1) A firm faces a 30% tax rate and has $200M in assets, currently financed entirely with
equity. Equity is worth $10 per share, and book value of equity is equal to market value
of equity. Also, let’s assume that the firm’s expected EBIT is $10M. The firm is
considering switching to a 25 percent debt capital structure, and has determined that
they would have to pay a 10 percent yield on perpetual debt. What will be the firm’s
new ROE if they switch to the proposed capital structure?
A.2.33%
B.2.86%
C.2.39%
D.1.04%
2) Free cash flow is defined as
A.Cash flows available for payments to stockholders of a firm after the firm has made
payments to all others will claims against it
B.Cash flows available for payments to stockholders and debt holders of a firm after the
firm has made payments necessary to vendors
C.Cash flows available for payments to stockholders and debt holders of a firm after the
firm has made investments in assets necessary to sustain the ongoing operations of the
firm
D.Cash flows available for payments to stockholders and debt holders of a firm that
would be tax-free to the recipients
3) Consider a 4.5% TIPS with an issue CPI reference of 187.2. At the beginning of this
year, the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain
of the TIPS in dollars?
A.$32.73
B.$46.92
C.$62.49
D.$75.85
4) Your current $115,000 mortgage calls for monthly payments over 30 years at an
annual rate interest rate of 7%. If you pay an additional $50 each month beginning with
the first payment, how much interest expense do you save by pre-paying?
A.$32,764.43
B.$30,718.29
C.$29,503.14
D.$22,008.73
5) Which of the following makes this a true statement? Ideally, when searching for a
beta for a new line of business
A.one could find other firms engaged in the proposed new line of business and use their
betas as proxies to estimate the project’s risk
B.one would like to find at least three or four pure-play proxies
C.two, or even one, proxies might represent a suitable sample if their line of business
resembles the proposed new project closely enough
D.All the answers make this a true statement
6) All of the following will tend to increase spontaneously with sales except
_________.
A.Accrued wages
B.Notes payable
C.Accounts payable
D.All of the above will tend to increase spontaneously with sales
7) Rule of 72 Approximately how many years does it take to double a $600 investment
when interest rates are 6% per year?
A..08 years
B.8 years
C.8.33 years
D.12 years
8) Outside parties that monitor the firm include all of the following except _______.
A.Credit Agencies
B.New York Stock Exchange
C.Analysts
D.Bankers
9) The practice generally known as double taxation is due to
A.shareholders’ dividends being taxed at both the federal and state levels
B.corporate income being taxed at both the federal and state levels
C.interest on shareholders’ dividends being taxed as income
D.corporate incomes being taxed at the corporate level, then again at the shareholder
level when corporate profits are paid out as dividends
10) Bond Quotes Consider the following three bond quotes; a Treasury note quoted at
87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45.
If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond
has a par value of $5,000, what is the price of these three bonds in dollars?
A.$872.50, $1000, $1000, respectively
B.$1000, $1000, $1000, respectively
C.$877.81, $1024.20, $5072.50, respectively
D.$1000, $1024.20, $1001.45, respectively
11) What is the present value of a $7,000 payment made in six years when the discount
rate is 4%?
A.$5,290.42
B.$5,532.20
C.$5,802.82
D.$6,103.73
12) Suppose a firm pays total dividends of $100,000 out of net income of $1 million.
What would the firm’s payout ratio be?
A.0.01
B.0.10
C.1.00
D.10.00
13) Which of the following is most correct?
A.In an efficient market, investors will buy overvalued stock which will drive its price
down
B.In an efficient market, investors will sell undervalued stock which will drive its price
down
C.In an efficient market, investors will sell overvalued stock which will drive its price
down
D.None of these statements is correct
14) Between corporate managers and stockholders, this can create ethical dilemmas.
A.Agency relationship
B.Auditors
C.Boards of Directors
D.Venture capitalist
15) Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to
generate cash inflows of $4,000 for 4 years. Project B costs $10,000 and is expected to
generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which
project would you accept and why?
A.Project B because it has the higher NPV
B.Project B because it has the higher IRR
C.Project A because it has the higher NPV
D.Project A because it has the higher IRR
16) Which statement is most correct regarding how pro forma financial statements can
be used to estimate additional funds needed?
A.Pro forma statements can be used to iteratively refine the amount of additional funds
needed
B.Pro forma statements are less precise than other methods for determining additional
funds needed
C.Pro forma statements take into account changes in cost of goods sold that other
methods of determining additional funds needed ignore
D.Pro forma statements take into account dividend payments that other methods of
determining additional funds needed ignore
17) Discounting One Year What is the present value of a $500 payment in one year
when the discount rate is 5 percent?
A.$475.00
B.$476.19
C.$500.00
D.$525.00
18) Present Value What is the present value of a $750 payment made in 3 years when
the discount rate is 5 percent?
A.$646.96
B.$647.88
C.$712.50
D.$868.22
19) Which of the following statements is correct?
A.If a firm has a very high fixed asset turnover, it means that the firm may be nearing
its maximum production capacity
B.An extremely low average collection period will maximize net income
C.In general, a firm should strive for a high average payment period because it wants to
pay for its purchases as quickly as possible
D.All of these statements are correct
20) Suppose a firm pays total dividends of $50,000 out of net income of $500,000.
What would the firm’s payout ratio be?
A.0.10
B.1.00
C.10.00
D.50.00
21) An employee stock option plan is ________________.
A.A perk usually only given to the board of directors as compensation
B.A plan that only partnerships can use to defer compensation to partners
C.A way to align the interests of employees with those of the owners
D.None of these answers are correct
22) Suppose a firm has a retention ratio of 25 percent, net income of $30 million, and 5
million shares outstanding. What would be the dividend per share paid out on the firm’s
stock?
A.$1.50
B.$4.50
C.$6.00
D.$16.67
23) A loan is offered with monthly payments and a 14.5% APR. What is the loan’s
effective annual rate (EAR)?
A.14.97%
B.15.50%
C.15.13%
D.15.63%
24) Exchange Rate Quote Convert the following direct quote to a dollar indirect quote:
1 Israeli Shekel = $0.2351
A.0.2351 Shekel
B.0.7649 Shekel
C.1.2351 Shekel
D.4.2535 Shekel
25) JPM has earnings per share of $3.75 and P/E of 47. What is the stock price?
A.$174.08
B.$176.25
C.$185.95
D.$112.98
26) Calculating Costs of Issuing Stock Your company needs to raise $10 million to
finance plant expansion. In discussions with its investment bank, you learn that the
bankers recommend a gross price of $45 per share and that 240,000 shares of stock be
sold. If the net proceeds on the stock sale leave your company with $10 million, what is
the underwriter’s spread on the stock issue?
A.$3.33
B.$6.66
C.$45.00
D.$41.67
27) A perpetuity pays $250 per year and interest rates are 5.5%. How much would its
value change if interest increased to 8.5%? Did the value increase or decrease?
A.$1,604.27; increase
B.$1,604.27; decrease
C.$1,508.29; increase
D.$1,508.29; decrease
28) This determines the dollar amount of interest paid to bondholders.
A.original issue discount
B.call premium
C.coupon rate
D.market rate
29) A firm has an ACP of 38 days and its annual sales are $5.3 million. What is its
account receivable balance?
A.$551,781
B.$619,304
C.$692,098
D.$759,021
30) Which of these is defined as the amount of domestic currency it takes to buy one
unit of foreign currency?
A.exchange rate
B.spot transaction
C.indirect quote
D.direct quote
31) Suppose that Glamour Nails, Inc.’s capital structure features 30 percent equity, 70
percent debt, and that its before-tax cost of debt is 4 percent, while its cost of equity is
10 percent. If the appropriate weighted average tax rate is 34 percent, what will be
Glamour Nails’ WACC?
A.4.78%
B.4.85%
C.5.80%
D.7.00%
32) Asset Management Ratios Tops N Bottoms Corp. reported sales for 2008 of $50
million. Tops N Bottoms listed $4 million of inventory on its balance sheet. Using a
365-day year, how many days did Tops N Bottoms’ inventory stay on the premises?
How many times per year did Tops N Bottoms’ inventory turn over?
A.29.2 days, 12.5 times, respectively
B.12.5 days, 29.2 times, respectively
C.0.08 days, 12.5 times, respectively
D.29.2 days, 0.0345 times, respectively
33) Future Value Compute the future value in year 10 of a $1,000 deposit in year 1 and
another $1,500 deposit at the end of year 4 using an 8% interest rate.
A.$3,120.73
B.$4,379.31
C.$4,500.00
D.$5,397.31
34) Variable Growth A fast growing firm recently paid a dividend of $1.00 per share.
The dividend is expected to increase at a 25 percent rate for the next 3 years.
Afterwards, a more stable 8 percent growth rate can be assumed. If a 10 percent
discount rate is appropriate for this stock, what is its value?
A.$12.50
B.$75.93
C.$83.13
D.$120.24
35) Solving for Time How long will it take $4,000 to reach $4,500 when it grows at 8
percent per year?
A.1.12 years
B.1.48 years
C.1.53 years
D.9.00 years
36) Discounting One Year What is the present value of a $250 payment in one year
when the discount rate is 6 percent?
A.$245.00
B.$235.85
C.$250.00
D.$265.00
37) OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of
preferred stock outstanding, and 50 thousand bonds. If the common shares are selling
for $21 per share, the preferred shares are selling for $10 per share, and the bonds are
selling for 111% of par ($1000), what weight should you use for debt in the
computation of OMG’s WACC?
A.32.74%
B.29.86%
C.25.79%
D.21.86%