1) The goal of financial management is to increase the:
A.future value of the firm’s total equity
B.book value of equity
C.dividends paid per share
D.current market value per share
E.number of shares outstanding
2) Boyertown Industrial Tools is considering a three-year project to improve its
production efficiency. Buying a new machine press for $611,000 is estimated to result
in $193,000 in annual pretax cost savings. The press falls in the MACRS five-year
class, and it will have a salvage value at the end of the project of $162,000. The press
also requires an initial investment in spare parts inventory of $19,000, along with an
additional $2,000 in inventory for each succeeding year of the project. If the tax rate is
35 percent and the discount rate is 12 percent, should the company buy and install the
machine press? Why or why not?
Table 9.7 Modified ACRS depreciation allowances
A.Yes; the NPV is $51,613
B.Yes; the NPV is $45,607
C.No; the NPV is -$22,311
D.No; the NPV is -$52,918
E.No; the NPV is -$74,945
3) Which one of the following statements is correct regarding mortgage-backed
securities (MBSs)?
A.There is a separate MBS for each individual mortgage processed by a mortgage
broker
B.An MBS is a type of debenture
C.The originating bank is the seller of MBSs to investors
D.Investors in MBSs are protected from default
E.Investors in MBSs are subject to real estate deflation risk
4) A stock produced returns of 16 percent, 9 percent, and 21 percent over three of the
past four years, respectively. The arithmetic average for the past four years is 10
percent. What is the standard deviation of the stock’s returns for the four-year period?
A.6.82 percent
B.8.54 percent
C.9.09 percent
D.10.83 percent
E.11.75 percent
5) Ted currently owns 100 shares of a publicly traded stock that he would like to sell.
Which one of the following provides the most efficient means for Ted to sell his shares?
A.Issuer-sponsored Dutch auction
B.Proxy statement
C.Private placement transaction
D.Stakeholder purchase
E.Secondary market transaction
6) Which of the following will increase the future value of a lump sum investment?
I. Decreasing the interest rate
II. Increasing the interest rate
III. Increasing the time period
IV. Decreasing the amount of the lump sum investment
A.I and III only
B.I and IV only
C.II and III only
D.II and IV only
E.II, III, and IV only
7) A stock produced returns of 19 percent, 27 percent, and -38 percent over three of the
past four years, respectively. The arithmetic average for the past four years is 7 percent.
What is the standard deviation of the stock’s returns for the four-year period?
A.11.63 percent
B.15.94 percent
C.19.70 percent
D.26.25 percent
E.30.21 percent
8) The managers of H.R Construction are considering remodeling plans for an old
building the firm currently owns. The building was purchased eight years ago for
$689,000. Over the past eight years, the firm rented out the building and used the rent to
pay off the mortgage. The building is now owned free and clear and has a current
market value of $898,000. The firm is considering remodeling the building into a
conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated
present value of the future income from this centre is $2.9 million. Which one of the
following defines the opportunity cost of the remodeling project?
A.Initial cost of the building
B.Cost of the remodeling
C.Current market value of the building
D.Initial cost of the building plus the remodeling costs
E.Current market value of the building plus the remodeling costs
9) The owners’ equity for The Deer Store was $58,900 at the beginning of the year.
During the year, the company had aftertax income of $4,200, of which $3,200 was paid
in dividends. Also during the year, the company repurchased $6,500 of stock from one
of the shareholders. What is the value of the owners’ equity at year end?
A.$53,400
B.$45,000
C.$59,900
D.$84,400
E.$90,900
10) Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of
1.7, and a profit margin of 2.4 percent. What is the equity multiplier?
A.0.70
B.0.73
C.1.93
D.2.70
E.2.84
11) Lester’s Fried Chick’n purchased its building 11 years ago at a cost of $139,000. The
building is currently valued at $179,000. The firm has other fixed assets that cost
$66,000 and are currently valued at $58,000. To date, the firm has recorded a total of
$79,000 in depreciation on the various assets. The company has current liabilities of
$36,600 and net working capital of $18,400. What is the total book value of the firm’s
assets?
A.$181,000
B.$241,000
C.$331,000
D.$339,000
E.$379,000
12) Downtown Merchants has paid a quarterly dividend of $0.60 per share for the past
two years. This quarter, the firm plans to pay $0.60 plus an additional $0.05. The firm
has stated that it uncertain whether it will pay $0.60 or $0.65 per share next quarter.
Which one of the following is the best description of the additional $0.05 that is being
paid this quarter?
A.Liquidating dividend
B.Special dividend
C.Extra dividend
D.Stock dividend
E.Normal dividend
13) Net working capital is defined as:
A.the depreciated book value of a firm’s fixed assets
B.the value of a firm’s current assets
C.available cash minus current liabilities
D.total assets minus total liabilities
E.current assets minus current liabilities
14) Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets
of $19,300, and owners’ equity of $21,100. What is the value of the net working
capital?
A.$9,800
B.$10,400
C.$18,900
D.$21,300
E.$23,200
15) Santa Klaus Toys just paid its annual dividend of $1.40. The required return is 8
percent and the dividend growth rate is 1 percent. What is the expected value of this
stock five years from now?
A.$20.82
B.$21.23
C.$22.06
D.$23.45
E.$23.78
16) The potential conflict of interest between a firm’s owners and its managers is
referred to as which type of conflict?
A.Organizational
B.Structural
C.Formation
D.Agency
E.Territorial
17) Textiles Unlimited has gathered projected cash flows for two projects. At what
interest rate would the company be indifferent between the two projects? Which project
is better if the required return is above this interest rate?
A.11.76 percent; A
B.12.49 percent; A
C.12.49 percent; B
D.13.15 percent; A
E.13.15 percent: B
18) Which one of the following is an example of the political risks associated with
foreign operations?
A.Technological changes
B.Exchange rate fluctuations
C.Translation exposure to exchange rate risk
D.Changes in foreign tax laws
E.Changes in relative wage rates between the home country and the foreign country
19) Ted’s Toys just reconciled its bank account and has $12,300 in outstanding deposits
and $31,400 in checks outstanding. The firm’s checkbook has a positive balance. The
firm sells on a cash basis only and deposits its receipts on a daily basis. The deposited
funds are available to the firm the following day. The firm writes and mails checks on a
daily basis also. These checks generally clear the bank in three days. What do you know
about the firm’s float given this information?
A.The firm has disbursements float but no collection float
B.The collection float exceeds the disbursement float
C.The firm has a net collection float
D.The disbursement float exceeds the collection float
E.Since transactions occur daily, the firm has no float
20) Which of the following will increase the cost of equity for a firm with a beta of 1.1?
I. Decrease in the security’s beta
II. Decrease in the market risk premium
III. Decrease in the risk-free rate
IV. Increase in the risk-free rate
A.II only
B.III only
C.I and II only
D.II and III only
E.I and IV only
21) Mary owns a risky stock and anticipates earning 16.5 percent on her investment in
that stock. Which one of the following best describes the 16.5 percent rate?
A.Expected return
B.Real return
C.Market rate
D.Systematic return
E.Risk premium
22) Gulf Coast Tours currently has a weighted average cost of capital of 11.3 percent
based on a combination of debt and equity financing. The firm has no preferred stock.
The current debt-equity ratio is 0.58 and the aftertax cost of debt is 6.4 percent. The
company just hired a new president who is considering eliminating all debt financing.
All else constant, what will the firm’s cost of capital be if the firm switches to an
all-equity firm?
A.10.45 percent
B.12.62 percent
C.12.89 percent
D.13.37 percent
E.14.32 percent
23) Given the following information, what is the standard deviation of the returns on
this stock?
A.19.90 percent
B.20.52 percent
C.22.41 percent
D.23.79 percent
E.25.52 percent
24) Lisa is interested in purchasing 1,000 shares of TJH, Inc. when the shares are
issued. Her broker just gave Lisa a preliminary prospectus on these shares for her to
review as she waits for the shares to be cleared for sale. What is the name of this
prospectus?
A.Green Shoe
B.Rights offer
C.Red herring
D.Spread
E.Tombstone
25) A project has the following cash flows. What is the payback period?
A.2.48 years
B.2.59 years
C.2.96 years
D.3.21 years
E.3.43 years
26) Jennifer has annual sales of $367,200 and cost of goods sold of $198,600. The
average accounts receivable balance is $20,400. How many days on average does it
take the firm to collect its accounts receivable?
A.16.08 days
B.16.30 days
C.17.27 days
D.18.00 days
E.20.28 days
27) The spot rate on the Hong Kong dollar is 7.75 . Interest rates in Hong Kong are
expected to be 6 percent while they are anticipated to be 3 percent in the U.S. What is
the expected exchange rate two years from now?
A.HK$7.9825
B.HK$8.1808
C.HK$8.2220
D.HK$8.3778
E.HK$8.4141
28) Industrial Services is analyzing a proposed investment that would initially require
$538,000 of new equipment. This equipment would be depreciated on a straight-line
basis to a zero balance over the four-year life of the project. The estimated salvage
value is $187,000. The project requires $39,000 initially for net working capital, all of
which will be recouped at the end of the project. The projected operating cash flow is
$194,900 a year. What is the internal rate of return on this project if the relevant tax rate
is 34 percent?
A.15.54 percent
B.15.92 percent
C.18.01 percent
D.18.67 percent
E.20.49 percent
29) Investors receive a total return of 13.7 percent on the common stock of Dexter
International. The stock is selling for $41.68 a share. What is the dividend growth rate if
the company plans to pay an annual dividend of $2.10 a share next year?
A.7.42 percent
B.8.66 percent
C.10.75 percent
D.11.60 percent
E.13.70 percent
30) You have just agreed to a forward trade that will be settled six months from now.
When will the exchange rate for this transaction be determined?
A.Today
B.Three months from today because that is the halfway point
C.Anytime you prefer within the next six months
D.Whenever the spot rate six months from today is known
E.Six months from now
31) Lacey’s has an average collection period of 32 days and factors all of its receivables
immediately at a 1.1 percent discount. Assume all accounts are collected in full. What is
the firm’s effective cost of borrowing?
A.13.38 percent
B.13.45 percent
C.13.57 percent
D.13.63 percent
E.13.88 percent
32) You have been told that you need $25,600 today in order to have $100,000 when
you retire 35 years from now. What rate of interest was used in the present value
computation? Assume interest is compounded annually.
A.3.97 percent
B.4.15 percent
C.4.29 percent
D.4.53 percent
E.4.58 percent
33) Over the period of 1926-2011:
A.the risk premium on large-company stocks was greater than the risk premium on
small- company stocks
B.U.S. Treasury bills had a risk premium that was just slightly over 2 percent
C.the risk premium on long-term government bonds was zero percent
D.the risk premium on stocks exceeded the risk premium on bonds
E.U. S. Treasury bills had a negative risk premium
34) A particular set of golf clubs in the U.S. costs $1,100. According to absolute
purchasing power parity, what should the identical set of clubs cost in the UK when the
spot rate is £0.6703 = $1?
A.£1,641.06
B.£1,728.08
C.£633.80
D.£647.50
E.£737.33
35) Christie is buying a new car today and is paying a $500 cash down payment. She
will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly
payments of $450 each with the first payment due 30 days from today. Which one of
the following statements is correct concerning this purchase?
A.The present value of the car is equal to $500 + (36 $450)
B.The $500 is the present value of the purchase
C.The car loan is an annuity due
D.To compute the initial loan amount, you must use a monthly interest rate
E.The future value of the loan is equal to 36 $450
36) An agreement to exchange currencies sometime in the future is referred to as which
one of the following?
A.Forward trade
B.Hedge
C.Gilt
D.Forward exchange rate
E.Spot trade