1) Which of the following will increase the additional funds needed from external
sources?
A.The firm’s profit margin increases
B.The firm’s dividend payout ratio decreases
C.The firm’s debt ratio decreases
D.None of these
2) This should be the primary objective of a firm as it may actually be the most
beneficial for society in the long run.
A.Minimizing layoffs
B.Maximizing market share
C.Minimizing costs
D.Maximizing shareholder value
3) IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual
coupon. What would be IVY’s component cost of preferred stock?
A.6.86%
B.7.00%
C.7.14%
D.14.00%
4) Imagine a firm has a temporary surplus of cash meant to fund an expansion project in
the next 9 months. Which of the following statements is correct?
A.The firm will probably want to invest this preferred stock
B.The firm will probably want to invest this surplus in U.S. Treasury bonds
C.The firm will probably want to invest this surplus in U.S. Treasury bills
D.The firm will probably want to invest this surplus in whichever security yields the
highest return
5) This is the concept and procedure for combining securities into a portfolio to
minimize risk.
A.firm specific theory
B.modern portfolio theory
C.optimal portfolio theory
D.total portfolio theory
6) These individuals follow a firm, conduct their own evaluations of the company’s
business activities, and report to the investment community.
A.Auditors
B.Investment analysts
C.Investment bankers
D.Credit analysts
7) Which of the following statements is incorrect?
A.The capital market line shows the relationship between return and risk as measured
by the standard deviation
B.The Efficient Market Hypothesis states that security prices fully reflect all available
information
C.The security market line shows the relationship between return and risk as measured
by beta
D.None of these statements are correct
8) Which of the following terms means the chance that future interest payments will
have to be reinvested at a lower interest rate?
A.credit quality risk
B.interest rate risk
C.liquidity rate risk
D.reinvestment rate risk
9) Economies of Scope A survey of a national market has provided the following
average cost data: Jackson County Construction (JCC) has assets of $2 million and an
average cost of 30 percent. Arkansas Architects (AA) has assets of $1.5 million and an
average cost of 20 percent. Colorado Home Builders (CHB) has assets of $500,000 and
an average cost of 10 percent. For each firm, average costs are measured as a proportion
of assets. JCC is planning to acquire AA and CHB with the expectation of reducing
overall average costs by eliminating the duplication of services. If JCC plans to reduce
operating costs by $200,000 after the merger, what will the average cost be for the new
firm?
A.18.75%
B.19.74%
C.20.00%
D.16.67%
10) Daddi Mac, Inc., doesn’t face any taxes and has $250 million in assets, currently
financed entirely with equity. Equity is worth $13 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 25 percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt. What will
be the standard deviation in EPS if they switch to the proposed capital structure?
A.$0.28
B.$0.33
C.$0.41
D.$0.11
11) Time to Maturity A bond issued by a corporation on October 1, 2007, is scheduled
to mature on October 1, 3007 . If today is October 2, 2009, what is this bond’s time to
maturity? (Assume annual interest payments.)
A.2 years
B.50 years
C.998 years
D.100 years
12) This is the risk that an asset’s sale price will be lower than its purchase price.
A.default risk
B.liquidity risk
C.price risk
D.trading risk
13) Your company has a 25% tax rate and has $600 million in assets, currently financed
entirely with equity. Equity is worth $20 per share, and book value of equity is equal to
market value of equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the possible values of
EBIT and their associated probabilities as shown below:
The firm is considering switching to a 30-percent debt capital structure, and has
determined that they would have to pay a 9 percent yield on perpetual debt in either
event. What will be the break-even level of EBIT?
A.$16,758,621
B.$20,000,000
C.$25,000,000
D.$54,000,000
14) Consider the following correlations:
Given this data, which of the following is most preferable if an investor can only select
one pair of companies?
A.Apple & IBM
B.Disney & IBM
C.Disney & Apple
D.It does not matter which two are selectedthere is no preference order
15) We use the term leverage to describe the use of debt in the firm’ capital structure
because:
A.It magnifies the potential expected return to equity and the variability of that
expected return
B.It magnifies the risk of bankruptcy
C.It magnifies earnings per share
D.None of these
16) Which of the following statements is correct?
A.Generally speaking, investors interpret a firm’s decision to repurchase their own stock
as a positive signal
B.A stock repurchase may be viewed as a sign that the firm doesn’t have enough
attractive capital budgeting projects
C.The IRS can impose penalties on a firm if tax authorities can show that the
repurchase was performed primarily to avoid dividend taxation
D.All of these are correct
17) Suppose that Wind Em Corp. currently has the balance sheet shown below, and that
sales for the year just ended were $15 million. The firm also has a profit margin of 23
percent, a retention ratio of 40 percent, and expects sales of $20 million next year. If all
assets and current liabilities are expected to grow with sales, how much will
spontaneous liabilities increase with the increase in sales?
A.$833,300
B.$240,000
C.$366,957.14
D.$1,125,000
18) Selling Stock with a Limit Order You would like to sell 100 shares of Pfizer, Inc.
(PFE). The current bid and ask quotes are $27.22 and $27.25, respectively. You place a
limit sell-order at $27.24. If the trade executes, how much money do you receive from
the buyer?
A.$2,722.00
B.$2,724.00
C.$2,725.00
D.$5,446.00
19) KatyDid Clothes has a $150 million ($1000 face value) 15-year bond issue selling
for 86% of par that carries a coupon rate of 8%, paid semi-annually. What would be
KatyDid’s before-tax component cost of debt?
A.4.90%
B.8.13%
C.9.80%
D.7.09%
20) The bird-in-the-hand fallacy refers to:
A.The fact that many, if not most, investors will reinvest their dividends in the firm
anyway
B.The fact that most investors are indifferent between capital gains and dividends
C.The fact that most firms pay such a low amount of dividends that it becomes
irrelevant to the average investor
D.None of these
21) Solving for Time How many years will it take $1 million to grow to $3 million with
an annual interest rate of 7 percent?
A.10.29 years
B.14.52 years
C.16.24 years
D.33.33 years
22) Sipe’s Paint and Wallpaper, Inc., needs to raise $1.25 million to finance plant
expansion. In discussions with its investment bank, Sipe’s learns that the bankers
recommend a gross price of $37.20 per share and that 48,500 shares of stock be sold. If
the net proceeds on the stock sale leaves Sipe’s with $1.25 million, calculate the
underwriter’s spread on the stock issue.
A.$11.43
B.$9.28
C.$7.14
D.$6.91
23) Zoeckler Mowing & Landscaping’s year-end 2011 balance sheet lists current assets
of $350,000, fixed assets of $325,000, current liabilities of $145,000, and long-term
debt of $185,000. Calculate Zoeckler’s total stockholders’ equity.
A.$115,000
B.$490,000
C.$345,000
D.$500,000
24) Which of the following statements is correct?
A.The cash ratio measures a firm’s ability to pay long-term debt with its available cash
and marketable securities
B.Holding extremely high levels of liquidity to guard against liquidity crises is an
inappropriate goal for the firm
C.The quick (or acid-test) ratio measures a firm’s ability to pay off short-term
obligations with long-term debt
D.The current ratio is a more stringent measure of liquidity than the quick (or acid-test)
ratio
25) Suppose exchange rates between the U.S. dollar and the Mexican peso is 12.90 peso
= $1 and the exchange rate between the U.S. dollar and the euro is $1 = 0.90 euros.
What is the cross-rate of the Mexican peso to the euro?
A.16.03
B.17.21
C.15.26
D.14.33