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1) Sugar and Spice stock is expected to produce the following returns given the various
states of the economy. What is the expected return on this stock?
A.7.89 percent
B.8.56 percent
C.9.43 percent
D.10.05 percent
E.10.50 percent
2) Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently
announced that all future dividends will be increased by 2.8 percent annually. What is
one share of this stock worth to you if you require a 14 percent rate of return?
A.$12.56
B.$12.95
C.$13.31
D.$13.68
E.$14.07
3) Shareholders' equity is equal to:
A.total assets plus total liabilities
B.net fixed assets minus total liabilities
C.net fixed assets minus long-term debt plus net working capital
D.net working capital plus total assets
E.total assets minus net working capital
4) The Blue Lagoon is considering a project with a five-year life. The project requires
$110,000 of fixed assets that are classified as five-year property for MACRS. Variable
costs equal 71 percent of sales, fixed costs are $9,600, and the tax rate is 35 percent.
What is the operating cash flow for year 4 given the following sales estimates and
MACRS depreciation allowance percentages?
A.-$1,806
B.$640
C.$1,809
D.$2,342
E.$2,811
5) Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past
15 years. Yesterday, the firm announced the dividend will increase next year by 10
percent and will stay at the level through year 3, after which time the dividends will
increase by 2 percent annually. The required return on this stock is 12 percent. What is
the current value per share?
A.$25.51
B.$26.08
C.$24.57
D.$26.02
E.$26.84
6) The financial statements of Jame's Auto Repair reflect cash of $14,600, accounts
receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term
debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to
cease operations today it could sell the inventory for $35,000 and the fixed assets for
$49,000. The firm could also collect 100 percent of its receivables. What is the market
value of the assets?
A.$32,800
B.$39,900
C.$74,000
D.$95,500
E.$110,100
7) Which one of the following statements is accurate for a levered firm?
A.WACC should be used as the required return for all proposed investments
B.A firm's WACC will decrease whenever the firm's tax rate decreases
C.An increase in the market risk premium will decrease a firm's WACC
D.The subjective approach totally ignores a firm's own WACC
E.A reduction in the risk level of a firm will tend to decrease the firm's WACC
8) The call premium is the amount by which the:
A.market price exceeds the par value
B.market price exceeds the call price
C.face value exceeds the market price
D.call price exceeds the par value
E.call price exceeds the market price
9) Which one of the following will tend to increase the length of the credit period?
A.Decrease in product cost
B.Decrease in consumer demand
C.Decrease in collateral value
D.Increase in credit risk
E.Increase in product standardization
10) The App Store needs to raise $2.2 million for an expansion project. The firm wants
to raise this money by selling zero coupon bonds with a par value of $1,000 that mature
in 20 years. The market yield on similar bonds is 8.8 percent. How many bonds must
The App Store sell to raise the money it needs? (Assume semiannual compounding.)
A.2,200 bonds
B.3,450 bonds
C.11,508 bonds
D.11,797 bonds
E.12,315 bonds
11) Currently, the risk-free rate is 4.0 percent. Stock A has an expected return of 9.6
percent and a beta of 1.08 . Stock B has an expected return of 13.5 percent. The stocks
have equal reward-to-risk ratios. What is the beta of Stock B?
A.1.21
B.1.33
C.1.52
D.1.78
E.1.83
12) Auto Detailers is buying some new equipment at a cost of $228,900. This
equipment will be depreciated on a straight-line basis to a zero book value its eight-year
life. The equipment is expected to generate net income of $36,000 a year for the first
four years and $22,000 a year for the last four years. What is the average accounting
rate of return?
A.15.48 percent
B.17.76 percent
C.18.09 percent
D.22.68 percent
E.25.34 percent
13) Which one of the following actions will increase the current ratio, all else constant?
Assume the current ratio is greater than 1.0
A.Cash purchase of inventory
B.Cash payment of an account receivable
C.Cash payment of an account payable
D.Credit sale of inventory at cost
E.Cash sale of inventory at a loss
14) An efficient capital market is best defined as a market in which security prices
reflect which one of the following?
A.Current inflation
B.A risk premium
C.Available information
D.The historical arithmetic rate of return
E.The historical geometric rate of return
15) A firm has earnings before interest and taxes of $25,380 with a net income of
$14,220. The taxes amounted to $5,400 for the year. During the year, the firm paid out
$43,800 to pay off existing debt and then later borrowed an additional $24,000. What is
the amount of the cash flow to creditors?
A.-$14,040
B.$19,800
C.$25,560
D.$28,440
E.$29,790
16) Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's
operations, sales, or equity. This reduction will increase which of the following ratios?
I. Capital intensity ratio
II. Return on assets
III. Total asset turnover
IV. Return on equity
A.I and II only
B.II and III only
C.II, III, and IV only
D.I, II, and IV only
E.I, II, III, and IV
17) A stock has an expected return of 15.0 percent, the risk-free rate is 3.2 percent, and
the market risk premium is 8.1 percent. What must the beta of this stock be?
A.0.88
B.0.94
C.1.08
D.1.31
E.1.46
18) Interest rate parity defines the relationships among which of the following?
A.Spot exchange rates, future exchange rates, interest rates, and inflation rates
B.Real and nominal interest rates across countries
C.Real interest and inflation rates
D.Forward exchange rates, relative interest rates, and spot exchange rates
E.Spot exchange rates, forward exchange rates, nominal interest rates, and real interest
rates
19) Discounted cash flow valuation is the process of discounting an investment's:
A.assets
B.future profits
C.liabilities
D.costs
E.future cash flows
20) The Bermuda Triangle Store pays a constant dividend. Last year, the dividend yield
was 5.4 percent when the stock was selling for $15 a share. What must the stock price
be today if the market currently requires a 3.8 percent dividend yield on this stock?
A.$21.32
B.$12.30
C.$11.59
D.$19.22
E.$22.48
21) Which one of the following is an underwriting of securities where the offer price is
determined by investor bids?
A.Private placement
B.Best efforts underwriting
C.Initial public offering
D.Green Shoe option
E.Dutch auction
22) Which one of the following portfolios will have a beta of zero?
A.A portfolio that is equally as risky as the overall market
B.A portfolio that consists of a single stock
C.A portfolio comprised solely of U. S. Treasury bills
D.A portfolio with a zero variance of returns
E.No portfolio can have a beta of zero
23) Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess
profits on ABC stock based on the knowledge he has related to his experiments if the
financial markets are:
A.weak form efficient
B.strong form efficient
C.semistrong form efficient
D.efficient at any level
E.aware that the trader is an insider
24) Your local athletic center is planning a $1.23 million expansion to its current
facility. This cost will be depreciated on a straight-line basis over a 20-year period. The
expanded area is expected to generate $524,000 in additional annual sales. Variable
costs are 48 percent of sales, the annual fixed costs are $79,400, and the tax rate is 35
percent. What is the operating cash flow for the first year of this project?
A.$118,336
B.$122,509
C.$147,027
D.$166,667
E.$219,323
25) Kurt's Forest Products is currently issuing both 5-year and 10-year bonds at par. The
bonds each pay 6.5 percent annual interest and have face values of $1,000. You decide
to purchase one of each of these bonds. Assume the yield to maturity on each of these
bonds is 7.4 percent 1 year from now. Given this, you will realize _____ percent price
depreciation on the 5-year bond and _____ percent price depreciation on the 10-year
bond.
A.3.02; 3.39
B.3.02; 4.08
C.3.02; 5.77
D.3.39; 4.08
E.3.39; 5.77
26) All else equal, an increase in which one of the following will decrease owners'
equity?
A.Increase in inventory
B.Increase in accounts payable
C.Increase in accounts receivable
D.Increase in net working capital
E.Increase in net fixed assets
27) Tom's Hardware has inventory of $318,000, equity of $421,800, total assets of
$647,700, and sales of $687,400. What is the common-size percentage for the inventory
account?
A.26.81 percent
B.33.66 percent
C.46.26 percent
D.49.10 percent
E.51.68 percent
28) Assume that long-term corporate bonds had an average return of 5.3 percent and a
standard deviation of 9.3 percent for a 30-year period. What range of returns would you
expect to see on these bonds 68 percent of the time?
A.-4.0 percent to 14.6 percent
B.-4.0 percent to 22.9 percent
C.-11.3 percent to 14.6 percent
D.-11.3 percent to 17.4 percent
E.-11.3 percent to 22.9 percent
29) The financial statements of Backwater Marina reflect depreciation expenses of
$41,600 and interest expenses of $27,900 for the year. The current assets increased by
$31,800 and the net fixed assets increased by $28,600. What is the amount of the net
capital spending for the year?
A.$7,000
B.$21,600
C.$28,600
D.$60,400
E.$70,200
30) Jim's Hardware is adding a new product line to its sales lineup. Initially, the firm
will stock $41,000 of the new inventory, which will be purchased on 30 days' credit
from a supplier. The firm will also invest $6,000 in accounts receivable and $4,000 in
equipment. What amount should be included in the initial project costs for net working
capital?
A.-$41,000
B.-$37,000
C.-$10,000
D.-$6,000
E.-$2,000
31) You want to create a $65,000 portfolio comprised of two stocks plus a risk-free
security. Stock A has an expected return of 14.2 percent and Stock B has an expected
return of 17.8 percent. You want to own $20,000 of Stock B. The risk-free rate is 4.8
percent and the expected return on the market is 13.1 percent. If you want the portfolio
to have an expected return equal to that of the market, how much should you invest in
the risk-free security?
A.$11,921
B.$13,509
C.$15,266
D.$17,315
E.$18,775
