1) In a typical month, River City Tours received 60 checks totaling $144,000. These are
delayed 3 days on average. What is the average daily float? Assume 30 days in a month.
A.$12,500
B.$13,333
C.$14,400
D.$16,217
E.$16,667
2) Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum
at the end of the loan term. Which one of the following interest rates is best for Jenny?
A.8 percent simple interest
B.8 percent interest, compounded annually
C.8.5 percent simple interest
D.8.5 percent interest, compounded annually
E.9 percent interest, compounded annually
3) Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of
$1,013. The bonds pay interest annually, mature in 11 years, and have a yield to
maturity of 5.34 percent. What is the current yield?
A.5.39 percent
B.5.43 percent
C.5.50 percent
D.5.61 percent
E.5.77 percent
4) Which one of the following terms is defined as the total tax paid divided by the total
taxable income?
A.Average tax rate
B.Variable tax rate
C.Marginal tax rate
D.Absolute tax rate
E.Contingent tax rate
5) Forbidden Fruit Extracts expects its earnings before interest and taxes to be $325,000
a year forever. Currently, the firm has no debt. The cost of equity is 16.3 percent and the
tax rate is 35 percent. The company is in the process of issuing $2 million of bonds at
par that carry a 6.5 percent annual coupon. What is the unlevered value of the firm?
A.$371,429
B.$431,971
C.$747,485
D.$969,325
E.$1,296,012
6) The Men’s Warehouse charges 1.6 percent interest per month. What rate of interest
are its credit customers actually paying?
A.18.00 percent
B.18.92 percent
C.19.26 percent
D.19.31 percent
E.20.98 percent
7) Forecasting risk is best defined as:
A.reality risk
B.value risk
C.potential risk
D.management risk
E.estimation risk
8) Musical Charts just paid an annual dividend of $2.45 per share. This dividend is
expected to increase by 3.3 percent annually. Currently, the firm has a beta of 1.09 and a
stock price of $36 a share. The risk-free rate is 4.2 percent and the market rate of return
is 12.6 percent. What is the cost of equity capital for this firm?
A.10.28 percent
B.11.84 percent
C.12.29 percent
D.12.95 percent
E.13.42 percent
9) Which of the following combinations is ensured to decrease the interest rate
sensitivity of a bond?
A.Increase in both the time to maturity and the coupon rate
B.Increase in the time to maturity and a decrease in the coupon rate
C.Decrease in both the time to maturity and the coupon rate
D.Decrease in the time to maturity and an increase in the coupon rate
E.Decrease in the time to maturity and an increase in the face value
10) Over the period of 1926-2011:
A.long-term government bonds underperformed long-term corporate bonds
B.small-company stocks underperformed large-company stocks
C.inflation exceeded the rate of return on U.S. Treasury bills
D.U.S. Treasury bills outperformed long-term government bonds
E.large-company stocks outperformed all other investment categories
11) University Furniture sells 2,500 sofas a year at an average price per sofa of $1,250.
The carrying cost per unit is $11.60. The company orders 80 sofas at a time and has a
fixed order cost of $55 per order. The sofas are sold out before they are restocked. What
is the economic order quantity?
A.154 sofas
B.172 sofas
C.181 sofas
D.198 sofas
E.211 sofas
12) Eric has $4,800 that he wants to invest for 4 years. He can invest this amount at his
credit union and earn 4 percent simple interest. Or, he can open an account at Compass
Bank and earn 3.65 percent interest, compounded annually. If he decides to invest at
Copmpass Bank for 3 years, he will:
A.earn $15.02 more than if he had invested with his credit union
B.earn $27.89 less than if he had invested with his credit union
C.earn the same amount as if he had invested with the credit union
D.have a total balance of $4,992 in his account after one year
E.have a total balance of $4,876 in his account after one year
13) A bond has a make-whole call provision. Given this, you know that the:
A.bond will always sell at par
B.call premium must equal the annual coupon payment
C.call price is directly related to the market rate of interest
D.call price is inversely related to the market rate of interest
E.bond must be a zero coupon bond
14) Roller Coaster’s has a cost of equity of 15.4 percent, a return on assets of 11.3
percent, and a cost of debt of 7.3 percent. There are no taxes. What is the firm’s
weighted average cost of capital?
A.7.30 percent
B.11.20 percent
C.12.97 percent
D.15.40 percent
E.Cannot be determined from the information provided
15) Which one of the following will increase the current value of a stock?
A.Decrease in the dividend growth rate
B.Increase in the required return
C.Increase in the market rate of return
D.Decrease in the expected dividend for next year
E.Increase in the capital gains yield
16) Baugh and Essary reports the following account balances: inventory of $17,600,
equipment of $128,300, accounts payable of $24,700, cash of $11,900, and accounts
receivable of $31,900. What is the amount of the current assets?
A.$46,700
B.$56,000
C.$61,400
D.$175,000
E.$199,700
17) Which of the following have been offered as justification for IPO underpricing?
I. Young firms tend to be very risky.
II. The best IPOs are oversubscribed.
III. Underwriters like to avoid lawsuits.
IV. It benefits the existing shareholders.
A.I and III only
B.II and IV only
C.I, II, and III only
D.II, III, and IV only
E.I, II, III, and IV
18) Which one of the following is most apt to decrease the accounts receivable period?
A.Increasing the time granted to customers to pay for purchases
B.Shortening the cash cycle
C.Increasing the discount for cash payment
D.Selling inventory slower
E.Paying suppliers faster
19) How long will it take to double your savings if you earn 7.2 percent interest,
compounded annually?
A.8.89 years
B.9.02 years
C.9.34 years
D.9.97 years
E.11 years
20) To minimize collection float, a firm should do which of the following?
I. Deposit its collections at least daily
II. Make sure all checks it receives at the sales counter are properly dated and signed
III. Pay its bills in a more timely manner
IV. Eliminate its regional lockboxes and have only one central lockbox located near the
firm’s home office
A.I and II only
B.III and IV only
C.II, III, and IV only
D.I, II, and III only
E.I, II, III, and IV
21) The payback method of analysis ignores which one of the following?
A.Initial cost of an investment
B.Arbitrary cutoff point
C.Cash flow direction
D.Time value of money
E.Timing of each cash inflow
22) Based on the capital asset pricing model, investors are compensated based on which
of the following?
I. Market risk premium
II. Portfolio standard deviation
III. Portfolio beta
IV. Risk-free rate
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
23) A project has an initial requirement of $261,000 for fixed assets and $27,000 for net
working capital. The fixed assets will be depreciated to a zero book value over the
four-year life of the project and have an estimated salvage value of $78,000. All of the
net working capital will be recouped at the end of the project. The annual operating
cash flow is $96,200 and the discount rate is 13 percent. What is the project’s net
present value if the tax rate is 35 percent?
A.$42,011
B.$43,333
C.$45,799
D.$47,880
E.$47,919
24) A local magazine is offering a $2,500 grand prize to one lucky winner. The prize
will be paid in four annual payments of $625 each, starting one year after the drawing.
How much would this prize be worth to you if you can earn 9 percent on your money?
A.$1,848.18
B.$1,934.24
C.$2,024.82
D.$2,450.14
E.$2,545.54
25) A perpetuity in Canada is frequently referred to as which one of the following?
A.Consul
B.Infinity
C.Forever cash
D.Dowry
E.Forevermore
26) Which one of the following statements matches M&M Proposition I?
A.The cost of equity capital has a positive linear relationship with a firm’s capital
structure
B.The dividends paid by a firm determine the firm’s value
C.The cost of equity capital varies in response to changes in a firm’s capital structure
D.The value of a firm is independent of the firm’s capital structure
E.The value of a firm is dependent on the firm’s capital structure
27) The weighted average cost of capital is defined as the weighted average of a firm’s:
A.return on its investments
B.cost of equity and its after tax cost of debt
C.pretax cost of debt and equity securities
D.bond coupon rates
E.dividend and capital gains yields
28) The current spot rate between the UK and the U.S. is £0.6220 per $1. The expected
inflation rate in the U.S. is 2.1 percent. The expected inflation rate in the UK is 2.6
percent. If relative purchasing power parity exists, what will the exchange rate be next
year?
A.£0.6189/$1
B.£0.6251/$1
C.£0.6823/$1
D.£0.7023/$1
E.£0.7110/$1
29) You place an order for 680 units of widgets at a unit price of $46. The supplier
offers terms of 2/5, net 20 . If you don’t take the discount, how much interest are you
paying implicitly?
A.$46
B.$625.60
C.$792.00
D.$1,460
E.$1,564
30) Tim Taylor Tools is a young start-up company. No dividends will be paid on the
stock over the next eight years because the firm needs to plow back its earnings to fuel
growth. The company will then pay a $9 per share dividend in year 8 and will increase
the dividend by 4 percent per year thereafter. If the required return on this stock is 12
percent, what is the current share price?
A.$42.64
B.$45.44
C.$57.23
D.$81.95
E.$100.13
31) Which one of the following methods of analysis is most appropriate to use when
two investments are mutually exclusive?
A.Internal rate of return
B.Profitability index
C.Net present value
D.Modified internal rate of return
E.Average accounting return
32) Marine Expeditors has three divisions. Division A is the core of the business and
represents 80 percent of the firm’s operations. Division B is involved only with
contractual short-term projects and therefore has about 8 percent less risk than Division
A. Division C develops and markets new products and is about 12 percent riskier than
Division A and about equal in size to Division B. The manager of Division A has
suggested that the operations of his division be increased by 10 percent next year. The
proposed project should probably be assigned a required return that is equal to _____
percent of the firm’s weighted average cost of capital.
A.40
B.60
C.80
D.100
E.110
33) Which one of the following statements is correct?
A.Both preferred stock and corporate bonds can be callable
B.Both preferred stock and corporate bonds have a stated liquidation value of $1,000
each
C.Interest payments to bondholders as well as dividend payments to preferred
shareholders are tax-deductible expenses for the issuing firm
D.Bondholders generally receive a fixed payment while preferred shareholders receive
a variable payment
E.Preferred shareholders receive preferential treatment over bondholders in a
liquidation
34) Which one of the following statements is correct concerning the taxation of
dividends and capital gains?
A.Seventy percent of capital gains derived from stock investments are tax exempt for
corporate investors
B.Dividends are a form of tax-exempt income for individual investors
C.All investors are subject to the same tax rate on dividend income
D.Individual investors can defer taxation on both dividends and capital gains
E.As of 2003, individual investors pay a 15 percent tax on both dividends and capital
gains
35) What is the significance of the slope of the security market line? Should investors
prefer a steeper slope or a flatter slope?
36) Kate is the sole founder of the exclusive retail store, Kate’s Interiors. Kate identified
additional locations that she believed offered profitable opportunities for expansion so
decided to take her firm public in order to finance her expansion plans. Bob is an
investor who purchased shares of Kate’s Interiors stock at the offer price. After one
month as a public firm, Kate realized that Bob had earned $1.1 million in profit on his
investment and had already cashed out and moved on. Kate, on the other hand, had
made no profit and still owns her shares. Explain how this could happen.
37) Explain the Rule of 72 .
38) Identify the cash flows that occur between a firm and its shareholders and explain
how each of these cash flows affects the cash flow to stockholders.
39) Explain how taxes affect the value of a firm based on M&M Proposition I.
40) Assume a firm follows a policy of using its weighted average cost of capital as the
required return for all of its proposed projects. Evaluate this policy. How will this policy
affect the overall risk level of the firm over time?
41) Miller Tool is a successful manufacturer of both consumer and industrial hand tools
and is publicly owned. The firm has several positive net present value projects that it
would like to pursue and thus decided to issue additional shares of common stock. As a
result of this stock issue, the firm’s stock price declined. Explain why this occurred
when the proceeds of the issue are being used to fund positive net present value
projects.
42) Ed has to choose between Project A and Project B, which are mutually exclusive.
Project A has an initial cost of $28,000 and an internal rate of return of 16 percent.
Project B has an initial cost of $47,000 and an internal rate of return of 12 percent.
Explain why the selection of the project with the higher internal rate of return could be
a faulty decision.