The bid price is:
A. an aftertax price.
B. the aftertax contribution margin.
C. the highest price you should charge if you want the project.
D. the only price you can bid if the project is to be profitable.
E. the minimum price you should charge if you want to earn a target return on
investment.
Answer:
Today, you earn a salary of $36,000. What will be your annual salary twelve years from
now if you earn annual raises of 3.6 percent?
A. $55,032.54
B. $57,414.06
C. $58,235.24
D. $59,122.08
E. $59,360.45
Answer:
A wealthy benefactor just donated some money to the local college. This gift was
established to provide scholarships for worthy students. The first scholarships will be
granted one year from now for a total of $35,000. Annually thereafter, the scholarship
amount will be increased by 5.5 percent to help offset the effects of inflation. The
scholarship fund will last indefinitely. What is the value of this gift today at a discount
rate of 9 percent?
A. $37,500
B. $350,000
C. $800,000
D. $1,000,000
E. $1,050,750
Answer:
Marie’s Fashions is considering a project that will require $28,000 in net working
capital and $87,000 in fixed assets. The project is expected to produce annual sales of
$75,000 with associated cash costs of $57,000. The project has a 5-year life. The
company uses straight-line depreciation to a zero book value over the life of the project.
The tax rate is 30 percent. What is the operating cash flow for this project?
A. -$1,520
B. -$580
C. $420
D. $15,680
E. $17,820
Answer:
You own a portfolio equally invested in a risk-free asset and two stocks. One of the
stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is
the beta of the second stock?
A. 0.75
B. 0.80
C. 0.94
D. 1.00
E. 1.10
Answer:
Paying off a firm’s debt is comparable to _____ on the assets of the firm.
A. purchasing a put option
B. purchasing a call option
C. exercising an in-the-money put option
D. exercising an in-the-money call option
E. selling a call option
Answer:
The sustainable growth rate:
A. assumes there is no external financing of any kind.
B. assumes no additional long-term debt is available.
C. assumes the debt-equity ratio is constant.
D. assumes the debt-equity ratio is 1.0.
E. assumes all income is retained by the firm.
Answer:
The current yield is defined as the annual interest on a bond divided by which one of
the following?
A. coupon
B. face value
C. market price
D. call price
E. dirty price
Answer:
The Fisher Effect primarily emphasizes the effects of _____ on an investor’s rate of
return.
A. default
B. market
C. interest rate
D. inflation
E. maturity
Answer:
Which of the following will increase the cash cycle, all else constant?
I. increasing the inventory period
II. decreasing the accounts receivable turnover rate
III. increasing the accounts payable period
IV. decreasing the accounts receivable period
A. I and II only
B. III and IV only
C. I and IV only
D. I, II, and III only
E. I, III, and IV only
Answer:
You would like to give your daughter $75,000 towards her college education 17 years
from now. How much money must you set aside today for this purpose if you can earn
8 percent on your investments?
A. $18,388.19
B. $20,270.17
C. $28,417.67
D. $29,311.13
E. $32,488.37
Answer:
Under European put-call parity, the present value of the strike price is equivalent to:
A. the current value of the stock minus the call premium.
B. the market value of the stock plus the put premium.
C. the present value of a government coupon bond with a face value equal to the strike
price.
D. a U.S. Treasury bill with a face value equal to the strike price.
E. a risk-free security with a face value equal to the strike price and a coupon rate equal
to the risk-free rate of return.
Answer:
A swap dealer in the U.S.:
A. acts solely as a seller of swap contracts.
B. matches buyers to sellers.
C. only deals if its book is matched.
D. is frequently a commercial bank.
E. trades electronically via NASDAQ.
Answer:
You have won a contest and will receive $2,500 a year in real terms for the next 3 years.
Each payment will be received at the end of the period with the first payment occurring
one year from today. The relevant nominal discount rate is 6.3 percent and the inflation
rate is 3.1 percent. What are your winnings worth today?
A. $7,057
B. $7,367
C. $7,401
D. $7,500
E. $7,838
Answer:
The owners’ equity accounts for Blueswell Industries are shown here:
If Blueswell Industries declares a 1-for-5 reverse stock split, there will be ____ shares
outstanding at a par value of _____ per share.
A. 1,800; $1.00
B. 1,800; $5.00
C. 9,000; $5.00
D. 45,000; $0.20
E. 45,000; $1.00
Answer:
Which one of the following is the equity risk that is most related to the daily operations
of a firm?
A. market risk
B. systematic risk
C. extrinsic risk
D. business risk
E. financial risk
Answer:
Which one of the following acts like an insurance policy if the price of a stock you own
suddenly decreases in value?
A. sale of a European call option
B. sale of an American put option
C. purchase of a protective put
D. purchase of a protective call
E. either the sale or purchase of a put
Answer:
You need $25,000 today and have decided to take out a loan at 7 percent for five years.
Which one of the following loans would be the least expensive? Assume all loans
require monthly payments and that interest is compounded on a monthly basis.
A. interest-only loan
B. amortized loan with equal principal payments
C. amortized loan with equal loan payments
D. discount loan
E. balloon loan where 50 percent of the principal is repaid as a balloon payment
Answer:
Which one of the following securities is used as a means of investing in a foreign stock
that otherwise could not be traded in the United States?
A. American Depository Receipt
B. Yankee bond
C. Yankee stock
D. LIBOR
E. gilt
Answer:
Which one of the following terms is used to identify a British perpetuity?
A. ordinary annuity
B. amortized cash flow
C. annuity due
D. discounted loan
E. consol
Answer:
You are the manager of a retail store. You believe the economy is in a recession and that
sales for the month will be unusually slow. Since you have complete discretion over the
pricing at your location, you decide to have a store-wide sale and offer 10 percent off all
merchandise for a 3-day period. You don’t expect your superiors to criticize this
decision as you believe they, along with the majority of the other store managers, feel
the same way about the economy as you do. Which one of the following applies to you?
A. recency bias
B. law of small numbers
C. gambler’s fallacy
D. false consensus
E. money illusion
Answer:
J&J Foods wants to issue some 7 percent preferred stock that has a stated liquidating
value of $100 a share. The company has determined that stocks with similar
characteristics provide a 12.8 percent rate of return. What should the offer price be?
A. $37.26
B. $41.38
C. $48.20
D. $54.69
E. $62.60
Answer:
What is the value of five August $25 call contracts on Dove stock?
A. $34
B. $68
C. $340
D. $690
E. $3,450
Answer:
Which of the following increase the costs associated with a merger?
A. changing the title to all the combined firm’s assets
B. disbanding the operations of the target firm
C. hiring an underwriter to distribute the IPO shares
D. issue costs associated with warrants that must be offered to the shareholders of the
acquiring firm
E. seeking approval of the shareholders of both the acquiring and the acquired firm
Answer:
Costs that decrease as a firm acquires additional current assets are called _____ costs.
A. carrying
B. shortage
C. debt
D. equity
E. payables
Answer:
A firm with a flexible short-term financial policy will:
A. maintain a low balance in accounts receivables.
B. only have minimal amounts, if any, invested in marketable securities.
C. invest heavily in inventory.
D. have low cash balances.
E. have tight restrictions on granting credit to customers.
Answer:
You are expecting a payment of 450,000PLN three years from now. The risk-free rate of
return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2.5percent in
the U.S. and 3 percent in Poland. Currently, you can buy 277PLN for 100USD. How
much will the payment three years from now be worth in U.S. dollars?
A. $154,751
B. $157,677
C. $219,511
D. $1,317,269
E. $1,369,888
Answer:
Polly’s Home Accents currently sells 320 units a month at a price of $59 a unit. Polly
thinks she can increase her sales by an additional 55 units if she switches to a net 30
credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is
$32. What is the net present value of the proposed credit policy switch?
A. $350,610
B. $350,895
C. $426,507
D. $621,929
E. $821,135
Answer:
The Design Team just decided to save $1,500 a month for the next 5 years as a safety
net for recessionary periods. The money will be set aside in a separate savings account
which pays 4.5 percent interest compounded monthly. The first deposit will be made
today. What would today’s deposit amount have to be if the firm opted for one lump
sum deposit today that would yield the same amount of savings as the monthly deposits
after 5 years?
A. $80,459.07
B. $80,760.79
C. $81,068.18
D. $81,333.33
E. $81,548.20
Answer:
The _____ tax rate is equal to total taxes divided by total taxable income.
A. deductible
B. residual
C. total
D. average
E. marginal
Answer:
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
Answer:
It is commonly recommended that the managers of a firm compare the performance of
their firm to that of its peers. Increasingly, this is becoming a more difficult task.
Explain some of the reasons why comparisons of this type can frequently be either
difficult to perform or produce misleading results.
Answer:
Ron leases a car from Uptown Motors and pays $225 a month as a lease payment.
Which one of the following terms applies to Ron?
A. lessee
B. lessor
C. guarantor
D. trustee
E. manager
Answer:
Explain how a lockbox system operates and why a firm might consider implementing
such a system.
Answer:
Describe the foreign currency and home currency approaches to capital budgeting for a
foreign project. Which is better? Which approach would you recommend a U.S. firm
use? Justify your answer.
Answer:
Explain how a manufacturer who has an ongoing need for silver as a raw material in the
production process might use futures to hedge. What does the manufacturer hope to
gain?
Answer:
List and describe the three basic types of secured inventory loans. Compare the
advantages and disadvantages of these loans.
Answer:
Call options are frequently attached to bonds, making them callable at the option of the
issuer. Consider a firm that just issued two sets of bonds: One is callable, has a 7
percent coupon rate, 15 years to maturity, and cannot be called during the first three
years; the second is noncallable, has a 7 percent coupon rate, 15 years to maturity, and
is identical to the first bond in every way except for the call option. Suppose the
noncallable bonds are sold for $1,000 each. Will the callable bonds sell for more or less
than $1,000? Who “purchases” the option in this case and who ‘sells” it?
Answer:
What value can the price-sales ratio provide to financial managers that the
price-earnings ratio cannot?
Answer:
What are the key features of the accounting, cash, and financial break-even points?
Answer:
Firms can frequently create synergy by merging and sharing complementary resources
with another firm. Give two examples of situations where this would most likely occur.
Answer:
Explain how cash dividends affect individual shareholders differently than an equal
amount of funds spent on a repurchase.
Answer:
Explain both a rights offering and the basic characteristics of a right.
Answer:
What is cross-hedging? Why do you suppose firms use this method of risk
management? What are some of the drawbacks?
Answer:
Empirical evidence indicates that the returns to shareholders of the target firm vary
significantly from the returns to the shareholders of the acquiring firm. Identify the
shareholders that tend to realize the smaller return and provide some possible
explanation for these low returns.
Answer:
What is the primary purpose of computing the equivalent annual costs when comparing
two machines? What is the assumption that is being made about each machine?
Answer:
Explain why financial mergers tend to benefit bondholders more than shareholders.
Answer:
Give an example of a protective put and explain how this strategy reduces investor risk.
Answer: