1) Which of the following statements is true?
A.Interest payments paid to U.S. Treasury bond holders are not taxed at the federal
level
B.Interest payments paid to corporate bond holders are not taxed at the federal level
C.Interest payments paid to corporate bond holders are not taxed at the state level
D.Interest payments paid to municipal bond holders are not taxed at the federal level, or
by the state for which the bond is issued
2) You are scheduled to pay a $350 cash flow in one year, and receive a $1,000 cash
flow in years 3 and 4 . If interest rates are 10% per year, what is the combined present
value of these cash flows?
A.$991.38
B.$1097.14
C.$1,116.14
D.$1,213.92
3) Which of the following statements is correct?
A.A 15-year mortgage will have larger monthly payments than a 30-year mortgage
B.If an account earns 3% per year compounded annually, then it also has an effective
annual rate (EAR) of 3%
C.The present value of a $500 perpetuity is greater if the interest rate is higher
D.Statements a, b and c are correct
E.Only statements a and b are correct
4) A firm reported working capital of $5.5 million and fixed assets of $20 million. Its
fixed asset turnover was 1.2 times. What was the firm’s sales to working capital ratio?
A.2.21 times
B.4.36 times
C.5.19 times
D.6.03 times
5) Currency Exchange Compute the amount of foreign currency that can be purchased
for $200,000:
1 Danish Krone = $0.1755
A.200,000 Krone
B.11,396 Krone
C.35,100 Krone
D.1,139,601.14 Krone
6) Suppose you sell a fixed asset for $99,000 when its book value is $75,000. If your
company’s marginal tax rate is 39 percent, what is the pre-tax gain or loss on the sale of
the asset?
A.$10,300
B.$11,600
C.$14,640
D.$24,000
7) Why might a firm announce a “reverse stock dividend”?
A.This only occurs when the firm wants its price to increase, perhaps due to listing
requirements
B.This is impossible
C.This only occurs when the firm is in financial hardship and the management team
wants to execute a leveraged buyout
D.None of these are reasons for a reverse stock dividend
8) The Wall Street Journal reports that the rate on 3-year Treasury securities is 6.50%,
and the 6-year Treasury rate is 6.80%. From discussions with your broker, you have
determined that expected inflation premium is 2.25% next year, 2.50% in Year 2, and
2.60% in Year 3 and beyond. Further, you expect that real interest rates will be 3.4%
annually for the foreseeable future. Calculate the maturity risk premium on the 3-year
and the 6-year Treasury security.
A.3-year: 0.6%; 6-year: 0.80%
B.3-year: 0.5%; 6-year: 0.90%
C.3-year: 0.6%; 6-year: 1.20%
D.3-year: 0.5%; 6-year: 0.80%
9) Which of the following statements is correct?
A.A dominant portfolio has the best risk-return relationship as compared to other
portfolios
B.It is not necessarily true that when an investment achieves a high return that it is risky
C.A low standard deviation means that the investment is less likely to achieve high
returns; which means that is more risky
D.None of these statements are correct
10) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 10 percent, and
that the maximum allowable payback and discounted payback statistics for the project
are 3.5 and 4.5 years, respectively. Use the discounted payback decision to evaluate this
project; should it be accepted or rejected?
A.Discounted payback = 4.25 years; accept the project
B.Discounted payback = 3.50 years; accept the project
C.Discounted payback > 5 years; reject the project
D.Discounted payback = 4.67 years; reject the project
11) What is the debt ratio for a firm with an equity multiplier of 3.5?
A.44.09%
B.58.51%
C.66.25%
D.71.43%
12) A firm uses only debt and equity in its capital structure. The firm’s weight of debt is
40%. The firm could issue new bonds at a yield to maturity of 9% and the firm has a tax
rate of 30%. If the firm’s WACC is 11%, what is the firm’s cost of equity?
A.15.92%
B.14.13%
C.15.03%
D.15.68%
13) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the nave approach?
A.$1,000,000
B.$1,740,000
C.$1,925,000
D.$2,200,000
14) This measures the number of days accounts receivable are held before the firm
collects cash from the sale.
A.Accounts receivable turnover
B.Average collection period
C.Average payment period
D.Accounts payable turnover
15) The term ‘spreading the financial statements” refers to _____________.
A.creating common-size financial statements
B.comparing the statements to the industry average
C.calculating the internal and sustainable growth rate
D.evaluating the debt levels
16) Total Risk Rank the following three stocks by their level of total risk, highest to
lowest. Rail Haul has an average return of 10 percent and standard deviation of 15
percent. The average return and standard deviation of Idol Staff are 15 percent and 25
percent; and of Poker-R-Us are 12 percent and 35 percent.
A.Rail Haul, Poker-R-Us, Idol Staff
B.Idol Staff, Poker-R-Us, Rail Haul
C.Poker-R-Us, Idol Staff, Rail Haul
D.Idol Staff, Rail Haul, Poker-R-Us
17) The set of assumptions underlying the firm’s financial plan and the resulting
projected financial statements are accordingly often referred to as which of the
following?
A.base case projections
B.deseaonalized financial statements
C.nave financial statements
D.pro forma financial statements
18) Which of the following is NOT one of the five basic elements of the kaizen
approach of productivity improvement?
A.teamwork
B.improved morale
C.quality circles
D.suggestions for personal discipline
19) Which of the following current asset financing policies reflects the firm financing
the seasonally-adjusted average level of asset demand with long-term debt and equity
enabling it to use both short-term financing and short-term investing as needed?
A.flexible financing policy
B.restrictive financing policy
C.compromise financing policy
D.alternative financing policy
20) JAY Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the
appropriate rate of return on this stock is 13 percent per year, and the stock consistently
goes ex-dividend 30 days before dividend payment date, what will be the expected
minimum price in light of the dividend payment logistics?
A.$3.16
B.$38.08
C.$38.46
D.$43.03
21) A bond with 23 years to maturity is selling for $991 and has a yield to maturity of
8.12%. If this bond pays its coupon payments semi-annually and par value is $1,000,
what is the bond’s annual coupon rate?
A.7.45%
B.8.03%
C.9.39%
D.10.82%
22) If the law of one price does not hold, then _____________________.
A.Investors will not be compensated for their risk
B.Inflation rates will be very volatile
C.Arbitrageurs can make large profits
D.None of these
23) Liquidity Premium Hypothesis The Wall Street Journal reports that the rate on
3-year Treasury securities is 4.75 percent and the rate on 4-year Treasury securities is
5.00 percent. The one-year interest rate expected in three years is E(4r1), 5.25 percent.
According to the liquidity premium hypotheses, what is the liquidity premium on the
4-year Treasury security, L4?
A.0.0375%
B.0.504%
C.5.01%
D.5.04%
24) Income Statement You have been given the following information for Sherry’s
Sandwich Corp.:
net sales = $300,000;
gross profit = $100,000;
addition to retained earnings = $30,000;
dividends paid to preferred and common stockholders = $8,500;
depreciation expense = $25,000.
The firm’s tax rate is 30 percent. What are the cost of goods sold and the interest
expense for Sherry’s Sandwich Corp.?
A.$20,000, and $200,000, respectively
B.$100,000, and $20,000, respectively
C.$200,000, and $20,000, respectively
D.$200,000, and $36,500, respectively
25) Which of these seeks to reduce, or even eliminate, trade restrictions and tariffs to
ease trade between countries?
A.commerce bureaus
B.tariff agreements
C.trade agreements
D.economic analysts
26) All of the following are secondary market transactions except ___________.
A.GE sells $30 million of new preferred stock
B.Microsoft sells $2 million of IBM preferred stock out of its marketable securities
portfolio
C.The Magellan Fund buys $100 million of Apple previously issued bonds
D.All-State Insurance Co. sells $5 million in IBM bonds
27) Sally wants to invest in only two stocks. Which pair of stocks should Sally select?
A.Stocks A and B move downward at the same time
B.Stocks C and D move in opposite directions at the same time
C.Stocks E and F move upward at the same time
D.Stocks G and H move randomly at the same time
28) A stock has an expected return of 12% and a standard deviation of 20%. Long-term
Treasury bonds have an expected return of 9% and a standard deviation of 15%. Given
this data, which of the following statements is correct?
A.The two assets have the same coefficient of variation
B.The stock investment has a better risk-return trade-off
C.The bond investment has a better risk-return trade-off
D.Both investments have the same diversifiable risk
29) Goldilochs Inc. reported sales of $8 million and net income of $1.5 million. The
firm has $10.5 million in total assets. The firm’s chief financial officer is projecting a
25% increase in sales. The firm has $1.25 million in accounts payable and $1,500,000
in long-term debt (bonds). The firm currently pays out 20% of its net income to
shareholders. Assuming that all assets and spontaneous liabilities are expected to grow
with sales, how much in additional funds will Goldilochs need from external sources to
fund the expected growth?
A.$902,700
B.$812,500
C.$821,000
D.$746,600
30) A firm is expected to pay a $4.00 dividend per share. The stock is selling in the
market place for $55.00 per share. If investors are demanding 12% on this stock, what
is this stock’s growth rate?
A.4.73%
B.7.25%
C.5.91%
D.6.14%
31) Sea Shell Industries has 50 million shares of common stock outstanding, 10 million
shares of preferred stock outstanding, and 100 thousand bonds. If the common shares
are selling for $19 per share, the preferred shares are selling for $8.50 per share, and the
bonds are selling for 97 percent of par ($1000), what would be the weights used in the
calculation of Sea Shell’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.15.26%, 6.83%, 77.91%
D.82.92%, 7.51%, 8.57%
32) A firm has a debt ratio of 45%, capital intensity ratio is 1.3 times, profit margin is
10%, and dividend payout ratio is 30%. Calculate the sustainable growth rate for the
firm.
A.1.56%
B.2.96%
C.3.05%
D.4.79%