1) Letitia borrowed $6,000 from her bank 2 years ago. The loan term is 4 years. Each
year, she must repay the bank $1,500 plus the annual interest. Which type of loan does
she have?
A.Amortized
B.Blended discount
C.Interest-only
D.Pure discount
E.Complex
2) Which one of the following statements is correct when a firm faces hard rationing?
A.All positive net present value projects will be accepted
B.Each division within a firm will be allocated an amount for capital expenditures that
will be less than the total value of its positive net present value projects
C.The firm does not have funds to finance any new projects
D.The firm will fund only those projects that create value for its shareholders
E.The firm will only finance the projects which have the highest profitability index
values
3) 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
4) Which one of the following best describes an agreement you make today to exchange
U.S. dollars for British pounds three months from now?
A.Forward trade
B.Spot trade
C.Arbitrage transaction
D.Cross-rate exchange
E.Eurocurrency transaction
5) A stock has a beta of 1.56 and an expected return of 17.3 percent. A risk-free asset
currently earns 5.1 percent. If a portfolio of the two assets has a beta of 1.06, what are
the portfolio weights?
A.Stock weight = 0.28; risk-free weight = 0.72
B.Stock weight = 0.032; risk-free weight = 0.68
C.Stock weight = 0.44; risk-free weight = 0.56
D.Stock weight = 0.68; risk-free weight = 0.32
E.Stock weight = 0.72; risk-free weight = 0.28
6) The Deltona Instrument Company has 9 percent coupon bonds on the market with 6
years left to maturity. The bonds make annual payments. If the bond currently sells for
$974.60, what is its YTM?
A.8.82 percent
B.8.90 percent
C.8.98 percent
D.9.58 percent
E.9.63 percent
7) You purchased an item costing $5,700 on July 13. The terms of sale were 1/5, net 20.
What is the last day you can pay the discounted price?
A.July 18
B.July 20
C.July 28
D.August 2
E.August 5
8) Western Wear purchased some 3-year MACRS property 3 years ago. What is the
current book value of this equipment if the original cost was $48,000? The MACRS
allowance percentages are as follows, commencing with year one: 33.33, 44.45, 14.81,
and 7.41 percent.
A.$0
B.$1,122
C.$3,557
D.$6,508
E.$8,886
9) Webster Industrial Products just signed a sales contract with a new customer. What is
this contract worth as of the end of year 4 if the following payments will be received
and the firm earns 5 percent on its savings?
A.$397,425.35
B.$402,311.19
C.$460,000.00
D.$478,887.78
E.$483,073.00
10) Webster Mining is considering the purchase of a new sorting machine. The quote
consists of a quarterly payment of $29,600 for 7 years at 8 percent interest. What is the
purchase price of the equipment?
A.$621,380.92
B.$629,925.66
C.$687,418.22
D.$774,311.28
E.$836,267.35
11) At 14 percent interest, how long does it take to quadruple your money?
A.10.42 years
B.10.58 years
C.11.03 years
D.11.21 years
E.11.36 years
12) What term is used to describe an account that a bond trustee manages for the sole
purpose of redeeming bonds early?
A.Registered account
B.Bearer account
C.Call account
D.Sinking fund
E.Premium fund
13) The net present value of a project’s cash inflows is $8,216 at a 14 percent discount
rate. The profitability index is 1.03 and the firm’s tax rate is 34 percent. What is the
initial cost of the project?
A.$6,900.00
B.$7,018.50
C.$7,428.32
D.$7,976.70
E.$8,066.67
14) The current spot rate between the U.K. and the U.S. is 0.6764 per $1. The expected
inflation rate in the U.S. is 1.8 percent. The expected inflation rate in the U.K. is 3.4
percent. If relative purchasing power parity exists, what will the exchange rate be 2
years from now?
A.0.6549/$1
B..0.6656/$1
C..0.6872/$1
D.0.6982/$1
E..5331/$1
15) Delmont Movers has a profit margin of 6.2 percent and net income of $48,900.
What is the common-size percentage for the cost of goods sold if that expense
amounted to $379,000 for the year?
A.12.90 percent
B.23.50 percent
C.33.25 percent
D.41.06 percent
E.48.05 percent
16) Selected information about South, Inc., a restaurant chain, follows.
Assuming the company neither sold nor salvaged any assets during the year, what were
the company’s capital expenditures during 2011?
A.482
B.78
C.421
D.61
E.139
F.None of the above
17) Use the following financial information to answer this question.
What are the values of the three components of the DuPont identity? Use ending
balance sheet values.
A.0.15; 1.02; 0.35
B.0.15; 2.02; 0.35
C.0.15; 0.98; 2.86
D.0.16; 0.98; 0.35
E.0.16; 1.02; 2.86
18) Miller Brothers is considering a project that will produce cash inflows of $61,500,
$72,800, $84,600, and $68,000 a year for the next four years, respectively. What is the
internal rate of return if the initial cost of the project is $225,000?
A.9.39 percent
B.10.22 percent
C.11.47 percent
D.11.62 percent
E.12.24 percent
19) Fancee Restaurant’s cost of equity is 15.3 percent and its aftertax cost of debt is 6.1
percent. What is the firm’s weighted average cost of capital if its debt-equity ratio is
0.58 and the tax rate is 30 percent?
A.8.94 percent
B.10.36 percent
C.11.92 percent
D.12.28 percent
E.13.01 percent
20) Taylor Tools is a young start-up company. No dividends will be paid on the stock
over the next 7 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.$47.76
B.$50.89
C.$64.30
D.$92.08
E.$112.50
21) The term “financial distress costs” includes which of the following?
I. Direct bankruptcy costs
II. Indirect bankruptcy costs
III. Direct costs related to being financially distressed, but not bankrupt
IV. Indirect costs related to being financially distressed, but not bankrupt
A.I only
B.III only
C.I and II only
D.III and IV only
E.I, II, III, and IV
22) Depreciation does which one of the following for a profitable firm?
A.Increases net income
B.Increases net fixed assets
C.Decreases net working capital
D.Lowers taxes
E.Has no effect on net income
23) Selected financial data for Link, Inc. follows: ($ in thousands)
Which of the following statements best describes how the company’s short-term
liquidity changed from 2011 to 2012?
A.Link’s short-run liquidity has improved modestly
B.Link’s short-run liquidity has deteriorated very little, but from a low initial base
C.Link’s short-run liquidity has improved considerably, but from a low initial base
D.Link’s short-run liquidity has deteriorated considerably, but from a high initial base
E.None of the above
24) Kline Construction is an all-equity firm that has projected perpetual earnings before
interest and taxes of $879,000. The current cost of equity is 18.3 percent and the tax
rate is 34 percent. The company is in the process of issuing $6.2 million of 8.5 percent
annual coupon bonds at par. What is the levered value of the firm?
A.$5,278,164
B.$5,541,085
C.$6,422,225
D.$6,713,185
E.$7,385,695
25) Which one of the following will tend to increase the length of the credit period?
A.Decrease in product cost
B.Decrease in consumer demand
C.Decrease in collateral value
D.Increase in credit risk
E.Increase in product standardization
26) 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
27) As the financial vice president for Squamish Equipment, you have the following
information:
Calculate Squamish’s times interest earned ratio for next year assuming the firm raises
$40 million of new debt at an interest rate of 7 percent.
A.2.00
B.3.09
C.3.66
D.4.35
E.None of the above
28) Maria is the sole proprietor of an antique store which she has operated at the same
location for the past 16 years. The store rents the space in which it is located but does
own all of the inventory and fixtures. The store has an outstanding loan with the local
bank but no other debt obligations. There are no specific loan covenants or assets
pledged as security for the loan. Due to a sudden and unexpected downturn in the
economy, the store is unable to generate sufficient funds to pay the loan payments due
to the bank. Which of the following options does the bank have to collect the money it
is owed?
I. Sell the inventory and use the cash raised to apply to the debt
II. Sell the store fixtures and use the cash raised to apply to the debt
III. Take funds from Maria’s personal account at the bank to pay the store’s debt
IV. Sell any assets Maria personally owns and apply the proceeds to the store’s debt
A.I only
B.III only
C.I and II only
D.I, II, and III only
E.I, II, III, and IV
29) Karl can afford car payments of $235 a month for 48 months. The bank will lend
him money to buy a car at 7.75 percent interest. How much money can he afford to
borrow?
A.$9,672.48
B.$9,734.95
C.$9,899.60
D.$10,022.15
E.$10,422.09
30) Stock prices tend to _____ following the announcement of a new equity issue and
tend to _____ following the announcement of a new debt issue.
A.increase; increase
B.increase; decrease
C.increase; remain relatively constant
D.decrease; increase
E.decrease; remain relatively constant
31) Which one of the following statements concerning annuities is correct?
A.The present value of an annuity is equal to the cash flow amount divided by the
discount rate
B.An annuity due has payments that occur at the beginning of each time period
C.The future value of an annuity decreases as the interest rate increases
D.If unspecified, you should assume an annuity is an annuity due
E.An annuity is an unending stream of equal payments occurring at equal intervals of
time
32) Which one of the following ratios identifies the amount of assets a firm needs in
order to generate $1 in sales?
A.current ratio
B.debt-to-equity
C.retention
D.asset turnover
E.return on assets
33) You have just won a contest! You can either receive $10,000 a year for 15 years or
$100,000 as a lump sum payment today. What is the interest rate on the annuity option?
A.5.56 percent
B.5.68 percent
C.6.20 percent
D.6.39 percent
E.6.50 percent
34) You will receive annual payments of $2,400 at the end of each year for 15 years.
The first payment will be received in year 6. What is the present value of these
payments if the discount rate is 7 percent?
A.$11,465.20
B.$12,018.52
C.$13,299.80
D.$15,585.16
E.$16,856.60
35) Winter Wear, Inc. has 6 percent bonds outstanding that mature in 13 years. The
bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds
are selling for $993 each. What is the firm’s pre-tax cost of debt?
A.5.97 percent
B.6.08 percent
C.6.14 percent
D.6.31 percent
E.6.40 percent
36) Which one of the following statements is correct?
A.An increase in the market value of preferred stock will increase a firm’s weighted
average cost of capital
B.The cost of preferred stock is unaffected by the issuer’s tax rate
C.Preferred stock is generally the cheapest source of capital for a firm
D.The cost of preferred stock remains constant from year to year
E.Preferred stock is valued using the capital asset pricing model
37) Roger just deposited $13,000 into his account at Market Place Bank. The bank will
pay 2.3 percent interest, compounded annually, on this account. How much interest on
interest will he earn over the next 15 years?
A.$638.16
B.$799.28
C.$821.03
D.$906.15
E.$923.70
38) Himmel Corp. wants to raise $100 million in a new stock issue. Its investment
banker indicates that the sale of new stock will require 12 percent underpricing and a 7
percent spread. (Hint: The underpricing is 12 percent of the current stock price, and the
spread is 7 percent of the issue price.)
a. Assuming Himmel’s stock price does not change from its current price of $50 per
share, how many shares must the company sell and at what price to the public?
b. How much money will the investment banking syndicates earn on the sale?
c. Is the 12 percent underpricing a cash flow? Is it a cost? If so, to whom?
39) Which of the following statements are correct concerning diversifiable, or
unsystematic, risks?
I. Diversifiable risks can be largely eliminated by investing in thirty unrelated
securities.
II. There is no reward for accepting diversifiable risks.
III. Diversifiable risks are generally associated with an individual firm or industry.
IV. Beta measures diversifiable risk.
A.I and III only
B.II and IV only
C.I and IV only
D.I, II, and III only
E.I, II, III, and IV
40) A firm has net income of $114,000, a return on assets of 12.6 percent, and a
debt-equity ratio of 0.60. What is the return on equity?
A.17.11 percent
B.18.98 percent
C.20.16 percent
D.22.20 percent
E.24.60 percent