Which one of the following methods determines the amount of the change a proposed
project will have on the value of a firm?
A. net present value
B. discounted payback
C. internal rate of return
D. profitability index
E. payback
Answer:
You sold one call option contract with a strike price of $55 when the option was quoted
at $0.80. The option expires today when the value of the underlying stock is $53.70.
Ignoring trading costs and taxes, what is the net profit or loss on this investment?
A. -$250
B. -$80
C. $0
D. $50
E. $80
Answer:
Tidewater Fishing has a current beta of 1.21. The market risk premium is 8.9 percent
and the risk-free rate of return is 3.2 percent. By how much will the cost of equity
increase if the company expands its operations such that the company beta rises to
1.50?
A. 1.88 percent
B. 2.58 percent
C. 2.60 percent
D. 3.10 percent
E. 3.26 percent
Answer:
Billingsley United declared a $0.20 a share dividend on Thursday, October 16. The
dividend will be paid on Monday, November 10 to shareholders of record on Friday,
October 31. Which one of the following is the ex-dividend date?
A. Tuesday, October 28
B. Wednesday, October 29
C. Thursday, October 30
D. Wednesday, November 5
E. Thursday, November 6
Answer:
This morning, you borrowed $150,000 to buy a house. The mortgage rate is 7.35
percent. The loan is to be repaid in equal monthly payments over 20 years. The first
payment is due one month from today. How much of the second payment applies to the
principal balance? (Assume that each month is equal to 1/12 of a year.)
A. $268.84
B. $277.61
C. $917.06
D. $925.83
E. $1,194.67
Answer:
A bakery generally enters into a forward contract in wheat as a:
A. hedger.
B. speculator.
C. spot trader.
D. broker.
E. spectator.
Answer:
Murray’s can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime
plus 2.25 percent. Fred’s can borrow money at a variable rate of prime plus 1.5 percent
or a fixed rate of 12 percent. Murray’s prefers a variable rate and Fred’s prefers a fixed
rate. Given this information, which one of the following statements is correct?
A. After swapping interest rates with Fred’s, Murray’s may be able to pay prime plus 2
percent.
B. Both companies can profit in a swap which will allow Murray’s to pay a variable rate
of prime plus one percent.
C. Fred’s will end up with a fixed rate of 10 percent.
D. Fred’s has the best chance of profiting if it does an interest rate swap with Murray’s.
E. There are no terms under which Murray’s and Fred’s can swap interest rates.
Answer:
Which one of the following credit instruments is commonly used in international
commerce?
A. open account
B. sight draft
C. time draft
D. banker’s acceptance
E. promissory note
Answer:
The accounts receivable approach to credit policy supports the theory that:
A. a firm’s risk of offering credit to a new customer is limited to the variable cost of the
sold items.
B. the best credit policy is an all-cash policy.
C. the cost of offering credit to a new customer is the same as the cost of offering credit
to an existing customer.
D. foregoing cash discounts is a method of obtaining inexpensive short-term financing.
E. the default risk of a credit policy is the same as the default risk under an all
cash-policy if your customers remain the same.
Answer:
A firm generated net income of $862. The depreciation expense was $47 and dividends
were paid in the amount of $25. Accounts payables decreased by $13, accounts
receivables increased by $28, inventory decreased by $14, and net fixed assets
decreased by $8. There was no interest expense. What was the net cash flow from
operating activity?
A. $776
B. $802
C. $882
D. $922
E. $930
Answer:
Which one of the following statements related to cash dividends is correct?
A. Extra cash dividends cannot be repeated in the future.
B. A dividend is never a liability until it has been declared.
C. If a firm has paid regular quarterly dividends for at least five consecutive years it is
legally obligated to continue doing so.
D. Regular cash dividends reduce paid-in capital.
E. The dividend yield expresses the annual dividend as a percentage of net income.
Answer:
Advertisements in a financial newspaper announcing a public offering of securities,
along with a list of the investment banks handling the offering, are called:
A. red herrings.
B. tombstones.
C. Green Shoes.
D. registration statements.
E. cash offers.
Answer:
Interest rate swaps:
I. benefit either the buyer or the seller, but not both.
II. are often used in conjunction with a currency swap.
III. are commonly used in business.
IV. can be used to change the index which determines the variable rate on a firm’s debt.
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Answer:
Bonds issued by the U.S. government:
A. are considered to be free of interest rate risk.
B. generally have higher coupons than those issued by an individual state.
C. are considered to be free of default risk.
D. pay interest that is exempt from federal income taxes.
E. are called “munis”.
Answer:
Lockboxes:
A. should be geographically located close to a firm’s primary customers.
B. should be located in remote locations to increase the net disbursement float.
C. offer no additional benefit to a firm now that the Check Clearing Act for the 21st
Century has been enacted.
D. tend to be negative net present value projects for firms with a large number of
sizeable transactions.
E. tend to also be used as concentration accounts.
Answer:
A stock repurchase program:
A. requires all shareholders to sell a fraction of their shares.
B. is preferred over a high-dividend program only by tax-exempt shareholders.
C. decreases both the number of shares outstanding and the market price per share.
D. has no effect on a firm’s financial statements.
E. is essentially the same as a cash dividend program provided there are no taxes or
other costs.
Answer:
A firm has total assets with a current book value of $68,700, a current market value of
$74,300, and a current replacement cost of $79,200. What is the value of Tobin’s Q?
A. .85
B. .87
C. .90
D. .92
E. .94
Answer:
Which one of the following statements is correct?
A. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than
1.0.
B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than
1.5.
C. The debt-equity ratio can be computed as 1 plus the equity multiplier.
D. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E. An increase in the depreciation expense will not affect the cash coverage ratio.
Answer:
You are an accountant and have been analyzing the financial statements of Euro Place
Markets, which is a foreign retailer. While the firm’s financials are not prepared
according to GAAP, you have still been able to understand the firm’s accounting
practices and feel that this firm has a bright future. On which one of the following U.S.
markets, if any, might you be able to purchase shares in this firm?
A. NYSE.
B. NASDAQ.
C. OTCBB.
D. Pink Sheets.
E. No U.S. market will list this foreign security.
Answer:
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past
five years: 2 percent, -12 percent, 16 percent, 22 percent, and 18 percent. What is the
variance of these returns?
A. 0.02070
B. 0.01972
C. 0.01725
D. 0.01684
E. 0.02633
Answer:
You own the following portfolio of stocks. What is the portfolio weight of stock C?
A. 39.85 percent
B. 42.86 percent
C. 44.41 percent
D. 48.09 percent
E. 52.65 percent
Answer:
The value of a stock option is dependent upon the value of the underlying stock. Thus, a
stock option is a:
A. forward agreement.
B. derivative security.
C. mezzanine asset.
D. contingent security.
E. junior security.
Answer:
The tendency for a decision maker to search for confirmation that a recent decision he
or she made was a good decision represents which one of the following characteristics?
A. overconfidence
B. overoptimism
C. affect heuristic
D. confirmation bias
E. representativeness heuristic
Answer:
M & M Proposition II is the proposition that:
A. the capital structure of a firm has no effect on the firm’s value.
B. the cost of equity depends on the return on debt, the debt-equity ratio, and the tax
rate.
C. a firm’s cost of equity is a linear function with a slope equal to (RA – RD).
D. the cost of equity is equivalent to the required rate of return on a firm’s assets.
E. the size of the pie does not depend on how the pie is sliced.
Answer:
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its
operations. Some recent financial information for the company is shown here:
MHMM is considering an investment that has the same P/E ratio as the firm. The cost
of the investment is $800,000, and it will be financed with a new equity issue. What
would the ROE on the investment have to be if we wanted the price after the offering to
be $115 per share? Assume the PE ratio remains constant.
A. 18.28 percent
B. 21.41 percent
C. 27.63 percent
D. 37.27 percent
E. 40.03 percent
Answer:
The procedure of allocating a fixed amount of funds for capital spending to each
business unit is called:
A. marginal spending.
B. capital preservation.
C. soft rationing.
D. hard rationing.
E. marginal rationing.
Answer:
The outstanding bonds of Tech Express are priced at $989 and mature in 10 years.
These bonds have a 6 percent coupon and pay interest annually. The firm’s tax rate is 35
percent. What is the firm’s aftertax cost of debt?
A. 3.01 percent
B. 3.22 percent
C. 3.35 percent
D. 4.00 percent
E. 4.41 percent
Answer:
An investor is more likely to prefer a high dividend payout if a firm:
A. has high flotation costs.
B. has few, if any, positive net present value projects.
C. has lower tax rates than the investor.
D. has a stock price that is increasing rapidly.
E. offers substantial gains on its equities, which are taxed at a favorable rate.
Answer:
The annual annuity stream of payments that has the same present value as a project’s
costs is referred to as which one of the following?
A. yearly incremental costs
B. sunk costs
C. opportunity costs
D. erosion cost
E. equivalent annual cost
Answer:
Nelson’s Landscaping has 1,200 bonds outstanding that are selling for $990 each. The
company also has 2,500 shares of preferred stock at a market price of $28 a share. The
common stock is priced at $37 a share and there are 28,000 shares outstanding. What is
the weight of the common stock as it relates to the firm’s weighted average cost of
capital?
A. 43.08 percent
B. 45.16 percent
C. 47.11 percent
D. 54.00 percent
E. 55.45 percent
Answer:
Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of
her winnings today discounted at her discount rate is called which one of the following?
A. single amount
B. future value
C. present value
D. simple amount
E. compounded value
Answer:
Decreasing which one of the following will increase the acceptability of a project?
A. sunk costs
B. salvage value
C. depreciation tax shield
D. equivalent annual cost
E. accounts payable requirement
Answer:
Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he
expects to harvest a record crop within the next two weeks. At present, he has no
storage facilities and therefore must sell his crop as soon as it is harvested. Which one
of the following risks is he facing because he must sell his crop at whatever the market
price is at harvest time?
A. futures risk
B. volatility exposure
C. surplus risk
D. transactions exposure
E. translation exposure
Answer:
Interest rates that include an inflation premium are referred to as:
A. annual percentage rates.
B. stripped rates.
C. effective annual rates.
D. real rates.
E. nominal rates.
Answer: