1) Carrie D’s has 6 million shares of common stock outstanding, 2 million shares of
preferred stock outstanding, and 10 thousand bonds. If the common shares are selling
for $15 per share, the preferred shares are selling for $28 per share, and the bonds are
selling for 109 percent of par, what would be the weight used for equity in the
computation of Carrie D’s WACC?
A.33.33%
B.57.36%
C.61.64%
D.75.00%
2) All of the following are problems associated with using the Z-score model to make
credit risk evaluations except _______________.
A.The model does not benchmark firms to the average in the industry
B.The model does not use important data that is difficult to quantify such as the phase
of the business cycle
C.The model categorizes firms as either high risk or low risk
D.All of these are problems associated with using the Z-score model
3) Sharif’s portfolio generated returns of 12%, 15%, -15%, 19% and -12% over 5 years.
What was his average return over this period?
A.19%
B.3.8%
C.17%
D.2.1%
4) Why do we use market-value weights instead of book-value weights?
A.Because often-times firms “window-dress” their financial statements
B.Because we are interested in determining what the cost of financing the firm’s assets
would be given today’s market situation and the component costs the firm currently
faces, not what the historical prices would have been
C.Because it is required in the Sarbanes-Oxley regulations
D.None of these answers is correct
5) The operating cycle will increase with all of the following changes except
____________.
A.The cost of goods sold increases
B.The level of accounts receivable increases
C.The level of inventory increases
D.All of these will increase the operating cycle
6)
Corporate Taxes The Sasnak Corporation had a 2010 taxable income of $4,450,000
from operations after all operating costs but before
(1) interest charges of $750,000,
(2) dividends received of $900,000,
(3) dividends paid of $500,000, and
(4) income taxes.
Using the tax schedule in Table 2.3, what is Sasnak’s income tax liability?
What are Sasnak’s average and marginal tax rates on taxable income from operations?
A.$1,349,800, 30.33%, 34%, respectively
B.$1,349,800, 34.00%, 34%, respectively
C.$1,564,000, 34.00%, 34%, respectively
D.$1,564,000, 35.15%, 34%, respectively
7) Which of the following activities result in an increase in a firm’s cash?
A.Decrease fixed assets
B.Decrease accounts payable
C.Pay dividends
D.Repurchase of common stock
8) All of the following are examples of factors that affect trading activity between
countries except __________________.
A.Charging a 0.75% import tax on steel imported from China into the U.S.
B.Charging $3 tariff per barrel of crude oil imported in the U.S.
C.Restricting the importation of produce into the U.S from South America
D.All of these are factors that affect trading activity between countries
9) All of the following are reasons that one should be cautious in interpreting financial
statements except ____________.
A.Firms can take steps to over- or understate earnings at various times
B.It is difficult to compare two firms that use different depreciation methods
C.Financial managers have quite a bit of latitude in using accounting rules to manage
their reported earnings
D.All of these are reasons to be cautious in interpreting financial statements
10) The theory that argues that dividends that the firm has committed to pay are less
risky to risk-averse investors than are potential future capital gains is referred to as
___________________.
A.Dividend irrelevance theory
B.Bird-in-the-hand theory
C.Residual dividend model
D.None of these
11) Which of the following is a formal bankruptcy proceeding involving the
reorganization of the corporation with some provision for repayment to the firm’s
creditors?
A.Chapter 7
B.Chapter 11
C.Chapter 13
D.Chapter 179
12) TIPS Capital Return Consider a 2.75% TIPS with an issue CPI reference of 184.2.
At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year.
What was the capital gain of the TIPS in dollars?
A.$5.10
B.$11.20
C.$16.30
D.$27.69
13) Stellar Shoes would like to maintain their cash account at a minimum level of
$25,000, but expects the standard deviation in net daily cash flows to be $2,000; the
effective annual rate on marketable securities to be 5 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.$27,000
B.$38,092.34
C.$114,277.02
D.$64,277.02
14) Value a Constant Growth Stock Financial analysts forecast Target Corp (TGT)
growth for the future to be 11 percent. Their recent dividend was $0.52. What is the
value of their stock when the required rate of return is 11.89 percent?
A.$5.25
B.$6.48
C.$58.43
D.$64.85
15) All of the following items would need to be included in the bond’s indenture
agreement except _____.
A.The coupon rate
B.The call feature
C.The credit rating
D.Steps that the bondholder can take in the event that the issuer fails to pay the interest
or principal
16) A firm has 5,000,000 shares of common stock outstanding, each with a market price
of $8.00 per share. It has 25,000 bonds outstanding, each selling for $1100 with a
$1000 face value. The bonds mature in 12 years, have a coupon rate of 9%, and pay
coupons semi-annually. The firm’s equity has a beta of 1.4, and the expected market
return is 15%. The tax rate is 35% and the WACC is 14%. Calculate the risk-free rate.
A.2.05%
B.15.27%
C.20.18%
D.1.19%
17) George’s Dry Cleaning is considering a merger with Weezzie’s Laundry Supply
Stores. George’s total operating costs of producing services are $590,000 for sales
volume (SG) of $4.7 million. Weezzie’s total operating costs of producing services are
$152,000 for a sales volume (SW) of $2.3 million. For a sales volume of $7 million,
calculate the reduction in production costs the merged firms need to experience such
that the total average cost (TAC) for the merged firms is equal to 9%.
A.$97,000
B.$101,000
C.$112,000
D.$128,000
18) Present Value of a Perpetuity What’s the present value, when interest rates are 6.5
percent, of a $100 payment made every year forever?
A.$6.50
B.$650.00
C.$1,000.00
D.$1,538.46
19) Agency problems exist in which forms of business ownership?
A.Sole proprietorship
B.S corporation
C.Partnership
D.Corporation
20) Which of the following can be computed as: Necessary increase in assets minus
spontaneous increase in liabilities minus projected increase in retained earnings?
A.additional funds needed
B.capital intensity ratio
C.current ratio
D.spontaneous assets
21) Given these two exchange rates, $1 = 12.5 Mexican peso and $1 = 0.75, compute
the cross-rate between the Mexican peso and the euro. State this exchange rate in pesos.
A.19.14 pesos
B.17.62 pesos
C.16.67 pesos
D.18.03 pesos
22) Which of the following is NOT a source of value-enhancing synergy in a merger?
A.Cost reduction
B.Revenue enhancement
C.Increased marketing presence
D.Tax considerations
23) All of the following are an advantage of prepackaged bankruptcy except
__________________.
A.There is less disruption to the firm’s business and less damage to its goodwill
B.Reduced legal expenses and other fees which leaves more funds available for the
creditors
C.It is a shorter and simpler bankruptcy process
D.All of these are advantages
24) Suppose you sell a fixed asset for $75,000 when its book value is $80,000. If your
company’s marginal tax rate is 35%, what will be the effect on cash flows of this sale
(i.e., what will be the after-tax cash flow of this sale)?
A.$5,000
B.$48,750
C.$76,750
D.$80,000
25) Calculation of Bankruptcy Probability 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 = .23 (debt ratio) + .08 (profit margin)
A firm you are thinking of lending to has a debt ratio of 60 percent and a profit margin
of 12 percent. Calculate the firm’s expected probability of default, or bankruptcy.
A.14.76%
B.22.32%
C.10.30%
D.13.25%
26) This is a repurchase where the firm simply buys shares of its own stock on the stock
market just like any other investor would.
A.fixed-price tender offer
B.fixed-duration tender offer
C.fixed-shares tender offer
D.open-market stock repurchase
27) Which of the following is an electronic stock market without a physical trading
floor?
A.American Stock Exchange
B.Mercantile Exchange
C.New York Stock Exchange
D.Nasdaq Stock Market
28) International capital budgeting will require that managers ___________.
A.Recognize all of the risks as well as the rewards
B.Increase the discount rate to account for any added risks associated with that country
C.All incremental cash flows be converted to the domestic currency or convert the
domestic discount rate to an equivalent rate in the foreign country
D.All of these