Which one of these is a positive covenant?
A. The firm must maintain a current ratio of 1.2 or better.
B. The firm will not issue any debt with higher seniority.
C. The firm cannot be acquired in a friendly takeover.
D. No dividend increases will be allowed.
E. The market debt-equity ratio cannot exceed .60.
Answer:
A firm’s net cash flow is calculated as:
A. EBIT – Taxes + Depreciation – Capital spending – Increases in net working capital.
B. EBIT + Taxes + Depreciation – Capital spending – Increases in net working capital.
C. EBIT – Taxes – Depreciation – Capital spending + Increases in net working capital.
D. EBIT – Taxes – Depreciation + Capital spending – Increases in net working capital.
E. EBIT + Taxes + Depreciation – Capital spending + Increases in net working capital.
Answer:
The shareholders of a target firm benefit the most when:
A. an acquiring firm has the better management team and replaces the target firm’s
managers.
B. the management of the target firm is more efficient than the management of the
acquiring firm which replaces them.
C. the management of both the acquiring firm and the target firm are as equivalent as
possible.
D. their current management team is kept in place even though the managers of the
acquiring firm are more suited to manage the target firm’s situation.
E. their management team is technologically knowledgeable yet ineffective.
Answer:
The quick ratio is measured as:
A. current assets divided by current liabilities.
B. cash on hand plus current liabilities, divided by current assets.
C. current liabilities divided by current assets, plus inventory.
D. current assets minus inventory, divided by current liabilities.
E. current assets minus inventory minus current liabilities.
Answer:
You hold a futures contract to take delivery of U.S. Treasury bonds in 6 months. If the
entire term structure of interest rates shifts down over the 6-month period, the value of
the forward contract will have _____ the date of delivery.
A. increased in value by
B. decreased in value by
C. the same value as when obtained on
D. either decreased in value or have a zero value by
E. zero value by
Answer:
Alpha Company has riskless debt, a debt-equity ratio of .46, a tax rate of 35 percent,
and an unlevered firm beta of 1.23. What is the equity beta?
A. .67
B. .73
C. .86
D. 1.60
E. 1.47
Answer:
What is the equity multiplier for 2015?
A. 1.48
B. 1.28
C. 1.66
D. 2.13
E. 2.99
Answer:
Which one of these factors generally has the greatest impact on a firm’s PE ratio?
A. required rate of return
B. current dividends
C. future opportunities
D. the overall risk level of the current firm
E. depreciation method used by the firm
Answer:
Champion Toys just purchased some MACRS 5-year property at a cost of $230,000.
The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52
percent, and 5.76 percent for Years 1 to 6, respectively. The book value of the asset as
of the end of Year 2 can be calculated as:
A. $230,000 (1 −.20 −.32). B. $230,000 ([1 – (.20 .32)].
B. $230,000 (1 – .20) (1 – .32).
C. $230,000 / (1 – .20 – .32).
D. $230,000 – ($230,000 .20 .32).
Answer:
Covered interest arbitrage involves:
A. two spot rates.
B. two forward rates.
C. both a spot rate and a forward rate.
D. a single exchange at the current exchange rate.
E. a single exchange at a spot rate that exists in the future.
Answer:
Probably the best argument for a reverse stock split is to:
A. decrease the liquidity of a stock.
B. decrease the market value per share.
C. increase the number of stockholders.
D. maintain a minimum share price set by a stock exchange.
E. raise additional capital from current stockholders.
Answer:
The salvage value of an asset creates an aftertax cash flow in an amount equal to the:
A. sales price of the asset.
B. sales price minus the book value.
C. sales price minus the tax due based on the sales price minus the book value.
D. sales price plus the tax due based on the sales price minus the book value.
E. sales price plus the tax due based on the book value minus the sales price.
Answer:
Birds Unlimited has a 60-day accounts payable period. The firm has expected sales of
$17,800, $22,100, $24,400 and $28,800, respectively, by quarter for the next calendar
year. The purchases for a quarter are equal to 65 percent of the following quarter’s sales.
What is the amount of the projected cash disbursements for accounts payable for
Quarter 3? Assume a 360-day year.
A. $11,126.67
B. $16,813.33
C. $12,693.33
D. $17,125.50
E. $12,250.33
Answer:
The annual percentage rate:
A. considers interest on interest.
B. is the actual cost of a loan with monthly payments.
C. is higher than the effective annual rate when interest is compounded quarterly.
D. is the interest rate charged per period divided by (1 + n), when n is the number of
periods per year.
E. equals the effective annual rate when the interest on an account is designated as
simple interest.
Answer:
The nominal rate of return on a bond is 7.28 percent while the real rate is 3.09 percent.
What is the rate of inflation?
A. 4.06%
B. 4.28%
C. 4.09%
D. 4.13%
E. 4.17%
Answer:
The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6
percent and the market risk premium is 9 percent. What is the expected rate of return?
A. 11.32%
B. 14.17%
C. 16.47%
D. 17.48%
E. 18.03%
Answer:
You own 200 shares of Loner, Inc. stock. The company announced that it will be
issuing a dividend of $.20 a share one year from today followed by a final liquidating
dividend of $1.60 a share two years from today. If you can earn 7 percent on your
funds, what will be the value of your total investment income in two years if you do not
want to receive any funds until then?
A. $362.80
B. $266.67
C. $302.30
D. $348.04
E. $247.78
Answer:
Which term best applies to the situation where an investor cares less about losing $1 of
his profits than he does about losing $1 of his original investment?
A. get-evenitis
B. snakebite effect
C. familiarity
D. home bias
E. house money effect
Answer:
Credit default swaps are most like:
A. inverse floaters.
B. call options on fixed assets.
C. an insurance policy.
D. an interest rate swap.
E. a delinquent loan.
Answer:
If stockholders want to know how much profit the firm is making on their entire
investment in that firm, the stockholders should refer to the:
A. profit margin.
B. return on assets.
C. return on equity.
D. equity multiplier.
E. earnings per share.
Answer:
If the average accounts receivable that a firm holds decreases without any decrease in
credit sales, the operating cycle will:
A. remain constant because sales remained constant.
B. remain constant because the change will only affect the cash cycle.
C. decrease because days’ sales outstanding will decrease.
D. increase because the accounts receivable turnover will decrease.
E. decrease because the accounts receivable turnover will decrease.
Answer:
A stock had a total return of 9.62 percent last year. The dividend amount was $.70 a
share which equated to a dividend yield of 2.39 percent. What is the dividend growth
rate?
A. 7.06%
B. 4.03%
C. 7.23%
D. 5.48%
E. 2.48%
Answer:
A cash payment made by a firm to its owners in the normal course of business is called
a:
A. share repurchase.
B. liquidating dividend.
C. regular cash dividend.
D. special dividend.
E. extra cash dividend.
Answer:
Cash flow from assets:
A.equals net income plus non-cash items.
B.can be positive, negative, or equal to zero.
C.equals operating cash flow minus net capital spending.
D.equals the addition to retained earnings.
E.equals operating cash flow minus the cash flow to creditors.
Answer:
Miller’s Hardware has a flexible short-term financing policy. Over the course of one
year, the firm should expect to have some months that allow it to:
A. repay all of its debts.
B. invest in marketable securities.
C. reduce its total costs below the firm’s normal minimum total cost point.
D. finance all of its assets with short-term loans.
E. earn high returns on all its current assets.
Answer:
Money deposited in a financial center outside the country whose currency is involved is
called:
A. a foreign depository receipt.
B. an international exchange certificate.
C. an American Depository Receipt.
D. Eurocurrency.
E. Eurodollars.
Answer:
A bond with a face value of $1,000 that sells for less than $1,000 in the market is called
a _____ bond.
A. par
B. discount
C. premium
D. zero coupon
E. floating rate
Answer:
Uptown Bank has granted a line of credit of $80,000 with an interest rate of 7.5 percent
and a compensating balance requirement of 2.5 percent to Jones Hardware. The
compensating balance requirement is based on the total amount borrowed. What is the
effective annual interest rate if the firm needs $55,000 for one year to finance its
inventory?
A. 8.80%
B. 9.44%
C. 8.12%
D. 7.69%
E. 7.78%
Answer:
From the bondholder’s point of view, the optimum time to convert a convertible bond is
when the bond’s conversion value is:
A. less than the call price, but greater than the face value.
B. greater than the call price, but less than the straight debt’s value.
C. equal to the face value.
D. less than the straight debt’s value, but greater than the call price.
E. greater than the both the call value and straight bond value on the call date.
Answer:
Which one of these is a non-cash item?
A.depreciation
B.interest expense
C.current taxes
D.dividends
E.selling expenses
Answer:
What is required for absolute purchasing power parity to hold? Do you think absolute
PPP would hold in the case where a shoe retailer in the U.S. sits directly across the
border from a shoe retailer in Canada? How about Houston, Texas, and London,
England?
Answer:
Explain repurchase agreements and the role they can play in a firm’s everyday
operations.
Answer:
Discuss the Check Clearing Act for the 21st Century and financial electronic data
exchange and how they have impacted float and float management.
Answer:
Is there an easily quantifiable debt-equity ratio that will maximize the value of a firm?
Why or why not?
Answer:
Discuss MM Propositions I and II in a world without taxes. List the basic assumptions,
results, and intuition of the model.
Answer:
Green Garden is a cash-only company. The company is considering switching to a
30-day credit policy with no discounts. What factors should the firm consider before
making the switch?
Answer:
Other than quantifying the potential NPV of a project, what other benefits do decision
trees offer to managers?
Answer:
What is triangle arbitrage?
Answer:
The futures markets are considered by some to be highly risky and equivalent to
gambling. Why is this an inaccurate portrayal of the market’s function?
Answer:
What advantages and disadvantages does the corporate form of organization have
compared to sole proprietorships and general partnerships?
Answer: