Use the following tax table to answer this question:
Bait and Tackle has taxable income of $411,562. How much does it owe in taxes?
A. $128,603.33
B. $134,611.27
C. $138,542.79
D. $139,931.08
E. $141,354.82
Answer:
The primary purpose of protective covenants is to help:
A. reduce interest rate risk.
B. the issuer in case of default.
C. protect bondholders from issuer actions.
D. bondholders whose bonds are called.
E. convert bearer bonds into registered form.
Answer:
A protective covenant:
A. protects the borrower from unscrupulous practices by the lender.
B. is designed to protect the bond dealer from potential legal liability related to the
bond issue.
C. prevents a bond from being called.
D. limits the actions of the borrower.
E. guarantees that a bond will be repaid in full with interest.
Answer:
You are analyzing a project and have developed the following estimates. The
depreciation is $7,600 a year and the tax rate is 34 percent. What is the worst-case
operating cash flow?
A. -$1,311
B. -$641
C. $274
D. $599
E. $1,206
Answer:
Which one of the following is the graphical representation of the sum of the carrying
costs and the opportunity costs of a credit policy?
A. Accounts receivable aging
B. Economic credit function
C. Optimal credit curve
D. Credit analysis
E. Credit cost curve
Answer:
Better Chocolates has a new project that requires $975,000 of equipment. What is the
depreciation in year 6 of this project if the equipment is classified as seven-year
property for MACRS purposes? The MACRS allowance percentages are as follows,
commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.
A. $77,294
B. $77,301
C. $82,988
D. $86,970
E. $139,327
Answer:
Which one of the following statements is accurate for a levered firm?
A. WACC should be used as the required return for all proposed investments.
B. A firm’s WACC will decrease whenever the firm’s tax rate decreases.
C. An increase in the market risk premium will decrease a firm’s WACC.
D. The subjective approach totally ignores a firm’s own WACC.
E. A reduction in the risk level of a firm will tend to decrease the firm’s WACC.
Answer:
The Piano Movers can borrow at 7.5 percent. The firm currently has no debt, and the
cost of equity is 16 percent. The current value of the firm is $540,000. What will the
value be if the firm borrows $160,000 and uses the proceeds to repurchase shares? The
corporate tax rate is 40 percent.
A. $528,000
B. $540,000
C. $552,000
D. $571,000
E. $604,000
Answer:
You’re trying to save to buy a new $210,000 Ferrari. You have $38,000 today that can
be invested at your bank. The bank pays 4.1 percent annual interest on its accounts.
How long will it be before you have enough to buy the car?
A. 39.13 years
B. 39.29 years
C. 40.67 years
D. 41.08 years
E. 42.54 years
Answer:
What is the net present value of the following set of cash flows at a discount rate of 7
percent? At 20 percent?
A. $4,518.47; $628.30
B. $4,518.47; -$321.76
C. $4,518.47; -$525.13
D. $4,722.09; $504.21
E. $4,722.09; -$418.05
Answer:
Swizer Industries has two separate divisions. Division X has less risk so its projects are
assigned a discount rate equal to the firm’s WACC minus 0.5 percent. Division Y has
more risk and its projects are assigned a rate equal to the firm’s WACC plus 1 percent.
The company has a debt-equity ratio of 0.45 and a tax rate of 35 percent. The cost of
equity is 14.7 percent and the aftertax cost of debt is 5.1 percent. Presently, each
division is considering a new project. Division Y’s project provides a 12.3 percent rate
of return and Division X’s project provides an 11.64 percent return. Which projects, if
any, should the company accept?
A. Accept both X and Y
B. Accept X and reject Y
C. Reject X and accept Y
D. Reject both X and Y
E. The answer cannot be determined based on the information provided.
Answer:
The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.00 per
share a year for the following two years, and then cease paying dividends altogether.
How much is one share of this stock worth to you today if you require a 19 percent rate
of return?
A. $2.31
B. $2.36
C. $2.56
D. $2.60
E. $2.64
Answer:
By definition, a bank that pays simple interest on a savings account will pay interest:
A. only at the beginning of the investment period.
B. on interest.
C. only on the principal amount originally invested.
D. on both the principal amount and the reinvested interest.
E. only if all previous interest payments are reinvested.
Answer:
Lake City Plastics currently produces plastic plates and silverware. The company is
considering expanding its product offerings to include plastic serving trays. Which of
the following are cash flows relevant to the new product?
I. Molds needed to form the serving trays
II. Projected increase in plate and silverware sales if the trays are produced
III. A portion of the production manager’s current annual salary of $75,000
IV. Raw materials used in the production of the serving trays
A. I and IV only
B. III and IV only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Answer:
Dexter, Inc. has a bond issue outstanding. The issue’s indenture provision prohibits the
firm from redeeming the bonds during the first three years. This provision is referred to
as the _____ provision.
A. safeguard
B. market
C. liquidity
D. deferred call
E. sinking fund
Answer:
You currently own a portfolio valued at $56,000 that has a beta of 1.28. You have
another $10,000 to invest and would like to invest it in a manner such that the portfolio
beta decreases to 1.20. What does the beta of the new investment have to be?
A. 0.75
B. 0.79
C. 0.86
D. 0.92
E. 1.15
Answer:
An income statement prepared according to GAAP:
A. reflects the net cash flows of a firm over a stated period of time.
B. reflects the financial position of a firm as of a particular date.
C. distinguishes variable costs from fixed costs.
D. records revenue when payment for a sale is received.
E. records expenses based on the matching principle.
Answer:
Computer Geeks has sales of $521,000, a profit margin of 14.8 percent, a total asset
turnover rate of 2.16, and an equity multiplier of 1.30. What is the return on equity?
A. 8.91 percent
B. 12.67 percent
C. 18.28 percent
D. 32.11 percent
E. 41.56 percent
Answer:
Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in
a high risk stock with the hope of earning a high rate of return. However, she wants her
portfolio to have no more risk than the overall market. Which one of the following
portfolios is most apt to meet all of her objectives?
A. Invest the entire $5,000 in a stock with a beta of 1.0
B. Invest $2,500 in a stock with a beta of 1.98 and $2,500 in a stock with a beta of 1.0
C. Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0
D. Invest $2,500 in a stock with a beta of 1.0, $1,250 in a risk-free asset, and $1,250 in
a stock with a beta of 2.0
E. Invest $2,000 in a stock with a beta of 3, $2,000 in a risk-free asset, and $1,000 in a
stock with a beta of 1.0
Answer:
The lowest rating a bond can receive from Moody’s and still be classified as an
investment-quality bond is:
A. BB.
B. BBB.
C. B.
D. Ba.
E. Baa.
Answer:
Northern Wood Products is an all-equity firm with 16,000 shares of stock outstanding
and a total market value of $352,000. Based on its current capital structure, the firm is
expected to have earnings before interest and taxes of $26,000 if the economy is
normal, $3,000 if the economy is in a recession, and $33,000 if the economy booms.
Ignore taxes. Management is considering issuing $88,000 of debt with a 6 percent
coupon rate. If the firm issues the debt, the proceeds will be used to repurchase stock.
What will the earnings per share be if the debt is issued and the economy is in a
recession?
A. -$0.27
B. -$0.19
C. $0.03
D. $0.26
E. $0.31
Answer:
The call premium is the amount by which the:
A. market price exceeds the par value.
B. market price exceeds the call price.
C. face value exceeds the market price.
D. call price exceeds the par value.
Answer: