Colors and More is considering replacing the equipment it uses to produce crayons. The
equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs
by an estimated $304,000 a year. The equipment will be depreciated using straight-line
depreciation to a book value of zero. The required rate of return is 15 percent and the
tax rate is 35 percent. What is the net income from this proposed project?
A. $18,508.75
B. $40,211.24
C. $66,441.67
D. $123,391.67
E. $136,709.48
Which of the following will increase the operating cycle?
I. increasing the inventory turnover rate
II. increasing the payables period
III. decreasing the receivable turnover rate
IV. decreasing the inventory level
A. I only
B. III only
C. II and IV only
D. I and IV only
E. II and III only
Dexter Smith & Co. is replacing a machine simply because it has worn out. The new
machine will not affect either sales or operating costs and will not have any salvage
value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line
depreciation over an asset's life, and has a positive net income. Given this, which one of
the following statements is correct?
A. As a project, the new machine has a net present value equal to minus one times the
machine's purchase price.
B. The new machine will have a zero rate of return.
C. The new machine will generate positive operating cash flows, at least in the first few
years of its life.
D. The new machine will create a cash outflow when the firm disposes of it at the end
of its life.
The next dividend payment by Hillside Markets will be $2.35 per share. The dividends
are anticipated to maintain a 4.5 percent growth rate forever. The stock currently sells
for $70 per share. What is the dividend yield?
A. 3.20 percent
B. 3.36 percent
C. 3.54 percent
D. 4.50 percent
E. 4.81 percent
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.
You are aware that your neighbor trades stocks based on confidential information he
overhears at his workplace. This information is not available to the general public. This
neighbor continually brags to you about the profits he earns on these trades. Given this,
you would tend to argue that the financial markets are at best _____ form efficient.
A. weak
B. semiweak
C. semistrong
D. strong
E. perfect
You are considering two independent projects both of which have been assigned a
discount rate of 15 percent. Based on the profitability index, what is your
recommendation concerning these projects?
A. You should accept both projects.
B. You should reject both projects.
C. You should accept project A and reject project B.
D. You should accept project B and reject project A.
E. You should accept project A and be indifferent to project B.
The common stock of Textile Mills pays an annual dividend of $1.65 a share. The
company has promised to maintain a constant dividend even though economic times are
tough. How much are you willing to pay for one share of this stock if you want to earn
a 12 percent annual return?
A. $13.75
B. $14.01
C. $14.56
D. $14.79
E. $15.23
Which one of the following is the equity risk that is most related to the daily operations
of a firm?
A. market risk
B. systematic risk
C. extrinsic risk
D. business risk
E. financial risk
You are working on a bid to build two city parks a year for the next three years. This
project requires the purchase of $180,000 of equipment that will be depreciated using
straight-line depreciation to a zero book value over the 3-year project life. The
equipment can be sold at the end of the project for $34,000. You will also need $20,000
in net working capital for the duration of the project. The fixed costs will be $16,000 a
year and the variable costs will be $168,000 per park. Your required rate of return is 15
percent and your tax rate is 34 percent. What is the minimal amount you should bid per
park? (Round your answer to the nearest $100)
A. $72,500
B. $128,600
C. $154,300
D. $189,100
E. $217,600
A stock had the following prices and dividends. What is the geometric average return
on this stock?
A. -15.87 percent
B. -15.21 percent
C. -13.33 percent
D. -12.91 percent
E. -11.48 percent
An agreement that grants its owner the right, but not the obligation, to buy or sell a
specific asset at a specific price for a set period of time is called a(n) _____ contract.
A. option
B. forward
C. futures
D. swap
E. spot
Steve owns 3,000 shares of NOP, Inc. stock which he purchased six years ago at a price
of $22 a share. Today, these shares are selling for $68 each. Assume the current tax laws
are such that Steve is subject to a tax rate of 25 percent on both his dividend income
and his capital gains. From Steve's point of view, a stock repurchase today: (Ignore
costs)
A. is equivalent to a cash dividend in all respects.
B. is more desirable than a cash dividend in respect to taxes.
C. will result in the same tax liability as an equivalent cash dividend.
D. is more highly taxed than a cash dividend.
E. is totally unacceptable to him.
The Athletic Sports Store has a beginning receivables balance on January 1 of $410.
Sales for January through April are $440, $460, $690, and $720, respectively. The
accounts receivable period is 60 days. How much did the firm collect in the month of
April? Assume a year has 360 days.
A. $410
B. $440
C. $460
D. $690
E. $720
With Dutch auction underwriting:
A. each winning bidder pays the price he or she bid.
B. all successful bidders pay the same price.
C. all bidders receive at least a portion of the quantity for which they bid.
D. the selling firm receives the maximum possible price for each security sold.
E. the bidder for the largest quantity receives the first allocation of securities.
The weighted average cost of capital for a firm may be dependent upon the firm's:
I. rate of growth.
II. debt-equity ratio.
III. preferred dividend payment.
IV. retention ratio.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Which one of the following is the best example of two mutually exclusive projects?
A. building a retail store that is attached to a wholesale outlet
B. producing both plastic forks and spoons on the same assembly line at the same time
C. using an empty warehouse to store both raw materials and finished goods
D. promoting two products during the same television commercial
E. waiting until a machine finishes molding Product A before being able to mold
Product B
Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights
offering by this firm. As a result, Roy will most likely be subject to:
A. an oversubscription cost.
B. underpricing.
C. dilution.
D. the Green Shoe provision.
E. a locked in period.
The market value of the Blackwell Corporation just declined by 5 percent. Analysts
believe this decrease in value was caused by recent legislation passed by Congress.
Which type of risk does this illustrate?
A. international risk
B. diversifiable risk
C. purchasing power risk
D. exchange rate risk
E. political risk
A zero coupon bond with a face value of $1,000 is issued with an initial price of
$212.56. The bond matures in 25 years. What is the implicit interest, in dollars, for the
first year of the bond's life?
A. $12.72
B. $13.58
C. $13.90
D. $15.63
E. $15.89
New Schools, Inc. expects an EBIT of $7,000 every year forever. The firm currently has
no debt, and its cost of equity is 17 percent. The firm can borrow at 8 percent and the
corporate tax rate is 34 percent. What will the value of the firm be if it converts to 50
percent debt?
A. $29,871.17
B. $31,796.47
C. $32,407.16
D. $34,552.08
E. $37,119.30
Carson Electronics uses 70 percent common stock and 30 percent debt to finance its
operations. The aftertax cost of debt is 5.4 percent and the cost of equity is 15.4 percent.
Management is considering a project that will produce a cash inflow of $36,000 in the
first year. The cash inflows will then grow at 3 percent per year forever. What is the
maximum amount the firm can initially invest in this project to avoid a negative net
present value for the project?
A. $299,032
B. $382,979
C. $411,406
D. $434,086
E. $441,414
Which one of the following best describes pro forma financial statements?
A. financial statements expressed in a foreign currency
B. financial statements where the assets are expressed as a percentage of total assets and
costs are expressed as a percentage of sales
C. financial statements showing projected values for future time periods
D. financial statements expressed in real dollars, given a stated base year
E. financial statements where all accounts are expressed as a percentage of last year's
values
Three weeks ago, you purchased a June $30 put option on Leeper Metals stock at an
option price of $1.80. The market price of the stock three weeks ago was $30.60. Today,
the stock is selling at $29.80 a share. What is the intrinsic value of your put contract?
A. -$100
B. -$20
C. $0
D. $20
E. $60
An indenture is:
A. another name for a bond's coupon.
B. the written record of all the holders of a bond issue.
C. a bond that is past its maturity date but has yet to be repaid.
D. a bond that is secured by the inventory held by the bond's issuer.
E. the legal agreement between the bond issuer and the bondholders.
Which one of the following will decrease the net working capital of a firm? Assume the
current ratio is greater than 1.0.
A. selling inventory at cost
B. collecting payment from a customer
C. paying a payment on a long-term debt
D. selling a fixed asset for book value
E. paying a supplier for the purchase of an inventory item
Which of the following are frequently used as sources of information when trying to
ascertain the creditworthiness of a customer?
I. payment history with similar firms
II. credit reports
III. financial statements
IV. information provided by a bank
A. I and III only
B. II and IV only
C. I and II only
D. I, II, and III only
E. I, II, III, and IV
Which of the following parties are considered stakeholders of a firm?
I. employee
II. long-term creditor
III. government
IV. common stockholder
A. I only
B. IV only
C. I and III only
D. II and IV only
E. II, III, and IV only
Which of the following are reasons why a firm may want to divest itself of some of its
assets?
I. to raise cash
II. to unload unprofitable operations
III. to improve the strategic fit of a firm's various divisions
IV. to comply with antitrust regulations
A. I and II only
B. I, II, and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Which of the following balance sheet accounts are affected by a small stock dividend?
I. cash
II. common stock
III. retained earnings
IV. capital in excess of par value
A. I and III only
B. II and III only
C. II and IV only
D. II, III, and IV only
E. I, II, III, and IV
A proposed project has fixed costs of $36,000 per year. The operating cash flow at
18,000 units is $67,000. What will be the new degree of operating leverage if the
number of units sold rises to 18,500?
A. 1.46
B. 1.52
C. 1.67
D. 2.08
E. 2.14
Which one of the following methods of project analysis is defined as computing the
value of a project based upon the present value of the project's anticipated cash flows?
A. constant dividend growth model
B. discounted cash flow valuation
C. average accounting return
D. expected earnings model
E. internal rate of return
Westover Winds just paid a dividend of $2.50 per share. The company will increase its
dividend by 8 percent next year and will then reduce its dividend growth rate by 2
percentage points per year until it reaches the industry average of 2 percent dividend
growth, after which the company will keep a constant growth rate forever. What is the
price of this stock today given a required return of 12 percent?
A. $28.42
B. $28.99
C. $31.83
D. $32.06
E. $32.47
Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as
the:
A. compound rate.
B. current yield.
C. cost of debt.
D. capital gains yield.
E. cost of capital.
