1) Interest rates The Wall Street Journal reports that the current rate on 10-year Treasury
bonds is 6.75 percent, on 20-year Treasury bonds is 7.25 percent, and on a 20-year
corporate bond is 8.50 percent. Assume that the maturity risk premium is zero. If the
default risk premium and liquidity risk premium on a 10-year corporate bond is the
same as that on the 20-year corporate bond, what is the current rate on a 10-year
corporate bond.
A.7.50%
B.8.00%
C.8.50%
D.8.75%
2) A firm is expected to pay a dividend of $2.00 next year and $3.75 the following year.
Financial analysts believe the stock will be at their price target of $125.00 in two years.
Compute the value of this stock with a required rate of return of 15%.
A.$78.34
B.$81.05
C.$87.13
D.$99.09
3) Which ratio measures the operating return on the firm’s assets irrespective of
financial leverage and taxes?
A.Basic earning power ratio
B.Profit margin
C.Return on Assets
D.Operating Leverage Return
4) An estimated WACC computed using some sort of proxy for the average equity risk
of the projects in a particular business unit is known as the ____________.
A.Business unit WACC
B.Pure play beta
C.Divisional WACC
D.Component cost
5) Variable Growth A fast growing firm recently paid a dividend of $0.50 per share. The
dividend is expected to increase at a 25 percent rate for the next 3 years. Afterwards, a
more stable 12 percent growth rate can be assumed. If a 15 percent discount rate is
appropriate for this stock, what is its value?
A.$5.00
B.$22.62
C.$25.75
D.$36.46
6)
Corporate Taxes The AOK Corporation had a 2008 taxable income of $2,200,000 from
operations after all operating costs but before
(1) interest charges of $90,000,
(2) dividends received of $750,000,
(3) dividends paid of $80,000, and
(4) income taxes.
Using the tax schedule in Table 2.3, what is AOK’s income tax liability?
What are AOK’s average and marginal tax rates on taxable income from operations?
A.$793,900, 34%, 34%, respectively
B.$793,900, 36.0864%, 34%, respectively
C.$972,400, 34%, 34%, respectively
D.$972,400, 44.2%, 34%, respectively
7) Your firm needs a computerized machine tool lathe which costs $50,000, requires
$10,000 in installation and another $12,000 in maintenance for each year of its 3-year
life. After 3 years, this machine will be replaced. The machine falls into the MACRS
3-year class life category. Assume a tax rate of 30% and a discount rate of 12%.
Calculate the depreciation tax shield for this project in year 1 .
A.$7,199.20
B.$8,886.00
C.$5,999.40
D.$6,554.40
8) Which of these makes this a true statement? When determining the appropriate
weights used in calculating a WACC, it should reflect
A.the relative sizes of the total book capitalizations for each kind of security that the
firm issues
B.the relative sizes of the total market capitalizations for each kind of security that the
firm issues
C.only the market after-tax cost of debt
D.only the market after-tax cost of equity
9) Which of the following is a theory that the difference in interest rates between two
countries is equal to the difference between the forward currency exchange rate and the
spot exchange rate?
A.purchasing power parity
B.interest rate parity
C.law of one price
D.currency swap parity
10) Which of the following is the primary goal of a firm?
A.maximize sales
B.maximize net income
C.maximize earnings per share
D.maximize shareholder wealth
11) Which of the following is incorrect with respect to limit orders?
A.They can be used only to buy stock
B.If the current quote does not meet the price cited in the limit order, the trade is not
executed
C.The advantage of the limit order is that the investor makes the trade at the desired
price
D.The disadvantage of the limit order is that the trade might not be executed at all
12) Calculation of Average Costs with Economies of Scope Building Supplies is
considering a merger with Tools and More. Building’s total operating costs of producing
services are $4 million for a sales volume of $20 million. Tools’ total operating costs of
producing services are $1 million for a sales volume of $5 million. Suppose that
synergies in the production process result in a cost of production for the merged firms
totaling $4.8 million with total sales remaining unchanged. Calculate the total average
cost for the merged firm.
A.9.6%
B.40.0%
C.19.2%
D.20.0%
13) Free Cash Flow The 2010 income statement for Lou’s Shoes shows that
depreciation expense is $2 million, EBIT is $5 million, EBT is $3 million, and the tax
rate is 40 percent. At the beginning of the year, the balance of gross fixed assets was
$16 million and net operating working capital was $6 million. At the end of the year
gross fixed assets was $20 million. Lou’s free cash flow for the year was $4 million.
What is their end of year balance for net operating working capital?
A.$1.8 million
B.$3.8 million
C.$5.8 million
D.$12.2 million
14) Changes in Growth and Stock Valuation Consider a firm that had been priced using
a 6 percent growth rate and a 9 percent required rate. The firm recently paid a $0.50
dividend. The firm has just announced that because of a new joint venture, it will likely
grow at an 8 percent rate. How much should the stock price change (in dollars and
percentage)?
A.$33.33, 67%
B.$33.33, 198%
C.$36.33, 67%
D.$36.33, 206%
15) Suppose your firm is considering investing in a project with the cash flows shown
below, that the required rate of return on projects of this risk class is 8 percent, and that
the maximum allowable payback and discounted payback statistics for the project are
3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should it
be accepted or rejected?
A.IRR = 16.92%; accept the project
B.IRR = 7.123%; reject the project
C.IRR = 18.32%; accept the project
D.IRR = 7.59%; reject the project
16) Would it be worth it to incur a compensating balance of $9,000 in order to get a .
70-percent-lower interest rate on a 1-year, pure discount loan of $250,000?
A.yes
B.no
C.not enough information is given to determine
17) You have secured a loan from your bank for two years to build your home. The
terms of the loan are that you will borrow $120,000 now and an additional $52,000 in
one year. Interest of 9% APR will be charged on the balance monthly. Since no
payments will be made during the 2-year loan, the balance will grow. At the end of the
two years, the balance will be converted to a traditional 30-year mortgage at a 6.5%
interest rate. What will you pay as monthly mortgage payments (principal and interest
only)?
A.$998.49
B.$1063.27
C.$1,190.14
D.$1,266.97
18) Which of the following statements is true?
A.If the new project is riskier than the firm’s existing projects, then it should be charged
a higher cost of capital
B.If the new project is riskier than the firm’s existing projects, then it should be charged
a lower cost of capital
C.If the new project is riskier than the firm’s existing projects, then it should be charged
the firm’s cost of capital
D.The new project’s risk is not a factor in determining its cost of capital
19) Suppose that Farrah’s Hair Care has annual sales of $100,000, cost of goods sold of
$65,000, average inventories of $2,000, and average accounts receivable of $5,000.
Assuming that all of Farrah’s sales are on credit, what will be the firm’s operating cycle?
A.7.02
B.11.23
C.18.25
D.29.48
20) Sally is choosing between two bonds both of which mature in 15 years and have the
same level of risk. Bond A is a municipal bond that yields 5.15%. Bond B is a corporate
bond that yields 7.15%. If Sally is in the 28% tax bracket, which bond should she select
and why?
A.Sally should select Bond A because its interest income is not taxable
B.Sally will be indifferent between Bond A and B since the taxable equivalent yield of
Bond A equals the yield of Bond B
C.Sally should select Bond A because its taxable equivalent yield is greater than the
yield of Bond B
D.Sally should select Bond B because the taxable equivalent yield of Bond A is less
than the yield of Bond B
21) Expected Return and Risk Compute the standard deviation given these four
economic states, their likelihoods, and the potential returns:
A.6.71%
B.22.5%
C.23.37%
D.52.20%
22) Solving for Time How long will it take $100 to reach $500 when it grows at 10
percent per year?
A.7.20 years
B.16.89 years
C.17.46 years
D.40.00 years
23) We commonly measure the risk-return relationship using which of the following?
A.coefficient of variation
B.correlation coefficient
C.standard deviation
D.expected returns
24) Bond Prices and Interest Rate Changes A 6 percent coupon bond with 12 years left
to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one
year, the yield to maturity will be 6.25 percent. What is the change in price the bond
will experience in dollars? (Assume semi-annual interest payments and $1,000 par
value.)
A.$19.67
B.$21.55
C.$25.00
D.$41.22
25) Sipe’s Paint and Wallpaper, Inc., needs to raise $1.05 million to finance plant
expansion. In discussions with its investment bank, Sipe’s learns that the bankers
recommend a gross price of $22 per share and that 50,000 shares of stock be sold. If the
net proceeds on the stock sale leave Sipe’s with $1.05 million, what percent of the stock
price does the underwriter’s spread represent?
A.4.29%
B.4.55%
C.5.62%
D.6.15%
26) Calculating Costs of Issuing Debt Just Add Water, Inc., with the help of its
investment bank recently issued $200,000,000 of new debt. The offer price on the debt
was $1,000 per bond and the underwriter’s spread was 4 percent of the gross proceeds.
What amount of capital funding did Just Add Water, Inc., raise through this bond issue?
A.$1,000
B.$8,000,000
C.$192,000,000
D.$200,000,000
27) Possible shapes for the yield curve include all of the following except
___________.
A.Upward sloping
B.Humped
C.Horizontal line
D.Vertical line
28) FarCry Industries, a maker of telecommunications equipment, has 6 million shares
of common stock outstanding, 1 million shares of preferred stock outstanding, and 10
thousand bonds. If the common shares are selling for $27 per share, the preferred shares
are selling for $15 per share, and the bonds are selling for 119% of par ($1000), what
weight should you use for debt in the computation of FarCry’s WACC?
A.4.93%
B.5.07%
C.5.81%
D.6.30%
29) Would it be worth it to incur a compensating balance of $15,000 in order to get a
2-percent-lower interest rate on a 1-year, pure discount loan of $1,000,000?
A.yes
B.no
C.not enough information is given to determine
30) What is the difference between a lockbox system and concentration banking?
A.In concentration banking, both physical collection and processing take place close to
the customer but in a lockbox system, neither the collections nor processing take place
close to the customer
B.In a lockbox system, customers’ payments are physically collected close to them and
much of the processing takes place close to the bank, but in concentration banking both
physical collection and processing take place close to the bank
C.Concentration banking involves using several banks to fund a large loan and lockbox
systems deal with the ability to speed up collections
D.None of these
31) FedEx Corp stock ended the previous year at $113.39 per share. It paid a $0.40 per
share dividend last year. It ended last year at $126.69. If you owned 300 shares of
FedEx, what was your dollar return and percent return?
A.$3,990; 11.73%
B.$4,110; 12.08%
C.$4,250; 12.29%
D.$2,009; 9.13%
32) Which statement is true?
A.The less liquid assets a firm holds, the less likely it is that the firm will experience
financial distress
B.The lower the liquidity ratios, the less liquidity risk a firm has
C.Liquid assets generate profits for the firm
D.Extremely high levels of liquidity guard against liquidity crises, but at the cost of
lower returns on assets
33) What is the taxable equivalent yield on a municipal bond with a yield to maturity of
4% for an investor in the 28% tax bracket?
A.2.88%
B.3.87%
C.4.51%
D.5.56%
34) Internal Growth Rate Leash N Collar reported a profit margin of 8%, total asset
turnover ratio of 1.5 times, debt-to-equity ratio of 0.75 times, net income of $400,000,
and dividends paid to common stockholders of $200,000. The firm has no preferred
stock outstanding. What is Leash N Collar’s internal growth rate?
A.5.2632%
B.7.3333%
C.8.6956%
D.6.383%
ROA = Profit Margin x Total asset turnover = 8% x 1.5 = 12%
RR = ($400,000 – $200,000)/$400,000 = .50
35) Which of the following statements is correct?
A.Accountants are focused on what happened in the past
B.Financial managers are focused on what happened in the past
C.Both accountants and financial managers use total quality management systems to
standardize data
D.Financial managers double-check the accountant’s statements