1) Future and Present Value of an Annuity Due If you start making $100 monthly
contributions today and continue them for 5 years, what’s their future value if the
compounding rate is 10 percent APR? What is the present value of this annuity?
A.$508.14, $487.74
B.$512.64, $491.80
C.$7,743.71, $4,706.53
D.$7,808.24, $4,745.78
2) Which of the following statements is correct?
A.The sales forecast is the driver for corporate financial planning
B.The addition to retained earnings is the driver for corporate financial planning
C.The debt ratio is the driver for corporate financial planning
D.None of the above
3) You are evaluating a project for your company. You estimate the sales price to be $25
per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000
units in year 3 . The project has a three-year life. Variable costs amount to $10 per unit
and fixed costs are $50,000 per year. The project requires an initial investment of
$10,000 in assets which will be depreciated straight-line to zero over the three-year
project life. The actual market value of these assets at the end of year 3 is expected to
be $1,000. NWC requirements at the beginning of each year will be approximately 10
percent of the projected sales during the coming year. The tax rate is 34 percent and the
required return on the project is 10 percent. What change in NWC occurs at the end of
year 1?
A.$1,750
B.$7,500
C.$11,550
D.$17,500
4) A stock recently paid a dividend of $2.5 per share. Its growth rate is expected to be
8%. Investors require a 10% return. The stock is selling in the market for $150. What is
this stock worth and is the stock undervalued or overvalued?
A.$125; undervalued
B.$125; overvalued
C.$135; undervalued
D.$135; overvalued
5) You have been given the following information for Corky’s Bedding Corp.:
Net sales = $15,250,000;
Cost of goods sold = $5,750,000;
Addition to retained earnings = $4,000,000;
Dividends paid to preferred and common stockholders = $995,000;
Interest expense = $1,150,000.
The firm’s tax rate is 30 percent. Calculate the depreciation expense for Corky’s
Bedding Corp.
A.$1,210,000
B.$1,970,000
C.$1,520,000
D.$1,725,000
6) Calculating Costs of Issuing Stock Your company needs to raise $4 million to finance
plant expansion. In discussions with its investment bank, you learn that the bankers
recommend a gross price of $50 per share and that 90,000 shares of stock be sold. If the
net proceeds on the stock sale leaves your company with $4 million, what is the
underwriter’s spread on the stock issue?
A.$2.78
B.$5.55
C.$44.44
D.$38.89
7) Your company has a 25% tax rate and has $600 million in assets, currently financed
entirely with equity. Equity is worth $20 per share, and book value of equity is equal to
market value of equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the possible values of
EBIT and their associated probabilities as shown below:
The firm is considering switching to a 30-percent debt capital structure, and has
determined that they would have to pay a 9 percent yield on perpetual debt in either
event. What will be the standard deviation in EPS if they switch to the proposed capital
structure?
A.0.46
B.0.49
C.0.88
D.1.16
8) When calculating the weighted average cost of capital, weights are based on
A.book values
B.book weights
C.market values
D.market betas
9) All of the following are strengths of NPV except _______________.
A.It works equally well for independent and mutually exclusive projects
B.Managers have a preference for using a statistic that is in percent instead of dollars
C.It uses a conservative reinvestment rate assumption
D.These are all strengths of the NPV statistic
10) Suppose that Wind Em Corp. currently has the balance sheet shown below, and that
sales for the year just ended were $15 million. The firm also has a profit margin of 19
percent, a retention ratio of 30 percent, and expects sales of $22 million next year. If all
assets and current liabilities are expected to grow with sales, what is the projected
increase in retained earnings?
A.$1,250,000
B.$1,240,000
C.$1,366,957.14
D.$1,840,000
11) Suppose that PAW, Inc. has a capital structure of 60 percent equity, 10 percent
preferred stock, and 30 percent debt. If the before-tax component costs of equity,
preferred stock and debt are 17.5 percent, 12 percent and 6.5 percent, respectively, what
is PAW’s WACC if the firm faces an average tax rate of 28%?
A.10.71%
B.12.00%
C.13.10%
D.13.65%
12) Suppose your firm is seeking a 5-year, amortizing $900,000 loan with annual
payments and your bank is offering you the choice between a $950,000 loan with a
$50,000 compensating balance and a $900,000 loan without a compensating balance. If
the interest rate on the $900,000 loan is 9.5 percent, how low would the interest rate on
the loan with the compensating balance have to be in order for you to choose it?
A.9.5%
B.5.56%
C.7.43%
D.not enough information is given to determine
13) Exchange Rate Risk A U.S. firm is expecting to pay cash flows of 20 million
Egyptian pounds and 25 million Qatar rials. The current spot exchange rates are: $1 =
5.829 pounds and $1 = 3.645 rials. If these cash flows are delayed one year and the
expected spot rates at that time will be $1 = 5.895 pounds and $1 = 3.899 rials, then
what is the difference in dollars paid that was caused by the delay?
A.$0.485 million less
B.$0.485 million more
C.$7.67 million more
D.$7.67 million less
14) Future Value of an Annuity Due If the future value of an ordinary, 4-year annuity is
$1,000 and interest rates are 6 percent, what’s the future value of the same annuity due?
A.$943.40
B.$1,000.00
C.$1,040.00
D.$1,060.00
15) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 12 percent, and
that the maximum allowable payback and discounted payback statistic for the project
are 2 and 2.5 years, respectively.
Use the payback decision rule to evaluate this project; should it be accepted or rejected?
A..23 years, accept
B.1.77 years, accept
C.2 years, accept
D.4.33 years, reject
16) Profitability and Asset Management Ratios You are thinking of investing in Tikki’s
Torches, Inc. You have only the following information on the firm at year-end 2011: net
income = $500,000, total debt = $12 million, and debt ratio = 40%. What is Tikki’s
ROE for 2011?
A.1.67%
B.2.78%
C.4.17%
D.10.42%
17) Solving for Rates What annual rate of return is implied on a $1,000 loan taken next
year when $1,500 must be repaid in year 5?
A.8.45%
B.10.00%
C.10.67%
D.12.50%
18) Suppose a firm has a retention ratio of 15 percent, net income of $60 million, and
15 million shares outstanding. What would be the dividend per share paid out on the
firm’s stock?
A.$0.25
B.$0.60
C.$3.40
D.$4.00
19) Which of the following is true regarding U.S. Government Agency Securities?
A.They carry the federal government’s full faith and credit guarantee
B.They do not carry the federal government’s full faith and credit guarantee
C.They are insured by the FDIC
D.They are treated the same as U.S. Treasury bonds with regard to the federal
government’s full faith and credit guarantee
20) On which of the four major financial statements would you find net plant and
equipment?
A.Balance Sheet
B.Income Statement
C.Statement of Cash Flows
D.Statement of Retained Earnings
21) Discount Rates A financial manager has determined that the appropriate discount
rate for a foreign project is 15 percent. However, that discount rate applies in the United
States using dollars. What discount rate should be used in the foreign country using the
foreign currency? The inflation rate in the United States and in the foreign country is
expected to be 8 percent and 4 percent, respectively.
A.11%
B.19%
C.21%
D.12%
22) Which of the following is the correct ranking from least risky to most risky?
A.Long-term Treasury bonds, Stocks, Treasury Bills
B.Treasury Bills, Long-term Treasury Bonds, Stocks
C.Stocks, Long-term Treasury Bond, Treasury Bills
D.Stocks, Treasury Bills, Long-term Treasury Bonds
23) A golf club costs $112 in the U.S. The same club costs AU$78 in Australia. Assume
that purchasing power parity holds. What is the exchange rate between the U.S. and
Australian dollars?
A.$1 U.S. = AU$1.37
B.$1 U.S. = AU$1.44
C.AU$1 = $1.37 U.S.
D.AU$1 = $1.44 U.S.
24) Forecasting Interest Rates A recent edition of The Wall Street Journal reported
interest rates of 3.10 percent, 3.50 percent, 3.75 percent, and 3.95 percent for three-year,
four-year, five-year, and six-year Treasury security yields, respectively, According to
the unbiased expectation theory of the term structure of interest rates, what are the
expected one-year rates for year 6?
A.3.575%
B.3.95%
C.4.96%
D.5.33%
25) Which of these is the period of time after a check has been written, but not yet
cleared and deposited?
A.liquid current assets
B.safety stock
C.overnight securities
D.float
26) The Modigilian-Miller (M&M) Theorem states that:
A.In an efficient market without taxes and bankruptcy costs, the value of a firm depends
upon the firm’s capital structure
B.In an efficient market without taxes and bankruptcy costs, the value of a firm does
not depend upon the firm’s capital structure
C.In an efficient market without taxes and bankruptcy costs, the value of a firm does
not depend upon the firm’s cost of capital
D.None of these
27) Tools that multinationals can use to help them reduce the risks inherent in making
investments in foreign countries include ___________.
A.Options
B.Hedges
C.Swaps
D.All of these
28) If fewer dollars will buy a unit of foreign currency, then the foreign currency is
________.
A.Strengthening
B.Weakening
C.Violating the law of purchasing power parity
D.Not in equilibrium
29) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the average approach if it was determined that 2008
is a ‘stale” year?
A.$1,000,000
B.$1,740,000
C.$1,925,000
D.$2,200,000
30) Paccar’s current stock price is $75.10 and it is likely to pay a $3.29 dividend next
year. Since analysts estimate Paccar will have a 14.2% growth rate, what is its required
return?
A.15.39%
B.17.94%
C.18.58%
D.19.62%
31) Expected Return A company’s current stock price is $65.40 and it is likely to pay a
$2.25 dividend next year. Since analysts estimate the company will have a 11.25%
growth rate, what is its expected return?
A.3.44%
B.3.61%
C.11.25%
D.14.69%
32) Multi-Year Future Value How much would be in your savings account in 10 years
after depositing $50 today if the bank pays 7% interest per year?
A.$35.00
B.$98.36
C.$535.00
D.$690.82
33) Everything else held constant, will an increase in the amount of inventory on hand
increase or decrease the firm’s profitability?
A.Decrease the profitability
B.Increase the profitability
C.It could either increase or decrease the profitability depending on net profit margins
D.It could either increase or decrease the profitability depending on the debt ratio.
34) The portion of a company’s profits that are kept by the company rather than
distributed to the stockholders as cash dividends is referred to as _______________.
A.Restricted earnings
B.Venture capital
C.Retained earnings
D.Institutional investment
35) This is another name for debt in the capital structure.
A.active
B.leverage
C.passive
D.long position
36) Goldilochs Inc. reported sales of $8 million and net income of $2 million. The firm
has a total asset turnover of 1.2. The firm’s chief financial officer is projecting a $6
million increase in sales and that spontaneous liabilities will increase by $1 million
automatically. The firm currently pays out 50% of its net income to shareholders.
Assuming that all assets and current liabilities are expected to grow with sales, how
much in additional funds will Goldilochs need from external sources to fund the
expected growth?
A.$1,250,000
B.$1,750,000
C.$2,500,000
D.$2,250,000
37) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the nave approach?
A.$2,100,000
B.$2,200,000
C.$1,780,000
D.$1,730,000
38) If the spot rate between the U.S. dollar and the Mexican peso is $1 = 2.45 peso and
the 3-month forward rate is $1 = 2.05 pesos, is the forward peso selling at a discount or
a premium?
A.Discount
B.Premium
C.Unable to determine with the cross-rates
39) Under/Over-Valued Stock A manager believes his firm will earn a 12 percent return
next year. His firm has a beta of 1.2, the expected return on the market is 8 percent, and
the risk-free rate is 3 percent. Compute the return the firm should earn given its level of
risk and determine whether the manager is saying the firm is under-valued or
over-valued.
A.9%, under-valued
B.9%, over-valued
C.13.8%, under-valued
D.13.8%, over-valued