There are two distinct discount rates at which a particular project will have a zero net
present value. In this situation, the project is said to:
A. have two net present value profiles.
B. have operational ambiguity.
C. create a mutually exclusive investment decision.
D. produce multiple economies of scale.
E. have multiple rates of return.
Answer:
Randall’s, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per
share. The market value is $12 per share. The balance sheet shows $42,000 in the
capital in excess of par account, $20,000 in the common stock account, and $50,500 in
the retained earnings account. The firm just announced a 5 percent (small) stock
dividend. What will the balance in the retained earnings account be after the dividend?
A. $38,500
B. $39,500
C. $50,500
D. $61,500
E. $62,500
Answer:
Colin is analyzing a project and has gathered the following data. Based on this data,
what is the average accounting rate of return? The project’s assets will be depreciated
using straight-line depreciation to a zero book value over the life of the project.
A. 6.94 percent
B. 13.88 percent
C. 15.66 percent
D. 27.75 percent
E. 31.31 percent
Answer:
You are developing a financial plan for a corporation. Which of the following questions
will be considered as you develop this plan?
I. How much net working capital will be needed?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained?
A. I and IV only
B. II and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Money deposited by a borrower with the bank in a low or non-interest-bearing account
as a condition of a loan agreement is called a:
A. compensating balance.
B. secured credit deposit.
C. letter of credit.
D. line of credit.
E. pledge.
Answer:
Southern Home Cookin’ just paid its annual dividend of $0.65 a share. The stock has a
market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5
percent and the market risk premium is 6.8 percent. What is the cost of equity?
A. 9.98 percent
B. 10.04 percent
C. 10.12 percent
D. 10.37 percent
E. 10.45 percent
Answer:
The Wildcat Oil Company is trying to decide whether to lease or buy a new
computer-assisted drilling system for its oil exploration business. Management has
decided that it must use the system to stay competitive; it will provide $1.2 million in
annual pretax cost savings. The system costs $6.7 million and will be depreciated
straight-line to zero over 4 years. Wildcat’s tax rate is 35 percent, and the firm can
borrow at 11 percent. Lambert Leasing Company has offered to lease the drilling
equipment to Wildcat for payments of $1,700,000 per year. Lambert’s policy is to
require its lessees to make payments at the start of the year. Lambert requires Wildcat to
pay a $270,000 security deposit at the inception of the lease. What is the NAL of
leasing the equipment?
A. $541,287
B. $658,844
C. $660,318
D. $661,828
E. $664,719
Answer:
Kurt currently owns 3.4 percent of Northeastern Transportation. The company has a
total of 438,000 shares outstanding with a current market price of $26.20 a share. At
present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt
decides not to participate in this offering. What will his ownership position be after the
offering is completed?
A. 3.06 percent
B. 3.22 percent
C. 3.27 percent
D. 3.40 percent
E. 3.51 percent
Answer:
The optimal investment in current assets for an operating firm occurs at the point
where:
A. both shortage costs and carrying costs equal zero.
B. shortage costs are equal to zero.
C. carrying costs are equal to zero.
D. carrying costs exceed shortage costs.
E. the total costs of holding current assets is minimized.
Answer:
Kingston Development Corp. purchased a piece of property for $2.79 million. The firm
paid a down payment of 15 percent in cash and financed the balance. The loan terms
require monthly payments for 15 years at an annual percentage rate of 7.75 percent,
compounded monthly. What is the amount of each mortgage payment?
A. $22,322.35
B. $23,419.97
C. $23,607.11
D. $24,878.15
E. $25,301.16
Answer:
The equivalent annual cost considers which of the following?
I. required rate of return
II. operating costs
III. need for replacement
IV. economic life
A. I and II only
B. II and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
Answer:
Rackin Pinion Corporation’s assets are currently worth $1,260. In one year, they will be
worth either $1,200 of $1,610. The risk-free interest rate is 5 percent. Suppose Rackin
Pinion has an outstanding debt issue with a face value of $1,200. What is the current
value of the firm’s debt?
A. $60.00
B. $114.14
C. $1,142.86
D. $1,263.19
E. $1,504.20
Answer:
Hungry Howie’s is currently operating at 84 percent of capacity. What is the total asset
turnover ratio at full capacity?
A. .68
B. .78
C. .95
D. 1.29
E. 1.42
Answer:
Which of the following questions are addressed by financial managers?
I. How should a product be marketed?
II. Should customers be given 30 or 45 days to pay for their credit purchases?
III. Should the firm borrow more money?
IV. Should the firm acquire new equipment?
A. I and IV only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Which one of the following should earn the most risk premium based on CAPM?
A. diversified portfolio with returns similar to the overall market
B. stock with a beta of 1.38
C. stock with a beta of 0.74
D. U.S. Treasury bill
E. portfolio with a beta of 1.01
Answer:
You just won the grand prize in a national writing contest! As your prize, you will
receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is
this prize worth to you today?
