1) Assume that PE is the euro price of a product, PUS is the U.S. price of the identical
product, and S0 is the spot exchange rate, quoted as the amount of foreign currency per
dollar. Given this, which one of the following correctly expresses absolute purchasing
power parity?
A.PUS = S0/PE
B.PUS = S0 PE
C.PUS = S0 + PE
D.PE = S0/PUS
E.PE = S0 PUS
2) Which one of the following statements concerning disbursement float is correct?
A.Disbursement float is the period of time between a firm making a bank deposit and
the funds from that deposit being available to the firm
B.Disbursement float decreases when a check is delayed in the mail due to an extended
holiday weekend
C.Disbursement float causes the available balance to exceed the ledger balance
D.Disbursement float is being totally eliminated by the Check Clearing Act for the 21st
Century
E.Disbursement float exists when the available balance is less than the book balance
3) Portfolio diversification eliminates which one of the following?
A.Total investment risk
B.Portfolio risk premium
C.Market risk
D.Unsystematic risk
E.Reward for bearing risk
4) Which one of the following policies most directly affects the projection of the
retained earnings balance to be used on a pro forma statement?
A.net working capital policy
B.capital structure policy
C.dividend policy
D.capital budgeting policy
E.capacity utilization policy
5) The opportunities that a manager has to modify a project once it has started are
called:
A.sensitivity choices
B.managerial options
C.scenario adjustments
D.restructuring options
E.erosion control measures
6) Christie’s Train Shoppe has 15,000 shares of common stock outstanding at a price of
$11 a share. It also has 2,000 shares of preferred stock outstanding at a price of $34 a
share. There are 50 bonds outstanding that have a 7.5 percent semiannual coupon. The
bonds mature in 6 years, have a face value of $1,000, and sell at 96 percent of par. What
is the capital structure weight of the preferred stock?
A.20.50 percent
B.21.68 percent
C.23.15 percent
D.24.20 percent
E.26.23 percent
7) Which of the following statements are correct?
I. Using the same risk-adjusted discount rate to discount all future cash flows adjusts for
the fact that the more distant cash flows are often more risky than cash flows occurring
sooner.
II. If you can borrow all of the money you need for a project at 5%, the cost of capital
for this project is 5%.
III. The best way to obtain the cost of debt capital for a firm is to use the coupon rates
on its bonds.
IV. The cost of capital, or WACC, is not the correct discount rate to use for all projects
undertaken by a firm.
A.I and III only
B.II and IV only
C.I and II only
D.I and IV only
E.I, II, and III only
8) Dallas Interiors has a cost of equity of 18.6 percent and a pre-tax cost of debt of 9.7
percent. The firm’s target weighted average cost of capital is 10.8 percent and its tax
rate is 35 percent. What is the firm’s target debt-equity ratio?
A.0.81
B.0.87
C.1.18
D.1.32
E.1.74
9) Which one of the following is the rate of return an investor earns on a bond before
adjusting for inflation?
A.Nominal rate
B.Real rate
C.Dirty rate
D.Coupon rate
E.Clean rate
10) Which one of the following statements is true?
A.The current yield on a par value bond will exceed the bond’s yield-to-maturity
B.The yield to maturity on a premium bond exceeds the bond’s coupon rate
C.The current yield on a premium bond is equal to the bond’s coupon rate
D.A premium bond has a current yield that exceeds the bond’s coupon rate
E.A discount bond has a coupon rate that is less than the bond’s yield to maturity
11) Circle Stores has net income of $41,000, a profit margin of 6.7 percent, and a return
on assets of 9 percent. What is the capital intensity ratio?
A.0.74
B.0.86
C.1.16
D.1.34
E.1.38
12) The Black Horse is currently considering a project that will produce cash inflows of
$12,000 a year for three years followed by $6,500 in year four. The cost of the project is
$38,000. What is the profitability index if the discount rate is 7 percent?
A.0.96
B.0.99
C.1.04
D.1.09
E.1.12
13) Todd and Cathy created a firm that is a separate legal entity and will share
ownership of that firm on a 50/50 basis. Which type of entity did they create if they
have no personal liability for the firm’s debts?
A.Limited partnership
B.Corporation
C.Sole proprietorship
D.General partnership
E.Public company
14) Which of the following are the most likely reasons for why a stock price might not
react at all on the day that new information related to the stock issuer is released?
I. Insiders knew the information prior to the announcement
II. Investors need time to digest the information prior to reacting
III. The information has no bearing on the value of the firm
IV. The information was anticipated
A.I and II only
B.I and III only
C.II and III only
D.II and IV only
E.III and IV only
15) Which one of the following is a general characteristic of a securities broker?
A.Trades from his or her own inventory
B.Trades only foreign securities
C.Trades listed securities in an auction market
D.Trades electronically from any geographic location
E.Is the principal trader of debt securities
16) For the year, Movers United has net income of $31,800, net new equity of $7,500,
and an addition to retained earnings of $24,200. What is the amount of the dividends
paid?
A.$100
B.$7,500
C.$7,600
D.$15,100
E.$16,700
17) Which of the following are important factors to consider when seeking a venture
capitalist?
I. exit strategy
II. management style
III. personal contacts
IV. financial strength
A.I and III only
B.II and IV only
C.III and IV only
D.II, III, and IV only
E.I, II, III, and IV
18) A good steak dinner in the U.S. costs $49 while the exact meal costs 660 pesos
across the border in Mexico. Based on purchasing power parity, what is the implied
Peso/$ exchange rate?
A.Ps12.97/$1
B.Ps13.47/$1
C.Ps14.42/$1
D.Ps14.67/$1
E.Ps15.08/$1
19) Which of the following can generally be found in a bond’s indenture agreement?
I. terms of repayment
II. names of registered shareholders
III. protective covenants
IV. total amount of the bond issue
A.I and III only
B.II, III, and IV only
C.I, II, and III only
D.I, III, and IV only
E.I, II, III, and IV
20) Which one of the following is an equity account?
A.Paid in surplus
B.Bonds payable
C.Patent
D.Depreciation
E.Net fixed assets
21) Which one of the following is a direct bankruptcy cost?
A.Loss of customer goodwill resulting from a bankruptcy filing
B.Legal and accounting fees related to a bankruptcy proceeding
C.Management time spent on a bankruptcy proceeding
D.Any financial distress cost
E.Costs a firm spends trying to avoid bankruptcy
22) Selected information about South, Inc., a restaurant chain, follows.
Assuming that there were no financing cash flows during 2011 and basing your answer
solely on the information provided, what were the cash flows from operations (in $
millions) for 2011?
A.45
B.106
C.15
D.76
E.31
F.None of the above
23) Clark’s Cookies has a return on assets of 15.3 percent and a cost of equity of 17.6
percent. What is the pre-tax cost of debt if the debt-equity ratio is 0.54? Ignore taxes.
A.8.87 percent
B.9.29 percent
C.9.64 percent
D.10.31 percent
E.11.04 percent
24) Which one of the following statements is correct?
A.The risk premium on a risk-free security is generally considered to be one percent
B.The expected rate of return on any security, given multiple states of the economy,
must be positive
C.There is an inverse relationship between the level of risk and the risk premium given
a risky security
D.If a risky security is correctly priced, its expected risk premium will be positive
E.If a risky security is priced correctly, it will have an expected return equal to the
risk-free rate
25) You are scheduled to receive $7,500 in three years. When you receive it, you will
invest it for eight more years at 7.5 percent per year. How much will you have in eleven
years?
A.$13,376.08
B.$14,428.09
C.$15,110.24
D.$16,113.33
E.$16,617.07
26) Which one of the following is the most apt to have the largest risk premium in the
future based on the historical record for 1926-2008?
A.U.S. Treasury bills
B.Large-company stocks
C.Long-term government debt
D.Small-company stocks
E.Long-term corporate debt
27) Baxter & Baxter has total assets of $710,000. There are 45,000 shares of stock
outstanding with a market value of $28 a share. The firm has a profit margin of 7.1
percent and a total asset turnover of 1.29. What is the price-earnings ratio?
A.16.38
B.17.99
C.19.38
D.20.12
E.22.41
28) Uptown Insurance offers an annuity due with semi-annual payments for 25 years at
6 percent interest. The annuity costs $200,000 today. What is the amount of each
annuity payment?
A.$7,546.70
B.$7,600.00
C.$7,773.10
D.$7,800.00
E.$7,856.25
29) Kelly’s uses the firm’s weighted average cost of capital (WACC) as the required
return for some of its projects. For other projects, the firms uses a rate equal to WACC
plus 1 percent, while another set of projects is assigned rates equal to WACC minus
some amount. Which one of the following factors should be the key factor the firm uses
to determine the amount of the adjustment it will make when assigning the project a
discount rate?
A.Firm beta
B.Date for project commencement
C.Risk level of project
D.Division within the firm that will be assigned to manage the project
E.Current debt-equity ratio
30) The common stock of Patee International goes ex-dividend tomorrow. The stock
closed at a price of $33.60 a share today. This quarter, the company is paying a cash
dividend of $0.24 a share and a liquidating dividend of $0.60 a share. Ignoring taxes
and assuming that all else is held constant, what will the ex-dividend price be tomorrow
morning?
A.$32.76
B.$33.00
C.$33.36
D.$33.96
E.$34.23
31) Given the following information, what is the variance of the returns on a portfolio
that is invested 40 percent in both stocks A and B, and 20 percent in stock C?
A.0.002102
B.0.002490
C.0.002513
D.0.005746
E.0.006143
32) Which one of the following parties can sell shares of ABC stock in the primary
market?
A.ABC company
B.Any corporation, other than the ABC company
C.Institutional shareholder
D.Private individual shareholder
E.Any of the above
33) Curtis is considering a project with cash inflows of $918, $867, $528, and $310
over the next four years, respectively. The relevant discount rate is 11 percent. What is
the net present value of this project if it the start up cost is $2,100?
A.$20.98
B.$46.48
C.$52.14
D.$74.22
E.$80.81
34) Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to
increase this dividend by 8 percent per year the following 3 years and then decrease the
dividend growth to 2 percent annually thereafter. Which one of the following is the
correct computation of the dividend for year 7?
A.($1.10) (1.08 3) (1.02 4)
B.($1.10) (1.08 3) (1.02 3)
C.($1.10) (1.08)3 (1.02)4
D.($1.10) (1.08)3 (1.02)3
E.($1.10) (1.08)3 (1.02)2
35) Baker’s Supply imposes a payback cutoff of 3.5 years for its international
investment projects. If the company has the following two projects available, should it
accept either of them?
A.Accept both Projects A and B
B.Accept Project A but not Project B
C.Accept Project B but not Project A
D.Both Project A and B are acceptable but you can only select one project
E.Reject both Projects A and B
36) Billingsley, Inc. is borrowing $60,000 for 5 years at an APR of 8 percent. The
principal is to be repaid in equal annual payments over the life of the loan with interest
paid annually. Payments will be made at the end of each year. What is the total payment
due for year 3 of this loan?
A.$13,920
B.$14,880
C.$15,220
D.$15,840
E.$16,800
37) Taylor’s, Inc. stock has plummeted in value and is currently priced at $4 a share.
The exchange on which the stock trades requires that the minimum stock price be $10 a
share. Taylor’s has decided to do a reverse stock split to avoid delisting. However, when
it does this, the firm wants the stock price increased to at least twice the minimum
exchange required price. Which one of the following stock split ratios is most
appropriate for this situation?
A.1-for-3
B.1-for-5
C.2-for-9
D.3-for-1
E.5-for-1
38) Which one of the following functions should be assigned to the treasurer rather than
the controller?
A.Data processing
B.Cost accounting
C.Tax management
D.Cash management
E.Financial accounting
39) Assume the federal government decides to permanently eliminate corporate income
taxes as a means of encouraging economic development and job growth. What effect, if
any, would this change have on the evaluation of a proposed project?
40) Explain why the net present value is considered to be the best method of analyzing
an investment.
41) Ten years ago you invested $1,000 for 10 shares of Steeze, Inc. common stock. You
sold the shares recently for $2,000. While you owned the stock it paid $10.08 per share
in annual dividends. What was your rate of return on Steeze stock?
42) The present value of the benefits of a particular investment happens to equal the
initial cost of that investment at the required rate of 14 percent. What is the value of the
investment’s internal rate of return, its net present value, and its profitability index?
43) For the period 1926-2008, small-company stocks had a risk premium of 12.6
percent. What does the term “risk premium” mean? Is the risk premium on these stocks
considered to be relatively high or relative low as compared to other investment
classes? Explain why.
44) List three decisions that a financial manager makes that would fall under the
category of working capital management.
45) Explain why a firm might prefer a stock repurchase rather than an increase in the
firm’s regular dividend.
46) Explain the Rule of 72
47) The following table presents a four-year forecast for Kenmore Air, Inc.:
Estimate the fair market value per share of Kenmore Air’s equity at the end of 2016 if
the company has 40 million shares outstanding and the market value of its
interest-bearing liabilities on the valuation date equals $250 million.
48) Explain how a firm can structure its operations such that it creates its own internal
hedge to long-run exposure to exchange rate risk.