1) Which of the following statements is correct?
A.The flotation-adjusted cost of equity will always be less than the cost of equity that
has not been adjusted for flotation costs
B.The flotation-adjusted cost of equity will always be more than the cost of equity that
has not been adjusted for flotation costs
C.The flotation-adjusted cost of equity may be more than or less than the cost of equity
that has not been adjusted for flotation costs
D.None of these statements is correct
2) Calculating Fees on a Loan Commitment Starr Co. has been approved for a $100,000
loan commitment from its local bank. The bank has offered the following terms: term =
1 year, up-front fee = 75 basis points, back-end fee = 25 basis points, and rate on the
loan = 8.00%. Starr expects to immediately take down $80,000 and no more during the
year unless there is some unforeseen need. What is the total interest and fees Starr can
expect to pay on this loan commitment?
A.$7050
B.$7175
C.$7200
D.$7400
3) Suppose you sell a fixed asset for $112,000 when its book value is $112,000. If your
company’s marginal tax rate is 39%, what will be the effect on cash flows of this sale
(i.e., what will be the after-tax cash flow of this sale)?
A.$0
B.$68,320
C.$112,000
D.$34,720
4) Which of the following statements is correct?
A.The effect of increasing a firm’s use of financial leverage is to decrease the volatility
of the firm’s earnings
B.The effect of increasing a firm’s use of financial leverage could be either to increase
or decrease the volatility of the firm’s earnings depending on how much leverage is
utilized
C.The effect of increasing a firm’s use of financial leverage is to increase the volatility
of the firm’s earnings
D.None of these statements is correct
5) Investor enthusiasm causes an inflated bull market that drives prices too high, ending
in a dramatic collapse in prices.
A.behavior finance
B.efficient market
C.privately held information
D.stock market bubble
6) A theory that describes the types of information that are reflected in current stock
prices.
A.asset pricing
B.behavioral finance
C.efficient market hypothesis
D.public information
7) A stock investor deposited $3,450 six years ago. Today the account is valued at
$2,180. What annual rate of return has this investor earned?
A.7.95%
B.-7.37%
C.10.26%
D.-9.74%
8) Which of the following is NOT one of the Baumol Model’s unrealistic assumptions?
A.The firm has a constant, perfectly predictable distribution rate for cash
B.No cash will come in during the period in question
C.No allowance for any safety stock of extra cash to buffer the firm against
unexpectedly high demand for cash
D.No assumption to start from a replenishment level of cash then decline smoothly to a
value of zero
9) Isaac realizes that he charged too much on his credit card and has racked up $5,000
in debt. If he can pay $225 each month and the card charges 17.55% APR (compounded
monthly), how long will it take him to pay off the credit card?
A.19.14 months
B.21.77 months
C.22.62 months
D.27.07 months
10) Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in
10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and
$1,000 par value.)
A.$553.68
B.$558.66
C.$940.00
D.$1000.00
11) Statement of Cash Flows Paige’s Properties Inc. reported 2008 net income of $5
million and depreciation of $1,500,000. The top part Paige’s Properties, Inc.’s 2007 and
2008 balance sheets is listed below (in millions of dollars).
What is the 2008 net cash flow from operating activities for Paige’s Properties, Inc.?
A.-$13,500,000
B.$1,500,000
C.$5,000,000
D.$6,500,000
12) Dogs 4 U Corporation has net cash flow from financing activities for the last year
of $10 million. The company paid $8 million in dividends last year. During the year, the
change in notes payable on the balance was $9 million, and change in common and
preferred stock was $0 million. The end of year balance for long-term debt was $44
million. Calculate the beginning of year balance for long-term debt.
A.$37 million
B.$34 million
C.$33 million
D.$35 million
13) Asset Management and Profitability Ratios You have the following information on
Universe It Ts, Inc.: sales to working capital = 10 times, profit margin = 25%, net
income available to common stockholders = $3 million, and current liabilities = $1
million. What is the firm’s balance of current assets?
A.$1.075 m
B.$1.2 m
C.$2.2 m
D.$5 m
14) Buying Stock with Commission At your discount brokerage firm, it costs $8.50 per
stock trade. How much money do you need to buy 200 shares of Apple (AAPL), which
trades at $171.54?
A.$32,608.00
B.$34,299.50
C.$34,316.50
D.$36,008.00
15) Compute the present value of a $2,500 deposit in year 4 and another $10,000
deposit at the end of year 8 if interest rates are 15%.
A.$4,211.26
B.$4,572.19
C.$4,698.40
D.$4,901.57
16) Which of these is the fee charged by a bank on any unused balances of a loan
commitment line at the end of the loan commitment period?
A.back-end (or commitment) fee
B.simple interest expense
C.discounted interest
D.up-front (or facility) fees
17) Calculating Costs of Issuing Debt Roy’s Bar, Inc., needs to raise $25 million to
finance firm expansion. In discussions with its investment bank, Roy’s learns that the
bankers recommend a debt issue with an offer price of $1,000 per bond and they will
charge an underwriter’s spread of 6 percent of the gross price. How many bonds will
Roy’s need to sell in order to receive the $25 million they need?
A.23,500
B.25,000
C.26,500
D.26,596
18) Market Value Ratios Lab R Doors’ year-end price on its common stock is $40. The
firm has total assets of $75 million, the debt ratio is 60%, there is no preferred stock,
and there are 4 million shares of common stock outstanding. Calculate the
market-to-book ratio for Lab R Doors.
A.2.13
B.3.20
C.5.33
D.10.00
19) Time to Maturity A bond issued by a corporation on May 1, 1999, is scheduled to
mature on May 1, 2019 . If today is May 2, 2009, what is this bond’s time to maturity?
(Assume annual interest payments.)
A.9 years
B.10 years
C.19 years
D.20 years
20) Calculation of Average Costs with Economies of Scope Baby Supplies is
considering a merger with Tot Toy Stores. Baby’s total operating costs of producing
services are $450,000 for sales volume of $2.15 million. Tot’s total operating costs of
producing services are $250,000 for a sales volume (JP) of $975,000. Calculate the
average cost of production for the Baby and Tot Toy firms, respectively.
A.11.63%, 20.93%
B.20.93%, 25.64%
C.46.15%, 11.63%
D.22.4%, 22.4%
21) Bill’s Boards has 20 million shares of common stock outstanding, 4 million shares
of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling
for $30 per share, the preferred shares are selling for $17 per share, and the bonds are
selling for 96 percent of par, what would be the weight used for debt in the computation
of Bill’s WACC?
A.0.83%
B.2.79%
C.2.87%
D.3.33%
22) You own $10,000 of Denny’s Corp stock that has a beta of 3.2. You also own
$15,000 of Qwest Communications (beta = 1.9) and $15,000 of Southwest Airlines
(beta = 0.4). Assume that the market return will be 13 percent and the risk-free rate is
5.5 percent. What is the risk premium of the portfolio?
A.10.51%
B.11.49%
C.12.45%
D.13.62%
23) If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its
payables turnover?
A.11.06
B.36.5
C.8.48
D.33
24) A project costs $101,000 today and is expected to generate cash flows of $31,000
per year for the next 15 years. At what rate is the NPV equal to zero?
A.30.10%
B.29.83%
C.22.47%
D.31.38%
25) Solving for Rates You invested $5,000 in the stock market one year ago. Today, the
investment is valued at $5,500. What return did you earn? What return would you suffer
next year for your investment to be valued at the original $5,000?
A.10%, -9.09%, respectively
B.-10%, +9.09%, respectively
C.110%, -10%, respectively
D.110%, -9.09%, respectively
26) Would a firm ever use short-term debt to finance permanent current assets? Why or
why not?
27) Explain why the divisional cost of capital approach may cause problems if new
projects are assigned to the wrong division.
28) Explain the Rule of Signs as it pertains to IRR.
29) List and explain the “five C’s” of credit analysis.
30) Explain why the Rule of 72 is less accurate with higher interest rates.