1) A stock is expected to pay a $4.00 dividend per share. The growth rate is expected to
be -1%. If investors demand 8% on this stock, what is the expected price of the stock 3
years from now?
A.$54.68
B.$52.17
C.$41.06
D.$43.12
2) Suppose a linear probability model you have developed finds there are two factors
influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin.
Based on past bankruptcy experience, the linear probability model is estimated as:
PDi = .15 (debt ratio) + .1 (profit margin)
A firm you are thinking of lending to has a debt ratio of 57 percent and a profit margin
of 7.15 percent. Calculate the firm’s expected probability of default, or bankruptcy.
A.9.27%
B.8.49%
C.7.83%
D.6.91%
3) Present Value Given a 7 percent interest rate, compute the present value of deposits
made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,500, and $1,500.
A.$3,967.06
B.$4,351.50
C.$4,859.81
D.$5,207.00
4) The best approach to convert an infinite series of asset purchases into a perpetuity is
known as the
A.Net working capital approach
B.Net present value approach
C.Equivalent annual cost approach
D.Equivalent annual cash flow approach
5) Which of the following defines iterative calculation?
A.The practice of overriding a spreadsheet program or calculator in order to be able to
compute an answer so as to take into account circular dependency in a system of
equations
B.The practice of ensuring there are no circular dependencies in a system of equations
C.The practice of letting a spreadsheet program or calculator repeatedly compute an
answer so as to take into account circular dependency in a system of equations
D.The practice of using the AFN formula to calculate an answer in order to avoid
circular dependencies in a system of equations
6) Liquidity Premium Hypothesis Based on economists’ forecasts and analysis, one-year
Treasury bill rates and liquidity premiums for the next four years are expected to be as
follows:
Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury
security?
A.7.736%
B.7.600%
C.7.738%
D.8.400%
7) Scenario A: At age 27, you invest $1,500 that earns 9% each year. Scenario B: At age
40, you invest $2,500 that earns 11% per year. Under which scenario do you
accumulate more money by age 60?
A.Scenario A
B.Scenario B
C.Both Scenarios have the same value by age 60.
D.Need more data to answer.
8) The optimal portfolio for you will be ______________________.
A.the one that offers the lowest correlation
B.the one that offers the highest returns
C.the one that reflects the amount of risk that you are willing to take
D.the one that offers the most diversification
9) Which of these statements is true regarding divisional WACC?
A.Using a divisional WACC vs a WACC for the firm’s current operations will result in
quite a few incorrect decisions
B.Using a simple firmwide WACC to evaluate new projects would give an unfair
advantage to projects that present more risk than the firm’s average beta
C.Using a simple firmwide WACC to evaluate new projects would give an unfair
advantage to projects that present less risk than the firm’s average beta
D.Using a firmwide WACC to evaluate new projects would have no impact on projects
that present less risk than the firm’s average beta
10) Portfolio Return At the beginning of the month, you owned $8,000 of Company G,
$8,000 of Company S, and $3,000 of Company N. The monthly returns for Company
G, Company S, and Company N were 7.80 percent, 1.50 percent, and -0.75 percent.
What is your portfolio return?
A.2.85%
B.3.79%
C.4.03%
D.8.55%
11) Compute the future value in year 12 of a $2,000 deposit in year 3 and another
$4,000 deposit at the end of year 5 using a 10% interest rate.
A.$12,510.77
B.$12,909.81
C.$13,4067.31
D.$15,007.52
12) Hollywood Shoes would like to maintain their cash account at a minimum level of
$50,000, but expects the standard deviation in net daily cash flows to be $4,000; the
effective annual rate on marketable securities to be 6 percent per year; and the trading
cost per sale or purchase of marketable securities to be $100 per transaction. What will
be their optimal upper cash limit?
A.$59,094.77
B.$69,588.47
C.$108,765.41
D.$54,000.00
13) Which rate-based decision statistic measures the excess return (the amount above
and beyond the cost of capital for a project), rather than the gross return?
A.Internal Rate of Return, IRR
B.Modified Internal Rate of Return, MIRR
C.Profitability Index, PI
D.Net Present Value, NPV
14) Bond Prices and Interest Rate Changes A 5.5 percent coupon bond with 18 years
left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one
year, the yield to maturity will be 5.75 percent. What is the change in price the bond
will experience in dollars? (Assume semi-annual interest payments and $1,000 par
value.)
A.$25.00
B.$26.89
C.$53.48
D.$80.37
15) P/E Ratio Model and Future Price Target Corp (TGT) recently earned a profit of
$3.57 earnings per share and has a P/E ratio of 17.3. The dividend has been growing at
a 14 percent rate over the past few years. If this growth continues, what would be the
stock price in five years if the P/E ratio remained unchanged? What would the price be
if the P/E ratio increased to 23 in five years.
A.$118.85, $158.01 respectively
B.$137.19, $182.39 respectively
C.$173.87, $231.15 respectively
D.$308.81, $410.55 respectively
16) Liquidity and Asset Management Ratios Green Products, Inc. has current liabilities
= $40 million, current ratio = 2.4 times, inventory turnover ratio = 8 times, average
collection period = 40 days, and sales = $320 million. What is the value of their cash
and marketable securities?
A.$20.93m
B.$56.00m
C.$75.07m
D.$96.00m
17) Which of the following statements is correct?
A.A low average payment period and a high accounts payable turnover are a sign of
good management
B.A high average payment period and a low accounts payable turnover are a sign of
good management
C.A high average payment period and a high accounts payable turnover are a sign of
good management
D.A low average payment period and a low accounts payable turnover are a sign of
good management
18) Dividend Growth Annual dividends of Wal-Mart Stores (WMT) grew from $0.23 in
2000 to $0.83 in 2007. What was the annual growth rate?
A.2.61%
B.20.12%
C.29%
D.260.87%
19) Campbell Soup Co paid a $1.55 dividend per share in 2004, which grew to $1.95 in
2009. This growth is expected to continue. What is the value of this stock at the
beginning of 2010 when the required return is 10.5 percent?
A.$35.20
B.$34.16
C.$33.48
D.$32.17
20) Interest rates A 2-year Treasury security currently earns 5.25 percent. Over the next
two years, the real interest rate is expected to be 3.00 percent per year and the inflation
premium is expected to be 2.00 percent per year. What is the maturity risk premium on
the 2-year Treasury security?
A.0.25%
B.1.00%
C.1.05%
D.5.00%
21) Equipment was purchased for $45,000 plus $2,000 in freight charges. Installation
costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide
advice during the selection of the equipment cost $3,000. What is this asset’s
depreciable basis?
A.$51,500
B.$49,500
C.$48,500
D.$52,500
22) What effect does decreasing the standard deviation in daily cash flows have on the
cash return point in the Miller-Orr model?
A.It will cause the cash return point to increase
B.It will cause the cash return point to decrease
C.It has no impact on the cash return point
D.It will cause the cash return point to first decrease, then increase
23) Suppose a firm has a retention ratio of 55 percent and net income of $7 million.
How much does it pay out in dividends?
A.$3,850,000
B.$3,150,000
C.$3,450,000
D.$3,550,000
24)
Corporate Taxes The Ohio Corporation had a 2010 taxable income of $50,000,000 from
operations after all operating costs but before
(1) interest charges of $500,000,
(2) dividends received of $45,000,
(3) dividends paid of $10,000,000, and
(4) income taxes.
Using the tax schedule in Table 2.3, what is Ohio’s income tax liability?
What are Ohio’s average and marginal tax rates on taxable income from operations?
A.$6,416,667, 12.83%, 35%, respectively
B.$13,829,725, 27.66%, 35%, respectively
C.$17,329,725, 34.66%, 35%, respectively
D.$17,340,750, 34.68%, 35%, respectively
25) Which of the following would cause dividends to decrease if the firm was using the
residual dividend model?
A.The firm has more positive NPV projects
B.The firm’s dividend payout ratio decreases
C.The firm’s average collection period increases
D.All of the these would cause dividends to decrease
26) Which of the following bonds carry significant risk that the issuer will not make
current or future payments?
A.credit quality risk bonds
B.interest rate risk bonds
C.liquidity rate risk bonds
D.junk bonds
27) Nonwage compensation which might actually enhance owner value, in that such
items may boost managers’ productivity.
A.agency theory
B.angel investor
C.invisible hand
D.perks/prerequisites
28) FarCry Industries, a maker of telecommunications equipment, has 26 million shares
of common stock outstanding, 1 million shares of preferred stock outstanding, and 10
thousand bonds. If the common shares sell for $12 per share, the preferred shares sell
for $114.50 per share, and the bonds sell for 98% of par ($1000), what weight should
you use for preferred stock in the computation of FarCry’s WACC?
A.28.52%
B.27.51%
C.26.24%
D.25.01%
29) Section 179 allows a business, with certain restrictions, to do which of the
following?
A.Offset the tax liability with the cost of the asset in the year of purchase
B.Expense the asset immediately in the year of purchase
C.Expense the asset using double declining balance depreciation during the life of the
asset
D.Get a government grant to purchase the asset
30) The current spot rate between the U.S. dollar and the Swedish krona is $1 = 7.5500
krona. If the inflation rate in the United States is 4 percent and in Sweden is 1 percent,
then what is the expected spot rate in one year?
A.$0.1908 per krona
B.$0.2116 per krona
C.$0.1529 per krona
D.$0.1364 per krona
31) Expected Return and Risk Compute the standard deviation given these four
economic states, their likelihoods, and the potential returns:
A.12.19%
B.23.8%
C.38.65%
D.88.06%
32) Coke is planning on marketing a new drink called Very Berry Coke which is a
mixture of raspberry and blackberry flavors blended to perfection and added to the
highly secret Coca-Cola formula. This new product is expected to reduce the sales of
their existing product, Cherry Coke, by $10 million dollars per year. This is an example
of a _______________.
A.Pro forma effect
B.Complementary effect
C.Substitutionary effect
D.Opportunity effect
33) Suppose that Runner Industries currently has the balance sheet shown below, and
that sales for the year just ended were $5 million. The firm also has a profit margin of
10 percent, a retention ratio of 20 percent, and expects sales of $7 million next year. If
fixed assets have enough capacity to cover the increase in sales and all other assets and
current liabilities are expected to increase with sales, what amount of additional funds
will the company need from external sources to fund the expected growth?
A.$0
B.$140,000
C.$220,000
D.$180,000
34) In a cost-cutting proposal, what might cause you to sometimes have a negative
EBIT?
35) What are free cash flows for a firm? What does it mean when a firm’s free cash flow
is negative?
36) If a firm is going to take a loan with a bank that has a compensating balance
requirement, how does that affect the amount of money the firm must borrow?
37) Your company has spent $200,000 on research to develop a new computer game.
The firm is planning to spend $300,000 on a machine to produce the new game.
Shipping and installation costs of the machine will be capitalized and depreciated; they
total $25,000. The machine has an expected life of 3 years, a $50,000 estimated resale
value, and falls under the MACRS 7-Year class life. Revenue from the new game is
expected to be $400,000 per year, with costs of $150,000 per year. The firm has a tax
rate of 35 percent, an opportunity cost of capital of 10 percent, and it expects net
working capital to increase by $75,000 at the beginning of the project. What will the
cash flows for this three-year project be?
38) Explain how important a firm’s growth is by creating an example of a growth and
no-growth stock.
39) Explain how it is possible for the Dow Jones Industrial Average and the Nasdaq
Composite to move in different directions in one day.