A firm is currently operating at full capacity. Net working capital, costs, and all assets
vary directly with sales. The firm does not wish to obtain any additional equity
financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive
external financing need, that need will be met by:
A. accounts payable.
B. long-term debt.
C. fixed assets.
D. retained earnings.
E. common stock.
You have won a contest and will receive $2,500 a year in real terms for the next 3 years.
Each payment will be received at the end of the period with the first payment occurring
one year from today. The relevant nominal discount rate is 6.3 percent and the inflation
rate is 4.5 percent. What are your winnings worth today?
A. $7,249
B. $7,367
C. $7,401
D. $7,500
E. $7,838
If you extend credit for a one-time sale to a new customer you risk an amount equal to:
A. the sales price of the item sold.
B. the variable cost of the item sold.
C. the fixed cost of the item sold.
D. the profit margin on the item sold.
E. zero.
Tucker’s National Distributing has a current market value of equity of $10,665.
Currently, the firm has excess cash of $640, total assets of $22,400, net income of
$3,210, and 500 shares of stock outstanding. Tucker’s is going to use all of its excess
cash to repurchase shares of stock. What will the stock price per share be after the stock
repurchase is completed?
A. $20.87
B. $20.94
C. $21.06
D. $21.33
E. $21.42
Currently, The Toy Box sells 465 units a month at an average price of $39 a unit. The
company thinks it can increase sales by an additional 130 units a month if it switches to
a net 30 credit policy. The monthly interest rate is 0.4 percent and the variable cost per
unit is $21. What is the incremental cash inflow of the proposed credit policy switch?
A. $2,120
B. $2,340
C. $2,200
D. $2,730
E. $5,070
By hedging financial risk, a firm can:
A. ensure a steady rate of return for its shareholders.
B. eliminate price changes over the long-term.
C. ensure its own economic viability.
D. gain time to adapt to changing market conditions.
E. eliminate its exposure to price increases in raw materials.
Jean’s Warehouse has 16,000 shares of stock outstanding. The current market value of
the firm is $768,000. The company has retained earnings of $123,000, paid in surplus of
$321,000, and a common stock account value of 16,000. The company is planning a
5-for-3 stock split. What will the retained earnings account value be after the split?
A. $73,800
B. $123,000
C. $153,600
D. $205,000
E. $245,500
You want to buy a bond from a dealer. Which one of the following prices will you pay?
A. call price
B. auction price
C. bid price
D. asked price
E. bid-ask spread
Sweet Treats common stock is currently priced at $19.06 a share. The company just
paid $1.15 per share as its annual dividend. The dividends have been increasing by 2.5
percent annually and are expected to continue doing the same. What is this firm’s cost
of equity?
A. 6.03 percent
B. 6.18 percent
C. 8.47 percent
D. 8.68 percent
E. 8.82 percent
Which of the following will increase the cash cycle, all else constant?
I. increasing the inventory period
II. decreasing the accounts receivable turnover rate
III. increasing the accounts payable period
IV. decreasing the accounts receivable period
A. I and II only
B. III and IV only
C. I and IV only
D. I, II, and III only
E. I, III, and IV only
A group of individuals got together and purchased all of the outstanding shares of
common stock of DL Smith, Inc. What is the return that these individuals require on
this investment called?
A. dividend yield
B. cost of equity
C. capital gains yield
D. cost of capital
E. income return
When using the equivalent annual cost as a basis for deciding which equipment should
be purchased, the equipment under consideration must fit which two of the following
criteria?
I. differing productive lives
II. differing manufacturers
III. required replacement at end of economic life
IV. differing initial cost
A. I and II
B. I and III
C. I and IV
D. II and IIII
E. II and IV
Consider the following premerger information about a bidding firm (Firm B) and a
target firm (Firm T). Assume that neither firm has any debt outstanding.
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is
$2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired
for $28 per share in cash?
A. $400
B. $600
C. $1,800
D. $2,200
E. $2,600
Six months ago, you purchased 100 shares of stock in Global Trading at a price of
$38.70 a share. The stock pays a quarterly dividend of $0.15 a share. Today, you sold all
of your shares for $40.10 per share. What is the total amount of your dividend income
on this investment?
A. $15
B. $30
C. $45
D. $50
E. $60
Which one of the following bonds is the least sensitive to interest rate risk?
A. 3-year; 4 percent coupon
B. 3-year; 6 percent coupon
C. 5-year; 6 percent coupon
D. 7-year; 6 percent coupon
E. 7-year; 4 percent coupon
Which one of the following is the risk that a firm faces when it opens a facility in a
foreign country, given that the exchange rate between the firm’s home country and this
foreign country fluctuates over time?
A. international risk
B. diversifiable risk
C. purchasing power risk
D. exchange rate risk
E. political risk
Today, you want to sell a $1,000 face value zero coupon bond you currently own. The
bond matures in 4.5 years. How much will you receive for your bond if the market yield
to maturity is currently 5.33 percent? Ignore any accrued interest.
A. $696.60
B. $698.09
C. $741.08
D. $756.14
E. $789.22
Shareholders probably have the most interest in which one of the following sets of
ratios?
A. return on assets and profit margin
B. long-term debt and times interest earned
C. price-earnings and debt-equity
D. market-to-book and times interest earned
E. return on equity and price-earnings
Grocery Express stock is selling for $22 a share. A 3-month, $20 call on this stock is
priced at $2.65. Risk-free assets are currently returning 0.2 percent per month. What is
the price of a 3-month put on Grocery Express stock with a strike price of $20?
A. $0.37
B. $0.53
C. $0.67
D. $1.10
E. $1.18
One year ago, you purchased a stock at a price of $32.16. The stock pays quarterly
dividends of $0.20 per share. Today, the stock is selling for $28.20 per share. What is
your capital gain on this investment?
A. -$4.16
B. -$3.96
C. -$3.76
D. -$3.16
E. -$2.96
Jemisen’s has expected earnings before interest and taxes of $6,200. Its unlevered cost
of capital is 13 percent and its tax rate is 34 percent. The firm has debt with both a book
and a face value of $2,500. This debt has a 9 percent coupon and pays interest annually.
What is the firm’s weighted average cost of capital?
A. 12.48 percent
B. 12.66 percent
C. 13.87 percent
D. 14.14 percent
E. 14.37 percent
A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation
of $6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio?
A. 12.14
B. 15.24
C. 17.27
D. 23.41
E. 24.56
Jefferson Mills just paid a dividend of $1.56 per share on its stock. The dividends are
expected to grow at a constant rate of 8 percent per year, indefinitely. What will the
price of this stock be in 7 years if investors require a 15 percent rate of return?
A. $28.18
B. $32.04
C. $37.46
D. $41.25
E. $43.33
The current market value of the assets of Nano Tek is $16 million. The market value of
the equity is $7.5 million. The risk-free rate is 4.5 percent and the outstanding debt
matures in 5 years. What is the market value of the firm’s debt?
A. $8.50 million
B. $9.98 million
C. $12.00 million
D. $19.42 million
E. $23.84 million
Which one of the following is correct in relation to pro forma statements?
A. Fixed assets must increase if sales are projected to increase.
B. Net working capital is affected only when a firm’s sales are expected to exceed the
firm’s current production capacity.
C. The addition to retained earnings is equal to net income plus dividends paid.
D. Long-term debt varies directly with sales when a firm is currently operating at
maximum capacity.
E. Inventory changes are directly proportional to sales changes.
Suppose you are committed to owning a $140,000 Ferrari. You believe your mutual
fund can achieve an annual rate of return of 9 percent and you want to buy the car in 7
years. How much must you invest today to fund this purchase assuming the price of the
car remains constant?
A. $74,208.16
B. $76,584.79
C. $77,911.08
D. $78,019.82
E. $79,446.60
Which of the following are needed to determine the amount of fixed assets required to
support each dollar of sales?
I. current amount of fixed assets
II. current sales
III. current level of operating capacity
IV. projected growth rate of sales
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Phil’s is a sit-down restaurant that specializes in home-cooked meals. Theresa’s is a
walk-in deli that specializes in specialty soups and sandwiches. Both firms are currently
considering expanding their operations during the summer months by offering
pre-wrapped donuts, sandwiches, and wraps at a local beach. Phil’s currently has a
WACC of 14 percent while Theresa’s WACC is 10 percent. The expansion project has a
projected net present value of $12,600 at a 10 percent discount rate and a net present
value of -$2,080 at a 14 percent discount rate. Which firm or firms should expand and
offer food at the local beach during the summer months?
A. Phil’s only
B. Theresa’s only
C. both Phil’s and Theresa’s
D. neither Phil’s nor Theresa’s
E. cannot be determined from the information provided
Valerie just completed analyzing a project. Her analysis indicates that the project will
have a 6-year life and require an initial cash outlay of $320,000. Annual sales are
estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative
$320,000. Based on this analysis, the project is expected to operate at the:
A. maximum possible level of production.
B. minimum possible level of production.
C. financial break-even point.
D. accounting break-even point.
E. cash break-even point.
When evaluating an acquisition you should:
A. concentrate on book values and ignore market values.
B. focus on the total cash flows of the merged firm.
C. apply the rate of return that is relevant to the incremental cash flows.
D. ignore any one-time acquisition fees or transaction costs.
E. ignore any potential changes in management.
Which of the following are inversely related to variable costs per unit?
I. contribution margin per unit
II. number of units sold
III. operating cash flow per unit
IV. net profit per unit
A. I and II only
B. III and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Kurt’s Market has 8,000 shares of stock outstanding with a par value of $1 per share and
a market value of $13 per share. The balance sheet shows $8,000 in the common stock
account, $26,000 in the capital in excess of par account, and $32,700 in the retained
earnings account. The firm just announced a 100 percent stock dividend. What will be
the balance in the retained earnings account after this dividend?
A. $0
B. $24,700
C. $32,700
D. $40,700
E. $128,700
Wesleyville Markets stock is selling for $36 a share. The 9-month $40 call on this stock
is selling for $2.23 while the 9-month $40 put is priced at $5.11. What is the
continuously compounded risk-free rate of return?
A. 2.87 percent
B. 3.11 percent
C. 3.38 percent
D. 3.56 percent
E. 3.79 percent
Several rumors concerning Value Rite stock are causing the market price of the stock to
be quite volatile. Given this situation, you decide to buy both a one-month European
$25 put and a one-month European $25 call on this stock. The call price per share is
$0.60 and the put price per share is $2.10. What will be your net profit or loss on these
option positions if the stock price is $18 on the day the options expire? Ignore trading
costs and taxes.
A. -$210
B. -$150
C. -$60
D. $430
E. $490