1) Which of the following statements concerning risk are correct?
I. Systematic risk is measured by beta.
II. The risk premium increases as unsystematic risk increases.
III. Systematic risk is the only part of total risk that should affect asset prices and
returns.
IV. Diversifiable risks are market risks you cannot avoid.
A.I and III only
B.II and IV only
C.I and II only
D.III and IV only
E.I, II, and III only
F.None of the above
2) Which one of the following is the financial statement that summarizes a firm’s
revenue and expenses over a period of time?
A.income statement
B.balance sheet
C.cash flow statement
D.sources and uses statement
E.market value statement
3) Key facts and assumptions concerning Costco Company, at December 31, 2011,
appear below.
Use the above information to answer the following questions.
a. Estimate Costco’s cost of equity capital.
b. Estimate Costco’s weighted-average cost of capital.
4) The weighted average cost of capital for a firm is the:
A.discount rate which the firm should apply to all of the projects it undertakes
B.rate of return a firm must earn on its existing assets to maintain the current value of
its stock
C.coupon rate the firm should expect to pay on its next bond issue
D.minimum discount rate the firm should require on any new project
E.rate of return shareholders should expect to earn on their investment in this firm
F.None of the above
5) Which one of the following accurately orders the rate of return on financial securities
from highest to lowest over most of recorded market history (the 1900-2010 period)?
A.Short-term government bills, long-term corporate bonds, long-term government
bonds, common stocks
B.Long-term corporate bonds, long-term government bonds, common stocks,
short-term government bills
C.Common stocks, long-term government bonds, long-term corporate bonds, short-term
government bills
D.Common stocks, long-term corporate bonds, long-term government bonds,
short-term government bills
E.Long-term corporate bonds, common stocks, short-term government bills, long-term
government bonds
F.None of the above
6) Selected financial data for Link, Inc. follows: ($ in thousands)
The current ratio at the end of 2012 is:
A.10.21
B.2.31
C.2.76
D.10.30
E.None of the above
7) The following table presents financial information for Boss Stores, Inc., a retail chain
store in the U.S.
Use the information from Boss’s annual financial statements. What is the actual sales
growth rate for 2010?
A.- 17.6%
B.- 7.9%
C.8.51%
D.21.4%
E.None of the above
8) Noncash items refer to:
A.sales which are made on a credit basis
B.inventory items purchased using credit
C.intangible assets such as patents
D.expenses, like depreciation, which do not directly affect cash flows
E.administrative expenses
9) When making a capital budgeting decision, which of the following is/are NOT
relevant?
I. The size of a cash flow.
II. The risk of a cash flow.
III. The accounting earnings from a cash flow.
IV. The timing of a cash flow.
A.I only
B.II only
C.III only
D.II and III only
E.III and IV only
F.They are all relevant
10) Which of the following statements are correct concerning diversifiable, or
unsystematic, risks?
I. Diversifiable risks can be largely eliminated by investing in thirty unrelated
securities.
II. There is no reward for accepting diversifiable risks.
III. Diversifiable risks are generally associated with an individual firm or industry.
IV. Beta measures diversifiable risk.
A.I and III only
B.II and IV only
C.I and IV only
D.I, II, and III only
E.I, II, III, and IV
F.None of the above
11) Which of these ratios, or levers of performance, are the determinants of ROE?
I. profit margin
II. financial leverage
III. times interest earned
IV. asset turnover
A.I and IV only
B.II and IV only
C.I, II, and IV only
D.I, II, and III only
E.I, III, and IV only
12) Depreciation expense:
A.reduces both taxes and net income
B.increases the net fixed assets as shown on the balance sheet
C.reduces both the net fixed assets and the costs of a firm
D.is a noncash item that increases net income
E.decreases current assets, net income, and operating cash flows
13) Naomi plans on saving $3,000 a year and expects to earn an annual rate of 10.25
percent. How much will she have in her account at the end of 45 years?
A.$1,806,429
B.$1,838,369
C.$2,211,407
D.$2,333,572
E.$2,508,316
F.None of the above
14) As CFO of Nile Holdings, a carpet wholesaler, you have the following information
as of December 2011:
Nile has an attractive investment opportunity, and to finance it, must decide whether to
issue $100 million in new debt or new equity.
Assume Nile raises $100 million of new debt at the end of 2011, at an interest rate of
7%.
a. Calculate the firm’s pro forma 2012 times interest earned (TIE) ratio.
b. Calculate the percentage EBIT can fall (below expected EBIT) before interest
coverage dips below 1.0.
15) Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011,
appear below.
Estimate FM’s after-tax cost of equity capital.
A.4.50%
B.6.92%
C.7.93%
D.12.20%
E.17.48%
F.None of the above
16) Which of the following securities has a purely residual claim against a firm’s cash
flows?
A.preferred stock
B.callable bonds
C.common stock
D.non-callable bonds
E.None of the above
17) Honest Abe’s is a chain of furniture retail stores. Integral Designs is a furniture
maker and a supplier to Honest Abe’s. Honest Abe’s has a beta of 1.38 as compared to
Integral Designs’ beta of 1.12. Both firms carry no debt, i.e., are 100% equity-financed.
The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent.
What discount rate should Honest Abe’s use if it considers a project that involves the
manufacturing of furniture?
A.12.46 percent
B.12.92 percent
C.13.50 percent
D.14.08 percent
E.14.54 percent
F.None of the above
18) Mike just purchased a bond which pays $40 each year in interest. The $40 interest
payment is also called the:
A.coupon
B.par value
C.discount
D.call premium
E.yield
F.None of the above
19) The following table presents forecasted financial and other information for Scott’s
Miracle-Gro Co.:
What is an appropriate estimate of Scott’s terminal value as of the end of 2014, using
the perpetual-growth equation as your estimate?
A.$161 million
B.$363 million
C.$3,690 million
D.$3,838 million
E.$5,357 million
F.None of the above
20) JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The
book value of its equity is $1,750,000. If the company repurchases 20 percent of its
shares in the stock market, what will be the book value of equity if all else remains the
same?
A.$750,000
B.$1,250,000
C.$1,000,000
D.$1,400,000
E.$4,000,000
F.None of the above
21) On a common-size balance sheet, all accounts are expressed as a percentage of:
A.sales for the period
B.the base year sales
C.total equity for the base year
D.total assets for the current year
E.total assets for the base year
22) Selected information about South, Inc., a restaurant chain, follows.
During 2011, what was the cost of goods (in $ millions) produced by the company?
A.223
B.194
C.252
D.228
E.218
F.None of the above
23)
Please refer to Oscar’s financial statements. What was the increase in retained earnings
of Oscar’s during 2012?
A.$450
B.$1,380
C.$1,830
D.$2,280
E.None of the above
24) Which of the following actions might a firm take if its actual sales growth exceeds
its sustainable rate of growth?
I. Increase prices
II. Decrease financial leverage
III. Decrease dividends
IV. Prune away less marginal products
A.I and II only
B.I and III only
C.I, II, and IV only
D.I, III, and IV only
E.I, II, III, and IV
F.None of the above
25) Which of the following factors favor the issuance of equity in the financing
decision?
I. Market signaling
II. Distress costs
III. Management incentives
IV. Financial flexibility
A.I and II only
B.I and III only
C.II and IV only
D.II, III, and IV only
E.I, II, and IV only
F.None of the above
26) Ratios that measure how efficiently a firm manages its assets and operations to
generate net income are referred to as _____ ratios.
A.asset turnover and control
B.financial leverage
C.coverage
D.profitability
E.None of the above
27) The after-tax cost of debt generally increases when:
I. a firm’s bond rating increases.
II. the market-required rate of interest for the company’s bonds increases.
III. tax rates decrease.
IV. bond prices rise.
A.I and III only
B.II and III only
C.I, II, and III only
D.II, III, and IV only
E.I, II, III, and IV
F.None of the above
28) Which of the following are the most likely reasons for why a stock price might not
react at all on the day that new information related to the stock issuer is released?
I. Insiders knew the information prior to the announcement
II. Investors need time to digest the information prior to reacting
III. The information has no bearing on the value of the firm
IV. The information was anticipated
A.I and II only
B.I and III only
C.II and III only
D.II and IV only
E.III and IV only
F.None of the above
29) Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE
Corporation. Based on recent market information, ACE is worth $710 million as an
independent operation. For the merger to make economic sense for Atmosphere, what
would the minimum estimated value of the enhancements from the merger have to be?
A.$0
B.$75 million
C.$150 million
D.$710 million
E.$860 million
F.None of the above
30) Steve has estimated the cash inflows and outflows for his sporting goods store for
next year. The report that he has prepared summarizing these cash flows is called a:
A.pro forma income statement.
B.sales projection
C.cash budget
D.receivables analysis
E.credit analysis
F.None of the above
31) At the end of fiscal year 2011, Crane Industries, Inc.’s stock price was $30.75. A
year later it was $34.88. Per share dividends over the year were $0.55, while earnings
per share were $1.33. What was the percentage change in the share price in fiscal year
2012?
A.1.79%
B.4.33%
C.13.43%
D.22%
E.17.76%
F.None of the above