1) Is it possible for a firm to have positive net income and yet to have cash flow
problems?
A.No, this is impossible since net income increases the firm’s cash
B.Yes, this can occur when a firm is growing very rapidly
C.Yes, this is possible if the firm window-dressed its financial statements
D.No, this is impossible since net income and cash are highly correlated
2) Which of the following is a true statement?
A.The risk and return that a firm experienced in the past is also the risk level for its
future
B.Firms can quite possibly change their stocks’ risk level by substantially changing their
business
C.If a firm takes on riskier new projects over time, the firm itself will become less risky
D.If a firm takes on less risky new projects over time, the firm itself will become more
risky
3) Which of the following statements is incorrect?
A.In a private placement, a public firm seeks to find a large institutional buyer or group
of buyers to purchase the whole issue
B.In a competitive sale, the bond-issuing firm invites bids from a number of
underwriters
C.In a negotiated sale, a single investment bank obtains the exclusive right to originate,
underwrite and distribute the new bonds though a one-on-one negotiation process
D.All of these statements are correct
4) Stock Index Performance On November 26, 2007, The Dow Jones Industrial Average
closed at 12,743.40, which was down 237.44 that day. What was the return (in percent)
of the stock market that day?
A.-.02%
B.+.02%
C.-1.83
D.+1.83%
5) Investment Return Noble stock was $60.00 per share at the end of last year. Since
then, it paid a $2.00 per share dividend last year. The stock price is currently $58. If you
owned 400 shares of Noble, what was your percent return?
A.-3.33%
B.0%
C.3.33%
D.3.45%
6) What will happen to the price of the stock once the stock goes ex-dividend?
A.It will decrease
B.It will increase
C.It will stay the same
D.One cannot determine what will happen to the price of the stock in this situation
7) Market Value versus Book Value Glo’s Glasses balance sheet lists net fixed assets as
$20 million. The fixed assets could currently be sold for $25 million. Glo’s current
balance sheet shows current liabilities of $7 million and net working capital of $3
million. If all the current accounts were liquidated today, the company would receive $9
million cash after paying $7 million in liabilities. What is the book value of Glo’s assets
today? What is the market value of these assets?
A.$10 million, $16 million
B.$10 million, $35 million
C.$30 million, $35 million
D.$30 million, $41 million
8) If a firm has a cash cycle of 39 days and an operating cycle of 88 days, what is its
average payment period?
A.39 days
B.49 days
C.88 days
D.127 days
9) The opportunity to buy stock at a fixed price over a specific period of time is referred
to as _____.
A.Stock opportunities
B.Stock options
C.Real assets
D.Restricted stock
10) These provide a forum in which demanders of funds raise funds by issuing new
financial instruments, such as stocks and bonds.
A.investment banks
B.money markets
C.primary markets
D.secondary markets
11) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 10 percent, and
that the maximum allowable payback and discounted payback statistics for the project
are 3.5 and 4.5 years, respectively. Use the MIRR decision to evaluate this project;
should it be accepted or rejected?
A.MIRR = 11.59%; accept the project
B.MIRR = 9.21%; reject the project
C.MIRR = 7.19%; reject the project
D.MIRR = 10.58%; accept the project
12) Risk versus Return Rank the following three stocks by their risk-return relationship,
best to worst. Rail Haul has an average return of 10 percent and standard deviation of
15 percent. The average return and standard deviation of Idol Staff are 15 percent and
25 percent; and of Poker-R-Us are 12 percent and 35 percent.
A.Rail Haul, Idol Staff, Poker-R-Us
B.Idol Staff, Poker-R-Us, Rail Haul
C.Poker-R-Us, Idol Staff, Rail Haul
D.Idol Staff, Rail Haul, Poker-R-Us
13) Suppose a U.S. Treasury bond promises to pay $9,780.13 in three years. If bonds of
this type are generating a 4% annual return, how much would you pay for this bond
today?
A.$8,429.71
B.$11,001.32
C.$8,694.50
D.$9,112.78
14) Suppose that the current one-year rate (one-year spot rate) and expected one-year
T-bill rates over the following 3 years (i.e., years 2, 3 and 4, respectively) are as
follows:
1R1 = 5%, E(2r1) = 7%, E(3r1) = 7.5% E(4r1) = 7.85%
Using the unbiased expectations theory, calculate the current (long-term) rates for
one-year and two-year -maturity Treasury securities.
A.One-year: 5.00%; Two-year: 5.50%
B.One-year: 5.00%; Two-year: 6.00%
C.One-year: 5.50%; Two-year: 6.15%
D.One-year: 5.50%; Two-year: 5.75%
15) Your company is considering a project that will cost $100. The project will generate
after-tax cash flows of $37.50 per year for five years. The WACC is 10% and the firm’s
D/A ratio is .40. The flotation cost for equity is 3%, the flotation cost for debt is 2%,
and your firm does not plan on issuing any preferred stock within its capital structure. If
your firm follows the practice of incorporating flotation costs into the project’s initial
investment, what is the weighted-average flotation cost for the firm?
A.2.6%
B.3.2%
C.3.7%
D.4.1%
16) Expected Return Home Depot (HD) recently paid a $0.90 dividend. The dividend is
expected to grow at a 17 percent rate. At the current stock price of $33.08, what is the
return shareholders are expecting?
A.2.70%
B.17.03%
C.17.18%
D.20.18%
17) Suppose your firm is considering two mutually exclusive, required projects with the
cash flows shown below. The required rate of return on projects of both of their risk
class is 10 percent, and the maximum allowable payback and discounted payback
statistic for the projects are 2.5 and 3.5 years, respectively.
Use the NPV decision rule to evaluate these projects; which one(s) should be accepted
or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
18) Suppose that a firm always announces a yearly dividend at the end of the first
quarter of the year, but then pays the dividend out as four equal quarterly payments. If
the next such “annual” dividend has been announced as $1, it is exactly one quarter
until the first quarterly dividend from that $1, the effective annual required rate of
return on the company’s stock is 10 percent, and all future “annual” dividends are
expected to grow at 5 percent per year indefinitely, how much will this stock be worth?
A.$20.42
B.$21.00
C.$21.26
D.$21.37
19) Suppose a firm has a dividend payout ratio of 25 percent and net income of $5
million. What would be the annual addition to retained earnings?
A.$3,750,000
B.$5,250,000
C.$1,750,000
D.$750,000
20) Low Financing or Cash Back? A car company is offering a choice of deals. You can
receive $2,000 cash back on the purchase, or a 2 percent APR, 3-year loan. The price of
the car is $17,000 and you could obtain a 3-year loan from your credit union, at 7
percent APR. Which deal is cheaper?
A.The car company’s 2 percent 3-year loan
B.The rebate with the credit union’s 7 percent 3-year loan
C.Neither deal is cheaper
D.There is not enough information given to determine which deal is cheaper
21) Which of the following is a legal contract that outlines the precise terms between
the issuer and the bondholder?
A.debenture
B.enforcement codes
C.indenture
D.prospectus
22) Interest Payments Determine the interest payment for the following three bonds: 5
percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury
note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par
value.)
A.$5.50, $6.45, $0, respectively
B.$27.50, $32.25, $0, respectively
C.$27.50, $32.25, $100, respectively
D.$55.00, $64.50, $0, respectively
23) Rule of 72 Approximately how many years does it take to double a $300 investment
when interest rates are 8% per year?
A..11 years
B.4.17 years
C.9 years
D.11 years
24) A capital budgeting technique that generates decision rules and associated metrics
for choosing projects based upon the implicit expected geometric average of a project’s
rate of return.
A.discounted payback
B.net present value
C.internal rate of return
D.profitability index
25) A 30-year bond with an 8% coupon has a yield to maturity of 6%. The bond could
be called in 7 years and if called would generate a yield to call of 5.75%. What is this
bond’s call premium? Assume the coupon payments are made annually and par value is
$1,000.
A.$219.73
B.$152.64
C.$106.29
D.$301.76
26) Dominant Portfolios Determine which one of these three portfolios dominates
another. Name the dominated portfolio and the portfolio that dominates it. Portfolio
Blue has an expected return of 13 percent and risk of 17 percent. The expected return
and risk of portfolio Yellow are 15 percent and 19 percent, and for the Purple portfolio
are 12 percent and 18 percent.
A.Portfolio Blue dominates Portfolio Yellow
B.Portfolio Yellow dominates Portfolio Blue
C.Portfolio Purple dominates Portfolio Blue
D.Portfolio Purple dominates Portfolio Yellow
27) As a college student, you probably receive many credit card offers in the mail.
Consider these two offers. The first card charges a 17% APR. An examination of the
footnotes reveals that this card compounds monthly. The second credit card charges
16.25% APR and compounds weekly. What is the effective annual rate of the cheaper
card?
A.17.00%
B.17.62%
C.16.25%
D.18.39%
28) Don’s Captain Morgan, Inc., needs to raise $25.5 million to finance plant expansion.
In discussions with its investment bank, Don’s learns that the bankers recommend an
offer price (or gross proceeds) of $19 per share and Don’s will receive $14.50 per share.
Calculate the underwriter’s spread on the issue. How many shares of stock will Don’s
need to sell in order to receive the $25.5 million they need?
A.1,758,621 shares
B.2,093,618 shares
C.1,068,966 shares
D.1,347,113 shares
29) Goldilochs Inc. reported sales of $8 million and net income of $1.5 million. The
firm has $12 million in total assets and $500,000 in current liabilities. The firm
currently pays out 25% of its net income to shareholders. Assume that all assets and
current liabilities are expected to grow with sales. If Goldilochs does not want to rely
on any external sources of funds, what is the most sales can grow (in percent)?
A.11.13%
B.10.84%
C.10.28%
D.9.69%
30) Individuals who use their own stock inventory and capital to buy and sell the stocks
they represent are called _________________.
A.Market makers
B.Brokers
C.Investors
D.None of these
31) Effective Annual Rate A loan is offered with monthly payments and a 10 percent
APR. What’s the loan’s effective annual rate (EAR)?
A.10.00%
B.10.47%
C.11.20%
D.12.67%
32) TJ Co stock has a beta of 1.45, the current risk-free rate is 5.75, and the expected
return on the market is 14 percent. What is TJ Co’s cost of equity?
A.17.71%
B.21.20%
C.26.05%
D.28.64%
33) 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 = $395
First mortgage = $100
Administration expenses associated with the bankruptcy = $2
Notes payable to the banks = $205
Subordinated debentures = $350
Taxes due to federal, state and other governmental agencies = $12
Wages due employees (1000 employees) = $3
A.$379
B.$378
C.$278
D.$279
34) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 8 percent, and that
the maximum allowable payback and discounted payback statistics for the project are
3.5 and 4.5 years, respectively. Use the NPV decision to evaluate this project; should it
be accepted or rejected?
A.NPV = $1,766.55; accept the project
B.NPV = $892.19; accept the project
C.NPV = $1,288.94; accept the project
D.NPV = -$104.73; reject the project
35) HiLo, Inc., doesn’t face any taxes and has $100 million in assets, currently financed
entirely with equity. Equity is worth $50 per share, and book value of equity is equal to
market value of equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the possible values of
EBIT and their associated probabilities as shown below:
The firm is considering switching to a 40 percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt. What will
be the standard deviation in EPS if they switch to the proposed capital structure?
A.$4.12
B.$14.57
C.$15.82
D.$15.09
36) Which of the following personal decisions is NOT impacted by finance?
A.Borrowing money to purchase cars or homes
B.Making credit card payments
C.Making retirement decisions
D.All of these are impacted by finance