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Jenningston Mills has a market value equal to its book value. Currently, the firm has
excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has
250 shares of stock outstanding and net income of $420. What will the new earnings per
share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?
A. $1.83
B. $1.89
C. $1.96
D. $2.00
E. $2.08
Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase
additional rail cars and upgrade its maintenance facilities. How many shares of stock
will the firm need to sell through this offering if the current market price is $34 a share
and the subscription price is $28 a share?
A. 417,647 shares
B. 437,856 shares
C. 458,065 shares
D. 482,604 shares
E. 507,143 shares
A year ago, you purchased 400 shares of Stellar Wood Products, Inc. stock at a price of
$8.62 per share. The stock pays an annual dividend of $0.10 per share. Today, you sold
all of your shares for $4.80 per share. What is your total dollar return on this
investment?
A. -$382
B. -$372
C. -$1,528
D. -$1,488
E. -$1,360
On an average day, Plastics Enterprises writes 42 checks with an average amount of
$587. These checks clear the bank in an average of 2 days. What is the average amount
of the disbursement float?
A. $1,174
B. $5,805
C. $24,654
D. $49,308
E. $73,962
Noncash items refer to:
A. accrued expenses.
B. inventory items purchased using credit.
C. the ownership of intangible assets such as patents.
D. expenses which do not directly affect cash flows.
E. sales which are made using store credit.
Which one of the following is true regarding forward contracts?
A. The upfront costs to enter a forward contract can be significant.
B. If a buyer of a forward contract earns a $200 profit then the seller will also profit by
$200.
C. The buyer wins when market prices are less than the forward price.
D. The payoff profile for the buyer of a forward contract is an upward sloping linear
function.
E. If the seller of a forward contract earns a profit then the buyer has neither a profit nor
a loss.
When the present value of the cash inflows exceeds the initial cost of a project, then the
project should be:
A. accepted because the internal rate of return is positive.
B. accepted because the profitability index is greater than 1.
C. accepted because the profitability index is negative.
D. rejected because the internal rate of return is negative.
Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is
listed on the NYSE. This trade occurred in which one of the following?
A. primary, dealer market
B. secondary, dealer market
C. primary, auction market
D. secondary, auction market
E. secondary, OTC market
The contribution margin per unit is equal to the:
A. sales price per unit minus the total costs per unit.
B. variable cost per unit minus the fixed cost per unit.
C. sales price per unit minus the variable cost per unit.
D. pre-tax profit per unit.
E. aftertax profit per unit.
At the accounting break-even point, the:
A. payback period must equal the required payback period.
B. NPV is zero.
C. IRR is zero.
D. contribution margin per unit equals the fixed costs per unit.
E. contribution margin per unit is zero.
A firm has debt of $12,000, a leveraged value of $26,400, a pre-tax cost of debt of 9.20
percent, a cost of equity of 17.6 percent, and a tax rate of 37 percent. What is the firm's
weighted average cost of capital?
A. 11.47 percent
B. 11.52 percent
C. 11.69 percent
D. 12.23 percent
E. 12.48 percent
Cash concentration accounts:
A. tend to increase the funds available for short-term investing.
B. tend to increase the complexity of a firm's cash management system.
C. that utilize wire transfers rather than automated clearing house transfers are less
expensive to maintain.
D. receive checks directly from all of a firm's customers.
E. are all zero-balance accounts.
The concept of homemade leverage is most associated with:
A. M&M Proposition I with no tax.
B. M&M Proposition II with no tax.
C. M&M Proposition I with tax.
D. M&M Proposition II with tax.
E. static theory proposition.
Southern Shores is considering a project that has an initial cost today of $12,500. The
project has a two-year life with cash inflows of $7,500 a year. Should the firm opt to
wait one year to commence this project, the initial cost will increase by 5 percent and
the cash inflows will increase to $8,500 a year. What is the value of the option to wait if
the applicable discount rate is 14 percent?
A. $614.52
B. $721.56
C. $914.62
D. $982.67
E. $1,021.66
Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend
increases at an average rate of 3.8 percent per year. The stock is currently selling for
$26.91 a share. What is the market rate of return?
A. 13.88 percent
B. 14.03 percent
C. 14.21 percent
D. 14.37 percent
E. 14.60 percent
The breakdown of the Bretton Woods accord caused _____ volatility to increase.
A. interest rate
B. inflation rate
C. exchange rate
D. commodity price
E. option price
Costs that decrease as a firm acquires additional current assets are called _____ costs.
A. carrying
B. shortage
C. debt
D. equity
E. payables
Which one of the following is least likely to be an agency problem?
A. increasing the size of a firm
B. concentrating on maximizing current profits
C. closing a division with net losses
D. increasing the market value of the firm's shares
E. obtaining a patent for a new product
Hollister & Hollister is considering a new project. The project will require $522,000 for
new fixed assets, $218,000 for additional inventory, and $39,000 for additional
accounts receivable. Short-term debt is expected to increase by $165,000. The project
has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value
over the life of the project. At the end of the project, the fixed assets can be sold for 20
percent of their original cost. The net working capital returns to its original level at the
end of the project. The project is expected to generate annual sales of $875,000 and
costs of $640,000. The tax rate is 34 percent and the required rate of return is 14
percent. What is the cash flow recovery from net working capital at the end of this
project?
A. $14,000
B. $75,000
C. $92,000
D. $344,000
E. $422,000
On a common-size balance sheet all accounts are expressed as a percentage of:
A. sales for the period.
B. the base year sales.
C. total equity for the base year.
D. total assets for the current year.
E. total assets for the base year.
Which one of the following inventory items is probably the least liquid?
A. plywood held in inventory by a home builder
B. a wheel barrow held in inventory by a garden center
C. a partially assembled interior for a new vehicle
D. a set of tires owned by an automobile manufacturer
E. a toy owned by a retail toy store
The difference between the conversion price and the current stock price, divided by the
current stock price, is called the:
A. conversion premium.
B. straight bond value.
C. conversion value.
D. conversion price.
When utilizing the percentage of sales approach, managers:
I. estimate company sales based on a desired level of net income and the current profit
margin.
II. consider only those assets that vary directly with sales.
III. consider the current production capacity level.
IV. can project both net income and net cash flows.
A. I and II only
B. II and III only
C. III and IV only
D. I, III, and IV only
E. II, III, and IV only
You purchased four April futures contracts on gold when the price quote was 687.7.
Given today's closing prices as shown in the table, what is your current profit or loss?
Gold - 100 troy oz.: U.S. dollars and cents per troy oz.
A. $16,600
B. $18,120
C. $20,800
D. $23,680
E. $26,080
Kingston Development Corp. purchased a piece of property for $2.79 million. The firm
paid a down payment of 15 percent in cash and financed the balance. The loan terms
require monthly payments for 15 years at an annual percentage rate of 7.75 percent,
compounded monthly. What is the amount of each mortgage payment?
A. $22,322.35
B. $23,419.97
C. $23,607.11
D. $24,878.15
E. $25,301.16
National Event Coordinators is contemplating the acquisition of a new tent that will be
used for major outdoor events. The purchase price is $147,000. The firm uses MACRS
depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41
percent depreciation over years 1 to 4, respectively. The tent will be worthless after four
years. The tent can be leased for four years at $42,500 a year. The firm can borrow
money at 7.5 percent and has a 34 percent tax rate. What is the net advantage to
leasing?
A. $1,789
B. $1,862
C. $1,922
D. $2,087
E. $2,127
You have your choice of two investment accounts. Investment A is a 5-year annuity that
features end-of-month $2,500 payments and has an interest rate of 11.5 percent
compounded monthly. Investment B is a 10.5 percent continuously compounded lump
sum investment, also good for five years. How much would you need to invest in B
today for it to be worth as much as investment A five years from now?
A. $108,206.67
B. $119,176.06
C. $124,318.08
D. $129,407.17
E. $131,008.15
The balance sheet for Apple Pie Corp. is shown here in market value terms. There are
4,000 shares of stock outstanding.
The company has declared a dividend of $1.80 per share. The stock goes ex-dividend
tomorrow. Ignore any tax effects. What will the price of the stock be tomorrow?
A. $18.90
B. $36.20
C. $49.95
D. $52.15
E. $71.80
On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following
Monday morning. Which one of the following is most likely the interest rate that will be
charged on this loan?
A. Eurodollar yield to maturity
B. London Interbank Offer Rate
C. Paris Opening Interest Rate
D. United States Treasury bill rate
E. international prime rate
Will has been purchasing $25,000 worth of New Tek stock annually for the past 11
years. His holdings are now worth $598,100. What is his annual rate of return on this
stock?
A. 14.13 percent
B. 14.24 percent
C. 14.29 percent
D. 14.37 percent
E. 14.68 percent
Keep M Flying is a wholesaler that stocks engine components and test equipment for
the commercial aircraft industry. A new customer has placed an order for eight high-
bypass turbine engines, which increase fuel economy. The variable cost is $1.7 million
per unit, and the credit price is $2.1 million each. Credit is extended for one period.
Based on historical experience, payment for about 1 out of every 240 such orders is
never collected. The required return is 2.8 percent per period. What is the NPV per unit
if this is a one-time order?
A. $316,407
B. $328,819
C. $334,290
D. $342,802
E. $351,056
You are considering implementing a lockbox system for your firm. The system is
expected to reduce the average collection time by 2.8 days. On an average day, your
firm receives 2,419 checks with an average value of $1,287 each. The daily interest rate
on Treasury bills is 0.016 percent. The bank charge per check is $0.30. What is the net
present value of this lockbox arrangement?
A. -$4,535,625
B. -$2,611,575
C. $187,419
D. $4,181,483
E. $13,252,733
A bond that is payable to whomever has physical possession of the bond is said to be in:
A. new-issue condition.
B. registered form.
C. bearer form.
D. debenture status.
E. collateral status.
