1) All else constant, the weighted average cost of capital for a risky, levered firm will
decrease if:
A.the firm’s bonds start selling at a premium rather than at a discount
B.the market risk premium increases
C.the firm replaces some of its debt with preferred stock
D.corporate taxes are eliminated
E.the dividend yield on the common stock increases
2) Blue Lagoon stock is expected to produce the following returns given the various
states of the economy. What is the expected return on this stock?
A.3.90 percent
B.4.23 percent
C.4.51 percent
D.5.47 percent
E.5.92 percent
3) The electronic system that transmits buy and sell orders directly to a specialist on the
floor of the NYSE is called:
A.NASDAQ
B.SuperDOT
C.TICKER
D.ECN
E.ORDFLOW
4) A cost that should be ignored when evaluating a project because that cost has already
been incurred and cannot be recouped is referred to as which type of cost?
A.Fixed
B.Forgotten
C.Variable
D.Opportunity
E.Sunk
5) The owners’ equity for The Buck Store was $58,900 at the beginning of the year.
During the year, the company had aftertax income of $34,200, of which $2,200 was
paid in dividends. Also during the year, the company repurchased $6,500 of stock from
one of the shareholders. What is the value of the owners’ equity at year end?
A.$54,500
B.$56,700
C.$82,200
D.$84,400
E.$90,900
6) The Sarbanes-Oxley Act of 2002 has:
A.reduced the annual compliance costs of all publicly traded firms in the U.S
B.decreased senior management’s involvement in the corporate annual report
C.greatly increased the number of U.S. firms that are going public for the first time
D.decreased the number of U.S. firms going public on foreign exchanges
E.made officers of publicly traded firms personally responsible for the firm’s financial
statements
7) Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million.
Last year, the government changed the emission requirements and this furnace cannot
meet those standards. Thus, Weston’s can no longer use the furnace nor have they been
able to locate anyone willing to purchase the furnace. Given the current situation, the
furnace is best described as which type of cost?
A.Erosion
B.Book
C.Sunk
D.Market
E.Opportunity
8) You can exchange $1 for either 0.7538 euros or 0.6789 British pounds. What is the
cross rate between the pound and the euro?
A.0.7519/1
B.0.8756/1
C.0.9006/1
D.1.0852/1
E.1.1103/1
9) Cross Hairs Gun Shop has sales of $189,000, a profit margin of 4.8 percent, and a
capital intensity ratio of 0.79. What is the return on assets?
A.5.67 percent
B.6.08 percent
C.6.39 percent
D.6.42 percent
E.6.67 percent
10) Which one of the following is the positive square root of the variance?
A.Standard deviation
B.Mean
C.Risk-free rate
D.Average return
E.Real return
11) Jamie is analyzing the estimated net present value of a project under various what if
scenarios. The type of analysis that Jamie is doing is best described as:
A.sensitivity analysis
B.erosion planning
C.scenario analysis
D.benefit planning
E.opportunity evaluation
12) Goshen Industrial Sales has sales of $828,900, total equity of $539,200, a profit
margin of 4.6 percent and a debt-equity ratio of 0.55. What is the return on assets?
A.3.89 percent
B.4.56 percent
C.6.67 percent
D.12.86 percent
E.13.33 percent
13) The common stock of Tasty Treats is valued at $10.80 a share. The company
increases its dividend by 8 percent annually and expects its next dividend to be $0.20
per share. What is the total rate of return on this stock?
A.8.64 percent
B.9.12 percent
C.9.40 percent
D.9.85 percent
E.10.64 percent
14) Diversifying a portfolio across various sectors and industries might do more than
one of the following. However, this diversification must do which one of the following?
A.Increase the expected risk premium
B.Reduce the beta of the portfolio to zero
C.Increase the security’s risk premium
D.Reduce the portfolio’s systematic risk level
E.Reduce the portfolio’s unique risks
15) The T-shirt Hut successfully managed to reduce its general and administrative costs
this year. This cost improvement will increase which of the following ratios?
I. Profit margin
II. Return on assets
III. Total asset turnover
IV. Return on equity
A.I and II only
B.I and III only
C.II, III, and IV only
D.I, II, and IV only
E.I, II, III, and IV
16) Which one of the following best defines the term collection policy’?
A.Process of determining which customers will be granted credit
B.Process of determining the probability customers will not pay
C.Set of guidelines used by a firm to determine the cost of offering credit to its
customers
D.Daily process of handling cash inflows and outflows of cash
E.Set of procedures a firm follows in collecting accounts receivable
17) Blue Diamond Equipment has 80,000 bonds outstanding that are selling at par.
Bonds with similar characteristics are yielding 6.75 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 $53 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.10.39 percent
B.10.64 percent
C.11.18 percent
D.11.30 percent
E.11.56 percent
18) The Glass Ceiling paid an annual dividend of $2.20 per share last year.
Management just announced that future dividends will increase by 2.8 percent annually.
What is the amount of the expected dividend in year 5?
A.$2.39
B.$2.41
C.$2.46
D.$2.53
E.$2.58
19) According to the pecking-order theory proposed by Stewart Myers of MIT, which of
the following are correct?
I. For financing needs, firms prefer to first tap internal sources such as retained profits
and excess cash.
II. There is an inverse relationship between a firm’s profit level and its debt level.
III. Firms prefer to issue new equity rather than source external debt.
IV. A firm’s capital structure is dictated by its need for external financing.
A.I and III only
B.II and IV only
C.I, III, and IV only
D.I, II, and IV only
E.I, II, III, and IV
20) Last year, The Pizza Joint added $4,100 to retained earnings from sales of $93,600.
The company had costs of $74,400, dividends of $2,500, and interest paid of $1,400.
The tax rate was 34 percent. What was the amount of the depreciation expense?
A.$7,300
B.$7,500
C.$7,800
D.$8,100
E.$8,400
21) What is the beta of the following portfolio?
A.1.08
B.1.14
C.1.17
D.1.21
E.1.23