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You invested $1,650 in an account that pays 5 percent simple interest. How much more
could you have earned over a 20-year period if the interest had compounded annually?
A. $849.22
B. $930.11
C. $982.19
D. $1,021.15
E. $1,077.94
The sources and uses of cash over a stated period of time are reflected on the:
A. income statement.
B. balance sheet.
C. tax reconciliation statement.
D. statement of cash flows.
E. statement of operating position.
What is the variance of the returns on a portfolio comprised of $5,400 of stock G and
$6,600 of stock H?
A. .000709
B. .000848
C. .001097
D. .001254
E. .001468
Which two of the following are the primary reasons why firms temporarily accumulate
large cash surpluses?
I. cyclical activities
II. desire to invest funds
III. daily operations
IV. fixed asset purchases
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only
The static theory of capital structure advocates that the optimal capital structure for a
firm:
A. is dependent on a constant debt-equity ratio over time.
B. remains fixed over time.
C. is independent of the firm's tax rate.
D. is independent of the firm's weighted average cost of capital.
E. equates the tax savings from an additional dollar of debt to the increased bankruptcy
costs related to that additional dollar of debt.
A bond that can be paid off early at the issuer's discretion is referred to as being which
one of the following?
A. zero coupon
B. callable
C. senior
D. collateralized
E. unsecured
You are looking at a one-year loan of $10,000. The interest rate is quoted as 10 percent
plus 5 points. A point on a loan is simply 1 percent (one percentage point) of the loan
amount. Quotes similar to this one are very common with home mortgages. The interest
rate quotation in this example requires the borrower to pay 5 points to the lender up
front and repay the loan later with 10 percent interest. What is the actual rate you are
paying on this loan?
A. 15.00 percent
B. 15.47 percent
C. 15.55 percent
D. 15.79 percent
E. 15.84 percent
The plowback ratio is:
A. equal to net income divided by the change in total equity.
B. the percentage of net income available to the firm to fund future growth.
C. equal to one minus the retention ratio.
D. the change in retained earnings divided by the dividends paid.
E. the dollar increase in net income divided by the dollar increase in sales.
The Cat Box acquired The Dog House. As part of this transaction, both firms ceased to
exist in their prior form and combined to create an all-new entity, Animal World. Which
one of the following terms best describes this transaction?
A. divestiture
B. consolidation
C. tender offer
D. spinoff
E. conglomeration
Your firm spends $54,000 a week to pay bills and maintains a lower cash balance limit
of $45,000. The standard deviation of your disbursements is $12,100. The applicable
interest rate is 4.5 percent and the fixed cost of transferring funds is $55. What is your
opportunity cost of holding cash based on the BAT model?
A. $1,318
B. $1,864
C. $2,204
D. $2,311
E. $3,709
You just sold 600 shares of Wesley, Inc. stock at a price of $31.09 a share. Last year,
you paid $30.92 a share to buy this stock. Over the course of the year, you received
dividends totaling $1.20 per share. What is your total capital gain on this investment?
A. -$618
B. -$102
C. $102
D. $618
E. $720
You have just made a $1,500 contribution to your individual retirement account.
Assume you earn a 12 percent rate of return and make no additional contributions. How
much more will your account be worth when you retire in 25 years than it would be if
you waited another 10 years before making this contribution?
A. $8,306.16
B. $9,658.77
C. $16,311.18
D. $16,907.17
E. $17,289.75
You are comparing the current income statement of a firm to the pro forma income
statement for next year. The pro forma is based on a four percent increase in sales. The
firm is currently operating at 85 percent of capacity. Net working capital and all costs
vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this
information, which one of the following statements must be true?
A. The projected net income is equal to the current year's net income.
B. The tax rate will increase at the same rate as sales.
C. Retained earnings will increase by four percent over its current level.
D. Total assets will increase by less than four percent.
E. Total liabilities and owners' equity will increase by four percent.
Which one of the following statements is correct?
A. An aging schedule helps identify those customers who are the most delinquent.
B. The percentage of total receivables that falls within a certain time period on an aging
schedule will remain constant over time even if the firm has seasonal sales.
C. Normally firms call their delinquent customers prior to sending them a past due
letter.
D. A constant average collection period over a period of time is cause for concern.
E. It is common practice when a customer files for bankruptcy to sell that customer's
receivable at face value.
North Side, Inc. has no debt outstanding and a total market value of $175,000. Earnings
before interest and taxes, EBIT, are projected to be $16,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 35 percent
higher. If there is a recession, then EBIT will be 70 percent lower. North Side is
considering a $70,000 debt issue with a 7 percent interest rate. The proceeds will be
used to repurchase shares of stock. There are currently 2,500 shares outstanding. North
Side has a tax rate of 34 percent. If the economy expands strongly, EPS will change by
____ percent as compared to a normal economy, assuming that the firm recapitalizes.
A. 38.80 percent
B. 45.26 percent
C. 50.45 percent
D. 53.92 percent
E. 61.07 percent
A market maker who acts as a dealer in one or more securities on the floor of the NYSE
is called a:
A. floor trader.
B. floor post.
C. specialist.
D. floor broker.
E. commission broker.
Which one of the following inventory items is probably the most liquid?
A. a custom made set of kitchen cabinets
B. metal cabinets for dishwashers
C. wheat stored in a grain silo
D. a customized drilling press
E. a partially built modular home
Atlas Industries combines the smaller investment proposals from each operational unit
into a single project for planning purposes. This process is referred to as which one of
the following?
A. conjoining
B. aggregation
C. conglomeration
D. appropriation
E. summation
Atlas Entertainment has 15-year bonds outstanding. The interest payments on these
bonds are sent directly to each of the individual bondholders. These direct payments are
a clear indication that the bonds can accurately be defined as being issued:
A. at par.
B. in registered form.
C. in street form.
D. as debentures.
E. as callable.
Which of the following grants its owner the right to purchase an asset at a stated price?
I. American call
II. European call
III. American put
IV. European put
A. I only
B. I and II only
C. I and III only
D. II and IV only
E. III and IV only
Assume that Major Manuscripts, Inc. is currently operating at 95 percent of capacity
and that sales are projected to increase to $20,000. What is the projected addition to
fixed assets?
A. $0
B. $1,493
C. $1,529
D. $1,546
E. $1,588
The Olive Vase has 56,000 shares of stock outstanding with a par value of $1 per share
and a market value of $11 a share. The company just announced a 3-for-4 reverse stock
split. Currently, you own 400 shares of this stock. What will the total value of your
shares be after the reverse stock split?
A. $3,300
B. $4,400
C. $5,500
D. $5,867
E. $6,333
National Home Rentals has a beta of 1.38, a stock price of $19, and recently paid an
annual dividend of $0.94 a share. The dividend growth rate is 4.5 percent. The market
has a 10.6 percent rate of return and a risk premium of 7.5 percent. What is the firm's
cost of equity?
A. 7.05 percent
B. 8.67 percent
C. 9.13 percent
D. 10.30 percent
E. 11.56 percent
A reverse stock split is defined as:
A. an increase in the number of shares outstanding that does not affect owners' equity.
B. a firm buying back existing shares of its stock on the open market.
C. a firm selling new shares of stock on the open market.
D. a decrease in the number of shares outstanding that does not affect owner's equity.
E. a decrease in both the number of shares outstanding and the price per share.
Webster United is paying a $1.10 per share dividend today. There are 350,000 shares
outstanding with a market price of $23 per share. Ignore taxes. Before the dividend, the
company had earnings per share of $1.74. As a result of this dividend, the:
A. retained earnings will decrease by $350,000.
B. retained earnings will increase by $385,000.
C. total firm value will not change.
D. earnings per share will increase to $2.84.
E. price-earnings ratio will be 12.59.
The basic lesson of M&M Theory is that the value of a firm is dependent upon:
A. the firm's capital structure.
B. the total cash flow of the firm.
C. minimizing the marketed claims.
D. the amount of marketed claims to that firm.
E. size of the stockholders' claims.
Financial planning accomplishes which of the following for a firm?
I. determination of asset requirements
II. development of plans to contend with unexpected events
III. establishment of priorities
IV. analysis of funding options
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
The _____ tells us that the expected return on a risky asset depends only on that asset's
nondiversifiable risk.
A. efficient markets hypothesis
B. systematic risk principle
C. open markets theorem
D. law of one price
E. principle of diversification
Which one of the following statements is correct?
A. Money market accounts are low-risk, high-return investments.
B. The rate of return earned on short-term securities tends to exceed that earned on
long-term securities.
C. U.S. Treasury bills are well suited for short-term investments.
D. The income earned on U.S. Treasury bills is exempt from all taxation.
E. Short-term investments tend to have high levels of default risk.
The option to wait:
I. may be of minimal value if a project is dependent upon rapidly changing technology.
II. is partially dependent upon the discount rate applied to the project being evaluated.
III. is defined as temporarily shutting down a project for a period of time.
IV. has a value equal to the NPV of a project if it is started at a later date minus the
NPV if the project is started today.
A. I and III only
B. II and IV only
C. I and II only
D. II, III, and IV only
E. I, II, and IV only
Which of the following affect the value of a call option?
I. strike price
II. time to maturity
III. standard deviation of the returns on a risk-free asset
IV. risk-free rate
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
The market has an expected rate of return of 10.7 percent. The long-term government
bond is expected to yield 5.8 percent and the U.S. Treasury bill is expected to yield 3.9
percent. The inflation rate is 3.6 percent. What is the market risk premium?
A. 6.0 percent
B. 6.8 percent
C. 7.5 percent
D. 8.5 percent
E. 9.3 percent
Which of the following represent potential gains from an acquisition?
I. increased use of debt
II. lower costs per unit produced
III. strategic beachhead
IV. diseconomies of scale
A. II and III only
B. I and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
Dan is comparing three machines to determine which one to purchase. The machines
sell for differing prices, have differing operating costs, differing machine lives, and will
be replaced when worn out. Which one of the following computational methods should
Dan use as the basis for his decision?
A. internal rate of return
B. operating cash flow
C. equivalent annual cost
D. depreciation tax shield
E. bottom-up operating cash flow
You are currently selling 72 units a month at a price of $210 a unit. Your variable cost
of each unit is $130. If you switch from your current cash sales only policy to a net 30
policy you think your sales will increase to a total of 95 units per month. The monthly
interest rate is 1.5 percent. What is the net present value of this proposed switch using
the accounts receivable approach?
A. $104,557
B. $114,829
C. $134,822
D. $136,516
E. $141,520
