1) Sports Corp has 10 million shares of common stock outstanding, 5 million shares of
preferred stock outstanding, and 1 million bonds. If the common shares are selling for
$25 per share, the preferred share are selling for $12.50 per share, and the bonds are
selling for 97 percent of par, what would be the weight used for equity in the
computation of Sports’s WACC?
A.18.59%
B.19.49%
C.62.50%
D.79.75%
2) ABC Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the
appropriate rate of return on this stock is 5 percent per year, and the stock consistently
goes ex-dividend 45 days before dividend payment date, what will be the expected
minimum price in light of the dividend payment logistics?
A.$98.83
B.$100.00
C.$103.77
D.$123.29
3) Suppose that the 2009 actual and 2010 projected financial statements for Cramner
Corp are initially as shown below. In these tables, sales are projected to rise 35 percent
in the coming year, and the components of the income statement and balance sheet that
are expected to increase at the same 35 percent rate as sales are indicated with an italics
font. Assuming that Cramner Corp wants to cover the AFN with 45 percent equity, 25
percent long-term debt, and the remainder from notes payable, what amount of
additional funds will they need to raise if debt carries an 8 percent interest rate?
A.$660,600 equity; $367,000 long-term debt; $440,400 notes payable
B.$660,600 equity; $440,400 notes payable; $367,000 long-term debt
C.$1,468,000 equity; $0 long-term debt; $0 notes payable
D.none of the answers are correct
4) Your credit rating and current economic conditions will determine
A.whether you get simple or compound interest
B.how long compounding will affect you
C.how long discounting will affect you
D.the interest rate that a lender will offer
5) Assume the current interest rate on a one-year Treasury bond (1R1) is 5.50%, the
current rate on a two-year Treasury bond (1R2) is 5.95%, and the current rate on a
three-year Treasury bond (1R3) is 8.50%. If the unbiased expectations theory of the
term structure of interest rates is correct, what is the one-year interest rate expected on
Treasury bills during year 3, 3f1?
A.13.79%
B.12.29%
C.11.69%
D.10.29%
6) Present Value of an Annuity Due If the present value of an ordinary, 4-year annuity is
$1,000 and interest rates are 6 percent, what’s the present value of the same annuity
due?
A.$943.40
B.$1,000.00
C.$1,040.00
D.$1,060.00
7) Unbiased Expectations Theory The Wall Street Journal reports that the rate on 4-year
Treasury securities is 4.75 percent and the rate on 5-year Treasury securities is 5.95
percent. According to the unbiased expectations hypotheses, what does the market
expect the 1-year Treasury rate to be four years from today, E(5r1)?
A.1.11%
B.5.95%
C.10.70%
D.10.89%
8) Suppose that TNT, Inc. has a capital structure of 43 percent equity, 23 percent
preferred stock, and 34 percent debt. If the before-tax component costs of equity,
preferred stock and debt are 15.4 percent, 10 percent and 7 percent, respectively, what is
TNT’s WACC if the firm faces an average tax rate of 28%?
A.9.45%
B.10.64%
C.10.80%
D.11.30%
9) Dominant Portfolios Determine which one of these three portfolios dominates
another. Name the dominated portfolio and the portfolio that dominates it. Portfolio
Blue has an expected return of 7 percent and risk of 10 percent. The expected return and
risk of portfolio Yellow are 13 percent and 17 percent, and for the Purple portfolio are 9
percent and 14 percent.
A.Portfolio Blue dominates Portfolio Yellow
B.Portfolio Yellow dominates Portfolio Blue
C.Portfolio Purple dominates Portfolio Blue
D.Portfolio Purple dominates Portfolio Yellow
10) Present Value of a Perpetuity A perpetuity pays $50 per year and interest rates are 9
percent. How much would its value change if interest rates decreased to 6 percent?
A.$150.00 increase
B.$150.00 decrease
C.$277.78 increase
D.$277.78 decrease
11) Your company doesn’t face any taxes and has $750 million in assets, currently
financed entirely with equity. Equity is worth $25 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 25-percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt in either
event. What will be the break-even level of EBIT?
A.$20 million
B.$23.75 million
C.$42.5 million
D.$75 million
12) Investors sell stock at the
A.dealer price
B.bid price
C.quoted ask price
D.broker price
13) Future Value of an Annuity What is the future value of an $800 annuity payment
over 15 years if the interest rates are 6 percent?
A.$1,917.25
B.$7,002.99
C.$12,720.00
D.$18,620.78
14) TellAll has 10 million shares of common stock outstanding, 20 million shares of
preferred stock outstanding, and 100 thousand bonds. If the common shares are selling
for $32 per share, the preferred shares are selling for $20 per share, and the bonds are
selling for 106 percent of par, what would be the weight used for preferred stock in the
computation of TellAll’s WACC?
A.33.33%
B.48.43%
C.55.55%
D.66.45%
15) Future Value of an Annuity What is the future value of a $1,000 annuity payment
over 4 years if the interest rates are 8 percent?
A.$3312.10
B.$4320.00
C.$4506.11
D.$9214.20
16) Which of the following describes the place over which the bank-to-bank transfers
are conducted within the United States?
A.lockbox system
B.concentration banking
C.wire transfers
D.Fedwire
17) Standard Deviation Compute the standard deviation of the five monthly returns for
PG&E: 1.25 percent, -1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent
A.1.876%
B.1.946%
C.2.046%
D.2.287%
18) JohnBoy Industries has a cash balance of $59,000; accounts payable of $139,000;
inventory of $115,000; accounts receivable of $220,000; notes payable of $175,000;
and accrued wages and taxes of $23,000. How much net working capital does the firm
need to fund?
A.$140,000
B.$34,000
C.-$25,000
D.$57,000
19) A firm has 1,000,000 shares of common stock outstanding, each with a market price
of $10.00 per share. It has 15,000 bonds outstanding, each selling for $900 (with a face
value of $1,000). The bonds mature in 15 years, have a coupon rate of 10%, and pay
coupons semi-annually. The firm’s equity has a beta of 1.5, and the expected market
return is 20%. The tax rate is 35% and the WACC is 16%. What is the risk-free rate?
A.4.8%
B.11.4%
C.27.6%
D.30.0%
20) Your firm needs a computerized machine tool lathe which costs $50,000, requires
$10,000 in installation, $5,000 in freight charges and another $12,000 in maintenance
for each year of its 3-year life. After 3 years, this machine will be replaced. The
machine falls into the MACRS 3-year class life category. Assume a tax rate of 30% and
a discount rate of 12%. If the lathe can be sold for $7,000 at the end of year 3, what is
the after-tax salvage value?
A.$6,499.35
B.$6,344.95
C.$5,999.45
D.$6,554.95
21) A firm has an ROA of 12% and an ROE of 52%. What is the firm’s equity
multiplier?
A.0.23
B.4.33
C.1.63
D.2.90
22) If a firm has excess capacity when calculating AFN (Additional Funds Needed), A*
will most likely equal which of the following?
A.Total Assets
B.Current Assets
C.Fixed Assets
D.Lumpy Assets
23) Suppose that a company’s equity is currently selling for $55 per share and that there
are 1 million shares outstanding. If the firm also has 50 thousand bonds outstanding,
which are selling at 95 percent of par ($1,000), what are the firm’s current capital
structure weights for equity and debt respectively?
A.50%, 50%
B.53.66%, 46.34%
C.52.38%, 47.62%
D.36.67%, 63.33%
24) These capital market instruments are long-term loans to individuals or businesses to
purchase homes, pieces of land, or other real property.
A.Treasury notes and bonds
B.Mortgages
C.Mortgage-backed securities
D.Corporate bonds
25) This term is defined as the group of investment banks used to help sell and
distribute a new security issue.
A.take down
B.syndicate
C.underwriter’s spread
D.originating house
26) Time value of money concepts can be used by _____________.
A.Individuals doing personal financial planning
B.CFOs and CEOs to make business decisions
C.Investors calculating a return on an investment
D.All of these are users of time value of money concepts
27) The term “capital structure” refers to
A.the amount of current versus long-term debt on the balance sheet
B.the amount of current versus fixed assets on the balance sheet
C.the amount of debt versus equity on the balance sheet
D.None of these
28) Which of the following is described as a firm buying back shares of its own stock?
A.ex-dividend
B.ex-stock purchase
C.repurchase or buyback
D.repossession
29) Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a
market interest rate of 10.5%. (Assume interest rates are semiannual and par value is
$1,000.) Is this a discount or premium bond?
A.$685.93; discount
B.$791.03; discount
C.$1,051.83; premium
D.$1,176.31; premium
30) You are considering an investment in 30-year bonds issued by Moore Corporation.
The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills
are currently earning 3.55%. Your broker has determined the following information
about economic activity and Moore Corporation bonds:
Real interest rate = 2.75%
Default risk premium = 1.05%
Liquidity risk premium = 0.50%
Maturity risk premium = 1.85%
What is the inflation premium?
A.0.80%
B.1.25%
C.6.25%
D.8.00%
31) Which of the following will decrease the additional funds needed from external
sources?
A.The firm’s profit margin decreases
B.The firm’s retention ratio is decreased
C.The firm becomes less capital intensive
D.The firm reduces its usage of trade credit
32) Bailey’s Dog Pens, Inc., with the help of its investment bank recently issued
$165,500,000 of new debt. The offer price on the debt was $1,000 per bond and the
underwriter’s spread was 7 percent of the gross proceeds. Calculate the amount of
capital funding Bailey’s Dog Pens, Inc., raised through this bond issue.
A.$159,915,000
B.$151,915,000
C.$153,915,000
D.$150,915,000
33) Which of the following is NOT a capital market instrument?
A.U.S. Treasury notes and bonds
B.U.S. Treasury bills
C.U.S. government agency bonds
D.Corporate stocks and bonds
34) Compute the MIRR for Project Y and accept or reject the project with the cash
flows shown below if the appropriate cost of capital is 12 percent.
A.7.62%, accept
B.7.62%, reject
C.47.09%, accept
D.47.09%, reject
35) If a firm has retained earnings of $10 million, a common shares account of $15
million, and additional paid-in-capital of $5 million, how much would be transferred in
(or out) of these accounts in response to a 50 percent stock dividend, respectively?
A.-100%, 0%, +100%
B.-100%, +100%, 0%
C.-100%, +50%, +50%
D.-50%, +50%, +50%
36) Which of the following describes the type of venture capital firms whose sole
purpose is to find and fund the most promising new firms?
A.blue chip venture capital firms
B.institutional venture capital firms
C.angel venture capitalists
D.expertise venture capitalists