1) Which one of the following is an underwriting of securities where the offer price is
determined by investor bids?
A.Private placement
B.Best efforts underwriting
C.Initial public offering
D.Green Shoe option
E.Dutch auction
2) The Furniture Hut is offering a bedroom suite for $1,999. The credit terms are 60
months at $50 per month. What is the interest rate on this offer?
A.16.33 percent
B.16.50 percent
C.16.65 percent
D.17.15 percent
E.17.30 percent
3) Bob’s is a retail chain of specialty hardware stores. The firm has 21,000 shares of
stock outstanding that are currently valued at $68 a share and provide a 13.2 percent
rate of return. The firm also has 500 bonds outstanding that have a face value of $1,000,
a market price of $1,068, and a 7 percent coupon. These bonds mature in 6 years and
pay interest semiannually. The tax rate is 35 percent. The firm is considering expanding
by building a new superstore. The superstore will require an initial investment of $12.3
million and is expected to produce cash inflows of $1.1 million annually over its
10-year life. The risks associated with the superstore are comparable to the risks of the
firm’s current operations. The initial investment will be depreciated on a straight line
basis over the life of the project. At the end of the 10 years, the firm expects to sell the
superstore for $6.7 million. Should the firm accept or reject the superstore project and
why?
A.Accept; The project’s NPV is $1.27 million
B.Accept; The NPV is $4.89 million
C.Reject; The NPV is $1.06 million
D.Reject; The NPV -$3.27 million
E.Reject; The NPV is -$5.71 million
4) Webster & Jones has net income of $49,200, sales of $936,800, a capital intensity
ratio of 0.74, and an equity multiplier of 1.5. What is the return on equity?
A.6.67 percent
B.8.98 percent
C.10.65 percent
D.12.21 percent
E.14.09 percent
5) What is the net present value of a project with the following cash flows if the
discount rate is 17 percent?
A.-$8,406.11
B.-$7,231.71
C.-$3,089.16
D.$1,407.92
E.$3,508.01
6) An investment costing $100,000 promises an after-tax cash flow of $36,000 per year
for 6 years.
a. Find the investment’s accounting rate of return and its payback period.
b. Find the investment’s net present value at a 15 percent discount rate.
c. Find the investment’s benefit-cost ratio (profitability index) at a 15 percent discount
rate.
d. Find the investment’s internal rate of return.
e. Assuming the required rate of return on the investment is 15 percent, which of the
above figures of merit indicate the investment is attractive? Which indicate it is
unattractive?
7) Mercier United has net income of $128,470. There are currently 32.67 days’ sales in
receivables. Total assets are $1,419,415, total receivables are $122,306, and the
debt-equity ratio is 0.40. What is the return on equity?
A.11.42 percent
B.12.67 percent
C.13.09 percent
D.13.48 percent
E.15.03 percent
8) A broker is an agent who:
A.trades on the floor of an exchange for himself or herself
B.buys and sells from inventory
C.offers new securities for sale to dealers only
D.who is ready to buy or sell at any time
E.brings buyers and sellers together
9) The checks received in a lockbox are deposited:
A.into a local bank and then transferred electronically to a concentration account
B.into a local bank and immediately invested in short-term investments
C.as soon as they are posted to the customer’s account
D.the following day and immediately invested
E.directly into an investment account
10) The Flowering Vine buys hanging plants for $2 each and resells them for $8.95
each. The firm sells 3,500 plants per year. Generally, the firm orders 400 plants at a
time and has a fixed cost per order of $28. The carrying cost per unit is $1.16. To avoid
newer plants mixing with older plants, the inventory is totally sold out before it is
restocked. The total annual carrying cost is ____ and the total annual restocking cost is
_____.
A.$211; $245
B.$211; $269
C.$232; $245
D.$232; $256
E.$232; $269
11) Assume a firm has positive net earnings. The operating cash flow of this firm:
A.ignores both depreciation and taxes
B.is unaffected by the depreciation expense
C.must be negative
D.increases when tax rates decrease
E.is equal to net income minus depreciation
12) Wholesale Foods would like to sell 1,500 shares of stock using a Dutch auction.
The bids received are as follows:
What is the total amount the issuer will receive from this auction? Ignore costs.
A.$58,500
B.$57,000
C.$56,500
D.$54,000
E.$51,000
13) You have just made your first $3,000 contribution to your individual retirement
account. Assuming you earn a 9 percent rate of return and make no additional
contributions, what will your account be worth when you retire in 35 years? What if
you wait for 5 years before contributing?
A.$48,507.26; $42,614.08
B.$57,311.20; $39,803.04
C.$57,311.20; $42,614.08
D.$61,241.90; $39,803.04
E.$61,241.90; $42.614.08
14) Which one of the following situations is most apt to create an agency conflict?
A.Compensating a manager based on his or her division’s net income
B.Giving all employees a bonus if a certain level of efficiency is maintained
C.Hiring an independent consultant to study the operating efficiency of the firm
D.Rejecting a profitable project to protect employee jobs
E.Selling an underproducing segment of the firm
15) Beverly’s is a retail chain selling the latest fashions through its outlets located in
various neighborhood malls. Clothing Galore is a wholesaler that buys from textile
mills and sells to retail outlets. Beverly’s has a cost of capital of 13.6 percent, while
Clothing Galore’s cost of capital is 17.8 percent. Both firms are considering opening a
retail outlet in a gigantic new mall. Both proposals are quite similar in design and have
basically the following financial features: an initial cash outlay of $2.7 million, a
projected 5-year life with no salvage value, and cash inflows of $845,000 a year for the
life of the project. Which firm or firms, if either, should open a retail outlet in the new
mall?
A.Beverly’s only
B.Clothing Galore only
C.Both Beverly’s and Clothing Galore
D.Neither Beverly’s nor Clothing Galore
E.The answer cannot be determined based on the information provided
16) As the financial vice president for Squamish Equipment, you have the following
information:
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
17) Which one of the following terms refers to the basic factors that are reviewed when
evaluating the creditworthiness of a potential customer?
A.Terms of sale
B.Cash concentration
C.Five Cs of credit
D.Collection policy
E.Credit score
18) Lakeside Winery is considering expanding its wine-making operations. The
expansion will require new equipment costing $649,000 that would be depreciated on a
straight-line basis to a zero balance over the 4-year life of the project. The estimated
salvage value is $187,000. The project requires $38,000 initially for net working
capital, all of which will be recouped at the end of the project. The projected operating
cash flow is $198,500 a year. What is the net present value of this project if the relevant
discount rate is 14 percent and the tax rate is 35 percent?
A.-$14,162
B.-$8,309
C.-$2,747
D.$2,311
E.$3,615
19) The exchange rates in New York for $1 are C$1.2381 and 0.6789. In Toronto, C$1
will buy 0.5487. How much profit can you earn on $10,000 using triangle arbitrage?
A.$6.56
B.$6.88
C.$6.97
D.$7.03
E.$7.11
20) Which one of the following provides compensation to a bondholder when a bond is
not readily marketable at its full value?
A.Interest rate risk premium
B.Inflation premium
C.Liquidity premium
D.Taxability premium
E.Default risk premium
21) A pro forma financial statement is a financial statement that:
A.expresses all values as a percentage of either total assets or total sales
B.compares actual results to the budgeted amounts
C.compares the performance of a firm to its industry
D.projects future years’ operations
E.values all assets based on their current market values
22) Pitt Metal Works had $87,600 in net fixed assets at the beginning of the year.
During the year, the company purchased $6,400 in new equipment. It also sold, at a
price of $2,300, some old equipment with a book value of $1,100. The depreciation
expense for the year was $4,700. What is the net fixed asset balance at the end of the
year?
A.$76,400
B.$78,800
C.$80,000
D.$88,200
E.$89,400
23) Gloria’s Boutique has 4,000 shares of stock outstanding at a price per share of $19.
What will the price per share be if the firm pays a $1.20 per share dividend? Ignore
taxes and market imperfections.
A.$17.80
B.$18.40
C.$18.80
D.$19.00
E.$20.20
24) You bought a share of 6.5 percent preferred stock for $87.40 last year. The market
price for your stock is now $88.10. What is your total return for last year?
A.7.51 percent
B.7.73 percent
C.7.86 percent
D.8.19 percent
E.8.24 percent
25) 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
26) Which one of the following combinations will always result in an increased
dividend yield?
A.Increase in the stock price combined with a lower dividend amount
B.Increase in the stock price combined with a higher dividend amount
C.Decrease in the stock price combined with a lower dividend amount
D.Decrease in the stock price combined with a higher dividend amount
E.Increase in the stock price combined with a constant dividend amount
27) Underwood Enterprises earns $0.07 in profit on every $1 of sales and has $0.67 in
assets for every $1 of sales. The firm pays out 20 percent of its profits to its
shareholders. What is the internal growth rate?
A.6.37 percent
B.7.76 percent
C.8.80 percent
D.9.12 percent
E.9.65 percent
28) Three years ago, Hi Tek purchased some 5-year MACRS property for $67,400.
Today, it is selling this property for $28,000. How much tax will the firm owe on this
sale if the tax rate is 34 percent? The MACRS allowance percentages are as follows,
commencing with year one: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.
A.-$2,920
B.-$1,480
C.$0
D.$1,480
E.$2,920
29) Key facts and assumptions concerning Costco Company, at December 31, 2011,
appear below.
Use the above information to answer the following questions.
a. Estimate Costco’s cost of equity capital.
b. Estimate Costco’s weighted-average cost of capital.
30) Chapter 5 presents evidence that the average annual rate of return on common
stocks over many years has exceeded the return on government bonds in the United
States, while returns on common stocks have also exhibited more volatility than returns
on U.S. government bonds. Suppose that last year, the realized rate of return on
government bonds exceeded the return on common stocks. Your colleague suggests that
“last year shows us that investors are now willing to settle for lower returns on stocks
than on bonds.” How would you interpret this result?
31) Give an example of a situation where the management of a firm is acting in a
manner that is contrary to the principal goal of financial management.
32) Why do financial managers need to understand the implications of the sustainable
rate of growth?
33) Assume this is your first day on the job as the new chief financial officer of a
mid-size company. Identify the three key ratios that you would compute first as you
begin to try to understand the financial status of the firm. Explain why you selected the
three ratios that you did.
34) Explain the similarities and differences among an ordinary annuity, an annuity due,
and a perpetuity.
35) Assume the federal government mandates that all retail stores in the northern states
install heated sidewalks to help minimize the number of injuries that occur from people
falling as a result of snow and ice buildup on those sidewalks. How should a firm
determine the cost of capital for a project such as is?