February 27, 2019

The common stock of Manchester & Moore is expected to earn 13 percent in a

recession, 6 percent in a normal economy, and lose 4 percent in a booming economy.

The probability of a boom is 5 percent while the probability of a recession is 45 percent.

What is the expected rate of return on this stock?

A. 8.52 percent

B. 8.74 percent

C. 8.65 percent

D. 9.05 percent

E. 9.28 percent

The Green Hornet offers a trade discount with terms of 2/5, EOM. Assume you

purchase an item on credit from The Green Hornet on Monday, November 3. What is

the invoice date for this purchase?

A. November 3

B. November 5

C. November 7

D. November 8

E. November 30

New York Bank provides Food Canning, Inc. a $250,000 line of credit with an interest

rate of 1.75 percent per quarter. The credit line also requires that 1 percent of the unused

portion of the credit line be deposited in a non-interest bearing account as a

compensating balance. Food Canning, Inc.'s short-term investments are paying 1.2

percent per quarter. What is the effective annual interest rate on this arrangement if the

line of credit goes unused all year? Assume any funds borrowed or invested use

compound interest.

A. 4.76 percent

B. 4.80 percent

C. 4.89 percent

D. 7.00 percent

E. 7.27 percent

Paying off a firm's debt is comparable to _____ on the assets of the firm.

A. purchasing a put option

B. purchasing a call option

C. exercising an in-the-money put option

D. exercising an in-the-money call option

E. selling a call option

We are examining a new project. We expect to sell 8,000 units per year at $80 net cash

flow apiece for the next 15 years. In other words, the annual operating cash flow is

projected to be $80 × 8,000 = $640,000. The relevant discount rate is 16 percent, and

the initial investment required is $2,740,000. The project can be dismantled after the

first year and sold for $2,130,000. Suppose you think it is likely that expected sales will

be revised upward to 9,600 units if the first year is a success and revised downward to

3,000 units if the first year is not a success. Suppose the scale of the project can be

doubled in one year in the sense that twice as many units can be produced and sold.

Naturally, expansion would be desirable only if the project is a success. This implies

that if the project is a success, projected sales after expansion will be 19,200. Assume

that success and failure are equally likely. Note that abandonment is still an option if the

project is a failure. What is the value of the option to expand?

A. $1,774,328

B. $1,809,941

C. $1,828,406

D. $1,848,920

E. $1,872,312

Metal Products Co. has an inventory period of 53 days, an accounts payable period of

68 days, and an accounts receivable turnover rate of 18. What is the length of the cash

cycle?

A. 3.00 days

B. 5.28 days

C. 26.28 days

D. 71.00 days

E. 73.28 days

Your current sales consist of 45 units per month at a price of $390 a unit. You are

weighing the pros and cons of switching to a net 30 credit policy from your current cash

only policy. If you decide to switch your credit policy you also plan to increase the sales

price to $410 a unit. The monthly interest rate is 1.4 percent. What is the break-even

default rate of the proposed switch?

A. 3.55 percent

B. 3.68 percent

C. 4.29 percent

D. 4.71 percent

E. 4.88 percent

J&N, Inc. stock has a current market price of $46 a share. The one-year call on this

stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike

price of $55 is priced at $8.24. What is the risk-free rate of return?

A. 1.49 percent

B. 1.82 percent

C. 3.10 percent

D. 3.64 percent

E. 4.21 percent

Wilderness Adventures specializes in back-country tours and resort management. Travel

Excitement specializes in making travel reservations and promoting vacation travel.

Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel

Excitement has an aftertax cost of capital of 11 percent. Both firms are considering

building wilderness campgrounds complete with man-made lakes and hiking trails. The

estimated net present value of such a project is estimated at $87,000 at a discount rate

of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either,

should accept this project?

A. Wilderness Adventures only

B. Travel Excitement only

C. both Wilderness Adventures and Travel Excitement

D. neither Wilderness Adventures nor Travel Excitement

E. cannot be determined without further information

A firm has total assets with a current book value of $68,700, a current market value of

$74,300, and a current replacement cost of $75,600. What is the value of Tobin's Q?

A. .85

B. .87

C. .92

D. .95

E. .98

Tidewater Fishing has a current beta of 1.48. The market risk premium is 8.9 percent

and the risk-free rate of return is 3.2 percent. By how much will the cost of equity

increase if the company expands its operations such that the company beta rises to

1.60?

A. 0.88 percent

B. 1.07 percent

C. 1.50 percent

D. 2.10 percent

E. 2.26 percent

Rachel's has a $50,000 line of credit with Uptown Bank. The line of credit calls for an

interest rate of 8 percent and a compensating balance of 4 percent. The compensating

balance is based on the total amount borrowed and will be held in an interest-free

account. What is the effective annual interest rate if the firm borrows $35,000 for one

year?

A. 7.76 percent

B. 8.00 percent

C. 8.17 percent

D. 8.33 percent

E. 8.42 percent

Which of the following should be included in the analysis of a new product?

I. money already spent for research and development of the new product

II. reduction in sales for a current product once the new product is introduced

III. increase in accounts receivable needed to finance sales of the new product

IV. market value of a machine owned by the firm which will be used to produce the new

product

A. I and III only

B. II and IV only

C. I, II, and III only

D. II, III, and IV only

E. I, II, III, and IV

The fact that a proposed project is analyzed based on the project's incremental cash

flows is the assumption behind which one of the following principles?

A. underlying value principle

B. stand-alone principle

C. equivalent cost principle

D. salvage principle

E. fundamental principle

The Flower Shoppe has accounts receivable of $3,709, inventory of $4,407, sales of

$218,640, and cost of goods sold of $167,306. How many days does it take the firm to

both sell its inventory and collect the payment on the sale assuming that all sales are on

credit?

A. 14.67 days

B. 15.81 days

C. 16.23 days

D. 17.18 days

E. 17.47 days

What is the net present value of a project that has an initial cash outflow of $34,900 and

the following cash inflows? The required return is 15.35 percent.

A. -$3,383.25

B. -$2,784.62

C. -$2,481.53

D. $52,311.08

E. $66,416.75

The amount paid to an underwriter who participates in a standby underwriting

agreement is called a(n):

A. gross spread.

B. optional spread.

C. standby fee.

D. additional fee.