If a bank loan officer were considering a company’s loan request, which of the
following statements would you consider to be CORRECT?
a.The lower the company’s inventory turnover ratio, other things held constant, the
lower the interest rate the bank would charge the firm.
b.Other things held constant, the higher the days sales outstanding ratio, the lower the
interest rate the bank would charge.
c.Other things held constant, the lower the total debt to total capital ratio, the lower the
interest rate the bank would charge.
d.The lower the company’s TIE ratio, other things held constant, the lower the interest
rate the bank would charge.
e.Other things held constant, the lower the current ratio, the lower the interest rate the
bank would charge the firm.
The use of financial leverage by the firm has a potential impact on which of the
following?
(1)The risk associated with the firm.
(2)The return experienced by the shareholder.
(3)The variability of net income.
(4)The degree of operating leverage.
(5)The degree of financial leverage.
a.1, 3, 5
b.1, 2, 5
c.2, 3, 5
d.2, 3, 4, 5
e.1, 2, 3, 5
Monroe Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its
variable costs are approximately 30% of sales, and its fixed costs amount to 50% of
revenues at its current output level. Although fixed costs are based on revenues at the
current output level, the cost level is fixed. What is Marcus’s degree of operating
leverage in sales dollars?
a.3.1588
b.3.3250
c.3.5000
d.3.6750
e.3.8588
Which of the following statements is CORRECT?
a.The beta of a portfolio of stocks is always smaller than the betas of any of the
individual stocks.
b.If you found a stock with a zero historical beta and held it as the only stock in your
portfolio, you would by definition have a riskless portfolio.
c.The beta coefficient of a stock is normally found by regressing past returns on a stock
against past market returns. One could also construct a scatter diagram of returns on the
stock versus those on the market, estimate the slope of the line of best fit, and use it as
beta. However, this historical beta may differ from the beta that exists in the future.
d.The beta of a portfolio of stocks is always larger than the betas of any of the
individual stocks.
e.It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta
of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free
(default-free) rate of return, rRF.
The value of a stock option depends on all of the following EXCEPT:
a.Exercise price.
b.Variability of the stock price.
c.Length of time until option expiration.
d.Risk-free rate of interest.
e.Bond price.
An investor who “writes” a call option against stock held in his or her portfolio is
selling a(n)
a.Straddle option.
b.Put option.
c.Out-of-the-money option.
d.Naked option.
e.Covered option.
Tuttle Enterprises is considering a project that has the following cash flow and WACC
data. What is the project’s NPV? Note that if a project’s projected NPV is negative, it
should be rejected.
a.$77.49
b.$81.56
c.$85.86
d.$90.15
e.$94.66
McGwire Company’s pension fund projects that most of its employees will take
advantage of an early retirement program the company plans to offer in 5 years.
Anticipating the need to fund these pensions, the firm bought zero coupon U.S.
Treasury Trust Certificates maturing in 5 years. When these instruments were originally
issued, they were 12% coupon, 30-year U.S. Treasury bonds. The stripped Treasuries
are currently priced to yield 10%. Their total maturity value is $6,000,000. What is their
total cost (price) to McGwire today?
a.$3,366,714
b.$3,453,040
c.$3,541,580
d.$3,632,390
e.$3,725,528
Consider the following balance sheet, for Games Inc. Because Games has $800,000 of
retained earnings, we know that the company would be able to pay cash to buy an asset
with a cost of $200,000.
a.True
b.False
The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the
market risk premium, rM – rRF, is positive. Which of the following statements is
CORRECT?
a.If the risk-free rate increases but the market risk premium stays unchanged, Stock B’s
required return will increase by more than Stock A’s.
b.Stock B’s required rate of return is twice that of Stock A.
c.If Stock A’s required return is 11%, then the market risk premium is 5%.
d.If Stock B’s required return is 11%, then the market risk premium is 5%.
e.If the risk-free rate remains constant but the market risk premium increases, Stock A’s
required return will increase by more than Stock B’s.