1) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 8 percent, and that
the maximum allowable payback and discounted payback statistics for the project are
3.5 and 4.5 years, respectively. Use the PI decision to evaluate this project; should it be
accepted or rejected?
A.PI = 6.94%; reject the project
B.PI = 7.52%; reject the project
C.PI = 23.61%; accept the project
D.PI = 35.33%; accept the project
2) Which of these is a company that operates production and/or sales facilities in
multiple countries?
A.world trade corporation
B.multinational corporation
C.free trade corporation
D.managed-floating corporation
3) Reed’s Birdie Shot, Inc.’s 2010 income statement lists the following income and
expenses: EBIT = $555,000, Interest expense = $178,000, and Taxes = $148,000.
Reed’s has no preferred stock outstanding and 100,000 shares of common stock
outstanding. Calculate the 2010 earnings per share.
A.$3.49
B.$2.29
C.$3.14
D.$2.79
4) Suppose your firm is considering two mutually exclusive, required projects with the
cash flows shown below. The required rate of return on projects of both of their risk
class is 8 percent, and the maximum allowable payback and discounted payback
statistic for the projects are 2 and 3 years, respectively.
Use the PI decision rule to evaluate these projects; which one(s) should be accepted or
rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
5) Sustainable Growth Rate You have located the following information on Maize
Company: debt ratio = 20%, capital intensity ratio = 1.25 times, profit margin = 12%,
and dividend payout ratio = 10%. What is the sustainable growth rate for Maize?
A.1.20%
B.10.10%
C.12.11%
D.73.26%
6) Future Value At age 20 you invest $1,000 that earns 7 percent each year. At age 30
you invest $1,000 that earns 10 percent per year. In which case would you have more
money at age 60?
A.At age 20 invest $1,000 at 7 percent
B.At age 30 invest $1,000 at 10 percent
C.Both yield the same amount at age 60
D.There is not enough information to determine which case earns the most money at
age 60
7) Unbiased Expectations Theory The Wall Street Journal reports that the rate on 3-year
Treasury securities is 6.25 percent and the rate on 5-year Treasury securities is 6.45
percent. According to the unbiased expectations hypotheses, what does the market
expect the 2-year Treasury rate to be three years from today, E(4r2)?
A.6.35%
B.6.75%
C.7.25%
D.7.45%
8) Teaser Rate Mortgage A mortgage broker is offering a 30-year mortgage with a
teaser rate. In the first two years of the mortgage, the borrower makes monthly
payments on only a 5.5 percent APR interest rate. After the second year, the mortgage
interest charged increases to 8.5 percent APR. What is the effective interest rate in the
first two years? What is the effective interest rate after the second year?
A.5.37%, 8.19% respectively
B.5.50%, 8.50% respectively
C.5.64%, 8.84% respectively
D.12.60%, 12.66% respectively
9) Unbiased Expectations Theory One-year Treasury bills currently earn 5.50 percent.
You expect that one year from now, one-year Treasury bill rates will increase to 5.75
percent. If the unbiased expectations theory is correct, what should the current rate be
on two-year Treasury securities?
A.5.50%
B.5.625%
C.5.75%
D.11.25%
10) Which of the following statements is correct?
A.Discounted payback solves all the shortcomings of payback
B.The reinvestment rate of NPV and MIRR is the same
C.The MIRR and IRR have the same reinvestment rate
D.All of these are correct statements
11) PQR Corp. is expected to pay a dividend of $1.50 per year indefinitely. If the
appropriate rate of return on this stock is 8 percent per year, and the stock consistently
goes ex-dividend 25 days before dividend payment date, what will be the expected
minimum price in light of the dividend payment logistics?
A.$12.84
B.$18.61
C.$18.75
D.$20.09
12) Portfolio Beta and Required Return You hold the positions in the table below. What
is the beta of your portfolio? If you expect the market to earn 14 percent and the
risk-free rate is 5 percent, what is the required return of the portfolio?
A.20.21%
B.22.66%
C.28.66%
D.32.48%
For the portfolio, determine the total value of the portfolio and the weights of each
stock in the portfolio:
Total value = $20.50 x 100 + $36.20 x 150 + $60.70 x 75 + $28.40 x 200 = $17,712.50
Website.com weight = $20.50 x 100/$17,712.50 = 11.57%
13) A preferred stock from DLC pays $3.00 in annual dividends. If the required return
on the preferred stock is 9.3%, what is the value of the stock?
A.$34.89
B.$32.26
C.$38.49
D.$31.13
14) All of the following would be a result of changing to the MACRS method of
depreciation except _______.
A.Higher depreciation expense
B.Lower taxes in the early years of a project’s life
C.Lower taxable income in the early years of a project’s life
D.All of these
15) TIPS Interest and Par Value A 2 percent TIPS has an original reference CPI of
170.4. If the current CPI is 205.7, what is the current interest payment and par value of
the TIPS? (Assume semi-annual interest payments and $1,000 par value.)
A.$1000, $7.16, respectively
B.$1000, $15.09, respectively
C.$1207.16, $7.16, respectively
D.$1207.16, $15.09, respectively
16) One Year Future Value What is the future value of $700 deposited for one year
earning 4% interest rate annually?
A.$28
B.$700
C.$728
D.$1428
17) Compute the amount of each foreign currency that can be purchased for $5,000:
a. 1 Danish Krone = $0.18
b. 1 Indian Rupee = $0.15
c. 1 Israeli Shekel = $0.37
$5,000 equals:
A.17,778 Krone; 33,333.33 Rupee; 18,513.51 Shekel
B.17,778 Krone; 33,333.33 Rupee; 13,513.51 Shekel
C.27,778 Krone; 38,333.33 Rupee; 13,513.51 Shekel
D.27,778 Krone; 33,333.33 Rupee; 13,513.51 Shekel
18) Suppose that the 2009 actual and 2010 projected financial statements for Counter
Corp are initially as shown below. In these tables, sales are projected to rise 35 percent
in the coming year, and the components of the income statement and balance sheet that
are expected to increase at the same 35 percent rate as sales are indicated with an italics
font. Assuming that Counter Corp wants to cover the AFN with 60 percent equity, 25
percent long-term debt, and the remainder from notes payable, what amount of
additional funds will they need to raise if debt carries an 8 percent interest rate?
A.$217,260 equity; $90,525 long-term debt; $54,315 notes payable
B.$217,260 equity; $90,525 notes payable; $54,315 long-term debt
C.$54,315 equity; $90,525 long-term debt; $217,260 notes payable
D.none of these answers are correct
19) When moving from the left to the right of a time line, we are using
A.compound interest to calculate future values
B.discounted cash flows to calculate present values
C.only payments to calculate future values
D.simple interest to calculate future values
20) Calculating Costs of Issuing Stock Polly’s Ponies, Inc., with the help of its
investment bank recently issued 7.5 million shares of new stock. The offer price on the
stock was $15.00 per share and Polly’s received a total of $105.75 million from the
stock offering. Calculate the net proceeds and the underwriter’s spread charged by the
underwriter to Polly’s. What percentage of the gross proceeds is the investment bank
charging Polly’s for underwriting the stock issue?
A.3%
B.6%
C.9%
D.94%
21) You have been asked by the president of your company to evaluate the proposed
acquisition of a new special-purpose truck for $250,000. The truck falls into the
MACRS three-year class, and it will be sold after three years for $50,000. Use of the
truck will require an increase in NWC (spare parts inventory) of $5,000. The truck will
have no effect on revenues, but it is expected to save the firm $80,000 per year in
before-tax operating costs, mainly labor. The firm’s marginal tax rate is 40 percent.
What will the operating cash flow for this project be during year 3?
A.$25,785
B.$62,810
C.$81,333
D.$85,025
22) Solving for Time How many years will it take $200 to grow to $250 with an annual
interest rate of 4 percent?
A.1.24 years
B.5.69 years
C.6.25 years
D.18.00 years
23) Which of the following is a combination of a firm with a supplier or distributor?
A.vertical merger
B.conglomerate merger
C.product extension merger
D.market extension merger
24) How many possible IRRs could you find for the following set of cash flows?
A.1
B.2
C.3
D.4
25) First order effects are defined as which of the following?
A.The subsequent, less observable effects of the change
B.The subsequent, more observable effects of the change
C.Higher order effects of the change
D.The immediately observable effects of changing one item on another
26) Diddy Corp stock has a beta of 1.0, the current risk-free rate is 5%, and the
expected return on the market is 15.5%. What is Diddy’s cost of equity?
A.15.50%
B.14.20%
C.18.50%
D.16.30%
27) Liquidity Ratios Ernie’s Mufflers has current liabilities of $45 million. Cash makes
up 5 percent of the current assets and accounts receivable makes up another 50 percent
of current assets. Ernie’s current ratio = 1.5 times. What is the value of inventory listed
on the firm’s balance sheet?
A.$13.75 m
B.$20.25 m
C.$30.375 m
D.$33.75 m
28) Suppose that Wind Em Corp. currently has the balance sheet shown below, and that
sales for the year just ended were $12 million. The firm also has a profit margin of 20
percent, a retention ratio of 30 percent, and expects sales of $22 million next year. If all
assets and current liabilities are expected to grow with sales, what is the necessary
increase in assets?
A.$6,240,000
B.$6,333,333.33
C.$8,333,333.33
D.$4,833,000
29) Yield to Maturity A 5.75 percent coupon bond with 12 years left to maturity is
offered for sale at $978.83. What yield to maturity is the bond offering? (Assume
interest payments are paid semi-annually and par value is $1,000.)
A.3.00%
B.3.09%
C.5.75%
D.6.00%
30) An all-equity financed firm has $500 in assets and the stock price is $20. If the firm
restructures with 15% debt which creates interest expense of $30 per year and the firm’s
tax rate is 40%, what is the break-even EBIT?
A.$37.50
B.$31.50
C.$200
D.$42.50
31) This term is defined as the lead bank(s) in a syndicate, who directly negotiate with
the issuing firm on behalf of the syndicate.
A.take down
B.syndicator
C.underwriter’s spread
D.originating house