1) The use of risk-adjusted discount rates is based on the concept that investors require
a higher rate of return for more risky projects.
2) A direct quote is always denominated in U.S. dollars, since the dollar is the medium
of exchange in international business.
3) A treasury bill is a near-cash asset.
4) If two bonds have the same yield to maturity, they also have the same current yield.
5) The par value of a corporate bond indicates the payment that the issuer promises to
make to the bondholder at maturity.
6) The percent of sales method does not provide a reasonable prediction of asset levels
for instances when there are economies of scale in the use of the asset being forecast
and when asset purchases are lumpy.
7) The hedging principle involves matching the cash flow from an asset with the cash
flow requirements of the financing used.
8) The use of a call provision in addition to a sinking fund can effectively create a
maturity date for preferred stock.
9) As market rates of interest rise, investors move their funds into bonds, thus
increasing their price and lowering their yield.
10) According to the CAPM, for each unit of Beta an asset’s required rate of return
increases by the market’s risk premium.
11) The Eurodollar market is larger than any financial market in the United States.
12) The cash conversion cycle is a measure of a firm’s effectiveness in managing its
working capital.
13) Other things equal, management should retain profits only if the company’s
investments within the firm are at least as attractive as the stockholders’ other
investment opportunities.
14) A project’s annual free cash flow is the change in operating cash flow less any
change in net working capital and less any change in capital spending.
15) The mutually exclusive project with the highest positive NPV will also have the
highest IRR.
16) Accounts receivable variables under control of the financial manager include the
terms of credit sales and the quality of credit customers.
17) Using the percentage of sales method, forecasted retained earnings balance is equal
to
A) prior year retained earnings plus projected net income less projected dividends
B) the ratio of retained earnings to sales for the current year multiplied by projected
sales for next year
C) the retained earnings balance for the current year as no changes are made to this
financing account when using the percent of sales method
D) the ratio of retained earnings to sales for the current year multiplied by projected
sales for next year, minus dividends paid
18) The December 31, 2009 balance sheet shows net fixed assets of $150,000 and the
December 31, 2010 balance sheet shows net fixed assets of $250,000. Depreciation
expense for 2009 is $25,000 and depreciation expense for 2010 is $35,000. Based on
this information, the cost of fixed assets purchased during 2010 is
A) $100,000
B) $110,000
C) $135,000
D) $160,000
19) A basis point is equal to
A) one percent
B) one-tenth of one percent
C) one-hundredth of one percent
D) one-half of one percent
20) A corporation announces a significant increase in its annual dividend and its stock
price increases on the news. This could be explained most directly by
A) residual dividend theory
B) bird-in-the-hand theory
C) perfect capital markets
D) MM’s indifference theorem
21) Racing Horse Corporation reported net income for 2010 of $200,000, sales of
$540,000, expenses (excluding depreciation) of $180,000, and depreciation expense of
$60,000. The company’s accounts receivable balance increased by $40,000 during the
year and its accounts payable balance remained the same. The company’s change in
cash for the year is estimated to be
A) $100,000
B) $160,000
C) $220,000
D) $380,000
22) Trevor Co.’s future earnings for the next four years are predicted below. Assuming
there are 500,000 shares outstanding, what will the yearly dividend per share be if the
dividend policy is
Trevor & Co.
1 $ 900,000
2 1,200,000
3 850,000
4 1,350,000
a.a constant payout ratio of 40%
b.stable dollar dividend targeted at 40% of the average earnings over the four-year
period
c.small, regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding
$1,000,000
23) What is the value of a bond that has a par value of $1,000, a coupon of $120
(annually), and matures in 10 years? Assume a required rate of return of 7.02%.
A) $1,198.45
B) $1,200.78
C) $1,284.38
D) $1,349.45
24) Which of the following ratios would be the best way to determine how customers
are paying for their purchases?
A) inventory turnover
B) total asset turnover
C) current ratio
D) average collection period
25) South Stage, Inc. preferred stock pays an annual dividend of $2.75 per share. If the
stock is currently selling for $27.50 per share, what is the expected rate of return on this
stock?
A) 2.75%
B) 10.0%
C) 17.5%
D) 27.5%
26) With regard to the hedging principle, which of the following would be an
appropriate method to finance a minimum level of current assets required for year
round operations?
A) short-term notes payable
B) trade credit
C) common stock
D) revolving credit agreements that must be repaid in a period less than 1 year
27) General Electric (GE) has been a public company for many years with its common
stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of
new common stock, the transaction will be describe as
A) an initial public offering
B) a secondary market transaction because GE common stock has been trading for
years
C) a seasoned equity offering because GE has sold common stock before
D) a money market transaction because GE raises new money to fund its business
28) Project A is expected to generate positive cash flow of $1 million in 10 years while
Project B is expected to generate $500,000 in 5 years. Therefore
A) Project A is preferred because shareholder value is based on cash flow
B) Project B is preferred because its cash flow is expected to be received sooner than
the cash flow from Project A
C) Both projects have equal value because they average $100,000 per year
D) Project B may be preferred to Project A if the opportunity cost of money is high
enough
29) Which of the following forms of business organization limits the liability of
owners?
A) sole proprietorship
B) general partnership
C) corporation
D) two person partnership
30) The current ratio of a firm would equal its quick ratio whenever
A) the firm has no inventory
B) the firm’s inventory is equal to its other current assets
C) the firm’s inventory is equal to its current liabilities
D) the firm’s current ratio is equal to one
31) The PMI, Inc. processes an estimated 200,000 checks per year from its customers.
Total revenue collected by check is $40,000,000. The average float time until the funds
are credited to PMI’s checking account is 6 days. For an extra cost of $ .06/check, PMI’s
bank will install a lock-box system that will reduce float time from 6 days to 2.5 days.
If PMI earns 3.5% on its checking account, how much per check will PMI make if it
uses the lock-box system?
A) $.005
B) $.006
C) $.007
D) $.008
32) Haroldson Inc. common stock is selling for $22 per share. The last dividend was
$1.20, and dividends are expected to grow at a 6% annual rate. Flotation costs on new
stock sales are 5% of the selling price. What is the cost of Haroldson Inc.’s new
common stock?
A) 5.73%
B) 11.45%
C) 11.78%
D) 12.09%
33) Bevel Building Products, Inc., whose common stock is currently selling for $12 per
share, is expected to pay a $1.80 dividend, and sell for $14.40 one year from now. What
are the dividend yield, growth rate, and total rate of return, respectively?
A) 15%20%35%
B) 10%5%15%
C) 15%12%27%
D) 20%15%35%
34) Insurance companies invest in the “long-end” of the securities market by purchasing
securities with longer maturities. In which of the following instruments would an
insurance company be least likely to invest most of its assets?
A) corporate stocks
B) corporate bonds
C) mortgages
D) commercial paper
35) What is the value on 1/1/13 of the following cash flows:
Date Cash ReceivedAmount of Cash
1/1/14$14,000
1/1/15$20,000
1/1/16$30,000
1/1/17$43,000
1/1/18$57,000
Use a 7% discount rate, and round your answer to the nearest $10.
A) $153,270
B) $128,490
C) $112,350
D) $107,330
36) LPD Logistics, Inc.’s projected sales for the first six months of 2010 are given
below.
Jan.$300,000April$350,000
Feb.$350,000May$500,000
Mar.$475,000June$400,000
20% of sales are collected in the month of the sale, 75% are collected in the month
following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of
sales. Purchases are made the month prior to the sales and are paid during the month the
purchases are made (i.e. goods sold in March are bought and paid for in February).
Total other cash expenses are $35,000/month. The company’s cash balance as of
February 1, 2010 will be $30,000. Excess cash will be used to retire short-term
borrowing (if any). LPD has no short term borrowing as of February 28, 2010 . Assume
that the interest rate on short-term borrowing is 1% per month. The company must have
a minimum cash balance of $20,000 at the beginning of each month. What is LPD’s
projected cumulative borrowing as of March 1, 2010?
A) $110,000
B) $90,000
C) $70,000
D) -0-
37) Which of the following statements concerning the required rate of return on stocks
is TRUE?
A) the higher an investor’s required rate of return, the higher the value of the stock
B) If risk is reduced, the required return will decrease because more investors are
risk-averse
C) The required return on preferred stock is generally higher than the required return on
common stock
D) the higher the risk, the higher the required return, other things being equal
38) Prior to 1973 the exchange rates between the major currencies of the world were
A) on a floating exchange rate system
B) on an arbitrage exchange rate system
C) on a fixed exchange rate system
D) on a spot exchange rate system
39) A corporation with very high growth prospects and many positive NPV projects to
fund may want to increase its dividend based on
A) the tax bias against capital gains
B) the residual dividend theory
C) the information effect
D) the very low agency costs of the corporation
40) Which type of value is shown on the firm’s balance sheet?
A) book value
B) liquidation value
C) market value
D) intrinsic value
41) Apollo Corp. reported the following balance sheet:
Apollo has sales of $600,000 and net income of $50,000. Apollo’s return on equity is
A) 5.00%
B) 50.00%
C) 38.17%
D) 41.13%
42) Which of the following actions would improve a firm’s liquidity?
A) repurchasing stock
B) selling bonds and increasing cash
C) buying bonds
D) increasing the company’s dividend payments
43) You have the choice of two equally risk annuities, each paying $5,000 per year for 8
years. One is an annuity due and the other is an ordinary annuity. If you are going to be
receiving the annuity payments, which annuity would you choose to maximize your
wealth?
A) the annuity due
B) the ordinary annuity
C) Since we don’t know the interest rate, we can’t find the value of the annuities and
hence we cannot tell which one is better
D) either one because they have the same present value
44) An investment is expected to yield $300 in three years, $500 in five years, and $300
in seven years. What is the present value of this investment if our opportunity rate is
5%?
A) $735
B) $864
C) $885
D) $900
45) A corporate investment manager needs to invest $1,000,000 for the next 6 months.
The current nominal rate of interest in the United States is 5%, while the nominal rate
of interest in Argentina is 8%. Which of the following statements is MOST correct?
A) The manager should invest the funds in Argentina and make an extra $30,000 for the
year
B) The manager may decide to invest the funds in the United States due to the
international Fisher effect, which suggests inflation in Argentina may make the extra
interest income worth less in one year
C) The manager is indifferent between investing the funds in the United States or
Argentina because real returns will always be the same in the end
D) The manager cannot invest in Argentina because his company is investing dollars
46) A project requires an initial investment of $389,600. The project generates free cash
flow of $540,000 at the end of year 4 . What is the internal rate of return for the project?
A) 138.6%
B) 38.6%
C) 8.5%
D) 6.9%
47) Which form of organization is free of initial legal requirements?
A) sole proprietorship
B) general partnership
C) corporation
D) both A and B
48) Your daughter is born today and you want her to be a millionaire by the time she is
35 years old. You open an investment account that promises to pay 12% per year. How
much money must you deposit each year, starting on her 1st birthday and ending on her
35th birthday, so your daughter will have $1,000,000 by her 35th birthday?
A) $2,317
B) $3,455
C) $5,777
D) $9,450
49) Shackleford Corporation net income this year is $800,000. The company generally
retains 35% of net income for reinvestment. The company’s common equity currently
has a book value of $5,000,000. They just paid a dividend of $1.37, and the required
rate of return on this stock is 12%. Compute the value of this stock if dividends are
expected to continue growing indefinitely at the company’s internal growth rate.
A) $22.61
B) $11.42
C) $15.63
D) $4.35
50) AJAX Corp. needs $100,000 for the next 30 days. The company has $100,000 in
cash it was expecting to use to pay off accounts payable in order to take advantage of
the 2/10 net 40 credit terms. Another source of financing is a short-term bank loan with
an interest rate of 20%. Would you recommend AJAX borrow the $100,000 it needs
from the bank and use the cash it already has to pay its accounts payable and take the
cash discount, or would you recommend the company forgo the cash discount and use
the $100,000 it has for its financing needs?
51) You purchased one share of Sophia Enterprises common stock for $30 today. If the
stock pays a dividend of $6.50 in one year, and sells for $32.50 at that time, what will
the dividend yield, growth rate, and total rate of return be for the year?
52) The price of DDS Corporation stock is expected to be $45 in 5 years. Dividends are
anticipated to increase at an annual rate of 10 percent from the most recent dividend of
$1.00. If your required rate of return is 15 percent, how much are you willing to pay for
DDS stock?
53) The Smith Corporation is a maker of fine stereo components and presently has
finished goods inventories of $800,000. They need a short-term bank loan of $400,000
for three months. The bank has proposed two different financing arrangements. The
first is a floating lien arrangement at a rate of 22 percent. The second proposal is for a
terminal warehouse arrangement at 11 percent. Under the latter proposal, Smith will
pay $1,000 a month plus round trip shipping expense of $6,000. Which source of credit
should be selected by the Smith Corporation? Explain.
54) Given the anticipated rate of inflation (i) of 1.7% and the real rate of interest (R) of
1.4%, find the nominal rate of interest (r).
55) The Western Boot Company will produce 94,000 pairs of boots next year. Variable
costs are 35 percent of sales, while fixed costs total $223,000. At what price must each
pair of boots be sold for Western to obtain an EBIT of $1,391,500?
56) Given the rate information in the table below, estimate the nominal rate for a
AA-rated corporate bond. Assume a liquidity premium of 8 basis points. Identify as part
of your answer the inflation risk premium, the default risk premium, the maturity
premium, and the liquidity premium.
3-month T-bills2.0%
30-year Treasury Bonds 5.0%
AA-rated Corp. Bonds8.0%
Inflation Rate1.0%