1) Which one of the following best defines legal bankruptcy?
A.Negotiating new payment terms with a firm’s creditors
B.A temporary technical insolvency
C.A legal proceeding for liquidating or reorganizing a business
D.The internal process of revising the capital structure of a firm
E.The failure of a firm to meet its financial obligations in a timely manner
2) If you put up $46,000 today in exchange for a 6.75 percent 15-year annuity, what
will the annual cash flow be?
A.$4,519.27
B.$4,666.67
C.$4,971.10
D.$5,203.16
E.$5,338.09
3) Phil is reviewing ABC Company’s dividend policy as it relates to the firm’s
shareholders. As part of this review, he wants to divide shareholders into two basic
categories in respect to dividend payments. The first group will be shareholders who are
taxed on dividend income and the second group will be shareholders who receive some
form of tax break on dividend income. Which of the following types of shareholders
should be placed in the tax-favored second group?
I. Corporate
II. Pension fund
III. Individuals
IV. Trust funds
A.I only
B.III only
C.I and III only
D.II and IV only
E.I, II, and IV only
4) Centre Bank pays 2.5 percent interest, compounded annually, on its savings
accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You
want to deposit sufficient funds today so that you will have $1,500 in your account 2
years from today. The amount you must deposit today:
A.is the same regardless of which bank you choose because they both pay compound
interest
B.is the same regardless of which bank you choose because they both pay simple
interest
C.is the same regardless of which bank you choose because the time period is the same
for both banks
D.will be greater if you invest with Centre Bank
E.will be greater if you invest with Country Bank
5) On May 12, you purchased $3,700 of merchandise from a supplier. The terms of the
sale were 2/5, net 15 . The discounted amount due is _____ which is payable no later
than ____.
A.$2,960; May 17
B.$3,515; May 27
C.$3,515; May 17
D.$3,626; May 17
E.$3,626; May 27
6) If a firm has a negative cash flow from assets every year for several years, the firm:
A.may be continually increasing in size
B.must also have a negative cash flow from operations each year
C.is operating at a high level of efficiency
D.is repaying debt every year
E.has annual net losses
7) Tom earned $120 in interest on his savings account last year. Tom has decided to
leave the $120 in his account so that he can earn interest on the $120 this year. This
process of earning interest on prior interest earnings is called:
A.discounting
B.compounding
C.duplicating
D.multiplying
E.indexing
8) You bought a share of 8.5 percent preferred stock for $40 last year. The market price
for your stock is now $88.10. What is your total return for last year?
A.7.51 percent
B.7.73 percent
C.7.86 percent
D.8.10 percent
E.10.53 percent
9) Waldale Pools has total equity of $289,100 and net income of $64,500. The
debt-equity ratio is 0.55 and the total asset turnover is 1.6 . What is the profit margin?
A.3.10 percent
B.5.23 percent
C.5.67 percent
D.9.00 percent
E.22.31 percent
10) The tax shield approach to computing the operating cash flow, given a tax-paying
firm:
A.ignores both interest expense and taxes
B.separates cash inflows from cash outflows
C.considers the changes in net working capital resulting from a new project
D.is based on the fact that depreciation does not affect the operating cash flows
E.recognizes that depreciation creates a cash inflow
11) We are evaluating a project that costs $1.68 million, has a five-year life, and has no
salvage value. Assume depreciation is straight-line to zero over the life of the project.
Sales are projected at 82,000 units per year. Price per unit is $43.29, variable cost per
unit is $22.18, and fixed costs are $623,000 per year. The tax rate is 34 percent, and we
require a 10 percent return on this project. What is the sensitivity of NPV to a 100-unit
change in the sales figure?
A.$3,998.40
B.$4,609.18
C.$4,897.20
D.$5,281.55
E.$5,557.12
12) Jefferson International is trying to choose between the following two mutually
exclusive design projects:
The required return is 12 percent. If the company applies the profitability index (PI)
decision rule, which project should the firm accept? If the company applies the NPV
decision rule, which project should it take? Given your first two answers, which project
should the firm actually accept?
A.Project A; Project B; Project A
B.Project A; Project B; Project B
C.Project B; Project A; Project A
D.Project B; Project A; Project B
E.Project B; Project B, Project B
13) You want to purchase a new condominium that costs $329,000. Your plan is to pay
20 percent down in cash and finance the balance over 25 years at 6.25 percent. What
will be your monthly mortgage payment?
A.$1,736.25
B.$1,833.33
C.$1,908.16
D.$2,221.43
E.$2,406.11
14) Which one of the following will decrease the liquidity level of a firm?
A.Cash purchase of inventory
B.Credit sale of inventory
C.Cash sale of inventory
D.Collection of an account receivable
E.Proceeds from a long-term loan
15) Hercules Movers pays a constant annual dividend of $1.75 per share on its stock.
Last year at this time, the market rate of return on this stock was 14.8 percent. Today,
the market rate has fallen to 11.2 percent. What would your capital gains yield have
been if you had purchased this stock one year ago and then sold the stock today?
A.18.78 percent
B.22.03 percent
C.28.16 percent
D.30.00 percent
E.32.14 percent
16) Your grandparents just gave you a gift of $15,000. You are investing this money for
12 years at 6 percent simple interest. How much money will you have at the end of the
12 years?
A.$15,900
B.$16,000
C.$17,375
D.$25,800
E.$26,938
17) Holly Farms has sales of $581,600, costs of $479,700, depreciation expense of
$32,100, and interest paid of $8,400. The tax rate is 42 percent. How much net income
did the firm earn for the period?
A.$25,788
B.35,612
C.$43,380
D.$45,671
E.$45,886
18) Which one of the following is the process of determining the probability that
customers will not pay?
A.Credit analysis
B.Collection policy
C.Account aging
D.Credit terms
E.Customer invoicing
19) Which one of the following is a graphical representation of the operating and cash
cycles?
A.Operations line
B.Production period
C.Cash flow time line
D.Inventory flow chart
E.Customer service line
20) Consider an asset that costs $465,000 and is depreciated straight-line to zero over
its six-year tax life. The asset is to be used in a four-year project; at the end of the
project, the asset can be sold for $120,000. If the relevant tax rate is 35 percent, what is
the aftertax cash flow from the sale of this asset?
A.$132,250
B.$155,000
C.$116,500
D.$97,600
E.$79,200
21) A bond for which no specific property has been pledged as security is classified as
a:
A.bearer bond
B.trust deed bond
C.registered bond
D.debenture
E.sinking fund bond
22) Flemington Farms is evaluating an extra dividend versus a share repurchase. In
either case, $15,000 would be spent. Current earnings are $2.80 per share, and the stock
currently sells for $75 per share. There are 2,800 shares outstanding. Ignore taxes and
other imperfections. The PE ratio will be ____ if the firm issues the dividend as
compared to ____ if the firm does the share repurchase.
A.24.87; 24.87
B.24.87; 26.79
C.26.79; 24.87
D.26.79; 26.79
E.26.79; 27.13
23) Swizer Industries has two separate divisions. Division X has less risk so its projects
are assigned a discount rate equal to the firm’s WACC minus 0.5 percent. Division Y
has more risk and its projects are assigned a rate equal to the firm’s WACC plus 1
percent. The company has a debt-equity ratio of 0.45 and a tax rate of 35 percent. The
cost of equity is 14.7 percent and the aftertax cost of debt is 5.1 percent. Presently, each
division is considering a new project. Division Y’s project provides a 12.3 percent rate
of return and Division X’s project provides an 11.64 percent return. Which projects, if
any, should the company accept?
A.Accept both X and Y
B.Accept X and reject Y
C.Reject X and accept Y
D.Reject both X and Y
E.The answer cannot be determined based on the information provided
24) Which one of the following firms is most apt to have the shortest inventory period?
A.General merchandise retail store
B.Hardware store
C.Furniture store
D.Locomotive manufacturer
E.Delicatessen
25) Stock A has an expected return of 15.6 percent and a beta of 1.27 . Stock B has an
expected return of 11.4 percent and a beta of 0.89. Both stocks have the same
reward-to-risk ratio. What is the risk-free rate?
A.1.56 percent
B.2.28 percent
C.2.79 percent
D.3.35 percent
E.3.92 percent
26) Which one of the following industries is most apt to have the shortest operating
cycle?
A.Toy store
B.Car manufacturer
C.Local restaurant
D.Furniture store
E.Plastics manufacturer
27) Which one of the following statements is correct when a firm faces hard rationing?
A.All positive net present value projects will be accepted
B.Each division within a firm will be allocated an amount for capital expenditures that
will be less than the total value of its positive net present value projects
C.The firm does not have funds to finance any new projects
D.The firm will fund only those projects that create value for its shareholders
E.The firm will finance only the projects that have the highest profitability index values
28) Green Tea House has a 35 percent tax rate and an interest tax shield valued at
$6,728 for the year. How much did the firm pay in annual interest?
A.$2,153
B.$2,304
C.$2,468
D.$19,107
E.$19,223
29) At 10 percent interest, how long does it take to quadruple your money?
A.14.33 years
B.14.55 years
C.15.11 years
D.15.36 years
E.15.56 years
30) If shareholders are granted a preemptive right they will:
A.be given the choice of receiving dividends either in cash or in additional shares of
stock
B.be paid dividends prior to the preferred shareholders during the preemptive period
C.be entitled to two votes per share of stock
D.be able to choose the timing and amount of any future dividends
E.have priority in the purchase of any newly issued shares
31) Diamond Enterprises is considering a project that will produce cash inflows of
$238,000 a year for three years followed by $149,000 in year 4 . What is the internal
rate of return if the initial cost of the project is $749,000?
A.3.43 percent
B.4.29 percent
C.5.81 percent
D.6.32 percent
E.7.55 percent
32) Explain why investors receive exactly what they pay for in a totally efficient
market.
33) Over the next three years, you expect the rate of inflation to decrease, but yet
remain positive. After that, you expect inflation to increase steadily for the next several
years. Draw a term structure of interest rates graph based on this assumption and
identify all the components of that structure.
34) Explain how a zero coupon bond can create taxable income during a year in which
the bond pays no interest payments. Also, explain how the annual taxable amount can
be computed.
35) You are considering a firm under three separate scenarios: (1) no debt, taxes, or
bankruptcy costs; (2) with debt and taxes but no bankruptcy costs; and (3) with debt,
taxes, and bankruptcy costs. Under which one of these three scenarios will the firm
have the highest value?
36) Explain the difference between scenario analysis and sensitivity analysis and
identify the purpose of each.
37) Explain the time value of money principle and also identify the underlying
assumption of that principle.
38) Identify one primary strength and one primary weakness for each of the following
methods of investment analysis:
Net present value:
Strength:
Weakness:
Internal rate of return:
Strength:
Weakness:
Profitability index:
Strength:
Weakness:
Payback:
Strength:
Weakness:
Average accounting return:
Strength:
Weakness:
39) How should a firm determine whether a restrictive or a flexible financial policy is
best given its current situation?