For the year, Movers United has net income of $31,800, net new equity of $7,500, and
an addition to retained earnings of $24,200. What is the amount of the dividends paid?
A. $100
B. $7,500
C. $7,600
D. $15,100
E. $16,700
Answer:
Sunshine Rentals has a debt-equity ratio of 0.84. Return on assets is 7.9 percent, and
total equity is $438,000. What is the net income?
A. $41,147.09
B. $54,311.29
C. $63,667.68
D. $48,887.02
E. $50,458.95
Answer:
Which of the following will increase the sustainable rate of growth for a firm?
I. Decreasing the profit margin
II. Increasing the dividend payout ratio
III. Decreasing the capital intensity ratio
IV. Increasing the target debt-equity ratio
A. I and II only
B. III and IV only
C. II and IV only
D. I, III, and IV only
E. I, II, III, and IV
Answer:
Holly Farms has sales of $581,600, costs of $479,700, depreciation expense of $32,100,
and interest paid of $8,400. The tax rate is 42 percent. How much net income did the
firm earn for the period?
A. $25,788
B. 35,612
C. $43,380
D. $45,671
E. $45,886
Answer:
Which one of the following will increase the current value of a stock?
A. Decrease in the dividend growth rate
B. Increase in the required return
C. Increase in the market rate of return
D. Decrease in the expected dividend for next year
E. Increase in the capital gains yield
Answer:
Jersey T’s is preparing to sell new shares of stock to the general public. As part of this
process, the firm just filed the required paperwork with the SEC that contains the
material information related to this issue of stock. What is the name associated with this
paperwork?
A. Prospectus
B. Red herring
C. Security agreement
D. Comment letter
E. Registration statement
Answer:
Which one of the following statements related to securities dealers is correct?
A. Dealers match buyers with sellers.
B. Dealers buy and sell from their own inventory.
C. Dealers operate on a physical trading floor.
D. Dealers operate exclusively in auction markets.
E. Dealers are limited to trading nonlisted stocks.
Answer:
If an investment is producing a return that is equal to the required return, the
investment’s net present value will be:
A. positive.
B. greater than the project’s initial investment.
C. zero.
D. equal to the project’s net profit.
E. less than, or equal to, zero.
Answer:
In an efficient market, the cost of equity for a risky firm does which one of the
following according to the security market line?
A. Produces a return that will be less than the market rate but higher than the risk-free
rate
B. Equals the market rate of return for all stocks
C. Has a maximum cost equal to the market rate of return
D. Decreases as the beta of the firm’s stock increases
E. Increases in direct relation to the stock’s systematic risk
Answer:
Alpha Industries is considering a project with an initial cost of $7.4 million. The project
will produce cash inflows of $1.54 million a year for seven years. The firm uses the
subjective approach to assign discount rates to projects. For this project, the subjective
adjustment is +1.5 percent. The firm has a pretax cost of debt of 8.6 percent and a cost
of equity of 13.7 percent. The debt-equity ratio is 0.0.65 and the tax rate is 35 percent.
What is the net present value of the project?
A. -$372,951
B. -$187,016
C. $48,209
D. $133,333
E. $269,480
Answer:
Botanical Gardens Nursery has 6,800 shares of stock outstanding at a market price of
$21 a share. The earnings per share are $1.54. The firm has total assets of $315,000 and
total liabilities of $186,000. Today, the firm is paying an annual cash dividend of $0.82
a share. Ignore taxes. What will the earnings per share be after the dividend is paid?
A. $0.31
B. $0.74
C. $1.54
D. $20.70
E. $21.02
Answer:
Decatur Marina has a line of credit with a local bank that permits it to borrow up to $1.3
million at any time. The interest rate is 0.60 percent per month. The bank charges
compound interest and also requires that 5 percent of the amount borrowed be deposited
into a non-interest-bearing account. What is the effective annual interest rate on this
loan?
A. 6.68 percent
B. 7.43 percent
C. 7.74 percent
D. 7.83 percent
E. 8.91 percent
Answer:
Which one of the following projects is most apt to be financed with venture capital?
A. Additional warehouse space for a profitable trucking firm
B. New product for an international plastics manufacturing company
C. Prototype for a newly patented hand tool by an individual inventor
D. Seasonal merchandise for a major retailer
E. Domestic outlet for a large global exporter
Answer:
Which one of the following is correct based on the static theory of capital structure?
A. A firm receives the greatest benefit from debt financing when its tax rate is relatively
low.
B. A debt-equity ratio of 1 is considered to be the optimal capital structure.
C. The costs of financial distress decrease the value of a firm.
D. The more debt a firm assumes, the greater the incentive to acquire even more debt
until such time as the firm is financed with 100 percent debt.
E. At the optimal level of debt a firm also optimizes its tax shield on debt.
Answer:
Which one of the following is an argument that dividend policy is irrelevant?
A. Flotation costs as they apply to equities
B. Tax laws as they currently exist
C. An unsatisfied demand for high-dividend-paying stocks
D. Current equilibrium in the clientele dividend market
E. The current tax exclusion available to corporate investors
Answer:
The Veggie Hut has net income of $26,400, total equity of $102,700, and total assets of
$189,500. The dividend payout ratio is 0.30. What is the internal growth rate?
A. 7.99 percent
B. 8.57 percent
C. 10.81 percent
D. 16.87 percent
E. 21.94 percent
Answer:
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
Answer:
The historical record for the period 1926-2011 shows that the annual nominal rate of
return on:
A. risk-free securities has averaged around 5 percent.
B. the Consumer Price Index has been positive every year.
C. U.S. Treasury bills have had a positive rate of return for every year in the period.
D. U.S. Treasury bills is constant.
E. large company stocks has averaged around 9 percent.
Answer:
The balance sheet of Binger, Inc. has the following balances:
What is the amount of the change in net working capital?
A. -$8,100
B. -$7,400
C. $7,700
D. $8,000
E. $8,100
Answer:
Lester’s Dry Goods paid $1.10 per share in dividends last year. The company currently
has excess cash and would like to distribute $0.40 a share to its shareholders. However,
the company is concerned about increasing the dividend by that amount as it will not be
able to afford any increase in the future and doesn’t want to lower the dividend once it
has been raised. Which one of the following is probably the best suggestion for
distributing the $0.40 per share?
A. Pay a special dividend of $0.40 per share
B. Pay an extra cash dividend of $0.40 per share
C. Pay a liquidating dividend of $0.40 per share
D. Increase the regular dividend by $0.11 and pay a special dividend of $0.29
E. Increase the regular dividend by $0.11 and pay an extra cash dividend of $0.29
Answer:
A firm is reviewing a project that has an initial cost of $71,000. The project will
produce annual cash inflows, starting with year 1, of $8,000, $13,400, $18,600,
$33,100, and finally in year 5, $37,900. What is the profitability index if the discount
rate is 11 percent?
A. 0.92
B. 0.98
C. 1.02
D. 1.07
E. 1.12
Answer:
Ben & Terry’s has an expected return of 12.9 percent and a beta of 1.25. The expected
return on the market is 11.7 percent. What is the risk-free rate?
A. 3.87 percent
B. 4.24 percent
C. 4.61 percent
D. 6.29 percent
E. 6.92 percent
Answer: