1) “The net amount of current assets that the firm has to fund, above and beyond those
that someone else funds for them” is referred to as ______________.
A.Net working capital
B.Excess capacity
C.Safety stock
D.Unfunded assets
2) Which of the following statements is incorrect regarding how beta is calculated?
A.The company return is the independent variable
B.The market portfolio return is the dependent variable
C.Using the oldest data possible will yield the most accurate results
D.All of these statements are incorrect
3) Statement of Retained Earnings Night Scapes, Corp. began the year 2008 with $10
million in retained earnings. The firm suffered a net loss of $2 million in 2008 and yet
paid $2 million to its preferred stockholders and $1 million to its common stockholders.
What is the year-end 2008 balance in retained earnings for Night Scapes?
A.$5 million
B.$8 million
C.$9 million
D.$15 million
4) What annual rate of return is earned on a $895 investment that grows to $1,976 in
eight years?
A.9.14%
B.9.97%
C.10.41%
D.11.73%
5) An exchange of existing shares for a different (usually larger) number of “new
shares,” with proportionately different par and market values is which of the following?
A.stock dividend
B.stock split
C.payment date
D.ex-dividend
6) TIPS Capital Return Consider a 3.25% TIPS with an issue CPI reference of 186.7. At
the beginning of this year, the CPI was 197.5 and was at 202.4 at the end of the year.
What was the capital gain of the TIPS in dollars? (Assume semi-annual interest
payments and $1,000 par value.)
A.$4.90
B.$10.80
C.$15.70
D.$26.25
7) A 3.75% TIPS has an original reference CPI of 183.9. If the current CPI is 214.7,
what is the current interest payment? (Assume semi-annual interest payments and a par
value of $1,000.)
A.$43.78
B.$37.50
C.$21.89
D.$18.75
8) WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of
par that pays an annual coupon of 9 percent. What would be WC’s before-tax
component cost of debt?
A.9.00%
B.9.10%
C.9.16%
D.18.32%
9) Which of these statements is true regarding calculating weights for WACC?
A.If we are calculating WACC for the firm, then equity, preferred stock and debt would
be the entire book value of each source of capital
B.If we are calculating WACC for the firm, then equity, preferred stock and debt would
be the entire market value of each source of capital
C.If we are calculating WACC for a project, then equity, preferred stock and debt would
be the entire book value of each source of capital
D.If we are calculating WACC for a project, then equity, preferred stock and debt would
be the entire market value of each source of capital
10) Which of the following is NOT considered a hybrid organization?
A.S Corporation
B.Limited Liability Partnership
C.Limited Liability Company
D.Limited Partnership
E.All of these are considered hybrid organizations
11) Currency Exchange Compute the number of dollars that can be bought with 1
million of foreign currency units:
$1 = 3.8249 Saudi Arabian Riyal
A.$261,444.7437
B.$4,824,900.00
C.$382,490.00
D.$1,000,000
12) Arbitrage profit can be made by _________________.
A.Selling assets in future markets and buying them in the spot markets
B.Buying assets in markets with high interest rates and selling them in a local market
C.Buying assets in a “cheap” market and selling them in another market where the price
is higher
D.None of these
13) Which of the following terms is a comparison of market yields on securities,
assuming all characteristics except maturity are the same?
A.credit quality risk
B.interest rate risk
C.liquidity of interest rate risk
D.term structure of interest rates
14) This measures the operating return on the firm’s assets, irrespective of financial
leverage and taxes.
A.Basic earnings power ratio
B.Profit margin
C.Return on assets
D.Return on equity
15) You started your first job after graduating from college. Your company offers a
retirement plan for which the company contributes 25% of what you contribute each
year. You expect to contribute $5,000 per year from your salary. You decide to invest
the contributions in assets that you expect to earn 8% per year. If you plan to retire in 35
years, how big will you expect that retirement account to be?
A.$861,584.02
B.$921,597.31
C.$972,110.74
D.$1,076,980.02
16) Yield to Call A 7.25 percent coupon bond with 25 years left to maturity can be
called in 5 years. The call premium is one year of coupon payments. It is offered for
sale at $1066.24. What is the yield to call of the bond? (Assume that interest payments
are paid semi-annually and par value is $1,000.)
A.3.41%
B.3.45%
C.3.51%
D.6.90%
17) You just won the lottery and after taxes you have $32,000. You want to have
$1,000,000 by the time you are 65, which is 45 years from now. Assuming that you can
earn 9% each on your money, how much (in dollars) of the $32,000 must you invest
today?
A.$17,891.62
B.$18,524.91
C.$20,692.24
D.$22,943.28
18) Which of the following statements is incorrect?
A.Partnerships have unlimited liability
B.Most sole proprietors raise money by borrowing from banks
C.An advantage of sole proprietorships is that the owner has complete control
D.S corporations are considered a hybrid organization
19) A stock has an expected return of 14.5%, the risk-free rate is 4% and the return on
the market is 11%. What is this stock’s beta?
A.1.5
B.3.0
C.1.05
D..94
20) To find the percentage return of an investment,
A.multiply the dollar return by the investment’s value at the beginning of the period
B.divide the dollar return by the investment’s value at the beginning of the period
C.multiply the dollar return by the investment’s value at the end of the period
D.divide the dollar return by the investment’s value at the end of the period
21) Which of the following is used to remove the effects of seasonality from historic
data?
A.average approach
B.base case approach
C.deseasonalized approach
D.pro forma approach
22) Which of the following statements is correct regarding the NPV profile?
A.The IRR appears as the intersection of the NPV profile with the x-axis
B.The IRR appears at the crossover point or where the two profiles intersect
C.NPV profiles for independent projects with normal cash flows will intersect
D.All of these statements are correct
23) What is the future value of a $500 annuity payment over 8 years if interest rates are
14%?
A.$6,241.09
B.$6,616.38
C.$6,750.14
D.$6,809.72
24) Market-specific reasons for financial distress include all of the following except
_________.
A.High interest rates
B.High unemployment
C.Economic recession
D.Volatility in earnings
25) Many people who want to start investing for their future want to start today which
implies an annuity stream that is paid at the beginning of the period.
Beginning-of-period cash flows are referred to as
A.ordinary annuities
B.annuities due
C.perpetuities
D.present values
26) Which ratio measures how many days inventory is held before the final product is
sold?
A.Inventory turnover
B.Days’ sales in inventory
C.Total asset turnover
D.Inventory intensity ratio
27) Liquidity Ratios Burt’s TVs has current liabilities of $25 million. Cash makes up 40
percent of the current assets and accounts receivable makes up another 20 percent of
current assets. Burt’s current ratio = .85 times. What is the value of inventory listed on
the firm’s balance sheet?
A.$4.25 m
B.$8.5 m
C.$10 m
D.$40 m
28) Solving for Rates What annual rate of return is earned on a $4,000 investment made
in year 2 when it grows to $8,000 by the end of year eight?
A.9.00%
B.12.00%
C.12.25%
D.50.00%
29) Which of the following is an important advantage to the issuer of a bond with a call
provision?
A.They are able to avoid interest rate risk
B.They are able to avoid reinvestment rate risk
C.They are able to reduce their credit risk
D.They allow for refinancing opportunities
30) How many possible IRRs could you find for the following set of cash flows?
A.1
B.2
C.3
D.Unable to determine unless we have the cost of capital
31) This subarea of finance involves methods and techniques to make appropriate
decisions about what kinds of securities to own, which firms’ securities to buy, and how
to be paid back in the form that the investor wishes.
A.real markets
B.investments
C.financial management
D.none of these
32) This refers to the fact that, in real life, investors do NOT have identical desires
about taxability and timing of firm payouts.
A.clientele effect
B.dividend irrelevance effect
C.capital gain theory
D.bird-in-the-hand theory
33) This is defined as the portion of total risk that is attributable to firm or industry
factors and can be reduced through diversification.
A.firm specific risk
B.market risk
C.modern portfolio risk
D.total risk
34) You are evaluating a project for your company. You estimate the sales price to be
$10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and
1000 units in year 3 . The project has a three-year life. Variable costs amount to $3 per
unit and fixed costs are $25,000 per year. The project requires an initial investment of
$50,000 in assets which will be depreciated straight-line to zero over the three-year
project life. The actual market value of these assets at the end of year 3 is expected to
be $10,000. NWC requirements at the beginning of each year will be approximately 25
percent of the projected sales during the coming year. The tax rate is 34 percent and the
required return on the project is 15 percent. What is the operating cash flow for the
project in year 2?
A.$18,700
B.$18,867
C.$35,367
D.$40,317
