A firm is considering two different capital structures. The first option is an all-equity
firm with 32,000 shares of stock. The second option is 20,000 shares of stock plus some
debt. Ignoring taxes, the break-even level of earnings before interest and taxes between
these two options is $48,000. How much money is the firm considering borrowing if
the interest rate is 8 percent?
A. $175,000
B. $225,000
C. $250,000
D. $275,000
E. $300,000
Answer:
Isaac only has $690 today but needs $800 to buy a new laptop. How long will he have
to wait to buy the laptop if he earns 5.4 percent compounded annually on his savings?
A. 2.29 years
B. 2.48 years
C. 2.51 years
D. 2.77 years
E. 2.81 years
Answer:
Investors require a 4 percent return on risk-free investments. On a particular risky
investment, investors require an excess return of 7 percent in addition to the risk-free
rate of 4 percent. What is this excess return called?
A. Inflation premium
B. Required return
C. Real return
D. Average return
E. Risk premium
Answer:
The financial statement that summarizes a firm’s accounting value as of a particular date
is called the:
A. income statement.
B. cash flow statement.
C. liquidity position.
D. balance sheet.
E. periodic operating statement.
Answer:
Which one of the following statements is correct?
A. Bond markets have less daily trading volume than equity markets.
B. There are fewer bond issues than there are equity issues.
C. Municipal bond prices are highly transparent.
D. Bond markets are dealer based.
E. Most bond trades occur on the NYSE.
Answer:
You have just made your first $5,000 contribution to your individual retirement
account. Assuming you earn a 5 percent rate of return and make no additional
contributions, what will your account be worth when you retire in 35 years? What if
you wait for 5 years before contributing?
A. $26,335.37; $23,011.60
B. $27,311.20; $29,803.04
C. $27,311.20; $22,614.08
D. $27,580.08; 21,609.71
E. $31,241.90; $32,614.08
Answer:
Which one of the following terms denotes for certain that a bond is unsecured?
A. Debenture
B. Bearer form
C. Call provision
D. Sinking fund
E. Blanket mortgage
Answer:
Chevelle, Inc. has sales of $487,000 and costs of $394,500. The depreciation expense is
$43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The tax rate is
35 percent. What is the addition to retained earnings?
A. $10,775
B. $11,460
C. $13,120
D. $13,325
E. $15,450
Answer:
Which one of the following is the bill given to a customer for goods he or she
purchased?
A. Account aging
B. Invoice
C. Docket
D. Remittance advice
E. Shipping receipt
Answer:
Which one of the following types of securities has no priority in a bankruptcy
proceeding?
A. Convertible bond
B. Senior debt
C. Common stock
D. Preferred stock
E. Straight bond
Answer:
Suppose Gallinger Corp. has the following characteristics:
Shares outstanding: 1,000,000
Current share price: $10
Total debt: $1,000,000
Total cash: $500,000
Based on the formula above, what is the enterprise value of Gallinger Corp.?
A. $9,500,000
B. $10,500,000
C. $11,500,000
D. $12,000,000
E. $13,500,000
Answer:
Which one of the following statements about the operating cycle is correct?
A. The operating cycle illustrates the sources and uses of cash.
B. The operating cycle is equal to the cash cycle plus the accounts receivable period.
C. The operating cycle begins when a product is sold to a customer.
D. The operating cycle is based on a 360-day year.
E. The operating cycle describes how a product moves through the current asset
accounts.
Answer:
Which one of the following statements is correct?
A. All of the major stock exchanges are U.S. based.
B. The NYSE was created by the National Association of Securities Dealers in the early
1970s.
C. The American Stock Exchange is a dealer market.
D. OTC markets have a physical trading floor generally located in either New York City
or Chicago.
E. The primary purpose of the NYSE is to match buyers with sellers.
Answer:
Which one of the following is most apt to cause a wise manager to increase a project’s
cost of capital? Assume the firm is levered.
A. Management decides to issue new stock to finance the project.
B. The initial cash outlay requirement is reduced.
C. She learns the project is riskier than previously believed.
D. The aftertax cost of debt just decreased.
E. The project’s life is shortened.
Answer:
You want to purchase a new condominium that costs $329,000. Your plan is to pay 20
percent down in cash and finance the balance over 25 years at 6.25 percent. What will
be your monthly mortgage payment?
A. $1,736.25
B. $1,833.33
C. $1,908.16
D. $2,221.43
E. $2,406.11
Answer:
Paddle Fans & More has a marginal tax rate of 34 percent and an average tax rate of
23.7 percent. If the firm earns $138,500 in taxable income, how much will it owe in
taxes?
A. $31,366.67
B. $31,500.00
C. $32,824.50
D. $39,957.25
E. $47,090.00
Answer:
A preferred stock sells for $48.20 a share and has a market return of 15.65 percent.
What is the dividend amount?
A. $6.93
B. $6.80
C. $7.25
D. $7.42
E. $7.54
Answer:
The Cracker Barrel has a beta of 0.98, a dividend growth rate of 3.2 percent, a stock
price of $33 a share, and an expected annual dividend of $1.06 per share next year. The
market rate of return is 11.2 percent and the risk-free rate is 3.7 percent. What is the
firm’s cost of equity?
A. 7.74 percent
B. 8.73 percent
C. 9.30 percent
D. 9.72 percent
E. 17.46 percent
Answer: