The Highlight Company is reviewing a proposed 7-year project with an initial cost of
$687,400. The annual fixed costs are $92,800, the variable cost per unit is $49.79, and
the sales price per unit is $89. The tax rate is 34 percent and the discount rate is 12
percent. All assets are depreciated straight-line over the life of the project for
accounting purposes. What is the accounting break-even point in units per year?
A. 6,518
B. 3,069
C. 5,475
D. 6,103
E. 4,871
Answer:
You want to design a portfolio has a beta of zero. Stock A has a beta of 1.69 and Stock
B’s beta is also greater than 1. You are willing to include both stocks as well as a
risk-free security in your portfolio. If your portfolio will have a combined value of
$5,000, how much should you invest in Stock B?
A. $2,630
B. $0
C. $2,959
D. $3,008
E. $1,487
Answer:
Including the option to expand in your project analysis will tend to:
A. extend the duration of a project but not affect the project’s net present value.
B. increase the cash flows of a project but decrease the project’s net present value.
C. increase the net present value of a project.
D. decrease the net present value of a project.
E. have no effect on either a project’s cash flows or its net present value.
Answer:
The principle of diversification tells us that:
A. concentrating an investment in two or three large stocks will eliminate all of your
risk.
B. concentrating an investment in three companies all within the same industry will
greatly reduce your overall risk.
C. spreading an investment across five diverse companies will not lower your overall
risk at all.
D. spreading an investment across many diverse assets will eliminate all of the risk.
E. spreading an investment across many diverse assets will eliminate idiosyncratic risk.
Answer:
Camille’s Caf is considering a project that will not produce any sales but will decrease
cash expenses by $12,000. If the project is implemented, taxes will increase from
$23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the
amount of the operating cash flow using the top-down approach?
A. $15,000
B. $10,500
C. $5,500
D. $17,500
E. $13,500
Answer:
Windshield glass purchased by an automaker and sitting on a shelf ready for use is
classified as:
A. finished goods inventory.
B. raw materials.
C. assembly materials.
D. work-in-progress.
E. partial-goods inventory.
Answer:
Which one of the following statements is correct concerning in-the-money option
values?
A. The value of a put decreases as the exercise price increases.
B. The value of a put increases as the price of the underlying stock increases.
C. The value of a call decreases as the exercise price increases.
D. An increase in the underlying stock price decreases both the value of a put and a call.
E. The value of a call decreases as the price of the underlying stock increases.
Answer:
Collection float increases:
A. disbursement float.
B. the bank balance.
C. the book balance.
D. the collected balance.
E. both book and bank balances.
Answer:
In the present value break-even, the EAC is used to:
A. determine the salvage value of the initial fixed asset investment.
B. allocate depreciation over the life of the project.
C. allocate the initial investment at its opportunity cost over the life of the project.
D. determine the contribution margin to fixed costs.
E. allocate the opportunity and erosion costs over the life of the project.
Answer:
Which one of the following statements concerning mergers and acquisitions is correct?
A. Generally, two-thirds of the shareholders in each firm must approve a merger.
B. Acquisitions always result in at least one firm being dissolved.
C. The net present value of an acquisition should have no bearing on whether or not the
acquisition occurs.
D. Acquisitions of assets are generally quite simple and inexpensive from a legal and
accounting perspective.
E. At least one-half of the shareholders must vote to approve an acquisition of stock.
Answer:
If you want to review a project from a benefit-cost perspective, you should use the
_______ method of analysis.
A. net present value
B. payback
C. internal rate of return
D. discounted payback
E. profitability index
Answer:
The term (RBB) represents the:
A. pretax cost of debt interest payments per period.
B. pretax cost of equity dividend payments per year.
C. average pretax cost of debt.
D. average pretax cost of equity.
E. weighted average cost of capital.
Answer:
If a stock price follows a random walk, the price today is said to be equal to the prior
period price plus the expected return for the period with any remaining difference from
the actual return considered to be:
A. a predictable amount based on the past prices.
B. due to new information related to the stock.
C. related to the security’s risk.
D. related to the risk-free rate.
E. an overall market abnormality.
Answer:
Fried Onions has total annual sales of 438,000 units, a carrying cost per unit of $2.67
per year, and restocking costs of $48 per order. What is the EOQ?
A. 4,203 units
B. 3,824 units
C. 3,968 units
D. 4,126 units
E. 4,511 units
Answer:
Suppose the spot rate on the Canadian dollar is C$1.1423. The risk-free nominal rate in
the U.S. is 7.8 percent while it is only 6.3 percent in Canada. Which one of the
following three-year forward rates best establishes the approximate interest rate parity
condition?
A. C$1.1920
B. C$1.0917
C. C$1.0929
D. C$1.1916
E. C$1.1918
Answer:
The optimal capital structure will tend to include more debt for firms with:
A. the highest depreciation deductions.
B. the lowest marginal tax rate.
C. substantial tax shields from other sources.
D. lower probability of financial distress.
E. less taxable income.
Answer:
All of the following represent potential gains from an acquisition except:
A. the replacement of ineffective managers.
B. lower costs per unit produced.
C. an increase in production size such that diseconomies of scale are realized.
D. increased asset utilization.
E. spreading of overhead costs.
Answer:
In the Black-Scholes option pricing formula, N(d1) is the probability that a
standardized, normally distributed random variable is:
A. less than or equal to N(d2).
B. less than one.
C. equal to one.
D. equal to d1.
E. less than or equal to d1.
Answer:
Moon Lite Cafe has a semiannual, 5 percent coupon bond with a current market price of
$988.52. The bond has a par value of $1,000 and a yield to maturity of 5.68%. How
many years is it until this bond matures?
A. 1.5 years
B. 1.8 years
C. 2.1 years
D. 2.2 years
E. 1.6 years
Answer:
Which one of these statements is correct?
A. Investors earn a return called a spread.
B. Dealers pay a fee, called the spread, to brokers.
C. Investors sell at the ask price.
D. Dealers buy at the bid price.
E. Brokers maintain an inventory of securities.
Answer:
Operating cash flow is defined as:
A.Pretax income – Taxes.
B.Net income – Dividends.
C.EBIT + Depreciation – Taxes.
D.Pretax income + Depreciation.
E.Cash flow to investors + Taxes.
Answer:
Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate
is 2.8 percent. He has determined that a particular bond he is considering should have
an interest rate risk premium of .27 percent, a liquidity premium of .08 percent, and a
taxability premium of 1.69 percent. What nominal rate of return is Stu demanding from
this particular bond?
A. 8.24%
B. 7.19%
C. 8.40%
D. 7.38%
E. 8.74%
Answer:
If an issuer retires a debt issue before maturity, the specific amount paid to do so is
called the:
A. amortized payoff.
B. call price.
C. sinking fund amount.
D. the discount.
E. par or face amount.
Answer:
Assume a firm has no interest expense or extraordinary items. Given this, the operating
cash flow can be computed as:
A. EBIT – Taxes.
B. EBIT (1 – Tax rate) + Depreciation Tax rate.
C. (Sales – Costs) (1 – Tax rate).
D. EBIT – Depreciation + Taxes.
E. Net income + Depreciation.
Answer:
Most firms in financial distress do not fail or cease to exist. In fact, many firms can
actually benefit from financial distress by:
A. reevaluating their core operations and restructuring their assets.
B. selectively ceasing payment on some of their outstanding debts.
C. filing for Chapter 7 bankruptcy.
D. liquidating.
E. increasing their debt load.
Answer:
Dream Makers has expended almost all of its start-up funds and is seeking venture
capital to begin manufacturing. Which type of financing is it seeking?
A. mezzanine financing
B. first-round financing
C. bridge financing
D. seed money financing
E. second-round financing
Answer:
An investment is acceptable if the payback period:
A. is less than some pre-specified period of time.
B. exceeds the life of the investment.
C. is negative.
D. is equal to or greater than some pre-specified period of time.
E. is equal to, and only if it is equal to, the investment’s life.
Answer:
You currently own a one-year call option on WOI stock with a strike price of $20. The
current stock price is $22.10 and the risk-free rate of return is 3.75 percent. If you
assume the option finishes in the money, what is the current value of your call option
per share?
A. $2.02
B. $2.18
C. $1.76
D. $3.13
E. $2.82
Answer:
BJ’s goal is to have $50,000 saved at the end of Year 5. At the end of Year 2, they can
add $7,500 to their savings but they want to deposit the remainder they need to reach
their goal today, Year 0, as a lump sum deposit. If they can earn 4.5 percent, how much
must they deposit today? A. $31,867.74
A. ANSB. $33,254.58
B. $33,108.09
C. $34,276.34
D. $34,642.28
Answer:
Preston Woods has 17,500 shares of stock outstanding along with $408,000 of interest
bearing debt. The market and book values of the debt are the same. The firm has sales
of $697,000 and a profit margin of 6.8 percent. The tax rate is 35 percent, the
debt-equity ratio is 40 percent, and the price-earnings ratio is 11.8. The firm has
$130,000 of current assets of which $41,200 is cash. What is the enterprise value
multiple?
A. $1,106,308
B. $994,520
C. $830,479
D. $1,018,097
E. $926,073
Answer: