1) You hold the positions in the table below. What is the beta of your portfolio? If you
expect the market to earn 10 percent and the risk-free rate is 4 percent, what is the
required return of the portfolio?
A.12.37%
B.9.73%
C.10.17%
D.11.68%
2) A financial analyst calculated that the after-tax salvage value for a machine was
$10,200. The current book value of the asset is $25,000 and the firm’s tax rate is 20%.
How much could the machine be sold for today?
A.$6,500
B.$7,500
C.$11,500
D.$9,500
3) What would be more valuable, receiving $1,895 today or receiving $3,450 in six
years if interest rates are 8%?
A.Receiving $1,895 today
B.Receiving $3,450 in 6 years
C.They are worth the same amount
D.Need more information to make a determination
4) KADS, Inc. has spent $400,000 on research to develop a new computer game. The
firm is planning to spend $250,000 on a machine to produce the new game. Shipping
and installation costs of the machine will be capitalized and depreciated; they total
$50,000. The machine has an expected life of 3 years, a $75,000 estimated resale value,
and falls under the MACRS 7-Year class life. Revenue from the new game is expected
to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 35
percent, an opportunity cost of capital of 15 percent, and it expects net working capital
to increase by $100,000 at the beginning of the project. What will the year 1 free cash
flow for this project be?
A.$195,000
B.$167,134.50
C.$210,004.50
D.$300,000
5) Stock A has a required return of 12%. Stock B has a required return of 15%. Assume
a risk-free rate of 4.75%. Which of the following is a correct statement about the two
stocks?
A.Stock A is riskier
B.Stock B is riskier
C.The stocks have the same risk
D.We would need to know if the markets are efficient to answer this question
6) What important tax-based reason suggests why some investors might prefer capital
gains?
A.Investors pay taxes only on dividends, not on capital gains
B.Investors pay capital gains taxes as their stock appreciates, not at the time of sale, so
they will be indifferent to selling the stock
C.Investors who don’t need or want any cash will not accept their dividend and they
therefore will not incur any obligation to pay taxes
D.Investors who don’t need or want any cash will not sell their stock and they therefore
will not incur any obligation to pay taxes
7) Portfolio Return Year-to-date, Company O had earned a -2.10 percent return. During
the same time period, Company V earned 8.00 percent and Company M earned 6.25
percent. If you have a portfolio made up of 40 percent Company O, 30 percent
Company V, and 30 percent Company M, what is your portfolio return?
A.3.435%
B.5.115%
C.12.15%
D.16.35%
8) What effect does increasing the standard deviation in daily cash flows have on the
cash return point in the Miller-Orr model?
A.It will cause the cash return point to increase
B.It will cause the cash return point to decrease
C.It has no impact on the cash return point
D.It will cause the cash return point to first increase, then decrease
9) A dollar paid (or received) in the future is
A.worth more than a dollar paid (or received) today
B.worth as much as a dollar paid (or received) today
C.not worth as much as a dollar paid (or received) today
D.not comparable to a dollar paid (or received) today
10) A new project would require an immediate increase in raw materials in the amount
of $12,000. The firm expects that accounts payable will automatically increase $8,500.
How much must the firm expect its investment in net working capital to change if they
accept this project?
A.+$20,000
B.+$3,500
C.-$20,500
D.-$3,500
11) Possible shapes for the yield include all of the following except ____________.
A.Humped
B.Downward sloping
C.Flat
D.All of these are possible shapes
12) If a firm has retained earnings of $4 million, a common shares account of $7
million, and additional paid-in-capital of $3 million, how much would be transferred in
(or out) of these accounts in response to a 20 percent stock dividend, respectively?
A.-20%, 0%, +20%
B.-20%, +20%, 0%
C.-50%, +20%, +20%
D.-50%, +25%, +25%
13) Portfolio Return The table below shows your stock positions at the beginning of the
year, the dividends that each stock paid during the year, and the stock prices at the end
of the year. What is your portfolio percentage return?
A.3.85%
B.11.54%
C.15.38%
D.17.58%
14) A firm had EBIT of $1,000, paid taxes of $225, expensed depreciation at $13, and
its gross fixed assets increased by $25. What was the firm’s operating cash flow?
A.$763
B.$737
C.$813
D.$788
15) Sipe’s Paint and Wallpaper, Inc., needs to raise $1 million to finance plant
expansion. In discussions with its investment bank, Sipe’s learns that the bankers
recommend a gross price of $40 per share and that 30,000 shares of stock be sold. If the
net proceeds on the stock sale leave Sipe’s with $1 million, what percent of the total
raised represents net proceeds to the firm?
A.81.98%
B.75.57%
C.83.33%
D.86.67%
16) Which of the following statements is correct?
A.The default risk premium of Baa 20-year corporate bonds over Aaa 20-year corporate
bonds does not vary
B.The market segmentation theory assumes that borrowers and investors do not want to
shift from one maturity sector to another without an interest rate premium
C.Real interest rates are the rates that are quoted in the news
D.All of these statements are correct
17) KADS, Inc. has spent $400,000 on research to develop a new computer game. The
firm is planning to spend $50,000 on a machine to produce the new game. Shipping and
installation costs of the machine will be capitalized and depreciated; they total $50,000.
The machine has an expected life of 3 years, a $15,000 estimated resale value, and falls
under the MACRS 5-Year class life. Revenue from the new game is expected to be
$500,000 per year, with costs of $300,000 per year. The firm has a tax rate of 35
percent, an opportunity cost of capital of 15 percent, and it expects net working capital
to increase by $55,000 at the beginning of the project. What will the year 3 free cash
flow for this project be?
A.$222,670
B.$211,550
C.$252,920
D.$243,640
18) A financial asset will pay you $10,000 at the end of 10 years if you pay premiums
of $175 per year at the end of each year for 10 years. What is the IRR of this financial
asset?
A.33.26%
B.34.98%
C.35.93%
D.36.72%
19) An asset’s cost plus the amounts you paid for items such as sales tax, freight
charges, and installation and testing fees is referred to as the ___________________.
A.Opportunity cost
B.Sunk cost
C.Asset costing reference
D.Depreciable basis
20) Apple’s 9% annual coupon bond has 10 years until maturity and the bonds are
selling in the market for $1190. If the firm’s after-tax cost of debt is 5%, what was the
firm’s tax rate?
A.21.51%
B.34.50%
C.44.50%
D.36.50%
21) This is when the Board of Directors announces its intention to pay a dividend.
A.declaration date
B.ex-dividend date
C.record date
D.payment date
22) Which financial statement reports a firm’s assets, liabilities, and equity at a
particular point in time?
A.Balance Sheet
B.Income Statement
C.Statement of Retained Earnings
D.Statement of Cash Flows
23) Exchange Rate Quote Convert the following direct quote to a dollar indirect quote:
1 Korean Won = $0.001045
A.0.1045 Won
B.1.001045 Won
C.9.5694 Won
D.956.9378 Won
24) TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per
share and an issue of $20 million in 7.5%, annual coupon bonds with a maturity of 15
years, selling at 109% of par ($1000). If TAFKAP’s weighted average tax rate is 34%
and its cost of equity is 12.5%, what is TAFKAP’s WACC?
A.11.02%
B.11.37%
C.12.16%
D.12.83%
25) Hollywood Shoes would like to maintain their cash account at a minimum level of
$50,000, but expects the standard deviation in net daily cash flows to be $4,000; the
effective annual rate on marketable securities to be 6 percent per year; and the trading
cost per sale or purchase of marketable securities to be $100 per transaction. What will
be their optimal cash return point?
A.$59,094.77
B.$69,588.47
C.$181,131.66
D.$54,000.00
26) Cross Rate Given these two exchange rates, $1 = 1.3254 Australian dollars and $1 =
£0.5233, compute the cross rate between the Australian dollars and the pound. State this
exchange rate in Australian dollars and in pounds.
A.A$2.5329, 0.3948 pounds
B.A$0.3948, 2.5329 pounds
C.A$0.3948, 0.6936 pounds
D.A$0.6936, 0.3948 pounds
27) JEN Corp. is expected to pay a dividend of $2.00 per year indefinitely. If the
appropriate rate of return on this stock is 12 percent per year, and the stock consistently
goes ex-dividend 25 days before dividend payment date, what will be the expected
maximum price in light of the dividend payment logistics?
A.$1.14
B.$16.54
C.$16.67
D.$18.52
28) Income Statement Barnyard, Inc.’s 2010 income statement lists the following
income and expenses: EBIT = $500,000, Interest expense = $45,000, and Taxes =
$152,000. Barnyard’s has no preferred stock outstanding and 200,000 shares of
common stock outstanding. What are its 2010 earnings per share?
A.$2.50
B.$2.275
C.$1.74
D.$1.515
29) Which of the following makes this a true statement? If the new project does
significantly increase the firm’s overall risk,
A.the increased risk will be borne equally amongst the bond holders, preferred
stockholders, and common stockholders
B.the increased risk will be borne disproportionately by bond holders
C.the increased risk will be borne disproportionately by preferred stockholders
D.the increased risk will be borne disproportionately by common stockholders
30) Calculation of Altman’s Z-Score: Suppose that the financial ratios of a potential
borrowing firm took the following values: X1 = Net working capital/Total assets = .25,
X2 = Retained earnings/Total assets = .30, X3 = Earnings before interest and
taxes/Total assets = .35, X4 = Market value of equity/Book value of long-term debt = .
50, X5 = Sales/Total assets ratio = 0.9. Calculate the Altman’s Z-score for this firm.
A.2.30
B.3.075
C.9.8
D.1.96
31) A linear probability model you have developed finds there are two factors
influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit
margin. Based on past bankruptcy experience, the linear probability model is estimated
as:
PDi = .013 (debt/equity) + .78 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 112 percent and its
expected probability of default, or bankruptcy, is estimated to be 15.35 percent. If sales
are $1.55 million, calculate the firm’s net income.
A.$276,100
B.$290,700
C.$196,200
D.$299,400
32) CAPM Required Return A company has a beta of 3.75. If the market return is
expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company’s
required return?
A.250%
B.39.375%
C.48.875%
D.55.625%
33) A car company is offering a choice of deals. You can receive $600 cash back on the
purchase, or a 2% APR, 4-year loan. The price of the car is $18,900 and you could
obtain a 4-year loan from your credit union at 6% APR. What is the monthly payment
of each deal?
A.Cash back: PMT = $429.78 2% APR: PMT = $410.04
B.Cash back: PMT = $438.24 2%APR: PMT = $424.09
C.Cash back: PMT = $458.12 2%APR: PMT = $414.09
D.Cash back: PMT = $408.33 2%APR: PMT = $410.04
34) B&O Cos. has sales of $850,000 and cost of goods sold of $490,000. The firm had
a beginning inventory of $69,000 and an ending inventory of $54,000. What is the
length of the days’ sales in inventory?
A.40.22 days
B.51.40 days
C.23.19 days
D.29.63 days
35) Statement of Retained Earnings Jamaican Ice Cream Corp. started the year with a
balance of retained earnings of $100 million. The company reported net income for the
year of $45 million, paid dividends of $2 million to the preferred stock holders and $15
million to common stock holders. What is Jamaican Ice Cream’s end of year balance in
retained earnings?
A.$38 million
B.$55 million
C.$128 million
D.$162 million
36) You invested $2,000 in the stock market one year ago. Today, the investment is
valued at $9,500. What return did you earn? What return would you need to suffer next
year for your investment to be valued at the original $2,000?
A.-78.95%; 0%
B.375%; – 78.95%
C.250%; – 51.8%
D.-78.95%; 100%
37) A “thin” market is characterized by ________________________.
A.Risky assets
B.Lower – priced assets
C.Unrated financial securities
D.None of these
38) Happy Feet would like to maintain their cash account at a minimum level of
$75,000, but expects the standard deviation in net daily cash flows to be $5,000; the
effective annual rate on marketable securities to be 7 percent per year; and the trading
cost per sale or purchase of marketable securities to be $150 per transaction. What will
be their optimal cash return point?
A.$80,000.00
B.$99,755.64
C.$76,593.42
D.$82,548.18
39) Which of the following current asset financing policies reflects the decision to
finance the peaks of current assets with long-term debt and equity that provides the firm
with a surplus of cash and marketable securities most of the time, except during peak
asset demand?
A.flexible financing policy
B.restrictive financing policy
C.compromise financing policy
D.alternative financing policy
40) How might credit card companies keep their cardholders in debt for a long time?
41) George Washington wants to invest in one of two corporate bonds issued by
separate firms. One bond yields 7% with a 10-year maturity; the other offers a 10%
yield with a 9-year maturity. George thinks the 9-year bond is the better deal since the
rate is higher. Is this necessarily so? Explain what factors George should consider
before making a choice.
42) What is meant when it is said that the U.S. dollar is strengthening? How would it
impact your vacation abroad and foreign visitors to the U.S.?
43) Land O Lakes Systems has a beta of 1.66. Does this mean that you should expect
Land O Lakes to earn a return 88 percent higher than the S&P500 Index return?
Explain.
44) Suppose two projects with normal cash flows, X and Y, have exactly the same
required initial investment, but X has a longer payback. Can we say anything about X’s
IRR versus that of Y?
45) Explain how the firm apportions risk and return amongst stockholders and
bondholders in a “perfect world.”
46) Explain what a PI of 35.23% would signify.
47) Ratio Analysis Use the following information to complete the balance sheet below.
Current ratio = 1.5
Current liabilities = $80 million
Profit margin = 12%
Credit sales = 200 million
Return on equity = 15%
Debt ratio = 60%
48) List and define the definitive set of four dates associated with a firm paying out a
dividend.