1) Painting, Inc. has sales of $400,000 and cost of goods sold of $275,000. The firm had
a beginning inventory of $42,000 and an ending inventory of $38,000. What is the
length of the days’ sales in inventory?
A.53.09 days
B.36.50 days
C.38.33 days
D.50.44 days
2) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the average approach if it is determined that 2007 is
a ‘stale” year?
A.$400,000
B.$580,000
C.$625,000
D.$700,000
3) Debt Management Ratios Nicole’s Neon Signs, Inc. reported a debt to equity ratio of
1.9 times at the end of 2011 . If the firm’s total assets at year-end are $100 million, how
much of their assets is financed with equity?
A.$34.48m
B.$65.52m
C.$52.63m
D.$100 m
4) How much would be in your savings account in 12 years if you deposited $1,500
today? Assume the bank pays 5% per year.
A.$2,387.12
B.$2,491.03
C.$2,693.78
D.$2,771.09
5) Suppose a firm pays total dividends of $489,000 out of net income of $5 million.
What would the firm’s retention ratio be?
A.9.78%
B.90.22%
C.81.24%
D.19.78%
6) You are evaluating two different machines. Machine A costs $10,000, has a five-year
life, and has an annual OCF (after tax) of -$2,500 per year. Machine B costs $15,000,
has a seven-year life, and has an annual OCF (after tax) of -$2,000 per year. If your
discount rate is 14 percent, using EAC which machine would you choose?
A.Machine A
B.Machine B
C.Both Machines A and B
D.Neither Machine A nor B
7) Compound Frequency Payday loans are very short-term loans that charge very high
interest rates. You can borrow $200 today and repay $250 in two weeks. What is the
compound annual rate implied by this 25 percent rate charged for only two weeks?
A.26.60%
B.32,987.22%
C.30.00%
D.128.25%
8) Number of Annuity Payments Phoebe realizes that she has charged too much on her
credit card and has racked up $10,000 in debt. If she can pay $300 each month and the
card charges 18 percent APR (compounded monthly), how long will it take her to pay
off the debt?
A.27.23 months
B.33.33 months
C.46.56 months
D.69.70 months
9) Your firm needs to buy additional physical therapy equipment that costs $27,000.
The equipment manufacturer will give you the equipment now if you will pay $7,000
per year for the next 5 years. Assume your firm can borrow at a 13% interest rate. You
need to analyze if your firm should pay the manufacturer the $27,000 now or accept the
five-year annuity offer of $7,000. Which of the following statements is correct?
A.You decide to pay $27,000 today because paying in cash is always cheaper
B.You decide to pay for the equipment over time because it only costs $24,620.62
C.You decide to pay for the equipment over time because it only costs $29,112.86
D.You decide to pay $27,000 today because it is cheaper than paying for the equipment
over time
10) What is the present value of a $1,100 payment made every year forever when
interest rates are 4.5%?
A.$11,100
B.$21,089.37
C.$22,963.14
D.$24,444.44
11) Concerning incremental project cash flow, this is a cost one would never count as
an expense of the project.
A.initial investment
B.taxes paid
C.operating expenses of the project
D.financing costs
12) Silly Putty Inc. has had sales of $12 million, $17 million, and $16 million for each
of the last 3 years. What would be the MAPE if the actual sales were $15 million using
the average approach?
A.0.24%
B.1.01%
C.0%
D.-0.43%
13)
Corporate Taxes Suppose that in addition to the $5.5 million of taxable income from
operations, Emily’s Flowers, Inc. received $500,000 of interest on state-issued bonds
and $300,000 of dividends on common stock it owns in Amy’s Iris Bulbs, Inc.
Using the tax schedule in Table 2.3 what is Emily’s Flowers’ income tax liability?
What are Emily’s Flowers’ average and marginal tax rates on total taxable income?
A.$1,900,600, 34%, 34%, respectively
B.$1,972,000, 34%, 34%, respectively
C.$2,070,600, 34%, 34%, respectively
D.$2,142,000, 34%, 34%, respectively
14) This is typically considered the return on U.S. government bonds and bills and
equals the real interest plus the expected inflation premium.
A.required return
B.risk-free rate
C.risk premium
D.market risk premium
15) A stock has an expected return of 15% and a standard deviation of 20%. Long-term
Treasury bonds have an expected return of 9% and a standard deviation of 11%. Given
this data, which of the following statements is correct?
A.The two assets have the same coefficient of variation
B.The stock investment has a better risk-return trade-off
C.The bond investment has a better risk-return trade-off
D.Both investments have the same diversifiable risk
16) Your company has a 40% tax rate and has $750 million in assets, currently financed
entirely with equity. Equity is worth $50 per share, and book value of equity is equal to
market value of equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the possible values of
EBIT and their associated probabilities as shown below:
The firm is considering switching to a 30-percent debt capital structure, and has
determined that they would have to pay a 9 percent yield on perpetual debt in either
event. What will be the standard deviation in EPS if they switch to the proposed capital
structure?
A.2.26
B.5.10
C.10.05
D.30.16
17) You are evaluating a product for your company. You estimate the sales price of
product to be $50 per unit and sales volume to be 50,000 units in year 1; 75,000 units in
year 2; and 10,000 units in year 3 . The project has a 3-year life. Variable costs amount
to $15 per unit and fixed costs are $100,000 per year. The project requires an initial
investment of $275,000 in assets which will be depreciated straight-line to zero over the
3-year project life. The actual market value of these assets at the end of year 3 is
expected to be $25,000. NWC requirements at the beginning of each year will be
approximately 10% of the projected sales during the coming year. The tax rate is 34%
and the required return on the project is 9%. What will the year 2 free cash flow for this
project be?
A.$1,556,332
B.$1,572,667
C.$1,697,667
D.$2,022,667
18) Which of the following is a true statement?
A.If interest rates fall, U.S. Treasury bonds will have decreasing values
B.If interest rates fall, corporate bonds will have decreasing values
C.If interest rates fall, no bonds will enjoy rising values
D.If interest rates fall, all bonds will enjoy rising values
19) The theory that states that the yield curve reflects the market’s current expectations
of future short-term rates is called the _____________.
A.Market segmentation theory
B.Liquidity premium theory
C.Unbiased expectations theory
D.Inverted forward theory
20) Which of the following statements is correct?
A.Penny stocks are the stocks of small companies that are priced below $1 per share
B.Restricted stocks are shares of stock issued to executives that have limitations on
voting rights
C.The Capital Market Line graphs the relationship between return and risk (beta)
D.All of these statements are correct
21) A $7 million deposit earns 5% for 9 years. If the account loses 2% per year after
that, how long will it take to be reduced back to $7 million?
A.6.78 years
B.10.29 years
C.11.29 years
D.21.74 years
22) Rank from highest credit risk to lowest credit risk the following bonds, with the
same time to maturity, by their yield to maturity: Treasury bond with yield of 6.55%,
IBM bond with yield of 10.95%, Trump Casino bond with a yield of 9.15%, and Banc
Ono bond with a yield of 9.46%.
A.Treasury, Trump Casino, Banc Ono, IBM
B.Banc Ono, Trump Casino, IBM, Treasury
C.Trump Casino, Treasury, Banc Ono, IBM
D.IBM, Banc Ono, Trump Casino, Treasury
23) Which of the following describes what will occur as you randomly add stocks to
your portfolio?
A.The nondiversifiable risk will decrease
B.Both the diversifiable and nondiversifiable risk will decrease
C.The portfolio return will increase
D.The diversifiable risk will decrease
24) These are fees paid by firms to investment bankers for issuing new securities.
A.flotation costs
B.interest expense
C.seller financing charges
D.user fees
25) Market Value Ratios Bree’s Tennis Supply’s market-to-book ratio is currently 9.4
times and PE ratio is 20 times. If Bree’s Tennis Supply’s common stock is currently
selling at $20.50 per share, what is the book value per share and earnings per share?
A.$1.025, $2.1809, respectively
B.$2.1809, $1.025, respectively
C.$410.00, $192.70, respectively
D.$192.70, $410.00, respectively
26) Which of the following bonds will have the largest percentage increase in value if
interest rates decrease by 1%?
A.2-year, 5% coupon bond
B.30-year, 10% coupon bond
C.10-year, zero coupon
D.30-year, zero coupon
27) Once firms issue financial instruments in primary markets, these same stocks and
bonds are then traded in which of these?
A.initial public offerings
B.direct transfers
C.secondary markets
D.over-the-counter stocks
28) Which of these is the type of loan where the firm would receive the funds as soon as
the bank approved the loan?
A.loan commitment agreements
B.spot loans
C.take-down loans
D.back-end loans
29) Portfolio Weights If you own 600 shares of Alaska Corporation at $23.25, 450
shares of Best Company at $34.50, and 150 shares of Motor Company at $6.95, what
are the portfolio weights of each stock?
A.Alaska = .6000, Best = .4500, Motor = .1500
B.Alaska = .3594, Best = .5332, Motor = .1074
C.Alaska = .4571, Best = .5087, Motor = .0342
D.Alaska = .2325, Best = .3450, Motor = .0695
30) Call Premium A 4.5 percent corporate coupon bond is callable in five years for a
call premium of one year of coupon payments. Assuming a par value of $1,000, what is
the price paid to the bondholder if the issuer calls the bond?
A.$45
B.$225
C.$1000
D.$1045
31) Your company doesn’t face any taxes and has $750 million in assets, currently
financed entirely with equity. Equity is worth $50 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 30-percent debt capital structure, and has
determined that they would have to pay a 9 percent yield on perpetual debt in either
event. What will be the standard deviation in EPS if they switch to the proposed capital
structure?
A.3.76
B.9.15
C.14.17
D.83.79
32) Compute the present value of $4,000 paid in five years using the following discount
rates: 10% in year 1, 2% in year 2, 12% in year 3, and 9% in years 4 and 5 .
A.$2,679.15
B.$2,206.81
C.$2,317.03
D.$2,362.19
33) How can an investor leverage itself more than the firm?
A.by borrowing money and investing it in stock along with the money they started with
B.by buying the firm’s bonds
C.by buying the firm’s preferred stock
D.Investors cannot leverage themselves more than the firm
34) DuPont Analysis If Epic, Inc. has an ROE = 25%, equity multiplier = 4, a profit
margin of 12%, what is the total asset turnover ratio?
A..0833
B..192
C..5208
D..75
35) All of the following are functions of the board of directors except ________.
A.Hire the CEO
B.Evaluate the CEO
C.Design compensation contracts for the CEO
D.Provide reports to the auditors
36) Suppose that Wind Em Corp. currently has the balance sheet shown below, and that
sales for the year just ended were $15 million. The firm also has a profit margin of 20
percent, a retention ratio of 30 percent, and expects sales of $22 million next year. If all
assets and current liabilities are expected to grow with sales, how much will
spontaneous liabilities increase with the increase in sales?
A.$1,950,000
B.$2,240,000
C.$2,366,000
D.$1,167,000
37) Which of the following actions will cause a firm’s net working capital to decrease?
A.The firm relaxes its credit policy
B.The firm increases its usage of accruals
C.The firm pays off a short-term bank loan with cash
D.None of these will cause a firm’s net working capital to decrease
38) Profitability Ratios In 2011, Colin’s Guitars, Inc. announced an ROA of 10.01%,
ROE of 17.35%, and profit margin of 5.89%. The firm had total assets of $2 million at
year-end 2011 . Calculate the 2008 values of net income available to common
stockholders’, common stockholders’ equity, and net sales for Colin’s Guitars, Inc.
39) Explain the differing reinvestment rate assumptions of NPV and IRR.
40) Suppose that the 2009 actual and 2010 projected financial statements for CMT Corp
are initially as shown below. In these tables, sales are projected to rise 35 percent in the
coming year, and the components of the income statement and balance sheet that are
expected to increase at the same 35 percent rate as sales need to be calculated and are
indicated with a blank space (___). Assuming that CMT Corp wants to cover the AFN
with 30 percent equity, 35 percent long-term debt, and the remainder from notes
payable, what amount of additional funds will they need to raise if debt carries a 9
percent interest rate?
41) Why is it useful to calculate forward rates?
42) Describe reasons that the U.S. Government and corporations would issue bonds.
43) List the order for the distribution of the funds from asset liquidation in a
bankruptcy.
44) What is meant by hedging exchange rate risk and what are some ways it is done?
45) How does a best effort underwriting differ from a firm commitment underwriting?
46) One approach to aligning managers’ personal interest with those of the owners is to
make the managers owners. List the avenues that a firm could use to offer managers an
equity stake in the firm.