The Mining Co. has 20,000 shares of stock outstanding. The current market value of the
firm is $328,000. The company has retained earnings of $27,000, capital in excess of
par value of $160,000, and a common stock account value of $20,000. The company is
planning a 2-for-5 reverse stock split. What will the par value per share be after the
split?
A. $0.15
B. $0.20
C. $1.00
D. $2.50
E. $5.00
Which one of the following terms is defined as a loan wherein the regular payments,
including both interest and principal amounts, are insufficient to retire the entire loan
amount, which then must be repaid in one lump sum?
A. amortized loan
B. continuing loan
C. balloon loan
D. remainder loan
E. interest-only loan
By definition, which of the following costs are included in the term “financial distress
costs”?
I. direct bankruptcy costs
II. indirect bankruptcy costs
III. direct costs related to being financially distressed, but not bankrupt
IV. indirect costs related to being financially distressed, but not bankrupt
A. I only
B. III only
C. I and II only
D. III and IV only
E. I, II, III, and IV
The specified date on which the principal amount of a bond is payable is referred to as
which one of the following?
A. coupon date
B. yield date
C. maturity
D. dirty date
E. clean date
You are going to loan a friend $900 for one year at a 5 percent rate of interest,
compounded annually. How much additional interest could you have earned if you had
compounded the rate continuously rather than annually?
A. $0.97
B. $1.14
C. $1.23
D. $1.36
E. $1.41
Oscar’s Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent,
and an equity multiplier of 1.49. What is the return on equity?
A. 17.14 percent
B. 18.63 percent
C. 19.67 percent
D. 21.69 percent
E. 22.30 percent
Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000
shares outstanding. After the seasoned offering, you still owned 7,500 shares but the
number of shares outstanding rose to 625,000. Which one of the following terms best
describes this situation?
A. overallotment
B. percentage ownership dilution
C. Green Shoe
D. Red herring
E. abnormal event
Mary is a retired widow who is financially dependent upon the interest income
produced by her bond portfolio. Which one of the following bonds is the least suitable
for her to own?
A. 6-year, putable, high coupon bond
B. 5-year TIPS
C. 10-year AAA coupon bond
D. 5-year floating rate bond
E. 7- year income bond
Which one of the following statements related to the NYSE is correct?
A. Commission brokers work on behalf of brokerage firm clients.
B. Shareholders of NYSE Group, Inc. own “seats” on the exchange.
C. Specialists buy at the asked price.
D. The NYSE is primarily a dealer’s market.
E. Floor brokers earn income in the form of a bid-ask spread.
You are considering two mutually exclusive projects with the following cash flows.
Which project(s) should you accept if the discount rate is 8.5 percent? What if the
discount rate is 13 percent?
A. accept project A as it always has the higher NPV
B. accept project B as it always has the higher NPV
C. accept A at 8.5 percent and B at 13 percent
D. accept B at 8.5 percent and A at 13 percent
E. accept B at 8.5 percent and neither at 13 percent
Which one of the following terms is defined as a conflict of interest between the
corporate shareholders and the corporate managers?
A. articles of incorporation
B. corporate breakdown
C. agency problem
D. bylaws
E. legal liability
A new coat costs 3,900 Russian rubles. How much will the identical coat cost in Euros
if absolute purchasing power parity exists and the following exchange rates apply?
A. €97.23
B. €112.97
C. €119.05
D. €181.27
E. €183.99
You own 15 percent or 13,500 shares of Printers, Etc. These shares have a total market
value of $426,600. By what percentage will the total value of your investment in this
firm change if the company sells an additional 10,000 shares of stock at $30 a share and
you do not buy any?
A. -1.37 percent
B. -1.21 percent
C. -0.51 percent
D. 1.03 percent
E. 1.29 percent
You own 400 shares of Western Feed Mills stock valued at $51.20 per share. What is
the dividend yield if your annual dividend income is $352?
A. 1.68 percent
B. 1.72 percent
C. 1.83 percent
D. 1.13 percent
E. 1.21 percent
Which one of the following best illustrates that the management of a firm is adhering to
the goal of financial management?
A. increase in the amount of the quarterly dividend
B. decrease in the per unit production costs
C. increase in the number of shares outstanding
D. decrease in the net working capital
E. increase in the market value per share
Galloway, Inc. has an odd dividend policy. The company has just paid a dividend of $7
per share and has announced that it will increase the dividend by $2 per share for each
of the next 5 years, and then never pay another dividend. How much are you willing to
pay per share today to buy this stock if you require a 15 percent return?
A. $27.08
B. $34.15
C. $41.72
D. $42.60
E. $43.33
Bonds issued by the U.S. government:
A. are considered to be free of interest rate risk.
B. generally have higher coupons than those issued by an individual state.
C. are considered to be free of default risk.
D. pay interest that is exempt from federal income taxes.
E. are called “munis”.
Which one of the following considers all of the options implicit in a project?
A. expansion planning
B. contingency planning
C. asset management review
D. prospective evaluation
E. strategic evaluation
Which one of the following is an agency cost?
A. accepting an investment opportunity that will add value to the firm
B. increasing the quarterly dividend
C. investing in a new project that creates firm value
D. hiring outside accountants to audit the company’s financial statements
E. closing a division of the firm that is operating at a loss
Morris Motors just purchased some MACRS 5-year property at a cost of $216,000.
Which one of the following will correctly give you the book value of this equipment at
the end of year 2?
A. $216,000/(1 + 0.20 + 0.32)
B. $216,000 × (1 – 0.20 – 0.32)
C. $216,000 × (0.20 + 0.32)
D. [$216,000 × (1 – 0.20)] × (1 – 0.32)
E. $216,000/[(1 + 0.20)(1 + 0.32)]
A zero coupon bond:
A. is sold at a large premium.
B. pays interest that is tax deductible to the issuer when paid.
C. can only be issued by the U.S. Treasury.
D. has more interest rate risk than a comparable coupon bond.
E. provides no taxable income to the bondholder until the bond matures.
J&J Enterprises is considering an investment that will cost $318,000. The investment
produces no cash flows for the first year. In the second year, the cash inflow is $47,000.
This inflow will increase to $198,000 and then $226,000 for the following two years,
respectively, before ceasing permanently. The firm requires a 15.5 percent rate of return
and has a required discounted payback period of three years. Should the project be
accepted? Why or why not?
A. accept; The discounted payback period is 2.18 years.
B. accept; The discounted payback period is 2.32 years.
C. accept; The discounted payback period is 2.98 years.
D. reject; The discounted payback period is 2.18 years.
E. reject; The project never pays back on a discounted basis.
Samuelson Engines wants to save $750,000 to buy some new equipment six years from
now. The plan is to set aside an equal amount of money on the first day of each quarter
starting today. The firm can earn 4.75 percent on its savings. How much does the firm
have to save each quarter to achieve its goal?
A. $26,872.94
B. $26,969.70
C. $27,192.05
D. $27,419.29
E. $27,911.08
A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5
percent over the past six years. What is the geometric average return for this time
period?
A. 4.26 percent
B. 4.67 percent
C. 5.13 percent
D. 5.39 percent
E. 5.60 percent
You have just won the lottery and will receive $540,000 as your first payment one year
from now. You will receive payments for 26 years. The payments will increase in value
by 4 percent each year. The appropriate discount rate is 10 percent. What is the present
value of your winnings?
A. $6,221,407
B. $6,906,372
C. $7,559,613
D. $7,811,406
E. $8,003.11
Unsystematic risk:
A. can be effectively eliminated by portfolio diversification.
B. is compensated for by the risk premium.
C. is measured by beta.
D. is measured by standard deviation.
E. is related to the overall economy.
Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7th. Ted
purchased 100 shares of Fast Deliveries stock on Thursday, July 8th. Fast Deliveries
declared a dividend on June 20th to shareholders of record on July 12th and payable on
August 1st. Which one of the following statements concerning the dividend paid on
August 1st is correct given this information?
A. Neither Kate nor Ted is entitled to the dividend.
B. Kate is entitled to the dividend but Ted is not.
C. Ted is entitled to the dividend but Kate is not.
D. Both Ted and Kate are entitled to the dividend.
E. Both Ted and Kate are entitled to one-half of the dividend amount.
Which one of the following is the financial statement that shows the accounting value
of a firm’s equity as of a particular date?
A. income statement
B. creditor’s statement
C. balance sheet
D. statement of cash flows
E. dividend statement
The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains a lower
cash balance limit of $175,000. The standard deviation of the disbursements is $16,000.
The applicable weekly interest rate is 0.025 percent and the fixed cost of transferring
funds is $49. What is the firm’s cash balance target based on the Miller-Orr model?
A. $208,511
B. $247,560
C. $251,006
D. $254,545
E. $258,878
Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The delay in
clearing is typically 3 days. The current interest rate is 0.025 percent per day. Assume
30 days per month. What is the highest daily fee the company should be willing to pay
to eliminate its float entirely?
A. $1.50
B. $3.00
C. $3.75
D. $4.50
E. $6.00