1) Currently, you can exchange $1 for Sf1.14. Assume that the average inflation rate in
the U.S. over the next two years will be 2.5 percent annually as compared to 3 percent
in Switzerland. Based on this information and relative purchasing power parity, which
one of the following assumptions can you make regarding the next two years?
A.The Swiss franc will appreciate against all currencies
B.The Swiss franc will appreciate against the U.S. dollar
C.The U.S. dollar will appreciate against all currencies
D.The U.S. dollar will appreciate against the Swiss franc
E.Both the U.S. dollar and the Swiss franc will appreciate against all other currencies
2) The Triangle Store pays a constant dividend. Last year, the dividend yield was 5.4
percent when the stock was selling for $18 a share. What must the stock price be today
if the market currently requires a 3.8 percent dividend yield on this stock?
A.$25.58
B.$14.76
C.$13.89
D.$23.16
E.$27.09
3) Which of the following is not an important step in the financial evaluation of an
investment opportunity?
A.Calculate a figure of merit for the investment
B.Estimate the accounting rate of return for the investment
C.Estimate the relevant cash flows
D.Compare the figure of merit to an acceptance criterion
E.All of the above are important steps
4) Currently, you can exchange 100 for $133. The inflation rate in Euroland is expected
to be 2.5 percent. In one year, it is expected that 100 can be exchanged for $136.
Assume relative purchasing power parity exists. What is the expected inflation rate in
the U.S.?
A.3.84 percent
B.4.26 percent
C.4.71 percent
D.5.21 percent
E.5.68 percent
5) Which one of the following is a shortage cost associated with a firm’s inventory?
A.Restocking cost
B.Opportunity cost of capital
C.Inventory obsolescence
D.Insurance cost
E.Inventory theft
6) Net capital spending is equal to:
A.ending net fixed assets minus beginning net fixed assets plus depreciation
B.beginning net fixed assets minus ending net fixed assets plus depreciation
C.ending net fixed assets minus beginning net fixed assets minus depreciation
D.ending total assets minus beginning total assets plus depreciation
E.ending total assets minus beginning total assets minus depreciation
7) The average risk premium on long-term government bonds for the period 1926-2008
was equal to:
A.zero
B.one percent
C.the rate of return on the bonds plus the corporate bond rate
D.the rate of return on the bonds minus the T-bill rate
E.the rate of return on the bonds minus the inflation rate
8) Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in
one lump sum payment one year from now. This type of loan is referred to as a(n):
A.interest-only loan
B.pure discount loan
C.quoted rate loan
D.compound interest loan
E.amortized loan
9) Which one of the following terms refers to a bond’s rate of return that is required by
the market place?
A.Coupon rate
B.Yield to maturity
C.Dirty yield
D.Call yield
E.Discount rate
10) Coaster’s has a cost of equity of 15.4 percent, a return on assets of 10.2 percent, and
a cost of debt of 7.3 percent. There are no taxes. What is the firm’s weighted average
cost of capital?
A.7.30 percent
B.10.20 percent
C.10.97 percent
D.15.40 percent
E.Cannot be determined from the information provided
11) The balance sheet of Retailers, Inc. has the following balances:
What is the amount of the change in net working capital?
A.-$8,100
B.-$7,400
C.$7,700
D.$8,000
E.$8,100
12) Financial leverage:
I. increases expected ROE but does not affect its variability.
II. increases breakeven, like operating leverage, but increases the rate of earnings per
share growth once breakeven is achieved.
III. is a fundamental financial variable affecting sustainable growth.
IV. increases expected return and risk to owners.
A.I and II only
B.I and III only
C.II and IV only
D.II, III, and IV only
E.I, II, III, and IV
13) Selected financial data for Link, Inc. follows: ($ in thousands)
The current ratio at the end of 2012 is:
A.10.21
B.2.31
C.2.76
D.10.30
E.None of the above
14) Municipal bonds are:
A.generally purchased by tax-exempt investors
B.risk-free
C.issued by federal, state, and local governmental bodies
D.zero-coupon bonds
E.generally callable
15) Which one of the following is the financial statement that summarizes a firm’s
revenue and expenses over a period of time?
A.income statement
B.balance sheet
C.cash flow statement
D.sources and uses statement
E.market value statement
16) Jake owes $3,400 on his credit card. He is not charging any additional purchases
because he wants to get this debt paid in full. The card has an APR of 13.9 percent.
How much longer will it take him to pay off this balance if he makes monthly payments
of $50 rather than $60?
A.28.24 months
B.31.33 months
C.36.74 months
D.39.20 months
E.41.79 months
17) Given the following information, what is the standard deviation of the returns on
this stock?
A.19.90 percent
B.20.52 percent
C.22.41 percent
D.23.79 percent
E.25.52 percent
18) Marcos Enterprises has three separate divisions. The firm allocates each division
$1.5 million per year for capital purchases. Which one of the following terms applies to
this allocation process?
A.Soft rationing
B.Hard rationing
C.Opportunity cost
D.Sunk cost
E.Strategic planning
19) You are given the following information concerning Around Town Tours:
Debt: 8,500, 7.1 percent coupon bonds outstanding, with 14 years to maturity and a
quoted price of 102.6. These bonds pay interest semiannually.
Common stock: 265,000 shares of common stock selling for $76 per share. The stock
has a beta of 0.92 and will pay a dividend of $2.48 next year. The dividend is expected
to grow by 4 percent per year indefinitely.
Preferred stock: 7,500 shares of 6 percent preferred stock selling at $88 per share.
Market: A 13.2 percent expected return, a 4.5 percent risk-free rate, and a 34 percent tax
rate.
Calculate the WACC for this firm.
A.8.22 percent
B.8.67 percent
C.9.29 percent
D.9.57 percent
E.10.08 percent
20) Aardvaark & Co. has sales of $291,200, cost of goods sold of $163,300, net profit
of $11,360, net fixed assets of $154,500, and current assets of $89,500. What is the total
asset turnover rate?
A.1.08
B.1.11
C.1.19
D.1.24
E.1.28
21) Which one of the following is the risk arising from changes in value caused by
political actions?
A.Exchange rate risk
B.Political risk
C.Translation risk
D.LIBOR risk
E.Cross rate risk
22) Waterfront Shirts is a specialty retailer offering T-shirts, sweatshirts, and caps. Its
most recent annual sales consisted of $14,000 of T-shirts, $11,000 of sweatshirts, and
$1,300 of caps. The company is adding polo shirts to the line-up and projects that this
addition will result in sales next year of $12,000 of T-shirts, $8,000 of sweatshirts,
$7,800 of polo shirts, and $1,300 of caps. What sales amount should be used when
evaluating the Polo shirt project?
A.$0
B.$2,800
C.$4,400
D.$5,000
E.$9,100
23) Stock in ABC Enterprises has a beta of 1.06. The market risk premium is 6.8
percent, and T-bills are currently yielding 3.2 percent. ABC’s most recent dividend was
$1.56 per share, and dividends are expected to grow at a 4 percent annual rate
indefinitely. If the stock sells for $43 a share, what is your best estimate of ABC’s cost
of equity?
A.7.78 percent
B.8.82 percent
C.9.09 percent
D.9.41 percent
E.9.69 percent
24) Scott has $4,800 that he wants to invest for 3 years. He can invest this amount at his
credit union and earn 4 percent simple interest. Or, he can open an account at Trust
Bank and earn 3.65 percent interest, compounded annually. If he decides to invest at
Trust Bank for 3 years, he will:
A.earn $15.02 more than if he had invested with his credit union
B.earn $30.98 less than if he had invested with his credit union
C.earn the same amount as if he had invested with the credit union
D.have a total balance of $4,992 in his account after one year
E.have a total balance of $4,876 in his account after one year
25) The matching principle states that:
A.costs should be recorded on the income statement whenever those costs can be
reliably determined
B.costs should be recorded when paid
C.the costs of producing an item should be recorded when the sale of that item is
recorded as revenue
D.sales should be recorded when the payment for that sale is received
E.sales should be recorded when the earnings process is virtually completed and the
value of the sale can be determined