If the market price of existing publicly traded shares declines due to the announcement
of a seasoned issue of stock, the decline is referred to as which one of the following?
A. Spread
B. Direct underwriting cost
C. Underpricing
D. Direct issue cost
E. Abnormal return
Answer:
According to the efficient markets hypothesis, professional investors will earn:
A. excess profits over the long-term.
B. excess profits, but only on short-term investments.
C. a dollar return equal to the value paid for an investment.
D. a return that cannot be accurately predicted because investments are subject to the
random movements of the markets.
E. a return that “beats the market.”
Answer:
Blue Water Cafe has $28,700 in total assets, depreciation of $3,100, and interest of
$1,400. The total asset turnover rate is 1.2. Earnings before interest and taxes are equal
to 28 percent of sales. What is the cash coverage ratio?
A. 6.33
B. 7.51
C. 9.10
D. 10.23
E. 10.98
Answer:
Rembrandt, Samurai, Yankee, and Bulldog are all names associated with which one of
the following?
A. Eurobonds
B. Currencies
C. Cross-rate
D. Foreign bonds
E. Foreign interest rates
Answer:
Which one of the following statements is correct?
A. From a legal perspective, preferred stock is a form of corporate equity.
B. All classes of stock must have equal voting rights per share.
C. Common shareholders elect the corporate directors while the preferred shareholders
vote on mergers and acquisitions.
D. Dividends are tax-free income for individual investors.
E. Shareholders prefer noncumulative dividends over cumulative dividends.
Answer:
General Importers announced today that its next annual dividend will be $2.60 per
share. After that dividend is paid, the company expects to encounter some financial
difficulties and is going to suspend dividends for five years. Following the suspension
period, the company expects to pay a constant annual dividend of $1.30 per share. What
is the current value of this stock if the required return is 18 percent?
A. $3.01
B. $3.55
C. $3.89
D. $4.27
E. $4.88
Answer:
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
Answer:
Over the past four years, large-company stocks and U.S. Treasury bills have produced
the returns stated below. During this period, inflation averaged 2.8 percent. Given this
information, the average real rate of return on large-company stocks was ___ percent as
compared to _____ percent for Treasury bills.
A. 6.47; 0.92
B. 6.47; 1.08
C. 7.98; 0.92
D. 7.98; 1.08
E. 7.98; 1.22
Answer:
Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to
increase this dividend by 8 percent per year the following three years and then decrease
the dividend growth to 2 percent annually thereafter. Which one of the following is the
correct computation of the dividend for year 7?
A. ($1.10) (1.08 3) (1.02 4)
B. ($1.10) (1.08 3) (1.02 3)
C. ($1.10) (1.08)3 (1.02)4
D. ($1.10) (1.08)3 (1.02)3
E. ($1.10) (1.08)3 (1.02)2
Answer:
Sarah earned a 2.9 percent real rate of return on her investments for the past year.
During that time, the risk-free rate was 4.1 percent and the inflation rate was 3.6
percent. What was her nominal rate of return?
A. 5.30 percent
B. 6.06 percent
C. 6.60 percent
D. 6.67 percent
E. 6.91 percent
Answer:
The Three Stooges has the following estimated sales.
Purchases are equal to 75 percent of the following quarter’s sales. The accounts payable
period is 45 days. Assume each month has 30 days. What is the estimated accounts
payable balance at the end of quarter 2?
A. $6,300
B. $6,520
C. $6,624
D. $4,901
E. $4,200
Answer:
Charles Henri is considering investing $36,000 in a project that is expected to provide
him with cash inflows of $12,000 in each of the first two years and $18,000 for the
following year. At a discount rate of zero percent this investment has a net present value
of ____, but at the relevant discount rate of 17 percent the project’s net present value is
____.
A. $0; -$5,739
B. $0; -$3,406
C. $6,000; -$5,739
D. $6,000; -$3,406
E. $6,000; $1,897
Answer:
The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is
expected to pay annual dividends of $4.40 and $4.50 per share the next two years,
respectively. After that, the firm expects to maintain a constant dividend growth rate of
2 percent per year. What is the value of this stock today if the required return is 15
percent?
A. $27.64
B. $29.61
C. $30.66
D. $33.05
E. $33.93
Answer:
You’re trying to determine whether or not to expand your business by building a new
manufacturing plant. The plant has an installation cost of $26 million, which will be
depreciated straight-line to zero over its three-year life. If the plant has projected net
income of $2,348,000, $2,680,000, and $1,920,000 over these three years, what is the
project’s average accounting return (AAR)?
A. 11.69 percent
B. 14.14 percent
C. 15.08 percent
D. 17.82 percent
E. 19.21 percent
Answer:
When using the pure play approach for a proposed investment, a firm is primarily
seeking a rate of return that:
A. is based on the actual source of funds that will be used to fund the project.
B. creates a positive net present value for the project.
C. reflects the size and life of the project.
D. most closely correlates with the proposed investment’s internal rate of return.
E. best matches the risk level of the proposed investment.
Answer:
River Rock, Inc. just paid an annual dividend of $2.80. The company has increased its
dividend by 2.5 percent a year for the past 10 years and expects to continue doing so.
What will a share of this stock be worth 6 years from now if the required return is 16
percent?
A. $23.60
B. $24.65
C. $25.08
D. $25.50
E. $26.90
Answer:
Glass Growers has no debt. Its cost of capital is 8.7 percent. Suppose the firm converts
to a debt-equity ratio of 0.65. The interest rate on the debt is 6.9 percent. What is its
new WACC?
A. 7.99 percent
B. 8.13 percent
C. 8.36 percent
D. 8.44 percent
E. 8.61 percent
Answer:
Which one of the following is the tax rate that applies to the next dollar of taxable
income that a firm earns?
A. Average tax rate
B. Variable tax rate
C. Marginal tax rate
D. Absolute tax rate
E. Contingent tax rate
Answer:
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
Answer:
The stock price of Russell, Inc. is $81. Investors require a 14 percent rate of return on
similar stocks. If the company plans to pay a dividend of $4.20 next year, what growth
rate is expected for the company’s stock price?
A. 7.99 percent
B. 8.00 percent
C. 8.12 percent
D. 8.37 percent
E. 8.81 percent
Answer: