The length of time a firm must wait to recoup the money it has invested in a project is
called the:
A. internal return period.
B. payback period.
C. profitability period.
D. discounted cash period.
E. valuation period.
Princeton Enterprises is a diversified company. In addition to its primary business
operations, the firm is also the sole shareholder of a wholly owned subsidiary. As part
of its restructuring plan, Princeton has decided to implement an IPO offering for shares
in the subsidiary. This offering is equivalent to a 25 percent ownership stake in the
subsidiary. What is the distribution of these shares called?
A. split-up
B. equity carve-out
C. countertender offer
D. white knight transaction
E. lockup transaction
Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock
has a market value per share of $52 and a book value per share of $38. What is the cost
of preferred stock?
A. 7.50 percent
B. 13.88 percent
C. 14.42 percent
D. 19.29 percent
E. 19.74 percent
You are considering the following two mutually exclusive projects. Both projects will
be depreciated using straight-line depreciation to a zero book value over the life of the
project. Neither project has any salvage value.
Should you accept or reject these projects based on the profitability index?
A. accept Project A and reject Project B
B. reject Project A and accept Project B
C. accept both Projects A and B
D. reject both Projects A and B
E. You cannot make this decision based on the profitability index.
Consider the following two mutually exclusive projects:
The required return is 15 percent for both projects. Which one of the following
statements related to these projects is correct?
A. Because both the IRR and the PI imply accepting Project B, that project should be
accepted.
B. The profitability rule implies accepting Project A.
C. The IRR decision rule should be used as the basis for selecting the project in this
situation.
D. Only NPV implies accepting Project A.
E. NPV, IRR, and PI all imply accepting Project A.
Which one of the following categories of securities has had the most volatile returns
over the period 1926-2007?
A. long-term corporate bonds
B. large-company stocks
C. intermediate-term government bonds
D. U.S. Treasury bills
E. small-company stocks
Your firm generally receives 4 checks a month. The check amounts and the collection
delay for each check is shown below. Given this information what is the amount of the
average daily float? Assume a 30 day month.
A. $1,070
B. $2,333
C. $2,640
D. $2,900
E. $3,416
A lockbox is a:
A. special safe used by a firm for overnight storage of any cash or undeposited checks.
B. special safe used by a firm that can only be opened at prespecified times of the day.
C. box located in a bank’s vault that is rented by a firm and used to hold unprocessed
checks.
D. special post office box which can only be opened by prespecified postal inspectors
for direct delivery to the addressee.
Jessica invested in Quantro stock when the firm was unlevered. Since then, Quantro has
changed its capital structure and now has a debt-equity ratio of 0.30. To unlever her
position, Jessica needs to:
A. borrow some money and purchase additional shares of Quantro stock.
B. maintain her current equity position as the debt of the firm did not affect her
personally.
C. sell some shares of Quantro stock and hold the proceeds in cash.
D. sell some shares of Quantro stock and loan out the sale proceeds.
E. create a personal debt-equity ratio of 0.30.
If a firm accepts Project A it will not be feasible to also accept Project B because both
projects would require the simultaneous and exclusive use of the same piece of
machinery. These projects are considered to be:
A. independent.
B. interdependent.
C. mutually exclusive.
D. economically scaled.
E. operationally distinct.
Designer’s Outlet has a capital intensity ratio of 0.87 at full capacity. Currently, total
assets are $48,900 and current sales are $52,300. At what level of capacity is the firm
currently operating?
A. 89 percent
B. 91 percent
C. 93 percent
D. 96 percent
E. 98 percent
The Coffee Express has computed its fixed costs to be $0.34 for every cup of coffee it
sells given annual sales of 212,000 cups. The sales price is $1.49 per cup while the
variable cost per cup is $0.63. How many cups of coffee must it sell to break-even on a
cash basis?
A. 83,814
B. 96,470
C. 123,910
D. 167,630
E. 212,000
Miller’s Dry Goods is an all equity firm with 45,000 shares of stock outstanding at a
market price of $50 a share. The company’s earnings before interest and taxes are
$128,000. Miller’s has decided to add leverage to its financial operations by issuing
$250,000 of debt at 8 percent interest. The debt will be used to repurchase shares of
stock. You own 400 shares of Miller’s stock. You also loan out funds at 8 percent
interest. How many shares of Miller’s stock must you sell to offset the leverage that
Miller’s is assuming? Assume you loan out all of the funds you receive from the sale of
stock. Ignore taxes.
A. 35.6 shares
B. 40.0 shares
C. 44.4 shares
D. 47.5 shares
E. 50.1 shares
Which one of the following statements related to stock repurchases is correct?
A. U.S. industrial firms have increased their stock repurchases every year for each of
the past twenty years.
B. A stock repurchase can be used as a means for incumbent officers to retain control of
a firm.
C. A tender offer indicates that a firm is willing and able to purchase how ever many
shares the current shareholders wish to sell.
D. All stock repurchases must be identified as such to the selling party.
E. Stock repurchases can be a relatively tax-efficient method of distributing cash to
shareholders.
Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. Today,
the company announced that future dividends will be increasing by 2.6 percent
annually. If you require a 12 percent rate of return, how much are you willing to pay to
purchase one share of this stock today?
A. $12.23
B. $12.55
C. $12.67
D. $12.72
E. $12.88
Which one of the following is computed by dividing next year’s annual dividend by the
current stock price?
A. yield to maturity
B. total yield
C. dividend yield
D. capital gains yield
E. growth rate
The Buck Store is considering a project that will require additional inventory of
$216,000 and will increase accounts payable by $181,000. Accounts receivable are
currently $525,000 and are expected to increase by 9 percent if this project is accepted.
What is the project’s initial cash flow for net working capital?
A. -$82,250
B. -$12,250
C. $12,250
D. $36,250
E. $44,250
Which of the following statements are correct?
I. Increasing the time to maturity may not increase the value of a European put.
II. Vega measures the sensitivity of an option’s value to the passage of time.
III. Call options tend to be more sensitive to the passage of time than are put options.
IV. An increase in time decreases the value of a call option.
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Most of the evidence to date indicates that firms with which two of the following
characteristics are most apt to frequently use derivatives?
I. firms with low financial distress costs
II. firms with high financial distress costs
III. firms with easy access to capital markets
IV. firms with constrained access to capital markets
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only
Which one of the following terms applies to an option that has an office building as its
underlying asset?
A. financial option
B. liquid option
C. fixed option
D. real option
E. concrete option
You own a house that you rent for $1,100 a month. The maintenance expenses on the
house average $200 a month. The house cost $219,000 when you purchased it 4 years
ago. A recent appraisal on the house valued it at $239,000. If you sell the house you will
incur $14,000 in real estate fees. The annual property taxes are $4,000. You are
deciding whether to sell the house or convert it for your own use as a professional
office. What value should you place on this house when analyzing the option of using it
as a professional office?
A. $211,800
B. $221,000
C. $225,000
D. $235,000
E. $239,000
Highway Express has paid annual dividends of $1.16, $1.20, $1.25, $1.10, and $0.95
over the past five years respectively. What is the average dividend growth rate?
A. -4.51 percent
B. -3.60 percent
C. 2.28 percent
D. 2.47 percent
E. 4.39 percent
A swap dealer in the U.S.:
A. acts solely as a seller of swap contracts.
B. matches buyers to sellers.
C. only deals if its book is matched.
D. is frequently a commercial bank.
E. trades electronically via NASDAQ.
Fixed costs:
A. change as a small quantity of output produced changes.
B. are constant over the short-run regardless of the quantity of output produced.
C. are defined as the change in total costs when one more unit of output is produced.
D. are subtracted from sales to compute the contribution margin.
E. can be ignored in scenario analysis since they are constant over the life of a project.
Assume the price of the underlying stock decreases. How will the values of the options
respond to this change?
I. call value decreases
II. call value increases
III. put value decreases
IV. put value increases
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. I only
According to theory, studying historical stock price movements to identify mispriced
stocks:
A. is effective as long as the market is only semistrong form efficient.
B. is effective provided the market is only weak form efficient.
C. is ineffective even when the market is only weak form efficient.
D. becomes ineffective as soon as the market gains semistrong form efficiency.
E. is ineffective only in strong form efficient markets.
Roger’s Meat Market is a chain of retail stores that limits its sales to fresh-cut meats.
The stores have been very profitable in northern cities. However, when two stores were
opened in the south, both lost money and had to be closed. Roger, the owner, has now
concluded that no southern-based store should be opened as it would not be profitable.
Which one of the following applies to Roger?
A. confirmation bias
B. endowment effect
C. money illusion
D. affect heuristic
E. representativeness heuristic
Which one of the following will be constant for all securities if the market is efficient
and securities are priced fairly?
A. variance
B. standard deviation
C. reward-to-risk ratio
D. beta
E. risk premium
Inventory needs under a derived-demand inventory system are:
A. primarily dependent upon the competitive demands placed on a firm’s suppliers.
B. based on the anticipated demand for the finished product.
C. based on minimizing the cost of restocking inventory.
D. held constant over time.
Which one of the following statements is correct concerning the NYSE?
A. The publicly traded shares of a NYSE-listed firm must be worth at least $250
million.
B. The NYSE is the largest dealer market for listed securities in the United States.
C. The listing requirements for the NYSE are more stringent than those of NASDAQ.
D. Any corporation desiring to be listed on the NYSE can do so for a fee.
Explain how a lockbox system operates and why a firm might consider implementing
such a system.
Explain how the internal rate of return (IRR) decision rule is applied to projects with
financing type cash flows.
062 = [ROE × 0.
Explain the differences and similarities between net present value (NPV) and the
profitability index.
Explain why a swap is effectively a series of forward contracts.
Kristie owns a perpetuity which pays $12,000 at the end of each year.
Assume that a country experiences a financial crisis that causes the nation’s financial
markets to freeze in a manner that prevents a private firm from raising capital from any
source.
Using two separate graphs, illustrate a flexible and a restrictive short-term financing
policy.
What are the two primary lessons learned from capital market history?
Pete is the CFO of Dexter International. He would like to increase the debt-equity ratio
of the firm but is concerned that the firm’s shareholders may not be willing to accept
additional financial leverage. Pete has come to you for advice. What is your
recommendation?
In each of the theories of capital structure, the cost of equity increases as the amount of
debt increases. So why don’t financial managers use as little debt as possible to keep the
cost of equity down? After all, aren’t financial managers supposed to maximize the
value of a firm?
How might agency problems arise in partnerships?
Explain how a firm loses value during the bankruptcy process from both a creditors and
a shareholders perspective.
Using currencies A, B, and C construct an example in which triangle arbitrage exists
and then show how to exploit it.
According to CAPM, the expected return on a risky asset depends on three components.
Explain 1) the concept of house money, 2) why the house money concept is such a
common behavior for so many individuals and 3) why house money is an irrational
behavior.
Explain how the Check Clearing Act for the 21st Century affects both collection and
disbursement float.
Ted, a wealthy individual, plans to purchase 30 percent of a firm’s Class A shares of
outstanding stock. He believes that such a purchase will allow him to control the firm
by electing his candidates to the board over time as current board member’s terms
expire. The firm has a cumulative voting process. What factors should Ted be
considering and why to ensure he can gain the control he desires?