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1) A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500
and finally in year four, $4,000. The profitability index is 1.14 and the discount rate is
12 percent. What is the initial cost of the project?
A.$7,899.16
B.$8,098.24
C.$8,166.19
D.$9,211.06
E.$9,250.00
2) Holiday House has sales of $648,000, a profit margin of 6.1 percent, and a capital
intensity ratio of 0.84. What is the total asset turnover rate?
A.1.04
B.1.08
C.1.13
D.1.19
E.1.26
3) A $100,000 Treasury bond has a bid price quote of 115:21 and an asked quote of
115:22. In dollars, what is the value of the bid-ask spread on this bond?
A.$0.31
B.$3.12
C.$31.25
D.$312.50
E.$3,125.00
4) Which one of the following is an example of systematic risk?
A.Major layoff by a regional manufacturer of power boats
B.Increase in consumption created by a reduction in personal tax rates
C.Surprise firing of a firm's chief financial officer
D.Closure of a major retail chain of stores
E.Product recall by one manufacturer
5) Which of the following statements are true?
I. Underwriters help private companies access public stock markets through IPOs.
II. Shelf registrations and private placements are examples of seasoned security issues.
III. Issue costs for debt are typically greater than issue costs for equity.
IV. Private equity financing is a common source of financing for startup firms.
A.I and II only
B.I and III only
C.I, II, and IV only
D.I, III, and IV only
E.I, II, III, and IV
6) Which one of the following is generally considered to be the best form of analysis if
you have to select a single method to analyze a variety of investment opportunities?
A.Payback
B.Profitability index
C.Accounting rate of return
D.Internal rate of return
E.Net present value
7) M&M Proposition II, without taxes, states that the:
A.capital structure of a firm is highly relevant
B.weighted average cost of capital decreases as the debt-equity ratio decreases
C.cost of equity increases as a firm increases its debt-equity ratio
D.return on equity is equal to the return on assets multiplied by the debt-equity ratio
E.return on equity remains constant as the debt-equity ratio increases
8) You own a portfolio consisting of the securities listed below. The expected return for
each security is as shown. What is the expected return on the portfolio?
A.9.97 percent
B.10.86 percent
C.11.23 percent
D.12.09 percent
E.14.20 percent
9) Tattler, Inc. has declared a $4.60 per share dividend. Suppose capital gains are not
taxed, but dividends are taxed at 20 percent. New IRS regulations require that taxes be
withheld at the time the dividend is paid. Tattler sells for $87 per share, and the stock is
about to go ex-dividend. What do you think the ex-dividend price will be?
A.$82.40
B.$83.32
C.$85.08
D.$86.67
E.$87.00
10) Which one of the following statements is correct related to the dividend growth
model approach to computing the cost of equity?
A.The rate of growth must exceed the required rate of return
B.The rate of return must be adjusted for taxes
C.The annual dividend used in the computation must be for year one if you are using
today's stock price to compute the return
D.The cost of equity is equal to the return on the stock plus the risk-free rate
E.The cost of equity is equal to the return on the stock multiplied by the stock's beta
11) Taylor, Inc. has sales of $11,898, total assets of $9,315, and a debt-equity ratio of
0.55. If its return on equity is 14 percent, what is its net income?
A.$841.35
B.$887.16
C.$904.10
D.$911.16
E.$927.46
12) Which one of the following best states the primary goal of inventory management?
A.Minimize the number of orders per year
B.Minimize the average inventory level
C.Minimize total inventory costs
D.Minimize the level of inventory for the most expensive items
E.Minimize opportunity costs
13) Scenario analysis asks questions such as:
A.How will changing the number of units sold affect the outcome of this project?
B.What is the best outcome that should reasonably be expected?
C.How much will a $1 increase in the variable cost per unit change the net present
value?
D.Will the net present value increase or decrease if the quantity sold increases by 100
units?
E.How will the operating cash flow change if the depreciation method is changed?
14) Which one of the following is an example of a perpetuity?
A.Trust income of $1,200 a year forever
B.Retirement pay of $2,200 a month for 20 years
C.Lottery winnings of $1,000 a month for life
D.Car payment of $260 a month for 60 months
E.Apartment rent payment of $800 a month for one year
15) A portfolio is comprised of 35 securities with varying betas. The lowest beta for an
individual security is 0.74 and the highest of the security betas of 1.51. Given this
information, you know that the portfolio beta:
A.must be 1.0 because of the large number of securities in the portfolio
B.is the geometric average of the individual security betas
C.must be less than the market beta
D.will be between 0 and 1.0
E.will be greater than or equal to 0.74 but less than or equal to 1.51
16) One year ago, Theresa purchased 600 shares of Outland Co. stock for $3,600. The
stock does not pay any regular dividends but it did pay a special dividend of $0.25 a
share last week. This morning, she sold her shares for $7.25 a share. What was the total
return on this investment?
A.18.00 percent
B.20.83 percent
C.22.50 percent
D.25.00 percent
E.27.33 percent
17) Katz is an all-equity development company that has 36,000 shares of stock
outstanding at a market price of $25 a share. The firm's earnings before interest and
taxes are $29,000. Katz has decided to issue $200,000 of debt at a rate of 6 percent and
use the proceeds to repurchase shares. What should Faith do if she owns 500 shares of
Katz stock and wants to use homemade leverage to offset the leverage being assumed
by the firm?
A.Borrow money and buy an additional 22 shares
B.Borrow money and buy an additional 111 shares
C.Sell 22 shares and loan out the proceeds
D.Sell 56 shares and loan out the proceeds
E.Sell 111 shares and loan out the proceeds
18) The Steel Factory is considering a project that will produce annual cash flows of
$36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is
the internal rate of return if the initial cost of the project is $135,000?
A.7.56 percent
B.9.19 percent
C.11.28 percent
D.12.24 percent
E.12.83 percent
19) You own a $46,000 portfolio comprised of four stocks. The values of stocks A, B,
and C are $5,600, $16,700, and $11,400, respectively. What is the portfolio weight of
stock D?
A.26.74 percent
B.28.39 percent
C.30.33 percent
D.32.10 percent
E.32.58 percent
20) Joshua's Antiques has a total asset turnover rate of 1.2, an equity multiplier of 1.4, a
profit margin of 5 percent, a retention ratio of 0.8, and total assets of $120,000. What is
the sustainable growth rate?
A.6.98 percent
B.7.20 percent
C.7.33 percent
D.7.54 percent
E.7.91 percent
21) Tuesday, December 1, is the ex-dividend date for Alpha stock. Which one of the
following dates is the record date? Assume there are no banking holidays to consider.
A.Friday, November 27
B.Monday, November 30
C.Wednesday, December 2
D.Thursday, December 3
E.Friday, December 4
22) Mike just purchased a bond which pays $40 each year in interest. The $40 interest
payment is also called the:
A.coupon
B.par value
C.discount
D.call premium
E.yield
23) Which of the following characteristics will tend to cause a firm to adopt a more
liberal credit policy?
I. repeat customers
II. excess capacity
III. high variable costs
IV. limited competition
A.I and II only
B.III and IV only
C.I, II, and III only
D.II, III, and IV only
E.I, II, III, and IV
24) You have just agreed to a forward trade that will be settled six months from now.
When will the exchange rate for this transaction be determined?
A.Today
B.Three months from today because that is the half-way point
C.Anytime you prefer within the next 6 months
D.Whenever the spot rate six months from today is known
E.Six months from now
25) Hal Enterprises stock has an expected return of 10.2 percent. Given the information
below, what is the expected return if the economy is in a recession?
A.-12.94 percent
B.-11.71 percent
C.-11.28 percent
D.-10.76 percent
E.-10.03 percent
26) Assume you own a portfolio of diverse securities which are each correctly priced.
Given this, the reward-to-risk ratio:
A.for the portfolio must equal 1.0
B.for the portfolio must be less than the market risk premium
C.for each security must equal zero
D.of each security is equal to the risk-free rate
E.of each security must equal the slope of the security market line
