1) Which of the following bonds makes no interest payments?
A.a bond whose coupon rate is equal to the market interest rates
B.a bond whose coupon rates are greater than market interest rates
C.a bond whose coupon rates are less than the market interest rates
D.zero coupon bond
2) CJ Co stock has a beta of 0.9, the current risk-free rate is 5.6, and the expected return
on the market is 13 percent. What is CJ Co’s cost of equity?
A.12.26%
B.17.30%
C.19.50%
D.22.34%
3) An 8% coupon bond with 15 years to maturity is priced to offer a 9% yield to
maturity. You believe that in one year, the yield to maturity will be 6.5%. What is the
change in price the bond will experience in dollars? (Assume annual interest payments
and par value is $1,000.)
A.$163.92
B.$176.15
C.$198.45
D.$215.82
4) An all-equity firm is considering the projects shown below. The T-bill rate is 4
percent and the market risk premium is 9 percent. If the firm uses its current WACC of
14 percent to evaluate these projects, which project(s) will be incorrectly rejected?
A.Project A
B.Project B
C.Project C
D.Project D
5) Valuation of a Merger The managers of BSW Inc. have been approached by EAG
Corp. for a possible merger. EAG Corp. is asking a price of $50 million to be purchased
by BSW Inc. The two firms currently have cumulative total cash flows of $2.5 million
that are growing at 2 percent annually. Managers of EAG estimate that because of
synergies the merged firm’s cash flows will increase by an additional 5 percent for the
first three years following the merger. After the first three years, managers of EAG have
estimated that cash flows will grow at a rate of 2 percent. The WACC for the merged
firms is 12 percent. Managers of BSW Inc. agree that cash flows should grow at an
additional 5 percent for the first three years, but are unsure of the long-term growth rate
in cash flows estimated by EAG. Calculate the minimum growth rate needed after the
first three years such that BSW Inc. would see this merger as a positive NPV project.
A.5.00%
B.6.925%
C.1.728%
D.12.00%
6) Suppose your firm is considering two independent projects with the cash flows
shown below. The required rate of return on projects of both of their risk class is 12
percent, and the maximum allowable payback and discounted payback statistic for the
projects are 2.5 and 3 years, respectively.
Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted
or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
7) You deposit $20,000 in an account that doubles in 7 years. How many years will it
take the account to be reduced to its original value if it loses 12% per year?
A.4.92 years
B.5.42 years
C.6.62 years
D.8.22 years
8) Which of the following is not correct with respect to derivative securities?
A.They are among the riskiest of securities in the financial securities markets
B.They can be used for hedging purposes
C.Examples of derivatives include futures, options and swaps
D.All of these are correct statements about derivatives
9) This type of business organization is relatively easy to start, and it is subject to much
lighter regulatory and paperwork burden than other business forms.
A.Sole proprietorship
B.Partnership
C.Corporation
D.Hybrid organization
10) The MIRR statistic is different from the IRR statistic in that _____________.
A.The MIRR assumes that the cash inflows can be reinvested at the cost of capital
B.The MIRR assumes that the cash inflows can be reinvested at the IRR
C.The MIRR uses weighted-average dollars
D.The MIRR uses input from the NPV whereas the IRR does not
11) Cost savings not directly due to economies of scope or economies of scale are
referred to as _____.
A.Economies of scale
B.Economies of scope
C.X-efficiencies
D.None of these
12) Modern portfolio theory is ________________.
A.a concept and procedure for combining securities into a portfolio to minimize risk
B.a concept and procedure for combining securities into a portfolio to maximize return
C.a concept and procedure for combining securities into a portfolio to maximize
volatility
D.a concept and procedure for combining securities into a portfolio to maximize dollar
return
13) Portfolio Weights If you own 1000 shares of Alaska Corporation at $19.95, 250
shares of Best Company at $17.50, and 250 shares of Motor Company at $2.50, what
are the portfolio weights of each stock?
A.Alaska = .1000, Best = .2500, Motor = .2500
B.Alaska = .4994, Best = .4380, Motor = .0626
C.Alaska = .7996, Best = .1754, Motor = .0250
D.Alaska = .1995, Best = .1750, Motor = .0250
14) An example of an illiquid asset is _____________________.
A.U.S. Treasury bill
B.Bonds issued by GM
C.Common stock issued by Apple Inc
D.Common stock issued by a small but financially strong firm
15) One-year Treasury bill rates in 20XX averaged 5.15% and inflation for the year was
7.3%. If investors had expected the same inflation rate as that realized, calculate the real
interest rate for 20XX according to the Fisher effect.
A.0.00%
B.-2.15%
C.2.15%
D.3.95%
16) Your company is considering a new project that will require $10,000 of new
equipment at the start of the project. The equipment will have a depreciable life of 5
years and will be depreciated to a book value of $3,000 using straight-line depreciation.
The cost of capital is 9%, and the firm’s tax rate is 34%. Estimate the present value of
the tax benefits from depreciation.
A.$476
B.$924
C.$1,400
D.$1,851
17) Compounding with Different Interest Rates A deposit of $1000 earns the following
interest rates:
* 8 percent in the first year
* 7 percent in the second year, and
* 8 percent in the third year.
What would be the third year future value?
A.$1082.15
B.$1230.00
C.$1248.05
D.$3030.00
18) This is an offer announced publicly that specifies in advance a single purchase
price, the number of shares sought, and the duration of the offer.
A.fixed-price tender offer
B.fixed-duration tender offer
C.fixed-shares tender offer
D.open-market stock repurchase
19) Which of the following is the best description of the operating cycle?
A.The length of time that it takes to convert raw materials into inventory
B.The length of time that it takes to convert raw materials into accounts receivable
C.The length of time to acquire raw materials and receive payment for them when sold
D.None of these
20) Your company is considering a project that will cost $175. The project will generate
after-tax cash flows of $37.50 per year for five years. The WACC is 10% and the firm’s
D/A ratio is .62. The flotation cost for equity is 5%, the flotation cost for debt is 3%,
and your firm does not plan on issuing any preferred stock within its capital structure. If
your firm follows the practice of incorporating flotation costs into the project’s initial
investment, what is the firm’s flotation-adjusted cash flow in year 0?
A.-$90.26
B.-$88.14
C.-$196.25
D.-$181.84
21) A strong liquidity position means that ______________.
A.the firm is able to meet its short-term obligations
B.the firm uses little debt in its capital structure
C.the firm pays out a large portion of its net income in the form of dividends
D.the firm pays its creditors on time
22) To list a stock on the NYSE, a company must meet minimum requirements that
include all of the following except ____________________.
A.Firm size
B.Total number of stockholders
C.
23) Standard Deviation The standard deviation of the past five monthly returns for PG
Company are 2.75 percent, -0.75 percent, 4.15 percent, 6.29 percent, and 3.84 percent.
What is the average monthly return?
A.2.309%
B.2.581%
C.3.256%
D.3.406%
24) Classify the following financial instruments as money market securities or capital
market securities:
a. Common Stock
b. Corporate Bonds
c. Mortgages
d. U.S. Treasury Bills
e. U.S. Treasury Notes
f. U.S. Treasury Bonds
g. State and Government Bonds
25) Which of the following is NOT a money market instrument?
A.Treasury bills
B.Commercial paper
C.Corporate bonds
D.Banker’s acceptances
26) Market Value Ratios Fancy Paws’ year-end price on its common stock is $20. The
firm has a profit margin of 12%, total assets of $20 million, a total asset turnover ratio
of 0.5, no preferred stock, and there are 2 million shares of common stock outstanding.
What is the PE ratio for Fancy Paws?
A.3.33
B.8.33
C.10.00
D.33.33
27) Assume that you observe the following rates on long-term bonds:
U.S. Treasury bonds = 4.15%
AAA Corporate bonds = 6.2%
BBB Corporate bonds = 7.15%
The main reason for the differences in the interest rates is:
A.Maturity risk premium
B.Inflation premium
C.Default risk premium
D.Convertibility premium
28) This ratio measures the dollars of current assets available to pay each dollar of
current liabilities.
A.cross-section
B.current
C.internal-growth
D.quick or acid test
29) Internal Growth Rate Saddle and Bridle reported a profit margin of 12%, total asset
turnover ratio of 2 times, debt-to-equity ratio of 1.9 times, net income of $1 million, and
dividends paid to common stockholders of $250,000. The firm has no preferred stock
outstanding. What is Saddle and Bridle’s internal growth rate?
A.13.64%
B.18.00%
C.24.00%
D.21.95%
30) Sustainable Growth Rate Last year Umbrellas Unlimited Corporation had an ROE
of 16.5% and a dividend payout ratio of 40%. What is the sustainable growth rate?
A.13.17%
B.10.99%
C.27.50%
D.32.93%