1) Which one of the following statements is correct?
A.Oral offers can be made for new securities during the waiting period
B.A Green Shoe letter must be provided to all investors who purchase shares of a new
equity offering
C.Corporate directors have the authority to authorize additional shares of stock for a
new issue
D.The underwriters must approve any increase in the authorized number of shares for a
firm
E.When issuing new securities, the first step is the distribution of the prospectus
2) Kessler, Inc. has accounts receivable of $31,600, total assets of $311,500, cost of
goods sold of $208,400, and a capital intensity ratio of 1.08. What is the accounts
receivables turnover rate?
A.8.99
B.9.13
C.9.42
D.9.61
E.9.72
3) Raceway Motors issued a 20-year, 8 percent semiannual bond 3 years ago. The bond
currently sells for 98.6 percent of its face value. The company’s tax rate is 34 percent.
What is the aftertax cost of debt?
A.5.38 percent
B.5.54 percent
C.5.69 percent
D.5.72 percent
E.5.99 percent
4) Which one of the following statements is correct?
A.A prepack is a plan of liquidation used to distribute a firm’s assets
B.Bankruptcy courts have “cram-down” powers
C.The absolute priority rule must be strictly followed in all bankruptcy proceedings
D.Creditors cannot force a firm into bankruptcy even though they might like to do so
E.A reorganization plan can only be approved if the firm’s creditors all agree with the
plan
5) The Saw Mill has a return on assets of 6.1 percent, a total asset turnover rate of 1.8,
and a debt-equity ratio of 1.6. What is the return on equity?
A.4.26 percent
B.9.76 percent
C.12.28 percent
D.15.86 percent
E.19.03 percent
6) You are analyzing a project and have developed the following estimates. The
depreciation is $7,600 a year and the tax rate is 34 percent. What is the worst case
operating cash flow?
A.-$1,311
B.-$641
C.$274
D.$599
E.$1,206
7) A firm offers terms of 2/5, net 30. What effective annual interest rate does the firm
earn when a customer does not take the discount?
A.21.69 percent
B.24.42 percent
C.28.97 percent
D.31.08 percent
E.34.31 percent
8) Over the period of 1926-2008:
A.long-term government bonds underperformed long-term corporate bonds
B.small-company stocks underperformed large-company stocks
C.inflation exceeded the rate of return on U.S. Treasury bills
D.U.S. Treasury bills outperformed long-term government bonds
E.large-company stocks outperformed all other investment categories
9) 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
10) Bridgewater Furniture has sales of $811,000, costs of $658,000, and interest paid of
$21,800. The depreciation expense is $56,100 and the tax rate is 34 percent. At the
beginning of the year, the firm had retained earnings of $318,300 and common stock of
$250,000. At the end of the year, the firm has retained earnings of $322,500 and
common stock of $280,000. What is the amount of the dividends paid for the year?
A.$15,266
B.$19,466
C.$31,566
D.$41,066
E.$45,366
11) Which one of the following is the minimum required rate of return on a new
investment that makes that investment attractive?
A.Risk-free rate
B.Market risk premium
C.Expected return minus the risk-free rate
D.Market rate of return
E.Cost of capital
12) You want to create a $65,000 portfolio comprised of two stocks plus a risk-free
security. Stock A has an expected return of 14.2 percent and stock B has an expected
return of 17.8 percent. You want to own $20,000 of stock B. The risk-free rate is 4.8
percent and the expected return on the market is 13.1 percent. If you want the portfolio
to have an expected return equal to that of the market, how much should you invest in
the risk-free security?
A.$11,921
B.$13,509
C.$15,266
D.$17,315
E.$18,775
13) All else equal, an increase in which one of the following will decrease owners’
equity?
A.Increase in inventory
B.Increase in accounts payable
C.Increase in accounts receivable
D.Increase in net working capital
E.Increase in net fixed assets
14) The common stock of Mid-Towne Movers is selling for $33 a share and has a 9
percent rate of return. The growth rate of the dividends is 1 percent annually. What is
the amount of the next annual dividend?
A.$2.58
B.$2.61
C.$2.64
D.$2.67
E.$2.70
15) Kelso’s is considering spending $80,000 on either a stock repurchase or an extra
cash dividend. Which one of the following values will be the same whether the firm
pays a dividend or repurchases stock? Assume there are no taxes or market
imperfections.
A.Number of shares outstanding
B.Price per share
C.Earnings per share
D.Price-earnings ratio
E.Market value of equity per share
16) Discounted cash flow valuation is the process of discounting an investment’s:
A.assets
B.future profits
C.liabilities
D.costs
E.future cash flows
17) The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense
of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net
income for this firm?
A.$61,930
B.$66,211
C.$67,516
D.$76,428
E.$83,219
18) The Shoe Box is considering adding a new line of winter footwear to its product
line-up. Which of the following are relevant cash flows for this project?
I. decreased revenue from products currently being offered if this new footwear is
added to the lineup
II. revenue from the new line of footwear
III. money spent to date looking for a new product line to add to the store’s offerings
IV. cost of new counters to display the new line of footwear
A.I and IV only
B.II and IV only
C.II and III only
D.I, II, and IV only
E.II, III, and IV only
19) Which one of the following will increase the sustainable rate of growth a
corporation can achieve?
A.avoidance of external equity financing
B.increase in corporate tax rates
C.reduction in the retention ratio
D.decrease in the dividend payout ratio
E.decrease in sales given a positive profit margin
20) We are evaluating a project that costs $1.68 million, has a 5-year life, and has no
salvage value. Assume depreciation is straight-line to zero over the life of the project.
Sales are projected at 82,000 units per year. Price per unit is $43.29, variable cost per
unit is $22.18, and fixed costs are $623,000 per year. The tax rate is 34 percent, and we
require a 10 percent return on this project. What is the sensitivity of NPV to a 100 unit
change in the sales figure?
A.$3,998.40
B.$4,609.18
C.$4,897.20
D.$5,281.55
E.$5,557.12
21) On May 11, you purchased $3,700 of merchandise from a supplier. The terms of the
sale were 1/5, net 15. The discounted amount due is _____ which is payable no later
than _____.
A.$2,960; May 16
B.$3,515; May 26
C.$3,515; May 16
D.$3,663; May 16
E.$3,663; May 26
22) The risk-free rate is 4.2 percent and the expected return on the market is 12.3
percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a
beta of 0.87 and an expected return of 11.4 percent. Are these stocks correctly priced?
Why or why not?
A.No; Stock A is underpriced and stock B is overpriced
B.No; Stock A is overpriced and stock B is underpriced
C.No; Stock A is overpriced but stock B is correctly priced
D.No; Stock A is underpriced but stock B is correctly priced
E.Yes; Both stocks are correctly priced
23) The basic lesson of the 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.the size of the stockholders’ claims
24) You are analyzing a project and have developed the following estimates: unit sales
= 2,600, price per unit = $56, variable cost per unit = $39, fixed costs = $24,700. The
depreciation is $15,800 a year and the tax rate is 33 percent. What effect would a
decrease of $1 in the variable cost per unit have on the operating cash flow?
A.-$2,600
B.-$1,742
C.-$823
D.$1,742
E.$2,600
25) The net present value:
A.decreases as the required rate of return increases
B.is equal to the initial investment when the internal rate of return is equal to the
required return
C.method of analysis cannot be applied to mutually exclusive projects
D.is directly related to the discount rate
E.is unaffected by the timing of an investment’s cash flows
26) Green Roofs, Inc. has current liabilities of $14,300 and accounts receivable of
$7,800. The firm has total assets of $43,100 and net fixed assets of $23,700. The
owners’ equity has a book value of $21,400. What is the amount of the net working
capital?
A.$5,100
B.$5,700
C.$6,500
D.$8,200
E.$9,400
27) The term structure of interest rates represents the relationship between which of the
following?
A.Nominal rates on risk-free and risky bonds
B.Real rates on risk-free and risky bonds
C.Nominal and real rates on default-free, pure discount bonds
D.Market and coupon rates on default-free, pure discount bonds
E.Nominal rates on default-free, pure discount bonds and time to maturity
28) For the most recent year, Wilson Enterprises had sales of $689,000, cost of goods
sold of $470,300, depreciation expense of $61,200, and additions to retained earnings
of $48,560. The firm currently has 12,000 shares of common stock outstanding, and the
previous year’s dividends per share were $1.18. Assuming a 35 percent tax rate, what
was the times interest earned ratio?
A.1.47
B.2.09
C.2.58
D.3.15
E.3.67
29) A company is considering two alternative methods of producing a new product. The
relevant data concerning the alternatives are presented below.
At the end of the useful life of whatever equipment is chosen the product will be
discontinued. The company’s tax rate is 50 percent and its cost of capital is 10 percent.
a. Calculate the net present value of each alternative.
b. Calculate the benefit cost ratio for each alternative.
c. Calculate the internal rate of return for each alternative.
d. If the company is not under capital rationing, which alternative should be chosen?
Why?
30) Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent
coupon, pay interest semiannually, and mature in 13.5 years. What is the current price
of these bonds if the yield to maturity is 6.82 percent?
A.$989.50
B.$994.56
C.$1,015.72
D.$1,018.27
E.$1,020.00
31) Financial leverage:
A.increases as the net working capital increases
B.is equal to the market value of a firm divided by the firm’s book value
C.is inversely related to the level of debt
D.is the ratio of a firm’s revenues to its fixed expenses
E.increases the potential return to the shareholders
32) Stan Lee’s sells 4,300 carpets a year at an average price per carpet of $1,490. The
carrying cost per unit is $21.63. The company orders 500 carpets at a time and has a
fixed order cost of $69 per order. The carpets are sold out before they are restocked.
What is the economic order quantity?
A.147 carpets
B.166 carpets
C.184 carpets
D.315 carpets
E.348 carpets
33) Stock A has an expected return of 15.6 percent and a beta of 1.27. Stock B has an
expected return of 11.4 percent and a beta of 0.89. Both stocks have the same
reward-to-risk ratio. What is the risk-free rate?
A.1.56 percent
B.2.28 percent
C.2.79 percent
D.3.35 percent
E.3.92 percent
34) Kelner’s Nursery has 8,000 bonds outstanding with a face value of $1,000 each. The
coupon rate is 6.5 percent and the tax rate is 34 percent. What is the present value of the
interest tax shield?
A.$2.72 million
B.$2.83 million
C.$3.09 million
D.$3.13 million
E.$3.26 million
35) Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE
Corporation. Based on recent market information, ACE is worth $710 million as an
independent operation. For the merger to make economic sense for Atmosphere, what
would the minimum estimated value of the enhancements from the merger have to be?
A.$0
B.$75 million
C.$150 million
D.$710 million
E.$860 million