1) Moving Cash Flows What is the value in year 6 of a $900 cash flow made in year 4
when the interest rates are 8 percent?
A.$1,044.00
B.$1,049.76
C.$1,332.00
D.$1,428.19
2) Year-to-date, Oracle had earned a 15.0 percent return. During the same time period,
Valero Energy earned -12.96 percent and McDonald’s earned 1.80 percent. If you have
a portfolio made up of 50 percent Oracle, 10 percent Valero Energy, and 40 percent
McDonald’s, what is your portfolio return?
A.6.14%
B.4.86%
C.5.86%
D.6.92%
3) In 2011, Usher Sports Shop had cash flows from investing activities of ($2,150,000)
and cash flows from financing activities of ($3,219,000). The balance in the firm’s cash
account was $980,000 at the beginning of 2011 and $1,025,000 at the end of the year.
Calculate Usher Sports Shop’s cash flow from operations for 2011 .
A.$6,219,000
B.$5,414,000
C.$4,970,000
D.$5,980,000
4) Which of these is defined as the possibility that the spot currency exchange rate will
change and reduce the value of foreign assets and cash flows?
A.foreign rate risk
B.exchange rate risk
C.spot rate risk
D.value rate risk
5) Daddi Mac, Inc., doesn’t face any taxes and has $250 million in assets, currently
financed entirely with equity. Equity is worth $13 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 25 percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt. What will
be the level of expected EPS if they switch to the proposed capital structure?
A.$0.13
B.$0.21
C.$0.27
D.$0.16
6) These ratios measure the relationship between a firm’s liquid (or current) assets and
its current liabilities.
A.cross-section
B.internal growth
C.liquidity
D.market value
7) This technique for evaluating capital projects is particularly useful when firms face
time constraints in repaying investors.
A.payback
B.internal rate of return
C.net present value
D.profitability index
8) Betty Boop has saved enough money to go back to grad school. She is planning to
put the money in a money market account where it will earn 2.5%. If she anticipates
slowly drawing the money out over the course of her time in grad school at a constant
rate of $29,000 per year, but is charged a commission of $7.95 every time she sells
shares, how much should she take out of the mutual fund at a time?
A.$4,589.52
B.$4,437.04
C.$4,294.65
D.$4,101.83
9) Consider that you are 30 years old and have just changed to a new job. You have
$91,000 in the retirement plan from your former employer. You can roll that money into
the retirement plan of the new employer. You will also contribute $4,800 each year into
your new employer’s plan. If the rolled-over money and the new contributions both earn
a 7% return, how much should you expect to have when you retire in 38 years?
A.$2,012,560.60
B.$2,018,506.60
C.$2,106,718.60
D.$2,216,781.60
10) A graph of a project’s ______ is a function of cost of capital.
A.discounted payback
B.net present value
C.modified internal rate of return
D.profitability index
11) What is the value in year 20 of a $1,000 cash flow made in year 8 if interest rates
are 15% in years 6 through 13 and increase to 18% in the remaining years?
A.$5,779.57
B.$5,9812.42
C.$6,005.71
D.$6,407.13
12) Comparing Bond Yields A client in the 33 percent marginal tax bracket is
comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk
corporate bond that offers a 6.25 percent yield. Which bond will give the client more
profit after taxes?
A.the municipal bond
B.the corporate bond
C.Both give the client equal profits after taxes
D.There is not enough information given to determine
13) Under/Over-Valued Stock A manager believes his firm will earn a 16 percent return
next year. His firm has a beta of 1.5, the expected return on the market is 14 percent,
and the risk-free rate is 4 percent. Compute the return the firm should earn given its
level of risk and determine whether the manager is saying the firm is under-valued or
over-valued.
A.19%, under-valued
B.19%, over-valued
C.22%, under-valued
D.22%, over-valued
14) This index tracks 500 companies which allows for a great deal of diversification.
A.Nasdaq
B.Fortune 500
C.S&P 500
D.Wall Street Journal
15) You have been asked by the president of your company to evaluate the proposed
acquisition of a new special-purpose truck for $75,000. The truck falls into the MACRS
three-year class, and it will be sold after three years for $13,000. Use of the truck will
require an increase in NWC (spare parts inventory) of $5,000. The truck will have no
effect on revenues, but it is expected to save the firm $20,000 per year in before-tax
operating costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the
operating cash flow for this project be during year 3?
A.$5,335.50
B.$8,892.50
C.$9,443.00
D.$16,443.00
16) If you own 400 shares of Xerox at $15.00, 500 shares of Qwest at $10.00, and 350
shares of Liz Claiborne at $45.00, what are the portfolio weights of each stock?
A.Weight of Xerox: 22.43%; Weight of Qwest: 11.09%; Weight of Liz Claiborne:
58.88%
B.Weight of Xerox: 34.67%; Weight of Qwest: 16.69%; Weight of Liz Claiborne:
48.64%
C.Weight of Xerox: 22.43%; Weight of Qwest: 18.69%; Weight of Liz Claiborne:
58.88%
D.Weight of Xerox: 36.98%; Weight of Qwest: 61.07%; Weight of Liz Claiborne:
1.95%
17) Which of these statements answers why bonds are known as fixed income
securities?
A.Many investors on fixed incomes buy them
B.Investors know how much they will receive in interest payments
C.Investors will not receive their principal when the bond’s term is up
D.All of these
18) Suppose that Wave Runners’ common shares sell for $35 per share, are expected to
set their next annual dividend at $2.00 per share, and that all future dividends are
expected to grow by 10 percent per year, indefinitely. If Wave faces a flotation cost of
15% on new equity issues, what will be the flotation-adjusted cost of equity?
A.6.73%
B.10.07%
C.15.71%
D.16.72%
19) Peter’s TV Supplies is considering a merger with Jan’s Radio Supply Stores. Peter’s
total operating costs of producing services are $330,000 for a sales volume (SP) of $4.5
million. Jan’s total operating costs of producing services are $30,000 for a sales volume
(SJ) of $550,000. Suppose that synergies in the production process result in a cost of
production for the merged firms totaling $360,000 for a sales volume of $5,050,000.
Calculate the total average cost (TAC) for the merged firm.
A.7.61%
B.7.43%
C.7.13%
D.7.52%
20) Convert the following direct quote to dollar indirect quote: 1 Indian Rupee =
$0.2110.
A.5.0226 Rupee
B.4.7393 Rupee
C.4.8814 Rupee
D.4.9097 Rupee
21) Goldilochs Inc. reported sales of $8 million and net income of $1.5 million. The
firm has $10.5 million in total assets and $1 million in current liabilities. The firm
currently pays out 75% of its net income to shareholders. Assume that all assets and
current liabilities are expected to grow with sales. If Goldilochs does not want to rely
on any external sources of funds, what is the most sales can grow (in percent)?
A.3.18%
B.2.99%
C.4.11%
D.3.64%
22) During the last year you have had a loan commitment from your bank to fund
working capital for your business. The total line available was $10,000,000, of which
you took down $9,125,000. It is now the end of the loan commitment period and your
bank had you pay the back-end fees. You have misplaced the paperwork that listed the
terms of the commitment, but you know you paid total fees (this does not include any
interest paid to borrow the $9,125,000) of $31,100 on this loan commitment. You
remember that the back-end fee was 85 basis points. Calculate the front-end fee on this
loan commitment.
A.31 basis points
B.28 basis points
C.26 basis points
D.24 basis points
23) Which of the following statements is correct?
A.A weakness of both payback and discounted payback is that neither accounts for cash
flows received after the payback
B.Discounted payback uses a more aggressive reinvestment rate assumption than
payback
C.Neither payback nor discounted payback uses time value of money concepts
D.None of these statements is correct
24) This ratio measures a firm’s ability to pay off short-term obligations without relying
on inventory sales.
A.cash
B.current
C.internal-growth
D.quick or acid test
25) If more dollars are required to buy a unit of foreign currency, then the dollar is
________.
A.Strengthening
B.Weakening
C.Violating the law of one price
D.Not in equilibrium
26) Expected Return A company’s current stock price is $84.50 and it is likely to pay a
$3.50 dividend next year. Since analysts estimate the company will have a 10% growth
rate, what is its expected return?
A.4.14%
B.4.26%
C.10.00%
D.14.14%
27) These individuals examine the firm’s accounting systems and comment on whether
financial statements fairly represent the firm’s financial position.
A.Accounting departments
B.Chief Financial Officers
C.Board of Directors
D.Auditors
28) Liquidity Ratios You have the following information on Marco’s Polo Shop: total
liabilities and equity = $205 million, current liabilities = $45 million, inventory = $60
million, and quick ratio = 2.4 times. Using this information, what is the balance for
fixed assets on Marco Polo’s balance sheet?
A.$37 m
B.$97 m
C.$145 m
D.$157 m
29) You are evaluating a project for your company. You estimate the sales price to be
$25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and
1,000 units in year 3 . The project has a three-year life. Variable costs amount to $10 per
unit and fixed costs are $50,000 per year. The project requires an initial investment of
$10,000 in assets which will be depreciated straight-line to zero over the three-year
project life. The actual market value of these assets at the end of year 3 is expected to
be $1,000. NWC requirements at the beginning of each year will be approximately 10
percent of the projected sales during the coming year. The tax rate is 34 percent and the
required return on the project is 10 percent. What is the operating cash flow for the
project in year 2?
A.$34,100
B.$37,093
C.$37,433
D.$39,700
30) Suppose that Sam Industries has annual sales of $2 million, cost of goods sold of
$950,000, average inventories of $45,000, and average accounts receivable of $90,000.
Assuming that all of Sam’s sales are on credit, what will be the firm’s operating cycle?
A.0.85
B.16.43
C.17.29
D.33.72
31) Which of these is the type of loan where the firm borrows against pre-negotiated
lines of credit or loan commitments?
A.loan commitment agreements
B.spot loans
C.take-down loans
D.back-end loans
32) ADK has 30,000 15-year 9% annual coupon bonds outstanding. If the bonds
currently sell for 111% of par and the firm pays an average tax rate of 36%, what will
be the before-tax and after-tax component cost of debt?
A.7.74%; 4.95%
B.7.91%; 5.06%
C.8.05%; 5.15%
D.9%; 5.76%
33) Bailey’s Dog Pens, Inc., with the help of its investment bank recently issued 5
million shares of new stock. The offer price on the stock was $19.5 per share and
Bailey’s received a total of $70 million from the stock offering. What percentage of the
gross proceeds is the investment bank charging Bailey’s Dog Pens for underwriting the
stock issue?
A.27.29%
B.28.21%
C.26.92%
D.25.31%
34) This has not been released to the public, but is known by few individuals, likely
company insiders.
A.audited financial statements
B.restricted stock
C.privately held information
D.insider trading
35) P/E Model and Cash Flow Valuation Suppose that a firm’s recent earnings per share
and dividends per share are $3.00 and $1.50, respectively. Both are expected to grow at
10 percent. However, the firm’s current P/E ratio of 20 seems high for this growth rate.
The P/E ratio is expected to fall to 16 within five years. Compute a value for this stock
by first estimating the dividends over the next five years and the stock price in five
years. Then discount these cash flows using a 14 percent required rate.
A.$31.68
B.$40.15
C.$46.89
D.$60.00
36) Which of these is a contractual commitment to loan the firm a certain maximum
amount at a given interest rate?
A.loan commitment agreements
B.spot loans
C.take-down loans
D.back-end loans
37) JaiLai Cos. stock has a beta of 1.7, the current risk-free rate is 6.2%, and the
expected return on the market is 11%. What is JaiLai’s cost of equity?
A.13.81%
B.15.19%
C.13.41%
D.14.36%
38) You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you
keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta
of 4.5?
A.3.31
B.3.51
C.3.61
D.3.71
39) Explain how discounting is the reverse of compounding.
40) List and describe the three basic levels of market efficiency,
41) Explain the residual dividend model.
42) Show the time line for a $1000 cash inflow today, a $1262.48 cash outflow in year
four, and a 6 percent interest rate.
43) Explain why high-income and wealthy people are more likely to buy a municipal
bond than a corporate bond.
44) List the steps for getting shares of stock to the investing public.