Which one of the following represents additional compensation provided to
bondholders to offset the possibility that the bond issuer might not pay the interest
and/or principal payments as expected?
A. Interest rate risk premium
B. Inflation premium
C. Liquidity premium
D. Taxability premium
E. Default risk premium
Answer:
Given the following partial stock quote, what was the closing price on the previous
trading day if the firm’s earnings per share are $1.90?
A. $16.71
B. $16.77
C. $16.89
D. $17.09
E. $17.40
Answer:
ACE, Inc. incurred depreciation expenses of $21,900 last year. The sales were $811,400
and the addition to retained earnings was $14,680. The firm paid interest of $9,700 and
dividends of $10,100. The tax rate was 40 percent. What was the amount of the costs
incurred by the firm?
A. $665,200.00
B. $689,407.67
C. $742,306.08
D. $738,500.00
E. $780,400.21
Answer:
The Egg House just borrowed $260,000 to build a new restaurant. The loan terms call
for equal annual payments at the end of each year. The loan is for 15 years at an APR of
8 percent. How much of the first annual payment will be used to reduce the principal
balance?
A. $8,311.62
B. $9,575.68
C. $10,211.08
D. $10,554.60
E. $11,420.90
Answer:
Lockboxes should be located:
A. in every town where a firm has a customer.
B. based on where a firm’s primary customers are located.
C. only in major urban areas since those are the key financial areas of the country.
D. close to a firm’s home office.
Answer:
Jim just deposited $13,000 into his account at Traditions Bank. The bank will pay 1.3
percent interest, compounded annually, on this account. How much interest on interest
will he earn over the next 15 years?
A. $238.16
B. $244.20
C. $360.70
D. $606.15
E. $623.70
Answer:
Diamond Enterprises is considering a project that will produce cash inflows of
$238,000 a year for three years followed by $149,000 in year 4. What is the internal
rate of return if the initial cost of the project is $749,000?
A. 3.43 percent
B. 4.29 percent
C. 5.81 percent
D. 6.32 percent
E. 7.55 percent
Answer:
You are scheduled to receive $7,500 in three years. When you receive it, you will invest
it for eight more years at 7.5 percent per year. How much will you have in eleven years?
A. $13,376.08
B. $14,428.09
C. $15,110.24
D. $16,113.33
E. $16,617.07
Answer:
Tim’s Tools just issued a dividend of $1.80 per share on its common stock. The
company is expected to maintain a constant 4 percent growth rate in its dividends
indefinitely. If the stock sells for $31 a share, what is the company’s cost of equity?
A. 8.81 percent
B. 9.37 percent
C. 9.94 percent
D. 10.04 percent
E. 10.46 percent
Answer:
A perpetuity in Canada is frequently referred to as which one of the following?
A. Consul
B. Infinity
C. Forever cash
D. Dowry
E. Forevermore
Answer:
Jeffries, Inc. has 6 percent coupon bonds on the market that have 11 years left to
maturity. The bonds make annual payments. If the YTM on these bonds is 7.4 percent,
what is the current bond price?
A. $895.88
B. $897.08
C. $903.14
D. $921.42
E. $933.33
Answer:
The Golf Range is considering adding an additional driving range to its facility. The
range would cost $76,000, would be depreciated on a straight-line basis over its
seven-year life, and would have a zero salvage value. The anticipated income from the
project is $34,000 a year with $14,400 of that amount being variable cost. The fixed
cost would be $16,200. The firm believes that it will earn an additional $13,000 a year
from its current operations should the driving range be added. The project will require
$2,000 of net working capital, which is recoverable at the end of the project. What is
the internal rate of return on this project at a tax rate of 34 percent?
A. 7.53 percent
B. 9.29 percent
C. 11.47 percent
D. 12.68 percent
E. 14.04 percent
Answer:
Cash concentration accounts:
A. are no longer needed since the Check Clearing Act for the 21st Century has been
passed.
B. eliminate the need for lockboxes.
C. decrease a firm’s disbursement float by reducing mail and processing delays.
D. allow firms to more efficiently handle cash.
E. tend to decrease a firm’s investment income.
Answer:
Which one of the following is the length of time that a retailer owes its supplier for an
inventory purchase?
A. Inventory period
B. Accounts receivable period
C. Accounts payable period
D. Operating cycle
E. Cash cycle
Answer:
The Cannon Ball has projected its first quarter sales at $11,200, second quarter sales at
$10,900, and third quarter sales at $13,300. The firm’s cost of goods sold is equal to 71
percent of the next quarter’s sales. The accounts receivable period is 30 days and the
accounts payable period is 60 days. At the beginning of the first quarter, the firm has an
accounts receivable balance of $2,800 and an accounts payable balance of $6,300. The
firm pays $1,500 a month in cash expenses and $200 a month in taxes. At the beginning
of the first quarter, the cash balance is $530 and the short-term loan balance is zero.
During the first quarter, the firm is planning on spending $2,600 for some new
equipment. The firm maintains a minimum cash balance of $20. Assume each month
has 30 days. What is the cumulative cash surplus (deficit) at the end of the first quarter,
prior to any short-term borrowing?
A. -$2,403
B. -$1,983
C. -$857
D. -$837
E. -$667
Answer:
Which of the following will increase the cost of equity for a firm with a beta of 1.1?
I. Decrease in the security’s beta
II. Decrease in the market risk premium
III. Decrease in the risk-free rate
IV. Increase in the risk-free rate
A. II only
B. III only
C. I and II only
D. II and III only
E. I and IV only
Answer:
Which one of the following statements is correct related to the dividend growth model
approach to computing the cost of equity?
A. The rate of growth must exceed the required rate of return.
B. The rate of return must be adjusted for taxes.
C. The annual dividend used in the computation must be for year 1 if you are using
today’s stock price to compute the return.
D. The cost of equity is equal to the return on the stock plus the risk-free rate.
Answer:
Depreciation does which one of the following for a profitable firm?
A. Increases net income
B. Increases net fixed assets
C. Decreases net working capital
D. Lowers taxes
E. Has no effect on net income
Answer: