1) When the firm finances the seasonally adjusted average level of asset demand with
long-term debt and equity, the firm is said to follow a _______________.
A.Seasonal-dependent financing policy
B.Relaxed financing policy
C.Restricted financing policy
D.Compromise financing policy
2) Firm A and Firm B have the same total assets, ROA and profit margin. However,
Firm B has a higher debt ratio and interest expense than Firm A. Which of the following
statements is correct?
A.Firm B must have a higher ROE than firm A
B.Firm B must have a higher capital intensity ratio than Firm A
C.Firm B must have a higher fixed asset turnover than Firm A
D.Firm B must have a lower ACP than Firm A
3) Which of the following statements is incorrect?
A.Trading at the New York Stock Exchange and the American Stock Exchange are done
by open outcry
B.Dealers create market liquidity in the Nasdaq’s electronic market
C.The Dow Jones Industrial Average includes 35 of the largest companies in the U.S.
D.The Nasdaq contains many very large technology firms
4) How many years (and months) will it take $4 million to grow to $7 million with an
annual interest rate of 12%?
A.4 years and 1.92 month
B.4 years and 11.28 months
C.5 years and 6.54 months
D.5 years and 10.86 months
5) ABC Inc. has $100 in cash on its balance at the end of 2009. During 2010, the firm
issued $450 in common stock, reduced its notes payable by $40, purchased fixed assets
in the amount of $750 and had cash flows from operating activities of $315. How much
cash did ABC Inc. have on its balance sheet at the end of 2010?
A.$75
B.$140
C.$225
D.-$25
6) Income Statement You have been given the following information for Halle’s
Holiday Store Corp. for the year 2008:
net sales = $50,000,000;
cost of goods sold = $35,000,000;
addition to retained earnings = $2,000,000;
dividends paid to preferred and common stockholders = $3,000,000;
interest expense = $3,000,000.
The firm’s tax rate is 30 percent.
In 2009, net sales are expected to increase by $5 million,
cost of goods sold is expected to be 65 percent of net sales,
expensed depreciation is expected to be the same as in 2008,
interest expense is expected to be $2,500,000,
the tax rate is expected to be 30 percent of EBT, and
dividends paid to preferred and common stockholders will not change.
What is the addition to retained earnings expected in 2009?
A.$2,000,000
B.$5,325,000
C.$8,447,500
D.$10,304,643
7) Debt Management Ratios Calculate the times interest earned ratio for Tierre’s Ts, Inc.
using the following information. Sales = $200,000, cost of goods sold = $50,000,
depreciation expense = $13,000, addition to retained earnings = $70,000, dividends per
share = $0.50, tax rate = 30%, and number of shares of common stock outstanding =
1,000. Tierre’s Ts has no preferred stock outstanding.
A.0.1814
B.0.4854
C.0.685
D.3.7756
8) Exchange Rate Quote Convert the following indirect quote to a dollar direct quote:
$1 = 0.5467 Latvian Lat
A.$1.5467
B.$0.15467
C.$0.018292
D.$1.8292
9) Yield to Call A 4.75 percent coupon bond with 12 years left to maturity can be called
in 2 years. The call premium is one year of coupon payments. It is offered for sale at
$1037.35. What is the yield to call of the bond? (Assume that interest payments are paid
semi-annually and par value is $1,000.)
A.4.60%
B.4.68%
C.4.75%
D.5.05%
10) A firm faces a 30% tax rate and has $500M in assets, currently financed entirely
with equity. Equity is worth $100 per share, and book value of equity is equal to market
value of equity. Also, let’s assume that the firm’s expected EBIT is $70M. The firm is
considering switching to an 18 percent debt capital structure, and has determined that
they would have to pay an 8 percent yield on perpetual debt. How much will ROE
change if they switch to the proposed capital structure?
A.There will no change in the firm’s ROE
B.The ROE will decrease by 0.52%
C.The ROE will increase by 1.58%
D.The ROE will increase by 0.92%
11) Income Statement You have been given the following information for Fina’s
Furniture Corp.:
net sales = $25,500,000;
cost of goods sold = $10,250,000;
addition to retained earnings = $305,000;
dividends paid to preferred and common stockholders = $500,000;
interest expense = $2,000,000.
The firm’s tax rate is 30 percent. What is the depreciation expense for Fina’s Furniture
Corp?
A.$12,100,000
B.$12,400,000
C.$14,100,000
D.$14,400,000
12) An average of which of the following will give a fairly accurate estimate of what a
project’s beta will be?
A.flotation beta
B.proxy beta
C.pure-play proxies
D.weighted average beta
13) Your company is considering a project that will cost $100. The project will generate
after-tax cash flows of $37.50 per year for five years. The WACC is 10% and the firm’s
D/A ratio is .70. The flotation cost for equity is 6%, the flotation cost for debt is 3%,
and your firm does not plan on issuing any preferred stock within its capital structure. If
your firm follows the practice of incorporating flotation costs into the project’s initial
investment, what is the weighted-average flotation cost for the firm?
A.2.90%
B.3.90%
C.3.30%
D.4.30%
14) Which of the following is NOT an example of an inventory loan?
A.blanket inventory liens
B.trust receipts
C.field warehousing financing
D.inventory factor
15) Calculate the price of a 6.5% coupon bond with 27 years left to maturity and a
market interest rate of 5%. (Assume interest payments are semiannual and par value is
$1,000.) Is this a discount or premium bond?
A.$982.03; discount
B.$1,010.59; discount
C.$1,220.93; premium
D.$1,315.62; premium
16) Calculation of Altman’s Z-Score: Suppose that the financial ratios of a potential
borrowing firm took the following values: X1 = Net working capital/Total assets = .35,
X2 = Retained earnings/Total assets = .50, X3 = Earnings before interest and
taxes/Total assets = .60, X4 = Market value of equity/Book value of long-term debt =
1.50, X5 = Sales/Total assets ratio = 3.65. Calculate the Altman’s Z-score for this firm.
A.7.65
B.1.54
C.6.60
D.1.32
17) Flotation costs are _______________.
A.insignificant and can be assumed away
B.the difference between the bid-ask spread on the sale of the security
C.commissions to the underwriting firm that floats the issue
D.None of these answers are correct.
18) Which of the following is defined as when a single investment bank obtains the
exclusive right to originate, underwrite, and distribute the new bonds through a
one-on-one negotiation process?
A.competitive sale
B.negotiated sale
C.commercial sale
D.silent auction sale
19) Balloons, Inc. normally pays a quarterly dividend. The last such dividend paid was
$0.80, all future quarterly dividends are expected to grow at 8 percent, and the firm
faces a required rate of return on equity of 13 percent. If the firm just announced that
the next dividend will be an extraordinary dividend of $2.00 per share that is not
expected to affect any other future dividends, what should the stock price be?
A.$16.00
B.$17.01
C.$17.28
D.$18.29
20) You have $100,000 in your account. Assuming no additional deposits are made and
your account earns 15% per year, how long will it take for the account to have a balance
of $500,000?
A.10.28 years
B.11.09 years
C.11.52 years
D.12.64 years
21) Average Return The past five monthly returns for K and Company are 4.25 percent,
4.13 percent, -2.05 percent, 3.25 percent, and 7.25 percent. What is the average monthly
return?
A.1.403%
B.1.744%
C.3.366%
D.4.186%
22) Suppose a firm has a retention ratio of 35 percent and net income of $2 million.
How much does it pay out in dividends?
A.$700,000
B.$1.3 million
C.$2 million
D.$3.07 million
23) Which of the following is incorrect?
A.It is possible to combine assets that all move in the exact same fashion over time and
gain the benefits of diversification
B.Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the
portfolio
C.The optimal portfolio is the one with the lowest amount of risk
D.All of these statements are correct
24) George’s Dry Cleaning is considering a merger with Weezzie’s Laundry Supply
Stores. George’s total operating costs of producing services are $790,000 for sales
volume (SG) of $4.7 million. Weezzie’s total operating costs of producing services are
$202,000 for a sales volume (SW) of $2.3 million. For a sales volume of $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 12%.
A.$840,000
B.$710,000
C.$175,000
D.$152,000
25) All of the following are ways that a multinational corporation can minimize the
impact of political risk except _________________.
A.Use local financing
B.Purchase country risk insurance
C.Pay off government officials
D.All of these are ways that a multinational corporation can minimize the impact of
political risk