1) Galaxy Sales has sales of $746,700, cost of goods sold of $603,200, and inventory of
$94,300. How long on average does it take the firm to sell its inventory?
A.6.40 days
B.7.23 days
C.48.68 days
D.57.06 days
E.61.10 days
2) What is the year 2 depreciation on equipment costing $166,000 if it is classified as
five-year property for MACRS purposes? The MACRS allowance percentages are as
follows, commencing with year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.
A.$37,620
B.$38,200
C.$41,984
D.$48,398
E.$53,120
3) Currently, you own 5.4 percent of the outstanding stock of Keiffer Industries. The
firm has decided to issue additional shares of stock and has given you the first option to
purchase 5.4 percent of those additional shares. Which one of the following will you be
participating in if you opt to purchase the shares you have been offered?
A.Rights offer
B.Red herring offer
C.Private placement
D.IPO
E.General cash offer
4) New Gadgets is growing at a very fast pace. As a result, the company expects to pay
annual dividends of $0.55, 0.80, and $1.10 per share over the next three years,
respectively. After that, the dividend is projected to increase by 5 percent annually. The
last annual dividend the firm paid was $0.40 a share. What is the current value of this
stock if the required return is 16 percent?
A.$8.50
B.$9.67
C.$10.46
D.$12.23
E.$12.49
5) Mountaintop Market is offering 60,000 shares of stock to the public in a general cash
offer. The offer price is $30 a share and the underwriter’s spread is 9 percent. The
administrative costs are estimated at $310,000. How much will Hilltop Market receive
from this stock offering assuming the issue is completely sold?
A.$1,370,800
B.$1,328,000
C.$1,490,000
D.$1,638,000
E.$1,800,000
6) High Tower Pharmacy pays out a fixed percentage of its net income to its
shareholders in the form of annual dividends. Given this, the percentage shown on a
common-size income statement for the dividend account will:
A.remain constant over time
B.be equal to the dividend amount divided by the net income
C.vary in direct relation to the net profit percentage
D.vary in direct relation to changes in the sales level
E.vary but not in direct relation to any other variable
7) You need to use the pure play approach to assign a cost of capital to a proposed
investment. Which one of the following characteristics should you most concentrate on
as you search for an appropriate pure play firm?
A.Firm size
B.Firm location
C.Firm experience
D.Firm operations
E.Firm management
8) Which one of the following statements is correct? Assume the pretax cost of debt is
less than the cost of equity.
A.A firm may change its capital structure if the government changes its tax policies
B.A decrease in the dividend growth rate increases the cost of equity
C.A decrease in the systematic risk of a firm will increase the firm’s cost of capital
D.A decrease in a firm’s debt-equity ratio will decrease the firm’s cost of capital
E.The cost of preferred stock decreases when the tax rate increases
9) Which one of the following statements is correct?
A.The risk premium on a risk-free security is generally considered to be 1 percent
B.The expected rate of return on any security, given multiple states of the economy,
must be positive
C.There is an inverse relationship between the level of risk and the risk premium given
a risky security
D.If a risky security is correctly priced, its expected risk premium will be positive
E.If a risky security is priced correctly, it will have an expected return equal to the
risk-free rate
10) Janis just won a scholarship that will pay her $500 a month, starting today, and
continuing for the next 48 months. Which one of the following terms best describes
these scholarship payments?
A.Ordinary annuity
B.Annuity due
C.Consol
D.Ordinary perpetuity
E.Perpetuity due
11) Professional Properties is considering remodeling the office building it leases to
Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building
is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in
rent for the next five years. The discount rate is 15 percent. What is the benefit of the
remodeling project to Professional Properties?
A.-$651,233
B.-$489,072
C.$5,214
D.$128,399
E.$311,417
12) Goshen Industrial Sales has sales of $828,900, total equity of $539,200, a profit
margin of 4.6 percent, and a debt-equity ratio of 0.55 . What is the return on assets?
A.3.89 percent
B.4.56 percent
C.6.67 percent
D.12.86 percent
E.13.33 percent
13) You are debating between spending a week in Brazil or a week in Chile. You’ve
estimated the cost of the Brazilian trip at 56,300 reals and the Chilean trip at 13.6
million pesos. The currency per U.S. dollar is 2.2212 reals and 581.73 pesos. If you
prefer the less expensive trip, as measured in U.S. dollars, you should travel to _____
because you can save ____.
A.Brazil; you can save $1,460.45
B.Brazil; you can save $1,518.74
C.Chile; you can save $984.29
D.Chile; you can save $1,613.33
E.Chile; you can save $1,968.12
14) A sole proprietorship:
A.provides limited liability for its owner
B.involves significant legal costs during the formation process
C.has an unlimited life
D.has its profits taxed as personal income
E.can generally raise significant capital from nonowner sources
15) Which one of the following best defines the term credit scoring?
A.Categorizing customers into groups depending on the length of time it takes each
customer to pay for purchases
B.Compiling a list of accounts receivable segregated by the length of time each
receivable has been outstanding
C.Evaluating the opportunity costs of a credit policy
D.Process of quantifying the probability of default when granting credit to customers
E.Tracking of both the number and the size of customer orders over a period of time
16) Which one of the following is a direct bankruptcy cost?
A.Loss of customer goodwill resulting from a bankruptcy filing
B.Legal and accounting fees related to a bankruptcy proceeding
C.Management time spent on a bankruptcy proceeding
D.Any financial distress cost
E.Costs a firm spends trying to avoid bankruptcy
17) Which one of the following terms applies to the costs incurred by a firm that is
trying to avoid filing for bankruptcy?
A.Indirect bankruptcy costs
B.Direct bankruptcy costs
C.Static theory cost
D.Optimal capital structure cost
E.Reorganization costs
18) Green Woods sells specialty equipment for mountain climbers. Its sales for last year
included $238,000 of tents and $411,000 of climbing gear. For next year, management
has decided to sell specialty sleeping bags also. As a result of this change, sales
projections for next year are $264,000 of tents, $426,000 of climbing gear, and $51,000
of sleeping bags. How much of next year’s sales are derived from the side effects of
adding the new product to its sales offerings?
A.$0
B.$20,500
C.$41,000
D.$51,000
E.$82,000
19) Smith and Weston has 55,000 shares of common stock outstanding at a price of $31
a share. It also has 3,000 shares of preferred stock outstanding at a price of $62 a share.
The firm has 8 percent, 12-year bonds outstanding with a total face value of $400,000.
The bonds are currently quoted at 101.2 percent of face and pay interest semiannually.
What is the capital structure weight of the firm’s preferred stock if the tax rate is 35
percent?
A.8.10 percent
B.15.20 percent
C.15.67 percent
D.16.84 percent
E.17.63 percent
20) Mike’s Fish Market is implementing a project that will initially increase accounts
payable by $4,600, 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.-$600
D.$200
E.$2,000
21) Which one of the following is the rate of return an investor earns on a bond before
adjusting for inflation?
A.Nominal rate
B.Real rate
C.Dirty rate
D.Coupon rate
E.Clean rate
22) Which one of these statements is correct?
A.Since the early 1980s, it has become increasingly more difficult to do a stock
repurchase due to SEC regulations
B.It is relatively easy to determine whether or not a firm has completed a planned stock
repurchase
C.Fixed stock repurchases allow managers to repurchase shares only when they feel
those shares are undervalued
D.A fixed stock repurchase plan could be a negative net present value investment for
the stock issuer
E.Stock repurchases send the exact same signals to investors as do cash dividends
23) Which one of the following indicates that a project is definitely acceptable?
A.Profitability index greater than 1.0
B.Negative net present value
C.Modified internal rate return that is lower than the requirement
D.Zero internal rate of return
E.Positive average accounting return
24) Changes in interest rates affect bond prices. Which one of the following
compensates bond investors for this risk?
A.Taxability risk premium
B.Default risk premium
C.Interest rate risk premium
D.Real rate of return
E.Bond premium
25) There are four open positions on the board of directors of Double Tree Hotels. The
company has 360,000 shares of stock outstanding. Each share is entitled to one vote.
How many shares of stock must you own to guarantee your personal election to the
board of directors if the firm uses cumulative voting?
A.36,001 shares
B.75,001 shares
C.77,001 shares
D.72,000 shares
E.72,001 shares
26) The Townhouse Galleries offers credit to its customers at a rate of 1.6 percent per
month. What is the effective annual rate of this credit offer?
A.18.45 percent
B.19.09 percent
C.19.41 percent
D.20.04 percent
E.20.98 percent
27) Northern Wood Products is an all-equity firm with 16,000 shares of stock
outstanding and a total market value of $352,000. Based on its current capital structure,
the firm is expected to have earnings before interest and taxes of $26,000 if the
economy is normal, $3,000 if the economy is in a recession, and $33,000 if the
economy booms. Ignore taxes. Management is considering issuing $88,000 of debt with
a 6 percent coupon rate. If the firm issues the debt, the proceeds will be used to
repurchase stock. What will the earnings per share be if the debt is issued and the
economy is in a recession?
A.-$0.27
B.-$0.19
C.$0.03
D.$0.26
E.$0.31
28) Which one of the following will increase the profit margin of a firm, all else
constant?
A.Increase in interest paid
B.Increase in fixed costs
C.Increase in depreciation expense
D.Decrease in the tax rate
E.Decrease in sales
29) Systematic risk is:
A.totally eliminated when a portfolio is fully diversified
B.defined as the total risk associated with surprise events
C.risk that affects a limited number of securities
D.measured by beta
E.measured by standard deviation
30) Design Interiors has a cost of equity of 18.6 percent and a pretax cost of debt of 9.7
percent. The firm’s target weighted average cost of capital is 12 percent and its tax rate
is 35 percent. What is the firm’s target debt-equity ratio?
A.0.81
B.0.87
C.0.98
D.1.02
E.1.16
31) Cromwell Enterprises is acquiring Athens, Inc. for $899,000. Athens has agreed to
accept annual payments of $210,000 at an interest rate of 8.5 percent. How many years
will it take Cromwell Enterprises to pay for this purchase?
A.5.00 years
B.5.18 years
C.5.55 years
D.5.47 years
E.5.80 years
32) Western Feed Mills has projected the following quarterly sales amounts for the
coming year.
Accounts receivable at the beginning of the year are $325. Western Feed Mills has a
60-day collection period. How much cash will the firm collect in quarter 1 and quarter
2, respectively?
A.$325; $498
B.$498; $347
C.$498; $530
D.$672; $367
E.$672; $540
33) Which one of the following is most apt to cause a wise manager to increase a
project’s cost of capital? Assume the firm is levered.
A.Management decides to issue new stock to finance the project
B.The initial cash outlay requirement is reduced
C.She learns the project is riskier than previously believed
D.The aftertax cost of debt just decreased
E.The project’s life is shortened
34) Weston Mines has a cost of equity of 20.8 percent, a pretax cost of debt of 9.4
percent, and a return on assets of 17.1 percent. Ignore taxes. What is the debt-equity
ratio?
A.0.39
B.0.41
C.0.48
D.0.56
E.0.62
35) Which one of the following statements is true regarding the period 1926-2011?
A.The returns on small-company stocks were less volatile than the returns on
large-company stocks
B.The risk-free rate of return remained constant over the time period
C.U.S. Treasury bills had a positive average real rate of return
D.Bonds had an average rate of return that exceeded the average return on stocks
E.The inflation rate was just as volatile as the return on long-term bonds
36) Which one of the following statements is correct?
A.Dividends are irrelevant
B.Flotation costs are a good reason to support a high-dividend payout
C.Current tax laws favor high current dividends for individual investors
D.Dividend policy is the time pattern of dividend payout
E.Corporate investors tend to prefer low-dividend payouts on securities they own
37) Can a firm have a negative cash cycle? If yes, explain how that can occur and
discuss whether or not that would be good for a firm. If no, explain why that cannot
occur and why preventing it from occurring is good for a firm.
38) The present value of the benefits of a particular investment happens to equal the
initial cost of that investment at the required rate of 14 percent. What is the value of the
investment’s internal rate of return, its net present value, and its profitability index?
39) Explain why the marginal tax rate, rather than the average tax rate, is used when
computing the cash flows from a proposed new project.
40) Explain the primary difference between a Chapter 7 bankruptcy and a Chapter 11
bankruptcy.
41) Identify four ways that you can use annuity computations in your everyday life.
42) Explain the similarities and differences among an ordinary annuity, an annuity due,
and a perpetuity.
43) Explain how the process of dividend smoothing affects the dividend growth rate as
compared to the earnings growth rate.
44) Identify four parties that have a demand for U.S. dollars and explain why they wish
to obtain those dollars.
45) Identify three managerial options that relate to project analysis and explain how
those options affect the net present value of a project.
46) Assume the federal government mandates that all retail stores in the northern states
install heated sidewalks to help minimize the number of injuries that occur from people
falling as a result of snow and ice buildup on those sidewalks. How should a firm
determine the cost of capital for a project such as this?