Which one of the following represents additional compensation provided to
bondholders to offset the possibility that the bond issuer might not pay the interest
and/or principal payments as expected?
A. Interest rate risk premium
B. Inflation premium
C. Liquidity premium
D. Taxability premium
E. Default risk premium
The total direct costs of a debt issue, when expressed as a percentage of gross proceeds,
tends to:
A. increase as the quality of the debt increases.
B. decrease as the size of the issue decreases.
C. decrease when the bonds are convertible rather than straight.
D. decrease as the proceeds of the bond issue increase.
E. be relatively the same regardless of the type or quality of the debt issue.
Outdoor Sports paid $12,500 in dividends and $9,310 in interest over the past year.
Sales totaled $361,820 with costs of $267,940. The depreciation expense was $16,500
and the tax rate was35 percent. What was the amount of the operating cash flow?
A. $64,232
B. $65,306
C. $57,556
D. $70,056
E. $70,568
Hunter’s Lodge purchased $612,000 of equipment four years ago. The equipment is
seven-year MACRS property. The firm is selling this equipment today for $174,500.
What is the aftertax cash flow from this sale if the tax rate is 34 percent? The MACRS
allowance percentages are as follows, commencing with Year 1: 14.29, 24.49, 17.49,
12.49, 8.93, 8.92, 8.93, and 4.46 percent.
A. $187,407.35
B. $180,174.19
C. $198,410.18
D. $168,825.81
E. $176,610.81
Gamma Corp. is expected to pay the following dividends over the next four years:
$7.50, $8.25, $15, and $1.80. Afterward, the company pledges to maintain a constant 4
percent growth rate in dividends, forever. If the required return is 14 percent, what is
the current share price?
A. $35.20
B. $31.06
C. $38.18
D. $32.30
E. $34.90
Kacie’s has an average collection period of 23 days and factors all receivables
immediately at a discount of .95percent. What is the effective cost of borrowing?
Assume that default is extremely unlikely.
A. 16.32 percent
B. 16.28 percent
C. 16.36 percent
D. 16.52 percent
E. 16.49 percent
Highly liquid assets:
A. increase the probability a firm will face financial distress.
B. appear on the right side of a balance sheet.
C. generally produce a high rate of return.
D. can be sold quickly at close to full value.
E. include all intangible assets.
Dixie’s Markets offers credit to its customers and charges interest of 1.2 percent per
month. What is the effective annual rate?
A. 15.39 percent
B. 14.61 percent
C. 15.10 percent
D. 15.51 percent
E. 15.73 percent
A cost-cutting project will decrease costs by $37,400 a year. The annual depreciation on
the project’s fixed assets will be $4,700 and the tax rate is 34 percent. What is the
amount of the change in the firm’s operating cash flow resulting from this project?
A. $21,582
B. $26,791
C. $25,805
D. $23,610
E. $26,282
Which of these activities is a source of cash?
A. Decreasing long-term debt
B. Increasing inventory
C. Repurchasing shares of stock
D. Increasing fixed assets
E. Decreasing accounts receivable
A stock has yielded returns of 9 percent, 16 percent, 18 percent, and -6 percent over the
past four years, respectively. What is the standard deviation of these returns?
A. 15.52 percent
B. 15.86 percent
C. 11.05 percent
D. 9.38 percent
E. 10.87 percent
Two companies have both announced IPOs at $16.50 per share. One of these is
undervalued by $2, and the other is overvalued by $1.60, but you have no way of
knowing which is which. You previously placed an order for 1,000 shares of each issue.
If an issue is undervalued, it will be rationed, and only half your order will be filled.
What profit do you now expect?
A. -$375
B. -$600
C. $25
D. $150
E. $400
Burke’s Corner currently sells blue jeans and T-shirts. Management is considering
adding fleece tops to its inventory. The tops would sell for $49 each with expected sales
of 3,200 tops annually. By adding the fleece tops, management feels the company will
sell an additional 150 pairs of jeans at $79 a pair and 220 fewer T-shirts at $18 each.
The variable cost per unit is $36 on the jeans, $7 on the T-shirts, and $21 on the fleece
tops. The project’s depreciation expense is $23,000 a year and the fixed costs are
$21,000 annually. The tax rate is 34 percent. What is the project’s operating cash flow?
A. $47,935.80
B. $52,201.20
C. $55,755.80
D. $43,209.90
E. $38,419.70
The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of
11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of
the last annual dividend paid?
A. $2.58
B. $2.61
C. $3.04
D. $3.32
E. $3.10
An American Depositary Receipt is defined as a security:
A. that has been deposited in an interest-bearing account at a U.S. bank.
B. issued outside the U.S. that represents shares of a U.S. stock.
C. issued in the U.S. that represents shares of a foreign stock.
D. that has a guarantee of payment from a U.S. bank.
E. issued in multiple countries but denominated in U.S. currency.
Net income increases when:
A. fixed costs increase.
B. depreciation increases.
C. the average tax rate increases.
D. revenue increases.
E. dividends cease.
AV Sales has net revenue of $513,000 and costs of $406,800. The depreciation expense
is $43,800,interest paid is $11,200, and dividends for the year are$4,500. The tax rate is
33 percent. What is the addition to retained earnings?
A. $38,804
B. $34,304
C. $28,120
D. $29,804
E. $30,450
The cash cycle is equal to the:
A. inventory period minus the accounts payable period.
B. operating cycle plus the accounts payable period.
C. operating cycle minus the accounts receivable period.
D. accounts receivable period minus the accounts payable period plus the inventory
period.
E. inventory period minus the accounts receivable period minus the accounts payable
period.
Nadine placed an order with her broker to purchase 1,500 shares of each of three IPOs
that are being released this month. Each IPO has an offer price of $26 a share. The
number of shares allocated to her along with the closing stock price at the end of the
first day of trading for each stock, are as follows:
What is her total profit or loss on these three stocks as of the end of the first day of
trading for each stock?
A. -$680
B. -$245
C. -$3,560
D. -$3,220
E. -$2,450
The Down Towner has a market value balance sheet as shown below. The firm currently
has 12,000 shares of stock outstanding and net income of $17,500.
The firm has decided to repurchase 10 percent of its outstanding stock at the current
market price and fund that purchase with new debt. After the repurchase there will be
____ shares outstanding at a price per share of ____.
A. 10,200; $11.50
B. 10,200; $12.65
C. 10,800; $12.65
D. 10,800; $11.50
E. 10,800; $14.05
A registered-form bond is defined as a bond that:
A. is a bearer bond.
B. is held in street name.
C. pays coupon payments directly to the owner of record.
D. is listed with the Securities and Exchange Commission (SEC).
E. is unsecured.
A bond’s indenture agreement generally includes all of the following except the:
A. terms of repayment.
B. details of protective covenants.
C. total amount of the bond issue.
D. names of registered shareholders.
E. description of property used as security.
Bee’s Honey currently has an inventory turnover of 28.6, a payables turnover of 10.8,
and a receivables turnover of 14.4. How many days are in the cash cycle?
A. 4.31 days
B. 2.70 days
C. 16.51 days
D. 24.39 days
E. 32.20 days
Which of these is evidence of indebtedness?
A. Terms of sale
B. Credit cost curve
C. Credit instrument
D. Concentration policy
E. Credit policy
You owe $6,800on a car loan that has an interest rate of 6.75 percent and monthly
payments of $310. You lost your job and your new job pays less, so your lender just
agreed to lower the monthly payments to $225 while keeping the interest rate at 6.75
percent. How much longer will it take you to repay this loan than you had originally
planned?
A. 10.50 months
B. 11.47 months
C. 9.74 months
D. 12.19 months
E. 18.90 months
A company has expected sales for January through April of $9,800, $9,500, $13,800,
and $9,500, respectively. Assume each month has 30 days and the accounts receivable
period is 38 days. How much does the company expect to collect in the month of May?
A. $10,646.67
B. $15,880.00
C. $9,720.00
D. $12,213.33
E. $15,406.00
You are analyzing a project and have developed the following estimates. The
depreciation is $17,340 a year and the tax rate is 34 percent. What is the best-case
operating cash flow?
A. $190,035.60
B. $172,695.60
C. $167,904.00
D. $173,799.60
E. $166,240.00
Bruno’s is considering changing from its current all-equity capital structure to 30
percent debt. There are currently 7,500 shares outstanding at a price per share of $39.
EBIT is expected to remain constant at $23,000. The interest rate on new debt is 7.5
percent and there are no taxes. Tracie owns $12,675 worth of stock in the company. The
firm has a 100 percent payout. What would Tracie’s cash flow be under the new capital
structure assuming that she keeps all of her shares?
A. $998
B. $1,109
C. $1,115
D. $1,037
E. $1,016
Which one of the following is the positive square root of the variance?
A. Standard deviation
B. Mean
C. Risk-free rate
D. Average return
E. Real return
Matt and Alicia created a firm that is a separate legal entity and will share ownership of
that firm on a 75/25 basis. Which type of entity did they create if they have no personal
liability for the firm’s debts?
A. Limited partnership
B. Corporation
C. Sole proprietorship
D. General partnership
E. Public company
A company needs to raise $22 million and plans to issue 20-year bonds for this purpose.
The required rate of return is7.6 percent in the current market. The company has two
issue alternatives: a 7.6 percent coupon and a zero coupon bond. The company’s tax
rate is 34 percent. At bond maturity, how much will the company need to pay to its
bondholders if it issues the coupon bonds? What if it issue the zeros? Assume
semiannual compounding for both bond issues. (For simplicity’s sake, assume the
company can issue a partial bond.)
A. $21.407 million; $102.12 million
B. $23.672 million; $97.795.51 million
C. $22.836 million; $102.12 million
D. $22.836 million; $97.795 million
E. $23.672 million; $102.12 million
O & B International just announced it will be paying an annual dividend of $1.10 a
share plus an extra dividend of $.41 a share this year. The company also announced that
its regular dividend, which is all it anticipates paying after this year, will increase by 2
percent annually. What is the anticipated dividend per share next year?
A. $1.1169
B. $1.1238
C. $1.1220
D. $1.5402
E. $1.1059
Custom Tailored Shirts is a specialty retailer offering T-shirts, sweatshirts, and caps. Its
most recent annual sales consisted of $21,000 of T-shirts, $18,000 of sweatshirts, and
$2,900 of caps. The company is adding polo shirts to the lineup and projects that this
addition will result in sales next year of $18,000 of T-shirts, $16,000 of sweatshirts,
$11,500 of Polo shirts, and $2,100 of caps. What sales amount should be used when
evaluating the Polo shirt project?
A. $11,500
B. $5,700
C. $4,900
D. $5,000
E. $6,100
Assume you can save $8,500 at the end of Year 2, $9,300 at the end of Year 3, and
$7,100 at the end of Year 6. If today is Year 0, what is the future value of your savings
10 years from now if the rate of return is 7.8 percent annually?
A. $35,211.57
B. $37,235.16
C. $40,822.55
D. $42,321.68
E. $44,564.54