1) Call Premium A 5.5 percent corporate coupon bond is callable in four years for a call
premium of one year of coupon payments. Assuming a par value of $1,000, what is the
price paid to the bondholder if the issuer calls the bond? (Assume annual interest
payments.)
A.$55
B.$220
C.$1000
D.$1055
2) At your discount brokerage firm, it costs $9.95 per stock trade. How much money do
you need to buy 200 shares of General Electric (GE), which trades at $45.19?
A.$9,038.00
B.$4528.95
C.$9,047.95
D.$4,595.95
3) Moving cash flows from one point in time to another requires us to use
A.only present value equations
B.only future value equations
C.both present value and future value equations
D.the Rule of 72
4) Buying Stock with Commission At your discount brokerage firm, it costs $9.95 per
stock trade. How much money do you need to buy 100 shares of Ralph Lauren (RL),
which trades at $85.13?
A.$8,503.05
B.$8,503.00
C.$8,595
D.$9,508.00
5) Which of these is an organization of 185 countries that monitors currency exchange,
examines financial stability, and watches the global financial system?
A.World Monetary Union
B.World Monetary Organization
C.International Monetary Fund
D.International Monetary Union
6) Call Premium A 6 percent corporate coupon bond is callable in ten years for a call
premium of one year of coupon payments. Assuming a par value of $1,000, what is the
price paid to the bondholder if the issuer calls the bond?
A.$60
B.$600
C.$1000
D.$1060
7) Which of the following is the firm’s highest-level financial manager?
A.Chief Executive Officer
B.Chief Financial Officer
C.Board of Directors
D.Corporate Governance
8) Which of the following is the most extreme type of financial distress for a business?
A.business failure
B.economic failure
C.technical insolvency
D.business extension
9) Rank the following bonds, from highest to lowest interest rate risk: 2-year zero
coupon, 2-year 5% coupon bond, 30-year 5% coupon bond, 30-year, zero coupon bond.
A.30-year, zero coupon bond, 30-year 5% coupon bond, 2-year 5% coupon bond,
2-year zero coupon bond
B.2-year 5% coupon bond, 2-year zero coupon bond, 30-year 5% coupon bond, 30-year
zero coupon bond
C.30-year, zero coupon bond, 30-year 5% coupon bond, 2-year zero coupon bond,
2-year 5% coupon bond
D.30-year, 5% coupon bond, 30-year zero coupon bond, 2-year 5% coupon bond,
2-year zero coupon bond
10) You note the following yield curve in The Wall Street Journal. According to the
unbiased expectations hypothesis, what is the one-year forward rate for the period
beginning one year from today, 2f1?
A.7.6%
B.8.6%
C.9.0%
D.10.2%
11) Buying Stock with a Market Order You would like to buy shares of Nokia (NOK).
The current bid and ask quotes are $20.13 and $20.15, respectively. You place a market
buy-order for 300 shares that executes at these quoted prices. How much money did it
cost to buy these shares?
A.$6.00
B.$6,039.00
C.$6,045.00
D.$12,084.00
12) The operating cycle will decrease with all of the following changes except
____________.
A.The cost of goods sold increases
B.The level of credit sales increases
C.The level of inventory decreases
D.All of these will decrease the operating cycle
13) CAPM Required Return A company has a beta of 3.25. If the market return is
expected to be 14 percent and the risk-free rate is 5.5 percent, what is the company’s
required return?
A.22.750%
B.33.125%
C.45.500%
D.51.000%
14) A Market in which corporations raise funds through new issues of securities is
referred to as a ____________.
A.Dealer market
B.Primary market
C.Spot market
D.Venture market
15) Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and
paying a $15,000 down payment. If you get a 15-year mortgage with a 6% interest rate,
what are the monthly payments?
A.$997.28
B.$1,072.51
C.$1,139.21
D.$1,238.93
16) This is a comparison of market yields on securities, assuming all characteristics
except maturity are the same.
A.liquidity risk
B.market risk
C.maturity risk
D.term structure of interest rates
17) Calculation of Bankruptcy Probability Suppose a linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms:
the debt ratio and the profit margin. Based on past bankruptcy experience, the linear
probability model is estimated as:
PDi = .20 (debt ratio) + .50 (profit margin)
You know a particular firm has a debt ratio of 60 percent and a probability of default of
15 percent. Calculate the firm’s profit margin.
A.6.00%
B.12.00%
C.19.50%
D.15.00%
18) JLP Industries has 6.5 million shares of common stock outstanding with a market
price of $20.00 per share. The company also has outstanding preferred stock with a
market value of $10 million, and 25,000 bonds outstanding, each with face value
$1,000 and selling at 90% of par value. The cost of equity is 14%, the cost of preferred
is 10%, and the cost of debt is 6.25%. If JLP’s tax rate is 34%, what is the WACC?
A.12.39%
B.12.98%
C.13.13%
D.13.72%
19) A survey of a local market has provided the following average cost data: Johnson
Construction Corp. (JCC) has assets of $3 million and an average cost of 22 percent.
Anderson Architects (AA) has assets of $4 million and an average cost of 31 percent.
Cole Home Builders (CHB) has assets of $5 million and an average cost of 28 percent.
For each firm, average costs are measured as a proportion of assets. JCC is planning to
acquire AA and CHB with the expectation of reducing overall average costs by
eliminating the duplication of services. If JCC plans to reduce operating costs by
$500,000 after the merger, what will the average cost be for the new firm?
A.23.33%
B.23.87%
C.24.12%
D.22.50%
20) Economies of Scope A survey of a local market has provided the following average
cost data: Johnson Construction Corp. (JCC) has assets of $5 million and an average
cost of 15 percent. Anderson Architects (AA) has assets of $8 million and an average
cost of 20 percent. Cole Home Builders (CHB) has assets of $8 million and an average
cost of 17 percent. For each firm, average costs are measured as a proportion of assets.
JCC is planning to acquire AA and CHB with the expectation of reducing overall
average costs by eliminating the duplication of services. If JCC plans to reduce
operating costs by $300,000 after the merger, what will the average cost be for the new
firm?
A.16.238%
B.15.00%
C.17.33%
D.17.667%
21) Exchange Rate Risk In the late 1990s, many East Asian currencies suddenly and
dramatically devalued. What is the percentage change in value of a $75 million
investment in Indonesia when the exchange rate changes from $1 = 1,000 rupiah to $1
= 7,000 rupiah?
A.14.29%
B.85.71%
C.12.5%
D.87.5%
22) Choosing the optimal level of investment in each current asset type involves a
trade-off between carry costs and
A.opportunity costs
B.financing costs
C.safety costs
D.shortage costs
23) Which of the following is a true statement?
A.A firm’s cost of debt increases with the use of equity in the capital structure
B.A firm’s cost of equity increases with the use of equity in the capital structure
C.A firm’s cost of equity increases with the use of debt in the capital structure
D.A firm’s cost of equity decreases with the use of debt in the capital structure
24) Which of the following is the type of financing that includes capital funds borrowed
from personal savings, friends and relatives, financial institutions such as commercial
banks, or venture capitalists?
A.debt financing
B.equity financing
C.public financing
D.capital financing
25) The efficient frontier portfolios are __________________________.
A.portfolios that risk adverse investors will select
B.portfolios where all the market risk is diversified away
C.portfolios where the correlation among assets is 0.0
D.portfolios that dominate all others
26) When saving for future expenditures, we can add the ________ of contributions
over time to see what the total will be worth at some point in time.
A.present value
B.future value
C.time value to money
D.payment
27) You are trying to pick the least-expensive car for your new delivery service. You
have two choices: the Scion xA, which will cost $15,000 to purchase and which will
have OCF of -$1,600 annually throughout the vehicle’s expected life of four years as a
delivery vehicle; and the Toyota Prius, which will cost $27,000 to purchase and which
will have OCF of -$750 annually throughout that vehicle’s expected six-year life. Both
cars will be worthless at the end of their life. If you intend to replace whichever type of
car you choose with the same thing when its life runs out, again and again out into the
foreseeable future, and if your business has a cost of capital of 10 percent, what is the
EAC of the most expensive car?
A.-$6,949.40
B.-$6,332.06
C.-$7,008.27
D.-$7,371.81
28) Articulate the rationale of the additional funds needed approach to estimating the
need for a firm to seek external financing.
29) What does the “term structure of interest rates” mean?
30) Present Value of an Annuity Carrie and Miranda earn the same salary. However,
Miranda has been far more financially responsible. She pays her bills on time and pays
off her credit card debt quickly. Carrie had been less financially responsible. She often
buys too many shoes and has allowed her credit card balance to balloon. If she is short
on cash for a month, she simply decides to not even pay the minimum balance due on
her credit card. Now they both are looking to buy apartments. Miranda decides she can
afford to make $2,500 payments, but Carrie can only make $2,000 payments and pay
off her credit card debt, too. Miranda qualifies for a 6.5%, 30-year mortgage, but
because of her bad credit rating Carrie will be charged 8% on a 30-year mortgage. Both
will put 20% down. How is Carrie’s bad credit going to impact her apartment search?
31) List and explain all the components of the WACC equation.
32) LG 5 2-21 Statement of Cash Flows Use the balance sheet and income statement
below to construct a statement of cash flows for Betty’s Bakery Corp.
