1) Which of the following is a type of merger in which two firms that sell the same
products in different market areas are combined?
A.vertical
B.conglomerate
C.product extension
D.market extension
2) Your company borrows $55,000 today to funds its growth initiatives. It must repay
the bank in 4 annual payments of $17,100 at the end of each year. What annual interest
rate is your firm paying?
A.7.76%
B.8.26%
C.9.33%
D.10.26%
3) A policy of a firm paying out only funds that are left over after all positive NPV
projects are funded.
A.bird-in-the-hand theory
B.clientele effect policy
C.residual dividend model
D.dividend irrelevance theorem
4) A measure of the sensitivity of a stock or portfolio to market risk.
A.behavioral finance
B.beta
C.efficient market
D.hedge
5) Which of the following statements is correct?
A.$100 to be received in the future is worth more than that today since it could be
invested and earn interest
B.$100 to be received in the future is worth less than that today since it could be
invested and earn interest
C.The Rule of 72 calculates the compounded return on investments
D.Discounting is finding the future value of an original investment
6) Which of these is defined as the practice of simultaneously purchasing and selling an
asset in different forms or markets to take advantage of an imbalance in price?
A.arbitrage
B.spot transaction
C.indirect quote
D.cross quote
7) Why does allowing for the existence of corporate taxation cause firms to prefer the
maximum amount of debt possible?
A.Because the flotation costs associated with debt are significantly lower than the
flotation costs associated with equity
B.Because debt is tax-deductible, the effective cost of debt is much cheaper than using
equity
C.Because debt places fewer demands on the firm’s cash flows
D.None of these
8) The two main factors that determine a firm’s capital structure are
____________________.
A.whether debt interest payments are tax deductible and how increased debt might
affect the likelihood of the firm going bankrupt
B.whether debt interest payments are tax deductible and whether or not the bonds could
be sold at a premium
C.whether the markets are perfectly efficient and whether or not all participants have
symmetric information
D.None of these
9) A firm reported an ROE of 19%. The firm’s debt ratio was 45%, sales were $12
million, and the capital intensity ratio was 1.1 times. Calculate the net income for the
firm.
A.0.34 million
B.1.38 million
C.1.93 million
D.2.06 million
10) Current Yield What’s the current yield of a 5.75 percent coupon corporate bond
quoted at a price of 103.05?
A.5.58%
B.5.75%
C.5.93%
D.17.54%
11) The Dow Jones Industrial Average (DJIA) includes
A.all of the stock listed on the New York Stock Exchange
B.30 of the largest (market capitalization) and most active companies in the U.S.
economy
C.500 firms that are the largest in their respective economic sectors
D.500 firms that are the largest as ranked by Fortune Magazine
12) Nikki G’s Corporation’s 10-year bonds are currently yielding a return of 9.25%. The
expected inflation premium is 2.0% annually and the real interest rate is expected to be
3.10% annually over the next 10 years. The liquidity risk premium on Nikki G’s bonds
is 0.1%. The maturity risk premium is 0.10% on 2-year securities and increases by
0.05% for each additional year to maturity. Calculate the default risk premium on Nikki
G’s 10-year bonds.
A.2.55%
B.5.65%
C.3.55%
D.1.85%
13) Which of these is defined as long-term investment in capital in a business operation
located in an economy other than that in which the company is based?
A.managed-floating corporation
B.multinational investment
C.multinational corporation
D.foreign direct investment
14) If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its
payables turnover?
A.14.6
B.4.56
C.6.64
D.55
15) All of the following can be included in the depreciable basis of an asset except
_______.
A.Freight charges
B.Installation fees
C.Sales tax
D.Variable costs
16) DuPont Analysis Last year, PJ’s Ice Cream Parlors, Inc. reported an ROE = 12%.
The firm’s debt ratio was 40%, sales were $25 million, and the capital intensity ratio
was 0.75 times. What is the net income for PJ’s last year?
A.$1.35m
B.$2.40m
C.$3.00m
D.$18.75m
17) If the price of silver in England is £6.25 per ounce, what is the expected price of
silver in the United States if the spot exchange rate is $1 = £0.55?
A.$11.36
B.$13.25
C.$10.17
D.$14.06
18) To increase the liquidity for the home mortgage market, Fannie Mae and Freddie
Mac purchased home mortgages from banks and other lenders. They combined the
mortgages into diversified portfolios of loans and issued ______________.
A.Trust securities
B.Mortgage-backed securities
C.Current yield securities
D.Treasury Inflation Protected Securities
19) Ed’s Tobacco Shop has total assets of $100 million. Fifty percent of these assets are
financed with debt of which $37 million is current liabilities. The firm has no preferred
stock but the balance in common stock and paid-in surplus is $32 million. Using this
information what is the balance for long-term debt and retained earnings on Ed’s
Tobacco Shop’s balance sheet?
A.$18 million; $27 million
B.$12 million; $12 million
C.$14 million; $29 million
D.$13 million; $18 million
20) Which of the following is the firm allowing its equity, some of which was held
privately by managers and venture capital investors, to be publicly traded in stock
markets for the first time?
A.over the counter market transaction
B.private market transaction
C.initial public offering
D.public market transaction
21) Portfolio Return The table below shows your stock positions at the beginning of the
year, the dividends that each stock paid during the year, and the stock prices at the end
of the year. What is your portfolio percentage return?
A.3.21%
B.4.06%
C.7.26%
D.8.97%
22) Average Return The past five monthly returns for K and Company are 2.28 percent,
2.64 percent, -1.05 percent, 4.25 percent, and 9.25 percent. What is the average monthly
return?
A.1.45%
B.1.62%
C.3.47%
D.3.89%
23) Team Sports Industries has a cash balance of $60,000; accounts payable of $40,000;
inventory of $100,000; accounts receivable of $110,000; notes payable of $80,000; and
accrued wages and taxes of $10,000. How much net working capital does the firm need
to fund?
A.$140,000
B.$130,000
C.$150,000
D.$210,000
24) Suppose that Gyp Sum Industries currently has the balance sheet shown below, and
that sales for the year just ended were $20 million. The firm also has a profit margin of
22 percent, a retention ratio of 42 percent, and expects sales of $30 million next year. If
all assets and current liabilities are expected to grow with sales, how much additional
funds will Gyp Sum need from external sources to fund the expected growth?
A.$3,925,000
B.$3,695,000
C.$4,124,000
D.$4,478,000
25) Market Value Ratios Fancy Paws’ year-end price on its common stock is $20. The
firm has total assets of $40 million, the debt ratio is 40%, there is no preferred stock,
and there are 2 million shares of common stock outstanding. Calculate the
market-to-book ratio for Fancy Paws.
A.0.47
B.1.67
C.8.00
D.10.00
26) Explain how stock is valued if the constant growth model cannot be used.
27) Explain how “interest rate” and “rate of return” are similar, yet different.
28) Differentiate between active and passive changes to capital structure.
29) List/explain the three dimensions of the revenue-enhancement argument.
30) The Modigliani and Miller’s Dividend Irrelevance Theorem is set in a “perfect
world.” List the four elements that are features of their “perfect world.”
31) You are a risk averse investor with a low-risk portfolio of bonds. How is it possible
that adding some stocks (which are riskier than bonds) to the portfolio can lower the
total risk of the portfolio?
32) What type of clientele would you expect to prefer dividends over capital gains?
Why?
33) The Altman’s Z-score model has several weaknesses. What are they?
34) Rank the capital budgeting tools from best to worst.
35) If demand for a firm’s products suddenly slows down so that inventory increases
while sales decrease, how will the firm’s needs for net working capital react?