What is the group of underwriters called who share both the risks and the marketing
responsibilities for a securities offering?
A. Syndicate
B. Underwriting cartel
C. Firm commitment group
D. Dutch auction group
E. Venture capitalists
The cost of preferred stock:
A. increases when a firm’s tax rate decreases.
B. is constant over time.
C. is unaffected by changes in the market price of the stock.
D. is equal to the stock’s dividend yield.
E. increases as the price of the stock increases.
Cash flow to stockholders is defined as:
A. cash flow from assets plus cash flow to creditors.
B. operating cash flow minus cash flow to creditors.
C. dividends paid plus the change in retained earnings.
D. dividends paid minus net new equity raised.
E. net income minus the addition to retained earnings.
Generally speaking, which of the following situations will occur if a seasonal company
adopts a compromise financial policy?
I. Periods where short-term financing is required
II. Less long-term debt than if the firm followed a restrictive financial policy
III. Periods of excess funds which can be invested in short-term marketable securities
IV. Lower investment in fixed assets than if the firm adopted a flexible financial policy
A. I only
B. II only
C. I and III only
D. II and IV only
E. I, III, and IV only
Westover Products has estimated monthly sales for February through May of $9,600,
$10,200, $10,700, and $11,400, respectively. If the accounts receivable period is 45
days, how much will be collected in April? Assume each month has 30 days.
A. $11,800
B. $11,050
C. $10,350
D. $10,450
E. $10,850
The sustainable growth rate is based on the premise that:
A. an additional dollar of debt will be acquired only if an additional dollar in equity
shares is issued.
B. no additional equity will be added to the firm.
C. the debt-equity ratio will be held constant.
D. the dividend payout ratio will be zero.
E. the dividend payout ratio will increase at a steady rate.
Jasper Industrial has no debt outstanding and a total market value of $216,000. Earnings
before interest and taxes, EBIT, are projected to be $15,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 12 percent
higher. If there is a recession, then EBIT will be 15 percent lower. There are currently
8,600 shares outstanding. Ignore taxes. What is the percentage change in EPS when a
normal economy slips into recession?
A. -15.5 percent
B. -15.2 percent
C. -15.0 percent
D. -16.1 percent
E. -14.8 percent
Which one of the following is the best definition of Eurocurrency?
A. Any paper money used by a country that has adopted the euro as its common
currency
B. Money deposited in a financial institution outside the country whose currency is
involved
C. Both paper and coins officially adopted under the euro system of coinage
D. U.S. dollars owned by any country that has adopted the euro as its currency
E. Any exchange of funds between two countries that have adopted the euro as their
official currency
Today, you are purchasing a 20-year, 6 percent annuity at a cost of $48,350. The
annuity will pay annual payments starting one year from today. What is the amount of
each payment?
A. $4,511.08
B. $4,215.37
C. $2,754.40
D. $4,013.20
E. $5,208.19
The Sarbanes-Oxley Act of 2002 has:
A. reduced the annual compliance costs of all publicly traded firms in the U.S.
B. decreased senior management’s involvement in the corporate annual report.
C. greatly increased the number of U.S. firms that are going public for the first time.
D. decreased the number of U.S. firms going public on foreign exchanges.
E. essentially made officers of publicly traded firms personally responsible for the
firm’s financial statements.
You own a portfolio that is invested as follows: $13,700 of Stock A, $4,800 of Stock B,
$16,200 of Stock C, and $9,100 of Stock D. What is the portfolio weight of Stock B?
A. 8.47 percent
B. 10.96 percent
C. 9.80 percent
D. 11.94 percent
E. 13.08 percent
Which statement is correct?
A. An underpriced security will plot below the security market line.
B. A security with a beta of 1.54 will plot on the security market line if it is correctly
priced.
C. A portfolio with a beta of .93 will plot to the right of the overall market.
D. A security with a beta of .99 will plot above the security market line if it is correctly
priced.
E. A risk-free security will plot at the origin.
Currently, the risk-free rate is 3.2 percent. Stock A has an expected return of 11.4
percent and a beta of 1.11. Stock B has an expected return of 13.7 percent. The stocks
have equal reward-to-risk ratios. What is the beta of Stock B?
A. 1.27
B. 1.33
C. 1.36
D. 1.08
E. 1.42
Donovan’s would like to increase its internal rate of growth. Decreasing which one of
the following will help the firm achieve its goal?
A. Return on assets
B. Net income
C. Retention ratio
D. Dividend payout ratio
E. Return on equity
Which of the following duties belong to the underwriters of a firm commitment
securities offer?
I. Duty to offer the Green Shoe provision to all investors who buy at the offer price
II. Duty to set the offer price
III. Duty to distribute the offered shares
IV. Duty to purchase any unsold shares
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Kurt’s Entertainment has a receivables turnover rate of 14.8, a payables turnover rate of
10.4 and an inventory turnover rate of 22.6. What is the length of the firm’s operating
cycle?
A. 34.89 days
B. 39.80 days
C. 40.81 days
D. 42.56 days
E. 38.77 days
Lacey will receive $135,000 a year for 5 years, starting today. If the rate of return is 8.9
percent, what are these payments worth today?
A. $568,346.72
B. $531,019.80
C. $573,323.90
D. $564,009.27
E. $526,468.23
The Sausage Hut is looking at a new sausage system with an installed cost of $187,400.
This cost will be depreciated straight-line to zero over the project’s four-year life, at the
end of which the sausage system can be scrapped for $25,000. The sausage system will
save the firm $69,000 per year in pretax operating costs, and the system requires an
initial investment in net working capital of $9,000, which will be recouped at project
end. If the tax rate is 34 percent and the discount rate is 12 percent, what is the NPV of
this project?
A. $6,508.54
B. -$320.81
C. $560.24
D. $1,410.10
E. $8,211.15
Towne Realty has total assets of $346,200, net fixed assets of $277,400, current
liabilities of $16,100, and long-term liabilities of $124,600. What is the total debt ratio?
A. .47
B. .41
C. .68
D. .56
E. .52
Which one of the following terms applies to a junk bond that was originally issued with
a bond rating of AA?
A. Debenture
B. Covenant
C. Fallen angel
D. Sinking ship
E. Trust deed
An increase in the accounts receivable period is most apt to:
A. lengthen the accounts payable period.
B. shorten the inventory period.
C. shorten the operating cycle.
D. lengthen the cash cycle.
E. shorten the accounts payable period.
Northern Beef has estimated quarterly sales for the coming year, starting with Quarter
1, of $680, $725, $740, and $720, respectively. The accounts receivable balance at the
beginning of Q1 is $330 and the collection period is 60 days. How much cash will the
firm collect in Q1, Q2, and Q3, respectively?
A. $695.00; $498.03; $730.00
B. $695.00; $466.67; $626.67
C. $556.67; $695.00; $730.00
D. $556.67; $367.33; $626.67
E. $647.33; $626.67; $730.00
Currently, you can exchange €100 for $125. The inflation rate in Europe is expected to
be 2.5 percent. In one year, it is expected that €100 can be exchanged for $125.88.
Assume relative purchasing power parity exists. What is the expected inflation rate in
the U.S.?
A. 3.84 percent
B. 4.26 percent
C. 3.20 percent
D. 5.21 percent
E. 5.68 percent
Russell Foods pays a fixed annual dividend of $2.28 a share. At a required return of
11.5 percent, the stock is valued at $43.20 a share. What is the dividend growth rate at
this price?
A. 5.99 percent
B. 5.28 percent
C. 6.12 percent
D. 5.37 percent
E. 6.22 percent
Bruceton’s is a specialty retailer with multiple brick-and-mortar stores and a cost of
capital of 16.4 percent. Specialty Imports is a wholesaler of specialty items and has a
cost of capital of 12.6 percent. Both firms are considering opening a new store in
downtown Chicago at a cost of $1.1 million. Because this type of store would be trendy,
it would have a life of only 8 years and no salvage value. The expected annual net cash
flow is $229,000, regardless of which firm opens the store. Which company(ies), if
either, should open the Chicago store?
A. Bruceton’s only
B. Specialty Imports only
C. Neither company
D. Both companies
E. The answer cannot be determined based on the information provided.
Industrial Tools owes you $38,600. This amount is seriously delinquent so you have
offered to accept weekly payments for one year at an interest rate of 3 percent to settle
this debt in full. What is the amount of each payment?
A. $829.90
B. $818.11
C. $609.18
D. $599.04
E. $753.71
Lawler’s BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of
$4,500. What is the plowback ratio?
A. 46.32 percent
B. 49.78 percent
C. 50.23 percent
D. 58.09 percent
E. 62.99 percent
An agency issue is most apt to develop when:
A. a firm encounters a period of stagnant growth.
B. a firm downsizes.
C. the control of a firm is separated from the firm’s ownership.
D. the firm’s owner is also its key manager.
E. a firm is structured as a general partnership.
The equity section of a firm’s market value balance sheet has common stock of $51,000
(par value $1); capital surplus of $218,300; and retained earnings of $329,700. The
firm’s stock sells for $41 a share. If the firm repurchases $35,000 of stock, what will be
the new market value of the firm’s total equity?
A. $548,571
B. $578,450
C. $599,000
D. $598,146
E. $564,000
Which one of the following indicates that a project is expected to create value for its
owners?
A. Profitability index less than 1.0
B. Payback period greater than the requirement
C. Positive net present value
D. Positive average accounting rate of return
E. Internal rate of return that is less than the requirement
Sweet Music sells 915 musical instruments a year at an average price per instrument of
$870. All sales are credit sales with terms of 2/10, net 40. Hogan’s has found that 87
percent of its customers take advantage of the discounted price. What is the amount of
the firm’s average accounts receivable? The discount amount is applied to a customer’s
account only after payments have been received and processed. Assume a 365-day year.
A. $29,560
B. $30,315
C. $31,280
D. $32,440
E. $32,620
Lisa has $1,000 in cash today. Which one of the following investment options is most
apt to double her money?
A. 6 percent interest for 3 years
B. 12 percent interest for 5 years
C. 7 percent interest for 9 years
D. 8 percent interest for 9 years
E. 6 percent interest for 10 years
Your parents spent $7,800 to buy 200 shares of stock in a new company 12 years ago.
The stock has appreciated 14.6 percent per year on average. What is the current value of
those 200 shares?
A. $36,408.70
B. $40,023.03
C. $39,580.92
D. $40,515.08
E. $37,449.92
The Underground Cafe has an operating cash flow of $187,000 and a cash flow to
creditors of $71,400 for the past year. The firm reduced its net working capital by
$28,000 and incurred net capital spending of $47,900. What is the amount of the cash
flow to stockholders for the last year?
A. -$171,500
B. -$86,700
C. $21,200
D. $95,700
E. $39,700
Which one of the following qualifies as an annuity payment?
A. Weekly grocery bill
B. Clothing purchases
C. Car repairs
D. Auto loan payment
E. Medical bills