is a correct reflection of the U.S. markets for the
period 1926-2007?
A. U.S. Treasury bill returns never exceeded a 9 percent return in any one year during
the period.
B. U.S. Treasury bills provided a positive rate of return each and every year during the
period.
C. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the
period.
D. Long-term government bonds outperformed U.S. Treasury bills every year during
the period.
E. National deflation occurred at least once every decade during the period.
