In the spot market, $1 is currently equal to £0.6211. Assume the expected inflation rate
in the U.K. is 2.6 percent while it is 4.3 percent in the U.S. What is the expected
exchange rate four years from now if relative purchasing power parity exists?
A. £0.5799
B. £0.5822
C. £0.6105
D. £0.6623
E. £0.6644
Answer:
You just signed a consulting contract that will pay you $38,000, $52,000, and $85,000
annually at the end of the next three years, respectively. What is the present value of
these cash flows given a 10.5 percent discount rate?
A. $139,975
B. $148,307
C. $154,880
D. $157,131
E. $162,910
Answer:
The difference between the conversion price and the current stock price, divided by the
current stock price, is called the:
A. conversion premium.
B. straight bond value.
C. conversion value.
D. conversion price.
E. conversion ratio.
Answer:
Which one of the following inventory-related costs is considered a shortage cost?
A. storage costs
B. insurance cost
C. cost of safety reserves
D. obsolescence cost
E. opportunity cost of capital used for inventory purchases
Answer:
Cool Treats is considering either leasing or buying a new freezer unit. The lessor will
charge $11,900 a year for a 2-year lease. The purchase price is $32,000. The freezer has
a 2-year life after which time it is expected to have a resale value of $9,000. Cool Treats
uses straight-line depreciation, borrows money at 8 percent, and has sufficient tax loss
carryovers to offset any potential taxable income the firm might have over the next 5
years. What is the net advantage to leasing?
A. $2,167
B. $2,384
C. $2,573
D. $2,710
E. $3,063
Answer:
The interest rate that is quoted by a lender is referred to as which one of the following?
A. stated interest rate
B. compound rate
C. effective annual rate
D. simple rate
E. common rate
Answer:
The common stock of United Industries has a beta of 1.34 and an expected return of
14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market
risk premium?
A. 7.02 percent
B. 7.90 percent
C. 10.63 percent
D. 11.22 percent
E. 11.60 percent
Answer:
What is the primary purpose of credit analysis?
A. determine the optimal credit period
B. establish the effectiveness of granting a cash discount
C. determine the optimal discount period, if any
D. access the frequency and amount of sales by customer
E. evaluate whether or not a customer will pay
Answer:
The Thunder Dan’s Corporation’s purchases from suppliers in a quarter are equal to 65
percent of the next quarter’s forecasted sales. The payables period is 60 days. Wages,
taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per
quarter. No capital expenditures are planned. Sales for the first quarter of the following
year are projected at $720. The projected quarterly sales are:
What is the amount of the total disbursements for Quarter 2?
A. $564.27
B. $579.43
C. $582.15
D. $585.30
E. $590.67
Answer:
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.
Answer:
A.K. Stevenson wants to raise $7.5 million through a rights offering. The subscription
price is set at $24. Currently, the company has 2.1 million shares outstanding with a
current market price of $25 a share. Each shareholder will receive one right for each
share of stock they currently own. How many rights will be needed to purchase one
new share of stock in this offering?
A. 6.40 rights
B. 6.67 rights
C. 6.72 rights
D. 6.87 rights
E. 7.00 rights
Answer:
The expected rate of return on a stock portfolio is a weighted average where the weights
are based on the:
A. number of shares owned of each stock.
B. market price per share of each stock.
C. market value of the investment in each stock.
D. original amount invested in each stock.
E. cost per share of each stock held.
Answer:
Rosie’s has 1,800 shares outstanding at a market price per share of $23.50. Sandy’s has
2,500 shares outstanding at a market price of $21 a share. Neither firm has any debt.
Sandy’s is acquiring Rosie’s. The incremental value of the acquisition is $1,200. What is
the value of Rosie’s to Sandy’s?
A. $41,100
B. $41,900
C. $42,300
D. $42,700
E. $43,500
Answer:
You are paying an effective annual rate of 18.974 percent on your credit card. The
interest is compounded monthly. What is the annual percentage rate on this account?
A. 17.50 percent
B. 18.00 percent
C. 18.25 percent
D. 18.64 percent
E. 19.00 percent
Answer:
The Bike Shop paid $1,990 in interest and $1,850 in dividends last year. The times
interest earned ratio is 2.2 and the depreciation expense is $520. What is the value of
the cash coverage ratio?
A. 1.67
B. 1.80
C. 2.21
D. 2.46
E. 2.52
Answer:
The foreign currency approach to capital budgeting analysis:
I. is computationally easier to use than the home currency approach.
II. produces the same results as the home currency approach.
III. requires an exchange rate for each time period for which there is a cash flow.
IV. computes the NPV of a project in both the foreign and the domestic currency.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Sales can often increase without increasing which one of the following?
A. accounts receivable
B. cost of goods sold
C. accounts payable
D. fixed assets
E. inventory
Answer:
A firm has annual sales of $320,000, a price-earnings ratio of 24, and a profit margin of
4.2 percent. There are 14,000 shares of stock outstanding. What is the price-sales ratio?
A. 0.97
B. 1.01
C. 1.08
D. 1.15
E. 1.22
Answer:
The excess return earned by an asset that has a beta of 1.34 over that earned by a
risk-free asset is referred to as the:
A. market risk premium.
B. risk premium.
C. systematic return.
D. total return.
E. real rate of return.
Answer:
You are considering two independent projects with the following cash flows. The
required return for both projects is 16 percent. Given this information, which one of the
following statements is correct?
A. You should accept Project A and reject Project B based on their respective NPVs.
B. You should accept Project B and reject Project A based on their respective NPVs.
C. You should accept Project A and reject Project B based on their respective IRRs.
D. You should accept Project B and reject Project A based on their respective IRRs.
E. You should accept both projects based on both the NPV and IRR decision rules.
Answer:
Which of the following statements are identified with financial break-even point?
I. The present value of the cash inflows exactly offsets the initial cash outflow.
II. The payback period is equal to the life of the project.
III. The NPV is zero.
IV. The discounted payback period equals the life of the project.
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. I, III, and IV only
Answer:
What is the interest rate charged per period multiplied by the number of periods per
year called?
A. effective annual rate
B. annual percentage rate
C. periodic interest rate
D. compound interest rate
E. daily interest rate
Answer:
Morrison Industrial Tool can either lease or buy some equipment. The lease payments
would be $12,400 a year. The purchase price is $34,900. The equipment has a 3-year
life after which it is expected to have a resale value of $5,500. The firm uses
straight-line depreciation over the asset’s life, borrows money at 8 percent, and has a 34
percent tax rate. What is the incremental cash flow for year 1 if the company decides to
lease the equipment rather than purchase it?
A. -$22,405
B. -$16,805
C. -$12,139
D. -$8,184
E. -$4,905
Answer:
Last year, Lexington Homes issued $1 million in unsecured, non-callable debt. This
debt pays an annual interest payment of $55 and matures 6 years from now. The face
value is $1,000 and the market price is $1,020. Which one of these terms correctly
describes a feature of this debt?
A. semi-annual coupon
B. discount bond
C. note
D. trust deed
E. collateralized
Answer:
A mail-order firm processes 5,000 checks per month. Of these, 55 percent are for $55
and 45 percent are for $65. The $55 checks are delayed 2 days on average; the $65
checks are delayed 5 days on average. Assume each month has 30 days. The interest
rate is 6 percent per year. How much should the firm be willing to pay to reduce the
weighted average float by 1.4 days?
A. $4,165
B. $13,883
C. $41,650
D. $138,883
E. $416,500
Answer:
M & M Proposition I with tax supports the theory that:
A. a firm’s weighted average cost of capital decreases as the firm’s debt-equity ratio
increases.
B. the value of a firm is inversely related to the amount of leverage used by the firm.
C. the value of an unlevered firm is equal to the value of a levered firm plus the value
of the interest tax shield.
D. a firm’s cost of capital is the same regardless of the mix of debt and equity used by
the firm.
E. a firm’s cost of equity increases as the debt-equity ratio of the firm decreases.
Answer:
The Green Paddle has a cost of equity of 12.1 percent and a pre-tax cost of debt of 7.6
percent. The debt-equity ratio is 0.65 and the tax rate is 32 percent. What is Green
Paddle’s unlevered cost of capital?
A. 10.72 percent
B. 11.85 percent
C. 14.29 percent
D. 14.46 percent
E. 15.08 percent
Answer:
Hoyes Lumber generally receives 3 checks a month. The check amounts and the
collection delay for each check are shown below. Given this information, what is the
amount of the average daily float? Assume each month has 30 days.
A. $1,386.67
B. $1,407.19
C. $4,750.00
D. $6,833.33
E. $6,933.33
Answer:
Why should financial managers strive to maximize the current value per share of the
existing stock?
A. doing so guarantees the company will grow in size at the maximum possible rate
B. doing so increases employee salaries
C. because they have been hired to represent the interests of the current shareholders
D. because this will increase the current dividends per share
E. because managers often receive shares of stock as part of their compensation
Answer:
Bright Morning Foods has expected earnings before interest and taxes of $48,600, an
unlevered cost of capital of 13.2 percent, and debt with both a book and face value of
$25,000. The debt has an 8.5 percent coupon. The tax rate is 34 percent. What is the
value of the firm?
A. $245,500
B. $247,600
C. $251,500
D. $264,800
E. $271,300
Answer:
Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units,
plus or minus 4 percent. The expected variable cost per unit is $11 and the expected
fixed costs are $290,000. The fixed and variable cost estimates are considered accurate
within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax
rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent.
What is the operating cash flow under the best case scenario?
A. $148,247
B. $148,475
C. $107,146
D. $168,630
E. $174,220
Answer:
The total direct costs of underwriting an equity IPO:
A. tends to increase on a percentage basis as the proceeds of the IPO increase.
B. is generally between 7 and 8 percent, regardless of the issue size.
C. can be as high as 25 percent for small issues.
D. excludes the gross spread.
E. excludes both the gross spread and the underpricing cost.
Answer:
Which one of the following statements related to the SML approach to equity valuation
is correct? Assume the firm uses debt in its capital structure.
A. This model considers a firm’s rate of growth.
B. The model applies only to non-dividend paying firms.
C. The model is dependent upon a reliable estimate of the market risk premium.
D. The model generally produces the same cost of equity as the dividend growth model.
E. This approach generally produces a cost of equity that equals the firm’s overall cost
of capital.
Answer:
Variable costs can be defined as the costs that:
A. remain constant for all time periods.
B. remain constant over the short run.
C. vary directly with sales.
D. are classified as non-cash expenses.
E. are inversely related to the number of units sold.
Answer: