Theo is depositing $1,300 today in an account with an expected rate of return of 8.1
percent. If he deposits an additional $3,200 two years from today, and $4,000 three
years from today, what will his account balance be ten years from today?
A. $14,044.89
B. $16,412.31
C. $15,182.53
D. $15,699.54
E. $17,741.71
Answer:
The Adept Co. is analyzing a proposed project. The company expects to sell 3,300
units, give or take 4 percent. The expected variable cost per unit is $11 and the expected
fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 2
percent range. The depreciation expense is $2,000. The sale price is estimated at $19 a
unit, give or take 2 percent. What is the contribution margin under the expected case
scenario?
A. $2.67
B. $3.00
C. $7.92
D. $8.00
E. $8.72
Answer:
The potential decision to abandon a project has option value because:
A. abandonment can occur at one specific point in the future.
B. a project may be worth more dead than alive.
C. management is locked into a negative outcome.
D. future demand may exceed expectations.
E. the project may be worth more if its commencement is delayed.
Answer:
Katrina is analyzing an expansion project for a new business and has developed this
input for a Black-Scholes model. Stock price = $4,186,300; Exercise price =
$7,250,000; time period = 4 years; standard deviation = 13.8 percent, and the
continuously compounded interest rate = 3.84 percent. What is the value of d2 as it is
used in the model?
A. .01338
B. 1.2784
C. 1.2953
D. “1.5713
E. “1.0293
Answer:
On average, D & M sells its inventory in 37 days, collects on its receivables in 3.4 days,
and takes 35 days to pay for its purchases. What is the length of the firm’s operating
cycle?
A. “1.4 days
B. 5.4 days
C. 33.6 days
D. 40.4 days
E. 41.6 days
Answer:
A firm has a debt-equity ratio of .64, a pretax cost of debt of 8.5 percent, and a required
return on assets of 12.6 percent. What is the cost of equity if you ignore taxes?
A. 8.06%
B. 8.55%
C. 11.12%
D. 15.22%
E. 16.38%
Answer:
Which combination is referred to as a protective put? Assume all sales and purchases
refer to ABC stock and its options.
A. buying 100 shares of stock and writing one put
B. selling a put and buying an offsetting call
C. buying 300 shares and selling three call option contracts
D. buying a put and buying 100 shares of stock
E. buying a put and selling a call with the same strike price and expiration date
Answer:
A forward PE is generally based on the projected:
A. average earnings for the next five years.
B. average earnings for the next three years.
C. earnings for the upcoming quarter.
D. earnings for the next year.
E. stock price in one year.
Answer:
The price at which offered securities are sold in a Dutch auction underwriting is
determined by the:
A. lead underwriter.
B. bidders.
C. SEC.
D. issuing firm.
E. venture capitalists.
Answer:
Which one of the following statements is correct when a project is operating at its
financial break-even point?
A. The present value of the cash flows subsequent to the initial cash flow equals the
amount of the initial investment.
B. The accounting profit is equal to zero.
C. The project never pays back on a discounted basis.
D. The project’s IRR exceeds the required rate of return.
E. The accounting profit is negative.
Answer:
Which one of these probably has reduced collection time the most?
A. traditional lockboxes
B. concentration accounts
C. financial EDI
D. zero balance accounts
E. depository transfer checks
Answer:
A business deal in which all publicly owned stock in a firm is replaced with complete
equity ownership by a private group is called a:
A. tender offer.
B. proxy contest.
C. going-private transaction.
D. acquisition.
E. consolidation.
Answer:
The notion that actual capital markets, such as the NYSE, are fairly priced is called the:
A. efficient market Hypothesis (EMH).
B. law of one price (LOP).
C. open markets theorem (OMT).
D. laissez-faire axiom.
E. monopoly pricing theorem (MPT).
Answer:
The option to wait:
A. increases in value as the project’s sensitivity to new technology increases.
B. is independent of the project’s discount rate.
C. is valueless when a project is profitable given immediate implementation.
D. decreases the net present value of a project.
E. may have value even if a project currently does not.
Answer:
Olivia is willing to pay $185 a month for four years for a car payment. If the interest
rate is 4.9 percent, compounded monthly, and she has a cash down payment of $2,500,
what price car can she afford to purchase?
A. $10,961.36
B. $10,549.07
C. $8,533.84
D. $8,686.82
E. $8,342.05
Answer:
Aspen’s Distributors has a levered cost of equity of 13.84 percent and an unlevered cost
of capital of 12.5 percent. The company has $5,000 in debt that is selling at par. The
levered value of the firm is $14,600 and the tax rate is 34 percent. What is the pretax
cost of debt?
A. 7.92%
B. 8.60%
C. 8.16%
D. 8.84%
E. 9.00%
Answer:
Share repurchases:
A. reduce a firm’s demand for external financing.
B. offer less tax advantages to shareholders than do cash dividends.
C. tend to increase agency costs.
D. are always positive net present value investments.
E. can be difficult to verify.
Answer:
A Canadian project has an initial cost of Can$1.8 million and is expected to produce
cash inflows of Can$710,000 a year for 3 years after which time it will be worthless.
The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S.
The applicable interest rate in Canada is 8 percent. The current spot rate is C$1 = $.88.
What is the net present value of this project in Canadian dollars using the foreign
currency approach?
A. Can$33,974.02
B. Can$32,790.05
C. Can$29,738.86
D. Can$28,721.40
E. Can$30,751.18
Answer:
A convertible preferred stock is similar to a convertible bond except that:
A. the conversion ratio is fixed.
B. the conversion price is fixed.
C. the time to maturity is infinite.
D. preferred stock converts to common stock while bonds convert to preferred stock.
E. preferred stock converts to bonds while bonds convert to common stock.
Answer:
A factor, as used in APT, is a variable that:
A. represents a nondiversifiable risk.
B. affects the returns of risky assets in an unsystematic fashion.
C. correlates the returns of a risky asset with those of a risk-free asset.
D. measures the response of a specific asset to a systematic risk.
E. represents a firm-specific risk.
Answer:
The date by which a stockholder must be registered on the firm’s roll as having share
ownership in order to receive a declared dividend is called the:
A. ex-rights date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. declaration date.
Answer:
Lee’s Furniture just purchased $24,000 of fixed assets that are classified as 5-year
MACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52
percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. What is the
amount of the depreciation expense for the third year?
A. $2,304
B. $2,507
C. $2,765
D. $4,608
E. $4,800
Answer:
A firm’s capital structure refers to the firm’s:
A. mixture of various types of production equipment.
B. investment selections for its excess cash reserves.
C. combination of cash and cash equivalents.
D. combination of accounts appearing on the left side of its balance sheet.
E. proportions of financing from current and long-term debt and equity.
Answer:
Blue Bird Caf is considering a project with an initial cost of $46,800, and cash flows of
$8,500, $25,000, $19,000, and −$4,500 for Years 1 to 4, respectively. How many
internal rates of return do you expect this project to have?
A. 0
B. 1
C. 4
D. 3
E. 2
Answer:
The internal rate of return is:
A. more reliable as a decision making tool than net present value whenever you are
considering mutually exclusive projects.
B. equivalent to the discount rate that makes the net present value equal to one.
C. computed using a project’s cash flows as the only source of inputs.
D. dependent on the interest rates offered in the marketplace.
E. a better methodology than net present value when dealing with unconventional cash
flows.
Answer:
As seen on an income statement:
A.interest is deducted from income and increases the total taxes incurred.
B.the tax rate is applied to the earnings before interest and taxes when the firm has both
depreciation and interest expenses.
C.depreciation is shown as an expense but does not affect the tax expense.
D.depreciation reduces both the pretax income and the net income.
E.interest expense is added to earnings before interest and taxes to compute pretax
income.
Answer:
If you excel in analyzing the future outlook of firms based on past performance, you
would prefer that the financial markets be less than ____ form efficient so that you can
have an advantage in the marketplace.
A. weak
B. semiweak
C. semistrong
D. strong
E. perfect
Answer:
Mary owns a floral and gift shop valued at $150,000. If she keeps the shop open 5 days
a week, EBIT is $75,000. If the shop remains open 6 days a week EBIT increases to
$92,000 annually. Mary needs an additional $50,000 which she can raise by either
selling stock or issuing debt at an interest rate of 7 percent. Ignore taxes. What will the
cash flow for the year be to Mary if she issues stock and remains open 6 days a week?
A. $92,000
B. $61,333
C. $92,000
D. $42,000
E. $69,000
Answer:
If a firm is more concerned about the quick return of its initial investment than it is
about the amount of value created, then the firm is most apt to evaluate a capital project
using the _____ method of analysis.
A. internal rate of return
B. net present value
C. modified internal rate of return
D. payback
E. profitability index
Answer:
The weighted average cost of capital is determined by _____ the weighted average cost
of equity.
A. multiplying the weighted average aftertax cost of debt by
B. adding the weighted average pretax cost of debt to
C. adding the weighted average aftertax cost of debt to
D. dividing the weighted average pretax cost of debt by
E. dividing the weighted average aftertax cost of debt by
Answer: