1) Compute the expected return given these three economic states, their likelihoods, and
the potential returns:
A.3.5%
B.7.0%
C.7.5%
D.12.5%
2) This is a situation that arises when a firm’s equity is close to worthless, and
equityholders will prefer to invest in overly risky projects with a small chance of
success rather than simply paying debtholders their regularly scheduled payments.
A.leverage problem
B.overinvestment problem
C.underinvestment problem
D.long position
3) Which of the following is NOT a necessary condition for an efficient market?
A.Many buyers and sellers
B.No prohibitively high barriers to entry
C.Free and readily available information available to all participants
D.No trading or transaction costs
4) Which of the following is an economic principle that states all identical goods in
different markets must have the same price?
A.purchasing power parity
B.interest rate parity
C.law of one price
D.price swap parity
5) This subarea of finance is important for adapting to the global economy.
A.investments
B.financial management
C.international finance
D.financial institutions and markets
6) Which of these is the person who liquidates the firm’s assets through a private sale or
public auction and then distributes any proceeds from the sale to the firms’ creditors and
stockholders?
A.assignor
B.grantor
C.trustor
D.trustee
7) The process of figuring out how much an amount that you expect to receive in the
future is worth today is called:
A.discounting
B.multiplying
C.compounding
D.computing
8) Exchange Rate Quote Convert the following indirect quote to a dollar direct quote:
$1 = 2,150.4 Venezuelan Bolivar
A.$0.00046503
B.$4.65
C.$1.465
D.$2.1504
9) Statement of Cash Flows Nickolas’s Nut Farms, Inc. has net cash flows from
operating activities for the last year of $25 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 a decrease of $4 million, change in
accrued wages and taxes was a decrease of $1 million and change in accounts payable
was a decrease 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
10) How might a small market risk premium impact people’s desire to buy stocks?
A.Investors with high risk aversion will be less willing to invest in stocks
B.Investors with high risk aversion will be more willing to invest in stocks
C.It will only impact the share prices
D.None of these statements is correct
11) This is a measurement of the co-movement between two variables that ranges
between -1 and +1.
A.coefficient of variation
B.correlation
C.standard deviation
D.total risk
12) Moving Cash Flows What is the value in year 3 of a $500 cash flow made in year 5
when interest rates are 6 percent?
A.$374
B.$420
C.$440
D.$445
13) A firm recently paid a $0.50 annual dividend. The dividend is expected to increase
by 10% in each of the next three years. In the third year, the stock price is expected to
be $110. If the required return is 15%, what is its value?
A.$62.53
B.$68.95
C.$73.71
D.$78.67
14) A bond’s current yield is defined as
A.the bond’s annual coupon rate divided by the bond’s par value
B.the bond’s annual coupon rate divided by the market interest rate
C.the bond’s annual coupon rate divided by the bond’s current market price
D.the bond’s annual coupon rate divided by the bond’s original issue price
15) Solving for Rates You invested $5,000 in the stock market one year ago. Today, the
investment is valued at $4,500. What return did you earn? What return would you need
to get next year to break even overall?
A.-111.11%, +90%, respectively
B.-90%, +111.11%, respectively
C.-10%, +11.11%, respectively
D.-11.11%, +10%, respectively
16) Calculating Fees on a Loan Commitment During the last year you have had a loan
commitment from your bank to fund working capital for your business. The total line
available was $25,000,000, of which you took down $20,000,000. It is now the end of
the loan commitment period and your bank is asking you to pay the back-end fees. You
have misplaced the paperwork that listed the terms of the commitment, but you know
you paid total fees (this does not include any interest paid to borrow the $20,000,000)
of $110,000 on this loan commitment. You remember that the back-end fee was 60
basis points. Calculate the front-end fee on this loan commitment.
A.60 basis points
B.32 basis points
C.40 basis points
D.16 basis points
17) Which of the following firms is more likely to use extraordinary dividends?
A.one with cyclical sales
B.one with stable sales
C.firms with either cyclical or stable sales
D.firms with neither cyclical nor stable sales
18) A firm uses only debt and equity in its capital structure. The firm’s weight of debt is
45%. The firm could issue new bonds at a yield to maturity of 10% and the firm has a
tax rate of 30%. If the firm’s WACC is 12%, what is the firm’s cost of equity?
A.16.09%
B.15.63%
C.15.21%
D.14.57%
19) Effects that arise from a new product or service that increase sales of the firm’s
existing products or services are referred to as
A.complementary effects
B.substitutionary effects
C.sunk effects
D.marginal effects
20) JUJU’s dividend next year is expected to be $1.50. It is trading at $45 and is
expected to grow at 9% per year. What is JUJU’s dividend yield and capital gain?
A.1.5%; 6%
B.9%; 3.33%
C.3.33%; 9%
D.6%; 1.5%
21) Which of the following is a checking account that the firm sets up so that the bank
agrees to automatically transfer funds from an interest-bearing account to pay off any
checks presented?
A.lockbox system
B.concentration banking
C.wire transfers
D.zero-balance account
22) Which of the following investments would you prefer?
A.An investment earning 10% for 20 years
B.An investment earning 8.5% for 20 years
C.An investment earning 5% for 40 years
D.An investment earning 3% for 40 years
23) A small business owner visits his bank to ask for a loan. The owner states that she
can repay a loan at $2,500 per month for the next 2 years and then $3,000 per month for
another 2 years after that. If the bank is charging customers 6.5% APR, how much
would it be willing to lend the business owner?
A.$111,712.39
B.$114,009.21
C.$115,278.17
D.$117,809.63
24) Trading at physical exchanges like the New York Stock Exchange and the American
Stock Exchange takes place
A.at dealers’ trading posts
B.at brokers’ trading posts
C.at dealers’ computers
D.at market markers
25) Asset Management Ratios Rachets R Us Corp. reported sales for 2011 of $200,000.
Rachets R Us listed $25,000 of inventory on its balance sheet. Using a 365-day year,
how many days did Rachets R Us’s inventory stay on the premises? How many times
per year did Rachets R Us’s inventory turn over?
A.0.125 days, 8 times, respectively
B.0.125 days, 5 times, respectively
C.45.625 days, 8 times, respectively
D.45.625 days, 5 times respectively