1) Brady inherited 1750 shares of LNM, Inc. The stock is selling in the market for $82
per share and the company is contemplating a 1-for-3 stock split. Given this
information, which of the following statements is correct?
A.Brady will have 583.33 shares and stock’s price will be near $246.00
B.Brady will have 583.33 shares and stock’s price will be near $27.33
C.Brady will have 5250 shares and stock’s price will be near $246.00
D.Brady will have 5250 shares and stock’s price will be near $27.33
2) Sipe’s Paint and Wallpaper, Inc., needs to raise $1 million to finance plant expansion.
In discussions with its investment bank, Sipe’s learns that the bankers recommend a
gross price of $40 per share and that 30,000 shares of stock be sold. If the net proceeds
on the stock sale leave Sipe’s with $1 million, what percent of the stock price does the
underwriter’s spread represent?
A.15.24%
B.15.57%
C.16.09%
D.16.67%
3) An all-equity financed firm has $450 in assets and the stock price is $45. If the firm
restructures with 20% debt which creates interest expense of $10 per year and the firm’s
tax rate is 40%, what is the break-even EBIT?
A.$30
B.$35
C.$45
D.$50
4) Compute the PI statistic for Project X and note whether the firm should accept or
reject the project with the cash flows shown below if the appropriate cost of capital is
10 percent.
A.10%, reject
B.14.22%, accept
C.13.26%, accept
D.18.96%, accept
5) Statement of Retained Earnings Soccer Starz, Inc. started the year with a balance of
retained earnings of $25 million and ended the year with retained earnings of $32
million. The company paid dividends of $2 million to the preferred stock holders and
$6 million to common stock holders. What was Soccer Starz’s net income for the year?
A.$7 million
B.$15 million
C.$40 million
D.$49 million
6) Financial planning involves estimating projected cash flows, which is useful for all
the following except:
A.setting internal goals
B.providing information to shareholders and other external stakeholders concerning the
firm’s future expectations
C.estimating the firm’s future needs for internal and external financing
D.auditors to determine if the company’s annual report is true and correct
7) If demand for a firm’s products suddenly slows down so that inventory increases
while sales decrease, how will the firm’s needs for net working capital react?
A.Net working capital would increase
B.Net working capital would decrease
C.There would be no change in net working capital
D.Net working capital would first decrease, then increase slowly over time
8) Interest-on-Interest Consider a $200 deposit earning 8 percent interest per year for 3
years. How much total interest is earned on interest (excluding interest earned on the
original deposit)?
A.$3.94
B.$24.00
C.$48.00
D.$51.94
9) Which of these is defined as a contractual agreement that states the exchange rate to
be used at a future exchange date?
A.fixed peg rate
B.forward exchange rate
C.managed exchange rate
D.future strategy rate
10) Daddi Mac, Inc., doesn’t face any taxes and has $250 million in assets, currently
financed entirely with equity. Equity is worth $13 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 10 percent yield on perpetual debt. What will
be the standard deviation in EPS if they switch to the proposed capital structure?
A.$0.33
B.$0.26
C.$0.21
D.$0.16
11) A mortgage broker is offering a $225,000 30-year mortgage with a teaser rate. In the
first two years of the mortgage, the borrower makes monthly payments on only a 2.5%
APR interest rate. After the second year, the mortgage interest rate charged increases to
8.5% APR. What are the mortgage payments in the first two years? What are the
mortgage payments after the second year?
A.$790.25; $1,512.93
B.$790.25; $1,309.13
C.$889.02; $1,650.61
D.$889.02; $1,677.09
12) IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the
following statements must be correct?
A.The market risk premium for Apple must be larger than the market risk premium of
IBM
B.If investors become more risk averse, the expected return of Apple will increase more
than the expected return on IBM
C.Apple’s expected rate of return must be three times as large as IBM’s
D.None of these statements is correct
13) Suppose that Psy Ops Industries currently has the balance sheet shown below, and
that sales for the year just ended were $6 million. The firm also has a profit margin of 9
percent, a retention ratio of 5 percent, and expects sales of $8.5 million next year. If
fixed assets have enough capacity to cover the increase in sales and all other assets and
current liabilities are expected to increase with sales, how much additional funds will
Psy Ops need from external sources to fund the expected growth?
A.$795,100
B.$141,300
C.$783,600
D.$214,900
14) A firm has 5,000,000 shares of common stock outstanding, each with a market price
of $10.00 per share. It has 55,000 bonds outstanding, each selling for $990 with a
$1000 face value. The bonds mature in 15 years, have a coupon rate of 8%, and pay
coupons semi-annually. The firm’s equity has a beta of 2.0, and the expected market
return is 15%. The tax rate is 35% and the WACC is 16%. Calculate the risk-free rate.
A.27.68%
B.1.79%
C.2.32%
D.2.12%
15) DuPont Analysis You are considering investing in Totally Tire Services. You have
been able to locate the following information on the firm: total assets = $50 million,
accounts receivable = $10 million, ACP = 15 days, net income = $4.5 million, and
debt-to-equity ratio = 0.75 times. What is the ROE for the firm?
A.1.58%
B.9.00%
C.15.75%
D.28.81%
16) If a firm has retained earnings of $40 million, a common shares account of $50
million, and additional paid-in-capital of $25 million, how much would be transferred
in (or out) of these accounts in response to a 40 percent stock dividend, respectively?
A.-40%, 0%, +40%
B.-40%, +40%, 0%
C.-75%, +37.5%, +37.5%
D.-75%, +40%, +40%
17) If the U.S. government completely eliminated taxation at the corporate level:
A.We would expect to no change in the capital structure since it is independent of the
tax rate
B.We would expect to see lower debt levels since debt would no longer enjoy a tax
advantage
C.We would expect to see higher debt levels since debt would become cheaper relative
to equity
D.We would expect to see higher percentages of preferred stock since it enjoys a tax
advantage over debt
18) Which of the following terms means that during periods when interest rates change
substantially, bondholders experience distinct gains and losses in their bond
investments?
A.credit quality risk
B.interest rate risk
C.liquidity rate risk
D.reinvestment rate risk
19) Reese’s Resources faces a smooth annual demand for cash of $15 million; incurs
transaction costs of $125 every time they sell marketable securities, and can earn 4.5
percent on their marketable securities. What will be their optimal cash replenishment
level?
A.$28,867.51
B.$288,675.13
C.$61,237.24
D.$6,123.72
20) Present Value Given a 4 percent interest rate, compute the present value of deposits
made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,400.
A.$4,103.06
B.$4,334.53
C.$4,615.38
D.$4,804.00
21) Which of the following statements is correct with regards to diversification?
A.Diversifying reduces the return of the portfolio
B.Diversifying reduces the market risk of the portfolio
C.Diversifying reduces the dollar return of the portfolio
D.None of these statements are correct
22) Suppose that a company’s equity is currently selling for $20 per share and that there
are 2 million shares outstanding. If the firm also has 8 thousand bonds outstanding,
which are selling at 99 percent of par ($1,000), what are the firm’s current capital
structure weights for equity and debt respectively?
A.50%, 50%
B.16.81%, 83.19%
C.83.47%, 16.53%
D.83.33%, 16.67%
23) Which financial statement reconciles net income earned during a given period and
any cash dividends paid within that period using the change in retained earnings
between the beginning and end of the period?
A.Balance Sheet
B.Income Statement
C.Statement of Retained Earnings
D.Statement of Cash Flows
24) You borrow $3,500 and will pay back the entire amount in 5 years. You are charged
9% interest per year. How much interest do you pay on this loan?
A.$1,885.18
B.$1,907.35
C.$1,959.02
D.$2,106.81
25) Unbiased Expectations Theory Suppose that the current one-year rate (one-year
spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2,
3, and 4, respectively) are as follows:
Using the unbiased expectations theory, what is the current (long-term) rate for
four-year-maturity Treasury securities?
A.6.00%
B.6.33%
C.6.75%
D.7.00%
26) Scribble, Inc. has sales of $80,000 and cost of goods sold of $64,000. The firm had
a beginning inventory of $10,000 and an ending inventory of $12,000. What is the
length of the days’ sales in inventory?
A.13.75 days
B.45.63 days
C.17.19 days
D.68.44 days
27) Which of the following is a use of cash?
A.The firm takes its depreciation expense
B.The firm sells some of its fixed assets
C.The firm issues more long-term debt
D.The firm decreases its accrued wages and taxes
28) Your company is considering a new project that will require $100,000 of new
equipment at the start of the project. The equipment will have a depreciable life of 10
years and will be depreciated to a book value of $5,000 using straight-line depreciation.
The cost of capital is 14%, and the firm’s tax rate is 30%. Estimate the present value of
the tax benefits from depreciation.
A.$14,865.93
B.$14,030.79
C.$15,017.25
D.$15,997.13
29) Bank A charges a 7.75% annual percentage rate and interest is due at the end of the
year. Bank B charges a 7% annual percentage rate and interest must be paid monthly.
What is the effective annual rate charged by each bank?
A.Bank A: 7.75%; Bank B: 7.23%
B.Bank A: 7.85%; Bank B: 7.23%
C.Bank A: 7.25%; Bank B: 7.5%
D.Bank A: 7.85%; Bank B: 8.15%
30) A firm’s year-end price on its common stock is $55. The firm has a profit margin of
6%, total assets of $75 million, a total asset turnover ratio of 0.9, no preferred stock,
and 2.5 million shares of common stock outstanding. Calculate the PE ratio for the firm.
A.16.94 times
B.17.98 times
C.24.16 times
D.33.95 times
31) Estee Lauder’s upcoming dividend is expected to be $0.65 and its stock is selling at
$45. The firm has a beta of 1.1 and is expected to grow at 10% for the foreseeable
future. Compute Estee Lauder’s required return using both CAPM and the constant
growth model. Assume that the market portfolio will earn 11 percent and the risk-free
rate is 4 percent.
A.CAPM: 11.2%; Constant Growth Model: 10.97%
B.CAPM: 11.7%; Constant Growth Model: 11.44%
C.CAPM: 10.1%; Constant Growth Model: 11.46%
D.CAPM: 9.2%; Constant Growth Model: 9.56%
32) Suppose a firm pays total dividends of $25,000 out of net income of $100,000.
What would the firm’s payout ratio be?
A.0.25
B.2.50
C.4.00
D.25.00
33) Which of these makes the following a true statement? Diversification resulting from
a merger can:
A.Make the debt of the merged firm more risky, thus lowering the cost of capital
B.Make the debt of the merged firm less risky, thus lowering the cost of capital
C.Make the debt of the merged firm less risky, thus raising the cost of capital
D.None of these make the statement true
34) 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 .35. The flotation cost for equity is 5%, the flotation cost for debt is 2%,
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 weighted-average flotation cost for the firm?
A.2.95%
B.3.15%
C.3.95%
D.4.80%
35) Suppose your firm is considering two independent projects with the cash flows
shown below. The required rate of return on projects of both of their risk class is 12
percent, and the maximum allowable payback and discounted payback statistic for the
projects are 2.5 and 3 years, respectively.
Use the IRR decision rule to evaluate these projects; which one(s) should be accepted
or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
36) Which of the following statements is correct?
A.For a few firms in completely different industries, it is possible to have a correlation
that approaches -2.0
B.A correlation of -1.0 means that the two firms are uncorrelated or that they have no
relationship
C.Most common stocks have low correlation with each other since they operate in
different industries
D.None of these statements are correct
37) Approximately what rate is needed to double an investment over five years?
A.8%
B.12.2%
C.14.4%
D.15.8%
38) Apple’s 9% annual coupon bond has 10 years until maturity and the bonds are
selling in the market for $790. If the firm’s after-tax cost of debt is 8%, what was the
firm’s tax rate?
A.23.11%
B.34.50%
C.44.50%
D.37.74%
39) An appliance store sells a TV for $1,200 and gives their customers a full 3 years to
pay for the TV. If interest rates are 5%, what is the equivalent sales price of the TV
when the customer takes the full 3 years to pay for it?
A.$991.72
B.$1,036.61
C.$1,104.14
D.$1,389.15
40) All of the following special provisions benefit security holders except
____________.
A.Tax-free status
B.Convertibility
C.Callability
D.All of these provisions are beneficial to security holders
41) What actions taken by the Federal Reserve preceded and possibly helped precipitate
the recent financial crisis?
42) What does a call provision allow the issuer to do, and why would they do it?
43) Why is NPV valuation an appropriate tool to use in the evaluation of a merger
target?
44) State the order claimants will be paid according to the absolute priority rule in a
Chapter 7 bankruptcy.
45) When might raising a firm’s dividend payout ratio be viewed as a negative signal?
46) The interest on your home mortgage is tax deductible. Why are the early years of
the mortgage more helpful in reducing taxes than the later years?
47) Diversifying Consider the characteristics of the following three stocks:
The correlation between T&Company and A&Company is -0.2. The correlation
between T&Company and S&Company is -0.21. The correlation between A&Company
and S&Company is 0.95. If you can pick only two stocks for your portfolio, which
would you pick? Why?
48) Risk, Return, and Their Relationship Consider the following stocks’ annual
average return, standard deviation, and coefficient of variation. Which stock appears
better? Why?
49) What are the differences between common stock and preferred stock?
50) Show mathematically that, with a tax rate on both dividends and capital gains of 10
percent, it doesn’t matter whether earnings are paid out as dividends or kept in the firm
to cause g to grow for a constant-dividend stock.