Westover Industries has 60,000 shares outstanding. Each share has one attached
warrant. A warrant holder can purchase one new share of stock for five warrants plus $5
per warrant. The stock is currently selling for $27 per share. All else held constant, what
will the stock price be if all of the warrants are exercised?
A. $26.38
B. $26.67
C. $25.00
D. $27.00
E. $26.50
Answer:
Last year, Alfred’s Automotive had a price-earnings ratio of 15 and earnings per share
of $1.20. This year, the price earnings ratio is 18 and the earnings per share is $1.20.
Based on this information, it can be stated with certainty that:
A. the price per share decreased.
B. the earnings per share decreased.
C. investors are paying a lower price per share this year as compared to last year.
D. investors are receiving a higher rate of return this year.
E. the investors’ outlook for the firm has improved.
Answer:
Which one of these parties holds a marketable claim on a firm’s assets?
A. customers
B. employees
C. bondholders
D. Internal Revenue Service
E. state tax authorities
Answer:
A grant of authority allowing someone else to vote shares of stock that you own is
called:
A. a power-of-share authorization.
B. a proxy.
C. a share authority grant (SAG).
D. a restricted conveyance.
E. a general right of execution.
Answer:
A firm has a pretax cost of debt of 7.35 percent and an unlevered cost of capital of 12.8
percent. The tax rate is 34 percent and the levered cost of equity is 15.07 percent. What
is the debt-equity ratio?
A. .67
B. .49
C. .51
D. .54
E. .63
Answer:
A _____ is a derivative security that gives the owner the right, but not the obligation, to
buy an asset at a fixed price for a specified period of time.
A. futures contract
B. call option
C. put option
D. swap
E. forward contract
Answer:
Estimating the rate of return for any portfolio lying on the security market line requires
which of the following?
A. market rate of return and the portfolio beta
B. market rate of return, market beta, and the risk-free rate
C. risk-free rate, factor beta, and the industry beta
D. factor beta and the market risk premium
E. portfolio beta, the risk-free rate, and the market risk premium
Answer:
A small craft store located in a kiosk expects to generate annual cash flows of $6,800
for the next three years. At the end of the three years, the business is expected to be sold
for $15,000. What is the value of this business at a discount rate of 15 percent?
A. $30,100.07
B. $29,408.27
C. $25,388.67
D. $17,409.09
E. $19,477.67
Answer:
A proposed project has estimated sale units of 2,500, give or take 2 percent.. The
expected variable cost per unit is $6.79 and the expected fixed costs are $17,500. Cost
estimates are considered accurate within a plus or minus 3 percent range. The
depreciation expense is $2,850. The sale price is estimated at $15.40 a unit, give or take
3 percent. The company bases its sensitivity analysis on the expected case scenario. If a
sensitivity analysis is conducted using a variable cost estimate of $7, what will be the
total annual variable costs?
A. $17,850
B. $17,500
C. $16,625
D. $18,125
E. $20,750
Answer:
Suppose that General Motors makes an offer to acquire General Mills. Ignoring
potential antitrust problems, this merger would be classified as a:
A. monopolistic merger.
B. horizontal merger.
C. vertical merger.
D. conglomerate merger.
E. equity carve-out merger.
Answer:
When analyzing the decision to change the cash discount policy, the firm should select
the policy that has the:
A. highest order size.
B. lowest variable cost.
C. lowest NPV.
D. highest NPV.
E. lowest cash discount.
Answer:
Subsidized financing ________ the APV ___________.
A. has no impact on; as the lower interest rate is offset by the lower discount rate
B. decreases; by decreasing the NPV of the loan
C. increases; by increasing the NPV of the loan
D. has no impact on; as the interest tax deduction is not allowed for subsidized loans
E. increases; because subsidies offset all tax payments.
Answer:
Triangle arbitrage can occur when the _____ rate between two currencies is not _____
to the ratio of the two direct rates.
A. cross; equal
B. spot; equal
C. cross; less than
D. spot; less than
E. cross; greater than
Answer:
The economy has a 10 percent chance of booming, 60 percent chance of being normal,
and 30 percent chance of going into a recession. A stock is expected to return 16 percent
in a boom, 11 percent in a normal, and lose 8 percent in a recession. What is the
standard deviation of the returns?
A. 5.80%
B. 7.34%
C. 8.38%
D. 9.15%
E. 9.87%
Answer:
A firm has 12,000 shares of stock outstanding, sales of $638,100, a profit margin of 8.2
percent, a tax rate of 35 percent, a price-earnings ratio of 11.3, and a book value per
share of $7.98. What is the market-to-book ratio?
A. 6.08
B. 5.42
C. 5.16
D. 6.17
E. 6.90
Answer:
Which one of the following statements is correct?
A. An increase in the initial fixed assets required by a project will increase the
accounting profit break-even point.
B. If a firm needs to lower the break-even points it should lower the sales price.
C. The NPV is zero at the accounting break-even point.
D. An increase in the tax rate will increase the accounting break-even point.
E. Depreciating project assets over a shorter time period will decrease the accounting
break-even point.
Answer:
A convertible bond is selling for $1,222.70. It has 10 years to maturity, a $1,000 face
value, a coupon rate of 10 percent, and semiannual interest payments. Similar
non-convertible bonds are priced to yield 8 percent. The conversion ratio is 40. The
stock currently sells for $30.13 a share. Calculate the convertible bond’s option value.
A. $8.68
B. $22.70
C. $13.59
D. $17.50
E. $86.80
Answer:
The sustainable growth rate will be equivalent to the internal growth rate when, and
only when,:
A. a firm has no debt.
B. the growth rate is positive.
C. the plowback ratio is positive but less than 1.
D. a firm has a debt-equity ratio equal to 1.
E. the retention ratio is equal to 1.
Answer:
The primary purpose of portfolio diversification is to:
A. increase returns and risks.
B. eliminate all risks.
C. eliminate asset-specific risk.
D. eliminate systematic risk.
E. lower both returns and risks.
Answer:
The relationship between nominal rates, real rates, and inflation is known as the:
A. Miller and Modigliani theorem.
B. Fisher effect.
C. Gordon growth model.
D. term structure of interest rates.
E. interest rate risk premium.
Answer:
The ability of shareholders to undo the dividend policy of the firm and create an
alternative dividend payment policy via reinvesting dividends or selling shares of stock
is referred to as:
A. the perfect foresight model.
B. MM Proposition I.
C. capital structure irrelevancy.
D. homemade leverage.
E. homemade dividends.
Answer:
According to the capital asset pricing model, the expected return on a security is:
A. negatively and non-linearly related to the security’s beta.
B. negatively and linearly related to the security’s beta.
C. positively and linearly related to the security’s variance.
D. positively and non-linearly related to the security’s beta.
E. positively and linearly related to the security’s beta.
Answer:
The projections for a new project show sales of 8,500 units, give or take 5 percent. The
expected variable cost per unit is $28.62 and the expected fixed cost is $164,000. The
fixed and variable cost estimates are considered accurate within a plus or minus 3
percent range. The depreciation expense is $62,000 and the tax rate is 35 percent. The
sale price is estimated at $55 a unit, give or take 2 percent. The company bases its
sensitivity analysis on the expected case scenario. What is the operating cash flow for a
sensitivity analysis using total fixed costs of $170,000?
A. $62,406.67
B. $58,219.90
C. $61,311.07
D. $56,949.50
E. $52,048.80
Answer:
The amount that investors are willing to pay for each dollar of annual earnings is
reflected in the:
A. return on assets.
B. return on equity.
C. debt-equity ratio.
D. price-earnings ratio.
E. DuPont identity.
Answer:
Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16. The
bond has a coupon rate of 6.2 percent, semiannual interest payments, and the next
interest payment occurs one month from today.Of the amount paid for the bond, what
was the dollar amount of the accrued interest?
A. $25.83
B. $5.17
C. $31.00
D. $27.39
E. $6.20
Answer:
Which one of the following assets is generally the most liquid?
A.inventory
B.buildings
C.accounts receivable
D.equipment
E.patents
Answer:
An increase in which one of the following will cause the operating cash flow to increase
for a profitable firm?
A.depreciation
B.changes in the amount of net fixed capital
C.net working capital
D.taxes
E.administrative expenses
Answer:
Bruno’s is analyzing two machines to determine which one it should purchase. The
company requires a rate of return of 14 percent and uses straight-line depreciation to a
zero book value. Machine A has a cost of $290,000, annual operating costs of $8,000,
and a 3-year life. Machine B costs $180,000, has annual operating costs of $12,000, and
has a 2-year life. Whichever machine is purchased will be replaced at the end of its
useful life. Which machine should Bruno’s purchase and why?
A. Machine A; because it will save the company about $8,600 a year
B. Machine A; because it will save the company about $132,912 a year
C. Machine B; because it will save the company about $200,000 a year
D. Machine B; because it will save the company about $11,600 a year
E. Machine B; because its equivalent annual cost is $199,759
Answer:
Anna is reviewing a new 5-year project with expected sales of 3,400 units, give or take
8 percent. The expected variable cost per unit is $22 and the expected fixed costs are
$47,500. Cost estimates are considered accurate within a plus or minus 2 percent range.
The depreciation expense is $17,800. The sale price is estimated at $45 a unit, give or
take 3 percent. The project initially requires $165,000 of fixed assets and $42,000 of net
working capital. At The end of the project, the networking capital will be recouped and
the fixed assets will produce an aftertax cash inflow of $35,000. The tax rate is 35
percent and the discount rate is 14 percent. What is the net present value of the
best-case scenario?
A. −$48,026.15
B. −$48,799.24
C. −$46,365.79
D. $41,202.98
E. $38,566.01
Answer:
Alpha Companies has an operating cycle of 328 days, a receivables period of 64 days,
and a payables period of 98 days. If the firm revises its credit policy it believes it can
reduce its receivable period by 9 days. Given this revision, what will be the firm’s new
cash cycle?
A. 239 days
B. 241 days
C. 230 days
D. 221 days
E. 218 days
Answer:
A firm with high operating leverage has:
A. low fixed costs in its production process.
B. high variable costs in its production process.
C. high fixed costs in its production process.
D. high costs per unit.
E. low costs per unit.
Answer:
The Retail Outlet has 6,000 shares of stock outstanding and the current market value of
the firm is $429,000. The company just announced a 2-for-1 stock split. What will be
the market price per share after the split?
A. $35.75
B. $40.50
C. $80.50
D. $71.50
E. $50.25
Answer: