The common stock of United Industries has a beta of 1.34 and an expected return of
14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market
risk premium?
A. 7.02 percent
B. 7.90 percent
C. 10.63 percent
D. 11.22 percent
E. 11.60 percent
Josie's Craft Shack has a beginning cash balance for the quarter of $1,126. The store has
a policy of maintaining a minimum cash balance of $1,000 and is willing to borrow
funds as needed to maintain that balance. Currently, the firm has a loan balance of $480.
How much will the store borrow or repay if the net cash flow for the quarter is -$280?
A. $0
B. $28
C. $126
D. $154
E. $280
Which one of the following is the price a dealer will pay to purchase a bond?
A. call price
B. asked price
C. bid price
D. bid-ask spread
E. par value
The National Bank has an agreement with The Foreign Bank to exchange 500,000 U.S.
dollars for 380,000 Euros on the first day of each of the next 3 calendar quarters. This
agreement is best described as a(n):
A. floating exchange.
B. spot trade.
C. option.
D. futures contract.
E. swap contract.
Consider the following information for Kaleb's Kickboxing:
What is the sustainable rate of growth?
A. 13.87 percent
B. 14.29 percent
C. 14.65 percent
D. 15.42 percent
E. 15.58 percent
A stakeholder is:
A. a person who owns shares of stock.
B. any person who has voting rights based on stock ownership of a corporation.
C. a person who initially founded a firm and currently has management control over
that firm.
D. a creditor to whom a firm currently owes money.
E. any person or entity other than a stockholder or creditor who potentially has a claim
on the cash flows of a firm.
The Green Fiddle has declared an $8 per share dividend. Suppose capital gains are not
taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be
withheld at the time the dividend is paid. Green Fiddle stock sells for $71.50 per share,
and the stock is about to go ex-dividend. What will the ex-dividend price be?
A. $64.70
B. $67.90
C. $78.30
D. $79.50
E. $82.23
You've observed the following returns on Crash-n-Burn Computer's stock over the past
five years: 2 percent, -12 percent, 27 percent, 22 percent, and 18 percent. What is the
variance of these returns?
A. 0.02070
B. 0.02588
C. 0.01725
D. 0.01684
E. 0.02633
On June 1, you borrowed $212,000 to buy a house. The mortgage rate is 8.25 percent.
The loan is to be repaid in equal monthly payments over 15 years. The first payment is
due on July 1. How much of the second payment applies to the principal balance?
(Assume that each month is equal to 1/12 of a year.)
A. $603.32
B. $698.14
C. $1,358.56
D. $1,453.38
E. $2,056.70
Hollister & Hollister is considering a new project. The project will require $522,000 for
new fixed assets, $218,000 for additional inventory, and $39,000 for additional
accounts receivable. Short-term debt is expected to increase by $165,000. The project
has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value
over the life of the project. At the end of the project, the fixed assets can be sold for 20
percent of their original cost. The net working capital returns to its original level at the
end of the project. The project is expected to generate annual sales of $875,000 and
costs of $640,000. The tax rate is 34 percent and the required rate of return is 14
percent. What is the amount of the aftertax cash flow from the sale of the fixed assets at
the end of this project?
A. $35,496
B. $68,904
C. $104,400
D. $287,615
E. $344,520
Which one of the following statements is correct?
A. Mergers benefit shareholders but not creditors.
B. Positive NPV projects will automatically benefit both creditors and shareholders.
C. Shareholders might prefer a negative NPV project over a positive NPV project.
D. Creditors prefer negative NPV projects while shareholders prefer positive NPV
projects.
E. Mergers rarely affect bondholders.
The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share
over the last four years, respectively. The stock is currently selling for $26 a share.
What is this firm's cost of equity?
A. 7.56 percent
B. 7.93 percent
C. 10.38 percent
D. 10.53 percent
E. 11.79 percent
Which one of the following equals the operating cycle?
A. cash cycle plus accounts receivable period
B. inventory period plus the accounts receivable period
C. inventory period plus the accounts payable period
D. accounts payable period minus the cash cycle
E. accounts payable period plus the accounts receivable period
Which one of the following statements would generally be considered as accurate given
independent projects with conventional cash flows?
A. The internal rate of return decision may contradict the net present value decision.
B. Business practice dictates that independent projects should have three distinct accept
indicators before a project is actually implemented.
C. The payback decision rule could override the net present value decision rule should
cash availability be limited.
D. The profitability index rule cannot be applied in this situation.
E. The projects cannot be accepted unless the average accounting return decision ruling
is positive.
Purvis Lawn Products has 18,000 shares of stock outstanding at a market price of $5.50
a share. What will the market price per share be if the company does a 1-for-4 reverse
stock split?
A. $1.38
B. $5.50
C. $11.00
D. $16.50
E. $22.00
What is an issue of securities that is offered for sale to the general public on a direct
cash basis called?
A. best efforts underwriting
B. firm commitment underwriting
C. general cash offer
D. rights offer
E. herring offer
A floor broker on the NYSE does which one of the following?
A. supervises the commission brokers for a financial firm
B. trades for his or her personal inventory
C. executes orders on behalf of a commission broker
D. maintains an inventory and takes the role of a specialist
E. is charged with maintaining a liquid, orderly market
Which one of the following statements is correct for a firm that uses debt in its capital
structure?
A. The WACC should decrease as the firm's debt-equity ratio increases.
B. When computing the WACC, the weight assigned to the preferred stock is based on
the coupon rate multiplied by the par value of the preferred.
C. The firm's WACC will decrease as the corporate tax rate decreases.
D. The weight of the common stock used in the computation of the WACC is based on
the number of shares outstanding multiplied by the book value per share.
On this date last year, you borrowed $3,400. You have to repay the loan principal plus
all of the interest six years from today. The payment that is required at that time is
$6,000. What is the interest rate on this loan?
A. 8.01 percent
B. 8.45 percent
C. 8.78 percent
D. 9.47 percent
E. 9.93 percent
A firm uses 2008 as the base year for its financial statements. The common-size, base-
year statement for 2009 has an inventory value of 1.08. This is interpreted to mean that
the 2009 inventory is equal to 108 percent of which one of the following?
A. 2008 inventory
B. 2008 total assets
C. 2009 total assets
D. 2008 inventory expressed as a percent of 2008 total assets
E. 2009 inventory expressed as a percent of 2009 total assets
The Du Pont identity can be used to help managers answer which of the following
questions related to a firm's operations?
I. How many sales dollars has the firm generated per each dollar of assets?
II. How many dollars of assets has a firm acquired per each dollar in shareholders'
equity?
III. How much net profit is a firm generating per dollar of sales?
IV. Does the firm have the ability to meet its debt obligations in a timely manner?
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III and IV only
E. I, II, III, and IV
Which one of the following statements applies to NASDAQ?
A. a partner with the London exchange
B. exchange floor is located in Chicago
C. single market maker for each listed security
D. broker's market
E. comprised of three separate markets
When weighing a decision, Kate places greater emphasis on opinions that match her
own than she does on opinions offered by others that disagree with her personal point of
view. Kate illustrates which one of the following?
A. frame dependence
B. overconfidence
C. gambler's fallacy
D. confirmation bias
E. overoptimism
The explicit costs, such as legal and administrative expenses, associated with corporate
default are classified as _____ costs.
A. flotation
B. issue
C. direct bankruptcy
D. indirect bankruptcy
E. unlevered
Your local travel agent is advertising an upscale winter vacation package for travel three
years from now to Antarctica. The package requires that you pay $25,000 today,
$30,000 one year from today, and a final payment of $45,000 on the day you depart
three years from today. What is the cost of this vacation in today's dollars if the discount
rate is 9.75 percent?
A. $86,376
B. $89,695
C. $91,219
D. $91,407
E. $93,478
Jefferson & Daughter has a cost of equity of 14.6 percent and a pre-tax cost of debt of
7.8 percent. The required return on the assets is 13.2 percent. What is the firm's debt-
equity ratio based on M&M II with no taxes?
A. 0.26
B. 0.33
C. 0.37
D. 0.43
E. 0.45
Which one of the following statements concerning U.S. Treasury bills is correct for the
period 1926- 2007?
A. The annual rate of return always exceeded the annual inflation rate.
B. The average risk premium was 0.7 percent.
C. The annual rate of return was always positive.
D. The average excess return was 1.1 percent.
E. The average real rate of return was zero.
An operating lease:
A. is recorded at its net present value on the balance sheet.
B. is recorded on the balance sheet as both an asset and a liability.
C. is recorded at its estimated residual balance on the balance sheet.
D. is reflected in the footnotes rather than on the balance sheet.
E. does not appear either on a financial statement or in the footnotes.
Executive Tours has decided to take its firm public and has hired an investment firm to
handle this offering. The investment firm is serving as a(n):
A. aftermarket specialist.
B. venture capitalist.
C. underwriter.
D. seasoned writer.
E. primary investor.
Which one of the following statements correctly applies to the period 1926-2007?
A. Large-company stocks earned a higher average risk premium than did small-
company stocks.
B. Intermediate-term government bonds had a higher average return than long-term
corporate bonds.
C. Large-company stocks had an average annual return of 14.7 percent.
D. Inflation averaged 2.6 percent for the period.
E. U.S. Treasury bills had a positive average real rate of return.
You are trying to attract new customers that you feel could become repeat customers.
The average selling price of your products is $69 each with a $41 per unit variable cost.
The monthly interest rate is 1.2 percent. Your experience tells you that 8 percent of
these customers will never pay their bill. What is the value of a new customer who does
not default on his or her bill?
A. $1,986
B. $2,333
C. $2,617
D. $4,817
E. $8,867
You collect old coins. Today, you have two coins each of which is valued at $250. One
coin is expected to increase in value by 6 percent annually while the other coin is
expected to increase in value by 4.5 percent annually. What will be the difference in the
value of the two coins 15 years from now?
A. $115.32
B. $208.04
C. $241.79
D. $254.24
E. $280.15
What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500
of stock N if the economy enjoys a boom period?
A. 10.93 percent
B. 11.16 percent
C. 12.55 percent
D. 13.78 percent
E. 15.43 percent
