Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.7119. The
expected inflation rate in Norway is 4 percent and in the U.S. 3 percent. A risk-free
asset in the U.S. is yielding 4.5 percent. What approximate real rate of return should
you expect on a risk-free Norwegian security?
A. 1.0 percent
B. 1.5 percent
C. 2.0 percent
D. 2.5 percent
E. 3.0 percent
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
A project has an initial cost of $27,400 and a market value of $32,600. What is the
difference between these two values called?
A. net present value
B. internal return
C. payback value
D. profitability index
E. discounted payback
Bi-Lo Traders is considering a project that will produce sales of $28,000 and increase
cash expenses by $17,500. If the project is implemented, taxes will increase by $3,000.
The additional depreciation expense will be $1,600. An initial cash outlay of $1,400 is
required for net working capital. What is the amount of the operating cash flow using
the top-down approach?
A. $4,500
B. $5,900
C. $6,100
D. $7,500
E. $8,900
A securities market primarily comprised of dealers who buy and sell for their own
inventories is referred to which type of market?
A. auction
B. private
C. over-the-counter
D. regional
E. electronic network
In 1895, the winner of a competition was paid $110. In 2006, the winner’s prize was
$70,000. What will the winner’s prize be in 2040 if the prize continues increasing at the
same rate?
A. $389,400
B. $421,122
C. $479,311
D. $505,697
E. $548,121
The preferred stock of Rail Lines, Inc., pays an annual dividend of $7.50 and sells for
$59.70 a share. What is the rate of return on this security?
A. 10.38 percent
B. 11.63 percent
C. 12.56 percent
D. 12.72 percent
E. 12.84 percent
Up until three years ago, A.C. Dime opened an average of ten new retail stores a year.
One of those stores had to be closed within two years due to poor sales. This 90 percent
success ratio was fairly steady for over 30 years. Starting three years ago, the firm has
opened 40 new stores and every one had significant profits within 6 months.
Management believes their recent success is not just a random event and that all future
stores will be profitable. Thus, the managers have decided to open a minimum of 15
new stores each year. The managers are suffering from:
A. arbitrage limitations.
B. anchoring and adjustment.
C. aversion to ambiguity.
D. the clustering illusion.
E. myopic aversion.
The Green Paddle has a cost of equity of 13.73 percent and a pre-tax cost of debt of 7.6
percent. The debt-equity ratio is 0.65 and the tax rate is 32 percent. What is Green
Paddle’s unlevered cost of capital?
A. 11.85 percent
B. 12.78 percent
C. 14.29 percent
D. 14.46 percent
E. 15.08 percent
The Beach House has sales of $784,000 and a profit margin of 11 percent. The annual
depreciation expense is $14,000. What is the amount of the operating cash flow if the
company has no long-term debt?
A. $68,760
B. $72,240
C. $86,240
D. $100,240
E. $101,760
You just received an insurance settlement offer related to an accident you had six years
ago. The offer gives you a choice of one of the following three offers:
You can earn 7.5 percent on your investments. You do not care if you personally receive
the funds or if they are paid to your heirs should you die within the settlement period.
Which one of the following statements is correct given this information?
A. Option A is the best choice as it provides the largest monthly payment.
B. Option B is the best choice because it pays the largest total amount.
C. Option C is the best choice because it is has the largest current value.
D. Option B is the best choice because you will receive the most payments.
E. You are indifferent to the three options as they are all equal in value.
Who owns the NYSE?
A. NYSE members
B. specialists
C. dealers
D. floor brokers
E. shareholders
Down Bedding has an unlevered cost of capital of 13 percent, a cost of debt of 7.8
percent, and a tax rate of 32 percent. What is the target debt-equity ratio if the targeted
cost of equity is 15.51 percent?
A. .63
B. .68
C. .71
D. .76
E. .84
Costs that increase as a firm acquires additional current assets are called _____ costs.
A. carrying
B. shortage
C. order
D. safety
E. trading
R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a
share. Next year’s annual dividend is expected to be $1.55 a share. The dividend growth
rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000
per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in
7.5 years. The bonds are selling at 98 percent of face value. The company’s tax rate is
34 percent. What is the firm’s weighted average cost of capital?
A. 5.4 percent
B. 6.2 percent
C. 7.5 percent
D. 8.5 percent
E. 9.6 percent
Which one of the following correctly describes the dividend yield?
A. next year’s annual dividend divided by today’s stock price
B. this year’s annual dividend divided by today’s stock price
C. this year’s annual dividend divided by next year’s expected stock price
D. next year’s annual dividend divided by this year’s annual dividend
E. the increase in next year’s dividend over this year’s dividend divided by this year’s
dividend
You are depositing $1,500 in a retirement account today and expect to earn an average
return of 7.5 percent on this money. How much additional income will you earn if you
leave the money invested for 45 years instead of just 40 years?
A. $10,723.08
B. $11,790.90
C. $12,441.56
D. $12,908.19
E. $13,590.93
The length of time a firm must wait to recoup, in present value terms, the money it has
in invested in a project is referred to as the:
A. net present value period.
B. internal return period.
C. payback period.
D. discounted profitability period.
E. discounted payback period.
One of the best selling items L.T. Ten offers sells for $9.99 a unit. The variable cost per
unit is $6.38 and the carrying cost per unit is $1.12. The firm sells 7,100 of these units
each year. The fixed cost to order this item is $75. What is the economic order quantity?
A. 690 units
B. 747 units
C. 975 units
D. 1,157 units
E. 1,260 units
When evaluating the creditworthiness of a customer, the term character refers to the:
A. nature of the cash flows of the customer’s business.
B. customer’s financial resources.
C. types of assets the customer wants to pledge as collateral.
D. customer’s willingness to pay bills in a timely fashion.
E. nature of the customer’s line of work.
Country Comfort, Inc. had equity of $150,000 at the beginning of the year. At the end
of the year, the company had total assets of $195,000. During the year, the company
sold no new equity. Net income for the year was $72,000 and dividends were $44,640.
What is the sustainable growth rate?
A. 15.32 percent
B. 15.79 percent
C. 17.78 percent
D. 18.01 percent
E. 18.24 percent
Major Manuscripts, Inc. does not want to incur any additional external financing. The
dividend payout ratio is constant. What is the firm’s maximum rate of growth?
A. 7.44 percent
B. 7.78 percent
C. 9.26 percent
D. 9.75 percent
E. 10.90 percent
Which of the following have been offered as factors contributing to the market crash of
1987?
I. requirement for only a 10 percent cash payment to purchase a stock
II. program trading
III. irrational investors
IV. preceeding bear market
A. I and III only
B. I and IV only
C. II and III only
D. I, II, and III only
E. I, II, and IV only
Disbursements float:
A. occurs when a deposit is recorded but the funds are unavailable.
B. causes the book balance to exceed the bank balance.
C. has tended to increase since the enactment of the Check Clearing Act for the 21st
Century.
D. is a recommended source of funds for short-term investments.
E. is eliminated when payments are made electronically.
The Cellar Door currently sells 9,620 units a month for total monthly sales of $316,000.
The company is considering replacing its current cash only credit policy with a net 30
policy. The variable cost per unit is $15 and the monthly interest rate is 1.5 percent.
What is the switch break-even level of sales?
A. 9,711 units
B. 9,779 units
C. 9,814 units
D. 9,957 units
E. 9,889 units
For the equity of a firm to be considered a call option on the firm’s assets, the firm
must:
A. be in default.
B. be leveraged.
C. pay dividends.
D. have a negative cash flow from operations.
E. have a negative cash flow from assets.
The present value of the following cash flow stream is $5,933.86 when discounted at 11
percent annually. What is the value of the missing cash flow?
A. $1,500
B. $1,750
C. $2,000
D. $2,250
E. $2,500
Last year, you purchased a “TIPS” at par. Since that time, both market interest rates and
the inflation rate have increased by 0.25 percent. Your bond has most likely done which
one of the following since last year?
A. decreased in value due to the change in inflation rates
B. experienced an increase in its bond rating
C. maintained a fixed real rate of return
D. increased in value in response to the change in market rates
E. increased in value due to a decrease in time to maturity
Which one of the following will increase a bid price?
A. a decrease in the fixed costs
B. a reduction in the net working capital requirement
C. a reduction in the firm’s tax rate
D. an increase in the salvage value
E. an increase in the required rate of return
When a manager develops a cost of capital for a specific project based on the cost of
capital for another firm which has a similar line of business as the project, the manager
is utilizing the _____ approach.
A. subjective risk
B. pure play
C. divisional cost of capital
D. capital adjustment
E. security market line
You have computed the break-even point between a levered and an unlevered capital
structure. Assume there are no taxes. At the break-even level, the:
A. firm is just earning enough to pay for the cost of the debt.
B. firm’s earnings before interest and taxes are equal to zero.
C. earnings per share for the levered option are exactly double those of the unlevered
option.
D. advantages of leverage exceed the disadvantages of leverage.
Employee stock options:
A. usually have a positive intrinsic value when issued.
B. must be backdated at least six months to comply with Sarbanes-Oxley.
C. are generally “underwater” when issued.
D. are frequently repriced if the options are in-the-money.
E. are generally issued with a zero intrinsic value.
Three months ago, Central Supply stock was selling for $51.40 a share. At that time,
you purchased five put options on the stock with a strike price of $50 per share and an
option price of $0.60 per share. The option expires today when the value of the stock is
$42.70 per share. What is your net profit or loss on this investment? Ignore trading
costs and taxes.
A. -$1,300
B. -$1,000
C. -$300
D. $3,350
E. $3,650
Which of the following should be considered when selecting a venture capitalist?
I. level of involvement
II. past experiences
III. termination of funding
IV. financial strength
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV