S&S stock is expected to return 17.5 percent in a booming economy, 12.4 percent in a
normal economy, and 1.2 percent in a recession. The probabilities of an economic
boom, normal state, or recession are 2 percent, 90 percent, and 8 percent, respectively.
What is the expected rate of return on this stock?
A. 11.89 percent
B. 12.56 percent
C. 12.43 percent
D. 11.61 percent
E. 10.50 percent
The variance is the average squared difference between which of the following?
A. Actual return and average return
B. Actual return and (average return/N – 1)
C. Actual return and the real return
D. Average return and the standard deviation
E. Actual return and the risk-free rate
Which one of the following could cause the total return on an investment to be a
negative rate?
A. Constant annual dividend amount
B. Increase in the annual dividend amount
C. Stock price that remains constant over the investment period
D. Stock price that declines over the investment period
E. Stock price that increases over the investment period
High Mountain Gear issued 385,000 shares of stock last week. The underwriters
charged a spread of 7.2 percent in exchange for agreeing to a firm commitment. The
legal and accounting fees were $302,000. The company incurred $39,000 in indirect
costs. The offer price was $17 a share. Within the day of of trading, the stock was
selling for $18.80 a share. What was the flotation cost as a percentage of the funds
raised?
A. 31.90 percent
B. 35.78 percent
C. 32.51 percent
D. 26.26 percent
E. 29.08 percent
Wes Motors has total assets of $98,300, net working capital of $11,300, owners’ equity
of $41,600, and long-term debt of $38,600. What is the value of the current assets?
A. $21,600
B. $18,100
C. $28,900
D. $29,400
E. $6,800
Use the following tax table to answer this question:
Comfy Inn earned $218,310 in taxable income for the year. How much tax does the
company owe?
A. $86,311.20
B. $85,140.90
C. $68,390.90
D. $69,998.20
E. $65,240.10
An efficient capital market is best defined as a market in which security prices reflect
which one of the following?
A. Current inflation
B. A risk premium
C. All available information
D. The historical arithmetic rate of return
E. The historical geometric rate of return
Which one of the following is the computation of the risk premium for an individual
security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the
security’s beta, and E(RM) is the expected rate of return on the market.
A. E(RM) -Rf
B. E(R) – E(RM)
C. E(R) – [E(RM) + Rf]
D. β[E(RM) – Rf]
E. β [E(R) – Rf]
Dexter Companies has a conventional factoring arrangement with its local bank. Which
of these would be a common characteristic of that type of financing arrangement?
A. Dexter Companies will receive the full amount of the accounts receivable included
in this arrangement on an agreed upon date sometime in the future.
B. The responsibility for collecting the covered receivables lies with Dexter Companies.
C. Any bad debt that results from an account receivable included in this arrangement
will be a cost to the bank.
D. Dexter Companies will pay a monthly fee to the bank and in turn will receive
payment for the full amount of its accounts receivable.
E. The arrangement keeps the receivables as an asset of Dexter Companies but places a
lien on those accounts in favor of the lending bank.
Which firm is most apt to have the shortest inventory period?
A. General merchandise retail store
B. Hardware store
C. Furniture store
D. Locomotive manufacturer
E. Delicatessen
Green Thumb Nursery has11,000 shares of stock outstanding at a market price of $18 a
share. The current earnings per share are $1.47. The firm has total assets of $286,000
and total liabilities of $86,000. Next week, the firm will be repurchasing $36,000 worth
of stock. Ignore taxes. What will be the earnings per share after the stock repurchase?
A. $1.883
B. $1.832
C. $1.620
D. $1.797
E. $1.848
The tax shield approach to computing the operating cash flow, given a tax-paying firm:
A. ignores both interest expense and taxes.
B. separates cash inflows from cash outflows.
C. considers the changes in net working capital resulting from a new project.
D. ignores all noncash expenses and their effects.
E. recognizes that depreciation creates a cash inflow.
Which statement is correct, all else held constant?
A. Beta is used to compute the return on equity and the standard deviation is used to
compute the return on preferred.
B. A decrease in a firm’s WACC will increase the attractiveness of the firm’s investment
options.
C. The aftertax cost of debt increases when the market price of a bond increases.
D. If you have both the dividend growth and the security market line’s costs of equity,
you should use the higher of the two estimates when computing WACC.
E. WACC is applicable only to firms that issue both common and preferred stock.
Alpha Industries stock had returns of 17 percent, -11 percent, 9 percent, and 2 percent
for four of the last five years, respectively. The average return of the stock over this
period was 8.7 percent. What is the standard deviation of the stock’s returns?
A. 14.67 percent
B. 12.90 percent
C. 15.14 percent
D. 15.47 percent
E. 14.31 percent
Which one of the following is most apt to align management’s priorities with
shareholders’ interests?
A. Holding corporate and shareholder meetings at high-end resort-type locations
preferred by managers
B. Compensating managers with shares of stock that must be held for a minimum of
three years
C. Paying a special management bonus on every fifth year of employment
D. Increasing the number of paid holidays that long-term employees are entitled to
receive
E. Allowing employees to retire early with full retirement benefits
Which one of the following will increase the profit margin of a firm, all else held
constant?
A. Increase in interest paid
B. Increase in fixed costs
C. Increase in depreciation expense
D. Decrease in the tax rate
E. Decrease in sales
The net present value of a project’s cash inflows is $2,716 at a discount rate of 12
percent. The profitability index is 1.09 and the firm’s tax rate is 34 percent. What is the
initial cost of the project?
A. $2,314.07
B. $2,018.50
C. $2,428.32
D. $2,491.74
E. $2,066.67
The length of time a firm grants its customers to pay for their purchases is called the:
A. lockbox period.
B. discount period.
C. credit period.
D. cash cycle.
E. receivables turnover period.
BJ’s just reconciled its bank account and has $10,800 in outstanding deposits, $26,300
in checks outstanding, and a positive checkbook balance. The firm sells on a cash-only
basis and deposits its receipts at the bank daily. The deposited funds are available to the
firm the following day. The firm writes and mails checks on a daily basis also. These
checks generally clear the bank in three days. What do you know about the firm’s float
given this information?
A. The firm has disbursements float but no collection float.
B. The collection float generally exceeds the disbursement float.
C. The firm has a net collection float.
D. The disbursement float generally exceeds the collection float.
E. Since transactions occur daily, the firm has no float.
Bill just financed a used car through his credit union. His loan requires payments of
$275 a month for five years. Assuming that all payments are paid on time, his last
payment will pay off the loan in full. What type of loan does Bill have?
A. Amortized
B. Complex
C. Pure discount
D. Lump sum
E. Interest-only
Fried Foods recently liquidated its fast-food division. That unit represented 30 percent
of the firm’s overall market value. Prior to the liquidation, the firm’s stock was selling
for $46 a share, the annual dividend was steady at $1.20 per share, and there were
18,000 shares outstanding. The firm is preparing to distribute the entire liquidation
proceeds to shareholders. How much should shareholders expect to receive per share
from this liquidating dividend? Ignore taxes.
A. $14.24
B. $13.30
C. $14.10
D. $13.10
E. $13.80
Which of the following have been offered as justification for IPO underpricing?
I. Young firms tend to be very risky.
II. The best IPOs are oversubscribed.
III. Underwriters like to avoid lawsuits.
IV. Underpricing benefits the existing shareholders.
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
The daily financial operations of a firm are primarily controlled by managing the:
A. total debt level.
B. working capital.
C. capital structure.
D. capital budget.
E. long-term liabilities.
The expected rate of return on Delaware Shores stock is based on three possible states
of the economy. These states are boom, normal, and recession which have probabilities
of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the
following statements is correct concerning the variance of the returns on this stock?
A. The variance must decrease if the probability of occurrence for a boom increases.
B. The variance will remain constant as long as the sum of the economic probabilities is
100 percent.
C. The variance can be positive, zero, or negative, depending on the expected rate of
return assigned to each economic state.
D. The variance must be positive provided that each state of the economy produces a
different expected rate of return.
E. The variance is independent of the economic probabilities of occurrence.
The payback method of analysis ignores which one of the following?
A. Initial cost of an investment
B. Arbitrary cutoff point
C. Cash flow direction
D. Time value of money
E. Timing of each cash inflow
A project has expected cash inflows, starting with Year 1, of $900, $1,200, $1,500, and
finally in Year 4, $2,000. The profitability index is 1.11 and the discount rate is 12
percent. What is the initial cost of the project?
A. $3,899.16
B. $4,098.24
C. $3,692.71
D. $3,211.06
E. $4,250.00
Assume the one-year forward rate for the British pound is £.6381 = $1. The spot rate is
£.6392 = $1. The interest rate on a risk-free asset in the UK is 4.4 percent. If interest
rate parity exists, what is the one-year risk-free rate in the U.S.?
A. 4.68 percent
B. 4.58 percent
C. 4.77 percent
D. 4.63 percent
E. 4.67 percent
Andersen’s Nursery has sales of $318,400, costs of $199,400, depreciation expense of
$28,600, interest expense of $1,100, and a tax rate of 35 percent. The firm paid out
$23,400 in dividends. What is the addition to retained earnings?
A. $36,909
B. $34,645
C. $44,141
D. $37,208
E. $40,615
Which one of the following dates is the date on which the board of directors votes to
pay a dividend?
A. Record date
B. Declaration date
C. Ex-dividend date
D. Payment date
E. Settlement date
The lower the standard deviation of returns on a security, the _____ the expected rate of
return and the _____ the risk.
A. lower; lower
B. lower; higher
C. higher; lower
D. higher; higher
A project will reduce costs by $62,750 but increase depreciation by $14,812. What is
the operating cash flow of this project based on the tax shield approach if the tax rate is
34 percent?
A. $41,415.00
B. $31,639.08
C. $38,211.19
D. $42,006.20
E. $46,451.08
Dellf’s has a profit margin of 3.8 percent on sales of $287,200. The firm currently has
5,000 shares of stock outstanding at a market price of $7.11 per share. What is the
price-earnings ratio?
A. 3.26
B. 8.02
C. 11.50
D. 5.93
E. 12.84
Modern Art Online is preparing to sell new shares of stock to the general public. As part
of this process, the firm just filed the required paperwork with the SEC that contains the
material information related to this issue of stock. What is the name associated with this
paperwork?
A. Prospectus
B. Red herring
C. Security agreement
D. Comment letter
E. Registration statement