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1) Central Staircase is offering preferred stock which is commonly referred to as 10-10
stock. This stock will pay an annual dividend of $10 a share starting 10 years from now.
What is this stock worth to you today if you desire a 16 percent rate of return?
A.$14.48
B.$16.43
C.$17.07
D.$17.84
E.$18.21
2) Homemade leverage is:
A.the incurrence of debt by a corporation in order to pay dividends to shareholders
B.the exclusive use of debt to fund a corporate expansion project
C.the borrowing or lending of money by individual shareholders as a means of
adjusting their level of financial leverage
D.best defined as an increase in a firm's debt-equity ratio
E.the term used to describe the capital structure of a levered firm
3) Which one of the following would tend to create an unexpected increase in a firm's
average collection period?
A.Increased credit sales
B.The implementation of a cash discount
C.Increased customer delinquencies
D.Increased dollar value per each sale
E.Increased collection efforts
4) Honest Abe's is a chain of furniture retail stores. Integral Designs is a furniture maker
and a supplier to Honest Abe's. Honest Abe's has a beta of 1.38 as compared to Integral
Designs' beta of 1.12. Both firms carry no debt, i.e., are 100% equity-financed. The
risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What
discount rate should Honest Abe's use if it considers a project that involves the
manufacturing of furniture?
A.12.46 percent
B.12.92 percent
C.13.50 percent
D.14.08 percent
E.14.54 percent
5) On April 14, Brewster's purchased $9,800 worth of inventory. The terms of sale were
2/10, net 30. The implicit interest is _____ and the effective annual rate is _____
percent.
A.$196; 14.95
B.$196; 44.59
C.$392; 14.95
D.$392; 27.38
E.$392; 44.59
6) The Outlet needs to raise $3.2 million for an expansion project. The firm wants to
raise this money by selling zero coupon bonds with a par value of $1,000 that mature in
20 years. The market yield on similar bonds is 7.8 percent. How many bonds must The
Outlet sell to raise the money it needs? (Assume semi-annual compounding.)
A.3,200 bond
B.3,450 bond
C.11,508 bond
D.13,797 bond
E.14,783 bonds
7) Janice plans to save $75 a month, starting today, for 20 years. Kate plans to save $80
a month for 20 years, starting one month from today. Both Janice and Kate expect to
earn an average return of 5.5 percent on their savings. At the end of the 20 years, Kate
will have approximately _____ more than Janice.
A.$2,028.39
B.$2,066.67
C.$2,091.50
D.$2,178.14
E.$2,189.12
8) LKP, Inc., stock has an expected return of 14.47 percent. The risk-free rate is 3.8
percent and the market risk premium is 8.6 percent. What is the stock's beta?
A.1.19
B.1.21
C.1.24
D.1.28
E.1.32
9) Tally Ho Inn has annual sales of $737,000. Earnings before interest and taxes is
equal to 21 percent of sales. For the period, the firm paid $7,900 in interest. What is the
profit margin if the tax rate is 35 percent?
A.12.46 percent
B.12.95 percent
C.13.33 percent
D.15.29 percent
E.16.11 percent
10) Which of the following should be included when compiling pro forma statements
for a proposed investment?
I. forecasted sales
II. start-up costs
III. aftertax salvage value of any assets sold
IV. anticipated changes in net working capital
A.I only
B.II and IV only
C.I, II, and III only
D.II, III, and IV only
E.I, II, III, and IV
11) The 8 percent, $1,000 face value bonds of Glenmore Foods are currently selling at
$1,027. These bonds have 16 years left until maturity. What is the current yield?
A.7.71 percent
B.7.79 percent
C.8.00 percent
D.8.23 percent
E.8.28 percent
12) A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the
security market line. A risk-free asset is yielding 2.8 percent. You want to create a
$6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio
beta is 0.65. What rate of return should you expect to earn on your portfolio?
A.8.50 percent
B.9.16 percent
C.9.33 percent
D.9.41 percent
E.9.56 percent
13) Great Woods sells specialty equipment for mountain climbers. Its sales for last year
included $238,000 of tents and $411,000 of climbing gear. For next year, management
has decided to sell specialty sleeping bags also. As a result of this change, sales
projections for next year are $254,000 of tents, $426,000 of climbing gear, and $51,000
of sleeping bags. How much of next year's sales are derived from the side effects of
adding the new product to its sales offerings?
A.$0
B.$15,500
C.$31,000
D.$51,000
E.$82,000
14) Christie is buying a new car today and is paying a $500 cash down payment. She
will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly
payments of $450 each with the first payment due 30 days from today. Which one of
the following statements is correct concerning this purchase?
A.The present value of the car is equal to $500 + (36 $450)
B.The $500 is the present value of the purchase
C.The car loan is an annuity due
D.To compute the initial loan amount, you must use a monthly interest rate
E.The future value of the loan is equal to 36 $450
15) When issuing securities, which of the following can occur prior to receiving the
approval by the SEC of a registration statement?
I. oral offer to buy shares
II. written offer to buy shares
III. final determination of the offer price
IV. distribution of a preliminary prospectus
A.I only
B.III only
C.III and IV only
D.I and IV only
E.None of the listed activities can occur until after the SEC approval is received
16) Industrial Machines has the following estimates for its new gear assembly project:
price = $1,340 per unit; variable costs = $348 per unit; fixed costs = $5.1 million;
quantity = 82,000 units. Suppose the company believes all of its estimates are accurate
only to within 4 percent. What value should the company use for its total variable costs
when performing its best-case scenario analysis?
A.$26,578,064
B.$28,490,342
C.$28,536,000
D.$29,802,130
E.$30,864,538
17) The capital structure weights used in computing the weighted average cost of
capital:
A.are based on the book values of total debt and total equity
B.are based on the market value of the firm's debt and equity securities
C.are computed using the book value of the long-term debt and the book value of equity
D.remain constant over time unless the firm issues new securities
E.are restricted to the firm's debt and common stock
18) An investment has conventional cash flows and a profitability index of 1.0. Given
this, which one of the following must be true?
A.The internal rate of return exceeds the required rate of return
B.The investment never pays back
C.The net present value is equal to zero
D.The average accounting return is 1.0
E.The net present value is greater than 1.0
19) Cash dividends send which two of the following signals to the market?
I. agency costs will be lowered since less cash will be held by the firm
II. the firm is planning on downsizing
III. the firm is currently, and expects to continue to be, profitable
IV. the firm will no longer conduct stock repurchases
A.I and II only
B.II and III only
C.III and IV only
D.II and IV only
E.I and III only
20) A prepack:
A.guarantees full payment to all creditors but lengthens the time span of the debt
B.is the joint filing of both a bankruptcy filing and a creditor-approved reorganization
plan
C.protects the interests of both the current creditors and the existing shareholders
D.applies only if a firm files under Chapter 7 of the bankruptcy code
E.extends the time that a firm is protected by the bankruptcy process
21) You are buying a bond at a clean price of $1,140. The bond has a face value of
$1,000, an 8 percent coupon, and pays interest semiannually. The next coupon payment
is 1 month from now. What is the dirty price of this bond?
A.$1,000.00
B.$1,146.67
C.$1,173.33
D.$1,176.67
E.$1,180.00
22) Which one of the following best defines a regular cash dividend?
A.Distribution by a firm to its shareholders
B.Payment from any source by a firm to its owners
C.One-time payment of cash by a firm to its shareholders
D.Cash payment by a firm to its owners as part of a firm's normal operations
E.Distribution of the proceeds from the sale of a portion of a firm's operations
23) Newly issued securities are sold to investors in which one of the following markets?
A.Proxy
B.Stated value
C.Inside
D.Secondary
E.Primary
24) A fire has destroyed a large percentage of the financial records of the Strongwell
Co. You have the task of piecing together information in order to release a financial
report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the
total debt ratio was 0.42, and total debt was $548,000. What is the return on assets?
A.6.92 percent
B.8.00 percent
C.8.45 percent
D.9.03 percent
E.9.29 percent
25) A firm has sales of $311,000 and net income of $21,600. Currently, there are 18,000
shares outstanding at a market price of $36 per share. What is the price-sales ratio?
A.2.08
B.3.11
C.4.26
D.5.15
E.6.95
26) The dividend yield is defined as:
A.the current annual cash dividend divided by the current market price per share
B.the current annual cash dividend divided by the current book value per share
C.next year's expected cash dividend divided by the current market price per share
D.next year's expected cash dividend divided by the current book value per share
E.next year's expected cash dividend divided by next year's expected market price per
share
27) Stock A has a beta of 1.47 while stock B has a beta of 1.08 and an expected return
of 13.2 percent. What is the expected return on stock A if the risk-free rate is 4.5 percent
and both stocks have equal reward-to-risk premiums?
A.12.12 percent
B.15.07 percent
C.16.34 percent
D.16.89 percent
E.17.78 percent
28) One year ago, you bought a stock for $36.48 a share. You received a dividend of
$1.62 per share last month and sold the stock today for $40.18 a share. What is the
capital gains yield on this investment?
A.2.86 percent
B.3.70 percent
C.10.14 percent
D.12.29 percent
E.14.58 percent
29) A new project you are considering is expected to generate an operating cash flow of
$48,210 and will initially free up $21,630 in net working capital. Purchases of fixed
assets costing $67,800 will be required to start up the project. What is the total cash
flow for this project at time zero?
A.-$67,800
B.-$46,170
C.-$1,040
D.-$26,580
E.-$41,220
