Which one of the following statements is correct?
A. Both partnerships and corporations incur double taxation.
B. Sole proprietorships and partnerships are taxed in a similar fashion.
C. Partnerships are the most complicated type of business to form.
D. Both partnerships and corporations have limited liability for general partners and
shareholders.
E. All types of business formations have limited lives.
Answer:
The statement of cash flows consists of the cash flows from:
A.operations, investing activities, and financing activities.
B.operations, investing activities, and divesting activities.
C.internal activities, external activities, and financing activities.
D.balance sheet accounts only.
E.income statement accounts only.
Answer:
The correlation between Stocks A and B is computed as the:
A. covariance between A and B divided by the standard deviation of A times the
standard deviation of B.
B. standard deviation A divided by the standard deviation of B.
C. standard deviation of AB divided by the covariance between A and B.
D. variance of A plus the variance of B divided by the covariance of AB.
E. square root of the covariance of AB.
Answer:
Probably the most sensible cash management policy would be to maintain:
A. sufficient cash on hand to meet all ordinary business needs plus some excess cash to
invest in marketable securities as a precautionary measure.
B. about 90 percent of the firm’s ordinary cash needs in cash and delay payment on the
remaining 10 percent.
C. enough cash on hand to meet any potential demand for cash.
D. a zero cash balance and transfer funds weekly to meet that week’s cash requirements.
E. twice the amount of cash on hand that would be typically indicated based on the
firm’s normal cash flows.
Answer:
All else equal, a stock dividend will _____ the number of shares outstanding and _____
the value per share.
A. increase; increase
B. increase; decrease
C. not change; increase
D. decrease; increase
E. decrease; decrease
Answer:
Assume $1 = 117.92 = .6392. If a TV in London costs 430, what will that identical TV
cost in Tokyo if absolute purchasing power parity exists?
A. 32,411.02
B. 34,666.67
C. 79,326.66
D. 98,001.28
E. 82,880.09
Answer:
Jackson’s has $1,000 face value, zero-coupon bonds outstanding that mature in 13.5
years. What is the current value of one of these bonds if the market rate of interest is 7.6
percent? Assume semiannual compounding.
A. $365.32
B. $401.12
C. $360.49
D. $378.17
E. $384.07
Answer:
Sensitivity analysis is primarily designed to determine the:
A. range of possible outcomes given expected ranges for every variable.
B. degree to which the net present value reacts to changes in a single variable.
C. net present value given the best and the worst possible expected situations.
D. degree to which a project relies on financial leverage.
Answer:
Stock A has a beta of .68 and an expected return of 8.1 percent. Stock B has a 1.42 beta
and expected return of 13.9 percent. Stock C has a 1.23 beta and an expected return of
12.4 percent. Stock D has a 1.31 beta and an expected return of 12.6 percent. Stock E
has a .94 beta and an expected return of 9.8 percent. Which one of these stocks is
correctly priced if the risk-free rate of return is 2.5 percent and the market risk premium
is 8 percent?
A. Stock A
B. Stock B
C. Stock C
D. Stock D
E. Stock E
Answer:
The payback method:
A. determines a cutoff point so that all projects accepted by the NPV rule will be
accepted by the payback period rule.
B. determines a cutoff point equal to the point where all initial capital investments have
been fully depreciated.
C. requires an arbitrary choice of a cutoff point.
D. varies the cutoff point with the market rate of interest.
E. is rarely used in actual practice.
Answer:
If a stock portfolio is well diversified, then the portfolio variance:
A. will equal the variance of the most volatile stock in the portfolio.
B. may be less than the variance of the least risky stock in the portfolio.
C. must be equal to or greater than the variance of the least risky stock in the portfolio.
D. will be a weighted average of the variances of the individual securities in the
portfolio.
E. will be an arithmetic average of the variances of the individual securities in the
portfolio.
Answer:
The introduction of personal taxes may reveal a disadvantage to the use of debt if the
personal tax rate on:
A. the distribution of income to stockholders is less than the personal tax rate on
interest income.
B. the distribution of income to stockholders is greater than the personal tax rate on
interest income.
C. the distribution of income to stockholders is equal to the personal tax rate on interest
income.
D. interest income is zero.
E. dividends and interest are equal.
Answer:
A proposed project costs $300 and has cash flows of $80, $200, $75, and $90 for Years
1 to 4, respectively. Because of its high risk, the project has been assigned a discount
rate of 16 percent. In dollars, how much will this project return in today’s dollars for
every $1 invested?
A. $1.01
B. $.99
C. $1.05
D. $.97
E. $1.03
Answer:
The characteristic line graphically depicts the relationship between the:
A. beta of a security and the return on the security.
B. arithmetic average beta of the securities in a portfolio and the weighted average beta
of those securities.
C. return on a security and the return on the market.
D. beta of a security and the return on the market.
E. beta of a security and the corresponding beta of the market.
Answer:
Your portfolio is comprised of 30 percent of Stock X, 50 percent of Stock Y, and 20
percent of Stock Z. Stock X has a beta of .64, Stock Y has a beta of 1.48, and Stock Z
has a beta of 1.04. What is the portfolio beta?
A. 1.01
B. 1.05
C. 1.09
D. 1.14
E. 1.18
Answer:
Which term defines the tax rate that applies to the next dollar of taxable income earned?
A.deductible
B.residual
C.total
D.average
E.marginal
Answer:
A company plans to pay an annual dividend of $.30 a share for two years commencing
two years from today. After that time, a constant $1 a share annual dividend is planned
indefinitely. Given a required return of 14 percent, what is the current value of this
stock?
A. $4.82
B. $5.25
C. $5.39
D. $5.46
E. $5.58
Answer:
The length of time between the payment for inventory and the collection of cash from
receivables is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.
Answer:
The credit period begins on the:
A. shipping date.
B. purchase order date.
C. shipping arrival date.
D. order process date.
E. invoice date.
Answer:
The bonds issued by Manson amp; Son bear a coupon of 6 percent, payable
semiannually. The bond matures in 15 years and has a $1,000 face value. Currently, the
bond sells at par. What is the yield to maturity?
A. 5.87%
B. 5.97%
C. 6.00%
D. 6.09%
E. 6.17%
Answer:
You want to import $56,000 worth of rugs from India. How many rupees will you need
to pay for this purchase if one rupee is worth $.01606?
A. Rs3,015,030
B. Rs2,666,667
C. Rs3,486,924
D. Rs3,008,001
E. Rs2,847,319
Answer:
Westover Industries has 600,000 shares outstanding with a market value of $27 a share.
Each share has one attached warrant. A warrant holder can purchase one new share of
stock for five warrants plus $25. What will be the value of the firm if all of the warrants
are exercised? Assume all else held constant.
A. $20.9 million
B. $19.2 million
C. $18.4 million
D. $18.9 million
E. $20.2 million
Answer:
A project has a projected sales price of $99 a unit, a variable cost per unit of $58, fixed
costs of $238,000, and depreciation of $139,000. All values have a range of plus or
minus 4 percent. The tax rate is 34 percent. What is the contribution margin for an
analysis using sales units of 12,800?
A. $27.06
B. $38.97
C. $22.41
D. $41.00
E. $42.64
Answer:
Mart’s Boutique has sales of $820,000 and costs of $540,000. Interest expense is
$36,000 and depreciation is $59,000. The tax rate is 35 percent. What is the net income?
A.$158,600
B.$120,250
C.$105,000
D.$179,250
E.$99,600
Answer:
When a building supply store acquires a lumber mill it is making a ______ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. complementary resources
Answer:
Norris Co. has developed an improved version of its most popular product. To get this
improvement to the market, will cost $48 million and will return an additional $13.5
million for 5 years in net cash flows. The firm’s debt-equity ratio is .25, the cost of
equity is 13 percent, the pretax cost of debt is 9 percent, and the tax rate is 30 percent.
What is the net present value of this proposed project?
A. $1,306,411
B. $1,102,459
C. $1,077,180
D. $1,214,318
E. $989,760
Answer:
According to MM Proposition II with no taxes, the:
A. return on assets is determined by financial risk.
B. required return on equity is a linear function of the firm’s debt-equity ratio.
C. cost of equity in inversely related to the firm’s debt-equity ratio.
D. cost of debt must equal the cost of equity.
E. required return on assets exceeds the weighted average cost of capital.
Answer:
The Quick-Start Company has the following pattern of potential cash flows for a new
project.
If the company has a discount rate of 16 percent, what is the Time 1 net present value?
A. $50,807,953
B. $48,326,218
C. $52,009,107
D. $47,362,515
E. $45,887,056
Answer:
The primary reason that company projects with positive net present values are
considered acceptable is that:
A. they create value for the owners of the firm.
B. the project’s rate of return exceeds the rate of inflation.
C. they return the initial cash outlay within three years or less.
D. the required cash inflows exceed the actual cash inflows.
E. the investment’s cost exceeds the present value of the cash inflows.
Answer:
Erosion can be explained as the:
A. additional income generated from the sales of a newly added product.
B. loss of current sales due to a new project being implemented.
C. loss of revenue due to employee theft.
D. loss of revenue due to customer theft.
E. loss of cash due to the expenses required to fix a parking lot after a heavy rain storm.
Answer:
Spot trades must be settled:
A. on the trade date.
B. within one business day.
C. within two business days.
D. within three business days.
E. within one week of the trade date.
Answer:
Total assets are $1,450, fixed assets are $790, long-term debt is $750, and short-term
debt is $300. What is the amount of current assets?
A.$660
B.$360
C.$300
D.$40
E.$790
Answer: