Kline Construction is an all-equity firm that has projected perpetual earnings before
interest and taxes of $628,000. The current cost of equity is 17.6 percent and the tax
rate is 35percent. The company is in the process of issuing $4.3 million of 8.3 percent
annual coupon bonds at par. What is the levered value of the firm?
A. $3,824,318
B. $3,541,085
C. $3,422,225
D. $2,713,185
E. $3,385,695
Alicia wrote a check for $18 on Friday, May 6. The check cleared the bank on
Wednesday, May 11. There were no other checks or deposits outstanding during the
month. Given this, which one of the following statements is correct?
A. On May 6, the available balance decreased by $18.
B. On May 11, the available balance was $18 less than the ledger balance.
C. On May 12, the ledger balance was $18 less than the available balance.
D. On May 14, the available balance increased by $18.
E. On May 10, the ledger balance was $18 less than the available balance.
Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to
5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit
margin if the tax rate is 34 percent?
A. -2.43 percent
B. 1.56 percent
C. 3.33 percent
D. -5.29 percent
E. -6.11 percent
Forbidden Fruit Extracts expects its earnings before interest and taxes to be $287,600 a
year forever. Currently, the firm has no debt. The cost of equity is 15.4 percent and the
tax rate is 34 percent. The company is in the process of issuing $3 million of bonds at
par that carry an annual coupon rate of 7.6 percent. What is the unlevered value of the
firm?
A. $1,371,429
B. $1,331,971
C. $1,107,405
D. $969,325
E. $1,232,571
A loan that compounds interest monthly has an EAR of 14.40 percent. What is the
APR?
A. 13.53 percent
B. 13.59 percent
C. 13.96 percent
D. 14.07 percent
E. 14.10 percent
Brick House Markets has a tax rate of 34 percent and taxable income of $308,211. What
is the value of the interest tax shield if the interest expense is $39,700?
A. $14,887
B. $15,010
C. $15,595
D. $13,498
E. $16,023
Supplemental liquidity providers (SLPs) trade securities on behalf of:
A. their own accounts.
B. the customers of a specific brokerage firm.
C. designated market makers.
D. any stock exchange member.
E. any stock exchange customer.
Which of these is most apt to delay the collection of cash?
A. Having customers mail checks to a local lockbox rather than the home office
B. Depositing checks throughout the day
C. Posting payments to accounts receivable prior to making deposits
D. Collecting mail more frequently
E. Supplying customers with bar coded payment slips
Tree Farms currently has 48,000 shares of stock outstanding and no debt. The price per
share is $22.50. The firm is considering borrowing funds at 8.5 percent interest and
using the proceeds to repurchase 1,750 shares of stock. Ignore taxes. How much is the
firm borrowing?
A. $42,500
B. $39,375
C. $32,750
D. $32,500
E. $40,000
During a normal month, Flo’s Flowers receives a total of nine checks with a total value
of $168,000. On average, it takes 1 day from the date of deposit for the funds from
these checks to be available to the firm. Assume each month has 30 days. What is the
average daily float?
A. $5,600
B. $73,000
C. $50,400
D. $100,800
E. $28,600
Given the following exchange rates, which of the following currencies are selling at a
premium against the dollar?
A. Japanese yen only
B. Swiss franc and Australian dollar only
C. UK pound only
D. Australian dollar, Swiss franc, and UK pound only
E. Japanese yen and Swiss franc only
Bulk Purchases just purchased a new warehouse. To finance the purchase, the firm
arranged for a 25-year mortgage for 80 percent of the $1,800,000 purchase price. The
monthly payment is $10,800. What is the APR? The EAR?
A. 7.67 percent; 7.94 percent
B. 7.67 percent; 8.03 percent
C. 7.72 percent; 7.94 percent
D. 7.72 percent; 8.03 percent
E. 7.75 percent; 8.03 percent
The call premium is the amount by which the:
A. market price exceeds the par value.
B. market price exceeds the call price.
C. face value exceeds the market price.
D. call price exceeds the par value.
E. call price exceeds the market price.
What is the Year 2 depreciation on equipment costing $148,315 if it is classified as
five-year property for MACRS purposes? The MACRS allowance percentages are as
follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.
A. $37,968.64
B. $38,201.50
C. $41,984.30
D. $48,398.80
E. $47,460.80
Which one of the following applies to a general partnership?
A. The firm’s operations must be controlled by a single partner.
B. Any one of the partners can be held solely liable for all of the partnership’s debt.
C. The profits of the firm are taxed as a separate entity.
D. Each partner’s liability for the firm’s debts is limited to each partner’s investment in
the firm.
E. The profits of a general partnership are taxed the same as those of a corporation.
A firm grants credit with terms of 2/10, net 30. The firm’s customers have ___ days to
pay in order to receive a _____ percent discount.
A. 2; 10
B. 10; 2
C. 15; 2
D. 20; 2
E. 30; 20
What is the IRR of the following set of cash flows?
A. 12.93 percent
B. 14.90 percent
C. 23.86 percent
D. 16.33 percent
E. 17.78 percent
Blasco International has sales of $389,700 and costs of $413,210. The company has
120,000 shares outstanding. What is the price-sales ratio if the stock has a book value of
$19.20 per share and a market value per share of $8.60?
A. 2.65
B. 1.89
C. 2.23
D. 2.48
E. 2.37
Lake City Plastics currently produces plastic plates and silverware. The company is
considering expanding its product offerings to include plastic serving trays. All of the
following are relevant costs to this project with the exception of:
A. the cost of additional utilities required to operate the serving tray production
operation.
B. any change in the expected sales of plates and silverware gained from offering trays
also.
C. a percentage of the current operating overhead.
D. the additional plastic raw materials that would be required.
E. the cost to acquire the forms needed to mold the trays.
Computing the present value of a future cash flow to determine what that cash flow is
worth today is called:
A. compounding.
B. factoring.
C. time valuation.
D. simple cash flow valuation.
E. discounted cash flow valuation.
You’re trying to determine whether or not to expand your business by building a new
manufacturing plant. The plant has an installation cost of $29 million, which will be
depreciated straight-line to zero over its three-year life. If the plant has projected net
income of $1,848,000, $2,080,000, and $2,720,000 over these three years, what is the
project’s average accounting return (AAR)?
A. 14.69 percent
B. 14.14 percent
C. 15.03 percent
D. 15.28 percent
E. 14.21 percent
Free Trade Partners needs to raise $24.2million to expand its operations into South
America. The company will sell new shares of common stock using a general cash
offering. The underwriters will charge a spread of 7.6 percent, the administrative costs
will be $631,000, and the offer price will be $32 per share. How many shares of stock
must be sold if the firm is to raise the funds it desires?
A. 748,315 shares
B. 839,793 shares
C. 911,502 shares
D. 989,415 shares
E. 1,051,515 shares
Fried Donuts has sales of $764,900, total assets of $687,300, total equity of $401,300,
net income of $68,200, and dividends paid of $27,000. What is the internal growth rate?
A. 5.48 percent
B. 6.38 percent
C. 5.98 percent
D. 7.34 percent
E. 7.92 percent
Which one of the following is the correct formula for computing the present value of
$600 to be received in 6 years? The discount rate is 7 percent.
A. PV = $600 (1 + .06)7
B. PV = $600 (1 + .07)6
C. PV = $600 x(.07 x6)
D. PV = $600/(1 + .07)6
E. PV = $600/(1 + 6).07
The operating cash flows of a project:
A. are unaffected by the depreciation method selected.
B. are equal to the project’s total projected net income.
C. decrease when net working capital increases.
D. include any aftertax salvage values.
E. include erosion effects.
Miller’s Hardware recently paid $1.21 per share in dividends. The company currently
has excess cash and would like to distribute an additional $.35 a share to its
shareholders. However, the company is concerned about increasing the dividend by that
amount as it will not be able to afford a similar increase in the future and doesn’t want
to lower the dividend once it has been raised. Which one of the following is probably
the best suggestion for distributing the $.35 per share?
A. Pay a special dividend of $.35 per share
B. Pay an extra cash dividend of $.35 per share
C. Pay a liquidating dividend of $.35 per share
D. Increase the regular dividend by $.12 and pay a special dividend of $.23
E. Increase the regular dividend by $.12 and pay an extra cash dividend of $23
The amount of time a firm holds inventory in stock is referred to as the:
A. inventory period.
B. accounts receivable period.
C. accounts payable period.
D. operating cycle.
E. cash cycle.
Last year, The Pizza Joint added $6,230 to retained earnings from sales of $104,650.
The company had costs of $87,300, dividends of $2,500, and interest paid of $1,620.
Given a tax rate of 34 percent, what was the amount of the depreciation expense?
A. $2,407
B. $1,908
C. $2,503
D. $3,102
E. $3,414
Precision Cuts has a target debt-equity ratio of .48. Its cost of equity is 16.4 percent, and
its pretax cost of debt is 8.2 percent. If the tax rate is 34 percent, what is the company’s
WACC?
A. 13.20 percent
B. 11.72 percent
C. 12.91 percent
D. 11.28 percent
E. 12.84 percent
Which one of the following situations is most apt to create an agency conflict?
A. Compensating a manager based on his or her division’s net income
B. Giving all employees a bonus if a certain level of efficiency is maintained
C. Hiring an independent consultant to study the operating efficiency of the firm
D. Basing management bonuses on the length of employment
E. Laying off employees during a slack period
Which of these is the most ethical practice related to cash disbursement management?
A. Intentionally delaying payments by creating a complex accounts payable system
B. Taking the cash discount but paying after the discount period
C. Paying a supplier from a zero-balance account
D. Purposely losing a supplier’s invoice and requiring the supplier to submit another
copy
E. Mailing a check from the most remote location possible
Galaxy Sales has sales of $938,300, cost of goods sold of $764,500, and inventory of
$123,600. How long on average does it take the firm to sell its inventory?
A. 6.40 days
B. 7.23 days
C. 48.68 days
D. 59.01 days
E. 61.10 days
Systematic risk is:
A. totally eliminated when a portfolio is fully diversified.
B. defined as the total risk associated with surprise events.
C. risk that affects a limited number of securities.
D. measured by beta.
E. measured by standard deviation.
A stock has produced returns of 11.9 percent, 5.6 percent, 16.4 percent, and -4.2 percent
over the past four years, respectively. What is the geometric average return?
A. 7.14 percent
B. 7.47 percent
C. 6.83 percent
D. 6.91 percent
E. 7.02 percent