1) Goldilochs Inc. reported sales of $8 million and net income of $1.5 million. The firm
has $12 million in total assets and $500,000 in current liabilities. The firm currently
pays out 25% of its net income to shareholders. Assume that all assets and current
liabilities are expected to grow with sales. If Goldilochs does not want to rely on any
external sources of funds, what is the most sales can grow (in dollars)?
A.$887,900
B.$867,500
C.$928,800
D.$964,100
2) An angel investor differs from a venture capitalist because of the:
A.type of investment
B.investment time frame
C.size of investment
D.voting rights
3) Which of the following is NOT true when developing a time line?
A.Cash inflows are designated with a positive number
B.Cash outflows are designated with a positive number
C.The cost is known as the interest rate
D.The time line shows the magnitude of cash flows at different points in time
4) Which financial statement shows the total revenues that a firm earns and the total
expenses the firm incurs to generate those revenues over a specific period of
timegenerally one year?
A.Balance Sheet
B.Income Statement
C.Statement of Retained Earnings
D.Statement of Cash Flows
5) Debt Management Ratios Tierre’s Ts, Inc. reported a debt to equity ratio of 3 times at
the end of 2011 . If the firm’s total assets at year-end are $15 million, how much of their
assets is financed with equity?
A.$3.75m
B.$5m
C.$11.25m
D.$45m
6) Which of the following is NOT an example of a revenue enhancement that is a result
of a merger?
A.The revenue stream of the acquired firm becomes more stable because the target firm
has different risk characteristics
B.The merger may expand the target firm’s operations into areas that are not fully
competitive
C.The merger may create cost synergies
D.All of these are examples of a revenue enhancement that is a result of a merger
7) Portfolio Beta You have a portfolio with a beta of 1.25. What will be the new
portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent
in a stock with a beta of 1.75?
A.1.00
B.1.35
C.1.50
D.3.00
8) You are evaluating a product for your company. You estimate the sales price of
product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in
year 2; and 1,000 units in year 3 . The project has a 3-year life. Variable costs amount to
$75 per unit and fixed costs are $200,000 per year. The project requires an initial
investment of $360,000 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 $40,000. NWC requirements at the beginning of each year will be
approximately 20% of the projected sales during the coming year. The tax rate is 34%
and the required return on the project is 13%. What will the year 2 free cash flow for
this project be?
A.$170,412
B.$192,500
C.$201,300
D.$481,300
9) Value stocks are _________________________.
A.stocks that are expected to exhibit high growth
B.stocks that have low P/E ratios and are selling at a bargain price
C.stocks that have high valuation ratios, such as P/E
D.None of these
10) Which of the following statements is correct?
A.The weighted average cost of capital is calculated on a before-tax basis
B.An increase in the market risk premium is likely to increase the weighted average
cost of capital
C.The weights of debt and equity should be based on the balance sheet because this is
the most accurate assessment of the valuation
D.All of these statements are correct
11) A financial asset will pay you $50,000 at the end of 20 years if you pay premiums
of $975 per year at the end of each year for 20 years. What is the IRR of this financial
asset?
A.8.64%
B.9.02%
C.10.51%
D.11.29%
12) Rule of 72 Approximately what interest rate is needed to double an investment over
4 years?
A.4%
B.18%
C.25%
D.100%
13) Suppose that Lil John Industries’ equity is currently selling for $64 per share and
that there are 1 million shares outstanding. If the firm also has 20 thousand bonds
outstanding, which are selling at 108 percent of par ($1,000), what are the firm’s current
capital structure weights?
A.Weight of Equity = 25.23%; Weight of Debt = 74.77%
B.Weight of Equity = 84.77%; Weight of Debt = 15.23%
C.Weight of Equity = 74.77%; Weight of Debt = 25.23%
D.Weight of Equity = 32.23%; Weight of Debt = 67.77%
14) Portfolio Weights If you own 100 shares of Air Line Inc. at $42.50, 250 shares of
BuyRite at $53.25, and 350 shares of Motor City at $7.75, what are the portfolio
weights of each stock?
A.Air Line = .3333, BuyRite = .3333, MotorCity = .3333
B.Air Line = .10, BuyRite = .25, MotorCity = .35
C.Air Line = .2096, BuyRite = .6566, MotorCity = .1338
D.Air Line = .1429, BuyRite = .3571, MotorCity = .5000
15) A $400 investment has doubled to $800 in six years because of a 12.25% return.
How much longer will it take for the investment to reach $1100 if it continues to earn
12.25%?
A.2.56 years
B.2.76 years
C.3.46 years
D.5 years
16) Financial management involves decisions about which of the following:
A.Which projects to fund
B.How to minimize taxation
C.What type of capital should be raised
D.All of these
17) You are evaluating a project for The Ultimate recreational tennis racket, guaranteed
to correct that wimpy backhand. You estimate the sales price of The Ultimate to be
$300 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and
1,325 units in year 3 . The project has a 3-year life. Variable costs amount to $200 per
unit and fixed costs are $50,000 per year. The project requires an initial investment of
$150,000 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 30% and the required
return on the project is 10%. What will the free cash flow for this project be in year 2?
A.$94,450
B.$49,950
C.$102,450
D.$65,250
18) Your company faces a 34% tax rate and has $200 million 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 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 40-percent debt capital structure, and has
determined that they would have to pay an 8 percent yield on perpetual debt in either
event. What will be the level of expected EPS if they switch to the proposed capital
structure?
A.$0.748
B.$0.7965
C.$0.946
D.$1.023
19) This is defined as the preliminary registration statement filed with the SEC.
A.shelf prospectus
B.red herring prospectus
C.SEC prospectus
D.originating prospectus
20) Suppose your firm is considering two independent projects with the cash flows
shown below. The required rate of return on projects of both of their risk class is 12
percent, and the maximum allowable payback and discounted payback statistic for the
projects are 2.5 and 3 years, respectively.
Use the payback decision rule to evaluate these projects; which one(s) should be
accepted or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
21) Forecasting Interest Rates Assume the current interest rate on a one-year Treasury
bond (1R1) is 5.00 percent, the current rate on a two-year Treasury bond (1R2) is 5.75
percent, and the current rate on a three-year Treasury bond (1R3) is 6.25 percent. If the
unbiased expectations theory of the term structure of interest rates is correct, what is the
one-year interest rate expected on Treasury bills during year 3, 3f1?
A.5.00%
B.5.67%
C.7.26%
D.8.00%
22) Suppose your firm is considering two mutually exclusive, required projects with the
cash flows shown below. The required rate of return on projects of both of their risk
class is 10 percent, and the maximum allowable payback and discounted payback
statistic for the projects are 2.5 and 3.5 years, respectively.
Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted
or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
23) Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10
percent and the risk-free rate is 4 percent, what is Hastings’ required return?
A.11.44%
B.12.44%
C.14.96%
D.16.40%
24) Suppose a firm pays total dividends of $750,000 out of net income of $2 million.
What would the firm’s retention ratio be?
A.37.50%
B.47.50%
C.25.50%
D.62.50%
25) Calculation of Average Costs with Economies of Scope Jan’s Bakery is considering
a merger with Tina’s Cookies. Jan’s total operating costs of producing services are
$300,000 for a sales volume of $2 million. Tina’s total operating costs of producing
services are $75,000 for a sales volume of $600,000. If the two firms merge, calculate
the total average cost for the merged firm assuming no synergies.
A.12.5%
B.11.54%
C.14.42%
D.13.75%
26) A corporate bond with a 5% coupon has 10 years left to maturity. It has had a credit
rating of BBB and a yield to maturity of 8.0%. The firm has recently gotten into some
trouble and the rating agency is downgrading the bonds to BB. The new appropriate
discount rate will be 9%. What will be the change in the bond’s price in dollars?
Assume interest payments are paid semi-annually and par value is $1,000.
A.-$43.61
B.-$51.07
C.-$62.43
D.-$56.31
27) Debt versus Equity Financing You are considering a stock investment in one of two
firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry
and have identical operating income of $3 million. AllDebt, Inc. finances its $6 million
in assets with $5 million in debt (on which it pays 5 percent interest annually) and $1
million in equity. AllEquity, Inc. finances its $6 million in assets with no debt and $6
million in equity. Both firms pay a tax rate of 40 percent on their taxable income. What
are the asset funders’ (the debt holders and stockholders’) resulting return on assets for
the two firms?
A.27.5%, and 30%, respectively
B.31.67%, and 30%, respectively
C.33%, and 30%, respectively
D.50%, and 50%, respectively
28) An equity-financed firm will
A.pay more in income taxes than a debt-financed firm
B.pay less in income taxes than a debt-financed firm
C.pay the same in income taxes as a debt-finance firm
D.not pay any income taxes
29) Calculating Costs of Issuing Stock Turbo Technology Corp. recently went public
with an initial public offering of 3 million shares of stock. The underwriter used a firm
commitment offering in which the net proceeds was $7.50 per share and the
underwriter’s spread was 9 percent of the gross proceeds. Turbo also paid legal and
other administrative costs of $200,000 for the IPO. Calculate the gross proceeds per
share received by Turbo from the sale of the 3 million shares of stock.
A.$7.50
B.$7.57
C.$8.24
D.$8.32
30) Which of the following statements is correct?
A.A stock’s price will increase upon announcing a dividend
B.Stock repurchases increase the number of shares
C.Paying a fixed percentage of net income is consistent with the clientele effect
D.None of these
31) Market Value Ratios Tina’s Track Supply’s market-to-book ratio is currently 4.5
times and PE ratio is 10.5 times. If Tina’s Track Supply’s common stock is currently
selling at $100 per share, what is the book value per share and earnings per share?
A.$450, $1050, respectively
B.$1050, $450, respectively
C.$22.2222, $9.5238, respectively
D.$9.5238, $22.2222, respectively
32) Suppose that a firm always announces a yearly dividend at the end of the first
quarter of the year, but then pays the dividend out as four equal quarterly payments. If
the next such “annual” dividend has been announced as $2, it is exactly one quarter
until the first quarterly dividend from that $2, the effective annual required rate of
return on the company’s stock is 15 percent, and all future “annual” dividends are
expected to grow at 10 percent per year indefinitely, how much will this stock be
worth?
A.$40.00
B.$41.83
C.$42.00
D.$42.09
33) Which of the following approach for determining the target cash balance assumes
that the distribution of daily net cash flows is normally distributed, and allows for both
cash inflows and outflows?
A.The Baumol Model
B.The Miller-Orr Model
C.The Merton Model
D.The Interbank Financial Model
34) Approximately how many years does it take to double a $475 investment when
interest rates are 8% per year?
A.18 years
B.12 years
C.9 years
D.4.75 years
35) All of the following are incremental cash flows attributable to the project except
_____.
A.Opportunity costs
B.Financing costs
C.Substitutionary effects
D.Complementary effects
36) Present Value What is the present value of a $500 deposit in year 1 and another
$100 deposit at the end of year 4 if interest rates are 5 percent?
A.$480.00
B.$493.62
C.$558.46
D.$582.27