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1) Today, you are buying a $1,000 face value bond at an invoice price of $987. The
bond has a 6 percent coupon and pays interest semiannually. There are two months until
the next coupon date. What is the clean price of this bond?
A.$947
B.$957
C.$967
D.$977
E.$987
2) This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it
up and noticed that the bond matured today. He presented the bond to the bank teller
and received both the principal and interest payment. The bond that Jeff found must
have been which one of the following?
A.Debenture
B.Note
C.Registered form bond
D.Bearer form bond
E.Callable bond
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) Manning, Inc. originally issued bonds that were rated investment grade. These bonds
have now been downgraded to junk status. Which one of the following terms applies to
this situation?
A.Called bond
B.Converted bond
C.Protected covenant
D.Fallen angel
E.Floating bond
5) Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent
coupon, pay interest semiannually, and mature in 13.5 years. What is the current price
of these bonds if the yield to maturity is 6.82 percent?
A.$989.50
B.$994.56
C.$1,015.72
D.$1,018.27
E.$1,020.00
6) Bridgewater Furniture has sales of $811,000, costs of $658,000, and interest paid of
$21,800. The depreciation expense is $56,100 and the tax rate is 34 percent. At the
beginning of the year, the firm had retained earnings of $318,300 and common stock of
$250,000. At the end of the year, the firm has retained earnings of $322,500 and
common stock of $280,000. What is the amount of the dividends paid for the year?
A.$15,266
B.$19,466
C.$31,566
D.$41,066
E.$45,366
7) Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5
percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost
of preferred stock is 8.9 percent, and the pretax cost of debt is 8.1 percent. What is the
company's WACC if the applicable tax rate is 35 percent?
A.9.29 percent
B.9.61 percent
C.10.34 percent
D.10.43 percent
E.10.83 percent
8) McClary Tires just decided to save money each year for the next four years to help
fund a new building. If it earns 6.5 percent on its savings, how much will the firm have
saved at the end of year 4?
A.$107,525.40
B.$108,392.69
C.$111,860.57
D.$113,200.39
E.$119,426.41
9) What is the value today of $3,600 received at the end of each year for seven years if
the first payment is paid at the end of year 3 and the discount rate is 12 percent?
A.$11,694.21
B.$12,484.57
C.$13,097.52
D.$15,089.23
E.$16,429.52
10) A new project you are considering is expected to generate an operating cash flow of
$45,620 and will initially free up $22,000 in net working capital. Purchases of fixed
assets costing $68,800 will be required to start up the project. What is the total cash
flow for this project at time zero?
A.-$68,800
B.-$46,800
C.-$1,040
D.-$26,580
E.-$41,220
11) Which one of the following is the equity risk arising from the capital structure
selected by a firm?
A.Strategic risk
B.Financial risk
C.Liquidity risk
D.Industry risk
E.Business risk
12) Which one of the following is most indicative of a flexible short-term financial
policy?
A.High ratio of short-term debt to long-term debt
B.Relatively small investment in current assets
C.High ratio of current assets to sales
D.Low level of net working capital
E.Relatively low level of liquidity
13) Bama Entertainment has common stock with a beta of 1.46 . The market risk
premium is 9.3 percent and the risk-free rate is 4.6 percent. What is the expected return
on this stock?
A.16.31 percent
B.16.67 percent
C.17.40 percent
D.18.03 percent
E.18.13 percent
14) Bill just financed a used car through his credit union. His loan requires payments of
$275 a month for five years. Assuming that all payments are paid on time, his last
payment will pay off the loan in full. What type of loan does Bill have?
A.Amortized
B.Complex
C.Pure discount
D.Lump sum
E.Interest-only
15) Suppose you could buy 1,320 South Korean won or 78 Pakistani rupees last year
for $1. Today, $1 will buy you 1,318 won or 80 rupees. Which one of the following
occurred over the past year?
A.The dollar appreciated against the won
B.The dollar depreciated against the rupee
C.The dollar appreciated against both the won and the rupee
D.The won depreciated against the dollar
E.The rupee depreciated against the dollar
16) A DMM is a(n):
A.employee who executes orders to buy and sell for clients of his or her brokerage firm
B.individual who trades on the floor of an exchange for his or her personal account
C.NYSE member who functions as a dealer for a limited number of securities
D.broker who buys and sells securities from a market maker
E.trader who deals only with primary offerings
17) Assume large-company stocks returned 12.8 percent on average over the past 75
years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.6
percent. What was the average nominal risk-free rate of return for those 75 years?
A.4.90 percent
B.9.20 percent
C.4.26 percent
D.8.33 percent
E.8.60 percent
18) In relation to bonds, which one of the following terms has the same meaning as the
term "crossover"?
A.Speculative
B.5B
C.Fallen angel
D.Junk
E.Triple A
19) The price at which an investor can purchase a bond from a dealer is called the
_____ price.
A.asked
B.coupon
C.call
D.face
E.bid
20) The Corner Market has decided to expand its retail store by building on a vacant lot
it currently owns. This lot was purchased four years ago at a cost of $299,000, which
the firm paid in cash. To date, the firm has spent another $38,000 on land
improvements, all of which was also paid in cash. Today, the lot has a market value of
$329,000. What value should be included in the analysis of the expansion project for
the cost of the land?
A.The sum of the cash paid to date for both the lot and the improvements
B.The original purchase price only
C.The current market value of the land plus the cash paid for the improvements
D.The current market value of the land
E.Zero because the land and the improvements were purchased with cash
21) The total direct costs of a debt issue, when expressed as a percentage of gross
proceeds, tends to:
A.increase as the quality of the debt increases
B.decrease as the size of the issue decreases
C.decrease when the bonds are convertible rather than straight
D.decrease as the proceeds of the bond issue increase
E.be relatively the same regardless of the type or quality of the debt issue
22) Which one of the following refers to a method of increasing the rate at which an
asset is depreciated?
A.Noncash expense
B.Straight-line depreciation
C.Depreciation tax shield
D.Accelerated cost recovery system
E.Market-based depreciation
23) The Inside Door has total debt of $78,600, total equity of $214,000, and a return on
equity of 14.5 percent. What is the return on assets?
A.9.14 percent
B.10.61 percent
C.21.45 percent
D.34.61 percent
E.39.48 percent
24) Lawler's is considering a new project. The company has a debt-equity ratio of 0.72 .
The company's cost of equity is 15.1 percent, and the aftertax cost of debt is 7.2
percent. The firm feels that the project is riskier than the company as a whole and that it
should use an adjustment factor of +3 percent. What is the WACC it should use for the
project?
A.12.53 percent
B.12.98 percent
C.14.79 percent
D.15.14 percent
E.15.68 percent
25) You just won a contest! You will receive $100,000 a year for 20 years, starting
today. If you can earn 12 percent on your investments, what are your winnings worth
today?
A.$750,000.00
B.$833,333.33
C.$836,577.69
D.$850,000.00
E.$887,450.72
26) Assume you own a portfolio of diverse securities which are each correctly priced.
Given this, the reward-to-risk ratio:
A.for the portfolio must equal 1.0
B.for the portfolio must be less than the market risk premium
C.for each security must equal zero
D.of each security is equal to the risk-free rate
E.of each security must equal the slope of the security market line
27) A bond yielded a real rate of return of 3.87 percent for a time period when the
inflation rate was 3.75 percent. What was the actual nominal rate of return?
A.87.58 percent
B.7.62 percent
C.7.77 percent
D.8.28 percent
E..36 percent
28) This morning, you purchased a stock that will pay an annual dividend of $1.90 per
share next year. You require a 12 percent rate of return and the annual dividend
increases at 3.5 percent annually. What will your capital gain be on this stock if you sell
it three years from now?
A.$2.43
B.$2.51
C.$2.63
D.$2.87
E.$2.92
29) An increase in which one of the following will increase net income?
A.Fixed costs
B.Depreciation
C.Marginal tax rate
D.Revenue
E.Dividends
30) What is the effective annual rate of 14.9 percent compounded quarterly?
A.14.48 percent
B.14.67 percent
C.15.23 percent
D.15.54 percent
E.15.75 percent
31) The payback period is the length of time it takes an investment to generate
sufficient cash flows to enable the project to:
A.produce a positive annual cash flow
B.produce a positive cash flow from assets
C.offset its fixed expenses
D.offset its total expenses
E.recoup its initial cost
32) Use the following financial information to answer this question.
What are the values of the three components of the DuPont identity? Use ending
balance sheet values.
A.0.15; 1.02; 0.35
B.0.15; 2.02; 0.35
C.0.15; 0.98; 2.86
D.0.16; 0.98; 0.35
E.0.16; 1.02; 2.86
33) Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded
annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent
interest, compounded annually. At the end of three years:
A.Both Jeff and Kurt will have accounts of equal value
B.Kurt will have twice the money saved that Jeff does
C.Kurt will earn exactly twice the amount of interest that Jeff earns
D.Kurt will have a larger account value than Jeff will
E.Jeff will have more money saved than Kurt
34) You are assigned the task of computing the expected return on a portfolio
containing several individual stocks. Which one of the following statements is correct
concerning this task?
A.The expected rate of return on the portfolio must be positive
B.The arithmetic average of the betas for each security held in the portfolio must equal
1.0
C.The portfolio beta must be 1.0
D.The summation of the return deviation from the portfolio expected return for each
economic state must equal zero
E.The standard deviation of the portfolio must equal 1.0
35) A firm is considering two different capital structures. The first option is an
all-equity firm with 32,000 shares of stock. The second option is 20,000 shares of stock
plus some debt. Ignoring taxes, the break-even level of earnings before interest and
taxes between these two options is $48,000. How much money is the firm considering
borrowing if the interest rate is 8 percent?
A.$175,000
B.$225,000
C.$250,000
D.$275,000
E.$300,000
