1) Your company has a 38% tax rate and has $800 million in assets, currently financed
entirely with equity. Equity is worth $60 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 20-percent debt capital structure, and has
determined that they would have to pay a 10 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.$1.98
B.$2.29
C.$2.36
D.$2.44
2) A deposit of $500 earns 5% the first year, 6% the second year and 7% the third year.
What would be the third year future value?
A.$595.46
B.$615.62
C.$634.91
D.$602
3) When does a dividend become a firm obligation?
A.when the firm declares them
B.when the firm pays them
C.when the firm records them
D.on the ex-dividend date
4) PNB Industries has 20 million shares of common stock outstanding with a market
price of $18.00 per share. The company also has outstanding preferred stock with a
market value of $50 million, and 500,000 bonds outstanding, each with face value
$1,000 and selling at 97% of par value. The cost of equity is 15%, the cost of preferred
is 12%, and the cost of debt is 8.50%. If PNB’s tax rate is 40%, what is the WACC?
A.7.05%
B.9.47%
C.11.31%
D.11.83%
5) Compute the NPV for Project X and accept or reject the project with the cash flows
shown below if the appropriate cost of capital is 9 percent.
A.$-639.96
B.$360.04
C.$392.44
D.$486.29
6) Which of the following is NOT a factor that determines the coupon rate of a
company’s bonds?
A.The amount of uncertainty about whether the company will be able to make all the
payments
B.The term of the loan
C.The level of interest rates in the overall economy at the time
D.All of these are factors that determine the coupon rate of a company’s bonds
7) Which of the following is NOT one of the “five C’s” of credit analysis?
A.Capacity
B.Character
C.Collateral
D.Collectability
8) Which of these is a political and economic union of 27 European countries?
A.European Union
B.European Free Trade Agreement (EFTA)
C.European Monetary Fund (EMF)
D.Mercosur
9) P/E Ratio and Stock Price Pfizer, Inc. (PFE) has earnings per share of $2.09 and a
P/E ratio of 11.02. What is the stock price?
A.$0.19
B.$5.27
C.$18.97
D.$23.03
10) This type of business organization is legally independent entirely from its owners.
A.Sole proprietorship
B.Partnership
C.Public Corporations
D.Hybrid organizations
11) If a firm has a cash cycle of 30 days and an operating cycle of 64 days, what is its
average payment period?
A.30 days
B.34 days
C.64 days
D.94 days
12) A “thin” market is characterized by ________________________.
A.Infrequent trades
B.Lower-priced assets
C.Unrated financial securities
D.None of these
13) Average Return The past five monthly returns for PG Company are 1.25 percent,
-1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent. What is the average monthly
return?
A.1.946%
B.2.546%
C.9.73%
D.12.73%
14) Internal Growth Rate Last year Rain Repel Corporation had an ROA of 5% and a
dividend payout ratio of 90%. What is the internal growth rate?
A.4.75%
B.0.50%
C.50.00%
D.52.63%
15) You deposit $1,000 today and want to save $100 each month beginning one month
from today. Your account earns a 5% annual interest rate. How long will it take you to
accumulate $5,000?
A.29.3 months
B.35.7 months
C.42.6 months
D.52.1 months
16) LLV Inc. originally forecasted the following financial data for next year: Sales =
$1,000, Cost of goods sold = $675 and Interest expense = $90. The firm believes that
COGS will always be 67.5% of sales. Due to increased global demand, the firm is now
projecting that sales will be 20% higher than the original forecast. What is the
additional net income (as compared to the original forecast) the firm can expect
assuming a 35% tax rate?
A.$59.45
B.$195.00
C.$42.25
D.$74.00
17) Which of the following is defined as a merged firm’s ability to generate synergistic
cost savings through the joint use of inputs in producing multiple products?
A.economies of scale
B.economies of scope
C.economies of synergy
D.x-efficiencies
18) JackITs has 5 million shares of common stock outstanding, 1 million shares of
preferred stock outstanding, and 20 thousand bonds. If the common shares are selling
for $28 per share, the preferred share are selling for $13.50 per share, and the bonds are
selling for 98 percent of par, what would be the weight used for equity in the
computation of JackIT’s WACC?
A.33.33%
B.80.88%
C.83.08%
D.91.19%
19) Free Cash Flow Martha’s Moving Van 4U, Inc. had free cash flow during 2008 of
$1 million, EBIT of $30 million, tax expense of $8 million, and depreciation of $4
million. Using this information, what was Martha’s Accounts Payable ending balance in
2008?
A.$5 million
B.$15 million
C.$35 million
D.$45 million
20) Suppose that Darlene’s Donuts has annual sales of $200,000; cost of goods sold of
$90,000; average inventories of $4,000; average accounts receivable of $10,000; and an
average accounts payable balance of $7,000. Assuming that all of Darlene’s sales are on
credit, what will be the firm’s cash cycle?
A.6.08
B.28.39
C.34.47
D.62.86
21) A firm’s stock is selling at $95.00 per share. Its growth rate is 10% and investors
demand 15% on this stock. What is the firm’s expected dividend?
A.$4.75
B.$5.95
C.$6.25
D.$5.50
22) Sustainable Growth Rate You have located the following information on Rock
Company: debt ratio = 40%, capital intensity ratio = 2.25 times, profit margin = 8%,
and dividend payout ratio = 25%. What is the sustainable growth rate for Rock?
A.3.56%
B.6.00%
C.4.65%
D.8.00%
23) Suppose that the financial ratios of a potential borrowing firm took the following
values: X1 = Net working capital/Total assets = .05, X2 = Retained earnings/Total
assets = .12, X3 = Earnings before interest and taxes/Total assets = .17, X4 = Market
value of equity/Book value of long-term debt = .42, X5 = Sales/Total assets ratio = 0.6.
Calculate and interpret the Altman’s Z-score for this firm.
A.1.64; High risk
B.1.64; Indeterminate
C.1.99; Low risk
D.2.79; Indeterminate
24) What is the value in year 10 of a $1,000 cash flow made in year 5 if interest rates
are 9% in years 6 and 7 and increase to 13% in the remaining years?
A.$1,538.62
B.$1,691.47
C.$1,714.31
D.$1,799.42
25) Which of the following is correct?
A.Hedge funds often sell stock they don’t even own
B.Hedge funds maintain secrecy about their holdings, trading and strategies
C.Hedge funds are limited to sophisticated investors
D.All of these statements are correct
26) An investor owns $8,000 of Adobe Systems stock, $5,000 of Dow Chemical, and
$3,000 of Office Depot. What are the portfolio weights of each stock?
A.Adobe: 0.5; Dow Chemical: 0.31; Office Depot: 0.19
B.Adobe: 0.5; Dow Chemical: 0.32; Office Depot: 0.18
C.Adobe: 0.5; Dow Chemical: 0.13; Office Depot: 0.27
D.Adobe: 0.5; Dow Chemical: 0.19; Office Depot: 0.31
27) You win $1000 today which happens to be your 20th birthday. You decide to
deposit this money in an account and plan to add $1000 to it each year on your birthday
beginning one year from today. If you earn 10% per year in the account, how long will
it take to grow to $750,000?
A.23.17 years
B.32.87 years
C.44.44 years
D.51.38 years
28) Suppose that Freddie’s Fries has annual sales of $500,000; cost of goods sold of
$375,000; average inventories of $9,000; average accounts receivable of $25,000; and
an average accounts payable balance of $20,000. Assuming that all of Freddie’s sales
are on credit, what will be the firm’s cash cycle?
A.46.48
B.1.22
C.7.54
D.27.01
29) Statement of Cash Flows In 2008, Upper Crust had cash flows from investing
activities of ($250,000) and cash flows from financing activities of ($150,000). The
balance in the firm’s cash account was $90,000 at the beginning of 2008 and $105,000
at the end of the year. What was Upper Crust’s cash flow from operations for 2008?
A.$15,000
B.$105,000
C.$400,000
D.$415,000
30) Which of the following will increase a firm’s quick ratio assuming no other
accounts change?
A.A reduction in accounts payable
B.An increase in accounts receivable
C.An increase in inventory
D.All of these statements will increase a firm’s quick ratio
31) Calculating Costs of Issuing Stock Paige’s Purses, Inc., needs to raise $30 million in
new capital funding from a seasoned equity offering. In discussions with its investment
bank, Paige learns that the bankers recommend a gross price of $25.00 per share and
they will charge an underwriter’s spread of $2.00 of the gross price. In addition, Paige
must pay $2 million in legal and other administrative expenses for the seasoned stock
offering. What is the number of shares of stock that Paige will need to sell to raise the
$30 million?
A.1,391,305
B.1,280,000
C.1,120,000
D.1,127,392
32) These money market instruments are short-term funds transferred between financial
institutions, usually for no more than one day.
A.Treasury bills
B.Federal funds
C.Commercial paper
D.Banker acceptances