New Century Products is a company that was founded last year. While the outlook for
the company is positive, it currently has negative earnings. If you wanted to measure
the progress of this firm, which one of the following ratios would probably be best to
monitor given the firm’s current situation?
A. Price-sales ratio
B. Market-to-book ratio
C. Profit margin
D. ROE
E. ROA
Answer:
The After Life has sales of $428,300, total assets of $389,100, and a profit margin of
7.2 percent. What is the return on assets?
A. 6.30 percent
B. 6.54 percent
C. 6.83 percent
D. 7.01 percent
E. 7.93 percent
Answer:
Which of the following have been offered as justification for IPO underpricing?
I. Young firms tend to be very risky.
II. The best IPOs are oversubscribed.
III. Underwriters like to avoid lawsuits.
IV. It benefits the existing shareholders.
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Quali Tech wants to raise $21 million to purchase equipment by issuing new securities.
Management estimates the issue will cost the firm $320,000 for accounting, legal, and
other costs. The underwriting spread is 7.5 percent and the issue price is $22 per share.
How many shares of stock must be sold if Quali Tech is to receive sufficient funds to
purchase all the desired equipment?
A. 1,008,010 shares
B. 1,021,121 shares
C. 1,047,666 shares
D. 1,147,666 shares
E. 1,110,333 shares
Answer:
What was the average annual risk premium on small-company stocks for the period
1926-2011?
A. 5.3 percent
B. 6.2 percent
C. 8.5 percent
D. 12.9 percent
E. 15.3 percent
Answer:
The Rent-to-Own Store has a six-year, interest-only loan at 12 percent interest. The firm
originally borrowed $125,000. How much will the firm pay in total interest over the life
of the loan?
A. $15,000.00
B. $53,666.67
C. $67,500.00
D. $69,000.00
E. $90,000.00
Answer:
Which one of the following statements is correct?
A. Both preferred stock and corporate bonds can be callable.
B. Both preferred stock and corporate bonds have a stated liquidation value of $1,000
each.
C. Interest payments to bondholders as well as dividend payments to preferred
shareholders are tax-deductible expenses for the issuing firm.
D. Bondholders generally receive a fixed payment while preferred shareholders receive
a variable payment.
E. Preferred shareholders receive preferential treatment over bondholders in a
liquidation.
Answer:
Roller Coaster’s has a cost of equity of 15.4 percent, a return on assets of 11.3 percent,
and a cost of debt of 7.3 percent. There are no taxes. What is the firm’s weighted
average cost of capital?
A. 7.30 percent
B. 11.20 percent
C. 12.97 percent
D. 15.40 percent
E. Cannot be determined from the information provided.
Answer:
The reinvestment approach to the modified internal rate of return:
A. individually discounts each separate cash flow back to the present.
B. reinvests all the cash flows, including the initial cash flow, to the end of the project.
C. discounts all negative cash flows to the present and compounds all positive cash
flows to the end of the project.
D. discounts all negative cash flows back to the present and combines them with the
initial cost.
E. compounds all of the cash flows, except for the initial cash flow, to the end of the
project.
Answer:
The common stock of Contemporary Interiors has a beta of 1.65 and a standard
deviation of 27.4 percent. The market rate of return is 13.2 percent and the risk-free rate
is 4.8 percent. What is the cost of equity for this firm?
A. 18.66 percent
B. 18.76 percent
C. 21.08 percent
D. 24.40 percent
E. 26.05 percent
Answer:
Ignoring the option to wait:
A. may overestimate the internal rate of return on a project.
B. may underestimate the net present value of a project.
C. ignores the ability of a manager to increase output after a project has been
implemented.
D. is the same as ignoring all strategic options.
E. ignores the value of discontinuing a project early.
Answer:
The Donut Hut has sales of $68,000, current assets of $11,300, net income of $5,100,
net fixed assets of $54,900, total debt of $23,800, and dividends of $800. What is the
sustainable growth rate?
A. 10.48 percent
B. 11.29 percent
C. 11.79 percent
D. 12.08 percent
E. 12.39 percent
Answer:
The Greasy Spoon Restaurant is considering a project with an initial cost of $525,000.
The project will not produce any cash flows for the first three years. Starting in year 4,
the project will produce cash inflows of $721,000 a year for three years. This project is
risky, so the firm has assigned it a discount rate of 16 percent. What is the project’s net
present value?
A. $417,294.85
B. $424,591.11
C. $451,786.86
D. $492,255.56
E. $512,408.23
Answer:
You own a portfolio of two stocks, A and B. Stock A is valued at $6,500 and has an
expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. What is
the expected return on the portfolio if the portfolio value is $9,500?
A. 9.58 percent
B. 9.62 percent
C. 9.74 percent
D. 10.07 percent
E. 10.22 percent
Answer:
Which one of the following is the process of determining the probability that customers
will not pay?
A. Credit analysis
B. Collection policy
C. Account aging
D. Credit terms
E. Customer invoicing
Answer:
Which one of the following is an example of a perpetuity?
A. Trust income of $1,200 a year forever
B. Retirement pay of $2,200 a month for 20 years
C. Lottery winnings of $1,000 a month for life
D. Car payment of $260 a month for 60 months
E. Apartment rent payment of $800 a month for one year
Answer:
Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond
has a 6 percent coupon and pays interest semiannually. There are two months until the
next coupon date. What is the clean price of this bond?
A. $947
B. $957
C. $967
D. $977
E. $987
Answer:
The spot rate between the UK and the U.S. is 0.6789 = $1, while the one-year forward
rate is 0.6782 = $1. The risk-free rate in the UK is 3.1 percent. The risk-free rate in the
U.S. is 2.9 percent. How much profit can you earn on a loan of $2,000 by utilizing
covered interest arbitrage?
A. -$4.09
B. -$2.78
C. $3.15
D. $6.13
E. $8.55
Answer:
Which one of the following is a correct value to use if you are conducting a best-case
scenario analysis?
A. Sales price that is most likely to occur
B. Lowest expected level of sales quantity
C. Lowest expected salvage value
D. Highest expected need for net working capital
E. Lowest expected value for fixed costs
Answer:
Which one of the following will increase the operating cycle?
A. Decreasing the days’ sales in inventory
B. Decreasing the accounts payable period
C. Increasing the accounts receivable turnover rate
D. Decreasing the inventory turnover rate
E. Decreasing the accounts payable turnover rate
Answer:
Which one of the following is the theory that a firm should borrow up to the point
where the additional tax benefit from an extra dollar of debt equals the additional costs
associated with financial distress from that additional debt?
A. M&M Proposition I, with taxes
B. M&M Proposition II, with taxes
C. M&M Proposition I, without taxes
D. Homemade leverage proposition
E. Static theory of capital structure
Answer:
You purchase a bond with an invoice price of $1,120. The bond has a coupon rate of 8.5
percent, semiannual coupons, and there are three months to the next coupon date. What
is the clean price of the bond?
A. $1,086.35
B. $1,098.75
C. $1,105.20
D. $1,132.50
E. $1,157.50
Answer:
Wage Garnishers, Inc. has sales for the year of $50,300 and cost of goods sold of
$23,700. The firm carries an average inventory of $4,800 and has an average accounts
payable balance of $4,400. What is the inventory period?
A. 12.39 days
B. 18.68 days
C. 31.29 days
D. 73.92 days
E. 81.36 days
Answer:
Which one of the following statements is correct regarding mortgage-backed securities
(MBSs)?
A. There is a separate MBS for each individual mortgage processed by a mortgage
broker.
B. An MBS is a type of debenture.
C. The originating bank is the seller of MBSs to investors.
D. Investors in MBSs are protected from default.
E. Investors in MBSs are subject to real estate deflation risk.
Answer:
Which one of the following best defines the term credit scoring?
A. Categorizing customers into groups depending on the length of time it takes each
customer to pay for purchases
B. Compiling a list of accounts receivable segregated by the length of time each
receivable has been outstanding
C. Evaluating the opportunity costs of a credit policy
D. Process of quantifying the probability of default when granting credit to customers
E. Tracking of both the number and the size of customer orders over a period of time
Answer: