1) Taylor’s Market received five checks today and went to the bank to deposit all of
them. Unfortunately, the bank was closed for the day due to a robbery. How does the
bank closure affect the firm’s float assuming these five checks are the only outstanding
bank items?
A.Collection float increased
B.Collection float decreased
C.Disbursement float increased
D.Disbursement float decreased
E.Net float remained unchanged
2) Sunshine Rentals has a debt-equity ratio of 0.84. Return on assets is 7.9 percent, and
total equity is $438,000. What is the net income?
A.$41,147.09
B.$54,311.29
C.$63,667.68
D.$48,887.02
E.$50,458.95
3) Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms
applies to the 28 percent?
A.Portfolio variance
B.Portfolio standard deviation
C.Portfolio weight
D.Portfolio expected return
E.Portfolio beta
4) The Sarbanes-Oxley Act:
A.makes the officers of a public corporation personally responsible for the firm’s
financial statements
B.requires all corporations to fully disclose its financial dealings to the general public
C.places the responsibility for a firm’s financial statements solely on the chief financial
officer
D.requires that the board of directors be solely responsible for the firm’s financial
dealings
E.places total responsibility for the financial statements of a firm on the auditor who
certifies the statements
5) If inflation is expected to steadily decrease in the future, the term structure of interest
rates will most likely be:
A.upward-sloping
B.flat
C.humped
D.downward-sloping
E.double-humped
6) A bond has a $1,000 face value, a market price of $1,036, and pays interest payments
of $70 every year. What is the coupon rate?
A.6.76 percent
B.7.00 percent
C.7.12 percent
D.13.51 percent
E.14.00 percent
7)
Please refer to Oscar’s financial statements. What was the increase in retained earnings
of Oscar’s during 2012?
A.$450
B.$1,380
C.$1,830
D.$2,280
E.None of the above
8) An asset used in a 3-year project falls in the five-year MACRS class for tax purposes.
The asset has an acquisition cost of $5.4 million and will be sold for $1.2 million at the
end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the
asset?
Table 9.7 Modified ACRS depreciation allowances
A.$1,075,680
B.$780,000
C.$904,320
D.$1,324,320
E.$1,187,560
9) Valentino’s maintains a constant debt-equity ratio of 0.45. The firm had net income of
$11,800 for the year and paid $6,500 in dividends. The firm has total assets of $92,000.
What is the sustainable growth rate?
A.7.38 percent
B.8.27 percent
C.9.11 percent
D.9.62 percent
E.10.38 percent
10) Which one of the following is a key provision of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005?
A.Disallowance of bankruptcy prepacks
B.Right granted to creditors to file their own reorganization plan once a firm is in
bankruptcy for 18 months
C.Disallowance of all management bonus payments while a firm is in bankruptcy
D.Requirement that only creditors can file reorganization plans for a bankrupt firm
E.Requirement for all Chapter 11 bankruptcies to be converted to Chapter 7
bankruptcies after 18 months
11) Six months ago, Altman Metal Works repurchased $20,000 of its common stock.
The company pays regular quarterly dividends totaling $7,500 per quarter. What is the
amount of the cash flow to stockholders for the past year if no additional shares were
issued?
A.-$10,000
B.$20,000
C.$27,500
D.$30,000
E.$50,000
12) Ben invested $5,000 twenty years ago with an insurance company that has paid him
5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a
fund that has paid him 5 percent interest, compounded annually. How much more
interest has Charles earned than Ben over the past 20 years?
A.$0
B.$2,109.16
C.$3,266.49
D.$7,109.16
E.$8,266.49
13) An investment has an initial cost of $3.2 million. This investment will be
depreciated by $900,000 a year over the 3-year life of the project. Should this project be
accepted based on the average accounting rate of return if the required rate is 10.5
percent? Why or why not?
A.Yes; because the AAR is 10.5 percent
B.Yes; because the AAR is less than 10.5 percent
C.Yes; because the AAR is greater than 10.5 percent
D.No; because the AAR is greater than 10.5 percent
E.No; because the AAR is less than 10.5 percent
14) You have been told that you need $21,600 today in order to have $100,000 when
you retire 42 years from now. What rate of interest was used in the present value
computation? Assume interest is compounded annually.
A.3.72 percent
B.3.89 percent
C.4.01 percent
D.4.23 percent
E.4.28 percent
15) As of this morning, your firm had a ledger balance of $740 with no outstanding
deposits or checks. Today, your firm deposited 5 checks in the amount of $89 each and
wrote a check in the amount of $330. What is the amount of the collection float as of
the end of the day?
A.$115
B.$240
C.$330
D.$445
E.$775
16) The Gift House offers credit to its customers and charges interest of 1.1 percent per
month. What is the annual percentage rate?
A.13.20 percent
B.13.39 percent
C.13.84 percent
D.14.03 percent
E.14.24 percent
17) During a normal month, Cunningham’s Lumber receives a total of 8 checks with a
total value of $546,000. On average, it takes 1 day from the date of deposit for the
funds from these checks to be available to the firm. Assume each month has 30 days.
What is the average daily float?
A.$18,200
B.$273,000
C.$546,000
D.8,190,000
E.$16,380,000
18) Which one of the following is the equity risk arising from the capital structure
selected by a firm?
A.Strategic risk
B.Financial risk
C.Liquidity risk
D.Industry risk
E.Business risk
19) Which one of the following terms is inclusive of both direct and indirect bankruptcy
costs?
A.Financial distress costs
B.Capital structure costs
C.Financial leverage
D.Homemade leverage
E.Cost of capital
20) Which one of the following statements concerning financial leverage is correct?
A.Financial leverage increases profits and decreases losses
B.Financial leverage has no effect on a firm’s return on equity
C.Financial leverage refers to the use of common stock
D.Financial leverage magnifies both profits and losses
E.Increasing financial leverage will always decrease the earnings per share
21) Which one of the following is specifically designed to compute the rate of return on
a project that has unconventional cash flows?
A.Average accounting return
B.Profitability index
C.Internal rate of return
D.Indexed rate of return
E.Modified internal rate of return
22) Which one of the following can be defined as a benefit-cost ratio?
A.Net present value
B.Internal rate of return
C.Profitability index
D.Accounting rate of return
E.Modified internal rate of return
23) Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011,
appear below.
Estimate FM’s after-tax cost of debt capital.
A.2.21%
B.4.10%
C.4.55%
D.6.30%
E.7.00%
24) Zacariah’s Nursery has 6,000 shares of stock outstanding at a market price of $20 a
share. The earnings per share are $1.54. The firm has total assets of $315,000 and total
liabilities of $186,000. Today, the firm is paying an annual cash dividend of $0.80 a
share. Ignore taxes. What will the earnings per share be after the dividend is paid?
A.$0.31
B.$0.74
C.$1.54
D.$20.70
E.$21.02
25) Given the following exchange rates, what is the cross-rate for euros in terms of
British pounds?
A.1.1066 = 1
B.1.1079 = 1
C.1.1092 = 1
D.1.1103 = 1
E.1.1116 = 1
26) As CFO of Nile Holdings, a carpet wholesaler, you have the following information
as of December 2011:
Nile has an attractive investment opportunity, and to finance it, must decide whether to
issue $100 million in new debt or new equity.
Suppose Nile expects $4.52 in EPS next year if it does not go through with the
investment and associated financing. As a shareholder, to satisfy its funding needs for
the investment opportunity, do you prefer the company issues $100 million in new debt
at an interest rate of 7%, or issues 2 million shares of equity at a target price of $50?
Show supporting calculations, and provide arguments and potential counter-arguments
for your recommendation.
27) Which is more important from a finance perspective—net income or operating cash
flow? What is the difference between these two values?
28) Identify some of the specific costs firms incur if their current asset levels are either
too high or too low.
29) “A firm can’t use interest tax shields unless it has (taxable) income to shield.” What
does this statement imply for capital structure? Explain briefly, comparing the following
two examples: a start-up biotech firm and an electric utility company.
30) Jesse just won the state lottery. He has been given the option of receiving either
$66.4 million today or $5 million a year for the next 30 years, with the first payment
paid today. Describe the process that Jesse should use to determine which payment
option he prefers. Ignore all taxes and assume that Jesse will live for at least 45 more
years.
31) Explain the primary goal of the Sarbanes-Oxley Act in 2002 and discuss whether or
not this act appears to be effectively meeting that goal.
32) Explain why the capital structure of a firm is irrelevant to equity investors.
33) Give an example of a potential agency problem for a corporation and identify
means by which the firm can help reduce or eliminate that problem.