Which one of the following is a use of cash?
A. increase in notes payable
B. decrease in inventory
C. increase in long-term debt
D. decrease in accounts receivables
E. decrease in common stock
Answer:
The internal rate of return is:
A. the discount rate that makes the net present value of a project equal to the initial cash
outlay.
B. equivalent to the discount rate that makes the net present value equal to one.
C. tedious to compute without the use of either a financial calculator or a computer.
D. highly dependent upon the current interest rates offered in the marketplace.
E. a better methodology than net present value when dealing with unconventional cash
flows.
Answer:
What is the value of a 6-month put with a strike price of $27.25 given the
Black-Scholes option pricing model and the following information?
A. $4.71
B. $4.88
C. $5.24
D. $5.64
E. $6.62
Answer:
Financial planning:
A. focuses solely on the short-term outlook for a firm.
B. is a process that firms employ only when major changes to a firm’s operations are
anticipated.
C. is a process that firms undergo once every five years.
D. considers multiple options and scenarios for the next two to five years.
E. provides minimal benefits for firms that are highly responsive to economic changes.
Answer:
Which of the following tends to increase the ability of a shareholder to create his or her
own homemade dividend policy?
I. low taxes on capital gains
II. dividend reinvestment plans
III. large holdings of shares
IV. low cost equity purchases
A. II only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Each year you sell 950 units of a product at a price of $899 each. The variable cost per
unit is $575 and the carrying cost per unit is $16.90. You have been buying 100 units at
a time. Your fixed cost of ordering is $60. What is the economic order quantity?
A. 82 units
B. 95 units
C. 105 units
D. 113 units
E. 124 units
Answer:
First Century Bank wants to earn an effective annual return on its consumer loans of 10
percent per year. The bank uses daily compounding on its loans. By law, what interest
rate is the bank required to report to potential borrowers?
A. 9.23 percent
B. 9.38 percent
C. 9.53 percent
D. 9.72 percent
E. 10.00 percent
Answer:
A $20 put option on Wildwood stock expires today. The current price of the stock is
$18.50. Which one of the following best describes this option?
A. funded
B. unfunded
C. at-the-money
D. in-the-money
E. out-of-the-money
Answer:
The operating cycle describes how a product:
A. is priced.
B. is sold.
C. moves through the current asset accounts.
D. moves through the production process.
E. generates a profit.
Answer:
Webster Electrics is offering 1,500 shares of stock in a Dutch auction. The bids include:
How much cash will Webster Electrics receive from selling these shares? Ignore all
transaction and flotation costs.
A. $28,500
B. $30,000
C. $31,500
D. $33,000
E. $34,500
Answer:
You invested $1,400 in an account that pays 5 percent simple interest. How much more
could you have earned over a 20-year period if the interest had compounded annually?
A. $749.22
B. $830.11
C. $882.19
D. $901.15
E. $914.62
Answer:
City Bank wants to appear competitive based on quoted loan rates and thus must offer a
7.75 percent annual percentage rate on its loans. What is the maximum rate the bank
can actually earn based on the quoted rate?
A. 8.06 percent
B. 8.14 percent
C. 8.21 percent
D. 8.26 percent
E. 8.58 percent
Answer:
Down River Markets has decided to acquire a controlling interest in Blue Jays by
purchasing shares of stock in the public markets. Which of the following statements
correctly apply to this acquisition?
I. The purchase of publicly-traded shares may be more expensive than an outright
merger with Blue Jays would have been.
II. Down River Markets can avoid dealing with the board of directors of Blue Jays by
purchasing shares in this manner.
III. If Down River Markets is successful in acquiring at least 80 percent of the
outstanding shares of Blue Jays, the remaining shareholders in Blue Jays will be forced
to also sell their shares to Down River Markets.
IV. Whether or not Down River Markets gains control of Blue Jays depends upon the
willingness of Blue Jays shareholders to sell their shares.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. I, II, and III only
E. I, II, III, and IV
Answer:
During the year, Kitchen Supply increased its accounts receivable by $130, decreased
its inventory by $75, and decreased its accounts payable by $40. How did these three
accounts affect the firm’s cash flows for the year?
A. $245 use of cash
B. $165 use of cash
C. $95 use of cash
D. $95 source of cash
E. $165 source of cash
Answer:
If you pay your suppliers five days sooner, then:
A. your payables turnover rate will decrease.
B. you may require additional funds from other sources to fund the cash cycle.
C. the cash cycle will decrease.
D. your operating cycle will increase.
E. the accounts receivable period will decrease.
Answer:
The Market Outlet has a beta of 1.38 and a cost of equity of 14.945 percent. The
risk-free rate of return is 4.25 percent. What discount rate should the firm assign to a
new project that has a beta of 1.25?
A. 13.54 percent.
B. 13.72 percent.
C. 13.94 percent.
D. 14.14 percent.
E. 14.36 percent.
Answer:
Which one of the following is a correct method for computing the operating cash flow
of a project assuming that the interest expense is equal to zero?
A. EBIT + D
B. EBIT – T
C. NI + D
D. (Sales – Costs) × (1 – D) × (1- T)
E. (Sales – Costs) × (1 – T)
Answer:
The Hobby Shop has a checking account with a ledger balance of $692. The firm has
$1,063 in uncollected deposits and $930 in outstanding checks. What is the amount of
the disbursement float on this account?
A. $0
B. $217
C. $930
D. $990
E. $1,063
Answer:
The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash balance
limit of $60,000. The standard deviation of the disbursements is $7,500. The applicable
weekly interest rate is 0.04 percent and the fixed cost of transferring funds is $50. What
is your optimal average cash balance based on the Miller-Orr model?
A. $79,116
B. $83,208
C. $110,315
D. $237,348
E. $249,624
Answer:
Birds and More is considering a project which requires the purchase of $175,000 of
fixed assets. The net present value of the project is $4,500. Equity shares will be issued
as the sole means of financing this project. The price-earnings ratio of the project equals
that of the existing firm. What will the new market value per share be after the project is
implemented given the following current information on the firm?
A. $18.68
B. $18.72
C. $18.80
D. $19.20
E. $21.10
Answer:
The counter area on the floor of the NYSE where a specialist operates is called a:
A. pit.
B. hot spot.
C. seat.
D. post.
E. DOT.
Answer:
Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000
shares outstanding. After the seasoned offering, you still owned 7,500 shares but the
number of shares outstanding rose to 625,000. Which one of the following terms best
describes this situation?
A. overallotment
B. percentage ownership dilution
C. Green Shoe
D. Red herring
E. abnormal event
Answer:
Which one of the following statements is correct?
A. An increase in the earnings per share as a result of an acquisition will increase the
price per share of the acquiring firm.
B. The price-earnings ratio will remain constant as a result of an acquisition which fails
to create value.
C. If firm A acquires firm B then the number of shares in AB will equal the number of
shares of A plus the number of shares of B.
D. If no value is created when firm A acquires firm B, then the total value of AB will
equal the value of A plus the value of B.
E. Diversification is one of the greatest benefits derived from an acquisition.
Answer:
Assume you graph a project’s net present value given various sales quantities. Which
one of the following is correct regarding the resulting function?
A. The steepness of the function relates to the project’s degree of operating leverage.
B. The steeper the function, the less sensitive the project is to changes in the sales
quantity.
C. The resulting function will be a hyperbole.
D. The resulting function will include only positive values.
E. The slope of the function measures the sensitivity of the net present value to a
change in sales quantity.
Answer:
Today, you can get either 121 Canadian dollars or 1,288 Mexican pesos for 100 U.S.
dollars. Last year, 100 U.S. dollars was worth 115 Canadian dollars or 1,291 Mexican
pesos. Which one of the following statements is correct given this information?
A. $100 converted into Canadian dollars last year would now be worth $105.22.
B. $100 converted into Mexican pesos last year would now be worth $99.77.
C. $100 converted into Mexican pesos last year would now be worth $100.36.
D. $100 converted into Canadian dollars last year would now be worth $95.05.
E. $100 invested in Canadian dollars last year would now be worth $100.
Answer:
As of the beginning of the quarter, Swenson’s, Inc. had a cash balance of $460. During
the quarter, the company collected $480 from customers and paid suppliers $360. The
company also paid an interest payment of $20 and a tax payment of $110. In addition,
the company repaid $140 on its long-term debt. What is Callahan’s cash balance at the
end of the quarter?
A. -$110
B. $290
C. $310
D. $350
E. $490
Answer:
Edwards Farm Products was unable to meet its financial obligations and was forced into
using legal proceedings to restructure itself so that it could continue as a viable
business. The process this firm underwent is known as a:
A. merger.
B. repurchase program.
C. liquidation.
D. reorganization.
E. divestiture.
Answer:
Jungle, Inc. has a target debt-equity ratio of 0.72. Its WACC is 11.5 percent and the tax
rate is 34 percent. What is the cost of equity if the aftertax cost of debt is 5.5 percent?
A. 13.75 percent
B. 13.84 percent
C. 14.41 percent
D. 14.79 percent
E. 15.82 percent
Answer:
Keep M Flying is a wholesaler that stocks engine components and test equipment for
the commercial aircraft industry. A new customer has placed an order for eight
high-bypass turbine engines, which increase fuel economy. The variable cost is $1.7
million per unit, and the credit price is $2.1 million each. Credit is extended for one
period. Based on historical experience, payment for about 1 out of every 240 such
orders is never collected. The required return is 3.2 percent per period. What is the NPV
per unit if this is a one-time order?
A. $316,407
B. $321,819
C. $326,405
D. $334,290
E. $351,056
Answer:
Which one of the following provides the option of selling a stock anytime during the
option period at a specified price even if the market price of the stock declines to zero?
A. American call
B. European call
C. American put
D. European put
E. either an American or a European put
Answer:
You own 600 shares of a NASDAQ listed stock that you wish to sell. Which of the
following are options available to you for this purpose?
I. sell the shares to a dealer at the dealer’s bid price
II. sell directly to another individual via an ECN
III. offer the shares yourself on NASDAQ via an ECN
IV. have a broker offer the shares for sale on the NYSE
A. I and II only
B. III and IV only
C. II and III only
D. I, II, and III only
E. II, III, and IV only
Answer:
Which of the following statements are correct concerning convertible bonds?
I. New shares of stock are issued when a convertible bond is converted.
II. A convertible bond is similar to a bond with a call option.
III. A convertible bond should always be worth less than a comparable straight bond.
IV. A convertible bond can be described as having upside potential with downside
protection.
A. I and III only
B. I, II, and IV only
C. I, II, and III only
D. I, III, and IV only
E. II, III, and IV only
Answer:
Which one of the following statements is correct?
A. Pro forma statements must assume that no new equity is issued.
B. Pro forma statements are projections, not guarantees.
C. Pro forma statements are limited to a balance sheet and income statement.
D. Pro forma financial statements must assume that no dividends will be paid.
E. Net working capital needs are excluded from pro forma computations.
Answer:
Explain how an increase in T-bill rates will affect the value of an American call and an
American put.
Answer:
What is forecasting risk and why is it important to the analysis of capital expenditure
projects? What methods can be used to reduce this risk?
Answer:
What are the primary differences and similarities between NASDAQ and the NYSE?
Answer:
Assume that a country experiences a financial crisis that causes the nation’s financial
markets to freeze in a manner that prevents a private firm from raising capital from any
source. Explain how project analysis conducted by that firm would work in this
situation.
Answer:
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?
Answer:
You are considering two separate investments. Both investments pay 7 percent interest.
Investment A pays simple interest and Investment B pays compound interest. Which
investment should you choose, and why, if you plan on investing for a period of 5
years?
Answer:
What value does the PEG ratio provide to financial analysts?
Answer:
Explain how option pricing theory can be used to argue that acquisitive firms pursuing
conglomerate mergers are not acting in the shareholders’ best interest.
Answer:
Explain why a swap is effectively a series of forward contracts.
Answer:
The managers of a firm wish to expand the firm’s operations and are trying to determine
the amount of debt financing the firm should obtain versus the amount of equity
financing that should be raised. The managers have asked you to explain the effects that
both of these forms of financing would have on the cash flows of the firm. Write a short
response to this request.
Answer:
What are the basic similarities and basic differences between warrants and call options?
Answer:
What is the formula for the tax-shield approach to OCF? Explain the two key points the
formula illustrates.
Answer:
Discuss the difference between book values and market values and explain which one is
more important to the financial manager and why.
Answer:
Using two separate graphs, illustrate a flexible and a restrictive short-term financing
policy. Place costs on the vertical axis and current assets on the horizontal axis. On each
graph, indicate the shortage costs, carrying costs, total costs, and indicate the optimal
investment in current assets.
Answer:
What concerns might a loan officer have when loaning funds to a sole proprietorship
that he or she might not have when loaning funds to a corporation?
Answer:
Kristie owns a perpetuity which pays $12,000 at the end of each year. She comes to you
and offers to sell you all of the payments to be received after the 10th year. Explain how
you can determine the value of this offer.
Answer:
Describe the key advantages associated with the corporate form of organization.
Answer: