Which one of the following is the financial statement that summarizes changes in the
company’s cash balance over a period of time?
A. income statement
B. balance sheet
C. cash flow statement
D. shareholders’ equity statement
E. market value statement
Answer:
You are to receive an annuity of $1,000 per year for 10 years. You will receive the first
payment two years from today. At a discount rate of 10%, what is the present value of
this annuity?
A. $5,078.15
B. $5,585.97
C. $6,144.57
D. $6,759.03
Answer:
Individuals who continually monitor the financial markets seeking mispriced
securities:
A. earn excess profits over the long term.
B. make the markets increasingly more efficient.
C. are never able to find a security that is temporarily mispriced.
D. are overwhelmingly successful in earning abnormal profits.
E. are always quite successful using only historical price information as their basis of
evaluation.
F. None of the above.
Answer:
Which one of the following correctly defines the retention ratio?
A. one plus the dividend payout ratio
B. additions to retained earnings divided by net income
C. additions to retained earnings divided by dividends paid
D. net income minus additions to retained earnings
E. net income minus cash dividends
F. None of the above.
Answer:
Which of the following would not be considered a cost of financial distress?
A. Lack of interest tax shields
B. Bankruptcy costs
C. Excessive risk-taking by shareholders
D. Loss of customers or suppliers
Answer:
Which of the following ratios are measures of a firm’s liquidity?
I. fixed asset turnover ratio
II. current ratio
III. debt-equity ratio
IV. acid test
A. I and III only
B. II and IV only
C. III and IV only
D. I, II, and III only
E. I, III, and IV only
Answer:
Homemade leverage is:
A. the incurrence of debt by a corporation in order to pay dividends to shareholders.
B. the exclusive use of debt to fund a corporate expansion project.
C. the borrowing or lending of money by individual shareholders as a means of
adjusting their level of financial leverage.
D. best defined as an increase in a firm’s debt-equity ratio.
E. the term used to describe the capital structure of a levered firm.
F. None of the above.
Answer:
Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today, she
gave you the proceeds of that investment which totaled $51,480.79. How much did she
originally invest?
A. $15,929.47
B. $16,500.00
C. $17,444.86
D. $17,500.00
E. $17,999.45
F. None of the above.
Answer:
Your brother will borrow $17,800 to buy a car. The terms of the loan call for monthly
payments for 5 years at an 8.6 percent annual interest rate, compounded monthly. What
is the amount of each payment?
A. $287.71
B. $296.67
C. $301.12
D. $342.76
E. $366.05
F. None of the above.
Answer:
What is the difference in the value of a $5,000 annual perpetuity and an annuity of
$5,000 for 100 years? Assume that the discount rate is 8% and that cash flows are
received at the end of the year.
A. $28
B. $656
C. $1,656
D. $5,000
Answer:
Financial leverage:
I. increases expected ROE but does not affect its variability.
II. increases breakeven sales, like operating leverage, but increases the rate of earnings
per share growth once breakeven is achieved.
III. is a fundamental financial variable affecting sustainable growth.
IV. increases expected return and risk to owners.
A. I and II only
B. I and III only
C. II and IV only
D. II, III, and IV only
E. I, II, III, and IV
F. None of the above.
Answer:
To estimate Missed Places Inc.’s (MP) external financing needs, the CFO needs to
figure out how much equity her firm will have at the end of next year. At the end of the
most recent fiscal year, MP’s retained earnings were $158,000. The Controller has
estimated that over the next year, gross profits will be $360,700, earnings after tax will
total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained
earnings at the end of next year?
A. $169,000
B. $170,400
C. $181,400
D. $506,300
E. $518,700
F. None of the above.
Answer:
Assume each month has 30 days and AmDocs has a 60-day accounts receivable period.
During the second calendar quarter of the year (April, May, and June), AmDocs will
collect payment for the sales it made during which of the months listed below?
A. October, November, and December
B. November, December, and January
C. December, January, and February
D. January, February, and March
E. February, March, and April
Answer:
When making a capital budgeting decision, which of the following is/are NOT
relevant?
I. The size of a cash flow.
II. The risk of a cash flow.
III. The accounting earnings from a cash flow.
IV. The timing of a cash flow.
A. I only
B. II only
C. III only
D. II and III only
E. III and IV only
F. They are all relevant.
Answer:
Salinas Corporation has net income of $15 million per year on net sales of $90 million
per year. It currently has no long-term debt, but is considering a debt issue of $20
million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an
effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp.
if it goes through with the debt issuance?
A. $560,000
B. $1,400,000
C. $8,000,000
D. $20,000,000
Answer:
What would be the carried interest (at 20%) on a private equity portfolio with an initial
value of $500 million that was subsequently liquidated for $750 million?
A. $50 million
B. $100 million
C. $150 million
D. $250 million
Answer:
You bought a yen-denominated corporate bond at the beginning of the year for
¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at
year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 =
Â¥97 at year-end. What holding period return, measured in U.S. dollars, did you earn
on the bond?
A. 3.09%
B. 6.09%
C. 13%
D. 16.49%
E. 30%
F. None of the above.
Answer:
Please refer to the financial data for Link, Inc. above. Which of the following
statements best describes how the Link’s short-term liquidity changed from 2013 to
2014?
A. Link’s short-term liquidity has improved modestly.
B. Link’s short-term liquidity has deteriorated very little, but from a low initial base.
C. Link’s short-term liquidity has improved considerably, but from a low initial base.
D. Link’s short-term liquidity has deteriorated considerably, but from a high initial
base.
E. None of the above.
Answer:
Please refer to the financial information for Squamish Equipment above. For next year,
calculate Squamish’s earnings per share if Squamish sells 2 million new shares at $20 a
share.
A. 1.28
B. 1.39
C. 2.00
D. 2.22
E. 4.00
F. None of the above.
Answer:
Which of the following statements is/are correct?
I. Going-concern value of a firm is equal to the present value of expected net income.
II. When a buyer values a target firm, the appropriate discount rate is the buyer’s
weighted-average cost of capital.
III. The liquidation value estimate of terminal value usually vastly understates a healthy
company’s terminal value.
IV. The value of a firm’s equity equals the discounted cash flow value of the firm minus
all liabilities.
A. II only
B. III only
C. I and II only
D. II and III only
E. II, III, and IV only
F. None of the above.
Answer: