A trader has just agreed to exchange $2 million U.S. dollars for $1.55 million Euros six
months from today. This exchange is an example of a:
A. spot trade.
B. forward trade.
C. currency swap.
D. floating swap.
E. triangle arbitrage.
Answer:
What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume
annual compounding.
A. $301,115
B. $306,492
C. $310,868
D. $342,908
E. $347,267
Answer:
Cross Country Trucking provides transportation services exclusively for four
customers. The average amount each customer pays per month along with the collection
delay associated with each payment is shown below. Given this information, what is the
weighted average delay? Assume each month has 30 days.
A. 2.11 days
B. 2.27 days
C. 2.46 days
D. 2.50 days
E. 2.78 days
Answer:
Assume you are an overconfident manager. You are most apt to do which one of the
following more so than you would if you were not overconfident?
A. research a project more thoroughly before committing funds to commence it
B. accept risky projects that turn out to be less profitable than you expected
C. wait until new technology proves its worth before incorporating it into your firm’s
operations
D. avoid mergers and acquisitions
E. invest excess company cash more conservatively than your peers at other firms
Answer:
Which one of the following statements is correct?
A. An aging schedule helps identify those customers who are the most delinquent.
B. The percentage of total receivables that falls within a certain time period on an aging
schedule will remain constant over time even if the firm has seasonal sales.
C. Normally firms call their delinquent customers prior to sending them a past due
letter.
D. A constant average collection period over a period of time is cause for concern.
E. It is common practice when a customer files for bankruptcy to sell that customer’s
receivable at face value.
Answer:
A general partner:
A. is personally responsible for all the partnership debts.
B. has no say over a firm’s daily operations.
C. faces double taxation whereas a limited partner does not.
D. has a maximum loss equal to his or her equity investment.
E. receives a salary in lieu of a portion of the profits.
Answer:
Which of the following have been offered as supporting arguments in favor of IPO
underpricing?
I. Underpricing counteracts the “winner’s curse”.
II. Underpricing rewards institutional investors for sharing their opinions of a stock’s
market value.
III. Underpricing diminishes the underwriting risk of a firm commitment underwriting.
IV. Underpricing reduces the probability that investors will sue the underwriters.
A. I and III only
B. II and IV only
C. I and II only
D. I, II, and III only
E. I, II, III, and IV
Answer:
The Sarbanes-Oxley Act of 2002 is a governmental response to:
A. decreasing corporate profits.
B. the terrorists attacks on 9/11/2001.
C. a weakening economy.
D. deregulation of the stock exchanges.
E. management greed and abuses.
Answer:
Juno Industrial Supply has a $150,000 line of credit with a 7.5 percent interest rate. The
loan agreement requires a 2 percent compensating balance, which is based on the total
amount borrowed, and which will be held in an interest-free account. What is the
effective interest rate if the firm borrows $90,000 on the line of credit for one year?
A. 5.42 percent
B. 5.50 percent
C. 7.30 percent
D. 7.50 percent
E. 7.65 percent
Answer:
You are a hard-charging manager who doesn’t really like to sit at a desk for too long.
You prefer to gather information quickly, make a decision, and move on to the next item
on your agenda. Which one of the following applies to you?
A. availability bias
B. arbitrage limits
C. law of small numbers
D. representativeness heuristic
E. regret aversion
Answer:
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:
A. permits creditors to file a prepack immediately after a firm files for bankruptcy
protection.
B. prevents creditors from submitting any reorganization plans.
C. prevents firms from filing for bankruptcy protection more than once.
D. permits key employee retention plans only if an employee has another job offer.
E. allows firms to pay bonuses to all key employees to entice those employees to
remain in the firm’s employ.
Answer:
Assume that Fake Stone, Inc. is operating at full capacity. Also assume that assets,
costs, and current liabilities vary directly with sales. The dividend payout ratio is
constant. What is the external financing need if sales increase by 12 percent?
A. -$318.09
B. -$268.49
C. $103.13
D. $350.40
E. $460.56
Answer:
An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year
life. It will have no salvage value. The corporate tax rate is 32 percent, and the cost of
borrowing is 8 percent. What lease payment amount will make the lessee and the lessor
equally well off?
A. $145,717.08
B. $154,141.11
C. $157,778.03
D. $162,795.34
E. $165,025.50
Answer:
The Sarbanes-Oxley Act of 2002 requires firms to report ESO grants within how many
days of the grant?
A. 2 calendar days
B. 2 business days
C. 7 calendar days
D. 30 business days
E. 45 calendar days
Answer:
Stephanie is going to contribute $300 on the first of each month, starting today, to her
retirement account. Her employer will provide a 50 percent match. In other words, her
employer will contribute 50 percent of the amount Stephanie saves. If both Stephanie
and her employer continue to do this and she can earn a monthly rate of 0.90 percent,
how much will she have in her retirement account 35 years from now?
A. $1,936,264
B. $1,943,286
C. $1,989,312
D. $2,068,418
E. $2,123,007
Answer:
Spencer Tools would like to offer a special product to its best customers. However, the
firm wants to limit its maximum potential loss on this product to the firm’s initial
investment in the project. The fixed costs are estimated at $21,000, the depreciation
expense is $11,000, and the contribution margin per unit is $12.50. What is the
minimum number of units the firm should pre-sell to ensure its potential loss does not
exceed the desired level?
A. 1,220 units
B. 1,680 units
C. 2,215 units
D. 2,560 units
E. 2,750 units
Answer:
Which one of the following is an example of a sunk cost?
A. $1,500 of lost sales because an item was out of stock
B. $1,200 paid to repair a machine last year
C. $20,000 project that must be forfeited if another project is accepted
D. $4,500 reduction in current shoe sales if a store commences selling sandals
E. $1,800 increase in comic book sales if a store commences selling puzzles
Answer:
Which one of the following statements is correct?
A. Project analysis should only include the cash flows that affect the income statement.
B. A project can create a positive operating cash flow without affecting sales.
C. The depreciation tax shield creates a cash outflow for a project.
D. Interest expense should always be included as a cash outflow when analyzing a
project.
E. The opportunity cost of a company-owned building that is going to be used in a new
project should be included as a cash inflow to the project.
Answer:
A firm has total assets of $310,100 and net fixed assets of $168,500. The average daily
operating costs are $2,980. What is the value of the interval measure?
A. 31.47 days
B. 47.52 days
C. 56.22 days
D. 68.05 days
E. 104.62 days
Answer:
At the accounting break-even point, Swiss Mountain Gear sells 14,600 ski masks at a
price of $12 each. At this level of production, the depreciation is $58,000 and the
variable cost per unit is $4. What is the amount of the fixed costs at this production
level?
A. $58,800
B. $59,400
C. $61,300
D. $87,600
E. $145,600
Answer:
Renew It, Inc., is preparing to pay its first dividend. It is going to pay $0.45, $0.60, and
$1 a share over the next three years, respectively. After that, the company has stated that
the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you
per share if you demand a 10.8 percent rate of return on stocks of this type?
A. $6.67
B. $8.21
C. $10.14
D. $11.47
E. $12.03
Answer:
Wexford Industrial Supply is considering a new project with estimated depreciation of
$26,000, fixed costs of $79,000, and total sales of $187,000. The variable costs per unit
are estimated at $11.80. What is the accounting break-even level of production?
A. 4,871 units
B. 5,333 units
C. 5,415 units
D. 6,949 units
E. 7,248 units
Answer:
The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1 per
share and a market value of $8 per share. The balance sheet shows $10,000 in the
common stock account, $60,000 in the capital in excess of par account, and $94,300 in
the retained earnings account. The firm just announced a 100 percent stock dividend.
What will be the value of the common stock account after the dividend?
A. $5,000
B. $10,000
C. $11,000
D. $15,000
E. $20,000
Answer:
Kaiser Industries has bonds on the market making annual payments, with 14 years to
maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is
the coupon rate?
A. 8.00 percent
B. 8.50 percent
C. 9.00 percent
D. 10.50 percent
E. 12.00 percent
Answer:
On average, your firm sells $38,700 of items on credit each day. The firm’s average
operating cycle is 49 days and it acquires and sells inventory, on average, every 17
days. What is the average accounts receivable balance?
A. $657,900
B. $848,000
C. $1,238,400
D. $1,315,500
E. $1,896,300
Answer:
Which one of the following measures the amount of systematic risk present in a
particular risky asset relative to the systematic risk present in an average risky asset?
A. beta
B. reward-to-risk ratio
C. risk ratio
D. standard deviation
E. price-earnings ratio
Answer:
What is the change in the net working capital from 2010 to 2011?
A. -$1,194
B. $1,306
C. $1,887
D. $4,780
E. $5,172
Answer:
An increase in which of the following will increase the accounting break-even quantity?
Assume straight-line depreciation is used.
I. annual salary for the firm’s president
II. contribution margin per unit
III. cost of equipment required by a project
IV. variable cost per unit
A. I and III only
B. I and IV only
C. II and III only
D. I, III, and IV only
E. I, II, and IV only
Answer:
The bonds issued by Stainless Tubs bear an 8 percent coupon, payable semiannually.
The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell
for $952. What is the yield to maturity?
A. 7.87 percent
B. 7.92 percent
C. 8.08 percent
D. 8.69 percent
E. 9.20 percent
Answer:
Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do
something to acknowledge the loyalty of the shareholders but needs all of its available
cash to fund the firm’s rapid growth. The market price of the stock is currently trading
at the upper end of its preferred trading range. The firm is most apt to consider which
one of the following in this situation?
A. liquidating dividend
B. stock split
C. reverse stock split
D. small stock dividend
E. special cash dividend
Answer:
Smith & Daughters is getting ready to compile pro forma statements for the next few
years. How can the managers establish a reasonable range of growth rates that they
should consider during this planning process?
Answer:
Using the dividend growth model, explain why a firm would be hesitant to reduce the
growth rate of its dividends.
Answer:
Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30. The retail
chain consistently takes the 2 percent discount and pays in 60 days. When pressed on
the issue, the retail chain tells the suppliers they can either accept the payments as they
currently are or lose the business. Is this ethical? How might this impact a small
supplier versus a large supplier? Explain.
Answer:
Assume a firm has a positive cash balance which is increasing annually. Why then is it
important to analyze a statement of cash flows?
Answer:
Based on the M & M propositions with and without taxes, how much time should a
financial manager spend analyzing the capital structure of a firm? What if the analysis
is based on the static theory?
Answer:
Circle Stores stock is priced at $28 a share. A $40 call on this stock has five months
until expiration and a call price of $0.15. Why would an investor purchase a call that is
so far out of the money?
Answer:
Kelley wants to purchase shares in Classic Kars, Inc., but is torn between buying shares
of common stock or shares of preferred stock. What should he consider before
determining the type of share he should purchase?
Answer:
Explain the difference between systematic and unsystematic risk. Also explain why one
of these types of risks is rewarded with a risk premium while the other type is not.
Answer:
What lesson does the future value formula provide for young workers who are looking
ahead to retiring some day?
Answer:
Suppose your boss comes to you and asks you to re-evaluate a capital budgeting
project. The first evaluation was in error, he explains, because it ignored flotation costs.
To correct for this, he asks you to evaluate the project using a higher cost of capital
which incorporates these costs. Is your boss’ approach correct? Why or why not?
Answer:
As long as a firm maintains a positive cash balance, why is it essential to review the
firm’s cash flows?
Answer:
In a single sentence, explain how you can determine which cash flows should be
included in the analysis of a project.
Answer:
According to CAPM, the expected return on a risky asset depends on three components.
Describe each component and explain its role in determining expected return.
Answer:
Identify the five variables that affect the value of an American put option and indicate
how an increase in each of the variables will affect the value of the put. Also indicate
the common name, if any, given to each variable.
Answer:
A portfolio beta is a weighted average of the betas of the individual securities which
comprise the portfolio. However, the standard deviation is not a weighted average of the
standard deviations of the individual securities which comprise the portfolio. Explain
why this difference exists.
Answer:
Why are so many businesses structured as sole proprietorships when the corporate form
of business offers more advantages?
Answer:
How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial
intent of that Act?
Answer: