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The common stock of Westover Foods is currently priced at $28.80 a share. One year
from now, the stock price is expected to be either $25 or $30 a share. The risk-free rate
of return is 4.2 percent. What is the current value of one call option on this stock if the
exercise price is $27.50?
A. $0
B. $2.40
C. $3.00
D. $3.80
E. $4.00
Answer:
An auto maker recently acquired a windshield manufacturer. Which type of an
acquisition was this?
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. indirect
Answer:
Which one of the following statements is correct concerning a corporation with taxable
income of $125,000?
A. Net income minus dividends paid will equal the ending retained earnings for the
year.
B. An increase in depreciation will increase the operating cash flow.
C. Net income divided by the number of shares outstanding will equal the dividends per
share.
D. Interest paid will be included in both net income and operating cash flow.
E. An increase in the tax rate will increase both net income and operating cash flow.
Answer:
Last year, Hansen Delivery paid an annual dividend of $3.20 per share. The company
has been reducing the dividends by 10 percent annually. How much are you willing to
pay to purchase stock in this company if your required rate of return is 13 percent?
A. $1.92
B. $7.87
C. $12.52
D. $21.16
E. $24.08
Answer:
Which one of the following terms applies to the value of an option on its expiration
date?
A. strike price
B. upper limit
C. deadline price
D. time value
E. intrinsic value
Answer:
Ten years ago, Jackson Supply set aside $130,000 in case of a financial emergency.
Today, that account has increased in value to $330,592. What rate of interest is the firm
earning on this money?
A. 8.80 percent
B. 9.78 percent
C. 10.75 percent
D. 11.28 percent
E. 11.53 percent
Answer:
Today, you are retiring. You have a total of $411,016 in your retirement savings and
have the funds invested such that you expect to earn an average of 7.10 percent,
compounded monthly, on this money throughout your retirement years. You want to
withdraw $2,500 at the beginning of every month, starting today. How long will it be
until you run out of money?
A. 31.97 years
B. 34.56 years
C. 42.03 year
D. 48.19 years
E. You will never run out of money.
Answer:
What is the cash flow from assets for 2011?
A. $1,732
B. $2,247
C. $2,961
D. $3,915
E. $4,267
Answer:
Tall Guys Clothing has a 45 day collection period. Sales for the next calendar year are
estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting with
the first quarter of the year. Given this information, which one of the following
statements is correct? Assume a year has 360 days.
A. The firm will collect $800 in Quarter 2.
B. The accounts receivable balance at the beginning of Quarter 4 will be $1,150.
C. The firm will collect $2,000 in Quarter 3.
D. The firm will have an accounts receivable balance of $2,300 at the end of the year.
E. The firm will collect a total of $2,400 in Quarter 4.
Answer:
The length of time a firm must wait to recoup, in present value terms, the money it has
in invested in a project is referred to as the:
A. net present value period.
B. internal return period.
C. payback period.
D. discounted profitability period.
E. discounted payback period.
Answer:
Peterborough Trucking just purchased some fixed assets that are classified as 3-year
property for MACRS. The assets cost $10,600. What is the amount of the depreciation
expense in year 3?
A. $537.52
B. $1,347.17
C. $1,569.86
D. $1,929.11
E. $2,177.56
Answer:
A firm has total debt of $4,850 and a debt-equity ratio of 0. What is the value of the
total assets?
A. $6,128.05
B. $7,253.40
C. $9,571.95
D. $11,034.00
E. $13,358.77
Answer:
The Woods Co. and the Mickelson Co. have both announced IPOs at $43 per share. One
of these is undervalued by $20, and the over is overvalued by $14, but you have no way
of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue
is underpriced, it will be rationed, and only half your order will be filled. What is the
amount of the difference between your expected profit and the amount of profit you
could earn if you could get 1,000 shares of Woods and 1,000 shares of Mickelson?
A. -$10,000
B. -$6,000
C. -$4,000
D. $4,000
E. $6,000
Answer:
W.V. Trees, Inc. has a debt-equity ratio of 1.4. Its WACC is 10 percent, and its cost of
debt is 9 percent. The corporate tax rate is 33 percent. What is the firm's unlevered cost
of equity capital?
A. 12.38 percent
B. 12.79 percent
C. 13.68 percent
D. 14.10 percent
E. 14.45 percent
Answer:
Which one of the following defines the relationship between the value of an option and
the option's time to expiration?
A. theta.
B. vega.
C. rho.
D. delta.
E. gamma.
Answer:
Historical returns support which one of the following statements?
A. Financial markets are highly inefficient as suggested by behavioral finance.
B. Professional money managers tend to outperform the Vanguard 500 index fund about
55 percent of the time on average.
C. The longer the time span, the more apt a professional money manager is to
outperform an index fund, such as the S&P 500.
D. Historical data supports the statement that arbitrage is unlimited and results in a
totally efficient market.
E. The financial markets appear to be efficient because, on average, they outperform
professional money managers.
Answer:
Hollister & Hollister is considering a new project. The project will require $522,000 for
new fixed assets, $218,000 for additional inventory, and $39,000 for additional
accounts receivable. Short-term debt is expected to increase by $165,000. The project
has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value
over the life of the project. At the end of the project, the fixed assets can be sold for 20
percent of their original cost. The net working capital returns to its original level at the
end of the project. The project is expected to generate annual sales of $875,000 and
costs of $640,000. The tax rate is 34 percent and the required rate of return is 14
percent. What is the cash flow recovery from net working capital at the end of this
project?
A. $14,000
B. $75,000
C. $92,000
D. $344,000
E. $422,000
Answer:
A group of five private investors recently loaned $6 million to Henderson Hardware for
ten years at 9 percent interest. This loan is best described as a:
A. private placement.
B. debt SEO.
C. notes payable.
D. debt IPO.
E. term loan.
Answer:
Dog Gone Good Engines has a bond issue outstanding with 17 years to maturity. These
bonds have a $1,000 face value, a 9 percent coupon, and pay interest semi-annually.
The bonds are currently quoted at 82 percent of face value. What is the company's
pre-tax cost of debt if the tax rate is 38 percent?
A. 4.10 percent
B. 4.42 percent
C. 6.61 percent
D. 8.90 percent
E. 11.42 percent
Answer:
Tedder Mining has analyzed a proposed expansion project and determined that the
internal rate of return is lower than the firm desires. Which one of the following
changes to the project would be most expected to increase the project's internal rate of
return?
A. decreasing the required discount rate
B. increasing the initial investment in fixed assets
C. condensing the firm's cash inflows into fewer years without lowering the total
amount of those inflows
D. eliminating the salvage value
E. decreasing the amount of the final cash inflow
Answer:
By definition, which one of the following must equal zero at the cash break-even point?
A. net present value
B. internal rate of return
C. contribution margin
D. net income
E. operating cash flow
Answer:
The Farmer's Market just paid an annual dividend of $5 on its stock. The growth rate in
dividends is expected to be a constant 5 percent per year indefinitely. Investors require a
13 percent return on the stock for the first 3 years, a 9 percent return for the next 3
years, a 7 percent return thereafter. What is the current price per share?
A. $212.40
B. $220.54
C. $223.09
D. $226.84
E. $227.50
Answer:
Which of the following statements is correct in relation to a stock investment?
I. The capital gains yield can be positive, negative, or zero.
II. The dividend yield can be positive, negative, or zero.
III. The total return can be positive, negative, or zero.
IV. Neither the dividend yield nor the total return can be negative.
A. I only
B. I and II only
C. I and III only
D. I and IV only
E. IV only
Answer:
When a firm has flotation costs equal to 7 percent of the funding need, project analysts
should:
A. increase the project's discount rate to offset these expenses by multiplying the firm's
WACC by 1.07.
B. increase the project's discount rate to offset these expenses by dividing the firm's
WACC by (1 - 0.07).
C. add 7 percent to the firm's WACC to get the discount rate for the project.
D. increase the initial project cost by multiplying that cost by 1.07.
E. increase the initial project cost by dividing that cost by (1 - 0.07).
Answer:
Which of the following are examples of cost reductions that can result from an
acquisition?
I. allocating fixed overhead across a wider range of products
II. lowering office payroll costs by combining job functions
III. benefiting from economies of scale when purchasing raw materials
IV. reducing the number of management personnel required
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
The two-stage dividend growth model evaluates the current price of a stock based on
the assumption a stock will:
A. pay an increasing dividend for a period of time and then cease paying dividends
altogether.
B. increase the dividend amount every other year.
C. pay a constant dividend for the first two quarters of each year and then increase the
dividend the last two quarters of each year.
D. grow at a fixed rate for a period of time after which it will grow at a different rate
indefinitely.
E. pay increasing dividends for a fixed period of time, cease paying dividends for a
period of time, and then commence paying increasing dividends for an indefinite period
of time.
Answer:
Which one of the following defensive tactics is designed to prevent a "two-tier"
takeover offer?
A. bear hug
B. poison put
C. shark repellent
D. dual class capitalization
E. fair price provision
Answer:
Bonner Metals wants to issue new 18-year bonds for some much-needed expansion
projects. The company currently has 11 percent bonds on the market that sell for
$1,459.51, make semiannual payments, and mature in 18 years. What should the
coupon rate be on the new bonds if the firm wants to sell them at par?
A. 5.75 percent
B. 6.23 percent
C. 6.41 percent
D. 6.60 percent
E. 6.79 percent
Answer:
Phone Home, Inc. is considering a new 4-year expansion project that requires an initial
fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to
zero over its 4-year tax life, after which time it will have a market value of $225,000.
The project requires an initial investment in net working capital of $330,000, all of
which will be recovered at the end of the project. The project is estimated to generate
$2,640,000 in annual sales, with costs of $1,056,000. The tax rate is 33 percent and the
required return for the project is 15 percent. What is the net present value for this
project?
A. $714,056
B. $681,409
C. $741,335
D. $742,208
E. $744,595
Answer:
Western Wear is considering a project that requires an initial investment of $274,000.
The firm maintains a debt-equity ratio of 0.40 and has a flotation cost of debt of 8
percent and a flotation cost of equity of 10.5 percent. The firm has sufficient internally
generated equity to cover the equity portion of this project. What is the initial cost of
the project including the flotation costs?
A. $280,409
B. $281,406
C. $288,005
D. $297,747
E. $302,762
Answer:
The owner of one of the 1,366 trading licenses for the NYSE is called a:
A. broker.
B. member.
C. agent.
D. specialist.
E. dealer.
Answer:
