1) Exchange Rate Risk What is the percentage change in value of a $50 million
investment in Russia when the exchange rate changes from $1 = 7 rubles to $1 = 12
rubles?
A.41.67%
B.58.33%
C.36.84%
D.63.16%
2) Sky, Inc. normally pays a quarterly dividend. The last such dividend paid was $2.50,
all future quarterly dividends are expected to grow at 4 percent, and the firm faces a
required rate of return on equity of 16.5 percent. If the firm just announced that the next
dividend will be an extraordinary dividend of $10.00 per share that is not expected to
affect any other future dividends, what should the stock price be?
A.$20.00
B.$20.80
C.$26.35
D.$27.17
3) We can estimate a stock’s value by
A.using the book value of the total stockholder equity section
B.discounting the future dividends and future stock price appreciation
C.compounding the past dividends and past stock price appreciation
D.using the book value of the total assets divided by the number of shares outstanding
4) Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this
stock. What is the percentage change in price if Coca-Cola is expected to grow at 7%
versus 8%?
A.31.29%
B.19.82%
C.21.60%
D.26.17%
5) A firm has sales of $690, EBIT of $300, depreciation of $40 and fixed assets
increased by $265. If the firm’s tax rate is 40% and there were no increases in net
operating working capital, what is the firm’s free cash flow?
A.$15
B.$75
C.-$45
D.-$55
6) Calculating Costs of Issuing Stock Blue Dragon, Inc., needs to raise $600 million to
finance its plan for nationwide expansion. In discussions with its investment bank, Blue
Dragon’s learns that the bankers recommend an offer price (or gross price) of $60 per
share and they will charge an underwriter’s spread of $3.00 per share. Calculate the net
proceeds to Blue Dragon’s from the sale of stock. How many shares of stock will Blue
Dragon’s need to sell in order to receive the $600 million they need?
A.10,000,000
B.10,526,316
C.200,000,000
D.600,000,000
7) Goldilochs Inc. reported sales of $8 million and net income of $2 million. The firm
has a total asset turnover of 3.2. The firm’s chief financial officer is projecting a $5
million increase in sales and that spontaneous liabilities will increase by $350,000
automatically. The firm currently pays out 80% of its net income to shareholders.
Assuming that all assets and current liabilities are expected to grow with sales, how
much in additional funds will Goldilochs need from external sources to fund the
expected growth?
A.$501,900
B.$562,500
C.$601,800
D.$446,600
8) You want to retire in 25 years and you have just inherited $300,000. You believe you
will need $1,450,000 upon retirement. What rate will you need to earn on the account to
achieve this goal?
A.4.5%
B.5.5%
C.6.5%
D.8.5%
9) A manager believes his firm will earn an 18 percent return next year. His firm has a
beta of 1.75, the expected return on the market is 13 percent, and the risk-free rate is 5
percent. Compute the return the firm should earn given its level of risk and determine
whether the manager is saying the firm is under-valued or over-valued.
A.19%; over-valued
B.19%; under-valued
C.16.7%; over-valued
D.16.7%; under-valued
10) Suppose that Mack Industries has annual sales of $10 million, cost of goods sold of
$6.5 million, average inventories of $1 million, and average accounts receivable of
$600,000. Assuming that all of Mack’s sales are on credit, what will be the firm’s
operating cycle?
A.34.25
B.21.9
C.56.15
D.78.05
11) Suppose that Jamie’s Jams has annual sales of $900,000; cost of goods sold of
$600,000; average inventories of $11,000; average accounts receivable of $50,000; and
an average accounts payable balance of $30,000. Assuming that all of Jamie’s sales are
on credit, what will be the firm’s cash cycle?
A.45.22
B.8.72
C.18.25
D.26.97
12) Interest rates, inflation and economic growth are economic factors that are
examples of ______________________.
A.Firm-specific risks that can be diversified away
B.Market risk
C.External factors that are neither firm specific risk nor market risk
D.None of these statements are correct
13) Calculating Costs of Issuing Stock Plains Corp. recently went public with an initial
public offering in which they received a total of $25 million in new capital funding. The
underwriter used a firm commitment offering in which the offer price was $25 and the
underwriter’s spread was $1.00. TriState also paid legal and other administrative costs
of $800,000 for the IPO. What is the number of shares issued through this IPO?
A.1,075,000
B.1,041,667
C.1,032,000
D.1,008,334
14) Your company is considering the purchase of a new machine. The original cost of
the old machine was $75,000; it is now 5 years old, and it has a current market value of
$20,000. The old machine is being depreciated over a 10-year life toward a zero
estimated salvage value on a straight-line basis, resulting in a current book value of
$37,500 and an annual depreciation expense of $7,500. The old machine can be used
for 6 more years but has no market value after its depreciable life is over. Management
is contemplating the purchase of a new machine whose cost is $60,000 and whose
estimated salvage value is zero. Expected before-tax cash savings from the new
machine are $10,000 a year over its full MACRS depreciable life. Depreciation is
computed using MACRS over a 5-year life, and the cost of capital is 9 percent. Assume
a 40 percent tax rate. What will the year 1 operating cash flow for this project be?
A.$3,300
B.$4,236
C.$7,800
D.$13,200
15) Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this
stock. What is the difference in price if Coca-Cola is expected to grow at 7% versus
8%?
A.$11.40
B.$16.80
C.$21.60
D.$19.40
16) This is used as a measure of the total amount of available cash flow from a project.
A.free cash flow
B.operating cash flow
C.investment in operating capital
D.sunk cash flow
17) A $2 million deposit earns 7% for 13 years. If the account earns 9% per year forever
after that, how long will it take to grow to $5 million?
A.Zero; the account exceeds $5 million after 13 years
B.0.26 years
C.0.43 years
D.1.18 years
18) Scenario A: At age 19 you invest $1,500 that earns 8% per year. Scenario B: At age
30 you invest $1,500 that earns 13% per year. Under which scenario would you have
more money at age 55 and what is the dollar difference at age 55 between the two
scenarios?
A.Scenario A; $1,085.49
B.Scenario A; $2,104.73
C.Scenario B; $4,179.36
D.Scenario B; $7,893.55
19) Risk versus Return Rank the following three stocks by their risk-return relationship,
best to worst. Rail Haul has an average return of 8 percent and standard deviation of 10
percent. The average return and standard deviation of Idol Staff are 10 percent and 20
percent; and of Poker-R-Us are 6 percent and 15 percent.
A.Rail Haul, Idol Staff, Poker-R-Us
B.Idol Staff, Rail Haul, Poker-R-Us
C.Poker-R-Us, Idol Staff, Rail Haul
D.Idol Staff, Poker-R-Us, Rail Haul
20) Purchasing Power Parity If the current spot rate between the U.S. dollar and the
Netherland Antilles Guilder was $1 = 1.68 Guilder, and if the inflation rate in the
United States was 1 percent and in the Netherland Antilles it was 6 percent, then what
would be the expected spot rate in one year?
A.$0.5952
B.$0.5654
C.$0.6250
D.$0.5671
21) Which of the following best describes the NPV profile?
A.A graph of a project’s NPV as a function of possible IRRs
B.A graph of a project’s NPV over time
C.A graph of a project’s NPV as a function of possible capital costs
D.None of these statements is correct
22) Methods to minimize agency problem include all except ________________.
A.Offer the managers an equity stake in the firm
B.Award the CEO stock options
C.Allow the CEO to purchase stock via an employee stock option plan
D.Allow the CEO to purchase bonds via an employee bond option plan
23) Suppose your firm is considering two mutually exclusive, required projects with the
cash flows shown below. The required rate of return on projects of both of their risk
class is 8 percent, and the maximum allowable payback and discounted payback
statistic for the projects are 2 and 3 years, respectively.
Use the discounted payback decision rule to evaluate these projects; which one(s)
should be accepted or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
24) Which of the following is likely to increase the firm’s additional funds needed?
A.The firm cuts its dividend by 50%
B.The firm reduces its usage of trade credit
C.The firm has unused fixed assets
D.All of these
25) Which of the following is defined as assuming that future sales will be equal to the
average historical value across some relevant period?
A.average approach
B.base case approach
C.nave approach
D.pro forma approach
26) This will only be executed if the order’s price conditions are met.
A.a trade
B.a limit order
C.an unlimited order
D.a spread
27) Which company has the most risk from an investor’s standpoint? Firm A has a PE of
92 times and Firm B has a PE of 16 times. Assume both firms operate in the same
industry. Firm A has fewer shares outstanding than Firm B.
A.Firm A because it has the higher PE ratio
B.Firm B because it has a lower PE ratio
C.Firm A because it has fewer shares outstanding
D.Firm B because it has more shares outstanding
28) Which of the following is NOT a tax consideration motive for a merger?
A.tax gains from net operating losses
B.tax gains from used debt capacity
C.tax gains from used equity capacity
D.tax gains from surplus firms
29) The size of the firm measured as the current stock price multiplied by the number of
shares outstanding is referred to as the firm’s
A.market capitalization
B.book value
C.market makers
D.constant growth model
30) Stock valuation model dynamics make clear that lower discount rates lead to
A.lower valuations
B.higher valuations
C.lower growth rates
D.higher growth rates
31) Loan Payments You wish to buy a $20,000 car. The dealer offers you a 5-year loan
with an 8 percent APR. What are the monthly payments?
A.$272.19
B.$333.33
C.$405.53
D.$4,080.35
32) Based on economists’ forecasts and analysis, one-year Treasury bill rates and
liquidity premiums for the next four years are expected to be as follows:
R1 = 5.95%
E(r2) = 6.25% L2 = 0.05%
E(r3) = 6.75% L3 = 0.10%
E(r4) = 7.15% L4 = 0.12%
Using the liquidity premium hypothesis, what should be the current rate on four-year
Treasury securities?
A.6.59%
B.6.75%
C.6.82%
D.7.13%
33) Calculation of Average Costs with Economies of Scope Flowers Galore is
considering a merger with Balloons N More. Flowers Galore’s total operating costs of
producing services are $400,000 for a sales volume of $4 million. Balloons’ total
operating costs of producing services are $30,000 for a sales volume of $700,000. If the
two firms merge, calculate the total average cost for the merged firm assuming no
synergies.
A.4.29%
B.9.15%
C.10.00%
D.7.14%
34) Bond Ratings and Prices A corporate bond with a 5.75 percent coupon has 15 years
left to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent.
The firm has recently gotten more financially stable and the rating agency is upgrading
the bonds to BBB. The new appropriate discount rate will be 6.00 percent. What will be
the change in the bond’s price in dollars? (Assume interest payments are paid
semi-annually and a par value of $1,000.)
A.decrease $22.25
B.increase $22.25
C.decrease $23.72
D.increase $23.72