1) The present value of a deferred annuity (e.g., an annuity that starts 10 years from
today) can be calculated in two steps: (1) calculate the future value of the annuity, and
(2) calculate the present value of the amount determined in step (1).
2) The realized rate of return, or holding period return, is equal to the holding period
dollar gain divided by the price at the beginning of the period.
3) The clientele effect does not imply that either high or low dividends are optimal,
rather that firm’s should not make significant and arbitrary changes in their existing
dividend policy.
4) A seasoned equity offering is the sale of additional shares by a company whose
shares are already publicly traded.
5) Using simulation provides the financial manager with a probability distribution of an
investment’s net present value or internal rate of return.
6) Ratios of almost all companies are easily comparable because all public companies
prepare their financial reports based upon generally accepted accounting principles.
7) Traditional financial forecasting takes the sales forecast as given and forecasts the
corresponding expenses, assets, and liabilities of the firm.
8) The owners of a corporation enjoy limited liability.
9) If the net present value of a project is zero, then the profitability index will equal one.
10) Debentures are expected to have a lower yield than secured bonds because the
debentures are more risky and therefore less desirable.
11) The benefits derived from reduced mail and processing floats must be greater than
the bank fees associated with a lockbox system or else a firm would be better off
without the lockbox.
12) The risk/return tradeoff implies that the return on a riskless asset must be zero.
13) In a private placement, the securities are offered and sold to a limited number of
investors.
14) A rational investor would prefer to receive $1,200 today rather than $100 per month
for 12 months.
15) If a bond is selling below its face value, then its yield to maturity must be less than
the bond’s coupon rate.
16) Stan’s Cans, Inc. expects to earn $150,000 next year after taxes on sales of
$2,200,000. Stan’s manufactures only one size of garbage can. Stan sells his cans for $8
apiece and they have a variable cost of $2.40 apiece. Stan’s tax rate is currently 34%.
a.What are the firm’s expected fixed costs for next year?
b.What is the break-even point in units?
17) Which of the following is FALSE concerning bonds?
A) The indenture spells out the obligations of the bond issuer
B) Mortgage bonds are secured by assets such as real estate
C) Debentures are secured by specific assets other than real estate
D) Subordinated debentures are riskier than unsubordinated debentures
18) Meacham Corp. wants to issue bonds with a 9% coupon rate, a face value of
$1,000, and 12 years to maturity. Meacham estimates that the bonds will sell for $1,090
and that flotation costs will equal $15 per bond. Meacham Corp. common stock
currently sells for $30 per share. Meacham can sell additional shares by incurring
flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share
and expects the dividend to grow at a constant rate of 5% per year. Meacham also
expects to have $12 million of retained earnings available for use in capital budgeting
projects during the coming year. Meacham’s capital structure is 40% debt and 60%
common equity. Meacham’s marginal tax rate is 35%.
a.Calculate the after-tax cost of debt assuming Meacham’s bonds are its only debt.
b.Calculate the cost of retained earnings.
c.Calculate the cost of new common stock.
d.Calculate the weighted average cost of capital assuming Meacham’s total capital
budget is $30 million.
19) Which of the following statements is TRUE?
A) The value of a bond is inversely related to changes in investors’ present required rate
of return
B) If interest rates decrease, the value of a bond will decrease
C) If interest rates increase, the value of a bond will increase
D) If interest rates remain constant, the value of premium bonds will increase over time
20) You decide to borrow $250,000 to build a new home. The bank charges an interest
rate of 8% compounded monthly. If you pay back the loan over 30 years, what will your
monthly payments be (rounded to the nearest dollar)?
A) $1,123
B) $1,237
C) $1,687
D) $1,834
21) All of the following are typically advantages of private placements EXCEPT
A) speed
B) reduced flotation costs
C) financial flexibility
D) the possibility of future SEC registration
22) Common examples of financial intermediaries include all of the following EXCEPT
A) Venture Capital Firms
B) Life Insurance Companies
C) Pension Funds
D) Mutual Funds
23) Which of the following statements about factoring is TRUE?
A) The firm, not the factor, bears the risk of collecting bad receivables in a factoring
arrangement
B) Factoring involves the outright sale of a firm’s accounts receivable to the factor
C) The borrowing firm is able to obtain a greater advance against inventory in a
factoring arrangement than in a typical line of credit secured by accounts receivable
D) Factoring firms sell the receivables of other firms
24) What is the expected rate of return on a bond that matures in 5 years, has a par
value of $1,000, a coupon rate of 11.5%, and is currently selling for $982? Assume
annual coupon payments.
A) 12.5%
B) 12.0%
C) 12.7%
D) 13.4%
25) In the basic EOQ model the optimal inventory level is the point at which
A) total cost is minimized
B) total revenue is maximized
C) carrying costs are minimized
D) ordering costs are minimized
26) You estimate you’ll need $200,000 per year for 25 years starting on your 65th
birthday to live on during your retirement. Today is your 50th birthday and you want to
make equal deposits into an account paying 9% interest per year, the first deposit today
and the last deposit on your 64th birthday. How much must each deposit be (rounded to
the nearest $10)?
A) $99,920
B) $85,840
C) $61,385
D) $49,380
27) Stock dividends
A) decrease stock prices because no cash goes to shareholders but companies pay
transactions costs.
B) may increase stock prices if the dividend is used to maintain on optimal trading
range for the common stock.
C) may increase stock prices if investors perceive the dividend as containing favorable
information about the firm’s future prospects.
D) Both B and C are TRUE.
28) A major corporation is considering a capital budgeting project that involves the
development of a new technology. The controller estimates the net present value to be
negative, yet argues that the company should invest in the project. Which of the
following statements is MOST correct?
A) The controller should be fired for making such a poor decision
B) The controller may be considering the option to expand or modify the project in the
future
C) The profitability index may be greater than one, giving an accept decision
D) Capital rationing may exist for the current year
29) Due to changes in regulatory requirements, the transactions costs associated with
selling corporate securities increased by $1 per share. This change will
A) cause the cost of capital to decrease
B) cause the cost of capital to increase
C) have no effect on the cost of capital because transactions costs are expensed
immediately
D) cause the cost of capital to decrease only if investors may be billed for part of the
increase in transactions costs
30) Which of the following statements about operating leverage is TRUE?
A) Operating leverage reduces a firm’s risk
B) Operating leverage is the responsiveness of the firm’s EBIT to fluctuations in sales
C) Operating leverage involves the usage of fixed cost financial securities in the
operation of a business
D) Operating leverage is the responsiveness of the firm’s EPS to fluctuations in sales
31) Johnson Production Company paid a dividend yesterday of $3.50 per share. The
dividend is expected to grow at a constant rate of 10% per year. The price of KayCee’s
common stock today is $40 per share. If KayCee decides to issue new common stock,
flotation costs will equal $4.00 per share. KayCee’s marginal tax rate is 35%. Based on
the above information, the cost of retained earnings is
A) 26.41%
B) 20.09%
C) 19.63%
D) 17.55%
32) Net working capital is equal to
A) total assets minus total liabilities
B) current assets minus total liabilities
C) total operating capital minus net income
D) current assets minus current liabilities
33) A firm’s financing costs include
A) depreciation expense
B) interest exposure
C) costs of goods sold
D) both A and B
34) Exchange rate risk is highest for companies with
A) international trade contracts denominated in the foreign currency
B) investment portfolios that contain foreign securities
C) direct foreign investments in foreign subsidiaries
D) international trade contracts denominated in the domestic currency
35) How much would you be willing to pay (rounded to the nearest dollar) for a 20-year
annuity due if the payments are $4,500 per year and you want to earn a rate of return
equal to 5.5% per year?
A) $84,500
B) $63,445
C) $56,734
D) $53,777
36) Beaver Corp preferred stock has a market price of $14.50. If it has a yearly
dividend of $3.50, what is your expected rate of return if you purchase the stock at its
market price?
A) 41.43%
B) 19.45%
C) 22.36%
D) 24.14%
37) Flashbinder Guitars, Inc. is negotiating with the bank for a lockbox system that is
expected to reduce check collection time by 4 days. Flashbinder Guitars’ average check
size is $1,200 and any funds freed up by the new system will be invested in a money
market account that is currently paying 2.5% annually. What is the most Flashbinder
Guitars should be willing to pay the bank for the lockbox service, assuming the bank
charges a per-check processing fee?
A) 20.500 cents
B) 29.767 cents
C) 30.726 cents
D) 32.877 cents
38) A retailer sells most of its merchandise on credit and bills clients monthly. Which of
the following elements of float does the retailer have the most control over?
A) mail float
B) processing float
C) transit float
D) disbursing float
39) A new machine can be purchased for $1,800,000. It will cost $35,000 to ship and
$15,000 to fine-tune the machine. The new machine will replace an older version that is
fully depreciated and will be sold for $200,000. The firm’s income tax rate is 35%.
What is the initial outlay for capital budgeting purposes?
A) $1,580,000
B) $1,630,000
C) $1,650,000
D) $1,720,000
40) For a retailer with inventory to sell, the acid-test ratio will be
A) less than the current ratio, thus providing a more stringent measure of liquidity
B) greater than the current ratio, thus providing a more stringent measure of liquidity
C) greater than the current ratio, thus providing a less stringent measure of liquidity
D) unimportant because it doesn’t include inventory
41) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects
its credit sales 30% in the month of sale, 60% one month after the sale, and 10% two
months after the sale.
Cash SalesCredit Sales
January$50,000$50,000
February$70,000$110,000
March$55,000$95,000
April$78,000$130,000
May$80,000$105,000
June$75,000$148,000
What are Matterhorn’s total cash receipts for the month of June?
A) $120,400
B) $147,000
C) $195,400
D) $213,000
42) A company borrows $10,000 and puts the money into its checking account. This
transaction will increase the company’s current ratio if prior to the transaction the
company’s current ratio was
A) equal to one
B) greater than one
C) less than one
D) greater than or less than one, but not equal to one
43) A company that forgoes the discount when credit terms are 2/10 net 60 is essentially
borrowing money from his supplier for an additional
A) 10 days
B) 50 days
C) 60 days
D) 70 days
44) Table 4-3
Emery Corporation
The operating return on total assets is
A) 55.62%
B) 10.06%
C) 44.74%
D) 33.33%
45) Suppose the current exchange rates are 1.3215 dollars per euro, and 84.19 yen per
dollar. What is the current exchange rate between yen and euros?
A) 86.356 yen per euro
B) 147.571 yen per euro
C) 151.696 yen per euro
D) 111.257 yen per euro
46) You are considering an investment in Citizens Bank Corp. The firm has a beta of
1.6 . Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S
& P 500 is 14%. What rate of return should you expect for your investment in Citizens
Bank?
A) 11.15%
B) 15.39%
C) 16.75%
D) 20.75%
47) Which of the following measures the average relationship between a stock’s returns
and the market’s returns?
A) coefficient of validation
B) standard deviation
C) geometric regression
D) beta coefficient
48) Southeast Compositions, Inc. is considering a project with the following cash flows:
Initial Outlay = $126,000
Cash Flows:Year 1 = $44,000
Year 2 = $59,000
Year 3 = $64,000
Compute the net present value of this project if the company’s discount rate is 14%.
A) -$249,335
B) -$138,561
C) $239,209
D) $725,000
49) Based on the data contained in Table A, what is the break-even point in units
produced and sold?
TABLE A
Average selling price per unit$18.00
Variable cost per unit$13.00
Units sold400,000
Fixed costs$650,000
Interest expense$ 50,000
A) 130,000
B) 140,000
C) 150,000
D) 180,000
50) The Rosewood Corporation established a line of credit with a local bank. The
maximum amount that can be borrowed under the terms of the agreement is $500,000 at
a rate of 10 percent. A compensating balance averaging 15 percent of the loan is
required. Prior to the agreement, Rosewood had maintained an account at the bank
averaging $25,000. Any additional funds needed for the compensating balance will also
have to be borrowed at the 10 percent rate. If the firm needs $280,000 for 6 months,
what is the annual cost of the loan?
51) JKE, Inc. has a break even sales level of $10,000,000 and has fixed costs of
$4,000,000 per year. The selling price per unit is $200. What is the variable cost per
unit?
52) Beverly Corp. had total sales of $1,200,000 in 2010 (80 percent of its sales are
credit). The company’s gross profit margin is 25 percent, its ending inventory is
$150,000, and its accounts receivable balance is $90,000. What additional amount of
cash could the firm have generated if it had increased its inventory turnover ratio to 9.0
and reduced its average collection period to 28.21875 days?
53) Table 4-6
Financial Data for Springfield Power Co. as of December 31, 2010:
From the information presented in Table 4-6, calculate the following ratios for the
Springfield Power Co.
i.current ratio
ii.acid test ratio
iii.average collection period
iv.inventory turnover
v.gross profit margin
vi.operating profit margin
vii.net profit margin
viii.total asset turnover
54) Due to a number of lawsuits related to toxic wastes, a major chemical company has
recently experienced a market revaluation. The firm has bonds outstanding that were
issued 8 years ago at their par value of $1,000. These bonds have 12 years to maturity
and a coupon rate of 6 percent, with interest paid semiannually. The required return on
these bonds has increased to 14 percent. What is the current value of one of these
bonds?
55) A zero coupon bond is selling for $476. The bond has a face value of $1,000 and
matures in 8 years. Your friend asks you if he should buy the bond. He tells you his
required return is 9 percent. Would you recommend he buy the bond or not? Explain
your answer.
56) Sutter Corporation’s common stock is selling for $16.80 a share. Last year Sutter
paid a dividend of $.80. Investors are expecting Sutter’s dividends to grow at an annual
rate of 5% per year. What is the cost of internal equity?
57) Describe the types of dividend policies that corporations frequently use. Which is
most common? Why?
58) A corporation decides to cut its dividend from $2 per share to $1.50 per share. Give
two rationales/theories to explain why this action may cause the stock price to decrease
and two rationales/theories to explain why this action may cause the stock price to
increase.