Which one of the following statements matches M&M Proposition I without taxes?
A. The cost of equity capital has a positive linear relationship with a firm’s capital
structure.
B. The dividends paid by a firm determine the firm’s value.
C. The cost of equity capital varies in response to changes in a firm’s capital structure.
D. The value of a firm is independent of the firm’s capital structure.
E. The value of a firm is dependent on the firm’s capital structure.
For the past six years, the price of Slippery Rock stock has been increasing at a rate of
8.21 percent a year. Currently, the stock is priced at $43.40 a share and has a required
return of 11.65 percent. What is the dividend yield?
A. 3.20 percent
B. 2.75 percent
C. 3.69 percent
D. 4.28 percent
E. 3.44 percent
Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm
will increase if the:
A. market risk premium decreases.
B. risk-free rate decreases.
C. market rate of return decreases.
D. beta decreases.
E. either the risk-free rate or the market rate of return decreases.
Which statement is true?
A. Venture capitalists tend to be long-term investors in a firm.
B. Venture capitalists generally have an exit strategy.
C. Venture capitalists generally provide all of their funding in one lump sum.
D. Venture capital is relatively easy to obtain given today’s markets.
E. Venture capitalists tend to invest in a vast array of enterprises rather than specialize
in a few areas.
A callable bond:
A. is generally call protected during the entire term of the bond issue.
B. generally will have a call protection period during the final three years prior to
maturity.
C. may be structured to pay bondholders the current value of the bond on the date of
call.
D. is prohibited from having a sinking fund also.
E. is frequently called at a price that is less than par value.
The accounts receivable turnover rate for Tall Men’s Wear has gone from an average of
11.2 times to 13.8 times per year. How has this change affected the firm’s accounts
receivable period?
A. Decrease of 3.98 days
B. Decrease of 6.14 days
C. Decrease of 2.28 days
D. Increase of 2.28 days
E. Increase of 6.14 days
If a security plots to the right and below the security market line, then the security has
____ systematic risk than the market and is ____.
A. more; overpriced
B. more; underpriced
C. less; overpriced
D. less; underpriced
E. less; correctly priced
Newborn Nursery has 12,000 bonds outstanding with a face value of $1,000 each. The
coupon rate is 6.9 percent and the tax rate is 34 percent. What is the present value of the
interest tax shield?
A. $4.14 million
B. $4.86 million
C. $3.87 million
D. $3.92 million
E. $4.08 million
A stock has a beta of 1.32 and an expected return of 12.8 percent. The risk-free rate is
3.6 percent. What is the slope of the security market line?
A. 6.49 percent
B. 7.28 percent
C. 6.97 percent
D. 9.03 percent
E. 7.99 percent
Paid-in surplus is classified as:
A. owners’ equity.
B. net working capital.
C. a current asset.
D. a cash expense.
E. long-term debt.
The Park Place has a return on assets of 12.9 percent, a cost of equity of 16.2 percent,
and a pretax cost of debt of 7.7 percent. What is the debt-equity ratio? Ignore taxes.
A. .44
B. .47
C. .67
D. .91
E. .63
Marcie’s has sales of $179,600,depreciation of $14,900, costs of goods sold of
$138,200, and other costs of $28,400. The tax rate is 35 percent. What is the net
income?
A. -$1,235
B. $382
C. $1,204
D. $14,660
E. $13,665
Tattler, Inc. has declared a dividend of $2.10 a share. Suppose capital gains are not
taxed, but dividends are taxed at 15 percent and that the IRS regulations require that
taxes be withheld at the time the dividend is paid. Tattler sells for $67 per share, and the
stock is about to go ex-dividend. What do you think the ex-dividend price will be?
A. $62.40
B. $65.22
C. $65.08
D. $66.67
E. $68.04
Which one of the following has the narrowest distribution of returns for the period
1926-2014?
A. Long-term corporate bonds
B. Long-term government bonds
C. Intermediate-term government bonds
D. Large-company stocks
E. Small-company stocks
A preferred stock pays an annual dividend of $4.50. What is one share of this stock
worth to you today if you require a rate of return of 11 percent?
A. $56.14
B. $37.98
C. $43.00
D. $40.91
E. $38.56
Cox Footwear pays a constant annual dividend. Last year, the dividend yield was 3.2
percent when the stock was selling for $35a share. What is the current price of the stock
if the current dividend yield is 2.9 percent?
A. $18.92
B. $38.62
C. $25.20
D. $26.87
E. $27.40
At the end of this month, Les will start saving $200 a month for retirement through his
company’s retirement plan. His employer will contribute an additional $.50 for every
$1.00 that he saves. If he is employed by this firm for 30 more years and earns an
average of 8.25 percent on his retirement savings, how much will he have in his
retirement account 30 years from now?
A. $589,406.19
B. $401,005.25
C. $540,311.67
D. $470,465.70
E. $503,289.01
Which one of the following will increase the cash flow from assets for a tax-paying
firm, all else constant?
A. An increase in net capital spending
B. A decrease in the cash flow to creditors
C. An increase in depreciation
D. An increase in the change in net working capital
E. A decrease in dividends paid
Which one of the following statements concerning sinking funds is correct?
A. Bond issuers must fund a sinking fund at the time the bonds are issued.
B. Sinking funds must include at least one “balloon payment.”
C. Sinking funds must be funded annually, starting on the issue date.
D. Sinking funds may be used to purchase bonds in the open market.
E. Sinking funds can be used only to call bonds.
Scott borrowed $2,500 today at an APR of 7.4 percent. The loan agreement requires
him to repay $2,685 in one lump sum payment one year from now. This type of loan is
referred to as a(n):
A. interest-only loan.
B. pure discount loan.
C. quoted rate loan.
D. compound interest loan.
E. amortized loan.
A lockup agreement ensures:
A. the lead underwriter maintains an economic interest in the IPO it is managing.
B. the issuer of new securities receives a minimally agreed upon amount from the issue.
C. no research reports are issued during the waiting period.
D. company insiders maintain an economic interest in the issuer of an IPO for a
minimum period of time.
E. an IPO is not underpriced by more than five percent.
The Bethlehem Inn is an all-equity firm with 9,000 shares outstanding at a value per
share of $26.80. The firm is issuing $39,932 of debt and using the proceeds to reduce
the number of outstanding shares. How many shares of stock will be outstanding once
the debt is issued? Ignore taxes.
A. 7,970 shares
B. 7,510 shares
C. 7,846 shares
D. 8,030 shares
E. 7,561 shares
Stock in ABC Enterprises has a beta of 1.28. The market risk premium is 7.4 percent,
and T-bills are currently yielding 3.6 percent. ABC’s most recently paid dividend was
$1.62 per share, and dividends are expected to grow at an annual rate of 2 percent
indefinitely. If the stock sells for $38 a share, what is your best estimate of ABC’s cost
of equity?
A. 9.78 percent
B. 7.82 percent
C. 9.71 percent
D. 9.41 percent
E. 7.41 percent
Dividends are:
A. payable at the discretion of a firm’s president.
B. treated as a tax-deductible expense of the issuing firm.
C. paid out of aftertax profits.
D. paid only to preferred stockholders.
E. only partially taxable to high-income individual shareholders.
An asset used in a three-year project falls in the three-year MACRS class for tax
purposes. The MACRS percentage rates starting with Year 1 are: 33.33, 44.45, 14.81,
and 7.41.The asset has an acquisition cost of $2.6 million and will be sold for $1.1
million at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage
value of the asset?
A. $742,519.10
B. $726,000.00
C. $832,056.60
D. $791,504.40
E. $887,560.15
Mike’s Place has total assets of $152,080, a debt-equity ratio of .62, and net income of
$14,342 What is the return on equity?
A. 13.48 percent
B. 13.73 percent
C. 15.74 percent
D. 15.28 percent
E. 14.61 percent
Assume a company has sales of $423,800, production costs of $297,400, other expenses
of $18,500, depreciation expense of $36,300, interest expense of $2,100, taxes of
$23,600, and dividends of $12,000. In addition, you’re told that during the year the firm
issued $4,500 in new equity and redeemed $6,500 in outstanding long-term debt. If net
fixed assets increased by $7,400 during the year, what was the addition to net working
capital?
A. $11,500
B. $24,500
C. $15,800
D. $37,500
E. $30,400
On a particular risky investment, investors require an excess return of 7 percent in
addition to the risk-free rate of 4 percent. What is this excess return called?
A. Inflation premium
B. Required return
C. Real return
D. Average return
E. Risk premium
Which statement is true?
A. Bonds are generally called at par value.
B. A current list of all bondholders is maintained whenever a firm issues bearer bonds.
C. An indenture is a contract between a bond’s issuer and its holders.
D. Collateralized bonds are called debentures.
E. A bondholder has the right to determine when his or her bond is called.
How long will it take to double your savings if you earn 6.4 percent interest,
compounded annually?
A. 11.89 years
B. 12.02 years
C. 11.39 years
D. 11.17 years
E. 10.58 years
A project has an annual operating cash flow of $52,620. Initially, this four-year project
required $5,160 in net working capital, which is recoverable when the project ends. The
firm also spent $39,700 on equipment to start the project. This equipment will have a
book value of $17,014 at the end of Year 4. What is the cash flow for Year 4 of the
project if the equipment can be sold for $15,900 and the tax rate is 35 percent?
A. $63,749.90
B. $73,680.00
C. $74,069.90
D. $73,862.00
E. $73,290.10
Which term best refers to the practice of investing in a variety of diverse assets as a
means of reducing risk?
A. Systematic
B. Unsystematic
C. Diversification
D. Security market line
E. Capital asset pricing model
Recently, you needed money and agreed to sell a car you had inherited at a price of
$55,000, to be paid in monthly payments of $1,500 for 42 months. What interest rate
did you charge for financing the sale?
A. 7.25 percent
B. 6.50 percent
C. 6.84 percent
D. 7.78 percent
E. 8.33 percent
