1) Portfolio Beta You own $1,000 of City Steel stock that has a beta of 1.5. You also
own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9).
What is the beta of your portfolio?
A.1.4
B.1.5
C.4.2
D.4.65
2) Calculating Fees on a Loan Commitment During the last year you have had a loan
commitment from your bank to fund inventory purchases for your small business. The
total line available was $500,000, of which you took down $400,000. It is now the end
of the loan commitment period and your bank is asking you to pay the back-end fees.
You have misplaced the paperwork that listed the terms of the commitment, but you
know you paid total fees (this does not include any interest paid to borrow the
$400,000) of $1,750 on this loan commitment. You remember that the up-front fee was
25 basis points. What is the back-end fee on this loan commitment?
A.5 basis points
B.50 basis points
C.10 basis points
D.20 basis points
3) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 10 percent, and
that the maximum allowable payback and discounted payback statistics for the project
are 3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should
it be accepted or rejected?
A.IRR = 16.92%; accept the project
B.IRR = 7.123%; reject the project
C.IRR = 8.81%; reject the project
D.IRR = 10.59%; accept the project
4) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using regression to estimate a trend?
A.$12,000,000
B.$12,140,000
C.$12,300,000
D.$12,500,000
5) Five years ago, sales were $4 million. Today your company’s sales are $10 million.
What annual rate have sales been growing?
A.1.5%
B.12.65%
C.16.65%
D.20.11%
6) Sustainable Growth Rate You have located the following information on Greenwich
Company: debt ratio = 60%, capital intensity ratio = 0.75 times, profit margin = 13.5%,
and dividend payout ratio = 80%. What is the sustainable growth rate for Greenwich?
A.2.70%
B.10.80%
C.25.00%
D.9.89%
7) DuPont Analysis Last year Caf Creations, Inc. had an ROA of 25%, a profit margin
of 12%, and sales of $4 million. What is Caf Creations’ total assets?
A.$0.12 m
B.$0.48 m
C.$1.00 m
D.$1.92 m
8) Individuals who provide small amounts of capital and expert business advice to small
firms in exchange for an ownership stake in the firm are referred to as
___________________.
A.institutional investors
B.corporate investors
C.angel investors
D.capital investors
9) If a firm has a cash cycle of 18 days and an operating cycle of 29 days, what is its
payables turnover?
A.11
B.18
C.29
D.33.18
10) Suppose your firm is considering two mutually exclusive, required projects with the
cash flows shown below. The required rate of return on projects of both of their risk
class is 10 percent, and the maximum allowable payback and discounted payback
statistic for the projects are 2.5 and 3.5 years, respectively.
Use the payback decision rule to evaluate these projects; which one(s) should be
accepted or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
11) Suppose that the 2009 actual and 2010 projected financial statements for Carrier
Corp are initially as shown below. In these tables, sales are projected to rise 40 percent
in the coming year, and the components of the income statement and balance sheet that
are expected to increase at the same 40 percent rate as sales are indicated with an italics
font. Assuming that Carrier Corp wants to cover the AFN with 50 percent equity, 25
percent long-term debt, and the remainder from notes payable, what amount of
additional funds will they need to raise if debt carries a 10 percent interest rate?
A.$120,000 equity; $60,000 long-term debt; $60,000 notes payable
B.$60,000 equity; $120,000 notes payable; $60,000 long-term debt
C.$60,000 equity; $120,000 long-term debt; $60,000 notes payable
D.none of these answers are correct
12) One-year interest rates are 3%. The market expects one-year rates to be 5% one
year from now. The market also expects one-year rates to be 7% two years from now.
Assume that the unbiased expectations theory holds. Which of the following is correct?
A.The yield curve is downward sloping
B.The yield curve is flat
C.The yield curve is upward sloping
D.We need the maturity risk premiums to be able to answer this question
13) Income Statement Listed below is the 2008 income statement for Lamps, Inc.
The CEO of Lamps wants the company to earn a net income of $12 million in 2009.
Cost of goods sold is expected to be 75 percent of net sales, depreciation expense is not
expected to change, interest expense is expected to increase to $4 million, and the firm’s
tax rate will be 40 percent. What is the net sales needed to produce net income of $12
million?
A.$29 million
B.$112 million
C.$116 million
D.$124 million
14) Stock A has a required return of 19%. Stock B has a required return of 11%.
Assume a risk-free rate of 4.75%. Which of the following is a correct statement about
the two stocks?
A.Stock A is riskier
B.Stock B is riskier
C.The stocks have the same risk
D.We would need to know if the markets are efficient to answer this question
15) China’s exchange rate is pegged to _______________.
A.U.S. dollar
B.Price of a barrel of oil
C.Euro
D.None of these
16) Compounding with Different Interest Rates A deposit of $700 earns interest rates of
10 percent in the first year and 7 percent in the second year. What would be the second
year future value?
A.$771.07
B.$819.00
C.$890
D.$1519.00
17) Investment in operating capital is __________________________.
A.The change in assets plus the change in current liabilities
B.The change in gross fixed assets plus depreciation
C.The change in gross fixed assets plus the change in free cash flow
D.None of these
18) This type of bankruptcy involves an attempt to allow the firm to reorganize the
business under court supervision.
A.Chapter 7
B.Chapter 11
C.Chapter 13
D.Chapter 9
19) No Nuns Cos. has a 20 percent tax rate and has $350 million in assets, currently
financed entirely with equity. Equity is worth $80 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 20 percent debt capital structure, and has
determined that they would have to pay a 7 percent yield on perpetual debt in either
event. What will be the level of expected EPS if they switch to the proposed capital
structure?
A.$1.20
B.$1.04
C.$0.93
D.$1.29
20) A firm has retained earnings of $11 million, a common shares account of $2 million,
and additional paid-in-capital of $6 million, and the firm just paid a 5 percent stock
dividend. Assume that fair market value is reflected in the relative size of both the
common shares account and the additional paid-in-capital account. Which of the
following statements is correct?
A.Retained earnings will increase by $400,000
B.Common shares will increase by $266,667
C.Additional paid-in-capital will increase by $300,000
D.None of these statements are correct
21) General TVM Five years ago, Jane invested $5,000 and locked in an 8 percent
annual interest rate for 25 years (end 20 years from now). James can make a twenty
year investment today and lock in a 10 percent interest rate. How much money should
he invest now in order to have the same amount of money in 20 years as Jane?
A.$3,160.43
B.$3,464.11
C.$5,089.91
D.$7,346.64
22) FarCry Industries, a maker of telecommunications equipment, has 26 million shares
of common stock outstanding, 1 million shares of preferred stock outstanding, and 10
thousand bonds. If the common shares sell for $15 per share, the preferred shares sell
for $114.50 per share, and the bonds sell for 101% of par ($1000), what weight should
you use for preferred stock in the computation of FarCry’s WACC?
A.28.52%
B.27.51%
C.26.24%
D.22.25%
23) Calculating Fees on a Loan Commitment You have approached your local bank for
a start-up loan commitment for $1,000,000 needed to open an auto repair store. You
have requested that the term of the loan be one-year. Your bank has offered you the
following terms: size of loan commitment = $1,000,000, term = 1 year, up-front fee =
20 basis points, back-end fee = 50 basis points. If you take down 90 percent of the total
loan commitment, calculate the total fees you have paid on this loan commitment.
A.$2,000
B.$2,500
C.$5,000
D.d.$ 6,500
24) These feature debt securities or instruments with maturities of one year or less.
A.money markets
B.primary markets
C.secondary markets
D.over-the-counter stocks
25) Which of these makes this a true statement? The WACC formula
A.is not impacted by taxes
B.uses the after-tax costs of capital to compute the firm’s weighted average cost of debt
financing
C.uses the pre-tax costs of capital to compute the firm’s weighted average cost of debt
financing
D.focuses on operating costs only to keep them separate from financing costs
26) Compute the PI statistic for Project Z and advise the firm whether to accept or
reject the project with the cash flows shown below if the appropriate cost of capital is
10 percent.
Project Z
A.The project’s PI is 8.48% and the project should be accepted
B.The project’s PI is 8.48% and the project should be rejected
C.The project’s PI is 16.48% and the project should be accepted
D.The project’s PI is 21.48% and the project should be accepted
27) To compute the present or future value of an annuity due, one computes the value of
an ordinary annuity and then
A.multiplies it by (1 + i)
B.divides it by (1 + i)
C.multiplies it by (1 – i)
D.divides it by (1 – i)
28) Which ratio assesses how efficiently a firm uses its fixed assets?
A.Capital intensity ratio
B.Current ratio
C.Average collection period
D.Fixed asset turnover
29) Liquidity Ratios The top part of Rammy’s Inc.’s 2008 balance sheet is listed below
(in millions of dollars).
What are Rammy’s Inc.’s Current ratio, Quick ratio, and Cash ratio for 2008?
A.1.74242, 0.30303, 0.07576
B.7.1875, 1.25, 0.3125
C.1.43939, 0.30303, 0.07576
D.19.16667, 3.33333, 0.83333
30) Restricted stock is:
A.a special type of stock that is not transferable from the current holder to others until
specific conditions are satisfied
B.a special type of stock that can be converted into corporate bonds after a specific
amount of time has elapsed
C.a special type of stock that is a result of offering an employee stock ownership plan
D.None of these answers is correct
31) Comparing Bond Yields A client in the 28 percent marginal tax bracket is
comparing a municipal bond that offers a 3.25 percent yield to maturity and a
similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the
client more profit after taxes?
A.the municipal bond
B.the corporate bond
C.Both give the client equal profits after taxes
D.There is not enough information given to determine answer
32) Calculation of Average Costs with Economies of Scope Crib World is considering a
merger with Tots Supply Stores. Crib’s total operating costs of producing services are
$250,000 for sales volume of $1.25 million. Tots’ total operating costs of producing
services are $210,000 for a sales volume (JP) of $900,000. Calculate the average cost of
production for the Crib and Tots firms, respectively.
A.20%, 23.33%
B.23.33%, 20%
C.27.78%, 16.8%
D.21.4%, 21.4%
33) Which of the following is a reason why the divisional cost of capital approach may
cause problems if new projects are assigned to the wrong division?
A.Managers in different divisions may use different methods to calculate the WACC
B.The expected return of the new project may be incorrect
C.If projects are assigned to the wrong division, the risk of that division may be
significantly different than the risk of the project, implying that the project will be
evaluated with a divisional cost of capital that is much different from what a
project-specific cost of capital would be
D.None of these answers is correct
34) We often use the P/E ratio model with the firm’s growth rate to estimate
A.required rates of return
B.inflation
C.a stock’s current price
D.a stock’s future price
35) As a college student, you probably receive many credit card offers in the mail.
Consider these two offers. The first card charges a 17% APR. An examination of the
footnotes reveals that this card compounds daily (365 day year). The second credit card
charges 18% APR and compounds semiannually. What is the effective annual rate of the
cheaper card?
A.18.00%
B.17.00%
C.18.81%
D.18.53%
36) You double your money in 5 years. The reason your return is not 20% per year is
because ___.
A.it is probably a “fad” investment
B.it does not reflect the effect of discounting
C.it does not reflect the effect of the Rule of 72
D.it does not reflect the effect of compounding
37) Suppose a new project was going to be financed partially with retained earnings.
What flotation costs should you use for retained earnings?
A.Use the same flotation cost that would be used to issue new common stock
B.Use an average of the flotation costs for debt, preferred and common stock
C.Use the industry average flotation cost for common stock
D.Zero
38) Dakota Corporation 15-year bonds have an equilibrium rate of return of 9%. For all
securities, the inflation risk premium is 1.95% and the real interest rate is 3.65%. The
security’s liquidity risk premium is 0.35% and maturity risk premium is 0.95%. The
security has no special covenants. Calculate the bond’s default risk premium.
A.2.10%
B.3.05%
C.3.40%
D.2.45%
39) What is computed by dividing the amount of assets tied directly to sales (A*) by the
amount of current sales (S0)?
A.capital intensity ratio
B.current ratio
C.quick ratio
D.spontaneous assets
40) Which of the following will increase a firm’s need for additional funds?
A.An increase in the firm’s average collection period
B.An increase in the retention ratio
C.A decrease in sales growth
D.An increase in accrued wages