On June 22, Roy’s Welding Shop purchased $2,618 worth of goods. The terms of the
sale were 2/15, net 45. What is the effective annual rate of interest for the credit period
for this sale?
A. 27.86 percent
B. 31.38 percent
C. 29.42 percent
D. 25.73 percent
E. 28.63 percent
The Kids’ Mart has a market-to-book ratio of 3.3, net income of $87,100, a book value
per share of $18.50, and 7,500 shares of stock outstanding. What is the price-earnings
ratio?
A. 4.34
B. 8.16
C. 5.61
D. 6.25
E. 5.26
D’s Hardware’s monthly purchases are equal to 72 percent of the following month’s
sales. The accounts payable period for purchases is 45 days. All other expenses are paid
when incurred. Assume each month has 30 days. The company has compiled the
following information:
What is the projected amount of disbursements for the month of September?
A. $16,910
B. $19,708
C. $19,490
D. $17,356
E. $20,311
Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you
willing to pay for one share if you require a rate of return of 14.6 percent?
A. $14.72
B. $9.52
C. $2.52
D. $1.59
E. $11.87
Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is
referred to as the:
A. true value.
B. future value.
C. present value.
D. discounted value.
E. complex value.
Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture
of debt and equity is referred to as the firm’s:
A. capital structure.
B. capital budget.
C. asset allocation.
D. working capital.
E. risk structure.
Which one of the following terms is defined as an underwriting for which the
underwriters assume full responsibility for any unsold shares?
A. Initial public offering
B. Best efforts underwriting
C. Firm commitment underwriting
D. Rights offer
E. Private placement
Lester’s is a globally diverse company with multiple divisions and a cost of capital of
15.8 percent. Med, Inc., is a specialty firm in the medical equipment field with a cost of
capital of 13.7 percent. With the aging of America, both firms recognize the
opportunities that exist in the medical field and are considering expansion in this area.
At present, there is an opportunity for multiple firms to be involved in a new medical
devices project. Each project will require an initial investment of $8.4 million with
annual returns of $2.2 million per year for seven years. Which company(ies), if either,
should become involved in the new projects?
A. Lester’s only
B. Med, Inc., only
C. Both Lester’s and Med, Inc.
D. Neither Lester’s nor Med, Inc.
E. The answer cannot be determined based on the information provided.
Assume the securities markets are strong form efficient. Given this assumption, you
should expect which one of the following to occur?
A. The risk premium on any security in that market will be zero.
B. The price of any one security in that market will remain constant at its current level.
C. Each security in the market will have an annual rate of return equal to the risk-free
rate.
D. The price of each security in that market will frequently fluctuate.
E. The prices of each security will fall to zero because the net present value of the
investments will be zero.
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last
year, the government changed the emission requirements and this furnace cannot meet
those standards. Thus, the company can no longer use the furnace, nor has it been able
to locate anyone willing to purchase the furnace. Given the current situation, the
furnace is best described as which type of cost?
A. Erosion
B. Book
C. Sunk
D. Market
E. Opportunity
Dairy Delight wants to raise $1.4 million by selling 15-year coupon bonds at par.
Comparable bonds in the market have a coupon rate of 5.4 percent, semiannual
payments, 15 years to maturity, and are selling at 97.8 percent of par. What coupon rate
should Dairy Delight set on its bonds?
A. 5.25 percent
B. 5.40 percent
C. 5.50 percent
D. 5.17 percent
E. 5.62 percent
Which one of the following is probably the most effective means of increasing
investors’ interest in an IPO?
A. Extending the lockup period
B. Issuing the IPO through a rights offering
C. Underpricing the IPO
D. Eliminating the quiet period
E. Eliminating the Green Shoe option
Given the following information for Electric Transport, find the WACC. Assume the
company’s tax rate is 35 percent.
Debt:8,100, 6.9 percent coupon bonds outstanding. $1,000 par value, 17 years to
maturity, selling for 101 percent of par, the bonds make semiannual payments.
Common stock: 175,000 shares outstanding, selling for $77 per share, beta is 1.32.
Preferred stock:9,000 shares of $7.50 preferred stock outstanding, currently selling for
$73 per share.
Market: 7.9 percent market risk premium and 3.6 percent risk-free rate.
A. 10.4 percent
B. 12.0 percent
C. 12.4 percent
D. 11.1 percent
E. 9.8 percent
Which one of the following is used as the pretax cost of debt?
A. Average coupon rate on the firm’s outstanding bonds
B. Coupon rate on the firm’s latest bond issue
C. Weighted average yield to maturity on the firm’s outstanding debt
D. Average current yield on the firm’s outstanding debt
E. Annual interest divided by the market price per bond for the latest bond issue
You have just agreed to a forward trade that will be settled six months from now. When
is the exchange rate for this transaction determined?
A. Today
B. Three months from today because that is the halfway point
C. Anytime you prefer within the next six months
D. Whenever the spot rate six months from today is known
E. Six months from now
P&M Industries has projected quarterly sales for the coming year, starting with Quarter
1, of $6,200, $6,500, $6,300, and $6,700, respectively. Sales in the year following this
one are projected to be 4 percent greater in each quarter. Assume the company places
orders during each quarter equal to 74 percent of projected sales for the next quarter.
How much will the firm pay its suppliers in Q3 if the firm has a 30-day payables
period?
A. $4,859.33
B. $4,826.67
C. $4,603.18
D. $4,890.22
E. $4,711.46
The beta of a risky portfolio cannot be less than _____ nor greater than ____.
A. 0; 1
B. 1; the market beta
C. the lowest individual beta in the portfolio; market beta
D. the market beta; the highest individual beta in the portfolio
E. the lowest individual beta in the portfolio; the highest individual beta in the portfolio
Mary has just been asked to analyze an investment to determine if it is acceptable.
Unfortunately, she is not being given sufficient time to analyze the project using various
methods. She must select one method of analysis and provide an answer based solely on
that method. Which method do you suggest she use in this situation?
A. Internal rate of return
B. Payback
C. Average accounting rate of return
D. Net present value
E. Profitability index
The profitability index reflects the value created per dollar:
A. invested.
B. of sales.
C. of net income.
D. of taxable income.
E. of shareholders’ equity.
Which one of the following forms of business organization offers liability protection to
some of its owners but not to all of its owners?
A. Sole proprietorship
B. General partnership
C. Limited partnership
D. Limited liability company
E. Corporation
Which one of these is correct?
A. Depreciation has no effect on taxes.
B. Interest paid is a noncash item.
C. Taxable income must be a positive value.
D. Net income is distributed either to dividends or retained earnings.
E. Taxable income equals net income × (1 + Average tax rate).
Green Tea House has a tax rate of 35 percent and an interest tax shield valued at $8,046
for the year. How much did the firm pay in annual interest?
A. $2,816.10
B. $2,304.11
C. $23,468.09
D. $21,107.99
E. $22,988.57
Which one of the following is the best universal definition of an exchange rate?
A. Price of one country’s currency expressed in terms of another country’s currency
B. Number of foreign dollars that can be purchased for every one U.S. dollar paid
C. Price of a country’s currency expressed in terms of that country’s currency unit
D. Number of units of a currency that were originally required to obtain one euro when
a country adopted the euro as its official currency
E. Price that must be paid to obtain a good or service from another country
The common stock of Contemporary Interiors has a beta of 1.13 and a standard
deviation of 21.4 percent. The market rate of return is 12.7 percent and the risk-free rate
is 4.1 percent. What is the cost of equity for this firm?
A. 13.82 percent
B. 11.76 percent
C. 12.08 percent
D. 14.40 percent
E. 13.05 percent
As of this morning, a firm had a ledger balance of $684 with no outstanding deposits or
checks. Today, the firm deposited six checks in the amount of $49 each and wrote a
check in the amount of $283. What is the amount of the collection float as of the end of
the day assuming none of these checks had cleared?
A. $11
B. $474
C. $283
D. $294
E. $978
The operating cycle:
A. illustrates the sources and uses of cash.
B. is equal to the cash cycle plus the accounts receivable period.
C. begins when a product is sold to a customer.
D. is based on a 360-day year.
E. describes how a product moves through the current asset accounts.
On April 14, McCallister’s purchased $7,800 worth of inventory. The terms of sale were
2/10, net 30. The implicit interest is _____ and the effective annual rate is _____
percent.
A. $200; 14.95
B. $156; 44.59
C. $400; 14.95
D. $400; 27.38
E. $400; 44.59
Bob’s is a retail chain of specialty hardware stores. The firm has 18,000 shares of stock
outstanding that are currently valued at $82 a share and provide a rate of return of 13.2
percent. The firm also has 600 bonds outstanding that have a face value of $1,000, a
market price of $1,032, and a coupon rate of 7 percent. These bonds mature in 7 years
and pay interest semiannually. The tax rate is 35percent. The firm is considering
expanding by building a new superstore. The superstore will require an initial
investment of $9.3 million and is expected to produce cash inflows of $1.07 million
annually over its 10-year life. The risks associated with the superstore are comparable
to the risks of the firm’s current operations. The initial investment will be depreciated
on a straight line basis to a zero book value over the life of the project. At the end of the
10 years, the firm expects to sell the superstore for an aftertax value of $4.7 million.
Should the firm accept or reject the superstore project and why?
A. Accept; The project’s NPV is $1.27 million.
B. Accept; The NPV is $4.89 million.
C. Reject; The NPV is $1.06 million.
D. Reject; The NPV -$1.15 million.
E. Reject; The NPV is -$5.71 million.
Textiles Unlimited has gathered projected cash flows for two projects. At what interest
rate would the company be indifferent between the two projects? Which project is better
if the required return is 12 percent?
A. 11.76 percent; A
B. 12.49 percent; A
C. 12.49 percent; B
D. -4.44 percent; A
E. -4.44 percent; B
Palm Beach Yachts has a line of credit with a local bank that permits it to borrow up to
$1.8 million at any time. The interest rate is .78 percent per month. The bank charges
compound interest and also requires that 5 percent of the amount borrowed be deposited
into a non-interest-bearing account. What is the effective annual interest rate on this
loan?
A. 10.68 percent
B. 10.43 percent
C. 9.74 percent
D. 10.29 percent
E. 9.91 percent
Which of these is a speculative motive for holding cash?
A. Buying extra inventory because a key supplier offered a special one-time discount
B. Paying a $100 bonus to all employees at year-end
C. Paying the annual insurance premium on the firm’s assets
D. Needing to purchase a new delivery truck because the old one was totally destroyed
in an accident
E. Contributing $1,000 to help fund medical care for an uninsured neighbor
The shareholders of Weil’s Markets would benefit if the firm were to be acquired by
Better Foods. However, Weil’s board of directors rejects the acquisition offer. This is an
example of:
A. a corporate takeover.
B. a capital structure issue.
C. a working capital decision.
D. an agency conflict.
E. a compensation issue.