To determine the value of a rights offering, the stockholder needs to know the following
two pieces of information in addition to the current stock price, the:
A. subscription price and the number of rights needed to acquire a new share.
B. amount of new equity to be raised and the number of rights needed to acquire a new
share.
C. amount of new equity to be raised and the standby fee.
D. detachment date and the subscription price.
E. the number of rights needed to acquire a new share and the number of shares
currently owned.
Answer:
You wrote ten call option contracts on JIG stock with a strike price of $41 and an option
price of $.60. What is your total profit on this investment if the price of JIG is $46.05
on the option expiration date?
A. -$5,050
B. -$4,450
C. $410
D. $4,450
E. $5,050
Answer:
Company A is a medical research company that develops and tests new drugs.
Company B is in the news industry and publishes multiple newspapers. If Company A
discovers a new product and its stock rises in value by 5 percent as a result, this will
most likely have ___ effect on Company B’s stock price because the discovery would
be classified as _______ risk.
A. no; a systematic
B. no; an unsystematic
C. a large; a systematic
D. a large; an unsystematic
E. an indeterminate; market
Answer:
Pete’s Boats has beginning long-term debt of $840 and ending long-term debt of $790.
The beginning and ending total debt balances are $1,220 and $1,360, respectively. The
interest paid is $30. What is the amount of the cash flow to creditors?
A.$80
B.-$110
C.$110
D.$20
E.-$80
Answer:
Shareholders who have rights are always:
A. better off if they exercise the rights rather than selling them.
B. better off if they sell their rights rather than exercising them.
C. in the same financial position if they sell or if they exercise their rights.
D. able to purchase one new share for each right they own.
E. financially disadvantaged any time a rights offer is made, regardless of any action
they take.
Answer:
Executive stock options generally have all of the following characteristics except:
A. aligning executive goals with shareholder goals.
B. linking executive compensation to performance.
C. providing tax efficiency.
D. increasing executive base salaries.
E. putting executive pay at risk.
Answer:
Edgeworth Co. has an all-cash policy and sells 50 units per month at $920 a unit. The
variable cost is $700 a unit. Should the firm grant 30 days of credit, it expects its sales
would rise to 60 units without changes to price or costs per unit. The default rate on
credit customers is predicted to be 2.25 percent. The monthly required return is .75
percent. What is the NPV of switching to a credit policy?
A. $266,667
B. $346,333
C. $366,667
D. $240,333
E. $258,778
Answer:
U.S. corporate taxes switch to a constant flat-rate tax once the average tax rate reaches:
A.32 percent.
B.33 percent.
C.28 percent.
D.40 percent.
E.35 percent.
Answer:
A type of short-term loan where the borrower sells its receivables to the lender up-front,
but at a discount to face value, is called:
A. a compensating balance.
B. assigned receivables financing.
C. a letter of credit.
D. factored receivables financing.
E. a bond.
Answer:
You plan to invest $6,500 for three years at 4 percent simple interest. What will your
investment be worth at the end of the three years? A. $6,941.11
A. ANSB. $7,280.00
B. $7,311.62
C. $7,250.00
D. $6,760.00
Answer:
The optimal capital structure has been achieved when the:
A. debt-equity ratio is equal to 1.
B. weight of equity is equal to the weight of debt.
C. cost of equity is maximized given a pretax cost of debt.
D. debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E. debt-equity ratio selected results in the lowest possible weighed average cost of
capital.
Answer:
To ascertain whether the inaccuracy of the variable cost estimate for a project will have
much effect on the final outcome of the project, you should probably conduct _____
analysis.
A. leverage
B. scenario
C. break-even
D. sensitivity
E. cash flow
Answer:
Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in
Year 2, $36,000 in Year 3, and −$5,000 in Year 4. Ginny requires a rate of return of 8
percent and has a required discounted payback period of three years. Based on the
discounted payback method should she make this investment? All things considered, do
you agree with this decision? Why or why not?
A. yes; because the NPV is positive and the project pays back on a discounted basis
within the assigned time period
B. yes; but only because the discounted payback requirement is met
C. no; although the project earns more than 8 percent, there is no situation where the
project can pay back on a discounted basis within three years
D. no; because the discounted payback period is too short
E. yes; discounted payback indicates acceptance but that is not a wise decision as the
NPV is negative and the final cash outflow is ignored by payback
Answer:
Jensen’s Boat Works total costs of holding inventory is $8,400 when its order sizes are
optimized. If the firm places 46 orders a year, what is the fixed cost per order?
A. $106.87
B. $101.15
C. $91.30
D. $87.62
E. $79.08
Answer:
Financial markets fluctuate daily because they:
A. are inefficient.
B. slowly reacting to new information.
C. are continually reacting to new information.
D. offer tremendous arbitrage opportunities.
E. only reflect historical information.
Answer:
Salmon Inc. has debt with both a face and a market value of $227,000. This debt has a
coupon rate of 7 percent and pays interest annually. The expected earnings before
interest and taxes is $87,200, the tax rate is 35 percent, and the unlevered cost of capital
is 12 percent. What is the firm’s cost of equity?
A. 13.25%
B. 13.89%
C. 13.92%
D. 14.27%
E. 14.14%
Answer:
A firm has several options available to it in times of financial distress. The firm may:
A. reduce capital and R & D spending.
B. raise new funds by selling securities or major assets.
C. file for bankruptcy.
D. negotiate with lenders.
E. take any or all of the other actions.
Answer:
Bernstein’s proposed project has an initial cost of $128,600 and cash flows of $64,500,
$98,300, and −$15,500 for Years 1 to 3 respectively. If all negative cash flows are
moved to Time 0 at a discount rate of 10 percent, what is the modified internal rate of
return?
A. 10.00%
B. 9.82%
C. 10.04%
D. 9.69%
E. 9.97%
Answer:
Sports “N More mails out 5 checks per month. These checks average $811, $416,
$6,420, $22,900, and $8,700. The three larger sized checks clear in 1.5 days while the
two smaller checks clear in one day. What is the weighted average delay?
A. 1.48 days
B. 1.39 days
C. 1.46 days
D. 1.37 days
E. 1.00 day
Answer:
The cash cycle will decrease as a result of increasing the:
A. payables turnover.
B. days sales in inventory.
C. operating cycle.
D. inventory turnover rate.
E. accounts receivable period.
Answer:
Sensitivity analysis:
A. provides the tradeoff between fixed and variable costs.
B. provides an estimate of the most profitable situation that is reasonably expected.
C. ANSD. can be conducted on any input value used in the computation of a project’s
NPV.
D. cannot evaluate a change in NPV related to a project’s initial investment.
E. should never be conducted if the base-case scenario results in a negative NPV.
Answer:
Which of the following would be indicative of inefficient markets?
A. overreaction and reversion
B. delayed response
C. immediate and accurate response
D. overreaction with reversion and delayed response
E. immediate and accurate response with a zero NPV
Answer:
You just won the lottery! As your prize you will receive $1,500 a month for 150
months. If you can earn 7 percent, compounded monthly, on your money, what is this
prize worth to you today?
A. $137,003.69
B. $149,676.91
C. $137,962.77
D. $148,104.26
E. $150,723.76
Answer:
Altman develop the Z-score model for publicly traded manufacturing firms. Using
financial statement data and multiple discriminant analysis, he found that:
A. in actual use, a Z-score greater than 2.99 meant bankruptcy within one year.
B. in actual use, a Z-score greater than 1.81 implied a 90 percent chance of bankruptcy
within one year.
C. in actual use, a Z-score of less than 1.81 would predict bankruptcy within one year.
D. in actual use, a Z-score less than 2.99 meant non-bankruptcy within one year.
E. the lower the score the lower the chance of pending bankruptcy.
Answer:
Sara is the recipient of a trust that will pay her $500 on the first day of each month,
starting immediately and continuing for 40 years. What is the value of this inheritance
today if the applicable discount rate is 7.3 percent, compounded monthly?
A. $76,811.30
B. $67,557.52
C. $89,204.04
D. $78,192.28
E. $80,006.09
Answer:
The receivables turnover ratio is measured as:
A. sales plus accounts receivable.
B. sales divided by accounts receivable.
C. sales minus accounts receivable, divided by sales.
D. accounts receivable times sales.
E. accounts receivable divided by sales.
Answer:
You want to compile a $1,000 portfolio which will be invested in Stocks A and B plus a
risk-free asset. Stock A has a beta of 1.2 and Stock B has a beta of .7. If you invest $300
in Stock A and want a portfolio beta of .9, how much should you invest in Stock B?
A. $700.00
B. $268.40
C. 300.00
D. $771.43
E. $608.15
Answer:
A growth-stock portfolio is best characterized as having a:
A. high PE ratio as compared to the overall market.
B. lower risk premium than the overall market.
C. low level of systematic risk and a high level of systematic risk.
D. relatively high value for ε.
E. low PE ratio as compared to the overall market.
Answer:
The Neptune Company offers network communications systems to computer users. The
company is planning a major investment expansion but is unsure of the cost of equity
capital as it has no publicly-traded equity. Your assignment is to determine an
appropriate equity cost. List and explain the steps you will need to take to complete this
assignment.
Answer:
When firms issue more debt, the present value of the tax shield on debt _____ while the
present value of financial distress costs:
A. decreases; decreases.
B. increases; increases.
C. decreases; remains constant.
D. decreases; increases.
E. increases; remains constant.
Answer:
Since the credit decision usually includes riskier customers, the decision should adjust
for this by:
A. determining the probability that customers will not pay and reducing the expected
cash flow.
B. discounting the net cash flows at a lower discount rate.
C. discounting the cash inflows at a higher discount rate.
D. increasing the variable cost per unit.
E. decreasing the variable cost per unit.
Answer: