1) The Green House has a profit margin of 5.6 percent on sales of $311,200. The firm
currently has 15,000 shares of stock outstanding at a market price of $11.60 per share.
What is the price-earnings ratio?
A.9.98
B.10.02
C.11.50
D.11.93
E.12.84
2) A loan that compounds interest monthly has an EAR of 15.40 percent. What is the
APR?
A.14.41 percent
B.14.58 percent
C.14.87 percent
D.14.99 percent
E.15.02 percent
3) EEG, Inc. is considering a new project that will require an initial cash investment of
$388,000. The project will produce no cash flows for the first two years. The projected
cash flows for years 3 through 7 are $69,000, $88,000, $102,000, $140,000, and
$160,000, respectively. How long will it take the firm to recover its initial investment in
this project?
A.3.81 years
B.3.98 years
C.5.57years
D.5.92 years
E.The project never pays back
4) In general, the capital structures used by non-financial U.S. firms:
A.typically result in debt-to-asset ratios between 60 and 80 percent
B.tend to converge to the same proportions of debt and equity
C.tend to be those that maximize the use of the firm’s available tax shelters
D.vary significantly across industries
E.None of the above
5) Great Lakes Shipping is an all-equity firm with anticipated earnings before interest
and taxes of $439,000 annually forever. The present cost of equity is 16.4 percent.
Currently, the firm has no debt but is considering borrowing $1.25 million at 8.5
percent interest. The tax rate is 36 percent. What is the value of the levered firm?
A.$2,163,171
B.$2,406,519
C.$2,588,547
D.$2,666,667
E.$2,818,181
6) Which one of the following is a non-cash payment made by a firm to its shareholders
and is a payment that lessens the value of each outstanding share?
A.Reverse stock split
B.Cash distribution
C.Stock dividend
D.Regular dividend
E.Liquidating dividend
7) What is the net present value of the following cash flows if the relevant discount rate
is 8.8 percent?
A.$1,482.15
B.$3,385.96
C.$23,507.19
D.$54,211.40
E.$68,278.59
8) Which one of the following will increase the cost of equity, all else held constant?
A.Increase in the dividend growth rate
B.Decrease in beta
C.Decrease in future dividends
D.Increase in stock price
E.Decrease in market risk premium
9) Martha’s Fabric House has sales of $137,200, total equity of $74,400, and a
debt-equity ratio of 0.45. What is the capital intensity ratio?
A.0.79
B.0.83
C.1.06
D.1.20
E.1.27
10) High Tower Pharmacy pays a fixed percentage of its net income out to its
shareholders in the form of annual dividends. Given this, the percent shown on a
common-size income statement for the dividend account will:
A.remain constant over time
B.be equal to the dividend amount divided by the net income
C.vary in direct relation to the net profit percentage
D.vary in direct relation to changes in the sales level
E.vary but not in direct relation to any other variable
11) What is the legal document called that is provided to potential investors and
describes a new security offering?
A.Security agreement
B.Prospectus
C.Public statement
D.Registration statement
E.Formal filing
12) Which one of the following best describes a private placement?
A.Interim financing for a new, high-risk entity
B.Long-term loan by a limited number of investors
C.Two-year direct business loan
D.3-year loan to a firm by its original founder
E.New equity issue offered to current shareholders
13) Which of the following are determinants of a firm’s sustainable rate of growth?
I. Amount of sales generated from each dollar invested in assets
II. Amount of debt per dollar of equity
III. Amount of current assets per dollar of current liabilities
IV. Percent of net income distributed as dividends
A.I and III only
B.II and IV only
C.I, II, and IV only
D.II, III, and IV only
E.I, II, III, and IV
14) The historical record for the period 1926-2008 shows that the annual nominal rate
of return on:
A.risk-free securities has averaged around 5 percent
B.the Consumer Price Index has been positive every year
C.U.S. Treasury bills have had a positive rate of return for every year in the period
D.U.S. Treasury bills is constant
E.large company stocks has averaged around 9 percent
15) Dividends are which one of the following?
A.Payable at the discretion of a firm’s president
B.Treated as a tax-deductible expense to the paying firm
C.Paid out of after tax profits
D.Paid to holders of record as of the declaration date
E.Only partially taxable to high-income individual shareholders
16) The treasurer of a major U.S. firm has $12 million to invest for 3 months. The
interest rate in the U.S. is 0.42 percent per month. The interest rate in Great Britain is
0.52 percent per month. The spot exchange rate is 0.70, and the three-month forward
rate is 0.71. Ignoring transaction costs, in which country would the treasurer want to
invest the company’s funds? Why?
A.U.S.; earn an additional $47,211.16
B.U.S.; earn an additional $135,325.24
C.U.K.; earn an additional $9,418.02
D.U.K.; earn an additional $38,522.47
E.U.K.; earn an additional $121,510.67
17) Suppose you know that a company’s stock currently sells for $65 per share and the
required return on the stock is 14 percent. You also know that the total return on the
stock is evenly divided between capital gains yield and a dividend yield. If it’s the
company’s policy to always maintain a constant growth rate in its dividends, what is the
current dividend per share?
A.$3.67
B.$4.25
C.$4.64
D.$5.01
E.$5.28
18) You are considering the following two mutually exclusive projects. The required
return on each project is 14 percent. Which project should you accept and what is the
best reason for that decision?
A.Project A; because it pays back faster
B.Project A; because it has the higher profitability index
C.Project B; because it has the higher profitability index
D.Project A; because it has the higher net present value
E.Project B; because it has the higher net present value
19) The preferred stock of Pollard’s Pools pays an annual dividend of $5.50 a share and
sells for $42 a share. The tax rate is 34 percent. What is the firm’s cost of preferred
stock?
A.12.28 percent
B.13.10 percent
C.15.07 percent
D.15.59 percent
E.16.47 percent
20) Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously
delinquent so your firm has offered to arrange a payment plan in the hopes that it might
at least collect a portion of this receivable. Your firm’s offer consists of weekly
payments for one year at an interest rate of 3 percent. What is the amount of each
payment?
A.$2,229.90
B.$2,318.11
C.$2,409.18
D.$2,599.04
E.$2,706.33
21) Capstone Crowns is considering a project that will produce cash inflows of $11,000
in year one, $24,000 in year two, and $36,000 in year three. What is the present value of
these cash inflows if the company assigns the project a discount rate of 14 percent?
A.$40,331.89
B.$46,564.28
C.$52,415.32
D.$54,868.15
E.$60,978.35
22) The variance is the average squared difference between which of the following?
A.Actual return and average return
B.Actual return and (average return/N – 1)
C.Actual return and the real return
D.Average return and the standard deviation
E.Actual return and the risk-free rate
23) The ability to delay an investment:
A.is commonly referred to as the best case scenario
B.is valuable provided there are conditions under which the investment will have a
positive net present value
C.ensures that the investment will have an expected net present value that is positive
D.offsets the need to conduct sensitivity analysis
E.is referred to as the option to abandon
24) You own a portfolio equally invested in a risk-free asset and two stocks. If one of
the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market,
what must the beta be for the other stock in your portfolio?
A.1.37
B.1.54
C.1.96
D.2.30
E.2.97
25) A stock has yielded returns of 6 percent, 11 percent, 14 percent, and -2 percent over
the past 4 years, respectively. What is the standard deviation of these returns?
A.5.52 percent
B.5.86 percent
C.6.05 percent
D.6.47 percent
E.6.99 percent
26) Figure 9.1
In March of 2011, Macklemore Corp. considered an acquisition of Blue Scholar
Learning, Inc. (BSL), a privately-held educational software firm. As a first step in
deciding what price to bid for BSL, Macklemore’s CFO, Ryan Lewis, has prepared a
five-year financial projection for the company assuming the acquisition takes place.
Use this projection and BSL’s 2010 actual financial figures to answer the questions
below.
Estimate the present value of BSL’s free cash flow (in $ millions) for the years 2011 –
2015. Macklemore’s WACC is 8.0 percent. BSL’s WACC is 11.5 percent, and the
average of the two companies’ WACCs, weighted by sales, is 8.2 percent.
A.- $1.29
B.$628.24
C.$720.58
D.$726.68
E.$743.94
27) Which of the following are effective means of aligning management goals with
shareholder interests?
I. Employee stock options
II. Threat of a takeover
III. Management bonuses tied to performance goals
IV. Threat of a proxy fight
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
28) Research conducted on firms’ dividend policies over time support which one of the
following conclusions?
A.Aggregate dividends and stock repurchases have steadily declined in real terms
B.Dividends are currently paid by the vast majority of firms
C.Managers tend to smooth dividends
D.Stock prices tend to increase whenever anticipated changes in dividends occur
E.Firms commence paying dividends prior to doing any stock repurchases
29) Franklin Oil issued 150,000 shares of stock last week. The underwriters charged a
7.5 percent spread in exchange for agreeing to a firm commitment. The legal and
accounting fees amounted to $310,000 and the company incurred $65,000 in indirect
costs. The offer price was $31 a share. Within the first hour of trading, the stock price
increased to $34 a share. What was the flotation cost as a percentage of the funds
raised?
A.20.89 percent
B.24.03 percent
C.24.47 percent
D.26.55 percent
E.29.89 percent
30) What is the net present value of the following cash flows if the relevant discount
rate is 8 percent?
A.$1,587.61
B.$2,311.92
C.$2,900.15
D.$3,248.87
E.$3,545.60
31) Which one of the following is a capital structure decision?
A.Determining the optimal inventory level
B.Establishing the preferred debt-equity level
C.Selecting new equipment to purchase
D.Setting the terms of sale for credit sales
E.Determining when suppliers should be paid
32) The spot exchange rate is the exchange rate that applies to a(n):
A.LIBOR transaction
B.ADR transaction
C.Spot trade
D.Forward trade
E.Future transaction
33) What is the IRR of the following set of cash flows?
A.12.93 percent
B.14.90 percent
C.15.81 percent
D.16.33 percent
E.17.78 percent
34) The Du Pont identity can be totally defined by which one of the following?
A.Return on equity, total asset turnover, and equity multiplier
B.Equity multiplier and return on assets
C.Profit margin and return on equity
D.Total asset turnover, profit margin, and debt-equity ratio
E.Equity multiplier, return on assets, and profit margin
35) Computer Geeks has sales of $521,000, a profit margin of 14.8 percent, a total asset
turnover rate of 2.16, and an equity multiplier of 1.30. What is the return on equity?
A.8.91 percent
B.12.67 percent
C.18.28 percent
D.32.11 percent
E.41.56 percent
36) Diamond Enterprises is considering a project that will produce cash inflows of
$238,000 a year for three years followed by $149,000 in year four. What is the internal
rate of return if the initial cost of the project is $749,000?
A.3.43 percent
B.4.29 percent
C.5.81 percent
D.6.32 percent
E.7.55 percent
37) The expected return on a security is currently based on a 22 percent chance of a 15
percent return given an economic boom and a 78 percent chance of a 12 percent return
given a normal economy. Which of the following changes will decrease the expected
return on this security?
I. an increase in the probability of an economic boom
II. a decrease in the rate of return given a normal economy
III. an increase in the probability of a normal economy
IV. an increase in the rate of return given an economic boom
A.I and II only
B.I and IV only
C.II and III only
D.I, III, and IV only
E.I, II, III, and IV
38) Marine Expeditors has three divisions. Division A is the core of the business and
represents 80 percent of the firm’s operations. Division B is involved only with
contractual short-term projects and therefore has about 8 percent less risk than division
A. Division C develops and markets new products and is about 12 percent riskier than
division A and about equal in size to division B. The manager of division A has
suggested that the operations of his division be increased by 10 percent next year. The
proposed project should probably be assigned a required return that is equal to _____
percent of the firm’s weighted average cost of capital.
A.40
B.60
C.80
D.100
E.110
39) Explain how a Dutch auction operates and why a firm might choose to sell its
securities in this manner.
40) Over the period of 1926-2008, U. S. Treasury bills had an average return of 3.8
percent while inflation averaged 3.1 percent. Based on this historical record, is it safe to
assume that an investor in U.S. Treasury bills will enjoy a positive real rate of return
each year? Why or why not?
41) As CFO of Nile Holdings, a carpet wholesaler, you have the following information
as of December 2011:
Nile has an attractive investment opportunity, and to finance it, must decide whether to
issue $100 million in new debt or new equity.
Calculate next year’s earnings per share assuming Nile raises the $100 million of new
debt.
42) Explain how the selection of a method of depreciation can affect the net present
value of an investment for a tax-paying firm.
43) Explain how taxes affect the value of a firm based on M&M Proposition I.
44) Global Importers predicted that its earnings per share for the year would be $1.86.
Today, the firm released its earnings report and the earnings per share turned out to be
$1.99 per share. In response to the earnings report, the price per share of Global
Importers stock declined by 3.4 percent. Explain how the market price can decrease
when the announced earnings were higher than the firm predicted.
45) What does it mean when a loan is amortized? Explain how amortization methods
can vary from one loan to another.
46) Assume a fellow student made these statements during a class discussion:
“Bankruptcy costs only affect a firm if the firm files a bankruptcy petition with the
court. Therefore, the static theory of capital structure only applies to bankrupt firms.”
Write a response to your fellow student that either supports or contradicts that student’s
statements.
47) Pro forma financial statements, by definition, are predictions of a company’s
financial statements at a future point in time. So, why is it important to analyze the
historical performance of the company before constructing pro forma financial
statements?
48) What are some of the pros and cons of a JIT inventory management system?