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Which one of the following has the greatest tendency to increase the percentage of debt
included in the optimal capital structure of a firm?
A. exceptionally high depreciation expenses
B. very low marginal tax rate
C. substantial tax shields from other sources
D. low probabilities of financial distress
E. minimal taxable income
Which of the following statements are true based on the historical record for 1926-
2007?
I. Risk and potential reward are inversely related.
II. Risk-free securities produce a positive real rate of return each year.
III. Returns are more predictable over the short-term than they are over the long-term.
IV. Bonds are generally a safer investment than are stocks.
A. I only
B. IV only
C. II and III only
D. II and IV only
E. II, III, and IV only
The yield-to-maturity on a bond is the interest rate you earn on your investment if
interest rates do not change. If you actually sell the bond before it matures, your
realized return is known as the holding period yield. Suppose that today, you buy a 12
percent annual coupon bond for $1,000. The bond has 13 years to maturity. Two years
from now, the yield-to-maturity has declined to 11 percent and you decide to sell. What
is your holding period yield?
A. 8.84 percent
B. 9.49 percent
C. 12.00 percent
D. 13.01 percent
E. 14.89 percent
The difference between a firm's future cash flows if it accepts a project and the firm's
future cash flows if it does not accept the project is referred to as the project's:
A. incremental cash flows.
B. internal cash flows.
C. external cash flows.
D. erosion effects.
E. financing cash flows.
Imprudential, Inc. has an unfunded pension liability of $850 million that must be paid
in 25 years. To assess the value of the firm's stock, financial analysts want to discount
this liability back to the present. The relevant discount rate is 6.5 percent. What is the
present value of this liability?
A. $159,803,162
B. $171,438,907
C. $176,067,311
D. $184,519,484
E. $191,511,367
Cookie Dough Manufacturing has a target debt-equity ratio of 0.5. Its cost of equity is
15 percent, and its cost of debt is 11 percent. What is the firm's WACC given a tax rate
of 31 percent?
A. 12.53 percent
B. 12.78 percent
C. 13.11 percent
D. 13.48 percent
E. 13.67 percent
The Town Crier and The News Express are all-equity firms. The Town Crier has 11,500
shares outstanding at a market price of $26 a share. The News Express has 15,000
shares outstanding at a price of $31 a share. The News Express is acquiring The Town
Crier. The incremental value of the acquisition is $3,800. What is the value of The
Town Crier to The News Express?
A. $57,500
B. $75,000
C. $87,000
D. $299,000
E. $302,800
Sensitivity analysis determines the:
A. range of possible outcomes given that most variables are reliable only within a stated
range.
B. degree to which the net present value reacts to changes in a single variable.
C. net present value range that can be realized from a proposed project.
D. degree to which a project relies on its fixed costs.
E. ideal ratio of variable costs to fixed costs for profit maximization.
Which one of the following factors tends to favor longer credit periods?
A. high consumer demand
B. lower priced merchandise
C. increased credit risk
D. merchandise with low collateral value
E. increased competition
Firms A and B formally agree to each put up $25 million to create firm C. Firm C will
perform environmental testing on the products produced by both Firm A and Firm B.
Which one of the following terms describes Firm C?
A. joint venture
B. going-private transaction
C. conglomerate
D. subsidiary
E. leveraged buyout
Which one of the following is most likely the primary reason why a lessee opts to lease
an asset on a short-term basis rather than buy that asset?
A. keep the asset off the balance sheet
B. tax avoidance
C. lower total cost
D. increased collateral
E. nonrecourse protection
The process of determining the present value of future cash flows in order to know their
worth today is called which one of the following?
A. compound interest valuation
B. interest on interest computation
C. discounted cash flow valuation
D. present value interest factoring
E. complex factoring
Last year, you purchased a stock at a price of $47.10 a share. Over the course of the
year, you received $2.40 per share in dividends while inflation averaged 3.4 percent.
Today, you sold your shares for $49.50 a share. What is your approximate real rate of
return on this investment?
A. 6.30 percent
B. 6.79 percent
C. 7.18 percent
D. 9.69 percent
E. 10.19 percent
Amy has been investing in stocks so she can accumulate sufficient money to purchase
her own home. These savings are currently valued at $82,500. As recently as last
month, her savings were worth in excess of $110,000. Today, Amy found the perfect
house. She knows she can withdraw her savings to pay on this house and borrow the
remaining balance from her father at zero percent interest. However, Amy is refusing
now to buy any house until her savings increase in value back to their $110,000
previous valuation. Amy is displaying which one of the following behaviors?
A. representativeness heuristic
B. loss aversion
C. house money effect
D. underconfidence
E. confirmation bias
The pure time value of money is known as the:
A. liquidity effect.
B. Fisher effect.
C. term structure of interest rates.
D. inflation factor.
E. interest rate factor.
The value of an option is equal to the:
A. intrinsic value minus the time premium.
B. time premium plus the intrinsic value.
C. implied standard deviation plus the intrinsic value.
D. summation of the intrinsic value, the time premium, and the implied standard
deviation.
E. summation of delta, theta, vega, and rho.
You are planning to save for retirement over the next 15 years. To do this, you will
invest $1,100 a month in a stock account and $500 a month in a bond account. The
return on the stock account is expected to be 7 percent, and the bond account will pay 4
percent. When you retire, you will combine your money into an account with a 5
percent return. How much can you withdraw each month during retirement assuming a
20-year withdrawal period?
A. $2,636.19
B. $2,904.11
C. $3,008.21
D. $3,113.04
E. $3,406.97
Suppose you know a company's stock currently sells for $90 per share and the required
return on the stock is 10 percent. You also know that the total return on the stock is
evenly divided between a capital gains yield and a dividend yield. What is the current
dividend if it's the company's policy to always maintain a constant growth rate in its
dividends?
A. $4.18
B. $4.29
C. $4.37
D. $4.50
E. $4.64
On the Statement of Cash Flows, which of the following are considered financing
activities?
I. increase in long-term debt
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and IV only
B. III and IV only
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV
A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout
ratio of 24 percent. The current profit margin is 10 percent and the firm uses no external
financing sources. What must the total asset turnover rate be?
A. 0.87 times
B. 0.90 times
C. 1.01 times
D. 1.15 times
E. 1.30 times
Show Boat Dinner Theatres has paid annual dividends of $0.32, $0.48, and $0.60 a
share over the past three years, respectively. The company now predicts that it will
maintain a constant dividend since its business has leveled off and sales are expected to
remain relatively flat. Given the lack of future growth, you will only buy this stock if
you can earn at least a 16 percent rate of return. What is the maximum amount you are
willing to pay for one share of this stock today?
A. $3.43
B. $3.75
C. $4.43
D. $4.69
E. $4.82
The current yield is defined as the annual interest on a bond divided by which one of
the following?
A. coupon
B. face value
C. market price
D. call price
E. dirty price
You are scheduled to receive annual payments of $4,800 for each of the next 7 years.
The discount rate is 8 percent. What is the difference in the present value if you receive
these payments at the beginning of each year rather than at the end of each year?
A. $1,999
B. $2,013
C. $2,221
D. $2,227
E. $2,304
Southern Chicken is considering two projects. Project A consists of creating an outdoor
eating area on the unused portion of the restaurant's property. Project B would use that
outdoor space for creating a drive-thru service window. When trying to decide which
project to accept, the firm should rely most heavily on which one of the following
analytical methods?
A. profitability index
B. internal rate of return
C. payback
D. net present value
E. accounting rate of return
Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine.
The machine will be depreciated using MACRS over a 4-year period, after which the
machine will be worthless. MACRS allows for 33.33 percent, 44.44 percent, 14.82
percent, and 7.41 percent depreciation over years 1 to 4, respectively. The machine
could be leased for $104,100 a year for 4 years. The firm can borrow money at 9.5
percent and has a 35 percent tax rate. The firm does not expect to pay any taxes for the
next 5 years. What is the net advantage to leasing?
A. -$1,667
B. -$4,587
C. -$18,640
D. -$21,651
E. -$30,277
Which one of the following statements concerning bond ratings is correct?
A. Investment grade bonds are rated BB or higher by Standard & Poor's.
B. Bond ratings assess both interest rate risk and default risk.
C. Split rated bonds are called crossover bonds.
D. The highest rating issued by Moody's is AAA.
E. A "fallen angel" is a term applied to all "junk" bonds.
Your credit card company charges you 1.65 percent interest per month. What is the
annual percentage rate on your account?
A. 18.95 percent
B. 19.80 percent
C. 20.90 percent
D. 21.25 percent
E. 21.70 percent
Winter Time Adventures is going to pay an annual dividend of $2.86 a share on its
common stock next year. This year, the company paid a dividend of $2.75 a share. The
company adheres to a constant rate of growth dividend policy. What will one share of
this common stock be worth five years from now if the applicable discount rate is 11.7
percent?
A. $43.45
B. $43.87
C. $44.15
D. $45.19
E. $47.00
You wrote eight call option contracts with a strike price of $42.50 at a call price of
$1.35 per share. What is your net gain or loss on this investment if the price of the
underlying stock is $40.30 per share on the option expiration date?
A. -$2,840
B. -$1,760
C. -$1,080
D. $1,080
E. $1,760
Which one of the following states that a firm's cost of equity capital is directly and
proportionally related to the firm's capital structure?
A. Capital Asset Pricing Model
B. M&M Proposition I
C. M&M Proposition II
D. Law of One Price
E. Efficient Markets Hypothesis
The Blue Goose is trying to decide whether to lease or buy some new refrigeration
equipment for the restaurant. The equipment costs $63,000, has a 7-year life and will be
worthless after the 7 years. The cost of borrowed funds is 8.4 percent and the tax rate is
32 percent. The equipment can be leased for $9,800 a year. What is the amount of the
annual depreciation tax shield if the firm uses straight-line depreciation?
A. $2,880
B. $4,300
C. $7,500
D. $8,333
E. $9,000
The Turn It Up Corporation sells on credit terms of net 30. Its accounts are, on average,
6 days past due. Annual credit sales are $7 million. What is the company's balance sheet
amount in accounts receivable?
A. $690,411
B. $723,333
C. $851,667
D. $915,407
E. $923,593
Assume that $1 is equal to 98 and also equal to C$1.21. Based on this, you could say
that C$1 is equal to: C$1(98/C$1.21) = 80.99. The exchange rate of C$1 = 80.99 is
referred to as the:
A. open exchange rate.
B. cross-rate.
C. backward rate.
D. forward rate.
