Which one of the following statements is correct concerning the organizational
structure of a corporation?
A. The vice president of finance reports to the chairman of the board.
B. The controller reports to the chief financial officer.
C. The controller reports to the president.
D. The treasurer reports to the chief executive officer.
E. The board of directors reports to the corporate president.
Answer:
A bond has a coupon rate of 8.2 percent, a $1,000 par value, matures in 11.5 years, has
a yield to maturity of 7.67 percent, and pays interest annually. What is the current yield?
A. 7.89%
B. 8.21%
C. 8.43% D. 7.67% E. 8.52%
Answer:
Which one of these statements is true?
A. Dividends are irrelevant.
B. Shareholders are unable to personally adjust the dividend policy set by the firm.
C. According to Miller and Modigliani, a firm should alter its investment policy
whenever a change is made in its dividend policy.
D. Dividend policy is relevant.
E. Firms should never give up a positive NPV project to increase a dividend.
Answer:
No matter how many forms of investment analysis you employ:
A. the actual results from a project may vary significantly from the expected results.
B. the internal rate of return will always produce the most reliable results.
C. a project will never be accepted unless the payback period is met.
D. the initial costs will generally vary considerably from the estimated costs.
E. only the first three years of a project ever affect its final outcome.
Answer:
Assume the corporate tax rate is 34 percent, the personal tax rate on interest income is
15 percent, and the personal tax rate on dividends is 10 percent. If the firm earns $5 per
share in taxable income and pays out 40 percent of its earnings, how much will a
shareholder receive in aftertax income?
A. $1.470
B. $1.782
C. $1.096
D. $1.232
E. $1.188
Answer:
Brown’s Market currently has an operating cycle of 76.8 days. It is planning some
operational changes that are expected to decrease the accounts receivable period by 2.8
days and decrease the inventory period by 3.1 days. The accounts payable turnover rate
is expected to increase from 9 to 11.5 times per year. If all of these changes are adopted,
what will be the firm’s new operating cycle?
A. 68.4 days
B. 73.4 days
C. 63.3 days
D. 57.9 days
E. 70.9 days
Answer:
Corporate bylaws:
A. establish the name of the corporation.
B. establish the rights granted to its shareholders.
C. set forth the purpose of the firm.
D. establish the rules by which the firm regulates its existence.
E. set forth the procedure by which the stockholders elect the senior managers of the
firm.
Answer:
Brite Industries has agreed to merge with Nu-Day in exchange for receiving shares in
the combined firm equal to Brite’s current market value. There are two economic
scenarios with equal probabilities of occurrence that must be considered. The market
value of Brite will be either $45 a share or $30 a share depending on the economic
state. Similarly, the market value of Nu-Day will be either $75 or $50 a share. What
value per share will the original Nu-Day shareholders receive in the combined firm
assuming no synergy is created by the merger?
A. $63.50
B. $54.25
C. $56.00
D. $57.75
E. $62.50
Answer:
If a large number of diverse securities are added to a portfolio comprised of three
stocks, then the:
A. weighted average expected return goes to zero.
B. weighted average of the APT factor betas goes to zero.
C. weighted average of the unsystematic risk goes to zero.
D. return of the portfolio goes to zero.
E. return on the portfolio will equal the risk-free rate.
Answer:
A firm has a debt-equity ratio of .64, a cost of equity of 13.04 percent, and a cost of
debt of 8 percent. The corporate tax rate is 35 percent. What would be the cost of equity
if the firm were all-equity financed?
A. 11.11%
B. 11.56%
C. 13.33%
D. 12.42%
E. 12.07%
Answer:
Calculate the duration of a $1,000 zero-coupon bond with a current price of $455.59, a
maturity of 6 years, and a yield to maturity of 14 percent.
A. 5.29 years
B. 5.76 years
C. 6.00 years
D. 5.47 years
E. 5.86 years
Answer:
What is the predominant source of financing for positive NPV projects by U.S.
nonfinancial corporations?
A. preferred stock
B. internally-generated funds
C. common stock
D. publicly-issued debt
E. privately-issued debt
Answer:
Which one of the following statements is correct if a firm has a receivables turnover of
10?
A. It takes the firm 10 days to collect payment from its customers.
B. It takes the firm 36.5 days to sell its inventory and collect the payment from the sale.
C. It takes the firm an average of 36.5 days to sell its items.
D. The firm collects on its sales in an average of 36.5 days.
E. The firm has ten times more in accounts receivable than it does in cash.
Answer:
Your firm has a $250,000 bond issue outstanding. These bonds have a coupon rate of 7
percent, pay interest semiannually, and have a current market price equal to 103 percent
of face value. What is the amount of the annual interest tax shield given a tax rate of 35
percent?
A. $6,125
B. $6,309
C. $9,500
D. $17,500
E. $18,025
Answer:
Shares of the Samson Co. offer an expected total return of 12 percent. The dividend is
increasing at a constant 3.25 percent per year. What is the value of the next dividend if
the stock is selling at $28 a share?
A. $2.50
B. $2.45
C. $2.78
D. $2.34
E. $2.10
Answer:
Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a
recession. Stock B is expected to return 11 percent in a normal economy and 5 percent
in a recession. The probability of the economy being normal is 75 percent with a 25
percent probability of a recession. What is the covariance of these two securities?
A. .007006
B. .006563
C. .005180
D. .007309
E. .006274
Answer:
Assume the single-factor APT model applies and a portfolio exists such that half of the
funds are invested in risky Security Q and the rest in the risk-free asset. Security Q has
a beta of 1.8. The portfolio has a factor beta of:
A. 0.
B. .8.
C. .9.
D. 1.
E. 1.8.
Answer:
(p.$$pageTag$$) Firm A is paying $300,000 in fixed interest payments a year while
Firm B is paying LIBOR plus 30 basis points on $5 million loans. The current LIBOR
rate is 5.5 percent. Firm A and B have agreed to swap interest payments. What is the net
payment between these firms this year?
A. Firm A pays $10,000 to Firm B
B. Firm B pays $10,000 to Firm A
C. Firm B pays $12,500 to Firm A
D. Firm A pays $15,000 to Firm B
E. Firm B pays $15,000 to Firm A
Answer:
A $1,000 face value Treasury note with a coupon rate of 6 percent matures in one year
and pays interest semiannually. If the effective annual yield for all maturities is 6.5
percent annually, what is the current price of the Treasury note?
A. $994.68
B. $986.69
C. $1,010.35
D. $1,014.40
E. $996.21
Answer:
If a project has a net present value equal to zero, then:
A. the initial cost of the project exceeds the present value of the project’s subsequent
cash flows.
B. the internal rate of return exceeds the discount rate.
C. the project produces cash inflows that exceed the minimum required inflows.
D. any delay in receiving the projected cash inflows will cause the project’s NPV to be
negative.
E. the discount rate exceeds the internal rate of return.
Answer:
The difference between liquidation and reorganization is that a:
A. reorganization terminates all operations of the firm while a liquidation only
terminates non-profitable operations.
B. liquidation terminates all operations immediately while a reorganization terminates
operations over two, or more, years.
C. liquidation terminates all operations and a reorganization maintains the option of the
firm as a going concern.
D. liquidation deals with net working capital while a reorganization deals with
long-term liabilities.
E. a liquidation must occur outside of bankruptcy while a reorganization involves the
bankruptcy process.
Answer:
Winslow, Inc. stock is currently selling for $59.48 a share. The stock has an expected
growth rate of 4.22 percent and an expected total return for the next year of 9.87
percent. How much dividend income should you expect to receive next year if you
purchase 800 shares of this stock today?
A. $2,309.20
B. $2,008.04
C. $2,688.50
D. $2,380.15
E. $2,001.10
Answer:
The pawn shop adds 2 percent to loan balances for every two weeks a loan is
outstanding. What is the effective annual rate they are charging?
A. 79.97%
B. 73.08%
C. 51.21%
D. 67.34%
E. 83.43%
Answer:
The investment timing decision relates to:
A. how long the cash flows last once a project is implemented.
B. when a project should commence.
C. how frequently the cash flows of a project occur.
D. how many times a project can be expanded.
E. how long a project should operate before an abandonment decision can be
implemented.
Answer:
If a security has a GNP beta of 1.5, then the security’s total rate of return will:
A. increase by 1.5 percent for every 1 percent decrease in GNP.
B. increase by 1.5 percent every time the GNP increases by 1.5 percent.
C. change by an amount equal to 1.5 times the percentage amount of any unexpected
change in GNP.
D. change by an amount equal to the unexpected percentage change in GNP divided by
a factor of 1.5.
E. increase by 1.5 percent whenever the GNP increases by 1.5 percent.
Answer:
The condition stating that the interest rate differential between two countries is equal to
the percentage difference between the forward exchange rate and the spot exchange rate
is called:
A. the unbiased forward rates condition.
B. uncovered interest rate parity.
C. the international Fisher effect.
D. purchasing power parity.
E. interest rate parity.
Answer:
Rudy’s and Blackstone are all-equity firms. Rudy’s has 1,200 shares outstanding at a
market price of $36 a share. Blackstone has 2,500 shares outstanding at a price of $38 a
share. Blackstone is acquiring Rudy’s for $48,000 in cash. What is the merger premium
per share?
A. $4.00
B. $4.25
C. $6.50
D. $8.00
E. $14.00
Answer:
A SunSet Co. customer would like to obtain a 3-month option to purchase additional
units of a product for $77 each. This product currently sells for $76 each. Assume u
equals 1.1502 and d = .8694. Approximately what price per unit should SunSet charge
for this option if the annual risk-free rate is 2.8 percent?
A. $4.79
B. $5.98
C. $6.17
D. $6.02
E. $5.07
Answer:
Futures contracts contrast with forward contracts by:
A. providing an option for the buyer rather than an obligation.
B. marking to the market on a weekly basis.
C. allowing the seller to deliver any day during the delivery month.
D. allowing the parties to negotiate the contract size.
E. requiring contract fulfillment by the two originating parties.
Answer:
The information content of a dividend increase generally signals that:
A. the firm has a one-time surplus of cash.
B. the firm has several net present value projects to pursue.
C. management believes the future earnings of the firm will be strong.
D. the firm has more cash than it needs due to sales declines.
E. future dividends will be lower.
Answer:
You plan to save $2,400 a year and earn an average rate of interest of 5.6 percent. How
much more will your savings be worth at the end of 40 years if you save at the
beginning of each year rather than at the end of each year?
A. $17,822.73
B. $18,821.10
C. $18,911.21
D. $19,103.04
E. $18,115.31
Answer:
The process of planning and managing a firm’s long-term assets is called:
A. working capital management.
B. financial depreciation.
C. agency cost analysis.
D. capital budgeting.
E. capital structure.
Answer:
You have decided to purchase shares of GHC but need an expected 12 percent rate of
return to compensate for the perceived risk of such ownership. What is the maximum
price you should pay per share if the company pays a constant $2.70 annual dividend
per share?
A. $23.04
B. $22.50
C. $32.67
D. $34.29
E. $21.59
Answer: