1) When computing the future value of an annuity, the higher the compound frequency,
A.the lower the future value will be
B.the higher the future value will be
C.the less likely the future value can be calculated
D.the more likely the future value can be calculated
2) Assume that you contribute $300 per month to a retirement plan for 25 years. Then
you are able to increase the contribution to $500 per month for 20 years. Given a 9%
interest rate, what is the value of your retirement plan after 45 years?
A.$1,743,956.03
B.$1,989,703.51
C.$2,189,194.36
D.$2,355,040.91
3) LLV Inc. originally forecasted the following financial data for next year: Sales =
$1,000, Cost of goods sold = $710 and Interest expense = $95. The firm believes that
COGS will always be 71% of sales. Due to pressure from shareholders, the firm wants
to achieve a net income of $150. Assuming the interest expense will remain the same,
how large must sales be to achieve this goal? Assume a 35% tax rate.
A.$1,403.82
B.$1,3009.18
C.$1,123.34
D.$1,296.51
4) Which of the following statements is correct?
A.The WACC measures the before-tax cost of capital
B.An increase in the firm’s marginal corporate tax rate will decrease the weighted
average cost of capital
C.Flotation costs can decrease the weighted average cost of capital
D.None of these statements is correct
5) Present Value of Multiple Annuities A small business owner visits his bank to ask for
a loan. The owner states that he can repay a loan at $2,000 per month for the next three
years and then $1,000 per month for the two years after that. If the bank is charging
customers 8.5 percent APR, how much would it be willing to lend the business owner?
A.$80,419.29
B.$6,494.66
C.$21,780.74
D.$96,000.00
6) If gold is selling in the U.S. for $1015 per ounce and if 1 peso = $0.35, then gold
should sell for _________ in Mexico.
A.$2,900
B.355.25 pesos
C.2,900 pesos
D.$355.25
7) After saving diligently your entire career, you and your spouse are ready to retire
with a nest egg of $500,000. You need to invest this money in a mix of stocks and
bonds that will allow you to earn $4,000 per month for 30 years. What annual interest
rate (APR) do you need to earn?
A.6.92%
B.7.45%
C.8.94%
D.9.17%
8) Which of the following is a security issue in which the investment bank guarantees
the issuer a price for newly issued securities by buying the whole issue at a fixed price
from the security issuer, and where the investment bank then seeks to resell the
securities to investors at a higher price?
A.best efforts underwriting
B.firm commitment underwriting
C.underwriter’s spread
D.venture capital
9) All of the following capital budgeting tools are suitable for non-normal cash flows
except ____.
A.MIRR
B.Profitability Index
C.Discounted Payback
D.NPV
10) This is defined as a method of registering securities that allows firms that plan to
offer multiple issues of the security over a two-year period to submit one registration
statement.
A.shelf registration
B.shelf prospectus
C.SEC registration
D.originating registration
11) Which of the following best describes the type of financing provided by
government agencies such as the Small Business Administration?
A.debt financing
B.equity financing
C.public sources of financing
D.capital financing
12) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 8 percent, and that
the maximum allowable payback and discounted payback statistic for the project are 3
and 3.5 years, respectively.
Use the PI decision rule to evaluate this project; should it be accepted or rejected?
A.-.39%, reject
B..39%, accept
C.-38.88%, reject
D.38.88%, accept
13) Calculating Fees on a Loan Commitment You have approached your local bank for
a start-up loan commitment for $1,000,000 needed to open a car repair store. You have
requested that the term of the loan be one-year. Your bank has offered you the following
terms: size of loan commitment = $1,000,000, term = 1 year, up-front fee = 20 basis
points, back-end fee = 50 basis points, and rate on the loan = 9%. If you immediately
take down $750,000 and no more during the year, what is the total interest and fees you
have paid on this loan commitment?
A.$70,250
B.$70,750
C.$74,500
D.$93,250
14) This model includes an equation that relates a stock’s required return to an
appropriate risk premium:
A.asset pricing
B.behavioral finance
C.beta
D.efficient markets
15) When a stockholder’s stake is worthless the firm runs the risk of ____________.
A.Underinvestment because there isn’t much capital for investment
B.Overinvestment because there isn’t much wealth at risk
C.Having bondholders invoke the Separation principle to obtain first rights on the firm’s
assets
D.None of these
16) Company Risk Premium A company has a beta of 2.91. If the market return is
expected to be 16 percent and the risk-free rate is 4 percent, what is the company’s risk
premium?
A.11.64%
B.12.00%
C.22.91%
D.34.92%
17) Which of the following is not correct with respect to financial institutions?
A.Financial institutions channel funds from those with shortages to those with surplus
funds
B.Commercial banks, insurance companies and mutual funds are examples of financial
institutions
C.Financial institutions reduce monitoring costs and liquidity costs
D.Financial institutions reduce price risk
18) This is a measure of risk to reward earned by an investment over a specific period
of time.
A.coefficient of variation
B.market deviation
C.standard deviation
D.total variation
19) Suppose that Dunn Industries has annual sales of $2.5 million, cost of goods sold of
$1,850,000, average inventories of $1,900,000, and average accounts receivable of
$660,000. Assuming that all of Dunn’s sales are on credit, what will be the firm’s
operating cycle?
A.471.22 days
B.374.86 days
C.418.61 days
D.515.39 days
20) Future Value Compute the future value in year 4 of a $500 deposit in year 1 and
another $1,000 deposit at the end of year 3 using a 5% interest rate.
A.$1,625.00
B.$1,628.81
C.$1,800.00
D.$1,823.26
21) Present Value of an Annuity What is the present value of a $300 annuity payment
over 5 years if interest rates are 8 percent?
A.$204.17
B.$440.80
C.$1,197.81
D.$1,938.96
22) The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.25%
and the rate on 4-year Treasury securities is 8.50%. The one-year interest rate expected
in three years is E(4r1), 4.10%. According to the liquidity premium hypotheses, what is
the liquidity premium on the 4-year Treasury security, L4?
A.6.7%
B.7.1%
C.8.2%
D.9.6%
23) The benchmark for the Profitability Index, PI, is the
A.cost of capital
B.managers’ maximum number of years
C.zero or anything larger than zero
D.zero or anything less than zero
24) Expected Return The Buckle (BKE) recently paid a $0.90 dividend. The dividend is
expected to grow at a 19 percent rate. At the current stock price of $43.17, what is the
return shareholders are expecting?
A.19.00%
B.19.02%
C.21.48%
D.22.74%
25) Market Value Ratios Lab R Doors’ year-end price on its common stock is $40. The
firm has a profit margin of 10%, total assets of $30 million, a total asset turnover ratio
of 2, no preferred stock, and there are 4 million shares of common stock outstanding.
What is the PE ratio for Lab R Doors?
A.0.375
B.0.750
C.6.667
D.26.667
26) The Wall Street Journal reports that the current rate on 10-year Treasury bonds is
6.25%, on 20-year Treasury bonds is 7.95%, and on a 20-year corporate bond is
10.75%. Assume that the maturity risk premium is zero. If the default risk premium and
liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year
corporate bond, calculate the current rate on a 10-year corporate bond.
A.9.05%
B.6.15%
C.7.60%
D.8.70%
27) Loan Payments You wish to buy a $15,000 car. The dealer offers you a 4-year loan
with a 9 percent APR. What are the monthly payments?
A.$260.78
B.$312.50
C.$373.28
D.$3,820.56
28) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 10 percent, and
that the maximum allowable payback and discounted payback statistics for the project
are 3.5 and 4.5 years, respectively. Use the NPV decision to evaluate this project;
should it be accepted or rejected?
A.NPV = $1,766.55; accept the project
B.NPV = -$892.19; reject the project
C.NPV = $1,288.94; accept the project
D.NPV = -$3,590; reject the project
29) If the present value of an ordinary, 8 year annuity is $12,500 and interest rates are
9.1%, what is the present value of the same annuity due?
A.$13,637.50
B.$13,941.90
C.$14,114.80
D.$14,211.90
30) Which of the following would cause dividends to increase if the firm was using the
residual dividend model?
A.The firm has less positive NPV projects
B.The firm uses more debt in its capital structure
C.Net income increases
D.All of these would cause dividends to increase
31) Which of the following issues Treasury Inflation Protected Securities (TIPS)?
A.U.S. Treasury
B.Corporations
C.Municipalities
D.Nonprofits
32) Economies of Scope A survey of a local market has provided the following average
cost data: Johnson Construction Corp. (JCC) has assets of $5 million and an average
cost of 15 percent. Anderson Architects (AA) has assets of $8 million and an average
cost of 20 percent. Cole Home Builders (CHB) has assets of $8 million and an average
cost of 17 percent. For each firm, average costs are measured as a proportion of assets.
JCC is planning to acquire AA and CHB with the expectation of reducing overall
average costs by eliminating the duplication of services.
What should be the average cost after the acquisition for JCC to justify this merger?
A.17.667% or lower
B.17.667% or higher
C.17.333% or lower
D.15.00% or lower
33) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the nave approach?
A.$2,450,000
B.$2,900,000
C.$2,350,000
D.$2,585,000
34) Stock valuation model dynamics make clear that higher growth rates lead to
A.lower valuations
B.higher valuations
C.lower growth rates continuing
D.higher growth rates continuing
35) Compute the NPV for Project X and accept or reject the project with the cash flows
shown below if the appropriate cost of capital is 10 percent.
A.$12.93
B.$14.22
C.$62.07
D.$136.90
36) Your firm needs a machine which costs $100,000, and requires $25,000 in
maintenance for each year of its 3-year life. After 3 years, this machine will be
replaced. The machine falls into the MACRS 3-year class life category. Assume a tax
rate of 35% and a discount rate of 14%. What is the depreciation tax shield for this
project in year 3?
A.$2,073.40
B.$5,183.50
C.$9,626.50
D.$14,810.00
37) Suppose that the current one-year rate (one-year spot rate) and expected one-year
T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as
follows:
1R1 = 5%, E(2r1) = 6%, E(3r1) = 7.5% E(4r1) = 6.85%
Using the unbiased expectations theory, calculate the current (long-term) rates for one-,
two-, three-, and four-year-maturity Treasury securities.
A.5.00%; 5.50%; 6.16%; 6.33%
B.5.00%; 5.25%; 6.10%; 6.27%
C.5.00%; 5.50%; 6.10%; 6.23%
D.5.00%; 5.25%; 6.16%; 6.49%
38) Which of these is defined as exchanging one currency for another today?
A.exchange rate
B.spot transaction
C.indirect quote
D.direct quote
39) Dandee Lions, Inc. has a cash balance of $105,000; accounts payable of $290,000;
inventory of $213,000; accounts receivable of $310,000; notes payable of $95,000; and
accrued wages and taxes of $65,000. How much net working capital does the firm need
to fund?
A.$8,000
B.$83,000
C.$178,000
D.$18,000
40) A firm has retained earnings of $6 million, a common shares account of $3 million,
and additional paid-in-capital of $6 million, and the firm just paid a 10 percent stock
dividend. Assume that fair market value is reflected in the relative size of both the
common shares account and the additional paid-in-capital account. What are the new
levels in each account?
A.Retained earnings = $900,000; Common shares = $300,000; Additional
paid-in-capital = $600,000
B.Retained earnings = $5,100,000; Common shares = $2,700,000; Additional
paid-in-capital = $5,400,000
C.Retained earnings = $5,100,000; Common shares = $3,300,000; Additional
paid-in-capital = $6,600,000
D.Retained earnings = $5,900,000; Common shares = $2,700,000; Additional
paid-in-capital = $5,400,000
41) When calculating WACC, should project-specific or firmwide debt and preferred
stock components be used, and why?
42) How would you explain to a friend why market value of a firm is more important to
an investor than book value of the firm?
43) If a popular video gaming system costs $400 in the United States, what do you
think it should cost in Japan? What are some reasons that your price might not be right?
44) Differentiate between the objective and subjective approach to computing a
divisional cost of capital.
45) What are the advantages of borrowing money in the country you plan to invest in?