1) The required return on a stock is equal to which one of the following if the dividend
on the stock decreases by 1 percent per year?
A.(P0/D1)-g
B.(D1/P0)/g
C.Dividend yield + capital gains yield
D.Dividend yield – capital gains yield
E.Dividend yield capital gains yield
2) The Toy Store has beginning retained earnings of $28,975. For the year, the company
earned net income of $4,680 and paid dividends of $1,600. The company also issued
$3,000 worth of new stock. What is the value of the retained earnings account at the end
of the year?
A.$20,445
B.$22,695
C.$27,375
D.$32,055
E.$35,255
3) You have compiled the following information on your investments. What rate of
return should you expect to earn on this portfolio?
A.9.54 percent
B.9.83 percent
C.10.01 percent
D.10.27 percent
E.10.58 percent
4) Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has
a beta of 0.68 and an expected return of 7.6 percent. You want a portfolio with the same
risk as the market. What is the expected return of your portfolio?
A.10.67 percent
B.11.18 percent
C.11.62 percent
D.12.04 percent
E.13.13 percent
5) Judy’s Boutique just paid an annual dividend of $1.65 on its common stock. The firm
increases its dividend by 2.5 percent annually. What is the rate of return on this stock if
the current stock price is $38.20 a share?
A.6.93 percent
B.7.37 percent
C.7.54 percent
D.8.19 percent
E.8.33 percent
6) Given an interest rate of 4.85 percent per year, what is the value at year t = 8 of a
perpetual stream of $2,500 payments that begin at year t = 25?
A.$23,042.78
B.$24,160.35
C.$48,211.12
D.$50,877.64
E.$51,546.49
7) After successfully completing your corporate finance class, you feel the next
challenge ahead is to serve on the board of directors of Marine Enterprises.
Unfortunately, you will be the only individual voting for you. If Marine Enterprises has
350,000 shares outstanding and the stock currently sells for $52, how much will it cost
you to buy a seat if the company uses straight voting? Assume Marine Enterprises uses
cumulative voting and there are five open seats in the current election; how much will it
cost you to buy a seat now?
A.$9,100,000; $3,640,000
B.$9,100,000; $3,033,385
C.$9,100,052; $3,548,052
D.$9,100,052; $3,033,385
E.$9,100,052; $3,640,000
8) Suppose a stock had an initial price of $74 per share, paid a dividend of $0.80 per
share during the year, and had an ending share price of $76. What was the capital gains
yield?
A.2.70 percent
B.3.29 percent
C.3.78 percent
D.4.01 percent
E.4.23 percent
9) Which one of the following best defines the economic order quantity (EOQ)?
A.Minimum size of an order needed to qualify for free shipping
B.Minimum amount that must be ordered to obtain the quantity discount
C.Number of items that are sold on average each month
D.Restocking quantity that minimizes the total cost of inventory
E.Minimal amount of inventory that must be purchased to receive a cash discount
10) Oil Town Marina has annual credit sales of $17 million. The average collection
period is 38 days. What is the average investment in accounts receivable as shown on
the balance sheet?
A.$646,000
B.$824,000
C.$1,408,888
D.$1,769,863
E.$1,824,509
11) Of the following, which two are the best reasons for doing a reverse stock split?
I. return a stock to its normal trading range
II. eliminate small shareholders
III. reduce shareholder costs
IV. avoid delisting
A.I and II
B.I and III
C.II and III
D.II and IV
E.III and IV
12) Global Traders has common stock outstanding at a market price of $53 per share.
The total market value of the firm is $6,603,800. The firm plans on liquidating one of
its divisions for $548,000 in cash and distributing the proceeds to the shareholders in
the form of a liquidating dividend. What will be the amount per share of that dividend?
A.$4.197
B.$4.398
C.$4.620
D.$4.714
E.$4.782
13) Corporate shareholders:
A.are proportionately liable for the firm’s debts
B.are protected from all losses
C.have the ability to change the corporation’s bylaws
D.receive tax-free distributions since all profits are taxed at the corporate level
E.have basically no control over the actual corporation
14) Five years ago, you purchased 600 shares of stock. The annual returns have been
7.2 percent, -19.4 percent, 3.8 percent, 14.2 percent, and 27.9 percent, respectively.
What is the variance of these returns?
A.0.029889
B.0.030021
C.0.030068
D.0.030133
E.0.030284
15) Which one of the following is probably the most effective means of increasing
investors’ interest in an IPO?
A.Extending the lockup period
B.Issuing the IPO through a rights offering
C.Underpricing the IPO
D.Eliminating the quiet period
E.Eliminating the Green Shoe option
16) Lester had $6,270 in his savings account at the beginning of this year. This amount
includes both the $6,000 he originally invested at the beginning of last year plus the
$270 he earned in interest last year. This year, Lester earned a total of $282.15 in
interest even though the interest rate on the account remained constant. This $282.15 is
best described as:
A.simple interest
B.interest on interest
C.discounted interest
D.complex interest
E.compound interest
17) Which one of the following statements is correct, all else held constant?
A.Beta is used to compute the return on equity and the standard deviation is used to
compute the return on preferred
B.A decrease in a firm’s WACC will increase the attractiveness of the firm’s investment
options
C.The aftertax cost of debt increases when the market price of a bond increases
D.If you have both the dividend growth and the security market line’s costs of equity,
you should use the higher of the two estimates when computing WACC
E.WACC is only applicable to firms that issue both common and preferred stock
18) Assume the total cost of a college education will be $285,000 when your child
enters college in 22 years. You presently have $35,000 to invest. What annual rate of
interest must you earn on your investment to cover the cost of your child’s college
education?
A.8.65 percent
B.9.40 percent
C.10.00 percent
D.10.60 percent
E.11.00 percent
19) As compared to a cash dividend, a share repurchase will do which of the following?
A.Increase both earnings per share and the PE ratio
B.Increase the earnings per share but not affect the PE ratio
C.Increase the earnings per share and decrease the PE ratio
D.Not affect either the earnings per share nor the PE ratio
E.Not affect the earnings per share but will decrease the PE ratio
20) You place an order for 750 units of Good Y at a unit price of $32. The supplier
offers terms of 1/15, net 45. The supplier is offering you a discount of _____ if you pay
within ____ days.
A.$240; 15
B.$240; 30
C.$240; 45
D.$1,600; 15
E.$1,600; 45
21) Selected information about South, Inc., a restaurant chain, follows.
During 2011, how much cash (in $ millions) did South collect from sales?
A.364
B.277
C.404
D.324
E.451
F.None of the above
22) Jodie’s Fashions has just signed a $2.2 million contract. The contract calls for a
payment of $0.6 million today, $0.8 million one year from today, and $0.8 million two
years from today. What is this contract worth today if the firm can earn 7.2 percent on
its money?
A.$2,038,616.67
B.$2,042,414.79
C.$2,108,001.32
D.$2,124,339.07
E.$2,202,840.91
23) The Border Crossing just paid an annual dividend of $4.20 per share and is
expected to pay annual dividends of $4.40 and $4.50 per share the next two years,
respectively. After that, the firm expects to maintain a constant dividend growth rate of
2 percent per year. What is the value of this stock today if the required return is 14
percent?
A.$30.04
B.$32.18
C.$33.33
D.$35.80
E.$36.75
24) Which one of the following statements is false?
A.Financial executives must design financial securities to meet the needs of the firm
and its investors
B.Financial instruments are subject to full disclosure requirements
C.Financial instruments are greatly constrained by law and regulation
D.Financial instruments are claims against a company’s cash flows and assets
E.None of the above
25) You bought a yen-denominated corporate bond at the beginning of the year for
100,000. The bond paid 3 percent annual interest and was trading for 110,000 at
year-end. The exchange rate was $1 = 100 at the beginning of the year and $1 = 97 at
year-end. What would be your U.S. dollar holding return on the bond?
A.3.09%
B.6.09%
C.13%
D.16.49%
E.30%
26) Webster Industrial Products has both common and noncumulative preferred stock
outstanding. The dividends on these stocks are $1.10 per quarter per share of common
and $2.50 per quarter per share of preferred. The company has not paid any dividends
for the past two quarters but is expected to pay dividends on both the common and the
preferred stock next quarter. What is the minimum amount the firm must pay per share
to its preferred stockholders next quarter if it plans to pay a common dividend?
A.$0
B.$1.10
C.$2.50
D.$5.00
E.$7.50
27) Which one of the following forms of business organization offers liability
protection to some of its owners but not to all of its owners?
A.Sole proprietorship
B.General partnership
C.Limited partnership
D.Limited liability company
E.Corporation
28) 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
29) Which of the following duties belong to the underwriters of a firm commitment
securities offer?
I. duty to offer the Green Shoe provision to all investors who buy at the offer price
II. duty to set the offer price
III. duty to distribute the offered shares
IV. duty to purchase any unsold shares
A.I and III only
B.II and IV only
C.II, III, and IV only
D.I, II, and III only
E.I, II, III, and IV
30) A callable bond:
A.is generally call protected during the entire term of the bond issue
B.generally will have a call protection period during the final three years prior to
maturity
C.may be structured to pay bondholders the current value of the bond on the date of call
D.is prohibited from having a sinking fund also
E.is frequently called at a price that is less than par value
31) You own a portfolio that is invested as follows: $11,600 of stock A, $7,800 of stock
B, $14,900 of stock C, and $3,200 of stock D. What is the portfolio weight of stock C?
A.38.47 percent
B.39.73 percent
C.41.26 percent
D.41.94 percent
E.43.08 percent
32) A registered form bond is defined as a bond that:
A.is a bearer bond
B.is held in street name
C.pays coupon payments directly to the owner of record
D.is listed with the Securities Exchange Commission (SEC)
E.is unsecured
33) Which one of the following statements is correct?
A.From a legal perspective, preferred stock is a form of corporate equity
B.All classes of stock must have equal voting rights per share
C.Common shareholders elect the corporate directors while the preferred shareholders
vote on mergers and acquisitions
D.Dividends are tax-free income for individual investors
E.Shareholders prefer noncumulative dividends over cumulative dividends
34) A 5.5 percent $1,000 bond matures in 7 years, pays interest semiannually, and has a
yield to maturity of 6.23 percent. What is the current market price of the bond?
A.$945.08
B.$947.21
C.$959.09
D.$959.60
E.$962.40
35) The managers of H.R Construction are considering remodeling plans for an old
building the firm currently owns. The building was purchased 8 years ago for $689,000.
Over the past 8 years, the firm rented out the building and used the rent to pay off the
mortgage. The building is now owned free and clear and has a current market value of
$898,000. The firm is considering remodeling the building into a conference centre and
sandwich bar at an estimated cost of $1.7 million. The estimated present value of the
future income from this centre is $2.9 million. Which one of the following defines the
opportunity cost of the remodeling project?
A.Initial cost of the building
B.Cost of the remodeling
C.Current market value of the building
D.Initial cost of the building plus the remodeling costs
E.Current market value of the building plus the remodeling costs
36) Soft and Cuddly is considering a new toy that will produce the following cash
flows. Should the company produce this toy if the firm requires a 15 percent rate of
return?
A.Yes; the project’s rate of return is 10.21 percent
B.Yes; the project’s rate of return is 11.47 percent
C.No; the project’s rate of return is 10.21 percent
D.No; the project’s rate of return is 11.47 percent
E.No; the internal rate of return is zero percent
37) You’ve just found a 7 percent coupon bond on the market that sells for par value.
What is the maturity on this bond?
A.The bond must mature in one year
B.The bond could have any maturity date
C.The bond must be maturing today
D.The bond must mature in 10 years
E.None of the other answers
38) High Valley Antiques would like to issue new equity shares if its cost of equity
declines to 10.5 percent. The company pays a constant annual dividend of $1.60 per
share. What does the market price of the stock need to be for the firm to issue the new
shares?
A.$14.48
B.$14.83
C.$15.24
D.$15.92
E.$16.80
39) What is the net present value of the following set of cash flows at a discount rate of
7 percent? At 20 percent?
A.$4,518.47; $628.30
B.$4,518.47; -$321.76
C.$4,518.47; -$525.13
D.$4,722.09; $504.21
E.$4,722.09; -$418.05
40) Which one of the following statements related to stock buybacks is correct?
A.Stock buybacks are a means of obtaining shares for employee stock option grants
B.Stock buybacks are becoming rare and may soon disappear totally
C.In 2007 and 2008, U.S. companies issued more shares than they repurchased
D.Firms are only permitted one large share repurchase program
E.Share repurchases are limited to 10 percent of the firm’s outstanding shares
41) Explain the relationships among the reward-to-risk ratio, risk-free rate of return,
market rate of return, market risk premium, beta, and the security market line.
42) Since there are no perfect or ideal standard ratios for a firm, why is ratio analysis
still considered a valuable management tool?
43) How is the stated value of a preferred stock utilized?
44) What is LIBOR and what role does it play in international finance?
45) At $1,000 par value, 10 percent coupon bond matures in 20 years. If the price of the
bond is $1,196.80, what is the yield to maturity on the bond? Assume interest is paid
annually.
46) 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.