Which one of the following indicates that a firm has generated sufficient internal cash
flow to finance its entire operations for the period?
A. Positive operating cash flow
B. Negative cash flow to creditors
C. Positive cash flow to stockholders
D. Negative net capital spending
E. Positive cash flow from assets
The clientele effect states that investors fall into various groups because of differences
in their preferences for which one of the following?
A. Share price levels
B. Risk level
C. Short-term versus long-term investments
D. Rates of return
E. Dividends
A stock has an expected return of 11.3 percent and a beta of 1.08. The risk-free rate is
4.7 percent. What is the slope of the security market line?
A. 7.25 percent
B. 6.11 percent
C. 6.78 percent
D. 5.92 percent
E. 7.03 percent
Which type of stock pays a fixed dividend, receives first priority in dividend payment,
and maintains the right to a dividend payment, even if that payment is deferred?
A. Noncumulative preferred
B. Cumulative preferred
C. Senior common
D. Cumulative common
E. Noncumulative common
H&H Companies has an average collection period of 43 days and factors all of its
receivables immediately at a discount of 1.1 percent. Assume all accounts are collected
in full. What is the firm’s effective cost of borrowing?
A. 9.68 percent
B. 9.73 percent
C. 9.97 percent
D. 9.84 percent
E. 10.07 percent
In relation to bonds, which one of the following terms has the same meaning as the term
“crossover”?
A. Speculative
B. 5B
C. Fallen angel
D. Junk
E. Triple A
Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par.
Comparable bonds have a current yield of 9.16 percent, an effective annual yield of
9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts
BBQ set on its bonds?
A. 9.00 percent
B. 9.16 percent
C. 9.50 percent
D. 9.68 percent
E. 10.00 percent
Ed owns a store that caters primarily to men. Each of the answer options represents an
item related to a planned store expansion. Each of these items should be included in the
expansion analysis with the exception of the cost:
A. of the property insurance premium increase.
B. of the exterior landscaping that will be required once the expansion is complete.
C. of the additional sales person that will be required.
D. of the inventory required to fill the additional retail space.
E. of the blueprints that have been drawn of the expansion area.
The Green Tomato purchased a parcel of land six years ago for $389,900. At that time,
the firm invested $128,000 grading the site so that it would be usable. Since the firm
wasn’t ready to use the site itself at that time, it decided to lease the land for $48,000 a
year. The Green Tomato is now considering building a hotel on the site as the rental
lease is expiring. The current value of the land is $415,000. The firm has no loans or
mortgages secured by the property. What value should be included in the initial cost of
the hotel project for the use of this land?
A. $0
B. $389,900
C. $415,000
D. $229,000
E. $101,900
Jensen Shipping has four open seats on its board of directors. How many shares will a
shareholder need to control to ensure that his or her candidate is elected to the board
given the fact that the firm uses straight voting? Assume each share receives one vote.
A. Twenty percent of the shares plus one share
B. Twenty-five percent of the shares plus one share
C. One-third of the shares plus one share
D. Fifty percent of the shares plus one share
E. Fifty-one percent of the shares plus one share
Sarah earned a 3.3 percent real rate of return on her investments for the past year.
During that time, the risk-free rate was 3.6 percent and the inflation rate was 3.1
percent. What was her nominal rate of return?
A. 5.30 percent
B. 6.06 percent
C. 6.50 percent
D. 6.67 percent
E. 6.91 percent
Gulf Shores Inn is comparing two separate capital structures. The first structure consists
of 64,000 shares of stock and no debt. The second structure consists of 50,000 shares of
stock and $1.01 million of debt. What is the price per share of equity?
A. $75.50
B. $69.97
C. $72.14
D. $68.36
E. $74.00
A firm has earnings before interest and taxes of $27,130,net income of $16,220, and
taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it
then later borrowed $42,000. What is the amount of the cash flow to creditors?
A. -$14,040
B. $0
C. -$4,660
D. $14,040
E. $4,660
Holding cash simply as a financial reserve is referred to as the ____ motive.
A. precautionary
B. opportunistic
C. speculative
D. activity
E. transaction
Assume both corporate taxes and financial distress costs apply to a firm. Given this, the
static theory of capital structure illustrates that:
A. a firm’s value and its weighted average cost of capital are inversely related.
B. a firm’s value and its tax rate are inversely related.
C. the maximum value of a firm is obtained when a firm is financed solely with debt.
D. the value of a firm rises as the interest rate on debt rises.
E. the value of a firm rises as both the interest rate on debt and the tax rate rise.
By definition, a bank that pays simple interest on a savings account will pay interest:
A. only at the beginning of the investment period.
B. on interest.
C. only on the principal amount originally invested.
D. on both the principal amount and the reinvested interest.
E. only if all previous interest payments are reinvested.
Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and
net fixed assets of $380,200. What is the value of the current liabilities?
A. $61,700
B. $88,40000
C. $102,900
D. $96,700
E. $111,500
Which one of the following is a correct value to use if you are conducting a best-case
scenario analysis?
A. Sales price that is most likely to occur
B. Lowest expected level of sales quantity
C. Lowest expected salvage value
D. Highest expected need for net working capital
E. Lowest expected value for fixed costs
Which statement is true?
A. A prepack is a plan of liquidation used to distribute a firm’s assets.
B. Bankruptcy courts have “cram-down” powers.
C. The absolute priority rule must be strictly followed in all bankruptcy proceedings.
D. Creditors cannot force a firm into bankruptcy even though they might like to do so.
E. A reorganization plan can be approved only if the firm’s creditors all agree with the
plan.
Float is defined as the difference between the:
A. beginning and ending cash balances as shown on a cash budget.
B. ledger balance and the available balance.
C. book balance and the ledger balance.
D. collections and disbursements for any given period of time.
E. available balance and the collected balance.
Which one of the following best illustrates the concept of derived demand?
A. A minimum wage worker tends to buy more off-brand products than do more highly
paid professionals.
B. A windshield company has to step up production because auto sales are increasing.
C. A grocery store is selling more fresh fruits and vegetables.
D. Restaurant sales are rising because unemployment is falling.
E. Retail stores have increased sales around the holiday season.
Which of the following are sources of cash?
I. Decreasing accounts receivable
II. Increasing inventory
III. Increasing accounts payable
IV. Increasing common stock
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
E. I, III, and IV only
Which one of the following best describes an agreement you make today to exchange
U.S. dollars for British pounds three months from now?
A. Forward trade
B. Spot trade
C. Arbitrage transaction
D. Cross-rate exchange
E. Eurocurrency transaction
The Check Clearing Act for the 21st Century has caused:
A. increased check kiting.
B. zero-balance accounts to disappear.
C. the elimination of all lockboxes.
D. a reduction in collection float, but not disbursement float.
E. a reduction in both collection and disbursement float.
The term structure of interest rates represents the relationship between which of the
following?
A. Nominal rates on risk-free and risky bonds
B. Real rates on risk-free and risky bonds
C. Nominal and real rates on default-free, pure discount bonds
D. Market and coupon rates on default-free, pure discount bonds
E. Nominal rates on default-free, pure discount bonds and time to maturity
Which one of the following will increase the cost of equity, all else held constant?
A. Increase in the dividend growth rate
B. Decrease in beta
C. Decrease in future dividends
D. Increase in stock price
E. Decrease in market risk premium
Blue Water bonds have a face value of $1,000, a coupon rate of 6.5 percent, semiannual
interest payments, and mature in 11.5 years. What is the current price of these bonds if
the yield to maturity is 6.36 percent?
A. $979.20
B. $984.56
C. $1,011.30
D. $1,018.27
E. $1,020.00
Which one of the following terms is used to describe international bonds issued in a
single country and generally denominated in that country’s currency?
A. Eurobonds
B. American Depositary Receipts
C. Foreign bonds
D. Swaps
E. Gilts
Currently, you can exchange €100 for $124.15. The inflation rate in Europe is expected
to be 3.3 percent as compared to 3.1 percent in the U.S. Assuming that relative
purchasing power parity exists, what should the exchange rate be five years from now?
A. €.8098/$1
B. €.8136/$1
C. €.8071/$1
D. €.8039/$1
E. €.7975/$1
Space Tours wants to do an IPO but is not comfortable that underwriters will set the
most optimal offer price for the securities. Which one of the following might the firm
consider to address this uncertainty?
A. Extended quiet period
B. Extended lockup period
C. Best efforts underwriting
D. Dutch auction underwriting
E. Standby underwriting
Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860,
accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?
A. .08
B. .25
C. .30
D. .46
E. .51
Ted is trying to decide what cost of capital he should assign to a project. Which one of
the following should be his primary consideration in this decision?
A. Amount of debt used to finance the project
B. Use, or lack, of preferred stock as a financing option
C. Mix of funds used to finance the project
D. Risk level of the project
E. Length of the project’s life
Which one of the following statements concerning financial leverage is correct?
A. The benefits of leverage are unaffected by the amount of a firm’s earnings.
B. The use of leverage will always increase a firm’s earnings per share.
C. The shareholders of a firm are exposed to less risk anytime a firm uses financial
leverage.
D. Changes in the capital structure of a firm will generally change the firm’s earnings
per share.
E. Financial leverage is beneficial to a firm only when the firm has negative earnings.
The market value:
A. of accounts receivable is generally higher than the book value of those receivables.
B. of an asset tends to provide a better guide to the actual worth of that asset than does
the book value.
C. of fixed assets will always exceed the book value of those assets.
D. of an asset is reflected in the balance sheet.
E. of an asset is lowered each year by the amount of depreciation expensed for that
asset.