Last year, Isaac earned 10.6 percent on her investments while U.S. Treasury bills
yielded 3.8 percent and the inflation rate was 3.1 percent. What real rate of return did
she earn on her investments last year?
A. 6.63 percent
B. 7.27 percent
C. 8.56 percent
D. 9.24 percent
E. 10.39 percent
Answer:
The Jones Brothers recently established a trust fund that will provide annual
scholarships of $12,000 indefinitely. These annual scholarships can best be described
by which one of the following terms?
A. Ordinary annuity
B. Annuity due
C. Amortized payment
D. Perpetuity
E. Continuation
Answer:
An investment has an initial cost of $420,000 and will generate the net income amounts
shown below. This investment will be depreciated straight-line to zero over the
four-year life of the project. Should this project be accepted based on the average
accounting rate of return if the required rate is 16 percent? Why or why not?
A. Yes, because the AAR is equal to 16 percent
B. Yes, because the AAR is greater than 16 percent
C. Yes, because the AAR is less than 16 percent
D. No, because the AAR is greater than 16 percent
E. No, because the AAR is less than 16 percent
Answer:
A flexible short-term financial policy will tend to have more of which of the following
than a restrictive short-term financial policy will?
I. uncollectable accounts receivable
II. work stoppages for lack of raw materials
III. carrying costs
IV. obsolete or out-of-date inventory
A. I and II only
B. III and IV only
C. II and III only
D. I, II, and III only
E. I, III, and IV only
Answer:
Titans, Inc. has 6 percent bonds outstanding that mature in 14 years. The bonds pay
interest semiannually and have a face value of $1,000. Currently, the bonds are selling
for $993 each. What is the firm’s pretax cost of debt?
A. 5.97 percent
B. 6.08 percent
C. 6.14 percent
D. 6.31 percent
E. 6.40 percent
Answer:
Which one of the following occupations best fits into the international area of finance?
A. Bank teller
B. Treasury bill analyst
C. Currency trader
D. Insurance risk manager
E. Local bank manager
Answer:
Fiddler’s Music Stores’ stock has a risk premium of 9.6 percent while the inflation rate
is 4.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this
stock?
A. 12.3 percent
B. 12.7 percent
C. 13.5 percent
D. 13.7 percent
E. 16.5 percent
Answer:
Jasper Industrial has no debt outstanding and a total market value of $110,000. Earnings
before interest and taxes, EBIT, are projected to be $12,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 15 percent
higher. If there is a recession, then EBIT will be 20 percent lower. Jasper Industrial is
considering a $35,000 debt issue with a 7 percent interest rate. The proceeds will be
used to repurchase shares of stock. There are currently 7,500 shares outstanding. Ignore
taxes for this problem. What is the percentage change in EPS when a normal economy
slips into recession?
A. -33 percent
B. -25 percent
C. -20 percent
D. -16 percent
E. -10 percent
Answer:
The weighted average cost of capital is defined as the weighted average of a firm’s:
A. return on its investments.
B. cost of equity and its aftertax cost of debt.
C. pretax cost of debt and equity securities.
D. bond coupon rates.
E. dividend and capital gains yields.
Answer:
You want to have $45,000 in cash to buy a car 4 years from today. You expect to earn
4.5 percent, compounded annually, on your savings. How much do you need to deposit
today if this is the only money you save for this purpose?
A. $33,618.92
B. $34,511.68
C. $35,726.04
D. $37,735.26
E. $38,156.19
Answer:
Popeye’s Fried Chicken just took out an 8 percent interest-only loan of $50,000 for
three years. Payments are to be made at the end of each year. What is the amount of the
payment that will be due at the end of year 3?
A. $19,052.58
B. $20,166.67
C. $50,000.00
D. $54,000.00
E. $61,824.60
Answer:
If a trade is made “in the crowd,” the trade has occurred:
A. between a broker and a DMM.
B. between two brokers.
C. electronically on NASDAQ.
D. on SuperDOT.
E. on an ECN.
Answer:
Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent,
21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of
these returns?
A. 11.27 percent
B. 13.05 percent
C. 13.59 percent
D. 15.08 percent
E. 14.40 percent
Answer:
Which one of the following types of bonds should an investor purchase if he or she is
primarily concerned about ensuring that bond ownership will increase his or her
purchasing power?
A. OTC
B. Death
C. CAT
D. PETS
E. TIPS
Answer:
Amish Bakery needs $210,000 today to fund a new project. The project will not
produce any cash flows for two years and thus the firm agreed to a two-year, pure
discount loan at 7.5 percent interest. How much will the firm owe on this loan at the
time it must be repaid?
A. $228,060.00
B. $237,540.21
C. $240,860.00
D. $241,159.39
E. $242,681.25
Answer:
Which one of the following is included in net working capital?
A. Newly purchased equipment with a useful life of 6 years
B. Mortgage on a building payable over the next 12 years
C. Interest on a long-term debt
D. 10-year bonds issued to the general public
E. Invoice from a supplier for inventory purchased
Answer:
Which one of the following is an expected result of the Check Clearing Act for the 21st
Century?
A. Firms will have to wait three days before having access to their deposited funds.
B. Zero-balance accounts will be eliminated.
C. Lockboxes will be prohibited.
D. Collection float, but not disbursement float, will be reduced.
E. Both collection and disbursement float will be reduced.
Answer:
Green Woods sells specialty equipment for mountain climbers. Its sales for last year
included $238,000 of tents and $411,000 of climbing gear. For next year, management
has decided to sell specialty sleeping bags also. As a result of this change, sales
projections for next year are $264,000 of tents, $426,000 of climbing gear, and $51,000
of sleeping bags. How much of next year’s sales are derived from the side effects of
adding the new product to its sales offerings?
A. $0
B. $20,500
C. $41,000
D. $51,000
E. $82,000
Answer:
Which one of the following is a disbursement account into which funds are transferred
only as needed to cover the demands for payment?
A. Master account
B. Controlled disbursement account
C. Bank controlled account
D. Investment account
E. Safety stock account
Answer:
The Brown Squirrel has the following estimated sales:
The accounts receivable period is 60 days. How much should the firm expect to collect
in April?
A. $18,600
B. $19,900
C. $21,200
D. $21,450
E. $24,300
Answer:
Kelso’s is considering spending $80,000 on either a stock repurchase or an extra cash
dividend. Which one of the following values will be the same whether the firm pays a
dividend or repurchases stock? Assume there are no taxes or market imperfections.
A. Number of shares outstanding
B. Price per share
C. Earnings per share
D. Price-earnings (PE) ratio
E. Market value of equity per share
Answer:
A security produced returns of 13 percent, 18 percent, 9 percent, 23 percent, and -17
percent over the past five years, respectively. Based on these five years, what is the
probability that this stock will earn more than 24.76 percent in any one given year?
A. 0.5 percent
B. 1.0 percent
C. 2.5 percent
D. 5.0 percent
E. 16.0 percent
Answer:
A 7 percent bond has a yield to maturity of 6.5 percent. The bond matures in seven
years, has a face value of $1,000, and pays semiannual interest payments. What is the
amount of each coupon payment?
A. $30.00
B. $35.00
C. $60.00
D. $65.00
E. $70.00
Answer:
Last year, a firm earned $31,200 in net income on sales of $217,600. The company paid
$8,500 in dividends. What is the dividend payout ratio?
A. 3.45 percent
B. 4.71 percent
C. 16.25 percent
D. 22.85 percent
E. 27.24 percent
Answer:
Which one of the following will increase the present value of a lump sum future
amount? Assume the interest rate is a positive value and all interest is reinvested.
A. Increase in the time period
B. Increase in the interest rate
C. Decrease in the future value
D. Decrease in the interest rate
E. None of these
Answer: