Ted purchased an annuity today that will pay $1,000 a month for five years. He
received his first monthly payment today. Allison purchased an annuity today that will
pay $1,000 a month for five years. She will receive her first payment one month from
today. Which one of the following statements is correct concerning these two annuities?
A. Both annuities are of equal value today.
B. Allison’s annuity is an annuity due.
C. Ted’s annuity has a higher present value than Allison’s.
D. Allison’s annuity has a higher present value than Ted’s.
E. Ted’s annuity is an ordinary annuity.
Answer:
Stock A has an expected return of 17.8 percent, and Stock B has an expected return of
9.6 percent. However, the risk of Stock A as measured by its variance is 3 times that of
Stock B. If the two stocks are combined equally in a portfolio, what would be the
portfolio’s expected return?
A. 13.37%
B. 13.70%
C. 15.75%
D. 12.41%
E. 14.55%
Answer:
The net credit period for a company with terms of 2/10, net 45 is:
A. 10 days.
B. 45 days.
C. 35 days.
D. 55 days.
E. 40 days.
Answer:
How should a profitability index of zero be interpreted?
A. The present value of the cash flows subsequent to the initial cash flow is equal to (−1
Initial cash flow).
B. The project has an internal rate of return equal to the discount rate.
C. The project produces a net income of zero for every year of its life.
D. The project’s cash flows subsequent to the initial cash flow have a present value of
zero.
E. The project also has a net present value of zero.
Answer:
You have a portfolio comprised of two risky securities. This combination produces no
diversification benefit. The lack of diversification benefits indicates the returns on the
two securities:
A. are too low for their level of risk.
B. move perfectly opposite of one another.
C. are too large to offset.
D. move perfectly in sync with one another.
E. are completely unrelated to one another.
Answer:
What is the operating cash flow for 2015?
A.$485 million
B.$1,030 million
C.$867 million
D.$783 million
E.$451 million
Answer:
The financial statement summarizing a firm’s accounting performance over a period of
time is the:
A.income statement.
B.balance sheet.
C.statement of cash flows.
D.tax reconciliation statement.
E.statement of equity.
Answer:
Project A is opening a bakery at 10 Center Street. Project B is opening a specialty
coffee shop at the same address. Both projects have unconventional cash flows, that is,
both projects have positive and negative cash flows that occur following the initial
investment. When trying to decide which project to accept, given sufficient funding to
accept either, you should rely most heavily on the _____ method of analysis.
A. profitability index
B. internal rate of return
C. payback
D. net present value
E. discounted payback
Answer:
Assume a stock has an ex-rights price of $32. The rights offer has a requirement of 3
rights per new share and a subscription price of $30. What is the rights-on stock price?
A. $28.06
B. $32.67
C. $42.00
D. $40.94
E. $38.33
Answer:
What is the cash flow to creditors for 2015?
A.$1,230
B.$8,025
C.$9,135
D.$5,565
E.$2,705
Answer:
Assume a risky firm has both bondholders and stockholders. If the firm obtains a
government loan guarantee on its existing debt, who will gain from this guarantee?
A. existing stockholders only
B. both existing bondholders and stockholders in proportion to the firm’s debt-equity
ratio
C. existing bondholders and stockholders on an equal basis
D. existing bondholders only
E. future stockholders only
Answer:
The party most apt to take a long position in agriculture futures is the firm that:
A. harvests lumber.
B. raises corn.
C. harvests cotton.
D. uses cocoa to make candy.
E. supplies pigs to slaughter houses.
Answer:
Ratios that measure a firm’s financial leverage are known as ________ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value
Answer:
Net working capital:
A. can be ignored in project analysis because any expenditure is normally recouped by
the end of the project.
B. requirements generally, but not always, create a cash inflow at the beginning of a
project.
C. expenditures commonly occur at the end of a project.
D. is frequently affected by the additional sales generated by a new project.
E. is the only expenditure where at least a partial recovery can be made at the end of a
project.
Answer:
Which one of the following depicts a correct relationship?
A. Dividend payout ratio = 1 ” Retention ratio
B. Total asset turnover = 1 + Capital intensity ratio
C. ROA = ROE (1 + Debt-equity ratio)
D. ROE = 1 ” ROA
E. Equity multiplier = 1 ” Debt-equity ratio
Answer:
Under generally accepted accounting principles (GAAP), a firm’s assets are reported at:
A.market value.
B.liquidation value.
C.market value less accumulated depreciation.
D.historical cost less accumulated depreciation.
E.liquidation value less accumulated depreciation.
Answer:
In a portfolio of risky assets, the portfolio’s response to any factor, Fi, can be
determined by:
A. multiplying the portfolio weighted average βi by the factorFi.
B. computing the portfolio weighted average Fi.
C. multiplying the CAPM beta times the factor.
D. summing the weighted random errors.
E. dividing the percentage change in the factor, Fi, by the total number of factors
affecting the portfolio.
Answer:
Jeff is analyzing an expansion project for a new business and has developed this input
for a Black-Scholes model. Stock price = $7,365,000; Exercise price = $12,400,000;
time period = 3 years; standard deviation = 14.5 percent, and the continuously
compounded interest rate = 4.2 percent. What is the value of d1 as it is used in the
model?
A. .1945
B. .5487
C. “1.4102
D. .4593
E. “1.4470
Answer:
Assume you purchase one share of a stock and sell a call on a single share of that same
stock with an exercise price of $25. What is the maximum payoff you can realize on
this combination?
A. the exercise price of $25
B. an amount equal to the stock price on the option expiration date
C. an amount equal to $25 minus the stock price on the option expiration date
D. an amount equal to the stock price on the expiration date plus $25
E. an amount equal to the sum of the exercise price and the stock price on the option
expiration date
Answer:
Lewis Companies sells 2,600 units a month for cash at a price of $299 a unit and a
variable cost of $187 a unit. The firm estimates it can increase its sales by 200 units a
month if it switches to a net 30 credit policy while keeping its price and costs at their
current levels. If the monthly cost of capital is .85 percent, what is the NPV of
switching?
A. $1,590,005
B. $1,394,008
C. $1,211,036
D. $1,820,494
E. $2,006,413
Answer:
A symmetric, bell-shaped frequency distribution that is completely defined by its mean
and standard deviation is the _____ distribution.
A. gamma
B. Poisson
C. bi-modal
D. normal
E. uniform
Answer:
Stock splits are often used to:
A. adjust the market price of a stock such that it falls within a preferred trading range.
B. decrease the excess cash held by a firm.
C. increase both the number of shares outstanding and the market price per share.
D. increase the total equity of a firm.
E. adjust the debt-equity ratio such that it falls within a preferred range.
Answer:
Joe’s Leisure Time Sports is an unlevered firm with an aftertax net income of $78,400.
The unlevered cost of capital is 11.4 percent and the tax rate is 35 percent. What is the
value of this firm?
A. $447,017.54
B. $581,818.02
C. $687,719.30
D. $613,309.24
E. $537,900.46
Answer:
Which one of the following would harm the financial position of a warrant holder?
A. a 3 for 1 stock split
B. a 20 percent stock dividend
C. a large cash dividend
D. a listing of the warrants on the NYSE
E. both a 20 percent stock dividend and a large cash dividend
Answer:
An equity issue up to $1 million offered in small increments to a large number of
people via the Internet is most commonly referred to as:
A. an initial public offering.
B. crowdfunding.
C. a web-based issue.
D. a private placement.
E. a syndicated issue.
Answer:
Cash decreases when:
A. current assets other than cash increase.
B. fixed assets decrease.
C. current liabilities increase.
D. retained earnings increase.
E. long-term debt increases.
Answer:
For a firm to create value it must:
A. have a greater cash inflow from its stockholders than its outflow to them.
B. create more cash flow than it uses.
C. reduce its investment in fixed assets since fixed assets require the use of cash.
D. avoid payments to the government so dividends can be increased.
E. avoid the issuance of debt securities.
Answer:
What is the equity multiplier for 2015?
A. 1.71
B. 1.87
C. 1.44
D. 1.82
E. 1.92
Answer:
The debt-equity ratio is measured as:
A. total equity divided by long-term debt.
B. total equity divided by total debt.
C. total debt divided by total equity.
D. long-term debt divided by total equity.
E. total assets minus total debt, divided by total equity.
Answer:
The single-factor APT model that resembles the market model uses _________ as the
single factor.
A. arbitrage fees
B. GNP
C. the inflation rate
D. the market risk premium
E. the risk-free return
Answer:
What are the days’ sales in inventory for 2015? (Use ending inventory)
A. 61.84 days
B. 62.79 days
C. 67.51 days
D. 42.97 days
E. 40.08 days
Answer:
Credit scoring models are used by lenders to determine:
A. the best discount to offer each customer.
B. the appropriate price to charge each customer.
C. the optimal debt-equity ratio for the firm.
D. a borrower’s credit risk.
E. the percentage of their loan that will be repaid in a bankruptcy.
Answer:
Ancient Industries just paid a dividend of $1.03 a share. The company announced today
that it expects to pay $.90 a share next year and a final liquidating dividend of $18.44 in
two years. What is one share of this stock worth today if the required rate of return is 16
percent?
A. $14.94
B. $14.48
C. $13.23
D. $13.44
E. $13.60
Answer:
The Black-Scholes option pricing model is dependent on which five parameters?
A. stock price, exercise price, risk-free rate, probability, and time to maturity
B. stock price, risk-free rate, probability, time to maturity, and variance
C. stock price, risk-free rate, probability, variance, and exercise price
D. stock price, exercise price, risk-free rate, variance, and time to maturity
E. exercise price, probability, stock price, variance, and time to maturity
Answer: