1) A real rate of return is defined as a rate that has been adjusted for which one of the
following?
A.Inflation
B.Interest rate risk
C.Taxes
D.Liquidity
E.Default risk
2) Which one of the following tends to be true for the average investor?
A.They frequently earn initially high returns on IPOs when shares are undersubscribed
B.They generally receive their full allocation of shares even when an IPO is
oversubscribed
C.They often encounter the “winner’s curse”
D.They are protected from losses by the Green Shoe provision
E.Average investors are not allowed to purchase IPOs at the offer price
3) Business Services, Inc. is expected to pay its first annual dividend of $0.80 per share
three years from now. Starting in year six, the company is expected to start increasing
the dividend by 2 percent per year. What is the value of this stock today at a required
return of 12 percent?
A.$6.16
B.$6.47
C.$6.63
D.$7.22
E.$7.47
4) A stock has an expected return of 17.2 percent and a beta of 1.59. The risk-free rate is
5.1 percent. What is the slope of the security market line?
A.7.55 percent
B.7.61 percent
C.7.78 percent
D.7.92 percent
E.8.03 percent
5) Assume large-company stocks returned 11.8 percent on average over the past 75
years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.2
percent. What was the average nominal risk-free rate of return for those 75 years?
A.3.90 percent
B.9.27 percent
C.4.26 percent
D.8.33 percent
E.8.60 percent
6) Boyertown Industrial Tools is considering a 3-year project to improve its production
efficiency. Buying a new machine press for $611,000 is estimated to result in $193,000
in annual pretax cost savings. The press falls in the MACRS five-year class, and it will
have a salvage value at the end of the project of $162,000. The press also requires an
initial investment in spare parts inventory of $19,000, along with an additional $2,000
in inventory for each succeeding year of the project. If the tax rate is 35 percent and the
discount rate is 12 percent, should the company buy and install the machine press? Why
or why not?
Table 9.7 Modified ACRS depreciation allowances
A.Yes; the NPV is $51,613
B.Yes: the NPV is $45,607
C.No; the NPV is -$22,311
D.No; the NPV is -$52,918
E.No; the NPV is -$74,945
7) Kristi is considering an investment that will pay $5,000 a year for 7 years, starting
one year from today. How much should she pay for this investment if she wishes to earn
a 12 percent rate of return?
A.$17,899.08
B.$18,023.88
C.$20,186.75
D.$22,818.78
E.$24,507.19
8) Lisa is interested in purchasing 1,000 shares of TJH, Inc. when the shares are issued.
Her broker just gave Lisa a preliminary prospectus on these shares for her to review as
she waits for the shares to be cleared for sale. What is the name of this prospectus?
A.Green Shoe
B.Rights offer
C.Red herring
D.Spread
E.Tombstone
9) An auction market:
A.is an electronic means of exchanging securities
B.has a physical trading floor
C.handles primary market transactions exclusively
D.is also referred to as an OTC market
E.is dealer based
10) The net present value of an investment represents the difference between the
investment’s:
A.cash inflows and outflows
B.cost and its net profit
C.cost and its market value
D.cash flows and its profits
E.assets and liabilities
11) Last year, Blakely’s Fashions earned net income of $68,400 and had 12,000 shares
of stock outstanding. The dividends per share were $2.20. What is the dividend payout
ratio?
A.32.98 percent
B.34.00 percent
C.38.60 percent
D.40.21 percent
E.44.14 percent
12) Which one of the following will decrease the aftertax cost of debt for a firm?
A.Decrease in the firm’s beta
B.Increase in tax rates
C.Increase in the risk-free rate of return
D.Decrease in the market price of the debt
E.Decrease in a bond’s yield-to-maturity
13) Lester lent money to The Corner Store by purchasing bonds issued by the store. The
rate of return that he and the other lenders require is referred to as the:
A.pure play cost
B.cost of debt
C.weighted average cost of capital
D.subjective cost
E.cost of equity
14) Which of the following actions might a firm take if its actual sales growth exceeds
its sustainable rate of growth?
I. Increase prices
II. Decrease financial leverage
III. Decrease dividends
IV. Prune away less marginal products
A.I and II only
B.I and III only
C.I, II, and IV only
D.I, III, and IV only
E.I, II, III, and IV
15) Harris Brothers just announced it will be paying an annual dividend of $0.85 a
share plus an extra dividend of $0.30 a share this year. The company also announced
that its regular dividend, which is all it anticipates paying after this year, will increase
by 3.5 percent annually. What is the anticipated dividend per share next year?
A.$0.82
B.$0.85
C.$0.88
D.$1.15
E.$1.19
16) Which one of the following statements concerning the balance sheet is correct?
A.Total assets equal total liabilities minus total equity
B.Net working capital is equal total assets minus total liabilities
C.Assets are listed in descending order of liquidity
D.Current assets are equal to total assets minus net working capital
E.Shareholders’ equity is equal to net working capital minus net fixed assets plus
long-term debt
17) Global Exchange has three divisions: A, B, and C. Division A has the least risk and
division C has the most risk. The firm has an aftertax cost of debt of 6.1 percent and a
cost of equity of 14.3 percent. The firm is financed with 35 percent debt and 65 percent
equity. Division A’s projects are assigned a discount rate that is 2 percent less than the
firm’s weighted average cost of capital. What is the discount rate applicable to division
A?
A.7.98 percent
B.8.27 percent
C.9.43 percent
D.11.48 percent
E.13.43 percent
18) Which one of the following will result from a stock repurchase?
A.Increase in the number of shares outstanding
B.Decrease in the earnings per share
C.Decrease in the market price per share
D.Increase in the market value of equity per share
E.Decrease in the P/E ratio
19) Browning’s Motor Works is reviewing its current accounts to determine how a
proposed project might affect the account balances. The firm estimates the project will
initially require $57,000 in additional current assets and $32,000 in additional current
liabilities. The firm also estimates the project will require an additional $7,000 a year in
current assets for each one of the four years of the project. How much net working
capital will the firm recoup at the end of the project assuming that all net working
capital can be recaptured?
A.-$85,000
B.$25,000
C.$53,000
D.$28,000
E.$85,000
20) Which of the following are participants in the foreign exchange market?
I. U.S. importers
II. U.S. exporters
III. U.S. travelers to Europe
IV. U.S. portfolio manager who purchases foreign securities
A.I and III only
B.II and IV only
C.I, III, and IV only
D.II, III, and IV only
E.I, II, III, and IV
21) Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest
semiannually, mature in 5 years, and have a 6 percent coupon. The current price is
quoted at 101. What is the yield to maturity?
A.5.77 percent
B.5.84 percent
C.6.00 percent
D.6.13 percent
E.6.27 percent
22) Which one of the following reports will tell me the percentage of accounts
receivables that are delinquent by 90 days or more?
A.Cash budget
B.5Cs of credit
C.Credit analysis
D.Aging schedule
E.Credit scoring report
23) The NYSE:
A.presently conducts all of its trading through SuperDOT
B.is a dealer market
C.is in the business of attracting order flow
D.is solely a primary market
E.is based on a multiple market maker system
24) Eastern Shore Builders is offering preferred stock for sale with a 7.75 percent rate
of return. What is the amount of the annual dividend on this stock if the current market
price per share is $83.87?
A.$6.33
B.$6.50
C.$7.00
D.$7.50
E.$7.75
25) A U.S. firm has total assets valued at 687,000 located in Germany. This valuation
did not change from last year. Last year, the exchange rate was 0.94 = $1. Today, the
exchange rate is .0.75 = $1. By what amount did these assets change in value on the
firm’s U.S. financial statements?
A.-$185,148.94
B.-$162,311.19
C.$162,311.19
D.$185,148.94
E.$0
26) Which one of the following statements is true concerning the price-earnings (PE)
ratio?
A.A high PE ratio may indicate that a firm is expected to grow significantly
B.A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current
earnings
C.PE ratios are unaffected by the accounting methods employed by a firm
D.The PE ratio is classified as a profitability ratio
E.The PE ratio is a constant value for each firm
27) Given the following information, what is the variance of the returns on this stock?
A.0.002453
B.0.002663
C.0.002691
D.0.002759
E.0.002914
28) Unsystematic risk:
A.can be effectively eliminated by portfolio diversification
B.is compensated for by the risk premium
C.is measured by beta
D.is measured by standard deviation
E.is related to the overall economy
29) Which of the following questions are appropriate to address upon conducting
sustainable growth analysis and the financial planning process?
I. Should the firm merge with a competitor?
II. Should additional equity be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced?
A.I, II, and III only
B.I, II, and IV only
C.I, III, and IV only
D.II, III, and IV only
E.I, II, III, and IV
30) A project will produce after-tax operating cash inflows of $3,200 a year for 5 years.
The after-tax salvage value of the project is expected to be $2,500 in year 5. The
project’s initial cost is $9,500. What is the net present value of this project if the
required rate of return is 16 percent?
A.-$302
B.$2,168.02
C.$4,650.11
D.$9,188.98
E.$21,168.02
31) Westover Electric is preparing to pay its quarterly dividend of $2.20 a share this
quarter. The stock closed at $70 a share today. What will the ex-dividend stock price be
if the relevant tax rate is 10 percent and all else is held constant?
A.$55.28
B.$55.50
C.$55.72
D.$55.94
E.$55.99
32) Which one of the following statements is the core principle of M&M Proposition I,
without taxes?
A.A firm’s cost of equity is directly related to the firm’s debt-equity ratio
B.A firm’s WACC is directly related to the firm’s debt-equity ratio
C.The interest tax shield increases the value of a firm
D.The capital structure of a firm is totally irrelevant
E.Levered firms have greater value than unlevered firms