1) The clientele effect states that investors fall into various groups because of
differences in their preferences for which one of the following?
A.Share price levels
B.Risk level
C.Short-term versus long-term investments
D.Rates of return
E.Dividends
2) Based on the capital asset pricing model, which one of the following must increase
the expected return on an individual security, all else constant?
A.An increase in the risk level of that security as measured by the standard deviation
B.An increase in the risk-free rate given a security beta of 1.42
C.A decrease in the market rate of return given a security beta of 1.13
D.A decrease in the market rate of return given a security beta of .78
E.A decrease in the risk-free rate given a security beta of 1.06
3) The following table presents financial information for Boss Stores, Inc., a retail chain
store in the U.S.
Use the information from Boss’s annual financial statements. What is the difference
between the sustainable growth and actual growth rates for 2011?
A.- 11.40%
B.- 7.09%
C.-3.04%
D.5.47%
E.13.98%
4) A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend
payout ratio of 60 percent. The current profit margin is 7.5 percent and the firm uses no
external financing sources. What must the total asset turnover be?
A.0.98
B.1.06
C.1.21
D.1.44
E.1.59
5) Which one of the following is defined as the average compound return earned per
year over a multiyear period?
A.Geometric average return
B.Variance of returns
C.Standard deviation of returns
D.Arithmetic average return
E.Normal distribution of returns
6) The Chip Dip Co. has 15,500 shares of stock outstanding, grants one vote per share,
and uses straight voting. How many shares must you control to guarantee that you will
be elected to the firm’s board of directors if there are three open seats?
A.5,167 shares
B.5,134 shares
C.3,876 shares
D.7,751 shares
E.7,134 shares
7) You are developing a financial plan for a corporation. Which of the following
questions will be considered as you develop this plan?
I. How much will our sales grow?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained?
A.I and IV only
B.II and III only
C.I, III, and IV only
D.II, III, and IV only
E.I, II, III, and IV
8) Which one of the following is evidence of indebtedness?
A.Terms of sale
B.Credit cost curve
C.Credit instrument
D.Concentration policy
E.Credit policy
9) A bond yielded a real rate of return of 3.87 percent for a time period when the
inflation rate was 4.75 percent. What was the actual nominal rate of return?
A.8.58 percent
B.8.60 percent
C.8.80 percent
D.9.28 percent
E.9.36 percent
10) Which of the following will decrease the future value of a lump sum investment
made today assuming that all interest is reinvested? Assume the interest rate is a
positive value.
I. Increase in the interest rate
II. Decrease in the lump sum amount
III. Increase in the investment time period
IV. Decrease in the investment time period
A.I and III only
B.I and IV only
C.I, II, and III only
D.II and III only
E.II and IV only
11) Pro forma free cash flows for a proposed project should:
I. exclude the cost of employing existing assets that could be sold anyway.
II. exclude interest expense.
III. include the depreciation tax shield related to the project.
IV. exclude any required increase in operating current assets.
A.I and II only
B.II and III only
C.II and IV only
D.I, III, and IV only
E.I, II, III, and IV
12) When are funds generally transferred into zero-balance accounts?
A.Monthly
B.Weekly
C.Daily
D.As needed
E.Never
13) Richardson Marina has 18,000 shares of stock outstanding that were sold to the
general public last year. The firm has just decided to issue an additional 6,000 shares of
common stock and has also decided to make the shares available to the firm’s current
shareholders before making any offer of these shares to the general public. Which one
of the following terms best applies to this offer?
A.General cash offer
B.Rights offer
C.In-house offering
D.Private placement
E.Initial public offering
14) The addition of a risky security to a fully diversified portfolio:
A.must decrease the portfolio’s expected return
B.must increase the portfolio beta
C.may or may not affect the portfolio beta
D.will increase the unsystematic risk of the portfolio
E.will have no effect on the portfolio beta or its expected return
15) Law Dog, Inc. is a provider of temporary and permanent personnel in legal services.
The following are selected financial data for the company for the period 2000 – 2004.
Use Law Dog’s selected information to answer the following questions:
a. Calculate Law Dog’s sustainable growth rate in each year.
b. Comparing the company’s sustainable growth rate with its actual growth rate in sales,
what growth problems did the company face over this period?
c. Considering economic conditions over the period, what appears a likely cause of
these problems?
16) Which one of the following is the tax rate that applies to the next dollar of taxable
income that a firm earns?
A.Average tax rate
B.Variable tax rate
C.Marginal tax rate
D.Absolute tax rate
E.Contingent tax rate
17) Which one of the following is the graphical representation of the sum of the
carrying costs and the opportunity costs of a credit policy?
A.Accounts receivables aging
B.Economic credit function
C.Optimal credit curve
D.Credit analysis
E.Credit cost curve
18) A security produced returns of 13 percent, 18 percent, 9 percent, 23 percent, and -17
percent over the past five years, respectively. Based on these five years, what is the
probability that this stock will earn more than 24.76 percent in any one given year?
A.0.5 percent
B.1.0 percent
C.2.5 percent
D.5.0 percent
E.16.0 percent
19) Peterboro recently defaulted on a bank loan. To avoid a bankruptcy proceeding, the
bank agreed to a composition. This composition would do which one of the following?
A.Forgive the loan payment in its entirety
B.Extend the due date on the missed loan payment
C.Reduce the amount of the loan payments so Peterboro can pay timely
D.Transfer some of Peterboro’s assets to the bank in lieu of the loan payment
E.Transfer all the equity shares in Peterboro to the lending bank
20) Over the past 4 years, a stock produced returns of 23 percent, -39 percent, 4
percent, and 16 percent. Based on these 4 years, what range of returns would you
expect to see 99 percent of the time?
A.-82.39 percent to 84.39 percent
B.-82.39 percent to 86.41 percent
C.-82.39 percent to 88.56 percent
D.-78.46 percent to 86.41 percent
E.-78.46 percent to 84.39 percent
21) Which one of the following is the theory that a firm should borrow up to the point
where the additional tax benefit from an extra dollar of debt equals the additional costs
associated with financial distress from that additional debt?
A.M&M Proposition I, with taxes
B.M&M Proposition II, with taxes
C.M&M Proposition I, without taxes
D.Homemade leverage proposition
E.Static theory of capital structure
22) Paying interest reduces the taxes owed by a firm. Which one of the following terms
applies to this relationship?
A.Static theory of interest rates
B.M&M Proposition I
C.Financial risk
D.Interest tax shield
E.Homemade leverage
23) Which one of the following will decrease the liquidity level of a firm?
A.Cash purchase of inventory
B.Credit sale of inventory
C.Cash sale of inventory
D.Collection of an account receivable
E.Proceeds from a long-term loan
24) The required return on Mountain Meadow stock is 14 percent and the dividend
growth rate is 3.5 percent. The stock is currently selling for $11.80 a share. What is the
dividend yield?
A.7.50 percent
B.8.00 percent
C.9.75 percent
D.10.50 percent
E.12.50 percent
25) Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both
firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax
bracket. The operating cash flows for each firm are identical except for the depreciation
effects. Given this, you know the:
A.depreciation expense for Firm A will be greater than Firm B’s expense every year
B.equipment has a higher value on Firm B’s books than on Firm A’s at the end of year
two
C.operating cash flow of Firm A is less than that of Firm B for year two
D.market value of Firm A’s equipment is greater than the market value of Firm B’s
equipment
E.market value of Firm B’s equipment is greater than the market value of Firm A’s
equipment
26) Which one of the following refers to the relationship between nominal returns, real
returns, and inflation?
A.Call premium
B.Fisher effect
C.Conversion ratio
D.Bid-ask spread
E.Clean-dirty spread
27) Which of the following are viable techniques to cope with the uncertainty inherent
in realistic financial projections?
I. Simulation
II. Ad hoc adjustments
III. Scenario analysis
IV. Sensitivity analysis
A.II and IV only
B.III and IV only
C.II, III, and IV only
D.I, II, and III only
E.I, III, and IV only
28) A firm has multiple divisions of similar nature, yet varying degrees of risk. Which
one of the following would be the most appropriate, yet relatively easy, means of
assigning discount rates to each of its proposed investments?
A.Assign every project a rate equal to the firm’s cost of equity
B.Assign every firm a random rate that varies between the firm’s cost of debt and its
cost of equity
C.Assign every project a rate equal to the firm’s WACC plus or minus a subjective
adjustment
D.Determine the best pure play rate for each project
E.Assign every project a rate equal to the market rate of return at the time of the
proposal
29) The 1-year forward rate between the U.S. and Japan is 122.47 = $1. A 1-year
risk-free security in Japan is yielding 5.3 percent while it is 4.6 percent in the U.S.
Assume interest rate parity exists. What is the spot rate between the U.S. and Japan?
A.120.41
B.121.08
C.121.66
D.121.94
E.122.03
30) During the year, The Dalton Firm had sales of $3,210,000. Cost of goods sold,
administrative and selling expenses, and depreciation expenses were $2,540,000,
$389,000, and $112,000, respectively. In addition, the company had an interest expense
of $118,000 and a tax rate of 34 percent. (Ignore any tax loss carryback or carryforward
provisions). What is its operating cash flow?
A.$263,660
B.$271,420
C.$273,330
D.$285,400
E.$287,700
31) The 1-year forward rate for the Swiss franc is Sf1.1375 = $1. The spot rate is
Sf1.1426 = $1. The interest rate on a risk-free asset in Switzerland is 3.3 percent. If
interest rate parity exists, a 1 year risk-free security in the U.S. is yielding _____
percent.
A.2.28 percent
B.2.51 percent
C.2.98 percent
D.3.40 percent
E.3.76 percent
32) JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The
book value of its equity is $1,750,000. What is JM Case’s book value per share?
A.$3.50
B.$5
C.$10
D.$25
E.$50
F.None of the above
33) Hilltop Market is offering 60,000 shares of stock to the public in a general cash
offer. The offer price is $30 a share and the underwriter’s spread is 8 percent. The
administrative costs are estimated at $310,000. How much will Hilltop Market receive
from this stock offering assuming the issue is completely sold?
A.$1,370,800
B.$1,346,000
C.$1,490,000
D.$1,610,000
E.$1,800,000
34) Which of the following are means by which a firm can reduce its number of
outstanding shares?
I. open market purchase
II. rights offer
III. tender offer
IV. targeted repurchase
A.IV only
B.I and IV only
C.II, III, and IV only
D.I, III and IV only
E.I, II, III, and IV
35) Currently, you can exchange $100 for 75.42. The inflation rate in Euroland is
expected to be 3.8 percent as compared to 2.1 percent in the U.S. Assuming that relative
purchasing power parity exists, what should the exchange rate be 4 years from now?
A.0.7042/$1
B.0.7414/$1
C.0.7670/$1
D.0.7778/$1
E.0.8068/$1
36) One year ago, Neal purchased 3,600 shares of Franklin stock for $101,124. Today,
he sold those shares for $26.60 a share. What is the total return on this investment if the
dividend yield is 1.7 percent?
A.-4.21 percent
B.-3.60 percent
C.-2.29 percent
D.1.10 percent
E.2.42 percent
37) Fred is the owner of a local feed store. Which one of the following ratios should he
compute if he wants to know how long the store can pay its bills given the amount of
cash the store currently has?
A.Current ratio
B.Debt ratio
C.Cash coverage ratio
D.Quick ratio
E.Cash ratio