Starting today, Alicia is going to contribute $100 a month to her retirement account. Her
employer matches her contribution by 50 percent. If these contributions remain
constant, and she earns a monthly rate of .55 percent, how much will her savings be
worth 40 years from now?
A. $399,459.44
B. $300,456.74
C. $349,981.21
D. $299,189.16
E. $354,087.88
Answer:
Assume you own both a May 40 put and a May 40 call on ABC stock. Which one of the
following statements is correct concerning your option positions? Ignore taxes and
transaction costs.
A. An increase in the stock price will increase the value of your put and decrease the
value of your call.
B. Both a May 45 put and a May 45 call will have higher values than your May 40
options.
C. The time premiums on both your put and call are less than the time premiums on
equivalent June options.
D. A decrease in the stock price will decrease the value of both of your options.
E. You can never profit on your positions as your profits on one option will be offset by
losses on the other option.
Answer:
Davidsons has 15,000 shares of stock outstanding with a par value of $1 per share and a
market value of $45 per share. The balance sheet shows $15,000 in the common stock
account, $158,000 in the capital in excess of par account, and $132,500 in the retained
earnings account. The firm just announced a 50 percent stock dividend. What is the
value of the retained earnings account after the dividend?
A. $125,000
B. $117,500
C. $132,500
D. $140,000
E. $147,500
Answer:
The common stock of WIN is currently priced at $52.50 a share. One year from now,
the stock price is expected to be either $54 or $60 a share. The risk-free rate of return is
4 percent. What is the per share value of one call option on WIN stock with an exercise
price of $55?
A. $.39
B. $.41
C. $.45
D. $.48
E. $.51
Answer:
If a stock pays a constant annual dividend then the stock can be valued using the:
A. fixed coupon bond present value formula.
B. present value of an annuity due formula.
C. payout ratio formula.
D. present value of an ordinary annuity formula.
E. perpetuity present value formula.
Answer:
Turner’s Inc. has a price-earnings ratio of 16. Alfred’s Co. has a price-earnings ratio of
19. Thus, you can state with certainty that one share of stock in Alfred’s:
A. has a higher market price than one share of stock in Turner’s.
B. has a higher market price per dollar of earnings than does one share of Turner’s.
C. sells at a lower price per share than one share of Turner’s.
D. represents a larger percentage of firm ownership than does one share of Turner’s
stock.
E. earns a greater profit per share than does one share of Turner’s stock.
Answer:
An annuity costs $70,000 today, pays $3,500 a year, and earns a return of 4.5 percent.
What is the length of the annuity time period?
A. 54.96 years
B. 49.48 years
C. 52.31 years
D. 43.08 years
E. 48.00 years
Answer:
A $1,000 par value bond carries a coupon rate of 6.5 percent and has a yield to maturity
of 7.29 percent. The inflation rate is 3.13 percent. What is the bond’s real rate of return?
A. 3.27%
B. 4.03%
C. 3.37%
D. 4.42%
E. 3.86%
Answer:
Baxter’s collects 30 percent of its sales in the month of sale, 55 percent in the month
following the month of sale, and 13 percent in the second month following the month of
sale. Given this, the company will collect _____ sales during the month of May.
A. 30 percent of May
B. 55 percent of March
C. 13 percent of April
D. 55 percent of May
E. 13 percent of February
Answer:
Which one of the following statements concerning the standard deviation is correct?
A. The standard deviation is a measure of total return.
B. The higher the standard deviation, the higher the expected return.
C. The standard deviation varies in direct relation to increases in dividend yield.
D. The higher the standard deviation, the lower the risk.
E. The lower the standard deviation, the less certain the rate of return in any one given
year.
Answer:
Shareholders sometimes pursue selfish strategies such as taking large risks or paying
excessive dividends. These actions generally result in:
A. no action by debtholders since these are shareholder concerns.
B. agency costs to bondholders.
C. investments with risks similar to those of the current firm.
D. undertaking scale-enhancing projects.
E. lower agency costs, as shareholders have more control over the firm’s assets.
Answer:
If a group other than current management solicits the authority to vote shares as part of
their effort replace the current management team, a _____ is said to occur.
A. proxy fight
B. stockholder derivative action
C. tender offer
D. vote of confidence
E. seniority turnover
Answer:
Which account is least apt to vary directly with sales?
A. notes payable
B. inventory
C. cost of goods sold
D. accounts payable
E. accounts receivable
Answer:
The proposition that the cost of equity is a positive linear function of capital structure is
called:
A. the capital asset pricing model.
B. MM Proposition I (no taxes).
C. MM Proposition II (no taxes).
D. the law of one price.
E. the efficient markets hypothesis.
Answer:
Delta Distributors has accounts receivable of $2,750,000 and average daily credit sales
of $118,280. The firm offers credit terms of 2/10, net 30. On average, what is the firm’s
accounts receivable period?
A. 19.47 days
B. 23.25 days
C. 37.14 days
D. 20.00 days
E. 18.64 days
Answer:
Samuelson’s has sales of $317,000, a profit margin of 8.6 percent, an equity multiplier
of 1.8, and total debt of $144,400. What is the return on equity?
A. 15.48%
B. 14.46%
C. 7.05%
D. 15.10%
E. 11.25%
Answer:
A firm currently has debt outstanding with a coupon rate of 7 percent. The firm is
obtaining subsidized financing for a new project at a rate of 5.5 percent. The current
market rate is 6.8 percent and the firm’s tax rate is 35 percent. What discount rate
should be used to compute the NPV of the loan?
A. 5.5 percent
B. 3.575 percent
C. 6.8 percent
D. 4.42 percent
E. 7 percent
Answer:
What are the arithmetic and geometric (Answer in that order) average returns for a
stock with annual returns of 4 percent, 9 percent, -6 percent, and 18 percent?
A. 5.89%; 6.25%
B. 6.25%; 5.89%
C. 6.25%; 8.33%
D. 8.33%; 5.89%
E. 8.33%; 6.25%
Answer:
Why do managers suggest that ignoring all cash flows following the assigned payback
period is not a major flaw of the payback method of capital budgeting analysis?
A. Payback is never used in real practice so it makes no difference how academics
apply the method in their studies
B. All cash flows after the first two years are highly inaccurate so including them
lessens the reliability of the resulting decision.
C. If the cash flows after the required payback period are significant, managers will use
their discretion to override the payback rule.
D. All cash flows after the assigned payback period are relatively worthless in today’s
dollars so ignoring them has no consequence.
E. The results of including the cash flows after the required payback period rarely have
any effect on the accept/reject decision.
Answer:
A firm has a market value equal to its book value, excess cash of $1,000, and equity
worth $17,800. The firm has 5,000 shares of stock outstanding and net income of
$31,200. What will the new earnings per share be if the firm uses its excess cash to
complete a stock repurchase?
A. $7.20
B. $6.50
C. $6.61
D. $5.89
E. $6.23
Answer:
All else equal, the contribution margin must increase as:
A. both the sales price and variable cost per unit increase.
B. the fixed cost per unit declines.
C. the variable cost per unit declines.
D. sales price per unit declines.
E. the sales price minus the fixed cost per unit increases.
Answer:
One reason why the efficient capital market hypothesis may not hold in reality is that:
A. risk has been eliminated from the process of arbitrage.
B. most investors appear in studies to be rational.
C. arbitrage appears to be fully effective.
D. irrationality may be related across individuals.
E. irrationalities cancel out across investors.
Answer:
A firm has an equity beta of 1.2, the risk-free rate of return is 3.4 percent, the market
return is 15.7 percent, and the pretax cost of debt is 9.4 percent. The debt-equity ratio
is .47. If you apply the common beta assumptions, what is the firm’s asset beta?
A. .816
B. .609
C. .667
D. .582
E. .646
Answer:
New Corp. last paid a $1.50 per share annual dividend. The company is planning on
paying $1.62, $1.68, $1.75, and $1.80 a share over the next four years, respectively.
After that the dividend will be a constant $2.00 per share per year. What is the market
price of this stock if the market rate of return is 15 percent?
A. $6.00
B. $8.49
C. $12.48
D. $11.57
E. $9.09
Answer:
A blanket mortgage is securitized by:
A. the sinking fund.
B. the borrower’s inventory.
C. all of the borrower’s real property.
D. the good faith and credit of the borrower.
E. the borrower’s inventories and accounts receivables.
Answer:
According to generally accepted accounting principles (GAAP), revenue is recognized
as income when:
A.a contract is signed to perform a service or deliver a good.
B.the transaction is complete and the goods or services are delivered.
C.payment is requested.
D.income taxes are paid on the revenue earned.
E.managers decide to recognize it.
Answer:
What is the value of a call given the Black-Scholes model and the following
information? Stock price $44 Exercise price $40 Time to expiration .75 Risk-free rate
4.5% Standard deviation 25% N(d1) .759395 N(d2) .687172
A. $2.03
B. $4.86
C. $6.84
D. $8.81
E. $9.27
Answer:
When credit is granted to another firm this gives rise to a(n):
A. accounts receivable and is called a consumer credit.
B. credit due and is called an installment note.
C. accounts receivable and is called trade credit.
D. trade receivable and is called an installment note.
E. trade receivable and is called a secured loan.
Answer:
An analysis of what happens to the estimate of net present value when only one variable
is changed is called _____ analysis.
A. forecasting
B. scenario
C. sensitivity
D. simulation
E. break-even
Answer:
Given a stated interest rate, which form of compounding will yield the highest effective
rate of interest?
A. annual compounding
B. monthly compounding
C. daily compounding
D. continuous compounding
E. semiannual compounding
Answer:
The first equity issue offered to the general public by a firm is a:
A. rights offer.
B. general cash offer.
C. restricted placement.
D. direct placement.
E. seasoned offering.
Answer: