Browns Ferry Furniture Outlet has an accounts receivable period of 45 days and an
accounts payable period of 96 days. The company turns over its inventory 2.8 times per
year and marks up the inventory an average of 45 percent over its wholesale cost. What
is the length of the firms operating cycle?
A. 85.36 days
B. 175.36 days
C. 189.22 days
D. 201.33 days
E. 205.68 days
A bond has an average return of 6.3 percent and a standard deviation of 3.8 percent.
What range of returns would you expect to see 68 percent of the time on this security?
A. -1.30 percent to 13.9 percent
B. -1.30 percent to 10.1 percent
C. 2.5 percent to 7.8 percent
D. 2.5 percent to 10.1 percent
E. 2.5 percent t0 13.9 percent
Which one of the following best describes an arithmetic average return?
A. Total return divided by N – 1, where N equals the number of individual returns
B. Average compound return earned per year over a multiyear period
C. Total compound return divided by the number of individual returns
D. Return earned in an average year over a multiyear period
E. Positive square root of the average compound return
We are evaluating a project that costs $1.68 million, has a five-year life, and has no
salvage value. Assume depreciation is straight-line to zero over the life of the project.
Sales are projected at 82,000 units per year. Price per unit is $43.29, variable cost per
unit is $22.18, and fixed costs are $623,000 per year. The tax rate is 34 percent, and we
require a 10 percent return on this project. What is the sensitivity of NPV to a 100-unit
change in the sales figure?
A. $3,998.40
B. $4,609.18
C. $4,897.20
D. $5,281.55
E. $5,557.12
The security market line is defined as a positively sloped straight line that displays the
relationship between which two of the following variables?
A. Beta and standard deviation
B. Systematic and unsystematic risk
C. Nominal and real returns
D. Expected return and beta
E. Risk premium and beta
Greenbriar Grain and Feed has the following estimated sales.
Purchases are equal to 75 percent of the following quarters sales. The accounts
receivable period is 30 days and the accounts payable period is 60 days. Assume there
are 30 days in each month. How much will the firm owe its suppliers at the end of
quarter 2?
A. $3,692
B. $3,807
C. $4,355
D. $4,550
E. $5,027
The one-year forward rate for the Swiss franc is SF 1.1375 = $1. The spot rate is SF
1.1426 = $1. The interest rate on a risk-free asset in Switzerland is 3.3 percent. If
interest rate parity exists, a one-year risk-free security in the U.S. is yielding _____
percent.
A. 2.28
B. 2.51
C. 2.98
D. 3.40
E. 3.76
Room and Board has determined that $36,000 is the break-even level of earnings before
interest and taxes for the two capital structures it is considering. The one structure
consists of all equity with 14,000 shares of stock. The second structure consists of
10,000 shares of stock and $80,000 of debt. What is the interest rate on the debt?
A. 7.72 percent
B. 8.19 percent
C. 9.97 percent
D. 11.43 percent
E. 12.86 percent
Stock Y has a beta of 1.28 and an expected return of 13.7 percent. Stock Z has a beta of
1.02 and an expected return of 11.4 percent. What would the risk-free rate have to be
for the two stocks to be correctly priced relative to each other?
A. 2.38 percent
B. 2.76 percent
C. 3.23 percent
D. 3.69 percent
E. 4.08 percent
Any changes to a firms projected future cash flows that are caused by adding a new
project are referred to as which one of the following?
A. Eroded cash flows
B. Deviated projections
C. Incremental cash flows
D. Directly impacted flows
E. Assumed flows
Which one of the following conditions exists at the point where a firm maximizes its
value?
A. The tax benefit from an additional dollar of debt is zero.
B. Financial distress costs are equal to zero.
C. The debt-equity ratio is 1.0.
D. WACC is minimized.
E. The cost of equity is minimized.
On May 12, you purchased $3,700 of merchandise from a supplier. The terms of the
sale were 2/5, net 15. The discounted amount due is _____ which is payable no later
than ____.
A. $2,960; May 17
B. $3,515; May 27
C. $3,515; May 17
D. $3,626; May 17
E. $3,626; May 27
The Color Box uses a combination of common stock, preferred stock, and debt
financing. The company wants preferred stock to represent 8 percent of the total
financing. It also wants to structure the firm in a manner that will produce a weighted
average cost of capital of 10.25 percent. The aftertax cost of debt is 5.1 percent, the cost
of preferred is 9.3 percent, and the cost of common stock is 15.6 percent. What
percentage of the firms capital funding should be debt financing?
A. 46.12 percent
B. 52.03 percent
C. 54.15 percent
D. 58.78 percent
E. 63.21 percent
Gulf Coast Tours currently has a weighted average cost of capital of 11.3 percent based
on a combination of debt and equity financing. The firm has no preferred stock. The
current debt-equity ratio is 0.58 and the aftertax cost of debt is 6.4 percent. The
company just hired a new president who is considering eliminating all debt financing.
All else constant, what will the firms cost of capital be if the firm switches to an
all-equity firm?
A. 10.45 percent
B. 12.62 percent
C. 12.89 percent
D. 13.37 percent
E. 14.32 percent
Classic Pickles is a mature manufacturing firm. The company just paid a $4 annual
dividend, but management expects to reduce the payout by 4 percent per year,
indefinitely. If you require a 12 percent return on this stock, what will you pay for a
share today?
A. $21.42
B. $24.00
C. $25.24
D. $28.56
E. $30.02
Design Interiors has a cost of equity of 18.6 percent and a pretax cost of debt of 9.7
percent. The firms target weighted average cost of capital is 12 percent and its tax rate
is 35 percent. What is the firms target debt-equity ratio?
A. 0.81
B. 0.87
C. 0.98
D. 1.02
E. 1.16
Which one of the following has the highest effective annual rate?
A. 6 percent compounded annually
B. 6 percent compounded semiannually
C. 6 percent compounded quarterly
D. 6 percent compounded monthly
E. All the other answers have the same effective annual rate.