Rock Bottom Carpets sells 3,100 carpets a year at an average price per carpet of $1,640.
The carrying cost per unit is $218.40. The company orders 500 carpets at a time and has
a fixed order cost of $78 per order. The carpets are sold out before they are restocked.
What is the economic order quantity?
A. 38 carpets
B. 66 carpets
C. 47 carpets
D. 51 carpets
E. 72 carpets
So you can retire early, you have decided to start saving $500 a month starting one
month from now. You plan to retire as soon as you can accumulate $1 million. If you
can earn 5 percent on your savings, how many years will it be before you can retire?
A. 33.39 years
B. 42.87 years
C. 44.76 years
D. 44.71 years
E. 33.87 years
The period 1926-2014 illustrates that U.S. Treasury bills:
A. outperform inflation by approximately 1 percent every year.
B. have a zero standard deviation.
C. can either outperform or underperform inflation on an annual basis.
D. produce a rate of return roughly equivalent to the rate of return on long-term
government bonds.
E. routinely have negative annual returns.
One year ago, Debra purchased 5,400 shares of KNF stock for $218,056. Today, she
sold those shares for $19.49 a share. What is the capital gains yield on this investment if
the dividend yield is 1.7 percent?
A. -28.01 percent
B. -48.82 percent
C. 3.07 percent
D. -51.73 percent
E. 4.53 percent
A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the
retention ratio is 56 percent. What is the common-size percentage for the dividends
paid?
A. 1.99 percent
B. 2.86 percent
C. 1.21 percent
D. 2.24 percent
E. 1.42 percent
Which statement is correct?
A. Firms should generally finance all of their assets with long-term debt.
B. Firms that follow restrictive financial policies can generally avoid short-term debt
financing.
C. Short-term borrowing is generally more expensive than long-term borrowing.
D. Long-term interest rates tend to be more volatile than short-term rates.
E. A firm is less apt to face financial distress if it adopts a flexible financial policy
rather than a restrictive policy.
In which one of the following situations would the payback method be the preferred
method of analysis?
A. A long-term capital-intensive project
B. Two mutually exclusive projects
C. A proposed expansion of a firm’s current operations
D. Different-sized projects
E. Investment funds available only for a limited period of time
Lawler’s is considering a new project. The company has a debt-equity ratio of .64. The
company’s cost of equity is 14.9 percent, and the aftertax cost of debt is 5.3 percent.
The firm feels that the project is riskier than the company as a whole and that it should
use an adjustment factor of +1.8 percent. What is the project cost of capital if the tax
rate is 34 percent?
A. 12.53 percent
B. 12.98 percent
C. 12.95 percent
D. 15.14 percent
E. 15.68 percent
Venture capital is most apt to be the source of funding for a:
A. bankruptcy reorganization.
B. global expansion of an established firm.
C. new, high-risk venture.
D. seasonal production costs.
E. daily operations for an established, profitable firm.
The Jones Brothers recently established a trust fund that will provide annual
scholarships of $12,000 indefinitely. These annual scholarships are:
A. an ordinary annuity.
B. an annuity due.
C. amortized payments.
D. a perpetuity.
E. a perpetuity due.
The Wood Shed has cash of $5,800, accounts receivable of $18,600, inventory of
$53,100, and net working capital of $2,100. What is the cash ratio?
A. .11
B. .08
C. .26
D. .21
E. .45
What is the effective annual rate of 9.6 percent compounded semiannually?
A. 9.71 percent
B. 9.83 percent
C. 9.79 percent
D. 9.68 percent
E. 9.92 percent
The dividend yield is defined as:
A. the last annual dividend divided by the current market price per share.
B. the last annual dividend divided by the current book value per share.
C. next year’s expected dividend divided by the current market price per share.
D. next year’s expected dividend divided by the current book value per share.
E. next year’s expected dividend divided by the par value per share.
A stock produced returns of 14 percent, 17percent, and -1 percent over three of the past
four years, respectively. The arithmetic average for the past four years is 6 percent.
What is the standard deviation of the stock’s returns for the four-year period?
A. 11.63 percent
B. 15.94 percent
C. 9.70 percent
D. 6.25 percent
E. 11.23 percent
How are checks that are deposited into a typical lockbox handled?
A. The checks are deposited into a local bank which then overnights one check for the
entire amount to the firm.
B. The checks are collected once a day, normally in the early morning, by a bank
employee.
C. The checks are posted to the customer’s account prior to being deposited.
D. The checks are collected throughout the day and immediately deposited into the
firm’s account.
E. The checks are collected and sent overnight to the firm’s main office for processing.
The NYSE:
A. presently conducts all of its trading through SuperDOT.
B. is a dealer market.
C. is in the business of attracting order flow.
D. is solely a primary market.
E. is based on a multiple market maker system.
What is the primary reason why the cash flow from assets (CFA) is adjusted when used
to value a firm?
A. Depreciation is a non-cash expense so both it and the depreciation tax shield must be
eliminated from the CFA.
B. Net working capital (NWC) is excluded from firm valuations so the change in NWC
must be added back to the “normal” CFA calculation
C. Interest expense is a financing cost and thus the tax benefit of this expense needs to
be eliminated from the CFA.
D. CFA is normally based on historical performance but since firm valuations are
forward looking the CFA must be adjusted for timing.
E. The CFA must be lowered by the amount of the noncash expenses to ascertain a
more accurate firm value.
Heidi owns 400 shares of Boyd Enterprises stock, which is valued at $13 a share. Boyd
Enterprises just declared a stock dividend of 4 percent. How many shares will Heidi
own and what will be the price per share after the dividend?
A. 385; $12.50
B. 385; $13.00
C. 416; $12.50
D. 416; $13.00
E. 416; $13.50
Home Grown Tomatoes stock returned 11.6 percent, 3.2 percent, 8.1 percent, 14.2, and
9.8 percent over the past five years, respectively. What is the arithmetic average return
for this period?
A. 9.38 percent
B. 10.62 percent
C. 8.10 percent
D. 11.93 percent
E. 10.10 percent
The common stock of Mountain Farms has yielded 14.2 percent, 11.7 percent, 3.4
percent, -2.8 percent, and 15.8 percent over the past five years, respectively. What is the
geometric average return?
A. 7.91 percent
B. 8.03 percent
C. 8.22 percent
D. 8.27 percent
E. 7.64 percent
Spring Falls Gifts has sales of $680,300, total assets of $589,100, and a profit margin of
4.3 percent. What is the return on assets?
A. 4.30 percent
B. 6.54 percent
C. 3.83 percent
D. 7.01 percent
E. 4.97 percent
Eleven years ago, you deposited $3,200 into an account. Seven years ago, you added an
additional $1,000 to this account. You earned 9.2 percent, compounded annually, for the
first 4 years and 5.5 percent, compounded annually, for the last 7 years. How much
money do you have in your account today?
A. $8,666.67
B. $7,717.29
C. $7,411.90
D. $8,708.15
E. $8,073.91
The price at which an investor can purchase in the bond market is called the _____
price.
A. asked
B. coupon
C. call
D. face
E. bid
What effective annual rate can a bank earn on an APR of 10.5 percent, compounded
monthly?
A. 10.50 percent
B. 10.76 percent
C. 11.84 percent
D. 11.02 percent
E. 13.08 percent
The Sarbanes-Oxley Act:
A. require the corporate officers to personally attest that the financial statements are a
fair representation of the company’s financial results.
B. requires all corporations to fully disclose its financial dealings to the general public.
C. places the responsibility for a firm’s financial statements solely on the chief financial
officer.
D. requires that the board of directors be solely responsible for the firm’s financial
dealings.
E. places total responsibility for the financial statements of a firm on the auditor who
certifies the statements.
Probably the least effective means of aligning management goals with shareholder
interests is:
A. the potential for a proxy fight by an unhappy segment of shareholders.
B. basing all management bonuses on performance goals.
C. holding management salaries steady while increasing stock option grants.
D. the threat of a takeover of the firm.
E. automatically increasing management salaries on an annual basis.
The Fish House is expected to pay annual dividends of $1.23 and $1.25 at the end of the
next two years, respectively. After that, the company expects to pay a constant dividend
of $1.35 a share. What is the value of this stock at a required return of 16.4 percent?
A. $6.07
B. $8.55
C. $8.05
D. $11.08
E. $8.23
Granny’s Home Remedy has a $27 million bond issue outstanding with a coupon rate of
8.75 percent and a current yield of 8.13 percent. What is the present value of the tax
shield if the tax rate is 35 percent?
A. $768,285
B. $826,875
C. $839,002
D. $8,160,000
E. $9,450,000
A stock has paid dividends of $1.70, $1.85, $2.00, $2.20, and $2.50 over the past five
years, respectively. What is the average capital gains yield?
A. 8.86 percent
B. 3.24 percent
C. 9.45 percent
D. 5.34 percent
E. 10.14 percent
Which one of the following statements is correct?
A. A longer payback period is preferred over a shorter payback period.
B. The payback rule states that you should accept a project if the payback period is less
than one year.
C. The payback period ignores the time value of money.
D. The payback rule is biased in favor of long-term projects.
E. The payback period considers the timing and amount of all of a project’s cash flows.
Trendsetters has a cost of equity of 14.6 percent. The market risk premium is 8.4
percent and the risk-free rate is 3.9 percent. The company is acquiring a competitor,
which will increase the company’s beta to 1.4. What effect, if any, will the acquisition
have on the firm’s cost of equity capital?
A. No effect
B. Decrease of .62 percent
C. Decrease of .84 percent
D. Increase of 1.06 percent
E. Increase of .13 percent
The Corner Bakery needs $86,000 today for remodeling. They have obtained a 2-year,
pure-discount loan at an interest rate of 6.8 percent, compounded annually. How much
must they repay in two years?
A. $94,064.20
B. $89,540.21
C. $90,860.00
D. $91,159.39
E. $98,093.66
Greenwood Motels has filed a petition for bankruptcy but hopes to continue its
operations both during and after the bankruptcy process. Which one of the following
terms best applies to this situation?
A. Chapter 7 bankruptcy
B. Liquidation
C. Technical insolvency
D. Accounting insolvency
E. Reorganization
Any changes to a firm’s projected future cash flows that are caused by adding a new
project are referred to as:
A. eroded cash flows.
B. deviated projections.
C. incremental cash flows.
D. directly impacted flows.
E. opportunity cash flows.
Innovative Technologies has 46,000 shares of stock outstanding at a market price of $6
a share. Which one of the following stock splits should the firm declare if it wants to
increase the stock price to exactly $16 a share? Ignore any taxes or market
imperfections.
A. 5-for-2 stock split
B. 3-for-1 stock split
C. 1-for-3-reverse stock split
D. 2-for-5 reverse stock split
E. 3-for-8 reverse stock split