1) 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 = .18 (debt ratio) + .35 (profit margin)
You know a particular firm has a debt ratio of 35 percent and a probability of default of
8 percent. Calculate the firm’s profit margin.
A.4.857%
B.8.163%
C.6.53%
D.8.00%
2) Suppose a firm pays total dividends of $250,000 out of net income of $2 million.
What would the firm’s payout ratio be?
A.0.125
B.0.25
C.1.25
D.8.00
3) The Nasdaq stock market bubble peaked at 10,816 in 2000. Two and a half years
later it had fallen to 4,000. What was the percentage decline?
A.-63.02%
B.-69.47%
C.-57.13%
D.-49.18%
4) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using regression to estimate a trend?
A.$850,000
B.$860,000
C.$861,500
D.$874,000
5) Investing for Retirement Monica has decided that she wants to build enough
retirement wealth that, if invested at 7 percent per year, will provide her with $3,000
monthly income for 30 years. To date, she has saved nothing, but she still has 20 years
until she retires. How much money does she need to contribute per month to reach her
goal?
A.$671.78
B.$865.62
C.$3,000.00
D.$7,025.77
6) All of the following are advantages to organizing as a corporation except ____.
A.Limited liability
B.Double taxation
C.Easy access to capital
D.Easy to transfer ownership
7) All of the following will result in an increase in net working capital except
_________.
A.An increase in inventory
B.A decrease in accounts payable
C.An increase in cash
D.An increase in accruals
8) ADK Industries common shares sell for $60 per share. ADK expects to set their next
annual dividend at $3.75 per share. If ADK expects future dividends to grow at 9% per
year, indefinitely, the current risk-free rate is 4%, the expected rate on the market is
11%, and the stock has a beta of 1.5, what should be the best estimate of the firm’s cost
of equity?
A.15.25%
B.14.50%
C.14.88%
D.15.03%
9) You have $10,000 to invest. You want to purchase shares of Alaska Air at $50.00,
Best Buy at $50.00, and Ford Motor at $10.00. How many shares of each company
should you purchase so that your portfolio consists of 25 percent Alaska Air, 40 percent
Best Buy, and 35 percent Ford Motor? Report only whole stock shares.
A.50 shares of Alaska Air, 80 shares of Best Buy and 300 shares of Ford Motor
B.50 shares of Alaska Air, 80 shares of Best Buy and 350 shares of Ford Motor
C.40 shares of Alaska Air, 90 shares of Best Buy and 300 shares of Ford Motor
D.75 shares of Alaska Air, 40 shares of Best Buy and 350 shares of Ford Motor
10) Compute the Payback statistic for Project Y and recommend whether the firm
should accept or reject the project with the cash flows shown below if the appropriate
cost of capital is 11 percent and the maximum allowable payback is 1 years.
A.1.25 years, reject
B.1.25 years, accept
C.1.33 years, accept
D.2.25 years, accept
11) Convert each of the following indirect quotes to dollar direct quotes:
$1 = 3.95 Saudi Arabian Riyal
$1 = 41.45 Philippine Peso
$1 = 0.58 Latvian Lat
$1 equals:
A..22 Riyal; .02 Peso; 1.75 Lat
B..25 Riyal; .02 Peso; 1.72 Lat
C..38 Riyal; .05 Peso; 1.72 Lat
D..38 Riyal; .02 Peso; 1.95 Lat
12) A pro-rata distribution of additional shares to stock to the current owners of the
stock is which of the following?
A.stock dividend
B.stock split
C.payment date
D.ex-dividend
13) Suppose you were forecasting sales for a firm that exhibited a cyclical pattern
within each week. How would you go about forecasting sales for this firm?
A.You would need to compute day-of-the week indices centered on the seven days
around each day of the week and use these indices to deseasonalize the historical
observations
B.Calculate the monthly average because it automatically deseasonalizes the historical
observations
C.Ignore the seasonality
D.Compute the daily change as a percent of sales and calculate the geometric average
14) 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 = .28 (debt ratio) + .51 (profit margin)
You know a particular firm has a debt ratio of 46 percent and a probability of default of
18 percent. Calculate the firm’s profit margin.
A.11.93%
B.13.27%
C.10.04%
D.12.81%
15) This is the process of estimating expected future cash flows of a project using only
the relevant parts of the balance sheet and income statements.
A.incremental cash flows
B.cash flow analysis
C.pro forma analysis
D.substitutionary analysis
16) Which of the following statements is incorrect?
A.The Security Market Line shows the relationship between risk and return for any
stock or portfolio
B.The y-intercept of the Security Market Line represents the return on the risk-free
asset
C.The measure of risk used in creating the Security Market Line is the standard
deviation
D.None of these statements are incorrect
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, what is the projected
increase in retained earnings?
A.$1,050,000
B.$1,240,000
C.$1,366,957.14
D.$1,840,000
18) Which of the following statements is incorrect?
A.For most businesses, increases in spontaneous liabilities will be enough to fund the
necessary increases in assets
B.The capital intensity ratio indicates the amount of assets the firm needs to invest to
generate each dollar in sales
C.The vast majority of fixed assets are “chunky” or “lumpy” since they have to be
bought in non-divisible quantities
D.All of these statements are correct
19) Suppose a firm has a dividend payout ratio of 42 percent and net income of $9.25
million. What would be the annual addition to retained earnings?
A.$4,875,000
B.$6255,000
C.$6,987,000
D.$5,365,000
20) Which is true? Ratio analysis:
A.can provide useful information on a firm’s current position but should never be used
to forecast future performance
B.can provide useful information on a firm’s current position and hint at future
performance
C.can provide useful information on a firm’s past but not current position
D.can provide useful information on a firm’s past and current position, but should never
be used to forecast future performance
21) Suppose your firm is considering two mutually exclusive, required projects with the
cash flows shown below. The required rate of return on projects of both of their risk
class is 10 percent, and the maximum allowable payback and discounted payback
statistic for the projects are 2.5 and 3.5 years, respectively.
Use the discounted payback decision rule to evaluate these projects; which one(s)
should be accepted or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
22) Bond Prices and Interest Rate Changes A 7.25 percent coupon bond with 25 years
left to maturity is priced to offer a 7 percent yield to maturity. You believe that in one
year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total
return of the bond in percent? (Assume semi-annual interest payments and $1,000 par
value.)
A.3.5%
B.5.3%
C.7.0%
D.7.15%
23) China’s exchange rate is a _________________________.
A.Freely floating regime
B.Managed floating regime
C.Fixed peg arrangement
D.None of these
24) Rose N More Resources faces a smooth annual demand for cash of $50 million;
incurs transaction costs of $350 every time they sell marketable securities, and can earn
5.2 percent on their marketable securities. What will be their optimal cash
replenishment level?
A.$18,708.29
B.$187,082.87
C.$82,041.27
D.$820,412.65
25) Which of the following statements is incorrect?
A.Sole proprietorships are subject to less regulation
B.Both angel investors and venture capitalists exchange capital for ownership
C.Shareholders are responsible for paying off the corporate bonds in the event of a
bankruptcy
D.All of these statements are correct
26) No Nuns Cos. has a 20 percent tax rate and has $350 million in assets, currently
financed entirely with equity. Equity is worth $80 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 20 percent debt capital structure, and has
determined that they would have to pay an 7 percent yield on perpetual debt in either
event. What will be the standard deviation in EPS if the firm switches to the proposed
capital structure?
A.$1.17
B.$0.92
C.$0.81
D.$1.06