1) All of the following capital budgeting tools are suitable for non-normal cash flows
except ____.
A.MIRR
B.Profitability Index
C.IRR
D.NPV
2) Which of the following statements is correct?
A.All else the same, an investor will require less return to invest in a callable bond than
one that is not callable
B.All else the same, an investor will require more return to invest in a callable bond
than one that is not callable
C.The call feature does not impact the return that investors demand
D.We would need to know the current level of interest rates to answer this question
3) Debt Management Ratios Calculate the times interest earned ratio for Paige’s Purses,
Inc. using the following information. Sales = $50,000,000, cost of goods sold =
$15,000,000, depreciation expense = $2,000,000, addition to retained earnings =
$10,000,000, dividends per share = $1.10, tax rate = 30%, and number of shares of
common stock outstanding = 10,000,000. Paige’s Purses has no preferred stock
outstanding.
A.0.27
B.3.30
C.11.00
D.16.67
4) Paper Exchange has 80 million shares of common stock outstanding, 60 million
shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are
selling for $20 per share, the preferred shares are selling for $10 per share, and the
bonds are selling for 105 percent of par, what would be the weight used for preferred
stock in the computation of Paper’s WACC?
A.26.64%
B.27.27%
C.33.33%
D.42.84%
5) Exchange Rate Quote Convert the following indirect quote to a dollar direct quote:
$1 = 3.8249 Saudi Arabian Riyal
A.$0.2614
B.$4.8249
C.$0.38249
D.$1.00
6) Portfolio Return Year to date, Company Y had earned a 7 percent return. During the
same time period, Company R earned 9.25 percent and Company C earned -2.25
percent. If you have a portfolio made up of 35 percent Y, 40 percent R, and 25 percent
C, what is your portfolio return?
A.4.6667%
B.6.1667%
C.5.5875%
D.12.6625%
7) Not all cash a company generates will be returned to the investors. Which of the
following will NOT reduce the amount of capital returned to the investors?
A.retained earnings
B.taxes
C.dividends
D.None of these will reduce the amount of capital returned to the investors
8) Currency Exchange Compute the amount of foreign currency that can be purchased
for $750,000:
1 Israeli Shekel = $0.2351
A.926,325 Shekel
B.750,000 Shekel
C.176,325 Shekel
D.3,190,131.859 Shekel
9) A particular security’s default risk premium is 3%. For all securities, the inflation risk
premium is 1.75% and the real interest rate is 4.2%. The security’s liquidity risk
premium is 0.35% and maturity risk premium is 0.95%. The security has no special
covenants. Calculate the security’s equilibrium rate of return.
A.8.50%
B.6.05%
C.10.25%
D.9.90%
10) One Stop has been approved for a $55,000 loan commitment from its local bank.
The bank has offered the following terms: term = 1 year, up-front fee = 85 basis points,
back-end fee = 35 basis points, and rate on the loan = 9.75%. Casey’s expects to
immediately take down $45,000 and no more during the year unless there is some
unforeseen need. Calculate the total interest and fees Casey’s One Stop can expect to
pay on this loan commitment.
A.$5,050
B.$5,115
C.$4,890
D.$4,650
11) Present Value Given a 5 percent interest rate, compute the present value of deposits
made in years 1, 2, 3, and 4 of $1,000, $1,400, $1,400, and $1,500.
A.$4,360.32
B.$4,665.65
C.$5,047.62
D.$5,305.00
12) A 5 1/8% TIPS has an original reference CPI of 191.8. If the current CPI is 188.3,
what is the par value of the TIPS?
A.$975
B.$1,018.60
C.$992.75
D.$1,042.95
13) If Walmart acquires Target, this would be an example of a ____________.
A.Horizontal merger
B.Vertical merger
C.Market Extension merger
D.Conglomerate merger
14) The Russian financial crisis of 1998 caused Russia’s currency to be dramatically
devalued. What is the percentage change in value of a $100 million investment in
Russia when the exchange rate changes from $1 = 6 rubles to $1 = 25 rubles?
A.-49%
B.-57%
C.-69%
D.-76%
15) Which of the following expenditures qualify for the Section 179 deduction?
a. machinery and equipment
b. furniture and fixtures
c. buildings
d. off-the-shelf computer software
e. property purchased from related parties
f. furniture held in a trust
g. property acquired by inheritance
16) Solar Shades has 8 million shares of common stock outstanding, 4 million shares of
preferred stock outstanding, and 10 thousand bonds. If the common shares are selling
for $13 per share, the preferred shares are selling for $30 per share, and the bonds are
selling for 105 percent of par, what would be the weight used for equity in the
computation of Solar Shades’ WACC?
A.33.33%
B.44.35%
C.46.42%
D.66.61%
17) Calculation of Bankruptcy Probability Suppose a linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms:
the debt ratio and the profit margin. Based on past bankruptcy experience, the linear
probability model is estimated as:
PDi = .25 (debt ratio) + .12 (profit margin)
A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin
of 14 percent. Calculate the firm’s expected probability of default, or bankruptcy.
A.17.18%
B.2.604%
C.14.99%
D.19.09%
18) Renee’s Boutique, Inc., needs to raise $75.25 million to finance firm expansion. In
discussions with its investment bank, Renee’s learns that the bankers recommend an
offer price of $67 per share and that 1.25 million shares of stock be sold. If the net
proceeds on the stock sale leaves Renee’s with $75.25 million, calculate the
underwriter’s spread on the stock issue.
A.$4.98
B.$5.12
C.$5.59
D.$6.80
19) Suppose that a firm’s recent earnings per share and dividend per share are $2.50 and
$1.00, respectively. Both are expected to grow at 5 percent. However, the firm’s current
P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19
within five years. Compute a value for this stock. Assume a 10 percent required rate.
A.$36.19
B.$38.86
C.$40.31
D.$42.00
20) General TVM Ten years ago, Jane invested $1,000 and locked in a 7 percent annual
interest rate for 30 years (end 20 years from now). James can made a twenty year
investment today and lock in a 6 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.$673.75
B.$1,206.59
C.$1,967.15
D.$2,373.54
21) Jenny’s Day Care is considering a merger with Lionel’s Diaper Manufacturers.
Jenny’s total operating costs of producing services are $350,000 for sales volume of
$1.4 million. Lionel’s total operating costs of producing services are $300,000 for a
sales volume of $1.3 million. For a sales volume of $2.7 million, calculate the reduction
in production costs the merged firms need to experience such that the total average cost
(TAC) for the merged firms is equal to 20%.
A.$129,000
B.$110,000
C.$540,000
D.$103,000
22) We call the process of earning interest on both the original deposit and on the earlier
interest payments _______________.
A.simple interest
B.compounding
C.future value
D.discounting
23) What is the value in year 6 of a $9,000 cash flow made in year 14 if interest rates
are 7% in years 4 through 9 and increase to 10% after that?
A.$4,252.19
B.$4,417.46
C.$4,561.71
D.$4,5798.53
24) Suppose a firm has a retention ratio of 25 percent, net income of $21 million, and 3
million shares outstanding. What would be the dividend per share paid out on the firm’s
stock?
A.$0.14
B.$1.75
C.$5.25
D.$7.00
25) Present Value Given a 6 percent interest rate, compute the present value of deposits
made in years 1, 2, 3, and 4 of $1,200, $1,400, $1,400, and $1,500.
A.$4,356.52
B.$4,768
C.$5,188.68
D.$5,506.00
26) You invested $1,400 in the stock market one year ago. Today the investment is
valued at $1,100. What return did you earn? What return would you need to get back
next year to break even overall?
A.-14.62%; 31.19%
B.-9.43%; 31.67%
C.-21.43%; 27.27%
D.-29.17%; 32.18%
27) JEN Corp. is expected to pay a dividend of $2.00 per year indefinitely. If the
appropriate rate of return on this stock is 12 percent per year, and the stock consistently
goes ex-dividend 25 days before dividend payment date, what will be the expected
minimum price in light of the dividend payment logistics?
A.$1.14
B.$16.54
C.$16.67
D.$18.52
28) Sustainable Growth Rate Last year Rain Repel Corporation had an ROE of 10%
and a dividend payout ratio of 80%. What is the sustainable growth rate?
A.1.11%
B.2.04%
C.44%
D.50.00%
29) Tater and Pepper Corp. reported free cash flows for 2010 of $20 million and
investment in operating capital of $15 million. Tater and Pepper listed $8 million in
depreciation expense and $12 million in taxes on its 2010 income statement. Calculate
Tater and Pepper’s 2010 EBIT.
A.$49,000,000
B.$42,000,000
C.$39,000,000
D.$47,000,000
30) Forecasting Interest Rates You note the following yield curve in The Wall Street
Journal. According to the unbiased expectations hypothesis, what is the one-year
forward rate for the period beginning one year from today, 2f1?
A.1.01%
B.1.19%
C.5.625%
D.7.51%
31) These ratios measure the extent to which the firm uses debt (or financial leverage)
versus equity to finance its assets.
A.debt management ratios
B.equity ratios
C.financial ratios
D.liquidity ratios
32) Which of the following will increase the future value of an annuity?
A.The number of periods increases
B.The amount of the annuity increases
C.The interest rate increases
D.All of the these will increase the future value of an annuity