Which one of the following capital intensity ratios indicates the largest need for fixed
assets per dollar of sales?
A. 0.70
B. 0.86
C. 1.00
D. 1.06
E. 1.15
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
Which one of the following statements related to options is correct?
A. American stock options can be exercised but not resold.
B. A European call is either equal to or less valuable than a comparable American call.
C. European puts can be resold but can never be exercised.
D. European options can be exercised on any dividend payment date.
A “fallen angel” is a bond that has moved from:
A. being publicly traded to being privately traded.
B. being a long-term obligation to being a short-term obligation.
C. having a yield-to-maturity in excess of the coupon rate to having a yield-to- maturity
that is less than the coupon rate.
D. senior status to junior status for liquidation purposes.
E. investment grade to speculative grade.
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past
five years: 3 percent, -10 percent, 24 percent, 22 percent, and 12 percent. Suppose the
average inflation rate over this time period was 3.6 percent and the average T-bill rate
was 4.8 percent. Based on this information, what was the average nominal risk
premium?
A. 5.15 percent
B. 5.40 percent
C. 6.01 percent
D. 6.37 percent
E. 6.60 percent
Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture
but wants to limit his liability to his initial investment and has no interest in the daily
operations. Sam will contribute his full efforts on a daily basis but has limited funds to
invest in the business. Alfredo will be involved as an active consultant and manager and
will also contribute funds. Sam and Alfredo are willing to accept liability for the firm’s
debts as they feel they have nothing to lose by doing so. All three individuals will share
in the firm’s profits and wish to keep the initial organizational costs of the business to a
minimum. Which form of business entity should these individuals adopt?
A. sole proprietorship
B. joint stock company
C. limited partnership
D. general partnership
E. corporation
Downtown Bank is offering 3.4 percent compounded daily on its savings accounts. You
deposit $8,000 today. How much will you have in your account 11 years from now?
A. $11,628.09
B. $11,714.06
C. $12,204.50
D. $12,336.81
E. $12,414.14
Steven’s Auto Detailers is trying to decide whether to lease or buy some new equipment
for polishing vehicles. The equipment costs $22,000, has a 3-year life, and will be
worthless after the 3 years. The aftertax discount rate is 6.2 percent. The annual
depreciation tax shield is $1,760 and the aftertax annual lease payment is $6,650. What
is the net advantage to leasing?
A. -$397.11
B. -$248.16
C. $184.92
D. $315.40
E. $462.84
Atlas Mines has adopted a policy of increasing the annual dividend on its common
stock at a constant rate of 2.75 percent annually. The firm just paid an annual dividend
of $1.67. What will the dividend be six years from now?
A. $1.88
B. $1.92
C. $1.97
D. $2.02
E. $2.05
In a merger the:
A. legal status of both the acquiring firm and the target firm is terminated.
B. acquiring firm retains its pre-merger legal status.
C. acquiring firm acquires the assets, but not the liabilities, of the target firm.
D. shareholders of the target firm have little, if any, say as to whether or not the merger
occurs.
E. target firm continues to exist but will be a wholly owned subsidiary of the acquiring
firm.
Your firm is considering either leasing or buying some new equipment. The lessor will
charge $13,800 a year for 4 years should you decide to lease. The purchase price is
$47,800. The equipment has a 4-year life after which it is expected to have a resale
value of $8,400. Your firm uses straight-line depreciation, borrows money at 10 percent,
and has a 33 percent tax rate. What is the aftertax salvage value of the equipment?
A. $5,544
B. $5,628
C. $5,709
D. $5,748
E. $5,820
The capital structure that maximizes the value of a firm also:
A. minimizes financial distress costs.
B. minimizes the cost of capital.
C. maximizes the present value of the tax shield on debt.
D. maximizes the value of the debt.
E. maximizes the value of the unlevered firm.
Which one of the following is a system for managing demand-dependent inventories
that minimizes the inventory levels of a firm?
A. just-in-time inventory
B. turnover planning
C. net working capital planning
D. inventory scoring
E. inventory ranking
Phone Home, Inc. is considering a new 5-year expansion project that requires an initial
fixed asset investment of $2.484 million. The fixed asset will be depreciated straight-
line to zero over its 5-year tax life, after which time it will be worthless. The project is
estimated to generate $2,208,000 in annual sales, with costs of $883,200. The tax rate is
32 percent and the required return on the project is 11 percent. What is the net present
value for this project?
A. $1,432,155
B. $1,433,059
C. $1,434,098
D. $1,434,217
E. $1,435,008
Which one of the following parties has ultimate control of a corporation?
A. chairman of the Board
B. board of directors
C. chief executive officer
D. chief operating office
E. shareholders
An acquisition completed simply to diversify a firm will:
A. create excessive synergy in almost all situations.
B. lower systematic risk and increase the value of the firm.
C. benefit the firm by eliminating unsystematic risk.
D. benefit the shareholders by providing otherwise unobtainable diversification.
E. generally not add any value to the firm.
Standard deviation is a measure of which one of the following?
A. average rate of return
B. volatility
C. probability
D. risk premium
E. real returns
Mountain Teas wants to raise $11.6 million to open a new production center. The
company estimates the issue costs including the legal and accounting fees will be
$440,000. The underwriters have set the stock price at $17.50 a share and the
underwriting spread at 9 percent. How many shares of stock does Mountain Teas have
to sell to meet its cash need?
A. 728,414 shares
B. 756,044 shares
C. 769,315 shares
D. 772,200 shares
E. 781,909 shares
What is the variance of the returns on a portfolio that is invested 60 percent in stock S
and 40 percent in stock T?
A. .000017
B. .000023
C. .000118
D. .000136
E. .000161
Which of the following are advantages of the payback method of project analysis?
I. works well for research and development projects
II. liquidity bias
III. ease of use
IV. arbitrary cutoff point
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. II, III, and IV only
Cell Tower stock has a current market price of $62 a share. The one-year call on Cell
Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a
strike price of $65 is priced at $7.69. What is the risk-free rate of return?
A. 3.95 percent
B. 4.21 percent
C. 4.67 percent
D. 5.38 percent
E. 5.57 percent
A decrease in which of the following will increase the value of a put option on a stock?
I. time to expiration
II. stock price
III. exercise price
IV. risk-free rate
A. III only
B. II and IV only
C. I and III only
D. I, II, and III only
E. II, III, and IV only
You have recently been hired as an accounting intern for Jefferson Mills. The job that
you have been assigned for today is to compile a spreadsheet that has six columns. The
column headings are: Invoice #; Customer name; < 30 days; 31-60 days; 61-90 days; >
90 days. You are to list every unpaid invoice by customer name with the amount owed
entered into the appropriate column for the number of days between the sale date and
today. Once you have completed that, you are to sort the report by customer name and
then total the amounts listed in each column. What is this report called?
A. credit report
B. aging schedule
C. risk assessment report
D. turnover delineation
E. receivables consolidation report
Phone Home, Inc. is considering a new 4-year expansion project that requires an initial
fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to
zero over its 4-year tax life, after which time it will have a market value of $231,000.
The project requires an initial investment in net working capital of $330,000, all of
which will be recovered at the end of the project. The project is estimated to generate
$2,640,000 in annual sales, with costs of $1,056,000. The tax rate is 31 percent and the
required return for the project is 15 percent. What is the net present value for this
project?
A. $714,056
B. $733,970
C. $741,335
D. $742,208
E. $744,595
You are a hard-charging manager who doesn’t really like to sit at a desk for too long.
You prefer to gather information quickly, make a decision, and move on to the next item
on your agenda. Which one of the following applies to you?
A. availability bias
B. arbitrage limits
C. law of small numbers
D. representativeness heuristic
E. regret aversion
The person on the floor of the NYSE who executes buy and sell orders on behalf of
customers is called a(n):
A. floor trader.
B. dealer.
C. specialist.
D. executor.
E. commission broker.
High Mountain Mining wants to expand its current operations and requires $3.5 million
in additional funding to do so. After discussing this with key shareholders, the firm has
decided to raise the necessary funds through a rights offering at a subscription price of
$18 a share. The current market price of the firm’s stock is $22 a share. How many
shares of stock will the firm need to sell through the rights offering to fund the
expansion plans?
A. 140,015 shares
B. 159,091 shares
C. 166,667 shares
D. 194,444 shares
E. 205,688 shares
Which one of the following is a preliminary prospectus?
A. tombstone
B. green shoe
C. registration statement
D. rights offer
E. red herring
You have $5,600 that you want to use to open a savings account. There are five banks
located in your area. The rates paid by banks A through E, respectively, are given below.
Which bank should you select if your goal is to maximize your interest income?
A. 3.26 percent, compounded annually
B. 3.20 percent, compounded monthly
C. 3.25 percent, compounded semi-annually
D. 3.10 percent, compounded continuously
E. 3.15 percent, compounded quarterly
Which one of the following standardizes items on the income statement and balance
sheet relative to their values as of a common point in time?
A. statement of standardization
B. statement of cash flows
C. common-base year statement
D. common-size statement
E. base reconciliation statement
Alfonzo’s Italian House has 25,000 shares of stock outstanding with a par value of $1
per share and a market price of $36 a share. The firm just announced a 5-for-3 stock
split. What will the market price per share be after the split?
A. $21.60
B. $24.20
C. $36.00
D. $54.00
E. $60.00
A firm borrows money at 8.75 percent, uses straight-line depreciation, and has a 37
percent tax rate. The firm’s break-even aftertax annual lease payment on a machine is
$16,511. How much will the firm have to pay annually to the lessor to lease this
machine?
A. $16,511
B. $19,408
C. $22,620
D. $23,919
E. $26,208
Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange
futures market. This process is known as:
A. secondary trading.
B. open trading.
C. open-hedging.
D. cross-hedging.
E. perfect-hedging.
Which one of the following is represented by the slope of the security market line?
A. reward-to-risk ratio
B. market standard deviation
C. beta coefficient
D. risk-free interest rate
E. market risk premium
Explain how option pricing theory can be used to argue that acquisitive firms pursuing
conglomerate mergers are not acting in the shareholders’ best interest.
Steve is the founder of Jefferson & Westover.
Explain why small shareholders should prefer cumulative voting over straight voting.
What is operating leverage and why is it important in the analysis of capital expenditure
projects?
Identify the four primary determinants of a firm’s growth and explain how each factor
could either add to or limit the growth potential of a firm.
Define and explain the three forms of market efficiency.
Kelley wants to purchase shares in Classic Kars, Inc., but is torn between buying shares
of common stock or shares of preferred stock. What should he consider before
determining the type of share he should purchase?
What is the primary purpose of computing the equivalent annual costs when comparing
two machines? What is the assumption that is being made about each machine?
Describe the relationships that exist between the coupon rate, the yield to maturity, and
the current yield for both a discount bond and a premium bond.
Mr.
Explain why the equity ownership of a firm is equivalent to owning a call option on the
firm’s assets.
Explain the conditions that would need to exist for the Treasury yield curve to be
downward sloping.
You need to analyze a firm’s performance in relation to its peers. You can do this either
by comparing the firms’ balance sheets and income statements or by comparing the
firms’ ratios. If you only had time to use one means of comparison which method would
you use and why?
What are the primary differences and similarities between NASDAQ and the NYSE?
List and briefly describe the three general areas of responsibility for a financial
manager.
What are some advantages of the subjective approach to determining the cost of capital
and why do you think that approach is utilized?
