1) Currently, you can exchange $100 for 97.25. The inflation rate in Euroland is
expected to be 3.8 percent as compared to 2.1 percent in the U.S. Assuming that relative
purchasing power parity exists, what should the exchange rate be four years from now?
A.0.7042/$1
B.0.7414/$1
C.0.7670/$1
D.0.9890/$1
E.0.1.0403/$1
2) Which one of the following is an indicator that an investment is acceptable?
A.Modified internal rate of return equal to zero
B.Profitability index of zero
C.Internal rate of return that exceeds the required return
D.Payback period that exceeds the required period
E.Negative average accounting return
3) Which two of the following tend to limit the amount of dividends that can be paid by
a leveraged corporation?
I. Current tax laws
II. Corporate tax exclusion
III. Bond indenture covenant
IV. State laws pertaining to retained earnings
A.I and II only
B.I and III only
C.II and III only
D.II and IV only
E.III and IV only
4) Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses
materials supplied by Chinese companies, and finances the entire operation with a loan
from a Chinese bank located in the same town as the factory. This firm is most likely
trying to greatly reduce, or eliminate, which one of the following?
A.Interest rate disparities
B.Short-run exposure to exchange rate risk
C.Long-run exposure to exchange rate risk
D.Political risk associated with the foreign operations
E.Translation exposure to exchange rate risk
5) An investment has conventional cash flows and a profitability index of 1.0 . Given
this, which one of the following must be true?
A.The internal rate of return exceeds the required rate of return
B.The investment never pays back
C.The net present value is equal to zero
D.The average accounting return is 1.0
E.The net present value is greater than 1.0
6) The internal rate of return is unreliable as an indicator of whether or not an
investment should be accepted given which one of the following?
A.One of the time periods within the investment period has a cash flow equal to zero
B.The initial cash flow is negative
C.The investment has cash inflows that occur after the required payback period
D.The investment is mutually exclusive with another investment under consideration
E.The cash flows are conventional
7) Currently, you can exchange 100 for $134.15. The inflation rate in Euroland is
expected to be 3.1 percent as compared to 3.6 percent in the U.S. Assuming that relative
purchasing power parity exists, what should the exchange rate be five years from now?
A.0.7198/$1
B.0.7270/$1
C.0.7367/$1
D.0.7405/$1
E.0.7423/$1
8) The balance sheet for Quik Treats, Inc. is shown here in market value terms. There
are 20,000 shares of stock outstanding.
The company has declared a dividend of $1.40 per share. The stock goes ex-dividend
tomorrow. Ignore any tax effects. What will the firm’s equity value be after the dividend
is paid?
A.$572,000
B.$587,000
C.$603,000
D.$615,000
E.$643,000
9) What is the name given to a subsidiary of a firm that exists solely to handle the credit
functions of the parent company?
A.Internal credit organization
B.Bank
C.Credit association
D.Captive finance company
E.Credit union
10) Traditional Bank has an issue of preferred stock with a $4.80 stated dividend that
just sold for $80 a share. What is the bank’s cost of preferred stock?
A.5.91 percent
B.6.00 percent
C.6.23 percent
D.6.47 percent
E.7.32 percent
11) Debbie’s Cookies has a return on assets of 15.3 percent and a cost of equity of 16.9
percent. What is the pretax cost of debt if the debt-equity ratio is 0.54? Ignore taxes.
A.8.87 percent
B.9.29 percent
C.9.64 percent
D.11.31 percent
E.12.33 percent
12) Your grandparents would like to establish a trust fund that would pay annual
payments to you and your heirs of $100,000 a year forever. How much do your parents
need to deposit into this trust fund today to achieve their goal if the fund can earn 6
percent interest?
A.$678,342.13
B.$700,000.00
C.$1,413,435.76
D.$1,620,975.32
E.$1,666,666.67
13) Investors require a 4 percent return on risk-free investments. On a particular risky
investment, investors require an excess return of 7 percent in addition to the risk-free
rate of 4 percent. What is this excess return called?
A.Inflation premium
B.Required return
C.Real return
D.Average return
E.Risk premium
14) The Outpost currently sells short leather jackets for $349 each. The firm is
considering selling long coats also. The coats would sell for $689 each and the
company expects to sell 900 a year. If the firm decides to carry the long coat,
management feels that the sales of the short jacket will decline from 1,420 to 1,265
units. Variable costs on the jacket are $210 and $445 on the long coat. The fixed costs
for this project are $42,000, depreciation is $11,000 a year, and the tax rate is 33
percent. What is the projected operating cash flow for this project?
A.$108,187
B.$111,264
C.$112,212
D.$119,672
E.$120,418
15) Which one of the following is an intended result of a lockup agreement?
A.Temporarily supporting the market price of IPO shares
B.Maximizing the return to a firm’s original owners from an initial spike in the market
price of IPO shares
C.Increasing the volume of trading for shares of a recent IPO
D.Limiting the price volatility of recent IPO shares caused by day trading
E.Guaranteeing a minimum number of sold shares for an IPO
16) Given the following information, what is the variance of the returns on this stock?
A.0.002453
B.0.002663
C.0.002691
D.0.002759
E.0.002914
17) Green Thumb Nursery has 6,000 shares of stock outstanding at a market price of
$20 a share. The earnings per share are $1.62. The firm has total assets of $315,000 and
total liabilities of $186,000. Today, the firm is repurchasing $4,800 worth of stock.
Ignore taxes. What will the earnings per share be after the stock repurchase?
A.$1.283
B.$1.232
C.$1.620
D.$1.688
E.$1.848
18) You are considering an equipment purchase costing $187,000. This equipment will
be depreciated straight-line to zero over its three-year life. What is the average
accounting return if this equipment produces the following net income?
A.12.29 percent
B.14.38 percent
C.15.67 percent
D.16.51 percent
E.21.00 percent
19) You and your sister are planning a large anniversary party 3 years from today for
your parents’ 50th wedding anniversary. You have estimated that you will need $4,500
for this party. You can earn 2.5 percent compounded annually on your savings. How
much would you and your sister have to deposit today in one lump sum to pay for the
entire party?
A.$4,076.55
B.$4,178.70
C.$4,308.16
D.$4,334.90
E.$4,368.81
20) Which one of the following statements is correct?
A.A prepack is a plan of liquidation used to distribute a firm’s assets
B.Bankruptcy courts have “cram-down” powers
C.The absolute priority rule must be strictly followed in all bankruptcy proceedings
D.Creditors cannot force a firm into bankruptcy even though they might like to do so
E.A reorganization plan can be approved only if the firm’s creditors all agree with the
plan
21) You are using a net present value profile to compare Project A and B, which are
mutually exclusive. Which one of the following statements correctly applies to the
crossover point between these two?
A.The internal rate of return for Project A equals that of Project B, but generally does
not equal zero
B.The internal rate of return of each project is equal to zero
C.The net present value of each project is equal to zero
D.The net present value of Project A equals that of Project B, but generally does not
equal zero
E.The net present value of each project is equal to the respective project’s initial cost
22) New Steel Products has total assets of $991,000, a total asset turnover rate of 1.1, a
debt-equity ratio of 0.6, and a return on equity of 8.7 percent. What is the firm’s net
income?
A.$53,885.63
B.$58,303.33
C.$64,624.14
D.$70,548.09
E.$77,236.67
23) Cox Footwear pays a constant annual dividend. Last year, the dividend yield was
2.5 percent when the stock was selling for $26 a share. What is the current price of the
stock if the current dividend yield is 3.1 percent?
A.$18.92
B.$20.97
C.$25.20
D.$26.87
E.$27.40
24) Which one of the following statements is true?
A.The current yield on a par value bond will exceed the bond’s yield to maturity
B.The yield to maturity on a premium bond exceeds the bond’s coupon rate
C.The current yield on a premium bond is equal to the bond’s coupon rate
D.A premium bond has a current yield that exceeds the bond’s coupon rate
E.A discount bond has a coupon rate that is less than the bond’s yield to maturity
25) The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense
of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net
income for this firm?
A.$61,930
B.$66,211
C.$67,516
D.$76,428
E.$83,219
26) Which one of the following is the maximum growth rate that a firm can achieve
without any additional external financing?
A.DuPont rate
B.External growth rate
C.Sustainable growth rate
D.Internal growth rate
E.Cash flow rate
27) Botanical Gardens Nursery has 6,800 shares of stock outstanding at a market price
of $21 a share. The earnings per share are $1.54. The firm has total assets of $315,000
and total liabilities of $186,000. Today, the firm is paying an annual cash dividend of
$0.82 a share. Ignore taxes. What will the earnings per share be after the dividend is
paid?
A.$0.31
B.$0.74
C.$1.54
D.$20.70
E.$21.02
28) The 7 percent annual coupon bonds of IPO, Inc. are selling for $1,021. The bonds
have a face value of $1,000 and mature in seven years. What is the yield to maturity?
A.6.42 percent
B.6.62 percent
C.6.66 percent
D.6.68 percent
E.6.70 percent
29) Laura Lynn owns 20,700 shares of Global Exporters. Her shares have a total market
value of $787,270. In total, the firm has 65,000 shares outstanding. Each share is
entitled to one vote under the straight voting policy of the firm. The next election is in
four months at which time two directors are up for election. How much more must
Laura Lynn invest in this firm to guarantee that she is elected to the board?
A.$0
B.$396,554
C.$448,820
D.$498,406
E.$547,478
30) Which one of the following statements is true concerning annuities?
A.All else equal, an ordinary annuity is more valuable than an annuity due
B.All else equal, a decrease in the number of payments increases the future value of an
annuity due
C.An annuity with payments at the beginning of each period is called an ordinary
annuity
D.All else equal, an increase in the discount rate decreases the present value and
increases the future value of an annuity
E.All else equal, an increase in the number of annuity payments decreases the present
value and increases the future value of an annuity
31) Consider the following two mutually exclusive projects:
Whichever project you choose, if any, you require a 14 percent return on your
investment. If you apply the payback criterion, you will choose Project ______; if you
apply the NPV criterion, you will choose Project ______; if you apply the IRR
criterion, you will choose Project _____; if you choose the profitability index criterion,
you will choose Project ___. Based on your first four answers, which project will you
finally choose?
A.A; B; A; A; B
B.A; A; B; B; A
C.A; A; B; B; B
D.B; A; B; A; A
E.B; A; B; B; A
32) On any given day, a firm receives numerous checks worth an average combined
total of $5,900. The funds from the deposited checks are generally available after two
days. Every day, the firm mails out checks totaling $4,400 that generally take three days
to clear the bank. What is the amount of the collection float?
A.$4,400
B.$5,900
C.$11,800
D.$13,250
E.$13,400
33) Which one of the following is the suggested method of handling exchange rate risk
for a large, multinational firm headquartered in the U.S.? Assume the operations in each
country represent a different division of the firm.
A.At the division level
B.At a level that combines all divisions representing a separate geographic continent
C.At a level that combines divisions based on the currency used by each division
D.By segregating U.S. operations and foreign operations
E.On a centralized basis for all divisions
34) Augustino’s has the following estimated sales.
Purchases are equal to 64 percent of the following quarter’s sales. The accounts
receivable period is 45 days and the accounts payable period is 60 days. Assume there
are 30 days in each month. How much will the firm pay its suppliers in the third
quarter?
A.$7,211
B.$7,656
C.$8,405
D.$8,520
E.$8,889