1) In the process of liquidation, some types of claims receive preference over other
claims. Which one of the following determines which type of claim is paid first?
A.Technical insolvency definition
B.Absolute priority rule
C.Accounting insolvency definition
D.Chapter 7 of the Federal Bankruptcy Reform Act of 1978
E.Securities and Exchange Commission
2) An investment has an initial cost of $3.3 million. This investment will be depreciated
by $900,000 a year over the three-year life of the project. Should this project be
accepted based on the average accounting rate of return if the required rate is 10.0
percent? Why or why not?
A.Yes, because the AAR is 10.0 percent
B.Yes, because the AAR is less than 10.0 percent
C.Yes, because the AAR is greater than 10.0 percent
D.No, because the AAR is greater than 10.0 percent
E.No, because the AAR is less than 10.0 percent
3) Phil and Terry started a new business three years ago. Two years ago, they
incorporated the business and issued themselves each 20,000 shares of stock. Last year,
they took the company public in an IPO and issued an additional 100,000 shares of
stock at that time. The offer price was $14 a share, the spread was 8 percent, and the
lockup period was six months. The stock closed at $17 a share at the end of the first day
of trading. During the first six months of trading, the stock had a price range of $13 to
$23 per share. During the second six months of trading, the stock sold between $15 and
$21 per share. Both Tracie and Amy purchased 100 shares at the offer price. Given this,
which one of the following statements is correct? Ignore trading costs and taxes.
A.Tracie could have earned a maximum profit of 100($23 – 17) on her investment
B.Phil could have sold 5,000 shares at $23 per share
C.The underwriters earned a spread equal to 8 percent of $17
D.The maximum price at which Terry could have sold shares is $21
E.Amy paid 108 percent of $14 per share to purchase her 100 shares
4) Lester’s BBQ has $121,000 in current assets and $109,000 in current liabilities.
These values as referred to as the firm’s:
A.capital structure
B.cash equivalents
C.working capital
D.net assets
E.fixed accounts
5) The owners’ equity accounts for Speed Boats are shown here:
How many shares will be outstanding if the firm declares a 1-for-6 reverse stock split?
A.5,833 shares
B.9,167 shares
C.18,000 shares
D.35,000 shares
E.330,000 shares
6) Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per
share three years from now. Starting in year 6, the company is expected to start
increasing the dividend by 2 percent per year. What is the value of this stock today at a
required return of 12 percent?
A.$7.70
B.$8.09
C.$8.29
D.$9.03
E.$9.34
7) If an investment is producing a return that is equal to the required return, the
investment’s net present value will be:
A.positive
B.greater than the project’s initial investment
C.zero
D.equal to the project’s net profit
E.less than, or equal to, zero
8) Whitts BBQ would like to issue some semiannual coupon bonds at par. Comparable
bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent,
and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its
bonds?
A.9.00 percent
B.9.16 percent
C.9.50 percent
D.9.68 percent
E.10.00 percent
9) If your nominal rate of return is 14.38 percent and your real rate of return is 4.97
percent, what is the inflation rate?
A.8.47 percent
B.8.96 percent
C.9.44 percent
D.19.35 percent
E.19.92 percent
10) Lake City Plastics currently produces plastic plates and silverware. The company is
considering expanding its product offerings to include plastic serving trays. Which of
the following are cash flows relevant to the new product?
I. Molds needed to form the serving trays
II. Projected increase in plate and silverware sales if the trays are produced
III. A portion of the production manager’s current annual salary of $75,000
IV. Raw materials used in the production of the serving trays
A.I and IV only
B.III and IV only
C.I, II, and IV only
D.I, III, and IV only
E.I, II, III, and IV
11) The expected rate of return on Delaware Shores, Inc. stock is based on three
possible states of the economy. These states are boom, normal, and recession which
have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively.
Which one of the following statements is correct concerning the variance of the returns
on this stock?
A.The variance must decrease if the probability of occurrence for a boom increases
B.The variance will remain constant as long as the sum of the economic probabilities is
100 percent
C.The variance can be positive, zero, or negative, depending on the expected rate of
return assigned to each economic state
D.The variance must be positive provided that each state of the economy produces a
different expected rate of return
E.The variance is independent of the economic probabilities of occurrence
12) The term structure of interest rates is affected by which of the following?
I. Interest rate risk premium
II. Real rate of interest
III. Default risk premium
IV. Inflation premium
A.I and II only
B.II and III only
C.I, III, and IV only
D.I, II, and IV only
E.I, II, III, and IV
13) Which one of the following best defines the economic order quantity (EOQ)?
A.Minimum size of an order needed to qualify for free shipping
B.Minimum amount that must be ordered to obtain the quantity discount
C.Number of items that are sold on average each month
D.Restocking quantity that minimizes the total cost of inventory
E.Minimal amount of inventory that must be purchased to receive a cash discount
14) Big Al’s Meat Market has annual sales of $531,000 and cost of goods sold of
$358,000. The profit margin is 4.8 percent and the accounts payable period is 41 days.
What is the average accounts payable balance?
A.$9,421
B.$25,488
C.$40,214
D.$45,211
E.$54,449
15) Which one of the following is minimized when the value of a firm is maximized?
A.Return on equity
B.WACC
C.Debt
D.Taxes
E.Bankruptcy costs
16) Which one of the following actions will decrease the operating cycle?
A.Increasing inventory
B.Paying suppliers faster
C.Buying more inventory with cash rather than with credit
D.Granting customers more time to pay for their credit purchases
E.Lessening the production time needed to manufacture a good for sale
17) Pete’s Warehouse has net working capital of $2,400, total assets of $19,300, and net
fixed assets of $10,200. What is the value of the current liabilities?
A.-$6,700
B.-$2,900
C.$2,900
D.$6,700
E.$11,500
18) Assume that large-company stocks had an average return of 11.4 percent and a
standard deviation of 19.7 percent for a 40-year period. What range of returns would
you expect to see on these stocks 95 percent of the time?
A.-50.3 percent to 53.2 percent
B.-50.3 percent to 73.9 percent
C.-50.3 percent to 64.1 percent
D.28.0 percent to 50.8 percent
E.-28.0 percent to 50.8 percent
19) Which one of the following best describes an arithmetic average return?
A.Total return divided by N – 1, where N equals the number of individual returns
B.Average compound return earned per year over a multiyear period
C.Total compound return divided by the number of individual returns
D.Return earned in an average year over a multiyear period
E.Positive square root of the average compound return
20) The Green House has a profit margin of 5.6 percent on sales of $311,200. The firm
currently has 15,000 shares of stock outstanding at a market price of $11.60 per share.
What is the price-earnings ratio?
A.9.98
B.10.02
C.11.50
D.11.93
E.12.84
21) Miller’s Hardware has 370,000 shares of stock outstanding with a current market
value of $37 a share. You own 48,000 of those shares. Next month, the election will be
held to select four new members to the board of directors. The firm uses a cumulative
voting system. How much additional money do you need to spend to guarantee that you
will be elected to the board assuming that everyone else votes for one of the other
candidates?
A.$0
B.$28,512
C.$34,047
D.$222,777
E.$299,001
22) A trader in Switzerland just agreed to trade Swiss francs for British pounds based on
today’s exchange rate. The trade is expected to settle tomorrow. What term best
describes this exchange?
A.Arbitrage transaction
B.Forward trade
C.Spot trade
D.Purchasing power parity
E.Interest rate parity
23) The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.00
per share a year for the following two years, and then cease paying dividends
altogether. How much is one share of this stock worth to you today if you require a 19
percent rate of return?
A.$2.31
B.$2.36
C.$2.56
D.$2.60
E.$2.64
24) Kurt wants to have $25,000 in an investment account four years from now. The
account will pay 0.2 percent interest per month. If he saves money every month,
starting one month from now, how much will he have to save each month to reach his
goal?
A.$496.75
B.$497.03
C.$497.75
D.$501.03
E.$502.14
25) Derek’s is a brick-and-mortar toy store. The firm is considering expanding its
operations to include Internet sales. Which one of the following would be the best firm
to use in a pure play approach to analyzing this proposed expansion?
A.Another brick-and-mortar store that also sells online
B.A wholesale toy distributor
C.A toy store that sells online only
D.The oldest online retailer of any product
E.Derek’s own store
26) You purchased 1,500 shares of KFC stock five years ago and have earned annual
returns of 7.1 percent, 11.2 percent, 5.25 percent, -4.7 percent, and 11.8 percent,
respectively. What is your arithmetic average return?
A.4.47 percent
B.6.13 percent
C.6.23 percent
D.6.47 percent
E.8.01 percent
27) Sly’s just arranged a three-year direct business loan. Which one of the following
terms matches this loan arrangement?
A.Term loan
B.Private placement
C.Rights offer
D.Seasoned offer
E.Shelf offer
28) The present value of a lump sum future amount:
A.increases as the interest rate decreases
B.decreases as the time period decreases
C.is inversely related to the future value
D.is directly related to the interest rate
E.is directly related to the time period
29) Taylor Farms is borrowing $75,000 for three years at an APR of 9 percent. The loan
calls for the principal balance to be reduced by equal amounts over the life of the loan.
Interest is to be paid in full each year. The payments are to be made annually at the end
of each year. How much will Taylor Farms pay in interest over the life of this loan?
A.$12,311.67
B.$12,484.90
C.$12,840.00
D.$13,500.00
E.$13,887.32
30) The foreign subsidiary of a U.S. firm is profitable when profits are measured in the
foreign currency but those profits become losses when measured in U.S. dollars. This is
an example of which one of the following?
A.Interest rate disparities
B.Short-run exposure to exchange rate risk
C.Long-run exposure to exchange rate risk
D.Political risk associated with the foreign operations
E.Translation exposure to exchange rate risk
31) You just won $50,000 and deposited your winnings into an account that pays 5.5
percent interest, compounded annually. How long will you have to wait until your
winnings are worth $100,000?
A.11.24 years
B.12.00 years
C.12.29 years
D.12.67 years
E.12.95 years
32) Given the following partial stock quote, what is the expected annual dividend?
A.$0.99
B.$1.08
C.$1.13
D.$1.28
E.$1.33
33) Which one of the following features distinguishes an ordinary annuity from an
annuity due?
A.Number of equal payments
B.Amount of each payment
C.Frequency of the payments
D.Annuity interest rate
E.Timing of the annuity payments
34) Computer Geeks has sales of $521,000, a profit margin of 14.8 percent, a total asset
turnover rate of 2.16, and an equity multiplier of 1.30 . What is the return on equity?
A.8.91 percent
B.12.67 percent
C.18.28 percent
D.32.11 percent
E.41.56 percent
35) When you were born, your parents opened an investment account in your name and
deposited $500 into the account. The account has earned an average annual rate of
return of 4.8 percent. Today, the account is valued at $36,911.22. How old are you?
A.74.47 years
B.76.67 years
C.81.08 years
D.87.33 years
E.91.75 years
36) Later this week, you are traveling from the U.S. to Canada for a week’s vacation.
This morning, you exchanged some U.S. dollars for Canadian dollars in preparation for
that trip. Which one of the following best describes this exchange?
A.Forward trade
B.Spot trade
C.Arbitrage transaction
D.Cross-rate exchange
E.Eurocurrency transaction
37) Great Lakes Shipping is an all-equity firm with anticipated earnings before interest
and taxes of $439,000 annually forever. The present cost of equity is 16.4 percent.
Currently, the firm has no debt but is considering borrowing $1.25 million at 8.5
percent interest. The tax rate is 36 percent. What is the value of the levered firm?
A.$2,163,171
B.$2,406,519
C.$2,588,547
D.$2,666,667
E.$2,818,181