1) Peter’s Motor Works has total assets of $689,400, long-term debt of $299,500, total
equity of $275,000, net fixed assets of $497,800, and sales of $721,500. The profit
margin is 4.6 percent. What is the current ratio?
A.0.60
B.0.91
C.1.01
D.1.67
E.2.16
2) Inside quotes are defined as the:
A.bid and asked prices presented by NYSE specialists
B.last bid and asked price offered prior to the market close
C.lowest asked and highest bid offers
D.daily opening bid and asked quotes
E.last traded bid and asked prices
3) The cost of preferred stock:
A.increases when a firm’s tax rate decreases
B.is constant over time
C.is unaffected by changes in the market price
D.is equal to the stock’s dividend yield
E.increases as the price of the stock increases
4) The Jam Jar would like to sell 1,100 shares of stock using the Dutch auction method.
The bids received are as follows:
Bidder D will receive _____ shares and pay a price per share of ______.
A.0; $0
B.700; $37.00
C.272; $37.00
D.272; $38.75
E.700; $38.75
5) The quiet period is designed to do which one of the following?
A.Prevent the original investors in a firm from selling their shares and destabilizing a
security’s price during the first six months of public trading
B.Ensure that all potential investors have fair access to identical information
C.Ensure that all bidders are heard in a Dutch auction
D.Stabilize the aftermarket
E.Quiet the market so the SEC can fairly evaluate a new securities offer
6) The Green Briar is an all-equity firm with a total market value of $418,000 and
20,000 shares of stock outstanding. Management is considering issuing $120,000 of
debt at an interest rate of 9 percent and using the proceeds on a stock repurchase. Ignore
taxes. How many shares will the firm repurchase if it issues the debt securities?
A.2,871 shares
B.3,516 shares
C.3,921 shares
D.4,607 shares
E.5,742 shares
7) The ratios that are based on financial statement values and used for comparison
purposes are called:
A.financial ratios
B.industrial statistics
C.equity standards
D.accounting returns
E.analytical standards
8) Given the following information, what is the expected return on a portfolio that is
invested 35 percent in Stock A, 45 percent in stock B, and the balance in Stock C?
A.11.84 percent
B.12.53 percent
C.12.91 percent
D.13.46 percent
E.13.87 percent
9) Which one of the following terms refers to the length of time a firm grants its
customers to pay for their purchases?
A.Lockbox period
B.Discount period
C.Credit period
D.Cash cycle
E.Receivables turnover period
10) When investment returns are less than perfectly positively correlated, the resulting
diversification effect means that:
A.making an investment in two or three large stocks will eliminate all of the
unsystematic risk
B.making an investment in three companies all within the same industry will greatly
reduce the systematic risk
C.spreading an investment across five diverse companies will not lower the total risk
D.spreading an investment across many diverse assets will eliminate all of the
systematic risk
E.spreading an investment across many diverse assets will eliminate some of the total
risk
11) Which one of the following statements is correct concerning the cash balance of a
firm?
A.Most firms attempt to maintain a zero cash balance at all times
B.The cumulative cash surplus shown on a cash budget is equal to the ending cash
balance plus the minimum desired cash balance
C.Most firms attempt to maximize the cash balance at all times
D.A cumulative cash deficit indicates a borrowing need
E.The ending cash balance must equal the minimum desired cash balance
12) The use of borrowing by an individual to adjust his or her overall exposure to
financial leverage is referred to as:
A.M&M Proposition I
B.capital restructuring
C.homemade leverage
D.M&M Proposition II
E.financial risk management
13) Based on the period 1926-2008, what rate of return should you expect to earn over
the long-term if you are unwilling to bear risk?
A.Between 0 and 1 percent
B.Between 1 and 2 percent
C.Between 2 and 3 percent
D.Between 3 and 4 percent
E.Between 4 and 5 percent
14) Which one of the following statements is accurate for a levered firm?
A.WACC should be used as the required return for all proposed investments
B.A firm’s WACC will decrease whenever the firm’s tax rate decreases
C.An increase in the market risk premium will decrease a firm’s WACC
D.The subjective approach totally ignores a firm’s own WACC
E.A reduction in the risk level of a firm will tend to decrease the firm’s WACC
15) Elkins Feed Lot is an all-equity firm with positive net income. Which one of the
following will result if the firm pays a cash dividend?
A.Number of shares outstanding will increase
B.Earnings per share will decrease
C.Total assets will remain constant
D.Price-earnings ratio will decrease
E.Total equity will increase
16) Skyline Industries will need $1.8 million 5 years from now to replace some
equipment. Currently, the firm has some extra cash and would like to establish a
savings account for this purpose. The account pays 5.25 percent interest, compounded
annually. How much money must the company deposit today to fully fund the
equipment purchase?
A.$1,279,947.20
B.$1,298,407.21
C.$1,350,868.47
D.$1,393,676.52
E.$1,412,308.18
17) T.L. C. Enterprises just revised its capital structure from a debt-equity ratio of 0.30
to a debt-equity ratio of 0.45. The firm’s shareholders who prefer the old capital
structure should:
A.sell some shares and hold the sale proceeds in cash
B.sell all of their shares and loan out the entire sale proceeds
C.do nothing
D.sell some shares and loan out the sale proceeds
E.borrow funds and purchase more shares
18) The accounts receivable period is the time that elapses between the _____ and the
_____.
A.purchase of inventory; payment to the supplier
B.purchase of inventory; collection of the receivable
C.sale of inventory; payment to supplier
D.sale of inventory; collection of the receivable
E.sale of inventory: billing to customer
19) You were recently hired by a firm as a project analyst. The owner of the firm is
unfamiliar with financial analysis and only wants to know what the expected dollar
return is per dollar spent on a given project. Which financial method of analysis will
provide the information that the owner requests?
A.Internal rate of return
B.Modified internal rate of return
C.Net present value
D.Profitability index
E.Payback
20) Jones Footwear pays a constant annual dividend. Last year, the dividend yield was
2.8 percent when the stock was selling for $26 a share. What is the current price of the
stock if the current dividend yield is 3.1 percent?
A.$21.19
B.$23.48
C.$25.20
D.$26.87
E.$27.40
21) What is the benefit-cost ratio for an investment with the following cash flows at a
14.5 percent required return?
A.0.94
B.0.98
C.1.02
D.1.06
E.1.11
22) You have $1,100 today and want to triple your money in 5 years. What interest rate
must you earn if the interest is compounded annually?
A.18.08 percent
B.19.90 percent
C.22.15 percent
D.24.57 percent
E.27.21 percent
23) You have $168,000 on deposit with no outstanding checks or uncleared deposits.
One day you write a check for $21,000. What is your book balance?
A.$147,000
B.$158,500
C.$168,000
D.$178,500
E.$189,000
24) Northern Air would like to sell 700 shares of stock using the Dutch auction method.
The bids received are as follows:
Bidder B will receive _____ shares and pay a price per share of _____.
A.0; $0
B.69; $42.25
C.69; $42.00
D.210; $42.00
E.$300; $40.00
25) The transaction motive for holding cash refers to the need to have cash for which
one of the following purposes?
A.Safety margin
B.Investment opportunities
C.Daily operations
D.Financial reserve
E.Bargain opportunities
26) When making a capital budgeting decision, which of the following is/are NOT
relevant?
I. The size of a cash flow.
II. The risk of a cash flow.
III. The accounting earnings from a cash flow.
IV. The timing of a cash flow.
A.I only
B.II only
C.III only
D.II and III only
E.III and IV only
27) Which one of the following is correct based on the static theory of capital structure?
A.A firm receives the greatest benefit from debt financing when its tax rate is relatively
low
B.A debt-equity ratio of 1 is considered to be the optimal capital structure
C.The costs of financial distress decrease the value of a firm
D.The more debt a firm assumes, the greater the incentive to acquire even more debt
until
such time as the firm is financed with 100 percent debt
E.At the optimal level of debt a firm also optimizes its tax shield on debt
28) Which of the following practices will reduce a firm’s collection float?
I. installing a lockbox system
II. utilizing zero-balance accounts
III. depositing checks daily rather than weekly
IV. reducing the processing delay by one day
A.I and III only
B.II and IV only
C.I, II, and III only
D.I, III, and IV only
E.I, II, III, and IV
29) Lexington Stables just declared a 15 percent stock dividend. Which one of the
following increased by 15 percent as a result of this dividend?
A.Book value of firm’s equity
B.Shareholders’ wealth
C.Number of shares outstanding
D.Firm’s cash balance
E.Stock price
30) Over the past 4 years, a stock produced returns of 15 percent, 6 percent, 11 percent,
and 22 percent. Based on these 4 years, what range of returns would you expect to see
95 percent of the time?
A.-6.58 percent to 31.33 percent
B.-6.58 percent to 27.02 percent
C.-6.58 percent to 24.39 percent
D.-0.02 percent to 24.39 percent
E.-0.02 percent to 27.02 percent
31) As the financial vice president for Squamish Equipment, you have the following
information:
Calculate Squamish’s earnings per share next year assuming Squamish raises $40
million of new debt at an interest rate of 7 percent.
A.1.28
B.2.00
C.2.12
D.2.22
E.3.06
32) The stock of Turner United is priced at $46 a share and has a dividend yield of 2.1
percent. The firm pays constant annual dividends. What is the amount of the next
dividend per share?
A.$0.021
B.$0.210
C.$0.966
D.$0.096
E.$0.219
33) Assume you can currently exchange one U.S. dollar for one hundred Japanese yen.
Also assume the inflation rate will be 2.5 percent annually in the U.S. and 2 percent in
Japan. Given these assumptions, how many yen should you expect in exchange for one
U.S. dollar next year?
A.More than 100
B.Either 100 or more than 100
C.Exactly 100
D.Either 100 or less than 100
E.Less than 100
34) The following information is available about Chiantivino Corp. (CC):
An activist investor is confident that by terminating CC’s money-losing fortified wine
division, she can increase free cash flow by $4 million annually for the next decade. In
addition, she estimates that an immediate, special dividend of $10 million can be
financed by the sale of the division.
a. Assuming these actions do not affect CC’s cost of capital, what is the maximum price
per share the investor would be justified in bidding for control of CC? What percentage
premium does this represent?
b. Show your answer if you conduct a sensitivity analysis by assuming the cost of
capital is 15 percent and the increased cash flow is only $3.5 million per year.
35) Ratios that measure how efficiently a firm manages its assets and operations to
generate net income are referred to as _____ ratios.
A.asset turnover and control
B.financial leverage
C.coverage
D.profitability
E.None of the above