1) If the U.S. government increased the corporate tax rates:
A.We would expect to no change in the capital structure since it is independent of the
component costs of capital
B.We would expect to see higher levels of equity since there would be less of a tax
advantage for debt
C.We would expect to see higher debt levels since debt would become cheaper relative
to equity
D.We would expect to see higher percentages of preferred stock since 70% of dividends
are not taxed by corporations
2) Your 30-year $95,000 mortgage calls for payments to be made at the end of each
month. The loan has a 5.85% annual interest rate. What is the remaining balance after 5
years?
A.$68,194.73
B.$76,903.26
C.$81,072.85
D.$88,236.17
3) Free Cash Flow The 2010 income statement for John’s Gym shows that depreciation
expense is $20 million, EBIT is $80 million, and taxes are $24 million. At the end of the
year, the balance of gross fixed assets was $102 million. The increase in net operating
working capital during the year was $18 million. John’s free cash flow for the year was
$41 million. What was the beginning of year balance for gross fixed assets?
A.$43 million
B.$85 million
C.$84 million
D.$163 million
4) The most common type of business in the United States is the __________.
A.Corporation
B.Partnership
C.Sole Proprietorship
D.Hybrid organization such as a limited liability company
5) The spot rate between the U.S. dollar and the New Zealand dollar is $1 =
NZD1.6607. If the interest rate in the United States is 6 percent and in New Zealand is
4 percent, then what should be the three-month forward exchange rate?
A.$0.5368 per NZD
B.$0.6051 per NZD
C.$0.7614 per NZD
D.$0.8075 per NZD
6) Which of the following statements is correct?
A.Yield spreads between bonds of different quality remain static over time
B.Yield spreads are set by the Securities Exchange Commission
C.Yield spreads between bonds of different quality change over time
D.None of these statements is correct
7) Valuation of a Merger Tim’s Fix It Shop, Inc., is asking a price of $50 million to be
purchased by Taylor’s Tire Hut Corp. The two firms currently have cumulative total
cash flows of $4 million which are growing at 2 percent annually. Managers estimate
that because of synergies the merged firm’s cash flows will increase by an additional 5
percent for the first four years following the merger. After the first four years cash flows
will grow at a rate of 3 percent. The WACC for the merged firms is 12 percent.
Calculate the NPV of the merger. Should Taylor’s Tire Hut Corporation agree to acquire
Tim’s Fix It Shop, Inc., for the asking price of $50 million?
A.yes, the NPV is $0
B.yes, the NPV is £ $0
C.no, the NPV is $0
D.no, the NPV is £ $0
8) Portfolio Weights If you own 400 shares of Air Line Inc. at $44.50, 500 shares of
BuyRite at $52.90, and 100 shares of Motor City at $9.25, what are the portfolio
weights of each stock?
A.Air Line = .3333, BuyRite = .3333, MotorCity = .3333
B.Air Line = .40, BuyRite = .50, MotorCity = .10
C.Air Line = .3940, BuyRite = .5855, MotorCity = .0205
D.Air Line = .4173, BuyRite = .4960, MotorCity = .0867
9) The stocks of small companies that are priced below $1 per share.
A.bargain stocks
B.hedge fund stocks
C.penny stocks
D.stock market bubble stocks
10) Which of the following is correct?
A.Stock prices increase as the next dividend approaches and then fall by the present
value of that dividend once the stock goes ex-dividend
B.Stock prices decrease as the next dividend approaches and then fall by the present
value of that dividend once the stock goes ex-dividend
C.Stock prices increase as the next dividend approaches and then increase by the
present value of that dividend once the stock goes ex-dividend
D.None of these
11) Future Value At age 25 you invest $2,000 that earns 6 percent each year. At age 35
you invest $2,000 that earns 9 percent per year. In which case would you have more
money at age 60?
A.At age 25 invest $2,000 at 6 percent
B.At age 35 invest $2,000 at 9 percent
C.Both yield the same amount at age 60
D.There is not enough information to determine which case earns the most money at
age 60
12) Your company faces a 34% tax rate and has $150 million in assets, currently
financed entirely with equity. Equity is worth $8 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 25-percent debt capital structure, and has
determined that they would have to pay a 12 percent yield on perpetual debt in either
event. What will be the level of expected EPS if they switch to the proposed capital
structure?
A.$0.49
B.$1.08
C.$1.31
D.$1.67
13) Corporate Taxes Eccentricity, Inc. had $300,000 in 2010 taxable income. Using the
tax schedule from Table 2-3, what is the company’s 2010 income taxes, average tax
rate, and marginal tax rate, respectively?
A.$22,250, 7.42%, 39%
B.$78,000, 26.00%, 39%
C.$100,250, 33.42%, 39%
D.$139,250, 46.42%, 39%
14) Which of the following is a type of merger in which an entirely new firm is created?
A.composition
B.synergy
C.consolidation
D.assignment
15) In the U.S., these financial institutions arrange most primary market transactions for
businesses.
A.investment banks
B.asset transformer
C.direct transfer agents
D.over-the-counter agents
16) Hunt Taxidermy, Inc. is concerned about the taxes paid by the company in 2011 . In
addition to $36.5 million of taxable income, the firm received $1,250,000 of interest on
state-issued bonds and $400,000 of dividends on common stock it owns in Hunt
Taxidermy, Inc. Calculate Hunt Taxidermy’s taxable income.
A.$40,250,000
B.$38,150,000
C.$36,900,000
D.$36,620,000
17) A security issued in which the underwriter does not guarantee a firm price to the
issuer and acts more as a placing or distribution agent for a fee is referred to as
___________________.
A.Negotiated sale
B.Competitive sale
C.Best efforts underwriting
D.None of these
18) All of the following are examples of carrying costs except ______________.
A.Rental payments on building where the business is located
B.The lost sale if the company runs out of a particular model
C.The opportunity costs associated with having capital tied up in current assets instead
of more productive fixed assets
D.All of these are examples of carrying costs
19) Which of the following is a situation in which you would want to use the constant
growth model approach for estimating the component cost of equity?
A.When the firm has a low beta
B.When the firm has multiple divisions
C.When the firm’s stock is expected to experience constant dividend growth
D.When the firm has a high level of financial leverage
20) Suppose a firm was planning to greatly reduce its raw materials inventory next year
by introducing just-in-time inventory control procedures. Assuming no other changes to
the firm’s operations, what would this do to AFN?
A.It would not change the AFN
B.The AFN would decrease
C.The AFN would increase
D.Unable to determine without knowing the impact on the profit margin
21) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the nave approach?
A.$1,780,000
B.$1,650,000
C.$2,100,000
D.$1,686,00
22) When Starbucks opens a location in Mexico City, this is an example of
___________.
A.Foreign direct investment
B.Arbitrage opportunity
C.Management of capital budgeting issues
D.None of these
23) Rule of 72 Approximately what interest rate is needed to double an investment over
8 years?
A.8%
B.9%
C.12%
D.100%
24) This is defined as the excess amounts of a current asset kept on hand to meet
unexpected shocks in demand.
A.liquid current assets
B.safety stock
C.overnight securities
D.float
25) Which of these statements is true?
A.The higher the default risk, the higher the interest rate that security buyers will
demand
B.The lower the default risk, the higher the interest rate that security buyers will
demand
C.The higher the default risk, the lower the interest rate that security buyers will
demand
D.The default risk does not impact the interest rate that security buyers will demand
26) These are the markets in which corporations raise funds through new stock issues.
A.primary
B.secondary
C.commercial
D.over the counter
27) Changes in Growth and Stock Valuation Consider a firm that had been priced using
a 10 percent growth rate and a 14 percent required rate. The firm recently paid a $1.00
dividend. The firm has just announced that because of a new joint venture, it will likely
grow at a 12 percent rate. How much should the stock price change (in dollars and
percentage)?
A.$25, 1%
B.$25, 100%
C.$28.50, 1.04%
D.$28.50, 104%
28) You have been asked by the president of your company to evaluate the proposed
acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS
three-year class, and it will be sold after three years for $14,000. Use of the truck will
require an increase in NWC (spare parts inventory) of $3,000. The truck will have no
effect on revenues, but it is expected to save the firm $20,000 per year in before-tax
operating costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the
operating cash flow for this project be during year 3?
A.$6,668.40
B.$11,114.00
C.$12,554.40
D.$15,554.40
29) Rose Axels faces a smooth annual demand for cash of $8 million; incurs transaction
costs of $200 every time they sell marketable securities; and can earn 3.8 percent on
their marketable securities. What will be their optimal cash replenishment level?
A.$264,583.03
B.$278,997.38
C.$290,190.50
D.$313,809.26
30) If Verizon buys the Green Bay Packers, this would be an example of a
___________.
A.Horizontal merger
B.Vertical merger
C.Market Extension merger
D.Conglomerate merger
31) Which of the following is correct?
A.Over a long time frame, stocks have performed better than Long-term Treasury
Bonds
B.Average stock returns are not an indication of what an investor may earn in any ONE
year
C.In some years, Long-term Treasury Bonds performed better than stocks
D.All of these statements are correct
32) The study of the cognitive processes and biases associated with making financial
and economic decisions.
A.asset pricing model
B.behavioral finance
C.efficient market hypothesis
D.stock market bubble
33) Calculating Costs of Issuing Stock Mick E Inc. plans to issue 25 million new shares
of its stock. In discussions with its investment bank, Mick E learns that the bankers
recommend a net proceed of $29.80 per share and they will charge an underwriter’s
spread of 8.5 percent of the gross proceeds. In addition, Mick E must pay $3 million in
legal and other administrative expenses for the seasoned stock offering. Calculate the
gross proceeds per share received by Mick E from the sale of the 25 million shares of
stock.
A.$29.80
B.$32.45
C.$32.57
D.$32.70
34) A firm’s recent dividend was $2.00 per share. The stock is selling in the market
place for $50.00 per share. If investors are demanding 10% on this stock, what is this
stock’s growth rate?
A.4.73%
B.5.92%
C.6.00%
D.5.77%
35) This technique for evaluating capital projects tells how long it will take a firm to
earn back the money invested in a project.
A.payback
B.internal rate of return
C.net present value
D.profitability index
36) Calculation of Bankruptcy Probability Suppose a linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms:
the debt ratio and the profit margin. Based on past bankruptcy experience, the linear
probability model is estimated as:
PDi = .20 (debt ratio) + .15 (profit margin)
A firm you are thinking of lending to has a debt ratio of 55 percent and a profit margin
of 10 percent. Calculate the firm’s expected probability of default, or bankruptcy.
A.12.5%
B.10.0%
C.1.65%
D.10.25%