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Soup Galore is a partnership that was formed three years ago for the purpose of
creating, producing, and distributing healthy soups in a dried form. The firm has been
extremely successful thus far and has decided to incorporate and offer shares of stock to
the general public. What is this type of an equity offering called?
A. venture capital offering
B. shelf offering
C. private placement
D. seasoned equity offering
E. initial public offering
A U.S. Treasury bond that is quoted at 100:11 is selling:
A. for 11 percent more than par value.
B. at an 11 percent discount.
C. for 100.11 percent of face value.
D. at par and pays an 11 percent coupon.
E. for 100 and 11/32nds percent of face value.
Which one of these statements related to preferred stock is correct?
A. Preferred shareholders normally receive one vote per share of stock owned.
B. Preferred shareholders determine the outcome of any election that involves a proxy
fight.
C. Preferred shareholders are considered to be the residual owners of a corporation.
D. Preferred stock normally has a stated liquidating value of $1,000 per share.
You expect to receive $9,000 at graduation in 2 years. You plan on investing this money
at 10 percent until you have $60,000. How many years will it be until this occurs?
A. 18.78 years
B. 19.96 years
C. 21.90 years
D. 23.08 years
E. 25.00 years
You buy an annuity that will pay you $24,000 a year for 25 years. The payments are
paid on the first day of each year. What is the value of this annuity today if the discount
rate is 8.5 percent?
A. $241,309
B. $245,621
C. $251,409
D. $258,319
E. $266,498
The Lumber Yard is considering adding a new product line that is expected to increase
annual sales by $238,000 and cash expenses by $184,000. The initial investment will
require $96,000 in fixed assets that will be depreciated using the straight-line method to
a zero book value over the 6-year life of the project. The company has a marginal tax
rate of 32 percent. What is the annual value of the depreciation tax shield?
A. $5,120
B. $13,160
C. $25,840
D. $32,560
E. $41,840
For financial statement purposes, goodwill created by an acquisition:
A. must be amortized on a straight-line basis over 10 years.
B. must be reviewed each year and amortized to the extent that it has lost value.
C. is expensed evenly over a 20-year period.
D. never affects the profits of the acquiring firm.
E. is recorded in an amount equal to the fair market value of the assets of the target
firm.
You just settled an insurance claim. The settlement calls for increasing payments over a
10-year period. The first payment will be paid one year from now in the amount of
$10,000. The following payments will increase by 4.5 percent annually. What is the
value of this settlement to you today if you can earn 8 percent on your investments?
A. $76,408.28
B. $80,192.76
C. $82,023.05
D. $84,141.14
E. $85,008.16
A firm has a debt-equity ratio of 0.42. What is the total debt ratio?
A. 0.30
B. 0.36
C. 0.44
D. 1.58
E. 2.38
Your company is deciding when to invest in a new machine. The new machine will
increase cash flow by $240,000 per year. You believe the technology used in the
machine has a 10-year life; in other words, no matter when you purchase the machine, it
will be obsolete 10 years from today. The machine is currently priced at $1,200,000.
The cost of the machine will decline by $120,000 per year until it reaches $720,000,
where it will remain. Your required return is 8 percent. In which year should you
purchase the machine?
A. Year 0
B. Year 1
C. Year 2
D. Year 3
E. Year 4
Glendale Marine is being acquired by Inland Motors for $53,000 worth of Inland
Motors stock. Inland Motors has 6,200 shares of stock outstanding at a price of $54 a
share. Glendale Marine has 1,700 shares outstanding with a market value of $30 a
share. The incremental value of the acquisition is $2,600. What is the total number of
shares in the new firm?
A. 6,200 shares
B. 7,181 shares
C. 7,229 shares
D. 7,852 shares
E. 7,900 shares
Alliance Chemicals recently acquired Swenson Industries in a transaction that produced
a NPV of $1.3 million. This NPV is referred to as:
A. the agency effect.
B. the consolidating value.
C. diversification.
D. the consolidation effect.
E. synergy.
Your older sister deposited $5,000 today at 8.5 percent interest for 5 years. You would
like to have just as much money at the end of the next 5 years as your sister will have.
However, you can only earn 7 percent interest. How much more money must you
deposit today than your sister did if you are to have the same amount at the end of the 5
years?
A. $321.19
B. $360.43
C. $387.78
D. $401.21
E. $413.39
Jiminy's Cricket Farm issued a 30-year, 8 percent, semiannual bond 6 years ago. The
bond currently sells for 114 percent of its face value. What is the aftertax cost of debt if
the company's tax rate is 31 percent?
A. 4.63 percent
B. 4.70 percent
C. 4.75 percent
D. 4.82 percent
E. 4.86 percent
The bottom-up approach to computing the operating cash flow applies only when:
A. both the depreciation expense and the interest expense are equal to zero.
B. the interest expense is equal to zero.
C. the project is a cost-cutting project.
D. no fixed assets are required for a project.
E. both taxes and the interest expense are equal to zero.
Long-run financial risk:
A. can frequently be hedged on a permanent basis.
B. is best hedged on a division by division basis within a conglomerate.
C. is related more to near-term transactions than to advancements in technology.
D. generally results from changes in the underlying economics of a business.
E. can generally be hedged such that the financial viability of a firm is protected.
Amy is the chief financial officer of a retail toy store. Recently, she decided that the
firm should expand its operations and open two additional stores. Within a very brief
period, it was obvious that Amy had made a very bad decision in opening those stores,
given that the economy is in the middle of a severe recession. In reflecting back on her
decision, Amy realizes that she made a bad decision due to a reasoning error. Which
one of the following areas of study best applies to this situation?
A. corporate ethics
B. financial statement analysis
C. managerial finance
D. debt management
E. behavioral finance
Jasper United had sales of $21,000 in 2008 and $24,000 in 2009. The firm's current
accounts remained constant. Given this information, which one of the following
statements must be true?
A. The total asset turnover rate increased.
B. The days' sales in receivables increased.
C. The net working capital turnover rate increased.
D. The fixed asset turnover decreased.
E. The receivables turnover rate decreased.
What is the price of a put option given the following information?
A. $16.57
B. $16.83
C. $17.74
D. $18.47
E. $19.02
Which one of the following will increase the maximum rate of growth a corporation can
achieve?
A. avoidance of external equity financing
B. increase in corporate tax rates
C. reduction in the retention ratio
D. decrease in the dividend payout ratio
E. decrease in sales given a positive profit margin
Which one of the following is an example of systematic risk?
A. investors panic causing security prices around the globe to fall precipitously
B. a flood washes away a firm's warehouse
C. a city imposes an additional one percent sales tax on all products
D. a toymaker has to recall its top-selling toy
E. corn prices increase due to increased demand for alternative fuels
A jumbo CD:
A. is issued by the federal government.
B. generally matures between 2 and 5 years.
C. is a loan of $100,000 or more to a municipality.
D. is a loan of $1 million or more on a short-term basis.
E. is a short-term loan of $100,000 or more to a commercial bank.
International bonds issued in a single country and denominated in that country's
currency are called:
A. Treasury bonds.
B. Eurobonds.
C. gilts.
D. Brady bonds.
E. foreign bonds.
An unlevered firm has a cost of capital of 17.5 percent and earnings before interest and
taxes of $327,500. A levered firm with the same operations and assets has both a book
value and a face value of debt of $650,000 with a 7.5 percent annual coupon. The
applicable tax rate is 38 percent. What is the value of the levered firm?
A. $1,397,212
B. $1,398,256
C. $1,402,509
D. $1,407,286
E. $1,414,414
Which of the following accounts are included in working capital management?
I. accounts payable
II. accounts receivable
III. fixed assets
IV. inventory
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and IV only
E. II, III, and IV only
The financial planning process tends to place the least emphasis on which one of the
following?
A. growth limitations
B. capacity utilization
C. market value of a firm
D. capital structure of a firm
E. dividend policy
Advertisements in a financial newspaper announcing a public offering of securities,
along with a list of the investment banks handling the offering, are called:
A. red herrings.
B. tombstones.
C. Green Shoes.
D. registration statements.
E. cash offers.
You are comparing two annuities with equal present values. The applicable discount
rate is 8.75 percent. One annuity pays $5,000 on the first day of each year for 20 years.
How much does the second annuity pay each year for 20 years if it pays at the end of
each year?
A. $5,211
B. $5,267
C. $5,309
D. $5,390
E. $5,438
J&K Enterprises is considering either leasing or buying some new equipment. The lease
payments would be $3,800 a year. The purchase price is $19,900. The equipment has a
6-year life after which it is expected to have a resale value of $2,100. Your firm uses
straight-line depreciation, borrows money at 11.5 percent, and has a 32 percent tax rate.
What is the aftertax salvage value of the equipment?
A. $1,407
B. $1,428
C. $1,471
D. $1,476
E. $1,512
Holly's is currently an all equity firm that has 9,000 shares of stock outstanding at a
market price of $42 a share. The firm has decided to leverage its operations by issuing
$120,000 of debt at an interest rate of 9.5 percent. This new debt will be used to
repurchase shares of the outstanding stock. The restructuring is expected to increase the
earnings per share. What is the minimum level of earnings before interest and taxes that
the firm is expecting? Ignore taxes.
A. $35,910
B. $38,516
C. $42,000
D. $44,141
E. $45,020
Theta measures an option's:
A. intrinsic value.
B. volatility.
C. rate of time decay.
D. sensitivity to changes in the value of the underlying asset.
E. sensitivity to risk-free rate changes.
Blue Water Systems is analyzing a project with the following cash flows. Should this
project be accepted based on the discounting approach to the modified internal rate of
return if the discount rate is 14 percent? Why or why not?
A. Yes; The MIRR is 13.48 percent.
B. Yes; The MIRR is 17.85 percent.
C. Yes; The MIRR is 21.23 percent.
D. No; The MIRR is 5.73 percent.
E. No; The MIRR is 17.85 percent.
