Paying interest reduces the taxes owed by a firm. Which one of the following terms
applies to this relationship?
A. Static theory of interest rates
B. M&M Proposition I
C. Financial risk
D. Interest tax shield
E. Homemade leverage
Your portfolio has provided you with returns of 11.4 percent, 6.2 percent, -.7 percent,
and 14.6 percent over the past four years, respectively. What is the geometric average
return for this period?
A. 7.25 percent
B. 7.72 percent
C. 7.57 percent
D. 7.63 percent
E. 7.55 percent
Which one of the following statements concerning annuities is correct?
A. The present value of an annuity is equal to the cash flow amount divided by the
discount rate.
B. An annuity due has payments that occur at the beginning of each time period.
C. The future value of an annuity decreases as the interest rate increases.
D. If unspecified, you should assume an annuity is an annuity due.
E. An annuity is an unending stream of equal payments occurring at equal intervals of
time.
Which statement is true?
A. IPO underpricing primarily benefits a firm’s pre-issue owners.
B. IPO underpricing is a function of the underwriting spread.
C. The more an issue is underpriced, the more it tends to be oversubscribed.
D. Underpricing tends to discourage investors from participating in the IPO market.
E. Undersubscribed shares generally tend to also be underpriced shares.
Botanical Gardens Nursery has 7,500 shares of stock outstanding at a market price of
$18 a share. The earnings per share are $1.23. The firm has total assets of $384,000 and
total liabilities of $146,000. Today, the firm is paying a quarterly cash dividend of $.22
a share. What will be the earnings per share after the dividend is paid if the tax rate on
dividends is 15 percent?
A. $1.01
B. $1.04
C. $1.23
D. $1.17
E. $1.20
Last year, a firm earned $67,800 in net income on sales of $934,600. Total assets
increased by $62,000 and total equity increased by $43,500 for the year. No new equity
was issued and no shares were repurchased. What is the retention ratio?
A. 29.62 percent
B. 35.84 percent
C. 56.25 percent
D. 70.38 percent
E. 64.16 percent
The set of procedures used to determine the inventory levels for demand-dependent
inventories is called:
A. the inventory flow log.
B. materials requirements planning.
C. a just-in-time inventory system.
D. the kanban.
E. the keiretsu.
Which one of the following is a use of cash?
A. Selling inventory at cost
B. Paying a supplier for inventory you purchased last month
C. Borrowing money from a local bank
D. Collecting payment from a customer
E. Selling a fixed asset such as a piece of machinery
Over the past four years, the annual percentage returns on large-company stocks were
15, 7, 4, and 18 percent. For the same time period, U.S. Treasury bills produced the
returns of 6, 3, 2, and 4 percent. Inflation averaged 2.8 percent over the four-year
period. The average real rate of return on large-company stocks was ___ percent as
compared to _____ percent for Treasury bills.
A. 6.47; .92
B. 6.47; 1.08
C. 7.98; .92
D. 7.98; 1.08
E. 7.98; 1.22
Deep Hollow Oil issued 135,000 shares of stock last week. The underwriters charged a
spread of 8.05 percent in exchange for agreeing to a firm commitment. The legal and
accounting fees amounted to $418,000 and the company incurred $48,000 in indirect
costs. The offer price was $33 a share. Within the first hour of trading, the stock price
increased to $36 a share. What was the flotation cost as a percentage of the funds
raised?
A. 28.89 percent
B. 33.03 percent
C. 26.47 percent
D. 20.55 percent
E. 33.87 percent
You have $500 today and want to triple your money in 6 years. What interest rate must
you earn if the interest is compounded annually?
A. 18.08 percent
B. 19.90 percent
C. 22.15 percent
D. 20.09 percent
E. 21.21 percent
According to the efficient markets hypothesis, professional investors will earn:
A. excess profits over the long-term.
B. excess profits, but only on short-term investments.
C. a dollar return equal to the value paid for an investment.
D. a return that cannot be accurately predicted because investments are subject to the
random movements of the markets.
E. a return that “beats the market.”
On which one of the following dates is the principal amount of a semiannual coupon
bond repaid?
A. A portion of the principal is repaid on each coupon date.
B. The entire bond is repaid on the issue date.
C. Half of the principal is repaid evenly over each coupon period with the remainder
paid on the issue date.
D. The entire bond is repaid on the maturity date.
E. Half of the principal is repaid evenly over each coupon period with the remainder
paid on the maturity date.
Delta Mowers has a debt-equity ratio of .6. Its WACC is 11.8 percent, and its cost of
debt is 7.7 percent. There is no corporate tax. What is the firm’s cost of equity capital?
A. 12.60 percent
B. 14.26 percent
C. 13.83 percent
D. 14.29 percent
E. 14.80 percent
A.B. Securities assists issuers by pricing and selling new securities to the general
public. Which one of the following terms best fits the role that A. B. Securities is
playing?
A. Underwriter
B. Investment advisor
C. Specialist
D. Securities dealer
E. Venture capitalist
Which one of the following is the abbreviation for the U.S. government coding system
that classifies a firm by its specific type of business operations?
A. BEC
B. SED
C. BID
D. SIC
E. SBC
Round House Furniture offers credit to its customers at a rate of 1.15 percent per
month. What is the effective annual rate of this credit offer?
A. 14.13 percent
B. 13.80 percent
C. 14.41 percent
D. 15.04 percent
E. 14.71 percent
What is the price of a $1,000 face value bond if the quoted price is 102.1?
A. $102.10
B. $1,002.10
C. $1,020.01
D. $1,020.10
E. $1,021.00
A firm has net income of $4,238 and interest expense of $898. The tax rate is 35
percent. What is the firm’s times interest earned ratio?
A. 7.33
B. 7.26
C. 5.38
D. 8.26
E. 9.33
An agreement to exchange currencies sometime in the future is referred to as which one
of the following?
A. Forward trade
B. Hedge
C. Gilt
D. Forward exchange rate
E. Spot trade
K’s Bridal Shoppe has 4,000 shares of common stock outstanding at a price of $13 a
share. It also has 500 shares of preferred stock outstanding at a price of $22 a share.
There are 50 bonds outstanding that have a semiannual coupon payment of $25. The
bonds mature in four years, have a face value of $1,000, and sell at 98 percent of par.
What is the capital structure weight of the common stock?
A. 48.20 percent
B. 49.68 percent
C. 48.15 percent
D. 46.43 percent
E. 50.08 percent
Which one of the following is the price that an investor pays to purchase an outstanding
bond?
A. Dirty price
B. Face value
C. Call price
D. Bid price
E. Clean price
Toy Mart recently announced that it will pay annual dividends at the end of the next two
years of $1.60 and $1.10 per share, respectively. Then, in Year 5 it plans to pay a final
dividend of $13.50 a share before closing its doors permanently. At a required return of
13.5 percent, what should this stock sell for today?
A. $3.24
B. $16.20
C. $9.43
D. $13.33
E. $12.70
Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate
of8 percent, matures in 6 years, has a total face value of $5 million, and is quoted at
101.2 percent of face value. The second issue has a 7.5 percent coupon, matures in 13
years, has a total face value of $18 million, and is quoted at 99 percent of face value.
Both bonds pay interest semiannually. What is the firm’s weighted average aftertax cost
of debt if the tax rate is 34 percent?
A. 5.05 percent
B. 5.12 percent
C. 5.63 percent
D. 5.95 percent
E. 6.08 percent
A project has annual depreciation of $15,028, costs of $82,592, and sales of $138,765.
The applicable tax rate is 34 percent. What is the operating cash flow according to the
tax shield approach?
A. $21,540.09
B. $27,666.67
C. $27,157.02
D. $42,183.70
E. $39,878.84
The financial statement that summarizes a firm’s accounting value as of a particular date
is called the:
A. income statement.
B. cash flow statement.
C. liquidity position.
D. balance sheet.
E. periodic operating statement.
Which one of the following represents the minimum rate of return a firm must earn on
its assets if it is to maintain the current value of its securities?
A. Cost of equity
B. Pretax cost of debt
C. Aftertax cost of debt
D. Weighted average cost of capital
E. Weighted average cost of preferred and common stock
Cromwell is acquiring some land for $1,200,000 in exchange for semiannual payments
of $75,000 at an interest rate of 6.35 percent. How many years will it take Cromwell to
pay for this purchase?
A. 11.00 years
B. 12.00 years
C. 11.35 years
D. 10.47 years
E. 11.80 years
Dividends are best defined as:
A. cash payments to shareholders.
B. cash payments to either bondholders or shareholders.
C. cash or stock payments to shareholders.
D. cash or stock payments to either bondholders or shareholders.
E. distributions of stock to current shareholders.
The average accounting return:
A. measures profitability rather than cash flow.
B. discounts all values to today’s dollars.
C. is expressed as a percentage of an investment’s current market value.
D. will equal the required return when the net present value equals zero.
E. is used more often by CFOs than the internal rate of return.
Which of these is most apt to decrease the cash cycle?
A. Decreasing the credit period granted to a customer
B. Decreasing the inventory turnover rate
C. Decreasing the accounts payable period
D. Decreasing the accounts receivable turnover rate
E. Increasing the receivables period
Electronic Products has 22,500 bonds outstanding that are currently quoted at 101.6.
The bonds mature in 8 years and pay an annual coupon payment of $90. What is the
firm’s aftertax cost of debt if the applicable tax rate is 34 percent?
A. 5.47 percent
B. 4.79 percent
C. 5.75 percent
D. 6.98 percent
E. 6.67 percent
In the US, stock dividends:
A. tend to change in direct proportion to changes in earnings.
B. have steadily declined in nominal terms over the years.
C. tend to decrease in amount just as frequently as they increase.
D. are concentrated in a few mature firms.
E. have steadily declined in real terms over the years.
The Golden Goose is considering a project with an initial cost of $46,700. The project
will produce cash inflows of $10,000 a year for the first two years and $12,000 a year
for the following three years. What is the payback period?
A. 2.87 years
B. 3.23 years
C. 3.41 years
D. 3.79 years
E. 4.23 years
A proposed project will increase a firm’s accounts payables. This increase is generally:
A. treated as an erosion cost.
B. treated as an opportunity cost.
C. a sunk cost and should be ignored.
D. a cash outflow at Time zero and a cash inflow at the end of the project.
E. a cash inflow at Time zero and a cash outflow at the end of the project.