1) Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to
mature on June 15, 2017 . If today is December 16, 2008, what is this bond’s time to
maturity? (Assume annual interest payments.)
A.1 year, 6 months
B.8 years
C.8 years, 6 months
D.10 years
2) Which of these is the line on a graph of return and risk (standard deviation) from the
risk-free rate through the market portfolio?
A.Capital Asset Pricing Line
B.Capital Market Line
C.Efficient Market Line
D.Efficient Market Hypothesis
3) Standard Deviation The standard deviation of the past five monthly returns for K and
Company are 2.28 percent, 2.64 percent, -1.05 percent, 4.25 percent, and 9.25 percent.
What is the average monthly return?
A.1.45%
B.1.62%
C.3.47%
D.3.76%
4) This is defined as the volatility of an investment, which includes firm specific risk as
well as market risk.
A.diversifiable risk
B.market risk
C.standard deviation
D.total risk
5) This is a general term for securities like stocks, bonds, and other assets that represent
ownership in a cash flow.
A.investment
B.financial asset
C.real asset
D.financial markets
6) Which of these is defined as an exchange rate regime where the currency is
completely determined by the foreign-exchange market through supply and demand?
A.foreign market regime
B.freely floating regime
C.currency market regime
D.managed-floating regime
7) Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and
paying a $15,000 down payment. If you get a 15-year mortgage with a 6% interest rate,
what would the loan balance be in 7 years?
A.$74,778.16
B.$79,091.72
C.$84,223.16
D.$86,687.84
8) Which of the following is an example of a capital structure?
A.15% current assets and 85% fixed assets
B.10% current liabilities and 90% long-term debt
C.20% debt and 80% equity
D.None of these
9) Which of these statements is true?
A.In general, the lower the total asset turnover and the lower the capital intensity ratio,
the more efficient the overall asset management of the firm will be
B.In general, the lower the total asset turnover and the higher the capital intensity ratio,
the more efficient the overall asset management of the firm will be
C.In general, the higher the total asset turnover and the lower the capital intensity ratio,
the more efficient the overall asset management of the firm will be
D.In general, the higher the total asset turnover and the higher the capital intensity ratio,
the more efficient the overall asset management of the firm will be
10) HiLo, Inc., faces a 38% tax rate and has $100 million in assets, currently financed
entirely with equity. Equity is worth $50 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 40 percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt. What will
be the level of expected EPS if they switch to the proposed capital structure?
A.$2.33
B.$3.68
C.$4.17
D.$4.91
11) Marme Inc. has preferred stock selling for 137% of par that pays an 11% annual
dividend. What would be Marme’s component cost of preferred stock?
A.11.00%
B.8.03%
C.8.17%
D.10.16%
12) A new project would require an immediate increase in raw materials in the amount
$17,000. The firm expects that accounts payable will automatically increase $7,000.
How much must the firm expect its investment in net working capital to increase if they
accept this project?
A.$17,000
B.$7,000
C.$10,000
D.$24,000
13) The set of probabilities for all possible occurrences.
A.probability
B.probability distribution
C.stock market bubble
D.market probabilities
14) A firm reported year-end sales of $20 million. It listed $7 million of inventory on its
balance sheet. Using a 365-day year, how many days did the firm’s inventory stay on
the premises?
A.127.75 days
B.157.75 days
C.97.75 days
D.75 days
15) An exchange rate regime where the country’s central bank allows its currency price
to float freely between an upper and lower bound and may buy or sell large amounts of
it in order to provide price support or resistance is referred to as ____________.
A.Forward exchange regime
B.Purchasing parity regime
C.Freely floating regime
D.Managed floating regime
16) MC Enterprises estimates that it takes, on average, 7 days for their customers’
payments to reach them, 2 day for the payments to be processed and deposited by their
bookkeeping department, and 3 more days for the checks to clear once they’re
deposited. What is their collection float?
A.12 days
B.10 days
C.9 days
D.7 days
17) A capital budgeting technique that converts a project’s cash flows using a more
consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision
rule.
A.discounted payback
B.net present value
C.modified internal rate of return
D.profitability index
18) Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your
company’s marginal tax rate is 40%, what will be the effect on cash flows of this sale
(i.e., what will be the after-tax cash flow of this sale)?
A.$3,000
B.$5,000
C.$92,000
D.$95,000
19) Interest rates The Wall Street Journal reports that the current rate on 5-year Treasury
bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent. Assume that the
maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond
purchased five years from today, E(5r1).
A.6.625%
B.6.75%
C.7.00%
D.7.58%
20) Given a 10% interest rate, compute the year 9 future value if deposits of $10,000
and $20,000 are made in years 1 and 5 respectively, and a withdrawal of $5,000 is made
in year 7.
A.$44,667.89
B.$45,103.47
C.$46,585.66
D.$47,002.89
21) You are deciding among several different bank accounts. Which of the following
will generate the highest effective annual rate (EAR)?
A.A 10% rate with monthly compounding
B.A 10% rate with annual compounding
C.A 10.5% rate with annual compounding
D.A 10% rate with quarterly compounding
22) If the future value of an ordinary, 11 year annuity is $5,575 and interest rates are
5.5%, what is the future value of the same annuity due?
A.$5,619.52
B.$5,769.06
C.$5,881.63
D.$5,947.88
23) Jenna receives an investment newsletter that recommends that she invest in a stock
that has doubled the return of the S&P 500 in the last two months. It also claims that
this stock is a ‘safe bet” for the future. Which of the following statements is correct
regarding this information?
A.This investment newsletter is most likely correct because they most likely have some
special knowledge about the stock
B.The investment newsletter contains contrary information since the stock must be a
high risk and therefore cannot also be a ‘safe bet”
C.It is common for individual stocks to double the return of the S&P500 and still be a
‘safe bet”
D.None of these statements are correct
24) Calculation of Average Costs with Economies of Scope Baby Supplies is
considering a merger with Tot Toy Stores. Baby’s total operating costs of producing
services are $450,000 for sales volume of $2.15 million. Tot’s total operating costs of
producing services are $250,000 for a sales volume (JP) of $975,000.For a sales volume
of $3.125 million, calculate the reduction in production costs the merged firms need to
experience such that the total average cost (TAC) for the merged firms is equal to
19.5%.
A.decrease of $609,375
B.decrease of $90,625
C.decrease of $9,375
D.decrease of $159,375
25) After saving diligently your entire career, you and your spouse are ready to retire
with a nest egg of $600,000. You need to invest this money in a mix of stocks and
bonds that will allow you to earn $5,000 per month for 30 years. What annual interest
rate (APR) do you need to earn?
A.9.40%
B.10.13%
C.8.37%
D.9.61%
26) Suppose that a company’s equity is currently selling for $45 per share and that there
are 1 million shares outstanding. If the firm also has 7 thousand bonds outstanding,
which are selling at 97 percent of par ($1,000), what are the firm’s current capital
structure weights for equity and debt respectively?
A.50%, 50%
B.86.89%, 13.11%
C.12.50%, 87.50%
D.31.69%, 68.31%
27) A firm’s recent dividend was $4.00 per share. The stock is selling in the market
place for $55.00 per share. If investors are demanding 12% on this stock, what is this
stock’s growth rate?
A.4.73%
B.4.41%
C.5.91%
D.6.14%
28) Value of Dividends and Future Price A firm is expected to pay a dividend of $2.00
next year and $2.14 the following year. Financial analysts believe the stock will be at
their target price of $75.00 in two years. Compute the value of this stock with a required
return of 10 percent.
A.$65.40
B.$66.67
C.$65.57
D.$79.14