Madison Corner writes 20 checks a day for an average amount of $630 each. These
checks generally clear the bank 2.5 days after they are written. In addition, the firm
generally receives an average of $18,400 a day in checks. Deposited amounts are
available after 2 days. What is the amount of the firm’s disbursement float?
A. $12,600
B. $25,800
C. $28,350
D. $29,840
E. $31,500
Answer:
The risk premium for an individual security is based on which one of the following
types of risk?
A. Total
B. Surprise
C. Diversifiable
D. Systematic
E. Unsystematic
Answer:
Which one of the following statements is correct?
A. The risk-free rate of return has a risk premium of 1.0.
B. The reward for bearing risk is called the standard deviation.
C. Risks and expected return are inversely related.
D. The higher the expected rate of return, the wider the distribution of returns.
E. Risk premiums are inversely related to the standard deviation of returns.
Answer:
Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this
loan?
A. 11.88 percent
B. 12.00 percent
C. 12.16 percent
D. 16.00 percent
E. 16.28 percent
Answer:
The treasurer of a major U.S. firm has $12 million to invest for three months. The
interest rate in the U.S. is 0.42 percent per month. The interest rate in the UK is 0.52
percent per month. The spot exchange rate is 0.70, and the three-month forward rate is
0.71. Ignoring transaction costs, in which country would the treasurer want to invest the
company’s funds? Why?
A. U.S.; earn an additional $47,211.16
B. U.S.; earn an additional $135,325.24
C. UK; earn an additional $9,418.02
D. UK; earn an additional $38,522.47
E. UK; earn an additional $121,510.67
Answer:
A credit card has an annual percentage rate of 12.9 percent and charges interest
monthly. The effective annual rate on this account:
A. will be less than 12.9 percent.
B. can either be less than or equal to 12.9 percent.
C. is 12.9 percent.
D. can either be greater than or equal to 12.9 percent.
E. will be greater than 12.9 percent.
Answer:
The payback method of analysis ignores which one of the following?
A. Initial cost of an investment
B. Arbitrary cutoff point
C. Cash flow direction
D. Time value of money
E. Timing of each cash inflow
Answer:
You expect the inflation rate to be 3.8 percent and the U.S. Treasury bill yield to be 3.9
percent for the next year. The risk premium on small-company stocks is 12.6 percent.
What nominal rate of return do you expect to earn on small-company stocks next year?
A. 15.5 percent
B. 16.5 percent
C. 16.8 percent
D. 9.2 percent
E. 8.8 percent
Answer:
Lester’s Fried Chick’n purchased its building 11 years ago at a cost of $139,000. The
building is currently valued at $179,000. The firm has other fixed assets that cost
$66,000 and are currently valued at $58,000. To date, the firm has recorded a total of
$79,000 in depreciation on the various assets. The company has current liabilities of
$36,600 and net working capital of $18,400. What is the total book value of the firm’s
assets?
A. $181,000
B. $241,000
C. $331,000
D. $339,000
E. $379,000
Answer:
The Embroidery Shoppe had beginning retained earnings of $18,670. During the year,
the company reported sales of $83,490, costs of $68,407, depreciation of $8,200,
dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the
retained earnings balance at the end of the year?
A. $21,883.25
B. $22,193.95
C. $22,833.24
D. $23,783.24
E. $30,393.95
Answer:
The 7 percent annual coupon bonds of IPO, Inc. are selling for $1,021. The bonds have
a face value of $1,000 and mature in seven years. What is the yield to maturity?
A. 6.42 percent
B. 6.62 percent
C. 6.66 percent
D. 6.68 percent
E. 6.70 percent
Answer:
Rocky Top, Inc. purchased some welding equipment six years ago at a cost of
$579,000. Today, the company is selling this equipment for $110,000. The tax rate is 35
percent. What is the aftertax cash flow from this sale? The MACRS allowance
percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93,
8.92, 8.93, and 4.46 percent.
A. $81,380
B. $96,152
C. $98,635
D. $101,540
E. $110,000
Answer:
Dividends are which one of the following?
A. Payable at the discretion of a firm’s president
B. Treated as a tax-deductible expense to the paying firm
C. Paid out of aftertax profits
D. Paid to holders of record as of the declaration date
E. Only partially taxable to high-income individual shareholders
Answer:
For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which $21,500
flowed to the firm’s stockholders. The interest paid was $2,300. What is the amount of
the net new borrowing?
A. -$14,300
B. -$9,700
C. $12,300
D. $14,300
E. $18,900
Answer:
A firm has adopted a policy whereby it will not seek any additional external financing.
Given this, what is the maximum growth rate for the firm if it has net income of
$12,100, total equity of $94,000, total assets of $156,000, and a 40 percent dividend
payout ratio?
A. 4.88 percent
B. 5.11 percent
C. 6.62 percent
D. 7.67 percent
E. 8.37 percent
Answer:
Provide two arguments in favor of IPO underpricing and two arguments against IPO
underpricing.
Answer:
List the various determinants of bond yields and indicate the type of situation that
would cause each determinant to increase the yield on a bond.
Answer:
Consider an ordinary annuity and the variables that are related to that annuity. For each
of the following sets of variables, identify whether the relationship between the two
variables is direct (D) or inverse (I). Assume all other variables are held constant.
Answer:
Explain the similarities and differences among an ordinary annuity, an annuity due, and
a perpetuity.
Answer:
How can a firm determine if its level of liquidity is appropriate?
Answer:
Draw a basic flowchart that depicts the components of collection time. Be sure to label
all key points and explain the various components. In addition, offer one suggestion for
decreasing the time required for each component.
Answer: