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Precise Machinery is analyzing a proposed project. The company expects to sell 2,100
units, give or take 5 percent. The expected variable cost per unit is $260 and the
expected fixed costs are $589,000. Cost estimates are considered accurate within a plus
or minus 4 percent range. The depreciation expense is $129,000. The sales price is
estimated at $750 per unit, give or take 2 percent. What is the amount of the total costs
per unit under the worst case scenario?
A. $548.58
B. $577.45
C. $604.16
D. $638.23
E. $640.25
Ignoring which of the following will cause the NPV of a project to be underestimated?
I. option to abandon
II. option to expand
III. option to wait
IV. option to contract
A. I and III only
B. II, III, and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
The operating cycle describes how a product:
A. is priced.
B. is sold.
C. moves through the current asset accounts.
D. moves through the production process.
E. generates a profit.
The optimal capital structure:
A. will be the same for all firms in the same industry.
B. will remain constant over time unless the firm changes its primary operations.
C. will vary over time as taxes and market conditions change.
D. places more emphasis on operations than on financing.
E. is unaffected by changes in the financial markets.
Which of the following tends to increase the ability of a shareholder to create his or her
own homemade dividend policy?
I. low taxes on capital gains
II. dividend reinvestment plans
III. large holdings of shares
IV. low cost equity purchases
A. II only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Silver Enterprises has acquired All Gold Mining in a merger transaction. The following
balance sheets represent the premerger book values for both firms.
Assume the merger is treated as a pooling of interests for accounting purposes. The
total assets are _____ and the total equity is _____ on the post-merger balance sheet.
A. $24,500; $10,500
B. $24,500; $18,200
C. $26,300; $10,500
D. $26,300; $16,600
E. $26,300; $18,200
Which one of the following is a project acceptance indicator given an independent
project with investing type cash flows?
A. profitability index less than 1.0
B. project's internal rate of return less than the required return
C. discounted payback period greater than requirement
D. average accounting return that is less than the internal rate of return
E. modified internal rate of return that exceeds the required return
You want to have $1.04 million in real dollars in an account when you retire in 46
years. The nominal return on your investment is 8 percent and the inflation rate is 3.5
percent. What is the real amount you must deposit each year to achieve your goal?
A. $6,667.67
B. $6,878.49
C. $7,433.02
D. $7,515.09
E. $7,744.12
Which one of following is the rate at which a stock's price is expected to appreciate?
A. current yield
B. total return
C. dividend yield
D. capital gains yield
E. coupon rate
Which one of the following statements is correct?
A. The unexpected return is always negative.
B. The expected return minus the unexpected return is equal to the total return.
C. Over time, the average return is equal to the unexpected return.
D. The expected return includes the surprise portion of news announcements.
E. Over time, the average unexpected return will be zero.
Alicia owns a $1,000 face value bond that can be converted into 20 shares of AB
Limited stock. Which one of the following terms refers to these 20 shares?
A. conversion premium
B. straight bond value
C. conversion value
D. conversion price
E. conversion ratio
For years, your family has operated a business that produces lawn mowers. Over the
years, the industry has progressed and new mass production techniques have been
developed. However, your firm cannot afford this new technology, nor can you compete
against those firms that can. Thus, the family has decided to close its facility at the end
of the year. Which one of the following describes the risks to which your family's firm
succumbed?
A. forward risk
B. volatility exposure
C. economic exposure
D. transactions exposure
E. translation risk
Kaiser Industries has bonds on the market making annual payments, with 14 years to
maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is
the coupon rate?
A. 8.00 percent
B. 8.50 percent
C. 9.00 percent
D. 10.50 percent
E. 12.00 percent
Which one of the following will classify a lease as a capital lease for accounting
purposes?
A. The lease transfers ownership of the asset to the lessee by the end of the lease.
B. The lease term is 75 percent or less of the estimated economic life of the asset.
C. The lessee can buy the asset at fair market value at the end of the lease.
D. The initial present value of the lease payments equals or exceeds 80 percent of the
fair market value of the asset.
E. The total of the lease payments exceeds $100,000.
Which one of the following players on the floor of the NYSE can be likened to part-
time help because they are called to duty only when others are fully employed?
A. floor trader
B. specialist
C. dealer
D. floor broker
E. commission broker
Mullineaux Corporation has a target capital structure of 41 percent common stock, 4
percent preferred stock, and 55 percent debt. Its cost of equity is 19 percent, the cost of
preferred stock is 6.5 percent, and the pre-tax cost of debt is 7.5 percent. What is the
firm's WACC given a tax rate of 34 percent?
A. 9.87 percent
B. 10.43 percent
C. 10.77 percent
D. 13.38 percent
E. 15.17 percent
Which one of the following statements is correct?
A. A spin-off frequently follows an equity carve-out.
B. A split-up frequently follows a spin-off.
C. An equity carve-out is a specific type of acquisition.
D. A spin-off involves an initial public offering.
E. A divestiture means that the original firm ceases to exist.
You are considering a project which will provide annual cash inflows of $4,500, $5,700,
and $8,000 at the end of each year for the next three years, respectively. What is the
present value of these cash flows, given a 9 percent discount rate?
A. $14,877
B. $15,103
C. $15,429
D. $16,388
E. $16,847
Under European put-call parity, the present value of the strike price is equivalent to:
A. the current value of the stock minus the call premium.
B. the market value of the stock plus the put premium.
C. the present value of a government coupon bond with a face value equal to the strike
price.
D. a U.S. Treasury bill with a face value equal to the strike price.
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500
per set and have a variable cost of $200 per set. The company spent $113,000 for a
marketing study that determined the company will sell 58,000 sets per year for 7 years.
The marketing study also determined that the company will lose sales of 15,000 sets of
its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of
$300. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap
clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year
will be $7,559,000. The company has also spent $1,133,000 on research and
development for the new clubs. The plant and equipment required will cost $21,000,000
and will be depreciated on a straight-line basis. The new clubs will also require an
increase in net working capital of $1,053,000 that will be returned at the end of the
project. The tax rate is 40 percent, and the cost of capital is 8 percent. What is the IRR?
A. 7.51 percent
B. 7.82 percent
C. 8.13 percent
D. 8.49 percent
E. 8.62 percent
Which one of the following statements is correct?
A. If the majority of a firm's new customers become repeat customers then there is a
strong argument against extending credit even if the default rate is low.
B. A customer's past payment history reveals little information in relation to his or her
future tendency to pay.
C. A suggested policy for offering credit to new customers is to limit the amount of
their initial credit purchase.
D. The risk of issuing credit is the same for a new customer as it is for an existing
customer.
E. The recommended credit policy for new customers is to extend the maximum
amount of credit you will ever be willing to offer as an enticement to get their business.
Which of the following statements generally apply to the cash flows of a financing type
project?
I. nonconventional cash flows
II. cash outflows exceed cash inflows prior to any time value adjustments
III. cash for services rendered is received prior to the cash that is spent providing the
services
IV. the total of all cash flows must equal zero on an unadjusted basis
A. I only
B. I and III only
C. II and IV only
D. I, II, and III only
E. I, II, III, and IV
Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and earnings
per share of $0.87. How many shares of stock are outstanding?
A. 13,558
B. 14,407
C. 165,523
D. 171,000
E. 173,540
The expected return on JK stock is 15.78 percent while the expected return on the
market is 11.34 percent. The stock's beta is 1.62. What is the risk-free rate of return?
A. 3.22 percent
B. 3.59 percent
C. 3.63 percent
D. 3.79 percent
E. 4.18 percent
Given the following information, what is the price per troy ounce that will be used for
today's marking-to-market for the December silver contract?
Silver - 5,000 troy oz.: dollars and cents per troy oz.
A. $9.53
B. $9.60
C. $10.185
D. $10.190
E. $10.220
You purchase a bond with an invoice price of $1,460. The bond has a coupon rate of 9.4
percent, and there are 3 months to the next semiannual coupon date. What is the clean
price of this bond?
A. $1,436.50
B. $1,452.17
C. $1,460.00
D. $1,467.83
E. $1,483.50
A firm's net working capital and all of its expenses vary directly with sales. The firm is
operating currently at 96 percent of capacity. The firm wants no additional external
financing of any kind. Which one of the following statements related to the firm's pro
forma statements for next year must be correct?
A. Total liabilities will remain constant at this year's value.
B. The maximum rate of sales increase is 4 percent.
C. The firm cannot exceed its internal rate of growth.
D. The projected owners' equity will equal this year's ending equity balance.
Which of the following ratios are measures of a firm's liquidity?
I. cash coverage ratio
II. interval measure
III. debt-equity ratio
IV. quick ratio
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Which one of the following statements is correct concerning the two-stage dividend
growth model?
A. G1 cannot be negative.
B. Pt = Dt/R.
C. G1 must be greater than G2.
D. G1 can be greater than R.
E. R must be less than G1 but greater than G2.
If General Electric, a highly diversified company, were to acquire Ocean Freight
Limited, the acquisition would be classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
The Fisher effect is defined as the relationship between which of the following
variables?
A. default risk premium, inflation risk premium, and real rates
B. nominal rates, real rates, and interest rate risk premium
C. interest rate risk premium, real rates, and default risk premium
D. real rates, inflation rates, and nominal rates
E. real rates, interest rate risk premium, and nominal rates
The Bakery is considering a new project it considers to be a little riskier than its current
operations. Thus, management has decided to add an additional 1.5 percent to the
company's overall cost of capital when evaluating this project. The project has an initial
cash outlay of $62,000 and projected cash inflows of $17,000 in year one, $28,000 in
year two, and $30,000 in year three. The firm uses 25 percent debt and 75 percent
common stock as its capital structure. The company's cost of equity is 15.5 percent
while the aftertax cost of debt for the firm is 6.1 percent. What is the projected net
present value of the new project?
A. -$6,208
B. -$5,964
C. -$2,308
D. $1,427
E. $1,573
Keyser Mining is considering a project that will require the purchase of $980,000 in
new equipment. The equipment will be depreciated straight-line to a zero book value
over the 7-year life of the project. The equipment can be scraped at the end of the
project for 5 percent of its original cost. Annual sales from this project are estimated at
$420,000. Net working capital equal to 20 percent of sales will be required to support
the project. All of the net working capital will be recouped. The required return is 16
percent and the tax rate is 35 percent. What is the amount of the aftertax salvage value
of the equipment?
A. $17,150
B. $31,850
C. $118,800
D. $237,600
E. $343,000
The stock of Cleaner Home Products is currently selling for $26.40 a share. The
company has decided to raise funds through a rights offering wherein every shareholder
will receive one right for each share of stock they own. The new shares being offered
are priced at $25 plus five rights. What is the value of one right?
A. $0.16
B. $0.23
C. $0.25
D. $0.47
E. $0.50
You would like to know the minimum level of sales that is needed for a project to be
accepted based on its net present value. To determine that sales level you should
compute the:
A. contribution margin per unit and set that margin equal to the fixed costs per unit.
B. contribution margin per unit.
C. accounting break-even point.
D. cash break-even point.
E. financial break-even point.
