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We are examining a new project. We expect to sell 9,000 units per year at $45 net cash
flow apiece for the next 20 years. In other words, the annual operating cash flow is
projected to be $45 × 9,000 = $405,000. The relevant discount rate is 14 percent, and
the initial investment required is $1,730,000. After the first year, the project can be
dismantled and sold for $1,350,000. If expected sales are revised based on the first
year's performance, it would make sense to abandon the investment if the sales are less
than which of the following number of units?
A. 4,580 units
B. 4,620 units
C. 4,750 units
D. 4,810 units
E. 5,020 units
Ron leases a car from Uptown Motors and pays $225 a month as a lease payment.
Which one of the following terms applies to Ron?
A. lessee
B. lessor
C. guarantor
D. trustee
E. manager
Moore Industries has agreed to be acquired by Scott Enterprises for $22,000 worth of
Scott Enterprises stock. Scott Enterprises currently has 7,500 shares of stock
outstanding at a price of $28 a share. Moore Industries has 1,800 shares outstanding at a
price of $12 a share. The incremental value of the acquisition is $1,100. What is the
value per share of Scott Enterprises stock after the acquisition?
A. $27.52
B. $27.96
C. $28.08
D. $28.47
E. $31.03
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 an be exercised at any time up to the expiration date while the
European call can only be exercised on the expiration date.
Aaron's Sailboats has decided to take the company public by offering a total of 120,000
shares of common stock to the public. The firm has hired an underwriter who arranges a
full commitment underwriting and suggests an initial selling price of $28 a share with
an 8.5 percent spread. As it turns out, the underwriters only sell 97,400 shares. How
much cash will Aaron's Sailboats receive from its first public offering?
A. $2,727,200
B. $2,495,388
C. $3,074,400
D. $3,360,000
E. $3,645,600
What is the expected return on a portfolio that is equally weighted between stocks K
and L given the following information?
A. 11.13 percent
B. 11.86 percent
C. 12.25 percent
D. 13.32 percent
E. 14.40 percent
The market price of Southern Press stock has been relatively volatile and you think this
volatility will continue for a couple more months. Thus, you decide to purchase a two-
month European call option on this stock with a strike price of $45 and an option price
of $2.20. You also purchase a two-month European put option on the stock with a strike
price of $45 and an option price of $0.30. What will be your net profit or loss on these
option positions if the stock price is $48 on the day the options expire? Ignore trading
costs and taxes.
A. -$30
B. $50
C. $80
D. $270
E. $330
Which one of the following is defined as a firm's short-term assets and its short-term
liabilities?
A. working capital
B. debt
C. investment capital
D. net capital
E. capital structure
An individual investor with a small portfolio who wishes to purchase 100 shares of
each IPO is more likely to receive an allocation of shares when:
A. an IPO is substantially oversubscribed than when it is not.
B. the knowledgeable investors feel the issue is underpriced.
C. an IPO is severely underpriced.
D. an IPO is undersubscribed.
E. he or she has a standing order with the underwriter to purchase shares in every IPO
handled by that underwriter.
A firm offers terms of 2/9, net 41. What effective annual interest rate does the firm earn
when a customer does not take the discount?
A. 18.67 percent
B. 20.45 percent
C. 23.37 percent
D. 25.34 percent
E. 25.92 percent
The optimal amount of credit equates the incremental costs of carrying the increase in
accounts receivable to the incremental:
A. decrease in the cash cycle.
B. benefit from decreasing the inventory level.
C. cash flows from increased sales.
D. increase in bad debts.
E. gain in net profits.
Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The
firm had a beginning inventory of $41,000 and an ending inventory of $47,000. What is
the length of the inventory period?
A. 19.21 days
B. 20.89 days
C. 26.72 days
D. 30.53 days
E. 33.69 days
The Taxi Co. is evaluating a project with the following cash flows:
The company uses a 10 percent interest rate on all of its projects. What is the MIRR
using the discounted approach?
A. 13.25 percent
B. 14.08 percent
C. 16.40 percent
D. 17.17 percent
E. 19.23 percent
A Procrustes approach to financial planning is based on:
A. a policy of producing a financial plan once every five years.
B. developing a plan around the goals of senior managers.
C. a proactive approach to the economic outlook.
D. a flexible capital budget.
E. a flexible capital structure.
Which of the following questions are addressed by financial managers?
I. How should a product be marketed?
II. Should customers be given 30 or 45 days to pay for their credit purchases?
III. Should the firm borrow more money?
IV. Should the firm acquire new equipment?
A. I and IV only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Richard has an outstanding order with his stock broker to purchase 1,000 shares of
every IPO. The next three IPOs are each priced at $30 a share and will all start trading
on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and
100 shares of IPO C. On the first day of trading IPO A opened at $31.50 a share and
ended the day at $26 a share. IPO B opened at $31 a share and finished the day at $32 a
share. IPO C opened at $36.50 a share and ended the day at $40.25 a share. What is
Richard's total profit or loss on these three IPOs as of the end of the first day of trading?
A. -$2,175
B. -$1,850
C. -$1,500
D. $2,250
E. $3,500
The average of a firm's cost of equity and aftertax cost of debt that is weighted based on
the firm's capital structure is called the:
A. reward to risk ratio.
B. weighted capital gains rate.
C. structured cost of capital.
D. subjective cost of capital.
E. weighted average cost of capital.
Which one of the following items is most likely a derived-demand inventory item?
A. cereal ready to be bagged and shipped to stores
B. tires held in inventory by an auto maker
C. shoes on display in a retail store
D. toys ready to be shipped to toy stores
E. wheat harvested by a farmer
Which of the following are results related to the enactment of the Sarbanes-Oxley Act
of 2002?
I. increased foreign stock exchange listings of U.S. stocks
II. decreased compliance costs
III. increased privatization of public corporations
IV. increased public disclosure by all corporations
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, III, and IV only
Which of the following statements related to interest rates are correct?
I. Annual interest rates consider the effect of interest earned on reinvested interest
payments.
II. When comparing loans, you should compare the effective annual rates.
III. Lenders are required by law to disclose the effective annual rate of a loan to
prospective borrowers.
IV. Annual and effective interest rates are equal when interest is compounded annually.
A. I and II only
B. II and III only
C. II and IV only
D. I, II, and III only
E. II, III, and IV only
Suppose the exchange rates are as follows:
Assume interest rate parity holds and the current six-month risk-free rate in the United
States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?
A. 2.73 percent
B. 2.87 percent
C. 2.94 percent
D. 3.10 percent
E. 3.52 percent
Miller & Chase is offering $4 million of new securities to the general public. Which
SEC regulation governs this offering?
A. Regulation A
B. Regulation C
C. Regulation G
D. Regulation Q
E. Regulation R
Western Mountain Water has 11,000 shares of stock outstanding with a par value of $1
per share. The current market value of the firm is $135,000. The balance sheet shows a
capital in excess of par value account balance of $68,000 and retained earnings of
$49,000. The company just announced a 2-for-1 stock split. What will the capital in
excess of par value account balance be after the split?
A. $45,333
B. $54,667
C. $68,000
D. $86,667
E. $102,000
Which of the following statements are correct?
I. Many professional fund managers are paid well but fail to outperform as expected.
II. Professional fund managers that have tenures in excess of ten years, tend to
consistently outperform the market on a long-term basis.
III. If a market is truly efficient, then all investments in that market are zero net present
value opportunities.
IV. Actively managing a fund appears to be the key to outperforming the market.
A. I and III only
B. II and IV only
C. II and III only
D. I, II, and III only
E. I, II, III, and IV
The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair. The
store consistently sells 5,700 pairs of these roller skates every year. The fixed costs to
order more skates is $68 and the carrying costs are $1.95 per pair. What is the economic
order quantity?
A. 446 pairs
B. 515 pairs
C. 529 pairs
D. 631 pairs
E. 648 pairs
The returns on the common stock of New Image Products are quite cyclical. In a boom
economy, the stock is expected to return 32 percent in comparison to 14 percent in a
normal economy and a negative 28 percent in a recessionary period. The probability of
a recession is 25 percent while the probability of a boom is 10 percent. What is the
standard deviation of the returns on this stock?
A. 19.94 percent
B. 21.56 percent
C. 25.83 percent
D. 32.08 percent
E. 39.77 percent
The home currency approach:
A. generally produces more reliable results than those found using the foreign currency
approach.
B. requires an applicable exchange rate for every time period for which there is a cash
flow.
C. uses the current risk-free nominal rate to discount all cash flows related to a project.
D. stresses the use of the real rate of return to compute the net present value (NPV) of a
project.
E. converts a foreign denominated NPV into a dollar denominated NPV.
Western Wear is considering a project that requires an initial investment of $274,000.
The firm maintains a debt-equity ratio of 0.40 and has a flotation cost of debt of 7
percent and a flotation cost of equity of 10.5 percent. The firm has sufficient internally
generated equity to cover the equity portion of this project. What is the initial cost of
the project including the flotation costs?
A. $279,592
B. $281,406
C. $288,005
D. $297,747
E. $302,762
Which one of the following statements concerning dilution is correct?
A. Dilution of percentage ownership occurs whenever an investor participates in a
rights offer.
B. Market value dilution increases as the net present value of a project increases.
C. Market value dilution occurs when the net present value of a project is negative.
D. Neither book value dilution nor market value dilution has any direct bearing on
individual shareholders.
E. Book value dilution is the cause of market value dilution.
Penn Station is saving money to build a new loading platform. Two years ago, they set
aside $24,000 for this purpose. Today, that account is worth $28,399. What rate of
interest is Penn Station earning on this investment?
A. 6.39 percent
B. 7.47 percent
C. 8.78 percent
D. 9.23 percent
E. 9.67 percent
Uptown Promotions has three divisions. As part of the planning process, the CFO
requested that each division submit its capital budgeting proposals for next year. These
proposals represent positive net present value projects that fall within the long-range
plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and
$6.8 million, respectively. For the firm as a whole, Uptown Promotions is limited to
spending $10 million for new projects next year. This is an example of:
A. scenario analysis.
B. sensitivity analysis.
C. determining operating leverage.
D. soft rationing.
E. hard rationing.
A 6 percent, annual coupon bond is currently selling at a premium and matures in 7
years. The bond was originally issued 3 years ago at par. Which one of the following
statements is accurate in respect to this bond today?
A. The face value of the bond today is greater than it was when the bond was issued.
B. The bond is worth less today than when it was issued.
C. The yield-to-maturity is less than the coupon rate.
D. The coupon rate is greater than the current yield.
E. The yield-to-maturity equals the current yield.
The Parodies Corp. has a 22 percent return on equity and a 23 percent payout ratio.
What is its sustainable growth rate?
A. 18.68 percent
B. 19.25 percent
C. 19.49 percent
D. 20.39 percent
E. 22.00 percent
