1) The sources and uses of cash over a stated period of time are reflected on the:
A.income statement
B.balance sheet
C.shareholders’ equity statement
D.cash flow statement
E.statement of operating position
2) Which of the following are cash inflows from net working capital?
I. increase in accounts payable
II. increase in inventory
III. decrease in accounts receivable
IV. decrease in fixed assets
A.II only
B.III only
C.I and III only
D.III and IV only
E.I, II, and III only
3) Stewart’s is considering a new project. The company has a debt-equity ratio of 0.72.
The company’s cost of equity is 15.1 percent, and the aftertax cost of debt is 7.2
percent. The firm feels that the project is riskier than the company as a whole and that it
should use an adjustment factor of +2 percent. What is the WACC it should use for the
project?
A.12.53 percent
B.12.98 percent
C.13.79 percent
D.14.14 percent
E.14.68 percent
4) A firm that uses its weighted average cost of capital as the required return for all of
its investments will:
A.maintain a constant value for its shareholders
B.increase the risk level of the firm over time
C.make the best possible accept and reject decisions related to those investments
D.find that its cost of capital declines over time
E.accept only the projects that add value to the firm’s shareholders
5) Which of the following are factors that help explain why the percentage of U.S.
industrial firms paying dividends has increased since the early 2000s?
I. decrease in the number of non-dividend paying firms
II. maturing of young, successful firms
III. signaling of a firm’s financial health
IV. May 2003 tax act
A.I and III only
B.II and IV only
C.I, II, and III only
D.II, III, and IV only
E.I, II, III, and IV
6) Which one of the following will tend to decrease the length of the credit period?
A.Decrease in default risk
B.Increase in the cost of the product
C.Increase in competition
D.Decrease in the size of the account
E.Decrease in turnover rate
7) The dividend growth model can be used to value the stock of firms which pay which
type of dividends?
I. constant annual dividend
II. annual dividend with a constant increasing rate of growth
III. annual dividend with a constant decreasing rate of growth
IV. zero dividend
A.I only
B.II only
C.II and III only
D.I, II, and III only
E.I, II, III, and IV
8) Over the past year, a firm decreased its current assets and increased its current
liabilities. As a result, the firm’s net working capital:
A.had to increase
B.had to decrease
C.could have remained constant if the amount of the decrease in current assets equaled
the amount of the increase in current liabilities
D.could have either increased, decreased, or remained constant
E.was unaffected as the changes occurred in the firm’s current accounts
9) Assume both corporate taxes and financial distress costs apply to a firm. Given this,
the static theory of capital structure illustrates that:
A.a firm’s value and its weighted average cost of capital are inversely related
B.a firm’s value and its tax rate are inversely related
C.the maximum value of a firm is obtained when a firm is financed solely with debt
D.the value of a firm rises as the interest rate on debt rises
E.the value of a firm rises as both the interest rate on debt and the tax rate rise
10) You are analyzing a project and have developed the following estimates: unit sales
= 1,320, price per unit = $79, variable cost per unit = $43, fixed costs = $24,900. The
depreciation is $11,300 a year and the tax rate is 35 percent. What effect would an
increase of $1 in the selling price have on the operating cash flow?
A.$858
B.$1,141
C.$1,320
D.$1,406
E.$1,433
11) A protective covenant:
A.protects the borrower from unscrupulous practices by the lender
B.is designed to protect the bond dealer from potential legal liability related to the bond
issue
C.prevents a bond from being called
D.limits the actions of the borrower
E.guarantees that a bond will be repaid in full with interest
12) What is the value today of $3,600 received at the end of each year for 7 years if the
first payment is paid at the end of year 3 and the discount rate is 12 percent?
A.$11,694.21
B.$12,484.57
C.$13,097.52
D.$15,089.23
E.$16,429.52
13) Martha’s Baked Goods has 15,000 shares of stock outstanding at a market price of
$24.10 per share. What will the price per share be after the firm declares a 5 percent
stock dividend? Ignore taxes and market imperfections.
A.$22.90
B.$22.95
C.$24.10
D.$25.31
E.$25.40
14) The Jelly Jar has total assets of $79,600 and an equity multiplier of 1.35. What is
the debt-equity ratio?
A.0.28
B.0.35
C.0.47
D.0.58
E.0.67
15) Assume you are comparing two firms that are identical in every aspect, except one
is levered and one is unlevered. Which one of the following statements is correct
regarding these two firms?
A.The levered firm has higher EPS than the unlevered firm at the break-even point
B.The levered firm will have higher EPS than the unlevered firm at all levels of EBIT
C.The unlevered firm will have higher EPS than the levered firm at relatively high
levels of EBIT
D.The EPS for the unlevered firm will always exceed those of the levered firm
E.The unlevered firm will have higher EPS at relatively low levels of EBIT
16) Preston’s Market has sales of $213,600, total assets of $198,700, a debt-equity ratio
of 1.6, and a profit margin of 2.4 percent. What is the equity multiplier?
A.0.60
B.0.63
C.1.83
D.2.60
E.2.84
17) Your coin collection contains ten 1949 silver dollars. If your grandparents
purchased them for their face value when they were new, how much will your
collection be worth when you retire in 2050, assuming they appreciate at a 6.1 percent
annual rate?
A.$3,550.61
B.$3,697.29
C.$3,728.54
D.$3,955.98
E.$4,197.29
18) Cash flow to creditors is equal to:
A.cash flow from assets plus cash flow to stockholders
B.beginning total liabilities minus ending total liabilities plus interest paid
C.beginning long-term debt minus ending long-term debt plus interest paid
D.ending total debt minus beginning total debt plus interest paid
E.ending long-term debt minus beginning long-term debt plus interest paid
19) Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess
profits on ABC stock based on the knowledge he has related to his experiments if the
financial markets are:
A.weak form efficient
B.strong form efficient
C.semistrong form efficient
D.efficient at any level
E.aware that the trader is an insider
20) Jamie is employed as a commercial loan officer for a regional bank centered in the
Midwestern section of the U.S. Her job falls into which one of the following areas of
finance?
A.International finance
B.Financial institutions
C.Corporate finance
D.Capital management
E.Investments
21) The following table presents forecasted financial and other information for Scott’s
Miracle-Gro Co.:
What is an appropriate estimate of Scott’s terminal value as of the end of 2014, using
the perpetual-growth equation as your estimate?
A.$161 million
B.$363 million
C.$3,690 million
D.$3,838 million
E.$5,357 million
22) Which one of the following statements related to IPO underpricing is correct?
A.The IPOs of larger-sized firms tend to be more underpriced than the IPOs of
smaller-sized firms
B.IPO underpricing is limited to the U.S. markets
C.The percent of underpricing remains stable over time in the U.S
D.The only period in the U.S. when underpricing produced first day returns of 50
percent or more was during the tech bubble of 1999-2000
E.Some of the greatest IPO underpricing has occurred in China
23) Which one of the following inventory management approaches determines the
finished goods inventory level and then works backwards until the raw material needs
are determined?
A.Extended EOQ
B.Just-in-time
C.ABC approach
D.Materials requirement planning
E.Economic order quantity
24) Which one of the following correctly defines a common chain of command within a
corporation?
A.The controller reports directly to corporate treasurer
B.The treasurer reports directly to the board of directors
C.The chief financial officer reports directly to the board of directors
D.The credit manager reports directly to the controller
E.The controller reports directly to the chief financial officer
25) The expected rate of return on Delaware Shores, Inc. stock is based on three
possible states of the economy. These states are boom, normal, and recession which
have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively.
Which one of the following statements is correct concerning the variance of the returns
on this stock?
A.The variance must decrease if the probability of occurrence for a boom increases
B.The variance will remain constant as long as the sum of the economic probabilities is
100 percent
C.The variance can be positive, zero, or negative, depending on the expected rate of
return assigned to each economic state
D.The variance must be positive provided that each state of the economy produces a
different expected rate of return
E.The variance is independent of the economic probabilities of occurrence
26) Eastern Shore Life Insurance Co. is trying to sell you an investment policy that will
pay you and your heirs $10,000 per year forever. If the required return on this
investment is 5.5 percent, how much will you pay for the policy?
A.$178,407.26
B.$181,818.18
C.$185,000.00
D.$187,511.02
E.$191,001.74
27) Delta Mowers has a debt-equity ratio of 1.2. Its WACC is 10.1 percent, and its cost
of debt is 7.5 percent. There is no corporate tax. What is the firm’s cost of equity
capital?
A.12.60 percent
B.13.22 percent
C.13.83 percent
D.14.29 percent
E.14.80 percent
28) Which of the following is/are helpful for evaluating the effect of leverage on a
company’s risk and potential returns?
I. Estimated pro forma coverage ratios
II. The recognition that financing decisions do not affect firm or shareholder value
III. A range of earnings chart and proximity of expected EBIT to the breakeven value
IV. A conservative debt policy that obviates the need to evaluate risk
A.I only
B.III only
C.I and III only
D.II and III only
E.IV only
29) Charles Henri is considering investing $36,000 in a project that is expected to
provide him with cash inflows of $12,000 in each of the first two years and $18,000 for
the following year. At a discount rate of zero percent this investment has a net present
value of _____, but at the relevant discount rate of 17 percent the project’s net present
value is _____.
A.$0; -$5,739
B.$0; -$3,406
C.$6,000; -$5,739
D.$6,000; -$3,406
E.$6,000; $1,897
30) The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00
per share a year for the following two years, and then cease paying dividends
altogether. How much is one share of this stock worth to you today if you require a 17
percent rate of return?
A.$2.38
B.$2.43
C.$2.56
D.$2.60
E.$2.64
31) Glass Blowers, Inc. has a new project in mind that will increase accounts receivable
by $18,000, decrease accounts payable by $6,000, increase fixed assets by $36,000, and
decrease inventory by $11,000. What is the amount the firm should use as the initial
cash flow attributable to net working capital when it analyzes this project?
A.-$45,000
B.-$37,000
C.-$13,000
D.-$9,000
E.-$1,000
32) You would like to borrow money three years from now to build a new building. In
preparation for applying for that loan, you are in the process of developing target ratios
for your firm. Which set of ratios represents the best target mix considering that you
want to obtain outside financing in the relatively near future?
A.Times interest earned = 1.7; debt-equity ratio = 1.6
B.Times interest earned = 1.5; debt-equity ratio = 1.2
C.Cash coverage ratio = 0.8; debt-equity ratio = 0.8
D.Cash coverage ratio = 2.6; debt-equity ratio = 0.3
E.Cash coverage ratio = 0.5; total debt ratio = 0.2
33) As of 2003, the maximum tax rate on long-term capital gains for high-income
individuals was which one of the following rates?
A.10 percent
B.15 percent
C.20 percent
D.35 percent
E.39 percent
34) You are comparing two annuities. Annuity A pays $100 at the end of each month for
10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of
return on both annuities is 8 percent. Which one of the following statements is correct
given this information?
A.The present value of Annuity A is equal to the present value of Annuity B
B.Annuity B will pay one more payment than Annuity A will
C.The future value of Annuity A is greater than the future value of Annuity B
D.Annuity B has both a higher present value and a higher future value than Annuity A
E.Annuity A has a higher future value but a lower present value than Annuity B
35) Andre’s Dog House had current assets of $67,200 and current liabilities of $71,100
last year. This year, the current assets are $82,600 and the current liabilities are $85,100.
The depreciation expense for the past year is $9,600 and the interest paid is $8,700.
What is the amount of the change in net working capital?
A.-$2,800
B.-$1,400
C.$1,400
D.$2,100
E.$2,800
36) Lewis Materials recently offered 15,000 shares of stock but only received payment
for 12,500 shares since that was all the shares the underwriters could sell. What type of
underwriting was this?
A.Syndicated
B.Firm commitment
C.Private placement
D.Best efforts
E.Dutch Auction
37) Ted currently owns 100 shares of a publicly traded stock which he would like to
sell. Which one of the following provides the most efficient means for Ted to sell his
shares?
A.Issuer sponsored Dutch auction
B.Proxy statement
C.Private placement transaction
D.Stakeholder purchase
E.Secondary market transaction
38) Identify three managerial options that relate to project analysis and explain how
those options affect the net present value of a project.
39) What are some of the key factors an individual should consider before selecting a
first-stage venture capitalist?
40) Given the following information about a possible average-risk, new product
investment, calculate the investment’s net present value.
41) Explain the difference between computing the value of a zero growth
dividend-paying stock and computing the value of a constant growth dividend-paying
stock.
42) Explain the difference between scenario analysis and sensitivity analysis and
identify the purpose of each.
43) Identify one primary strength and one primary weakness for each of the following
methods of investment analysis.
Net present value:
Strength:
Weakness:
Internal rate of return:
Strength:
Weakness:
Profitability index:
Strength:
Weakness:
Payback:
Strength:
Weakness:
Average accounting return:
Strength:
Weakness:
44) Explain how a zero coupon bond can create taxable income during a year in which
the bond pays no interest payments. Also, explain how the annual taxable amount can
be computed.