The Motor Plant wants to raise $21.4 million through a rights offering so it can
modernize its facilities. The subscription price for the offering is set at $11 a share.
Currently, the company has 2.6 million shares of stock outstanding at a market price of
$12.50 a share. Each shareholder will receive one right for each share of stock they
own. How many rights will a shareholder need to purchase one new share of stock in
this offering?
A. 1.34 rights
B. 1.52 rights
C. 1.55 rights
D. 1.60 rights
E. 1.67 rights
Answer:
Beginning three months from now, you want to be able to withdraw $1,700 each quarter
from your bank account to cover college expenses over the next 4 years. The account
pays 1.25 percent interest per quarter. How much do you need to have in your account
today to meet your expense needs over the next 4 years?
A. $24,514.50
B. $24,847.15
C. $25,068.00
D. $25,454.09
E. $25,711.18
Answer:
Your friend is the owner of a stock which had returns of 25 percent, -36 percent, 1
percent, and 16 percent for the past four years. Your friend thinks the stock may be able
to achieve a return of 50 percent or more in a single year. Based on these returns, what
is the probability that your friend is correct?
A. less than 0.5 percent
B. greater than 0.5 percent but less than 1.0 percent
C. greater than 1.0 percent but less than 2.5 percent
D. greater than 2.5 percent but less than 16 percent
E. greater than 16.0 percent
Answer:
The party who owns a leased asset is called the:
A. lessee.
B. lessor.
C. guarantor.
D. trustee.
E. manager.
Answer:
Which one of these is most apt to be a fixed cost?
A. raw materials
B. manufacturing wages
C. management bonuses
D. office salaries
E. shipping and freight
Answer:
The capital structure weights used in computing the weighted average cost of capital:
A. are based on the book values of total debt and total equity.
B. are based on the market value of the firm’s debt and equity securities.
C. are computed using the book value of the long-term debt and the book value of
equity.
D. remain constant over time unless the firm issues new securities.
E. are restricted to the firm’s debt and common stock.
Answer:
Which one of the following is defined as the sales level that corresponds to a zero
NPV?
A. accounting break-even
B. leveraged break-even
C. marginal break-even
D. cash break-even
E. financial break-even
Answer:
Precise Machinery is analyzing a proposed project. The company expects to sell 2,100
units, give or take 5 percent. The expected variable cost per unit is $260 and the
expected fixed costs are $589,000. Cost estimates are considered accurate within a plus
or minus 4 percent range. The depreciation expense is $129,000. The sales price is
estimated at $750 per unit, give or take 2 percent. What is the contribution margin per
unit under the best case scenario?
A. $209.52
B. $494.60
C. $469.52
D. $490.00
E. $515.40
Answer:
Which one of the following earned the highest risk premium over the period
1926-2010?
A. long-term corporate bonds
B. U.S. Treasury bills
C. small-company stocks
D. large-company stocks
E. long-term government bonds
Answer:
Which form of business structure is most associated with agency problems?
A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company
Answer:
You own 2,200 shares of Deltona Hardware. The company has stated that it plans on
issuing a dividend of $0.42 a share at the end of this year and then issuing a final
liquidating dividend of $2.90 a share at the end of next year. Your required rate of return
on this security is 16 percent. Ignoring taxes, what is the value of one share of this stock
to you today?
A. $2.30
B. $2.43
C. $2.52
D. $2.92
E. $3.32
Answer:
The Peace River Corporation has 62,000 shares of stock outstanding at a market price
of $48 a share. The company has just announced a 3-for-2 stock split. How many shares
of stock will be outstanding after the split?
A. 41,333 shares
B. 54,333 shares
C. 89,333 shares
D. 93,000 shares
E. 100,500 shares
Answer:
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
Answer:
You are working on a bid to build two apartment buildings a year for the next 5 years
for a local college. This project requires the purchase of $750,000 of equipment that
will be depreciated using straight-line depreciation to a zero book value over the
project’s life. The equipment can be sold at the end of the project for $325,000. You will
also need $140,000 in net working capital over the life of the project. The fixed costs
will be $628,000 a year and the variable costs will be $1,298,000 per building. Your
required rate of return is 14.5 percent for this project and your tax rate is 35 percent.
What is the minimal amount, rounded to the nearest $100, you should bid per building?
A. $1,423,700
B. $1,489,500
C. $1,733,000
D. $2,780,600
E. $3,465,900
Answer:
The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of
$365,000, and a profit margin of 4.80 percent. What is the return on assets?
A. 5.74 percent
B. 6.48 percent
C. 7.02 percent
D. 7.78 percent
E. 9.79 percent
Answer:
Consider the following two mutually exclusive projects:
What is the crossover rate for these two projects?
A. 8.22 percent
B. 8.48 percent
C. 8.71 percent
D. 8.75 percent
E. 8.94 percent
Answer:
You are scheduled to receive annual payments of $5,100 for each of the next 7 years.
The discount rate is 10 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. $2,483
B. $2,513
C. $2,721
D. $2,727
E. $2,804
Answer:
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
Answer:
Preston Milled Products currently sells a product with a variable cost per unit of $21
and a unit selling price of $40. At the present time, the firm only sells on a cash basis
with monthly sales of 2,800 units. The monthly interest rate is 0.5 percent. What is the
switch break-even point if the firm switched to a net 30 credit policy? Assume the
selling price per unit and the variable costs per unit remain constant.
A. 2,830 units
B. 2,910 units
C. 3,333 units
D. 3,414 units
E. 3,526 units
Answer:
Suzie is a chemist who has been experimenting with fragrances in her home laboratory
and feels that she now has three viable perfumes that could be successfully marketed.
She knows a venture capitalist who has offered to finance her business to the point
where she would be ready to begin the manufacturing and marketing stage. Which type
of financing is Suzie being offered?
A. syndicate
B. introduction
C. second-stage
D. mezzanine-level
E. seed money
Answer:
Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate
for all proposed projects. Each division is in a separate line of business and each
presents risks unique to those lines. Given this, a division within the firm will tend to:
A. receive less project funding if its line of business is riskier than that of the other
divisions.
B. avoid risky projects so it can receive more project funding.
C. become less risky over time based on the projects that are accepted.
D. have equal probability of receiving funding as compared to the other divisions.
E. prefer higher risk projects over lower risk projects.
Answer:
A rights offering in which an underwriting syndicate agrees to purchase the
unsubscribed portion of an issue is called a _____ underwriting.
A. standby
B. best efforts
C. firm commitment
D. direct fee
E. tombstone
Answer:
Jemisen’s has expected earnings before interest and taxes of $6,200. Its unlevered cost
of capital is 14 percent and its tax rate is 34 percent. The firm has debt with both a book
and a face value of $2,500. This debt has a 9 percent coupon and pays interest annually.
What is the firm’s weighted average cost of capital?
A. 12.48 percent
B. 13.60 percent
C. 13.87 percent
D. 14.14 percent
E. 14.37 percent
Answer:
Which one of the following statements concerning scenario analysis is correct?
A. The pessimistic case scenario determines the maximum loss, in current dollars, that a
firm could possibly incur from a given project.
B. Scenario analysis defines the entire range of results that could be realized from a
proposed investment project.
C. Scenario analysis determines which variable has the greatest impact on a project’s
final outcome.
D. Scenario analysis helps managers analyze various outcomes that are possible given
reasonable ranges for each of the assumptions.
E. Management is guaranteed a positive outcome for a project when the worst case
scenario produces a positive NPV.
Answer:
Merryl Enterprises currently has an operating cycle of 59 days. The firm is analyzing
some operational changes, which are expected to increase the accounts receivable
period by 2 days and decrease the inventory period by 5 days. The accounts payable
turnover rate is expected to increase from 42 to 46 times per year. If all of these changes
are adopted, what will the firm’s new operating cycle be?
A. 51 days
B. 54 days
C. 56 days
D. 59 days
E. 65 days
Answer:
A firm’s net working capital and all of its expenses vary directly with sales. The firm is
operating currently at 96 percent of capacity. The firm wants no additional external
financing of any kind. Which one of the following statements related to the firm’s pro
forma statements for next year must be correct?
A. Total liabilities will remain constant at this year’s value.
B. The maximum rate of sales increase is 4 percent.
C. The firm cannot exceed its internal rate of growth.
D. The projected owners’ equity will equal this year’s ending equity balance.
E. Fixed assets must remain constant at the current level.
Answer:
The price of Dimension, Inc. stock will be either $65 or $87 at the end of the year. Call
options are available with one year to expiration. T-bills currently yield 5 percent.
Suppose the current price of Dimension stock is $70. What is the value of the call
option if the exercise price is $70 per share?
A. $6.26
B. $8.48
C. $11.58
D. $15.39
E. $17.62
Answer:
Which one of the following statements is correct concerning a portfolio beta?
A. Portfolio betas range between -1.0 and +1.0.
B. A portfolio beta is a weighted average of the betas of the individual securities
contained in the portfolio.
C. A portfolio beta cannot be computed from the betas of the individual securities
comprising the portfolio because some risk is eliminated via diversification.
D. A portfolio of U.S. Treasury bills will have a beta of +1.0.
E. The beta of a market portfolio is equal to zero.
Answer:
The Coffee Express has computed its fixed costs to be $0.34 for every cup of coffee it
sells given annual sales of 212,000 cups. The sales price is $1.49 per cup while the
variable cost per cup is $0.63. How many cups of coffee must it sell to break-even on a
cash basis?
A. 83,814
B. 96,470
C. 123,910
D. 167,630
E. 212,000
Answer:
The Taxi Co. is evaluating a project with the following cash flows:
The company uses an 8 percent interest rate on all of its projects. What is the MIRR
using the discounted approach?
A. 13.25 percent
B. 14.08 percent
C. 15.40 percent
D. 16.13 percent
E. 19.23 percent
Answer:
Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover
of 3.2, and a current ratio of 2.9. What is the cost of goods sold?
A. $980,000
B. $1,060,000
C. $1,200,000
D. $1,400,000
E. $1,560,000
Answer:
The proposition that a firm borrows up to the point where the marginal benefit of the
interest tax shield derived from increased debt is just equal to the marginal expense of
the resulting increase in financial distress costs is called:
A. the static theory of capital structure.
B. M & M Proposition I.
C. M & M Proposition II.
D. the capital asset pricing model.
E. the open markets theorem.
Answer:
Which of the following should be considered when selecting a venture capitalist?
I. level of involvement
II. past experiences
III. termination of funding
IV. financial strength
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
Answer:
The present value of the interest tax shield is expressed as:
A. (TC × D)/RA.
B. VU + (TC × D).
C. [EBIT × (TC × D)]/RU.
D. [EBIT × (TC × D)]/RA.
E. Tc × D.
Answer: