Over the period of 1926 through 2014, the annual rate of return on _____ has been
more volatile than the annual rate of return on _____.
A. large-company stocks; small-company stocks
B. U.S. Treasury bills; small-company stocks
C. U.S. Treasury bills; long-term government bonds
D. long-term corporate bonds; small-company stocks
E. large-company stocks; long-term corporate bonds
Answer:
The average compound return earned per year over a multi-year period is called the
_____ average return.
A. arithmetic
B. standard
C. variant
D. geometric
E. real
Answer:
Brad’s Company has equipment with a book value of $500 that could be sold today at a
50 percent discount. Its inventory is valued at $450 and could be sold to a competitor
for that amount. The firm has $100 in cash and customers owe the firm $250, all of
which is collectible. What is the current market value of the firm’s assets?
A.$100
B.$550
C.$1,050
D.$1,300
E.$600
Answer:
What is the future value of $3,100 a year for six years at interest rate of 8.9 percent?
A. $20,255.40
B. $26,847.26
C. $27,134.16
D. $23,263.57
E. $24,414.67
Answer:
Which one of the following statements is correct concerning the standard deviation of a
portfolio?
A. The greater the diversification of a portfolio, the greater the standard deviation of
that portfolio.
B. The standard deviation of a portfolio can often be lowered by changing the weights
of the securities in the portfolio.
C. Standard deviation is used to determine the amount of risk premium that should
apply to a portfolio.
D. The standard deviation of a portfolio is equal to the geometric average standard
deviation of the individual securities held within that portfolio.
E. The standard deviation of a portfolio is equal to a weighted average of the standard
deviations of the individual securities held within the portfolio.
Answer:
Suppose you identified three important systematic risk factors given by exports,
inflation, and industrial production. At the beginning of the year, a firm’s stock return is
estimated at 9.6 percent and the growth in the three factors is estimated at -1 percent,
2.5 percent, and 3.5 percent respectively. The factor betas are: βEX = 1.8, βI = .7, and
βIP = 1. What would be the stock’s total return if the actual growth in each of the factors
was equal to the expected growth and no unexpected company news occurred?
A. 4.6%
B. 5.9%
C. 9.6%
D. 14.6%
E. 8.7
Answer:
A bond manager who wishes to hold the bonds with the greatest potential volatility
should acquire:
A. short-term, high-coupon bonds.
B. long-term, low-coupon bonds.
C. long-term, zero-coupon bonds.
D. short-term, zero-coupon bonds.
E. short-term, low-coupon bonds.
Answer:
Short-term marketable securities generally have:
A. high maturity risk.
B. little, if any, marketability.
C. significant default risk.
D. a high level of liquidity.
E. maturities between one and two years.
Answer:
If a firm has seasonal sales, then is highly likely the firm will:
A. hold extra excess cash throughout the year.
B. borrow short term for part of the year and invest in marketable securities the rest of
the year.
C. never be able to invest any excess funds.
D. continually have short-term loans outstanding.
E. have less volatile cash flows than a comparable firm with constant sales.
Answer:
Which one of the following actions by a financial manager creates an agency problem?
A. refusing to borrow money when doing so will create losses for the firm
B. refusing to lower selling prices if doing so will reduce the net profits
C. agreeing to expand the company at the expense of stockholders’ value
D. agreeing to pay bonuses based on the market value of the company’s stock
E. increasing current costs in order to increase the market value of the stockholders’
equity
Answer:
Which type(s) of dilution are relevant to a firm’s shareholders when the firm’s shares are
issued with rights?
A. dilution of percentage ownership
B. dilution of stock price per share
C. dilution of both book value per share and earnings per share
D. dilution of both percentage ownership and book value per share
E. dilution of both stock price per share and earnings per share
Answer:
Guggenheim offers a bond with annual payments and a coupon rate of 5 percent. The
yield to maturity is 5.62 percent and the maturity date is 9 years away. What is the
market price of a $1,000 face value bond?
A. $942.66
B. $868.67
C. $869.67
D. $957.12
E. $1,009.59
Answer:
The cost of holding cash:
A. is the opportunity cost of the lost investment income.
B. is zero because it is the most liquid asset a firm can hold.
C. decreases as cash holdings increase.
D. increases as market rates decline.
E. is irrelevant in today’s electronic world.
Answer:
Given a flexible financing policy, a growing firm generally has a permanent
requirement for:
A. both current and long-term assets.
B. long-term assets only.
C. short-term debt.
D. both short- and long-term debt.
E. current assets and short-term debt.
Answer:
Which one of the following statements is false?
A. Commercial drafts represent a way to obtain a credit commitment from a customer
before the goods are delivered.
B. When a banker’s acceptance is discounted in the secondary market it becomes a
commercial note.
C. Sight drafts require immediate payment.
D. Banker’s acceptances arise when a bank guarantees payment on a commercial draft.
E. A commercial draft becomes a trade acceptance once the buyer accepts the draft and
promises to pay.
Answer:
Martin’s Yachts is expected to pay annual dividends of $1.40, $1.75, and $2.00 a share
over the next three years, respectively. After that, the dividend is expected to remain
constant. What is the current value per share at a discount rate of 14 percent?
A. $12.22
B. $13.57
C. $13.08
D. $12.82
E. $13.39
Answer:
Jordan and Sons has an inventory period of 48.6 days, an accounts payable period of
36.2 days, and an accounts receivable period of 29.3 days. Management is considering
offering a 5 percent discount if its credit customers pay for their purchases within 10
days. This discount is expected to reduce the receivables period by 17 days. If the
discount is offered, the operating cycle will decrease from ___ days to ___ days.
A. 28.3; 11.3
B. 77.9; 60.9
C. 28.3; 45.3
D. 77.9; 94.9
E. 54.2; 37.2
Answer:
Southern Goods has an estimated going-concern value of $2 million. As a result of
negotiations the firm’s bankruptcy reorganization plan consists of $600,000 in new
mortgage debt, $250,000 in subordinated debt, and $1,150,000 in new equity. Currently
the firm has a mortgage of $823,000, other secured debt of $89,000, and unsecured debt
of $1.34 million. According to the APR, what will the stockholders receive if they
currently have 2 million shares with a par value of $1 each?
A. $0
B. $315,714 in new equity
C. $583,333 in a combination of new debt and equity securities
D. $1,150,000 in new equity
E. $940,000 in new equity
Answer:
Thompson amp; Thomson is an all-equity firm that has 280,000 shares of stock
outstanding. The company is in the process of borrowing $2.4 million at 5.5 percent
interest to repurchase 75,000 shares of the outstanding stock. What is the value of this
firm if you ignore taxes?
A. $8,960,000
B. $9,240,000
C. $10,710,000
D. $12,500,000
E. $11,360,000
Answer:
When [(1 ” tC) (1 ” tS) = (1 ” tB)], then the:
A. firm should hold no debt.
B. value of the levered firm is greater than the value of the unlevered firm.
C. cash flow to stockholders equals the cash flow to bondholders.
D. tax shield on debt is exactly offset by higher levels of dividends.
E. tax shield on debt is exactly offset by higher capital gains.
Answer:
A firm has a debt-equity ratio of .55 with a cost of debt of 6.7 percent. If it had no debt,
its cost of equity would be 14.5 percent. What is its levered cost of equity assuming
there are no taxes or other imperfections?
A. 18.96%
B. 15.82%
C. 17.94%
D. 18.79%
E. 13.67%
Answer:
The most valuable investment given up if an alternative investment is chosen is a(n):
A. salvage value expense.
B. net working capital expense.
C. sunk cost.
D. opportunity cost.
E. erosion cost.
Answer:
Which one of following statements is false?
A. Importers are participants in the foreign exchange market.
B. The foreign exchange market is an over-the-counter market.
C. There are no speculators in the foreign exchange market.
D. Exporters are participants in the foreign exchange market.
E. Portfolio managers are participants in the foreign exchange market.
Answer:
Tool Makers manufactures equipment for use by other firms. The initial cost of one
customized machine is $850,000 with an annual operating cost of $10,000, and a life of
3 years. The machine will be replaced at the end of its life. What is the equivalent
annual cost of this machine if the required rate of return is 15 percent and we ignore
taxes?
A. $375,797.41
B. $340,008.02
C. $382,280.42
D. $347,647.78
E. $351,610.29
Answer:
Merriweather’s has a policy of increasing its annual dividend by 1.75 percent each year.
How much will one share be worth five years from now if the required rate of return is
15 percent and the next dividend will be $3.40?
A. $28.48
B. $27.99
C. $34.84
D. $28.60
E. $32.78
Answer:
At the beginning of the year, long-term debt of a firm is $2,400 and total debt is $3,150.
At the end of the year, long-term debt is $2,800 and total debt is $4,370. The interest
paid is $40. What is the amount of the cash flow to creditors?
A.$440
B.$40
C.$1,260
D.$1,180
E.$360
Answer:
An out-of-the-money call option is best defined as an option that:
A. has an exercise price below the current market price of the underlying security.
B. should not be exercised.
C. has an exercise price equal to the current market price of the underlying security.
D. has expired.
E. qualifies as an American option.
Answer:
A stock had annual returns of 7.63 percent, 9.28 percent, -3.11 percent, and 15.09
percent for the past four years, respectively. What is the real average rate of return for
this period if inflation averaged 2.3 percent?
A. 4.15%
B. 5.24%
C. 4.81%
D. 5.02%
E. 5.36%
Answer:
Wydex, Inc. stock is currently trading at $82 a share. The firm feels that its primary
clientele can afford to spend between $2,000 and $2,500 to purchase a round lot of 100
shares. The firm should consider a:
A. reverse stock split.
B. liquidating dividend.
C. stock dividend.
D. stock split.
E. special dividend.
Answer:
The rules by which corporations govern themselves are called:
A. indenture provisions.
B. indemnity provisions.
C. charter agreements.
D. bylaws.
E. articles of incorporation.
Answer:
The least problem encountered when comparing the financial statements of one firm
with those of another firm occurs when the firms:
A. are in different lines of business.
B. have geographically diverse operations.
C. use different methods of depreciation.
D. are both classified as conglomerates.
E. have the same fiscal year-end.
Answer:
The cross rate is:
A. the inverse of the direct rate.
B. an implicit rate based on two currencies and their individual relationships with a
third currency.
C. the rate converting the direct rate into the indirect rate.
D. is the average of the spot and forward rates.
E. is the link between the spot and forward rates.
Answer:
All else held constant, the earnings per share will:
A.decrease as net income increases.
B.decrease as the number of shares outstanding increase.
C.decrease as the total revenue of the firm increases.
D.increase as the tax rate increases.
E.decrease as the costs decrease.
Answer: