1) A company with a current ratio higher than industry average must also have a quick
ratio higher than industry average because both ratios measure liquidity.
2) The best financial structure is determined by finding the debt and equity mix that
maximizes the firm’s cost of capital.
3) The investment banking business is dominated by a few very large, stand-alone
investment banking firms.
4) The same underlying formula is used for computing both the future value and present
value.
5) The value of a bond investment, which provides fixed interest payments, will
increase when discounted at a 8% rate rather than at a 11% rate.
6) If a project’s IRR is equal to its required return, then the project’s NPV is equal to
zero and its PI is equal to one.
7) The difference between the price the corporation gets and the public offering price is
called the broker-dealer spread.
8) An investor who pays no tax would be more likely to accept the view that high
dividends increase stock values rather than the view that low dividends increase stock
values.
9) The cash budget can be used to provide an estimate of the firm’s future financing
needs.
10) A project’s contribution-to-firm risk does allow for diversification within the firm.
11) The statement of cash flow explains the changes that took place in the firm’s cash
balance over the period of interest.
12) Assuming two investments have equal lives, a high discount rate tends to favor
A) the investment with large cash flow early
B) the investment with large cash flow late
C) the investment with even cash flow
D) neither investment since they have equal lives
13) Use the “percent of sales method” of preparing pro forma financial statements to
determine the projection for next year’s inventory. Make the following assumptions:
current year’s sales are $27,800,000; current year’s cost of goods sold is $17,528,000;
sales are expected to rise by 30%. The firm’s investment in inventory in the current year
is $5,890,200. What is the projection for next year’s inventory?
A) $7,657,260
B) $6,981,250
C) $5,845,500
D) $4,526,600
14) WPM, Inc. has current assets of $8,000,000, current liabilities of $4,000,000,
inventory of $1,320,000, and sales of $12,000,000. What is the acid test ratio?
A) 2.0
B) 1.67
C) 0.22
D) 0.1
15) In addition to those risks faced by domestic corporations, multinational
corporations face
A) political risk
B) exchange risk
C) Both A and B are correct
D) All domestic and multinational corporations face similar risk profiles
16) Consider the following four types of payments that could be made by a normal
operating firm: interest, common dividends, income taxes, and preferred dividends.
Compared to the other payments mentioned, where would you rank common dividend
payments in terms of the order of payment if the firm is liquidating?
A) first
B) second
C) third
D) fourth
17) The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate
is .6211 pounds per dollar. Therefore, pounds in the forward market are selling at a
________ to the current spot rate.
A) .958 discount
B) .958 premium
C) .04 discount
D) .04 premium
18) You have a savings bond that will be worth $750 when it matures in 3 years, but
you need cash today. If the current going rate of interest is 5%, what is your bond worth
if you sell it today (rounded to the nearest dollar)?
A) $675
B) $648
C) $625
D) $612
19) Acme Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000 and total
assets of $70,000. What is Acme’s level of current liabilities?
A) $8,400
B) $9,400
C) $12,348
D) $10,600
20) Company A reports sales of $100,000 and net income of $15,000. Company B
reports sales of $100,000 and net income of $10,000. Therefore
A) Company A’s cash flow may be higher or lower than Company B’s cash flow even
though A’s net income is higher
B) Company A’s cash flow is $5,000 more than Company B’s cash flow
C) Company B is creating less value for its shareholders than Company A
D) Company B’s accounts receivable must be higher than Company A’s accounts
receivable
21) The residual dividend theory suggests that dividends will only be paid
A) if the tax rate on capital gains is higher than the tax rate on dividends
B) if the corporation has more positive NPV projects than it can fund
C) if interest rates available to shareholders are higher than the required return on the
company’s stock
D) if current retained earnings exceed the equity portion of the firm’s capital budget
22) If you invest $750 every six months at 8 percent compounded semiannually, how
much would you accumulate at the end of 10 years?
A) $10,065
B) $10,193
C) $22,334
D) $21,731
23) You are analyzing the purchase of new equipment. Since you are not an expert on
this type of equipment, you hire a consulting firm to make recommendations. The
consultant charged you $1,500 and recommended the purchase of the latest model from
ACME Corp. of America. The equipment costs $80,000, and it will cost another
$10,000 to modify it for special use by your firm. The equipment will be depreciated on
a straight-line basis over six years with no salvage value. You expect the equipment will
be sold after three years for $28,000. Use of the equipment will require an increase in
your company’s net working capital of $4,000, but this $4,000 will be recovered at the
end of year three. The use of the equipment will have no effect on revenues, but it is
expected to save the firm $50,000 per year in before-tax operating costs. Your
company’s marginal tax rate is 35%. What is the initial outlay required to fund this
project?
A) $80,000
B) $84,000
C) $90,000
D) $94,000
24) Profits are down so the controller decides to change the corporation’s accounting
policy relating to inventory costing. The change will allow the corporation to report
higher income and higher assets, although the physical inventory has not changed.
Which of the following statements is MOST correct?
A) The stock price is likely to increase because income is higher
B) The stock price is likely to be unaffected because the stock market is efficient
C) The stock price is likely to decrease because reported inventory is higher
D) If the stock price increases, the stock market is efficient
25) ACME, Inc. expects its current annual $2.50 per share common stock dividend to
remain the same for the foreseeable future. Therefore, the value of the stock to an
investor with a required return of 12% is
A) $3.00
B) $18.33
C) $20.83
D) $30.00
26) Rawhide Outfitters had projected its sales for the first six months of 2012 to be as
follows:
Jan.$ 50,000April$180,000
Feb.$ 60,000May$240,000
Mar.$100,000June$240,000
Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior
to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the
month following the sale, and the remaining 20% in the second month following the
sale. Total other cash expenses are $40,000/month. The company’s cash balance as of
March 1st, 2012 is projected to be $40,000, and the company wants to maintain a
minimum cash balance of $15,000. Excess cash will be used to retire short-term
borrowing (if any exists). Fielding has no short-term borrowing as of March 1st, 2012 .
Assume that the interest rate on short-term borrowing is 1% per month. How much
short term financing is needed by March 30, 2012?
A) $110,000
B) $15,000
C) $70,000
D) $85,000
27) Which of the following factors would most likely be present if a company increases
its dividend payout ratio significantly?
A) a high debt/equity ratio (i.e., use of a large amount of financial leverage)
B) a quick ratio that is significantly below the industry average
C) current shareholders cannot participate in a new offering and desire to maintain
ownership control
D) the variability of expected future earnings decreases
28) AFB, Inc. and DAS, Inc. both paid a $2 per share dividend last year. This year,
AFB, Inc. announces an increase to $3 per share while DAS, Inc. announces an increase
to $2.50 per share. After the announcement, the price of DAS, Inc. stock increases and
the price of AFB, Inc.’s stock decreases. Which of the following best explains this
situation?
A) The stock market is irrational
B) AFB, Inc. had higher agency costs than DAS, Inc. prior to the announcement
C) Both companies need to raise capital for positive NPV projects and flotation costs
are high
D) Capital markets are perfect
29) JPR Company’s preferred stock is currently selling for $28.00, and pays a perpetual
annual dividend of $2.00 per share. Underwriters of a new issue of preferred stock
would charge $3 per share in flotation costs. The firm’s tax rate is 40%. Compute the
cost of new preferred stock for JPR.
A) 4.80%
B) 7.14%
C) 8.00%
D) 9.15%
30) A bond maturing in 10 years pays $80 each year (including year 10) and $1,000
upon maturity. Assuming 10 percent to be the appropriate discount rate, the present
value of the bond is
A) $877.11
B) $1,000.00
C) $416.39
D) $1,785.67
31) Determine the five-year equivalent annual annuity of the following project if the
appropriate discount rate is 16%:
Initial Outflow = $150,000
Cash Flow Year 1 = $40,000
Cash Flow Year 2 = $90,000
Cash Flow Year 3 = $60,000
Cash Flow Year 4 = $0
Cash Flow Year 5 = $80,000
A) $7,058
B) $8,520
C) $9,454
D) $9,872
32) Rogue Tire Masters has fixed costs of $220,000. Tires sell for $95 each and have a
unit variable cost of $45. What is Rogue’s break-even point in units?
A) 4,000
B) 4,400
C) 5,200
D) 5,500
33) What is the present value of an annuity of $120 received at the end of each year for
11 years? Assume a discount rate of 7%. The first payment will be received one year
from today (round to nearest $1).
A) $250
B) $400
C) $570
D) $900
34) The net present value always provides the correct decision provided that
A) cash flows are constant over the asset’s life
B) the required rate of return is greater than the internal rate of return
C) capital rationing is not imposed
D) the internal rate of return is positive
35) Your company buys supplies on credit terms of 2/10 net 45. Suppose the company
makes a purchase of $20,000 today. Which of the following payment options makes the
most sense as a general rule?
A) Pay the bill as soon as possible to keep the supplier happy
B) Pay the bill on day 45 due to the time value of money
C) Pay the bill on day 10 to get the discount
D) Either pay the bill on day 10 to get the discount, or wait until day 45
36) Capital rationing may be imposed because of all of the following EXCEPT
A) capital market conditions are poor
B) management has a fear of debt
C) stockholder control problems prevent issuance of additional stock
D) the company’s stock price is at an historically high level
37) The five basic principles of finance include all of the following EXCEPT
A) Cash flow is what matters
B) Money has a time value
C) Risk requires a reward
D) Incremental profits determine value
38) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%.The modified internal rate of return for Project A is
A) 19.19%
B) 24.18%
C) 26.89%
D) 29.63%
39) HomeCraft makes wooden play sets. The company pays annual rent of $400,000
per year and pays administrative salaries totaling $150,000 per year. Each play set
requires $400 of wood, ten hours of labor at $70 per hour, and variable overhead costs
of $100. Fixed advertising expenses equal $100,000 per year. Each play set sells for
$3,200. What is Homecraft’s break-even output level?
A) 340 play sets
B) 325 play sets
C) 297 play sets
D) 258 play sets
40) Which of the following is an advantage of organized stock exchanges?
A) increased stock price volatility
B) screening companies to ensure only low risk stocks are sold
C) providing a continuous market
D) only profitable companies may issue new securities on an organized exchange
41) Bart’s Moving Company bonds have a 11% coupon rate. Interest is paid
semiannually. The bonds have a par value of $1,000 and will mature 8 years from now.
Compute the value of Bart’s Moving Company bonds if investors’ required rate of
return is 9.5%.
A) $1,197.27
B) $1,133.05
C) $1,098.99
D) $1,082.75
42) Charlie Corporation has two bonds outstanding. Both bonds mature in 10 years,
have a face value of $1,000, and have a yield to maturity of 8%. One bond is a zero
coupon bond and the other bond has a coupon rate of 8%. Which of the following
statements is TRUE?
A) Both bonds must sell for the same price if markets are in equilibrium
B) The zero coupon bond must have a higher price because of its greater capital gain
potential
C) The zero coupon bond must sell for a lower price than the bond with an 8% coupon
rate
D) All rational investors will prefer the 8% bond because it pays more interest
43) Butler Automotive developed a new diagnostic testing procedure that is expected to
increase sales by $10,000 per month. As more drivers bring in their vehicles, Butler
expects to also do more oil changes and brake repairs. As a result, inventory levels of
oil and brake parts must be increased by $5,000. Revenues from oil changes and brake
jobs are expected to increase by $4,000 per month. An example of an increase in net
working capital requirements from the new diagnostic testing procedure is the
A) increase in inventory levels of oil and brake parts of $5,000
B) increase in revenue of $10,000 per month for the diagnostic testing
C) increase in revenues from oil changes and brake jobs of $4,000 per month
D) increase in all activities totaling $19,000 per month
44) Whistle Corp. has a preferred stock that pays a dividend of $2.40. If you are willing
to purchase the stock at $11, what is your required rate of return (round your answer to
the nearest .1% and assume that there are no transaction costs)?
A) 21.8%
B) 11.0%
C) 9.1%
D) 20.1%
45) All of the following are likely to result in the use of less debt in a company’s capital
structure EXCEPT
A) desire to maintain financial flexibility
B) desire to maintain a high credit rating
C) insufficient internal funds
D) a decrease in a company’s marginal tax rate
46) Float is best described by which of the below?
A) investing excess cash balances
B) the time required for a deposited check to clear through the commercial banking
system and be available for payment
C) the term used to describe payment for the purchase of raw materials that are needed
to complete production of a luxury liner
D) the time that is required to receive payment on a zero balance account
47) Plato Industries’ projected sales for the first six months of 2012 are given below:
Jan.$250,000April$300,000
Feb.$340,000May$350,000
Mar.$280,000June$380,000
20% of sales are collected in cash at time of sale, 50% are collected in the month
following the sale, and the remaining 30% are collected in the second month following
the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to
the sales, and payments for purchases are made in the month of the sale. Total other
cash expenses are $70,000/month. The company’s cash balance as of February 28, 2012
will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato
has no short term borrowing as of February 28, 2012 . Ignore any interest on short-term
borrowing. The company must have a minimum cash balance of $40,000 at the
beginning of each month. Plato’s projected EBIT for March 2012?
A) $42,000
B) $23,000
C) ($28,000)
D) ($60,000)
48) Joe, a risk-averse investor, is trying to choose between investment A and investment
B. If investment A is riskier than investment B and Joe selects investment A anyway,
then
A) the actual return for investment A will be higher than the actual return for investment
B
B) the actual return for investment A will be higher than the expected return for
investment B
C) the expected return for investment A will be higher than the actual return for
investment B
D) the expected return for investment A will be higher than the expected return for
investment B
49) A typical measure for the risk-free rate of return is the
A) U.S. Treasury Bill rate
B) prime lending rate
C) money market rate
D) short-term AAA-rated bond rate
50) Southland Tours has net income of $2 million this year. The book value of
Southland Tours common equity is $8 million dollars. The company’s dividend payout
ratio is 60% and is expected to remain this way. What is Southland Tours’ internal
growth rate?
A) 6%
B) 9%
C) 10%
D) 15%
51) Master Craft Control Inc. has bonds that mature in 6 1/2 years with a par value of
$1,000. They pay a coupon rate of 9% with semiannual payments. If the required rate of
return on these bonds is 11% what is the bond’s value?
A) $1,026.73
B) $973.76
C) $1,022.74
D) $908.83