1) On the _____________, the firm will look on its books to find the registered owners
so that they can start addressing payments.
A.Owner date
B.Record date
C.Owner of record date
D.Ex-dividend date
2) If a firm has retained earnings of $20 million, a common shares account of $40
million, and additional paid-in-capital of $10 million, how much would be transferred
in (or out) of these accounts in response to a 30 percent stock dividend, respectively?
A.-30%, 0%, +30%
B.-30%, +30%, 0%
C.-75%, +30%, +30%
D.-75%, +37.5%, +37.5%
3) Which of the following statements is incorrect?
A.Governments affect foreign exchange rates indirectly by altering prevailing interest
rates within their own countries
B.Foreign currency exchange rates vary with the day-to-day demand and supply of the
two foreign currencies
C.Central governments can intervene in foreign exchange markets directly and value
their currency at high rates relative to another currency
D.All of these statements are correct
4) Solving for Rates You invested $1,000 in the stock market one year ago. Today, the
investment is valued at $750. What return did you earn? What return would you need to
get next year to break even overall?
A.-112.5%, +75%, respectively
B.-75%, +112.5%, respectively
C.-33.33%, +25%, respectively
D.-25%, +33.33% respectively
5) GW Inc. had $800 million in retained earnings at the beginning of the year. During
the year, the firm paid $.75 per share dividend and generated $1.92 earnings per share.
The firm has 100 million shares outstanding. At the end of year, what was the level of
retained earnings for GW?
A.$725 million
B.$917 million
C.$882 million
D.$807 million
6) Which of these is defined as the amount of foreign currency it takes to buy one unit
of domestic currency?
A.exchange rate
B.spot transaction
C.indirect quote
D.direct quote
7) Portfolio Weights You have $45,050 to invest. You want to purchase shares of
Company Air at $10.25, Company B at $15.10, and Company F at $9.05. How many
shares of each company should you purchase so that your portfolio consists of 30
percent Company A, 50 percent Company B, and 20 percent Company F? Report only
whole stock shares.
A.Company A = 30 shares, Company B = 50 shares, Company F = 20 shares
B.Company A = 44 shares, Company B = 30 shares, Company F = 50 shares
C.Company A = 308 shares, Company B = 755 shares, Company F = 181 shares
D.Company A = 1318 shares, Company B = 1491 shares, Company F = 995 shares
8) You started your first job after graduating from college. Your company offers a
retirement plan for which the company contributes 50% of what you contribute each
year. You expect to contribute $4,000 per year from your salary. You decide to invest
the contributions in assets that you expect to earn 8% per year. If you plan to retire in 35
years, how big will you expect that retirement account to be?
A.$689,267.21
B.$823,147.29
C.$1,033,900.82
D.$1,308,427.41
9) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the average approach?
A.$1,000,000
B.$1,740,000
C.$1,925,000
D.$2,200,000
10) Compute the MIRR statistic for Project J and advise whether to accept or reject the
project with the cash flows shown below if the appropriate cost of capital is 10 percent.
Project J
A.The project’s MIRR is 14.77% and the project should be accepted
B.The project’s MIRR is 9.29% and the project should be rejected
C.The project’s MIRR is 13.76% and the project should be accepted
D.The project’s MIRR is 15.31% and the project should be accepted
11) These markets trade currencies for immediate or for some future stated delivery.
A.money markets
B.primary markets
C.foreign exchange markets
D.over-the-counter stocks
12) What is the value in year 2 of a $200 cash flow made in year 8 if interest rates are
3%?
A.$132.89
B.$147.23
C.$152.91
D.$167.50
13) XYZ Industries has 10 million shares of stock outstanding selling at $10 per share
and an issue of $30 million in 8.5 percent, annual coupon bonds with a maturity of 25
years, selling at 102 percent of par ($1000). If XYZ’s weighted average tax rate is 40
percent and its cost of equity is 15 percent, what is XYZ’s WACC?
A.8.06%
B.11.75%
C.12.65%
D.13.43%
14) Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $20 per share
and an issue of $50 million in 8%, annual coupon bonds with a maturity of 13 years,
selling at 93.5% of par ($1000). If Johnny Cake’s weighted average tax rate is 34%, its
next dividend is expected to be $2.00 per share, and all future dividends are expected to
grow at 5% per year, indefinitely, what is its WACC?
A.12.64%
B.13.18%
C.13.26%
D.14.06%
15) Which of the following will directly impact the cost of equity?
A.Expected growth rate in sales
B.Expected future tax rates
C.Stock price
D.Profit margins
16) HotFoot Shoes would like to maintain their cash account at a minimum level of
$35,000, but expect the standard deviation in net daily cash flows to be $2,000; the
effective annual rate on marketable securities to be 5 percent per year; and the trading
cost per sale or purchase of marketable securities to be $210 per transaction. What will
be their optimal cash return point?
A.$41,899.45
B.$45,901.75
C.$51,752.46
D.$56,780.25
17) P/E Ratio and Stock Price Ralph Lauren (RL) has earnings per share of $3.85 and a
P/E ratio of 17.37. What is the stock price?
A.$0.22
B.$4.51
C.$22.16
D.$66.87
18) According to this theory of term structure of interest rates, at any given point in
time, the yield curve reflects the market’s current expectations of future short-term
rates.
A.Expectations Theory
B.Future Short-term Rates Theory
C.Term Structure of Interest Rates Theory
D.Unbiased Expectations Theory
19) A perpetuity pays $250 per year and interest rates are 8.5%. How much would its
value change if interest decreased to 5.5%? Did the value increase or decrease?
A.$1,604.27; increase
B.$1,604.27; decrease
C.$1,714.20; increase
D.$1,714.20; decrease
20) 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 = .15,
X2 = Retained earnings/Total assets = .10, X3 = Earnings before interest and
taxes/Total assets = .15, X4 = Market value of equity/Book value of long-term debt = .
40, X5 = Sales/Total assets ratio = 0.8. Calculate the Altman’s Z-score for this firm.
A.9.10
B.1.60
C.0.371
D.1.855
21) A linear probability model you have developed finds there are two factors
influencing the past bankruptcy behavior of firms: the equity multiplier and the total
asset turnover ratio. Based on past bankruptcy experience, the linear probability model
is estimated as:
PDi = .02 (equity multiplier) + .06 (total asset turnover)
A firm has an equity multiplier of 1.1 times and a probability of default of 6.2 percent.
Calculate the firm’s total asset turnover ratio.
A.0.53 times
B.0.67 times
C.1.2 times
D.0.84 times
22) A commitment fee is _____________.
A.the back-end fee
B.the facility fee
C.the up-front fee
D.None of these
23) A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of
10.06%. If this bond pays its coupon payments semi-annually and par value is $1,000,
what is the bond’s annual coupon rate?
A.5.50%
B.8.19%
C.9.57%
D.11.00%
24) Interest rates A particular security’s default risk premium is 3 percent. For all
securities, the inflation risk premium is 2 percent and the real interest rate is 2.25
percent. The security’s liquidity risk premium is 0.75 percent and maturity risk premium
is 0.90 percent.
The security has no special covenants. What is the security’s equilibrium rate of return?
A.1.78%
B.3.95%
C.8.90%
D.17.8%
25) Portfolio Weights You have $15,040 to invest. You want to purchase shares of
Company Air at $42.50, Company B at $51.50, and Company F at $9.75. How many
shares of each company should you purchase so that your portfolio consists of 20
percent Company A, 40 percent Company B, and 40 percent Company F? Report only
whole stock shares.
A.Company A = 20 shares, Company B = 40 shares, Company F = 40 shares
B.Company A = 85 shares, Company B = 21shares, Company F = 39 shares
C.Company A = 71 shares, Company B = 117 shares, Company F = 615 shares
D.Company A = 353 shares, Company B = 291 shares, Company F = 1538 shares
26) An all-equity financed firm has $650 in assets and the stock price is $20. If the firm
restructures with 40% debt which creates interest expense of $17 per year and the firm’s
tax rate is 40%, what is the break-even EBIT?
A.$37.50
B.$31.50
C.$49.50
D.$42.50
27) The financing policy that will result in investing in marketable securities when asset
requirements are low is referred to as ______________.
A.Compromise financing
B.Restrictive financing
C.Flexible financing
D.None of these
28) Which of the following is the type of financing that includes capital funds invested
or venture capitalists?
A.debt financing
B.equity financing
C.public financing
D.capital financing
29) A proxy beta is _________________.
A.the average beta of firms that are only engaged in the proposed new line of business
B.the industry average beta that is used in lieu of the firm’s beta because the firm has
not existed long enough to have a beta calculated
C.the beta used when the firm has a great deal of business risk
D.None of these answers is correct
30) Compounding with Different Interest Rates A deposit of $500 earns the following
interest rates:
* 5 percent in the first year
* 6 percent in the second year, and
* 8 percent in the third year.
What would be the third year future value?
A.$527.14
B.$595.00
C.$601.02
D.$1595.00
31) Which of the following is incorrect with respect to preferred stock?
A.Preferred stock is largely owned by other companies rather than individual investors
B.Preferred stock takes preference over common stock in bankruptcy proceedings
C.Preferred stock dividends do not grow
D.All of these statements are correct
32) Daddi Mac, Inc., doesn’t face any taxes and has $250 million in assets, currently
financed entirely with equity. Equity is worth $13 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 25 percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt. What will
be the level of expected EPS if they switch to the proposed capital structure?
A.$0.59
B.$0.41
C.$0.27
D.$0.19
33) Which statement is true?
A.The larger the standard deviation, the lower the total risk
B.The larger the standard deviation, the higher the total risk
C.The larger the standard deviation, the more portfolio risk
D.The standard deviation is not an indication of total risk
34) Your company faces a 25% tax rate and has $750 million in assets, currently
financed entirely with equity. Equity is worth $25 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 25-percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt in either
event. What will be the standard deviation in EPS if they switch to the proposed capital
structure?
A.0.6886
B.0.8298
C.1.1857
D.1.4059
35) All of the following are factors that affect nominal interest rates except
___________.
A.Time to maturity
B.Real interest rate
C.Convertibility features
D.Foreign exchange