Suppose the Simmons Co’s common stock has a beta of 1.37, the risk-free rate is 3.4
percent, and the market risk premium is 8.2 percent. The yield to maturity in the firm’s
bonds is 7.6 percent and the debt-equity ratio is .45. What is the RWACC if the tax rate is
34 percent?
A. 14.07%
B. 10.94%
C. 12.60%
D. 10.59%
E. 11.65%
Answer:
Thirty-five years ago, your father invested $2,000. Today that investment is worth
$98,407. What rate of return has your father earned on his investment?
A. 10.94%
B. 11.33%
C. 10.50%
D. 11.77%
E. 9.99%
Answer:
Consider an investment with an initial cost of $20,000 that expected to last for 5 years.
The expected cash flows in Years 1 and 2 are $5,000 each, in Years 3 and 4 are $5,500
each, and the Year 5 cash flow is $1,000. Assume each annual cash flow is spread
evenly over its respective year. What is the payback period?
A. 3.18 years
B. 3.82 years
C. 4.00 years
D. 4.55 years
E. None of these
Answer:
In estimating the future equity risk premium, it is important to include assumptions
about the:
A. historical distribution of returns on derivative securities only.
B. future risk environment only.
C. amount of risk aversion of future investors only.
D. historical distribution of returns on derivative securities and the future risk
environment.
E. future risk environment and the amount of risk aversion of future investors.
Answer:
The costs of avoiding a bankruptcy filing by a financially distressed firm are classified
as _____ costs.
A. flotation
B. direct bankruptcy
C. indirect bankruptcy
D. financial solvency
E. capital structure
Answer:
Assume that all costs, assets, and accounts payable change spontaneously with sales.
For simplicity’s sake, assume interest expense also changes spontaneously with sales
(even though you know if may not). The tax rate and dividend payout ratios remain
constant. If the firm’s managers project a firm growth rate of 15 percent for next year,
what will be the amount of external financing needed to support this level of growth?
A. $49,535
B. $68,211
C. −$10,406
D. $13,909
E. $32,408
Answer:
Marcos receives an annuity payment of $2,500, payable every two years, for the next
ten years. The next payment is due two years from today. What is the present value of
this annuity at a discount rate of 5 percent?
A. $10,466.67
B. $11,221.08
C. $9,416.75
D. $10,052.48
E. $8,949.60
Answer:
The beta of debt is commonly considered to be:
A. equal to the market beta.
B. one-half of the equity beta.
C. the same as the asset beta.
D. zero.
E. one.
Answer:
The condition stating that the expected percentage change in the exchange rate is equal
to the difference in interest rates between the countries is called:
A. the unbiased forward rates condition.
B. uncovered interest parity.
C. the international Fisher effect.
D. purchasing power parity.
E. interest rate parity.
Answer:
Capital market history shows us that a correct ordering of the average arithmetic mean
return for asset classes, from lowest to highest, is:
A. corporate bonds, U.S. Treasury bills, small-company stocks, large-company stocks.
B. U.S. Treasury bills, small-company stocks, large-company stocks, government
bonds.
C. government bonds, U.S. Treasury bills, large-company stocks, small-company
stocks.
D. U.S. Treasury bills, government bonds, corporate bonds, large-company stocks.
E. U.S. Treasury bills, long-term government bonds, intermediate-term government
bonds, small-company stock.
Answer:
The flow-to-equity approach to capital budgeting involves all of the following except:
A. calculating the levered cost of equity.
B. determining the amount of the investment that is not borrowed.
C. computing the PV of the cash flows using the cost of equity for an all-equity firm.
D. discounting the levered cash flows using the levered cost of equity.
E. computing the project’s NPV.
Answer:
Samuel’s has shares of stock outstanding with a par value of $1 per share and a
market-to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock
account, $58,000 in the capital in excess of par account, and $32,500 in the retained
earnings account. The firm just announced a 50 percent stock dividend. What is the
value of the common stock account after the dividend?
A. $10,000
B. $8,500
C. $9,000
D. $7,500
E. $5,000
Answer:
The preferred stock of ABC Co. offers a rate of return of 7.87 percent. The stock is
currently priced at $63.53 per share. What is the amount of the annual dividend?
A. $5.20
B. $5.00
C. $4.60
D. $5.50
E. $6.00
Answer:
Winslow Motors purchased $225,000 of MACRS 5-year property. The MACRS rates
are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent
for Years 1 to 6, respectively. The tax rate is 34 percent. If the firm sells the asset after
five years for $10,000, what will be the aftertax cash flow from the sale?
A. $8,993.60
B. $8,880.20
C. $11,006.40
D. $7,770.40
E. $12,892.00
Answer:
You borrow $12,600 to buy a car. The terms of the loan call for monthly payments for
five years at an interest rate of 4.65 percent, compounded monthly. What is the amount
of each payment?
A. $253.22
B. $243.73
C. $230.62
D. $235.76
E. $233.04
Answer:
MM Proposition I with taxes supports the theory that:
A. there is a positive linear relationship between the amount of debt in a levered firm
and its value.
B. the value of a firm is inversely related to the amount of leverage used by the firm.
C. the value of an unlevered firm is equal to the value of a levered firm plus the value
of the interest tax shield.
D. a firm’s cost of capital is the same regardless of the mix of debt and equity used by
the firm.
E. a firm’s weighted average cost of capital increases as the debt-equity ratio of the firm
rises.
Answer:
The systematic risk of the market is measured by a:
A. beta of 1.0.
B. beta of zero.
C. standard deviation of 1.0.
D. standard deviation of zero.
E. variance of 1.0.
Answer:
A firm’s WACC can be correctly used to discount the expected cash flows of a new
project when that project:
A. has the same level of risk as the firm’s current operations.
B. will be financed solely with new debt and internal equity.
C. will be managed by the firm’s current managers.
D. will be financed with the same proportions of debt and equity as those currently used
by the overall firm.
E. will be financed solely with internal equity.
Answer:
The common stock of Energy Saver pays an annual dividend that is expected to
increase by 4 percent annually. The stock commands a market rate of return of 12
percent and sells for $58.25 a share. What is the expected amount of the next dividend
to be paid?
A. $4.87
B. $5.02
C. $5.10
D. $4.66
E. $4.33
Answer:
There are seven seats on the board of directors of Furniture Unlimited up for election.
The firm has 246,500 shares of stock outstanding and uses straight voting. Each share is
granted one vote. How many shares must you control if you want to guarantee your
election to the board assuming no one else votes for you?
A. 123,250
B. 123,251
C. 30,814
D. 35,215
E. 30,813
Answer:
A 3-month futures contract on gold is priced at $1,200 per troy ounce when the contract
is initiated. If the price of gold rises every day over the 3-month period, then when the
contract is settled, the buyer will _____ and the seller will _____.
A. lose; gain
B. gain; lose
C. gain; break even
D. gain; gain
E. lose; lose
Answer:
If the expected rate of inflation was 3 percent and the actual rate was .2 percent higher
than the expectation, the systematic response coefficient from inflation, βI, would result
in a change in any security return of [βI ___%].
A. 3.2
B. .2
C. -.2
D. -3.2
E. 3
Answer:
In a prepackaged bankruptcy the firm:
A. reaches an agreement with its creditors prior to filing the bankruptcy petition.
B. exchanges all debt securities with equity securities.
C. pays all of its secured creditors and exchanges the unsecured debt securities with
equity.
D. must agree with the bankruptcy plan submitted to it by its creditors.
E. prearranges an auction that will liquidate the firm within one month of the legal
filing.
Answer:
Based on the concept of the clientele effect, which one of these combinations correctly
aligns an investor group with its preferred type of stocks?
A. low-tax-bracket individuals; zero-to-low payout stocks
B. high-tax-bracket individuals; low-to-medium payout stocks
C. corporations; low-to-medium payout stocks
D. tax-free institutions; medium-payout stocks
E. high-tax-bracket individuals; high-payout stocks
Answer:
A stock with an actual return that lies above the security market line has:
A. more systematic risk than the overall market.
B. more risk than warranted based on the realized rate of return.
C. yielded a higher return than expected for the level of risk assumed.
D. less systematic risk than the overall market.
E. yielded a return equivalent to the level of risk assumed.
Answer:
The maximum value of a call option is equal to the:
A. strike price minus the initial cost of the option.
B. exercise price plus the price of the underlying stock.
C. strike price.
D. price of the underlying stock.
E. purchase price.
Answer:
Ratios that measure how efficiently a firm’s management uses its assets and equity to
generate bottom line net income are known as _______ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value
Answer:
Caps and floors are used in conjunction with derivatives to:
A. limit any impact from interest rate changes.
B. increase the rate of return to the derivative holder.
C. increase the volatility of the at-risk asset.
D. offset the costs associated with establishing the derivative position.
E. lower acquisition costs irrespective of financing costs.
Answer:
Which one of these is a cash outflow from a corporation?
A. sale of an asset
B. dividend payment
C. sale of common stock
D. issuance of debt
E. profit retained by the firm
Answer:
Last month you introduced a new product to the market. Consumer demand has been
overwhelming and it appears that strong demand will exist over the long-term. Given
this situation, management should consider the option to:
A. suspend.
B. expand.
C. abandon.
D. contract.
E. withdraw.
Answer:
Ernie’s Electrical is evaluating a project which will increase sales by $50,000 and costs
by $30,000. The project will cost $150,000 and will be depreciated straight-line to a
zero book value over the 10-year life of the project. The applicable tax rate is 34
percent. What is the operating cash flow for this project?
A. $19,200
B. $15,000
C. $21,300
D. $17,900
E. $18,300
Answer:
M&D Enterprises paid its first annual dividend yesterday in the amount of $.28 a share.
The company plans to double each annual dividend payment for the next three years.
After that time, it plans to pay a constant $2.25 per share indefinitely. What is one share
of this stock worth today if the market rate of return on similar securities is 11.5
percent?
A. $19.41
B. $18.40
C. $17.46
D. $16.93
E. $17.13
Answer:
Direct expenses of an IPO include the:
A. gross spread plus other direct expenses.
B. gross spread and underpricing.
C. abnormal returns and underpricing.
D. Green Shoe option and the abnormal returns.
E. gross spread, Green Shoe option, and other direct expenses.
Answer:
Fly-By-Night Airlines currently has $2.4 million on deposit with its bank. It also has a
book balance of $2.4 million. What will be its bank and book balances as soon as it
writes a check for $1.1 million to pay its fuel bill?
A. $2.4 million; $1.3 million
B. $2.4 million; $2.4 million
C. $1.3 million; $2.4 million
D. $1.3 million; $1.3 million
E. $1.85 million; $1.85 million
Answer: