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An investment project provides cash flows of $1,190 per year for 10 years. If the initial
cost is $8,000, what is the payback period?
A. 3.36 years
B. 5.28 years
C. 6.72 years
D. 8.13 years
E. never
Answer:
Which of the following are considered weaknesses in the average accounting return
method of project analysis?
I. exclusion of time value of money considerations
II. need of a cutoff rate
III. easily obtainable information for computation
IV. based on accounting values
A. I only
B. I and IV only
C. II and III only
D. I, II, and IV only
E. I, II, III, and IV
Answer:
A stock has returns of 18 percent, 15 percent, -21 percent, and 6 percent for the past
four years. Based on this information, what is the 95 percent probability range of
returns for any one given year?
A. -13.56 to 20.56 percent
B. -24.60 to 31.80 percent
C. -31.00 to 40.00 percent
D. -47.68 to 54.68 percent
E. -71.73 to 71.73 percent
Answer:
The base case values used in scenario analysis are the ones considered the most:
A. optimistic.
B. desired by management.
C. pessimistic.
D. conducive to creating a positive net present value.
E. likely to occur.
Answer:
Cross Town Express is contemplating the acquisition of some new equipment. The
purchase price is $74,000. The equipment would be depreciated using MACRS
depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41
percent depreciation over years 1 to 4, respectively. The equipment would be worthless
after that time. The equipment can be leased for $19,100 a year for 4 years. The firm
can borrow money at 9.5 percent and has a 28 percent tax rate. What is the incremental
annual cash flow for year 3 if the company decides to lease the equipment rather than
purchase it?
A. -$16,823
B. -$15,797
C. $14,312
D. $15,797
E. $16,823
Answer:
Which one of the following grants an individual the right to vote on behalf of a
shareholder?
A. proxy
B. by-laws
C. indenture agreement
D. stock option
E. stock audit
Answer:
The process of determining the present value of future cash flows in order to know their
worth today is called which one of the following?
A. compound interest valuation
B. interest on interest computation
C. discounted cash flow valuation
D. present value interest factoring
E. complex factoring
Answer:
Given the following information, what is the value of d2 as it is used in the
Black-Scholes option pricing model?
A. -1.1346
B. -0.8657
C. -0.8241
D. -0.7427
E. -0.7238
Answer:
Which one of the following statements regarding employee stock options (ESOs) is
correct?
A. ESOs grant an employee the right to buy a fixed number of shares of company stock
at the market price.
B. Employees must exercise their ESOs prior to those ESOs becoming vested.
C. Employees may forfeit their ESOs if they terminate their employment with the
issuing firm.
D. If a firm issues ESOs it must make them available to all employees.
E. Employees can sell their ESOs if they do not want to personally exercise them.
Answer:
A preferred stock pays an annual dividend of $3.20. What is one share of this stock
worth today if the rate of return is 11.75 percent?
A. $23.48
B. $25.00
C. $27.23
D. $33.80
E. $35.55
Answer:
Outdoor Living needs $7.5 million to finance modifications to its production equipment
because the design of its all-season tents has changed dramatically. The underwriters
estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5
percent underwriting spread. This would be a firm commitment underwriting. The
estimated issue costs are $125,000. How many shares of stock will Outdoor Living
need to sell to finance this project?
A. 568,500 shares
B. 488,917 shares
C. 452,311 shares
D. 559,180 shares
E. 562,400 shares
Answer:
You are considering the following two mutually exclusive projects. Both projects will
be depreciated using straight-line depreciation to a zero book value over the life of the
project. Neither project has any salvage value.
Should you accept or reject these projects based on the average accounting return?
A. accept Project A and reject Project B
B. reject Project A and accept Project B
C. accept both Projects A and B
D. reject both Projects A and B
E. You cannot make this decision based on the information provided.
Answer:
Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for
$92 per share. What is the bank's cost of preferred?
A. 4.60 percent
B. 4.64 percent
C. 5.39 percent
D. 5.43 percent
E. 5.54 percent
Answer:
Which one of the following statements related to risk is correct?
A. The beta of a portfolio must increase when a stock with a high standard deviation is
added to the portfolio.
B. Every portfolio that contains 25 or more securities is free of unsystematic risk.
C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the
portfolio.
D. Adding five additional stocks to a diversified portfolio will lower the portfolio's beta.
E. Stocks that move in tandem with the overall market have zero betas.
Answer:
Douglass Interiors is considering two mutually exclusive projects and have determined
that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of
return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this
information, which one of the following statements is correct?
A. Project A should be accepted as its IRR is closer to the crossover point than is
Project B's IRR.
B. Project B should be accepted as it has the higher IRR.
C. Both projects should be accepted as both of the project's IRRs exceed the crossover
rate.
D. Neither project should be accepted since both of the project's IRRs exceed the
crossover rate.
E. You cannot determine which project should be accepted given the information
provided.
Answer:
The price of Time Squared Corp. stock will be either $80 or $95 at the end of the year.
Call options are available with one year to expiration. T-bills currently yield 6 percent
and the current price of Time Squared Corp. stock is $85. What is the value of a call
option if the exercise price is $75 per share?
A. $14.25
B. $15.06
C. $18.78
D. $24.25
E. $25.06
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.
You can lease it for $475,000 per year for 4 years. Assume the tax rate is 34 percent.
You can borrow at 10 percent before taxes. What is the net advantage to leasing from
the lessor's viewpoint?
A. -$376,439
B. -$290,988
C. -$248,464
D. $26,228
E. $103,511
Answer:
The EOQ model is designed to determine how much:
A. total inventory a firm needs in any one year.
B. total inventory costs will be for any one given year.
C. inventory should be purchased at a time.
D. inventory will be sold per day.
E. a firm loses in sales per day when an inventory item is depleted.
Answer:
Which one of the following is the best example of two mutually exclusive projects?
A. building a retail store that is attached to a wholesale outlet
B. producing both plastic forks and spoons on the same assembly line at the same time
C. using an empty warehouse to store both raw materials and finished goods
D. promoting two products during the same television commercial
E. waiting until a machine finishes molding Product A before being able to mold
Product B
Answer:
The difference between the underwriters' cost of buying shares in a firm commitment
and the offering price of those securities to the public is called the:
A. gross spread.
B. under price amount
C. filing fee.
D. new issue premium.
E. offer price.
Answer:
The Miller-Orr model assumes that:
A. the cash balance is depleted at regular intervals.
B. all cash flows are known with certainty.
C. the average change in the daily cash flows is positive.
D. management will set both the lower and the upper desired levels of cash.
E. the cash balance fluctuates in a random manner.
Answer:
Which one of the following indicates a portfolio is being effectively diversified?
A. an increase in the portfolio beta
B. a decrease in the portfolio beta
C. an increase in the portfolio rate of return
D. an increase in the portfolio standard deviation
E. a decrease in the portfolio standard deviation
Answer:
Which one of the following statements is correct?
A. Firms with large net operating losses tend to be acquiring firms rather than target
firms.
B. The leverage associated with an acquisition increases the tax liability of the
acquiring firm.
C. If either an increase or a decrease in the level of production causes the average cost
per unit to increase then the firm is currently operating at its optimal production level.
D. Firms can always benefit from economies of scale if they increase the size of their
firm through acquisitions.
E. If a firm uses it surplus cash to acquire another firm then the shareholders of the
acquiring firm immediately incur a tax liability related to the transaction.
Answer:
Coulter Supply has a total debt ratio of 0.52. What is the equity multiplier?
A. 0.89
B. 1.13
C. 1.47
D. 2.08
E. 2.13
Answer:
Elizabeth owns a call option on 100 shares of Microsoft stock. She has decided to buy
those shares. This purchase is commonly referred to as:
A. striking the asset.
B. expiring the option.
C. exercising the option.
D. putting the collar.
E. the collar option.
Answer:
Dixie Supply has total assets with a current book value of $368,900 and a current
replacement cost of $486,200. The market value of these assets is $464,800. What is the
value of Tobin's Q?
A. .86
B. .92
C. .96
D. 1.01
E. 1.06
Answer:
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500
per set and have a variable cost of $200 per set. The company spent $113,000 for a
marketing study that determined the company will sell 58,000 sets per year for 7 years.
The marketing study also determined that the company will lose sales of 15,000 sets of
its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of
$300. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap
clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year
will be $7,559,000. The company has also spent $1,133,000 on research and
development for the new clubs. The plant and equipment required will cost $21,000,000
and will be depreciated on a straight-line basis over the life of the project. The new
clubs will also require an increase in net working capital of $1,053,000 that will be
returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 8
percent. What is the IRR?
A. 7.51 percent
B. 7.82 percent
C. 8.13 percent
D. 8.49 percent
E. 8.62 percent
Answer:
As of 2012, which one of the following statements concerning corporate income taxes
is correct?
A. The largest corporations have an average tax rate of 39 percent.
B. The lowest marginal rate is 25 percent.
C. A firm's tax is computed on an incremental basis.
D. A firm's marginal tax rate will generally be lower than its average tax rate once the
firm's income exceeds $50,000.
E. When analyzing a new project, the average tax rate should be used.
Answer:
On May 1, your firm had a beginning cash balance of $175. Your sales for April were
$430 and your May sales were $480. During May, you had cash expenses of $110 and
payments on your accounts payable of $290. Your accounts receivable period is 30
days. What is your firm's beginning cash balance on June 1?
A. $145
B. $155
C. $205
D. $215
E. $265
Answer:
Suzie is the controller of The Price Rite Company. She has been granted the right to buy
1,000 shares of her employer's stock at $25 a share anytime within the next three years.
Which one of the following has Suzie been granted?
A. employee stock option
B. company bonus option
C. employee grant
D. employee exercise option
E. company benefits option
Answer:
This morning, Krystal purchased shares of Global Markets stock at a cost of $39.40 per
share. She simultaneously purchased puts on Global Markets stock at a cost of $1.50
per share and a strike price of $40 per share. The put expires in one year. How much
profit will she earn per share on these transactions if the stock is worth $38 a share one
year from now?
A. -$2.65
B. -$1.25
C. -$0.90
D. $0.60
E. $1.25
Answer:
