1) LD Inc. declared bankruptcy through a Chapter 7 filing. Consider the following data
in millions of dollars and determine the funds available for secured creditors.
Proceeds from the liquidation of assets = $225
First mortgage = $50
Administration expenses associated with the bankruptcy = $5
Notes payable to the banks = $205
Subordinated debentures = $350
Taxes due to federal, state and other governmental agencies = $17
Wages due employees (2000 employees) = $6
A.$197
B.$147
C.$199
D.$149
2) ABC Engineering just bought a new machine. All of the following are examples of
incremental cash flows except _______________.
A.Interest expense on the loan used to purchase the machine
B.Installation costs on the new machine
C.Increase in costs as a result of the new machine
D.Increases in depreciation expenses as a result of the new machine
3) Would it be worth it to incur a compensating balance of $4,000 in order to get a
1.5-percent-lower interest rate on a 1-year, pure discount loan of $300,000?
A.yes if the interest rate is less than 13.64%
B.no if the interest rate is less than 13.64%
C.yes if the interest rate is more than 1.5%
D.not enough information is given to determine
4) Portfolio Beta You own $2,000 of City Steel stock that has a beta of 2.5. You also
own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25).
What is the beta of your portfolio?
A.1.51
B.1.55
C.4.65
D.14.00
5) The past five monthly returns for PG&E are 12.14 percent, -11.37 percent, 3.77
percent, 6.47 percent, and 3.58 percent. What is the average monthly return?
A.2.92%
B.1.21%
C.-3.46%
D.3.17%
6) Which of the following would you prefer?
A.Option Q: $400 to be received in 9 years when rates are 8%
B.Option A: $210 today
C.Option R: $500 to be received in 12 years when rates are 8%
D.Option K: $500 to be received in 12 years when rates are 9%
7) Interest Payments Determine the interest payment for the following three bonds: 2
percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury
note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par
value.)
A.$2.50, $3.15, $0, respectively
B.$12.50, $15.75, $0, respectively
C.$12.50, $15.75, $100, respectively
D.$25.00, $31.50, $0, respectively
8) Payday loans are very short-term loans that charge very high interest rates. You can
borrow $550 today and repay $675 in two weeks. What is the compounded annual rate
implied by this 22.73% rate charged for only two weeks?
A.25.40%
B.204.45%
C.2,04.45%
D.20,445.61%
9) Which of these is the fee charged by a bank for making funds available through a
loan commitment?
A.back-end (or commitment) fee
B.simple interest expense
C.discounted interest
D.up-front (or facility) fees
10) Goldilochs Inc. reported sales of $8 million and net income of $1.5 million. The
firm has $10.5 million in total assets. The firm’s chief financial officer is projecting a
20% increase in sales. If the firm’s sales do increase by 20%, it is expected that
spontaneous liabilities will increase by $500,000. The firm currently pays out 30% of
its net income to shareholders. Assuming that all assets are expected to grow with sales,
how much in additional funds will Goldilochs need from external sources to fund the
expected growth?
A.$340,000
B.$299,000
C.$321,000
D.$360,000
11) This is another term for market risk.
A.firm specific risk
B.modern portfolio risk
C.nondiversifiable risk
D.total risk
12) Calculation of Bankruptcy Probability A linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms:
the equity multiplier and the total asset turnover ratio. Based on past bankruptcy
experience, the linear probability model is estimated as:
PDi = .04 (equity multiplier) + .01 (total asset turnover)
A firm has an equity multiplier of 1.5 times and a probability of default of 7 percent.
Calculate the firm’s total asset turnover ratio.
A.1.0
B.4.5
C..01
D.2.0
13) The real interest rate is _______________________.
A.The rate charged to the corporations with the best credit rating or least amount of
default risk
B.The rate that a security would pay if no inflation were expected over its holding
period
C.The rate that a security would pay if the security had no maturity risk
D.None of these statements is a correct definition
14) Compute Bond Price Compute the price of a 6 percent coupon bond with 10 years
left to maturity and a market interest rate of 8.75 percent. (Assume interest payments
are semi-annual and par value is $1,000.) Is this a discount or premium bond?
A.discount
B.premium
N = 20, I = 4.375, PMT = 30, FV = 1000 CPT PV = -819.19
Since this is less than $1,000, it is a discount bond.
15) Portfolio Return The table below shows your stock positions at the beginning of the
year, the dividends that each stock paid during the year, and the stock prices at the end
of the year. What is your portfolio percentage return?
A.2.50%
B.5.83%
C.10.50%
D.13.83%
16) Which of the following statements is correct?
A.The use of debt in the capital structure results in tax benefits to the firm
B.Debt is referred to as “financial leverage” because it magnifies returns to shareholders
C.Debt management ratios evaluate whether a firm is financing its assets with a
reasonable amount of debt versus equity financing
D.All of these statements are correct
17) Suppose that Tan Lines’ common shares sell for $20 per share, are expected to set
their next annual dividend at $1.00 per share, and that all future dividends are expected
to grow by 5 percent per year, indefinitely. If Tan Lines faces a flotation cost of 10% on
new equity issues, what will be the flotation-adjusted cost of equity?
A.5.06%
B.5.50%
C.10.00%
D.10.56%
18) The CEO of Tom and Sue’s wants the company to earn a net income of $3.25
million in 2010 . Cost of goods sold is expected to be 60 percent of net sales,
depreciation expense is $2.9 million, interest expense is expected to increase to $1.050
million, and the firm’s tax rate will be 30 percent. Calculate the net sales needed to
produce net income of $3.25 million.
A.$26.02 million
B.$29.36 million
C.$21.48 million
D.$28.25 million
19) Purchasing power parity (PPP) may not hold exactly because of which of the
following?
A.shipping costs
B.insurance costs
C.trading costs
D.All of these are transaction costs that may not allow PPP to hold exactly
20) Which of the following is a debt security whose payments originate from other
loans, such as credit card debt, auto loans, and home equity loans?
A.asset-backed securities
B.credit quality securities
C.debentures
D.junk bonds
21) Your firm receives an offer from the supplier who provides computer chips used to
manufacture cell phones. Due to poor planning, the supplier has an excess amount of
chips and is willing to sell $600,000 worth of chips for only $500,000. You already
have two years’ supply on hand. It would cost you $7,500 today to store the chips until
your firm needs them in two years. What implied interest rate would you be earning if
you purchased and store the chips?
A.6.57%
B.8.73%
C.9.54%
D.18.23%
22) Compute the PI statistic for Project Q and advise the firm whether to accept or
reject the project with the cash flows shown below if the appropriate cost of capital is
12 percent.
Project Q
A.The project’s PI is -8.70% and the project should be rejected
B.The project’s PI is -11.70% and the project should be rejected
C.The project’s PI is 3.70% and the project should be accepted
D.The project’s PI is 5.70% and the project should be accepted
23) Balance Sheet Hair Etc. has total assets of $15 million. Twenty percent of these
assets are financed with debt of which $1 million is current liabilities. The firm has no
preferred stock but the balance in common stock and paid-in surplus is $8 million.
Using this information what is the balance for long-term debt and retained earnings on
Hair Etc.’s balance sheet?
A.$1 million, $8 million
B.$2 million, $4 million
C.$2 million, $8 million
D.$3 million, $4 million
24) Which of these is defined as the compensation for the expenses and risks incurred
by the investment bank to conduct primary sales of stock for a firm?
A.net proceeds
B.gross proceeds
C.underwriter’s spread
D.initial public offering
25) You hold a diversified portfolio consisting of $1,000 investment in each of 10
different stocks. The portfolio has a beta of 0.8. You have decided to sell one of your
stocks that has a beta equal to 1.1 for $1,000. You will purchase $1,000 of a new stock
with a beta of 2.5. After these two transactions (sell and buy), what will be the beta of
the new portfolio?
A.1.1
B.0.99
C.0.87
D.0.94
26) If fewer dollars will buy a unit of foreign currency, then the dollar is ________.
A.Strengthening
B.Weakening
C.Violating the law of purchasing power parity
D.Not in equilibrium
27) Reed’s Birdie Shot, Inc.’s 2011 income statement lists the following income and
expenses: EBIT = $550,000, Interest expense = $43,000, and Net income = $300,000.
Calculate the 2011 Taxes reported on the income statement.
A.$85,000
B.$107,000
C.$309,000
D.$207,000
28) If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following
statements is true?
A.The current bond price will increase
B.Interest rates required on new bond issues will increase
C.The current bond price will decrease
D.The current bond price will increase and interest rates on new bonds issues will
decrease
29) Rank the following three stocks by their risk-return relationship, best to worst.
Night Ryder has an average return of 33 percent and standard deviation of 40 percent.
The average return and standard deviation of WholeMart are 10 percent and 20 percent;
and of Fruit Fly are 19 percent and 33 percent.
A.Night Ryder, WholeMart, Fruit Fly
B.WholeMart, Fruit Fly, Night Ryder
C.Night Ryder, Fruit Fly, WholeMart
D.Fruit Fly, WholeMart, NightRyder
30) Which of the following is the technique for reducing collection float by having
funds sent to several geographically situated regional banks and then transferring to a
main concentration account in another bank?
A.lockbox system
B.concentration banking
C.wire transfers
D.collection float
31) Consider that you are 30 years old and have just changed to a new job. You have
$91,000 in the retirement plan from your former employer. You can roll that money into
the retirement plan of the new employer. You will also contribute $400 each month into
your new employer’s plan. If the rolled-over money and the new contributions both earn
a 7% annual return, how much should you expect to have when you retire in 38 years?
A.$2,019,095.26
B.$2,195,145.40
C.$2,298,025.12
D.$2,301,116.92
32) Muffin’s Masonry, Inc.’s balance sheet lists net fixed assets as $16 million. The
fixed assets could currently be sold for $17 million. Muffin’s current balance sheet
shows current liabilities of $5.5 million and net working capital of $6.5 million. If all
the current accounts were liquidated today, the company would receive $10.25 million
cash after paying $5.5 million in liabilities. What is the book value of Muffin’s
Masonry’s assets today? What is the market value of these assets?
A.Book Value: $28M; Market Value: $32.75M
B.Book Value: $32M; Market Value: $42.25M
C.Book Value: $32M; Market Value: $32.75M
D.Book Value: $28M; Market Value: $42.25M
33) Which of the following is cost savings usually attributed to superior management
skills and other difficult-to-measure managerial factors?
A.economies of scale
B.economies of scope
C.economies of synergy
D.x-efficiencies
34) The financial crisis that started in 2006 was magnified by which of the following:
A.Public concern over the war in Afghanistan
B.Consistently increasing oil and gas prices
C.Ethical issues affecting high value investment
D.Mortgage lenders securitizing large quantities of their loans