Sensitivity analysis:
A. looks at the most reasonably optimistic and pessimistic results for a project.
B. helps identify the variable within a project that presents the greatest forecasting risk.
C. is used for projects that cannot be analyzed by scenario analysis because the cash
flows are unconventional.
D. is generally conducted prior to scenario analysis just to determine if the range of
potential outcomes is acceptable.
E. illustrates how an increase in operating cash flow caused by changing both the
revenue and the costs simultaneously will change the net present value for a project.
Southern Air would like to sell 750 shares of stock using the Dutch auction method. The
bids received are as follows:
Bidder B will receive _____ shares and pay a price per share of ____.
A. 0; $0
B. 69; $42.25
C. 69; $42.00
D. 225; $42.00
E. 300; $40.00
Which one of the following terms refers to the basic factors that are reviewed when
evaluating the creditworthiness of a potential customer?
A. Terms of sale
B. Cash concentration
C. Five Cs of credit
D. Collection policy
E. Credit score
The 7.5 percent preferred stock of Home Town Brewers is selling for $45 a share. What
is the firms cost of preferred stock if the tax rate is 35 percent and the par value per
share is $100?
A. 7.50 percent
B. 15.92 percent
C. 16.17 percent
D. 16.52 percent
E. 16.67 percent
The common stock of Beasley International goes ex-dividend tomorrow. The stock
closed at a price of $34.65 a share today. This quarter, the company is paying a cash
dividend of $0.24 a share and a liquidating dividend of $0.60 a share. Ignoring taxes
and assuming that all else is held constant, what will the ex-dividend price be tomorrow
morning?
A. $32.76
B. $33.00
C. $33.81
D. $33.96
E. $34.05
The period 1926-2011 illustrates that U.S. Treasury bills:
A. outperform inflation by approximately 1 percent every year.
B. have a zero standard deviation.
C. can either outperform or underperform inflation on an annual basis.
D. produce a rate of return roughly equivalent to the rate of return on long-term
government bonds.
E. routinely have negative annual returns.
Tessler Farms has a return on equity of 12.71 percent, a debt-equity ratio of 0.75, and a
total asset turnover of 0.9. What is the return on assets?
A. 7.26 percent
B. 8.06 percent
C. 13.67 percent
D. 15.24 percent
E. 17.41 percent
Your coin collection contains ten 1939 silver dollars. If your great grandparents
purchased them for their face value when they were new, how much will your
collection be worth when you retire in 2050, assuming they appreciate at a 5.1 percent
annual rate?
A. $2,243.63
B. $2,329.29
C. $2,348.98
D. $2,499.78
E. $2,644.29
Overnight Trucking recently purchased a new truck costing $150,800. The firm
financed this purchase at 8.6 percent interest with monthly payments of $2,100. How
many years will it take the firm to pay off this debt?
A. 7.04 years
B. 7.22 years
C. 8.10 years
D. 8.23 years
E. 8.44 years
Which one of the following will occur when the internal rate of return equals the
required return?
A. The average accounting return will equal 1.0.
B. The profitability index will equal 1.0.
C. The profitability index will equal 0.
D. The net present value will equal the initial cash outflow.
E. The profitability index will equal the average accounting return.
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
What was the average annual risk premium on small-company stocks for the period
1926-2011?
A. 5.3 percent
B. 6.2 percent
C. 8.5 percent
D. 12.9 percent
E. 15.3 percent
Changes in interest rates affect bond prices. Which one of the following compensates
bond investors for this risk?
A. Taxability risk premium
B. Default risk premium
C. Interest rate risk premium
D. Real rate of return
E. Bond premium
For the most recent year, Wilson Enterprises had sales of $689,000, cost of goods sold
of $470,300, depreciation expense of $61,200, and additions to retained earnings of
$48,560. The firm currently has 12,000 shares of common stock outstanding, and the
previous years dividends per share were $1.18. Assuming a 35 percent tax rate, what
was the times interest earned ratio?
A. 1.47
B. 2.09
C. 2.58
D. 3.15
E. 3.67
Caspers is analyzing a proposed expansion project that is much riskier than the firms
current operations. Thus, the project will be assigned a discount rate equal to the firms
cost of capital plus 3 percent. The proposed project has an initial cost of $17.2 million
that will be depreciated on a straight-line basis over 20 years. The project also requires
additional inventory of $687,000 over the projects life. Management estimates the
facility will generate cash inflows of $2.78 million a year over its 20-year life. After 20
years, the company plans to sell the facility for an estimated $1.3 million. The company
has 60,000 shares of common stock outstanding at a market price of $49 a share. This
stock just paid an annual dividend of $1.84 a share. The dividend is expected to
increase by 3.5 percent annually. The firm also has 10,000 shares of 12 percent
preferred stock with a market value of $98 a share. The preferred stock has a par value
of $100. The company has a 9 percent, semiannual coupon bond issue outstanding with
a total face value of $1.1 million. The bonds are currently priced at 102 percent of face
value and mature in 16 years. The tax rate is 33 percent. Should the firm pursue the
expansion project at this point in time? Why or why not?
A. Accept; the NPV is $2.648 million.
B. Accept; the NPV is $4.507 million.
C. Reject; the NPV is -$3.241 million.
D. Reject; the NPV is -$3.027 million.
E. Reject; the NPV is -$1.040 million.