Parametric or empirical models rely:
A. on security betas explaining systematic factor relationships.
B. on finding regularities and relations in past market data.
C. on security returns always being located on the capital market line.
D. solely on factors within the security’s issuing firm’s realm of control.
E. primarily on financial market models and theories.
Answer:
Payback is frequently used to analyze independent projects because:
A. it considers the time value of money.
B. all relevant cash flows are included in the analysis.
C. it is easy and quick to calculate.
D. it is the most desirable of all the available analytical methods from a financial
perspective.
E. it produces better decisions than those made using either NPV or IRR.
Answer:
If a firm bases its growth projection on the rate of sustainable growth, shows positive
net income, and has a dividend payout ratio of 30 percent, then the:
A. fixed assets will have to increase at the same rate, even if the firm is currently
operating at only 78 percent of capacity.
B. number of common shares outstanding will increase at the same rate of growth.
C. debt-equity ratio will have to increase.
D. debt-equity ratio will remain constant while retained earnings increase.
E. fixed assets, the debt-equity ratio, and number of common shares outstanding will all
increase.
Answer:
The return pattern on your favorite stock has been 5.39 percent, 8.26 percent, -12.04
percent, and 14.27 percent over the last four years. What are the average arithmetic and
geometric rates of return?
A. 3.45%; 3.21%
B. 3.97%; 3.48%
C. 3.88%; 3.64%
D. 3.92%; 3.56%
E. 3.51%; 3.26%
Answer:
Which one of the following will decrease the net working capital of a firm? Assume the
current ratio is greater than 1.0.
A. selling inventory at a profit
B. collecting an accounts receivable
C. paying a payment on a long-term debt
D. selling a fixed asset for book value
E. paying an accounts payable
Answer:
A foreign subsidiary can repatriate funds to the parent firm in the following
waysexcept:
A. dividends.
B. management fees for central services.
C. royalties on the use of trade names.
D. royalties on the use of patents.
E. through nationalization.
Answer:
Since 1995 U.S. nonfinancial corporations have tended to:
A. issue new equity securities and retire debt.
B. finance share repurchases with new debt.
C. increase their issuance of both debt and equity securities.
D. retire more debt than they issue.
E. issue more equity shares than they repurchase.
Answer:
Custom Cars purchased some $39,000 of fixed assets two years ago that are classified
as 5-year MACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent,
11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The tax
rate is 34 percent. If the assets are sold today for $19,000, what will be the aftertax cash
flow from the sale?
A. $16,358.88
B. $17,909.09
C. $18,720.00
D. $18,904.80
E. $19,000.00
Answer:
Firm A is acquiring Firm B for $40,000 in cash. Firm A has a current market value of
$66,000 while Firm B’s current market value is $38,000. The synergy value from the
acquisition is $2,500. What is the value of Firm A after the acquisition?
A. $108,500
B. $68,500
C. $45,000
D. $66,500
E. $106,500
Answer:
The stock of Big Joe’s has a beta of 1.38 and an expected return of 16.26 percent. The
risk-free rate of return is 3.42 percent. What is the expected return on the market?
A. 7.60%
B. 8.04%
C. 9.30%
D. 12.72%
E. 12.16%
Answer:
In the accounting statement of cash flows, which one of these is calculated by adding
back noncash expenses to net income and adjusting for changes in current assets and
liabilities?
A.cash flow from investing activities
B.cash flow from financing activities
C.net working capital
D.cash flow from operating activities
E.cash flow to investors
Answer:
The higher the inventory turnover, the:
A. less time inventory items remain on the shelf.
B. higher the inventory as a percentage of total assets.
C. longer it takes a firm to sell its inventory.
D. greater the amount of inventory held by a firm.
E. lesser the amount of inventory held by a firm.
Answer:
Earnings per share:
A.will increase if net income increases and number of shares outstanding decreases.
B.will increase if net income decreases and number of shares outstanding increases.
C.is defined as the addition to retained earnings divided by the number of shares
outstanding.
D.is the total amount of dividends paid per year on a per share basis.
E.must increase at the same rate as the total operating revenue.
Answer:
Solid Financial provides lockbox services. They estimate that your firm can reduce its
average collection mail time by 1.6 days and the clearing and processing time by 1.2
days by implementing their system. Your firm receives 74 checks a day on with an
average value of $9,750 each. The current T-Bill rate is .014 percent per day. Assume a
365-day year. What is the annual amount of income the bank can earn if it installs this
service?
A. $105,675.00
B. $102,640.00
C. $106,408.17
D. $103,232.22
E. $108,746.20
Answer:
Supplemental liquidity providers (SLPs):
A. act as floor brokers.
B. only represent stock purchasers.
C. seek the best price for their customers.
D. donot operate on the floor of a stock exchange.
E. have been replaced by designated market makers.
Answer:
If your accounts receivable period is 30 days, you will collect payment for your _____
sales during the second quarter of a calendar year.
A. December, January, and February
B. January, February, and March
C. February and March
D. February, March, and April
E. March, April and May
Answer:
The cash flow tax savings generated as a result of a firm’s tax-deductible depreciation
expense is called the:
A. aftertax depreciation savings.
B. depreciable basis.
C. depreciation tax shield.
D. operating cash flow.
E. aftertax salvage value.
Answer:
The market values of Firm V and Firm A are $1,800 and $600, respectively. Assume
Firm V acquires Firm A at a cost of $650 and creates $150 in synergy. What would be
the NPV of this acquisition to Firm V?
A. $50
B. $100
C. $125
D. $150
E. $0
Answer:
In a general partnership, the general partners have _____ liability and have _____
control over day-to-day operations.
A. limited; no
B. unlimited; total
C. limited; total
D. unlimited; no
E. no; total
Answer:
Juanita’s Steak House has $12,000 of debt outstanding that is selling at par and has a
coupon rate of 8 percent. The tax rate is 34 percent. What is the present value of the tax
shield?
A. $2,823
B. $2,887
C. $4,080
D. $4,500
E. $4,633
Answer:
The interest tax shield is a key reason why:
A. the required rate of return on assets rises when debt is added to the capital structure.
B. the value of an unlevered firm is equal to the value of a levered firm.
C. the net cost of debt to a firm is generally less than the cost of equity.
D. the cost of debt is equal to the cost of equity for a levered firm.
E. firms prefer equity financing over debt financing.
Answer:
The treasurer and the controller of a corporation generally report to the:
A. board of directors.
B. chairman of the board.
C. chief executive officer.
D. president.
E. chief financial officer.
Answer:
The amount of systematic risk present in a particular risky asset, relative to the
systematic risk present in an average risky asset, is called the particular asset’s:
A. beta coefficient.
B. reward-to-risk ratio.
C. total risk.
D. diversifiable risk.
E. Treynor index.
Answer:
Assume Uptown Markets just made a tender offer to purchase shares of its own stock.
This offer was made to all its shareholders except for the largest outside shareholder.
This offer is referred to as a(n):
A. limited recapitalization.
B. white knight offer.
C. exclusionary self-tender.
D. asset restructuring.
E. greenmail offer.
Answer:
Rosita’s has a cost of equity of 13.76 percent and a pretax cost of debt of 8.5 percent.
The debt-equity ratio is .60 and the tax rate is 34 percent. What is Rosita’s unlevered
cost of capital?
A. 11.83%
B. 12.27%
C. 13.97%
D. 14.08%
E. 14.60%
Answer:
Assume a firm issues convertible bonds at a time when the risk of the firm is difficult to
properly assess. If the firm is subsequently determined to have low risk, then the:
A. straight bond component of the convertible bond will have high value.
B. bond should be immediately converted.
C. conversion value will always exceed the straight bond value.
D. call option of the convertible bond will have high value.
E. the firm will eliminate the conversion option.
Answer:
A day order to sell at a limit of $32 will be:
A. executed at the next available price once a trade occurs at the limit price.
B. cancelled at the end of the day if not executed.
C. executed only if the purchase price is less than the limit amount.
D. executed at the end-of-day price if $32 has not been obtained.
E. transferred to a market order on the following day if not executed at the limit price.
Answer:
The understanding of the work and cash to be contributed to a partnership by each
member of that partnership is formalized in the:
A. indemnity clause.
B. indenture contract.
C. statement of purpose.
D. partnership agreement.
E. group charter.
Answer:
Assume a bond had a conversion price of $40 and a conversion ratio of 25. What would
be the conversion ratio and conversion price if the bond issuer declared a 4-for-1 stock
split?
A. 2.50; $400
B. 100; $10
C. 25; $40
D. 6.25; $160
E. 100; $25
Answer:
Projected future financial statements are called:
A. plug statements.
B. pro forma statements.
C. reconciled statements.
D. aggregated statements.
E. comparative statements.
Answer:
The equity multiplier is measured as total:
A. equity divided by total assets.
B. equity plus total debt.
C. assets minus total equity, divided by total assets.
D. assets plus total equity, divided by total debt.
E. assets divided by total equity.
Answer:
An increase in treasury stock:
A.increases the total equity of the firm.
B.is the result of a firm issuing new shares to stock to the federal government.
C.increases the number of shares outstanding.
D.results from a repurchase of outstanding shares of stock.
E.requires repayment at some point in the future.
Answer:
Changes in the net working capital:
A. can affect the cash flows of a project every year of the project’s life.
B. only affect the initial cash flows of a project.
C. are included in project analysis only if they represent cash outflows.
D. are generally excluded from project analysis due to their irrelevance to the total
project.
E. affect the initial and the final cash flows of a project but not the cash flows of the
middle years.
Answer: