Which of the following are benefits derived from short-term financial planning?
I. having advance notice of when your firm will require external financing
II. being able to determine the extent of time for which a loan is required
III. having the ability to time capital expenditures in order to place the least financial
burden possible on a firm
IV. knowing for certain what your cash balance will be six months in advance
A. I and III only
B. I, II, and III only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
Answer:
You are comparing the current income statement of a firm to the pro forma income
statement for next year. The pro forma is based on a four percent increase in sales. The
firm is currently operating at 85 percent of capacity. Net working capital and all costs
vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this
information, which one of the following statements must be true?
A. The projected net income is equal to the current year’s net income.
B. The tax rate will increase at the same rate as sales.
C. Retained earnings will increase by four percent over its current level.
D. Total assets will increase by less than four percent.
E. Total liabilities and owners’ equity will increase by four percent.
Answer:
You are comparing stock A to stock B. Given the following information, what is the
difference in the expected returns of these two securities?
A. -0.85 percent
B. 2.70 percent
C. 3.05 percent
D. 13.45 percent
E. 13.55 percent
Answer:
Standard deviation is a measure of which one of the following?
A. average rate of return
B. volatility
C. probability
D. risk premium
E. real returns
Answer:
Which two of the following factors cause the yields on a corporate bond to differ from
those on a comparable Treasury security?
I. inflation risk
II. interest rate risk
III. taxability
IV. default risk
A. I and II only
B. III and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
The EOQ model is designed to minimize:
A. production costs.
B. inventory obsolescence.
C. the carrying costs of inventory.
D. the costs of replenishing inventory.
E. the total costs of holding inventory.
Answer:
We are evaluating a project that costs $854,000, has a 15-year life, and has no salvage
value. Assume that depreciation is straight-line to zero over the life of the project. Sales
are projected at 154,000 units per year. Price per unit is $41, variable cost per unit is
$20, and fixed costs are $865,102 per year. The tax rate is 33 percent, and we require a
14 percent return on this project. Suppose the projections given for price, quantity,
variable costs, and fixed costs are all accurate to within ±14 percent. What is the
worst-case NPV?
A. $984,613
B. $1,267,008
C. $1,489,511
D. $1,782,409
E. $1,993,870
Answer:
The Wildcat Oil Company is trying to decide whether to lease or buy a new
computer-assisted drilling system for its oil exploration business. Management has
decided that it must use the system to stay competitive; it will provide $850,000 in
annual pretax cost savings. The system costs $8 million and will be depreciated
straight-line to zero over 5 years. Wildcat’s tax rate is 34 percent, and the firm can
borrow at 8 percent. Lambert Leasing Company has offered to lease the drilling
equipment to Wildcat for payments of $2,040,000 per year. Lambert’s policy is to
require its lessees to make payments at the start of the year. What is the maximum lease
payment that would be acceptable to the company?
A. $1,893,231
B. $1,896,996
C. $1,904,506
D. $1,906,318
E. $1,911,472
Answer:
Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon
as she earns any interest so she only receives interest on her initial $500 investment.
Which type of interest is Sara earning?
A. free interest
B. complex interest
C. simple interest
D. interest on interest
E. compound interest
Answer:
Hungry Howie’s maintains a constant payout ratio. The firm is currently operating at
full capacity. What is the maximum rate at which the firm can grow without acquiring
any additional external financing?
A. 9.74 percent
B. 12.97 percent
C. 13.06 percent
D. 13.58 percent
E. 14.23 percent
Answer:
Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with
similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of
7 percent preferred stock and 2.5 million shares of common stock outstanding. The
preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for
$42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market
is 11.2 percent. The corporate tax rate is 38 percent. What is the firm’s weighted average
cost of capital?
A. 10.15 percent
B. 10.64 percent
C. 11.18 percent
D. 11.30 percent
E. 11.56 percent
Answer:
Which one of the following states that a firm’s cost of equity capital is directly and
proportionally related to the firm’s capital structure?
A. Capital Asset Pricing Model
B. M & M Proposition I
C. M & M Proposition II
D. Law of One Price
E. Efficient Markets Hypothesis
Answer:
Nelson’s Interiors has $1.52 million in net working capital. The firm has fixed assets
with a book value of $23.23 million and a market value of $26.16 million. The firm has
no long-term debt. The Home Centre is buying Nelson’s Interiors for $29.5 million in
cash. The acquisition will be recorded using the purchase accounting method. What is
the amount of goodwill that The Home Centre will record on its balance sheet as a
result of this acquisition?
A. $1.82 million
B. $3.34 million
C. $3.88 million
D. $4.14 million
E. $6.27 million
Answer:
Your portfolio is invested 30 percent each in Stocks A and C, and 40 percent in Stock B.
What is the standard deviation of your portfolio given the following information?
A. 12.38 percent
B. 12.64 percent
C. 12.72 percent
D. 12.89 percent
E. 13.97 percent
Answer:
What is the primary difference between an American call option and a European call
option?
A. The American call has a fixed strike price while the European strike price varies over
time.
B. An American call is a right to buy while a European call is an obligation to buy.
C. An American call has an expiration date while the European call does not.
D. An American call is written on 100 shares of the underlying security while the
European call covers 1,000 shares.
E. An American call can be exercised at any time up to the expiration date while the
European call can only be exercised on the expiration date.
Answer:
Which one of the following statements is correct?
A. Net float decreases every time a firm issues a check to pay one of its suppliers.
B. A positive net float indicates that collection float exceeds disbursements float.
C. Firms prefer a zero net float over a positive net float.
D. Net float is equal to collection float minus disbursement float.
E. Net float is equal to a firm’s available balance minus its book balance.
Answer:
If the economy is normal, Charleston Freight stock is expected to return 16.5 percent. If
the economy falls into a recession, the stock’s return is projected at a negative 11.6
percent. The probability of a normal economy is 80 percent while the probability of a
recession is 20 percent. What is the variance of the returns on this stock?
A. 0.010346
B. 0.012634
C. 0.013420
D. 0.013927
E. 0.014315
Answer:
Nieger Mills engages in farming, trucking of farm products, and the milling and
retailing of farm grains. The firm has decided to sell its farming operations to Jasper
Farms. This sale is referred to as a(n):
A. liquidation.
B. divestiture.
C. merger.
D. allocation.
E. restructuring.
Answer:
A firm uses 2011 as the base year for its financial statements. The common-size,
base-year statement for 2012 has an inventory value of 1.08. This is interpreted to mean
that the 2012 inventory is equal to 108 percent of which one of the following?
A. 2011 inventory
B. 2011 total assets
C. 2012 total assets
D. 2011 inventory expressed as a percent of 2011 total assets
E. 2012 inventory expressed as a percent of 2012 total assets
Answer:
George’s Equipment is planning on merging with Nelson Machinery. George’s will pay
Nelson’s shareholders the current value of their stock in shares of George’s Equipment.
George’s currently has 4,600 shares of stock outstanding at a market price of $31 a
share. Nelson’s has 1,600 shares outstanding at a price of $38 a share. What is the value
per share of the merged firm?
A. $30.77
B. $31.00
C. $31.29
D. $31.74
E. $32.06
Answer:
Which one of the following is a result of a stock repurchase?
A. increase in the number of shares outstanding
B. increase in the market price per share
C. increase in the total equity of the repurchasing firm
D. decrease in EPS
E. PE ratio equal to that resulting from a comparable cash dividend
Answer:
Which one of the following formulas expresses the absolute purchasing power parity
relationship between the U.S. dollar and the British pound?
A. S0 = PUK × PUS
B. PUS = Ft × PUK
C. PUK = S0 × PUS
D. Ft = PUS × PUK
E. S0 × Ft = PUK × PUS
Answer:
What is the closing value on this day for one March futures contract on silver?
Silver – 6,000 troy oz.: U.S. dollars and cents per troy oz.
A. $47,650
B. $57,600
C. $61,140
D. $61,524
E. $61,620
Answer:
Deep Mining and Precious Metals are separate firms that are both considering a silver
exploration project. Deep Mining is in the actual mining business and has an aftertax
cost of capital of 12.8 percent. Precious Metals is in the precious gem retail business
and has an aftertax cost of capital of 10.6 percent. The project under consideration has
initial costs of $575,000 and anticipated annual cash inflows of $102,000 a year for ten
years. Which firm(s), if either, should accept this project?
A. Company A only
B. Company B only
C. both Company A and Company B
D. neither Company A or Company B
E. cannot be determined without further information
Answer:
Forecasting risk is defined as the possibility that:
A. some proposed projects will be rejected.
B. some proposed projects will be temporarily delayed.
C. incorrect decisions will be made due to erroneous cash flow projections.
D. some projects will be mutually exclusive.
E. tax rates could change over the life of a project.
Answer:
The equivalent annual cost method is useful in determining:
A. which one of two machines to purchase if the machines are mutually exclusive, have
differing lives, and are a one-time purchase.
B. the tax shield benefits of depreciation given the purchase of new assets for a project.
C. the operating cash flows of a cost-cutting project.
D. which one of two investments to accept when the investments have different
required rates of return.
E. which one of two machines should be purchased when the machines are mutually
exclusive, have different machine lives, and will be replaced once they are worn out.
Answer:
Precise Machining is considering a rights offer. The company has determined that the
ex-rights price would be $46. The current price is $53 per share, and there are 7 million
shares outstanding. The rights offer would raise a total of $70 million. What is the
subscription price?
A. $26.48
B. $27.06
C. $27.50
D. $28.18
E. $29.10
Answer:
Which two of the following are the primary reasons why firms temporarily accumulate
large cash surpluses?
I. cyclical activities
II. desire to invest funds
III. daily operations
IV. fixed asset purchases
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only
Answer:
The decision to issue additional shares of stock is an example of which one of the
following?
A. working capital management
B. net working capital decision
C. capital budgeting
D. controller’s duties
E. capital structure decision
Answer:
West Wind Tours stock is currently selling for $48 a share. The stock has a dividend
yield of 3.2 percent. How much dividend income will you receive per year if you
purchase 200 shares of this stock?
A. $24.96
B. $36.20
C. $424.80
D. $362.00
E. $307.20
Answer:
The expected return on JK stock is 15.78 percent while the expected return on the
market is 11.34 percent. The stock’s beta is 1.51. What is the risk-free rate of return?
A. 2.22 percent
B. 2.31 percent
C. 2.42 percent
D. 2.50 percent
E. 2.63 percent
Answer:
Assume that Major Manuscripts, Inc. is currently operating at 97 percent of capacity
and that sales are projected to increase to $20,000. What is the projected addition to
fixed assets?
A. $0
B. $1,533
C. $1,629
D. $1,646
E. $1,688
Answer: