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1) The relationship between the present value and the time period is best described as:
A.direct
B.inverse
C.unrelated
D.ambiguous
E.parallel
2) You purchase a bond with an invoice price of $1,120. The bond has a coupon rate of
7.5 percent, semiannual coupons, and there are four months to the next coupon date.
What is the clean price of the bond?
A.$1,095.00
B.$1,107.50
C.$1,114.00
D.$1,132.50
E.$1,157.50
3) At the end of this month, Les will start saving $150 a month for retirement through
his company's retirement plan. His employer will contribute an additional $0.50 for
every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an
average of 10.5 percent on his retirement savings, how much will Les have in his
retirement account 30 years from now?
A.$389,406.19
B.$401,005.25
C.$540,311.67
D.$566,190.22
E.$603,289.01
4) Stone House Cafe has a 30 percent tax rate and total taxes of $35,280. What is the
value of the interest tax shield if the interest expense is $16,700?
A.$4,887
B.$5,010
C.$5,395
D.$5,708
E.$6,023
5) Which one of the following principles refers to the assumption that a project will be
evaluated based on its incremental cash flows?
A.Forecast assumption principle
B.Base assumption principle
C.Fallacy principle
D.Erosion principle
E.Stand-alone principle
6) The annual interest divided by the face value of a bond is referred to as the:
A.market rate
B.call rate
C.coupon rate
D.current yield
E.yield-to-maturity
7) Which one of the following terms applies to a junk bond that was originally issued
with a bond rating of AA?
A.Debenture
B.Covenant
C.Fallen angel
D.Sinking
E.Triple B
8) What is the key difference between an ordinary preferred stock and a money market
preferred stock?
A.Issuer
B.Maturity
C.Fixed versus floating dividend
D.Voting rights
E.Absence of any dividend
9) If an investment is producing a return that is equal to the required return, the
investment's net present value will be:
A.positive
B.greater than the project's initial investment
C.zero
D.equal to the project's net profit
E.less than, or equal to, zero
10) The security market line is a linear function which is graphed by plotting data
points based on the relationship between which two of the following variables?
A.Risk-free rate and beta
B.Market rate of return and beta
C.Market rate of return and the risk-free rate
D.Risk-free rate and the market rate of return
E.Expected return and beta
11) A negative cash flow to stockholders indicates a firm:
A.had a negative cash flow from assets
B.had a positive cash flow to creditors
C.paid dividends that exceeded the amount of the net new equity
D.repurchased more shares than it sold
E.received more from selling stock than it paid out to shareholders
12) Mueller Brothers has 38,000 shares of stock outstanding at a price per share of $59.
How many shares will be outstanding if the firm does a 3-for-2 stock split?
A.24,000 shares
B.25,333 shares
C.55,667 shares
D.57,000 shares
E.61,000 shares
13) Use the following tax table to answer this question:
The Stone Inn earned $167,284 in taxable income for the year. How much tax does the
company owe on this income?
A.$46,311.02
B.$48,490.76
C.$54,519.27
D.$59,998.81
E.$65,240.76
14) Last year, Rita earned 11.6 percent on her investments while U.S. Treasury bills
yielded 3.8 percent and the inflation rate was 3.1 percent. What real rate of return did
she earn on her investments last year?
A.7.51 percent
B.8.24 percent
C.8.56 percent
D.9.24 percent
E.10.39 percent
15) The accounting statement which measures the revenues, expenses, and net income
of a firm over a period of time is called the:
A.statement of cash flows
B.income statement
C.GAAP statement
D.balance sheet
E.net working capital schedule
16) Which one of the following types of bonds permits its issuer to forego paying
interest payments if certain natural events cause significant losses?
A.PETS
B.PUT
C.CAT
D.PINES
E.LIBOR
17) The after-tax cost of debt generally increases when:
I. a firm's bond rating increases.
II. the market-required rate of interest for the company's bonds increases.
III. tax rates decrease.
IV. bond prices rise.
A.I and III only
B.II and III only
C.I, II, and III only
D.II, III, and IV only
E.I, II, III, and IV
18) Answer the questions below based on the following information. Taxes are 35% and
all dollars are in millions.
a) Calculate each company's ROE, ROA, and ROIC.
b) Why is Runrun's ROE so much higher than Suunto's? Does this mean Runrun is a
better company? Why or why not?
c) Why is Suunto's ROA higher than Runrun's? What does this tell you about the two
companies?
d) How do the two companies' ROICs compare? What does this suggest about the two
companies?
19) Which one of the following states that a firm's cost of equity capital is a positive
linear function of the firm's capital structure?
A.Static theory of capital structure
B.M&M Proposition I
C.M&M Proposition II
D.Homemade leverage theory
E.WACC
20) High Mountain Gear issued 240,000 shares of stock last week. The underwriters
charged a 7.85 percent spread in exchange for agreeing to a firm commitment. The legal
and accounting fees were $385,000. The company incurred $98,000 in indirect costs
related to management time and other internal expenses. The offer price was $21 a
share. Within the first hour of trading, the stock was selling for $23.20 a share. What
was the flotation cost as a percentage of the funds raised?
A.21.53 percent
B.25.29 percent
C.27.46 percent
D.33.80 percent
E.41.22 percent
21) Gallagher's Supply has sales of $387,000 and costs of $294,500. The depreciation
expense is $43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The
tax rate is 35 percent. What is the addition to retained earnings?
A.$10,775
B.$11,460
C.$13,120
D.$13,325
E.$15,450
22) Old Town Industries has three divisions. Division X has been in existence the
longest and has the most stable sales. Division Y has been in existence for five years
and is slightly less risky than the overall firm. Division Z is the research and
development side of the business. When allocating funds, the firm should probably:
A.require the highest rate of return from division X since it has been in existence the
longest
B.assign the highest cost of capital to division Z because it is most likely the riskiest of
the three divisions
C.use the firm's WACC as the cost of capital for division Z as it provides analysis for
the entire firm
D.use the firm's WACC as the cost of capital for divisions A and B because they are part
of the revenue-producing operations of the firm
E.allocate capital funds evenly amongst the divisions to maintain the current capital
structure of the firm
23) Stewart's Office Supply has revised its office procedures such that it now takes 1
day to prepare the daily deposit, rather than 2 days. Accounts payables are processed in
5 days, rather than the previous 4 days, so that shipping and receiving can better verify
the charges before the checks are written. How will these revised procedures affect the
firm's float?
A.Increase the disbursement float by 1 day
B.Decrease the collection float by 1 day
C.Decrease the net float by 2 days
D.Increase the net float by 2 days
E.No effect on the firm's float
24) The Boat House offers credit terms of 2/15, net 45 to all of its customers.
Historically, 86 percent of its customers take advantage of the discount. What is the
firm's average collection period?
A.17.36 days
B.18.87 days
C.19.20 days
D.20.33 days
E.21.08 days
25) Chandler Tire Co. is trying to decide which one of two projects it should accept.
Both projects have the same start-up costs. Project 1 will produce annual cash flows of
$52,000 a year for 6 years. Project 2 will produce cash flows of $48,000 a year for 8
years. The company requires a 15 percent rate of return. Which project should the
company select and why?
A.Project 1; because the annual cash flows are greater than those of Project 2
B.Project 1; because the present value of its cash inflows exceeds those of Project 2 by
$14,211.62
C.Project 2; because the total cash inflows are $70,000 greater than those of Project 1
D.Project 2; because the present value of the cash inflows exceeds those of Project 1 by
$18,598.33
E.It does not matter as both projects have almost identical present values
26) Your portfolio has provided you with returns of 8.6 percent, 14.2 percent, -3.7
percent, and 11.4 percent over the past four years, respectively. What is the geometric
average return for this period?
A.7.25 percent
B.7.40 percent
C.7.57 percent
D.7.63 percent
E.7.78 percent
27) Which one of the following is the suggested method of handling exchange rate risk
for a large, multinational firm headquartered in the U.S.? Assume the operations in each
country represent a different division of the firm.
A.At the division level
B.At a level which combines all divisions representing a separate geographical
continent
C.At a level which combines divisions based on the currency used by each division
D.By segregating U.S. operations and foreign operations
E.On a centralized basis for all divisions
28) Which one of the following is the date on which the board of directors agrees to pay
a dividend and passes a resolution to do so?
A.Date of record
B.Ex-dividend date
C.Payment date
D.Declaration date
E.Public announcement date
29) 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
30) You are assigned the task of computing the expected return on a portfolio
containing several individual stocks. Which one of the following statements is correct
concerning this task?
A.The expected rate of return on the portfolio must be positive
B.The arithmetic average of the betas for each security held in the portfolio must equal
1.0
C.The portfolio beta must be 1.0
D.The summation of the return deviation from the portfolio expected return for each
economic state must equal zero
E.The standard deviation of the portfolio must equal 1.0
31) Which one of the following terms denotes for certain that a bond is unsecured?
A.Debenture
B.Bearer form
C.Call provision
D.Sinking fund
E.Blanket mortgage
32) What is the difference between a tender offer and a targeted repurchase?
33) Over the next three years, you expect the rate of inflation to decrease, but yet
remain positive. After that, you expect inflation to increase steadily for the next several
years. Draw a term structure of interest rates graph based on this assumption and
identify all the components of that structure.
34) Explain the difference between a bid price and an asked price and also explain why
the prices are different.
35) Explain why the DuPont identity is so useful to a financial manager.
36) Explain the concept of incremental cash flow analysis and its purpose.
37) Investments A and B both cost $100,000 and each promises a single payoff in one
year. The distribution of payoffs for each investment appears below.
Ignoring possible differences in nondiversifiable risk, which investment would a
risk-averse investor prefer, and why?
38) The book value of Little Statistic's total assets is $400,000. Suppose Number
Crunching Inc. acquires Little Statistic's assets for $1 million and finances the purchase
by selling $600,000 in new stock, $300,000 in new debt, and reducing cash by
$100,000. Describe how the acquisition affects Number Crunching's balance sheet.
39) Selected financial information for Hard Knock Doors is presented below:
Calculate the actual and sustainable growth rate for each year.
Sustainable growth calculation:
40) You are considering a firm under three separate scenarios: 1) no debt, taxes or
bankruptcy costs, 2) with debt and taxes but no bankruptcy costs, and 3) with debt,
taxes, and bankruptcy costs. Under which one of these three scenarios will the firm
have the highest value?
