1) Renee’s Boutique, Inc., needs to raise $300 million to finance firm expansion. In
discussions with its investment bank, Renee’s learns that the bankers recommend a debt
issue with an offer price of $1,000 per bond and they will charge an underwriter’s
spread of 7.125 percent of the gross price. How many bonds will Renee’s Boutique need
to sell in order to receive the $300 million they need?
A.302,396
B.329,048
C.316,947
D.323,015
2) When calculating operating cash flow for a project, one would calculate it as being
mathematically equal to which of the following?
A.EBIT – Interest – Taxes + Depreciation
B.EBIT – Taxes
C.EBIT + Depreciation
D.EBIT – Taxes + Depreciation
3) Given a 7% interest rate, compute the year 8 future value of deposits made in years
1, 2, 3, and 4 of $750, $1,200, $500, and $250.
A.$3,801.62
B.$3,899.17
C.$4,034.20
D.$4,167.29
4) The merged firm’s ability to generate synergistic cost savings through the joint use of
inputs in producing multiple products is referred to as ______________.
A.Economies of scale
B.Economies of scope
C.X-efficiencies
D.None of these
5) Which of the following statements is correct?
A.Adding corporate taxes to the M&M model reduces both the level and volatility of
EPS
B.Adding corporate taxes to the M&M model has no impact on the level and volatility
of EPS
C.Adding corporate taxes to the M&M model increases both the level and volatility of
EPS
D.None of these
6) As individual legal entities, corporations assume liability for their own debts, so the
shareholders hold
A.only limited liability
B.unlimited liability
C.shared liability
D.joint liability
7) Jasmine has decided that she wants to build enough retirement wealth that, if
invested at 6% per year, will provide her with $3,000 of monthly income for 30 years.
To date, she has saved nothing but she still has 25 years until she retires. Jasmine
believes that she can earn 6% on her investments until she retires. How much money
does she need to contribute per month to reach her goal?
A.$512.93
B.$616.27
C.$722.05
D.$863.49
8) A U.S. firm is expecting cash flows of 20 million Mexican pesos and 35 million
Indian rupees. The current spot exchange rates are: $1 = 11.792 pesos and $1 = 49.204
rupees. If these cash flows are not received for one year and the expected spot rates at
that time will be $1 = 11.118 pesos and $1 = 41.075 rupees, then what is the difference
in dollars received that was caused by the delay?
A.$0.03 million
B.$0.15 million
C.$0.24 million
D.$0.32 million
9) Which of the following are investor diversification problems?
A.Many employees hold mostly their employer’s stocks as investments
B.Many households hold relatively few individual stocksthe median is three
C.Investors seem to prefer local firms thereby limiting diversification opportunities
D.All of these are investor diversification problems
10) Under what conditions is a bond likely to be called?
A.The firm is in financial duress
B.The firm is planning a massive expansion and needs to raise a lot of capital
C.Interest rates have significantly declined
D.The firm wants to increase its debt ratio
11) Which of the following is an example of an appropriate loan covenant?
A.The firm must increase its debt ratio by at least 10%
B.The firm must reduce its total asset turnover by 10%
C.The firm must purchase an insurance policy on a key employee
D.All of these are examples of an appropriate loan covenant
12) Suppose a firm has a retention ratio of 33 percent and net income of $6.25 million.
How much does it pay out in dividends?
A.$4,187,500
B.$2,062,500
C.$1,987,500
D.$4,375,500
13) All of the following are examples of carrying costs except ______________.
A.Rental payments on storage facility where inventory is maintained
B.The lost sale if the company runs out of a particular model
C.The opportunity costs associated with having capital tied up in current assets instead
of more productive fixed assets
D.All of these are examples of carrying costs
14) From a taxation perspective, the form of business organization with the highest
business level taxes is the __________.
A.Sole proprietorship
B.Corporation
C.Partnership
D.S Corporation
15) Compute the PI statistic for Project X and note whether the firm should accept or
reject the project with the cash flows shown below if the appropriate cost of capital is
10 percent.
A.-.0977%, reject
B.-9.77%, reject
C.-24.41%, reject
D.24.41%, accept
16) Which of these is the requirement of the firm to keep a certain percentage of the
borrowed money deposited in the firm’s bank accounts, whereby the bank agrees to lend
money to the firm?
A.commercial loan
B.line of credit
C.compensating balance
D.inventory loan
17) BOGO Shoes would like to maintain their cash account at a minimum level of
$100,000, but expects the standard deviation in net daily cash flows to be $7,000; the
effective annual rate on marketable securities to be 6.5 percent per year; and the trading
cost per sale or purchase of marketable securities to be $175 per transaction. What will
be their optimal cash return point?
A.$107,000
B.$133,374.63
C.$144,266.52
D.$101,859.65
18) Apple’s 9% annual coupon bond has 10 years until maturity and the bonds are
selling in the market for $890. The firm’s tax rate is 36%. What is the firm’s after-tax
cost of debt?
A.10.86%
B.3.91%
C.9.81%
D.6.95%
19) For corporations, maximizing the value of owner’s equity can also be stated as
A.maximizing retained earnings
B.maximizing earnings per share
C.maximizing net income
D.maximizing the stock price
20) If a firm has already paid an expense or is obligated to pay one in the future,
regardless of whether a particular project is undertaken, that expense is a
A.committed cost
B.complementary cost
C.obligated cost
D.sunk cost
21) Balance Sheet Ted’s Taco Shop has total assets of $5 million. Forty percent of these
assets are financed with debt of which $400,000 is current liabilities. The firm has no
preferred stock but the balance in common stock and paid-in surplus is $1 million.
Using this information what is the balance for long-term debt and retained earnings on
Ted’s Taco Shop’s balance sheet?
A.$400,000, $1 million
B.$1.6 million, $2 million
C.$1.6 million, $3 million
D.$2 million, $3 million
22) Compute the Discounted Payback statistic for Project X and recommend whether
the firm should accept or reject the project with the cash flows shown below if the
appropriate cost of capital is 10 percent and the maximum allowable discounted
payback is 3 years.
A.2.49 years, accept
B.2.98 years, accept
C.3.49 years, reject
D.4.98 years, reject
23) Which of the following is a poor justification for a merger?
A.Tax considerations
B.Lowered cost of capital
C.Reduce costs
D.Increase the size of the firm
24) Calculation of Average Costs with Economies of Scope Dee’s Dry Cleaning is
considering a merger with Larry’s Laundry Supply Stores. Dee’s total operating costs of
producing services are $600,000 for sales volume of $4 million. Larry’s total operating
costs of producing services are $200,000 for a sales volume (JP) of $1 million.
Calculate the average cost of production for the Dee’s and Larry’s firms, respectively.
A.15%, 20%
B.20%, 15%
C.16%, 16%
D.60%, 5%
25) Portfolio Weights An investor owns $2,000 of Adobe Systems stock, $4,000 of Dow
Chemical, and $6,000 of Office Depot. What are the portfolio weights of each stock?
A.Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333
B.Adobe System = 0.1667, Dow Chemical = 0.3333, Office Depot = 0.5
C.Adobe System = 0.3333, Dow Chemical = 0.1667, Office Depot = 0.5
D.Adobe System = 0.2, Dow Chemical = 0.4, Office Depot = 0.6
26) B&B Cos. has sales of $732,000 and cost of goods sold of $323,000. The firm had a
beginning inventory of $48,000 and an ending inventory of $39,000. What is the length
of the days’ sales in inventory?
A.37.79 days
B.31.84 days
C.44.07 days
D.49.02 days
27) A capital budgeting technique that generates a decision rule and associated metric
for choosing projects based on the total discounted value of their cash flows is referred
to as ______________.
A.PI
B.IRR
C.NPV
D.MIRR
28) This is the risk that a security issuer will miss an interest or principal payment or
continue to miss such payments.
A.default risk
B.liquidity risk
C.maturity risk
D.price risk
29) Sally has researched GLE and wants to pay no more than $50 for the stock.
Currently, GLE is trading in the market for $54. Sally would be best served to:
A.buy using a limit order
B.buy using a market order
C.use the bid-ask spread to her advantage
D.None of these
30) How are future values affected by changes in interest rates?
A.The lower the interest rate, the larger the future value will be
B.The higher the interest rate, the larger the future value will be
C.Future values are not affected by changes in interest rates
D.One would need to know the present value in order to determine the impact
31) Selling Stock with a Limit Order You would like to sell 400 shares of International
Business Machines (IBM). The current bid and ask quotes are $96.24 and $96.17,
respectively. You place a limit sell-order at $96.20. If the trade executes, how much
money do you receive from the buyer?
A.$38,464.00
B.$38,468.00
C.$38,480.00
D.$38,496.00
32) An all-equity firm is considering the projects shown below. The T-bill rate is 4
percent and the market risk premium is 8 percent. If the firm uses its current WACC of
13 percent to evaluate these projects, which project(s) will be incorrectly accepted?
A.Project A
B.Project C
C.Project D
D.Projects C and D
33) Which of the following statements is correct?
A.Most current assets are depreciated using the MACRS depreciation calculation
B.Most large corporations use Section 179 to depreciate their assets
C.Most businesses benefit from accelerated depreciation; therefore the straight-line
depreciation method is preferred by most businesses
D.None of these statements is correct
34) Value of Future Cash Flows A firm recently paid a $1.00 annual dividend. The
dividend is expected to increase by 10 percent in each of the next four years. In the
fourth year, the stock price is expected to be $100. If the required rate for this stock is
14 percent, what is its current value?
A.$25.00
B.$36.60
C.$62.87
D.$72.30
35) Suppose your firm is seeking a 7-year, amortizing $400,000 loan with annual
payments and your bank is offering you the choice between a $410,000 loan with a
$10,000 compensating balance and a $400,000 loan without a compensating balance. If
the interest rate on the $400,000 loan is 9.5 percent, how low would the interest rate on
the loan with the compensating balance have to be in order for you to choose it?
A.The interest rate would have to be lower than 8.76%
B.The rate would have to be lower than 8.29%
C.The rate would have to be lower than 8.14%
D.The rate would have to be lower than 7.99%
36) HiLo, Inc., doesn’t face any taxes and has $100 million in assets, currently financed
entirely with equity. Equity is worth $50 per share, and book value of equity is equal to
market value of equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the possible values of
EBIT and their associated probabilities as shown below:
The firm is considering switching to a 40-percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt. What will
be the break-even level of EBIT?
A.$7.25 million
B.$7 million
C.$10 million
D.$11.2 million
37) On which of the four major financial statements would you find the increase in
inventory?
A.Balance Sheet
B.Income Statement
C.Statement of Cash Flows
D.Statement of Retained Earnings
38) Value of a Preferred Stock If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in
annual dividends, and the required return on the preferred stock is 7 percent, what’s the
value of the stock?
A.$0.21
B.$0.43
C.$21.00
D.$42.86
39) Bond Quotes Consider the following three bond quotes; a Treasury note quoted at
102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45.
If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond
has a par value of $5,000, what is the price of these three bonds in dollars?
A.$1002.30, $1000, $1000, respectively
B.$1000, $1000, $5000, respectively
C.$1002.30, $994.50, $5012.25 respectively
D.$1029.38, $994.50, $5122.50, respectively