1) Suppose a firm has had the historical sales figures shown below. What would be the
forecast for next year’s sales using the average approach if it is determined that none of
the years are ‘stale”?
A.$1,600,000
B.$1,660,000
C.$1,700,000
D.$1,800,000
2) GEN has 3 million shares outstanding and a P/E ratio of 15 . Its earnings per share is
$3.00 What is GEN’s market capitalization?
A.$45,000,000
B.$135,000,000
C.$112,000,000
D.$9,000,000
3) A 7.5% coupon bond with 16 years left to maturity is offered for sale at $834.92.
What yield to maturity is the bond offering? (Assume interest payments are paid
semi-annually and par value is $1,000.)
A.4.77%
B.7.5%
C.9.54%
D.10.34%
4) Sustainable Growth Rate You have located the following information on Tyler
Company: debt ratio = 50%, capital intensity ratio = 1.5 times, profit margin = 9%, and
dividend payout ratio = 40%. What is the sustainable growth rate for Tyler?
A.12.00%
B.7.76%
C.20.00%
D.30.00%
5) Which of the following statements is incorrect with respect to time lines?
A.A helpful tool for organizing our analysis is the time line
B.Cash flows we receive are called inflows are denoted with a positive number
C.Cash flows we pay out are called outflows are designated with a negative number
D.Interest rates are not included on our time lines
6) This subarea of finance helps facilitate the capital flows between investors and
companies.
A.investments
B.financial management
C.treasury management
D.financial institutions and markets
7) KatyDid Clothes has a $150 million ($1000 face value) 15-year bond issue selling
for 106% of par that carries a coupon rate of 8%, paid semi-annually. What would be
KatyDid’s before-tax component cost of debt?
A.3.67%
B.7.34%
C.8.12%
D.7.09%
8) A firm is evaluating a potential investment that is expected to generate cash flows of
$100 in years 1 through 4 and $400 in years 5 through 7 . The initial investment is
$750. What is the payback for this investment?
A.4.88 years
B.4.48 years
C.5.88 years
D.5.48 years
9) Compute the expected return and standard deviation given these four economic
states, their likelihoods, and the potential returns:
A.9.5%; 32.43%
B.9.5%; 21.96%
C.9.5%; 18.97%
D.9.5%; 29.18%
10) If a firm changes their capital structure by waiting until the firm requires additional
capital to cover capital budgeting needs and then selling more of the type of claims they
wish to increase, they are using this type of capital structure change.
A.active
B.passive
C.separation
D.supportive
11) Exchange Rate Risk A U.S. firm is expecting cash flows of 15 million Mexican
pesos and 20 million Indian rupees. The current spot exchange rates are: $1 = 11.501
pesos and $1 = 45.525 rupees. If these cash flows are not received for one year and the
expected spot rates at that time will be $1 = 11.265 pesos and $1 = 45.005 rupees, then
what is the difference in dollars received that was caused by the delay?
A.$0.03 million more
B.$0.03 million less
C.$16.94 million more
D.$16.94 million less
12) Exchange Rate Quote Convert the following direct quote to a dollar indirect quote:
1 Thai Baht = $0.03057
A.0.03057 Baht
B.1.03057 Baht
C.0.96943 Baht
D.32.7118 Baht
13) A firm has an ROE of 14% and a debt ratio of 40%. If the total asset turnover is 3.4,
what is the firm’s profit margin?
A.2.47%
B.3.86%
C.4.29%
D.5.67%
14) All of the following are political risks to the assets and cash flows of multinational
corporations except ____________.
A.Government seizure of a company’s assets in the country
B.Enactment of new taxation
C.Expropriation with minimal compensation
D.Improving exchange rates to stimulate foreign investment
15) Portfolio Return Year to date, Company Y had earned a 10.8 percent return. During
the same time period, Company R earned 12.20 percent and Company C earned -1.56
percent. If you have a portfolio made up of 45 percent Y, 35 percent R, and 20 percent
C, what is your portfolio return?
A.7.15%
B.8.19%
C.8.82%
D.9.44%
16) Which of the following statements is correct?
A.A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the
term-to-maturity
B.Real interest rates are generally lower than nominal interest rates
C.Liquidity risk is the risk that a security may be difficult to sell on short notice for its
true value
D.All of these statements are correct
17) Your firm needs a machine which costs $125,000, and requires $5,000 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 35% and a discount rate of 10%. If this machine can be sold for $15,000 at the
end of year 3, what is the after-tax salvage value?
A.$9,262.50
B.$9,750.00
C.$11,692.69
D.$12,991.88
18) When you get your credit card bill, if you make a payment larger than the minimum
payment
A.you are wasting your current consumption and making TVM not work for you
B.you will reduce the payoff time
C.you will increase the payoff time
D.you will not affect the payoff time
19) Suppose your firm is considering two mutually exclusive, required projects with the
cash flows shown below. The required rate of return on projects of both of their risk
class is 8 percent, and the maximum allowable payback and discounted payback
statistic for the projects are 2 and 3 years, respectively.
Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted
or rejected?
A.accept both A and B
B.accept neither A nor B
C.accept A, reject B
D.reject A, accept B
20) Praxair’s upcoming dividend is expected to be $2.25 and its stock is selling at $65.
The firm has a beta of 0.8 and is expected to grow at 10% for the foreseeable future.
Compute Praxair’s required return using both CAPM and the constant growth model.
Assume that the market portfolio will earn 10 percent and the risk-free rate is 3 percent.
A.CAPM: 8.6%; Constant Growth Model: 13.46%
B.CAPM: 9.7%; Constant Growth Model: 12.56%
C.CAPM: 10.1%; Constant Growth Model: 11.46%
D.CAPM: 8.2%; Constant Growth Model: 9.56%
21) A 5.5% coupon municipal bond has 16 years left to maturity and has a price quote
of 92.55. The bond can be called in 9 years. The call premium is one year of coupon
payments. Compute the bond’s current yield. Assume interest payments are paid
semi-annually and a par value of $5,000.
A.5.94%
B.11.89%
C.12.19%
D.13.14%
22) This is a situation that arises when a firm’s equity is close to worthless, and
equityholders will prefer to not invest in safe projects.
A.leverage problem
B.overinvestment problem
C.underinvestment problem
D.long position
23) This group is elected by stockholders to oversee management in a corporation.
A.Chief Counselors
B.Chief Executives
C.Board of Directors
D.Auditors
24) Your company has a 38% tax rate and has $800 million in assets, currently financed
entirely with equity. Equity is worth $60 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 20-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.$26.67 million
B.$50 million
C.$56.67 million
D.$80.1 million
25) Classify the following transactions as taking place in the primary or secondary
markets:
a. A company issues new common stock.
b. A company issues common stock in an IPO.
c. A shareholder sells preferred stock out of its marketable securities portfolio.
d. A mutual fund buys previously issued bonds.
e. An insurance company sells another company’s common stock.
f. A company buys another company’s stock from a mutual fund.
26) A firm uses only debt and equity in its capital structure. The firm’s weight of equity
is 70%. The firm’s cost of equity is 13% and it has a tax rate of 30%. If the firm’s
WACC is 11%, what is the firm’s before-tax cost of debt?
A.7.17%
B.9.05%
C.6.38%
D.5.36%
27) What is the future value of $2,500 deposited for one year earning a 14% interest
rate annually?
A.$2,550
B.$2,850
C.$2,950
D.$3,150
28) Calculation of Bankruptcy Probability A linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms:
the equity multiplier and the total asset turnover ratio. Based on past bankruptcy
experience, the linear probability model is estimated as:
PDi = .05 (equity multiplier) + .02 (total asset turnover)
A firm has an equity multiplier of 1.9 times and a probability of default of 10 percent.
Calculate the firm’s total asset turnover ratio.
A.0.25
B.25
C.2.5
D.0.75
29) Stock A has a required return of 19%. Stock B has a required return of 11%.
Assume a risk-free rate of 4.75%. By how much does Stock A’s risk premium exceed
the risk premium of Stock B?
A.3.25%
B.6.25%
C.8.00%
D.7.00%
30) A local bank is contemplating adding a new ATM to their lobby. They will need
another phone line to provide communications which has a monthly cost of $50 per
month. This is an example of _____________.
A.Incremental cash flow
B.Sunk cost
C.Complementary costs
D.None of these
31) Bond prices are quoted in terms of which of the following?
A.original issue discount
B.percent of par value
C.coupon rate in dollars
D.market rate in dollars
32) When calculating the component cost of equity, what two ways can it be calculated,
and which way is better and why?
33) What ten sectors of the economy are represented in the S&P 500 Index?
34) Is forecasting more important for small firms or large firms? Why?
35) When might the constant growth model not be used?
36) How can managers’ personal incentives result in value-destroying mergers and
acquisitions?
37) Explain the characteristics of preferred stock.
38) When a firm is determining which current asset policy would work best for them,
what factors must they consider?
39) When calculating operating cash flow for a project, why would one treat EBIT as a
negative for tax purposes when there is an operating loss?
40) Which strategy, active or passive capital structure management, would make the
process of changing the firm’s capital structure a longer-term proposition? Why?
41) Describe the diversification potential of two assets with a -0.7 correlation. What is
the potential if the correlation is + 0.7?