Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The
addition to retained earnings is $418 and net new equity is $500. The tax rate is 35
percent. Sales are $15,900 and depreciation is $680. What are the earnings before
interest and taxes?
A. $589.46
B. $1,269.46
C. $1,331.54
D. $1,951.54
E. $1,949.46
Answer:
Interest earned on both the initial principal and the interest reinvested from prior
periods is called:
A. free interest.
B. dual interest.
C. simple interest.
D. interest on interest.
E. compound interest.
Answer:
Hand Tools, Inc. receives an average of 611 checks a day. The average amount per
check is $425. The firm is considering a lockbox system which it anticipates will reduce
the average collection time by 1 day. The bank charges $0.275 a check for this service.
The daily interest rate on Treasury bills is 0.013 percent. What is the average daily cost
of the lockbox system?
A. $31.16
B. $54.19
C. $168.03
D. $180.11
E. $199.19
Answer:
Steele Insulators is analyzing a new type of insulation for interior walls. Management
has compiled the following information to determine whether or not this new insulation
should be manufactured. The insulation project has an initial fixed asset requirement of
$1.3 million, which would be depreciated straight-line to zero over the 12-year life of
the project. Projected fixed costs are $769,000 and the anticipated annual operating
cash flow is $241,000. What is the degree of operating leverage for this project?
A. 3.78
B. 3.92
C. 4.19
D. 4.27
E. 4.53
Answer:
A firm wants to maintain a minimum stock price of $15 a share. Due to a recent market
downturn, the stock is currently selling for $6 a share. The firm should consider a:
A. 3-for-1 stock split.
B. 4-for-1 stock split.
C. 1-for-3 reverse stock split.
D. 1-for-4 reverse stock split.
E. 1-for-5 reverse stock split.
Answer:
You own one call option with an exercise price of $40 on S’more Good stock. The stock
is currently selling for $41 a share but is expected to sell for either $37 or $43 a share in
one year. The risk-free rate of return is 4.25 percent and the inflation rate is 3.6 percent.
What is the current call option price if the option expires one year from now?
A. $0.55
B. $0.69
C. $1.37
D. $2.43
E. $2.75
Answer:
Which one of the five Cs of credit refers to a firm’s financial reserves?
A. character
B. capacity
C. collateral
D. conditions
E. capital
Answer:
The ABC approach to inventory management is based on the concept that:
A. inventory should arrive just in time to be used.
B. the inventory period should be constant for all inventory items.
C. basic inventory items that are essential to production and also inexpensive should be
ordered in small quantities only.
D. a small percentage of the inventory items probably represents a large percentage of
the inventory cost.
E. one-third of a year’s inventory need should be on hand, another third should be on
order, and the last third should not be ordered yet.
Answer:
Atlas Industries combines the smaller investment proposals from each operational unit
into a single project for planning purposes. This process is referred to as which one of
the following?
A. conjoining
B. aggregation
C. conglomeration
D. appropriation
E. summation
Answer:
Which one of the following is the financial statement that shows the accounting value
of a firm’s equity as of a particular date?
A. income statement
B. creditor’s statement
C. balance sheet
D. statement of cash flows
E. dividend statement
Answer:
Which one of the following statements currently applies to a NYSE broker?
A. owns a ‘seat” on the exchange
B. buys at the bid price
C. remains at his or her specified post
D. matches customer buy and sell orders
E. trades for his or her personal account
Answer:
You work for a nuclear research laboratory that is contemplating leasing a diagnostic
scanner (leasing is a very common practice with expensive, high-tech equipment). The
scanner costs $2 million and it would be depreciated straight-line to zero over 4 years.
Because of radiation contamination, it will actually be completely valueless in 4 years.
Assume the tax rate is 33 percent. You can borrow at 6 percent before taxes. How much
would the lease payment have to be in order for both the lessor and the lessee to be
indifferent about the lease?
A. $500,000
B. $521,909
C. $552,200
D. $563,333
E. $576,477
Answer:
Mangrove Fruit Farms has a $250,000 bond issue outstanding that is selling at 92
percent of face value. The firm also has 1,500 shares of preferred stock and 15,000
shares of common stock outstanding. The preferred stock has a market price of $35 a
share compared to a price of $24 a share for the common stock. What is the weight of
the preferred stock as it relates to the firm’s weighted average cost of capital?
A. 6.75 percent
B. 7.20 percent
C. 7.75 percent
D. 8.03 percent
E. 8.17 percent
Answer:
You are considering switching from an all cash credit policy to a net 30 credit policy.
You do not expect the switch to affect either your sales quantity or your sales price.
Ignoring interest and assuming that every month has 30 days, your net present value of
the switch will be equal to:
A. zero.
B. your selling price per unit.
C. your selling price per unit multiplied by -1.
D. your selling price per unit multiplied by -30.
E. your total monthly sales multiplied by -1.
Answer:
Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The
underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares
were purchased in accordance with which one of the following?
A. Green shoe provision
B. Red herring provision
C. quiet provision
D. lockup agreement
E. post-issue agreement
Answer:
Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an
accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit.
What is the days’ sales in receivables?
A. 21.90 days
B. 27.56 days
C. 33.18 days
D. 35.04 days
E. 36.19 days
Answer:
Which one of the following is a source of cash?
A. increase in accounts receivable
B. decrease in notes payable
C. decrease in common stock
D. increase in accounts payable
E. increase in inventory
Answer:
By definition, which of the following costs are included in the term “financial distress
costs”?
I. direct bankruptcy costs
II. indirect bankruptcy costs
III. direct costs related to being financially distressed, but not bankrupt
IV. indirect costs related to being financially distressed, but not bankrupt
A. I only
B. III only
C. I and II only
D. III and IV only
E. I, II, III, and IV
Answer:
Which one of the following will be used in the computation of the best-case analysis of
a proposed project?
A. minimal number of units that are expected to be produced and sold
B. the lowest expected salvage value that can be obtained for a project’s fixed assets
C. the most anticipated sales price per unit
D. the lowest variable cost per unit that can reasonably be expected
E. the highest level of fixed costs that is actually anticipated
Answer:
You are doing some comparison shopping. Five stores offer the product you want at
basically the same price. Which one of the following stores offers the best credit terms
if you plan to forego the discount?
A. store A
B. store B
C. store C
D. store D
E. store E
Answer:
Which one of the following will decrease the net working capital of a firm? Assume the
current ratio is greater than 1.0.
A. selling inventory at cost
B. collecting payment from a customer
C. paying a payment on a long-term debt
D. selling a fixed asset for book value
E. paying a supplier for the purchase of an inventory item
Answer:
Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a
lockbox system to speed up collections from its customers located on the East Coast. A
Philadelphia-area bank will provide this service for an annual fee of $25,000 plus 12
cents per transaction. The estimated reduction in collection and processing time is one
day. The average customer payment in this region is $8,200. Treasury bills are currently
yielding 5 percent per year. Assume a year has 365 days. Approximately how many
customers each day, on average, are needed to make the system profitable for Cow
Chips, Inc.?
A. 56
B. 68
C. 74
D. 83
E. 89
Answer:
The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share
over the last four years, respectively. The stock is currently selling for $26 a share.
What is this firm’s cost of equity?
A. 7.56 percent
B. 7.93 percent
C. 10.38 percent
D. 10.53 percent
E. 11.79 percent
Answer:
Percy’s Wholesale Supply has earnings before interest and taxes of $106,000. Both the
book and the market value of debt is $170,000. The unlevered cost of equity is 15.5
percent while the pre-tax cost of debt is 8.6 percent. The tax rate is 38 percent. What is
the firm’s weighted average cost of capital?
A. 11.94 percent
B. 12.65 percent
C. 13.45 percent
D. 14.01 percent
E. 14.37 percent
Answer:
The common stock of Metal Molds has a negative growth rate of 1.5 percent and a
required return of 18 percent. The current stock price is $11.40. What was the amount
of the last dividend paid?
A. $2.07
B. $2.11
C. $2.19
D. $2.22
E. $2.26
Answer:
Kate is attempting to sell her house for $260,000. Fred lives across the street in an
identical house. Fred recently stated to his wife that Kate’s house is probably worth only
$250,000 but that once she sells her house, he would like to put their house on the
market at $285,000 and then move into a condominium. Which one of the following
behaviors applies to Fred?
A. myopic loss aversion
B. house money effect
C. money illusion
D. self-attribution bias
E. endowment effect
Answer:
The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair. The
store consistently sells 5,700 pairs of these roller skates every year. The fixed costs to
order more skates is $68 and the carrying costs are $1.95 per pair. What is the economic
order quantity?
A. 446 pairs
B. 515 pairs
C. 529 pairs
D. 631 pairs
E. 648 pairs
Answer:
Weisbrough United currently has a cash sales only policy. Under this policy, the firm
sells 410 units a month at a price of $219 a unit. The variable cost per unit is $140 and
the carrying cost per unit is $3.30. The monthly interest rate is 1.3 percent. The firm
believes it can increase its sales to 475 units a month if it institutes a net 30 credit
policy. What is the net present value of the switch using the one-shot approach?
A. $255,590
B. $296,110
C. $298,470
D. $302,233
E. $305,902
Answer:
The most acceptable method of evaluating the financial statements of a firm is to
compare the firm’s current:
A. financial ratios to the firm’s historical ratios.
B. financial statements to the financial statements of similar firms operating in other
countries.
C. financial ratios to the average ratios of all firms located within the same geographic
area.
D. financial statements to those of larger firms in unrelated industries.
E. financial statements to the projections that were created based on Tobin’s Q.
Answer:
A firm is technically insolvent when:
A. it has a negative book value.
B. total debt exceeds total equity.
C. it is unable to meet its financial obligations.
D. it files for bankruptcy protection.
E. the market value of its stock is less than its book value.
Answer:
A bond has a market price that exceeds its face value. Which of the following features
currently apply to this bond?
I. discounted price
II. premium price
III. yield-to-maturity that exceeds the coupon rate
IV. yield-to-maturity that is less than the coupon rate
A. III only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only
Answer:
Which one of the following is a type of equity security that has a fixed dividend and a
priority status over other equity securities?
A. senior bond
B. debenture
C. warrant
D. common stock
E. preferred stock
Answer:
A firm has assets of $21.8 million and a 3-year, zero-coupon, risky bonds with a total
face value of $8.5 million. The bonds have a total current market value of $8.1 million.
How can the shareholders of this firm change these risky bonds into risk-free bonds?
A. purchase a call option with a 1-year life and a $8.1 million face value
B. purchase a call option with a 5-year life and a $8.5 million face value
C. purchase a put option with a 1-year life and a $21.8 million face value
D. purchase a put option with a 3-year life and a $8.1 million face value
E. purchase a put option with a 3-year life and an $8.5 million face value
Answer:
Uptown Men’s Wear has accounts payable of $2,214, inventory of $7,950, cash of
$1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of
$4,200. What is the value of the net working capital to total assets ratio?
A. 0.31
B. 0.42
C. 0.47
D. 0.51
E. 0.56
Answer: