1) Home Supply, Inc. has compiled the following information:
For 2010, the cash flow from assets is _____ and the cash flow to shareholders is
_______.
A.$49,100; $62,500
B.$49,100; $76,800
C.$49,100; $81,100
D.$56,400; $76,800
E.$56,400; $79,300
2) In relation to bonds, which one of the following terms has the same meaning as the
term “crossover”?
A.Speculative
B.5B
C.Fallen angel
D.Junk
E.Triple A
3) Suppose you bought a 6 percent coupon bond one year ago for $929. The bond sells
today for $933. The face value is $1,000. If the inflation rate last year was 3.4 percent,
what was your total real rate of return on this investment?
A.3.37 percent
B.3.92 percent
C.4.31 percent
D.6.89 percent
E.7.08 percent
4) Which one of the following statements concerning the issuance of long-term debt is
correct?
A.Rarely is debt issued privately in the U.S
B.All U.S. debt issues, private and public, must be registered with the SEC
C.Private placements generally have shorter maturities than term loans
D.It is easier to renegotiate a public issue than it is a private issue of debt
E.A direct placement of debt generally has more restrictive covenants than a public
issue
5) Which one of the following defines the terms of sale?
A.Period of time during which a discount can be taken on an invoice
B.Period of time granted to a customer to pay for the goods or services received
C.Legal documents related to the credit sale of either goods or services
D.Conditions under which a firm sells its goods or services for either cash or credit
E.Process used to determine which customers shall be granted credit and which shall
not
6) Southern Fried Foods has a $12 million bond issue outstanding with a coupon rate of
6.75 percent and a yield-to-maturity of 7.27 percent. What is the present value of the tax
shield if the tax rate is 35 percent?
A.$283,500
B.$305,340
C.$3,053,400
D.$3,560,000
E.$4,200,000
7) Which one of the following commences on the day inventory is purchased and ends
on the day the payment for that inventory is collected? Assume all sales and purchases
are on credit.
A.Inventory period
B.Accounts receivable period
C.Accounts payable period
D.Operating cycle
E.Cash cycle
8) Which one of the following is most apt to cause a wise manager to increase a
project’s cost of capital? Assume the firm is levered.
A.Management decides to issue new stock to finance the project
B.The initial cash outlay requirement is reduced
C.She learns the project is riskier than previously believed
D.The aftertax cost of debt just decreased
E.The project’s life is shortened
9) Computing the present value of a future cash flow to determine what that cash flow
is worth today is called:
A.compounding
B.factoring
C.time valuation
D.simple cash flow valuation
E.discounted cash flow valuation
10) Pete’s Warehouse has net working capital of $2,400, total assets of $19,300, and net
fixed assets of $10,200. What is the value of the current liabilities?
A.-$6,700
B.-$2,900
C.$2,900
D.$6,700
E.$11,500
11) You have just purchased a new warehouse. To finance the purchase, you’ve arranged
for a 25-year mortgage for 80 percent of the $1,800,000 purchase price. The monthly
payment on this loan will be $10,800. What is the APR? The EAR?
A.7.67 percent; 7.94 percent
B.7.67 percent; 8.03 percent
C.7.72 percent; 7.94 percent
D.7.72 percent; 8.03 percent
E.7.75 percent; 8.03 percent
12) When you refer to a bond’s coupon, you are referring to which one of the
following?
A.Difference between the purchase price and the face value
B.Annual interest divided by the current bond price
C.Difference between the bid and ask price
D.Annual interest payment
E.Principal amount of the bond
13) Which one of the following best describes a line of credit?
A.Long-term, prearranged, committed bank loan
B.Short-term loan secured by accounts receivable
C.Short-term loan secured by inventory
D.Long-term, prearranged, noncommitted bank loan
E.Short-term prearranged bank loan that can be either committed or noncommitted
14) You are debating between spending a week in Brazil or a week in Chile. You’ve
estimated the cost of the Brazilian trip at 56,300 reals and the Chilean trip at 13.6
million pesos. The currency per U.S. dollar is 2.2212 reals and 581.73 pesos. If you
prefer the less expensive trip, as measured in U.S. dollars, you should travel to _____
because you can save _____.
A.Brazil; you can save $1,460.45
B.Brazil; you can save $1,518.74
C.Chile; you can save $984.29
D.Chile; you can save $1,613.33
E.Chile; you can save $1,968.12
15) Glass Ornaments, Inc. is an all-equity firm with a total market value of $386,000
and 15,000 shares of stock outstanding. Management is considering issuing $75,000 of
debt at an interest rate of 8 percent and using the proceeds on a stock repurchase. As an
all-equity firm, management believes the earnings before interest and taxes (EBIT) will
be $31,000 if the economy is normal, $11,000 if it is in a recession, and $37,000 if the
economy booms. Ignore taxes. What will the earnings per share (EPS) be if the
economy falls into a recession and the firm maintains its all-equity status?
A.$0.68
B.$0.73
C.$1.21
D.$1.67
E.$2.07
16) LOG, Inc. currently has 300,000 shares of stock outstanding that sell for $73 per
share. Assuming no market imperfections or tax effects exist, what will the share price
be after LOG has a five-for-three stock split?
A.$43.80
B.$45.60
C.$73.00
D.$109.18
E.$121.67
17) Freedom Health Centers has total equity of $861,300, sales of $1.48 million, and a
profit margin of 5.2 percent. What is the return on equity?
A.5.82 percent
B.6.49 percent
C.7.18 percent
D.8.68 percent
E.8.94 percent
18) Which of the following will tend to increase the credit period?
I. increase in the buyer’s inventory period
II. decrease in the buyer’s inventory period
III. increase in the buyer’s operating cycle
IV. decrease in the buyer’s operating cycle
A.I and III only
B.I and IV only
C.II and III only
D.II and IV only
E.II only
19) Venture capital is most apt to be the source of funding for which one of the
following?
A.Bankruptcy reorganization
B.Global expansion for an established firm
C.New, high-risk venture
D.Seasonal production
E.Daily operations for an established, profitable firm
20) Friendly’s Shoe Store has earnings before interest and taxes of $21,680 and net
income of $12,542. The tax rate is 34 percent. What is the times interest earned ratio?
A.0.88
B.1.67
C.3.09
D.5.59
E.8.10
21) Wesson Metals has an outstanding loan that calls for equal annual payments of
$9,768.46 over the life of the loan. The original loan amount was $50,000 at an APR of
8.5 percent. How much of the second loan payment is interest?
A.$3,525.61
B.$3,780.93
C.$4,250.00
D.$5,409.16
E.$5,987.53
22) Which one of the following is the name given to a registration of securities under
SEC 415 which permits a firm to issue the securities over a two-year period?
A.Seasoned registration
B.Negotiated registration
C.Shelf registration
D.Extended registration
E.Delayed registration
23) Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the
company expects its cash flows to increase by $62,000 a year for the next two years and
by $98,000 a year for the following three years. How long must the firm wait until it
recovers all of its initial investment?
A.3.97 years
B.4.18 years
C.4.46 years
D.4.70 years
E.The project never pays back
24) Which one of the following is an intended result of a lockup agreement?
A.Temporarily supporting the market price of IPO shares
B.Maximizing the return to a firm’s original owners from an initial spike in the market
price of IPO shares
C.Increasing the volume of trading for shares of a recent IPO
D.Limiting the price volatility of recent IPO shares caused by day trading
E.Guaranteeing a minimum number of sold shares for an IPO
25) An agent who buys and sells securities from inventory is called a:
A.floor trader
B.dealer
C.commission broker
D.broker
E.floor broker
26) A firm has net working capital of $3,800 and current assets of $11,700. What is the
current ratio?
A.0.34
B.0.60
C.1.48
D.1.65
E.2.92
27) The common stock of The Burger Hut is selling for $16.25 a share. The company
has earnings per share of $0.42 and a book value per share of $9.28. What is the
market-to-book ratio?
A.1.58
B.1.69
C.1.75
D.1.87
E.1.92
28) The Sausage Hut is looking at a new sausage system with an installed cost of
$438,000. This cost will be depreciated straight-line to zero over the project’s 4-year
life, at the end of which the sausage system can be scrapped for $69,000. The sausage
system will save the firm $129,000 per year in pretax operating costs, and the system
requires an initial investment in net working capital of $29,000, which will be recouped
at project end. If the tax rate is 35 percent and the discount rate is 9 percent, what is the
NPV of this project?
A.-$18,870
B.-$6,320
C.$2,560
D.$14,410
E.$26,880
29) Which one of the following will increase the current value of a stock?
A.Decrease in the dividend growth rate
B.Increase in the required return
C.Increase in the market rate of return
D.Decrease in the expected dividend for next year
E.Increase in the capital gains yield
30) Which one of the following statements is correct?
A.The net present value is a measure of profits expressed in today’s dollars
B.The net present value is positive when the required return exceeds the internal rate of
return
C.If the initial cost of a project is increased, the net present value of that project will
also increase
D.If the internal rate of return equals the required return, the net present value will
equal zero
E.Net present value is equal to an investment’s cash inflows discounted to today’s
dollars
31) Catnip Stores has a $20 million bond issue outstanding that currently has a market
value of $18.6 million. The bonds mature in 6.5 years and pay semiannual interest
payments of $30 each. What is the firm’s pre-tax cost of debt?
A.6.99 percent
B.7.37 percent
C.7.58 percent
D.7.74 percent
E.7.80 percent
32) If the financial markets are efficient then:
A.stock prices should remain constant
B.stock prices should increase or decrease slowly as new events are analyzed and the
information is absorbed by the markets
C.an increase in the value of one security should be offset by a decrease in the value of
another security
D.stock prices will only change when an event actually occurs, not at the time the event
is anticipated
E.stock prices should only respond to unexpected news and events
33) Which one of the following is the correct formula for computing the present value
of $600 to be received in 6 years? The discount rate is 7 percent.
A.PV = $600 (1 + 6)7
B.PV = $600 (1 + 0.07)6
C.PV = $600 (0.07 6)
D.PV = $600/(1 + 0.07)6
E.PV = $600/(1 + 6)0.07
34) A preferred stock sells for $48.20 a share and has a market return of 15.65 percent.
What is the dividend amount?
A.$6.93
B.$6.80
C.$7.25
D.$7.42
E.$7.54
35) Which one of the following statements is correct?
A.The APR is equal to the EAR for a loan that charges interest monthly
B.The EAR is always greater than the APR
C.The APR on a monthly loan is equal to (1 + monthly interest rate)12 – 1
D.The APR is the best measure of the actual rate you are paying on a loan
E.The EAR, rather than the APR, should be used to compare both investment and loan
options
36) If a project with conventional cash flows has a profitability index of 1.0, the project
will:
A.never pay back
B.have a negative net present value
C.have a negative internal rate of return
D.produce more cash inflows than outflows in today’s dollars
E.have an internal rate of return that equals the required return
37) Which of the following are advantages of the corporate form of organization?
I. Ability to raise large sums of equity capital
II. Ease of ownership transfer
III. Profits taxed at the corporate level
IV. Limited liability for all owners
A.I and II only
B.III and IV only
C.II, III, and IV only
D.I, II, and IV only
E.I, II, III, and IV
38) The “Say on Pay” bill requires corporations to do which one of the following?
A.Give the chairman of the board the final say on executive pay
B.Give the firm’s creditors a nonbinding say on executive pay
C.Give the firm’s creditors a binding say on executive pay
D.Give shareholders a nonbinding vote on executive pay
E.Give shareholders a binding vote on executive pay
39) Which one of the following could cause the total return on an investment to be a
negative rate?
A.Constant annual dividend amount
B.Increase in the annual dividend amount
C.Stock price that remains constant over the investment period
D.Stock price that declines over the investment period
E.Stock price that increases over the investment period