Which type of analysis identifies the variable, or variables, that are most critical to the
success of a particular project?
A. leverage
B. risk
C. break-even
D. sensitivity
E. cash flow
Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1952.
The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S. Using
covered interest arbitrage you can earn an extra _____ profit over that which you would
earn if you invested $1 in the U.S.
A. $0.003
B. $0.006
C. $0.008
D. $0.015
E. $0.018
Which one of the following is an example of a strategic option for a restaurant?
A. opening a new restaurant with a different look and an entirely different menu to see
if that type of restaurant appeals to the public
B. deciding to close one hour earlier during the winter months due to slow sales
C. abandoning a menu item based on customer complaints
D. deciding to open only two new locations next year instead of the five that were
originally scheduled
E. deciding to create separate lunch and dinner menus rather than have them combined
on one menu
Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of
her winnings today discounted at her discount rate is called which one of the following?
A. single amount
B. future value
C. present value
D. simple amount
E. compounded value
You are the manager of a project that has a 2.8 degree of operating leverage and a
required return of 14 percent. Due to the current state of the economy, you expect sales
to decrease by 7 percent next year. What change should you expect in the operating
cash flows next year given your sales prediction?
A. 19.60 percent decrease
B. 16.03 percent decrease
C. 13.46 percent decrease
D. 5.60 percent decrease
E. 2.74 percent decrease
A stock had returns of 11 percent, -18 percent, -21 percent, 5 percent, and 34 percent
over the past five years. What is the standard deviation of these returns?
A. 18.74 percent
B. 20.21 percent
C. 20.68 percent
D. 22.60 percent
E. 23.49 percent
Which one of the following is defined as the sales level that corresponds to a zero
NPV?
A. accounting break-even
B. leveraged break-even
C. marginal break-even
D. cash break-even
E. financial break-even
D. L. Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon
rate of 7.5 percent. The tax rate is 32 percent. What is the present value of the tax
shield?
A. $504
B. $615
C. $644
D. $6,200
E. $6,720
Webster Electrics is offering 1,500 shares of stock in a Dutch auction. The bids include:
How much cash will Webster Electrics receive from selling these shares? Ignore all
transaction and flotation costs.
A. $28,500
B. $30,000
C. $31,500
D. $33,000
E. $34,500
Which one of the following credit instruments is commonly used in international
commerce?
A. open account
B. sight draft
C. time draft
D. banker’s acceptance
E. promissory note
A proposed project has a contribution margin per unit of $13.10, fixed costs of $74,000,
depreciation of $12,500, variable costs per unit of $22, and a financial break-even point
of 11,360 units. What is the operating cash flow at this level of output?
A. $0
B. $12,500
C. $62,309
D. $74,816
E. $86,500
A firm has an interval measure of 48. This means that the firm has sufficient liquid
assets to do which one of the following?
A. pay all of its debts that are due within the next 48 hours
B. pay all of its debts that are due within the next 48 days
C. cover its operating costs for the next 48 hours
D. cover its operating costs for the next 48 days
E. meet the demands of its customers for the next 48 hours
Dexter Mills issued 20-year bonds a year ago at a coupon rate of 11.4 percent. The
bonds make semiannual payments. The yield-to-maturity on these bonds is 9.2 percent.
What is the current bond price?
A. $985.55
B. $991.90
C. $1,192.16
D. $1,195.84
E. $1,198.00
Stewart is a fellow finance student at your school who is addicted to day trading and
thus buys and sells stocks between classes and over his lunch break. He never has time
to really analyze a security so just trades the stock symbols that other investors appear
to be trading. Stewart is which one of the following?
A. noise trader
B. arbitrageur
C. crasher
D. regret averter
E. myopic loss averter
You just paid $750,000 for an annuity that will pay you and your heirs $45,000 a year
forever. What rate of return are you earning on this policy?
A. 5.25 percent
B. 5.50 percent
C. 5.75 percent
D. 6.00 percent
E. 6.25 percent
You are an accountant and have been analyzing the financial statements of Euro Place
Markets, which is a foreign retailer. While the firm’s financials are not prepared
according to GAAP, you have still been able to understand the firm’s accounting
practices and feel that this firm has a bright future. On which one of the following U.S.
markets, if any, might you be able to purchase shares in this firm?
A. NYSE
B. NASDAQ
C. OTCBB
D. Pink Sheets
E. No U.S. market will list this foreign security.
A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350,
and current liabilities of $3,908. How many dollars worth of sales are generated from
every $1 in total assets?
A. $1.08
B. $1.14
C. $1.19
D. $1.26
E. $1.30
What is the cost of two November $25 put option contracts on Dove stock given the
following price quotes?
A. $0.15
B. $0.30
C. $1.50
D. $15.00
E. $30.00
Inside information has the least value when financial markets are:
A. weak form efficient.
B. semiweak form efficient.
C. semistrong form efficient.
D. strong form efficient.
E. inefficient.
Interstate Services needs some equipment costing $61,000. The equipment has a 4-year
life after which it will be worthless. The firm uses MACRS depreciation which allows
for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over
years 1 to 4, respectively. The equipment can be leased for $16,600 a year. The firm can
borrow money at 7.5 percent and has a 36 percent tax rate. What is the incremental
annual cash flow for year 2 if the company decides to lease the equipment rather than
purchase it?
A. -$18,897
B. -$19,286
C. -$19,389
D. -$19,407
E. -$20,383
Lassiter Industries has annual sales of $220,000 with 10,000 shares of stock
outstanding. The firm has a profit margin of 7.5 percent and a price-sales ratio of 1.20.
What is the firm’s price-earnings ratio?
A. 14
B. 16
C. 18
D. 20
E. 22
Suppose a financial manager buys call options on 45,000 barrels of oil with an exercise
price of $30 per barrel. She simultaneously sells a put option on 45,000 barrels of oil
with the same exercise price of $30 per barrel. Her net profit per barrel is _____ if the
price per barrel is $29 and _____ if the price per barrel is $35.
A. -$5; $1
B. -$1; $0
C. $0; -$1
D. $0; $1
E. -$1; $5
What is the model called that determines the present value of a stock based on its next
annual dividend, the dividend growth rate, and the applicable discount rate?
A. zero growth
B. dividend growth
C. capital pricing
D. earnings capitalization
E. discounted dividend
What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume
annual compounding.
A. $301,115
B. $306,492
C. $310,868
D. $342,908
E. $347,267
Selling an option is generally more valuable than exercising the option because of the
option’s:
A. riskless value.
B. intrinsic value.
C. standard deviation.
D. exercise price.
The EOQ model is designed to determine how much:
A. total inventory a firm needs in any one year.
B. total inventory costs will be for any one given year.
C. inventory should be purchased at a time.
D. inventory will be sold per day.
E. a firm loses in sales per day when an inventory item is depleted.
All else equal, the market value of a stock will tend to decrease by roughly the aftertax
value of the dividend on the:
A. dividend declaration date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. day after the date of payment.
The purchase accounting method requires that:
A. the excess of the purchase price over the fair market value of the target firm be
recorded as a one-time expense on the income statement of the acquiring firm.
B. goodwill be amortized on a yearly basis for financial statement purposes.
C. the equity of the acquiring firm be reduced by the excess of the purchase price over
the fair market value of the target firm.
D. the assets of the target firm be recorded at their fair market value on the balance
sheet of the acquiring firm.
E. the excess amount paid for the target firm be recorded as a tangible asset on the
books of the acquiring firm.
Sheakley Industries is considering expanding its current line of business and has
developed the following expected cash flows for the project. Should this project be
accepted based on the discounting approach to the modified internal rate of return if the
discount rate is 13.4 percent? Why or why not?
A. Yes; The MIRR is 6.50 percent.
B. Yes; The MIRR is 7.59 percent.
C. Yes; The MIRR is 8.23 percent.
D. No; The MIRR is 6.50 percent.
E. No; The MIRR is 7.59 percent.
City Bank wants to appear competitive based on quoted loan rates and thus must offer a
7.75 percent annual percentage rate on its loans. What is the maximum rate the bank
can actually earn based on the quoted rate?
A. 8.06 percent
B. 8.14 percent
C. 8.21 percent
D. 8.26 percent
E. 8.58 percent
A firm’s overall cost of equity is:
A. is generally less that the firm’s WACC given a leveraged firm.
B. unaffected by changes in the market risk premium.
C. highly dependent upon the growth rate and risk level of the firm.
D. generally less than the firm’s aftertax cost of debt.
E. inversely related to changes in the firm’s tax rate.
