1) All of the following are stock market indices except _________________.
A.Standard & Poor’s 500 Index
B.Dow Jones Industrial Average
C.Nasdaq Composite Index
D.Mercantile 1000
2) Compound Frequency Payday loans are very short-term loans that charge very high
interest rates. You can borrow $600 today and repay $675 in two weeks. What is the
compound annual rate implied by this 12.5 percent rate charged for only two weeks?
A.12.89%
B.13.28%
C.2037.71%
D.113.28%
3) Crab Cakes Ltd. has 5 million shares of stock outstanding selling at $15 per share
and an issue of $10 million in 10 percent, annual coupon bonds with a maturity of 25
years, selling at 97 percent of par ($1000). If Crab Cakes’ weighted average tax rate is
30 percent, its next dividend is expected to be $1.00 per share, and all future dividends
are expected to grow at 5 percent per year, indefinitely, what is its WACC?
A.8.42%
B.10.84%
C.11.16%
D.11.52%
4) If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its
average payment period?
A.10
B.33
C.43
D.53
5) A firm uses only debt and equity in its capital structure. The firm’s weight of equity is
75%. The firm’s cost of equity is 16% and it has a tax rate of 30%. If the firm’s WACC
is 13%, what is the firm’s before-tax cost of debt?
A.6.89%
B.6.28%
C.5.97%
D.5.71%
6) Which of these is the type of loan where the firm makes fixed interest payments over
the life of the loan?
A.fixed-rate loans
B.variable-rate loans
C.take-down loans
D.spot loans
7) Debt versus Equity Financing You are considering a stock investment in one of two
firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry
and have identical operating income of $400,000. AllDebt, Inc. finances its $800,000 in
assets with $600,000 in debt (on which it pays 5 percent interest annually) and
$200,000 in equity. AllEquity, Inc. finances its $800,000 in assets with no debt and
$800,000 in equity. Both firms pay a tax rate of 30 percent on their taxable income.
What are the asset funders’ (the debt holders and stockholders’) resulting return on
assets for the two firms?
A.32.375%, and 35.00%,respectively
B.36.125%, and 35.00%, respectively
C.46.25%, and 50%, respectively
D.50%, and 50%, respectively
8) Due to poor spending habits, Ricky has accumulated $10,000 in credit card debt. He
has missed several payments and now the annual interest rate on the card is 18.95%! If
he pays $175 per month on the card, how long will it take Ricky to pay off the card?
A.121.5 months
B.148.50 months
C.162.5 months
D.Ricky never pays off the card.
9) Currency Exchange Compute the amount of foreign currency that can be purchased
for $1,000,000:
1 Malaysian Ringget = $0.2875
A.287,500 Ringget
B.1,287,500 Ringget
C.3,478,260.87 Ringget
D.4,478,300 Ringget
10) Statement of Cash Flows Crispy Corporation has net cash flow from financing
activities for the last year of $20 million. The company paid $5 million in dividends last
year. During the year, the change in notes payable on the balance sheet was an increase
of $2 million, and change in common and preferred stock was an increase of $3 million.
The end of year balance for long-term debt was $45 million. What was their beginning
of year balance for long-term debt?
A.$15 million
B.$20 million
C.$25 million
D.$35 million
11) Income Statement You have been given the following information for Nicole’s
Neckties Corp.:
net sales = $2,500,000;
cost of goods sold = $1,300,000;
addition to retained earnings = $30,000;
dividends paid to preferred and common stockholders = $300,000;
interest expense = $50,000.
The firm’s tax rate is 40 percent. What is the depreciation expense for Nicole’s Neckties
Corp.?
A.$550,000
B.$600,000
C.$650,000
D.$820,000
12) Annuity Interest Rate What annual interest rate would you need to earn if you
wanted a $500 per month contribution to grow to $27,050 in 4 years?
A.2.37%
B.5.77%
C.6.00%
D.13.53%
13) Common stockholders’ equity divided by number of shares of common stock
outstanding is the formula for calculating
A.Earnings per share (EPS)
B.Dividends per share (DPS)
C.Book value per share (BVPS)
D.Market value per share (MVPS)
14) A capital budgeting technique that generates a decision rule and associated metric
for choosing projects based on the total discounted value of their cash flows.
A.discounted payback
B.net present value
C.internal rate of return
D.profitability index
15) Suppose that Team Industries, Inc. currently has the balance sheet shown below,
and that sales for the year just ended were $3 million. The firm also has a profit margin
of 20 percent, a retention ratio of 30 percent, and expects sales of $6 million next year.
If all assets and current liabilities are expected to increase with sales, what amount of
additional funds will the company need from external sources?
A.$2,140,000
B.$2,320,000
C.$2,500,000
D.$4,500,000
16) Your firm needs a machine which costs $500,000, and requires $10,000 in
maintenance for each year of its 3-year life. After 3 years, this machine will be
replaced. The machine falls into the MACRS 3-year class life category. Assume a tax
rate of 35% and a discount rate of 15%. What is the depreciation tax shield for this
project in year 3?
A.$7,219.88
B.$24,500.00
C.$25,917.50
D.$48,150
17) Rates over One Year Determine the interest rate earned on a $1,500 deposit when
$1,680 is paid back in one year.
A.0.89%
B.1.12%
C.12.00%
D.89.00%
18) Annuity Interest Rate What’s the interest rate of a 4-year, annual $1,000 annuity
with present value of $3,500?
A.3.85%
B.5.56%
C.8.84%
D.9.70%
19) How might a large market risk premium impact people’s desire to buy stocks?
A.Investors with high risk aversion will be less willing to invest in stocks
B.Investors with high risk aversion will be more willing to invest in stocks
C.It will only impact the share prices
D.None of these statements is correct
20) If a bond is selling at par value, which of the following statements is correct?
A.The current yield must equal the coupon rate
B.The current yield must equal the yield to maturity
C.Both of these statements are correct
D.None of these statements is correct
21) A U.S. firm is expecting to pay cash flows of 15 million Egyptian pounds and 25
million Qatar rials. The current spot exchange rates are: $1 = 5.25 pounds and $1 = 3.75
rials. If these cash flows are delayed one year and the expected spot rates at that time
will be $1 = 5.62 pounds and $1 = 4.00 rials, then what is the difference in dollars paid
that was caused by the delay?
A.$0.68 million
B.$0.84 million
C.$1.08 million
D.$0.6 million
22) Expected Return Risk Compute the standard deviation of the expected return given
these three economic states, their likelihoods, and the potential returns:
A.8.4%
B.10.87%
C.11.34%
D.24.09%
23) Which of the following was the catalyst for the recent financial crisis?
A.Corruption in the investment banking industry
B.Widespread layoffs due to illegal alien hiring
C.Defaults on subprime mortgages
D.All of these
24) Under/Over-Valued Stock A manager believes his firm will earn a 7.5 percent return
next year. His firm has a beta of 2, the expected return on the market is 5 percent, and
the risk-free rate is 2 percent. Compute the return the firm should earn given its level of
risk and determine whether the manager is saying the firm is under-valued or
over-valued.
A.8%, under-valued
B.8%, over-valued
C.12%, under-valued
D.12%, over-valued
25) Daisy D Industries has a cash balance of $75,000; accounts payable of $140,000;
inventory of $300,000; accounts receivable of $350,000; notes payable of $145,000;
and accrued wages and taxes of $80,000. How much net working capital does the firm
need to fund?
A.$285,000
B.$60,000
C.$440,000
D.$360,000
26) The simplest approach to estimating a future period’s sales is to assume that they
will be equal to those of the latest observed period. In statistics, this is often simply
referred to as which of the following?
A.base case approach
B.deseaonalized approach
C.nave approach
D.pro forma approach
27) Investment Return Rx Corp stock was $60.00 per share at the end of last year. Since
then, it paid a $1.00 per share dividend last year. The stock price is currently $62.50. If
you owned 400 shares of Rx, what was your percent return?
A.1.67%
B.4.17%
C.5.60%
D.5.83%
28) What is the difference between a Chapter 11 and a Chapter 7 bankruptcy?
29) Is the set of cash flows depicted below normal or non-normal? Explain.
30) To compute and use the Equivalent Annual Cost (EAC) approach of two or more
alternative assets, what would one need?
31) Everything else held constant, if a firm announces that it will double the length of
time between its ex-dividend date and its payment date, what should be the effect on
stock price?
32) Explain why the effective annual rate (EAR) is a more accurate measure of the
interest rate paid than the annual percentage rate (APR)?
33) What does diversification do to the risk and return characteristics of a portfolio?