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.
Answer:
Santa Klaus Toys just paid its annual dividend of $1.40. The required return is 8 percent
and the dividend growth rate is 1 percent. What is the expected value of this stock five
years from now?
A. $20.82
B. $21.23
C. $22.06
D. $23.45
E. $23.78
Answer:
You have $175,000 on deposit with no outstanding checks or uncleared deposits. One
day you write a check for $18,000. What is your book balance?
A. $157,000
B. $158,500
C. $175,000
D. $178,500
E. $189,000
Answer:
Suppose you could buy 1,320 South Korean won or 78 Pakistani rupees last year for $1.
Today, $1 will buy you 1,318 won or 80 rupees. Which one of the following occurred
over the past year?
A. The dollar appreciated against the won.
B. The dollar depreciated against the rupee.
C. The dollar appreciated against both the won and the rupee.
D. The won depreciated against the dollar.
E. The rupee depreciated against the dollar.
Answer:
China Importers would like to spend $221,000 to expand its warehouse. However, the
company has a loan outstanding that must be repaid in 2.5 years and thus will need the
$221,000 at that time. The warehouse expansion project is expected to increase the cash
inflows by $58,000 in the first year, $139,000 in the second year, and $210,000 a year
for the following 2 years. Should the firm expand at this time? Why or why not?
A. Yes, because the money will be recovered in 1.69 years
B. Yes, because the money will be recovered in 1.87 years
C. Yes, because the money will be recovered in 2.11 years
D. No, because the project never pays back
E. No, because the money will not be recovered in time to repay the loan
Answer:
Which one of the following terms refers to the best option that was foregone when a
particular investment is selected?
A. Side effect
B. Erosion
C. Sunk cost
D. Opportunity cost
E. Marginal cost
Answer:
Erin’s purchases from suppliers in a quarter are equal to 67 percent of the next quarter’s
forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 30
percent of sales, and interest and dividends are $90 per quarter. No capital expenditures
are planned. Projected quarterly sales are:
Sales for the first quarter of the following year are projected at $1,510. What is the
amount of the firm’s total cash outlay for the third quarter?
A. $1,990
B. $1,420
C. $1,480
D. $1,530
E. $1,550
Answer:
Last year, when the stock of Alpha Minerals was selling for $55 a share, the dividend
yield was 3.2 percent. Today, the stock is selling for $41 a share. What is the total return
on this stock if the company maintains a constant dividend growth rate of 2.5 percent?
A. 6.13 percent
B. 6.58 percent
C. 6.90 percent
D. 7.47 percent
E. 7.40 percent
Answer:
Which one of the following correctly defines a common chain of command within a
corporation?
A. The controller reports directly to the 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.
Answer:
Which one of the following statements is correct?
A. An increase in the market value of preferred stock will increase a firm’s weighted
average cost of capital.
B. The cost of preferred stock is unaffected by the issuer’s tax rate.
C. Preferred stock is generally the cheapest source of capital for a firm.
D. The cost of preferred stock remains constant from year to year.
E. Preferred stock is valued using the capital asset pricing model.
Answer:
By definition, an inventory loan is which one of the following types of loan?
A. Secured short-term loan
B. Unsecured short-term loan
C. Secured long-term loan
D. Unsecured long-term loan
E. Trust receipt loan
Answer:
A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond
matures in three years and pays interest annually. The coupon rate is 7 percent. What is
the current price of this bond?
A. $948.01
B. $949.60
C. $1,005.26
D. $1,008.18
E. $1,010.13
Answer:
The Black Horse is currently considering a project that will produce cash inflows of
$12,000 a year for three years followed by $6,500 in year 4. The cost of the project is
$38,000. What is the profitability index if the discount rate is 7 percent?
A. 0.96
B. 0.99
C. 1.04
D. 1.09
E. 1.12
Answer:
Currently, you own a portfolio comprised of the following three securities. How much
of the riskiest security should you sell and replace with risk-free securities if you want
your portfolio beta to equal 90 percent of the market beta?
A. $7,023.15
B. $7,811.29
C. $8,666.67
D. $9,613.64
E. $10,318.50
Answer:
Which one of the following occurs when interest rate parity exists between Countries A
and B?
A. Country A investors are indifferent between risk-free investments in Countries A and
B.
B. Forward exchange rates for Countries A and B must be equal for all time periods.
C. Risk-free interest rates in Countries A and B must be equal.
D. Spot and forward exchange rates between the currencies of the two countries must
be equal.
E. Significant covered interest arbitrage opportunities between currencies of Countries
A and B must exist.
Answer:
Jim’s Hardware is adding a new product line to its sales lineup. Initially, the firm will
stock $41,000 of the new inventory, which will be purchased on 30 days’ credit from a
supplier. The firm will also invest $6,000 in accounts receivable and $4,000 in
equipment. What amount should be included in the initial project costs for net working
capital?
A. -$41,000
B. -$37,000
C. -$10,000
D. -$6,000
E. -$2,000
Answer:
Derek’s is a brick-and-mortar toy store. The firm is considering expanding its operations
to include Internet sales. Which one of the following would be the best firm to use in a
pure play approach to analyzing this proposed expansion?
A. Another brick-and-mortar store that also sells online
B. A wholesale toy distributor
C. A toy store that sells online only
D. The oldest online retailer of any product
E. Derek’s own store
Answer:
The current spot rate between the UK and the U.S. is 0.6220 per $1. The expected
inflation rate in the U.S. is 2.1 percent. The expected inflation rate in the UK is 2.6
percent. If relative purchasing power parity exists, what will the exchange rate be next
year?
A. 0.6189/$1
B. 0.6251/$1
C. 0.6823/$1
D. 0.7023/$1
E. 0.7110/$1
Answer:
Granny’s Home Remedy has a $30 million bond issue outstanding with a coupon rate of
7.75 percent and a current yield of 7.67 percent. What is the present value of the tax
shield if the tax rate is 34 percent?
A. $632,400
B. $625,872
C. $1.20 million
D. $8.16 million
E. $10.2 million
Answer:
Plato’s Foods has ending net fixed assets of $84,400 and beginning net fixed assets of
$79,900. During the year, the firm sold assets with a total book value of $13,600 and
also recorded $14,800 in depreciation expense. How much did the company spend to
buy new fixed assets?
A. -$23,900
B. $3,300
C. $32,900
D. $36,800
E. $37,400
Answer: