The standard deviation of a portfolio:
A. is a weighted average of the standard deviations of the individual securities held in
the portfolio.
B. can never be less than the standard deviation of the most risky security in the
portfolio.
C. must be equal to or greater than the lowest standard deviation of any single security
held in the portfolio.
D. is an arithmetic average of the standard deviations of the individual securities which
comprise the portfolio.
E. can be less than the standard deviation of the least risky security in the portfolio.
Today, you earn a salary of $36,000. What will be your annual salary twelve years from
now if you earn annual raises of 3.6 percent?
A. $55,032.54
B. $57,414.06
C. $58,235.24
D. $59,122.08
E. $59,360.45
Which one of the following statements is correct concerning market efficiency?
A. Real asset markets are more efficient than financial markets.
B. If a market is efficient, arbitrage opportunities should be common.
C. In an efficient market, some market participants will have an advantage over others.
D. A firm will generally receive a fair price when it issues new shares of stock.
E. New information will gradually be reflected in a stock’s price to avoid any sudden
change in the price of the stock.
Check kiting is:
A. used by most firms as an ethical means of handling its cash reserves.
B. the process of withdrawing all funds from a bank account as soon as the funds are
available.
C. the central core of a good cash management system.
D. using uncollected cash to invest in short-term, liquid assets.
E. increasingly popular due to recent banking law changes.
The yield to maturity on a bond is currently 8.46 percent. The real rate of return is 3.22
percent. What is the rate of inflation?
A. 5.08 percent
B. 5.64 percent
C. 6.24 percent
D. 6.53 percent
E. 6.71 percent
Your average customer is located 4.3 mailing days away from your firm. You have
determined that, on average, it is taking your staff 1.5 days to process payments
received from customers. In addition, it takes an average of 2.2 days for your funds to
be available for use once you have made your bank deposit. What is your firm’s
collection time?
A. 2.2 days
B. 3.7 days
C. 4.3 days
D. 5.8 days
E. 8.0 days
On the day you entered college you borrowed $25,000 from your local bank. The terms
of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal
is due in full one year after you graduate. Interest is to be paid annually at the end of
each year. Assume that you complete college in four years. How much total interest will
you pay on this loan?
A. $5,266.67
B. $5,400.00
C. $5,937.50
D. $6,529.00
E. $6,607.11
Which of the following defines a note?
I. secured
II. unsecured
III. maturity less than 10 years
IV. maturity in excess of 10 years
A. III only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only
South Shore Limited has 21,000 shares of stock outstanding with a par value of $1 per
share and a market price of $7.50 a share. The firm just announced a 5-for-2 stock split.
What will the par value of the stock be after the split?
A. $0.40
B. $0.80
C. $1.00
D. $1.40
E. $1.60
Hungry Howie’s maintains a constant payout ratio. The firm is currently operating at
full capacity. What is the maximum rate at which the firm can grow without acquiring
any additional external financing?
A. 9.74 percent
B. 10.52 percent
C. 11.06 percent
D. 11.58 percent
E. 12.23 percent
What is the standard deviation of the returns on a portfolio that is invested in stocks A,
B, and C? Twenty five percent of the portfolio is invested in stock A and 40 percent is
invested in stock C.
A. 6.31 percent
B. 6.49 percent
C. 7.40 percent
D. 7.83 percent
E. 8.72 percent
Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a month at a
price of $469 each. The variable cost per unit is $305 and the monthly interest rate is
1.7 percent. Based on a recent survey, the firm believes it can sell an additional 36 units
per month if it offers a net 30 credit policy. What is the net present value of the switch
using the one-shot approach?
A. $212,806
B. $231,543
C. $235,479
D. $248,946
E. $251,118
Seaweed Mfg., Inc. is currently operating at only 86 percent of fixed asset capacity.
Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to
$664,000. What amount must be spent on new fixed assets to support this growth in
sales?
A. $0
B. $22,654
C. $46,319
D. $79,408
E. $93,608
What is the amount of the excess return on a U.S. Treasury bill if the risk-free rate is 2.8
percent and the market rate of return is 8.35 percent?
A. 0.00 percent
B. 2.80 percent
C. 5.55 percent
D. 8.35 percent
E. 11.15 percent
A group of five private investors recently loaned $6 million to Henderson Hardware for
ten years at 9 percent interest. This loan is best described as a:
A. private placement.
B. debt SEO.
C. notes payable.
D. debt IPO.
E. term loan.
The Snow Hut has analyzed the carrying and shortage costs associated with its cash
holdings and determined that the firm should ideally maintain a cash balance of $3,600.
This $3,600 represents which one of the following to the firm?
A. target cash balance
B. concentration balance
C. available balance
D. selected cash amount
E. compensating balance
Diets For You announced today that it will begin paying annual dividends next year.
The first dividend will be $0.12 a share. The following dividends will be $0.15, $0.20,
$0.50, and $0.60 a share annually for the following 4 years, respectively. After that,
dividends are projected to increase by 4 percent per year. How much are you willing to
pay to buy one share of this stock today if your desired rate of return is 8.5 percent?
A. $9.67
B. $9.94
C. $10.38
D. $10.50
E. $10.86
The common stock of Pierson Enterprises has historically had a high dividend yield and
is expected to continue to do so. As a result, the majority of its shareholders are
individuals and entities that are seeking a regular source of cash income. Most of these
shareholders pay either no taxes or a relatively low amount of taxes. The fact that most
of these shareholders have similar characteristics is referred to by which one of the
following terms?
A. information content effect
B. clientele effect
C. efficient markets hypothesis
D. distribution effect
E. market reaction effect
Which one of the following statements is correct?
A. Firms prefer to cut dividend payments rather than borrow money to fund a short-
term cash need.
B. Share repurchases tend to increase agency costs.
C. Maintaining a steady dividend is a key goal of most dividend-paying firms.
D. Tax rates are the key factor in determining a firm’s dividend policy.
E. Stock prices tend to ignore expected changes in dividend payments.
What is the probability that small-company stocks will produce an annual return that is
more than one standard deviation below the average?
A. 1.0 percent
B. 2.5 percent
C. 5.0 percent
D. 16 percent
E. 32 percent
Which two of the following are the key considerations for a seller who is establishing
the length of the credit period being offered to a customer?
I. seller’s operating cycle
II. customer’s operating cycle
III. seller’s inventory period
IV. customer’s inventory period
A. I and II
B. II and III
C. III and IV
D. II and IV
E. I and IV
The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2009:
The accounts receivable balance at the end of the previous quarter was $45,000
($32,000 of which was uncollected December sales.) What is the amount of the January
collections?
A. $112,400.00
B. $112,408.16
C. $115,703.03
D. $122,356.33
E. $125,400.00
Which of the following statements related to financial risk are correct?
I. Financial risk is the risk associated with the use of debt financing.
II. As financial risk increases so too does the cost of equity.
III. Financial risk is wholly dependent upon the financial policy of a firm.
IV. Financial risk is the risk that is inherent in a firm’s operations.
A. I and III only
B. II and IV only
C. II and III only
D. I, II, and III only
E. I, II, III, and IV
Steve, the sales manager for TL Products, wants to sponsor a one-week “Customer
Appreciation Sale” where the firm offers to sell additional units of a product at the
lowest price possible without negatively affecting the firm’s profits. Which one of the
following represents the price that should be charged for the additional units during this
sale?
A. average variable cost
B. average total cost
C. average total revenue
D. marginal revenue
E. marginal cost
Browning Enterprises currently has all fixed-rate debt. The firm would like to convert
part of this to floating-rate debt. Which one of the following will accomplish this for the
firm?
A. option on floating-rate bonds
B. forward contract on U.S. Treasury bills
C. interest rate swap
D. currency swap
E. interest rate call option
Uncovered interest parity is defined as:
A. E(St) = S0 × [1 + (hFC – hUS)]t.
B. E(St) = S0 × [1 + (RFC – RUS)]t.
C. E(St) = S0 × [1 – (RFC – RUS)]t.
D. E(St) = S0 × [1 + (RUS – RFC)]t.
E. E(St) = S0 × [1 + (RFC + RUS)]t.
Today, you can exchange $1 for 0.6211. Last week, 1 was worth $1.6104. How much
profit or loss would you now have if you had converted 100 into dollars last week?
A. loss of ₤1.57
B. loss of ₤0.39
C. loss of ₤0.07
D. profit of ₤0.02
E. profit of ₤1.59
You are paying an effective annual rate of 18.974 percent on your credit card. The
interest is compounded monthly. What is the annual percentage rate on this account?
A. 17.50 percent
B. 18.00 percent
C. 18.25 percent
D. 18.64 percent
E. 19.00 percent
Percy’s Wholesale Supply has earnings before interest and taxes of $106,000. Both the
book and the market value of debt is $170,000. The unlevered cost of equity is 15.5
percent while the pre-tax cost of debt is 8.6 percent. The tax rate is 38 percent. What is
the firm’s weighted average cost of capital?
A. 11.94 percent
B. 12.65 percent
C. 13.45 percent
D. 14.01 percent
E. 14.37 percent
Bob’s Warehouse has a pre-tax cost of debt of 8.4 percent and an unlevered cost of
capital of 14.6 percent. The firm’s tax rate is 37 percent and the cost of equity is 18
percent. What is the firm’s debt-equity ratio?
A. 0.72
B. 0.76
C. 0.79
D. 0.82
E. 0.87
The IRS will disallow any lease that:
A. has a lease term in excess of three years.
B. has a term that is less than one-half of the economic life of the asset.
C. involves a lessee that has net operating losses.
D. appears to exist solely to defer taxes.
E. reduces the combined tax obligations of the lessor and the lessee.
