1) A $1,000 investment has doubled to $2,000 in seven years. How much longer will it
take for the investment to reach $5,000 if it continues to earn the same rate?
A.6.16 years
B.6.86 years
C.7.15 years
D.9.25 years
2) Neither payback period nor discounted payback period techniques for evaluating
capital projects account for
A.time value of money
B.market rates of return
C.cash flows that occur after payback
D.cash flows that occur during payback
3) Assume you borrow $5,000 today and pay back the loan in one lump sum 4 years
from today. You are charged 8% interest per year. What amount will you pay back and
how much interest will you pay?
A.$6,356; $1,356
B.$6,508.21; $1,508.21
C.$6,802.44; $1802.44
D.$7,902.11; $2,902.11
4) Suppose we observe the following rates: 1R1 = 12%, 1R2 = 15%. If the unbiased
expectations theory of the term structure of interest rates holds, what is the one-year
interest rate expected one year from now, E(2r1)?
A.13.5%
B.14.2%
C.15.6%
D.18.0%
5) The advantage of the shelf registration is that _______________.
A.The firm can use their red herring prospectus as a substitute for the master
registration statement
B.The firm can get stocks into the market quickly if the firm feels conditions are right
without the time lag
C.The firm can bypass the lengthy SEC process
D.None of these
6) Joe’s Burgers would like to maintain their cash account at a minimum level of
$300,000, but expects the standard deviation in net daily cash flows to be $20,000; the
effective annual rate on marketable securities to be 5.2 percent per year; and the trading
cost per sale or purchase of marketable securities to be $22.55 per transaction. What
will be their optimal upper cash limit?
A.$320,000.00
B.$336,492.68
C.$409,478.04
D.$1,009,478.04
7) You have reviewed your budget and determine that the most you can afford on a car
loan is $455 per month. What is the most you can borrow if interest rates are 7% and
you can pay the loan over 4 years?
A.$19,000.89
B.$19,741.29
C.$20,074.82
D.$21,671.53
8) DuPont Analysis If Apex, Inc. has an ROE = 10%, equity multiplier = 3, and profit
margin of 5%, what is the total asset turnover ratio?
A..0600
B..0667
C..1667
D..6667
9) All of the following are advantages of an IPO except ________________.
A.The market provides a market value for the firm’s common stock
B.The original owners can reallocate their personal wealth away from the firm into
more diversified portfolios
C.The market provides a transparent measure of firm performance which can attract
more investors
D.IPOs are traditionally priced at a premium to cover the costs of the underwriters
10) Which is more valuable, receiving $775 today or receiving $885 in two and
one-half years if interest rates are 7.25%?
A.Receiving $775 today
B.Receiving $885 in 2.5 years
C.They are worth the same amount
D.Need more information to make a determination
11) Suppose that a company’s equity is currently selling for $19 per share and that there
are 3 million shares outstanding and 10 thousand bonds outstanding, which are selling
at 100 percent of par ($1,000). If the firm was considering an active change to their
capital structure so that the firm would have a D/E of 0.5, which type of security (stocks
or bonds) would they need to sell to accomplish this, and how much would they have to
sell?
A.$12,333,333 in new debt
B.$1,755,400 in new debt
C.$12,328,000 in new equity
D.$1,755,400 in new equity
12) Calculating Costs of Issuing Stock Sandal Etc., Inc., needs to raise $49 million to
finance firm expansion. In discussions with its investment bank, Sandals learns that the
bankers recommend an offer price of $25 per share and that 2 million shares of stock be
sold. If the net proceeds on the stock sale leaves Sandal with $49 million, calculate the
underwriter’s spread on the stock issue.
A.$0.50
B.$1.00
C.$2.90
D.$2.00
13) Solving for Rates What annual rate of return is implied on a $700 loan taken next
year when $800 must be repaid in year 3?
A.4.55%
B.4.76%
C.6.90%
D.7.14%
14) Triangular Arbitrage The U.S. dollar spot exchange rate with the Australian dollar is
$1 = AU$1.2835. The U.S. dollar and euro exchange rate is $1 = 0.7605. If the
cross-rate between the euro and Australian dollar is 1 = AU$1.610 then show that an
arbitrage is possible. What positions should be taken to profit from the mispricing?
A.Starting with U.S. dollars, buy Australian dollars and convert them to euros and then
back to U.S. dollars
B.Starting with U.S. dollars, buy euros and convert them to Australian dollars and then
back to U.S. dollars
C.Starting with euros, buy U.S. dollars and covert them to Australian dollars and then
back to euros
D.Starting with Australian dollars, buy euros and convert them to U.S. dollars and then
back to Australian dollars
15) A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10
percent. Given this, the project must have:
A.only one negative cash flow
B.a PI that is negative
C.a discounted payback period that is shorter than its payback period
D.an NPV that is greater than zero
16) Which of the following statements is correct?
A.Uncorrelated assets have a correlation of -1.0
B.Most common stocks are positively correlated with each other because they are
impacted by the economic factors
C.We can typically add many stocks together to fully eliminate the market risk in a
portfolio
D.None of these statements are correct
17) If a bond is selling at a premium, then ________________________________.
A.its coupon rate must be greater than its yield
B.its coupon rate must be less than its yield
C.its coupon rate must be equal to its yield
D.its coupon rate must be equal to one-half the yield to maturity for a 5-year bond
18) You have reviewed your budget and determine that the most you can afford on a car
loan is $375 per month. What is the most you can borrow if interest rates are 8% and
you can pay the loan over 5 years?
A.$20,591.86
B.$16,779.02
C.$18,494.41
D.$21,147.83
19) Rule of 72 Approximately what interest rate is needed to double an investment over
6 years?
A.6%
B.12%
C.17%
D.100%
20) If a firm has a cash cycle of 71 days and an operating cycle of 139 days, what is its
average payment period?
A.210 days
B.68 days
C.53 days
D.41 days
21) You wish to buy a $30,000 car. The dealer offers you a 5-year loan with a 9% APR.
What are the monthly payments? What is the monthly payment if you paid interest
only?
A.$622.75; $225.00
B.$659.41; $291.23
C.$701.23; $291.23
D.$712.03; $271.19
22) Which of the following is an example of aligning managers’ personal interests with
those of the owners?
A.Allow the managers to have as many perks as they request
B.Pay the managers high salaries
C.Offer the managers an equity stake in the firm
D.Trust the managers’ actions as they will always act in the owners’ best interest
23) Suppose that TV Industries, Inc. currently has the balance sheet shown below, and
that sales for the year just ended were $5 million. The firm also has a profit margin of
15 percent, a retention ratio of 25 percent, and expects sales of $5.5 million next year. If
all assets and current liabilities are expected to increase with sales, what amount of
additional funds will the company need from external sources to fund the expected
growth?
A.$0
B.$6,250
C.$206,250
D.$12,500
24) Cash flows available to pay the firm’s stockholders and debt holders after the firm
has made the necessary working capital investments, fixed asset investments, and
developed the necessary new products to sustain the firm’s ongoing operations is
referred to as _________________.
A.Operating cash flow
B.Net operating working capital
C.Free cash flow
D.None of these
25) Liquidity Premium Hypothesis One-year Treasury bills currently earn 5.50 percent.
You expect that one year from now, one-year Treasury bill rates will increase to 5.75
percent. The liquidity premium on two-year securities is 0.075 percent. If the liquidity
theory is correct, what should the current rate be on two-year Treasury securities?
A.3.775%
B.5.625%
C.5.662%
D.11.325%
26) KADS, Inc. has spent $400,000 on research to develop a new computer game. The
firm is planning to spend $150,000 on a machine to produce the new game. Shipping
and installation costs of the machine will be capitalized and depreciated; they total
$50,000. The machine has an expected life of 3 years, a $75,000 estimated resale value,
and falls under the MACRS 7-Year class life. Revenue from the new game is expected
to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35
percent, an opportunity cost of capital of 15 percent, and it expects net working capital
to increase by $100,000 at the beginning of the project. What will the year 0 free cash
flow for this project be?
A.-$250,000
B.-$150,000
C.-$200,000
D.-$300,000
27) When computing the rate of return from selling an investment, the number of years
between the present and future cash flows is an important factor in determining:
A.the annual rate earned
B.the annual payments required
C.whether the present value or the future value is a cash inflow
D.whether the present value or the future value is a cash outflow
28) GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently
financed entirely with equity. Equity is worth $10 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 40 percent debt capital structure, and has
determined that they would have to pay a 5 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.$1.03
B.$0.42
C.$0.62
D.$0.55
29) Liquidity and Asset Management Ratios Oasis Products, Inc. has current liabilities
= $10 million, current ratio = 1.5 times, inventory turnover ratio = 12 times, average
collection period = 20 days, and sales = $100 million. What is the value of their cash
and marketable securities?
A.$1,187,215
B.$8,333,333
C.$15,000,000
D.$17,146,188
30) These are cash inflows and outflows associated with buying and selling of fixed or
other long-term assets.
A.Cash flows from operations
B.Cash flows from investing activities
C.Cash flows from financing activities
D.Net change in cash and cash equivalents
31) Accessory Industries has 2 million shares of common stock outstanding, 1 million
shares of preferred stock outstanding, and 100 thousand bonds. If the common shares
are selling for $22 per share, the preferred shares are selling for $10.50 per share, and
the bonds are selling for 96 percent of par ($1000), what would be the weights used in
the calculation of Accessory’s WACC for common stock, preferred stock, and bonds,
respectively?
A.33.33%, 33.33%, 33.33%
B.29.23%, 6.98%, 63.79%
C.64.52%, 32.26%, 3.22%
D.17.12%, 8.17%, 74.71%
32) Why is debt often referred to as leverage in finance?
A.Debt magnifies the yield to maturity on the firm’s bonds
B.Debt magnifies both the potential returns and the risk to bondholders
C.Debt magnifies the debt ratio
D.None of these
33) Which of the following are considered “chunky” or “lumpy” assets?
A.Total Assets
B.Current Assets
C.Fixed Assets
D.Additional Funds Needed (AFN)
34) CM Enterprises estimates that it takes, on average, 7 days for their customers’
payments to reach them, 1 day for the payments to be processed and deposited by their
bookkeeping department, and 3 more days for the check to clear once they’re deposited.
What is their collection float?
A.11 days
B.10 days
C.8 days
D.7 days
35) When determining a form of business organization, all of the following are
considered EXCEPT:
A.Who owns the firm
B.What are the owners’ risks
C.What are the tax ramifications
D.The physical location of the business
36) Exchange Rate Risk A U.S. firm is expecting cash flows of 5 million Mexican pesos
and 10 million Indian rupees. The current spot exchange rates are: $1 = 11.255 pesos
and $1 = 44.864 rupees. If these cash flows are not received for one year and the
expected spot rates at that time will be $1 = 10.080 pesos and $1 = 44.125 rupees, then
what is the difference in dollars received that was caused by the delay?
A.$56,000 more
B.$56,000 less
C.$13.265 million more
D.$9.275 million more
37) Which of the following is NOT a source of cash?
A.The firm reduces its inventory
B.The firm pays off some of its long-term debt
C.The firm has positive net income
D.The firm sells more common stock