The items included in an indenture that limit certain actions of the issuer in order to
protect bondholder's interests are referred to as the:
A. trustee relationships.
B. bylaws.
C. legal bounds.
D. "plain vanilla" conditions.
E. protective covenants.
Which of the following shareholders tend to favor a high dividend policy?
I. retired individuals
II. endowment funds
III. corporate investors
IV. investors with high dividend tax rates but low capital gains tax rates
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Fancy Footwear has a line of credit with a local bank in the amount of $80,000. The
loan agreement calls for interest of 7 percent with a compensating balance of 5 percent,
which is based on the total amount borrowed. The compensating balance will be
deposited into an interest-free account. What is the effective interest rate on the loan if
the firm needs to borrow $75,000 for one year to cover operating expenses?
A. 7.37 percent
B. 7.43 percent
C. 7.56 percent
D. 8.17 percent
E. 8.33 percent
Blasco's has a market value equal to its book value. Currently, the firm has excess cash
of $1,332, other assets of $11,674, and equity of $7,200. The firm has 600 shares of
stock outstanding and net income of $838. Blasco's has decided to spend one-third of its
excess cash on a share repurchase program. How many shares of stock will be
outstanding after the stock repurchase is completed?
A. 537 shares
B. 550 shares
C. 563 shares
D. 578 shares
E. 584 shares
The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63 percent of
sales. The beginning accounts receivable balance is $41,000 and the ending accounts
receivable balance is $38,000. How long on average does it take the firm to collect its
receivables?
A. 17.26 days
B. 17.78 days
C. 18.58 days
D. 20.44 days
E. 29.77 days
The owner of one of the 1,366 trading licenses for the NYSE is called a:
A. broker.
B. member.
C. agent.
D. specialist.
E. dealer.
What is the primary purpose of credit analysis?
A. determine the optimal credit period
B. establish the effectiveness of granting a cash discount
C. determine the optimal discount period, if any
D. access the frequency and amount of sales by customer
E. evaluate whether or not a customer will pay
Miller Bros. Hardware is operating at full capacity with a sales level of $689,700 and
fixed assets of $468,000. The profit margin is 7 percent. What is the required addition
to fixed assets if sales are to increase by 10 percent?
A. $3,276
B. $4,680
C. $28,400
D. $32,760
E. $46,800
Which one of the following is probably the most successful means of finding venture
capital?
A. internet searches
B. Dutch auctions
C. newspaper advertisements
D. personal contacts
E. personal letters to venture capital firms
Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000
shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual
bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per
share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and
the bonds have 17 years to maturity and sell for 91 percent of par. The market risk
premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm's tax rate is 32
percent. What discount rate should the firm apply to a new project's cash flows if the
project has the same risk as the firm's typical project?
A. 14.59 percent
B. 14.72 percent
C. 15.17 percent
D. 15.54 percent
E. 16.41 percent
In the Black-Scholes option pricing formula, N(d1) is the probability that a
standardized, normally distributed random variable is:
A. less than or equal to N(d2).
B. less than one.
C. equal to one.
D. equal to d1.
E. less than or equal to d1.
Mr. Black has agreed to a currency exchange with Mr. White. The parties have agreed
to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now.
This agreed-upon exchange rate is called the:
A. spot rate.
B. swap rate.
C. forward rate.
D. parity rate.
Which one of the following statements is correct concerning zero-balance accounts?
A. Each zero-balance account is offset by a compensating balance account.
B. Zero-balance accounts are used for depositing incoming funds.
C. A master account must be used in conjunction with a zero-balance account.
D. Zero-balance accounts are used solely in conjunction with a lockbox system.
E. Zero-balance accounts are still required to maintain a minimal balance.
Coulter Supply has a total debt ratio of 0.47. What is the equity multiplier?
A. 0.89
B. 1.13
C. 1.47
D. 1.89
E. 2.13
The market risk premium is computed by:
A. adding the risk-free rate of return to the inflation rate.
B. adding the risk-free rate of return to the market rate of return.
C. subtracting the risk-free rate of return from the inflation rate.
D. subtracting the risk-free rate of return from the market rate of return.
E. multiplying the risk-free rate of return by a beta of 1.0.
Efficient financial markets fluctuate continuously because:
A. the markets are continually reacting to old information as that information is
absorbed.
B. the markets are continually reacting to new information.
C. arbitrage trading is limited.
D. current trading systems require human intervention.
E. investments produce varying levels of net present values.
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
Assume the average vehicle selling price in the United States last year was $41,996.
The average price 9 years earlier was $29,000. What was the annual increase in the
selling price over this time period?
A. 3.89 percent
B. 4.20 percent
C. 4.56 percent
D. 5.01 percent
E. 5.40 percent
Which of the following represent cash outflows from a corporation?
I. issuance of securities
II. payment of dividends
III. new loan proceeds
IV. payment of government taxes
A. I and III only
B. II and IV only
C. I and IV only
D. I, II, and IV only
E. II, III, and IV only
Which of the following statements are identified with financial break-even point?
I. The present value of the cash inflows exactly offsets the initial cash outflow.
II. The payback period is equal to the life of the project.
III. The NPV is zero.
IV. The discounted payback period equals the life of the project.
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. I, III, and IV only
Fourteen years ago, your parents set aside $7,500 to help fund your college education.
Today, that fund is valued at $26,180. What rate of interest is being earned on this
account?
A. 7.99 percent
B. 8.36 percent
C. 8.51 percent
D. 9.34 percent
E. 10.06 percent
A stock repurchase program:
A. requires all shareholders to sell a fraction of their shares.
B. is preferred over a high-dividend program only by tax-exempt shareholders.
C. decreases both the number of shares outstanding and the market price per share.
D. has no effect on a firm's financial statements.
E. is essentially the same as a cash dividend program provided there are no taxes or
other costs.
Which one of the following names matches the country where the bond is issued?
A. Empire: United Kingdom
B. Western: United States
C. Samurai: China
D. Bulldog: France
E. Rembrandt: Netherlands
Jungle, Inc. has a target debt-equity ratio of 0.72. Its WACC is 11.5 percent and the tax
rate is 34 percent. What is the cost of equity if the aftertax cost of debt is 5.5 percent?
A. 13.75 percent
B. 13.84 percent
C. 14.41 percent
D. 14.79 percent
E. 15.82 percent
Flotation costs for a levered firm should:
A. be ignored when analyzing a project because they are not an actual project cost.
B. be spread over the life of a project thereby reducing the cash flows for each year of
the project.
C. only be considered when two projects are mutually exclusive.
D. be weighted and included in the initial cash flow.
E. be totally ignored when internal equity funding is utilized.
Metal Designs, Inc., historically produced products for inventory. Now, the firm only
produces a product when it receives an actual order from a customer. All else equal, this
change will:
A. increase the operating cycle.
B. lengthen the accounts receivable period.
C. shorten the accounts payable period.
D. decrease the cash cycle.
Suppose you observe the following situation:
Assume these securities are correctly priced. Based on the CAPM, what is the return on
the market?
A. 13.99 percent
B. 14.42 percent
C. 14.67 percent
D. 14.78 percent
E. 15.01 percent
The absolute priority rule determines:
A. when a firm must be declared officially bankrupt.
B. how a distressed firm is reorganized.
C. which judge is assigned to a particular bankruptcy case.
D. how long a reorganized firm is allowed to remain under bankruptcy protection.
E. which parties receive payment first in a bankruptcy proceeding.
The equivalent annual cost method is useful in determining:
A. which one of two machines to purchase if the machines are mutually exclusive, have
differing lives, and are a one-time purchase.
B. the tax shield benefits of depreciation given the purchase of new assets for a project.
C. the operating cash flows of a cost-cutting project.
D. which one of two investments to accept when the investments have different
required rates of return.
E. which one of two machines should be purchased when the machines are mutually
exclusive, have different machine lives, and will be replaced once they are worn out.
Which one of the following is a means by which shareholders can replace company
management?
A. stock options
B. promotion
C. Sarbanes-Oxley Act
D. agency play
E. proxy fight
Workout Together has projected the following sales for the coming year:
Sales in the year following this one are projected to be 18 percent greater in each
quarter. Assume the firm places orders during each quarter equal to 29 percent of
projected sales for the next quarter. How much will the firm pay to its suppliers in
Quarter 2 if its accounts payable period is 60 days?
A. $212.67
B. $224.33
C. $241.67
D. $251.33
E. $256.67
Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is
$225,000 and the market value of the firm's debt is $109,000. The firm has 20,000
shares of stock outstanding and a book value per share of $2.09. What is the market to
book ratio?
A. 2.56 times
B. 3.18 times
C. 3.54 times
D. 4.01 times
E. 4.20 times
Lamont Corp. uses no debt. The weighted average cost of capital is 11 percent. The
current market value of the equity is $38 million and there are no taxes. What is EBIT?
A. $3,423,000
B. $3,508,600
C. $3,781,100
D. $3,898,700
E. $4,180,000
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value
that matures in one year. The current market value of the firm's assets is $10,600. The
standard deviation of the return on the firm's assets is 40 percent per year, and the
annual risk-free rate is 7 percent per year, compounded continuously. What is the
market value of the firm's debt based on the Black-Scholes model? (Round your answer
to the nearest $100.)
A. $6,415.30
B. $6,900
C. $8,300
D. $8,800
E. $9,200
A deferred call provision is which one of the following?
A. requirement that a bond issuer pay the current market price, plus accrued interest,
should the firm decide to call a bond
B. ability of a bond issuer to delay repaying a bond until after the maturity date should
the issuer so opt
C. prohibition placed on an issuer which prevents that issuer from ever redeeming
bonds prior to maturity
D. prohibition which prevents bond issuers from redeeming callable bonds prior to a
specified date
E. requirement that a bond issuer pay a call premium which is equal to or greater than
one year's coupon should that issuer decide to call a bond
