Which one of the following is an unintended result of the Sarbanes-Oxley Act?
A. more detailed and accurate financial reporting
B. increased management awareness of internal controls
C. corporations delisting from major exchanges
D. increased responsibility for corporate officers
E. identification of internal control weaknesses
Answer:
What is a prospectus?
A. a letter issued by the SEC authorizing a new issue of securities
B. a report stating that the SEC recommends a new security to investors
C. a letter issued by the SEC that outlines the changes required for a registration
statement to be approved
D. a document that describes the details of a proposed security offering along with
relevant information about the issuer
E. an advertisement in a financial newspaper that describes a security offering
Answer:
You are considering implementing a lockbox system for your firm. The system is
expected to reduce the average collection time by 1.2 days. On an average day, your
firm receives 320 checks with an average value of $99 each. The daily interest rate on
Treasury bills is 0.014 percent. What is the anticipated amount of the daily savings if
this system is implemented?
A. $2.61
B. $3.29
C. $4.45
D. $5.32
E. $5.78
Answer:
Your firm spends $54,000 a week to pay bills and maintains a lower cash balance limit
of $45,000. The standard deviation of your disbursements is $12,100. The applicable
interest rate is 4.5 percent and the fixed cost of transferring funds is $55. What is your
opportunity cost of holding cash based on the BAT model?
A. $1,318
B. $1,864
C. $2,204
D. $2,311
Answer:
Paper Submarine Manufacturing is investigating a lockbox system to reduce its
collection time. It has determined the following:
The total collection time will be reduced by 2 days if the lockbox system is adopted.
What is the NPV of adopting the lockbox system?
A. $600,000
B. $675,000
C. $695,000
D. $745,000
E. $795,000
Answer:
The cost of preferred stock:
A. is equal to the dividend yield.
B. is equal to the yield to maturity.
C. is highly dependent on the dividend growth rate.
D. is independent of the stock’s price.
E. decreases when tax rates increase.
Answer:
Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model
spas each year. The firm is considering adding a mid-class spa and expects that if it
does it can sell 375 of them. However, if the new spa is added, Class A sales are
expected to decline to 225 units while the Class C sales are expected to decline to 200.
The sales of the deluxe model will not be affected. Class A spas sell for an average of
$12,000 each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000
each. The new mid-range spa will sell for $8,000. What is the value of the erosion?
A. $600,000
B. $1,200,000
C. $1,800,000
D. $2,400,000
E. $3,900,000
Answer:
You want to purchase some shares of Green World stock but need a 15 percent rate of
return to compensate for the perceived risk of such ownership. What is the maximum
you are willing to spend per share to buy this stock if the company pays a constant
$0.90 annual dividend per share?
A. $5.40
B. $6.00
C. $6.90
D. $7.20
E. $7.80
Answer:
When credit policy is at the optimal point, the:
A. total costs of granting credit will be maximized.
B. carrying costs of credit will be equal to zero.
C. opportunity cost of credit will be equal to zero.
D. carrying costs will equal the opportunity costs.
E. total costs will equal the opportunity costs.
Answer:
What is the cash flow to creditors for 2011?
A. -$1,020
B. -$1,100
C. $280
D. $1,580
E. $1,760
Answer:
The Timken Company has announced a rights offer to raise $25 million for a new
journal, the Journal of Financial Excess. This journal will review potential articles after
the author pays a nonrefundable reviewing fee of $2,500 per page. The stock currently
sells for $48 per share, and there are 2.6 million shares outstanding. The subscription
price is set at $43 per share. What is the ex-rights price per share?
A. $45.58
B. $47.09
C. $48.15
D. $48.80
E. $49.42
Answer:
National Exporters deals strictly with two customers. The average amount each
customer pays per month along with the collection delay associated with each payment
is shown below. Given this information, what is the amount of the average daily
receipts? Assume that every month has 30 days.
A. $2,653.33
B. $3,006.33
C. $4,533.33
D. $7,811.67
E. $8,600.00
Answer:
The Delta Fish Hatchery factors its accounts receivables immediately at a 2 percent
discount. The average collection period is 34 days. Assume that all accounts are
collected in full. What is the effective annual interest rate on this arrangement?
A. 24.22 percent
B. 25.20 percent
C. 25.36 percent
D. 25.78 percent
E. 26.04 percent
Answer:
Amy is a current shareholder of DJ Industries. She has been given the right to purchase
an additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises
that right within the next 12 months. What is this security called that Amy has been
given?
A. convertible bond
B. warrant
C. straddle
D. spread
E. put
Answer:
Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of
9.2 percent, and a current price of $802.30. The bonds make semiannual payments.
What is the coupon rate?
A. 6.56 percent
B. 7.00 percent
C. 7.25 percent
D. 7.40 percent
E. 7.65 percent
Answer:
What is the price of a put option given the following information?
A. $13.57
B. $13.83
C. $14.80
D. $16.47
E. $17.74
Answer:
Which one of the following will decrease the operating cycle?
A. decreasing the inventory turnover rate
B. decreasing the accounts payable period
C. increasing the accounts receivable turnover rate
D. increasing the accounts payable period
E. increasing the accounts receivable period
Answer:
BL Lumber has earnings per share of $1.21. The firm’s earnings have been increasing at
an average rate of 3.1 percent annually and are expected to continue doing so. The firm
has 21,500 shares of stock outstanding at a price per share of $15.60. What is the firm’s
PEG ratio?
A. 0.48
B. 1.24
C. 2.85
D. 3.97
E. 4.16
Answer:
Over the past fifteen years, the common stock of The Flower Shoppe, Inc. has produced
an arithmetic average return of 12.2 percent and a geometric average return of 11.5
percent. What is the projected return on this stock for the next five years according to
Blume’s formula?
A. 11.70 percent
B. 11.89 percent
C. 12.00 percent
D. 12.03 percent
E. 12.12 percent
Answer:
If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays
will always:
A. remain constant at the average of the floor and cap rates.
B. remain constant at the floor rate.
C. remain constant at the cap rate.
D. be higher than, or equal to, the cap but lower than, or equal to, the floor.
E. be higher than, or equal to, the floor but lower than, or equal to, the cap.
Answer:
The incremental investment in receivables under the accounts receivable approach is
equal to:
A. P – vQ.
B. PQ.
C. PQ + v(Q – Q).
D. P(Q – Q).
E. PQ(Q – Q).
Answer:
All of the following are related to a proposed project. Which of these should be
included in the cash flow at time zero?
I. purchase of $1,400 of parts inventory needed to support the project
II. loan of $125,000 used to finance the project
III. depreciation tax shield of $1,100
IV. $6,500 of equipment needed to commence the project
A. I and II only
B. I and IV only
C. II and IV only
D. I, II, and IV only
E. I, II, III, and IV
Answer:
The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63 percent of
sales. The beginning accounts receivable balance is $41,000 and the ending accounts
receivable balance is $38,000. How long on average does it take the firm to collect its
receivables?
A. 17.26 days
B. 17.78 days
C. 18.58 days
D. 20.44 days
E. 29.77 days
Answer:
Which one of the following grants its owner the right to buy or to sell an asset at a
prespecified price at any time during a stated period?
A. option
B. forward contract
C. futures contract
D. swap
E. intrinsic contract
Answer:
Two IPOs will commence trading next week. Scott places an order to buy 300 shares of
IPO A. Steve places an order to purchase 300 shares of IPO A and 300 shares of IPO B.
Both IPOs are priced at $20 a share. Scott is allocated 100 shares of IPO A. Steve is
allocated 100 shares of IPO A and 300 shares of IPO B. At the end of the first day of
trading, IPO A is selling for $22.70 a share and IPO B is selling for $18.60 a share.
What is the difference in the total profits or losses that Scott and Steve have as of the
end of the first day of trading?
A. $120
B. $240
C. $360
D. $420
E. $580
Answer:
Stacy purchased a stock last year and sold it today for $3 a share more than her
purchase price. She received a total of $0.75 in dividends. Which one of the following
statements is correct in relation to this investment?
A. The dividend yield is expressed as a percentage of the selling price.
B. The capital gain would have been less had Stacy not received the dividends.
C. The total dollar return per share is $3.
D. The capital gains yield is positive.
E. The dividend yield is greater than the capital gains yield.
Answer:
The cost of equity for a firm:
A. tends to remain static for firms with increasing levels of risk.
B. increases as the unsystematic risk of the firm increases.
C. ignores the firm’s risks when that cost is based on the dividend growth model.
D. equals the risk-free rate plus the market risk premium.
E. equals the firm’s pretax weighted average cost of capital.
Answer:
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
Answer:
Which one of the following statements related to unexpected returns is correct?
A. All announcements by a firm affect that firm’s unexpected returns.
B. Unexpected returns over time have a negative effect on the total return of a firm.
C. Unexpected returns are relatively predictable in the short-term.
D. Unexpected returns generally cause the actual return to vary significantly from the
expected return over the long-term.
E. Unexpected returns can be either positive or negative in the short term but tend to be
zero over the long-term.
Answer:
You sold ten put contracts on Cross Town Bank stock at an option price per share of
$0.85. The options have an exercise price of $39 per share. The options were exercised
today when the stock price was $34 a share. What is your net profit or loss on this
investment assuming that you closed out your positions at a stock price of $34? Ignore
transaction costs and taxes.
A. -$4,500
B. -$4,150
C. $1,800
D. $850
E. $3,500
Answer:
Which of the following individuals have unlimited liability based on their ownership
interest?
I. general partner
II. sole proprietor
III. stockholder
IV. limited partner
A. II only
B. I and II only
C. II and IV only
D. I, II, and III only
E. I, II, and IV only
Answer:
The real rate of return on a stock is approximately equal to the nominal rate of return:
A. multiplied by (1 + inflation rate).
B. plus the inflation rate.
C. minus the inflation rate.
D. divided by (1 + inflation rate).
E. divided by (1 – inflation rate).
Answer:
You are considering two lottery payment options: Option A pays $10,000 today and
Option B pays $20,000 at the end of ten years. Assume you can earn 6 percent on your
savings. Which option will you choose if you base your decision on present values?
Which option will you choose if you base your decision on future values? Explain why
your answers are either the same or different.
Answer:
Assume you are a credit manager in charge of approving commercial loans to business
firms. Identify three aspects of a firm’s cash flows you would review and explain the
type of information you hope to gain from reviewing each of those five aspects.
Answer:
The profitability index (PI) of a project is 1.0. What do you know about the project’s net
present value (NPV) and its internal rate of return (IRR)?
Answer:
What are the upper and lower bounds for an American call option? Explain what would
happen in each case if the bound was violated.
Answer:
Identify some real-world factors which might make it more difficult for an individual to
effectively create a homemade dividend policy.
Answer:
What is the relationship between the value of the dollar and the value of the euro in
relation to the rate of inflation in the United States?
Answer:
Explain why a low-priced, low trading volume stock is more apt to present limits to
arbitrage than is a high-priced, high trading volume stock.
Answer:
Explain the meaning of the dividend clientele effect and why it is important.
Answer:
Assume you are the financial officer of a major firm. The president of the firm has just
stated that she wishes to reduce the firm’s investment in current assets since those assets
provide little, if any, return to the firm. How would you respond to this statement?
Answer:
Explain why there is a tendency for IPOs to be underpriced.
Answer:
Assume a firm sets its bid price for a project at the minimum level as computed using
the discounted cash flow method. Given this, what do you know about the net present
value and the internal rate of return on the project as bid?
Answer:
In general, what does a high Tobin’s Q value indicate and how reliable does that value
tend to be?
Answer:
You want to deposit sufficient money today into a savings account so that you will have
$1,000 in the account three years from today. Explain why you could deposit less
money today if you could earn 3.5 percent interest rather than 3 percent interest.
Answer:
Explain how a firm loses value during the bankruptcy process from both a creditors and
a shareholders perspective.
Answer:
Explain how the slope of the security market line is determined and why every stock
that is correctly priced, according to CAPM, will lie on this line.
Answer:
Give some examples of ways in which manager’s goals can differ from those of
shareholders.
Answer:
Stock repurchase programs appear to becoming more popular with business firms.
Explain the appeal of these programs as compared to that of cash dividend programs
from the stock issuer’s point of view.
Answer:
Explain the differences and similarities between net present value (NPV) and the
profitability index.
Answer:
Explain how the unethical use of uncollected funds has been impacted by the growth of
on-line retailing and banking.
Answer:
Shawn earned an average return of 14.6 percent on his investments over the past 20
years while the S&P 500, a measure of the overall market, only returned an average of
13.9 percent. Explain how this can occur if the stock market is efficient.
Answer: