1) Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock
sells for $28.40 a share at a required return of 14 percent. What is the amount of the last
dividend this company paid?
A.$3.50
B.$3.55
C.$3.60
D.$3.65
E.$3.70
2) The spot rate between Japan and the U.S. is 100.37 = $1, while the 1-year forward
rate is 99.97 = $1. A 1-year risk-free security in the U.S. is yielding 3.8 percent. What is
the rate of return on a 1-year risk-free security in Japan assuming that interest rate
parity exists?
A.3.32 percent
B.3.39 percent
C.3.44 percent
D.3.49 percent
E.3.56 percent
3) Currently, you can exchange $1 for 100.37 yen or 0.7538 in New York. In Tokyo, the
exchange rate is 1 = 0.0077. If you have $1,000, how much profit can you earn using
triangle arbitrage?
A.$18.08
B.$25.27
C.$27.91
D.$32.50
E.$33.14
4) Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The
asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period
equity) is 1.77. What is the sustainable rate of growth?
A.1.91 percent
B.6.12 percent
C.10.83 percent
D.11.26 percent
E.74 percent
5) Which of the following features are advantages of the dividend growth model?
I. easy to understand
II. model simplicity
III. constant dividend growth rate
IV. model’s applicability to all common stocks
A.II only
B.I and III only
C.II and IV only
D.I and II only
E.I, II, and III only
6) The Color Box uses a combination of common stock, preferred stock, and debt
financing. The company wants preferred stock to represent 8 percent of the total
financing. It also wants to structure the firm in a manner that will produce a weighted
average cost of capital of 10.25 percent. The aftertax cost of debt is 5.1 percent, the cost
of preferred is 9.3 percent, and the cost of common stock is 15.6 percent. What
percentage of the firm’s capital funding should be debt financing?
A.46.12 percent
B.52.03 percent
C.54.15 percent
D.58.78 percent
E.63.21 percent
7) Second Union Bank pays 5 percent simple interest on its savings account balances,
whereas Third Street Bank pays 5 percent compounded annually. If you made a $12,000
deposit in each bank, how much more money would you earn from your Third Street
Bank account at the end of 15 years?
A.$3,602.89
B.$3,947.14
C.$4,008.01
D.$4,221.15
E.$4,414.14
8) The balance sheet for Quik Treats, Inc. is shown here in market value terms. There
are 20,000 shares of stock outstanding.
The company has declared a dividend of $1.40 per share. The stock goes ex-dividend
tomorrow. Ignore any tax effects. What will the firm’s equity value be after the dividend
is paid?
A.$572,000
B.$587,000
C.$603,000
D.$615,000
E.$643,000
9) Benny’s is considering adding a new product to its lineup. This product is expected to
generate sales for four years after which time the product will be discontinued. What is
the project’s net present value if the firm wants to earn a 14 percent rate of return?
A.$2,336.29
B.$2,511.49
C.$2,874.21
D.$3,013.05
E.$3,268.47
10) The interest tax shield has no value when a firm has:
I. no taxable income.
II. debt-equity ratio of 1.
III. zero debt.
IV. no leverage.
A.I and III only
B.II and IV only
C.I, III, and IV only
D.II, III, and IV only
E.I, II, and IV only
11) Which of the following will increase the present value of an annuity, all else held
constant?
I. Increase in the number of payments
II. Increase in the interest rate
III. Decrease in the interest rate
IV. Decrease in the payment amount
A.I and II only
B.I and III only
C.II and IV only
D.I, II, and IV only
E.I, III, and IV only
12) What percent of capital gains are excluded from taxation for corporate
shareholders?
A.0 percent
B.10 percent
C.25 percent
D.70 percent
E.75 percent
13) Net working capital is defined as:
A.the depreciated book value of a firm’s fixed assets
B.the value of a firm’s current assets
C.available cash minus current liabilities
D.total assets minus total liabilities
E.current assets minus current liabilities
14) All else constant, an increase in a firm’s cost of debt:
A.could be caused by an increase in the firm’s tax rate
B.will result in an increase in the firm’s cost of capital
C.will lower the firm’s weighted average cost of capital
D.will lower the firm’s cost of equity
E.will increase the firm’s capital structure weight of debt
15) A security produced returns of 12 percent, -11 percent, -2 percent, 15 percent, and 9
percent over the past five years, respectively. Based on these five years, what is the
probability that an investor in this stock will lose more than 17.06 percent in any one
given year?
A.0.50 percent
B.1.00 percent
C.1.25 percent
D.2.50 percent
E.5.00 percent
16) A local magazine is offering a $2,500 grand prize to one lucky winner. $1,000 will
be paid on the day of the drawing. The remaining $1,500 will be paid in three annual
payments of $500 each, starting one year after the drawing. How much would this prize
be worth to you if you can earn 9 percent on your money?
A.$2,048.18
B.$2,164.29
C.$2,265.65
D.$2,450.14
E.$2,545.54
17) Aaron’s Market is implementing a project that will initially increase accounts
payable by $3,600, increase inventory by $4,800, and decrease accounts receivable by
$800. All net working capital will be recouped when the project terminates. What is the
cash flow related to the net working capital for the last year of the project?
A.-$2,000
B.-$400
C.$400
D.$1,200
E.$2,000
18) Margie opened a used book store and is both the 100 percent owner and the store’s
manager. Which type of business entity does Margie own if she is personally liable for
all the store’s debts?
A.Sole proprietorship
B.Limited partnership
C.Corporation
D.Joint stock company
E.General partnership
19) Alicia placed an order with her broker to purchase 500 shares of each of three IPOs
that are being released this month. Each IPO has an offer price of $16 a share. The
number of shares allocated to Alicia along with the closing stock price at the end of the
first day of trading for each stock, are as follows:
What is Alicia’s total profit or loss on these three stocks as of the end of the first day of
trading for each stock?
A.-$425
B.-$260
C.-$150
D.$375
E.$550
20) This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it
up and noticed that the bond matured today. He presented the bond to the bank teller
and received both the principal and interest payment. The bond that Jeff found must
have been which one of the following?
A.Debenture
B.Note
C.Registered form bond
D.Bearer form bond
E.Callable bond
21) Which one of the following formulas illustrates the mechanics of covered interest
arbitrage? Assume the $1 is borrowed and S0 = spot rate; F1 = one-year forward rate;
RF = foreign country risk-free rate; and RUS = U.S. risk-free rate.
A.$1 F1 (1 + RF)/S0 – $1 (1 + RUS)
B.$1 S0 (1 + RF)/F1 – $1 (1 + RUS)
C.$1 F1 (1 + RF)/S0 + $1 (1 + RUS)
D.$1 S0 (1 + RF) – $1 (1 + RUS)/F1
E.$1 S0 (1 + RF)/F1 + $1 (1 + RUS)
22) Percentage returns:
I. are easy to understand.
II. relay information about a security more easily than dollar returns do.
III. are not affected by the amount of the investment.
IV. can be easily separated into dividend yield and capital gain yield.
A.II and III only
B.I and III only
C.I, II, and III only
D.I, II, and IV only
E.I, II, III, and IV
23) A stock has a beta of 1.37 and an expected return of 16.6 percent. The risk-free rate
is 4.8 percent. What is the slope of the security market line?
A.6.49 percent
B.7.28 percent
C.8.61 percent
D.9.23 percent
E.9.99 percent
24) Steve has estimated the cash inflows and outflows for his sporting goods store for
next year. The report that he has prepared summarizing these cash flows is called a:
A.pro forma income statement.
B.sales projection
C.cash budget
D.receivables analysis
E.credit analysis
25) Which one of the following is the vertical intercept of the security market line?
A.Market rate of return
B.Individual security rate of return
C.Market risk premium
D.Individual security beta multiplied by the market risk premium
E.Risk-free rate
26) ASP, Inc. needs to raise $32 million to finance its expansion into new markets. The
company will sell new shares of equity via a general cash offering to raise the needed
funds. If the offer price is $45 per share and the company’s underwriters charge a 7.5
percent spread, how many shares need to be sold?
A.648,729 shares
B.691,208 shares
C.723,467 shares
D.768,769 shares
E.801,323 shares
27) If the market price of existing publicly traded shares declines due to the
announcement of a seasoned issue of stock, the decline is referred to as which one of
the following?
A.Spread
B.Direct underwriting cost
C.Underpricing
D.Direct issue cost
E.Abnormal return
28) Which one of the following terms is used to identify the concept that exchange rates
vary to keep purchasing power constant among currencies?
A.Exchange rate equilibrium
B.Exchange rate parity
C.Universal parity
D.Market equilibrium
E.Purchasing power parity
29) Which two of the following tend to limit the amount of dividends that can be paid
by a leveraged corporation?
I. current tax laws
II. corporate tax exclusion
III. bond indenture covenant
IV. state laws pertaining to retained earnings
A.I and II only
B.I and III only
C.II and III only
D.II and IV only
E.III and IV only