The Miller-Orr model:
A. recommends selling securities in an amount equal to (U* – C) when the cash balance
reaches L.
B. requires that marketable securities be sold whenever the cash balance falls below the
target level.
C. bases the optimal level of cash solely on the opportunity costs of holding cash.
D. supports the argument that the target cash balance declines as order costs increase.
E. advocates investing an amount described as (U* – C) in marketable securities when
the cash balance reaches U*.
Answer:
All else constant, which one of the following will increase a firm’s cost of equity if the
firm computes that cost using the security market line approach? Assume the firm
currently pays an annual dividend of $1 a share and has a beta of 1.2.
A. a reduction in the dividend amount
B. an increase in the dividend amount
C. a reduction in the market rate of return
D. a reduction in the firm’s beta
E. a reduction in the risk-free rate
Answer:
Small-company stocks, as the term is used in the textbook, are best defined as the:
A. 500 newest corporations in the U.S.
B. firms whose stock trades OTC.
C. smallest twenty percent of the firms listed on the NYSE.
D. smallest twenty-five percent of the firms listed on NASDAQ.
E. firms whose stock is listed on NASDAQ.
Answer:
Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in
December for an upcoming promotion. You would like to lock in your costs today
because you are concerned that corn prices might go up between now and December.
To hedge your risk exposure, you could purchase corn futures contracts today
effectively locking in a total settlement price of _____, based on the closing price
shown in the table below.
Futures:
Corn – 5,000 bu., U.S. cents per bu.
A. $163,800
B. $164,125
C. $174,238
D. $179,400
E. $183,463
Answer:
Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture
but wants to limit his liability to his initial investment and has no interest in the daily
operations. Sam will contribute his full efforts on a daily basis but has limited funds to
invest in the business. Alfredo will be involved as an active consultant and manager and
will also contribute funds. Sam and Alfredo are willing to accept liability for the firm’s
debts as they feel they have nothing to lose by doing so. All three individuals will share
in the firm’s profits and wish to keep the initial organizational costs of the business to a
minimum. Which form of business entity should these individuals adopt?
A. sole proprietorship
B. joint stock company
C. limited partnership
D. general partnership
E. corporation
Answer:
You find a certain stock that had returns of 4 percent, -5 percent, -15 percent, and 16
percent for four of the last five years. The average return of the stock for the 5-year
period was 13 percent. What is the standard deviation of the stock’s returns for the
five-year period?
A. 21.39 percent
B. 24.98 percent
C. 27.16 percent
D. 31.23 percent
E. 34.02 percent
Answer:
Blasco Industries is currently at full-capacity sales. Which one of the following is
limiting sales to this level?
A. net working capital
B. long-term debt
C. inventory
D. fixed assets
E. debt-equity ratio
Answer:
Which one of the following dates is used to determine the names of shareholders who
will receive a dividend payment?
A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date
Answer:
A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000
face value. The bond is currently quoted at 98.7. What is the clean price of this bond if
the next interest payment will occur 2 months from today?
A. $987.00
B. $994.50
C. $1,002.00
D. $1,011.25
E. $1,022.50
Answer:
Suppose the spot exchange rate for the Canadian dollar is C$1.28 and the six-month
forward rate is C$1.33. The U.S. dollar is selling at a _____ relative to the Canadian
dollar and the U.S. dollar is expected to _____ relative to the Canadian dollar.
A. discount; appreciate
B. discount; depreciate
C. premium; appreciate
D. premium; depreciate
E. premium; remain constant
Answer:
You just paid $750,000 for an annuity that will pay you and your heirs $42,000 a year
forever. What rate of return are you earning on this policy?
A. 4.85 percent
B. 5.10 percent
C. 5.35 percent
D. 5.60 percent
E. 5.85 percent
Answer:
Treasury bonds are:
A. issued by any governmental agency in the U.S.
B. issued only on the first day of each fiscal year by the U.S. Department of Treasury.
C. bonds that offer the best tax benefits of any bonds currently available.
D. generally issued as semi-annual coupon bonds.
E. totally risk-free.
Answer:
“Cat” bonds are primarily designed to help:
A. municipalities survive economic recessions.
B. corporations respond to overseas competition.
C. the federal government cope with huge deficits.
D. corporations recover from involuntary reorganizations.
E. insurance companies fund excessive claims.
Answer:
A leveraged lease is a:
A. lease where the lessee is the owner of the asset for tax purposes.
B. sale and leaseback arrangement.
C. type of operating lease.
D. lease paid with money borrowed by the lessee.
E. lease where the lessor borrows on a nonrecourse basis.
Answer:
An increase in which of the following will increase the value of a call?
I. time to expiration
II. underlying stock price
III. risk-free rate of return
IV. price volatility of the underlying stock
A. I and III only
B. II, III, and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Answer:
Which one of the following can a firm do if it effectively manages its financial risks?
A. eliminate all the risks faced by the firm
B. totally eliminate all financial risks
C. reduce the price volatility it faces
D. guarantee the firm’s financial success
E. avoid all long-term financial risks
Answer:
Which one of the following equals the operating cycle?
A. cash cycle plus accounts receivable period
B. inventory period plus the accounts receivable period
C. inventory period plus the accounts payable period
D. accounts payable period minus the cash cycle
E. accounts payable period plus the accounts receivable period
Answer:
You are evaluating a project which requires $230,000 in external financing. The
flotation cost of equity is 11.6 percent and the flotation cost of debt is 5.4 percent. What
is the initial cost of the project including the flotation costs if you maintain a
debt-equity ratio of 0.45?
A. $248,494
B. $249,021
C. $254,638
D. $255,551
E. $255,646
Answer:
The Green Fiddle is considering a project that will produce sales of $87,000 a year for
the next 4 years. The profit margin is estimated at 6 percent. The project will cost
$90,000 and will be depreciated straight-line to a book value of zero over the life of the
project. The firm has a required accounting return of 11 percent. This project should be
_____ because the AAR is _____ percent.
A. rejected; 10.03
B. rejected; 10.25
C. rejected; 11.60
D. accepted; 10.25
E. accepted; 11.60
Answer:
Corporate bylaws:
A. must be amended should a firm decide to increase the number of shares authorized.
B. cannot be amended once adopted.
C. define the name by which the firm will operate.
D. describe the intended life and purpose of the organization.
E. determine how a corporation regulates itself.
Answer:
Rachel’s has a $50,000 line of credit with Uptown Bank. The line of credit calls for an
interest rate of 8 percent and a compensating balance of 4 percent. The compensating
balance is based on the total amount borrowed and will be held in an interest-free
account. What is the effective annual interest rate if the firm borrows $35,000 for one
year?
A. 7.76 percent
B. 8.00 percent
C. 8.17 percent
D. 8.33 percent
E. 8.42 percent
Answer:
The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These
bonds fit the definition of which one of the following terms?
A. note
B. discounted
C. zero-coupon
D. callable
E. debenture
Answer:
To purchase shares in a rights offering, a shareholder generally just needs to:
A. pay the subscription amount in cash.
B. submit the required form along with the required number of rights.
C. pay the difference between the market price of the stock and the subscription price.
D. submit the required number of rights along with a payment for the underwriting fee.
E. submit the required number of rights along with the subscription price.
Answer:
Individuals who continually monitor the financial markets seeking mispriced securities:
A. earn excess profits over the long-term.
B. make the markets increasingly more efficient.
C. are never able to find a security that is temporarily mispriced.
D. are overwhelmingly successful in earning abnormal profits.
E. are always quite successful using only historical price information as their basis of
evaluation.
Answer:
Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at
any time over the next year. This arrangement is called a(n):
A. floor loan.
B. open loan.
C. compensating balance.
D. line of credit.
E. bank note.
Answer:
Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent,
and expected earnings before interest and taxes of $15,700. The company has $12,000
in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds
are selling at par value. What is the cost of equity?
A. 12.61 percent
B. 13.36 percent
C. 13.64 percent
D. 14.07 percent
E. 14.29 percent
Answer:
Calculate the standard deviation of the following rates of return:
A. 10.79 percent
B. 12.60 percent
C. 13.48 percent
D. 14.42 percent
E. 15.08 percent
Answer:
Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a
5.28 percent yield to maturity, and a face value of $1,000. The current rate of inflation
is 4.1 percent. What is the real rate of return on these bonds?
A. 0.86 percent
B. 0.90 percent
C. 1.04 percent
D. 1.13 percent
E. 1.19 percent
Answer:
Steve owns 3,000 shares of NOP, Inc. stock, which he purchased six years ago at a price
of $22 a share. Today, these shares are selling for $68 each. Assume the current tax laws
are such that Steve is subject to a tax rate of 25 percent on both his dividend income
and his capital gains. From Steve’s point of view, a stock repurchase today: (Ignore
costs)
A. is equivalent to a cash dividend in all respects.
B. is more desirable than a cash dividend in respect to taxes.
C. will result in the same tax liability as an equivalent cash dividend.
D. is more highly taxed than a cash dividend.
E. is totally unacceptable to him.
Answer:
Which of the following statements concerning bonds are correct?
I. Bonds provide tax benefits to issuers.
II. The risk of a firm financially failing increases when the firm issues bonds.
III. Most long-term bond issues are referred to as unfunded debt.
IV. All bonds are treated equally in a bankruptcy proceeding.
A. II and III only
B. I and II only
C. III and IV only
D. II and IV only
E. I, II, and III only
Answer:
The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B.
Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that:
A. stock A is riskier than stock B and both stocks are fairly priced.
B. stock A is less risky than stock B and both stocks are fairly priced.
C. either stock A is underpriced or stock B is overpriced or both.
D. either stock A is overpriced or stock B is underpriced or both.
E. both stock A and stock B are correctly priced since stock A is riskier than stock B.
Answer: