Steve owns a store that caters primarily to men and their hobbies. He is contemplating
greatly expanding the hunting and fishing section of the store. If he does this, he
expects his fishing and hunting sales will increase, his camping gear sales will increase,
and his model train sales will decrease. Which of the following should Steve include in
his revenue projection for the expansion project?
I. Increase in fishing and hunting sales
II. Increase in camping gear sales
III. Decrease in model train sales
A. I only
B. II only
C. I and III only
D. II and III only
E. I, II, and III
Answer:
Which of the following are participants in the foreign exchange market?
I. U.S. importers
II. U.S. exporters
III. U.S. travelers to Europe
IV. U.S. portfolio manager who purchases foreign securities
A. I and III only
B. II and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
A prepack:
A. guarantees full payment to all creditors but lengthens the time span of the debt.
B. is the joint filing of both a bankruptcy filing and a creditor-approved reorganization
plan.
C. protects the interests of both the current creditors and the existing shareholders.
D. applies only if a firm files under Chapter 7 of the bankruptcy code.
Answer:
Short-run exposure to exchange rate risk is best illustrated by which one of the
following?
A. Change in book value when the market value of an asset remains constant
B. Daily fluctuations in the spot rate
C. Increases in the forward rate as the time to settlement increases
D. Changes in relative economic conditions between two countries
E. Unrealized foreign exchange gains
Answer:
Your friend claims that he invested $5,000 seven years ago and that this investment is
worth $38,700 today. For this to be true, what annual rate of return did he have to earn?
Assume the interest compounds annually.
A. 28.87 percent
B. 31.39 percent
C. 33.96 percent
D. 36.01 percent
E. 37.87 percent
Answer:
Four years ago, the Morgan Co. issued 15-year, 7.0 percent semiannual coupon bonds at
par. Today, the bonds are quoted at 101.6. What is this firm’s pretax cost of debt?
A. 6.97 percent
B. 7.08 percent
C. 6.79 percent
D. 6.83 percent
E. 7.39 percent
Answer:
A stock has a beta of 1.86, the expected return on the market is 14.72, and the risk-free
rate is 4.65. What must the expected return on this stock be?
A. 15.67 percent
B. 16.75 percent
C. 17.10 percent
D. 20.46 percent
E. 23.38 percent
Answer:
Hunter’s Lodge purchased $578,000 of equipment four years ago. The equipment is
seven-year MACRS property. The firm is selling this equipment today for $199,500.
What is the aftertax cash flow from this sale if the tax rate is 35 percent? The MACRS
allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49,
12.49, 8.93, 8.92, 8.93, and 4.46 percent.
A. $153,869.81
B. $158,114.81
C. $198,410.18
D. $209,740.81
E. $216,610.81
Answer:
Use the following financial information to answer this question.
What are the values of the three components of the DuPont identity? Use ending
balance sheet values.
A. 0.15; 1.02; 0.35
B. 0.15; 2.02; 0.35
C. 0.15; 0.98; 2.86
D. 0.16; 0.98; 0.35
E. 0.16; 1.02; 2.86
Answer:
Tanner Tavern writes four checks a day for an average amount of $5,400 each. These
checks generally clear the bank four days after they are written. In addition, the firm
generally receives and deposits checks amounting to $18,700 each day. All deposits are
available on the next day. What is the firm’s net float?
A. Net collection float of $13,200
B. Net collection float of $18,700
C. Net collection float of $22,300
D. Net disbursement float of $67,700
E. Net disbursement float of $86,400
Answer:
Which one of the following statements concerning underwriting is correct?
A. Underwriters exercise the Green Shoe option whenever the market price of an IPO
declines initially.
B. Underwriters guarantee the number of shares to be sold in a best efforts
underwriting.
C. Competitive underwriting is generally more expensive than negotiated underwriting.
D. The majority of equity underwritings in the U.S. are competitive underwritings.
E. Underwriters may receive warrants as part of their compensation.
Answer:
Cash dividends send which two of the following signals to the market?
I. Agency costs will be lowered since less cash will be held by the firm.
II. The firm is planning on downsizing.
III. The firm is currently, and expects to continue to be, profitable.
IV. The firm will no longer conduct stock repurchases.
A. I and II only
B. II and III only
C. III and IV only
D. II and IV only
E. I and III only
Answer:
Ben invested $5,000 twenty years ago with an insurance company that has paid him 5
percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund
that has paid him 5 percent interest, compounded annually. How much more interest has
Charles earned than Ben over the past 20 years?
A. $0
B. $2,109.16
C. $3,266.49
D. $7,109.16
E. $8,266.49
Answer:
Fig Newton Industries is considering a project and has developed the following
estimates: unit sales = 7,300, price per unit = $149, variable cost per unit = $91, fixed
costs = $216,400. The depreciation is $94,700 a year and the tax rate is 40 percent.
What effect would an increase of $1 in the selling price have on the operating cash
flow?
A. $4,380
B. $4,823
C. $5,316
D. $5,448
E. $7,300
Answer:
Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5
percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost
of preferred stock is 8.9 percent, and the pretax cost of debt is 8.1 percent. What is the
company’s WACC if the applicable tax rate is 35 percent?
A. 9.29 percent
B. 9.61 percent
C. 10.34 percent
D. 10.43 percent
E. 10.83 percent
Answer:
Over the past four years, a stock produced returns of 23 percent, -39 percent, 4 percent,
and 16 percent, respectively. Based on these four years, what range of returns would
you expect to see 99 percent of the time?
A. -82.39 percent to 84.39 percent
B. -82.39 percent to 86.41 percent
C. -82.39 percent to 88.56 percent
D. -78.46 percent to 86.41 percent
E. -78.46 percent to 84.39 percent
Answer:
Which one of the following is the maximum growth rate that a firm can achieve without
any additional external financing?
A. DuPont rate
B. External growth rate
C. Sustainable growth rate
D. Internal growth rate
E. Cash flow rate
Answer:
Abbott Co. and Costello Co. have both announced IPOs at $24 per share. One of these
is undervalued by $3, and the other is overvalued by $1.30, but you have no way of
knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is
underpriced, it will be rationed, and only half your order will be filled. What profit do
you actually expect?
A. $175
B. $200
C. $225
D. $350
E. $425
Answer:
Which one of the following functions should be assigned to the treasurer rather than the
controller?
A. Data processing
B. Cost accounting
C. Tax management
D. Cash management
E. Financial accounting
Answer:
The tax shield approach to computing the operating cash flow, given a tax-paying firm:
A. ignores both interest expense and taxes.
B. separates cash inflows from cash outflows.
C. considers the changes in net working capital resulting from a new project.
D. is based on the fact that depreciation does not affect the operating cash flows.
E. recognizes that depreciation creates a cash inflow.
Answer:
Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current
liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners’
equity?
A. $36,900
B. $66,700
C. $71,600
D. $89,400
E. $106,300
Answer:
Which of the following ratings indicate that a bond is low quality?
I. Baa
II. BB
III. B
IV. Ba
A. II only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Answer:
The Five and Dime Store has a cost of equity of 15.8 percent, a pretax cost of debt of
7.7 percent, and a tax rate of 35 percent. What is the firm’s weighted average cost of
capital if the debt-equity ratio is 0.40?
A. 10.18 percent
B. 11.72 percent
C. 12.72 percent
D. 13.49 percent
E. 14.93 percent
Answer:
Which one of the following statements is correct?
A. If a firm decreases its inventory period, its accounts receivable period will also
decrease.
B. The longer the cash cycle, the more cash a firm typically has available to invest.
C. A firm would prefer a negative cash cycle over a positive cash cycle.
D. Decreasing the inventory period will also decrease the payables period.
E. Both the operating cycle and the cash cycle must be positive values.
Answer: