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All else equal, the market value of a stock will tend to decrease by roughly the aftertax
value of the dividend on the:
A. dividend declaration date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. day after the date of payment.
Answer:
Assume that you invest in a portfolio of large-company stocks. Further assume that the
portfolio will earn a rate of return similar to the average return on large-company stocks
for the period 1926-2010. What rate of return should you expect to earn?
A. less than 10 percent
B. between 10 and 12.5 percent
C. between 12.5 and 15 percent
D. between 15 and 17.5 percent
E. more than 17.5 percent
Answer:
The current market value of the assets of Smethwell, Inc. is $54 million, with a standard
deviation of 16 percent per year. The firm has zero-coupon bonds outstanding with a
total face value of $40 million. These bonds mature in 2 years. The risk-free rate is 4
percent per year compounded continuously. What is the value of d1?
A. 1.32
B. 1.48
C. 1.67
D. 1.79
E. 2.06
Answer:
Young's Home Supply has a debt-equity ratio of 0.80. The cost of equity is 14.5 percent
and the aftertax cost of debt is 4.9 percent. What will the firm's cost of equity be if the
debt-equity ratio is revised to 0.70?
A. 10.89 percent
B. 11.47 percent
C. 11.70 percent
D. 13.89 percent
E. 13.97 percent
Answer:
Net working capital is defined as:
A. total liabilities minus shareholders' equity.
B. current liabilities minus shareholders' equity.
C. fixed assets minus long-term liabilities.
D. total assets minus total liabilities.
E. current assets minus current liabilities.
Answer:
Which one of the following best defines the primary purpose of a protective put?
A. ensure a maximum purchase price in the future
B. offset an equivalent call option
C. limit the downside risk of asset ownership
D. lock in a risk-free rate of return on a financial asset
E. increase the upside potential return on an investment
Answer:
Which one of the following is NOT included in cash flow from assets?
A. accounts payable
B. inventory
C. sales
D. interest expense
E. cash account
Answer:
An investment offers a 10.5 percent total return over the coming year. Sam Bernanke
thinks the total real return on this investment will be only 6.2 percent. What does Sam
believe the inflation rate will be for the next year?
A. 5.60 percent
B. 5.67 percent
C. 4.05 percent
D. 6.00 percent
E. 6.21 percent
Answer:
Wicker Imports established a trust fund that provides $90,000 in scholarships each year
for needy students. The trust fund earns a fixed 6 percent rate of return. How much
money did the firm contribute to the fund assuming that only the interest income is
distributed?
A. $1,150,000
B. $1,200,000
C. $1,333,333
D. $1,500,000
E. $1,600,000
Answer:
Which one of the following statements is correct?
A. If the majority of a firm's new customers become repeat customers then there is a
strong argument against extending credit even if the default rate is low.
B. A customer's past payment history reveals little information in relation to his or her
future tendency to pay.
C. A suggested policy for offering credit to new customers is to limit the amount of
their initial credit purchase.
D. The risk of issuing credit is the same for a new customer as it is for an existing
customer.
E. The recommended credit policy for new customers is to extend the maximum
amount of credit you will ever be willing to offer as an enticement to get their business.
Answer:
Phyllis is planning for her retirement in fifteen years. She knows that she can currently
live reasonably well on $38,000 a year given that she is debt-free. Based on her family
history she expects to die ten years after she retires. Thus, she computes her retirement
need as $38,000 a year for 10 years. Which one of the following behaviors applies to
Phyllis?
A. regret aversion
B. money illusion
C. self-attribution bias
D. endowment effect
E. myopic loss aversion
Answer:
Which one of the following characteristics best describes a project that has a low degree
of operating leverage?
A. high variable costs relative to the fixed costs
B. relatively high initial cash outlay
C. an OCF that is highly sensitive to the sales quantity
D. high level of forecasting risk
E. a high depreciation expense
Answer:
We are examining a new project. We expect to sell 8,000 units per year at $80 net cash
flow apiece for the next 15 years. In other words, the annual operating cash flow is
projected to be $80 × 8,000 = $640,000. The relevant discount rate is 16 percent, and
the initial investment required is $2,740,000. The project can be dismantled after the
first year and sold for $2,130,000. Suppose you think it is likely that expected sales will
be revised upward to 9,600 units if the first year is a success and revised downward to
3,000 units if the first year is not a success. Suppose the scale of the project can be
doubled in one year in the sense that twice as many units can be produced and sold.
Naturally, expansion would be desirable only if the project is a success. This implies
that if the project is a success, projected sales after expansion will be 19,200. Assume
that success and failure are equally likely. Note that abandonment is still an option if the
project is a failure. What is the value of the option to expand?
A. $1,774,328
B. $1,809,941
C. $1,828,406
D. $1,848,920
E. $1,872,312
Answer:
An agent who arranges a transaction between a buyer and a seller of equity securities is
called a:
A. broker.
B. floor trader.
C. capitalist.
D. principal.
E. dealer.
Answer:
Assume the spot rate on the Canadian dollar is C$0.9872. The risk-free nominal rate in
the U.S. is 5.4 percent while it is only 4.2 percent in Canada. Which one of the
following four-year forward rates best establishes the approximate interest rate parity
condition?
A. C$0.9407
B. C$0.9608
C. C$1.0267
D. C$1.0519
E. C$1.0597
Answer:
On the day you entered college you borrowed $30,000 from your local bank. The terms
of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal
is due in full one year after you graduate. Interest is to be paid annually at the end of
each year. Assume that you complete college in four years. How much total interest will
you pay on this loan?
A. $7,266.67
B. $7,400.00
C. $7,125.00
D. $8,529.00
E. $8,607.11
Answer:
Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond. Both bonds
have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7
percent. If interest rates suddenly rise by 2 percent, what will the percentage change in
the price of Bond T be?
A. -15.16 percent
B. -14.87 percent
C. -13.56 percent
D. -12.92 percent
E. -12.67 percent
Answer:
An amortized loan:
A. requires the principal amount to be repaid in even increments over the life of the
loan.
B. may have equal or increasing amounts applied to the principal from each loan
payment.
C. requires that all interest be repaid on a monthly basis while the principal is repaid at
the end of the loan term.
D. requires that all payments be equal in amount and include both principal and interest.
E. repays both the principal and the interest in one lump sum at the end of the loan
term.
Answer:
Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings
ratio of 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?
A. 0.33 percent
B. 1.06 percent
C. 3.32 percent
D. 5.30 percent
E. 10.60 percent
Answer:
The _____ tells us that the expected return on a risky asset depends only on that asset's
nondiversifiable risk.
A. efficient markets hypothesis
B. systematic risk principle
C. open markets theorem
D. law of one price
E. principle of diversification
Answer:
Your firm has an inventory turnover rate of 14, a payables turnover rate of 8, and a
receivables turnover rate of 19. How long is your firm's operating cycle?
A. 45.06 days
B. 45.28 days
C. 45.63 days
D. 53.13 days
E. 53.78 days
Answer:
The difference between a firm's future cash flows if it accepts a project and the firm's
future cash flows if it does not accept the project is referred to as the project's:
A. incremental cash flows.
B. internal cash flows.
C. external cash flows.
D. erosion effects.
E. financing cash flows.
Answer:
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently
sold for $1.2 million. Over the past five years, the price of land in the area has increased
10 percent per year, with an annual standard deviation of 19 percent. A buyer has
recently approached you and wants an option to buy the land in the next 9 months for
$1,310,000. The risk-free rate of interest is 7 percent per year, compounded
continuously. How much should you charge for the option? (Round your answer to the
nearest $1,000.)
A. $32,000
B. $38,000
C. $43,000
D. $52,000
E. $60,000
Answer:
The depreciation tax shield is best defined as the:
A. amount of tax that is saved when an asset is purchased.
B. tax that is avoided when an asset is sold as salvage.
C. amount of tax that is due when an asset is sold.
D. amount of tax that is saved because of the depreciation expense.
E. amount by which the aftertax depreciation expense lowers net income.
Answer:
On the day you entered college, you borrowed $18,000 on an interest-only, four-year
loan at 5.25 percent from your local bank. Payments are to be paid annually. What is the
amount of your loan payment in year 2?
A. $945
B. $1,890
C. $3,600
D. $5,106
E. $6,250
Answer:
Increasing which one of the following will increase the operating cash flow assuming
that the bottom-up approach is used to compute the operating cash flow?
A. erosion effects
B. taxes
C. fixed expenses
D. salaries
E. depreciation expense
Answer:
Prezario's has 25,000 shares of stock outstanding with a par value of $1 per share. The
current market value of the firm is $847,000. Currently, the retained earnings account
balance is $428,000 and the capital in excess of par value account balance is $187,000.
The company just announced a 3-for-1 stock split. What is the common stock account
balance after the stock split?
A. $8,333
B. $25,000
C. $75,000
D. $77,333
E. $232,000
Answer:
You want to have $1 million in your savings account when you retire. You plan on
investing a single lump sum today to fund this goal. You are planning on investing in an
account which will pay 7.5 percent annual interest. Which of the following will reduce
the amount that you must deposit today if you are to have your desired $1 million on
the day you retire?
I. Invest in a different account paying a higher rate of interest.
II. Invest in a different account paying a lower rate of interest.
III. Retire later.
IV. Retire sooner.
A. I only
B. II only
C. I and III only
D. I and IV only
E. II and III only
Answer:
An increase in the depreciation expense will do which of the following?
I. increase net income
II. decrease net income
III. increase the cash flow from assets
IV. decrease the cash flow from assets
A. I only
B. II only
C. I and III only
D. II and III only
E. II and IV only
Answer:
D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire
offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares
to the public at an offer price of $22 a share. What type of underwriting was this?
A. best efforts
B. shelf
C. over subscribed
D. private placement
E. firm commitment
Answer:
National Warehousing just announced it is increasing its annual dividend to $1.18 next
year and establishing a policy whereby the dividend will increase by 3.25 percent
annually thereafter. How much will one share of this stock be worth 8 years from now if
the required rate of return is 9.5 percent?
A. $24.38
B. $25.68
C. $26.51
D. $27.02
E. $27.37
Answer:
