1) If Treasury bills are currently paying 3.2 percent and the inflation rate is 2.8 percent,
what is the approximate real rate of interest? The exact real rate?
A.0.40 percent; 3.89 percent
B.0.40 percent; 3.98 percent
C.6.00 percent; 5.67 percent
D.6.00 percent; 5.87 percent
E.6.00 percent; 5.92 percent
2) Which of the following are determinants of a firm’s sustainable rate of growth?
I. Amount of sales generated from each dollar invested in assets
II. Amount of debt per dollar of equity
III. Amount of current assets per dollar of current liabilities
IV. Percentage of net income distributed as dividends
A.I and III only
B.II and IV only
C.I, II, and IV only
D.II, III, and IV only
E.I, II, III, and IV
3) 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
4) The Five and Dime Store has a cost of equity of 15.8 percent, a pretax cost of debt of
7.7 percent, and a tax rate of 35 percent. What is the firm’s weighted average cost of
capital if the debt-equity ratio is 0.40?
A.10.18 percent
B.11.72 percent
C.12.72 percent
D.13.49 percent
E.14.93 percent
5) Titans, Inc. has 6 percent bonds outstanding that mature in 14 years. The bonds pay
interest semiannually and have a face value of $1,000. Currently, the bonds are selling
for $993 each. What is the firm’s pretax cost of debt?
A.5.97 percent
B.6.08 percent
C.6.14 percent
D.6.31 percent
E.6.40 percent
6) Operating cash flow is defined as:
A.a firm’s net profit over a specified period of time
B.the cash that a firm generates from its normal business activities
C.a firm’s operating margin
D.the change in the net working capital over a stated period of time
E.the cash that is generated and added to retained earnings
7) The Green Balloon just paid its first annual dividend of $0.12 a share. The firm plans
to increase the dividend by 3.5 percent per year indefinitely. What is the firm’s cost of
equity if the current stock price is $6.50 a share?
A.5.35 percent
B.5.41 percent
C.14.42 percent
D.18.79 percent
E.19.98 percent
8) Plato’s Foods has ending net fixed assets of $84,400 and beginning net fixed assets of
$79,900. During the year, the firm sold assets with a total book value of $13,600 and
also recorded $14,800 in depreciation expense. How much did the company spend to
buy new fixed assets?
A.-$23,900
B.$3,300
C.$32,900
D.$36,800
E.$37,400
9) What is the future value of $20 a week for 10 years at 6 percent interest? Assume the
first payment occurs at the end of this week.
A.$14,239.14
B.$14,361.08
C.$14,727.15
D.$15,003.14
E.$15,221.80
10) The spot rate between Canada and the U.S. is Can$1.2381 = $1, while the one-year
forward rate is Can$1.2379 = $1. The risk-free rate in Canada is 2.8 percent. The
risk-free rate in the U.S. is 3.6 percent. How much profit can you earn on a loan of
$1,000 by utilizing covered interest arbitrage?
A.-$8.14
B.-$7.83
C.-$5.36
D.$3.49
E.$6.57
11) Which one of the following increases the number of shares outstanding but does not
increase the value of owners’ equity?
A.Stock repurchase
B.Reverse stock split
C.Stock split
D.Cash distribution
E.Liquidating dividend
12) A bond has a yield to maturity of 9.38 percent, a 7.5 percent annual coupon, a
$1,000 face value, and a maturity date 21 years from today. What is the current yield?
A.7.91 percent
B.8.47 percent
C.9.04 percent
D.9.38 percent
E.9.46 percent
13) An all-equity firm has a return on assets of 15.3 percent. The firm is considering
converting to a debt-equity ratio of 0.40 . The pretax cost of debt is 8.1 percent.
Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital
structure?
A.15.30 percent
B.16.28 percent
C.16.67 percent
D.17.46 percent
E.18.18 percent
14) Which one of the following terms applies to a bond that initially sells at a deep
discount and pays no interest payments?
A.Callable
B.Income
C.Zero coupon
D.Convertible
E.Tax-free
15) You have agreed to pay a 5 percent commission to your best friend if he can locate a
buyer for your car. This arrangement is most similar to the compensation arrangement
for which one of these individuals who is involved with the stock market?
A.DMM
B.Floor trader
C.Market maker
D.Commission broker
E.Dealer
16) China Importers would like to spend $221,000 to expand its warehouse. However,
the company has a loan outstanding that must be repaid in 2.5 years and thus will need
the $221,000 at that time. The warehouse expansion project is expected to increase the
cash inflows by $58,000 in the first year, $139,000 in the second year, and $210,000 a
year for the following 2 years. Should the firm expand at this time? Why or why not?
A.Yes, because the money will be recovered in 1.69 years
B.Yes, because the money will be recovered in 1.87 years
C.Yes, because the money will be recovered in 2.11 years
D.No, because the project never pays back
E.No, because the money will not be recovered in time to repay the loan
17) Use the following tax table to answer this question:
The Holiday Inn earned $177,284 in taxable income for the year. How much tax does
the company owe on this income?
A.$46,311.02
B.$48,490.76
C.$52,390.76
D.$59,998.81
E.$65,240.76
18) Sue needs to invest $3,626 today in order for her savings account to be worth
$5,000 six years from now. Which one of the following terms refers to the $3,626?
A.Present value
B.Compound value
C.Future value
D.Complex value
E.Factor value
19) Which one of the following is the correct formula for computing the present value
of $600 to be received in 6 years? The discount rate is 7 percent.
A.PV = $600 (1 + 6)7
B.PV = $600 (1 + 0.07)6
C.PV = $600 (0.07 6)
D.PV = $600/(1 + 0.07)6
E.PV = $600/(1 + 6)0.07
20) The Bird Cage has the following estimated sales.
Purchases are equal to 67 percent of the following quarter’s sales. The sales for the first
quarter of the following year are estimated at $42,100. The accounts receivable period
is 30 days and the accounts payable period is 45 days. Assume there are 30 days in each
month. By how much will the firm’s collections exceed its payments for quarter 2?
A.$9,648.50
B.$11,884.20
C.$13,383.50
D.$17,925.00
E.$24,211.70
21) Cash flow from assets is defined as:
A.the cash flow to shareholders minus the cash flow to creditors
B.operating cash flow plus the cash flow to creditors plus the cash flow to shareholders
C.operating cash flow minus the change in net working capital minus net capital
spending
D.operating cash flow plus net capital spending plus the change in net working capital
E.cash flow to shareholders minus net capital spending plus the change in net working
capital
22) An investment has an initial cost of $420,000 and will generate the net income
amounts shown below. This investment will be depreciated straight-line to zero over the
four-year life of the project. Should this project be accepted based on the average
accounting rate of return if the required rate is 16 percent? Why or why not?
A.Yes, because the AAR is equal to 16 percent
B.Yes, because the AAR is greater than 16 percent
C.Yes, because the AAR is less than 16 percent
D.No, because the AAR is greater than 16 percent
E.No, because the AAR is less than 16 percent
23) First Trust offers personal loans at 7.7 percent compounded monthly. Second Bank
offers similar loans at 7.75 percent compounded semiannually. Which one of the
following statements is correct concerning these loans?
A.The First Trust loan has an effective rate of 7.98 percent
B.The Second Bank loan has an effective rate of 8.03 percent
C.The annual percentage rate for the Second Bank loans is 7.90 percent
D.Borrowers should prefer the loans offered by Second Bank
E.First Trust offers the best deal on loans
24) Which of the following will increase the value of a levered firm according to M&M
Proposition I, with taxes?
I. Decrease in the amount of the debt
II. Increase in the value of the unlevered firm
III. Decrease in the tax rate
IV. Increase in the interest rate on the debt
A.II only
B.I and IV only
C.II and III only
D.II and IV only
E.II, III, and IV only
25) A project has the following cash flows. What is the internal rate of return?
A.8.26 percent
B.9.11 percent
C.10.58 percent
D.11.23 percent
E.12.18 percent
