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.