1) Which of the following are true statements?
I. Venture capitalists tend to be long-term investors in a firm.
II. Venture capital is relatively easy to obtain for most new firms.
III. Venture capitalists generally have an exit strategy.
IV. Venture capitalists tend to specialize in one type of financing for a select type of
firm.
A.I and II only
B.III and IV only
C.I and III only
D.I and IV only
E.II and IV only
2) On any given day, a firm receives numerous checks worth an average combined total
of $5,900. The funds from the deposited checks are generally available after 1.5 days.
Every day, the firm mails out checks totaling $4,400 that generally take 3 days to clear
the bank. What is the amount of the collection float?
A.$4,400
B.$4,450
C.$8,850
D.$13,250
E.$13,400
3) The market rate of return is 14.8 percent and the risk-free rate is 4.45 percent. Galaxy
Co. has 54 percent more systematic risk than the overall market and has a dividend
growth rate of 5.5 percent. The firm’s stock is currently selling for $39 a share and has a
dividend yield of 3.6 percent. What is the firm’s cost of equity?
A.14.73 percent
B.15.31 percent
C.15.82 percent
D.16.28 percent
E.16.73 percent
4) Which one of the following increases the number of shares outstanding but does not
increase the value of owner’s equity?
A.Stock repurchase
B.Reverse stock split
C.Stock split
D.Cash distribution
E.Liquidating dividend
5) The Paper Moon has an operating cash flow of $187,000 and a cash flow to creditors
of $61,400 for the past year. During that time, the firm invested $28,000 in net working
capital and incurred net capital spending of $48,900. What is the amount of the cash
flow to stockholders for the last year?
A.-$171,500
B.-$86,700
C.$21,200
D.$48,700
E.$110,100
6) Aaron’s Nursery has 6,000 shares of stock outstanding at a market price of $20 a
share. The earnings per share are $1.54. The firm has total assets of $315,000 and total
liabilities of $186,000. Today, the firm is repurchasing $4,800 worth of stock. Ignore
taxes. What will the earnings per share be after the stock repurchase?
A.$1.283
B.$1.232
C.$1.540
D.$1.604
E.$1.848
7) Which of the following figures of merit might not use all possible cash flows in its
calculations?
I. Payback period
II. Internal rate of return
III. Net present value (NPV)
IV. Accounting rate of return
A.III only
B.I & III only
C.II & III only
D.I & IV only
E.III & IV only
8) The financial statements for Limited Brands, Inc. follow (fiscal years ending
January):
Use Limited Brands, Inc.’s financial statements, above, to answer the following
question. Use the company’s operating profit as an approximation of its EBIT, and
assume a 40% tax rate for your calculations. For the fiscal years ending in January of
2006 and 2007, calculate:
a) Limited Brands’ total liabilities-to-equity ratio;
b) Times interest earned ratio; and
c) Times burden covered.
9) All else constant, which of the following will increase the aftertax cost of debt for a
firm?
I. increase in the yield to maturity of the firm’s outstanding debt
II. decrease in the yield to maturity of the firm’s outstanding debt
III. increase in the firm’s tax rate
IV. decrease in the firm’s tax rate
A.I only
B.I and III only
C.I and IV only
D.II and III only
E.II and IV only
10) Which one of the following statements is correct?
A.A portfolio that contains at least 30 diverse individual securities will have a beta of
1.0
B.Any portfolio that is correctly valued will have a beta of 1.0
C.A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a
security market line graph
D.A risk-free security plots at the origin on a security market line graph
E.An underpriced security will plot above the security market line
11) The Market Place recently announced that it will pay its first annual dividend two
years from today. The first dividend will be $0.50 a share with that amount doubling
each year for the following two years. After that, the dividend is expected to increase by
4 percent annually. What is the value of this stock today if the required return is 15
percent?
A.$11.68
B.$12.47
C.$12.99
D.$14.02
E.$14.94
12) Jeffries, Inc. has 6 percent coupon bonds on the market that have 11 years left to
maturity. The bonds make annual payments. If the YTM on these bonds is 7.4 percent,
what is the current bond price?
A.$895.88
B.$897.08
C.$903.14
D.$921.42
E.$933.33
13) An increase in which one of the following will increase operating cash flow for a
profitable, tax-paying firm?
A.Fixed expenses
B.Interest paid
C.Net capital spending
D.Inventory
E.Depreciation
14) Ted is trying to decide what cost of capital he should assign to a project. Which one
of the following should be his primary consideration in this decision?
A.Amount of debt used to finance the project
B.Use, or lack thereof, of preferred stock to finance the project
C.Mix of funds used to finance the project
D.Risk level of the project
E.Length of the project’s life
15) A trader in Switzerland just agreed to trade Swiss francs for British pounds based on
today’s exchange rate. The trade is expected to settle tomorrow. What term best
describes this exchange?
A.Arbitrage transaction
B.Forward trade
C.Spot trade
D.Purchasing power parity
E.Interest rate parity
16) Sunshine Cruises issues only common stock and coupon bonds. The firm has a
debt-equity ratio of 0.55. The cost of equity is 16.3 percent and the pre-tax cost of debt
is 9.9 percent. What is the capital structure weight of the firm’s equity if the firm’s tax
rate is 34 percent?
A.46.75 percent
B.49.97 percent
C.52.93 percent
D.61.08 percent
E.64.52 percent
17) The internal rate of return is unreliable as an indicator of whether or not an
investment should be accepted given which one of the following?
A.One of the time periods within the investment period has a cash flow equal to zero
B.The initial cash flow is negative
C.The investment has cash inflows that occur after the required payback period
D.The investment is mutually exclusive with another investment under consideration
E.The cash flows are conventional
18) The sustainable growth rate of a firm is best described as the:
A.minimum growth rate achievable assuming a 100 percent retention ratio
B.minimum growth rate achievable if the firm maintains a constant equity multiplier
C.maximum growth rate achievable excluding external financing of any kind
D.maximum growth rate achievable excluding any external equity financing while
maintaining a constant debt-equity ratio
E.maximum growth rate achievable with unlimited debt financing
19) If intermediate-term, default-free, pure discount bonds have a higher rate of return
than either the comparable shorter-term or longer-term bonds, the term structure of
interest rates will be:
A.upward-sloping
B.flat
C.humped
D.downward-sloping
E.double-humped
20) A firm is considering two different capital structures. The first option is an
all-equity firm with 32,000 shares of stock. The second option is 20,000 shares of stock
plus some debt. Ignoring taxes, the breakeven level of earnings before interest and taxes
between these two options is $48,000. How much money is the firm considering
borrowing if the interest rate is 8 percent?
A.$175,000
B.$225,000
C.$250,000
D.$275,000
E.$300,000
21) Which one of the following is a source of cash?
A.decrease in accounts receivable
B.decrease in common stock
C.decrease in long-term debt
D.decrease in accounts payable
E.increase in inventory
22) Which one of the following statements concerning money market securities is
correct?
A.Commercial paper is highly marketable
B.All T-bills are issued with 90-day maturities
C.A certificate of deposit is a short-term loan to the government
D.Any CD with a face amount of $10,000 or more is classified as a jumbo CD
E.Money market preferred is less volatile than ordinary preferred
23) Which one of the following terms refers to the best option that was foregone when a
particular investment is selected?
A.Side effect
B.Erosion
C.Sunk cost
D.Opportunity cost
E.Marginal cost
24) The Blue Lantern has a return on equity of 17.8 percent, an equity multiplier of 1.9,
and a total asset turnover of 1.45. What is the profit margin?
A.2.76 percent
B.3.57 percent
C.4.90 percent
D.5.28 percent
E.6.46 percent
25) Which one of the following statements is correct concerning capital structure
weights?
A.Target rates are less relevant to a project than are historical rates
B.The weights are unaffected when a bond issue matures
C.An increase in the debt-equity ratio will increase the weight of the common stock
D.The repurchase of preferred stock will increase the weight of debt
E.The issuance of additional shares of common stock will increase the weight of the
preferred stock
26) Limited liability companies are primarily designed to:
A.allow a portion of its owners to enjoy limited liability while granting the other
portion of its owners control over the entity
B.provide the benefits of the corporate structure to foreign-based entities
C.spin-off a wholly-owned subsidiary
D.allow companies to reorganize themselves through the bankruptcy process
E.provide limited liability while avoiding double taxation
27) Which one of the following is the bill given to a customer for goods he or she
purchased?
A.Account aging
B.Invoice
C.Docket
D.Remittance advice
E.Shipping receipt
28) Kaylor’s Tool Shoppe has 16,000 shares of stock outstanding at a market price of $2
a share. Which one of the following stock splits should the firm declare if it wants to
increase the stock price to exactly $15 a share? Ignore any taxes or market
imperfections.
A.15-for-2 stock split
B.8-for-1 stock split
C.1-for-7-reverse stock split
D.2-for-15 reverse stock split
E.1-for-8 reverse stock split
29) Your parents would like to establish a trust fund that would pay annual payments to
you and your heirs of $100,000 a year forever. How much do your parents need to
deposit into this trust fund today to achieve their goal if the fund can earn 7 percent
interest?
A.$678,342
B.$700,000
C.$1,211,516
D.$1,389,407
E.$1,428,571
30) Ginormous Oil entered into an agreement to purchase all of the outstanding shares
of Slick Company for $60 per share. The number of outstanding shares at the time of
the announcement was 82 million. The book value of liabilities on the balance sheet of
Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of
Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of
Slick Co.?
A.$2.21 billion
B.$2.71 billion
C.$4.17 billion
D.$6.38 billion
E.None of the above
31) Which one of the following is most apt to create a situation where an agency
conflict could arise?
A.Increasing the size of a firm’s operations
B.Downsizing a firm
C.Separating management from ownership
D.Decreasing employee turnover
E.Reducing both management and non-management salaries
32) Which one of the following methods of analysis is most appropriate to use when
two investments are mutually exclusive?
A.Internal rate of return
B.Profitability index
C.Net present value
D.Modified internal rate of return
E.Average accounting return
33) Which one of the following statements concerning sinking funds is correct?
A.Bond issuers must fund a sinking fund at the time the bonds are issued
B.Sinking funds must include at least one “balloon payment”
C.Sinking funds must be funded annually, starting on the issue date
D.Sinking funds may be used to purchase bonds in the open market
E.Sinking funds can only be used to call bonds
34) The present value of a lump sum future amount:
A.increases as the interest rate decreases
B.decreases as the time period decreases
C.is inversely related to the future value
D.is directly related to the interest rate
E.is directly related to the time period
35) The optimal credit policy will do which one of the following?
A.Maximize sales
B.Minimize bad debts
C.Maximize units sold
D.Minimize the total costs of granting credit
E.Minimize carrying costs
36) What is the effective annual rate of 14.9 percent compounded monthly?
A.14.48 percent
B.14.67 percent
C.15.23 percent
D.15.74 percent
E.15.96 percent
37) Which one of the following bonds is most apt to have the smallest liquidity
premium?
A.Treasury bill
B.Corporate bond issued by a new firm
C.Municipal bond issued by the State of New York
D.Municipal bond issued by a rural city in Alaska
E.Corporate bond issued by General Motors (GM)
38) Which one of the following is a disbursement account into which funds are
transferred only as needed to cover the demands for payment?
A.Master account
B.Controlled disbursement account
C.Bank controlled account
D.Investment account
E.Safety stock account
39) The spot rate between Canada and the U.S. is C$1.2381 = $1, while the 1-year
forward rate is C$1.2379 = $1. The risk-free rate in Canada is 2.8 percent. The risk-free
rate in the U.S. is 3.6 percent. How much profit can you earn on a loan of $10,000 by
utilizing covered interest arbitrage?
A.-$81.42
B.-$78.34
C.-$53.60
D.$34.91
E.$65.07