1) Which of these is the measurement of risk for a collection of stocks for an investor?
A.beta
B.efficient market
C.expected return
D.portfolio beta
2) Your company is considering a new project that will require $2,000,000 of new
equipment at the start of the project. The equipment will have a depreciable life of 10
years and will be depreciated to a book value of $250,000 using straight-line
depreciation. The cost of capital is 12%, and the firm’s tax rate is 39%. Estimate the
present value of the tax benefits from depreciation.
A.$68,250
B.$106,750
C.$175,000
D.$385,628
3) Which of the following allows for two types of bankruptcy for which most
businesses can file?
A.Securities Exchange Commission
B.Generally Accepted Accounting Principles
C.The Internal Revenue Service
D.The United States Bankruptcy Code
4) Statement of Cash Flows Fina’s Faucets, Inc. has net cash flows from operating
activities for the last year of $17 million. The income statement shows that net income
is $15 million and depreciation expense is $6 million. During the year, the change in
inventory on the balance sheet was an increase of $4 million, change in accrued wages
and taxes was an increase of $1 million and change in accounts payable was an increase
of $1 million. At the beginning of the year the balance of accounts receivable was $5
million. What was the end of year balance for accounts receivable?
A.$2 million
B.$3 million
C.$7 million
D.$9 million
5) Which of the following combines two companies that have no related products or
markets?
A.vertical merger
B.conglomerate merger
C.product extension merger
D.market extension merger
6) The optimal cash replenishment level will increase with all of the following changes
except ____.
A.The transaction cost decreases
B.The annual demand for cash increases
C.The interest rate decreases
D.All of these will increase the optimal cash replenishment level
7) Unbiased Expectations Theory Suppose we observe the following rates: 1R1 = 6%,
1R2 = 7.5%. If the unbiased expectations theory of the term structure of interest rates
holds, what is the one-year interest rate expected one year from now, E(2r1)?
A.6.75%
B.7.50%
C.9.02%
D.13.5%
8) Statement of Retained Earnings Bike and Hike, Inc. started the year with a balance of
retained earnings of $100 million and ended the year with retained earnings of $128
million. The company paid dividends of $9 million to the preferred stock holders and
$22 million to common stock holders. What was Bike and Hike’s net income for the
year?
A.$28 million
B.$31 million
C.$59 million
D.$128 million
9) If a firm’s inventory ratio increases, what will happen to the firm’s cash cycle?
A.It will increase
B.It will decrease
C.It will increase and then slowly decrease back to the initial level
D.It will decrease and the slowly increase back to the initial level
10) A local furniture store is advertising a deal in which you buy a $3,500 living room
set with 3 years before you need to make payments (no interest is incurred). How much
money would have to deposit now in a savings account earning 3.5% APR,
compounded monthly, to pay the $3,500 bill in three years?
A.$2,981.17
B.$3,151.62
C.$3,200.61
D.$3,886.89
11) P/E Ratio and Stock Price International Business Machines (IBM) has earnings per
share of $6.85 and a P/E ratio of 15.19. What is the stock price?
A.$0.45
B.$2.22
C.$45.09
D.$104.05
12) 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 MIRR decision to evaluate this project; should it
be accepted or rejected?
A.MIRR = 13.59%; accept the project
B.MIRR = 7.96%; reject the project
C.MIRR = 7.19%; reject the project
D.MIRR = 12.58%; accept the project
13) All else the same, firms with stable, predictable income streams will able to
_____________.
A.Use less debt
B.Use more debt
C.Have lower D/E ratios
D.None of these
14) TJ Industries has 7 million shares of common stock outstanding with a market price
of $20.00 per share. The company also has outstanding preferred stock with a market
value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and
selling at 95% of par value. The cost of equity is 12%, the cost of preferred is 10%, and
the cost of debt is 6.45%. If TJ’s tax rate is 34%, what is the WACC?
A.8.92%
B.9.76%
C.12.59%
D.13.43%
15) When you get your credit card bill, it will offer a minimum payment, which
A.usually only pays the accrued interest and a small amount of principal
B.usually only pays the principal and a small amount of accrued interest
C.usually only pays the principal and no accrued interest
D.usually only pays the accrued interest and no principal
16) Sally saves $500 per month in her retirement plan. She plans on making monthly
contributions for 35 years. If her account earns a 12% annual interest rate, how much
will she have at the end of 35 years and what percent of the total are her out-of-pocket
contributions?
A.$1,113,879.14; 43.72%
B.$2,452,905.33; 12.07%
C.$3,215,479.74; 6.53%
D.$3,691,003.27; 8.28%
17) You are considering a stock investment in one of two firms (A and B), both of
which operate in the same industry. A finances its $20 million in assets with $18 million
in debt and $2 million in equity. B finances its $20 million in assets with $2 million in
debt and $18 million in equity. Calculate the equity multiplier for the two firms.
A.Firm A: 15 times; Firm B: 1.00 times
B.Firm A: 10 times; Firm B: 1.11 times
C.Firm A: 10 times; Firm B: 9.99 times
D.Firm A: 20 times; Firm B: 1.11 times
18) Determine the interest rate earned on a $800 deposit when $808 is paid back in one
year.
A.100%
B.10%
C.1%
D.15%
19) Common-size financial statements:
A.Allow for an easy comparison of balance sheets and income statements across firms
in the industry
B.Provide quantitative clues about the direction that the firm is moving
C.Are obtained by dividing all income statement accounts by net sales and all balance
sheet accounts by total assets
D.All of these
20) Compute the Payback statistic for Project X and recommend whether the firm
should accept or reject the project with the cash flows shown below if the appropriate
cost of capital is 9 percent and the maximum allowable payback is 4 years.
A.3.4375 years, accept
B.3.78 years, reject
C.4.4375 years, reject
D.4.78 years, accept
21) This ratio measures the number of dollars of sales produced per dollar of inventory.
A.asset management
B.cash
C.internal-growth
D.inventory turnover
22) Corporate stakeholders include all of the following except:
A.Employees
B.Shareholders
C.Suppliers
D.Auditors
23) This ratio measures the number of dollars of operating earnings available to meet
the firm’s interest dollars and other fixed charges.
A.Times interest earned
B.Basic earning power
C.Fixed charge coverage ratio
D.ROA
24) TJ Corp. is expected to pay a dividend of $3.00 per year indefinitely. If the
appropriate rate of return on this stock is 10 percent per year, and the stock consistently
goes ex-dividend 45 days before dividend payment date, what will be the expected
minimum price in light of the dividend payment logistics?
A.$3.70
B.$26.68
C.$29.65
D.$30.00
25) Which of the following is most correct?
A.When comparing two firms within the same industry, most analysts calculate the
weighted average cost of capital on a before-tax basis to facilitate comparisons
B.Firms should use historical costs rather than marginal costs of capital
C.An increase in the risk-free rate will increase the cost of equity
D.All of these statements are equally correct
26) How are present values affected by changes in interest rates?
A.The lower the interest rate, the larger the present value will be
B.The higher the interest rate, the larger the present value will be
C.Present values are not affected by changes in interest rates
D.One would need to know the future value in order to determine the impact
27) If a firm has a cash cycle of 38 days and an operating cycle of 82 days, what is its
payables turnover?
A.8.79x
B.8.30x
C.9.53x
D.10.89x
28) Exchange Rate Risk In the late 1990s, many East Asian currencies suddenly and
dramatically devalued. What is the percentage change in value of a $10 million
investment in Indonesia when the exchange rate changes from $1 = 3,000 rupiah to $1
= 10,000 rupiah?
A.30%
B.10%
C.70%
D.90%
29) Which of the following statements is correct?
A.Long-term bonds have more reinvestment rate risk than short-term bonds
B.Long-term bonds have more interest rate risk than short-term bonds
C.Short-term bonds with high coupons have high interest rate risk
D.Zero coupon bonds do not have interest rate risk
30) Which of the following statements is correct?
A.Bonds with short-term maturities will have very little interest rate risk
B.Bonds with large coupon payments will have very little interest rate risk
C.Bonds with higher credit ratings will have very little interest rate risk
D.All of these statements are correct
31) The first day that the shares will trade without the dividend attached is referred to as
the ___________.
A.Dividend date
B.Declaration date
C.Record date
D.None of these
32) Wealthy individuals who make equity investments in firms are referred to as
______________.
A.Equity consolidators
B.Red herring investors
C.Private equity investors
D.Angel venture capitalists
33) Your company has a 25% tax rate and has $600 million in assets, currently financed
entirely with equity. Equity is worth $20 per share, and book value of equity is equal to
market value of equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the possible values of
EBIT and their associated probabilities as shown below:
The firm is considering switching to a 30-percent debt capital structure, and has
determined that they would have to pay a 9 percent yield on perpetual debt in either
event. What will be the level of expected EPS if they switch to the proposed capital
structure?
A.$0.32
B.$0.36
C.$0.38
D.$0.95
34) Expected Return Compute the expected return given these three economic states,
their likelihoods, and the potential returns:
A.13.5%
B.22.5%
C.18.3%
D.40.0%
35) In Japan, many consumers pay their bills by electronic deduction from their
checking accounts instead of using paper checks. What effect do you think this has on
the collection float of Japanese firms versus that of American firms?
36) Explain the residual dividend model.
37) What is a derivative security and what determines its value?
38) The financial plan is an important element in the process of strategic planning.
What does strategic planning involve?
39) How do financial institutions impact business firms?
40) Describe how compounding affects the future value computation of an annuity.
41) Why do we use market-based weights instead of book-value weights when
computing the WAAC?