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1) Better Plastics is a mature manufacturing firm. The company just paid a $4 annual
dividend, but management expects to reduce the payout by 3 percent per year,
indefinitely. If you require a 12 percent return on this stock, what will you pay for a
share today?
A.$23.09
B.$25.87
C.$27.14
D.$28.56
E.$30.02
2) Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities.
These values as referred to as the firm's:
A.capital structure
B.cash equivalents
C.working capital
D.net assets
E.fixed accounts
3) You need to use the pure play approach to assign a cost of capital to a proposed
investment. Which one of the following characteristics should you most concentrate on
as you search for an appropriate pure play firm?
A.Firm size
B.Firm location
C.Firm experience
D.Firm operations
E.Firm management
4) Henderson's is an all-equity firm that has 135,000 shares of stock outstanding. Neal,
the financial vice-president, is considering borrowing $220,000 at 7.25 percent interest
to repurchase 20,000 shares. Ignoring taxes, what is the value of the firm?
A.$1,260,000
B.$1,400,000
C.$1,485,000
D.$1,620,000
E.$1,750,000
5) Ratzell's Place has a market-to-book ratio of 2.7, net income of $68,400, a book
value per share of $37, and 45,000 shares of stock outstanding. What is the
price-earnings ratio?
A.24.34
B.28.16
C.55.10
D.59.09
E.65.72
6) Tasty Dee-Lite has current liabilities of $6,630, net working capital of $2,180,
inventory of $2,750, and sales of $36,800. What is the quick ratio?
A.0.76
B.0.84
C.0.91
D.1.09
E.1.19
7) The yield to maturity on a discount bond is:
A.equal to both the coupon rate and the current yield
B.is equal to the current yield but greater than the coupon rate
C.is greater than both the current yield and the coupon rate
D.is less than the current yield but greater than the coupon rate
E.is less than both the current yield and the coupon rate
8) Currently, the risk-free rate is 3.5 percent. Stock A has an expected return of 9.6
percent and a beta of 1.08. Stock B has an expected return of 13.5 percent. The stocks
have equal reward-to-risk ratios. What is the beta of stock B?
A.1.21
B.1.33
C.1.52
D.1.68
E.1.77
9) Which one of the following statements is true?
A.Debt instruments offer residual claims to future cash payouts
B.Bonds with call provisions will have lower coupon rates than otherwise identical
bonds
C.Bondholders enjoy a direct voice in company decisions
D.Bonds are low-risk investments that do well in inflationary periods
E.Preferred shareholders are the first investors to be repaid in bankruptcy liquidation
10) When, if ever, will the geometric average return exceed the arithmetic average
return for a given set of returns?
A.When the set of returns includes only risk-free rates
B.When the set of returns has a wide frequency distribution
C.When the set of returns has a very narrow frequency distribution
D.When all of the rates of return in the set of returns are equal to each other
E.Never
11) The common stock of Yanderloft and Sons has a beta that is 25 percent larger than
the overall market beta. Currently, the market risk premium is 9.2 percent while the
U.S. Treasury bill is yielding 4.7 percent. What is the cost of equity for this firm?
A.13.76 percent
B.14.96 percent
C.15.80 percent
D.16.20 percent
E.17.85 percent
12) Which of the following characteristics apply to U. S. Treasury bills?
I. income taxed at both the federal and state level
II. minimal, if any, default risk
III. marketable, but not liquid
IV. short maturities
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
13) Which of the following tends to cause differences between market values and book
values?
I. Accounting often creates a dichotomy between realized and unrealized income.
II. Accountants allocate goodwill when a firm is acquired for more than book value.
III. Many accounting values are transactions-based and hence backward-looking.
IV. The use of fair-value accounting.
V. Accountants refuse to assign a cost to equity capital.
A.I and II only
B.I and III only
C.II and IV only
D.I, III, and IV only
E.I, III, and V only
F.I, III, IV, and V only
14) Today, you are borrowing money from your local bank. The loan is to be repaid in
one lump sum payment of $14,000 one year from now. How much money are you
borrowing today if the APR is 9.6 percent?
A.$11,899.48
B.$12,550.00
C.$12,773.72
D.$13,221.64
E.$14,000.00
15) You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per
year forever. What annual rate of return will you realize?
A.0.48 percent
B.2.40 percent
C.4.80 percent
D.5.10 percent
E.20.83 percent
16) You just won $25,000 and deposited your winnings into an account that pays 6.2
percent interest, compounded annually. How long will you have to wait until your
winnings are worth $50,000?
A.11.52 years
B.12.00 years
C.12.29 years
D.12.67 years
E.12.90 years
17) You own 100 of the 15,000 outstanding shares of Delta Movers stock. The firm just
announced that it will be issuing an additional 5,000 shares to the general public in a
cash offer at $22 per share. What type of event are you participating in if you opt to
purchase 100 of these additional shares?
A.Dutch auction
B.Seasoned equity offering
C.Private placement
D.IPO
E.Rights offer
18) Consider an asset that costs $459,000 and is depreciated straight-line to zero over
its 6-year tax life. The asset is to be used in a 4-year project; at the end of the project,
the asset can be sold for $120,000. If the relevant tax rate is 34 percent, what is the
aftertax cash flow from the sale of this asset?
A.$131,220
B.$127,840
C.$116,500
D.$97,600
E.$79,200
19) A stock has produced returns of 11 percent, 18 percent, -6 percent, -13 percent, and
21 percent for the past five years, respectively. What is the standard deviation of these
returns?
A.7.75 percent
B.8.87 percent
C.9.23 percent
D.14.99 percent
E.16.64 percent
20) The Good Life Store has a 6-year, interest-only loan at 9 percent interest. The firm
originally borrowed $125,000. How much will the firm pay in total interest over the life
of the loan?
A.$42,189.84
B.$53,666.67
C.$67,500.00
D.$69,000.00
E.$74,500.00
21) A firm has earnings before interest and taxes of $25,380 with a net income of
$14,220. The taxes amounted to $5,400 for the year. During the year, the firm paid out
$43,800 to pay off existing debt and then later borrowed an additional $24,000. What is
the amount of the cash flow to creditors?
A.-$14,040
B.$19,800
C.$25,560
D.$28,440
E.$29,790
22) Major Importers would like to spend $211,000 to expand its warehouse. However,
the company has a loan outstanding that must be repaid in 2.5 years and thus will need
the $211,000 at that time. The warehouse expansion project is expected to increase the
cash inflows by $48,000 in the first year, $139,000 in the second year, and $210,000 a
year for the following two 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
23) The net working capital invested in a project is generally:
A.a sunk cost
B.an opportunity cost
C.recouped in the first year of the project
D.recouped at the end of the project
E.depreciated to a zero balance over the life of the project
24) As CFO of Nile Holdings, a carpet wholesaler, you have the following information
as of December 2011:
Nile has an attractive investment opportunity, and to finance it, must decide whether to
issue $100 million in new debt or new equity.
Assume Nile raises $100 million of new debt at the end of 2011, at an interest rate of
7%.
a. Calculate the firm's pro forma 2012 times interest earned (TIE) ratio.
b. Calculate the percentage EBIT can fall (below expected EBIT) before interest
coverage dips below 1.0.
25) Given the following partial stock quote, what is the amount of the next annual
dividend if yesterday's closing price was $32.60?
A.$1.07
B.$1.11
C.$1.15
D.$1.19
E.$1.23
26) You have an outstanding loan with an EAR of 14.6 percent. What is the APR if
interest is compounded monthly?
A.13.48 percent
B.13.71 percent
C.14.60 percent
D.15.41 percent
E.15.62 percent
27) The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of
par value. The bonds mature in 8 years and pay interest semiannually. These bonds have
current yield of _____ percent, a yield to maturity of _____ percent, and an effective
annual yield of _____ percent.
A.6.12; 6.32; 6.36
B.6.12; 6.32; 6.42
C.6.12; 6.36; 6.42
D.6.23; 6.32; 6.36
E.6.23; 6.36; 6.42
28) A common-size balance sheet helps financial managers determine:
A.which customers are paying on a timely basis
B.if costs are increasing faster or slower than sales
C.if changes are occurring in a firm's mix of assets
D.if a firm is generating more or less sales per dollar of assets than in prior years
E.the rate at which the firm's dividends are changing
29) You are making a $120,000 investment and feel that a 10 percent rate of return is
reasonable given the nature of the risks involved. You feel you will receive $48,000 in
the first year, $54,000 in the second year, and $56,000 in the third year. You expect to
pay out $12,000 as an additional investment in the fourth year. What is the net present
value of this investment given your expectations?
A.$2,141.93
B.$5,607.16
C.$14,206.10
D.$16,233.33
E.$18,534.25
30) Which one of the following refers to the option to expand into related businesses in
the future?
A.Strategic option
B.Contingency option
C.Soft rationing
D.Hard rationing
E.Capital rationing option
31) Many of the smaller sell orders sent to the floor of the NYSE are:
A.handled by the floor traders
B.purchased by the commission brokers
C.electronically transmitted to the specialists
D.executed on an ECN
E.executed in the primary market
32) Plastics, Inc. will pay an annual dividend of $1.85 next year. The company just
announced that future dividends will be increasing by 2.25 percent annually. How much
are you willing to pay for one share of this stock if you require a 16 percent return?
A.$13.45
B.$13.61
C.$13.76
D.$14.02
E.$14.45
33) The Drive-Thru requires an average accounting return (AAR) of at least 17 percent
on all fixed asset purchases. Currently, it is considering some new equipment costing
$168,000. This equipment will have a 4-year life over which time it will be depreciated
on a straight line basis to a zero book value. The annual net income from this equipment
is estimated at $8,100, $10,300, $17,900, and $19,600 for the four years. Should this
purchase occur based on the accounting rate of return? Why or why not?
A.Yes; because the AAR is less than 17 percent
B.Yes; because the AAR is equal to 17 percent
C.Yes; because the AAR is greater than 17 percent
D.No; because the AAR is less than 17 percent
E.No; because the AAR is greater than 17 percent
34) Which one of the following is an aftermarket function performed by the
underwriters of a securities issue?
A.Distributing the registration statements
B.Distributing the red herrings
C.Filing a letter of comment with the SEC
D.Exercising the Green Shoe option
E.Setting the market price
35) Which one of the following is a payment by a firm to its shareholders from any
source other than current or accumulated retained earnings?
A.Interest
B.Distribution
C.Retained earnings
D.Dividend
E.Stock repurchase
36) Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011,
appear below.
Estimate the appropriate weight of debt to be used when calculating FM's weighted
average cost of capital.
A.11.5%
B.19.3%
C.80.7%
D.88.5%
E.100.0%
37) Which one of the following can NOT be computed?
A.Future value of an ordinary annuity
B.Future value of a perpetuity
C.Present value of a perpetuity
D.Present value of an annuity due
E.Present value of an ordinary annuity
38) The sustainable growth rate is defined as the maximum rate at which a firm can
grow given which of the following conditions?
A.No new external financing of any kind
B.No new debt but additional external equity equal to the increase in retained earnings
C.New debt and external equity in equal proportions
D.New debt and external equity, provided the debt-equity ratio remains constant
E.No new equity and a constant debt-equity ratio
39) You are considering an investment for which you require a 14 percent rate of return.
The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years.
Should you accept this project based on its internal rate of return? Why or why not?
A.Yes; because the IRR is 13.13 percent
B.Yes; because the IRR is 13.65 percent
C.Yes; because the IRR is 13.67 percent
D.No; because the IRR is 13.13 percent
E.No; because the IRR is 13.65 percent
