1) Taylor Farms is borrowing $75,000 for 3 years at an APR of 9 percent. The loan calls
for the principal balance to be reduced by equal amounts over the life of the loan.
Interest is to be paid in full each year. The payments are to be made annually at the end
of each year. How much will Taylor Farms pay in interest over the life of this loan?
A.$12,311.67
B.$12,484.90
C.$12,840.00
D.$13,500.00
E.$13,887.32
2) Which one of the following statements is correct?
A.Bonds are generally called at par value
B.A current list of all bondholders is maintained whenever a firm issues bearer bonds
C.An indenture is a contract between a bond’s issuer and its holders
D.Collateralized bonds are called debentures
E.A bondholder has the right to determine when his or her bond is called
3) A stock has a beta of 1.68, the expected return on the market is 14.72, and the
risk-free rate is 4.65. What must the expected return on this stock be?
A.15.67 percent
B.16.75 percent
C.17.10 percent
D.18.46 percent
E.21.57 percent
4) The modified internal rate of return is specifically designed to address the problems
associated with which one of the following?
A.Mutually exclusive projects
B.Unconventional cash flows
C.Long-term projects
D.Negative net present values
E.Crossover points
5) Systematic risk is:
A.totally eliminated when a portfolio is fully diversified
B.defined as the total risk associated with surprise events
C.risk that affects a limited number of securities
D.measured by beta
E.measured by standard deviation
6) Which one of the following statements concerning market and book values is
correct?
A.The market value of accounts receivable is generally higher than the book value of
those receivables
B.The market value tends to provide a better guide to the actual worth of an asset than
does the book value
C.The market value of fixed assets will always exceed the book value of those assets
D.Book values represent the amount of cash that will be received if an asset is sold
E.The current book value of equipment purchased last year is equal to the initial cost of
the equipment
7) A firm has sales of $428,000 for the year. The profit margin is 3.4 percent and the
retention ratio is 60 percent. What is the common-size percentage for the dividends
paid?
A.0.99 percent
B.1.18 percent
C.1.21 percent
D.1.36 percent
E.1.42 percent
8) You are planning a trip to the U.K. and plan on spending 3,600 pounds. How many
dollars will this trip cost you if the currency per U.S. dollar is 0.6789 pounds?
A.$2,444.04
B.$3,892.16
C.$5,302.70
D.$5,890.01
E.$6,044.04
9) Which one of the following statements is correct?
A.Firms cannot use lockboxes if they use cash concentration accounts
B.Firms prefer to increase processing delay on disbursements
C.Firms prefer to eliminate all types of float
D.Firms open regional offices so their employees can pick up lockbox payments
throughout the day
E.The Check Clearing Act for the 21st Century is designed to reduce the collection time
to one day
10) The Closet Shoppe has total sales of $713,200 and a profit margin of 5.8 percent.
Currently, the firm has 12,500 shares outstanding. What are the earnings per share?
A.$2.98
B.$3.31
C.$3.56
D.$3.89
E.$4.02
11) Given the following information for Electric Transport, find the WACC. Assume the
company’s tax rate is 34 percent.
Debt: 7,500, 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to
maturity, selling for 103 percent of par, the bonds make semiannual payments.
Common stock: 195,000 shares outstanding, selling for $78 per share, beta is 1.21
Preferred stock: 11,000 shares of 6.35 percent preferred stock outstanding, currently
selling for $76 per share.
Market: 8 percent market risk premium and 5.1 percent risk-free rate.
A.11.49 percent
B.12.07 percent
C.12.42 percent
D.13.33 percent
E.13.80 percent
12) The price of a stock at year 4 can be expressed as:
A.D0 / (R + G4)
B.D0 (1 + R)5
C.D1 (1 + R)5
D.D4/(R-g)
E.D5/(R-g)
13) Which of the following factors favor the issuance of debt in the financing decision?
I. Market signaling
II. Distress costs
III. Tax benefits
IV. Financial flexibility
A.I and II only
B.I and III only
C.II and IV only
D.I, II, and III only
E.I, II, and IV only
14) Which one of the following will occur when the internal rate of return equals the
required return?
A.The average accounting return will equal 1.0
B.The profitability index will equal 1.0
C.The profitability index will equal 0
D.The net present value will equal the initial cash outflow
E.The profitability index will equal the average accounting return
15) Home Grown Grains stock returned 28.7 percent, 2.6 percent, 13.1 percent, and
11.8 percent over the past four years, respectively. What is the arithmetic average return
for this period?
A.14.05 percent
B.14.62 percent
C.15.10 percent
D.15.93 percent
E.16.01 percent
16) Which one of the following supports the theory that the value of a firm increases as
the firm’s level of debt increases?
A.M&M Proposition I, without taxes
B.M&M Proposition II, without taxes
C.M&M Proposition I, with taxes
D.Static theory of capital structure
E.No theory suggests this
17) Which one of the following actions will increase the current ratio, all else constant?
Assume the current ratio is greater than 1.0
A.Cash purchase of inventory
B.Cash payment of an account receivable
C.Cash payment of an account payable
D.Credit sale of inventory at cost
E.Cash sale of inventory at a loss
18) Jasper Industrial has no debt outstanding and a total market value of $110,000.
Earnings before interest and taxes, EBIT, are projected to be $12,000 if economic
conditions are normal. If there is strong expansion in the economy, then EBIT will be
15 percent higher. If there is a recession, then EBIT will be 20 percent lower. Jasper
Industrial is considering a $35,000 debt issue with a 7 percent interest rate. The
proceeds will be used to repurchase shares of stock. There are currently 7,500 shares
outstanding. Ignore taxes for this problem. What is the percentage change in EPS when
a normal economy slips into recession?
A.-33 percent
B.-25 percent
C.-20 percent
D.-16 percent
E.-10 percent
19) The primary purpose of protective covenants is to help:
A.reduce interest rate risk
B.the issuer in case of default
C.protect bondholders from issuer actions
D.bondholders whose bonds are called
E.convert bearer bonds into registered form
20) Donner United has total owner’s equity of $18,800. The firm has current assets of
$23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of
the long-term debt?
A.$5,400
B.$12,500
C.$13,700
D.$29,800
E.$43,000
21) The Food Store is planning a major expansion for 4 years from today. In preparation
for this, the company is setting aside $35,000 each quarter, starting today, for the next 4
years. How much money will the firm have when it is ready to expand if it can earn an
average of 6.25 percent on its savings?
A.$528,409.29
B.$540,288.16
C.$610,411.20
D.$640,516.63
E.$662,009.14
22) Katie owns 100 shares of ABC stock. Which one of the following terms is used to
refer to the return that Katie and the other shareholders require on their investment in
ABC?
A.Weighted average cost of capital
B.Pure play cost
C.Cost of equity
D.Subjective cost
E.Cost of debt
23) Southwest Tours currently has a weighted average cost of capital of 11.3 percent
based on a combination of debt and equity financing. The firm has no preferred stock.
The current debt-equity ratio is 0.58 and the aftertax cost of debt is 6.4 percent. The
company just hired a new president who is considering eliminating all debt financing.
All else constant, what will the firm’s cost of capital be if the firm switches to an
all-equity firm?
A.11.45 percent
B.12.62 percent
C.12.89 percent
D.13.37 percent
E.14.14 percent
24) Which one of the following statements is correct?
A.Dividends are irrelevant
B.Flotation costs are a good reason to support a high dividend payout
C.Current tax laws favor high current dividends for individual investors
D.Dividend policy is the time pattern of dividend payout
E.Corporate investors tend to prefer low dividend payouts on securities they own
25) Able Co. has $218,000 in taxable income and Bravo Co. has $5,600,000 in taxable
income. Suppose both firms have identified a new project that will increase taxable
income by $12,000. The additional project will increase Able Co.’s taxes by _____ and
Bravo Co.’s taxes by _____.
A.$1,800; $1,800
B.$4,080; $4,080
C.$4,080; $4,680
D.$4,680; $4,080
E.$4,680; $4,680
26) The balance sheet of a firm shows current liabilities of $46,300 and long-term debt
of $189,200 as of last year. Current liabilities are $56,900 and long-term debt is
$248,750 as of today, which is the end of the current year. The financial statements for
the current year reflect an interest paid amount of $18,700 and dividends of $22,000.
What is the amount of the net new borrowing?
A.$51,450
B.$59,550
C.$64,750
D.$70,150
E.$78,250
27) The more actively traded large companies that are listed on NASDAQ are traded in
which one of the NASDAQ markets?
A.National
B.Capital
C.Regional
D.Global Select
E.Global
28) JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The
book value of its equity is $1,750,000. If the company repurchases 20 percent of its
shares in the stock market and there are no taxes or transactions costs and all else
remains the same, what should the market value of the firm be after the repurchase?
A.$1,000,000
B.$1,750,000
C.$3,250,000
D.$4,000,000
E.$5,000,000
F.None of the above
29) The beta of a risky portfolio cannot be less than _____ nor greater than _____.
A.0; 1
B.1; the market beta
C.the lowest individual beta in the portfolio; market beta
D.the market beta; the highest individual beta in the portfolio
E.the lowest individual beta in the portfolio; the highest individual beta in the portfolio
30) Pluto, Inc., has an issue of preferred stock outstanding that pays a $4.50 dividend
every year, in perpetuity. If this issue currently sells for $82.30 per share, what is the
required return?
A.5.47 percent
B.6.89 percent
C.7.70 percent
D.8.23 percent
E.8.98 percent
31) Nu Tech wants to raise $21 million to purchase equipment by issuing new
securities. Management estimates the issue will cost the firm $320,000 for accounting,
legal, and other costs. The underwriting spread is 7.5 percent and the issue price is $21
per share. How many shares of stock must be sold if Nu Tech is to receive sufficient
funds to purchase all the desired equipment?
A.1,008,010 shares
B.1,021,121 shares
C.1,097,555 shares
D.1,102,048 shares
E.1,110,333 shares
32) There are two open seats on the board of directors. If two separate votes occur to
elect the new directors, the firm is using a type of voting that is best described as _____
voting.
A.simultaneous
B.straight
C.proxy
D.cumulative
E.sequential
33) A $36,000 portfolio is invested in a risk-free security and two stocks. The beta of
stock A is 1.29 while the beta of stock B is 0.90. One-half of the portfolio is invested in
the risk-free security. How much is invested in stock A if the beta of the portfolio is
0.58?
A.$6,000
B.$9,000
C.$12,000
D.$15,000
E.$18,000
34) Which one of the following categories has the widest frequency distribution of
returns for the period 1926-2008?
A.Small-company stocks
B.U.S. Treasury bills
C.Long-term government bonds
D.Inflation
E.Large-company stock
35) A firm uses the extended economic order quantity approach to inventory
management. Which one of the following inventory levels is considered to be the
minimum inventory level given this approach?
A.Zero inventory
B.Reorder point level
C.Safety stock level
D.50 percent of the reorder quantity
E.Safety stock plus the reorder quantity
36) Kristina started setting aside funds 3 years ago to save for a down payment on a
house. She has saved $900 each quarter and earned an average rate of return of 4.8
percent. How much money does she currently have saved for her down payment?
A.$11,542.10
B.$12,388.19
C.$15,209.80
D.$15,366.67
E.$16,023.13
37) Terry invested $2,000 today in an investment that pays 6.5 percent annual interest.
Which one of the following statements is correct, assuming all interest is reinvested?
A.Terry will earn the same amount of interest each year
B.Terry could have the same future value and invest less than $2,000 initially if he
could earn more than 6.5 percent interest
C.Terry will earn an increasing amount of interest each and every year even if he should
decide to withdraw the interest annually rather than reinvesting the interest
D.Terry’s interest for year two will be equal to $2,000 0.065 2
E.Terry will be earning simple interest