1) Which one of the following players on the floor of the NYSE is obligated to maintain
a fair, orderly market for a limited number of securities?
A.Specialist
B.Floor trader
C.$2 broker
D.Commission broker
E.Floor broker
2) M.G. Movers can borrow at 7.5 percent. The firm currently has no debt, and the cost
of equity is 16 percent. The current value of the firm is $540,000. What will the value
be if the firm borrows $160,000 and uses the proceeds to repurchase shares? The
corporate tax rate is 34 percent.
A.$528,000
B.$540,000
C.$552,000
D.$571,000
E.$594,400
3) Over the period of 1926-2008, which one of the following investment classes had the
highest volatility of returns?
A.Large-company stocks
B.U.S. Treasury bills
C.Small-company stocks
D.Long-term corporate bonds
E.Long-term government bonds
4) 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 4-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
5) Which one of the following is an example of systematic risk?
A.The Federal Reserve unexpectedly announces an increase in target interest rates
B.A flood washes away a firm’s warehouse
C.A city imposes an additional one percent sales tax on all products
D.A toymaker has to recall its top-selling toy
E.Corn prices increase due to increased demand for alternative fuels
6) Gabe’s Market is comparing two different capital structures. Plan I would result in
11,000 shares of stock and $225,000 in debt. Plan II would result in 14,000 shares of
stock and $150,000 in debt. The interest rate on the debt is 8 percent. Ignoring taxes,
compare both of these plans to an all-equity plan assuming that EBIT will be $45,000.
The all-equity plan would result in 20,000 shares of stock outstanding. Of the three
plans, the firm will have the highest EPS with _____ and the lowest EPS with _____.
A.Plan I; Plan II
B.Plan I; all-equity plan
C.Plan II; Plan I
D.Plan II; all-equity plan
E.all-equity plan; Plan I
7) You purchase a bond with a coupon rate of 8 percent, semiannual coupons, and a
clean price of $1,011. If the next coupon payment is due in five months, what is the
invoice price?
A.$1,017.67
B.$1,024.33
C.$1,031.00
D.$1,037.67
E.$1,044.33
8) The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the
other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is
the net income?
A.$2,904
B.$8,382
C.$11,204
D.$14,660
E.$16,682
9) Which one of the following defines the internal rate of return for a project?
A.Discount rate that creates a zero cash flow from assets
B.Discount rate which results in a zero net present value for the project
C.Discount rate which results in a net present value equal to the project’s initial cost
D.Rate of return required by the project’s investors
E.The project’s current market rate of return
10) You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in
Stock B. If the expected returns on these stocks are 9 percent and 15 percent,
respectively, what is the expected return on the portfolio?
A.10.57 percent
B.11.14 percent
C.11.96 percent
D.12.52 percent
E.13.07 percent
11) What is the price of a $1,000 face value bond if the quoted price is 102.1?
A.$102.10
B.$1,002.10
C.$1,020.01
D.$1,020.10
E.$1,021.00
12) Aaron’s Rentals has 58,000 shares of common stock outstanding at a market price of
$36 a share. The common stock just paid a $1.64 annual dividend and has a dividend
growth rate of 2.8 percent. There are 12,000 shares of 6 percent preferred stock
outstanding at a market price of $51 a share. The preferred stock has a par value of
$100. The outstanding bonds mature in 17 years, have a total face value of $750,000, a
face value per bond of $1,000, and a market price of $1,011 each. The bonds pay 8
percent interest, semiannually. The tax rate is 34 percent. What is the firm’s weighted
average cost of capital?
A.7.74 percent
B.8.68 percent
C.9.29 percent
D.9.97 percent
E.10.30 percent
13) Assume that large-company stocks had an average return of 11.8 percent and a
standard deviation of 20.7 percent for a 40-year period. What range of returns would
you expect to see on these stocks 95 percent of the time?
A.-50.3 percent to 53.2 percent
B.-50.3 percent to 73.9 percent
C.-50.3 percent to 64.1 percent
D.-29.6 percent to 73.9 percent
E.-29.6 percent to 53.2 percent
14) As CFO of Nile Holdings, a carpet wholesaler, you have the following information
as of December 2011:
Nile has an attractive investment opportunity, and to finance it, must decide whether to
issue $100 million in new debt or new equity.
Assume Nile raises $100 million of new debt at the end of 2011, at an interest rate of
7%.
a. Assuming Nile must make a $20 million payment on the new debt next year,
calculate the firm’s times burden covered ratio and times common covered (including
debt payments) ratio.
b. As Nile’s banker, would you be comfortable loaning the company this new debt?
Briefly explain why, or for what reasons you’d be comfortable or uncomfortable.
15) You’re trying to determine whether or not to expand your business by building a
new manufacturing plant. The plant has an installation cost of $26 million, which will
be depreciated straight-line to zero over its three-year life. If the plant has projected net
income of $2,348,000, $2,680,000, and $1,920,000 over these three years, what is the
project’s average accounting return (AAR)?
A.11.69 percent
B.14.14 percent
C.15.08 percent
D.17.82 percent
E.19.21 percent
16) Which one of the following would be the most common evidence of indebtedness
when a sale is made on open account?
A.Sight draft
B.Commercial draft
C.Banker’s acceptance
D.Promissory note
E.Invoice
17) Scott placed an order with his broker to purchase 1,000 shares of each of three IPOs
that are being released this month. Each IPO has an offer price of $24 a share. The
number of shares allocated to Scott along with the closing stock price at the end of the
first day of trading for each stock, are as follows:
What is Scott’s total profit or loss on these three stocks as of the end of the first day of
trading for each stock?
A.-$380
B.-$240
C.-$10
D.$220
E.$450
18) Miller and Sons is evaluating a project with the following cash flows:
The company uses a 10 percent interest rate on all of its projects. What is the MIRR of
the project using the reinvestment approach? The discounting approach? The
combination approach?
A.8.46 percent; 7.29 percent; 8.59 percent
B.8.46 percent; 7.38 percent; 8.61 percent
C.8.54 percent; 7.29 percent; 8.61 percent
D.8.54 percent; 7.38 percent; 8.59 percent
E.8.54 percent; 8.23 percent; 8.61 percent
19) Lester’s Dry Goods paid $1.10 per share in dividends last year. The company
currently has excess cash and would like to distribute $0.40 a share to its shareholders.
However, the company is concerned about increasing the dividend by that amount as it
will not be able to afford any increase in the future and doesn’t want to lower the
dividend once it has been raised. Which one of the following is probably the best
suggestion for distributing the $0.40 per share?
A.Special dividend of $0.40 per share
B.Extra cash dividend of $0.40 per share
C.Liquidating dividend of $0.40 per share
D.Increase the regular dividend by $0.11 and pay a special dividend of $0.29
E.Increase the regular dividend by $0.11 and pay an extra cash dividend of $0.29
20) You are analyzing a project and have developed the following estimates. The
depreciation is $4,200 a year and the tax rate is 34 percent. What is the best case
operating cash flow?
A.$13,473
B.$14,196
C.$15,280
D.$17,027
E.$17,763
21) The Golf Range is considering adding an additional driving range to its facility. The
range would cost $76,000, would be depreciated on a straight line basis over its 7-year
life, and would have a zero salvage value. The anticipated income from the project is
$34,000 a year with $14,400 of that amount being variable cost. The fixed cost would
be $16,200. The firm believes that it will earn an additional $13,000 a year from its
current operations should the driving range be added. The project will require $2,000 of
net working capital, which is recoverable at the end of the project. What is the internal
rate of return on this project at a tax rate of 34 percent?
A.7.53 percent
B.9.29 percent
C.11.47 percent
D.12.68 percent
E.14.04 percent
22) The Blackwell Group is unable to obtain financing for any new projects under any
circumstances. Which term best applies to this situation?
A.Contingency planning
B.Soft rationing
C.Hard rationing
D.Sensitivity analysis
E.Scenario analysis
23) Birds and Yards has 10-year bonds outstanding that carry an annual coupon of 8
percent. The bonds mature in 7 years and are currently priced at 108.4 percent of face
value. What is the firm’s pre-tax cost of debt?
A.6.47 percent
B.6.82 percent
C.7.34 percent
D.7.70 percent
E.8.23 percent
24) Bruceton Hotels is an all-equity firm with 60,000 shares of stock outstanding. The
stock has a beta of 1.27 and a standard deviation of 13.8 percent. The market risk
premium is 9.1 percent and the risk-free rate of return is 4.2 percent. The company is
considering a project that it considers riskier than its current operations so it wants to
apply an adjustment of 1 percent to the project’s discount rate. What should the firm set
as the required rate of return for the project?
A.12.54 percent
B.13.92 percent
C.15.39 percent
D.16.76 percent
E.17.03 percent
25) Which one of the following statements is correct?
A.Peer group analysis is easier when a firm is a conglomerate versus when it only has a
single
B.line of business
C.Peer group analysis is easier when seasonal firms have different fiscal years
D.Peer group analysis is simplified when firms use varying methods of depreciation
E.Comparing results across geographic locations is easier since all countries now use a
common
F.set of accounting standards
G.Adjustments have to be made when comparing the income statements of firms which
use different methods of accounting for inventory
26) An American Depositary Receipt is defined as a security:
A.that has been deposited in an interest-bearing account at a U.S. bank
B.issued outside of the U.S. that represents shares of a U.S. stock
C.issued in the U.S. which represents shares of a foreign stock
D.that has a guarantee of payment from a U.S. bank
E.issued in multiple countries but denominated in U.S. currency
27) Smiley Industrial Goods has bonds on the market making annual payments, with 13
years to maturity, and selling for $1,095. At this price, the bonds yield 6.4 percent.
What must the coupon rate be on these bonds?
A.6.67 percent
B.6.84 percent
C.7.23 percent
D.7.50 percent
E.7.83 percent
28) As the financial vice president for Squamish Equipment, you have the following
information:
Calculate Squamish’s times burden covered ratio for the next year assuming annual
sinking fund payments on the new debt will equal $8 million.
A.1.01
B.1.08
C.1.38
D.1.49
E.1.95
29) One year ago, you purchased 400 shares of stock for $12 a share. The stock pays
$0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share.
What is your total dollar return on this investment?
A.$6,222
B.$6,432
C.$6,520
D.$6,220
E.$6,608
30) Which one of the following best illustrates the concept of derived demand?
A.A minimum wage worker tends to buy more off brand products than do more
highly-paid professionals
B.A windshield company has to step up production because auto sales are increasing
C.A grocery store is selling more fresh fruits and vegetables because people are
improving their diets
D.Restaurant sales are rising because unemployment is falling
E.Retail stores have higher sales around the holiday season than in other seasons of the
year
31) Which one of the following statements is correct? Assume the pre-tax cost of debt is
less than the cost of equity.
A.A firm may change its capital structure if the government changes its tax policies
B.A decrease in the dividend growth rate increases the cost of equity
C.A decrease in the systematic risk of a firm will increase the firm’s cost of capital
D.A decrease in a firm’s debt-equity ratio will decrease the firm’s cost of capital
E.The cost of preferred stock decreases when the tax rate increases
32) You place an order for 680 units of Good M at a unit price of $46. The supplier
offers terms of 1/5, net 20. If you don’t take the discount, how much interest are you
paying implicitly?
A.$46
B.$312.80
C.$346.00
D.$1,460
E.$1,564
33) Scenario analysis:
A.determines the impact a $1 change in sales has on the internal rate of return
B.determines which variable has the greatest impact on a project’s net present value
C.helps determine the reasonable range of expectations for a project’s anticipated
outcome
D.evaluates a project’s net present value while sensitivity analysis evaluates a project’s
internal rate of return
E.determines the absolute worst and absolute best outcome that could ever occur
34) First Bank offers personal loans at 7.6 percent compounded monthly. Second Bank
offers similar loans at 7.75 percent compounded semi-annually. Which one of the
following statements is correct concerning these loans?
A.The First Bank loan has an effective rate of 7.67 percent
B.The Second Bank loan has an effective rate of 8.03 percent
C.The annual percentage rate for the Second Bank loans is 7.90 percent
D.Borrowers should prefer the loans offered by Second Bank
E.The First Bank offers the best deal on loans