The addition of a risky security to a fully diversified portfolio:
A. must decrease the portfolio’s expected return.
B. must increase the portfolio beta.
C. may or may not affect the portfolio beta.
D. will increase the unsystematic risk of the portfolio.
E. will have no effect on the portfolio beta or its expected return.
Answer:
Dover Wholesalers sells products exclusively to Benn Retailer. Benn Retailer buys
exclusively from Dover Wholesalers. Dover Wholesalers has a receivables period of 44
days, an inventory period of 8 days, and a payables period of 63 days. Benn Retailer has
an inventory period of 15 days, a receivables period of 22 days, and a payables period
of 44 days. Which one of the following statement is correct given this information?
A. Dover Wholesalers has a shorter operating cycle than does Benn Retailer.
B. Benn Retailer has an operating cycle of 81 days.
C. It takes Benn Retailer less time to collect payment on a sale than it does for the firm
to sell its inventory.
D. Dover Wholesalers is financing 100 percent of Benn Retailer’s operating cycle.
Answer:
Which one of the following states that a firm’s cost of equity capital is a positive linear
function of the firm’s capital structure?
A. Static theory of capital structure
B. M&M Proposition I
C. M&M Proposition II
D. Homemade leverage theory
E. WACC
Answer:
Miller and Sons is evaluating a project with the following cash flows:
The company uses a 10 percent interest rate on all of its projects. What is the MIRR of
the project using the reinvestment approach? The discounting approach? The
combination approach?
A. 8.46 percent; 7.29 percent; 8.59 percent
B. 8.46 percent; 7.38 percent; 8.61 percent
C. 8.54 percent; 7.29 percent; 8.61 percent
D. 8.54 percent; 7.38 percent; 8.59 percent
E. 8.54 percent; 8.23 percent; 8.61 percent
Answer:
Mark Anderson’s Legal Aid has the following estimated revenue.
Assume each month has 30 days and the accounts receivable period is 60 days. How
much does the firm expect to collect in May?
A. $14,800
B. $15,600
C. $16,350
D. $16,400
E. $17,900
Answer:
Rock Bottom Carpets sells 5,600 carpets a year at an average price per carpet of $1,490.
The carrying cost per unit is $22.37. The company orders 500 carpets at a time and has
a fixed order cost of $69 per order. The carpets are sold out before they are restocked.
What is the economic order quantity?
A. 147 carpets
B. 166 carpets
C. 186 carpets
D. 315 carpets
E. 372 carpets
Answer:
The stock of Southern United is priced at $40 a share and has a dividend yield of 2.1
percent. The firm pays constant annual dividends. What is the amount of the next
dividend per share?
A. $0.021
B. $0.210
C. $0.840
D. $0.871
E. $0.875
Answer:
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.
Answer:
Which one of the following statements is the core principle of M&M Proposition I,
without taxes?
A. A firm’s cost of equity is directly related to the firm’s debt-equity ratio.
B. A firm’s WACC is directly related to the firm’s debt-equity ratio.
C. The interest tax shield increases the value of a firm.
D. The capital structure of a firm is totally irrelevant.
E. Levered firms have greater value than unlevered firms.
Answer:
Assume a canned soft drink costs $1 in the U.S. and $1.30 in Canada. At the same time,
the currency per U.S. dollar is Can$1.30. Which one of the following conditions exists
in this situation?
A. Absolute purchasing power parity
B. Interest rate parity
C. Relative purchasing power parity
D. Translation exposure
E. Equal spot and forward rates
Answer:
The average risk premium on long-term government bonds for the period 1926-2011
was equal to:
A. zero.
B. 1 percent.
C. the rate of return on the bonds plus the corporate bond rate.
D. the rate of return on the bonds minus the T-bill rate.
Answer:
Wilson’s Realty has total assets of $46,800, net fixed assets of $37,400, current
liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio?
A. 0.41
B. 0.60
C. 0.66
D. 0.78
E. 0.86
Answer:
You find a certain stock that had returns of 14 percent, -27 percent, 19 percent, and 21
percent for four of the last five years, respectively. The average return of the stock over
this period was 9.5 percent. What is the standard deviation of the stock’s returns?
A. 11.67 percent
B. 12.90 percent
C. 14.14 percent
D. 18.47 percent
E. 20.59 percent
Answer:
The annual interest divided by the face value of a bond is referred to as the:
A. market rate.
B. call rate.
C. coupon rate.
D. current yield.
E. yield-to-maturity.
Answer:
The DuPont identity can be totally defined by which one of the following?
A. Return on equity, total asset turnover, and equity multiplier
B. Equity multiplier and return on assets
C. Profit margin and return on equity
D. Total asset turnover, profit margin, and debt-equity ratio
E. Equity multiplier, return on assets, and profit margin
Answer:
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
Answer:
Frank’s Oil Supply has a cash balance of $27 and a short-term loan balance of $50 at the
beginning of quarter 1. The net cash inflow for the first quarter is $68 and for the
second quarter there is a net cash outflow of $23. All cash shortfalls are funded with
short-term debt. The firm pays 2 percent of its prior quarter’s ending loan balance as
interest each quarter. The minimum cash balance is $15. What is the short-term loan
balance at the end of the first quarter?
A. $0
B. $13
C. $15
D. $17
E. $18
Answer:
The owners’ equity for The Deer Store was $58,900 at the beginning of the year. During
the year, the company had aftertax income of $4,200, of which $3,200 was paid in
dividends. Also during the year, the company repurchased $6,500 of stock from one of
the shareholders. What is the value of the owners’ equity at year end?
A. $53,400
B. $45,000
C. $59,900
D. $84,400
E. $90,900
Answer: