1) Which one of the following is the primary advantage of payback analysis?
A.Incorporation of the time value of money concept
B.Ease of use
C.Research and development bias
D.Arbitrary cutoff point
E.Long-term bias
2) Alpha Industries is considering a project with an initial cost of $7.4 million. The
project will produce cash inflows of $1.54 million a year for seven years. The firm uses
the subjective approach to assign discount rates to projects. For this project, the
subjective adjustment is +1.5 percent. The firm has a pretax cost of debt of 8.6 percent
and a cost of equity of 13.7 percent. The debt-equity ratio is 0.0.65 and the tax rate is 35
percent. What is the net present value of the project?
A.-$372,951
B.-$187,016
C.$48,209
D.$133,333
E.$269,480
3) Angela has just received an insurance settlement of $35,000. She wants to save this
money until her daughter goes to college. If she can earn an average of 5.5 percent,
compounded annually, how much will she have saved when her daughter enters college
10 years from now?
A.$48,000.00
B.$50,929.02
C.$51,374.89
D.$59,875.06
E.$59,785.06
4) Which one of the following describes a Green Shoe provision?
A.Determination of underwriters’ fees
B.Guarantee of sale for all offered shares
C.Price auction
D.Overallotment option
E.Description of issue excluding the offer price
5) A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is
compounded monthly?
A.13.09 percent
B.13.46 percent
C.13.90 percent
D.14.56 percent
E.14.82 percent
6) The Tattle Teller has a printing press sitting idly in its back room. The press has no
market value to another printer because the machine utilizes old technology. The firm
could get $250 for the press as scrap metal. The press is six years old and originally cost
$148,000. The current book value is $2,570. The president of the firm is considering a
new project and feels he can use this press for that project. What value, if any, should be
assigned to the press as an initial cost of the new project?
A.$0
B.$250
C.$2,245
D.$2,570
E.$2,495
7) The 7.5 percent preferred stock of Home Town Brewers is selling for $45 a share.
What is the firm’s cost of preferred stock if the tax rate is 35 percent and the par value
per share is $100?
A.7.50 percent
B.15.92 percent
C.16.17 percent
D.16.52 percent
E.16.67 percent
8) Windsor stock has produced returns of 22.6 percent, 18.7 percent, 11.3 percent, -19.8
percent, and 2.4 percent over the past five years, respectively. What is the variance of
these returns?
A.0.028453
B.0.031947
C.0.035682
D.0.039515
E.0.040016
9) Standard deviation measures _____ risk while beta measures _____ risk.
A.systematic; unsystematic
B.unsystematic; systematic
C.total; unsystematic
D.total; systematic
E.asset-specific; market
10) What was the average annual risk premium on small-company stocks for the period
1926-2011?
A.5.3 percent
B.6.2 percent
C.8.5 percent
D.12.9 percent
E.15.3 percent
11) An unexpected decrease in market interest rates will cause a:
A.coupon bond’s current yield to increase
B.zero coupon bond’s price to decrease
C.fixed-rate bond’s coupon rate to decrease
D.zero coupon bond’s current yield to decrease
E.coupon bond’s yield to maturity to decrease
12) Judy’s Boutique just paid an annual dividend of $1.65 on its common stock. The
firm increases its dividend by 2.5 percent annually. What is the rate of return on this
stock if the current stock price is $38.20 a share?
A.6.93 percent
B.7.37 percent
C.7.54 percent
D.8.19 percent
E.8.33 percent
13) A firm offers credit terms of 1/5, net 25 . How long is the net credit period?
A.1 day
B.5 days
C.20 days
D.25 days
E.30 days
14) A firm grants credit with terms of 2/5, net 20 . The firm’s customers have ___ days
to pay in order to receive a _____ percent discount.
A.2; 5
B.5; 2
C.15; 2
D.20; 2
E.30; 5
15) What is the net present value of the following set of cash flows at a discount rate of
7 percent? At 20 percent?
A.$4,518.47; $628.30
B.$4,518.47; -$321.76
C.$4,518.47; -$525.13
D.$4,722.09; $504.21
E.$4,722.09; -$418.05
16) Working capital management includes which one of the following?
A.Deciding which new projects to accept
B.Deciding whether to purchase a new machine or fix a current machine
C.Determining which customers will be granted credit
D.Determining how many new shares of stock should be issued
E.Establishing the target debt-equity ratio
17) Sara is investing $1,000 today. Which one of the following will increase the future
value of that amount?
A.Shortening the investment time period
B.Paying interest only on the principal amount
C.Paying simple interest rather than compound interest
D.Paying interest only at the end of the investment period rather than throughout the
investment period
E.Increasing the interest rate
18) It takes The Crossroads Boutique an average of 61 days to sell its inventory and 30
days to collect its accounts receivable. The firm has sales of $568,700 and costs of
goods sold of $398,800. What is the accounts receivable turnover rate?
A.5.98
B.11.41
C.12.17
D.12.23
E.12.55
19) Vegan Delite stock is valued at $124.20 a share. The company pays a constant
annual dividend of $8.80 per share. What is the total return on this stock?
A.6.62 percent
B.7.00 percent
C.7.09 percent
D.7.49 percent
E.7.82 percent
20) Hunter’s Lodge purchased $578,000 of equipment four years ago. The equipment is
seven-year MACRS property. The firm is selling this equipment today for $199,500.
What is the aftertax cash flow from this sale if the tax rate is 35 percent? The MACRS
allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49,
12.49, 8.93, 8.92, 8.93, and 4.46 percent.
A.$153,869.81
B.$158,114.81
C.$198,410.18
D.$209,740.81
E.$216,610.81
21) ACE, Inc. incurred depreciation expenses of $21,900 last year. The sales were
$811,400 and the addition to retained earnings was $14,680. The firm paid interest of
$9,700 and dividends of $10,100. The tax rate was 40 percent. What was the amount of
the costs incurred by the firm?
A.$665,200.00
B.$689,407.67
C.$742,306.08
D.$738,500.00
E.$780,400.21
22) Which one of the following is true if the managers of a firm accept only projects
that have a profitability index greater than 1.5?
A.The firm should increase in value each time the firm accepts a new project
B.The firm is most likely steadily losing value
C.The price of the firm’s stock should remain constant
D.The net present value of each new project is zero
E.The internal rate of return on each new project is zero
23) The concept of marginal taxation is best exemplified by which one of the
following?
A.Kirby’s paid $120,000 in taxes while its primary competitor paid only $80,000 in
taxes
B.Johnson’s Retreat paid only $45,000 on total revenue of $570,000 last year
C.Mitchell’s Grocer increased its sales by $52,000 last year and had to pay an additional
$16,000 in taxes
D.Burlington Centre paid no taxes last year due to carryforward losses
E.The Blue Moon paid $2.20 in taxes for every $10 of revenue last year
24) An investment has an initial cost of $300,000 and a life of four years. This
investment will be depreciated by $60,000 a year and will generate the net income
shown below. Should this project be accepted based on the average accounting rate of
return (AAR) if the required rate is 9.5 percent? Why or why not?
A.Yes, because the AAR less than 9.5 percent
B.Yes, because the AAR is 9.5 percent
C.Yes, because the AAR is greater than 9.5 percent
D.No, because the AAR is 9.5 percent
E.No, because the AAR is greater than 9.5 percent
25) You are considering the following two mutually exclusive projects. The required
return on each project is 14 percent. Which project should you accept and what is the
best reason for that decision?
A.Project A, because it pays back faster
B.Project A, because it has the higher profitability index
C.Project B, because it has the higher profitability index
D.Project A, because it has the higher net present value
E.Project B, because it has the higher net present value
26) Last year, a firm earned $31,200 in net income on sales of $217,600. The company
paid $8,500 in dividends. What is the dividend payout ratio?
A.3.45 percent
B.4.71 percent
C.16.25 percent
D.22.85 percent
E.27.24 percent
27) Textile Mills has sales of $923,000, cost of goods sold of $748,000, and accounts
receivable of $106,700. How long on average does it take the firm’s customers to pay
for their purchases?
A.8.65 days
B.11.28 days
C.25.01 days
D.42.19 days
E.45.33 days
28) PayDay Loans wants to earn an effective annual return on its consumer loans of 18
percent per year. The bank uses daily compounding on its loans. What interest rate is
the bank required by law to report to potential borrowers?
A.16.23 percent
B.16.56 percent
C.17.62 percent
D.18.39 percent
E.18.88 percent
29) Beverly’s is a retail chain selling the latest fashions through its outlets located in
various neighborhood malls. Clothing Galore is a wholesaler that buys from textile
mills and sells to retail outlets. Beverly’s has a cost of capital of 13.6 percent, while
Clothing Galore’s cost of capital is 17.8 percent. Both firms are considering opening a
retail outlet in a gigantic new mall. Both proposals are quite similar in design and have
basically the following financial features: an initial cash outlay of $2.7 million, a
projected five-year life with no salvage value, and cash inflows of $845,000 a year for
the life of the project. Which firm or firms, if either, should open a retail outlet in the
new mall?
A.Beverly’s only
B.Clothing Galore only
C.Both Beverly’s and Clothing Galore
D.Neither Beverly’s nor Clothing Galore
E.The answer cannot be determined based on the information provided
30) Lunar Excursions wants to do an IPO but is very uncertain that underwriters will set
the most optimal offer price for the securities. Which one of the following might the
firm consider to address this uncertainty?
A.Extended quiet period
B.Extended lockup period
C.Best efforts underwriting
D.Dutch auction underwriting
E.Standby underwriting