Which one of the following is a correct statement concerning risk premium?
A. The greater the volatility of returns, the greater the risk premium.
B. The lower the volatility of returns, the greater the risk premium.
C. The lower the average rate of return, the greater the risk premium.
D. The risk premium is not correlated to the average rate of return.
E. The risk premium is not affected by the volatility of returns.
Answer:
The last date on which you can purchase shares of stock and still receive the dividend is
the date _____ business day(s) prior to the date of record.
A. zero
B. one
C. three
D. five
E. seven
Answer:
The expected variable cost per unit for a proposed project is $8.48 and the expected
fixed cost is $27,400. The cost estimates have a plus or minus range of 5 percent. The
depreciation expense is $13,290 and the tax rate is 35 percent. The sale price is
estimated at $13.29 a unit, give or take 2 percent. If the firm bases its sensitivity
analysis on the base case estimates, what will be the operating cash flow for a
sensitivity analysis of 9,200 units?
A. −$66.02
B. $15,605.30
C. $2,078.40
D. $11,554.50
E. $18,385.60
Answer:
Altman’s revised Z-score predicts the likelihood of bankruptcy within:
A. five years.
B. three years.
C. two years.
D. one year.
E. six months.
Answer:
On the day you retire, you have $389,900 in your retirement savings. You expect to earn
4.5 percent, compounded monthly, and live 24 more years. How much can you
withdraw from your savings each month during your retirement if you plan to die on the
day you spend your last penny?
A. $2,181.96
B. $2,092.05
C. $2,398.17
D. $2, 072.00
E. $2,216.29
Answer:
The most effective method of directly evaluating the financial performance of a firm is
to compare the financial ratios of the firm to:
A. the firm’s ratios from prior time periods and to the ratios of firms with similar
operations.
B. the average ratios of all firms within the same country over a period of time.
C. those of other firms located in the same geographic area that are similarly sized.
D. the average ratios of the firm’s international peer group.
E. those of the largest conglomerate that has operations in the same industry as the firm.
Answer:
Which one of these will increase the book value of the stockholders’ equity in a
profitable, non-dividend paying firm? Assume no shares of stock are repurchased or
sold.
A.a decrease in the book value of inventory
B.an increase in earnings per share
C.an increase in the market value of the firm’s buildings
D.an increase in the market value of the firm’s long-term debt
E.an increase in non-cash expenses
Answer:
Which one of the following is a source of cash?
A. an increase in accounts receivable
B. an increase in fixed assets
C. a decrease in long-term debt
D. the payment of a cash dividend
E. an increase in accounts payable
Answer:
Stock S is expected to return 12 percent in a boom and 6 percent in a normal economy.
Stock T is expected to return 20 percent in a boom and 4 percent in a normal economy.
There is a 40 percent probability that the economy will boom; otherwise, it will be
normal. What is the portfolio variance if 30 percent of the portfolio is invested in Stock
S and 70 percent is invested in Stock T?
A. .002220
B. .004056
C. .006224
D. .008080
E. .098000
Answer:
The Elder Co. is in downsizing mode. The company paid a $2.50 annual dividend last
year. The company has announced plans to lower the dividend by $.50 a year. Once the
dividend amount becomes zero, the company will cease all dividends permanently. The
required rate of return is 14.5 percent. What is one share of this stock worth?
A. $3.85
B. $3.48
C. $4.87
D. $4.13
E. $4.39
Answer:
BG’s cost of equity is 9.4 percent, expected return on the market is 13.6 percent, and the
risk-free rate is 3.8 percent. What is the firm’s debt-equity ratio if its asset beta is .36?
Assume there is no preferred stock.
A. .52
B. .59
C. .82
D. .77
E. .63
Answer:
Last year, Logistics paid an annual dividend of $2.20 and announced that all future
dividends would be $2.25 a share indefinitely. What is your required rate of return if
you are willing to pay $15.25 a share for this stock?
A. 14.75%
B. 16.07%
C. 13.88%
D. 13.67%
E. 14.50%
Answer:
The market price of ABC stock has been very volatile and you think this volatility will
continue for several weeks. Thus, you decide to purchase one two-month call option
contract on ABC stock with a strike price of $25 and an option price of $1.30. You also
purchase one two-month put option on ABC stock with a strike price of $25 and an
option price of $.50. What will be your total profit on these positions if the stock price
is $25.60 on the day the options expire?
A. -$180
B. -$120
C. -$100
D. $120
E. $180
Answer:
An efficient set of portfolios is comprised of:
A. a complete opportunity set.
B. the portion of the opportunity set located below the minimum variance portfolio.
C. only the minimum variance portfolio.
D. the dominant portion of the opportunity set.
E. only the maximum return portfolio.
Answer:
City Movers announced that its next annual dividend will be $.40 a share. The
following dividends will be $.60, and $.75 a share annually for the following two years,
respectively. After that, dividends are projected to increase by 3.5 percent per year. How
much is one share of this stock worth at a rate of return of 12 percent?
A. $8.45
B. $6.84
C. $7.87
D. $8.06
E. $7.03
Answer:
Wilson, Inc. has an inventory turnover rate of 16, an accounts payable period of 47 days
and an accounts receivable period of 37 days. What is the length of the cash cycle?
A. 32.81 days
B. -6.00 days
C. 2.00 days
D. 6.00 days
E. 12.81 days
Answer:
The contribution margin:
A. is dependent upon achieving a minimal level of output.
B. increases as the level of output decreases.
C. is unaffected by the efficiency, or lack thereof, of the production process.
D. has a major effect on the financial break-even point.
E. changes as a firm’s tax rate changes.
Answer:
The tax savings of the firm derived from the deductibility of interest expense is called
the:
A. interest tax shield.
B. depreciable basis.
C. financing umbrella.
D. current yield.
E. tax-loss carry forward savings.
Answer:
Different classes of stock usually are issued to:
A. allow a certain group to maintain ownership control while reducing that group’s
equity position.
B. reduce the firm’s dividend obligation.
C. fool investors.
D. extract perquisites from one class of shareholders without the other class of
shareholders knowing.
E. distinguish the time periods in which the various shares were issued.
Answer:
A financing project has an initial cash inflow of $42,000 and cash flows of −$15,600, −
$22,200, and −$18,000 for Years 1 to 3, respectively. The required rate of return is 13
percent. What is the internal rate of return? Should the project be accepted?
A. 15.26%; accept
B. 15.26%; reject
C. 13.44%; reject
D. 13.44%; accept
E. 10.33%; accept
Answer:
Wilson’s Dry Goods has a line of credit with a local bank for $250,000. The loan
agreement calls for interest of 7.6 percent with a compensating balance requirement of
5 percent, which is based on the total amount borrowed. What is the effective interest
rate if the firm needed $138,000 for one year to cover its expansion costs?
A. 8.55%
B. 7.60%
C. 8.13%
D. 8.38%
E. 8.00%
Answer:
A bank line of credit:
A. generally requires the borrower to borrow the entire credit line amount at some point
in time.
B. Generally involves a fee charged to the borrower on the unused portion of the
revolver.
C. may only be offered for periods of one year or less.
D. is generally free unless money is actually borrowed.
E. allows the borrower to determine the amount of credit to be granted.
Answer:
Covenants restricting additional borrowings primarily protect the:
A. shareholders’ residual interests in the firm.
B. debtholders from the added risk of dilution of their claims.
C. debtholders from changes in market interest rates.
D. managers by avoiding agency costs.
E. shareholders from agency costs.
Answer:
During the month Leslie’s receive 4 checks in the amounts of $100, $325, $200, and
$500. They are delayed for 1.6 days, 2.1 days, 2.6, and 1 day, respectively. What is the
average daily collection float? Assume a 30-day month.
A. $74.93
B. $63.80
C. $62.08
D. $59.47
E. $68.15
Answer:
If the risk of an investment project differs from the overall firm’s risk then the:
A. market rate of return should be used as the project’s discount rate.
B. project’s discount rate must be adjusted based on the risks of the project’s cash flows.
C. project’s discount rate must be adjusted based on the sources of project financing.
D. average rate used for all prior projects should be used as the new project’s discount
rate.
E. project’s initial cost should be increased/decreased to account for the
increase/decrease in risk.
Answer:
Assume a firm’s debtholders are promised payments in one year of $35 if the firm does
well and $20 if the firm does poorly. There is a 50/50 chance of the firm doing well or
poorly. If bondholders are willing to pay $25.50, what is the promised return to those
bondholders?
A. 7.33%
B. 6.87%
C. 7.39%
D. 7.84%
E. 8.26%
Answer:
A short-term loan where the lender holds the borrower’s receivables as security is
called:
A. a compensating balance.
B. assigned receivables financing.
C. a letter of credit.
D. factored receivables financing.
E. a bond.
Answer:
The annual dividend per share stated as a percentage of the annual earnings per share is
called the:
A. dividend yield.
B. dividend per share.
C. annual yield.
D. dividend rate.
E. dividend payout.
Answer:
A partnership:
A. is taxed the same as a corporation.
B. terminates at the death of any limited partner.
C. creates an unlimited liability for all general partners for the partnership debts.
D. has the same ability to raise capital as a corporation does.
E. allows for easy transfer of interest from one general partner to another.
Answer:
Which one of the following related to float management is true?
A. Float management is the practice of speeding up the disbursement of cash.
B. An objective of float management eliminate disbursement float.
C. An objective of float management is to reduce float by reducing sales.
D. Firms prefer net disbursement float over net collection float.
E. Float management is no longer needed.
Answer:
In examining the issue of whether the choice of accounting methods affects stock
prices, studies have found that:
A. accounting depreciation methods can significantly affect stock prices.
B. switching depreciation methods can significantly affect stock prices.
C. accounting changes that increase accounting earnings also increase stock prices.
D. accounting changes can affect stock prices if the company were either to withhold
information or provide incorrect information.
E. accounting reporting has little, if any effect, ever on stock prices.
Answer:
Assume Atlantic Fish sells 3,200 pounds of fish per month at a price of $2.90 a pound.
The variable cost per pound is $2.22. Currently, the firm has a cash-only sales policy.
The firm is considering changing to a net 30 credit policy. The monthly required return
is 1.2 percent. What does the new level of sales need to be to break-even on the switch?
A. 3,219.40 pounds
B. 3,489.67 pounds
C. 3,370.44 pounds
D. 170.44 pounds
E. 119.40 pounds
Answer:
A Chapter 7 bankruptcy involves all of the following except:
A. filing a petition in federal court.
B. issuing new equity securities to current shareholders.
C. the appointing of a bankruptcy trustee .
D. administration costs.
E. distribution of liquidation proceeds.
Answer:
The three components of credit policy are:
A. collection policy, credit analysis, and interest rate determination.
B. collection policy, credit analysis, and terms of the sale.
C. collection policy, interest rate determination, and repayment analysis.
D. credit analysis, repayment analysis, and terms of the sale.
E. interest rate determination, repayment analysis and terms of sale.
Answer: