1) Cash flow to creditors is defined as:
A.interest paid minus net new borrowing
B.interest paid plus net new borrowing
C.the operating cash flow minus net capital spending minus change in net working
capital
D.dividends paid plus net new borrowing
E.cash flow from assets plus net new equity
2) Room and Board has determined that $36,000 is the break-even level of earnings
before interest and taxes for the two capital structures it is considering. The one
structure consists of all equity with 14,000 shares of stock. The second structure
consists of 10,000 shares of stock and $80,000 of debt. What is the interest rate on the
debt?
A.7.72 percent
B.8.19 percent
C.9.97 percent
D.11.43 percent
E.12.86 percent
3) Eric & Jared’s Department Store has current liabilities of $7,630, net working capital
of $2,180, inventory of $2,750, and sales of $51,800. What is the quick ratio?
A.0.79
B.0.84
C.0.93
D.1.09
E.3.50
4) The stream of customer instructions to buy and sell securities is called the:
A.order flow
B.market maker
C.execution stream
D.operations flow
E.buyer’s stream
5) The transaction motive for holding cash refers to the need to have cash for which one
of the following purposes?
A.Safety margin
B.Investment opportunities
C.Daily operations
D.Financial reserve
E.Bargain opportunities
6) Assume that clienteles exist. Given this assumption, which one of the following
statements is correct?
A.A firm can increase its share price by increasing its dividend payout
B.Dividend policy is irrelevant as long as each clientele group is currently satisfied
C.All firms will adopt a high-dividend-payout policy
D.All dividends become irrelevant
E.All firms should adopt a low-dividend-payout policy
7) Kate could not attend the last shareholders’ meeting and thus she granted the
authority to vote on her behalf to the managers of the firm. Which one of the following
terms is used to describe the method by which Kate’s shares were voted?
A.Straight
B.Cumulative
C.Consent-form
D.Proxy
E.In absentia
8) You own two bonds. Both bonds pay annual interest, have 6 percent annual coupons,
$1,000 face values, and currently have 6 percent yields to maturity. Bond A has 12
years to maturity and Bond B has 4 years to maturity. If the market rate of interest rises
unexpectedly to 7 percent, Bond _____ will be the most volatile with a price decrease
of _____ percent.
A.A; 5.73
B.A; 6.08
C.A; 7.94
D.B; 3.39
E.B; 4.51
9) You’ve just found a 7 percent coupon bond on the market that sells for par value.
What is the maturity on this bond?
A.The bond must mature in 1 year
B.The bond could have any maturity date
C.The bond must be maturing today
D.The bond must mature in 10 years
E.None of these are correct
10) Research conducted on firms’ dividend policies over time support which one of the
following conclusions?
A.Aggregate dividends and stock repurchases have steadily declined in real terms
B.Dividends are currently paid by the vast majority of firms
C.Managers tend to smooth dividends
D.Stock prices tend to increase whenever anticipated changes in dividends occur
E.Firms commence paying dividends prior to doing any stock repurchases
11) Over the past four years, a stock produced returns of 23 percent, -39 percent, 4
percent, and 16 percent, respectively. Based on these four years, what range of returns
would you expect to see 99 percent of the time?
A.-82.39 percent to 84.39 percent
B.-82.39 percent to 86.41 percent
C.-82.39 percent to 88.56 percent
D.-78.46 percent to 86.41 percent
E.-78.46 percent to 84.39 percent
12) An income statement prepared according to GAAP:
A.reflects the net cash flows of a firm over a stated period of time
B.reflects the financial position of a firm as of a particular date
C.distinguishes variable costs from fixed costs
D.records revenue when payment for a sale is received
E.records expenses based on the matching principle
13) The primary goal of financial management is to maximize which one of the
following for a corporation?
A.Current profits
B.Market share
C.Number of shares outstanding
D.Market value of existing stock
E.Revenue growth
14) The lowest rating a bond can receive from Moody’s and still be classified as an
investment-quality bond is:
A.BB
B.BBB
C.B
D.Ba
E.Baa
15) Which of the following are effective means of aligning management goals with
shareholder interests?
I. Employee stock options
II. Threat of a takeover
III. Management bonuses tied to performance goals
IV. Threat of a proxy fight
A.I and III only
B.II and IV only
C.I, II, and III only
D.I, III, and IV only
E.I, II, III, and IV
16) Scott placed an order with his broker to purchase 1,000 shares of each of three IPOs
that are being released this month. Each IPO has an offer price of $24 a share. The
number of shares allocated to Scott along with the closing stock price at the end of the
first day of trading for each stock, are as follows:
What is Scott’s total profit or loss on these three stocks as of the end of the first day of
trading for each stock?
A.-$380
B.-$240
C.-$10
D.$220
E.$450
17) Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you
and your heirs $10,000 per year forever. If the required return on this investment is 4.75
percent, how much will you pay for the policy?
A.$206,576.83
B.$210,526.32
C.$214,211.50
D.$217,119.02
E.$221,160.91
18) The Flour Baker is considering a project with the following cash flows. Should this
project be accepted based on its internal rate of return if the required return is 11
percent?
A.Yes, because the project’s rate of return is 7.78 percent
B.Yes, because the project’s rate of return is 9.36 percent
C.No, because the project’s rate of return is 7.78 percent
D.No, because the project’s rate of return is 9.36 percent
E.No, because the project’s rate of return is 13.08 percent
19) You have an outstanding loan with an EAR of 14.6 percent. What is the APR if
interest is compounded monthly?
A.13.48 percent
B.13.71 percent
C.14.60 percent
D.15.41 percent
E.15.62 percent
20) Which of the following terms can be used to describe unsystematic risk?
I. Asset-specific risk
II. Diversifiable risk
III. Market risk
IV. Unique risk
A.I and IV only
B.II and III only
C.I, II, and IV only
D.II, III, and IV only
E.I, II, III, and IV
21) Your coin collection contains ten 1939 silver dollars. If your great grandparents
purchased them for their face value when they were new, how much will your
collection be worth when you retire in 2050, assuming they appreciate at a 5.1 percent
annual rate?
A.$2,243.63
B.$2,329.29
C.$2,348.98
D.$2,499.78
E.$2,644.29
22) The level of financial risk to which a firm is exposed is dependent on the firm’s:
A.tax rate
B.debt-equity ratio
C.return on assets
D.level of earnings before interest and taxes
E.operational level of risk
23) Children’s Place has a market-to-book ratio of 2.9, net income of $68,400, a book
value per share of $37, and 45,000 shares of stock outstanding. What is the
price-earnings ratio?
A.24.34
B.28.16
C.55.10
D.63.25
E.70.59
24) The interest rate used to compute the present value of a future cash flow is called
the:
A.prime rate
B.current rate
C.discount rate
D.compound rate
E.simple rate
25) The federal government has a tax claim on the cash flows of The Window Store.
This claim is defined as a claim by one of the firm’s:
A.residual owners
B.shareholders
C.financiers
D.provisional partners
E.stakeholders
26) By definition, a bank that pays simple interest on a savings account will pay
interest:
A.only at the beginning of the investment period
B.on interest
C.only on the principal amount originally invested
D.on both the principal amount and the reinvested interest
E.only if all previous interest payments are reinvested
27) A corporation:
A.is ultimately controlled by its board of directors
B.is a legal entity separate from its owners
C.is prohibited from entering into contractual agreements
D.has its identity defined by its bylaws
E.has its existence regulated by the rules set forth in its charter
28) Assume you can exchange $1 for either £1.0 or 0.50 in the U.S. In the London
market, you can exchange £1 for 0.52. This situation creates an opportunity to profit
immediately from which one of the following?
A.Futures arbitrage
B.Currency hedge
C.Interest rate swap
D.Absolute purchasing power parity
E.Triangle arbitrage
29) You were recently hired by a firm as a project analyst. The owner of the firm is
unfamiliar with financial analysis and wants to know only what the expected dollar
return is per dollar spent on a given project. Which financial method of analysis will
provide the information that the owner requests?
A.Internal rate of return
B.Modified internal rate of return
C.Net present value
D.Profitability index
E.Payback
30) Given the following exchange rates, what is the cross-rate for euros in terms of
British pounds?
A.1.1066 = £1
B.1.1079 = £1
C.1.1092 = £1
D.1.1103 = £1
E.1.1116 = £1
31) The security market line is a linear function that is graphed by plotting data points
based on the relationship between which two of the following variables?
A.Risk-free rate and beta
B.Market rate of return and beta
C.Market rate of return and the risk-free rate
D.Risk-free rate and the market rate of return
E.Expected return and beta
32) Which one of the following would tend to create an unexpected increase in a firm’s
average collection period?
A.Increased credit sales
B.The implementation of a cash discount
C.Increased customer delinquencies
D.Increased dollar value per each sale
E.Increased collection efforts
33) If the financial markets are efficient then:
A.stock prices should remain constant
B.stock prices should increase or decrease slowly as new events are analyzed and the
information is absorbed by the markets
C.an increase in the value of one security should be offset by a decrease in the value of
another security
D.stock prices will change only when an event actually occurs, not at the time the event
is anticipated
E.stock prices should respond only to unexpected news and events
34) Which one of the following will affect the capital structure weights used to compute
a firm’s weighted average cost of capital?
A.Decrease in the book value of a firm’s equity
B.Decrease in a firm’s tax rate
C.Increase in the market value of the firm’s common stock
D.Increase in the market risk premium
E.Increase in the firm’s beta
35) The Priceville Bull Dogs offers credit terms of 2/15, net 40 to all of its customers.
Historically, 80 percent of its customers take advantage of the discount. What is the
firm’s average collection period?
A.17.60 days
B.17.87 days
C.18.20 days
D.20.33 days
E.21.08 days
36) Lester had $6,270 in his savings account at the beginning of this year. This amount
includes both the $6,000 he originally invested at the beginning of last year plus the
$270 he earned in interest last year. This year, Lester earned a total of $282.15 in
interest even though the interest rate on the account remained constant. This $282.15 is
best described as:
A.simple interest
B.interest on interest
C.discounted interest
D.complex interest
E.compound interest
37) If the financial markets are semistrong form efficient, then:
A.only the most talented analysts can determine the true value of a security
B.only individuals with private information have a marketplace advantage
C.technical analysis provides the best tool to use to gain a marketplace advantage
D.no one individual has an advantage in the marketplace
E.every security offers the same rate of return
38) Which one of the following indicates that a firm has generated sufficient internal
cash flow to finance its entire operations for the period?
A.Positive operating cash flow
B.Negative cash flow to creditors
C.Positive cash flow to stockholders
D.Negative net capital spending
E.Positive cash flow from assets
39) How quickly can a bank receive payment once it transmits a copy of a check to the
bank on which the check was drawn?
A.Immediately
B.In one day
C.Between one and two days
D.In two days
E.Between two and three days
40) Which one of the following statements is correct?
A.The internal rate of return is the most reliable method of analysis for any type of
investment decision
B.The payback method is biased toward short-term projects
C.The modified internal rate of return is most useful when projects are mutually
exclusive
D.The average accounting return is the most difficult method of analysis to compute
E.The net present value method is applicable only if a project has conventional cash
flows