Bikes and More just announced its next annual dividend will be $2.42 a share and all
future dividends will increase by 2.5 percent annually. What is the market rate of return
if this stock is currently selling for $22 a share?
A. 13.62%
B. 13.84%
C. 13.58%
D. 13.50%
E. 13.46%
Answer:
You want to establish a trust fund that will provide $50,000 a year forever for your
heirs. If the fund can earn a guaranteed rate of return of 4.5 percent, how much must
you deposit in a lump sum to establish this trust? This will be the only deposit you
make to the fund.
A. $1,333,333.33
B. $2,250,000.00
C. $1,250,000.00
D. $1,666,666.67
E. $1,111,111.11
Answer:
One disadvantage of the corporate form of business ownership is the:
A. limited liability protection provided for all owners.
B. firm’s ability to raise cash.
C. unlimited life of the firm.
D. difficulties encountered when changing ownership.
E. double taxation of profits.
Answer:
Payments made out of a firm’s earnings to its owners in the form of cash or stock are
called:
A. dividends.
B. distributions.
C. share repurchases.
D. payments-in-kind.
E. stock splits.
Answer:
You have plotted the monthly returns for two securities for the past five years on the
same graph. The pattern of the movements of each of the two securities generally rose
and fell to the same degree in step with each other. This indicates the securities have:
A. no correlation with each other.
B. a weak negative correlation.
C. a strong negative correlation.
D. a strong positive correlation.
E. a weak positive correlation.
Answer:
A zero coupon bond with a face value of $1,000 is issued with an initial price of
$430.84 based on semiannual compounding. The bond matures in 20 years. What is the
implicit interest, in dollars, for the first year of the bond’s life?
A. $19.08
B. $22.56
C. $18.53
D. $21.47
E. $25.25
Answer:
The Consolidated Transfer Co. is an all-equity financed firm. The beta is .75, the market
risk premium is 7.78 percent and the risk-free rate is 3.84 percent. What is the expected
return on Consolidated stock?
A. 6.80%
B. 8.22%
C. 9.54%
D. 9.68%
E. 8.46%
Answer:
Assume the single-factor APT model applies and a portfolio exists such that 65 percent
of the funds are invested in risky Security Q and the rest in the risk-free asset. Security
Q has a beta of 1.5. The portfolio has a beta of:
A. 1.500.
B. .925.
C. .650.
D. .975.
E. 1.000.
Answer:
Conflicts of interest between stockholders and bondholders are known as:
A. trustee costs.
B. financial distress costs.
C. dealer costs.
D. agency costs.
E. underwriting costs.
Answer:
The market price of ABC stock has been very volatile and you think this volatility will
continue for a few weeks. Thus, you decide to purchase a one-month call option
contract on ABC stock with a strike price of $25 and an option price of $1.50. You also
purchase a one-month put option on ABC stock with a strike price of $25 and an option
price of $.70. What will be your total profit on these option positions if the stock price
is $24.60 on the day the options expire?
A. -$180
B. -$140
C. -$100
D. -$220
E. $140
Answer:
The duration of a 2-year annual 6 percent bond that is selling at par is:
A. 1.00 year.
B. 1.94 years.
C. 1.97 years.
D. 1.91 years.
E. 2.03 years.
Answer:
Brook Side reported sales of $738,000 and cost of goods sold of $584,000 for the year.
The firm had a beginning inventory of $51,000 and an ending inventory of $46,000.
What is the length of the inventory period?
A. 15.24 days
B. 15.16 days
C. 31.19 days
D. 29.87 days
E. 30.31 days
Answer:
Financial distress is least apt to lead to:
A. asset restructuring.
B. financial restructuring.
C. liquidation.
D. increasing dividends.
E. rising stock prices.
Answer:
For 2014, Tree Top Farms had sales of $438,000, cost of goods sold of $286,000,
inventory of $154,000, accounts receivable of $46,000, and accounts payable of
$38,000. For 2015, sales were $413,000, cost of goods sold was $281,000, inventory
was $149,000, accounts receivables were $48,000, and accounts payable were $36,000.
What was the cash cycle for 2015 based on a 365-day year?
A. 202.96
B. 190.27
C. 203.17
D. 185.87
E. 186.05
Answer:
Which one of the following is cited as an argument for a high dividend payout?
A. flotation costs involved with a new securities issue
B. high personal tax rates relative to corporate rates
C. desire to maintain constant dividends over time
D. restrictive covenant contained in a bond indenture agreement
E. agency costs related to excess cash reserves
Answer:
The acronym APT stands for:
A. arbitrage pricing techniques.
B. absolute profit theory.
C. arbitrage pricing theory.
D. asset pricing theory.
E. assured price techniques.
Answer:
Leisure Vacations is considering a project which will require the purchase of $1.4
million in new 5-Year MACRS equipment The MACRS rates are 20 percent, 32
percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6,
respectively. The firm desires a minimal 14 percent rate of return and the tax rate is 34
percent. What is the value of the depreciation tax shield in Year 2 of the project?
A. $95,200.00
B. $117,205.29
C. $140,000.00
D. $123,416.79
E. $152,320.00
Answer:
An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and
taxes of $138,000. A levered firm with the same operations and assets has both a book
value and a face value of debt of $520,000 with an annual coupon of 7 percent. The
applicable tax rate is 34 percent. What is the value of the levered firm?
A. $996,421.19
B. $907,679.09
C. $1,184,929.09
D. $846,505.88
E. $1,191.505.88
Answer:
The CFO of Financial Savings has just been granted at-the-money options on 200,000
shares. The options expire in three years. The firm’s stock is currently trading at $22 a
share, the volatility of the returns as measured by standard deviation is 19 percent, and
the continuously compounded risk-free rate is 3.6 percent. What is the value of d1 as it
is used in the Black- Scholes option pricing model?
A. .1842
B. .4102
C. .4583
D. .4927
E. .5412
Answer:
The fastest but most expensive way for a firm to transfer surplus funds from the local
deposit bank to the concentration bank is:
A. a depository transfer check.
B. a cashier’s check.
C. a wire transfer.
D. the firm’s in-house transfer system.
E. an automated clearinghouse transfer.
Answer:
Which statement concerning the net present value (NPV) of an investment or a
financing project is correct?
A. A financing project should be accepted if, and only if, the NPV is exactly equal to
zero.
B. An investment project should be accepted only if the NPV is equal to the initial cash
flow.
C. Any type of project should be accepted if the NPV is positive and rejected if it is
negative.
D. Any type of project with greater total cash inflows than total cash outflows, should
always be accepted.
E. An investment project that has positive cash flows for every time period after the
initial investment should be accepted.
Answer:
TL Company has expected earnings of $75 in one year if it does well and $25 if it does
poorly. The firm has outstanding debt of $50 that is due in one year. However, given the
financial distress costs, the debtholders will only receive $40 in one year if the firm
does well and $15 if it does poorly. There is a 60 percent chance the firm will do well
and a 40 percent chance that it will do poorly. What is the current value of the debt if
the interest rate on bonds is 8 percent?
A. $27.78
B. $27.50
C. $30.00
D. $26.67
E. $28.40
Answer:
Negotiated offers generally:
A. are used as a last resort.
B. involve an underwriting syndicate.
C. result in higher issue costs than do competitive offers.
D. involve only large issuers.
E. reduce the probability an issue will be successful.
Answer:
Alexandria’s Dance Studio is currently an all-equity firm with earnings before interest
and taxes of $338,000 and a cost of equity of 14.2 percent. The tax rate is 34 percent.
Alexandria is considering adding $400,000 of debt with a coupon rate of 7 percent to
her capital structure. The debt will be sold at par value. What is the levered value of the
equity?
A. $1,987,408
B. $1,306,986
C. $1,038,519
D. $986,420
E. $2,380,282
Answer:
You are considering two projects with the following cash flows:
Assuming both projects have the same initial cost, you know that:
A. there are no conditions under which the projects can have equal values.
B. Project B has a higher net present value than Project A.
C. Project A is more valuable than Project B given a positive discount rate.
D. both projects offer the same rate of return.
E. both projects have equal net present values at any discount rate.
Answer:
Which characteristic does not apply to Eurobonds?
A. generally traded from London
B. always denominated in euros
C. always denominated in a single currency
D. generally denominated in the issuer’s home currency
E. issued in multiple countries
Answer:
Unsystematic risk:
A. can be effectively eliminated through portfolio diversification.
B. is compensated for by the risk premium.
C. is measured by beta.
D. cannot be avoided if you wish to participate in the financial markets.
E. is related to the overall economy.
Answer:
You are considering a project with projected annual cash inflows of $32,200, $41,800,
$22,900 for the next three years, respectively. What is the value of the project today at a
discount rate of 14 percent?
A. $86,487.47
B. $75,866.20
C. $77,103.18
D. $81,292.25
E. $66,549.30
Answer:
A credit card compounds interest monthly and has an effective annual rate of 12.67
percent. What is the annual percentage rate?
A. 12.35%
B. 12.00%
C. 11.99%
D. 11.87%
E. 11.93%
Answer:
You own a call option on Jasper Co. stock that expires in one year. The exercise price is
$35. The current price of the stock is $48 and the risk-free rate of return is 4.5 percent.
Assume the option will finish in the money. What is the current value of the call option
per share?
A. $13.00
B. $13.59
C. $13.97
D. $14.51
E. $15.46
Answer:
When comparing levered versus unlevered capital structures, leverage works to increase
EPS for high levels of EBIT because interest payments on the debt:
A. vary with EBIT levels.
B. stay fixed, leaving less income to be distributed over fewer shares.
C. stay fixed, leaving more income to be distributed over fewer shares.
D. stay fixed, leaving less income to be distributed over more shares.
E. stay fixed, leaving more income to be distributed over more shares.
Answer: