You currently own a portfolio valued at $52,000 that has a beta of 1.16. You have
another $10,000 to invest and would like to invest it in a manner such that the portfolio
beta decreases to 1.15. What does the beta of the new investment have to be?
A. 1.098
B. .889
C. .869
D. .924
E. 1.125
Chandler Tire Co. is trying to decide which one of two projects it should accept. Both
projects have the same start-up costs. Project 1 will produce annual cash flows of
$52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for
eight years. The company requires a 15 percent rate of return. Which project should the
company select and why?
A. Project 1, because the annual cash flows are greater by $4,000 than those of Project
2
B. Project 1, because the present value of its cash inflows exceeds those of Project 2 by
$14,211.62
C. Project 2, because the total cash inflows are $72,000 greater than those of Project 1
D. Project 2, because the present value of the cash inflows exceeds those of Project 1 by
$18,598.33
E. It does not matter as both projects have almost identical present values.
You have been told that you need $32,000 today for each $100,000 you want when you
retire 28 years from now. What rate of interest was used in the present value
computation? Assume interest is compounded annually.
A. 4.15 percent
B. 4.37 percent
C. 4.29 percent
D. 4.53 percent
E. 4.58 percent
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one
of the following costs related to this truck is the best example of a sunk cost? Assume
the truck has a usable life of five years.
A. New tires that will be purchased this winter
B. Costs of repairs needed so the truck can pass inspection next month
C. Money spent last month repairing a damaged front fender
D. Engine tune-up that is scheduled for this afternoon
E. Cost for a truck driver for the remainder of the truck’s useful life
Which statement is true?
A. Firms often pay higher interest rates on term loans than on public issues of debt.
B. The only difference between a term loan and a private placement is the size of the
issue.
C. A prospectus is required for equity issues but not for debt issues.
D. The flotation costs of issuing debt tend to be more expensive than for issuing equity.
E. Direct long-term loans must be registered with the SEC.
Which one of the following is minimized when the value of a firm is maximized?
A. Return on equity
B. WACC
C. Debt
D. Taxes
E. Bankruptcy costs
Miller and Sons is evaluating a project with the following cash flows:
The company uses a 10 percent interest rate on all of its projects. What is the MIRR of
the project using the reinvestment approach? The discounting approach? The
combination approach?
A. 18.54 percent; 17.29 percent; 14.61 percent
B. 13.96 percent; 14.38 percent; 14.61 percent
C. 18.54 percent; 17.29 percent; 13.67 percent
D. 13.96 percent; 17.85 percent; 13.67 percent
E. 18.54 percent; 18.23 percent; 18.61 percent
The average net income of a project divided by the project’s average book value is
referred to as the project’s:
A. required return.
B. market rate of return.
C. internal rate of return.
D. average accounting return.
E. discounted rate of return.
The Fabric House has sales of $411,800, total equity of $237,400, and a debt-equity
ratio of .55. What is the capital intensity ratio?
A. .89
B. .83
C. 1.06
D. 1.20
E. 1.27
The Rent-to-Own Store has a six-year, interest-only loan at 7.6 percent interest. The
firm originally borrowed $115,000. How much will the firm pay in total interest over
the life of the loan?
A. $32,451.13
B. $53,666.67
C. $47,500.00
D. $69,000.00
E. $52,440.00
During the past year, Yard Services paid $36,800 in interest along with $2,000 in
dividends. The company issued $3,000 of stock and $16,000 of new debt. The company
reduced the balance due on its old debt by $18,400. What is the amount of the cash flow
to creditors?
A. $8,200
B. $55,200
C. $2,400
D. $39,200
E. $15,800
Which one of the following statements is true?
A. The current yield on a par value bond will exceed the bond’s yield to maturity.
B. The yield to maturity on a premium bond exceeds the bond’s coupon rate.
C. The current yield on a premium bond is equal to the bond’s coupon rate.
D. A premium bond has a current yield that exceeds the bond’s coupon rate.
E. A discount bond has a coupon rate that is less than the bond’s yield to maturity.
What is the net present value of a project with the following cash flows if the discount
rate is 13.6 percent?
A. $406.11
B. $3,643.38
C. $3,207.20
D. -$1,407.92
E. -$5,433.67
You place an order for 380 units of Good Y at a unit price of $49. The supplier offers
terms of 2/10, net 30. The supplier is offering you a discount of _____ on your order if
you pay within ____ days.
A. $372.40;10
B. $1,489.60;30
C. $372.40;20
D. $1,489.60;10
E. $372.40; 30
Which one of the following is the best example of an announcement that is most apt to
result in an unexpected return?
A. A news bulletin that the anticipated layoffs by a firm will occur as expected on
December 1
B. Announcement that the CFO of the firm is retiring June 1 as previously announced
C. Announcement that a firm will continue its practice of paying a $3 a share annual
dividend
D. Statement by a firm that it has just discovered a manufacturing defect and is
recalling its product
E. The verification by senior management that the firm is being acquired as had been
rumored
A firm offers credit terms of 1/5, net 25. How long is the net credit period?
A. 1 day
B. 5 days
C. 20 days
D. 25 days
E. 30 days
On any given day, a firm receives and deposits numerous checks worth an average
combined total of $9,215. The funds from the deposited checks are generally available
after two days. Every day, the firm mails out checks totaling $7,300 that generally take
three days to clear the bank. What is the amount of the collection float if the opening
bank balance was $9,200?
A. $14,230
B. $15,970
C. $18,430
D. $7,300
E. $11,130
The Art Works needs to raise $6.2 million for a new facility. Assuming they issue new
equity shares via a general cash offering, they expect to incur administrative costs of
$412,000 in addition to the underwriting spread of 7.8 percent. If the offer price turns
out to be $16 a share, how many shares need to be sold to finance the new facility?
A. 448,210 shares
B. 454,743 shares
C. 406,211 shares
D. 405,141 shares
E. 487,923 shares
The spot rate on the Canadian dollar is 1.15. Interest rates in Canada are expected to
average 3.2 percent while they are anticipated to be 3.6 percent in the U.S. What is the
expected exchange rate three years from now?
A. C$1.1960
B. C$1.1363
C. C$1.2613
D. C$1.1108
E. C$1.1071
Beta Industries is considering a project with an initial cost of $6.9 million. The project
will produce cash inflows of $1.52 million a year for seven years. The firm uses the
subjective approach to assign discount rates to projects. For this project, the subjective
adjustment is +2.2 percent. The firm has a pretax cost of debt of 9.1 percent and a cost
of equity of 17.7 percent. The debt-equity ratio is .57 and the tax rate is 34 percent.
What is the net present value of the project? (Round the answer to the nearest $100.)
A. -$698,400
B. -$187,100
C. $48,200
D. $333,300
E. $2,500
All else held constant, which of these statements is correct concerning the accounts
payable period?
A. The accounts payable period is equal to 360/(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.
Which one of the following best defines legal bankruptcy?
A. Negotiating new payment terms with a firm’s creditors
B. A temporary technical insolvency
C. A legal proceeding for liquidating or reorganizing a business
D. The internal process of revising the capital structure of a firm
E. The failure of a firm to meet its financial obligations in a timely manner
Kristina started setting aside funds three years ago to save for a down payment on a
house. She has saved $900 each quarter and earned an average rate of return of 4.8
percent. How much money does she currently have saved?
A. $11,542.10
B. $12,388.19
C. $15,209.80
D. $15,366.67
E. $16,023.13
Which one of the following is an example of a direct bankruptcy cost?
A. Operating at a debt-equity ratio that is less than the optimal ratio
B. Reducing the dividend payout ratio as a means of increasing a firm’s equity
C. Forgoing a positive net present value project to conserve current cash
D. Incurring legal fees for the preparation of bankruptcy filings
E. Losing a key customer due to concerns over a firm’s financial viability
Lucas expects to receive a sales bonus of $7,500 one year from now. The process of
determining how much that bonus is worth today is called:
A. aggregating.
B. discounting.
C. simplifying.
D. compounding.
E. extrapolating.
International Exchange has three divisions: A, B, and C. Division A has the least risk
and Division C has the most risk. The firm has an aftertax cost of debt of 6.1percent and
a cost of equity of 14.3 percent. The firm is financed with 37 percent debt and 63
percent equity. Division A’s projects are assigned a discount rate that is 2.2 percent less
than the firm’s weighted average cost of capital. What is the discount rate applicable to
Division A?
A. 7.98 percent
B. 8.27 percent
C. 9.07 percent
D. 9.48 percent
E. 6.87 percent
Corner Restaurant is considering a project with an initial cost of $211,600. The project
will not produce any cash flows for the first three years. Starting in Year 4, the project
will produce cash inflows of $151,000 a year for three years. This project is risky, so
the firm has assigned it a discount rate of 18.6 percent. What is the project’s net present
value?
A. $113,585.57
B. -$4,591.11
C. $51,786.86
D. $2,255.56
E. -$16,670.67
Assume an all-equity firm has positive net earnings. The operating cash flow of this
firm:
A. ignores both depreciation and taxes.
B. is unaffected by the depreciation expense.
C. must be negative.
D. increases when the tax rate decreases.
E. is equal to net income minus depreciation.
Gulf Coast Tours currently has a weighted average cost of capital of 12.4 percent based
on a combination of debt and equity financing. The firm has no preferred stock. The
current debt-equity ratio is .47 and the aftertax cost of debt is 6.1 percent. The company
just hired a new president who is considering eliminating all debt financing. All else
constant, what will the firm’s cost of capital be if the firm switches to an all-equity
firm?
A. 15.45 percent
B. 12.92 percent
C. 12.89 percent
D. 13.37 percent
E. 15.36 percent
Deltona Motors just issued 230,000 zero-coupon bonds. These bonds mature in 18
years, have a par value of $1,000, and have a yield to maturity of 5.9 percent. What is
the approximate total amount of money the company raised from issuing these bonds?
Assume semiannual compounding.
A. $88.20 million
B. $80.76 million
C. $75.14 million
D. $62.08 million
E. $91.84 million
A new project is expected to generate an operating cash flow of $38,728 and will
initially free up $11,610 in net working capital. Purchases of fixed assets costing
$52,800 will be required to start up the project. What is the total cash flow for this
project at Time zero?
A. -$64,410
B. -$41,190
C. -$52,800
D. $25,682
E. $50,338
British Metals is reviewing its current accounts to determine how a proposed project
might affect the account balances. The firm estimates the project will initially require
$81,000 in additional current assets and $57,000 in additional current liabilities. The
firm also estimates the project will require an additional $8,000 a year in current assets
in each of the first three of the four years of the project. How much net working capital
will the firm recoup at the end of the project assuming that all net working capital can
be recaptured?
A. $105,000
B. $24,000
C. $48,000
D. $68,000
E. $81,000
Which one of the following statements is correct?
A. Dividends are irrelevant.
B. Flotation costs are a good reason to support a high-dividend payout.
C. Current tax laws favor high current dividends for individual investors.
D. Dividend policy is the time pattern of dividend payout.
E. Corporate investors tend to prefer low-dividend payouts on securities they own.
The checks received in a lockbox are deposited:
A. into a local bank and then transferred electronically to a concentration account.
B. into a local bank and immediately invested in short-term investments.
C. as soon as they are posted to the customer’s account.
D. the following day and immediately invested.
E. directly into an investment account.