The current spot rate between the UK and the U.S. is 0.6220 per $1. The expected
inflation rate in the U.S. is 2.1 percent. The expected inflation rate in the UK is 2.6
percent. If relative purchasing power parity exists, what will the exchange rate be next
year?
A. 0.6189/$1
B. 0.6251/$1
C. 0.6823/$1
D. 0.7023/$1
E. 0.7110/$1
The owners equity for The Deer Store was $58,900 at the beginning of the year. During
the year, the company had aftertax income of $4,200, of which $3,200 was paid in
dividends. Also during the year, the company repurchased $6,500 of stock from one of
the shareholders. What is the value of the owners equity at year end?
A. $53,400
B. $45,000
C. $59,900
D. $84,400
E. $90,900
When using the pure play approach for a proposed investment, a firm is primarily
seeking a rate of return that:
A. is based on the actual source of funds that will be used to fund the project.
B. creates a positive net present value for the project.
C. reflects the size and life of the project.
D. most closely correlates with the proposed investments internal rate of return.
E. best matches the risk level of the proposed investment.
Delta Mowers has a debt-equity ratio of 1.2. Its WACC is 10.1 percent, and its cost of
debt is 7.5 percent. There is no corporate tax. What is the firms cost of equity capital?
A. 12.60 percent
B. 13.22 percent
C. 13.83 percent
D. 14.29 percent
E. 14.80 percent
Cash flow to creditors is defined as:
A. interest paid minus net new borrowing.
B. interest paid plus net new borrowing.
C. the operating cash flow minus net capital spending minus change in net working
capital.
D. dividends paid plus net new borrowing.
E. cash flow from assets plus net new equity.
The ability to delay an investment:
A. is commonly referred to as the best-case scenario.
B. is valuable provided there are conditions under which the investment will have a
positive net present value.
C. ensures that the investment will have an expected net present value that is positive.
D. offsets the need to conduct sensitivity analysis.
E. is referred to as the option to abandon.
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual
basis and the principal at the end of three years. What type of loan did you obtain?
A. Interest-only
B. Amortized
C. Perpetual
D. Pure discount
E. Lump sum
Textile Mills has sales of $923,000, cost of goods sold of $748,000, and accounts
receivable of $106,700. How long on average does it take the firms customers to pay
for their purchases?
A. 8.65 days
B. 11.28 days
C. 25.01 days
D. 42.19 days
E. 45.33 days
The amount by which a firms tax bill is reduced as a result of the depreciation expense
is referred to as the depreciation:
A. tax shield.
B. credit.
C. erosion.
D. opportunity cost.
E. adjustment.
The addition of a risky security to a fully diversified portfolio:
A. must decrease the portfolios expected return.
B. must increase the portfolio beta.
C. may or may not affect the portfolio beta.
D. will increase the unsystematic risk of the portfolio.
E. will have no effect on the portfolio beta or its expected return.
Haywood and More have a market value balance sheet as shown below. The firm
currently has 5,000 shares of stock outstanding at a market price per share of $35.40.
Net income is $9,500.
The firm has decided to spend $8,000 and pay an extra cash dividend. What will the
firms PE ratio be after this dividend is paid, all else held constant? Ignore taxes.
A. 14.20
B. 16.67
C. 18.63
D. 21.22
E. 24.50
Which one of the following is most apt to create a situation where an agency conflict
could arise?
A. Increasing the size of a firms operations
B. Downsizing a firm
C. Separating management from ownership
D. Decreasing employee turnover
E. Reducing both management and nonmanagement salaries
Toms Hardware has inventory of $318,000, equity of $421,800, total assets of
$647,700, and sales of $687,400. What is the common-size percentage for the inventory
account?
A. 26.81 percent
B. 33.66 percent
C. 46.26 percent
D. 49.10 percent
E. 51.68 percent
Which one of the following statements related to the inventory period is correct?
A. The inventory period increases as the inventory turnover rate increases.
B. The length of the inventory period depends on the length of the cash cycle.
C. The inventory period is the average number of days a firm holds inventory on its
shelves.
D. The inventory period is equal to the operating cycle minus the accounts payable
period.
E. The inventory period has no effect on the cash cycle.
A perpetuity in Canada is frequently referred to as which one of the following?
A. Consul
B. Infinity
C. Forever cash
D. Dowry
E. Forevermore
A project has an initial requirement of $698,700 for fixed assets and $61,000 for net
working capital. The fixed assets will be depreciated to a zero book value over the
four-year life of the project and will be worthless at the end of the project. All of the net
working capital will be recouped after four years. The expected annual operating cash
flow is $218,000. What is the projects internal rate of return if the tax rate is 35
percent?
A. 7.72 percent
B. 8.41 percent
C. 8.69 percent
D. 9.11 percent
E. 9.97 percent
A callable bond:
A. is generally call protected during the entire term of the bond issue.
B. generally will have a call protection period during the final three years prior to
maturity.
C. may be structured to pay bondholders the current value of the bond on the date of
call.
D. is prohibited from having a sinking fund also.
E. is frequently called at a price that is less than par value.