An investment project provides cash flows of $1,190 per year for 10 years. If the initial
cost is $8,000, what is the payback period?
A. 3.36 years
B. 5.28 years
C. 6.72 years
D. 8.13 years
E. never
To convince investors to accept greater volatility, you must:
A. decrease the risk premium.
B. increase the risk premium.
C. decrease the real return.
D. decrease the risk-free rate.
The accounts receivable approach to credit policy supports the theory that:
A. a firm’s risk of offering credit to a new customer is limited to the variable cost of the
sold items.
B. the best credit policy is an all-cash policy.
C. the cost of offering credit to a new customer is the same as the cost of offering credit
to an existing customer.
D. foregoing cash discounts is a method of obtaining inexpensive short-term financing.
E. the default risk of a credit policy is the same as the default risk under an all cash-
policy if your customers remain the same.
The price of Time Squared Corp. stock will be either $80 or $95 at the end of the year.
Call options are available with one year to expiration. T-bills currently yield 6 percent
and the current price of Time Squared Corp. stock is $85. What is the value of a call
option if the exercise price is $75 per share?
A. $14.25
B. $15.06
C. $18.78
D. $24.25
E. $25.06
The internal rate of return is:
A. the discount rate that makes the net present value of a project equal to the initial cash
outlay.
B. equivalent to the discount rate that makes the net present value equal to one.
C. tedious to compute without the use of either a financial calculator or a computer.
D. highly dependent upon the current interest rates offered in the marketplace.
Major Manuscripts, Inc. is currently operating at maximum capacity. All costs, assets,
and current liabilities vary directly with sales. The tax rate and the dividend payout ratio
will remain constant. How much additional debt is required if no new equity is raised
and sales are projected to increase by 8 percent?
A. -$157
B. -$68
C. $241
D. $348
E. $367
A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent.
The capital intensity ratio is 1.2 and the debt-equity ratio is 0.64. What is the profit
margin?
A. 6.28 percent
B. 7.67 percent
C. 9.47 percent
D. 12.38 percent
E. 14.63 percent
Which one of the following terms is defined as dividends paid expressed as a
percentage of net income?
A. dividend retention ratio
B. dividend yield
C. dividend payout ratio
D. dividend portion
E. dividend section
On average, Furniture & More is able to sell its inventory in 27 days. The firm takes 87
days on average to pay for its purchases. On the other hand, its average customer pays
with a credit card which allows the firm to collect its receivables in 4 days. Given this
information, what is the length of operating cycle?
A. 31 days
B. 38 days
C. 45 days
D. 56 days
E. 62 days
As a bond’s time to maturity increases, the bond’s sensitivity to interest rate risk:
A. increases at an increasing rate.
B. increases at a decreasing rate.
C. increases at a constant rate.
D. decreases at an increasing rate.
Which one of the following statements currently applies to a NYSE broker?
A. owns a “seat” on the exchange
B. buys at the bid price
C. remains at his or her specified post
D. matches customer buy and sell orders
E. trades for his or her personal account
Which one of the following premiums is compensation for expected future inflation?
A. default risk
B. taxability
C. liquidity
D. inflation
E. interest rate risk
Outdoor Living needs $7.5 million to finance modifications to its production equipment
because the design of its all-season tents has changed dramatically. The underwriters
estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5
percent underwriting spread. This would be a firm commitment underwriting. The
estimated issue costs are $121,000. How many shares of stock will Outdoor Living
need to sell to finance this project?
A. 568,201 shares
B. 488,917 shares
C. 452,311 shares
D. 559,180 shares
E. 562,400 shares
Hanover Tech is currently an all equity firm that has 320,000 shares of stock
outstanding with a market price of $19 a share. The current cost of equity is 15.4
percent and the tax rate is 36 percent. The firm is considering adding $1.2 million of
debt with a coupon rate of 8 percent to its capital structure. The debt will be sold at par
value. What is the levered value of the equity?
A. $5.209 million
B. $5.312 million
C. $5.436 million
D. $6.512 million
E. $6.708 million
Cantor’s has been busy analyzing a new product. Thus far, management has determined
that an OCF of $218,200 will result in a zero net present value for the project, which is
the minimum requirement for project acceptance. The fixed costs are $329,000 and the
contribution margin per unit is $216.40. The company feels that it can realistically
capture 2.5 percent of the 110,000 unit market for this product. The tax rate is 34
percent and the required rate of return is 11 percent. Should the company develop the
new product? Why or why not?
A. Yes; The project’s expected IRR exceeds the required rate of return.
B. Yes; The expected level of sales exceeds the required level of production.
C. No; The required level of production exceeds the expected level of sales.
D. No; The IRR is less than the required rate of return.
E. No; The project will never payback on a discounted basis.
Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and
matures in 18.5 years. The bonds have a par value of $1,000 and a market price of
$964.20. Interest is paid semiannually. What is the yield to maturity?
A. 8.36 percent
B. 8.42 percent
C. 8.61 percent
D. 8.74 percent
E. 8.90 percent
Green Valley Farms is considering either leasing or buying some new farm equipment.
The lessor will charge $27,500 a year for a 5-year lease. The purchase price is
$136,000. The equipment has a 5-year life after which time it will be worthless. Green
Valley Farms uses straight-line depreciation, has a 32 percent tax rate, borrows money
at 10 percent, and has sufficient tax loss carryovers to offset any potential taxable
income the firm might have over the next five years. What is the net advantage to
leasing?
A. $20,574
B. $21,507
C. $22,638
D. $26,283
E. $31,753
Chemical Mines has 5,000 shareholders and is preparing to elect two new board
members.
You do not own enough shares to personally control the elections but are determined to
oust the current leadership. Likewise, no other single shareholder owns sufficient shares
to personally control the outcome of the election. Which one of the following is the
most likely outcome of this situation given that some shareholders are happy with the
existing management?
A. negotiated settlement where each side is granted control over one of the open seats
B. protracted legal battle over control of the board of directors
C. arbitrated settlement where the arbitrator determines who will be elected to the board
D. control of the board decided without your influence
E. proxy fight for control of the board
You’ve worked out a line of credit arrangement that allows you to borrow up to $50
million at any time. The interest rate is 0.5 percent per month. In addition, 5 percent of
the amount that you borrow must be deposited in a non-interest bearing account.
Assume your bank uses compound interest on its line of credit loans. What is the
effective annual interest rate on this lending arrangement?
A. 6.50 percent
B. 6.62 percent
C. 6.81 percent
D. 6.87 percent
E. 6.94 percent
How does accounts receivable affect the statement of cash flows for 2009?
A. a use of $4,218 of cash as an investment activity
B. a source of $807 of cash as an operating activity
C. a use of $4,218 of cash as a financing activity
D. a source of $807 of cash as an investment activity
E. a use of $807 of cash as an operating activity
Today, you purchased 100 shares of Lazy Z stock at a market price of $47 per share.
You also bought a one year, $45 put option on Lazy Z stock at a cost of $0.15 per share.
What is the maximum total amount you can lose on these purchases?
A. -$4,715
B. -$4,685
C. -$4,015
D. -$215
E. -$0
A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62
percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10
percent. What must the debt-equity ratio be if the firm wishes to keep that ratio
constant?
A. 0.05
B. 0.40
C. 0.55
D. 0.60
E. 0.95
Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The firm
has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.2 percent. What
debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of
capital?
A. 0.38
B. 0.44
C. 1.02
D. 2.25
E. 2.63
Which of the following statements are correct?
I. The usage of forward rates increases the short-run exposure to exchange rate risk.
II. Accounting translation gains and losses are recorded in the equity section of the
balance sheet.
III. The long-run exchange rate risk faced by an international firm can be reduced if a
firm borrows money in the foreign country where the firm has operations.
IV. Unexpected changes in economic conditions are classified as short-run exposure to
exchange rate risk.
A. I and III only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, III, and IV only
A firm has assets of $21.8 million and a 3-year, zero-coupon, risky bonds with a total
face value of $8.5 million. The bonds have a total current market value of $8.1 million.
How can the shareholders of this firm change these risky bonds into risk-free bonds?
A. purchase a call option with a 1-year life and a $8.1 million face value
B. purchase a call option with a 5-year life and a $8.5 million face value
C. purchase a put option with a 1-year life and a $21.8 million face value
D. purchase a put option with a 3-year life and a $8.1 million face value
E. purchase a put option with a 3-year life and an $8.5 million face value
Billingsley United declared a $0.20 a share dividend on Thursday, October 16. The
dividend will be paid on Monday, November 10 to shareholders of record on Friday,
October 31. Which one of the following is the ex-dividend date?
A. Tuesday, October 28
B. Wednesday, October 29
C. Thursday, October 30
D. Wednesday, November 5
E. Thursday, November 6
A convertible bond has a face value of $1,000 and a conversion price of $12.50. The
bond has a 6 percent coupon, pays interest semi-annually, and matures in 12 years.
Similar bonds are yielding 9 percent. The current price of the stock is $13.40 per share.
What is the straight bond value?
A. $782.57
B. $781.82
C. $827.74
D. $832.09
E. $843.47
Mountain Homes wishes to expand its facilities. The company currently has 7 million
shares outstanding and no debt. The stock sells for $55 per share, but the book value per
share is $43. The firm’s net income is currently $9.1 million. The new facility will cost
$30 million, and it will increase net income by $309,000. Assume the firm issues new
equity to fund this expansion while maintaining a constant price-earnings ratio. What
will be the EPS be after the new equity issue?
A. $1.25
B. $1.30
C. $1.35
D. $1.40
E. $1.45
Which one of the following statements is correct?
A. The capital gains yield is the annual rate of change in a stock’s price.
B. Preferred stocks have constant growth dividends.
C. A constant dividend stock cannot be valued using the dividend growth model.
D. The dividend growth model can be used to compute the current value of any stock.
E. An increase in the required return will decrease the capital gains yield.
Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary
to acquire 100 percent of the outstanding shares of Southern Fried Chicken. This
transaction is known as a:
A. proxy contest.
B. management buyout.
C. vertical acquisition.
D. leveraged buyout.
E. unfriendly takeover.
The most recent financial statements for Heng Co. are shown here:
Assets and costs are proportional to sales. The company maintains a constant 40 percent
dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in
sales that can be sustained next year assuming no new equity is issued?
A. $4,808.12
B. $5,211.17
C. $5,987.48
D. $6,493.74
E. $6,666.67
Which one of the following statements related to market crashes is correct?
A. Financial market crashes are unique to the United States.
B. A severe market decline tends to occur over a multi-day period.
C. Once the market finally crashed in 1929, stock prices began to slowly increase again.
D. The market crash of 1987 occurred on a day when trading volume was light
indicating there were a limited number of irrational investors involved.
E. Actions in Washington, D.C. may have helped contribute to the market crash in 1929
but not to the 1987 crash.
Steve owns an option which grants him the right to purchase shares of Lokier Tool
stock at a price of $45 a share. Currently, the stock is selling for $52.40 a share. Steve
would like to realize his profits but is not permitted to exercise the option for another
two weeks. Which one of the following does Steve own?
A. straight bond
B. American call
C. American put
D. European call
E. European put