1) A firm has EBIT of $300,000 and depreciation expense of $12,000. Fixed charges
total $44,000. Interest expense totals $7,000. What is the firm’s cash coverage ratio?
A.3.76 times
B.4.91 times
C.7.25 times
D.7.09 times
2) You own $9,000 of Olympic Steel stock that has a beta of 2.5. You also own $7,000
of Rent-a-Center (beta = 1.2) and $8,000 of Lincoln Educational (beta = 0.4). What is
the beta of your portfolio?
A.1.18
B.1.07
C.1.42
D.1.53
3) Calculate the price of a zero coupon bond that matures in 20 years if the market
interest rate is 8.5%. (Assume annual compounding and a par value of $1,000.)
A.$90.29
B.$195.62
C.$1,195.62
D.$995.62
4) In 2006, a significant indicator of the U.S. economic decline was:
A.a significant drop in interest rates
B.a sharp increase in unregulated Ponzi-type security sales
C.rising defaults by subprime mortgage borrowers
D.a large increase in loan default due to unemployment
5) Free Cash Flow Catering Corp. reported free cash flows for 2008 of $8 million and
investment in operating capital of $2 million. Catering listed $1 million in depreciation
expense and $2 million in taxes on its 2008 income statement. What was Catering’s
2008 EBIT?
A.$7 million
B.$10 million
C.$11 million
D.$13 million
6) This is the interest rate that is actually observed in financial markets.
A.nominal interest rates
B.real interest rates
C.real risk free rate
D.market premium
7) Which of these is an international organization that deals with international trade
rules and helps settle disputes between its member governments?
A.World Trade Union
B.World Free Trade Agreement
C.International Monetary Fund
D.World Trade Organization
8) Hughes Technology Corp. recently went public with an initial public offering in
which they received a total of $42 million in new capital funding. The underwriter used
a firm commitment offering in which the offer price was $22 and the underwriter’s
spread was $0. Hughes also paid legal and other administrative costs of $825,000 for
the IPO. Calculate the number of shares issued through this IPO.
A.2,024,823
B.3,125,000
C.3,328,864
D.4,002,179
9) Which of the following statements is correct regarding total risk?
A.The coefficient of variation is a measure of the firm’s total risk
B.All firms have the same amount of total risk because they are all exposed to the same
market risk
C.Conglomerates will have less total risk than a firm that has one line of business
D.None of these statements are correct
10) Isaac realizes that he charged too much on his credit card and has racked up $7,000
in debt. If he can pay $275 each month and the card charges 17.55% APR (compounded
monthly), how long will it take him to pay off the credit card? How much interest
expense will Isaac pay during this time?
A.32.07 months; $8,819.25
B.32.07 months; $3,819.25
C.22.07 months; $8,819.25
D.22.07 months; $3,819.25
11) All of the following are common shapes for the yield curve except ____________.
A.Elliptical
B.Upward-sloping
C.Flat
D.Inverted
12) Loan Balance Hank purchased a $20,000 car two years ago using an 8 percent,
5-year loan. He has decided that he would sell the car now, if he could get a price that
would pay off the balance of his loan. What’s the minimum price Hank would need to
receive for his car?
A.$8,000.00
B.$12,079.65
C.$12,941.12
D.$15,133.64
13) Rates over One Year Determine the interest rate earned on a $450 deposit when
$475 is paid back in one year.
A.0.89%
B.1.13%
C.5.56%
D.13.0%
14) Your company is considering a project that will cost $100. The project will generate
after-tax cash flows of $37.50 per year for five years. The WACC is 10% and the firm’s
D/A ratio is .70. The flotation cost for equity is 6%, the flotation cost for debt is 3%,
and your firm does not plan on issuing any preferred stock within its capital structure. If
your firm follows the practice of incorporating flotation costs into the project’s initial
investment, what is the firm’s flotation-adjusted cash flow in year 0?
A.-$90.16
B.-$104.06
C.-$96.25
D.-$102.72
15) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the average approach?
A.$500,000
B.$580,000
C.$625,000
D.$700,000
16) At your discount brokerage firm, it costs $7.95 per stock trade. How much money
do you receive after selling 250 shares of General Electric (GE), which trades at
$55.19?
A.$14,037.95
B.$11,958.55
C.$12,174.95
D.$13,789.55
17) Which of the following statements is correct?
A.Michael Milken pioneered an active high-yield bond market in the late 1970s that
provided much needed capital to entrepreneurs and financial innovators
B.Prior to Milken, the only junk bonds were those issued by once financially stable
firms that had fallen on hard times
C.Milken showed investors that, historically, junk bonds rarely defaulted and offered a
very high return to those willing to assume the risk of owning them
D.All of these statements are correct
18) A decrease in net working capital (NWC) is treated as a
A.cash inflow
B.cash outflow
C.sunk cost
D.historical cost
19) A legal duty between two parties where one party must act in the interest of the
other party.
A.Agency theory
B.Angel Investor
C.Fiduciary
D.Investment banker
20) One-year Treasury bills currently earn 4.5 percent. You expect that one year from
now, one-year Treasury bill rates will increase to 6.65 percent. The liquidity premium
on two-year securities is 0.05 percent. If the liquidity theory is correct, what should the
current rate be on two-year Treasury securities?
A.5.24%
B.5.59%
C.5.65%
D.5.95%
21) Total Risk Rank the following three stocks by their level of total risk, highest to
lowest. Rail Haul has an average return of 8 percent and standard deviation of 10
percent. The average return and standard deviation of Idol Staff are 10 percent and 20
percent; and of Poker-R-Us are 6 percent and 15 percent.
A.Rail Haul, Poker-R-Us, Idol Staff
B.Idol Staff, Rail Haul, Poker-R-Us
C.Poker-R-Us, Idol Staff, Rail Haul
D.Idol Staff, Poker-R-Us, Rail Haul
22) Compounding monthly versus annually causes the interest rate to be effectively
higher, and thus the future value
A.grows
B.decreases
C.is independent of the monthly compounding
D.is affected only if the calculation involves an annuity due
23) Which of these is defined as an exchange rate regime where the country’s central
bank allows its currency price to float freely between an upper and lower bound and
may buy and sell large amounts of it in order to provide price support or resistance?
A.foreign market regime
B.freely floating regime
C.currency market regime
D.managed-floating regime
24) Firm-specific reasons for financial distress include all of the following except
_________.
A.Large amounts of financial leverage
B.Poor management
C.Economic recession
D.Volatility in earnings
25) Your firm needs a machine which costs $60,000, and requires $15,000 in
maintenance for each year of its 5-year life. After 5 years, this machine will be
replaced. The machine falls into the MACRS 5-year class life category. Assume a tax
rate of 35% and a discount rate of 10%. If this machine can be sold for $8,000 at the
end of year 5, what is the after-tax salvage value?
A.$3,456.00
B.$4,544.00
C.$5,200.00
D.$6,409.60
26) Debt Management Ratios Trina’s Trikes, Inc. reported a debt-to-equity ratio of 2
times at the end of 2011 . If the firm’s total debt at year-end was $10 million, how much
equity does Trina’s Trikes have?
A.$2 million
B.$5 million
C.$10 million
D.$20 million
27) Statement of Cash Flows In 2010, Lower Case Productions had cash flows from
investing activities of +$50,000 and cash flows from financing activities of +$100,000.
The balance in the firm’s cash account was $80,000 at the beginning of 2010 and
$65,000 at the end of the year. What was Lower Case’s cash flow from operations for
2010?
A.$-15,000
B.$-150,000
C.$-165,000
D.$65,000
28) Taxable Equivalent Yield What’s the taxable equivalent yield on a municipal bond
with a yield to maturity of 3.9 percent for an investor in the 35 percent marginal tax
bracket?
A.1.09%
B.3.90%
C.6.00%
D.11.14%
29) A firm’s net income last year was $2.65 million. Its net income grew 8% during the
last 5 years. If that growth rate continues, how long will it take for the firm’s net income
to double?
A.6.6 years
B.7.1 years
C.8.2 years
D.9 years
30) Your company faces a 34% tax rate and has $150 million in assets, currently
financed entirely with equity. Equity is worth $8 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 25-percent debt capital structure, and has
determined that they would have to pay a 12 percent yield on perpetual debt in either
event. What will be the standard deviation in EPS if they switch to the proposed capital
structure?
A.0.2890
B.0.5376
C.0.7983
D.0.8935
31) You are evaluating a project for The Ultimate recreational tennis racket, guaranteed
to correct that wimpy backhand. You estimate the sales price of The Ultimate to be
$300 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and
1,325 units in year 3 . The project has a 3-year life. Variable costs amount to $200 per
unit and fixed costs are $50,000 per year. The project requires an initial investment of
$150,000 in assets which will be depreciated straight-line to zero over the 3-year
project life. The actual market value of these assets at the end of year 3 is expected to
be $25,000. NWC requirements at the beginning of each year will be approximately
10% of the projected sales during the coming year. The tax rate is 30% and the required
return on the project is 10%. What will the free cash flow for this project be in year 3?
A.$142,000
B.$167,000
C.$130,000
D.$204,000
32) Suppose that Beach Blanket’s common shares sell for $55 per share, are expected to
set their next annual dividend at $3.00 per share, and that all future dividends are
expected to grow by 8 percent per year, indefinitely. If Beach faces a flotation cost of
10% on new equity issues, what will be the flotation-adjusted cost of equity?
A.5.45%
B.8.06%
C.13.45%
D.14.06%
33) Statement of Cash Flows Caf Creations Inc. has net cash flow from financing
activities for the last year of $25 million. The company paid $15 million in dividends
last year. During the year, the change in notes payable on the balance sheet was a
decrease of $40 million, and change in common and preferred stock was an increase of
$50 million. The end of year balance for long-term debt was $40 million. What was
their beginning of year balance for long-term debt?
A.$10 million
B.$20 million
C.$30 million
D.$40 million
34) Your company doesn’t face any taxes and has $200 million in assets, currently
financed entirely with equity. Equity is worth $10 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 40-percent debt capital structure, and has
determined that they would have to pay an 8 percent yield on perpetual debt in either
event. What will be the level of expected EPS if they switch to the proposed capital
structure?
A.$0.75
B.$1.1325
C.$1.1925
D.$1.55
35) Which of the following is defined as the purchase of one firm by another firm?
A.merger
B.synergy
C.acquisition
D.assignment
36) Which of these terms is defined as the value of the combined firms being greater
than the sum of the value of the two firms individually?
A.composition
B.synergy
C.consolidation
D.conglomerate
37) Present Value What is the present value of a $500 payment made in 4 years when
the discount rate is 8 percent?
A.$365.35
B.$367.51
C.$460.00
D.$680.24
38) Why would a firm ever use short-term debt to finance permanent current assets?
A.This would be illogical and is rarely observed
B.This would occur if short-term rates were much lower than long-term rates
C.This would only occur if the managers were very conservative
D.None of these
39) For which situation below would one need to ‘smooth out” the variation in each set
of cash flows so that each becomes a perpetuity?
A.choosing between projects with differing risks
B.choosing between independent project
C.choosing between alternative assets with differing lives
D.choosing between alternative assets with equal lives
40) This is the portion of total risk that is attributable to overall economic factors.
A.firm specific risk
B.market risk
C.modern portfolio risk
D.total risk
41) Future Value and Annuity Payments Chandler and Monica are trying to decide if
they will have enough money to retire early in 15 years, at age 60 . Their current assets
are $250,000 in retirement plans and they have $80,000 in other investments. Together,
they contribute $30,000 per year to their retirement plans and another $6,000 to other
investments. If their assets grow at 9 percent per year, how much money will they have
when they turn 60? After they retire, they will invest their wealth more conservatively
and it will earn 6 percent per year. Is this enough to fund a $150,000 per year retirement
for 30 years?
42) Describe how adding a risk-free security to modern portfolio theory allows
investors to do better than the efficient frontier.
43) What is the difference between an annuity due and an ordinary annuity?
44) Why might a firm announce a reverse stock split?
45) What two main factors come into play when a firm is deciding to change its funding
mix with regard to their capital structure?
46) What are the two methods financial managers can use for resolving the problem of
having cash flows from a foreign project in a foreign currency, while the discount rate is
usually evaluated from the domestic country perspective?
47) Why is a dollar worth more today than a dollar received one year from now?
48) Consider two firms with the same P/E ratio. Explain how one could be described as
expensive compared to the other.
49) Describe the relationship between interest rate changes and bond prices.