1) A corporation:
A.is ultimately controlled by its board of directors
B.is a legal entity separate from its owners
C.is prohibited from entering into contractual agreements
D.has its identity defined by its bylaws
E.has its existence regulated by the rules set forth in its charter
2) In an efficient market, the cost of equity for a risky firm does which one of the
following according to the security market line?
A.Produces a return that will be less than the market rate but higher than the risk-free
rate
B.Equals the market rate of return for all stocks
C.Has a maximum cost equal to the market rate of return
D.Decreases as the beta of the firm’s stock increases
E.Increases in direct relation to the stock’s systematic risk
3) The pre-tax cost of debt:
A.is based on the current yield to maturity of the firm’s outstanding bonds
B.is equal to the coupon rate on the latest bonds issued by a firm
C.is equivalent to the average current yield on all of a firm’s outstanding bonds
D.is based on the original yield to maturity on the latest bonds issued by a firm
E.has to be estimated as it cannot be directly observed in the market
4) Which one of the following bonds is the least sensitive to changes in market interest
rates?
A.Zero-coupon, 10 year
B.6 percent annual coupon, 10 year
C.Zero-coupon, 4 year
D.8 percent annual coupon, 4 year
E.6 percent annual coupon, 4 year
5) Which one of the following represents the present value of the interest tax shield?
A.D (1 – Tc)
B.D/(1 – Tc)
C.D/Tc
D.D – D(Tc)
E.TC D
6) Which one of the following specifies the length of time that must pass after an IPO
before insiders are permitted to sell their shares?
A.Lockup period
B.Quiet period
C.Comment period
D.Green Shoe period
E.Rights offer period
7) You purchased 1,300 shares of LKL stock 5 years ago and have earned annual
returns of 7.1 percent, 11.2 percent, 3.6 percent, -4.7 percent and 11.8 percent. What is
your arithmetic average return?
A.4.47 percent
B.5.80 percent
C.6.23 percent
D.6.47 percent
E.6.98 percent
8) Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How
much interest will you earn over the next 5 years?
A.$96.00
B.$101.15
C.$480.00
D.$492.16
E.$519.97
9) The corporate tax structure in the U.S. is based on a:
A.maximum tax rate of 38 percent
B.minimum tax rate of 10 percent
C.flat rate of 34 percent for the highest income earners
D.flat-rate tax
E.modified flat-rate tax
10) A stock has produced returns of 15.6 percent, 3.4 percent, 11.7 percent, and -9.2
percent over the past four years, respectively. What is the geometric average return?
A.4.93 percent
B.5.47 percent
C.6.23 percent
D.6.61 percent
E.7.08 percent
11) The Cracker Mill has a beta of 0.97, a dividend growth rate of 3.2 percent, a stock
price of $33 a share, and an expected annual dividend of $1.06 per share next year. The
market rate of return is 11.2 percent and the risk-free rate is 3.7 percent. What is the
firm’s cost of equity?
A.7.74 percent
B.8.69 percent
C.9.30 percent
D.9.72 percent
E.10.01 percent
12) Charlie’s Bar writes 3 checks a day for an average amount of $5,400 each. These
checks generally clear the bank 4 days after they are written. In addition, the firm
generally receives and deposits checks amounting to $18,700 each day. All deposits are
available on the next day. What is the firm’s net float?
A.Net collection float of $13,200
B.Net collection float of $18,700
C.Net collection float of $22,300
D.Net disbursement float of $46,100
E.Net disbursement float of $64,800
13) Which one of the following statements is true regarding the period 1926-2008?
A.The returns on small-company stocks were less volatile than the returns on
large-company stocks
B.The risk-free rate of return remained constant over the time period
C.U.S. Treasury bills had a positive average real rate of return
D.Bonds had an average rate of return that exceeded the average return on stocks
E.The inflation rate was just as volatile as the return on long-term bonds
14) Farm Equipment, Inc. announced this morning that its next annual dividend will be
decreased to $1.80 a share and that all future dividends will be decreased by an
additional 1.5 percent annually. What is the current value per share of this stock if the
required return is 16.5 percent?
A.$8
B.$10
C.$12
D.$14
E.$16
15) Russell’s Hardware has inventory of $218,000, equity of $421,800, total assets of
$647,700, and sales of $587,200. What is the common-size percentage for the inventory
account?
A.26.81 percent
B.33.66 percent
C.37.12 percent
D.49.09 percent
E.51.68 percent
16) The systematic risk principle states that the expected return on a risky asset depends
only on which one of the following?
A.Unique risk
B.Diversifiable risk
C.Asset-specific risk
D.Market risk
E.Unsystematic risk
17) During the past year, ABC stock has sold for as little as $19 a share and a much as
$33 a share. Which one of the following terms applies to these prices?
A.Benchmark values
B.Price splits
C.Price dividers
D.Split range
E.Trading range
18) Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today,
she gave you the proceeds of that investment which totaled $51,480.79. How much did
she originally invest?
A.$15,929.47
B.$16,500.00
C.$17,444.86
D.$17,500.00
E.$17,999.45
19) Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump
sum at the end of the loan term. Which one of the following interest rates is best for
Jenny?
A.8 percent simple interest
B.8 percent interest, compounded annually
C.8.5 percent simple interest
D.8.5 percent interest, compounded annually
E.9 percent interest, compounded annually
20) Underwood Homes Sales has total assets of $589,900 and total debt of $318,000.
What is the equity multiplier?
A.0.46
B.0.54
C.1.21
D.1.85
E.2.17
21) By definition, a bank that pays simple interest on a savings account will pay
interest:
A.only at the beginning of the investment period
B.on interest
C.only on the principal amount originally invested
D.on both the principal amount and the reinvested interest
E.only if all previous interest payments are reinvested
22) Which one of the following would tend to favor a low dividend payout?
A.Higher tax rates on capital gains than on dividend income
B.High flotation cost for equity issues
C.Endowment fund investors who cannot spend principal
D.Investors’ desire for a high dividend yield
E.Elimination of the tax-deferral on capital gains
23) Dorchester, Inc. has 7,500 shares of stock outstanding at a market price of $42 each
and earnings per share of $1.80. The firm has decided to repurchase $63,000 worth of
stock. What will the PE ratio be after the repurchase, all else held constant?
A.$1.30
B.$1.44
C.$1.80
D.$2.02
E.$2.25
24) Worth While Entertainment has common stock with a beta of 1.46. The market risk
premium is 9.1 percent and the risk-free rate is 4.6 percent. What is the expected return
on this stock?
A.16.31 percent
B.16.67 percent
C.17.40 percent
D.17.89 percent
E.18.23 percent
25) Which one of the following will affect the capital structure weights used to compute
a firm’s weighted average cost of capital?
A.Decrease in the book value of a firm’s equity
B.Decrease in a firm’s tax rate
C.Increase in the market value of the firm’s common stock
D.Increase in the market risk premium
E.Increase in the firm’s beta