1) The 1-year forward rate for the British pound is 0.6781 = $1. The spot rate is 0.6789
= $1. The interest rate on a risk-free asset in the U.K. is 4.6 percent. If interest rate
parity exists, what is the 1 year risk-free rate in the U.S.?
A.4.68 percent
B.4.72 percent
C.4.77 percent
D.4.83 percent
E.4.87 percent
2) Kate owns a stock with a market price of $31 per share. This stock pays a constant
annual dividend of $0.60 per share. If the price of the stock suddenly increases to $36 a
share, you would expect the:
I. dividend yield to increase.
II. dividend yield to decrease.
III. capital gains yield to increase.
IV. capital gains yield to decrease.
A.I only
B.II only
C.III only
D.I and III only
E.II and IV only
3) The static theory of capital structure assumes a firm:
A.maintains a constant debt-equity ratio
B.has an all-equity structure
C.is fixed in terms of its assets
D.pays no taxes
E.is operating at the point where financial distress costs are eliminated
4) Which of the following factors favor the issuance of equity in the financing decision?
I. Market signaling
II. Distress costs
III. Management incentives
IV. Financial flexibility
A.I and II only
B.I and III only
C.II and IV only
D.II, III, and IV only
E.I, II, and IV only
5) It takes The Corner Store an average of 51 days to sell its inventory and 32 days to
collect its accounts receivable. The firm has sales of $568,700 and costs of goods sold
of $398,800. What is the accounts receivable turnover rate?
A.11.23
B.11.41
C.11.78
D.12.23
E.12.55
6) The amount of time that a firm holds inventory in stock is referred to as which one of
the following?
A.Inventory period
B.Accounts receivable period
C.Accounts payable period
D.Operating cycle
E.Cash cycle
7) Abbott Co. and Baker Co. have both announced IPOs at $24 per share. One of these
is undervalued by $3, and the other is overvalued by $1.25, but you have no way of
knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is
underpriced, it will be rationed, and only half your order will be filled. What profit do
you actually expect?
A.$175
B.$250
C.$325
D.$350
E.$425
8) Appalachian Mountain Goods has paid increasing dividends of $.0.12, $0.18, $0.20,
and $0.25 a share over the past four years, respectively. The firm estimates that future
increases in its dividends will be equal to the arithmetic average growth rate over these
past four years. The stock is currently selling for $12.60 a share. The risk-free rate is 3.2
percent and the market risk premium is 9.1 percent. What is the cost of equity for this
firm if its beta is 1.26?
A.14.34 percent
B.16.91 percent
C.19.78 percent
D.22.96 percent
E.24.03 percent
9) Which of the following will increase the cost of equity for a firm with a beta of 1.1?
I. decrease in the security’s beta
II. decrease in the market risk premium
III. decrease in the risk-free rate
IV. increase in the risk-free rate
A.II only
B.III only
C.I and II only
D.II and III only
E.I and IV only
10) What is the net present value of a project that has an initial cost of $40,000 and
produces cash inflows of $8,000 a year for 11 years if the discount rate is 15 percent?
A.$798.48
B.$1,240.23
C.$1,869.69
D.$2,111.41
E.$2,470.01
11) The payback period is the length of time it takes an investment to generate
sufficient cash flows to enable the project to:
A.produce a positive annual cash flow
B.produce a positive cash flow from assets
C.offset its fixed expenses
D.offset its total expenses
E.recoup its initial cost
12) The price at which a dealer will purchase a bond is called the _____ price.
A.asked
B.face
C.call
D.put
E.bid
13) Which one of the following must equal zero if a firm pays a constant annual
dividend?
A.Dividend yield
B.Capital gains yield
C.Total return
D.Market value per share
E.Book value per share
14) The Road House would like to issue some semiannual coupon bonds at par.
Comparable bonds have a current yield of 8.16 percent, an effective annual yield of
8.68 percent, and a yield to maturity of 8.50 percent. What coupon rate should The
Road House set on its bonds?
A.8.00 percent
B.8.16 percent
C.8.50 percent
D.8.68 percent
E.9.00 percent
15) A firm has two open positions on its board of directors. How many shares do you
need to own to guarantee your own election to the board if the firm has 12,500 shares of
stock outstanding and uses cumulative voting? Each share is granted one vote.
A.3,334 shares
B.4,168 shares
C.5,251 shares
D.5,501 shares
E.6,251 shares
16) Figure 9.1
In March of 2011, Macklemore Corp. considered an acquisition of Blue Scholar
Learning, Inc. (BSL), a privately-held educational software firm. As a first step in
deciding what price to bid for BSL, Macklemore’s CFO, Ryan Lewis, has prepared a
five-year financial projection for the company assuming the acquisition takes place.
Use this projection and BSL’s 2010 actual financial figures to answer the questions
below.
Assume that at year-end 2015 the company’s equity is worth 15 times earnings after tax
and its debt is worth book value. Macklemore’s WACC is 8.0 percent. BSL’s WACC is
11.5 percent, and the average of the two companies’ WACCs, weighted by sales, is 8.2
percent. What is the maximum acquisition price (in $ millions) Macklemore should pay
to acquire BSL’s equity at the end of 2010?
A.$3,484.68
B.$4,723.26
C.$4,938.06
D.$5,554.68
E.$6,343.26
17) Which one of the following is the price that an investor pays to purchase an
outstanding bond?
A.Dirty price
B.Face value
C.Call price
D.Bid price
E.Clean price
18) Which of the following statements concerning a firm’s cash flows and profits is
false?
A.Managers must be at least as concerned with cash flows as with profits.
B.A company that sells merchandise at a profit will generate cash soon enough to
replenish cash flows required for continued production
C.The cash flows generated in a given time period can differ from the profits reported
D.Profits are no assurance that cash flow will be sufficient to maintain solvency
E.Due to required cash investments in current assets, fast-growing and profitable
companies can literally “grow broke”
19) Chesterfield and Weston has 55,000 shares of common stock outstanding at a price
of $31 a share. It also has 3,000 shares of preferred stock outstanding at a price of $62 a
share. The firm has 8 percent, 12-year bonds outstanding with a total face value of
$400,000. The bonds are currently quoted at 101.2 percent of face and pay interest
semiannually. What is the capital structure weight of the firm’s debt if the tax rate is 35
percent?
A.14.49 percent
B.15.20 percent
C.15.67 percent
D.16.84 percent
E.17.63 percent
20) If a firm has a negative cash flow from assets every year for several years, the firm:
A.may be continually increasing in size
B.must also have a negative cash flow from operations each year
C.is operating at a high level of efficiency
D.is repaying debt every year
E.has annual net losses
21) A U.S. firm has total assets valued at 890,000 located in London. This valuation did
not change from last year. Last year, the exchange rate was 0.62 = $1. Today, the
exchange rate is 0.68 = $1. By what amount did these assets change in value on the
firm’s U.S. financial statements?
A.-$126,660.34
B.$-113,511.03
C.$-87,248.91
D.$113,511.03
E.$126,660.34
22) Northwestern Lumber Products currently has 15,000 shares of stock outstanding.
Patricia, the financial manager, is considering issuing $120,000 of debt at an interest
rate of 6.75 percent. Given this, how many shares of stock will be outstanding once the
debt is issued if the break-even level of EBIT between these two capital structure
options is $60,000? Ignore taxes.
A.12,975 shares
B.13,650 shares
C.14,025 shares
D.14,550 shares
E.15,000 shares
23) A recent alumnus of your university gifted money to the school to fund annual
scholarships for needy students. The school expects to earn an average rate of return of
6.5 percent and distribute $40,000 annually in scholarships. What was the amount of the
gift?
A.$260,000.00
B.$328,500.00
C.$615,384.62
D.$658,929.38
E.$661,423.33
24) Dexter, Inc. has a bond issue outstanding. The issue’s indenture provision prohibits
the firm from redeeming the bonds during the first three years. This provision is
referred to as the _____ provision.
A.safeguard
B.market
C.liquidity
D.deferred call
E.sinking fund
25) Which of the following statements are correct?
I. Liquidation value of a firm is equal to the present worth of expected future cash flows
from operating activities.
II. When an acquiring firm purchases a target firm’s equity, the acquirer must assume
the target’s liabilities.
III. The market value of a public company reflects the worth of the business to minority
investors.
IV. The fair market value of a business is usually the lower of its liquidation value and
its going-concern value.
A.I and III only
B.II and IV only
C.II and III only
D.I, II, and III only
E.II, III, and IV only
26) Which one of the following might be included in a bond’s list of negative
covenants?
A.Maintaining a current ratio of 1.2 or more
B.Maintaining a minimum cash balance of $1.2 million
C.Limiting cash dividends to $1 per share or less
D.Maintaining a times interest earned ratio of 2 or more
E.Providing audited financial statements in a timely manner
27) Farmer’s Supply, Inc. is considering opening a clothing store, which would be a new
line of business for the firm. Management has decided to use the cost of capital of a
similar clothing store as the discount rate that should be used to evaluate this proposed
expansion. Which one of the following terms is used to describe the approach Farmer’s
Supply is taking to establish an appropriate discount rate for the project?
A.Equity approach
B.Aftertax approach
C.Subjective approach
D.Market play
E.Pure play approach
28) The economic order quantity approach states that inventory order sizes should be
determined in which one of the following manners?
A.By dividing annual item sales by the carrying cost per item and multiplying by 2
B.By computing the average number of items sold each month
C.By equating restocking costs with carrying costs
D.By dividing the inventory into various groups based on the value per item
E.By computing the amount of the derived demand
29) Which one of the following methods of analysis ignores cash flows?
A.Profitability index
B.Net present value
C.Average accounting return
D.Modified internal rate of return
E.Internal rate of return
30) The Corner Market has decided to expand its retail store by building on a vacant lot
it currently owns. This lot was purchased four years ago at a cost of $299,000, which
the firm paid in cash. To date, the firm has spent another $38,000 on land
improvements, all of which was also paid in cash. Today, the lot has a market value of
$329,000. What value should be included in the analysis of the expansion project for
the cost of the land?
A.The sum of the cash paid to date for both the lot and the improvements
B.The original purchase price only
C.The current market value of the land plus the cash paid for the improvements
D.The current market value of the land
E.Zero because the land and the improvements were purchased with cash