Which one of the following names matches the country where the bond is issued?
A. Empire: United Kingdom
B. Western: United States
C. Samurai: China
D. Bulldog: France
E. Rembrandt: Netherlands
Answer:
Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units,
plus or minus 2 percent. The expected variable cost per unit is $11 and the expected
fixed costs are $287,000. The fixed and variable cost estimates are considered accurate
within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax
rate is 32 percent. The sales price is estimated at $64 a unit, plus or minus 3 percent.
What is the earnings before interest and taxes under the base case scenario?
A. $46,920
B. $93,160
C. $114,920
D. $69,000
E. $58,480
Answer:
You are considering the following two mutually exclusive projects. Both projects will
be depreciated using straight-line depreciation to a zero book value over the life of the
project. Neither project has any salvage value.
Should you accept or reject these projects based on the profitability index?
A. accept Project A and reject Project B
B. reject Project A and accept Project B
C. accept both Projects A and B
D. reject both Projects A and B
E. You cannot make this decision based on the profitability index.
Answer:
Based on M & M Proposition II with taxes, the weighted average cost of capital:
A. is equal to the aftertax cost of debt.
B. has a linear relationship with the cost of equity capital.
C. is unaffected by the tax rate.
D. decreases as the debt-equity ratio increases.
E. is equal to RU × (1 – TC).
Answer:
The Sweet Shoppe and Candy Land are all-equity firms. The Sweet Shoppe has 500
shares outstanding at a market price of $96 a share. Candy Land has 2,700 shares
outstanding at a price of $24 a share. The Sweet Shoppe is acquiring Candy Land for
$62,000 in cash. The incremental value of the acquisition is $3,600. What is the net
present value of acquiring Candy Land to The Sweet Shoppe?
A. $1,600
B. $6,400
C. $6,700
D. $7,200
E. $7,700
Answer:
Which one of the following is least apt to reduce the unsystematic risk of a portfolio?
A. reducing the number of stocks held in the portfolio
B. adding bonds to a stock portfolio
C. adding international securities into a portfolio of U.S. stocks
D. adding U.S. Treasury bills to a risky portfolio
E. adding technology stocks to a portfolio of industrial stocks
Answer:
Assume the profit margin and the payout ratio of Major Manuscripts, Inc. are constant.
If sales increase by 9 percent, what is the pro forma retained earnings?
A. $5,220.18
B. $5,721.42
C. $6,308.50
D. $6,648.42
E. $7,028.56
Answer:
Martin invested $1,000 six years ago and expected to have $1,500 today. He has not
added or withdrawn any money from this account since his initial investment. All
interest was reinvested in the account. As it turns out, Martin only has $1,420 in his
account today. Which one of the following must be true?
A. Martin earned simple interest rather than compound interest.
B. Martin earned a lower interest rate than he expected.
C. Martin did not earn any interest on interest as he expected.
D. Martin ignored the Rule of 72 which caused his account to decrease in value.
E. The future value interest factor turned out to be higher than Martin expected.
Answer:
Cayman Productions is considering either leasing or buying some new underwater
photographic equipment. The lessor will charge $26,900 a year for a 2-year lease. The
purchase price is $48,600. The equipment has a 2-year life after which time it will be
worthless. Cayman uses straight-line depreciation, borrows money at 8 percent, and has
sufficient tax loss carryovers to offset any taxes which otherwise might be owed for the
next 4 years. What is the net advantage to leasing?
A. -$1,315
B. -$1,298
C. $630
D. $1,343
E. $1,457
Answer:
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no
debt. Penn believes the acquisition will increase its total aftertax annual cash flows by
$3.7 million indefinitely. The current market value of Teller is $103 million, and that of
Penn is $151.7 million. The appropriate discount rate for the incremental cash flows is 9
percent. Penn is trying to decide whether it should offer 40 percent of its stock of $127
million in cash to Teller’s shareholders. The cost of the cash alternative is _____, while
the cost of the stock alternative is _____.
A. $103,000,000; $118,324,444
B. $103,000,000; $127,000,000
C. $127,000,000; $103,000,000
D. $127,000,000; $118,324,444
E. $236,000,000; $103,000,000
Answer:
The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of
11.8 percent. The company has $22,000 in debt that is selling at par value. The levered
value of the firm is $41,000 and the tax rate is 34 percent. What is the pre-tax cost of
debt?
A. 4.73 percent
B. 6.18 percent
C. 6.59 percent
D. 7.22 percent
E. 9.92 percent
Answer:
Depreciation:
A. reduces both taxes and net income.
B. increases the net fixed assets as shown on the balance sheet.
C. reduces both the net fixed assets and the costs of a firm.
D. is a noncash expense which increases the net income.
E. decreases net fixed assets, net income, and operating cash flows.
Answer:
A 4-year project has an initial asset investment of $306,600, and initial net working
capital investment of $29,200, and an annual operating cash flow of -$46,720. The
fixed asset is fully depreciated over the life of the project and has no salvage value. The
net working capital will be recovered when the project ends. The required return is 15
percent. What is the project’s equivalent annual cost, or EAC?
A. -$158,491
B. -$152,309
C. -$147,884
D. -$145,509
E. -$142,212
Answer:
You invest $4,500 today at 6.5 percent, compounded continuously. How much will this
investment be worth 8 years from now?
A. $6,728
B. $7,569
C. $8,311
D. $8,422
E. $8,791
Answer:
The bid price always assumes which one of the following?
A. A project has a one-year life.
B. The aftertax net income of the project is zero.
C. The net present value of the project is zero.
D. Any assets purchased will have a positive salvage value at the end of the project.
E. Assets will be depreciated based on MACRS.
Answer:
The Snow Hut has analyzed the carrying and shortage costs associated with its cash
holdings and determined that the firm should ideally maintain a cash balance of $3,600.
This $3,600 represents which one of the following to the firm?
A. target cash balance
B. concentration balance
C. available balance
D. selected cash amount
E. compensating balance
Answer:
The Daily News had net income of $121,600 of which 40 percent was distributed to the
shareholders as dividends. During the year, the company sold $75,000 worth of
common stock. What is the cash flow to stockholders?
A. -$75,000
B. -$26,360
C. -$2,040
D. $123,640
E. $147,960
Answer:
Show Boat Dinner Theatres has paid annual dividends of $0.32, $0.52, and $0.60 a
share over the past three years, respectively. The company now predicts that it will
maintain a constant dividend since its business has leveled off and sales are expected to
remain relatively flat. Given the lack of future growth, you will only buy this stock if
you can earn at least a 19 percent rate of return. What is the maximum amount you are
willing to pay for one share of this stock today?
A. $2.43
B. $3.16
C. $4.43
D. $4.69
E. $4.82
Answer:
Which one of the following statements related to capital gains is correct?
A. The capital gains yield includes only realized capital gains.
B. An increase in an unrealized capital gain will increase the capital gains yield.
C. The capital gains yield must be either positive or equal to zero.
D. The capital gains yield is expressed as a percentage of the sales price.
E. The capital gains yield represents the total return earned by an investor.
Answer:
Last year, which is used as the base year, a firm had cash of $52, accounts receivable of
$218, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of
$61, accounts receivable of $198, inventory of $527, and net fixed assets of $1,216.
What is the common-base year value of accounts receivable?
A. 0.08
B. 0.10
C. 0.88
D. 0.91
E. 1.18
Answer:
Which one of the following statements is generally correct?
A. Private placements must be registered with the SEC.
B. All secondary markets are auction markets.
C. Dealer markets have a physical trading floor.
D. Auction markets match buy and sell orders.
E. Dealers arrange trades but never own the securities traded.
Answer:
Which of the following will decrease the value of a call option?
I. a decrease in the exercise price
II. a decrease in the value of the underlying security
III. an increase in the risk-free rate
IV. an increase in the time to expiration
A. II only
B. I and II only
C. III and IV only
D. I, II, and IV only
E. I, II, and III only
Answer:
Kelso Electric is debating between a leveraged and an unleveraged capital structure.
The all equity capital structure would consist of 40,000 shares of stock. The debt and
equity option would consist of 25,000 shares of stock plus $280,000 of debt with an
interest rate of 7 percent. What is the break-even level of earnings before interest and
taxes between these two options? Ignore taxes.
A. $42,208
B. $44,141
C. $46,333
D. $49,667
E. $52,267
Answer:
Which one of the following methods of setting prices would reduce the transactions
exposure for both the buyer and seller of a swap contract?
A. setting a permanent price at which a commodity will be traded
B. setting the price at the minimum spot price during a given period of time
C. setting the price equal to the spot price on the delivery date
D. using the average market price over a given period of time
E. setting the contract price equal to some percentage, less than 100 percent, of the
market price on any given day
Answer:
Miller Bros. Hardware is operating at full capacity with a sales level of $689,700 and
fixed assets of $468,000. The profit margin is 7 percent. What is the required addition
to fixed assets if sales are to increase by 10 percent?
A. $3,276
B. $4,680
C. $28,400
D. $32,760
E. $46,800
Answer:
A zero coupon bond:
A. is sold at a large premium.
B. pays interest that is tax deductible to the issuer when paid.
C. can only be issued by the U.S. Treasury.
D. has more interest rate risk than a comparable coupon bond.
E. provides no taxable income to the bondholder until the bond matures.
Answer:
Atlas Corp. wants to raise $4 million via a rights offering. The company currently has
450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter
has set a subscription price of $24 per share and will charge the company a 7 percent
spread. Assume that you currently own 7,200 shares of stock in the company and decide
not to participate in the rights offering. How much can you get for selling all of your
rights?
A. $24,911.21
B. $25,362.84
C. $25,792.19
D. $27,094.95
E. $32,811.16
Answer:
What is the price-sales ratio for 2012 if the market price is $18.49 per share?
A. 2.43
B. 3.29
C. 3.67
D. 4.22
E. 4.38
Answer:
Bankruptcy:
A. creates value for a firm.
B. transfers value from shareholders to bondholders.
C. technically occurs when total equity equals total debt.
D. costs are limited to legal and administrative fees.
E. is an inexpensive means of reorganizing a firm.
Answer:
Which of the following are sources of cash?
I. decrease in inventory
II. increase in accounts receivable
III. repayment of a bond
IV. sale of preferred stock
A. I and III only
B. I and IV only
C. II and III only
D. I, II, and III only
E. I, III, and IV only
Answer:
The standard deviation of a portfolio:
A. is a weighted average of the standard deviations of the individual securities held in
the portfolio.
B. can never be less than the standard deviation of the most risky security in the
portfolio.
C. must be equal to or greater than the lowest standard deviation of any single security
held in the portfolio.
D. is an arithmetic average of the standard deviations of the individual securities which
comprise the portfolio.
E. can be less than the standard deviation of the least risky security in the portfolio.
Answer: