Given the current tax laws, which one of the following statements is correct?
A. Both stock repurchases and cash dividends are treated equally for tax purposes for
individual shareholders.
B. Stock repurchases give individual shareholders more control over their personal
taxes than do cash dividends.
C. Cash dividends are preferable to stock repurchases from the individual shareholder
point of view.
D. Stock repurchases offer more tax benefits to the issuer than do cash dividends.
E. Cash dividends offer more tax benefits than do stock repurchases for the issuer.
Answer:
Which one of the following statements is correct?
A. The APR is equal to the EAR for a loan that charges interest monthly.
B. The EAR is always greater than the APR.
C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 – 1.
D. The APR is the best measure of the actual rate you are paying on a loan.
E. The EAR, rather than the APR, should be used to compare both investment and loan
options.
Answer:
Which one of the following is the abbreviation for the U.S. government coding system
that classifies a firm by its specific type of business operations?
A. BEC
B. SED
C. BID
D. SIC
E. SBC
Answer:
The ratios that are based on financial statement values and used for comparison
purposes are called:
A. financial ratios.
B. industrial statistics.
C. equity standards.
D. accounting returns.
E. analytical standards.
Answer:
Delivery trucks are classified as:
A. noncash expenses.
B. current liabilities.
C. current assets.
D. tangible fixed assets.
E. intangible fixed assets.
Answer:
There are four open positions on the board of directors of Double Tree Hotels. The
company has 360,000 shares of stock outstanding. Each share is entitled to one vote.
How many shares of stock must you own to guarantee your personal election to the
board of directors if the firm uses cumulative voting?
A. 36,001 shares
B. 75,001 shares
C. 77,001 shares
D. 72,000 shares
E. 72,001 shares
Answer:
Which one of the following statements matches M&M Proposition I?
A. The cost of equity capital has a positive linear relationship with a firm’s capital
structure.
B. The dividends paid by a firm determine the firm’s value.
C. The cost of equity capital varies in response to changes in a firm’s capital structure.
D. The value of a firm is independent of the firm’s capital structure.
Answer:
Corporate shareholders:
A. are proportionately liable for the firm’s debts.
B. are protected from all losses.
C. have the ability to change the corporation’s bylaws.
D. receive tax-free distributions since all profits are taxed at the corporate level.
E. have basically no control over the actual corporation.
Answer:
Marine Expeditors has three divisions. Division A is the core of the business and
represents 80 percent of the firm’s operations. Division B is involved only with
contractual short-term projects and therefore has about 8 percent less risk than Division
A. Division C develops and markets new products and is about 12 percent riskier than
Division A and about equal in size to Division B. The manager of Division A has
suggested that the operations of his division be increased by 10 percent next year. The
proposed project should probably be assigned a required return that is equal to _____
percent of the firm’s weighted average cost of capital.
A. 40
B. 60
C. 80
D. 100
E. 110
Answer:
Alicia placed an order with her broker to purchase 500 shares of each of three IPOs that
are being released this month. Each IPO has an offer price of $16 a share. The number
of shares allocated to Alicia along with the closing stock price at the end of the first day
of trading for each stock, are as follows:
What is Alicia’s total profit or loss on these three stocks as of the end of the first day of
trading for each stock?
A. -$425
B. -$260
C. -$150
D. $375
E. $550
Answer:
Pluto United has 18,000 shares of stock outstanding at a price per share of $38. How
many shares will be outstanding if the firm does a 5-for-4 stock split?
A. 13,600 shares
B. 15,800 shares
C. 18,000 shares
D. 19,600 shares
E. 22,500 shares
Answer:
All else equal, an increase in which one of the following will decrease owners’ equity?
A. Increase in inventory
B. Increase in accounts payable
C. Increase in accounts receivable
D. Increase in net working capital
E. Increase in net fixed assets
Answer:
A recent alumnus of your university gifted money to the school to fund annual
scholarships for students in need. The school expects to earn an average rate of return of
5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the
gift?
A. $384,090.91
B. $485,293.05
C. $615,384.62
D. $658,929.38
E. $909,090.91
Answer:
Westover Products has the following estimated monthly sales.
The accounts receivable period is 45 days. What is the amount of the collections in
May? Assume each month has 30 days.
A. $13,800
B. $11,700
C. $8,350
D. $9,050
E. $9,500
Answer:
Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate
of 9 percent, matures in 3 years, has a total face value of $6 million, and is quoted at
108 percent of face value. The second issue has a 7.5 percent coupon, matures in 16
years, has a total face value of $18 million, and is quoted at 97 percent of face value.
Both bonds pay interest semiannually. What is the firm’s weighted average aftertax cost
of debt if the tax rate is 35 percent?
A. 4.78 percent
B. 5.12 percent
C. 5.63 percent
D. 5.95 percent
E. 6.08 percent
Answer:
Which one of the following statements is correct?
A. A portfolio that contains at least 30 diverse individual securities will have a beta of
1.0.
B. Any portfolio that is correctly valued will have a beta of 1.0.
C. A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a
security market line graph.
D. A risk-free security plots at the origin on a security market line graph.
E. An underpriced security will plot above the security market line.
Answer:
Decatur Arts Center writes 158 checks a day for an average amount of $211 each. These
checks generally clear the bank 3.5 days after they are written. In addition, the firm
generally receives an average of $50,000 a day in checks. The checks that are received
are deposited immediately and the funds are generally available the following day.
What is the amount of the firm’s disbursement float?
A. $104,625.00
B. $116,683.00
C. $155,255.50
D. $170,450.00
E. $50,000.00
Answer:
Any person who owns a license to trade on the NYSE is called a:
A. dealer.
B. floor trader.
C. DMM.
D. member.
E. proxy.
Answer:
Farmer’s Supply, Inc. is considering opening a clothing store, which would be a new
line of business for the firm. Management has decided to use the cost of capital of a
similar clothing store as the discount rate that should be used to evaluate this proposed
expansion. Which one of the following terms is used to describe the approach Farmer’s
Supply is taking to establish an appropriate discount rate for the project?
A. Equity approach
B. Aftertax approach
C. Subjective approach
D. Market play
E. Pure play approach
Answer:
If intermediate-term, default-free, pure discount bonds have a higher rate of return than
either the comparable shorter-term or longer-term bonds, the term structure of interest
rates will be:
A. upward sloping.
B. flat.
C. humped.
D. downward sloping.
E. double-humped.
Answer:
Capstone Investments is considering a project that will produce cash inflows of $11,000
in year 1, $24,000 in year 2, and $36,000 in year 3. What is the present value of these
cash inflows if the company assigns the project a discount rate of 12 percent?
A. $41,997.60
B. $46,564.28
C. $54,578.17
D. $54,868.15
E. $63,494.54
Answer:
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.
Answer:
The possibility that more than one discount rate can cause the net present value of an
investment to equal zero is referred to as:
A. duplication.
B. the net present value profile.
C. multiple rates of return.
D. the AAR problem.
E. the dual dilemma.
Answer:
A firm expects to increase its annual dividend by 20 percent per year for the next two
years and by 15 percent per year for the following two years. After that, the company
plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1 a
share. What is the current value of this stock if the required rate of return is 12 percent?
A. $17.71
B. $18.97
C. $20.50
D. $21.08
E. $21.69
Answer:
Birds of a Feather has 10-year bonds outstanding that carry an annual coupon of 8
percent. The bonds mature in 7 years and are currently priced at 110 percent of face
value. What is the firm’s pretax cost of debt?
A. 6.20 percent
B. 6.60 percent
C. 7.34 percent
D. 7.70 percent
E. 8.23 percent
Answer:
