1) Valerie bought 200 shares of Able stock today. Able stock has been trading for some
time on the NYSE. Valerie’s purchase occurred in which market?
A.Dealer market
B.Over-the-counter market
C.Secondary market
D.Primary market
E.Tertiary market
2) Mark is analyzing a proposed project to determine how changes in the variable costs
per unit would affect the project’s net present value. What type of analysis is Mark
conducting?
A.Sensitivity analysis
B.Erosion planning
C.Scenario analysis
D.Cost-benefit analysis
E.Opportunity cost analysis
3) Your friend claims that he invested $5,000 seven years ago and that this investment is
worth $38,700 today. For this to be true, what annual rate of return did he have to earn?
Assume the interest compounds annually.
A.28.87 percent
B.31.39 percent
C.33.96 percent
D.36.01 percent
E.37.87 percent
4) Which one of the following is contained in the corporate bylaws?
A.Procedures for electing corporate directors
B.State of incorporation
C.Number of authorized shares
D.Intended life of the corporation
E.Business purpose of the corporation
5) Which of the following individuals commonly use finance in the course of their job?
I. Chief financial officers
II. Accountants
III. Security analysts
IV. Strategic managers
A.I and II only
B.III and IV only
C.I and III only
D.I, II, and III only
E.I, II, III, and IV
6) Alpha Industries is considering a project with an initial cost of $7.4 million. The
project will produce cash inflows of $1.54 million a year for 7 years. The firm uses the
subjective approach to assign discount rates to projects. For this project, the subjective
adjustment is +1.5 percent. The firm has a pre-tax cost of debt of 8.6 percent and a cost
of equity of 13.7 percent. The debt-equity ratio is .0.65 and the tax rate is 35 percent.
What is the net present value of the project?
A.-$372,951
B.-$187,016
C.$48,209
D.$133,333
E.$269,480
7) Curtis Builders is borrowing $140,000 today for 5 years. The loan is an interest-only
loan with an APR of 9.5 percent. Payments are to be made annually. What is the amount
of the first annual payment?
A.$13,300.00
B.$21,500.00
C.$31,280.40
D.$36,461.10
E.$41,300.00
8) The equity multiplier is equal to:
A.one plus the debt-equity ratio
B.one plus the total asset turnover
C.total debt divided by total equity
D.total equity divided by total assets
E.one divided by the total asset turnover
9) For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which
$21,500 flowed to the firm’s stockholders. The interest paid was $2,300. What is the
amount of the net new borrowing?
A.-$14,300
B.-$9,700
C.$12,300
D.$14,300
E.$18,900
10) If a trade is made “in the crowd”, the trade has occurred:
A.between a broker and a specialist
B.between two brokers
C.electronically on NASDAQ
D.on SuperDOT
E.on an ECN
11) A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and an
aftertax cost of debt of 6 percent. Given this, which one of the following will increase
the firm’s weighted average cost of capital?
A.Increasing the firm’s tax rate
B.Issuing new bonds at par
C.Redeeming shares of common stock
D.Increasing the firm’s beta
E.Increasing the debt-equity ratio
12)
Please refer to Oscar’s financial statements. Assume a constant debt-equity ratio, net
profit margin and dividend payout ratio, and further assume all of Oscar’s costs, assets
and current liabilities vary directly with sales. What is the pro forma net fixed asset
value for next year if sales are projected to increase by 7.5 percent?
A.$10,857.50
B.$10,931.38
C.$11,663.75
D.$15,587.50
E.$18,987.50
13) The following table presents a four-year forecast for Kenmore Air, Inc.:
Estimate the fair market value of Kenmore Air’s equity per share at the end of 2012
under the following assumptions:
a. EBIT in year 2016 is $200 million, and then grows at 5 percent per year forever.
b. To support the perpetual growth in EBIT, capital expenditures in year 2017 exceed
depreciation by $30 million, and this difference grows 5 percent per year forever.
c. Similarly, working capital investments are $15 million in 2017, and this amount
grows 5 percent per year forever.
14) A project has annual depreciation of $16,200, costs of $87,100, and sales of
$123,000. The applicable tax rate is 34 percent. What is the operating cash flow
according to the tax shield approach?
A.$23,019
B.$27,667
C.$27,458
D.$29,202
E.$29,878
15) Today, you are borrowing $13,800 to purchase a car. What will be your monthly
payment amount if the loan is for 4 years at 7.5 percent interest?
A.$298.40
B.$321.150
C.$333.67
D.$380.24
E.$400.10
16) A risky security has less risk than the overall market. What must the beta of this
security be?
A.0
B.> 0 but < 1
C.1
D.> 1
E.The beta cannot be determined based on the information provided.
17) You are considering the following two mutually exclusive projects. The required
return on each project is 14 percent. Which project should you accept and what is the
best reason for that decision?
A.Project A; because it pays back faster
B.Project A; because it has the higher internal rate of return
C.Project B; because it has the higher internal rate of return
D.Project A; because it has the higher net present value
E.Project B; because it has the higher net present value
18) The “R” in the Fisher effect formula represents the:
A.current yield
B.real return
C.coupon rate
D.inflation rate
E.nominal return
19) You want to invest an amount of money today and receive back twice that amount
in the future. You expect to earn 8 percent interest. Approximately how long must you
wait for your investment to double in value?
A.6 years
B.7 years
C.8 years
D.9 years
E.10 years
20) The dividend growth model can be used to compute the cost of equity for a firm in
which of the following situations?
I. Firms that have a 100 percent retention ratio
II. Firms that pay an unchanging dividend
III. Firms that pay a constantly increasing dividend
IV. Firms that pay an erratically growing dividend
A.I and II only
B.I and IV only
C.II and III only
D.I, II, and III only
E.I, III, and IV only
21) Upstate Bank has an issue of preferred stock with a $4.80 stated dividend that just
sold for $86 a share. What is the bank’s cost of preferred stock?
A.4.91 percent
B.5.58 percent
C.6.23 percent
D.6.47 percent
E.7.32 percent
22) Any changes to a firm’s projected future cash flows that are caused by adding a new
project are referred to as which one of the following?
A.Eroded cash flows
B.Deviated projections
C.Incremental cash flows
D.Directly impacted flows
E.Assumed flows
23) Arts and Crafts Warehouse wants to issue 15-year, zero coupon bonds that yield 7.5
percent. What price should it charge for these bonds if the face value is $1,000?
(Assume semi-annual compounding.)
A.$308.15
B.$331.40
C.$356.08
D.$362.14
E.$369.94
24) The Gable Inn is an all-equity firm with 16,000 shares outstanding at a value per
share of $14.50. The firm is issuing $50,000 of debt and using the proceeds to reduce
the number of outstanding shares. How many shares of stock will be outstanding once
the debt is issued? Ignore taxes.
A.11,970 shares
B.12,552 shares
C.12,846 shares
D.13,030 shares
E.13,561 shares
25) Northern Wood Products is an all-equity firm with 16,000 shares of stock
outstanding and a total market value of $352,000. Based on its current capital structure,
the firm is expected to have earnings before interest and taxes of $26,000 if the
economy is normal, $3,000 if the economy is in a recession, and $33,000 if the
economy booms. Ignore taxes. Management is considering issuing $88,000 of debt with
a 6 percent coupon rate. If the firm issues the debt, the proceeds will be used to
repurchase stock. What will the earnings per share be if the debt is issued and the
economy is in a recession?
A.-$0.27
B.-$0.19
C.$0.03
D.$0.26
E.$0.31
26) Which of the following statements are correct?
I. Going-concern value of a firm is equal to the present value of expected future cash
flows to owners and creditors.
II. When an acquiring firm purchases a target firm’s equity, the acquirer need not
assume the target’s liabilities.
III. The market value of a public company reflects the worth of the business to minority
investors.
IV. The fair market value of a business is usually the lower of its liquidation value and
its going-concern value.
A.I and III only
B.II and IV only
C.II and III only
D.I, II, and III only
E.II, III, and IV only
27) Keller Metals common stock is selling for $36 a share and has a dividend yield of
3.2 percent. What is the dividend amount?
A.$0.32
B.$1.15
C.$3.49
D.$11.25
E.$11.52
28) The Berry Patch has sales of $438,000, cost of goods sold of $369,000, depreciation
of $37,400, and interest expense of $13,800. The tax rate is 35 percent. What is the
times interest earned ratio?
A.2.29
B.3.46
C.3.87
D.4.38
E.4.79
29) Which one of the following is the hypothesis that securities markets are efficient?
A.Geometric market hypothesis
B.Standard deviation hypothesis
C.Efficient markets hypothesis
D.Capital market hypothesis
E.Financial markets hypothesis
30) Which one of the following premiums is paid on a corporate bond due to its tax
status?
A.Interest rate risk premium
B.Inflation premium
C.Liquidity premium
D.Taxability premium
E.Default risk premium
31) Which one of the following types of bonds should an investor purchase if he or she
is primarily concerned about ensuring that bond ownership will increase his or her
purchasing power?
A.OTC
B.Death
C.CAT
D.PETS
E.TIPS
32) Nu Tek is comprised of four separate operating divisions. For this year, the firm has
decided to allocate capital funds using a soft rationing approach. Which one of the
following applies to this situation?
A.Division managers will be limited to accepting a single new project each
B.Division managers are being given blanket approval to accept all positive net present
value projects
C.Divisions managers will vie with each other for additional capital allocations
D.Division managers will not receive any funding for new projects but will be allowed
to expand current operations
E.Division managers will not receive capital funding for any project
33) An investment has an initial cost of $320,000 and a life of four years. This
investment will be depreciated by $60,000 a year and will generate the net income
shown below. Should this project be accepted based on the average accounting rate of
return (AAR) if the required rate is 9 percent? Why or why not?
A.Yes; because the AAR less than 9 percent
B.Yes; because the AAR is 9 percent
C.Yes; because the AAR is greater than 9 percent
D.No; because the AAR is 9 percent
E.No; because the AAR is greater than 9 percent
34) The average accounting return:
A.measures profitability rather than cash flow
B.discounts all values to today’s dollars
C.is expressed as a percentage of an investment’s current market value
D.will equal the required return when the net present value equals zero
E.is used more often by CFOs than the internal rate of return