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You're trying to determine whether to expand your business by building a new
manufacturing plant. The plant has an installation cost of $12 million, which will be
depreciated straight-line to zero over its 4-year life. The plant has projected net income
of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years. What is the
average accounting return?
A. 10.70 percent
B. 15.63 percent
C. 18.87 percent
D. 21.39 percent
E. 23.05 percent
Answer:
What is the cash flow to creditors for 2011?
A. -$353
B. -$210
C. $300
D. $432
E. $527
Answer:
Taylor's Hardware is acquiring The Corner Store for $25,000 in cash. Taylor's has 1,500
shares of stock outstanding at a market value of $46 a share. The Corner Store has
2,200 shares of stock outstanding at a market price of $8 a share. Neither firm has any
debt. The incremental value of the acquisition is $3,500. What is the value of Taylor's
Hardware after the acquisition?
A. $49,000
B. $50,300
C. $57,300
D. $65,100
E. $72,400
Answer:
Which one of the following statements related to an income statement is correct?
Assume accrual accounting is used.
A. The addition to retained earnings is equal to net income plus dividends paid.
B. Credit sales are recorded on the income statement when the cash from the sale is
collected.
C. The labor costs for producing a product are expensed when the product is sold.
D. Interest is a non-cash expense.
E. Depreciation increases the marginal tax rate.
Answer:
Which of the following variables are included in the Black-Scholes call option pricing
formula?
I. put premium
II. N(d1)
III. exercise price
IV. stock price
A. III and IV only
B. I, II, and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Answer:
Which one of the following accurately defines a perpetuity?
A. a limited number of equal payments paid in even time increments
B. payments of equal amounts that are paid irregularly but indefinitely
C. varying amounts that are paid at even intervals forever
D. unending equal payments paid at equal time intervals
E. unending equal payments paid at either equal or unequal time intervals
Answer:
Adelson's Electric had beginning long-term debt of $42,511 and ending long-term debt
of $48,919. The beginning and ending total debt balances were $84,652 and $78,613,
respectively. The interest paid was $4,767. What is the amount of the cash flow to
creditors?
A. -$1,641
B. -$1,272
C. $1,272
D. $7,418
E. $11,175
Answer:
A payoff profile:
A. determines the price of an option contract.
B. determines whether a forward or a futures contract is needed.
C. applies only to contract sellers.
D. determines the price of a collar.
E. illustrates potential gains and losses.
Answer:
Which of the following are included in current liabilities?
I. note payable to a supplier in eight months
II. amount due from a customer next month
III. account payable to a supplier that is due next week
IV. loan payable to the bank in fourteen months
A. I and III only
B. II and III only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
Answer:
The date on which a shareholder is officially listed as the recipient of stock rights is
called the:
A. issue date.
B. offer date.
C. declaration date.
D. holder-of-record date.
E. ex-rights date.
Answer:
The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of
$1,000, and a yield to maturity of 8.45 percent. How many years is it until these bonds
mature?
A. 11.92 years
B. 12.28 years
C. 13.80 years
D. 13.01 years
E. 27.59 years
Answer:
National Trucking has paid an annual dividend of $1.00 per share on its common stock
for the past fifteen years and is expected to continue paying a dollar a share long into
the future. Given this, one share of the firm's stock is:
A. basically worthless as it offers no growth potential.
B. equal in value to the present value of $1 paid one year from today.
C. priced the same as a $1 perpetuity.
D. valued at an assumed growth rate of one percent.
E. worth $1 a share in the current market.
Answer:
The unlevered cost of capital refers to the cost of capital for a(n):
A. private entity.
B. all-equity firm.
C. governmental entity.
D. private individual.
E. corporate shareholder.
Answer:
You plan on saving $5,200 this year, nothing next year, and $7,500 the following year.
You will deposit these amounts into your investment account at the end of each year.
What will your investment account be worth at the end of year three if you can earn 8.5
percent on your funds?
A. $13,528.12
B. $13,621.57
C. $13,907.11
D. $14,526.50
E. $14,779.40
Answer:
Which one of the following best describes the concept of erosion?
A. expenses that have already been incurred and cannot be recovered
B. change in net working capital related to implementing a new project
C. the cash flows of a new project that come at the expense of a firm's existing cash
flows
D. the alternative that is forfeited when a fixed asset is utilized by a project
E. the differences in a firm's cash flows with and without a particular project
Answer:
Which one of the following is the depreciation method which allows accelerated
write-offs of property under various lifetime classifications?
A. IRR
B. ACRS
C. AAR
D. straight-line to zero
E. straight-line with salvage
Answer:
Which one of the following statements related to payback and discounted payback is
correct?
A. Payback is a better method of analysis than is discounted payback.
B. Discounted payback is used more frequently in business than is payback.
C. Discounted payback does not require a cutoff point like the payback method does.
D. Discounted payback is biased towards long-term projects while payback is biased
towards short-term projects.
E. Payback is used more frequently even though discounted payback is a better method.
Answer:
Which one of the following bonds is the least sensitive to interest rate risk?
A. 3-year; 4 percent coupon
B. 3-year; 6 percent coupon
C. 5-year; 6 percent coupon
D. 7-year; 6 percent coupon
E. 7-year; 4 percent coupon
Answer:
Which one of the following is the best example of a diversifiable risk?
A. interest rates increase
B. energy costs increase
C. core inflation increases
D. a firm's sales decrease
E. taxes decrease
Answer:
International bonds issued in multiple countries but denominated solely in the issuer's
currency are called:
A. Treasury bonds.
B. Bulldog bonds.
C. Eurobonds.
D. Yankee bonds.
E. Samurai bonds.
Answer:
Which form of financing do firms prefer to use first according to the pecking-order
theory?
A. regular debt
B. convertible debt
C. common stock
D. preferred stock
E. internal funds
Answer:
This morning, you purchased a call option on Schoolhouse Supply Co. stock that
expires in one year. The exercise price is $40. The current price of the stock is $43.40
and the risk-free rate of return is 3.6 percent. Assume the option will finish in the
money. What is the current value of the call option?
A. $0
B. $1.49
C. $3.97
D. $4.79
E. $5.46
Answer:
Based on the following information, what is the sustainable growth rate of Hendrix
Guitars, Inc.?
A. 7.68 percent
B. 9.52 percent
C. 11.12 percent
D. 13.49 percent
E. 14.41 percent
Answer:
If Major Manuscripts, Inc. decides to maintain a constant debt-equity ratio, what rate of
growth can it maintain assuming that no additional external equity financing is
available.
A. 11.23 percent
B. 12.49 percent
C. 12.83 percent
D. 13.27 percent
E. 13.65 percent
Answer:
Cash flow from assets is also known as the firm's:
A. capital structure.
B. equity structure.
C. hidden cash flow.
D. free cash flow.
E. historical cash flow.
Answer:
A graph depicting the gains and losses a seller of a forward contract would earn at
various market prices is referred to as a:
A. risk profile.
B. payoff profile.
C. risk offer line.
D. scatter plot.
E. risk-return graph.
Answer:
Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield
to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per
bond if the face value is $1,000?
A. $989.70
B. $991.47
C. $996.48
D. $1,002.60
E. $1,013.48
Answer:
Which one of the following statements related to the cash flow to creditors is correct?
A. If the cash flow to creditors is positive then the firm must have borrowed more
money than it repaid.
B. If the cash flow to creditors is negative then the firm must have a negative cash flow
from assets.
C. A positive cash flow to creditors represents a net cash outflow from the firm.
D. A positive cash flow to creditors means that a firm has increased its long-term debt.
E. If the cash flow to creditors is zero, then a firm has no long-term debt.
Answer:
Which one of the following is the legal proceeding under which an insolvent firm can
be reorganized?
A. restructure process
B. bankruptcy
C. forced merger
D. legal takeover
E. rights offer
Answer:
At the beginning of the year, you have an outstanding short-term loan of $274 which
was used to cover your cash needs for the previous year. The interest expense for the
year is $19. The projected net cash flow for this year is $123, prior to any payment of
principal or interest on this loan. What is your anticipated loan balance at year end?
A. $151
B. $170
C. $176
D. $189
E. $193
Answer:
When the operating cash flow of a project is equal to zero, the project is operating at
the:
A. maximum possible level of production.
B. minimum possible level of production.
C. financial break-even point.
D. accounting break-even point.
E. cash break-even point.
Answer:
Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays
interest on January 1 and July 1. Which one of the following prices represents your total
cost of purchasing this bond today?
A. clean price
B. dirty price
C. asked price
D. quoted price
E. bid price
Answer:
