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1) Consider a three-year project with the following information: initial fixed asset
investment = $770,000; straight-line depreciation to zero over the three-year life; zero
salvage value; price = $34.99; variable costs = $23.16; fixed costs = $245,000; quantity
sold = 94,500 units; tax rate = 40 percent. How sensitive is OCF to an increase of one
unit in the quantity sold?
A.$7.10
B.$7.73
C.$8.67
D.$9.97
E.$11.83
2) The average net income of a project divided by the project's average book value is
referred to as the project's:
A.required return
B.market rate of return
C.internal rate of return
D.average accounting return
E.discounted rate of return
3) You own 100 of the 15,000 outstanding shares of Delta Movers stock. The firm just
announced that it will be issuing an additional 5,000 shares to the general public in a
cash offer at $22 per share. What type of event are you participating in if you opt to
purchase 100 of these additional shares?
A.Dutch auction
B.Seasoned equity offering
C.Private placement
D.IPO
E.Rights offer
4) Which one of the following best describes a private placement?
A.Interim financing for a new, high-risk entity
B.Long-term loan by a limited number of investors
C.Two-year direct business loan
D.Three-year loan to a firm by its original founder
E.New equity issue offered to current shareholders
5) A stock has a beta of 1.86, the expected return on the market is 14.72, and the
risk-free rate is 4.65 . What must the expected return on this stock be?
A.15.67 percent
B.16.75 percent
C.17.10 percent
D.20.46 percent
E.23.38 percent
6) The inflation premium:
A.increases the real return
B.is inversely related to the time to maturity
C.remains constant over time
D.rewards investors for accepting interest rate risk
E.compensates investors for expected price increases
7) The Underground Cafe has an operating cash flow of $187,000 and a cash flow to
creditors of $71,400 for the past year. During that time, the firm invested $28,000 in net
working capital and incurred net capital spending of $47,900. What is the amount of the
cash flow to stockholders for the last year?
A.-$171,500
B.-$86,700
C.$21,200
D.$39,700
E.$111,100
8) Which one of the following defines the internal rate of return for a project?
A.Discount rate that creates a zero cash flow from assets
B.Discount rate that results in a zero net present value for the project
C.Discount rate that results in a net present value equal to the project's initial cost
D.Rate of return required by the project's investors
E.The project's current market rate of return
9) As compared to a cash dividend, a share repurchase will do which of the following?
A.Increase both earnings per share and the PE ratio
B.Increase the earnings per share but not affect the PE ratio
C.Increase the earnings per share and decrease the PE ratio
D.Not affect either the earnings per share nor the PE ratio
E.Not affect the earnings per share but will decrease the PE ratio
10) Which one of the following is a special post office mailbox that is used to speed up
the collection of accounts receivable payments?
A.Separation box
B.Cash box
C.Concentration account
D.Lockbox
E.Float box
11) The cash cycle is equal to which one of the following?
A.Inventory period minus the accounts payable period
B.Operating cycle plus the accounts payable period
C.Operating cycle minus the accounts receivable period
D.Accounts receivable period minus the accounts payable period plus the inventory
period
E.Inventory period minus the accounts receivable period minus the accounts payable
period
12) Casper's is analyzing a proposed expansion project that is much riskier than the
firm's current operations. Thus, the project will be assigned a discount rate equal to the
firm's cost of capital plus 3 percent. The proposed project has an initial cost of $17.2
million that will be depreciated on a straight-line basis over 20 years. The project also
requires additional inventory of $687,000 over the project's life. Management estimates
the facility will generate cash inflows of $2.78 million a year over its 20-year life. After
20 years, the company plans to sell the facility for an estimated $1.3 million. The
company has 60,000 shares of common stock outstanding at a market price of $49 a
share. This stock just paid an annual dividend of $1.84 a share. The dividend is
expected to increase by 3.5 percent annually. The firm also has 10,000 shares of 12
percent preferred stock with a market value of $98 a share. The preferred stock has a
par value of $100. The company has a 9 percent, semiannual coupon bond issue
outstanding with a total face value of $1.1 million. The bonds are currently priced at
102 percent of face value and mature in 16 years. The tax rate is 33 percent. Should the
firm pursue the expansion project at this point in time? Why or why not?
A.Accept; the NPV is $2.648 million
B.Accept; the NPV is $4.507 million
C.Reject; the NPV is -$3.241 million
D.Reject; the NPV is -$3.027 million
E.Reject; the NPV is -$1.040 million
13) Ten years from now, you will be inheriting $100,000. What is this inheritance worth
to you today if you can earn 5.5 percent interest, compounded annually?
A.$58,543.06
B.$63,215.46
C.$72,419.05
D.$72,798.47
E.$74,003.15
14) The local video store has to restock a popular video game every five days as it
completely sells out in that period of time. What is the inventory turnover rate for this
game?
A.5.00 times
B.5.25 times
C.57.14 times
D.60.00 times
E.73.00 times
15) Smelly Perfumes sells 3,500 units of its perfume collection each year at a price per
unit of $275. All sales are on credit with terms of 1/7, net 30 . The discount is taken by
40 percent of the customers. What is the amount of the company's accounts receivable?
A.$54,849
B.$58,246
C.$61,003
D.$64,815
E.$67,778
16) The term structure of interest rates represents the relationship between which of the
following?
A.Nominal rates on risk-free and risky bonds
B.Real rates on risk-free and risky bonds
C.Nominal and real rates on default-free, pure discount bonds
D.Market and coupon rates on default-free, pure discount bonds
E.Nominal rates on default-free, pure discount bonds and time to maturity
17) Boone Brothers remodels homes and replaces windows. Ace Builders constructs
new homes. If Boone Brothers considers expanding into new home construction, it
should evaluate the expansion project using which one of the following as the required
return for the project?
A.Boone Brothers' cost of capital
B.Ace Builders' cost of capital
C.Average of Boone Brothers' and Ace Builders' cost of capital
D.Lower of Boone Brothers' or Ace Builders' cost of capital
E.Higher of Boone Brothers' or Ace Builders' cost of capital
18) Which one of the following statements is correct?
A.The APR is equal to the EAR for a loan that charges interest monthly
B.The EAR is always greater than the APR
C.The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1
D.The APR is the best measure of the actual rate you are paying on a loan
E.The EAR, rather than the APR, should be used to compare both investment and loan
options
19) The cost of preferred stock:
A.increases when a firm's tax rate decreases
B.is constant over time
C.is unaffected by changes in the market price
D.is equal to the stock's dividend yield
E.increases as the price of the stock increases
20) You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in
Stock B. If the expected returns on these stocks are 9 percent and 15 percent,
respectively, what is the expected return on the portfolio?
A.10.57 percent
B.11.14 percent
C.11.96 percent
D.12.52 percent
E.13.07 percent
21) Which one of the following might be included in a bond's list of negative
covenants?
A.Maintaining a current ratio of 1.2 or more
B.Maintaining a minimum cash balance of $1.2 million
C.Limiting cash dividends to $1 per share or less
D.Maintaining a times interest earned ratio of 2 or more
E.Providing audited financial statements in a timely manner
22) A stock is expected to return 13 percent in an economic boom, 10 percent in a
normal economy, and 3 percent in a recessionary economy. Which one of the following
will lower the overall expected rate of return on this stock?
A.An increase in the rate of return in a recessionary economy
B.An increase in the probability of an economic boom
C.A decrease in the probability of a recession occurring
D.A decrease in the probability of an economic boom
E.An increase in the rate of return for a normal economy
23) When you refer to a bond's coupon, you are referring to which one of the
following?
A.Difference between the purchase price and the face value
B.Annual interest divided by the current bond price
C.Difference between the bid and ask price
D.Annual interest payment
E.Principal amount of the bond
24) Birds of a Feather has 10-year bonds outstanding that carry an annual coupon of 8
percent. The bonds mature in 7 years and are currently priced at 110 percent of face
value. What is the firm's pretax cost of debt?
A.6.20 percent
B.6.60 percent
C.7.34 percent
D.7.70 percent
E.8.23 percent
25) Which one of the following statements is correct?
A.Firms cannot use lockboxes if they use cash concentration accounts
B.Firms prefer to increase processing delay on disbursements
C.Firms prefer to eliminate all types of float
D.Firms open regional offices so their employees can pick up lockbox payments
throughout the day
E.The Check Clearing Act for the 21st Century is designed to reduce the collection time
to one day
26) Which one of the following statements is correct?
A.A portfolio that contains at least 30 diverse individual securities will have a beta of
1.0
B.Any portfolio that is correctly valued will have a beta of 1.0
C.A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a
security market line graph
D.A risk-free security plots at the origin on a security market line graph
E.An underpriced security will plot above the security market line
27) Which one of the following statements concerning money market securities is
correct?
A.Commercial paper is highly marketable
B.All T-bills are issued with 90-day maturities
C.A certificate of deposit is a short-term loan to the government
D.Any CD with a face amount of $10,000 or more is classified as a jumbo CD
E.Money market preferred is less volatile than ordinary preferred
28) Alderson Metals is compiling a cash balance projection by quarter for next year.
Which one of the following adjustments to this projection will decrease the cumulative
surplus?
A.Reducing payroll costs from its current projection amount
B.Decreasing the accounts receivable period by changing the firm's credit policy
effective the first of next year
C.Receiving more favorable credit terms from the firm's suppliers
D.Increasing the dividend per share on the firm's outstanding common stock
E.Refinancing the firm's long-term debt at a lower interest rate
29) Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of
7.75 percent and monthly payments of $310. Your financial situation recently changed
such that you can no longer afford these payments. After talking with your banker and
explaining the situation, he has agreed to lower the monthly payments to $225 while
keeping the interest rate at 7.75 percent. How much longer will it take you to repay this
loan than you had originally planned?
A.12.29 months
B.14.47 months
C.15.84 months
D.17.19 months
E.19.90 months
30) Venture capital is most apt to be the source of funding for which one of the
following?
A.Bankruptcy reorganization
B.Global expansion for an established firm
C.New, high-risk venture
D.Seasonal production
E.Daily operations for an established, profitable firm
31) Explain the difference between a sunk cost and an opportunity cost and give an
example of each.
32) How can a firm benefit from preparing a short-term financial plan?
33) Explain the concept of the subjective approach to assigning a required return to a
project.
34) Global Importers predicted that its earnings per share for the year would be $1.86.
Today, the firm released its earnings report and the earnings per share turned out to be
$1.99 per share. In response to the earnings report, the price per share of Global
Importers stock declined by 3.4 percent. Explain how the market price can decrease
when the announced earnings were higher than the firm predicted.
35) Explain how staggering offsets some of the benefits associated with cumulative
voting.
36) Which type of financial market, dealer or auction, is best suited to expanding
internationally and why?
37) Explain why the capital structure of a firm is irrelevant to equity investors.
38) How are preferred stock dividends treated for tax purposes by the issuer, an
individual shareholder, and a corporate shareholder?
