A bond with 10 detachable warrants has just been offered for sale at $1,000. The bond
matures in 15 years and has an annual coupon of $80. Each warrant gives the owner the
right to purchase two shares of stock in the company at $14 per share. Ordinary bonds
(with no warrants) of similar quality are priced to yield 11 percent. What is the value of
one warrant?
A. $7.00
B. $13.58
C. $14.00
D. $16.67
E. $21.57
Jack and Jill are house hunting. They find House A situated on a hill. They really like
the house but want to continue searching the market for one more week before making
their final decision to buy the house. To avoid having someone else purchase House A
while they continue their house hunting, they decide to place a $2,500 deposit on House
A. This deposit will apply to the purchase price if they buy House A. If they do not buy
House A, they will forfeit the $2,500. Essentially, Jack and Jill have a _____ on House
A.
A. financial put
B. financial call
C. warrant
D. real put
E. real call
Blackwell, Inc. has a $75,000 liability it must pay three years from today. The company
is opening a savings account so that the entire amount will be available when this debt
needs to be paid. The plan is to make an initial deposit today and then deposit an
additional $15,000 each year for the next three years, starting one year from today. The
account pays a 4.5 percent rate of return. How much does the firm need to deposit
today?
A. $18,299.95
B. $20,072.91
C. $21,400.33
D. $24,487.78
E. $31,076.56
The equity of Blooming Roses has a total market value of $16,000. Currently, the firm
has excess cash of $1,200 and net income of $15,400. There are 750 shares of stock
outstanding. What will be the percentage change in the stock price per share if the firm
pays out all of its excess cash as a cash dividend?
A. -9.40 percent
B. -7.50 percent
C. -5.80 percent
D. -2.75 percent
E. 0.00 percent
A Treasury bond is quoted at a price of 106:23 with a 3.50 percent coupon. The bond
pays interest semiannually. What is the current yield on one of these bonds?
A. 3.06 percent
B. 3.19 percent
C. 3.28 percent
D. 3.33 percent
E. 3.38 percent
The Dog House has net income of $3,450 and total equity of $8,600. The debt-equity
ratio is 0.60 and the payout ratio is 20 percent. What is the internal growth rate?
A. 14.47 percent
B. 17.78 percent
C. 25.09 percent
D. 29.40 percent
E. 33.33 percent
What is the value of a 3-month call option with a strike price of $25 given the
Black-Scholes option pricing model and the following information?
A. $3.38
B. $3.42
C. $3.68
D. $4.27
E. $4.53
A sinking fund is managed by a trustee for which one of the following purposes?
A. paying interest payments
B. early bond redemption
C. converting bonds into equity securities
D. paying preferred dividends
E. reducing coupon rates
S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last ten
quarters. Which one of the following is most apt to cause the firm to reduce the amount
of its next dividend payment?
A. decrease in the next quarter’s revenue
B. decrease in the next quarter’s net income
C. loss of a major customer which lowers the firm’s outlook for the next few years
D. major lump sum cash outflow next month to settle a class action product liability
lawsuit on a product that is no longer produced
E. decrease in the number of new projects under consideration as compared to last year
Chapman Machine Shop is considering a 4-year project to improve its production
efficiency. Buying a new machine press for $576,000 is estimated to result in $192,000
in annual pretax cost savings. The press falls in the MACRS 5-year class, and it will
have a salvage value at the end of the project of $84,000. The press also requires an
initial investment in spare parts inventory of $24,000, along with an additional $3,600
in inventory for each succeeding year of the project. The inventory will return to its
original level when the project ends. The shop’s tax rate is 35 percent and its discount
rate is 11 percent. Should the firm buy and install the machine press? Why or why not?
A. no; The net present value is -$7,489.
B. no; The net present value is -$667.
C. yes; The net present value is $211.
D. yes; The net present value is $4,319.
E. yes; The net present value is $8,364.
Which of the following apply to the lessee of a sale and leaseback arrangement?
I. may have option to purchase asset at end of lease term
II. receives cash from the sale of the asset
III. maintains ownership rights
IV. uses the asset
A. I and IV only
B. II and III only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an
accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit.
What is the days’ sales in receivables?
A. 21.90 days
B. 27.56 days
C. 33.18 days
D. 35.04 days
E. 36.19 days
Rosa’s Designer Gowns creates exquisite gowns for special occasions on a prepaid basis
only. The required return is 8 percent. Rosa has estimated the cash flows for one gown
as follows. Should Rosa sell this gown at the price she is currently considering based on
the estimated internal rate of return (IRR)?
A. Rosa should sell the gown for $155,000.
B. Rose can sell the gown for as little as $153,819 and still earn her required return.
C. The gown must be sold for a minimum price of $175,926 if Rosa is to earn her
required return.
D. The IRR decision rule cannot be applied to this project.
E. Insufficient information is provided to make a decision based on IRR.
Why should financial managers strive to maximize the current value per share of the
existing stock?
A. doing so guarantees the company will grow in size at the maximum possible rate
B. doing so increases employee salaries
C. because they have been hired to represent the interests of the current shareholders
D. because this will increase the current dividends per share
E. because managers often receive shares of stock as part of their compensation
You’re trying to save to buy a new $160,000 Ferrari. You have $56,000 today that can
be invested at your bank. The bank pays 6 percent annual interest on its accounts. How
many years will it be before you have enough to buy the car? Assume the price of the
car remains constant.
A. 16.67 years
B. 17.04 years
C. 17.41 years
D. 17.87 years
E. 18.02 years
What is the effective annual rate of 9.75 percent compounded continuously?
A. 10.17 percent
B. 10.24 percent
C. 10.29 percent
D. 10.33 percent
E. 10.47 percent
You want to purchase some shares of Green World stock but need a 15 percent rate of
return to compensate for the perceived risk of such ownership. What is the maximum
you are willing to spend per share to buy this stock if the company pays a constant
$0.90 annual dividend per share?
A. $5.40
B. $6.00
C. $6.90
D. $7.20
E. $7.80
A firm’s total investment in receivables depends primarily on the firm’s:
A. total sales and cash discount period.
B. cash to credit sales ratio.
C. bad debt ratio.
D. average collection period and amount of credit sales.
E. amount of credit sales and cash discount percentage.
George and Pat just made an agreement to exchange currencies based on today’s
exchange rate. Settlement will occur tomorrow. Which one of the following is the
exchange rate that applies to this agreement?
A. spot exchange rate
B. forward exchange rate
C. triangle rate
D. cross rate
E. current rate
You are purchasing a 25-year, zero-coupon bond. The yield to maturity is 8.68 percent
and the face value is $1,000. What is the current market price?
A. $106.67
B. $108.18
C. $119.52
D. $121.50
E. $128.47
You own a portfolio equally invested in a risk-free asset and two stocks. One of the
stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is
the beta of the second stock?
A. 0.75
B. 0.80
C. 0.94
D. 1.00
E. 1.10
The external financing need:
A. will limit growth if unfunded.
B. is unaffected by the dividend payout ratio.
C. must be funded by long-term debt.
D. ignores any changes in retained earnings.
E. considers only the required increase in fixed assets.
Elizabeth owns a call option on 100 shares of Microsoft stock. She has decided to buy
those shares. This purchase is commonly referred to as:
A. striking the asset.
B. expiring the option.
C. exercising the option.
D. putting the collar.
E. the collar option.
Which one of the following can a firm do if it effectively manages its financial risks?
A. eliminate all the risks faced by the firm
B. totally eliminate all financial risks
C. reduce the price volatility it faces
D. guarantee the firm’s financial success
E. avoid all long-term financial risks
The dividend growth model:
A. is only as reliable as the estimated rate of growth.
B. can only be used if historical dividend information is available.
C. considers the risk that future dividends may vary from their estimated values.
D. applies only when a firm is currently paying dividends.
E. uses beta to measure the systematic risk of a firm.
Which one of the following dates is used to determine the names of shareholders who
will receive a dividend payment?
A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date
The Eliot Co. needs $185,000 a week to pay bills. The standard deviation of the weekly
disbursements is $17,600. The firm has established a lower cash balance limit of
$75,000. The applicable interest rate is 5.5 percent and the fixed cost of transferring
funds is $47. Based on the BAT model, what is the optimal initial cash balance?
A. $90,668
B. $97,515
C. $104,141
D. $128,224
E. $136,509
The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay
interest semi-annually. Currently, the bonds are quoted at 101.4 percent of face value
and carry a 9 percent coupon. What is the firm’s aftertax cost of debt if the tax rate is 30
percent?
A. 4.88 percent
B. 5.36 percent
C. 5.45 percent
D. 6.11 percent
E. 8.74 percent
Which one of the following is a key goal of the aftermarket period?
A. collection of largest number of Dutch auction bids as possible
B. best determination of a fair offer price for an upcoming IPO
C. price support for a new issue of securities
D. establishment of a broad-based underwriting syndicate for an upcoming IPO
E. widest distribution of red herrings as possible
Which one of the following will cause the sustainable growth rate to equal to internal
growth rate?
A. dividend payout ratio greater than 1.0
B. debt-equity ratio of 1.0
C. retention ratio between 0.0 and 1.0
D. equity multiplier of 1.0
E. zero dividend payments
Jeff owns a $1,000 face value bond. He can exchange that bond for 25 shares of KNJ
stock at any time within the next 2 years. What type of bond does Jeff own?
A. secured
B. warranted
C. convertible
D. junk
E. callable