Leo received $7,500 today and will receive another $5,000 two years from today. He
will invest these funds when he receives them and expects to earn a rate of return of
11.5 percent. What value does he expect his investments to have five years from today?
A. $18,758.04
B. $18,806.39
C. $19,856.13
D. $20,314.00
E. $19,904.36
Answer:
Your credit card company charges you 1.35 percent per month. What is the annual
percentage rate on your account?
A. 16.45%
B. 16.30%
C. 16.39%
D. 16.20%
E. 16.56%
Answer:
The difference between the present value of an investment’s future cash flows and its
initial cost is the:
A. net present value.
B. internal rate of return.
C. payback period.
D. profitability index.
E. discounted payback period.
Answer:
Which form of business structure faces the greatest agency problems?
A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company
Answer:
A convertible bond is selling for $967, matures in 15 years, has a $1,000 face value,
pays interest semiannually, and has a coupon rate of 8 percent. Similar non-convertible
bonds are priced to yield 8.5 percent. The conversion ratio is 20. The stock currently
sells for $47.50 a share. Calculate the convertible bond’s option value.
A. $2.92
B. $7.27
C. $2.03
D. $8.95
E. $1.48
Answer:
A classified board is:
A. a communication network that identifies firms that are willing to be acquired.
B. the inclusion a super majority provision to prevent a small number of directors from
exerting total control over the board’s decisions.
C. a board where only a portion of the directors are elected in any one year.
D. a communication network that distributes resumes for potential board candidates.
E. a listing of criteria that a firm is seeking for a targeted purchase.
Answer:
Northern Industries has accounts receivable of $42,300, inventory of $61,200, sales of
$544,200, and cost of goods sold of $393,500. How many days, on average, does it take
the firm to sell its inventory?
A. 93.08
B. 74.92
C. 85.14
D. 56.77
E. 80.46
Answer:
Lester’s has a return on equity of 11.6 percent, a profit margin of 6.2 percent, and a
payout ratio of 35 percent. What is the firm’s growth rate?
A. 13.74%
B. 7.54%
C. 11.09%
D. 8.77%
E. 9.71%
Answer:
Awnings Incorporated has beginning net fixed assets of $234,100 and ending net fixed
assets of $243,600. Assets valued at $42,500 were sold during the year. Depreciation
was $62,500. What is the amount of net capital spending?
A.$42,500
B.$9,500
C.$72,000
D.$53,000
E.$29,500
Answer:
The standard deviation for a set of stock returns can be calculated as the:
A. positive square root of the average return.
B. average squared difference between the actual return and the average return.
C. positive square root of the variance.
D. average return divided by N minus one, where N is the number of returns.
E. variance squared.
Answer:
Deep Water Drilling has 160,000 shares of stock outstanding at a market price of $109 a
share. The company has just announced a 7-for-3 stock split. What will the market price
per share be after the split?
A. $38.27
B. $46.71
C. $48.40
D. $46.18
E. $48.80
Answer:
One use of cash is represented by:
A. an increase in borrowing.
B. an increase in operating cash flow.
C. a decrease in accounts payable.
D. an increase in notes payable.
E. a decrease in inventory.
Answer:
Deep Falls Timber stock sold for $6.50 a share as of 2015. What was the
market-to-book ratio at that time?
A. 1.78
B. 2.22
C. 2.78
D. 3.03
E. 3.22
Answer:
The expected return on HiLo stock is 14.08 percent while the expected return on the
market is 11.5 percent. The beta of HiLo is 1.26. What is the risk-free rate of return?
A. .41%
B. 2.01%
C. .69%
D. 1.58%
E. 1.62%
Answer:
The sustainable growth rate:
A. assumes there is no external financing of any kind.
B. is normally higher than the internal growth rate.
C. assumes the debt-equity ratio is variable.
D. is based on receiving additional external debt and equity financing.
E. assumes the dividend payout ratio is equal to zero.
Answer:
If a market is strong form efficient then:
A. company insiders are the only investors capable of earning an abnormal profit.
B. abnormal profits are obtainable by any and all investors.
C. technical analysts who study past market performance have a market advantage.
D. all investments should have positive NPVs.
E. company insiders have no advantage over John Q. Public investor.
Answer:
Goodday is merging with Baker, Inc. Goodday has debt with a face value of $80 and
Baker has debt with a face value of $40. The pre-merger values of the firms given two
economic states with equal probabilities of occurrence are as follows:
What will be the gain or loss to the current shareholders of Goodday if the merger
provides no synergy?
A. “$10
B. $0
C. -$5
D. $5
E. $10
Answer:
The Can-Do Co. is analyzing a proposed project with anticipated sales of 12,000 units,
give or take 4 percent. The expected variable cost per unit is $7 and the expected fixed
cost is $36,000. The cost estimates have a range of plus or minus 6 percent. The
depreciation expense is $29,600. The tax rate is 34 percent. The sale price is estimated
at $14.99 a unit, give or take 1 percent. What is the operating cash flow under the
best-case scenario?
A. $58,235.78
B. $54,309.17
C. $56,208.01
D. $59,311.10
E. $54,499.29
Answer:
For a JIT inventory system to be efficient, the:
A. inventory must have an independent demand.
B. firm’s suppliers need to be able to deliver goods quickly upon order.
C. managers must limit production each day to a set quantity.
D. firm must be a reseller of goods, not a manufacturer.
E. supplying firm must be a subsidiary of the ordering firm.
Answer:
The slope of an asset’s security market line is the:
A. reward-to-risk ratio.
B. portfolio weight.
C. beta coefficient.
D. risk-free interest rate.
E. market risk premium.
Answer:
A firm has experienced a significant increase in its share value. In retrospect, which one
of the following securities would generally have provided the most benefit to the firm
assuming the securities had been issued prior to the change in share value?
A. B. bonds with attached warrants common stock
B. convertible preferred stock
C. ANSD. straight bonds
D. convertible bonds
Answer:
All of the following are anticipated effects of a proposed project. Which of these should
be considered when computing the cash flow for the final year of a project?
A. operating cash flow and salvage values
B. salvage values and net working capital recovery
C. operating cash flow, net working capital recovery, salvage values
D. net working capital recovery and operating cash flow
E. operating cash flow only
Answer:
A purely financial merger:
A. increases shareholder value but does not affect bondholders.
B. decreases both bondholder and shareholder values.
C. transfers bondholder value to shareholders.
D. increases bondholder value but does not affect shareholder value.
E. reduces shareholder value while increasing bondholder value.
Answer:
Which one of these is the best means of creating a valuable financing opportunity?
A. reduce a tax subsidy
B. fool investors in an efficient market
C. create a new security to meet the needs of an unsatisfied clientele
D. issue new securities in a market niche of satisfied clientele
E. create new securities to minimize tax benefits
Answer:
When graphing firm value against debt levels, the debt level that maximizes the value
of the firm is the level where:
A. the increase in the present value of distress costs from an additional dollar of debt is
greater than the increase in the present value of the debt tax shield.
B. the increase in the present value of distress costs from an additional dollar of debt is
equal to the increase in the present value of the debt tax shield.
C. the increase in the present value of distress costs from an additional dollar of debt is
less than the increase of the present value of the debt tax shield.
D. distress costs as well as debt tax shields are zero.
E. distress costs as well as debt tax shields are maximized.
Answer:
Eight months ago, you purchased 400 shares of Winston stock at a price of $46.40 a
share. The company pays quarterly dividends of $1.05 a share. Today, you sold all of
your shares for $48.30 a share. What is your total percentage return on this investment?
A. 10.12%
B. 4.09%
C. 8.62%
D. 12.08%
E. 7.34%
Answer:
Angie has been offered Can$164 for 100. How much profit can she earn on a triangle
arbitrage if the official rate is $1 = Can$1.1268 and the USD equivalent of 1 is 1.4809?
Assume she currently has only $100 in cash.
A. $1.75
B. $.73
C. $1.09
D. $1.37
E. $.57
Answer:
Clancy’s has a beginning cash balance of $27 and a net cash inflow for the quarter of
-$52. Company policy is to maintain a minimum cash balance of $20 and borrow only
the amount that is necessary to maintain that balance. How much does the firm need to
borrow this quarter?
A. $17
B. $52
C. $45
D. $20
E. $59
Answer:
A stock had returns of 12 percent, 6 percent, 13 percent, -11 percent, and -2 percent
over the past five years. What is the geometric average return for this time period?
A. 4.35%
B. 3.19%
C. 3.29%
D. 4.08%
E. 4.57%
Answer:
Winston’s has a beta of 1.08 and a cost of debt of 8 percent. The current risk free rate is
3.2 percent and the market rate of return is 11.47 percent. What is the company’s cost of
equity capital?
A. 8.93%
B. 16.93%
C. 12.13%
D. 20.13%
E. 16.13%
Answer:
Cash increases when:
A. long-term debt decreases.
B. equity decreases.
C. current liabilities decrease.
D. accounts payable increases.
E. fixed assets increase.
Answer:
A futures contract on gold is based on 100 troy ounces with prices quoted in dollars per
troy ounce. Assume one contract called for delivery some time during the month of
April. The price of gold opened the month at 1,194. The low quote for April was 1,189,
the high was 1,212, and the end of month settle quote was 1,197. By what amount did
the value on one contract vary over the month of April?
A. $30
B. $23
C. $3,000
D. $2,300
E. $300
Answer:
What are the components of the required rate of return on a share of stock?
Answer:
Explain the primary benefit of sensitivity analysis and explain why that benefit cannot
be realized by conducting scenario analysis.
Answer:
What is the difference between an ordinary annuity and an annuity due? What value can
be used to quickly convert both the present value and the future value of an ordinary
annuity into annuity due values?
Answer:
Depreciation is classified as a noncash item because no cash is spent when depreciation
is recorded. Why are expenses that have been accrued, but not yet paid, not also
considered to be noncash items and therefore excluded from operating cash flow just as
depreciation is excluded?
Answer:
In what instances is the binomial option pricing model superior to the Black-Scholes
option pricing model?
Answer:
A number of publicly traded firms pay no dividends yet investors are willing to buy
shares in these firms. How is this possible? Does this violate our basic principle of
stock valuation?
Answer:
Why would a firm’s creditors voluntarily agree to a prepackaged reorganization that
offers those creditors less than they are owed?
Answer:
Explain the difference between a spot trade and a forward trade as they relate to
currencies.
Answer:
Sometimes the management of a target firm fights a takeover attempt even when that
attempt appears to be in the best interest of the shareholders. Why would management
take this stance?
Answer:
It has been shown that in the absence of taxes and other market imperfections firm
value will be unaffected by dividend policy. Explain the logic behind this conclusion.
Answer:
Suppose XYZ is priced at $125 a share. The 150 call has six months to expiration and is
quoted at $.05. Why do you suppose investors would be willing to purchase a call that
is so far out of the money?
Answer: