1) All of the following are benefits that financial institutions provide to our economy
except _________.
A.Increased liquidity
B.Increased monitoring
C.Increased dollar amount of funds flowing from suppliers to fund users
D.Increased price risk
2) What annual rate of return is earned on a $13,000 investment made in year 2 when it
grows to $17,000 by the end of year 7?
A.10.64%
B.4.28%
C.8.04%
D.5.51%
3) This theory argues that individual investors and financial institutions have specific
maturity preferences, and to encourage buyers to hold securities with maturities other
than their most preferred requires a higher interest rate.
A.Liquidity Premium Hypothesis
B.Market Segmentation Theory
C.Supply and Demand Theory
D.Unbiased Expectations Theory
4) An investor wanting large returns will be interested in companies that have ____.
A.high ROAs
B.high ROEs
C.high current ratios
D.high times interest earned
5) If an investor wanted to reduce the risk of a levered stock in their portfolio, how
could they go about doing so while still retaining shares in the company?
A.They could sell some of their shares and use the proceeds to buy the firm’s bonds
B.They could sell some of their bonds and use the proceeds to buy the firm’s stock
C.They could use borrowed funds to buy more of the firm’s stock
D.None of these
6) Which of the following makes this a true statement: The shape of the efficient
frontier implies that
A.diminishing returns apply to risk-taking in the investment world
B.increasing returns apply to risk-taking in the investment world
C.returns are not impacted by risk-taking in the investment world
D.None of these complete the sentence to make it true
7) Number of Annuity Payments Joey realizes that he has charged too much on his
credit card and has racked up $4,000 in debt. If he can pay $200 each month and the
card charges percent 20 APR (compounded monthly), how long will it take him to pay
off the debt?
A.17.40 months
B.20.00 months
C.24.04 months
D.24.53 months
8) Suppose that the 2009 actual and 2010 projected financial statements for Camera
Corp are initially as shown below. In these tables, sales are projected to rise 40 percent
in the coming year, and the components of the income statement and balance sheet that
are expected to increase at the same 40 percent rate as sales are indicated with an italics
font. Assuming that Camera Corp wants to cover the AFN with 40 percent equity, 30
percent long-term debt, and the remainder from notes payable, what amount of
additional funds will they need to raise if debt carries a 7 percent interest rate?
A.$81,200 equity; $60,900 long-term debt; $60,900 notes payable
B.$60,900 equity; $81,200 notes payable; $60,900 long-term debt
C.$203,000 equity; $0 long-term debt; $0 notes payable
D.none of the answers are correct
9) Comparing Bond Yields A client in the 35 percent marginal tax bracket is comparing
a municipal bond that offers a 4.25 percent yield to maturity and a similar-risk corporate
bond that offers a 5.10 percent yield. Which bond will give the client more profit after
taxes?
A.the municipal bond
B.the corporate bond
C.Both give the client equal profits after taxes
D.There is not enough information given to determine answer
10) Current Yield What’s the current yield of a 6 percent coupon corporate bond quoted
at a price of 101.70?
A.5.9%
B.6.0%
C.6.1%
D.10.2%
11) Which of the following is defined as a transaction in which two firms combine to
form a single firm?
A.merger
B.synergy
C.acquisition
D.assignment
12) An 8% coupon municipal bond has 15 years left to maturity and has a price quote of
102.0. The bond can be called in 6 years. The call premium is one year of coupon
payments. Compute the bond’s yield to call and determine if the bond will be called.
Assume interest payments are paid semi-annually and a par value of $5,000.
A.4.31%; yes, the bond will be called
B.8.62%; yes, the bond will be called
C.8.62%; no, the bond will not be called
D.11.21%; no the bond will not be called
13) Your company doesn’t face any taxes and has $150 million in assets, currently
financed entirely with equity. Equity is worth $8 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 25-percent debt capital structure, and has
determined that they would have to pay a 12 percent yield on perpetual debt in either
event. What will be the break-even EBIT?
A.$18 million
B.$27.5 million
C.$32.5 million
D.$40 million
14) All of the following are factors that influence interest rates for individual securities
except ________.
A.The security’s term to maturity
B.Inflation
C.Special provisions regarding the use of funds raised by a particular security issuer
D.The home mortgage rate
15) When stock market values are relatively high, ___________________.
A.You will tend to observe more IPOs and new stock issuances
B.You will tend to observe more bond issuances
C.You will tend to observe firms raising more money from venture capitalists
D.You will tend to observe firms borrowing more money from banks
16) Which of the following will decrease the additional funds needed from external
sources?
A.The firm’s profit margin decreases
B.The firm’s retention ratio is increased
C.The firm reduces its usage of trade credit
D.None of these
17) Value stocks usually have
A.low P/E ratios and high growth rates
B.high P/E ratios and low growth rates
C.low P/E ratios and low growth rates
D.high P/E ratios and high growth rates
18) Which of the following statements is correct?
A.There is an inverse relationship between bond prices and bond yields
B.There is a positive relationship between bond prices and bond yields
C.There is no relationship between bond prices and bond yields
D.The relationship between bond prices and bond yields is dependent on the market
interest rate
19) Calculating Costs of Issuing Stock Volleyball Gear, Inc., with the help of its
investment bank recently issued 1.5 million shares of new stock. The offer price on the
stock was $18.50 per share and Volleyball’s received a total of $26,917,500 through this
stock offering. Calculate the net proceeds and the underwriter’s spread on the stock
offering. What percentage of the gross price is the investment bank charging
Volleyball’s for underwriting the stock issue?
A.3%
B.4.5%
C.6%
D.9%
20) Ten years ago, Hailey invested $1,000 and locked in a 9% annual rate for 30 years
(end 20 years from now). Aidan can make a 20-year investment today and lock in an
8% rate. How much money should he invest now in order to have the same amount of
money in 20 years as Hailey?
A.$1,589.03
B.$2,846.56
C.$3,109.48
D.$2,109.73
21) Income Statement You have been given the following information for Romeo’s
Rockers Corp.:
net sales = $5,200,000;
cost of goods sold = $2,100,000;
addition to retained earnings = $1,000,000;
dividends paid to preferred and common stockholders = $400,000;
interest expense = $200,000.
The firm’s tax rate is 30 percent. What is the depreciation expense for Romeo’s Rockers
Corp.?
A.$900,000
B.$1,100,000
C.$1,500,000
D.$1,600,000
22) Suppose that TipsNToes, Inc.’s capital structure features 40 percent equity, 60
percent debt, and that its before-tax cost of debt is 9 percent, while its cost of equity is
15 percent. If the appropriate weighted average tax rate is 34 percent, what will be
TipsNToes’ WACC?
A.9.36%
B.9.56%
C.11.40%
D.24.00%
23) Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent
and the risk-free rate is 7 percent, what is Netflicks’ risk premium?
A.20.91%
B.22.38%
C.25.72%
D.29.38%
24) Which of the following statements is correct?
A.If a new project is riskier than the firm’s existing projects, then it should be expect to
be “charged” a higher cost of capital than the firm’s overall WACC
B.If a new project is riskier than the firm’s existing projects, then it should be expect to
be “charged” a lower cost of capital than the firm’s overall WACC
C.The project’s risk and the cost of capital to which it is compared are independent
D.None of these answers is correct
25) Present Value of an Annuity What is the present value of a $600 annuity payment
over 4 years if interest rates are 6 percent?
A.$475.26
B.$757.49
C.$2,079.06
D.$3,145.28
26) Which of the following statements is incorrect?
A.The SBA can guarantee up to $750,000 at an interest rate not to exceed 2.75% more
than the prime lending rate
B.The primary function of the SBA is to guarantee loans made to new and small
businesses
C.For qualified new and small firms that are unable to obtain long-term financing on
reasonable terms from banks or other financial institutions, the SBA offers a basic loan
guarantee program
D.All of these statements are correct
27) Which of the following is the equivalent of $300 received today?
A.$795.99 to be received 20 years in the future assuming a 5% annual interest rate
B.$100 to be received two years from now and $200 three years from now
C.$300 compounded at 10% for one year
D.All of these are the equivalent of $300 received today
28) GBH Inc. is planning on announcing a 2-for-5 stock split. The stock is currently
trading at $12 per share. Based on this information, what will be the new stock price?
A.$4.80
B.$5.10
C.$27.00
D.$30.00
29) This ratio measures the percentage of total assets financed by debt.
A.debt
B.debt-to-equity
C.equity multiplier
D.liquidity
30) Which of the following is a short-term promissory note issued by a corporation,
bearing the unconditional guarantee of a major bank?
A.banker’s paper
B.commercial paper
C.banker’s acceptance
D.commercial acceptance
31) Your company doesn’t face any taxes and has $500 million in assets, currently
financed entirely with equity. Equity is worth $40 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 30-percent debt capital structure, and has
determined that they would have to pay a 9 percent yield on perpetual debt in either
event. What will be the standard deviation in EPS if they switch to the proposed capital
structure?
A.5.07
B.9.78
C.25.73
D.95.68
32) Maximizing owners’ equity value means carefully considering all of the following
except _______.
A.How to best bring additional funds into the firm
B.Which projects to invest in
C.How best to increase the firm’s risk
D.How best to return the profits from those projects to the owners over time
33) Corporate Taxes Scuba, Inc. is concerned about the taxes paid by the company in
2010. In addition to $5 million of taxable income, the firm received $80,000 of interest
on state-issued bonds and $500,000 of dividends on common stock it owns in Boating
Adventures, Inc. What is Scuba’s tax liability, average tax rate, and marginal tax rate,
respectively?
A.$1,637,100, 31.79%, 34%
B.$1,751,000, 34.00%, 34%
C.$1,870,000, 34.00%, 34%
D.$1,983,900, 36.07%, 34%