1) During the last year you have had a loan commitment from your bank to fund
working capital for your business. The total line available was $10,000,000, of which
you took down $7,800,000. It is now the end of the loan commitment period and your
bank had you pay the back-end fees. You have misplaced the paperwork that listed the
terms of the commitment, but you know you paid total fees (this does not include any
interest paid to borrow the $7,800,000) of $51,200 on this loan commitment. You
remember that the back-end fee was 112 basis points. Calculate the front-end fee on this
loan commitment.
A.31 basis points
B.27 basis points
C.25 basis points
D.23 basis points
2) Which of the following statements is correct?
A.Stocks and long-term Treasury bonds are highly positively correlated
B.Stocks and Treasury bills are highly positively correlated
C.Stocks, long-term Treasury bonds and Treasury bills are all highly correlated
D.None of these statements is correct
3) Exchange Rate Quote Convert the following direct quote to a dollar indirect quote:
1 Malaysian Ringget = $0.2875
A.0.2875 Ringget
B.1.2875 Ringget
C.3.4783 Ringget
D.4.4783 Ringget
4) If a firm’s inventory ratio increases, what will happen to the firm’s operating cycle?
A.It will increase
B.It will decrease
C.It will increase and then slowly decrease back to the initial level
D.It will decrease and the slowly increase back to the initial level
5) Which of the following would cause dividends to decrease if the firm was using the
residual dividend model?
A.The firm has more positive NPV projects
B.The firm uses less debt in its capital structure
C.Net income decreases
D.All of these would cause dividends to decrease
6) You are considering an investment in 30-year bonds issued by Moore Corporation.
The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills
are currently earning 3.55%. Your broker has determined the following information
about economic activity and Moore Corporation bonds:
Real interest rate = 2.75%
Default risk premium = 1.05%
Liquidity risk premium = 0.50%
Maturity risk premium = 1.85%
What is the fair interest rate on Moore Corporation 30-year bonds?
A.3.80%
B.6.45%
C.6.95%
D.9.70%
7) Calculating Costs of Issuing Debt Soccer Games, Inc., with the help of its investment
bank recently issued $10 million of new debt. The offer price (and face value) on the
debt was $1,000 per bond and the underwriter’s spread was 5 percent of the gross
proceeds. What is the amount of capital funding Soccer Games, Inc., raised through this
debt offering?
A.$1,000
B.$0.5 million
C.$9.5 million
D.$10 million
8) Expected Return American Eagle Outfitters (AEO) recently paid a $0.38 dividend.
The dividend is expected to grow at a 15.5 percent rate. At the current stock price of
$24.07, what is the return shareholders are expecting?
A.15.50%
B.15.52%
C.17.08%
D.17.32%
9) Liquidity Ratios You have the following information on Olivia’s Bridle Shop: total
liabilities and equity = $65 million, current liabilities = $10 million, inventory = $15
million, and quick ratio = 3 times. Using this information, what is the balance for fixed
assets on Olivia’s balance sheet?
A.$20 m
B.$40 m
C.$45 m
D.$135 m
10) The study of the cognitive processes and biases associated with making financial
and economic decisions is known as _______________.
A.Efficient Thinking Hypothesis
B.Financial Cognition
C.Financial Leverage
D.Behavioral Finance
11) Free Cash Flow The 2010 income statement for Pete’s Pumpkins shows that
depreciation expense is $250 million, EBIT is $500 million, EBT is $320 million, and
the tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets
was $1,600 million and net operating working capital was $640 million. At the end of
the year gross fixed assets was $2,000 million. Pete’s free cash flow for the year was
$630 million. What is their end of year balance for net operating working capital?
A.$24 million
B.$264 million
C.$654 million
D.$1,064 million
12) What is the present value of a $775 annuity payment over 6 years if interest rates
are 11%?
A.$3,017.84
B.$3,119.67
C.$3,2002.92
D.$3,278.67
13) Regarding dividend payment procedures, this is the first day that the shares will be
traded without the dividend attached.
A.declaration date
B.ex-dividend date
C.record date
D.payment date
14) Compute the number of dollars that can be bought with 1 million of each foreign
currency units:
$1 = 3.9 Saudi Arabian Riyal
$1 = 0.52 Philippine Peso
$1 = 0.75 Latvian Lat
A.$258,410.26; $1,923,076.92; $1,333,888.33
B.$256,410.26; $1,928,076.92; $1,333,333.33
C.$256,410.26; $1,923,076.92; $1,333,333.33
D.$258,410.26; $1,928,076.92; $1,333,333.33
15) Your company is considering the purchase of a new machine. The original cost of
the old machine was $100,000; it is now 5 years old, and it has a current market value
of $40,000. The old machine is being depreciated over a 10-year life toward a zero
estimated salvage value on a straight-line basis, resulting in a current book value of
$50,000 and an annual depreciation expense of $10,000. The old machine can be used
for 6 more years but has no market value after its depreciable life is over. Management
is contemplating the purchase of a new machine whose cost is $80,000 and whose
estimated salvage value is zero. Expected before-tax cash savings from the new
machine are $13,000 a year over its full MACRS depreciable life. Depreciation is
computed using MACRS over a 5-year life, and the cost of capital is 10 percent.
Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project
be?
A.$2,200
B.$4,900
C.$10,200
D.$14,200
16) Liquidity Premium Hypothesis Suppose we observe the following rates: 1R1 = 8%,
1R2 = 10%, and E(2r1) = 8%. If the liquidity premium theory of the term structure of
interest rates holds, what is the liquidity premium for year 2, L2?
A.1.02%
B.4.04%
C.6.15%
D.12.03%
17) Investment Return WayCo stock was $75 per share at the end of last year. Since
then, it paid a $3 per share dividend last year. The stock price is currently $70. If you
owned 200 shares of WayCo, what was your percent return?
A.-6.67%
B.-2.67%
C.4.00%
D.4.29%
18) Loan amortization schedules show
A.the principal balance paid per period only
B.the interest paid per period only
C.both the principal balance and interest paid per period
D.the present value of the payments due
19) Which of these is NOT considered a coverage ratio?
A.Cash coverage ratio
B.Current ratio
C.Fixed-charge coverage ratio
D.Times Interest Earned
20) All of the following are types of financial institutions except _______.
A.Insurance companies
B.Pension funds
C.Thrifts
D.Federal Reserve Bank
21) Compound Frequency Payday loans are very short-term loans that charge very high
interest rates. You can borrow $500 today and repay $550 in two weeks. What is the
compound annual rate implied by this 10 percent rate charged for only two weeks?
A.10.50%
B.12.00%
C.1091.78%
D.110.50%
22) If a firm has a cash cycle of 75 days and an operating cycle of 120 days, what is its
payables turnover?
A.8.11x
B.7.19x
C.5.97x
D.6.73x
23) Calculation of Average Costs with Economies of Scope Crib World is considering a
merger with Tots Supply Stores. Crib’s total operating costs of producing services are
$250,000 for sales volume of $1.25 million. Tots’ total operating costs of producing
services are $210,000 for a sales volume (JP) of $900,000. For a sales volume of $2.15
million, calculate the reduction in production costs the merged firms need to experience
such that the total average cost (TAC) for the merged firms is equal to 17.5%.
A.decrease of $376,250
B.decrease of $83,750
C.decrease of $127,500
D.decrease of $87,500
24) Risk, Return, and Their Relationship Consider the following annual average
return, standard deviation, and coefficient of variation for Companies E and L. Which
stock appears better? Why?
25) Pumpkin Pie Industries has 5 million shares of common stock outstanding, 1
million shares of preferred stock outstanding, and 10 thousand bonds. If the common
shares are selling for $50 per share, the preferred shares are selling for $31 per share,
and the bonds are selling for 98 percent of par ($1000), what would be the weights used
in the calculation of Pumpkin Pie’s WACC for common stock, preferred stock, and
bonds, respectively?
A.33.33%, 33.33%, 33.33%
B.83.19%, 16.64%, 0.17%
C.85.97%, 10.67%, 3.38%
D.27.93%, 17.32%, 54.75%
26) In theory, this is a combination of securities that places the portfolio on the efficient
frontier and on a line tangent from the risk-free rate.
A.efficient market
B.market portfolio
C.probability distribution
D.stock market bubble
27) This is cash flow available for payments to stockholders and debt holders of a firm
after the firm has made investments in assets necessary to sustain the ongoing
operations of the firm.
A.Net income available to common stockholders
B.Cash flow from operations
C.Net cash flow
D.Free cash flow
28) Which one of the following is unlikely to have a high capital intensity ratio?
A.Railroad
B.Automobile manufacturer
C.Law firm
D.Shipbuilder
29) If a firm changes their capital structure by immediately selling additional claims of
one type of capital and using the proceeds to retire another kind of claims, they are
using this type of capital structure change.
A.active
B.passive
C.separation
D.supportive
30) GBH Inc. is planning on announcing a 5-for-2 stock split. The stock is currently
trading at $90 per share. Based on this information, what will be the new stock price?
A.$36.00
B.$225.00
C.$52.00
D.$34.00
31) When calculating the number of years needed to grow an investment to a specific
amount of money,
A.the lower the interest rate, the shorter the time period needed to achieve the growth
B.the higher the interest rate, the shorter the time period needed to achieve the growth
C.the interest rate has nothing to do with the length of the time period needed to achieve
the growth
D.the Rule of 72 is the only way to calculate the time period needed to achieve the
growth
32) What must the rate be less than to be worth it to incur a compensating balance of
$20,000 in order to get a 2-percent-lower interest rate on a 1-year, pure discount loan of
$200,000?
A.The rate must be less than 78%
B.The rate must be greater than 78%
C.The rate must be greater than -78%
D.The rate must be less than -78%
33) Operating cycle is measured as:
A.Inventory Turns minus Average Collection Period
B.Inventory Turns plus Average Collection Period
C.Days’ Sales in Inventory minus Average Collection Period
D.Days’ Sales in Inventory plus Average Collection Period
34) Which of these is a short-term loan secured by a company’s assets?
A.commercial loan
B.line of credit
C.asset-based loan
D.inventory loan
35) This is the ease with which an asset can be converted into cash.
A.direct transfer
B.liquidity
C.primary market
D.secondary market
36) Which of the following is not true about EE savings bonds?
A.Interest payments are received annually but are tax deductible
B.About 1 in 6 Americans own a savings bond
C.These are tax deferred investments
D.Patriot bonds sell for one-half of their face value
37) Calculate the total fees a firm would have to pay when its bank offers the firm the
following loan commitment: A loan commitment of $1,500,000 with an up-front fee of
95 basis points and a back-end fee of 25 basis points. The take-down on the loan is
50%.
A.$15,550
B.$16,125
C.$18,125
D.$15,955