1) Oberon Inc. has a $20 million ($1000 face value) 10-year bond issue selling for 99%
of par that pays an annual coupon of 7.25%. What would be Oberon’s before-tax
component cost of debt?
A.6.12%
B.7.02%
C.7.40%
D.8.15%
2) This theory argues that dividends that the firm has committed to pay are less risky to
risk-averse investors than are potential future capital gains.
A.Dividend irrelevance theorem
B.Dividend indifference theory
C.Bird-in-the-hand theory
D.Jobs and Growth Tax Relief Reconciliation Act
3) The simple form of an annualized interest rate is called the annual percentage rate
(APR). The effective annual rate (EAR) is a
A.less accurate measure of the interest rate paid for monthly compounding
B.more accurate measure of the interest rate paid for monthly compounding
C.concept that is only used because the law requires it, and is of no use to a borrower
D.measure that only applies to mortgages
4) Which of the following is a set of financial statements depicting an operating
division of a firm’s expected financial situation in the foreseeable future under the most
reasonable set of assumptions concerning relevant factors?
A.base case projections
B.deseaonalized financial statements
C.nave financial statements
D.pro forma financial statements
5) Which financial statement reports the amounts of cash that the firm generated and
distributed during a particular time period?
A.Balance Sheet
B.Income Statement
C.Statement of Retained Earnings
D.Statement of Cash Flows
6) ADK Industries common shares sell for $40 per share. ADK expects to set their next
annual dividend at $1.75 per share. If ADK expects future dividends to grow at 7% per
year, indefinitely, the current risk-free rate is 4%, the expected rate on the market is
11%, and the stock has a beta of 1.2, what should be the best estimate of the firm’s cost
of equity?
A.11.89%
B.11.38%
C.12.40%
D.12.71%
7) Which of the following would cause dividends to decrease if the firm was using the
residual dividend model?
A.The firm has fewer positive NPV projects
B.The firm’s dividend payout ratio decreases
C.Net income decreases
D.All of these would cause dividends to decrease
8) Your company has spent $200,000 on research to develop a new computer game. The
firm is planning to spend $40,000 on a machine to produce the new game. Shipping and
installation costs of the machine will be capitalized and depreciated; they total $5,000.
The machine has an expected life of 3 years, a $25,000 estimated resale value, and falls
under the MACRS 5-Year class life. Revenue from the new game is expected to be
$300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 35
percent, an opportunity cost of capital of 14 percent, and it expects net working capital
to increase by $50,000 at the beginning of the project. What will be the operating cash
flow for year one of this project?
A.-$49,150
B.$3,150
C.$123,400
D.$133,150
9) Kelly Girl’s Golf Games, Inc., with the help of its investment bank recently issued
$7.95 million of new debt. The offer price (and face value) on the debt was $1,000 per
bond and the underwriter’s spread was 4 percent of the gross proceeds. Calculate the
amount of capital funding Kelly Girl’s Golf Games, Inc., raised through this debt
offering.
A.$6,992,500
B.$7,632,000
C.$8,281,300
D.$8,794,200
10) A disadvantage of the payback statistic is that ___________.
A.It does not reflect the time value of money
B.It does not give an indication of the project’s riskiness
C.It does not consider cash flows beyond the payback period
D.All of these are disadvantages of payback
11) Why is debt often referred to as leverage in finance?
A.Debt magnifies the firm’s total asset turnover
B.Debt magnifies both the potential returns and the risk to bondholders
C.Debt magnifies both the potential returns and the risk to equityholders
D.None of these
12) Interest-on-Interest Consider a $1,000 deposit earning 7 percent interest per year for
4 years. How much total interest is earned on the original deposit (excluding interest
earned on interest)?
A.$28.00
B.$30.00
C.$280.00
D.$310.00
13) Your company doesn’t face any taxes and has $800 million in assets, currently
financed entirely with equity. Equity is worth $60 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 20-percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt in either
event. What will be the standard deviation in EPS if they switch to the proposed capital
structure?
A.2.47
B.5.36
C.6.12
D.28.76
14) Suppose that a firm always announces a yearly dividend at the end of the first
quarter of the year, but then pays the dividend out as four equal quarterly payments. If
the next such “annual” dividend has been announced as $5, it is exactly one quarter
until the first quarterly dividend from that $5, the effective annual required rate of
return on the company’s stock is 14 percent, and all future “annual” dividends are
expected to grow at 4 percent per year indefinitely, how much will this stock be worth?
A.$17.10
B.$50.00
C.$52.55
D.$00
15) Interest Rate Parity If the spot rate between the U.S. dollar and the New Zealand
dollar is $1 = NZD1.5215, and if the interest rate in the United States is 8 percent and in
New Zealand is 4 percent, then what should be the three-month forward exchange rate?
A.$0.6637
B.$0.6572
C.$0.6825
D.$0.6329
16) Asset Management Ratios Corn Products Corp. ended the year 2011 with an
average collection period of 40 days. The firm’s credit sales for 2011 were $9 million.
What is the approximate year-end 2011 balance in accounts receivable for Corn
Products?
A.$225,000
B.$986,300
C.$4,444,400
D.$360,000,000
17) Purchasing Power Parity If the current spot rate between the U.S. dollar and the
Netherland Antilles Guilder was $1 = 1.54 Guilder, and if the inflation rate in the
United States was 2 percent and in the Netherland Antilles it was 8 percent, then what
would be the expected spot rate in one year?
A.$0.6104
B.$0.6494
C.$1.4476
D.$0.6133
18) Free Cash Flow You are considering an investment in Cruise, Inc. and want to
evaluate the firm’s free cash flow. From the income statement, you see that Cruise
earned an EBIT of $202 million, paid taxes of $51 million, and its depreciation expense
was $75 million. Cruise’s gross fixed assets increased by $70 million from 2007 to 2008
. The firm’s current assets decreased by $10 million and spontaneous current liabilities
increased by $6 million. What is Cruise’s operating cash flow, investment in operating
capital, and free cash flow for 2008, respectively, in millions?
A.$202, $70, $130
B.$226, $70, $156
C.$226, $54, $172
D.$226, $74, $152
19) Exchange Rate Quote Convert the following direct quote to a dollar indirect quote:
1 Danish Krone = $0.1755
A.0.1755 Krone
B.0.8245 Krone
C.1.1755 Krone
D.5.698 Krone
20) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 8 percent, and that
the maximum allowable payback and discounted payback statistic for the project are 3
and 3.5 years, respectively.
Use the payback decision rule to evaluate this project; should it be accepted or rejected?
A.2.45 years, accept
B.2.83 years, accept
C.3.45 years, accept
D.3.83 years, reject
21) Suppose a firm has a retention ratio of 35 percent, net income of $35 million, and
10 million shares outstanding. What would be the dividend per share paid out on the
firm’s stock?
A.$1.225
B.$2.275
C.$3.50
D.$7.00
22) Which of the following is the definition of political risk?
A.The possibility that changes in the corporation will occur that reduce the profitability
of doing business in that country
B.The possibility that changes in the business environment will occur that reduce the
profitability of doing business in that country
C.The possibility that changes in the business environment will occur that increase the
profitability of doing business in that country
D.The possibility that international rules will occur that reduce the profitability of doing
business in one particular country
23) A merger between BankOne and Amcore is an example of a _________________.
A.Vertical merger
B.Horizontal merger
C.Conglomerate merger
D.None of these
24) Present Value What is the present value of a $200 payment made in 3 years when
the discount rate is 8 percent?
A.$150.00
B.$158.77
C.$251.94
D.$515.42
25) The length of time of the annuity is very important in accumulating wealth within
an annuity. What other factor also has this effect?
A.the time line
B.interest rate for compounding
C.the present value
D.the future value
26) A stock recently paid a dividend of $3 per share. Its growth rate is expected to be
8%. Investors require a 10% return. The stock is selling in the market for $140. What is
this stock worth and is the stock undervalued or overvalued?
A.$162; undervalued
B.$162; overvalued
C.$150; undervalued
D.$150; overvalued
27) Which of these is NOT a theory that explains the shape of the term structure of
interest rates?
A.liquidity theory
B.market segmentation theory
C.short-term structure of interest rates theory
D.unbiased expectations theory
28) Statement of Cash Flows Full Moon Productions Inc. has net cash flow from
financing activities for the last year of $105 million. The company paid $15 million in
dividends last year. During the year, the change in notes payable on the balance sheet
was an increase of $40 million, and change in common and preferred stock was an
increase of $50 million. The end of year balance for long-term debt was $50 million.
What was their beginning of year balance for long-term debt?
A.$5 million
B.$20 million
C.$30 million
D.$35 million
29) A corporation has a total asset turnover of 2 times, ROA of 12% and ROE of 14%.
What is this firm’s profit margin and debt ratio?
A.Profit margin: 2%; Debt ratio: 19.45%
B.Profit margin: 3%; Debt ratio: 31.81%
C.Profit margin: 4%; Debt ratio: 12.94%
D.Profit margin: 6%; Debt ratio: 14.53%
30) Which of the following is correct?
A.Investors can reduce the risk in their portfolio by investing in international stocks
since they tend to have low correlation with our own stock market
B.Combining both stocks and bonds will likely reduce risk in a portfolio because the
two assets have low correlation
C.Your optimal portfolio is an efficient portfolio with your desired risk level
D.All of these statements are correct
31) Which of the following statements is correct?
A.Increasing the amount of firm debt increases both the expected cash flows to equity
holders and the number of shares outstanding
B.Increasing the amount of firm debt increases both the expected cash flows to equity
holders and the amortization
C.Increasing the amount of firm debt increases both the expected cash flows to equity
holders and the volatility of those cash flows
D.Increasing the amount of firm debt increases both the expected cash flows to equity
holders and the tax liability
32) All else the same, firms facing relatively high tax rates should ______________.
A.Use more debt
B.Use less debt
C.Have lower E/E ratios
D.None of these
33) LD Inc. declared bankruptcy through a Chapter 7 filing. Consider the following
data in millions of dollars and determine the funds available for secured creditors.
Proceeds from the liquidation of assets = $395
First mortgage = $102
Administration expenses associated with the bankruptcy = $5
Notes payable to the banks = $205
Subordinated debentures = $350
Taxes due to federal, state and other governmental agencies = $17
Wages due employees (2000 employees) = $6
A.$265
B.$367
C.$267
D.$369