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What is the effective annual rate if a bank charges you 9.50 percent compounded
quarterly?
A. 9.62 percent
B. 9.68 percent
C. 9.72 percent
D. 9.84 percent
E. 9.91 percent
How many dollars of sales are being generated from every dollar of net fixed assets?
(Use 2009 values.)
A. $0.88
B. $1.87
C. $2.33
D. $2.59
E. $3.09
What was the highest annual rate of inflation during the period 1926-2007?
A. between 0 and 3 percent
B. between 3 and 5 percent
C. between 5 and 10 percent
D. between 10 and 15 percent
E. between 15 and 20 percent
You currently own a one-year call option on Rail Company, Inc., stock. The current
stock price is $51.80 and the risk-free rate of return is 4.25 percent. Your option has a
strike price of $50 and you assume the option will finish in the money. What is the
current value of your call option?
A. $1.20
B. $2.59
C. $3.84
D. $5.13
E. $7.27
A $20 put option on Wildwood stock expires today. The current price of the stock is
$18.50. Which one of the following best describes this option?
A. funded
B. unfunded
C. at-the-money
D. in-the-money
E. out-of-the-money
Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal
payment at maturity. What is the $1,000 called?
A. coupon
B. face value
C. discount
D. yield
E. dirty price
The price-sales ratio is especially useful when analyzing firms that have which one of
the following?
A. volatile market prices
B. negative earnings
C. positive PEG ratios
D. a negative Tobin's Q
E. increasing sales
Johnson Manufacturers and Peabody Enterprises are both manufacturers of plastic
products, such as plastic plates and silverware. These two firms have decided to work
together to find a more efficient way to recycle rejected products so that any rejected
material can be reused. Thus, each company is going to assign two of its engineers to
this project and have agreed to share any and all costs incurred in this process. This
project is an example of a:
A. consolidation.
B. merged alliance.
C. joint venture.
D. takeover project.
E. strategic alliance.
Which one of the following statements related to the SML approach to equity valuation
is correct? Assume the firm uses debt in its capital structure.
A. This model considers a firm's rate of growth.
B. The model applies only to non-dividend paying firms.
C. The model is dependent upon a reliable estimate of the market risk premium.
D. The model generally produces the same cost of equity as the dividend growth model.
E. This approach generally produces a cost of equity that equals the firm's overall cost
of capital.
Which two methods of project analysis were the most widely used by CEO's as of
1999?
A. net present value and payback
B. internal rate of return and payback
C. net present value and average accounting return
D. internal rate of return and net present value
E. payback and average accounting return
The Lumber Mart recently replaced its management team. As a result, the firm is
implementing a restrictive short-term policy in place of the flexible policy under which
the firm had been operating. Which of the following should the employees expect as a
result of this policy change?
I. reduction in sales due to stock outs
II. greater inventory selection
III. decreased sales due to the new accounts receivable credit policy
IV. decreased investment in marketable securities
A. I and II only
B. II and IV only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
You are comparing two mutually exclusive projects. The crossover point is 12.3
percent. You have determined that you should accept project A if the required return is
13.1 percent. This implies you should:
A. always accept project A.
B. be indifferent to the projects at any discount rate above 13.1 percent.
C. always accept project A if the required return exceeds the crossover rate.
D. accept project B only when the required return is equal to the crossover rate.
If a lessor borrows money on a nonrecourse basis to purchase an asset that will be
leased to another party, then:
A. the lessor is responsible for the payments on the borrowed funds whether or not the
lessee pays the lease payments.
B. the lessee must pay both the lease payment and the loan payment.
C. the loan is considered paid in full if the lessee discontinues making the lease
payments or terminates the lease early.
D. the lessor is only obligated to make loan payments as long as the lessor is collecting
the lease payments.
E. the lessor must pursue the lessee if the lessee fails to make the agreed upon lease
payments.
Andy deposited $3,000 this morning into an account that pays 5 percent interest,
compounded annually. Barb also deposited $3,000 this morning into an account that
pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings
and spend it as soon as possible. Barb will reinvest her interest earnings into her
account. Given this, which one of the following statements is true?
A. Barb will earn more interest the first year than Andy will.
B. Andy will earn more interest in year three than Barb will.
C. Barb will earn interest on interest.
D. After five years, Andy and Barb will both have earned the same amount of interest.
E. Andy will earn compound interest.
Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he
expects to harvest a record crop within the next two weeks. At present, he has no
storage facilities and therefore must sell his crop as soon as it is harvested. Which one
of the following risks is he facing because he must sell his crop at whatever the market
price is at harvest time?
A. futures risk
B. volatility exposure
C. surplus risk
D. transactions exposure
E. translation exposure
An increase in which of the following will increase the value of a call?
I. time to expiration
II. underlying stock price
III. risk-free rate of return
IV. price volatility of the underlying stock
A. I and III only
B. II, III, and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a
share. The difference between these two prices is referred to as the:
A. price variance.
B. bid-ask spread.
C. trading range.
D. opening price.
Which one of the following costs was incurred in the past and cannot be recouped?
A. incremental
B. side
C. sunk
D. opportunity
E. erosion
Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The
underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares
were purchased in accordance with which one of the following?
A. Green shoe provision
B. Red herring provision
C. quiet provision
D. lockup agreement
E. post-issue agreement
Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25
percent. How much will she have in her account at the end of 45 years?
A. $1,806,429
B. $1,838,369
C. $2,211,407
D. $2,333,572
E. $2,508,316
Boston Chicken is considering two mutually exclusive projects with the following cash
flows. What is the crossover rate? If the required rate of return is lower than the
crossover rate, which project should be accepted?
A. 14.72 percent; A
B. 14.72 percent; B
C. 15.99 percent; A
D. 15.99 percent; B
E. 16.08 percent; B
You are considering an investment with the following cash flows. If the required rate of
return for this investment is 15.5 percent, should you accept the investment based solely
on the internal rate of return rule? Why or why not?
A. Yes; The IRR exceeds the required return.
B. Yes; The IRR is less than the required return.
C. No; The IRR is less than the required return.
D. No; The IRR exceeds the required return.
E. You cannot apply the IRR rule in this case.
Which one of the following statements concerning venture capital financing is correct?
A. Venture capitalists desire shares of common stock but avoid preferred stock.
B. Venture capital is relatively easy to obtain.
C. Venture capitalists rarely assume active roles in the management of the financed
firm.
D. Venture capitalists often require at least a forty percent equity position as a condition
of financing.
E. Venture capital is relatively inexpensive in today's competitive markets.
Which of the following have been offered as supporting arguments in favor of IPO
underpricing?
I. Underpricing counteracts the "winner's curse".
II. Underpricing rewards institutional investors for sharing their opinions of a stock's
market value.
III. Underpricing diminishes the underwriting risk of a firm commitment underwriting.
IV. Underpricing reduces the probability that investors will sue the underwriters.
A. I and III only
B. II and IV only
C. I and II only
D. I, II, and III only
E. I, II, III, and IV
A firm has sales of $3,400, net income of $390, total assets of $4,500, and total equity
of $2,750. Interest expense is $40. What is the common-size statement value of the
interest expense?
A. 0.89 percent
B. 1.18 percent
C. 3.69 percent
D. 10.26 percent
E. 14.55 percent
A proposed expansion project is expected to increase sales of JL Ticker's Store by
$35,000 and increase cash expenses by $21,000. The project will cost $24,000 and be
depreciated using straight-line depreciation to a zero book value over the 4-year life of
the project. The store has a marginal tax rate of 30 percent. What is the operating cash
flow of the project using the tax shield approach?
A. $5,600
B. $7,800
C. $11,600
D. $13,300
E. $14,600
Which one of the following statements is correct concerning unsystematic risk?
A. An investor is rewarded for assuming unsystematic risk.
B. Eliminating unsystematic risk is the responsibility of the individual investor.
C. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk.
D. Beta measures the level of unsystematic risk inherent in an individual security.
E. Standard deviation is a measure of unsystematic risk.
The 40-day period following an IPO during which the SEC places restrictions on the
public communications of the issuer is known as the _____ period.
A. silent
B. quiet
C. lockup
D. green
E. red
An account into which funds are deposited only in an amount equal to the value of the
checks presented for payment that day is called a _____ account.
A. lockbox
B. concentration
C. zero-balance
D. compensating balance
E. revolving
Springboro Tech is a young start-up company. No dividends will be paid on the stock
over the next 15 years, because the firm needs to plow back its earnings to fuel growth.
The company will pay a $12 per share dividend in 16 years and will increase the
dividend by 3 percent per year thereafter. What is the current share price if the required
return on this stock is 8 percent?
A. $75.66
B. $88.19
C. $120.00
D. $164.59
E. $240.00
Which one of the following statements is correct if you purchase an item with credit
terms of 1/5, net 15?
A. If you pay within 1 day, you will receive a 5 percent discount.
B. If you pay within 5 days, you will receive a 1 percent discount.
C. If you do not pay within 15 days, you will be charged interest at a 1.5 percent
monthly rate.
D. If you pay within 15 days, you will receive a 1/5th percent discount.
E. You must pay the discounted amount within 15 days.
Which one of the following defensive tactics is designed to prevent a "two-tier"
takeover offer?
A. bear hug
B. poison put
C. shark repellent
D. dual class capitalization
E. fair price provision
AB Industries is an all-equity firm that has $8 per share in cash and a book value per
share of $12. At which one of the following market prices would you know with
absolute certainty that the stock was mispriced?
A. $7
B. $8
C. $10
D. $12
E. $13
Which one of the following describes the intrinsic value of a put option?
A. lesser of the strike price or the stock price
B. lesser of the stock price minus the exercise price or zero
C. lesser of the stock price or zero
D. greater of the strike price minus the stock price or zero
E. greater of the stock price minus the exercise price or zero
If a stock portfolio is well diversified, then the portfolio variance:
A. will equal the variance of the most volatile stock in the portfolio.
B. may be less than the variance of the least risky stock in the portfolio.
C. must be equal to or greater than the variance of the least risky stock in the portfolio.
D. will be a weighted average of the variances of the individual securities in the
portfolio.
E. will be an arithmetic average of the variances of the individual securities in the
portfolio.
