A&M Hardware assumes new customers will default 8 percent of the time but if they
don”t default, they will become repeat customers who always pay their bills. Assume
the average sale is $383 with a variable cost of $260, and a monthly required return of
1.65 percent. What is the NPV of extending credit for one month to a new customer?
A. $5,589.09
B. $6,103.47
C. $6,598.18
D. $5,748.09
E. $6,858.18
Answer:
There is a 15 percent probability the economy will boom; otherwise, it will be normal.
Stock G should return 15 percent in a boom and 8 percent in a normal economy. Stock
H should return 9 percent in a boom and 6 percent otherwise. What is the variance of a
portfolio consisting of $3,500 in Stock G and $6,500 in Stock H?
A. .000209
B. .000247
C. .002098
D. .037026
E. .073600
Answer:
Correlation is expressed as the symbol:
A. α.
B. ρ.
C. β.
D. c.
E. є.
Answer:
Quiet Press has a 38-day accounts receivable period. The estimated quarterly sales for
this year, starting with the first quarter, are $1,200, $1,400, $1,900, and $1,200,
respectively. How much does the firm expect to collect in the fourth quarter? Assume a
360-day year.
A. $1,592.08
B. $1,604.44
C. $1,495.56
D. $1,509.11
E. $1,660.02
Answer:
Flotation costs:
A. are amortized using a declining-balance method over the life of the loan.
B. are amortized using the straight-line method over the life of the loan.
C. are deducted as a business expense in the year incurred.
D. cannot be deducted as a business expense.
E. are deducted as a business expense at the time the loan is repaid in full.
Answer:
In percentage terms, higher coupon bonds experience a _______ price change
compared with lower coupon bonds of the same maturity given a stated change in yield
to maturity.
A. greater
B. smaller
C. similar
D. equal
E. zero
Answer:
Bright View Windows issued warrants with an exercise price of $17. Bright View’s
common stock currently sells for $16 per share. The warrants are:
A. in the money.
B. out of the money.
C. valuable.
D. not very valuable.
E. both in the money and valuable.
Answer:
You are comparing two investment options, each of which will provide $15,000 of total
income. Option A pays five annual payments starting with $5,000 the first year
followed by four annual payments of $2,500 each. Option B pays five annual payments
of $3,000 each. Which one of the following statements is correct given these two
investment options?
A. Both options are of equal value today.
B. Given a positive rate of return, Option A is worth more today than Option B.
C. Option B has a higher present value than Option A given a positive rate of return.
D. Option B has a lower present value than Option A given a zero rate of return.
E. Option A is preferable because it is an annuity due.
Answer:
A proposed new venture will cost $175,000 and should produce annual cash flows of
$48,500, $85,000, $40,000, and $40,000 for Years 1 to 4, respectively. The required
payback period and discounted payback period is 3 years. The discount rate is 9
percent. Which methods indicate project acceptance and which indicate project
rejection?
A. accept: NPV, IRR, PI, payback; reject: discounted payback
B. accept: NPV, IRR, PI; reject: payback, discounted payback
C. accept: payback, PI; reject: NPV, IRR, discounted payback
D. accept: payback, discounted payback; reject: NPV, IRR, PI
E. accept: NPV, IRR; reject: PI, payback, discounted payback
Answer:
Based on arbitrage pricing theory, systematic risk arises from:
A. a common factor, F.
B. negative betas.
C. the lack of market liquidity.
D. the variable, ε.
E. a positive covariance between securities.
Answer:
The linear relation between an asset’s expected return and its beta coefficient defines
the:
A. reward-to-risk ratio.
B. covariance line.
C. characteristic line.
D. security market line.
E. market risk premium.
Answer:
At the beginning of the year, a firm has current assets of $16,200 and current liabilities
of $13,280. At the end of the year, the current assets are $14,800 and the current
liabilities are $14,210. What is the change in net working capital?
A.$470
B.$50
C.$470
D.$2,330
E.$2,330
Answer:
Which corporate document sets forth the number of members on the original board of
directors?
A. indenture contract.
B. state tax agreement.
C. corporate bylaws.
D. debt charter.
E. articles of incorporation.
Answer:
MM Proposition I without taxes proposes that:
A. the value of an unlevered firm exceeds that of a levered firm.
B. there is one ideal capital structure for each firm.
C. leverage does not affect the value of the firm.
D. shareholder wealth is directly affected by the capital structure selected.
E. the value of a levered firm exceeds that of an unlevered firm.
Answer:
An independent investment is acceptable if the profitability index (PI) of the investment
is:
A. greater than one.
B. less than one.
C. greater than the internal rate of return.
D. less than the internal rate of return.
E. greater than a pre-specified rate of return.
Answer:
Net present value analysis frequently ignores:
A. project risk.
B. cash flows after the first three years.
C. the time value of money.
D. some or all of a project’s options.
E. start-up costs.
Answer:
For a firm with a constant payout ratio, the dividend growth rate can be estimated as:
A. Payout ratio Return on equity.
B. Return on assets Retention ratio.
C. Return on equity (1 + Retention ratio).
D. Payout ratio Return on assets.
E. Return on retained earnings Retention ratio.
Answer:
The implicit exchange rate between two currencies when both are quoted in some third
currency is called a(n):
A. open exchange rate.
B. cross-rate.
C. backward rate.
D. forward rate.
E. interest rate.
Answer:
Over the period of 1926 to 2014, small company stocks had an average return of ____
percent.
A. 18.8
B. 10.2
C. 17.4
D. 14.6
E. 16.7
Answer:
A project has an unlevered NPV of $1.5 million. To finance the project, debt is being
issued with associated flotation costs of $60,000. The flotation costs can be amortized
over the project’s 5-year life. The debt of $10 million is being issued at the market
interest rate of 10 percent, with principal repaid in a lump sum at the end of the fifth
year. If the firm’s tax rate is 34 percent, calculate the project’s APV.
A. $2,441,107
B. $1,494,028 88
C. $2,384,312
D. $2,744,334
E. $1,909,417
Answer:
Jack is considering adding toys to his general store. He estimates the cost of toy
inventory will be $4,200. The remodeling and shelving costs are estimated at $1,500.
Toy sales are expected to produce net annual cash inflows of $1,200, $1,500, $1,600,
and $1,750 over the next four years, respectively. Should Jack add toys to his
merchandise if he requires a three-year payback period? Why or why not?
A. yes; because the payback period is 2.94 years
B. yes; because the payback period is 2.02 years
C. yes; because the payback period is 3.80 years
D. no; because the payback period is 2.02 years
E. no; because the payback period is 3.80 years
Answer:
The expected inflation rate in Switzerland is 2.2 percent while it is 1.6 percent in the
U.S. A risk-free asset in the U.S. is yielding 3.7 percent. What real rate of return should
you expect on a risk-free Swiss security?
A. 2.0%
B. 2.1%
C. 3.0%
D. 3.5%
E. 3.1%
Answer:
A conflict of interest between the stockholders and management of a firm is referred to
as the:
A. stockholders’ liability.
B. corporate breakdown.
C. agency problem.
D. corporate activism.
E. legal liability.
Answer:
The length of time between the sale of inventory and the collection of cash from
receivables is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.
Answer:
Which one of these statements correctly applies to either a leveraged or an unleveraged
syndicated loan?
A. The loan will always be rated as investment grade.
B. The loan may not be publicly traded.
C. The loan arranger is not involved with the actual lending.
D. Each bank that participates negotiates the terms for its portion of the overall loan.
E. Each bank has its own loan agreement with the borrowers.
Answer:
Homer is considering a project with cash inflows of $950 a year for Years 1 to 4,
respectively. The project has a required discount rate of 11 percent and an initial cost of
$2,100. What is the discounted payback period?
A. 3.05 years
B. 2.68 years
C. 3.39 years
D. 2.21 years
E. never
Answer:
Project A costs $84,500 and has cash flows of $32,300, $36,400, and $30,000 for Years
1 to 3, respectively. Project B has an initial cost of $79,000 and has cash flows of
$30,000, $36,000, and $29,000 for Years 1 to 3, respectively. What is the incremental
IRR of these two mutually exclusive projects?
A. 18.11%
B. 13.01%
C. −14.91%
D. −16.75%
E. −20.37%
Answer:
In a Chapter 11 bankruptcy, a class of creditors is considered to have accepted the
bankruptcy plan when:
A. two-thirds of the class in dollar amount agree.
B. at least 51 percent of the class in number agree.
C. at least 90 percent of the members of the class agree.
D. at least 51 percent of the class in dollar amount agree.
E. one-half of the class in number agree.
Answer:
“The change in exchange rates is determined by the difference in the inflation rates of
the two countries.” This statement expresses the concept of:
A. absolute purchasing power parity.
B. relative purchasing power parity.
C. the international Fisher effect
D. unbiased forward rates.
E. interest rate parity.
Answer:
What is the future value of investing $5,650 for 14 years at a continuously compounded
rate of 8.6 percent?
A. $17,933.54
B. $16,685.44
C. $19,369.83
D. $18,833.85
E. $13,183.85
Answer:
Market efficiency requires:
A. arbitrage conducted by irrational investors.
B. the absence of arbitrage.
C. speculation by amateur investors.
D. all investors to be rational.
E. countervailing irrationalities.
Answer: