1) Gabriel Furniture has a profit margin of 8.2 percent and a dividend payout ratio of 30
percent. What is the plowback ratio?
A.10.66 percent
B.27.33 percent
C.54.60 percent
D.70.00 percent
E.78.20 percent
2) Which of the following are examples of diversifiable risk?
I. An earthquake damages Oakland, California.
II. The federal government imposes an additional $1,000 fee on all business entities.
III. Employment taxes increase nationally.
IV. Toymakers are required to improve their safety standards.
A.I and III only
B.II and IV only
C.II and III only
D.I and IV only
E.I, III, and IV only
3) Cross Town Cookies is an all-equity firm with a total market value of $720,000. The
firm has 150,000 shares of stock outstanding. Management is considering issuing
$200,000 of debt at an interest rate of 7 percent and using the proceeds to repurchase
shares. The projected earnings before interest and taxes are $58,600. What are the
anticipated earnings per share if the debt is issued? Ignore taxes.
A.$0.25
B.$0.33
C.$0.38
D.$0.41
E.$0.47
4) Shoe Box Stores is currently an all-equity firm with 28,000 shares of stock
outstanding. Management is considering changing the capital structure to 40 percent
debt. The interest rate on the debt would be 9 percent. Ignore taxes. Jamie owns 300
shares of Shoe Box Stores stock that is priced at $17 a share. What should Jamie do if
she prefers the all-equity structure but Shoe Box Stores adopts the new capital
structure?
A.Borrow money and buy an additional 120 shares
B.Borrow money and buy an additional 180 shares
C.Keep her shares but loan out all of the dividend income at 9 percent
D.Sell 120 shares and loan out the proceeds at 9 percent
E.Sell 180 shares and loan out the proceeds at 9 percent
5) Kurt, who is a divisional manager, continually brags that his division’s required
return for its projects is one percent lower than the return required for any other division
of the firm. Which one of the following most likely contributes the most to the lower
rate requirement for Kurt’s division?
A.Kurt tends to overestimate the projected cash inflows on his projects
B.Kurt tends to underestimate the variable costs of his projects
C.Kurt has the most efficiently managed division
D.Kurt’s division is less risky than the other divisions
E.Kurt’s projects are generally financed with debt while the other divisions’ projects are
financed with equity
6) Kelly’s Corner writes 18 checks a day for an average amount of $630 each. These
checks generally clear the bank 2.5 days after they are written. In addition, the firm
generally receives an average of $16,400 a day in checks. Deposited amounts are
available after 2 days. What is the amount of the firm’s disbursement float?
A.$22,680
B.$25,800
C.$28,350
D.$29,840
E.$32,800
7) The goal of financial management is to increase the:
A.future value of the firm’s total equity
B.book value of equity
C.dividends paid per share
D.current market value per share
E.number of shares outstanding
8) The balance sheet for Oasis, Inc. is shown here in market value terms. There are
30,000 shares of stock outstanding.
The company has announced it is going to repurchase $40,000 worth of stock. What
will the price per share be after the repurchase?
A.$36.29
B.$38.17
C.$38.67
D.$39.42
E.$39.89
9) Textiles Unlimited has gathered projected cash flows for two projects. At what
interest rate would the company be indifferent between the two projects? Which project
is better if the required return is above this interest rate?
A.11.76 percent; A
B.12.49 percent; A
C.12.49 percent; B
D.13.15 percent; A
E.13.15 percent: B
10) The Gift Mart is an all-equity firm with a current cost of equity of 19.6 percent. The
estimated earnings before interest and taxes are $239,000 annually forever. Currently,
the firm has no debt but is in the process of borrowing $400,000 at 9.5 percent interest.
The tax rate is 30 percent. What is the value of the unlevered firm?
A.$849,207
B.$853,571
C.$856,411
D.$919,307
E.$926,667
11) Western Shores is comparing two separate capital structures. The first structure
consists of 260,000 shares of stock and no debt. The second structure consists of
210,000 shares of stock and $1.5 million of debt. What is the price per share of equity?
A.$18
B.$22
C.$27
D.$30
E.$33
12) Which one of the following terms is defined as having international operations in a
world where relative currency values change?
A.Political risk
B.Relative purchasing power parity
C.Interest rate parity
D.Absolute purchasing power parity
E.Exchange rate risk
13) Over the period of 1926-2008:
A.the risk premium on large-company stocks was greater than the risk premium on
small- company stocks
B.U.S. Treasury bills had a risk premium that was just slightly over 2 percent
C.the risk premium on long-term government bonds was zero percent
D.the risk premium on stocks exceeded the risk premium on bonds
E.U. S. Treasury bills had a negative risk premium
14) Greenwood Motels has filed a petition for bankruptcy but hopes to continue its
operations both during and after the bankruptcy process. Which one of the following
terms best applies to this situation?
A.Chapter 7 bankruptcy
B.Liquidation
C.Technical insolvency
D.Accounting insolvency
E.Reorganization
15) Turner’s Store had a profit margin of 6.8 percent, sales of $898,200, and total assets
of $798,000. If management set a goal of increasing the total asset turnover to 1.40
times, what would the new sales figure need to be, assuming no increase in total assets?
A.$860,333
B.$984,320
C.$1,088,500
D.$1,117,200
E.$1,257,480
16) You currently own a portfolio valued at $80,000 that is equally as risky as the
market. Given the information below, what is the beta of stock C?
A.0.91
B.0.95
C.1.04
D.1.13
E.1.18
17) Your German friend has decided to come and visit you in the U.S. You estimate the
cost of her trip at $2,200. What is the cost to her in euros if the U.S. dollar equivalent of
the euro is 1.3266?
A.1,566.67
B.1,658.37
C.1,908.50
D.2,716.34
E.2,918.52
18) Al’s Bakery has a check book balance of $1,650. A $700 deposit was made today
and will be added to the available balance tomorrow. There are two outstanding checks
that total to $623. There are no other outstanding items. Which one of the following
statements accurately reflects this situation?
A.The disbursement float is $1,650
B.The firm’s current available balance is equal to $1,650 plus $700 minus $623
C.The firm’s collection float exceeds its disbursement float
D.The firm’s available balance is greater than its book balance
E.The firm has a net disbursement float
19) The concept of marginal taxation is best exemplified by which one of the
following?
A.Kirby’s paid $120,000 in taxes while its primary competitor only paid $80,000 in
taxes
B.Johnson’s Retreat only paid $45,000 on total revenue of $570,000 last year
C.Mitchell’s Grocer increased its sales by $52,000 last year and had to pay an additional
$16,000 in taxes
D.Burlington Centre paid no taxes last year due to carryforward losses
E.The Blue Moon paid $2.20 in taxes for every $10 of revenue last year
20) A stock has had returns of 11 percent, -8 percent, 6 percent, 21 percent, 24 percent,
and 16 percent over the last six years. What is the geometric return for this stock?
A.10.82 percent
B.11.13 percent
C.11.31 percent
D.11.42 percent
E.11.47 percent
21) Today is your 21st birthday and you just decided to start saving money so you can
retire early. Thus, you are going to save $500 a month starting one month from now.
You plan to retire as soon as you can accumulate $1 million. If you can earn an average
of 8 percent on your savings, how old will you be when you retire?
A.33.39 years old
B.42.87 years old
C.54.39 years old
D.64.71 years old
E.63.87 years old
22) Tim has been promoted and is now in charge of all fixed asset purchases. In other
words, Tim is in charge of:
A.capital structure management
B.asset allocation
C.risk management
D.capital budgeting
E.working capital management
23) 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
24) Home Repairs, Inc. incurred depreciation expenses of $21,900 last year. The sales
were $811,400 and the addition to retained earnings was $14,680. The firm paid interest
of $9,700 and dividends of $1,100. The tax rate was 34 percent. What was the amount
of the costs incurred by the firm?
A.$665,200.00
B.$689,407.67
C.$742,306.08
D.$755,890.91
E.$780,400.21
25) Your parents loaned you money at 0.25 percent interest per month. What is the APR
of this loan?
A.2.97 percent
B.3.00 percent
C.3.04 percent
D.4.00 percent
E.4.07 percent
26) Which one of the following statements is true concerning annuities?
A.All else equal, an ordinary annuity is more valuable than an annuity due
B.All else equal, a decrease in the number of payments increases the future value of an
annuity due
C.An annuity with payments at the beginning of each period is called an ordinary
annuity
D.All else equal, an increase in the discount rate decreases the present value and
increases the future value of an annuity
E.All else equal, an increase in the number of annuity payments decreases the present
value and increases the future value of an annuity
27) Which one of the following is minimized when the value of a firm is maximized?
A.Return on equity
B.WACC
C.Debt
D.Taxes
E.Bankruptcy costs
28) Berkeley, Inc. just paid an annual dividend of $2.60 per share on its stock. The
dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If
investors require an 11 percent return on this stock, what will the price be in 12 years?
A.$66.46
B.$67.84
C.$69.16
D.$70.89
E.$74.08
29) Valley Forge and Metal purchased a truck five years ago for local deliveries. Which
one of the following costs related to this truck is the best example of a sunk cost?
Assume the truck has a usable life of eight years.
A.New tires that will be purchased this winter
B.Costs of repairs needed so the truck can pass inspection next month
C.Money spent last month repairing a damaged front fender
D.Engine tune-up that is scheduled for this afternoon
E.Cost for a truck driver for the remainder of the truck’s useful life
30) You just received a loan offer from Friendly Loans. The company is offering you
$5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this
offer, how long will it take you to pay off the loan?
A.5.84 years
B.6.37 years
C.6.80 years
D.7.33 years
E.7.59 years
31) A firm has a return on equity of 12.4 percent according to the dividend growth
model and a return of 18.7 percent according to the capital asset pricing model. The
market rate of return is 13.5 percent. What rate should the firm use as the cost of equity
when computing the firm’s WACC?
A.12.4 percent because it is lower than 18.7 percent
B.18.7 percent because it is higher than 12.4 percent
C.The arithmetic average of 12.4 percent and 18.7 percent
D.The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent
E.13.5 percent
32) An income statement prepared according to GAAP:
A.reflects the net cash flows of a firm over a stated period of time
B.reflects the financial position of a firm as of a particular date
C.distinguishes variable costs from fixed costs
D.records revenue when payment for a sale is received
E.records expenses based on the matching principle
33) The following table presents financial information for Boss Stores, Inc., a retail
chain store in the U.S.
Use the above information from Boss’s annual financial statements. What is the
sustainable sales growth rate for 2010?
A.- 17.6%
B.- 7.9%
C.9.07%
D.10.27%
E.12.23%
34) Donegal’s Industrial Products wishes to maintain a growth rate of 6 percent a year, a
debt-equity ratio of 0.45, and a dividend payout ratio of 30 percent. The ratio of total
assets to sales is constant at 1.25. What profit margin must the firm achieve?
A.4.68 percent
B.5.29 percent
C.6.33 percent
D.6.97 percent
E.8.19 percent
35) Stock J has a beta of 1.47 and an expected return of 15.8 percent. Stock K has a
beta of 1.05 and an expected return of 11.9 percent. What is the risk-free rate if these
securities both plot on the security market line?
A.2.15 percent
B.3.34 percent
C.3.88 percent
D.4.41 percent
E.4.68 percent
36) Which one of the following statements is true?
A.Equity securities offer fixed claims on future cash payouts
B.Unlike bondholders, for their returns, shareholders rely entirely on price appreciation
C.In theory, common shareholders exercise very little control over company decisions
D.Historically, common shareholders have earned a risk premium as compensation for
risk borne in excess of government bonds
E.Preferred shareholders are the first investors to be repaid in bankruptcy liquidation
37) Isabella is considering three mutually exclusive options for the additional space she
just added to her specialty women’s store. The cost of the expansion was $127,000. She
can use this additional space to add a fabric and quilting section, add an exclusive gifts
department, or expand into imported decorator items for the home. She estimates the
present value of these options at $114,000 for fabric and quilting, $163,000 for
exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should
Isabella accept?
A.None of the options
B.Fabric and quilting only
C.Exclusive gifts only
D.Exclusive gifts and decorator items only
E.All three options
38) Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011,
appear below.
Estimate FM’s weighted-average cost of capital.
A.6.46%
B.6.58%
C.11.27%
D.11.32%
E.11.52%