Which one of the following is an advantage of the average accounting return method of
analysis?
A. easy availability of information needed for the computation
B. inclusion of time value of money considerations
C. the use of a cutoff rate as a benchmark
D. the use of pre-tax income in the computation
E. use of real, versus nominal, average income
Answer:
Which of the following are examples of diversifiable risk?
I. earthquake damages an entire town
II. federal government imposes a $100 fee on all business entities
III. employment taxes increase nationally
IV. toymakers are required to improve their safety standards
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
E. I, III, and IV only
Answer:
A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout
ratio of 24 percent. The current profit margin is 7 percent and the firm uses no external
financing sources. What must the total asset turnover rate be?
A. 0.87 times
B. 0.90 times
C. 1.01 times
D. 1.15 times
E. 1.86 times
Answer:
Delta Importers has a pure discount loan with a face value of $180,000 due in one year.
The assets of the firm are currently worth $265,000. The shareholders in this firm
basically own a _____ option on the assets of the firm with a strike price of _____.
A. put; $180,000.
B. put; $265,000.
C. warrant; $265,000.
D. call; $180,000.
E. call; $265,000.
Answer:
Douglass Gardens pays an annual dividend that is expected to increase by 3.6 percent
per year. The stock commands a market rate of return of 12.6 percent and sells for
$28.50 a share. What is the expected amount of the next dividend?
A. $2.03
B. $2.57
C. $3.17
D. $2.20
E. $2.28
Answer:
Which one of the following methods of project analysis is defined as computing the
value of a project based upon the present value of the project’s anticipated cash flows?
A. constant dividend growth model
B. discounted cash flow valuation
C. average accounting return
D. expected earnings model
E. internal rate of return
Answer:
Your employer contributes $50 a week to your retirement plan. Assume that you work
for your employer for another 20 years and that the applicable discount rate is 9
percent. Given these assumptions, what is this employee benefit worth to you today?
A. $24,106.15
B. $24,618.46
C. $25,211.11
D. $25,306.16
E. $25,987.74
Answer:
Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per
quarter. The loan agreement also requires that 2 percent of the unused portion of the
credit line be deposited in a non-interest bearing account as a compensating balance.
Your short-term investments are paying 0.20 percent per month. What is your effective
annual interest rate on this arrangement if you do not borrow any money on this credit
line during the year? Assume any funds borrowed or invested use compound interest.
A. 2.00 percent
B. 2.43 percent
C. 3.18 percent
D. 7.00 percent
E. 7.19 percent
Answer:
Patience is reviewing a project with projected sales of 4,200 units a year, a cash flow of
$28 a unit, and a four-year project life. Assume all operating cash flows occur on the
last day of each year. The initial cost of the project is $247,000. The relevant discount
rate is 13 percent. Patience has the option to abandon the project after two years at
which time she feels she could sell the project’s assets for $110,000. At what level of
annual sales, starting in year 3, should she be willing to abandon this project?
A. 2,119 units
B. 2,355 units
C. 2,367 units
D. 2,516 units
E. 2,667 units
Answer:
Which one of the following is an example of unsystematic risk?
A. income taxes are increased across the board
B. a national sales tax is adopted
C. inflation decreases at the national level
D. an increased feeling of prosperity is felt around the globe
E. consumer spending on entertainment decreased nationally
Answer:
Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase
additional rail cars and upgrade its maintenance facilities. How many shares of stock
will the firm need to sell through this offering if the current market price is $34 a share
and the subscription price is $31 a share?
A. 417,647 shares
B. 437,856 shares
C. 445,065 shares
D. 453,604 shares
E. 458,065 shares
Answer:
Jillian was recently hired by a major retail store. Her job is to determine the probability
that individual customers will fail to pay for their charge sales. Jillian’s job best relates
to which one of the following?
A. terms of sale
B. credit analysis
C. collection policy
D. payables policy
E. customer service
Answer:
Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000
and lasts about 4 years before it needs to be replaced. The annual operating cost per
oven is $41,000. What is the equivalent annual cost of an oven if the required rate of
return is 13 percent?
A. -$272,638
B. -$248,313
C. -$232,407
D. -$200,561
E. $196,210
Answer:
Based on the following information, the value of the U.S. dollar will _____ with respect
to the yen and will _____ with respect to the Canadian dollar.
A. appreciate; appreciate
B. appreciate; depreciate
C. depreciate; appreciate
D. depreciate; depreciate
E. depreciate; remain constant
Answer:
Sheakley Industries is considering expanding its current line of business and has
developed the following expected cash flows for the project. Should this project be
accepted based on the discounting approach to the modified internal rate of return if the
discount rate is 13.4 percent? Why or why not?
A. Yes; The MIRR is 6.50 percent.
B. No; The MIRR is 8.67 percent.
C. Yes; The MIRR is 8.23 percent.
D. No; The MIRR is 6.50 percent.
E. No; The MIRR is 7.59 percent.
Answer:
You are the manager of a project that has a 2.8 degree of operating leverage and a
required return of 14 percent. Due to the current state of the economy, you expect sales
to decrease by 7 percent next year. What change should you expect in the operating
cash flows next year given your sales prediction?
A. 19.60 percent decrease
B. 16.03 percent decrease
C. 13.46 percent decrease
D. 5.60 percent decrease
E. 2.74 percent decrease
Answer:
Your holiday ski vacation was great, but it unfortunately ran a bit over budget. All is not
lost. You just received an offer in the mail to transfer your $5,000 balance from your
current credit card, which charges an annual rate of 18.7 percent, to a new credit card
charging a rate of 9.4 percent. You plan to make payments of $510 a month on this debt.
How many less payments will you have to make to pay off this debt if you transfer the
balance to the new card?
A. 0.36 payments
B. 0.48 payments
C. 1.10 payments
D. 1.23 payments
E. 2.49 payments
Answer:
Which of the following are needed to determine the amount of fixed assets required to
support each dollar of sales?
I. current amount of fixed assets
II. current sales
III. current level of operating capacity
IV. projected growth rate of sales
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
A company currently has a 51 day cash cycle. Assume the firm changes its operations
such that it decreases its receivables period by 2 days, increases its inventory period by
3 days, and increases its payables period by 4 days. What will the length of the cash
cycle be after these changes?
A. 42 days
B. 45 days
C. 48 days
D. 49 days
E. 51 days
Answer:
Breakwater Aquatics has a 45 day accounts receivable period. The estimated quarterly
sales for this year, starting with the first quarter, are $6,800, $7,100, $8,200, and $6,400,
respectively. What is the accounts receivable balance at the beginning of the third
quarter? Assume a year has 360 days.
A. $3,400
B. $3,550
C. $6,950
D. $7,100
E. $7,650
Answer:
The Card Shoppe needs to maintain 20 percent of its sales in net working capital.
Currently, the shoppe is considering a 6-year project that will increase sales from its
current level of $379,000 to $421,000 the first year and to $465,000 a year for the
following 5 years of the project. What amount should be included in the project analysis
for net working capital in year 6 of the project?
A. -$17,200
B. -$2,990
C. $0
D. $2,990
E. $17,200
Answer:
What is the value of d2 given the following information on a stock?
A. 0.1218
B. 0.1225
C. 0.1313
D. 0.1335
E. 0.1340
Answer:
Which one of the following statements related to Chapter 7 bankruptcy is correct?
A. A firm in Chapter 7 bankruptcy is reorganizing its operations such that it can return
to being a viable concern.
B. Under a Chapter 7 bankruptcy, a trustee will assume control of the firm’s assets until
those assets can be liquidated.
C. Chapter 7 bankruptcies are always involuntary on the part of the firm.
D. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the
administrative costs of the bankruptcy.
E. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of
stock are generally issued prior to the firm coming out of bankruptcy.
Answer:
The camera you want to buy costs $230 in the U.S. How much will the identical camera
cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing
power parity exists.
A. $238.77
B. $242.19
C. $243.52
D. $248.60
E. $278.38
Answer:
Which one of the following statements is correct?
A. A general partnership is legally the same as a corporation.
B. Both sole proprietorship and partnership income is taxed as individual income.
C. Partnerships are the most complicated type of business to form.
D. All business organizations have bylaws.
E. Only firms organized as sole proprietorships have limited lives.
Answer:
What is the effective annual rate of 5.25 percent compounded continuously?
A. 5.27 percent
B. 5.39 percent
C. 5.43 percent
D. 5.46 percent
E. 5.49 percent
Answer:
The amount paid to an underwriter who participates in a standby underwriting
agreement is called a(n):
A. gross spread.
B. optional spread.
C. standby fee.
D. additional fee.
E. oversubscription fee.
Answer:
Kid’s Delight expects to sell $8,200 worth of toys in December, $3,700 worth in
January, $4,400 in February, and $6,100 in March. The wholesale cost is 72 percent of
the retail price. The firm has a receivables period of 30 days, a payables period of 60
days, and buys inventory one month prior to selling it. Which one of the following
statements is correct?
A. The February payments to suppliers are $2,992.
B. The March collections are $3,700.
C. The accounts receivable balance at the end of March is $4,400.
D. The purchases for February are $3,168.
E. The accounts payable balance at the end of January is $5,832.
Answer:
In an effort to capture the large jet market, Hiro Airplanes invested $12.68 billion
developing its B490, which is capable of carrying 800 passengers. The plane has a list
price of $275 million. In discussing the plane, Hiro Airplanes stated that the company
would break-even when 246 B490s were sold. Assume the break-even sales figure
given is the cash flow break-even. Suppose the sales of the B490 last for only 9 years.
How many airplanes must Hiro Airplanes sell per year to provide its shareholders a 19
percent rate of return on this investment?
A. 47.17
B. 52.48
C. 59.09
D. 63.10
E. 68.40
Answer:
Plyler Cabinets declared a dividend of $1.20 a share on May 15 to holders of record on
Monday, June 1. The dividend is payable on June 15. Sara purchased 500 shares of
Plyler Cabinets stock on Friday, May 29. How much dividend income will she receive
on June 15 from Plyler Cabinets?
A. $0
B. $0.80
C. $1.60
D. $160.00
E. $320.00
Answer:
Miller Brothers Hardware paid an annual dividend of $0.95 per share last month. Today,
the company announced that future dividends will be increasing by 2.6 percent
annually. If you require a 13 percent rate of return, how much are you willing to pay to
purchase one share of this stock today?
A. $9.23
B. $9.37
C. $9.67
D. $9.72
E. $9.88
Answer: