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
Answer:
Kelly decided to accept the risk and purchased a high growth stock. Her returns for the
past five years are 48 percent, 39 percent, -56 percent, 61 percent, and -24 percent,
respectively. What is the standard deviation of these returns?
A. 43.20 percent
B. 45.46 percent
C. 47.88 percent
D. 50.83 percent
E. 58.39 percent
Answer:
Which one of the following factors favors a high-dividend payout?
A. Low transaction costs on stock trades
B. Lower taxes on capital gains than on dividends
C. Tax deferment on capital gains, but not on dividend income
D. Flotation costs
E. Corporate shareholders
Answer:
Which one of the following states that the difference in interest rates between two
countries is equal to the percentage difference between the forward exchange rate and
the spot exchange rate?
A. Arbitrage equilibrium
B. Relative purchasing power parity
C. Absolute purchasing power parity
D. Interest rate parity
E. Cross-rate parity
Answer:
Which one of the following will decrease the net working capital of a firm?
A. Obtaining a three-year loan and using the proceeds to buy inventory
B. Collecting a payment from a credit customer
C. Obtaining a five-year loan to buy equipment
D. Selling inventory at a profit
E. Making a payment on a long-term debt
Answer:
Appalachian Bank offers you a $135,000, nine-year term loan at 7.5 percent annual
interest. What will your annual loan payment be?
A. $18,507.16
B. $19,229.08
C. $20,660.02
D. $20,889.20
E. $21,163.57
Answer:
Currently, you own 5.4 percent of the outstanding stock of Keiffer Industries. The firm
has decided to issue additional shares of stock and has given you the first option to
purchase 5.4 percent of those additional shares. Which one of the following will you be
participating in if you opt to purchase the shares you have been offered?
A. Rights offer
B. Red herring offer
C. Private placement
D. IPO
E. General cash offer
Answer:
Which one of the following statements related to the income statement is correct?
A. Depreciation has no effect on taxes.
B. Interest paid is a noncash item.
C. Taxable income must be a positive value.
D. Net income is distributed either to dividends or retained earnings.
E. Taxable income plus interest and depreciation equals earnings before interest and
taxes.
E. record both income and expenses as soon as the amount for each can be ascertained.
Answer:
Which of the following costs tend to rise when a firm switches to a flexible financial
policy from a restrictive financial policy?
I. restocking costs
II. lower prices to offset limited selection
III. storage costs
IV. current asset opportunity costs
A. I and II only
B. III and IV only
C. I, III, and IV only
D. I, II, and III only
E. II, III, and IV only
Answer:
Precision Cuts has a target debt-equity ratio of 0.55. Its cost of equity is 15.4 percent,
and its pretax cost of debt is 7.8 percent. If the tax rate is 32 percent, what is the
company’s WACC?
A. 10.20 percent
B. 10.72 percent
C. 10.91 percent
D. 11.28 percent
E. 11.82 percent
Answer:
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
Answer:
A stock is expected to return 13 percent in an economic boom, 10 percent in a normal
economy, and 3 percent in a recessionary economy. Which one of the following will
lower the overall expected rate of return on this stock?
A. An increase in the rate of return in a recessionary economy
B. An increase in the probability of an economic boom
C. A decrease in the probability of a recession occurring
D. A decrease in the probability of an economic boom
E. An increase in the rate of return for a normal economy
Answer:
The equity multiplier is equal to:
A. one plus the debt-equity ratio.
B. one plus the total asset turnover.
C. total debt divided by total equity.
D. total equity divided by total assets.
E. one divided by the total asset turnover.
Answer:
Which one of the following will affect the capital structure weights used to compute a
firm’s weighted average cost of capital?
A. Decrease in the book value of a firm’s equity
B. Decrease in a firm’s tax rate
C. Increase in the market value of the firm’s common stock
D. Increase in the market risk premium
E. Increase in the firm’s beta
Answer:
The aftertax cost of which of the following is affected by a change in a firm’s tax rate?
I. Preferred stock
II. Debt
III. Equity
IV. Capital
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
How is the stated value of a preferred stock utilized?
Answer:
What are some of the pros and cons of a JIT inventory management system?
Answer:
Explain how a zero coupon bond can create taxable income during a year in which the
bond pays no interest payments. Also, explain how the annual taxable amount can be
computed.
Answer:
Identify one primary strength and one primary weakness for each of the following
methods of investment analysis:
Net present value:
Strength:
Weakness:
Internal rate of return:
Strength:
Weakness:
Profitability index:
Strength:
Weakness:
Payback:
Strength:
Weakness:
Average accounting return:
Strength:
Weakness:
Answer:
Explain the difference between scenario analysis and sensitivity analysis and identify
the purpose of each.
Answer:
Explain the difference between a bid price and an asked price and also explain why the
prices are different.
Answer:
Identify the cash flows that occur between a firm and its shareholders and explain how
each of these cash flows affects the cash flow to stockholders.
Answer:
Identify four ways that you can use annuity computations in your everyday life.
Answer:
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 _________
Answer: