Permanently rejecting an investment project today may not be a wise decision primarily
because:
A. the size of the firm will be less than it would be with the project.
B. there are always errors in the estimation of NPVs.
C. the management team may be replaced.
D. the company is foregoing all future options.
E. the firm may not have any other investment opportunities.
Answer:
ABC and XYZ are all-equity firms. ABC has 1,750 shares outstanding at a market price
of $20 a share while XYZ has 2,500 shares outstanding at a price of $28 a share. ABC
is acquiring XYZ for $75,000 in cash. The incremental value of the acquisition is
$8,000. What is the net present value of acquiring XYZ to ABC?
A. $2,000
B. $3,000
C. $6,000
D. $4,000
E. $8,000
Answer:
Which one of the following business types is best suited to raising large amounts of
capital?
A. sole proprietorship
B. limited liability company
C. corporation
D. general partnership
E. limited partnership
Answer:
A proposed project has fixed costs of $3,600, depreciation expense of $1,500, and a
sales quantity of 1,300 units. What is the contribution margin if the projected level of
sales is the accounting break-even point?
A. $3.92
B. $4.14
C. $4.50
D. $4.80
E. $5.00
Answer:
In estimating the future equity risk premium, it is important to include assumptions
about the:
A. historical distribution of returns on derivative securities only.
B. future risk environment only.
C. amount of risk aversion of future investors only.
D. historical distribution of returns on derivative securities and the future risk
environment.
E. future risk environment and the amount of risk aversion of future investors.
Answer:
One year ago, you purchased 300 shares of IXC stock at a price of $22.05 per share,
received $460 in dividends over the year, and today sold all of your shares for $29.32
per share. What was your dividend yield?
A. 5.23%
B. 5.87%
C. 6.95%
D. 1.92%
E. 2.48%
Answer:
Overton Markets stock has an expected return of 7.8 percent and betas of: βGNP =
1.06; βI = 1.01; and βEx = .52. This expectation is based on a three-factor model with
expected values of: GNP growth of 2.6 percent; inflation of 3.1 percent; and export
growth of 1.4 percent. However, actual growth in these factors turns out to be 3.1
percent, 2.6 percent, and .2 percent, respectively. Calculate the stock’s total return if the
company announces that an important patent filing has been granted sooner than
expected and will earn the company 5 percent more in return.
A. 16.02%
B. 12.20%
C. 11.55%
D. 10.90%
E. 11.02%
Answer:
Which one of the following is the best example of two mutually exclusive projects?
A. planning to build a warehouse and a retail outlet side by side
B. buying sufficient equipment to manufacture both desks and chairs simultaneously
C. renting out a company warehouse or selling it outright
D. using the company sales force to promote sales of both shoes and socks
E. buying both inventory and fixed assets using funds from the same bank loan
Answer:
The primary goal of financial management is to:
A. maximize current dividends per share of the existing stock.
B. maximize the current value per share of the existing stock.
C. avoid financial distress.
D. minimize operational costs and maximize firm efficiency.
E. maintain steady growth in both sales and net earnings.
Answer:
A prearranged, short-term bank loan made on a formal or informal basis, and typically
reviewed for renewal annually, is called a:
A. letter of credit.
B. cleanup loan.
C. compensating balance.
D. line of credit.
E. roll-over.
Answer:
Lasko’s has 250,000 shares of stock outstanding, $400,000 in perpetual annual earnings,
and a discount rate of 16 percent. The firm is considering a new project that has initial
costs of $350,000 and annual perpetual cash flows of $60,000. What will be the change
in the firm’s stock price per share if this project is accepted?
A. $.14
B. $.10
C. $.07
D. $1.02
E. $31.06
Answer:
Brown’s Market has 15,000 shares of stock outstanding with a par value of $1 per share
and a market value per share of $8. The firm just announced a 10 percent stock
dividend. What will the market price per share be after the dividend?
A. $7.20
B. $7.27
C. $7.33
D. $8.00
E. $8.80
Answer:
A manufacturing firm has a 90-day collection period. The firm produces seasonal
merchandise and thus has the least sales during the first quarter of a year and the
highest level of sales during the third quarter of a year. The firm maintains a relatively
steady level of production which means that its cash disbursements are fairly equal in
all quarters. The firm is most apt to face a cash-out situation in:
A. the first quarter.
B. the second quarter.
C. the third quarter.
D. the fourth quarter.
E. any quarter, equally.
Answer:
On an average day, Wilson’s Meats receives 20 checks from customers that average
$1,200 each. It takes half a day to process these payments and another day for the funds
to become available. Wilson’s also receives $48,000 of daily payments from customers
who are billed and pay electronically. The electronic payments are available
immediately. What is the firm’s collection float?
A. -$49,800
B. -$1,800
C. $1,200
D. $1,800
E. $49,800
Answer:
The Merriweather Co. just announced that it will pay a dividend next year of $1.60. The
company will then increase its dividend by 10 percent per year for two years after
which it will maintain a constant 2 percent dividend growth rate. What is one share
worth today at a required rate of return of 14 percent?
A. $21.60
B. $15.17
C. $23.14
D. $23.95
E. $24.79
Answer:
Ferns and Plants are all-equity firms. Ferns’ has 2,500 shares outstanding at a market
price of $28 a share. Plants has 2,500 shares outstanding at a price of $41 a share.
Plants is acquiring Ferns for $72,000 in cash. The synergy of the acquisition is $3,500.
What is the value of Ferns to Plants?
A. $66,500
B. $70,000
C. $36,000
D. $73,500
E. $79,500
Answer:
Edie’s Health Supply has 125,000 shares of stock outstanding with a par value of $1 per
share and a market value of $5 a share. The company has retained earnings of $76,500
and capital in excess of par of $340,000. The company just announced a 1-for-5 reverse
stock split. What will be the par value per share after the split?
A. $.20
B. $.25
C. $2.50
D. $5.00
E. $10.00
Answer:
Analysts estimate that a bond has an equal probability of being priced at either $940 or
$1,050 one year from today. The bond is also callable at any time at $1,020. What is the
expected value of this bond in one year?
A. $995
B. $980
C. $1,000
D. $1,020
E. $940
Answer:
A growing perpetuity is currently valued $6,225.81. The next annuity payment will be
$386 and the discount rate is 9 percent. What is the annuity’s rate of growth?
A. 2.45%
B. 3.10%
C. 2.80%
D. 2.50%
E. 2.95%
Answer:
Which one of these statements related to beta is correct?
A. Firm betas have less error than industry betas.
B. Firms should always rely on their own beta rather than their industry beta.
C. Beta is unaffected by a firm’s capital structure.
D. The sample size used to compute beta may be too small to yield a reliable result.
E. Firm betas rarely vary over time.
Answer:
Uptowne Restaurant has sales of $418,000, total equity of $224,400, a tax rate of 34
percent, a debt-equity ratio of .37, and a profit margin of 5.1 percent. What is the return
on assets?
A. 6.93%
B. 9.50%
C. 11.08%
D. 7.13%
E. 13.13%
Answer:
Internal equity is:
A. assumed to be cost-free.
B. assumed to have a beta of 1.
C. assigned a cost equal to the aftertax cost of equity.
D. assigned the same cost as common stock.
E. assigned a cost equal to the risk-free rate.
Answer:
Samson’s purchased a lot four years ago at a cost of $398,000. At that time, the firm
spent $289,000 to build a small retail outlet on the site. The most recent appraisal on the
property placed a value of $629,000 on the property and building. Samson’s now wants
to tear down the original structure and build a new strip mall on the site at an estimated
cost of $2.3 million. What amount should be used as the initial cash flow for new
project?
A. $2,987,000
B. $2,242,000
C. $2,058,000
D. $2,300,000
E. $2,929,000
Answer:
Luis has a management contract which grants him a lump sum payment of $20 million
be paid upon the completion of his first five years of service. The company wants to set
aside an equal amount of funds each year to cover this anticipated cash outflow. The
company can earn 4.5 percent on these funds. How much must the company set aside
each year for this purpose?
A. $3,775,042.93
B. $3,798,346.17
C. $3,801,033.67
D. $3,655,832.79
E. $4,038,018.22
Answer:
Some of the key reasons why a firm would choose a formal bankruptcy over a private
workout include all of the following except the:
A. issuance of debtor in possession debt.
B. tax treatment of tax loss carryforwards.
C. tax treatment of debt forgiveness.
D. ability to issue new debt that is senior to all prior debts.
E. higher priority given to the existing stockholders.
Answer:
Assume the spot market exchange rate for $1 is currently A$1.1904. The expected
inflation rate is 3.3 percent in Australia compared to the U.S. rate of 2.8 percent. What
is the expected exchange rate one year from now if relative purchasing power parity
exists?
A. A$1.1844
B. A$1.2062
C. A$1.2286
D. A$1.1964
E. A$1.1484
Answer:
Interest rate swaps allow one party to exchange a:
A. floating interest rate for a fixed rate.
B. fixed interest rate a lower fixed rate.
C. floating interest rate for a lower floating rate.
D. floating interest rate for a one-time immediate cash payment.
E. fixed interest rate for a one-time future cash payment.
Answer:
Kay’s Nautique is considering a project which will require additional inventory of
$128,000 and will also increase accounts payable by $45,000. Accounts receivable are
currently $80,000 and are expected to increase by 10 percent if this project is accepted.
What is the initial project cash flow needed for net working capital?
A. $75,000
B. $91,000
C. $99,000
D. $136,000
E. $181,000
Answer:
Uptown Interior Designs is an all-equity firm that has 40,000 shares of stock
outstanding. The company has decided to borrow $74,000 to buy out the 2,100 shares
of a deceased stockholder. What is the total value of this firm if you ignore taxes?
A. $2,008,157
B. $1,388,056
C. $1,409,524
D. $3,885,000
E. $2,630,620
Answer:
Potential investors primarily obtain detailed information regarding a new issue by
reading the:
A. SEC’s comment letter.
B. red herring.
C. letter of commitment.
D. registration statement.
E. rights offering.
Answer:
Amanda’s Interior Design has credit sales of $783,000, costs of goods sold of $418,000,
and average accounts receivable of $107,900. How long does it take its credit customers
to pay for their purchases?
A. 36.09 days
B. 50.30 days
C. 31.23 days
D. 35.20 days
E. 27.95 days
Answer:
The accounting break-even production quantity for a project is 5,799 units. The fixed
costs are $92,640, the depreciation is $36,210, and the sales price per unit is $48.29.
What is the variable cost per unit?
A. $31.18
B. $27.04
C. $26.07
D. $32.81
E. $33.04
Answer:
In the formula, P3= Div / R – g, the dividend is for period:
A. two.
B. five.
C. four.
D. three.
E. one.
Answer: