The common stock of Mill Stones has a beta that is 8 percent greater than the overall
market beta. Currently, the market risk premium is 7.65 percent while the U.S. Treasury
bill is yielding 4.3 percent. What is the cost of equity for this firm?
A. 12.76 percent
B. 11.96 percent
C. 12.91 percent
D. 12.56 percent
E. 11.85 percent
Graphic Designs has 68,000 shares of cumulative preferred stock outstanding. Preferred
shareholders are supposed to be paid $1.60 per quarter per share in dividends. However,
the firm has encountered financial problems and has not paid any dividends for the past
three quarters. How much will the firm have to pay per share of preferred next quarter if
the firm also wishes to pay a common stock dividend?
A. $3.20
B. $4.80
C. $6.40
D. $7.50
E. $1.60
According to today’s stock report, BL Lumber shares were up .14, the stock dividend
yield is 2.6 percent, and the PE ratio is 9.8. What is the amount of the next annual
dividend if yesterday’s closing price was $35.14?
A. $.918
B. $.917
C. $.914
D. $.924
E. $9.31
Kate is the CFO of a major firm and has the job of assigning discount rates to each
project under consideration. Kate’s method of doing this is to assign an incrementally
higher rate as the risk level of the project increases and a lower rate as the risk level
declines. Kate is applying the ___ approach.
A. pure play
B. divisional rating
C. subjective
D. straight WACC
E. equity rating
Assume that last year, Isaac earned 13.6 percent on his investments while U.S. Treasury
bills yielded 2.7 percent, and the inflation rate was 2.2 percent. What real rate of return
did he earn on his investments last year?
A. 11.63 percent
B. 11.15 percent
C. 13.56 percent
D. 12.24 percent
E. 10.39 percent
The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent.
Stock A has a beta of 1.1 and an expected return of 13.1 percent. Stock B has a beta of .
86 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or
why not?
A. No, Stock A is underpriced and Stock B is overpriced.
B. No, Stock A is overpriced and Stock B is underpriced.
C. No, Stock A is overpriced but Stock B is correctly priced.
D. No, Stock A is underpriced but Stock B is correctly priced.
E. No, both stocks are overpriced.
You just received a loan offer from Friendly Loans. The company is offering you
$5,000 at 9.3 percent interest. The monthly payment is only $100. If you accept this
offer, how long will it take you to pay off the loan?
A. 5.84 years
B. 5.29 years
C. 6.80 years
D. 6.33 years
E. 7.59 years
A preferred stock offers a rate of return of 5.45 percent and sells for $78.20? What is the
annual dividend amount?
A. $4.26
B. $4.09
C. $3.53
D. $4.50
E. $3.87
For the most recent year, Wilson Enterprises had sales of $689,000, cost of goods sold
of $492,300, depreciation expense of $61,200, additions to retained earnings of
$48,560, and dividends per share of $2.18. There are 12,000 shares of common stock
outstanding and the tax rate is 35 percent. What is the times interest earned ratio?
A. 5.47
B. 5.09
C. 6.59
D. 7.15
E. 3.67
All else held constant, the future value of an annuity will increase if you:
A. decrease both the interest rate and the time period.
B. increase the time period.
C. decrease the present value.
D. decrease the payment amount.
E. decrease the interest rate.
The HOT Truck operates several specialty vehicles that provide hot food and beverages
for firms that have workers employed in outlying regions. The company has annual
sales of $489,500. Cost of goods sold average 59 percent of sales and the profit margin
is 6.1 percent. The average accounts receivable balance is $41,700. On average, how
long does it take this food truck to collect payment for its services?
A. 27.84 days
B. 28.17 days
C. 31.09 days
D. 38.33 days
E. 41.90 days
If a trade is made “in the crowd,” the trade has occurred:
A. between a broker and a DMM.
B. between two brokers.
C. electronically on NASDAQ.
D. onSuperDOT.
E. on an ECN.
The 6.5 percent preferred stock of Home Town Brewers is selling for $42 a share. What
is the firm’s cost of preferred stock if the tax rate is 35 percent and the par value per
share is $100?
A. 17.50 percent
B. 15.92 percent
C. 16.17 percent
D. 16.52 percent
E. 15.48 percent
What condition must exist if a bond’s coupon rate is to equal both the bond’s current
yield and its yield to maturity? Assume the market rate of interest for this bond is
positive.
A. The clean price of the bond must equal the bond’s dirty price.
B. The bond must be a zero coupon bond and mature in exactly one year.
C. The market price must exceed the par value by the value of one year’s interest.
D. The bond must be priced at par.
E. There is no condition under which this can occur.
Today’s stock market report shows that SW Companies has a PE ratio of 9.8, a dividend
yield of 2.2 percent, a closing price $29.86, and a net change of .11. What is the annual
dividend amount?
A. $.66
B. $1.08
C. $1.13
D. $1.28
E. $1.33
Which one of the following statements is correct? Assume cash flows are conventional.
A. If the IRR exceeds the required return, the profitability index will be less than 1.0.
B. The profitability index will be greater than 1.0 when the net present value is
negative.
C. When the internal rate of return is greater than the required return, the net present
value is positive.
D. Projects with conventional cash flows have multiple internal rates of return.
E. If two projects are mutually exclusive, you should select the project with the shortest
payback period.
Laurie’s Ice Rink keeps an extra $1,000 in its checking account simply in case an
emergency arises. Which type of motive for holding cash does this represent?
A. Speculative
B. Float requirement
C. Transaction
D. Precautionary
E. Availability
Standards Life Insurance offers a perpetuity that pays annual payments of $12,000. This
contract sells for $250,000 today. What is the interest rate?
A. 4.80 percent
B. 3.87 percent
C. 4.10 percent
D. 4.21 percent
E. 4.39 percent
Kyle Electric has three positive net present value opportunities. Unfortunately, the firm
has not been able to find financing for any of these projects. Which one of the following
terms best fits the situation facing the firm?
A. Sensitivity analysis
B. Capital rationing
C. Soft rationing
D. Contingency planning
E. Sunk cost
For the past year, LP Gas, Inc., had cash flow from assets of $38,100 of which $21,500
flowed to the firm’s stockholders. The interest paid was $2,300. What is the amount of
the net new borrowing?
A. -$14,300
B. -$9,700
C. $12,300
D. $14,300
E. $18,900
Which one of the following correctly states a qualification an issuer must meet to be
qualified to use Rule 415 for shelf registration?
A. The issuer must never have defaulted on its debt.
B. The issuer must have outstanding stock with a market value in excess of $250
million.
C. The issuer must never have violated the Securities Act of 1934.
D. The issuer must have an investment grade rating.
E. The issuer cannot have defaulted on its debt within the past five years.
Unsystematic risk can be defined by all of the following except:
A. unrewarded risk.
B. diversifiable risk.
C. market risk.
D. unique risk.
E. asset-specific risk.
Which of these practices will reduce a firm’s collection float?
I. Installing a lockbox system
II. Utilizing zero-balance accounts
III. Depositing checks daily rather than weekly
IV. Reducing the processing delay by one day
A. I and III only
B. II and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
Which one of the following premiums is paid on a corporate bond due to its tax status?
A. Interest rate risk premium
B. Inflation premium
C. Liquidity premium
D. Taxability premium
E. Default risk premium
You are considering the following two mutually exclusive projects. What is the
crossover point?
A. 20.76 percent
B. 23.72 percent
C. 25.89 percent
D. 18.79 percent
E. 22.08 percent
The foreign subsidiary of a U.S. firm is profitable when profits are measured in the
foreign currency but those profits become losses when measured in U.S. dollars. This is
an example of which one of the following?
A. Interest rate disparities
B. Short-run exposure to exchange rate risk
C. Long-run exposure to exchange rate risk
D. Political risk associated with the foreign operations
E. Translation exposure to exchange rate risk
Turner Industries started a new project three months ago. Sales arising from this project
are significantly less than anticipated. Given this, which one of the following is
management most apt to implement?
A. Option to wait
B. Soft rationing
C. Option to delay
D. Option to expand
E. Option to abandon
Given the following information, what is the expected return on a portfolio that is
invested 35 percent in Stock A, 45 percent in Stock B, and the balance in Stock C?
A. 12.04 percent
B. 12.16 percent
C. 12.91 percent
D. 13.46 percent
E. 11.87 percent
A project has the following cash flows. What is the payback period?
A. 2.38 years
B. 2.49 years
C. 2.74 years
D. 3.01 years
E. 3.33 years
Given an interest rate of zero percent, the future value of a lump sum invested today
will always:
A. remain constant, regardless of the investment time period.
B. decrease if the investment time period is shortened.
C. decrease if the investment time period is lengthened.
D. be equal to $0.
E. be infinite in value.
Which one of the following will occur when the internal rate of return equals the
required return?
A. The average accounting return will equal 1.0.
B. The profitability index will equal 1.0.
C. The profitability index will equal 0.
D. The net present value will equal the initial cash outflow.
E. The profitability index will equal the average accounting return.
A project has sales of $511,800, costs of $322,400, depreciation of $22,620, interest
expense of $3,062, and a tax rate of 34 percent. What is the value of the depreciation
tax shield?
A. $7,690.80
B. $8,064.08
C. $6,652.40
D. $9,281.88
E. $10,805.39
Al’s Bakery has a checkbook balance of $1,650. A $700 deposit was made today and
will be added to the available balance tomorrow. There are two outstanding checks that
total to $623 that should clear tomorrow. There are no other outstanding items. Which
one of the following statements accurately reflects this situation?
A. The disbursement float is $1,650.
B. The firm’s current available balance is equal to $1,650 plus $700 minus $623.
C. The firm’s collection float exceeds its disbursement float.
D. The firm’s available balance is greater than its book balance.
E. The firm has a net disbursement float.