1) Shoe Box Stores is currently an all-equity firm with 28,000 shares of stock
outstanding. Management is considering changing the capital structure to 40 percent
debt. The interest rate on the debt would be 9 percent. Ignore taxes. Jamie owns 400
shares of Shoe Box Stores stock that is priced at $17 a share. What should Jamie do if
she prefers the all-equity structure but Shoe Box Stores adopts the new capital
structure?
A.Borrow money and buy an additional 160 shares
B.Borrow money and buy an additional 180 shares
C.Keep her shares but loan out all of the dividend income at 9 percent
D.Sell 160 shares and loan out the proceeds at 9 percent
E.Sell 180 shares and loan out the proceeds at 9 percent
2) A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500,
and finally in year 4, $4,000. The profitability index is 1.14 and the discount rate is 12
percent. What is the initial cost of the project?
A.$7,899.16
B.$8,098.24
C.$8,166.19
D.$9,211.06
E.$9,250.00
3) Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has
a beta of 0.68 and an expected return of 7.6 percent. You want a portfolio with the same
risk as the market. What is the expected return of your portfolio?
A.10.67 percent
B.11.18 percent
C.11.62 percent
D.12.04 percent
E.13.13 percent
4) Which one of the following represents additional compensation provided to
bondholders to offset the possibility that the bond issuer might not pay the interest
and/or principal payments as expected?
A.Interest rate risk premium
B.Inflation premium
C.Liquidity premium
D.Taxability premium
E.Default risk premium
5) Which of the following are important factors to consider when seeking a venture
capitalist?
I. Exit strategy
II. Management style
III. Personal contacts
IV. Financial strength
A.I and III only
B.II and IV only
C.III and IV only
D.II, III, and IV only
E.I, II, III, and IV
6) Which one of the following is the pretax cost of debt?
A.Average coupon rate on the firm’s outstanding bonds
B.Coupon rate on the firm’s latest bond issue
C.Weighted average yield to maturity on the firm’s outstanding debt
D.Average current yield on the firm’s outstanding debt
E.Annual interest divided by the market price per bond for the latest bond issue
7) Which one of the following is most apt to delay the collection of cash?
A.Having customers mail checks to a local lockbox rather than the home office
B.Depositing checks throughout the day
C.Posting payments to accounts receivable prior to making deposits
D.Collecting mail twice daily
E.Supplying customers with bar coded payment slips
8) Which one of the following is the graphical representation of the sum of the carrying
costs and the opportunity costs of a credit policy?
A.Accounts receivable aging
B.Economic credit function
C.Optimal credit curve
D.Credit analysis
E.Credit cost curve
9) Travis is buying a car and will finance it with a loan that requires monthly payments
of $265 for the next four years. His car payments can be described by which one of the
following terms?
A.Perpetuity
B.Annuity
C.Consol
D.Lump sum
E.Factor
10) Generally speaking, which of the following situations will occur if a seasonal
company adopts a compromise financial policy?
I. periods where short-term financing is required
II less long-term debt than if the firm followed a restrictive financial policy
III. periods of excess funds which can be invested in short-term marketable securities
IV. lower investment in fixed assets than if the firm adopted a flexible financial policy
A.I only
B.II only
C.I and III only
D.II and IV only
E.I, III, and IV only
11) Harvest generally receives three checks a month in the amounts of $46,500,
$32,000, and $63,800. On average, it takes two days for the funds from these checks to
be added to the firm’s available balance at the bank once they have been deposited.
What is the amount of the average daily float?
A.$4,743
B.$9,487
C.$14,209
D.$21,506
E.$56,750
12) The spot rate on the Norwegian kroner is 6.689 . The exchange rate one year from
now is expected to be 6.745 assuming that relative interest rate parity exists. Interest
rates in Norway are 3.7 percent. What is the interest rate in the U.S.?
A.2.86 percent
B.3.02 percent
C.3.59 percent
D.4.54 percent
E.4.68 percent
13) What is the probability associated with a return that lies in the upper tail when the
mean plus two standard deviations is graphed?
A.0.05 percent
B.0.5 percent
C.1.0 percent
D.2.5 percent
E.5.0 percent
14) A security produced returns of 13 percent, 18 percent, 9 percent, 23 percent, and -17
percent over the past five years, respectively. Based on these five years, what is the
probability that this stock will earn more than 24.76 percent in any one given year?
A.0.5 percent
B.1.0 percent
C.2.5 percent
D.5.0 percent
E.16.0 percent
15) The Fruit Mart is an all-equity firm with a current cost of equity of 19.6 percent.
The estimated earnings before interest and taxes are $315,000 annually forever.
Currently, the firm has no debt but is in the process of borrowing $400,000 at 9.5
percent interest. The tax rate is 33 percent. What is the value of the unlevered firm?
A.$849,207
B.$853,571
C.$856,411
D.$1,019,307
E.$1,076,786
16) Which one of the following methods of analysis has the greatest bias toward
short-term projects?
A.Net present value
B.Internal rate of return
C.Average accounting return
D.Profitability index
E.Payback
17) Kate owns a stock with a market price of $31 per share. This stock pays a constant
annual dividend of $0.60 per share. If the price of the stock suddenly increases to $36 a
share, you would expect the:
I. dividend yield to increase.
II. dividend yield to decrease.
III. capital gains yield to increase.
IV. capital gains yield to decrease.
A.I only
B.II only
C.III only
D.I and III only
E.II and IV only
18) The Black Horse is currently considering a project that will produce cash inflows of
$12,000 a year for three years followed by $6,500 in year 4 . The cost of the project is
$38,000. What is the profitability index if the discount rate is 7 percent?
A.0.96
B.0.99
C.1.04
D.1.09
E.1.12
19) Suppose the spot exchange rate for the Hungarian forint is HUF 238 . Interest rates
in the United States are 4.1 percent per year. They are 3.6 percent in Hungary. What do
you predict the exchange rate will be in three years?
A.HUF 234.45
B.HUF 236.90
C.HUF 241.59
D.HUF 236.81
E.HUF 239.19
20) Appalachian Bank offers you a $135,000, nine-year term loan at 7.5 percent annual
interest. What will your annual loan payment be?
A.$18,507.16
B.$19,229.08
C.$20,660.02
D.$20,889.20
E.$21,163.57
21) Taunton’s is an all-equity firm that has 150,000 shares of stock outstanding. Neal,
the financial vice president, is considering borrowing $220,000 at 8.25 percent interest
to repurchase 20,000 shares. Ignoring taxes, what is the value of the firm?
A.$1,260,000
B.$1,400,000
C.$1,485,000
D.$1,520,000
E.$1,650,000
22) Kelso’s Pharmacy generates $2 in sales for every $1 the firm has invested in total
assets. Which one of the following ratios would reflect this relationship?
A.Receivables turnover
B.Equity multiplier
C.Profit margin
D.Return on assets
E.Total asset turnover
23) Which one of the following correctly defines a common chain of command within a
corporation?
A.The controller reports directly to the corporate treasurer
B.The treasurer reports directly to the board of directors
C.The chief financial officer reports directly to the board of directors
D.The credit manager reports directly to the controller
E.The controller reports directly to the chief financial officer
24) You own a stock that has an expected return of 16.00 percent and a beta of 1.33 .
The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent.
What is the expected rate of return on the market?
A.12.07 percent
B.12.94 percent
C.13.64 percent
D.14.09 percent
E.14.42 percent
25) Farm Equipment, Inc. announced this morning that its next annual dividend will be
decreased to $1.80 a share and that all future dividends will be decreased by an
additional 1.5 percent annually. What is the current value per share of this stock if the
required return is 16.5 percent?
A.$8
B.$10
C.$12
D.$14
E.$16
26) Which one of the following is the annuity present value formula?
A.C {{1 – [1/(1 + r)t]}/r}
B.C {1 – [1/(1 + r)t]} – r
C.C {1 – [r/(1 + r)t]}/r
D.C {{1 – [1/(1 r)t]} r}
E.C {1 – [r/(1 r)t]} r
27) Explain the differences between total risk, unsystematic risk, and systematic risk.
Identify which risk is measured by standard deviation and which is measured by beta.
28) The Sausage Hut is looking at a new sausage system with an installed cost of
$438,000. This cost will be depreciated straight-line to zero over the project’s four-year
life, at the end of which the sausage system can be scrapped for $69,000. The sausage
system will save the firm $129,000 per year in pretax operating costs, and the system
requires an initial investment in net working capital of $29,000, which will be recouped
at project end. If the tax rate is 35 percent and the discount rate is 9 percent, what is the
NPV of this project?
A.-$18,870
B.-$6,320
C.$2,560
D.$14,410
E.$26,880
29) Rocky Top pays a constant annual dividend. One year ago, when you purchased
shares of that stock at $12 a share, the dividend yield was 2 percent. Over this past year,
the inflation rate has been 2.6 percent. Today, the required return on this stock is 9
percent and you just sold all of your shares. What is your total nominal return on this
investment? Round your answer to the nearest whole percentage.
A.-77 percent
B.-75 percent
C.-76 percent
D.70 percent
E.76 percent