Incorporating flotation costs into the analysis of a project will:
A. cause the project to be improperly evaluated.
B. increase the net present value of the project.
C. increase the project’s rate of return.
D. increase the initial cash outflow of the project.
E. have no effect on the present value of the project.
Which one of the following statements concerning net working capital is correct?
A. Net working capital increases when inventory is purchased with cash.
B. Net working capital must be a positive value.
C. Total assets must increase if net working capital increases.
D. A decrease in the cash balance also decreases net working capital.
E. Net working capital is the amount of cash a firm currently has available for spending.
A news flash just appeared that caused about a dozen stocks to suddenly drop in value
by about 20 percent. What type of risk does this news flash represent?
A. portfolio
B. nondiversifiable
C. market
D. unsystematic
E. total
In an effort to capture the large jet market, Hiro Airplanes invested $12.68 billion
developing its B490, which is capable of carrying 800 passengers. The plane has a list
price of $275 million. In discussing the plane, Hiro Airplanes stated that the company
would break-even when 246 B490s were sold. Assume the break-even sales figure
given is the cash flow break-even. Suppose the sales of the B490 last for only 9 years.
How many airplanes must Hiro Airplanes sell per year to provide its shareholders a 19
percent rate of return on this investment?
A. 47.17
B. 52.48
C. 59.09
D. 63.10
E. 68.40
Steve has estimated the cash inflows and outflows for his hardware store for next year.
The report that he has prepared recapping these cash flows is called a:
A. pro forma income statement.
B. sales projection.
C. cash budget.
D. receivables analysis.
E. credit analysis.
Mangrove Fruit Farms has a $200,000 bond issue outstanding that is selling at 92
percent of face value. The firm also has 1,500 shares of preferred stock and 15,000
shares of common stock outstanding. The preferred stock has a market price of $35 a
share compared to a price of $24 a share for the common stock. What is the weight of
the preferred stock as it relates to the firm’s weighted average cost of capital?
A. 6.75 percent
B. 7.20 percent
C. 7.75 percent
D. 8.30 percent
E. 8.80 percent
The business risk of a firm:
A. depends on the firm’s level of unsystematic risk.
B. is inversely related to the required return on the firm’s assets.
C. is dependent upon the relative weights of the debt and equity used to finance the
firm.
D. has a positive relationship with the firm’s cost of equity.
E. has no relationship with the required return on a firm’s assets according to M&M
Proposition II.
Why do firms need liquidity?
I. to meet compensating balance requirements
II. to take advantage of an opportunity that suddenly arises
III. to conduct daily business activities
IV. to be prepared for a financial emergency
A. I and II only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Kurt owns a convertible bond that matures in three years. The bond has a 7.5 percent
coupon and pays interest semi-annually. The face value of the bond is $1,000 and the
conversion price is $25. Similar bonds have a market return of 9.25 percent. The current
price of the stock is $26.50 per share. What is the straight bond value?
A. $948.20
B. $955.05
C. $972.80
D. $987.78
E. $991.15
Which one of the following events would be included in the expected return on Sussex
stock?
A. The chief financial officer of Sussex unexpectedly resigned.
B. The labor union representing Sussex’ employees unexpectedly called a strike.
C. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was
anticipated.
D. The price of Sussex stock suddenly declined in value because researchers
accidentally discovered that one of the firm’s products can be toxic to household pets.
E. The board of directors made an unprecedented decision to give sizeable bonuses to
the firm’s internal auditors for their efforts in uncovering wasteful spending.
You’re trying to determine whether to expand your business by building a new
manufacturing plant. The plant has an installation cost of $12 million, which will be
depreciated straight-line to zero over its 4-year life. The plant has projected net income
of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years. What is the
average accounting return?
A. 10.70 percent
B. 15.63 percent
C. 18.87 percent
D. 21.39 percent
E. 23.05 percent
A common-size income statement is an accounting statement that expresses all of a
firm’s expenses as percentage of:
A. total assets.
B. total equity.
C. net income.
D. taxable income.
The U.S. government coding system that classifies a firm by the nature of its business
operations is known as the:
A. NASDAQ 100.
B. Standard & Poor’s 500.
C. Standard Industrial Classification code.
D. Governmental ID code.
Alpha is planning on merging with Beta. Alpha will pay Beta’s shareholders the current
value of their stock in shares of Alpha. Alpha currently has 4,200 shares of stock
outstanding at a market price of $40 a share. Beta has 2,500 shares outstanding at a
price of $18 a share. The after-merger earnings will be $8,800. What will the earnings
per share be after the merger?
A. $1.61
B. $1.65
C. $1.75
D. $1.81
E. $1.86
Bill feels that he possesses a good dose of “street smarts”. Thus, he makes his business
decisions based on how a project feels to him rather than taking the time to financially
analyze a project. This type of behavior is referred to as:
A. overconfidence.
B. endowment effect.
C. money illusion.
D. affect heuristic.
E. sentiment-based risk.
You just returned from some extensive traveling throughout the Americas. You started
your trip with $20,000 in your pocket. You spent 3.4 million pesos while in Chile and
16,500 bolivares in Venezuela. Then on the way home, you spent 47,500 pesos in
Mexico. How many dollars did you have left by the time you returned to the U.S. given
the following exchange rates? (Note: Multiple symbols are used to designate various
currencies. For example, the U.S. dollar is notated as “$” or as “USD”.)
A. 1,113 USD
B. 3,535 USD
C. 4,117 USD
D. 4,244 USD
E. 7,408 USD
Southern Home Cookin’ just paid its annual dividend of $0.65 a share. The stock has a
market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5
percent and the market risk premium is 6.8 percent. What is the cost of equity?
A. 9.98 percent
B. 10.04 percent
C. 10.12 percent
D. 10.37 percent
E. 10.45 percent
The sustainable growth rate of a firm is best described as the:
A. minimum growth rate achievable assuming a 100 percent retention ratio.
B. minimum growth rate achievable if the firm maintains a constant equity multiplier.
C. maximum growth rate achievable excluding external financing of any kind.
D. maximum growth rate achievable excluding any external equity financing while
maintaining a constant debt-equity ratio.
E. maximum growth rate achievable with unlimited debt financing.
The Burger Hut has sales of $29 million, total assets of $43 million, and total debt of
$13 million. The profit margin is 11 percent. What is the return on equity?
A. 7.42 percent
B. 10.63 percent
C. 11.08 percent
D. 13.31 percent
E. 14.28 percent
Which one of the following measures the amount of systematic risk present in a
particular risky asset relative to the systematic risk present in an average risky asset?
A. beta
B. reward-to-risk ratio
C. risk ratio
D. standard deviation
E. price-earnings ratio
A call option with an exercise price of $31 and 6 months to expiration has a price of
$3.77. The stock is currently priced at $17.99, and the risk-free rate is 3 percent per
year, compounded continuously. What is the price of a put option with the same
exercise price and expiration date?
A. $13.89
B. $14.57
C. $15.24
D. $15.69
E. $16.32
Assume the euro is selling in the spot market for $1.33. Simultaneously, in the 3-month
forward market the euro is selling for $1.35. Which one of the following statements
correctly describes this situation?
A. The spot market is out of equilibrium.
B. The forward market is out of equilibrium.
C. The dollar is selling at a premium relative to the euro.
D. The euro is selling at a premium relative to the dollar.
E. The euro is expected to depreciate in value.
Given an interest rate of 8 percent per year, what is the value at date t = 9 of a perpetual
stream of $500 annual payments that begins at date t = 17?
A. $3,646.81
B. $4,109.19
C. $4,307.78
D. $6,250.00
E. $6,487.17
Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the
first step he must take if he wishes to take Harvest Foods public?
A. select an underwriter
B. obtain SEC approval
C. gain board approval
D. prepare a registration statement
E. distribute a prospectus
Forecasting risk is defined as the possibility that:
A. some proposed projects will be rejected.
B. some proposed projects will be temporarily delayed.
C. incorrect decisions will be made due to erroneous cash flow projections.
D. some projects will be mutually exclusive.
Which one of the following statements appears to be supported by the current dividend
policies of U.S. industrial firms?
A. Firms tend to increase the dividend amount per share, even when it’s unclear if the
increase can be maintained.
B. Investors no longer react to changes, either up or down, in dividends.
C. Newer, high-growth firms tend to pay larger dividends than mature firms.
D. Dividends are still viewed by shareholders as a signal of a firm’s future outlook.
E. Managers are no longer hesitant to lower dividend payments.
The BAT model is used to:
A. maximize the benefits of leverage.
B. determine the optimal cash position of a firm.
C. eliminate all daily cash surpluses.
D. analyze the cash balance given fluctuating cash inflows and outflows.
E. maximize the opportunity costs of holding cash.
Bernie’s Beverages purchased some fixed assets classified as 5-year property for
MACRS. The assets cost $87,000. What will the accumulated depreciation be at the end
of year three?
A. $13,520
B. $25,056
C. $38,241
D. $48,759
E. $61,944
At a production level of 4,500 units, a project has total costs of $108,000. The variable
cost per unit is $11.20. Assume the firm can increase production by 1,000 units without
increasing its fixed costs. What will the total costs be if 4,800 units are produced?
A. $102,780
B. $104,640
C. $106,400
D. $108,000
E. $111,360
If the economy is normal, Charleston Freight stock is expected to return 15.7 percent. If
the economy falls into a recession, the stock’s return is projected at a negative 11.6
percent. The probability of a normal economy is 80 percent while the probability of a
recession is 20 percent. What is the variance of the returns on this stock?
A. 0.010346
B. 0.011925
C. 0.013420
D. 0.013927
E. 0.014315
Which of the following apply to a partnership that consists solely of general partners?
I. double taxation of partnership profits
II. limited partnership life
III. active involvement in the firm by all the partners
IV. unlimited personal liability for all partnership debts
A. II only
B. I and II only
C. II and III only
D. I, II, and IV only
E. II, III, and IV only
Phil’s Print Shop grants its customers the right to pay for their print jobs within 30 days
of the date of service. This 30-day period is referred to as the:
A. payables period.
B. cash cycle.
C. transactions period.
D. credit period.
E. disbursement period.
Penco Supply spends $428,000 a week to pay bills and maintains a lower cash balance
limit of $75,000. The standard deviation of its disbursements is $18,900. The applicable
interest rate is 5 percent and the fixed cost of transferring funds is $65. What is the
firm’s optimal initial cash balance based on the BAT model?
A. $150,600
B. $158,929
C. $170,096
D. $221,506
E. $240,553
Which one of the following best illustrates an error which you, as a manager, might
make due to overconfidence?
A. overestimating the best outcome expected from a project while underestimating the
possibility of a less favorable outcome
B. assuming that a new project will be profitable since similar projects in the past were
successful
C. assuming that your expectations of the future outcome from a project are more
accurate than the expectations of others within your organization
D. listening to the advice of subordinates with whom you agree while ignoring the
advice of subordinates with whom you tend to disagree
E. downplaying the cost of future failure of an existing project since the project has
already paid for itself
The outstanding bonds of Tech Express are priced at $989 and mature in 8 years. These
bonds have a 6 percent coupon and pay interest annually. The firm’s tax rate is 39
percent. What is the firm’s aftertax cost of debt?
A. 3.01 percent
B. 3.22 percent
C. 3.35 percent
D. 3.77 percent
E. 4.41 percent