Enterprise value equals the:
A. combined market value of debt and equity minus excess cash.
B. market value of equity minus the market value of debt plus excess cash.
C. market value of debt plus the book value of equity minus excess cash.
D. combined market value of debt and equity.
E. combined book value of debt and equity minus excess cash.
Answer:
Venture capitalists are:
A. intermediaries that raise funds from outside investors.
B. investors who take a hands-off approach to investment management.
C. generally interested in primarily long-term investments.
D. easily contacted and tend to assist with most requests received.
E. generally granted a maximum of 25 percent of a firm’s equity.
Answer:
Firms are least apt to deal with financial distress by:
A. selling major assets.
B. merging with another firm.
C. issuing new securities.
D. exchanging debt for equity.
E. acquiring a competitor.
Answer:
If a firm needs to increase its cash holdings it could:
A. increase fixed assets.
B. decrease accounts payable.
C. decrease long-term debt.
D. increase other current assets.
E. increase current liabilities.
Answer:
Empirical evidence suggests that new equity issues are generally:
A. priced efficiently by the market.
B. overpriced by investor excitement concerning a new issue.
C. overpriced resulting from SEC regulation.
D. underpriced, in part, to counteract the winner’s curse.
E. underpriced resulting from SEC regulation.
Answer:
Management’s first step in any issue of securities to the public is to:
A. file a registration form with the SEC.
B. distribute copies of the preliminary prospectus.
C. distribute copies of the final prospectus.
D. obtain approval from the board of directors.
E. prepare the tombstone advertisement.
Answer:
Benson’s established a trust fund that provides $125,000 in college scholarships each
year. The trust fund earns a rate of return of 6.15 percent and distributes only its annual
income. How much money did Benson’s contribute to establish the trust fund?
A. $2,291,613.13
B. $2,032,520.33
C. $2,150,000.00
D. $2,018,970.44
E. $1,987,408.15
Answer:
Lew just purchased $67,600 of equipment that is classified as 5-year MACRS property.
The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52
percent, and 5.76 percent for Years 1 to 6, respectively. What will the book value of this
equipment be at the end of four years should he decide to resell the equipment at that
point in time?
A. $11,681.28
B. $18,280.20
C. $17,040.00
D. $19,468.80
E. $22,672.00
Answer:
Which one of the following industries tends to have the highest leverage ratio?
A. natural gas distribution
B. computer
C. television broadcasting stations
D. educational services
E. biological products
Answer:
All else held constant, which one of these is most apt to increase the WACC of a
leveraged firm?
A. an increase in the weightof debt
B. a decrease in a firm’s equity beta
C. a decrease in the dividend growth rate
D. a decrease in the tax rate
E. an increase in the risk-free rate when the equity beta > 1
Answer:
If a firm decreases its operating costs, all else constant, then the:
A. profit margin will decrease.
B. return on assets will decrease.
C. total asset turnover rate will increase.
D. cash coverage ratio will decrease.
E. price-earnings ratio will decrease.
Answer:
Heritage Farms has sales of $1.62 million with costs of goods sold equal to 78 percent
of sales. The average inventory is $369,000, accounts payable average $438,000, and
receivables average $147,000. How long is the cash cycle?
A. 13.30 days
B. 13.19 days
C. 17.29 days
D. 7.54 days
E. 11.77 days
Answer:
If a corporate security can be exchanged for a fixed number of shares of stock, the
security is said to be:
A. callable.
B. convertible.
C. protected.
D. putable.
E. inflated.
Answer:
The Montana Hills Co. has expected earnings before interest and taxes of $17,100, an
unlevered cost of capital of 12.4 percent, and debt with both a book and face value of
$25,000. The debt has an annual 6.2 percent coupon. If the tax rate is 34 percent, what
is the value of the firm?
A. $91,016.13
B. $137,903.23
C. $99,516.13
D. $106,666.67
E. $146,403.23
Answer:
The owner of a European call option has the:
A. right but not the obligation to buy a stock at a specified price on a specified date.
B. right but not the obligation to buy a stock at a specified price during a specified
period of time.
C. obligation to buy a stock on a specified date but only at the specified price.
D. obligation to buy a stock sometime during a specified period of time at the specified
price.
E. obligation to buy a stock at the lower of the exercise price or the market price on the
expiration date.
Answer:
Which concept states that real rates of interest are equal across countries?
A. uncovered interest parity
B. relative purchasing power parity
C. unbiased forward rates
D. absolute purchasing power parity
E. international Fisher effect
Answer:
Wheels and More needs to maintain 8 percent of its sales in net working capital. The
firm is considering a 5-year project which will increase sales from their current level of
$110,000 to $146,000, $152,000, $158,000, $164,000, and $155,000 for Years 1 to 5 of
the project, respectively. What amount should be included in the project analysis for net
working capital for Year 3 of the project?
A. −$12,640
B. −$480
C. $0
D. $480
E. $12,640
Answer:
A use of cash is associated with:
A. a decrease in a liability.
B. an increase in an asset.
C. an increase in retained earnings.
D. both an increase in an asset and an increase in retained earnings.
E. both a decrease in a liability and an increase in an asset.
Answer:
Which one of these is a characteristic of a sensible payout policy?
A. over time pay out half of all free cash flows
B. set the current regular dividend consistent with a 100 percent payout ratio
C. increase regular dividends to distribute transitory cash flow increases
D. set the dividends high even if it means acquiring expensive external financing
E. avoid rejecting positive NPV projects to increase dividends or buyback shares
Answer:
The condition stating that the current forward rate is an unbiased predictor of the future
spot exchange rate is called:
A. the unbiased forward rates condition.
B. uncovered interest rate parity.
C. the international Fisher effect.
D. purchasing power parity.
E. interest rate parity.
Answer:
Debt capacity is often offered as a reason for a stock price to decline when additional
equity securities are issued. The primary reason that supports this argument is that:
A. the high issue costs of a debt offering must be paid by the shareholders.
B. an additional equity issue reduces the debt capacity of a firm.
C. management feels the probability of default has risen, which limits the firm’s debt
capacity and thus an equity issue is necessary.
D. unless additional debt is issued in the future, stock dividends will tend to decline
after the new securities are issued.
E. additional equity is only issued when a firm cannot meet its current debt obligations,
thereby signaling the firm is on the verge of bankruptcy.
Answer:
A potential disadvantage of forward contracts versus futures contracts is:
A. the extra liquidity required to cover the potential outflows that can occur prior to
delivery.
B. the incentive for a particular party to default.
C. that the buyers and sellers don’t know each other and never meet.
D. the obligatory requirements rather than the optional opportunities.
E. the increased ability to close out a position prior to expiration.
Answer:
You sold ten put option contracts on PLT stock with an exercise price of $31.20 and an
option price of $1.20. Today, the option expires and the underlying stock is selling for
$33 a share. Ignoring trading costs and taxes, what is your total profit on this
investment?
A. -$3,300
B. -$1,200
C. $120
D. $1,200
E. $3,300
Answer:
Assume you are determining the risk-neutral probabilities of a price increase and
decrease. In this situation, you know the expected return on the asset must equal the:
A. sponsoring firm’s cost of capital.
B. risk-free rate.
C. market rate of return.
D. annual inflation rate.
E. CAPM rate of return.
Answer:
If you were to consider the CAPM as a one-factor model, then the factor would be the:
A. rate of inflation.
B. market risk premium.
C. GNP.
D. risk-free rate.
E. individual beta of each security or portfolio.
Answer:
Noncash items refer to:
A.the credit sales of a firm.
B.the accounts payable of a firm.
C.the costs incurred for the purchase of intangible fixed assets.
D.expenses charged against revenues that do not directly affect cash flow.
E.all accounts on the balance sheet other than cash on hand.
Answer:
Which one of these ratios is commonly used to compute the horizon value of a firm?
A. PE
B. Price/Sales
C. EV/EBITDA
D. Book equity/ROE
E. Market value of equity/ROE
Answer:
A compensating balance:
A. requirement generally applies to inventory-type loans.
B. is a means of paying for banking services received.
C. requirement is generally set equal to one percent of the amount borrowed.
D. decreases the cost of short-term bank financing.
E. refunds a portion of the borrower’s interest if a loan is repaid early.
Answer:
The Market Place recently offered 5,000 shares of stock for sale via a Dutch auction.
The firm received bids as follows: 500 shares at $22.50; 2,500 shares at $22.20; 3,300
shares at $22; and 5,500 shares at $21. Ignoring all costs, how much will the firm
receive from this auction?
A. $110,000
B. $105,000
C. $138,600
D. $112,500
E. $247,800
Answer:
CC’s is analyzing a proposed project with anticipated sales of 3,620 units, give or take 5
percent at a sales price of $24, plus or minus 2 percent.. The variable cost per unit is
$14.60, plus or minus 4 percent, and the fixed costs are $12,900, plus or minus 1
percent. The depreciation expense is $8,100. If the company conducts a sensitivity
analysis using a variable cost of $16, the total variable cost estimate will be:
A. $53,470
B. $54,900
C. $55,500
D. $57,920
E. $61,050
Answer:
For a firm with long-term debt, net income is equal to:
A.Pretax income – Interest expense – Taxes.
B.EBIT – Taxes.
C.Taxes + Addition to retained earnings.
D.Pretax income (1 – Marginal tax rate).
E.Dividends + Addition to retained earnings.
Answer:
Prime Bank is offering your company the use of their lockbox services. They estimate
that you can reduce your average mail time by 1.5 days and they can save you a
combined clearing and processing time of 1 day by putting the checks into the clearing
system sooner. Your firm receives 198 checks a day with an average value of $2,300
each. The current T-Bill rate is .011 per day. Assume a 365-day year. Prime Bank will
charge your firm an annual fee of $27,500 plus $.20 per check. What is the annual net
savings from installing this system?
A. $4,115.36
B. $3,480.00
C. $2,816.00
D. $3,756.78
E. $4,108.29
Answer:
Stock A has a beta of .69 and an expected return of 9.27 percent. Stock B has a 1.13
beta and an expected return of 11.88 percent. Stock C has a 1.48 beta and an expected
return of 15.31 percent. Stock D has a beta of .71 and an expected return of 8.79
percent. Lastly, Stock E has a 1.45 beta and an expected return of 14.04 percent. Which
one of these stocks is correctly priced if the risk-free rate of return is 3.6 percent and the
market rate of return is 10.8 percent?
A. Stock A
B. Stock B
C. Stock C
D. Stock D
E. Stock E
Answer:
Tru-U stock is selling for $41 a share. A 6-month call on Tru-U stock with a strike price
of $45 is priced at $1.60. Risk-free assets are currently returning .29 percent per month.
What is the price of a 6-month put on Tru-U stock with a strike price of $45?
A. $2.98
B. $3.00
C. $4.63
D. $4.82
E. $4.90
Answer:
Which one of the following is a capital budgeting decision?
A. determining how much debt should be borrowed from a particular lender
B. deciding whether or not a new production facility should be built
C. deciding when to repay a long-term debt
D. determining how much inventory to keep on hand
E. deciding how much credit to grant to a particular customer
Answer: