1) A stock with a beta of 1.4 has 40% more variability in returns than the average stock.
2) Short-term debt has a greater risk of illiquidity than long-term debt because it must
be rolled over more frequently and its use creates more uncertainty concerning future
interest rates.
3) The after-tax cost of debt is equal to one minus the marginal tax rate times the yield
to maturity on the firm’s outstanding debt.
4) The purchase of a pool of mortgages is often financed through the sale of securities
called mortgage-backed securities, or MBS. This is a key part of the securitization
process.
5) The effective cost to the borrower of an unsecured bank loan is increased if a
compensating balance is required.
6) Low dividends may increase stock value due to the advantage of tax deferral that
comes with capital gains.
7) Using the weighted cost of capital as a cutoff rate assumes that the riskiness of the
project being evaluated is similar to the riskiness of the company’s existing assets.
8) A company’s investment in accounts receivable is determined by the company’s level
of sales, percent of credit sales to total sales, and credit and collection policies.
9) U.S. Treasury Bills are exempt from federal, state, and local income taxes.
10) It is commonly accepted that the industry average for a ratio is the ideal goal for a
financial manager to achieve.
11) The initial outlay of a project may be reduced by the after-tax salvage value of
replaced equipment.
12) A corporate investment manager needs to invest $1,000,000 for the next 6 months.
The current nominal rate of interest in the United States is 5%, while the nominal rate
of interest in Argentina is 8%. Which of the following statements is MOST correct?
A) The manager should invest the funds in Argentina and make an extra $30,000 for the
year
B) The manager may decide to invest the funds in the United States due to the
international Fisher effect, which suggests inflation in Argentina may make the extra
interest income worth less in one year
C) The manager is indifferent between investing the funds in the United States or
Argentina because real returns will always be the same in the end
D) The manager cannot invest in Argentina because his company is investing dollars
13) You plan to go to Asia to visit friends in three years. The trip is expected to cost a
total of $10,000 at that time. Your parents have deposited $5,000 for you in a Certificate
of Deposit paying 6% interest annually, maturing three years from now. Uncle Lee has
agreed to pay for all remaining expenses. If you are going to put Uncle Lee’s gift in an
investment earning 10% over the next three years, how much must he deposit today, so
you can visit your friends three years from today?
A) $3,757
B) $3,039
C) $5,801
D) $3,345
14) Techno Robots produces a functioning toy robot. At a production and sales level of
10,000 robots, the firm has the following information:
Selling price per unit = $15
Variable costs per unit = $8
EBIT = $17,500
a.What is the break-even point in units for the firm?
15) Crandle’s common stock is currently selling for $79.00. It just paid a dividend of
$4.60 and dividends are expected to grow at a rate of 5% indefinitely. What is the
required rate of return on Crandle’s stock?
A) 11.11%
B) 11.76%
C) 12.2%
D) 14.21%
16) Of the following, which differs in meaning from the other three?
A) systematic risk
B) market risk
C) undiversifiable risk
D) asset-unique risk
17) The telecommunications system that provides a national information linkup among
brokers and dealers operating in the over-the-counter market is called
A) NCIS
B) NSQA
C) NASDAQ
D) NASQ
18) The balance sheet and income statement for Johnson and Breakwater is presented
below.
a.Compute the following ratios: Current ratio, Acid test ratio, Debt ratio, Total asset
turnover, Operating profit margin, Return on total investments, Times interest earned,
Inventory turnover.
b.All other things equal, compute the dollar amount of sales needed to achieve an 18%
return on total assets for the coming year.
c.Given Johnson’s inventory turnover ratio, find a way of computing the current level of
inventory given this ratio and assuming the current level of inventories is unknown. Set
up but do not solve.
19) The percent of sales method does not accurately estimate the balances for lumpy
assets. Which of the following statements best describes the possible errors?
A) If excess capacity exists, the percent of sales method will overestimate asset
requirements
B) The percent of sales method consistently underestimates the forecasted balances of
lumpy assets
C) The percent of sales method consistently overestimates the forecasted balances of
lumpy assets
D) If fixed assets are utilized at full capacity currently, the percent of sales method will
underestimate the forecasted fixed asset balance
20) When terminating a project for capital budgeting purposes, the working capital
outlay required at the initiation of the project will
A) not affect the cash flow
B) decrease the cash flow because it is a historical cost
C) increase the cash flow because it is recaptured
D) decrease the cash flow because it is an outlay
21) Which of the following is NOT a definition of yield to maturity?
A) discount rate that equates present value of future cash flows with a bond’s price
B) investors’ required rate of return on a bond investment
C) return that an investor will earn if they buy the bond for its market price and hold it
until maturity
D) discount rate that equates present value of future cash flows with a bond’s face value
22) All of the following securities are sold in money markets EXCEPT
A) common stock
B) commercial paper
C) 3-month U.S. Treasury Bills
D) 6-month certificates of deposit
23) Trinitron, Inc. purchased a new molding machine for $85,000. The company paid
$8,000 for shipping and another $7,000 to get the machine integrated with the
company’s existing assets. Trinitron must maintain a supply of special lubricating oil
just in case the machine breaks down. The company purchased a supply of oil for
$4,000. The machine is to be depreciated on a straight-line basis over its expected
useful life of 8 years. What will depreciation expense be during the first year?
A) $13,000
B) $12,500
C) $11,625
D) $11,500
24) Which of the following items does NOT belong in a cash budget?
A) rent
B) taxes
C) depreciation
D) wages and salaries
25) Tillamook Farms invests in a new kind of frozen dessert called polar cream that
becomes very popular. So many new customers come to the store that the sales of
existing ice cream products are increased. The extra sales revenue
A) should not be counted as incremental revenue for the polar cream project because
the sales come from existing products
B) are synergistic effects that should be counted as incremental revenues for the polar
cream project
C) are cannibalized sales that should be excluded from the analysis
D) should be included in the analysis, but not the cost of the ice cream that is sold as
that is a recurring expense
26) All of the following are income statement items EXCEPT
A) accrued expenses
B) depreciation expense
C) cost of goods sold
D) interest expense
27) Based on the information in Table 4-1, the debt ratio is
A) 24.1%
B) 32.6%
C) 45.0%
D) 55.2%
28) Asymmetric Frames Corp had a return on equity of 15%. The corporation’s earnings
per share was $6.00, its dividend payout ratio was 40% and its profit-retention rate was
60%. If these relationships continue, what will be United Financial Corp’s internal
growth rate?
A) 6.0%
B) 8.6%
C) 9.0%
D) 15.6%
29) A well-diversified portfolio includes investments in 50 securities. The portfolio’s
systematic risk is likely to be about
A) 50% of the total risk
B) 40% of the total risk
C) 25% of the total risk
D) zero because risk is eliminated with a portfolio of 50 securities or more
30) Put the following in order of their claim on assets of a firm, starting with the LAST
to have a claim:
A. Subordinated debenturesB. Debentures (unsubordinated)
C. Common StockD. Preferred stock
A) C, B, A, D
B) C, D, A, B
C) B, A, C, D
D) D, C, B, A
E) D, C, A, B
31) You are considering an investment in a AAA-rated U.S. corporate bond but you are
not sure what rate of interest it should pay. Assume that the real risk-free rate of interest
is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the
default risk premium for AAA-rated corporate bonds is 3.5%. What rate of interest
should the U.S. corporate bond pay?
A) 8.5%
B) 6.0%
C) 5.0%
D) 2.5%
32) Plato Industries’ projected sales for the first six months of 2012 are given below:
Jan.$250,000April$300,000
Feb.$340,000May$350,000
Mar.$280,000June$380,000
20% of sales are collected in cash at time of sale, 50% are collected in the month
following the sale, and the remaining 30% are collected in the second month following
the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to
the sales, and payments for purchases are made in the month of the sale. Total other
cash expenses are $70,000/month. The company’s cash balance as of February 28, 2012
will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato
has no short term borrowing as of February 28, 2012. Ignore any interest on short-term
borrowing. The company must have a minimum cash balance of $40,000 at the
beginning of each month. What is Plato Industries’ total disbursement in May?
A) $367,500
B) $348,000
C) $425,500
D) $324,000
33) Which of the following is a fixed cost?
A) insurance
B) direct material
C) direct labor
D) freight costs on products
34) What is the value of a bond that matures in 17 years, makes an annual coupon
payment of $50, and has a par value of $1,000? Assume a required rate of return of
5.90%.
A) $823.48
B) $856.98
C) $895.23
D) $905.02
35) Many preferred stocks have a provision that entitles a company to repurchase its
preferred stock from their holders at stated prices over a given time period. What is the
name of this provision?
A) cumulative
B) putable
C) callable
D) convertible
36) Corporation B reported earnings per share of $10. Corporation B has 100,000
shares of common stock outstanding and reported an increase in owners equity of
$400,000 for the period. Corporation B paid $50,000 in interest expense during the
period. Corporation B paid dividends per share of
A) $6.00
B) $5.50
C) $6.50
D) $14.003
37) The pure play method
A) calculates beta using only project returns
B) uses the beta of a firm that is similar to the project being analyzed to determine the
required rate of return for the project
C) selects a firm similar to the project being analyzed and uses its returns as the market
return in estimating a project beta
D) selects one of the firm’s existing projects that is similar to the project being analyzed
and uses that project’s required rate of return
38) Mountain Recreation, Inc. is considering a new product line. The company
currently manufactures several lines of snow skiing apparel. The new products,
insulated ski bikinis, are expected to generate sales of $1.2 million per year for the next
five years. They expect that during this five-year period, they will lose about $150,000
each year in sales on their existing lines of longer ski pants. The new line will require
no additional equipment or space in the plant and can be produced in the same manner
as the apparel products. The new project will, however, require that the company spend
an additional $50,000 per year on insurance in case customers sue for frostbite. Also, a
new marketing director would be hired to oversee the line at $75,000 per year in salary
and benefits. Because of the different construction of the bikinis, an increase in
inventory of $9,000 would be required initially. If the marginal tax rate is 35%,
compute the incremental after tax cash flows for years 1-5.
A) $634,500 per year
B) $625,000 per year
C) $601,250 per year
D) $537,500 per year
39) The financial manager is concerned with
A) striking a balance between holding too much and too little cash
B) maintaining high levels of profitability
C) minimizing the chance of insolvency
D) all of the above
40) Which of the following securities will likely have the highest maturity risk
premium?
A) U.S. Treasury Bond maturing in 2027
B) BBB-rated corporate bond maturing in 2020 actively traded on a major exchange
C) AAA-rated corporate bond maturing in 2015 not actively traded
D) U.S. Treasury Bill
41) Alloy Corp. is considering the acquisition of a new processing line. The processor
can be purchased for $4,550,000. It will cost $65,000 to ship and $190,500 to install the
processor. A recently completed feasibility study that was performed at a cost of
$45,000 indicated that the processor would produce a positive NPV. Studies have
shown that employee-training expenses will be $150,000. What is the total investment
in the processing line for capital budgeting purposes?
A) $4,550,000
B) $4,700,000
C) $4,955,500
D) $5,000,500
42) What is the value of a bond that matures in 5 years, has an annual coupon payment
of $110, and a par value of $2,000? Assume a required rate of return of 8.69%.
A) $938.50
B) $1,876.99
C) $1,891.36
D) $1,749.83
43) If a firm with credit terms of 2/10 net 30 were to change its terms to 2/10 net 60, the
result would probably be
A) more customers would take advantage of the cash discount
B) fewer customers would take advantage of the cash discount
C) increased accounts receivable turnover
D) a reduction in safety stock
44) Which of the following categories of owners enjoy limited liability?
A) all partners in a limited partnership
B) common shareholders of a corporation
C) in a partnership, only the general partners
D) only B and C above
45) Your daughter is born today and you want her to be a millionaire by the time she is
40 years old. open an investment account that promises to pay 11.5% per year. How
much money must you deposit today so your daughter will have $1,000,000 by her 35th
birthday?
A) $28,575
B) $22,150
C) $20,100
D) $18,940
46) Prepare a balance sheet using the information given below. Make sure to identify
current assets, net fixed assets, total assets, current liabilities, long-term debt, total
equity, and total liabilities and equity.
47) DXZ, Inc. currently produces one product which sells for $250 per unit. The
company’s fixed costs are $75,000 per year; variable costs are $205 per unit. A
salesman has offered to sell the company a new piece of equipment which will increase
fixed costs to $100,000. The salesman claims that the company’s break-even point will
not be altered if the company purchases this equipment. What will be the company’s
new variable cost per unit?
48) AAC, Inc. is planning to issue $5,000,000 in 180-day maturity notes paying a rate
of 12 percent per annum. The company expects to incur costs of approximately $20,000
in dealer placement fees and other expenses of issuing the commercial paper. The
company plans to back up their commercial paper offering with a line of credit from a
bank for $5,000,000. The compensating balance requirement is 10 percent of the line of
credit. The company normally maintains $450,000 in its accounts with the bank. What
is the effective cost of the commercial paper offering?
49) Leigh Delight Candy, Inc. is choosing between two bonds in which to invest their
cash. One is being offered from Hershey’s and will mature in 10 years and pay $30 each
quarter. The other alternative is a Mars’ bond that will mature in 20 years and pay $30
each quarter. What would be the present value of each bond if the discount rate is 10%
compounded quarterly, and each bond pays $1,000 at maturity?
50) The corporate treasurer of Wooden Furniture Inc. is considering the purchase of
either a municipal obligation with a 6.1% coupon or a corporate bond with a 9.5%
return. Both bonds have a $1,000 par value. The company is currently in the 35%
marginal tax bracket. Which security should the treasurer recommend?
51) Amalgamated Enterprises is planning to purchase some new equipment. With this
new equipment, the company expects sales to increase from $8,000,000 to $10,000,000.
A portion of the financing for the purchase of the equipment will come from a
$1,000,000 new common stock issue. The company knows that its current assets, fixed
assets, accounts payable, and accrued expenses increase directly with sales. The
company’s net profit margin on sales is 8 percent, and the company plans to pay 40
percent of its after-tax earnings in dividends. A copy of the company’s current balance
sheet is given below.
Amalgamated Enterprises Balance Sheet
Prepare a pro forma balance sheet for Amalgamated for next year.
52) Toombes, Inc. is issuing new common stock at a market price of $55. Dividends last
year were $3.30 per share and are expected to grow at a rate of 6%. Flotation costs will
be 5% of the market price. What is Toombes’ cost of retained earnings, and new equity,
respectively?
53) Your company needs to pay $10,000 for the overhaul of five trucks. A bank offers
you a loan at 18 percent per annum with a compensating balance requirement of 15
percent of the loan amount. You plan to borrow the money for 9 months and currently
do not have any account with this bank. What is the effective cost of the loan?
