Assume the securities markets are strong form efficient. Given this assumption, you
should expect which one of the following to occur?
A. The risk premium on any security in that market will be zero.
B. The price of any one security in that market will remain constant at its current level.
C. Each security in the market will have an annual rate of return equal to the risk-free
rate.
D. The price of each security in that market will frequently fluctuate.
Answer:
Juno’s has projected its first quarter sales at $42,000 and its second quarter sales at
$45,000. The firm’s cost of goods sold is equal to 70 percent of the next quarter’s sales.
The accounts receivable period is 30 days and the accounts payable period is 45 days.
As of the beginning of the first quarter, the accounts receivable balance is $13,200 and
the accounts payable balance is $14,500. The firm pays $1,800 a month in cash
expenses and $100 a month in taxes. At the beginning of the first quarter, the cash
balance is $380 and the short-term loan balance is zero. The firm maintains a minimum
cash balance of $50. Assume each month has 30 days. What is the cumulative cash
surplus (deficit) at the end of the first quarter, prior to any short-term borrowing?
A. -$5,210
B. -$4,620
C. -$3,615
D. $7,880
E. $9,380
Answer:
Gleason, Inc. elects its board of directors on a staggered basis using cumulative voting.
This implies that:
A. if there are two open seats, then the candidate with the highest number of votes and
the candidate with the lowest number of votes will be selected.
B. the candidates for the open seats are voted for in individual elections.
C. all open positions are filled with one round of voting, assuming there are no tie
votes.
D. shareholders can accumulate their votes over multiple years and cast all those votes
in one election.
E. the firm’s entire board of directors is elected annually in one combined election.
Answer:
EKG, Inc. is considering a new project that will require an initial cash investment of
$398,000. The project will produce no cash flows for the first two years. The projected
cash flows for years 3 through 7 are $79,000, $88,000, $102,000, $140,000, and
$160,000, respectively. How long will it take the firm to recover its initial investment in
this project?
A. 3.81 years
B. 3.98 years
C. 5.57years
D. 5.92 years
E. The project never pays back.
Answer:
The required return on Mountain Brook stock is 14 percent and the dividend growth
rate is 5.5 percent. The stock is currently selling for $18.80 a share. What is the
dividend yield?
A. 7.50 percent
B. 8.93 percent
C. 9.75 percent
D. 10.50 percent
E. 12.50 percent
Answer:
You would like to invest $19,000 and have a portfolio expected return of 12.3 percent.
You are considering two securities, A and B. Stock A has an expected return of 15.6
percent and B has an expected return of 10.3 percent. How much should you invest in
Stock A if you invest the balance in Stock B?
A. $6,807
B. $7,170
C. $7,411
D. $7,937
E. $8,626
Answer:
Which one of the following will increase the profit margin of a firm, all else constant?
A. Increase in interest paid
B. Increase in fixed costs
C. Increase in depreciation expense
D. Decrease in the tax rate
E. Decrease in sales
Answer:
Shoe Box Stores is currently an all-equity firm with 28,000 shares of stock outstanding.
Management is considering changing the capital structure to 40 percent debt. The
interest rate on the debt would be 9 percent. Ignore taxes. Jamie owns 400 shares of
Shoe Box Stores stock that is priced at $17 a share. What should Jamie do if she prefers
the all-equity structure but Shoe Box Stores adopts the new capital structure?
A. Borrow money and buy an additional 160 shares
B. Borrow money and buy an additional 180 shares
C. Keep her shares but loan out all of the dividend income at 9 percent
D. Sell 160 shares and loan out the proceeds at 9 percent
E. Sell 180 shares and loan out the proceeds at 9 percent
Answer:
Stock prices tend to _____ following the announcement of a new equity issue and tend
to _____ following the announcement of a new debt issue.
A. increase; increase
B. increase; decrease
C. increase; remain relatively constant
D. decrease; increase
E. decrease; remain relatively constant
Answer:
Home Grown Tomatoes stock returned 28.7 percent, 2.6 percent, 13.1 percent, 12.2, and
11.8 percent over the past five years, respectively. What is the arithmetic average return
for this period?
A. 13.68 percent
B. 14.62 percent
C. 15.10 percent
D. 15.93 percent
E. 17.10 percent
Answer:
Over the last four years, the common stock of Plymouth Shippers has had an arithmetic
average return of 9.3 percent. Three of those four years produced returns of 14.1
percent, 15.6 percent, and 3.4 percent, respectively. What is the geometric average
return for this four-year period?
A. 7.72 percent
B. 8.41 percent
C. 8.93 percent
D. 9.16 percent
E. 9.368 percent
Answer:
The clientele effect states that investors fall into various groups because of differences
in their preferences for which one of the following?
A. Share price levels
B. Risk level
C. Short-term versus long-term investments
D. Rates of return
E. Dividends
Answer:
The relationship between the present value and the time period is best described as:
A. direct.
B. inverse.
C. unrelated.
D. ambiguous.
E. parallel.
Answer:
Able Co. has $218,000 in taxable income and Bravo Co. has $5,600,000 in taxable
income. Suppose both firms have identified a new project that will increase taxable
income by $12,000. The additional project will increase Able Co.’s taxes by _____ and
Bravo Co.’s taxes by ____.
A. $1,800; $1,800
B. $4,080; $4,080
C. $4,080; $4,680
D. $4,680; $4,080
E. $4,680; $4,680
Answer:
You purchase a bond with a coupon rate of 7 percent, semiannual coupons, and a clean
price of $1,011. If the next coupon payment is due in four months, what is the invoice
price?
A. $1,022.67
B. $1,029.36
C. $1,031.00
D. $1,037.67
E. $1,044.33
Answer:
Which one of the following statements concerning IPOs and underpricing is correct?
A. IPO underpricing primarily benefits a firm’s pre-issue owners.
B. IPO underpricing is a function of the underwriting spread.
C. The more an issue is underpriced, the more it tends to be oversubscribed.
D. Underpricing tends to discourage investors from participating in the IPO market.
E. Undersubscribed shares generally tend to also be underpriced shares.
Answer:
Eurobonds are best defined as international bonds issued in _____ and denominated in
____.
A. a single country; multiple currencies
B. a single country; a single currency
C. multiple countries; multiple currencies
D. multiple countries; a single currency
E. Euroland; euros
Answer:
A firm has a return on equity of 12.4 percent according to the dividend growth model
and a return of 18.7 percent according to the capital asset pricing model. The market
rate of return is 13.5 percent. What rate should the firm use as the cost of equity when
computing the firm’s weighted average cost of capital (WACC)?
A. 12.4 percent because it is lower than 18.7 percent
B. 18.7 percent because it is higher than 12.4 percent
C. The arithmetic average of 12.4 percent and 18.7 percent
D. The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent
E. 13.5 percent
Answer:
Professional Properties is considering remodeling the office building it leases to
Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building
is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in
rent for the next five years. The discount rate is 15 percent. What is the benefit of the
remodeling project to Professional Properties?
A. -$651,233
B. -$489,072
C. $5,214
D. $128,399
E. $311,417
Answer:
Tressler Dry Cleaners has inventory of $1,700, accounts payable of $4,200, cash of
$1,950, and accounts receivable of $3,680. What is the cash ratio?
A. 0.24
B. 0.46
C. 0.53
D. 0.98
E. 1.34
Answer:
Angela has just received an insurance settlement of $35,000. She wants to save this
money until her daughter goes to college. If she can earn an average of 5.5 percent,
compounded annually, how much will she have saved when her daughter enters college
10 years from now?
A. $48,000.00
B. $50,929.02
C. $51,374.89
D. $59,875.06
E. $59,785.06
Answer:
First Trust offers personal loans at 7.7 percent compounded monthly. Second Bank
offers similar loans at 7.75 percent compounded semiannually. Which one of the
following statements is correct concerning these loans?
A. The First Trust loan has an effective rate of 7.98 percent.
B. The Second Bank loan has an effective rate of 8.03 percent.
C. The annual percentage rate for the Second Bank loans is 7.90 percent.
D. Borrowers should prefer the loans offered by Second Bank.
E. First Trust offers the best deal on loans.
Answer:
The expected return on a security depends on which of the following?
I. Risk-free rate of return
II. Amount of the security’s unique risk
III Market rate of return
IV. Standard deviation of returns
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Answer:
Which of the following characteristics apply to U.S. Treasury bills?
I. Income taxed at both the federal and state level
II. Minimal, if any, default risk
III. Marketable, but not liquid
IV. Short maturities
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Which one of the following refers to a method of increasing the rate at which an asset is
depreciated?
A. Noncash expense
B. Straight-line depreciation
C. Depreciation tax shield
D. Accelerated cost recovery system
E. Market-based depreciation
Answer: