1) Marcos Enterprises has three separate divisions. The firm allocates each division
$1.5 million per year for capital purchases. Which one of the following terms applies to
this allocation process?
A.Soft rationing
B.Hard rationing
C.Opportunity cost
D.Sunk cost
E.Strategic planning
2) Valerie bought 200 shares of Able stock today. Able stock has been trading for some
time on the NYSE. Valerie’s purchase occurred in which market?
A.Dealer market
B.Over-the-counter market
C.Secondary market
D.Primary market
E.Tertiary market
3) A prepack:
A.guarantees full payment to all creditors but lengthens the time span of the debt
B.is the joint filing of both a bankruptcy filing and a creditor-approved reorganization
plan
C.protects the interests of both the current creditors and the existing shareholders
D.applies only if a firm files under Chapter 7 of the bankruptcy code
E.extends the time that a firm is protected by the bankruptcy process
4) New Labs just announced that it has received a patent for a product that will
eliminate all flu viruses. This news is totally unexpected and viewed as a major medical
advancement. Which one of the following reactions to this announcement indicates the
market for New Labs stock is efficient?
A.The price of New Labs stock remains unchanged
B.The price of New Labs stock increases rapidly and then settles back to its
pre-announcement level
C.The price of New Labs stock increases rapidly to a higher price and then remains at
that price
D.All stocks quickly increase in value and then all but New Labs stock fall back to their
original values
E.The value of all stocks suddenly increase and then level off at their higher values
5) What is the name given to the model that computes the present value of a stock by
dividing next year’s annual dividend amount by the difference between the discount rate
and the rate of change in the annual dividend amount?
A.Stock pricing model
B.Equity pricing model
C.Capital gain model
D.Dividend growth model
E.Present value model
6) Greenbriar Cotton Mill is spending $330,000 to update its facility. The company
estimates that this investment will improve its cash inflows by $56,500 a year for 10
years. What is the payback period?
A.4.03 years
B.4.95 years
C.5.48 years
D.5.84 years
E.The project never pays back
7) Which one of the following is the hypothesis that securities markets are efficient?
A.Geometric market hypothesis
B.Standard deviation hypothesis
C.Efficient markets hypothesis
D.Capital market hypothesis
E.Financial markets hypothesis
8) Morgantown Movers has net working capital of $11,300, current assets of $31,200,
equity of $53,400, and long-term debt of $11,600. What is the amount of the net fixed
assets?
A.$31,800
B.$32,900
C.$45,500
D.$48,100
E.$53,700
9) Which one of the following is the price that an investor pays to purchase an
outstanding bond?
A.Dirty price
B.Face value
C.Call price
D.Bid price
E.Clean price
10) The Green Mile has the following estimated quarterly sales for next year.
The accounts receivable period is 45 days. What is the expected accounts receivable
balance at the end of the third quarter? Assume each month has 30 days.
A.$4,300
B.$4,750
C.$5,600
D.$6,667
E.$8,600
11) Skyline Industries will need $1.8 million 5 years from now to replace some
equipment. Currently, the firm has some extra cash and would like to establish a
savings account for this purpose. The account pays 5.25 percent interest, compounded
annually. How much money must the company deposit today to fully fund the
equipment purchase?
A.$1,279,947.20
B.$1,298,407.21
C.$1,350,868.47
D.$1,393,676.52
E.$1,412,308.18
12) Which one of the following is true concerning a controlled disbursement account?
A.The number of checks that can be disbursed on any one day is limited
B.The bank will inform the firm of the amount that needs to be transferred on a daily
basis
C.The amount that can be disbursed on any given day is limited to the balance in the
account when the bank opens in the morning
D.The total number of checks that can be written in any one month is limited
E.The amount of the disbursements is limited to the amount the firm has available on its
bank line of credit
13) Which one of the following statements concerning issue costs is correct?
A.The underwriters pay the spread
B.Taxes are an indirect underwriting cost
C.Seasoned equity offerings (SEOs) tend to be less costly than IPOs
D.Straight bonds are more costly to issue than convertible bonds
E.The total direct cost as a percentage of gross proceeds for an IPO tends to decrease as
the size of the offer decreases
14) Aardvaark & Co. has sales of $291,200, cost of goods sold of $163,300, net profit
of $11,360, net fixed assets of $154,500, and current assets of $89,500. What is the total
asset turnover rate?
A.1.08
B.1.11
C.1.19
D.1.24
E.1.28
15) Blazer Sports Store is preparing to pay its quarterly dividend of $2.20 a share this
quarter. The stock closed at $70 a share today. What will the ex-dividend stock price be
if the relevant tax rate is 15 percent and all else is held constant?
A.$55.28
B.$55.50
C.$55.83
D.$55.94
E.$57.70
16) Which one of the following best represents the transaction motive for holding cash?
A.Buying extra inventory in response to an unexpected sale offered by a supplier
B.Distributing the weekly paychecks
C.Increasing the minimum cash balance for the firm’s main bank account
D.Unexpectedly purchasing a competitor’s firm
E.Holding cash in anticipation that the firm may need to close for a few days if
floodwaters keep rising
17) The Bethlehem Inn is an all-equity firm with 18,000 shares outstanding at a value
per share of $14.50. The firm is issuing $50,000 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.11,970 shares
B.14,552 shares
C.14,846 shares
D.15,030 shares
E.15,561 shares
18) Daniel’s Market has sales of $36,600, costs of $28,400, depreciation expense of
$3,100, and interest expense of $1,500. If the tax rate is 34 percent, what is the
operating cash flow, OCF?
A.$4,811
B.$5,279
C.$6,466
D.$6,976
E.$7,013
19) For the past six years, the price of Slippery Rock stock has been increasing at a rate
of 9.6 percent a year. Currently, the stock is priced at $67 a share and has a required
return of 14 percent. What is the dividend yield?
A.1.20 percent
B.2.75 percent
C.3.49 percent
D.4.28 percent
E.4.40 percent
20) Radio Shack offers credit to its customers and charges interest of 1.2 percent per
month. What is the annual percentage rate?
A.14.40 percent
B.14.61 percent
C.15.10 percent
D.15.31 percent
E.15.53 percent
21) The Toy Chest pays an annual dividend of $4.80 per share and sells for $93.20 a
share based on a market rate of return of 15 percent. What is the capital gains yield?
A.7.35 percent
B.7.78 percent
C.9.23 percent
D.9.85 percent
E.10.00 percent
22) You’ve worked out a line of credit arrangement that allows you to borrow up to $55
million at any time. The interest rate is 0.55 percent per month. In addition, 3 percent of
the amount you borrow must be deposited in a non-interest-bearing account. Assume
that your bank uses compound interest on its line-of-credit loans. Suppose you need $12
million today and you repay it in six months. How much interest will you pay?
A.$387,567
B.$413,902
C.$421,028
D.$441,414
E.$442,886
23) Electronic Products has 35,000 bonds outstanding that are currently quoted at 102.3
. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm’s
aftertax cost of debt if the applicable tax rate is 30 percent?
A.4.47 percent
B.4.79 percent
C.6.07 percent
D.6.98 percent
E.8.67 percent
24) You are analyzing a company that has cash of $11,200, accounts receivable of
$27,800, fixed assets of $124,600, accounts payable of $31,300, and inventory of
$56,900. What is the quick ratio?
A.0.30
B.0.67
C.0.80
D.1.25
E.1.37
25) Which one of the following is a key provision of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005?
A.Disallowance of bankruptcy prepacks
B.Right granted to creditors to file their own reorganization plan once a firm is in
bankruptcy for 18 months
C.Disallowance of all management bonus payments while a firm is in bankruptcy
D.Requirement that only creditors can file reorganization plans for a bankrupt firm
E.Requirement for all Chapter 11 bankruptcies to be converted to Chapter 7
bankruptcies after 18 months
26) Which one of the following defines the cash cycle?
A.Inventory period plus the accounts receivable period
B.Inventory period plus the accounts payable period
C.Operating cycle minus the inventory period
D.Operating cycle minus the accounts payable period
E.Operating cycle minus the accounts receivable period
27) List three decisions that a financial manager makes that would fall under the
category of working capital management.
28) Todd wants to start his own business and is debating between organizing the
business as a sole proprietorship or a corporation. Explain the pros and cons of both
forms of business organization.
29) Provide two arguments in favor of IPO underpricing and two arguments against
IPO underpricing.
30) Explain why the net present value is considered to be the best method of analyzing
an investment.
31) Assume a firm has both a controller and a treasurer. Identify the types of
responsibilities each should have and explain why their duties should be separated as
you suggest.
32) Assume the federal government decides to permanently eliminate corporate income
taxes as a means of encouraging economic development and job growth. What effect, if
any, would this change have on the evaluation of a proposed project?
33) Explain how the selection of a method of depreciation can affect the net present
value of an investment for a tax-paying firm.
34) Assume this is your first day on the job as the new chief financial officer of a
midsize company. Identify the three key ratios that you would compute first as you
begin to try to understand the financial status of the firm. Explain why you selected the
three ratios that you did.
35) Explain how a Dutch auction operates and why a firm might choose to sell its
securities in this manner.
36) Since there are no perfect or ideal standard ratios for a firm, why is ratio analysis
still considered a valuable management tool?