The explicit costs, such as legal and administrative expenses, associated with corporate
default are classified as _____ costs.
A. flotation
B. issue
C. direct bankruptcy
D. indirect bankruptcy
E. unlevered
Answer:
A business firm ceases to exist as a going concern as a result of which one of the
following?
A. divestiture
B. share repurchase
C. liquidation
D. reorganization
E. capital restructuring
Answer:
This afternoon, you deposited $1,000 into a retirement savings account. The account
will compound interest at 6 percent annually. You will not withdraw any principal or
interest until you retire in forty years. Which one of the following statements is correct?
A. The interest you earn six years from now will equal the interest you earn ten years
from now.
B. The interest amount you earn will double in value every year.
C. The total amount of interest you will earn will equal $1,000 × .06 × 40.
D. The present value of this investment is equal to $1,000.
E. The future value of this amount is equal to $1,000 × (1 + 40).06.
Answer:
Samantha opened a savings account this morning. Her money will earn 5 percent
interest, compounded annually. After five years, her savings account will be worth
$5,600. Assume she will not make any withdrawals. Given this, which one of the
following statements is true?
A. Samantha deposited more than $5,600 this morning.
B. The present value of Samantha’s account is $5,600.
C. Samantha could have deposited less money and still had $5,600 in five years if she
could have earned 5.5 percent interest.
D. Samantha would have had to deposit more money to have $5,600 in five years if she
could have earned 6 percent interest.
E. Samantha will earn an equal amount of interest every year for the next five years.
Answer:
Which one of the following correctly describes the dividend yield?
A. next year’s annual dividend divided by today’s stock price
B. this year’s annual dividend divided by today’s stock price
C. this year’s annual dividend divided by next year’s expected stock price
D. next year’s annual dividend divided by this year’s annual dividend
E. the increase in next year’s dividend over this year’s dividend divided by this year’s
dividend
Answer:
Travis invested $9,250 in an account that pays 6 percent simple interest. How much
more could he have earned over a 7-year period if the interest had compounded
annually?
A. $741.41
B. $773.58
C. $802.16
D. $833.33
E. $858.09
Answer:
Currently, $1 will buy C$1.2103 while $1.2762 will buy €1. What is the exchange rate
between the Canadian dollar and the euro?
A. C$1 = €0.6474
B. C$1 = €0.6539
C. C$1 = €1.2762
D. C$1.5446 = €1
E. C$1.5528 = €1
Answer:
Which one of the following statements is correct concerning a cash management system
that employs both lockboxes and a concentration bank account?
A. All customer payments must be submitted to a lockbox.
B. The party which collects the checks from the lockbox is responsible for recording the
payment on the customer’s account.
C. Payments received in a lockbox are transferred immediately to the concentration
account.
D. The firm’s cash manager determines how the funds in the concentration account are
disbursed.
E. The concentration account must be zeroed out on a daily basis.
Answer:
Which one of the following statements is correct?
A. Firms should accept low risk projects prior to funding high risk projects.
B. Making subjective adjustments to a firm’s WACC when determining project discount
rates unfairly punishes low-risk divisions within a firm.
C. A project that is unacceptable today might be acceptable tomorrow given a change in
market returns.
D. The pure play method is most frequently used for projects involving the expansion
of a firm’s current operations.
E. Firms that elect to use the pure play method for determining a discount rate for a
project cannot subjectively adjust the pure play rate.
Answer:
Holiday Tours (HT) has an employment contract with its newly hired CEO. The
contract requires a lump sum payment of $10.4 million be paid to the CEO upon the
successful completion of her first three years of service. HT wants to set aside an equal
amount of money at the end of each year to cover this anticipated cash outflow and will
earn 5.65 percent on the funds. How much must HT set aside each year for this
purpose?
A. $3,184,467
B. $3,277,973
C. $3,006,409
D. $3,318,190
E. $3,466,667
Answer:
The controller of a corporation generally reports directly to the:
A. board of directors.
B. chairman of the board.
C. chief executive officer.
D. president.
E. vice president of finance.
Answer:
Consider the following financial statement information for the Bulldog Icers
Corporation:
How long is the cash cycle?
A. 39.0 days
B. 40.2 days
C. 41.0 days
D. 41.4 days
E. 42.8 days
Answer:
The value of an option is equal to the:
A. intrinsic value minus the time premium.
B. time premium plus the intrinsic value.
C. implied standard deviation plus the intrinsic value.
D. summation of the intrinsic value, the time premium, and the implied standard
deviation.
E. summation of delta, theta, vega, and rho.
Answer:
Lamont Corp. uses no debt. The weighted average cost of capital is 11 percent. The
current market value of the equity is $38 million and there are no taxes. What is EBIT?
A. $3,423,000
B. $3,508,600
C. $3,781,100
D. $3,898,700
E. $4,180,000
Answer:
Net present value:
A. is the best method of analyzing mutually exclusive projects.
B. is less useful than the internal rate of return when comparing different sized projects.
C. is the easiest method of evaluation for non-financial managers to use.
D. is less useful than the profitability index when comparing mutually exclusive
projects.
E. is very similar in its methodology to the average accounting return.
Answer:
The length of time a firm must wait to recoup the money it has invested in a project is
called the:
A. internal return period.
B. payback period.
C. profitability period.
D. discounted cash period.
E. valuation period.
Answer:
Assume the shareholders of a target firm benefit from being acquired in a stock
transaction. Given this, these shareholders are most apt to realize the largest benefit if
the:
A. acquiring firm has the better management team and replaces the target firm’s
managers.
B. management of the target firm is more efficient than the management of the
acquiring firm which replaces them.
C. management of both the acquiring firm and the target firm are as equivalent as
possible.
D. current management team of the target firm is kept in place even though the
managers of the acquiring firm are more suited to manage the target firm’s situation.
E. current management team of the target firm is technologically knowledgeable but yet
ineffective.
Answer:
The most recent financial statements for 7 Seas, Inc. are shown here:
Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity
are not. The company maintains a constant 50 percent dividend payout ratio. Like every
other firm in its industry, next year’s sales are projected to increase by exactly 16
percent. What is the external financing need?
A. $1,317.16
B. $1,411.16
C. $1,583.09
D. $2,211.87
E. $2,349.98
Answer:
Keyser Mining is considering a project that will require the purchase of $980,000 in
new equipment. The equipment will be depreciated straight-line to a zero book value
over the 7-year life of the project. The equipment can be scraped at the end of the
project for 5 percent of its original cost. Annual sales from this project are estimated at
$420,000. Net working capital equal to 20 percent of sales will be required to support
the project. All of the net working capital will be recouped. The required return is 16
percent and the tax rate is 35 percent. What is the amount of the aftertax salvage value
of the equipment?
A. $17,150
B. $31,850
C. $118,800
D. $237,600
E. $343,000
Answer:
How does accounts receivable affect the statement of cash flows for 2012?
A. a use of $4,218 of cash as an investment activity
B. a source of $807 of cash as an operating activity
C. a use of $4,218 of cash as a financing activity
D. a source of $807 of cash as an investment activity
E. a use of $807 of cash as an operating activity
Answer:
You cannot attend the shareholder’s meeting for Alpha United so you authorize another
shareholder to vote on your behalf. What is the granting of this authority called?
A. altering
B. cumulative voting
C. straight voting
D. indenture agreement
E. voting by proxy
Answer:
Financial planning accomplishes which of the following for a firm?
I. determination of asset requirements
II. development of plans to contend with unexpected events
III. establishment of priorities
IV. analysis of funding options
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Answer:
What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500
of stock N if the economy enjoys a boom period?
A. 10.93 percent
B. 11.16 percent
C. 12.55 percent
D. 12.78 percent
E. 13.69 percent
Answer:
Municipal bonds:
A. are less liquid than U.S. Treasury bills.
B. produce income that is subject to federal income taxation.
C. generally pay a higher coupon than corporate bonds.
D. are also referred to as commercial paper.
E. are issued by the federal government.
Answer:
On June 1, you borrowed $220,000 to buy a house. The mortgage rate is 8.25 percent.
The loan is to be repaid in equal monthly payments over 15 years. The first payment is
due on July 1. How much of the second payment applies to the principal balance?
(Assume that each month is equal to 1/12 of a year.)
A. $626.08
B. $721.14
C. $1,358.56
D. $1,453.38
E. $2,056.70
Answer:
The Corner Store has $219,000 of sales and $193,000 of total assets. The firm is
operating at 87 percent of capacity. What is the capital intensity ratio at full capacity?
A. 0.62
B. 0.68
C. 0.77
D. 1.35
E. 1.47
Answer:
Jean’s Warehouse has 16,000 shares of stock outstanding. The current market value of
the firm is $768,000. The company has retained earnings of $130,000, paid in surplus of
$321,000, and a common stock account value of 16,000. The company is planning a
5-for-3 stock split. What will the retained earnings account value be after the split?
A. $73,800
B. $130,000
C. $153,600
D. $205,000
E. $245,500
Answer:
The U.S. government coding system that classifies a firm by the nature of its business
operations is known as the:
A. NASDAQ 100.
B. Standard & Poor’s 500.
C. Standard Industrial Classification code.
D. Governmental ID code.
E. Government Engineered Coding System.
Answer:
Suppose you purchase the November call option on orange juice futures with a strike
price of 150 at the price shown in the table below. What will be your profit or loss on
this contract if the price of orange juice futures is $0.616 per pound at expiration of the
option contract?
Futures Options
Orange juice: 15,000 lbs, U.S. cents per lb.
A. loss of $2,107.50
B. loss of $1,717.50
C. no profit or loss
D. profit of $1,717.50
E. profit of $2,107.50
Answer:
Which two of the following are the best justifications for a reverse stock split?
I. combine a reverse stock split with a stock repurchase to enable a firm to go dark
II. increase the respectability of the stock
III. avoid delisting
IV. reduce transaction costs for shareholders
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. III and IV only
Answer:
Which one of the following risks would a floating-rate bond tend to have less of as
compared to a fixed-rate coupon bond?
A. real rate risk
B. interest rate risk
C. default risk
D. liquidity risk
E. taxability risk
Answer: