1) Donegal’s Industrial Products wishes to maintain a growth rate of 6 percent a year, a
debt-equity ratio of 0.45, and a dividend payout ratio of 30 percent. The ratio of total
assets to sales is constant at 1.25 . What profit margin must the firm achieve?
A.4.68 percent
B.5.29 percent
C.6.33 percent
D.6.97 percent
E.8.19 percent
2) The average accounting return:
A.measures profitability rather than cash flow
B.discounts all values to today’s dollars
C.is expressed as a percentage of an investment’s current market value
D.will equal the required return when the net present value equals zero
E.is used more often by CFOs than the internal rate of return
3) Which one of the following statements is correct?
A.Firms should generally finance all of their assets with long-term debt
B.Firms that follow restrictive financial policies can generally avoid short-term debt
financing
C.Short-term borrowing is generally more expensive than long-term borrowing
D.Long-term interest rates tend to be more volatile than short-term rates
E.A firm is less apt to face financial distress if it adopts a flexible financial policy rather
than a restrictive policy
4) You purchased an item costing $5,900 on April 15 . The terms of sale were 1/5, net
20 . What is the last day you can pay the discounted price?
A.April 20
B.April 22
C.April 28
D.May 2
E.May 5
5) The market rate of return is 14.8 percent and the risk-free rate is 4.45 percent. Galaxy
Co. has 54 percent more systematic risk than the overall market and has a dividend
growth rate of 5.5 percent. The firm’s stock is currently selling for $39 a share and has a
dividend yield of 3.6 percent. What is the firm’s cost of equity?
A.14.84 percent
B.15.31 percent
C.15.82 percent
D.16.28 percent
E.20.39 percent
6) Which one of the following methods of analysis ignores cash flows?
A.Profitability index
B.Net present value
C.Average accounting return
D.Modified internal rate of return
E.Internal rate of return
7) Which one of the following is the positive square root of the variance?
A.Standard deviation
B.Mean
C.Risk-free rate
D.Average return
E.Real return
8) Which one of the following relates to a negative change in net working capital?
A.Increase in the inventory level
B.Sale of net fixed assets
C.Purchase of net fixed assets
D.Increase in current assets and decrease in current liabilities for the period
E.Increase in current liabilities with no change in current assets for the period
9) Which one of the following best defines the term collection policy?
A.Process of determining which customers will be granted credit
B.Process of determining the probability that customers will not pay
C.Set of guidelines used by a firm to determine the cost of offering credit to its
customers
D.Daily process of handling cash inflows and outflows of cash
E.Set of procedures a firm follows in collecting accounts receivable
10) Which one of the following is a correct statement, all else held constant?
A.The present value is inversely related to the future value
B.The future value is inversely related to the period of time
C.The period of time is directly related to the interest rate
D.The present value is directly related to the interest rate
E.The future value is directly related to the interest rate
11) Diversifying a portfolio across various sectors and industries might do more than
one of the following. However, this diversification must do which one of the following?
A.Increase the expected risk premium
B.Reduce the beta of the portfolio to zero
C.Increase the security’s risk premium
D.Reduce the portfolio’s systematic risk level
E.Reduce the portfolio’s unique risks
12) Consider the following financial statement information for Kirkwood United.
Assume all sales are on credit. How long is the cash cycle?
A.28.21 days
B.33.25 days
C.51.03 days
D.51.58 days
E.53.57 days
13) Twelve days ago, DOG, Inc. declared a dividend of $1.34 a share. The ex-dividend
date is tomorrow. All else constant, which one of the following is the best estimate of
DOG, Inc.’s opening stock price tomorrow?
A.$1.34 lower than today’s closing price
B.Today’s closing price minus an amount approximately equal to the aftertax value of
the dividend
C.The same as today’s closing price since the dividend is expected
D.$1.34 higher than today’s closing price
E.Today’s closing price plus an amount approximately equal to the aftertax value of the
dividend
14) USA Manufacturing issued 30-year, 8.5 percent semiannual bonds 6 years ago. The
bonds currently sell at 101 percent of face value. What is the firm’s aftertax cost of debt
if the tax rate is 30 percent?
A.5.88 percent
B.5.62 percent
C.5.76 percent
D.6.59 percent
E.8.40 percent
15) The $1,000 face value bonds of Shonesy International have a 7.5 percent coupon
and pay interest annually. Currently, the bonds are quoted at 95.27 and mature in 3.5
years. What is the yield to maturity?
A.7.88 percent
B.8.02 percent
C.8.18 percent
D.8.79 percent
E.9.14 percent
16) Soft and Cuddly is considering a new toy that will produce the following cash
flows. Should the company produce this toy if the firm requires a 15 percent rate of
return?
A.Yes, because the project’s rate of return is 10.21 percent
B.Yes, because the project’s rate of return is 11.47 percent
C.No, because the project’s rate of return is 10.21 percent
D.No, because the project’s rate of return is 11.47 percent
E.No, because the internal rate of return is zero percent
17) Which one of the following is the quoted price of a bond?
A.Par value
B.Discount price
C.Face value
D.Dirty price
E.Clean price
18) Five years ago, you purchased 600 shares of stock. The annual returns have been
7.2 percent, -19.4 percent, 3.8 percent, 14.2 percent, and 27.9 percent, respectively.
What is the variance of these returns?
A.0.029889
B.0.030021
C.0.030068
D.0.030133
E.0.030284
19) There are two open seats on the board of directors. If two separate votes occur to
elect the new directors, the firm is using a type of voting that is best described as _____
voting.
A.simultaneous
B.straight
C.proxy
D.cumulative
E.sequential
20) A firm has total assets of $523,100, current assets of $186,500, current liabilities of
$141,000, and total debt of $215,000. What is the debt-equity ratio?
A.0.48
B.0.70
C.1.10
D.1.43
E.2.13
21) You want to save $200 a month for the next 24 years and hope to earn an average
rate of return of 11 percent. How much more will you have at the end of the 24 years if
you invest your money at the beginning of each month rather than the end of each
month?
A.$1,611.29
B.$1,807.70
C.$2,238.87
D.$2,569.14
E.$2,707.27
22) Which one of the following statements is correct?
A.Shareholders’ equity is the residual value of a firm
B.Net working capital must be a positive value
C.An increase in cash reduces the liquidity of a firm
D.Equipment is generally considered a highly liquid asset
E.Depreciation increases total assets
23) Which one of the following is a general characteristic of a securities broker?
A.Trades from his or her own inventory
B.Trades only foreign securities
C.Trades listed securities in an auction market
D.Trades electronically from any geographic location
E.Is the principal trader of debt securities
24) Which one of the following had the lowest standard deviation of returns for the
period of 1926-2011?
A.U.S. Treasury bill
B.Inflation
C.Long-term corporate bonds
D.Large-company stocks
E.Long-term government bonds
25) Which one of the following is most commonly used in international trades?
A.Sight draft
B.Time draft
C.Commercial paper
D.Banker’s acceptance
E.Open account
26) Which one of the following is directly related to increases in a firm’s current assets?
A.Reorder costs
B.Shortage costs
C.Restocking costs
D.Out-of-stock events
E.Carrying costs
27) Assume you are comparing two firms that are identical in every aspect, except one
is levered and one is unlevered. Which one of the following statements is correct
regarding these two firms?
A.The levered firm has higher EPS (earnings per share) than the unlevered firm at the
break-even point
B.The levered firm will have higher EPS than the unlevered firm at all levels of EBIT
C.The unlevered firm will have higher EPS than the levered firm at relatively high
levels of EBIT
D.The EPS for the unlevered firm will always exceed those of the levered firm
E.The unlevered firm will have higher EPS at relatively low levels of EBIT
28) The market value of a firm’s fixed assets:
A.must exceed the book value of those assets
B.is more predictable than the book value of those assets
C.in addition to the firm’s net working capital reflects the true value of a firm
D.is decreased annually by the depreciation expense
E.is equal to the estimated current cash value of those assets
29) Explain the difference between computing the value of a zero growth
dividend-paying stock and computing the value of a constant growth dividend-paying
stock.
30) Identify the relationship (direct or inverse) between each of the following pairs of
variables as they relate to the time value of money: (Assume all else constant)
Present value and future value _________
Present value and interest rate _________
Present value and time _________
Time and interest rate _________
Time and future value _________
Interest rate and future value _________
31) Explain how a firm can structure its operations such that it creates its own internal
hedge to long-run exposure to exchange rate risk.
32) Explain what a mortgage-backed security (MBS) is and how it functions. Also,
explain why these securities were such a problem during 2008 .
33) There are regulations that prohibit “insider trading,” which is the use of nonpublic
information about a security to earn abnormal profits from trading that security. Which
form of market efficiency would make these laws unnecessary? Explain why.