A. $172,252.71
B. $178,411.06
C. $181,338.40
D. $185,333.33
E. $190,450.25
Answer:
The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay
interest semi-annually. Currently, the bonds are quoted at 101.4 percent of face value
and carry a 9 percent coupon. What is the firm’s aftertax cost of debt if the tax rate is 30
percent?
A. 4.88 percent
B. 5.36 percent
C. 5.45 percent
D. 6.11 percent
E. 8.74 percent
Answer:
Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
A. coupon
B. face value
C. discount
D. call premium
E. yield
Answer:
A project with financing type cash flows is typified by a project that has which one of
the following characteristics?
A. conventional cash flows
B. cash flows that extend beyond the acceptable payback period
C. a year or more in the middle of a project where the cash flows are equal to zero
D. a cash inflow at time zero
E. cash inflows which are equal in amount
Answer:
The Turtle Cave currently has 160,000 shares of stock outstanding that sell for $60 per
share. Assume no market imperfections or tax effects exist. What will the new share
price be if the firm declares a 10 percent stock dividend?
A. $52.17
B. $54.55
C. $60.00
D. $64.50
E. $69.00
Answer:
Which one of the following is classified as an intangible fixed asset?
A. accounts receivable
B. production equipment
C. building
D. trademark
E. inventory
Answer:
You own a house that you rent for $1,100 a month. The maintenance expenses on the
house average $200 a month. The house cost $219,000 when you purchased it 4 years
ago. A recent appraisal on the house valued it at $239,000. If you sell the house you will
incur $14,000 in real estate fees. The annual property taxes are $4,000. You are
deciding whether to sell the house or convert it for your own use as a professional
office. What value should you place on this house when analyzing the option of using it
as a professional office?
A. $211,800
B. $221,000
C. $225,000
D. $235,000
E. $239,000
Answer:
Metal Designs, Inc., historically produced products for inventory. Now, the firm only
produces a product when it receives an actual order from a customer. All else equal, this
change will:
A. increase the operating cycle.
B. lengthen the accounts receivable period.
C. shorten the accounts payable period.
D. decrease the cash cycle.
E. decrease the inventory turnover rate.
Answer:
You are considering two mutually exclusive projects with the following cash flows.
Which project(s) should you accept if the discount rate is 8.5 percent? What if the
discount rate is 13 percent?
A. accept project A as it always has the higher NPV
B. accept project B as it always has the higher NPV
C. accept A at 8.5 percent and B at 13 percent
D. accept B at 8.5 percent and A at 13 percent
E. accept B at 8.5 percent and neither at 13 percent
Answer:
Float is defined as the:
A. amount of cash a firm can immediately withdraw from its bank account.
B. difference between book cash and bank cash.
C. change in a firm’s cash balance from one accounting period to the next.
D. amount of cash a firm has on hand.
E. cash balance according to a firm’s records.
Answer:
A stock with an actual return that lies above the security market line has:
A. more systematic risk than the overall market.
B. more risk than that warranted by CAPM.
C. a higher return than expected for the level of risk assumed.
D. less systematic risk than the overall market.
E. a return equivalent to the level of risk assumed.
Answer:
Which one of the following is the risk that a firm faces when it opens a facility in a
foreign country, given that the exchange rate between the firm’s home country and this
foreign country fluctuates over time?
A. international risk
B. diversifiable risk
C. purchasing power risk
D. exchange rate risk
E. political risk
Answer:
Which one of the following managers determines which customers must pay cash and
which can charge their purchases?
A. purchasing manager
B. credit manager
C. controller
D. production manager
E. payables manager
Answer:
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This
transaction:
A. took place in the primary market.
B. occurred in a dealer market.
C. was facilitated in the secondary market.
D. involved a proxy.
E. was a private placement.
Answer:
Colors and More is considering replacing the equipment it uses to produce crayons. The
equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs
by an estimated $310,000 a year. The equipment will be depreciated using straight-line
depreciation to a book value of zero. The required rate of return is 15 percent and the
tax rate is 35 percent. What is the net income from this proposed project?
A. $18,508.75
B. $40,211.24
C. $66,441.67
D. $127,291.67
E. $136,709.48
Answer:
The dividend market is in equilibrium when:
A. all firms adopt a low dividend policy.
B. half of the firms adopt a low dividend policy and half adopt a high dividend policy.
C. all clienteles are satisfied.
D. dividends remain constant and no special dividends are declared.
E. the total amount of the annual dividends is equal to the net income for the year.
Answer:
Which one of the following statements is correct in relation to a firm’s short-run
financial risk?
A. Short-run financial risk results from permanent changes in prices due to new
technology.
B. A financially sound firm can become financially distressed as the result of its
short-run exposure to financial risk.
C. Each segment of a business should be responsible for hedging its own short-run
financial risk.
D. Short-run financial risk is defined as temporary price changes which result directly
from natural disasters, such as tornadoes, droughts, and floods.
E. Thus far, hedging techniques have been unsuccessful in reducing short-run financial
risk.
Answer:
General rules used as the basis for decision making are referred to as:
A. a loss aversion technique.
B. heuristics.
C. self-attribution.
D. narrow framing.
E. confirmation bias.
Answer: