Lucinda owns a convertible bond that matures in six years. The bond has a 9 percent
coupon and pays interest annually. The face value of the bond is $1,000 and the
conversion price is $22. Similar bonds have a market return of 8.75 percent. The current
price of the stock is $21.60 per share. What is the conversion value of this bond?
A. $835.60
B. $848.40
C. $942.11
D. $981.82
E. $1,000.00
Answer:
The dividend growth model can be used to compute the cost of equity for a firm in
which of the following situations?
I. firms that have a 100 percent retention ratio
II. firms that pay a constant dividend
III. firms that pay an increasing dividend
IV. firms that pay a decreasing dividend
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III only
E. II, III, and IV only
Answer:
The market price of Southern Press stock has been relatively volatile and you think this
volatility will continue for a couple more months. Thus, you decide to purchase a
two-month European call option on this stock with a strike price of $45 and an option
price of $2.00. You also purchase a two-month European put option on the stock with a
strike price of $45 and an option price of $0.30. What will be your net profit or loss on
these option positions if the stock price is $48 on the day the options expire? Ignore
trading costs and taxes.
A. -$30
B. $70
C. $80
D. $270
E. $330
Answer:
Assume that net working capital and all of the costs of Fake Stone, Inc. increase
directly with sales. Also assume that the tax rate and the dividend payout ratio are
constant. The firm is currently operating at full capacity. What is the external financing
need if sales increase by 4 percent?
A. -$1,214.48
B. -$804.15
C. -$397.19
D. $201.16
E. $525.38
Answer:
Three months ago, Toy Town introduced a new toy for pre-school children. The store
expected this toy to be an instant success and a fast moving item. To their surprise,
children have zero interest in this toy so sales have been abysmal. Which one of the
following options should Toy Town consider in respect to this toy?
A. suspension
B. expansion
C. abandonment
D. contraction
E. re-introduction
Answer:
According to the Statement of Cash Flows, an increase in interest expense will _____
the cash flow from _____ activities.
A. decrease; operating
B. decrease; financing
C. increase; operating
D. increase; financing
E. increase; investment
Answer:
Aaron’s Sailboats has decided to take the company public by offering a total of 120,000
shares of common stock to the public. The firm has hired an underwriter who arranges a
full commitment underwriting and suggests an initial selling price of $25 a share with a
7 percent spread. As it turns out, the underwriters only sell 97,400 shares. How much
cash will Aaron’s Sailboats receive from its first public offering?
A. $2,727,200
B. $3,074,400
C. $2,790,000
D. $3,360,000
E. $3,645,600
Answer:
A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual
rate of the discount if the firm purchases $4,800 worth of merchandise?
A. 27.24 percent
B. 26.57 percent
C. 28.80 percent
D. 29.03 percent
E. 29.27 percent
Answer:
Which one of the following statements is correct?
A. The price of an American put is equal to the stock price minus the exercise price.
B. The value of a European call is greater than the value of a comparable American call.
C. The value of a put is equal to one minus the value of an equivalent call.
D. The value of a put minus the value of a comparable call is equal to the value of the
stock minus the exercise price.
E. The value of an American put will equal or exceed the value of a comparable
European put.
Answer:
Cross Town Express has sales of $137,000, net income of $14,000, total assets of
$98,000, and total equity of $45,000. The firm paid $7,560 in dividends and maintains a
constant dividend payout ratio. Currently, the firm is operating at full capacity. All costs
and assets vary directly with sales. The firm does not want to obtain any additional
external equity. At the sustainable rate of growth, how much new total debt must the
firm acquire?
A. $0
B. $6,311
C. $6,989
D. $7,207
E. $8,852
Answer:
Which one of the following is a preliminary prospectus?
A. tombstone
B. green shoe
C. registration statement
D. rights offer
E. red herring
Answer:
At the beginning of the year, the long-term debt of a firm was $72,918 and total debt
was $138,407. At the end of the year, long-term debt was $68,219 and total debt was
$145,838. The interest paid was $6,430. What is the amount of the cash flow to
creditors?
A. -$18,348
B. -$1,001
C. $11,129
D. $13,861
E. $19,172
Answer:
You currently own 8 percent of the 3.5 million outstanding shares of Webster Mills. The
company has just announced a rights offering with a subscription price of $28. One
right will be issued for each share of outstanding stock. This offering will provided $9
million of new financing for the firm, ignoring all issue costs. Assume that all rights are
exercised. What will be your new ownership position if you opted to sell your rights
rather than exercise them personally?
A. 7.33 percent
B. 7.46 percent
C. 7.87 percent
D. 8.00 percent
E. 8.21 percent
Answer:
Which one of the following statements is correct?
A. A spin-off frequently follows an equity carve-out.
B. A split-up frequently follows a spin-off.
C. An equity carve-out is a specific type of acquisition.
D. A spin-off involves an initial public offering.
E. A divestiture means that the original firm ceases to exist.
Answer:
The Huff Co. has just gone public. Under a firm commitment agreement, Huff received
$21.50 for each of the 6 million shares sold. The initial offering price was $23.65 per
share, and the stock rose to $31.42 per share in the first few minutes of trading. Huff
paid $1,260,000 in direct legal and other costs, and $390,000 in indirect costs. The
flotation costs were what percentage of the funds raised?
A. 38.56 percent
B. 40.32 percent
C. 41.68 percent
D. 48.03 percent
E. 49.09 percent
Answer:
A stock is currently selling for $36 a share. The risk-free rate is 3.8 percent and the
standard deviation is 27 percent. What is the value of d1 of a 9-month call option with a
strike price of $40?
A. -0.21872
B. -0.21179
C. -0.21047
D. -0.20950
E. -0.20356
Answer:
High Brow Express deals strictly with two customers. The average amount each
customer pays per month along with the collection delay associated with each payment
is shown below. Given this information, what is the weighted average delay? Assume
that every month has 30 days.
A. 1.79 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.55 days
Answer:
Sal’s Pizza has a dividend payout ratio of 10 percent. The firm does not want to issue
additional equity shares but does want to maintain its current debt-equity ratio and its
current dividend policy. The firm is profitable. Which one of the following defines the
maximum rate at which this firm can grow?
A. internal growth rate × (1 – 0.10)
B. sustainable growth rate × (1 – 0.10)
C. internal growth rate
D. sustainable growth rate
E. zero percent
Answer:
Which one of the following terms is defined as the mixture of a firm’s debt and equity
financing?
A. working capital management
B. cash management
C. cost analysis
D. capital budgeting
E. capital structure
Answer:
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
Answer:
Green Valley Farms is considering either leasing or buying some new farm equipment.
The lessor will charge $27,500 a year for a 5-year lease. The purchase price is
$136,000. The equipment has a 5-year life after which time it will be worthless. Green
Valley Farms uses straight-line depreciation, has a 32 percent tax rate, borrows money
at 10 percent, and has sufficient tax loss carryovers to offset any potential taxable
income the firm might have over the next five years. What is the net advantage to
leasing?
A. $20,574
B. $21,507
C. $22,638
D. $26,283
E. $31,753
Answer:
Which one of the following is a working capital management decision?
A. determining the amount of equipment needed to complete a job
B. determining whether to pay cash for a purchase or use the credit offered by the
supplier
C. determining the amount of long-term debt required to complete a project
D. determining the number of shares of stock to issue to fund an acquisition
E. determining whether or not a project should be accepted
Answer:
Roy’s Welding Supplies common stock sells for $38 a share and pays an annual
dividend that increases by 3 percent annually. The market rate of return on this stock is
8.20 percent. What is the amount of the last dividend paid?
A. $1.80
B. $1.86
C. $1.92
D. $1.98
E. $2.10
Answer:
Most people would tend to agree that technology stocks were highly overvalued in the
late 1990’s. This time period is best described as a technology:
A. crash.
B. circle.
C. bubble.
D. limit.
E. arbitrage.
Answer:
Frozen Foods Delivery is considering the purchase of a delivery truck costing $49,000.
The truck can be leased for 3 years at $19,500 per year or it can be purchased at an
interest rate of 7.5 percent. The estimated life of the truck is 3 years. The corporate tax
rate is 34 percent. The company does not expect to owe any taxes for the next several
years due to accumulated net operating losses. The firm uses straight-line depreciation.
What is the net advantage to leasing?
A. -$1,710
B. -$866
C. $304
D. $1,006
E. $1,394
Answer:
You work for a nuclear research laboratory that is contemplating leasing a diagnostic
scanner (leasing is a very common practice with expensive, high-tech equipment). The
scanner costs $2.2 million and it would be depreciated straight-line to zero over 4 years.
Because of radiation contamination, it will actually be completely valueless in 4 years.
You can lease it for $600,000 per year for 4 years. Assume your company does not
contemplate paying taxes for the next several years. You can borrow at 6 percent before
taxes. What is the net advantage to leasing from your company’s standpoint?
A. $82,711
B. $120,937
C. $121,409
D. $122,818
E. $128,315
Answer:
Which one of the following terms is defined as a loan wherein the regular payments,
including both interest and principal amounts, are insufficient to retire the entire loan
amount, which then must be repaid in one lump sum?
A. amortized loan
B. continuing loan
C. balloon loan
D. remainder loan
E. interest-only loan
Answer:
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
Answer:
Which one of the following ratios identifies the amount of assets a firm needs in order
to generate $1 in sales?
A. current ratio
B. equity multiplier
C. retention ratio
D. capital intensity ratio
E. payout ratio
Answer:
Which of the following are futures exchanges?
I. New York Mercantile Exchange
II. New York Stock Exchange
III. Chicago Board of Trade
IV. NASDAQ
A. I and II only
B. II and III only
C. II and IV only
D. I and III only
E. II, III, and IV only
Answer:
High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and
a profit margin of 7.5 percent. What is the return on equity?
A. 8.94 percent
B. 10.87 percent
C. 12.69 percent
D. 14.38 percent
E. 15.11 percent
Answer:
Alfonzo’s Italian House has 25,000 shares of stock outstanding with a par value of $1
per share and a market price of $28 a share. The firm just announced a 5-for-3 stock
split. What will the market price per share be after the split?
A. $16.80
B. $21.60
C. $28.00
D. $46.67
E. $56.00
Answer:
Luis is going to receive $20,000 six years from now. Soo Lee is going to receive
$20,000 nine years from now. Which one of the following statements is correct if both
Luis and Soo Lee apply a 7 percent discount rate to these amounts?
A. The present values of Luis and Soo Lee’s monies are equal.
B. In future dollars, Soo Lee’s money is worth more than Luis’ money.
C. In today’s dollars, Luis’ money is worth more than Soo Lee’s.
D. Twenty years from now, the value of Luis’ money will be equal to the value of Soo
Lee’s money.
E. Soo Lee’s money is worth more than Luis’ money given the 7 percent discount rate.
Answer:
It takes your firm 4.5 days to prepare and mail out all the monthly statements to your
customers. On average, the mail time between your firm and your customers is 2.6
days. Customer checks take an average of 1.8 days to clear the bank. You have
determined that your total average collection time is 6.1 days. How long, on average,
does it take your firm to process the payments from customers?
A. 1.7 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 6.2 days
Answer:
A $1,000 face value bond can be redeemed early at the issuer’s discretion for $1,030,
plus any accrued interest. The additional $30 is called which one of the following?
A. dirty price
B. redemption value
C. call premium
D. original-issue discount
E. redemption discount
Answer: