1) Which one of the following is the agreed-upon exchange rate that is to be used when
currencies are exchanged at some point in the future based on an agreement made
today?
A.Spot rate
B.ADR rate
C.London Interbank Offer Rate
D.Forward exchange rate
E.Cross-rate
2) The cost of capital for a project depends primarily on which one of the following?
A.Source of funds used for the project
B.Division within the firm that undertakes the project
C.Project’s modified internal rate of return
D.How the project uses its funds
E.Project’s fixed costs
3) Which one of the following individuals is most apt to purchase a municipal bond?
A.Minimum-wage employee
B.Retired individual with minimal current income
C.Recent college graduate
D.Tax-exempt organization
E.Highly compensated business owner
4) Country Kitchen’s cost of equity is 15.3 percent and its aftertax cost of debt is 6.9
percent. What is the firm’s weighted average cost of capital if its debt-equity ratio is
0.58 and the tax rate is 30 percent?
A.8.94 percent
B.11.47 percent
C.12.21 percent
D.12.28 percent
E.13.01 percent
5) Brick House Cafe has a 35 percent tax rate and total taxes of $35,280. What is the
value of the interest tax shield if the interest expense is $16,700?
A.$4,887
B.$5,010
C.$5,595
D.$5,845
E.$6,023
6) A project has sales of $462,000, costs of $274,000, depreciation of $26,000, interest
expense of $3,400, and a tax rate of 35 percent. What is the value of the depreciation
tax shield?
A.$9,100
B.$9,564
C.$10,650
D.$10,800
E.$11,350
7) What is the net present value of the following cash flows if the relevant discount rate
is 9.0 percent?
A.$3,374.11
B.$5,006.19
C.$8,215.46
D.$13,058.39
E.$18,519.71
8) The Christmas Tree Farms, Inc. currently has 45,000 shares of stock outstanding and
no debt. The price per share is $17.50. The firm is considering borrowing funds at 7.5
percent interest and using the proceeds to repurchase 4,000 shares of stock. Ignore
taxes. How much is the firm borrowing?
A.$52,500
B.$70,000
C.$110,500
D.$125,000
E.$140,000
9) The dividend yield is defined as:
A.the current annual cash dividend divided by the current market price per share
B.the current annual cash dividend divided by the current book value per share
C.next year’s expected cash dividend divided by the current market price per share
D.next year’s expected cash dividend divided by the current book value per share
E.next year’s expected cash dividend divided by next year’s expected market price per
share
10) Popeye’s Fried Chicken just took out an 8 percent interest-only loan of $50,000 for
three years. Payments are to be made at the end of each year. What is the amount of the
payment that will be due at the end of year 3?
A.$19,052.58
B.$20,166.67
C.$50,000.00
D.$54,000.00
E.$61,824.60
11) One year ago, you purchased 500 shares of stock for $12 a share. The stock pays
$0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share.
What is your total dollar return on this investment?
A.$6,222
B.$7,432
C.$8,150
D.$7,775
E.$8,260
12) You own a portfolio of two stocks, A and B. Stock A is valued at $6,500 and has an
expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. What is
the expected return on the portfolio if the portfolio value is $9,500?
A.9.58 percent
B.9.62 percent
C.9.74 percent
D.10.07 percent
E.10.22 percent
13) The Blue Lagoon has a return on equity of 18.9 percent, an equity multiplier of 1.9,
and a total asset turnover of 1.45 . What is the profit margin?
A.2.76 percent
B.3.57 percent
C.4.90 percent
D.6.85 percent
E.14.60 percent
14) Suppose that Martin Metal Products changes its policy and starts requiring all of its
customers to pay within 20 days rather than the 30 days that it currently allows. Which
one of the following will result from this change?
A.Increase in receivables period
B.Increase in inventory period
C.Decrease in cash cycle
D.Increase in operating cycle
E.Increase in accounts payable period
15) Which one of the following terms best refers to the practice of investing in a variety
of diverse assets as a means of reducing risk?
A.Systematic
B.Unsystematic
C.Diversification
D.Security market line
E.Capital asset pricing model
16) Tessler Farms has a return on equity of 12.71 percent, a debt-equity ratio of 0.75,
and a total asset turnover of 0.9 . What is the return on assets?
A.7.26 percent
B.8.06 percent
C.13.67 percent
D.15.24 percent
E.17.41 percent
17) Which one of the following is generally considered to be the best form of analysis if
you have to select a single method to analyze a variety of investment opportunities?
A.Payback
B.Profitability index
C.Accounting rate of return
D.Internal rate of return
E.Net present value
18) Katz is an all-equity development company that has 36,000 shares of stock
outstanding at a market price of $25 a share. The firm’s earnings before interest and
taxes are $29,000. Katz has decided to issue $200,000 of debt at a rate of 6 percent and
use the proceeds to repurchase shares. What should Leslie do if she owns 600 shares of
Katz stock and wants to use homemade leverage to offset the leverage being assumed
by the firm?
A.Borrow money and buy an additional 22 shares
B.Borrow money and buy an additional 133 shares
C.Sell 22 shares and loan out the proceeds
D.Sell 56 shares and loan out the proceeds
E.Sell 133 shares and loan out the proceeds
19) PayDay Loans is offering a special on one-year loans. The company will loan you
$5,000 today in exchange for one payment of $5,900 one year from now. What is the
APR on this loan?
A.10.63 percent
B.11.20 percent
C.11.63 percent
D.17.93 percent
E.18.00 percent
20) Spiral Staircase is offering preferred stock which is commonly referred to as 10-10
stock. This stock will pay an annual dividend of $10 a share starting 10 years from now.
What is this stock worth to you today if you desire a 15 percent rate of return?
A.$16.70
B.$18.95
C.$19.63
D.$20.52
E.$20.94
21) Suppose that a small, rural city in the countryside of North Dakota plans to issue
$150,000 worth of 10-year bonds. Which one of the following components of the
bond’s yield will be affected by the fact that no active secondary market is expected for
these bonds?
A.Real rate
B.Liquidity premium
C.Interest rate risk premium
D.Inflation premium
E.Taxability premium
22) You are comparing three investments, all of which pay $100 a month and have an 8
percent interest rate. One is ordinary annuity, one is an annuity due, and the third
investment is a perpetuity. Which one of the following statements is correct given these
three investment options?
A.To be the perpetuity, the payments must occur on the first day of each monthly period
B.The ordinary annuity would be more valuable than the annuity due if both had a life
of 10 years
C.The present value of the perpetuity has to be higher than the present value of either
the ordinary annuity or the annuity due
D.The future value of all three investments must be equal
E.The present value of all three investments must be equal
23) A firm’s float management policy is most apt to include which one of the following
statements?
A.All invoices are to be paid the same day they are received
B.All outgoing checks are to be delivered by the fastest means possible
C.The depository bank needs to process all deposits in accordance with the Check
Clearing Act for the 21st Century
D.Any check received is to be held until the customer’s account has been updated to
record the payment
E.Accounts payable processing should be given priority over accounts receivable
processing
24) Which one of the following most likely represents the greatest political risk for a
U.S.-based firm?
A.A product assembly plant located in a foreign country
B.A foreign sales office
C.Accounting office that handles all payroll functions and is located in a foreign
country
D.Natural ore mine in a foreign country
E.Subassembly plant in a foreign country that uses U.S.-made components
25) All else held constant, which one of the following statements is correct concerning
the accounts payable period?
A.The accounts payable period is equal to 365/(Sales/Average accounts payable)
B.A decrease in the accounts payable period will increase the operating cycle
C.An increase in the accounts payable period will decrease the cash cycle
D.A decrease in the accounts payable period will decrease the operating cycle
E.An increase in the accounts payable turnover rate decreases the cash cycle
26) A registered form bond is defined as a bond that:
A.is a bearer bond
B.is held in street name
C.pays coupon payments directly to the owner of record
D.is listed with the Securities and Exchange Commission (SEC)
E.is unsecured
27) Underwood Homes Sales has total assets of $589,900 and total debt of $318,000.
What is the equity multiplier?
A.0.46
B.0.54
C.1.21
D.1.85
E.2.17
28) Which one of the following occupations best fits into the international area of
finance?
A.Bank teller
B.Treasury bill analyst
C.Currency trader
D.Insurance risk manager
E.Local bank manager
29) Assume the securities markets are strong form efficient. Given this assumption, you
should expect which one of the following to occur?
A.The risk premium on any security in that market will be zero
B.The price of any one security in that market will remain constant at its current level
C.Each security in the market will have an annual rate of return equal to the risk-free
rate
D.The price of each security in that market will frequently fluctuate
E.The prices of each security will fall to zero because the net present value of the
investments will be zero
30) Explain the primary goal of the Sarbanes-Oxley Act in 2002 and discuss whether or
not this act appears to be effectively meeting that goal.
31) What are some of the pros and cons of a JIT inventory management system?
32) Explain the differences between a broker market and a dealer market.
33) Using a security market line graph, illustrate a security that is overpriced and has a
beta of 0.89 . Label all relevant points, including those that represent the overall market.
Explain why the security plots as you have illustrated it.
34) Identify and briefly explain three ways in which a firm can finance its short-term
assets.
35) Draw a graph that illustrates the relationship between interest rates and the present
value of $1,000 to be received in one year.
36) Jesse just won the state lottery. He has been given the option of receiving either
$62.9 million today or $5 million a year for the next 35 years, with the first payment
paid today. Describe the process that Jesse should use to determine which payment
option he prefers. Ignore all taxes and assume that Jesse will live for at least 40 more
years.
37) Give an example of a situation where the management of a firm is acting in a
manner that is contrary to the principal goal of financial management.