1) Which one of the following will increase the operating cash flow as computed using
the tax shield approach?
A.Decrease in depreciation
B.Decrease in sales
C.Increase in variable costs
D.Decrease in fixed costs
E.Increase in the tax rate
2) A firm uses its weighted average cost of capital to evaluate the proposed projects for
all of its varying divisions. By doing so, the firm:
A.automatically gives preferential treatment in the allocation of funds to its riskiest
division
B.encourages the division managers to recommend only their most conservative
projects
C.maintains the current risk level and capital structure of the firm
D.automatically maximizes the total value created for its shareholders
E.allocates capital funds evenly among its divisions
3) Electronics and More offers credit terms of 1/5, net 20 . What is the effective annual
rate on a $12,000 purchase if you forgo the discount?
A.0 percent
B.8.59 percent
C.14.99 percent
D.27.71 percent
E.32.58 percent
4) 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
5) Baxter & Baxter has total assets of $710,000. There are 45,000 shares of stock
outstanding with a market value of $28 a share. The firm has a profit margin of 7.1
percent and a total asset turnover of 1.29 . What is the price-earnings ratio?
A.16.38
B.17.99
C.19.38
D.20.12
E.22.41
6) Lakeside Rides is adding a new roller coaster to its amusement park. The firm
expects this addition to increase its overall ticket sales and increase attendance at its
park. In particular, the firm expects to sell more tickets for its current roller coaster and
experience extremely high demand for its new coaster. Sales for its boat ride are
expected to decline but food and beverage sales are expected to increase significantly.
Which of the following are considered side effects associated with the new roller
coaster?
I. Ticket sales for the new roller coaster
II. Change in ticket sales for the existing coaster
III. Change in ticket sales for the boat ride
IV. Change in food and beverage sales
A.I only
B.III only
C.II and III only
D.I, II, and III only
E.II, III, and IV only
7) Jamie is analyzing the estimated net present value of a project under various what if
scenarios. The type of analysis that Jamie is doing is best described as:
A.sensitivity analysis
B.erosion planning
C.scenario analysis
D.benefit planning
E.opportunity evaluation
8) Which one of the following best describes an agreement you make today to exchange
U.S. dollars for British pounds three months from now?
A.Forward trade
B.Spot trade
C.Arbitrage transaction
D.Cross-rate exchange
E.Eurocurrency transaction
9) You want to borrow $40,000 from your local bank to buy a new sailboat. You can
afford to make monthly payments of $775, but no more. Assuming monthly
compounding, what is the highest rate you can afford on a 60-month APR loan?
A.5.9 percent
B.6.0 percent
C.6.1 percent
D.6.2 percent
E.7.2 percent
10) Which one of the following statements is correct?
A.The risk-free rate of return has a risk premium of 1.0
B.The reward for bearing risk is called the standard deviation
C.Risks and expected return are inversely related
D.The higher the expected rate of return, the wider the distribution of returns
E.Risk premiums are inversely related to the standard deviation of returns
11) You are analyzing a project and have developed the following estimates: unit sales
= 3,100, price per unit = $215, variable cost per unit = $115, fixed costs = $164,000.
The depreciation is $59,000 a year and the tax rate is 35 percent. What effect would the
sale of one more unit have on the operating cash flow?
A.$60.90
B.$61.40
C.$61.80
D.$65.00
E.$65.70
12) Four years ago, the Morgan Co. issued 15-year, 7.0 percent semiannual coupon
bonds at par. Today, the bonds are quoted at 101.6 . What is this firm’s pretax cost of
debt?
A.6.97 percent
B.7.08 percent
C.6.79 percent
D.6.83 percent
E.7.39 percent
13) Glass Growers has no debt. Its cost of capital is 8.7 percent. Suppose the firm
converts to a debt-equity ratio of 0.65 . The interest rate on the debt is 6.9 percent. What
is its new WACC?
A.7.99 percent
B.8.13 percent
C.8.36 percent
D.8.44 percent
E.8.61 percent
14) The Farmer’s Market recently announced that it will pay its first annual dividend
two years from today. The first dividend will be $0.50 a share with that amount
doubling each year for the following two years. After that, the dividend is expected to
increase by 4 percent annually. What is the value of this stock today if the required
return is 10 percent?
A.$23.57
B.$25.16
C.$26.21
D.$28.32
E.$30.18
15) The Tree House has a pretax cost of debt of 7.9 percent and a return on assets of
11.7 percent. The debt-equity ratio is 0.50. Ignore taxes. What is the cost of equity?
A.11.87 percent
B.12.33 percent
C.12.47 percent
D.12.98 percent
E.13.60 percent
16) The ability to delay an investment:
A.is commonly referred to as the best-case scenario
B.is valuable provided there are conditions under which the investment will have a
positive net present value
C.ensures that the investment will have an expected net present value that is positive
D.offsets the need to conduct sensitivity analysis
E.is referred to as the option to abandon
17) A “floater” bond frequently has a:
A.flexible deferred call period
B.fixed yield to maturity but a flexible coupon payment
C.government guarantee
D.fixed-dollar obligation
E.put provision
18) Reynolds Metals common stock is selling for $25 a share and has a dividend yield
of 3.1 percent. What is the dividend amount?
A.$0.31
B.$0.78
C.$3.49
D.$4.25
E.$7.80
19) Six months ago, Benders Gym repurchased $20,000 of its common stock. The
company pays regular quarterly dividends totaling $8,500 per quarter. What is the
amount of the cash flow to stockholders for the past year if no additional shares were
issued?
A.-$10,000
B.$20,000
C.$28,500
D.$30,000
E.$54,000
20) What term is used to describe an account that a bond trustee manages for the sole
purpose of redeeming bonds early?
A.Registered account
B.Bearer account
C.Call account
D.Sinking fund
E.Premium fund
21) If you have three thousand euros, how many dollars do you have given the
following exchange rates?
A.$2,261.42
B.$2,608.14
C.$3,211.09
D.$3,979.80
E.$4,216.50
22) You own a portfolio that is invested 38 percent in Stock A, 43 percent in Stock B,
and the remainder in Stock C. The expected returns on these stocks are 10.9 percent,
15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio?
A.10.55 percent
B.11.02 percent
C.11.67 percent
D.12.49 percent
E.13.05 percent
23) Early Works had $87,600 in net fixed assets at the beginning of the year. During the
year, the company purchased $6,400 in new equipment. It also sold, at a price of
$2,300, some old equipment with a book value of $1,100. The depreciation expense for
the year was $3,700. What is the net fixed asset balance at the end of the year?
A.$76,400
B.$78,800
C.$80,000
D.$89,200
E.$89,400
24) Cromwell’s Interiors is considering a project that is equally as risky as the firm’s
current operations. The firm has a cost of equity of 13.7 percent and a pretax cost of
debt of 8.4 percent. The debt-equity ratio is .65 and the tax rate is 40 percent. What is
the cost of capital for this project?
A.9.97 percent
B.10.29 percent
C.11.38 percent
D.11.62 percent
E.12.30 percent
25) The Flowering Vine buys hanging plants for $2 each and resells them for $8.95
each. The firm sells 3,500 plants per year. Generally, the firm orders 400 plants at a
time and has a fixed cost per order of $28. The carrying cost per unit is $1.16. To avoid
newer plants mixing with older plants, the inventory is totally sold out before it is
restocked. The total annual carrying cost is ____ and the total annual restocking cost is
____.
A.$211; $245
B.$211; $269
C.$232; $245
D.$232; $256
E.$232; $269
26) Southern Air would like to sell 750 shares of stock using the Dutch auction method.
The bids received are as follows:
Bidder B will receive _____ shares and pay a price per share of ____.
A.0; $0
B.69; $42.25
C.69; $42.00
D.225; $42.00
E.300; $40.00
27) Anna pays 1.5 percent interest monthly on her credit card account. When the
interest rate on that debt is expressed as if it were compounded only annually, the rate
would be referred to as the:
A.annual percentage rate
B.compounded rate
C.quoted rate
D.stated rate
E.effective annual rate
28) Bruno’s is considering a change from its current capital structure. Bruno’s currently
has an all-equity capital structure and is considering a capital structure with 30 percent
debt. There are currently 6,500 shares outstanding at a price per share of $46. EBIT is
expected to remain constant at $43,000. The interest rate on new debt is 8.5 percent and
there are no taxes. Tracie owns $20,700 worth of stock in the company. The firm has a
100 percent payout. What would Tracie’s cash flow be under the new capital structure
assuming that she keeps all of her shares?
A.$1,998
B.$2,227
C.$2,815
D.$3,027
E.$3,499
29) Which one of the following statements concerning IPOs and underpricing is
correct?
A.IPO underpricing primarily benefits a firm’s pre-issue owners
B.IPO underpricing is a function of the underwriting spread
C.The more an issue is underpriced, the more it tends to be oversubscribed
D.Underpricing tends to discourage investors from participating in the IPO market
E.Undersubscribed shares generally tend to also be underpriced shares
30) The operating cash flows of a project:
A.are unaffected by the depreciation method selected
B.are equal to the project’s total projected net income
C.decrease when net working capital increases
D.include any aftertax salvage values
E.include erosion effects
31) Which one of the following statements concerning market and book values is
correct?
A.The market value of accounts receivable is generally higher than the book value of
those receivables
B.The market value tends to provide a better guide to the actual worth of an asset than
does the book value
C.The market value of fixed assets will always exceed the book value of those assets
D.Book values represent the amount of cash that will be received if an asset is sold
E.The current book value of equipment purchased last year is equal to the initial cost of
the equipment
32) The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of
par value. The bonds mature in eight years and pay interest semiannually. These bonds
have current yield of _____ percent, a yield to maturity of _____ percent, and an
effective annual yield of _____ percent.
A.6.12; 6.32; 6.36
B.6.12; 6.32; 6.42
C.6.12; 6.36; 6.42
D.6.23; 6.32; 6.36
E.6.23; 6.36; 6.42
33) Blue Water Cafe has $28,700 in total assets, depreciation of $3,100, and interest of
$1,400. The total asset turnover rate is 1.2 . Earnings before interest and taxes are equal
to 28 percent of sales. What is the cash coverage ratio?
A.6.33
B.7.51
C.9.10
D.10.23
E.10.98
34) Currently, you can purchase either 128 Canadian dollars or 10,050 Japanese yen for
$100. What is the /Can$ cross-rate?
A.78.52/Can$1
B.79.94/Can$1
C.81.23/Can$1
D.86.27/Can$1
E.87.08/Can$1
35) A committed line of credit:
A.guarantees that a set amount of funds will be available to a firm for a stated period of
time regardless of events that might occur during that time period
B.is a guarantee that a bank will purchase a firm’s accounts receivable at full value
C.provides greater assurance than a noncommitted credit line that funds will be
available when needed by a firm
D.guarantees that any funds borrowed during a stated period of time will be charged the
lowest rate of interest the lending bank offers to any of its customers
E.is a loan arrangement for a stated period of time which is free of all costs and fees
other than the actual interest paid on the funds borrowed
36) You want to have $25,000 for a down payment on a house 6 years from now. If you
can earn 6.5 percent, compounded annually, on your savings, how much do you need to
deposit today to reach your goal?
A.$17,133.35
B.$17,420.73
C.$17,880.69
D.$18,211.17
E.$18,886.40
37) A firm that uses its weighted average cost of capital as the required return for all of
its investments will:
A.maintain a constant value for its shareholders
B.increase the risk level of the firm over time
C.make the best possible accept and reject decisions related to those investments
D.find that its cost of capital declines over time
E.accept only the projects that add value to the firm’s shareholders
38) 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
39) Rick is planning to invest the following amounts at 6 percent interest. How much
money will he have saved at the end of year 3?
A.$2,200.00
B.$2,238.47
C.$2,309.80
D.$2,309.16
E.$2,402.19
40) A project has annual depreciation of $16,200, costs of $87,100, and sales of
$123,000. The applicable tax rate is 40 percent. What is the operating cash flow
according to the tax shield approach?
A.$21,540
B.$27,667
C.$27,458
D.$28,020
E.$29,878