1) Which of the following is a true statement?
A.Sectors of the U.S. economy that tend to have quite variable income streams also
carry the highest D/E ratios
B.Sectors of the U.S. economy that tend to have quite variable income streams also
carry the lowest D/E ratios
C.Conglomerates tend to have high, unstable income streams
D.Utilities have variable income streams and carry low D/E ratios
2) What is the future value of $2000 deposited for one year earning 6% interest rate
annually?
A.$120
B.$2000
C.$2120
D.$4120
3) This is the idea that it does not matter whether a firm pays dividends or not as
derived from a Modigliani and Miller Theorem.
A.Dividend Indifference Theory
B.Dividend Irrelevance Theorem
C.Shareholder Maximization Theorem
D.Shareholder Rationalization Theorem
4) KADS, Inc. has spent $400,000 on research to develop a new computer game. The
firm is planning to spend $50,000 on a machine to produce the new game. Shipping and
installation costs of the machine will be capitalized and depreciated; they total $50,000.
The machine has an expected life of 3 years, a $75,000 estimated resale value, and falls
under the MACRS 5-Year class life. Revenue from the new game is expected to be
$500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 35
percent, an opportunity cost of capital of 15 percent, and it expects net working capital
to increase by $100,000 at the beginning of the project. What will the year 2 free cash
flow for this project be?
A.$206,200
B.$174,200
C.$194,200
D.$195,000
5) How long will it take for the purchasing power of $1 to be cut in half if inflation is
4%?
A.4.97 years
B.7.42 years
C.10.72 years
D.17.67 years
6) We accept projects with a positive NPV because it means that ____________.
A.We have recovered all our costs
B.We are creating wealth for shareholders
C.The project’s expected return exceeds the cost of capital
D.All of these
7) Suppose your firm is considering two independent projects with the cash flows
shown below. The required rate of return on projects of both of their risk class is 12
percent, and the maximum allowable payback and discounted payback statistic for the
projects are 2.5 and 3 years, respectively.
Use the discounted payback decision rule to evaluate these projects; which one(s)
should be accepted or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
8) Which of these are NOT basic approaches to minimizing the agency problem?
A.Just ignore the conflict of interest
B.Monitor managers’ actions
C.Align managers’ personal interest with those of the owners by making the managers
owners
D.All of these are basic approaches to minimizing the agency problem
9) The overall goal of the financial manager is to _________________.
A.Minimize total costs
B.Maximize net income
C.Maximize earnings per share
D.Maximize shareholder wealth
10) Which of the following indices best reflects the ten sectors of the economy?
A.Nasdaq Composite
B.Dow Jones Industrial Average
C.Standard & Poor’s 500
D.None of these
11) Stock Market Bubble If the Japanese stock market bubble peaked at 37,500, and
two and a half years later it had fallen to 25,900, what was the percentage decline?
A.-10.31%
B.-27.63%
C.-30.93%
D.-69.07%
12) Drawing, Inc. has sales of $860,000 and cost of goods sold of $450,000. The firm
had a beginning inventory of $50,000 and an ending inventory of $59,000. What is the
length of the days’ sales in inventory?
A.23.13 days
B.44.21 days
C.21.22 days
D.47.86 days
13) Which of the following is a money-market security, issued by large banks and
medium-to-large corporations, that matures in nine months or less?
A.banker’s paper
B.commercial paper
C.banker’s acceptance
D.commercial acceptance
14) People borrow money because they expect:
A.their purchases to give them the satisfaction in the future that compensates them for
the interest payments charged on the loan
B.the time value of money to apply only if they are saving money
C.interest rates to rise
D.that consumers don’t need to calculate the impact of interest on their purchases
15) A situation that arises when a firm’s equity is close to worthless, and equity holders
will prefer to invest in overly risky projects with a small chance of success rather than
simply paying debt holders their regularly schedule payments is referred to as
_____________________.
A.Separation principle
B.Underinvestment problem
C.Overinvestment problem
D.Passive capital structure management
16) PNB Cos. has sales of $250,000 and cost of goods sold of $120,000. The firm had a
beginning inventory of $19,000 and an ending inventory of $13,000. What is the length
of the days’ sales in inventory?
A.27.74 days
B.57.79 days
C.18.98 days
D.39.54 days
17) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using regression to estimate a trend?
A.$2,440,000
B.$2,500,000
C.$2,575,000
D.$2,600,000
18) Over the past decade, China has acquired hundreds of billions of U.S. dollars due to
the trade imbalance between the two countries. The Chinese government has used many
of these dollars to purchase Treasury bonds. What would be the effect if China suddenly
decided to sell the majority of these Treasury bonds and exchange the dollars for pesos?
A.The price of Treasury bonds would rise, the yield on the Treasury bonds would fall,
the dollar would weaken and the peso would strengthen
B.The price of Treasury bonds would rise, the yield on the Treasury bonds would fall,
the dollar would strengthen and the peso would weaken
C.The price of Treasury bonds would fall, the yield on the Treasury bonds would rise,
the dollar would weaken and the peso would strengthen
D.The price of Treasury bonds would fall, the yield on the Treasury bonds would fall,
the dollar would strengthen and the peso would weaken
19) AB Mining Company just commissioned a firm to identify if an unused portion of
their mine contains any silver or gold at a cost of $125,000. This is an example of a(n)
_______________.
A.Opportunity cost
B.Sunk cost
C.Incremental cash flow
D.Relevant cash flow
20) Investment Return MedTech Corp stock was $50.95 per share at the end of last
year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50.
If you owned 500 shares of MedTech, what was your percent return?
A.7.20%
B.8.83%
C.22.67%
D.23.55%
21) If Whole Foods grocery store buys Whole Wheat Bread, this would be an example
of a ___________.
A.Horizontal merger
B.Vertical merger
C.Market Extension merger
D.Conglomerate merger
22) A firm does not pay any dividends at this point in time. Which valuation method
should be used on this stock?
A.Residual Claimant Model
B.Variable Growth Model
C.P/E Ratio Model
D.Capital Gain Model
23) Which of the following statements is incorrect?
A.Preferred stock prices fluctuate with market interest rates and behave like corporate
bond prices
B.Common stock price changes with the value of the company’s underlying business
C.Preferred stockholders have higher precedence for payment in the event of firm
liquidation from bankruptcy
D.All of these statements are correct
24) Which of the following is the type of financial distress in which the return on a
firm’s assets is less than the firm’s cost of capital?
A.business failure
B.economic failure
C.technical insolvency
D.business extension
25) Which of the following statements is correct?
A.Most securities are offered on a best efforts underwriting
B.In a competitive sale, the bond-issuing firm invites bids from a number of
institutional buyers such as mutual funds and pension funds
C.In a negotiated sale, a single investment bank obtains the exclusive right to originate,
underwrite and distribute the new bonds though a one-on-one negotiation process
D.All of these statements are correct
26) Statement of Cash Flows Zoe’s Dog Biscuits, Inc. has net cash flows from operating
activities for the last year of $226 million. The income statement shows that net income
is $150 million and depreciation expense is $85 million. During the year, the change in
inventory on the balance sheet was an increase of $14 million, change in accrued wages
and taxes was an increase of $15 million and change in accounts payable was an
increase of $10 million. At the beginning of the year the balance of accounts receivable
was $45 million. What was the end of year balance for accounts receivable?
A.$20 million
B.$25 million
C.$45 million
D.$65 million
27) HiLo, Inc., doesn’t face any taxes and has $100 million in assets, currently financed
entirely with equity. Equity is worth $50 per share, and book value of equity is equal to
market value of equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the possible values of
EBIT and their associated probabilities as shown below:
The firm is considering switching to a 40 percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt. What will
be the level of expected EPS if they switch to the proposed capital structure?
A.$3.19
B.$3.94
C.$4.41
D.$5.67
28) Junk bonds are those bonds with a credit rating of _____________.
A.BB and lower
B.B and lower
C.BBB and lower
D.None of these
29) Forecasted sales drives all of the following except:
A.the amount of assets needed
B.the liabilities needed
C.the external funds needed
D.earnings per share on the annual report
30) The use of debt to increase an investment position.
A.behavioral finance
B.financial leverage
C.probability
D.stock market bubble
31) Yields of a Bond A 3.25 percent coupon municipal bond has 12 years left to
maturity and has a price quote of 98.75. The bond can be called in 5 years. The call
premium is one year of coupon payments. What is the bond’s taxable equivalent yield
for an investor in the 35 percent marginal tax bracket? (Assume interest payments are
paid semi-annually and a par value of $5,000.)
A.3.38%
B.5.00%
C.5.20%
D.10.12%
32) Your company doesn’t face any taxes and has $750 million in assets, currently
financed entirely with equity. Equity is worth $25 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 25-percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt in either
event. What will be the level of expected EPS if they switch to the proposed capital
structure?
A.$1.06
B.$1.17
C.$2.27
D.$2.28
33) The Wall Street Journal reports that the current rate on 5-year Treasury bonds is
6.45% and on 10-year Treasury bonds is 7.75%. Assume that the maturity risk premium
is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years
from today, E(5r5).
A.7.25%
B.8.12%
C.9.07%
D.10.16%
34) If you invested $1,000 in Disney and $5,000 in Oracle and the two companies
returned 15% and 18% respectively, what was your portfolio’s return?
A.15.5%
B.17.1%
C.16.2%
D.17.5%
35) GBH Inc. is planning on announcing a 7-for-3 stock split. The stock is currently
trading at $119 per share. Based on this information, what will be the new stock price?
A.$62.67
B.$51.00
C.$277.67
D.$39.17
36) Elle Mae Industries has a cash balance of $50,000; accounts payable of $150,000;
inventory of $190,000; accounts receivable of $250,000; notes payable of $210,000;
and accrued wages and taxes of $40,000. How much net working capital does the firm
need to fund?
A.$50,000
B.$90,000
C.$110,000
D.$130,000
37) What is the value in year 4 of a $9,000 cash flow made in year 13 if interest rates
are 7% in years 4 through 9 and increase to 11% after that?
A.$4,226.99
B.$4,472.06
C.$4,698.17
D.$4,716.52
38) The process of estimating expected future cash flows of a project using only the
relevant parts of the balance sheet and income statements is referred to as the
_________________.
A.Substitute and complement
B.Pro forma analysis
C.Incremental cash flows
D.Estimation and depreciation analysis
39) Suppose that a company’s equity is currently selling for $30 per share and that there
are 5 million shares outstanding. If the firm also has 20 thousand bonds outstanding,
which are selling at 98 percent of par ($1,000), what are the firm’s current capital
structure weights for equity and debt respectively?
A.50%, 50%
B.88.44%, 11.56%
C.99.60%, 0.40%
D.88.23%, 11.77%