1) 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 which must be paid to obtain a good or service from another country
2) Western Electric has 23,000 shares of common stock outstanding at a price per share
of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent
preferred stock outstanding at a price of $48 a share. The preferred stock has a par value
of $100. The outstanding debt has a total face value of $350,000 and currently sells for
102 percent of face. The yield-to-maturity on the debt is 8.49 percent. What is the firm’s
weighted average cost of capital if the tax rate is 34 percent?
A.12.69 percent
B.13.44 percent
C.14.19 percent
D.14.47 percent
E.14.92 percent
3) The Spoon Restaurant is considering a project with an initial cost of $525,000. The
project will not produce any cash flows for the first three years. Starting in year four,
the project will produce cash inflows of $721,000 a year for three years. This project is
risky, so the firm has assigned it a discount rate of 17 percent. What is the project’s net
present value?
A.$382,507.17
B.$389,211.76
C.$414,141.41
D.$451,329.69
E.$469,691.45
4) The lowest rating a bond can receive from Moody’s and still be classified as an
investment-quality bond is:
A.BB
B.BBB
C.B
D.Ba
E.Baa
5) You currently own a portfolio valued at $56,000 that has a beta of 1.25. You have
another $10,000 to invest and would like to invest it in a manner such that the portfolio
beta decreases to 1.20. What does the beta of the new investment have to be?
A.0.74
B.0.79
C.0.86
D.0.92
E.1.00
6) Delivery trucks are classified as:
A.non-cash expenses
B.current liabilities
C.current assets
D.tangible fixed assets
E.intangible fixed assets
7) 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.
What is BSL’s free cash flow (in $ millions) for 2011?
A.- $938
B.- $792
C.- $7
D.$122
E.$1,091
8) Jack’s Fried Chicken just took out a 7 percent interest-only loan of $50,000 for 3
years. Payments are to be made at the end of each year. What is the amount of the
payment that will be due at the end of year 3?
A.$19,052.58
B.$20,166.67
C.$50,000.00
D.$53,500.00
E.$61,252.15
9) Which one of the following is an argument that dividend policy is irrelevant?
A.Flotation costs as they apply to equities
B.Tax laws as they currently exist
C.An unsatisfied demand for high-dividend paying stocks
D.Current equilibrium in the clientele dividend market
E.The current tax exclusion available to corporate investors
10) Which one of the following decreases net income but does not affect the operating
cash flow of a firm which owes no taxes for the current year?
A.Indirect cost
B.Direct cost
C.Noncash item
D.Period cost
E.Variable cost
11) Mary owns a risky stock and anticipates earning 16.5 percent on her investment in
that stock. Which one of the following best describes the 16.5 percent rate?
A.Expected return
B.Real return
C.Market rate
D.Systematic return
E.Risk premium
12) When using the pure play approach for a proposed investment, a firm is primarily
seeking a rate of return which:
A.is based on the actual source of funds that will be used to fund the project
B.creates a positive net present value for the project
C.reflects the size and life of the project
D.most closely correlates with the proposed investment’s internal rate of return
E.best matches the risk level of the proposed investment
13) You want to purchase a new condominium which costs $329,000. Your plan is to
pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent.
What will be your monthly mortgage payment?
A.$1,736.25
B.$1,833.33
C.$1,908.16
D.$2,221.43
E.$2,406.11
14) Cash concentration accounts:
A.are no longer needed since the Check Clearing Act for the 21st Century has been
passed
B.eliminate the need for lockboxes
C.decrease a firm’s disbursement float by reducing mail and processing delays
D.allow firms to more efficiently handle cash
E.tend to decrease a firm’s investment income
15) Neighborhood Stores’ stock has a risk premium of 9.6 percent while the inflation
rate is 3.1 percent and the risk-free rate is 3.8 percent. What is the expected return on
this stock?
A.12.3 percent
B.12.7 percent
C.13.4 percent
D.13.6 percent
E.16.5 percent
16) At the end of fiscal year 2011, Crane Industries, Inc.’s stock price was $30.75. A
year later it was $34.88. Per share dividends over the year were $0.55, while earnings
per share were $1.33. What was the dividend yield in fiscal year 2012?
A.1.79%
B.4.33%
C.13.43%
D.15.22%
E.17.76%
17) Which one of the following is a working capital decision?
A.How should the firm raise additional capital to fund its expansion?
B.What debt-equity ratio is best suited to our firm?
C.What is the cost of debt financing?
D.Which type of debt is best suited to finance our inventory?
E.How much cash should the firm keep in reserve?
18) Which one of the following is the primary advantage of payback analysis?
A.Incorporation of the time value of money concept
B.Ease of use
C.Research and development bias
D.Arbitrary cutoff point
E.Long-term bias
19) You and your brother are planning a large anniversary party 3 years from today for
your grandparents’ 50th wedding anniversary. You have estimated that you will need
$2,500 for this party. You can earn 3.5 percent compounded annually on your savings.
How much would you and your brother have to deposit today in one lump sum to pay
for the entire party?
A.$2,199.74
B.$2,254.86
C.$2,308.16
D.$2,334.90
E.$2,368.81
20) Used Motors will sell you a $13,000 car for $380 a month for 48 months. What is
the interest rate?
A.16.55 percent
B.16.67 percent
C.16.99 percent
D.17.58 percent
E.17.72 percent
21) As the financial vice president for Squamish Equipment, you have the following
information:
For next year, calculate Squamish’s times burden covered ratio if Squamish sells 2
million new shares at $20 a share.
A.1.03
B.1.38
C.1.60
D.1.89
E.2.10
22) Musical Charts just paid an annual dividend of $2.45 per share. This dividend is
expected to increase by 3.3 percent annually. Currently, the firm has a beta of 1.09 and a
stock price of $36 a share. The risk-free rate is 4.2 percent and the market rate of return
is 12.6 percent. What is the cost of equity capital for this firm?
A.10.28 percent
B.11.84 percent
C.12.29 percent
D.12.95 percent
E.13.42 percent
23) Brewster’s is considering a project that is equally as risky as the firm’s current
operations. The firm has a cost of equity of 13.7 percent and a pre-tax cost of debt of
8.4 percent. The debt-equity ratio is .65 and the tax rate is 36 percent. What is the cost
of capital for this project?
A.9.97 percent
B.10.42 percent
C.11.38 percent
D.11.62 percent
E.13.30 percent
24) The Green Shoe option is most apt to be exercised when an IPO is ______ and
______.
A.underpriced; oversubscribed
B.underpriced; undersubscribed
C.correctly priced; neither over nor undersubscribed
D.overpriced; oversubscribed
E.overpriced; undersubscribed
25) If today is Year 0, what is the future value of the following cash flows 10 years
from now? Assume an interest rate of 6.9 percent per year.
A.$35,211.57
B.$36,666.67
C.$38,604.00
D.$40,020.50
E.$42,141.41
26) Noncash items refer to:
A.sales which are made on a credit basis
B.inventory items purchased using credit
C.intangible assets such as patents
D.expenses, like depreciation, which do not directly affect cash flows
E.administrative expenses
27) Which one of these statements is correct?
A.Since the early 1980’s, it has become increasingly more difficult to do a stock
repurchase due to SEC regulations
B.It is relatively easy to determine whether or not a firm has completed a planned stock
repurchase
C.Fixed stock repurchases allow managers to repurchase shares only when they feel
those shares are undervalued
D.A fixed stock repurchase plan could be a negative net present value investment for
the stock issuer
E.Stock repurchases send the exact same signals to investors as do cash dividends
28) On any given day, Casey’s receives numerous checks worth an average combined
total of $6,300. The funds from the deposited checks are generally available in 1.5 days.
Every day, the firm mails out checks totaling $4,800 that generally take 2 days to clear
the bank. What is the amount of the disbursement float?
A.$150
B.$400
C.$9,450
D.$9,600
E.$9,850
29) The price at which an investor can purchase a bond from a dealer is called the
_____ price.
A.asked
B.coupon
C.call
D.face
E.bid
30) Travis is buying a car and will finance it with a loan which requires monthly
payments of $265 for the next 4 years. His car payments can be described by which one
of the following terms?
A.Perpetuity
B.Annuity
C.Consol
D.Lump sum
E.Factor
31) One year ago, you purchased a 7.5 percent annual coupon bond for a clean price of
$980. The bond now has 7 years remaining until maturity. Today, the yield to maturity
on this bond is 6.87 percent. How does today’s clean price of this bond compare to your
purchase price?
A.4.24 percent lower
B.4.70 percent lower
C.5.48 percent lower
D.5.52 percent higher
E.6.61 percent higher
32) Which one of the following is the most ethical practice related to cash disbursement
management?
A.Intentionally delaying payments by creating a complex accounts payable system
B.Taking the cash discount but paying after the discount period
C.Paying a supplier from a zero-balance account
D.Purposely losing a supplier’s invoice and requiring the supplier to submit another
copy
E.Mailing a check from the most remote location possible
33) Kelly decided to accept the risk and purchased a high growth stock. Her returns for
the past five years are 48 percent, 39 percent, -56 percent, 61 percent, and -24 percent.
What is the standard deviation of these returns?
A.43.20 percent
B.45.46 percent
C.47.88 percent
D.50.83 percent
E.58.39 percent
34) Which one of the following indicates that a project is expected to create value for its
owners?
A.Profitability index less than 1.0
B.Payback period greater than the requirement
C.Positive net present value
D.Positive average accounting rate of return
E.Internal rate of return that is less than the requirement
35) Explain why the marginal tax rate, rather than the average tax rate, is used when
computing the cash flows from a proposed new project.
36) Explain the primary difference between a Chapter 7 bankruptcy and a Chapter 11
bankruptcy.
37) Explain how the process of dividend smoothing affects the dividend growth rate as
compared to the earnings growth rate.
38) Explain what is meant when a news broadcaster states “the value of the dollar fell
today relative to all currencies”. How will this change in value affect U.S. imports and
exports?
39) Explain the differences between a broker market and a dealer market.