Todd and Cathy created a firm that is a separate legal entity and will share ownership of
that firm on a 50-50 basis. Which type of entity did they create if they have no personal
liability for the firm’s debts?
A. Limited partnership
B. Corporation
C. Sole proprietorship
D. General partnership
E. Public company
Answer:
Brick House Cafe has a 35 percent tax rate and total taxes of $35,280. What is the value
of the interest tax shield if the interest expense is $16,700?
A. $4,887
B. $5,010
C. $5,595
D. $5,845
E. $6,023
Answer:
Which one of the following supports the theory that the value of a firm increases as the
firm’s level of debt increases?
A. M&M Proposition I, without taxes
B. M&M Proposition II, without taxes
C. M&M Proposition I, with taxes
D. Static theory of capital structure
E. No theory suggests this.
Answer:
Which of the following combinations is ensured to decrease the interest rate sensitivity
of a bond?
A. Increase in both the time to maturity and the coupon rate
B. Increase in the time to maturity and a decrease in the coupon rate
C. Decrease in both the time to maturity and the coupon rate
D. Decrease in the time to maturity and an increase in the coupon rate
E. Decrease in the time to maturity and an increase in the face value
Answer:
The accounts receivable period is the time that elapses between the _____ and the ____.
A. purchase of inventory; payment to the supplier
B. purchase of inventory; collection of the receivable
C. sale of inventory; payment to supplier
D. sale of inventory; collection of the receivable
E. sale of inventory: billing to customer
Answer:
The manager of Gloria’s Boutique has approved Carla’s application for credit. The
maximum payment that has been approved is $65 a month for 24 months. The APR is
15.7 percent. What is the maximum initial purchase that Carla can make given this
credit approval?
A. $1,288.90
B. $1,300.00
C. $1,331.42
D. $1,350.00
E. $1,428.46
Answer:
The Priceville Bull Dogs offers credit terms of 2/15, net 40 to all of its customers.
Historically, 80 percent of its customers take advantage of the discount. What is the
firm’s average collection period?
A. 17.60 days
B. 17.87 days
C. 18.20 days
D. 20.33 days
E. 21.08 days
Answer:
Western Feed Mills has projected the following quarterly sales amounts for the coming
year.
Accounts receivable at the beginning of the year are $325. Western Feed Mills has a
60-day collection period. How much cash will the firm collect in quarter 1 and quarter
2, respectively?
A. $325; $498
B. $498; $347
C. $498; $530
D. $672; $367
E. $672; $540
Answer:
Assume the total cost of a college education will be $285,000 when your child enters
college in 22 years. You presently have $35,000 to invest. What annual rate of interest
must you earn on your investment to cover the cost of your child’s college education?
A. 8.65 percent
B. 9.40 percent
C. 10.00 percent
D. 10.60 percent
E. 11.00 percent
Answer:
Eric has $4,800 that he wants to invest for 4 years. He can invest this amount at his
credit union and earn 4 percent simple interest. Or, he can open an account at Compass
Bank and earn 3.65 percent interest, compounded annually. If he decides to invest at
Copmpass Bank for 3 years, he will:
A. earn $15.02 more than if he had invested with his credit union.
B. earn $27.89 less than if he had invested with his credit union.
C. earn the same amount as if he had invested with the credit union.
D. have a total balance of $4,992 in his account after one year.
E. have a total balance of $4,876 in his account after one year.
Answer:
Delmont Movers has a profit margin of 6.2 percent and net income of $48,900. What is
the common-size percentage for the cost of goods sold if that expense amounted to
$379,000 for the year?
A. 12.90 percent
B. 23.50 percent
C. 33.25 percent
D. 41.06 percent
E. 48.05 percent
Answer:
Which one of the following is the correct formula for the future value of $500 invested
today at 7 percent interest for 8 years?
A. FV = $500/[(1 + 0.08) 7]
B. FV = $500/[(1 + 0.07) 8]
C. FV = $500/(0.07 8)
D. FV = $500 (1 + 0.07)8
E. FV = $500 (1 + 0.08)7
Answer:
Scenario analysis asks questions such as:
A. How will changing the number of units sold affect the outcome of this project?
B. What is the best outcome that should reasonably be expected?
C. How much will a $1 increase in the variable cost per unit change the net present
value?
D. Will the net present value increase or decrease if the quantity sold increases by 100
units?
E. How will the operating cash flow change if the depreciation method is changed?
Answer:
You are given the following exchange rates for the Canadian dollar versus the U.S.
dollar:
Which one of the following statements is correct given this information?
A. Last week, it took Can$0.8078 to purchase US$1.
B. This week you can exchange one Canadian dollar for $1.2376 American.
C. It is cheaper for an American to travel in Canada this week as compared to last week.
D. The Canadian dollar depreciated from last week to this week.
E. You would have made a profit if you invested U.S. $100 in Canadian dollars last
week and then converted your money back to U.S. dollars this week. Ignore any interest
earnings.
Answer:
Which one of the following is the agreed-upon exchange rate that is to be used when
currencies are exchanged at some point in the future based on an agreement made
today?
A. Spot rate
B. ADR rate
C. London Interbank Offer Rate
D. Forward exchange rate
E. Cross-rate
Answer:
You recently sold an antique car you owned and valued greatly. However, you needed
money and agreed to sell the car at a price of $58,000, to be paid in monthly payments
of $1,500 each for 48 months. What interest rate did you charge for financing the sale?
A. 10.33 percent
B. 10.44 percent
C. 10.60 percent
D. 11.03 percent
E. 11.33 percent
Answer:
The Sausage Hut is looking at a new sausage system with an installed cost of $438,000.
This cost will be depreciated straight-line to zero over the project’s four-year life, at the
end of which the sausage system can be scrapped for $69,000. The sausage system will
save the firm $129,000 per year in pretax operating costs, and the system requires an
initial investment in net working capital of $29,000, which will be recouped at project
end. If the tax rate is 35 percent and the discount rate is 9 percent, what is the NPV of
this project?
A. -$18,870
B. -$6,320
C. $2,560
D. $14,410
E. $26,880
Answer:
You purchased 1,500 shares of KFC stock five years ago and have earned annual
returns of 7.1 percent, 11.2 percent, 5.25 percent, -4.7 percent, and 11.8 percent,
respectively. What is your arithmetic average return?
A. 4.47 percent
B. 6.13 percent
C. 6.23 percent
D. 6.47 percent
E. 8.01 percent
Answer:
As compared to a cash dividend, a share repurchase will do which of the following?
A. Increase both earnings per share and the PE ratio
B. Increase the earnings per share but not affect the PE ratio
C. Increase the earnings per share and decrease the PE ratio
D. Not affect either the earnings per share nor the PE ratio
E. Not affect the earnings per share but will decrease the PE ratio
Answer:
Carter’s Gym currently has a 189-day operating cycle. The company is concentrating on
increasing its inventory turnover rate from 8.4 to 9.5 times. What will the firm’s new
operating cycle be if it can effectively make this change?
A. 183.97 days
B. 183.46 days
C. 187.00 days
D. 194.03 days
E. 196.34 days
Answer:
Slaughter Industries just signed a sales contract with a new customer. What is this
contract worth as of the end of year 4 if the following payments will be received and the
firm earns 6 percent on its savings?
A. $397,425.35
B. $402,311.19
C. $466,118.00
D. $485,271.13
E. $489,512.14
Answer: