1) EAC Nutrition offers a 9.5 percent coupon bond with annual payments, maturing 11
years from today. Your required return is 11.2 percent. What price are you willing to
pay for this bond if the face (or par) value is $1,000?
A.$895.43
B.$896.67
C.$941.20
D.$946.18
E.$953.30
2) Phil’s Dinor purchased some new equipment 2 years ago for $89,500. Today, it is
selling this equipment for $67,000. 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 one: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.
A.$58,586
B.$63,421
C.$67,000
D.$70,938
E.$74,875
3) The Corner Store currently has $3,600 in cash. The company owes $31,800 to
suppliers for merchandise and $21,500 to the bank for a long-term loan. Customers owe
The Corner Store $19,000 for their purchases. The inventory has a book value of
$53,300 and an estimated market value of $71,200. If the store compiled a balance
sheet as of today, what would be the book value of the current assets?
A.$46,800
B.$55,600
C.$64,700
D.$75,900
E.$96,500
4) Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past
15 years. Yesterday, the firm announced the dividend will increase next year by 10
percent and will stay at the level through year three, after which time the dividends will
increase by 2 percent annually. The required return on this stock is 12 percent. What is
the current value per share?
A.$25.51
B.$26.08
C.$24.57
D.$26.02
E.$26.84
5) The discount rate assigned to an individual project should be based on:
A.the firm’s weighted average cost of capital
B.the actual sources of funding used for the project
C.an average of the firm’s overall cost of capital for the past five years
D.the current risk level of the overall firm
E.the risks associated with the use of the funds required by the project
6) Orchard Farms has a pre-tax cost of debt of 7.68 percent and a cost of equity of 15.2
percent. The firm uses the subjective approach to determine project discount rates.
Currently, the firm is considering a project to which it has assigned an adjustment factor
of -0.5 percent. The firm’s tax rate is 34 percent and its debt-equity ratio is 0.45. The
project has an initial cost of $4.3 million and produces cash inflows of $1.27 million a
year for 5 years. What is the net present value of the project?
A.$121,619
B.$328,895
C.$514,370
D.$561,027
E.$628,721
7) A project has an annual operating cash flow of $43,700. Initially, this 4-year project
required $3,800 in net working capital, which is recoverable when the project ends. The
firm also spent $21,500 on equipment to start the project. This equipment will have a
book value of $4,300 at the end of year 4. What is the cash flow for year 4 of the project
if the equipment can be sold for $5,400 and the tax rate is 34 percent?
A.$51,724
B.$52,038
C.$52,526
D.$52,900
E.$43,100
8) You would like to invest $18,000 and have a portfolio expected return of 12.3
percent. You are considering two securities, A and B. Stock A has an expected return of
15.6 percent and B has an expected return of 10.3 percent. How much should you invest
in stock A if you invest the balance in stock B?
A.$5,807
B.$6,792
C.$7,411
D.$7,937
E.$8,626
9) Bruno’s is considering a change from its current capital structure. Bruno’s currently
has an all-equity capital structure and is considering a capital structure with 30 percent
debt. There are currently 6,500 shares outstanding at a price per share of $46. EBIT is
expected to remain constant at $43,000. The interest rate on new debt is 8.5 percent and
there are no taxes. Tracie owns $20,700 worth of stock in the company. The firm has a
100 percent payout. What would Tracie’s cash flow be under the new capital structure
assuming that she keeps all of her shares?
A.$1,998
B.$2,227
C.$2,815
D.$3,027
E.$3,499
10) Selected financial data for Link, Inc. follows: ($ in thousands)
Assume a 365-day year for your calculations. The payables period in days, based on
cost of goods sold, at the end of 2012 is:
A.5.2
B.24.3
C.28.8
D.35.7
E.None of the above
11) Ginormous Oil entered into an agreement to purchase all of the outstanding shares
of Slick Company for $60 per share. The number of outstanding shares at the time of
the announcement was 82 million. The book value of liabilities on the balance sheet of
Slick Co. was $1.46 billion. What was the cost of this acquisition to the shareholders of
Ginormous Oil?
A.$1.46 billion
B.$3.46 billion
C.$4.92 billion
D.$6.38 billion
E.$8.38 billion
12) You’re trying to save to buy a new $210,000 Ferrari. You have $38,000 today that
can be invested at your bank. The bank pays 4.1 percent annual interest on its accounts.
How long will it be before you have enough to buy the car?
A.39.13 years
B.39.29 years
C.40.67 years
D.41.08 years
E.42.54 years
13) Snow Mountain Resort has a 33 percent tax rate. Its total interest payment for the
year just ended was $6.8 million. What is the interest tax shield?
A.$2,006,500
B.$2,244,000
C.$2,410,600
D.$2,525,000
E.$2,618,000
14) Denton, Inc. has total equity of $389,600, long-term debt of $116,400, net working
capital of $1,600, and total assets of $527,600. What is the total debt ratio?
A.0.22
B.0.26
C.0.67
D.1.49
E.3.85
15) According to the Efficient Market Hypothesis, professional investors will earn:
A.excess profits over the long-term
B.excess profits, but only on short-term investments
C.a dollar return equal to the value paid for an investment
D.a return that cannot be accurately predicted because investments are subject to the
random movements of the markets
E.a return that “beats the market”
16) In New York, you can exchange $1 for 0.7538 or 0.6789. In Berlin, 1 costs 1.1087.
How much profit can you earn on $5,000 using triangle arbitrage?
A.$5.45
B.$5.87
C.$7.33
D.$7.92
E.$8.48
17) The 7.5 percent preferred stock of Home Town Brews is selling for $43 a share.
What is the firm’s cost of preferred stock if the tax rate is 34 percent and the par value
per share is $100?
A.14.47 percent
B.15.92 percent
C.16.17 percent
D.16.52 percent
E.17.44 percent
18) Which one of the following statements is correct?
A.If the IRR exceeds the required return, the profitability index will be less than 1.0
B.The profitability index will be greater than 1.0 when the net present value is negative
C.When the internal rate of return is greater than the required return, the net present
value is positive
D.Projects with conventional cash flows have multiple internal rates of return
E.If two projects are mutually exclusive, you should select the project with the shortest
payback period
19) You want to create a $48,000 portfolio that consists of three stocks and has an
expected return of 14.5 percent. Currently, you own $16,700 of stock A and $24,200 of
stock B. The expected return for stock A is 18.7 percent, and for stock B it is 11.2
percent. What is the expected rate of return for stock C?
A.13.67 percent
B.14.14 percent
C.15.38 percent
D.15.87 percent
E.16.11 percent
20) New Labs just announced that it has received a patent for a product that will
eliminate all flu viruses. This news is totally unexpected and viewed as a major medical
advancement. Which one of the following reactions to this announcement indicates the
market for New Labs stock is efficient?
A.The price of New Labs stock remains unchanged
B.The price of New Labs stock increases rapidly and then settles back to its
pre-announcement level
C.The price of New Labs stock increases rapidly to a higher price and then remains at
that price
D.All stocks quickly increase in value and then all but New Labs stock fall back to their
original values
E.The value of all stocks suddenly increase and then level off at their higher values
21) Which one of the following is the set of procedures used to determine the inventory
levels for demand-dependent inventory?
A.Inventory flow log
B.Materials requirements planning
C.Just-in-time inventory system
D.Kanban
E.Keiretsu
22) Neal Fabricators just liquidated its poorest performing division and realized net
proceeds from the transaction of $2.6 million. The firm has 180,000 shares of stock
outstanding at a market price of $64 a share. Which one of the following is the best
estimate of the stock’s post-dividend price per share if the firm distributes the entire
liquidation proceeds in the form of a liquidating dividend? Ignore taxes and market
imperfections.
A.$49.56
B.$51.38
C.$53.40
D.$58.79
E.$64.00
23) The common stock of Gallaghan’s closed at $36.80 a share today. Tomorrow
morning, the stock goes ex-dividend. The dividend that is being paid this quarter is
$1.40 a share. The tax rate on dividends is 15 percent. All else equal, what should the
opening stock price be tomorrow morning?
A.$35.19
B.$35.40
C.$35.52
D.$35.61
E.$35.70
24) Relative purchasing power parity is based on the principle that the expected
percentage change in the exchange rate between two countries is equal to which one of
the following?
A.difference in the risk-free interest rates in the two countries
B.average interest rate in the two countries
C.average inflation rate of the two countries
D.difference in the inflation rates of the two countries
E.difference between the two countries’ average inflation and interest rates
25) Hot To Go is an all-equity firm specializing in hot ready-to-eat meals. Management
has estimated the firm’s earnings before interest and taxes will be $167,000 annually
forever. The present cost of equity is 15.1 percent. Currently, the firm has no debt but is
considering borrowing $750,000 at 9 percent interest. The tax rate is 34 percent. What
is the value of the unlevered firm?
A.$623,017
B.$646,511
C.$704,141
D.$729,934
E.$755,200
26) Quattro, Inc. has the following mutually exclusive projects available. The company
has historically used a 4-year cutoff for projects. The required return is 11 percent.
The payback for Project A is ____ while the payback for Project B is _____. The NPV
for Project A is _____ while the NPV for Project B is _____. Which project, if any,
should the company accept?
A.3.92 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B
B.3.92 years; 3.79 years; -$211.60; $1,211.48; accept Project B only
C.3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only
D.4.06 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B
E.4.06 years; 3.79 years; -$211.60; -$7,945.93; reject both projects
27) Later this week, you are traveling from the U.S. to Canada for a week’s vacation.
This morning, you exchanged some U.S. dollars for Canadian dollars in preparation for
that trip. Which one of the following best describes this exchange?
A.Forward trade
B.Spot trade
C.Arbitrage transaction
D.Cross-rate exchange
E.Eurocurrency transaction
28) Six years ago, Global Exporters paid cash for a new packaging machine that cost
$287,000. Three years ago, the firm spent $2,900 on repairs and modifications to the
machine. The machine is now fully depreciated and has just sat idly in a back corner of
the shop for the past 7 months. The estimated value of the machine today is $124,500.
The firm is considering using this machine in a new project. If it does so, what value
should be assigned to this machine and included in the initial costs of the new project?
A.$0
B.$2,900
C.$124,500
D.$127,400
E.$143,500
29) Which one of the following statements is correct?
A.The financial market generally reacts the same to a new issue of equity as it does to a
new issue of debt as long as the issuer is the same
B.Issuing new equity shares is always viewed by the market as a positive event
C.Informed managers tend to issue new securities when the existing securities are
underpriced
D.A decline in the price of existing stock when a new issue is released is a direct cost of
selling securities
E.A firm’s existing shareholders would prefer that new securities be issued when those
securities are overpriced rather than underpriced
30) Assume there are no taxes or imperfections. Given this assumption, which one of
the following statements is correct?
A.A cash dividend has no effect on the market price of the payer’s stock
B.A cash dividend decreases shareholder wealth
C.Stock repurchases decrease the market value per share
D.Both a cash dividend and a share repurchase increase a firm’s PE ratio
E.A stock repurchase has the same effect on a firm’s market value balance sheet as does
a cash dividend
31) Kate could not attend the last shareholders meeting and thus she granted the
authority to vote on her behalf to the managers of the firm. Which one of the following
terms is used to describe the method by which Kate’s shares were voted?
A.Straight
B.Cumulative
C.Consent-form
D.Proxy
E.In absentia
32) Which one of the following individuals is most apt to purchase a municipal bond?
A.Minimum-wage employee
B.Retired individual with minimal current income
C.Recent college graduate
D.Tax-exempt organization
E.Highly-compensated business owner
33) Wilson’s Realty has total assets of $46,800, net fixed assets of $37,400, current
liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio?
A.0.41
B.0.60
C.0.66
D.0.78
E.0.86
34) Which one of the following had the lowest standard deviation of returns for the
period of 1926 – 2008?
A.U.S. Treasury bill
B.Inflation
C.Long-term corporate bonds
D.Large-company stocks
E.Long-term government bonds
35) Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on
the board of directors. Assume there are 3 open seats in the current election and Mary
casts all 300 of her votes for a single candidate. What is the term used to describe this
type of voting?
A.Proxy
B.Aggregate
C.Cumulative
D.Straight
E.Condensed
36) You just returned from a trip to Venezuela and have 1,516 bolivares fuertes in your
pocket. How many dollars will you receive when you exchange this money if the U.S.
dollar equivalent of the bolivares fuertes is 0.465701?
A.$629.08
B.$706.00
C.$811.40
D.$2,897.18
E.$3,255.31
37) Your local athletic center is planning a $1.23 million expansion to its current
facility. This cost will be depreciated on a straight-line basis over a 20-year period. The
expanded area is expected to generate $524,000 in additional annual sales. Variable
costs are 48 percent of sales, the annual fixed costs are $79,400, and the tax rate is 35
percent. What is the operating cash flow for the first year of this project?
A.$118,336
B.$122,509
C.$147,027
D.$166,667
E.$219,323
38) Blue Water Cafe has $28,700 in total assets, depreciation of $3,100, and interest of
$1,400. The total asset turnover rate is 1.2. Earnings before interest and taxes are equal
to 28 percent of sales. What is the cash coverage ratio?
A.6.33
B.7.51
C.9.10
D.10.23
E.10.98
39) Ptarmigan Travelers had sales of $420,000 in 2010 and $480,000 in 2011. The
firm’s current accounts remained constant. Given this information, which one of the
following statements must be true?
A.The total asset turnover rate increased
B.The days’ sales in receivables increased
C.The inventory turnover rate increased
D.The fixed asset turnover decreased
E.The collection period decreased
40) A specialist is a(n):
A.employee who executes orders to buy and sell for clients of his or her brokerage firm
B.individual who trades on the floor of an exchange for his or her personal account
C.NYSE member who functions as a dealer for a limited number of securities
D.broker who buys and sells securities from a market maker
E.trader who only deals with primary offerings