The Tool Box needs to purchase a new machine costing $1.46 million. Management is
estimating the machine will generate cash inflows of $223,000 the first year and
$600,000 for the following three years. If management requires a minimum 12 percent
rate of return, should the firm purchase this particular machine based on its IRR? Why
or why not?
A. Yes, because the IRR is 10.75 percent
B. Yes, because the IRR is 12.74 percent
C. No, because the IRR is 10.75 percent
D. No, because the IRR is 12.74 percent
E. The answer cannot be determined as there are multiple IRRs
Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000
six years from now. Which one of the following terms refers to the $5,318?
A. Present value
B. Compound value
C. Future value
D. Complex value
E. Factor value
Which one of the following statements is correct regarding bankruptcies post-2005?
A. All Chapter 7 bankruptcy filings must include a “workout” agreement.
B. Firms must remain in bankruptcy for at least 18 months.
C. Key employee retention plans are no longer permitted under any circumstances.
D. Labor contracts cannot be modified through the bankruptcy process.
E. Section 363 speeds up the bankruptcy process via a bidding process.
Uptown Construction is comparing two different capital structures. Plan I would result
in 16,000 shares of stock and $160,000 in debt. Plan II would result in 18,000 shares of
stock and $110,000 in debt. The interest rate on the debt is 9 percent. Ignoring taxes,
EPS will be identical for Plans I and II when EBIT equals which one of the following?
A. $48,550
B. $50,400
C. $69,600
D. $53,700
E. $60,750
The Cookie Shops’ purchases are equal to 73 percent of the following month’s sales.
The accounts payable period for purchases is 30 days while all other expenditures are
paid in the month in which they are incurred. Assume each month has 30 days. The
company has compiled the following information.
What is the total amount of the firm’s disbursements for the month of June?
A. $8,132
B. $8,170
C. $7,410
D. $7,571
E. $8,424
W. S. Movers had $138,600 in net fixed assets at the beginning of the year. During the
year, the company purchased $27,400 in new equipment. It also sold, at a price of
$5,300, some old equipment that had a book value of $2,100. The depreciation expense
for the year was $6,700. What is the net fixed asset balance at the end of the year?
A. $146,900
B. $159,300
C. $163,900
D. $157,200
E. $148,400
Industrial Products has both common and noncumulative preferred stock outstanding.
The dividends on these stocks are $1.10 per quarter per share of common and $2.25 per
quarter per share of preferred. The company has not paid any dividends for the past two
quarters but is expected to pay dividends on both the common and the preferred stock
next quarter. What is the minimum amount the firm must pay per share to its preferred
stockholders next quarter if it plans to pay a common dividend?
A. $0
B. $3.35
C. $2.25
D. $4.50
E. $6.75
The future value of a lump sum investment will increase if you:
A. decrease the interest rate.
B. decrease the number of compounding periods.
C. increase the time period.
D. decrease the time period.
E. decrease the lump sum amount.
Hi-Lo has 160,000 shares outstanding priced at $33 a share. There will be three open
positions on its board in the next election. Currently, you are not a shareholder but
would like to become one and also gain a seat on the board. How much will it cost you
to buy a seat if the company uses straight voting? What if the firm uses cumulative
voting?
A. $2,640,033; $1,320,033
B. $2,710,033; $1,760,033
C. $2,710,033; $1,430,033
D. $2,640,033; $1,320,033
E. $2,640,033; $1,760,033
Fiddler’s Music Stores’ stock has a risk premium of 8.3 percent while the inflation rate
is 3.1 percent and the risk-free rate is 3.8 percent. What is the expected return on this
stock?
A. 9.0 percent
B. 6.9 percent
C. 12.1 percent
D. 13.7 percent
E. 15.2 percent
Sporting Goods charges .85 percent interest per month. What rate of interest are its
credit customers actually paying?
A. 11.00 percent
B. 11.92 percent
C. 10.26 percent
D. 9.31 percent
E. 10.69 percent
Quattro, Inc. has the following mutually exclusive projects available. The company has
historically used a four-year cutoff for projects. The required return is 11 percent.
The payback for Project A is ____ while the payback for Project B is ____. The NPV
for Project A is _____ while the NPV for Project B is ____. Which project, if any,
should the company accept?
A. 3.92 years; 3.64 years; $780.85; $1,211.48; accept both Projects
B. 3.92 years; 3.79 years; -$17,108.60; $1,211.48; accept Project B only
C. 3.96 years; 3.42 years; -$19,764.06; -$10,566.02; reject both projects
D. 3.96 years; 3.42 years; $17,780.85; -$1,211.48; accept Project A only
E. 4.06 years; 3.79 years; $211.60; -$7,945.93; accept Project A only
Northern Wood Products is an all-equity firm with 14,000 shares of stock outstanding
and a total market value of $585,480. Based on its current capital structure, the firm is
expected to have earnings before interest and taxes of $46,800 if the economy is
normal, $21,200 if the economy is in a recession, and $56,000 if the economy booms.
Ignore taxes. Management is considering issuing $150,000 of debt at a coupon rate of 7
percent. 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?
(Round the number of shares repurchased down to the nearest whole share.)
A. $.97
B. $1.03
C. $1.36
D. $.88
E. $.68
Daniel’s Market has sales of $43,800, costs of $40,400, depreciation expense of $2,500,
and interest expense of $1,100. If the tax rate is 34 percent, what is the operating cash
flow, OCF? Assume tax losses can be carried forward and utilized.
A. $3,332
B. $3,279
C. $3,511
D. $3,468
E. $3,013
The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one
of the following ratios would reflect this relationship?
A. Receivables turnover
B. Equity multiplier
C. Profit margin
D. Return on assets
E. Total asset turnover
Over the last four years, a stock has had an arithmetic average return of 12.8 percent.
Three of those four years produced returns of 22.6 percent, 15.2 percent, and -24.1
percent, respectively. What is the geometric average return for this four-year period?
A. 10.18 percent
B. 8.39 percent
C. 11.67 percent
D. 12.40 percent
E. 12.67 percent
The Big Box Store has annual credit sales of $3,268,200 and cost of goods sold of
$2,428,600. The average accounts receivable balance is $39,400. How many days on
average does it take the firm to collect its accounts receivable?
A. 3.97 days
B. 6.30 days
C. 7.27 days
D. 8.13 days
E. 4.40 days
Phil’s Dinor purchased some new equipment two years ago for $32,600. Today, it is
selling this equipment for $22,000. What is the aftertax cash flow from this sale if the
tax rate is 35percent? The applicable MACRS allowance percentages are as follows,
commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.
A. $19,776.80
B. $18,846.67
C. $24,223.20
D. $20,408.20
E. $25,153.33
M&M Proposition I with taxes states that:
A. the optimal capital structure is the all-equity option.
B. the levered value of a firm exceeds the firm’s unlevered value.
C. a firm’s capital structure is irrelevant.
D. the value of a firm is independent of taxes.
E. WACC remains constant given any debt-equity ratio.
You live in the U.S. and want to invest in a Chinese company, which will be referred to
as “CC,” because you believe its stock is uniquely positioned to be unusually profitable
over the next five years. However, you do not have direct access to the Chinese
financial markets. You may be able to indirectly invest in CC by purchasing a(n):
A. swap.
B. American depository receipt.
C. gilt.
D. Bulldog bond.
E. Samurai bond.
Assume the spot rate between Japan and the U.S. is ¥119.37 = $1, while the one-year
forward rate is ¥119.07 = $1. A one-year risk-free security in the U.S. is yielding 4.2
percent. What is the rate of return on a one-year risk-free security in Japan assuming
that interest rate parity exists?
A. 3.82 percent
B. 3.94 percent
C. 3.44 percent
D. 3.49 percent
E. 4.46 percent
In a typical month, a company receives 39 checks totaling $168,000. The payment on
these checks is normally delayed by an average of 2.7 days. What is the average daily
float? Assume 30 days in a month.
A. $14,500
B. $15,333
C. $15,120
D. $16,217
E. $14,667
Five years ago, you purchased 800 shares of stock. The annual returns have been 6.4
percent, -28.7 percent, 2.1 percent, 14.4 percent, and 32.6 percent, respectively. What is
the variance of these returns?
A. .049888
B. .030021
C. .030068
D. .050133
E. .050284
You purchased a zero coupon bond one year ago for $346.72. The market interest rate is
now 5.75 percent. If the bond had 15 years to maturity when you originally purchased
it, what is your total return to date if the face value of the bond is $1,000?
A. 30.42 percent
B. 22.18 percent
C. 16.34 percent
D. 12.65 percent
E. 24.90 percent
The Glass Ceiling paid an annual dividend of $1.64 per share last year and just
announced that future dividends will increase by 1.3 percent annually. What is the
amount of the expected dividend in Year 6?
A. $1.43
B. $1.75
C. $1.46
D. $1.77
E. $1.58
The amount by which a firm’s tax bill is reduced as a result of the depreciation expense
is referred to as the depreciation:
A. tax shield.
B. credit.
C. erosion.
D. opportunity cost.
E. adjustment.
You are analyzing a project and have developed the following estimates. The
depreciation is $1,020 a year and the tax rate is 35 percent. What is the worst-case
operating cash flow?
A. -$110.50
B. -$64.10
C. $909.50
D. $209.00
E. $660.50
Assume that large-company stocks had an average return of 12.1 percent and a standard
deviation of 19.6 percent for a 40-year period. What range of returns would you expect
to see on these stocks 95 percent of the time?
A. -30.3 percent to 53.2 percent
B. -30.3 percent to 73.9 percent
C. -30.3 percent to 64.1 percent
D. -27.1 percent to 53.2 percent
E. -27.1 percent to 51.3 percent
Turner’s Store had a profit margin of 6.8 percent, sales of $498,200, and total assets of
$542,000. If management set a goal of increasing the total asset turnover to 1.10 times,
what would the new sales figure need to be, assuming no increase in total assets?
A. $467,185
B. $492,727
C. $488,500
D. $596,200
E. $657,480
A firm’s liquidity level decreases when:
A. inventory is purchased with cash.
B. inventory is sold on credit.
C. inventory is sold for cash.
D. an account receivable is collected.
E. proceeds from a long-term loan are received.