1) The Green Shingle purchased a parcel of land 6 years ago for $299,500. At that time,
the firm invested $64,000 grading the site so that it would be usable. Since the firm
wasn’t ready to use the site itself at that time, it decided to lease the land for $28,000 a
year. The Green Shingle is now considering building a hotel on the site as the rental
lease is expiring. The current value of the land is $347,500. The firm has no loans or
mortgages secured by the property. What value should be included in the initial cost of
the hotel project for the use of this land?
A.$0
B.$299,500
C.$347,500
D.$363,500
E.$411,500
2) Which one of the following correctly matches a country with its currency?
A.Canada – pound
B.China – yuan
C.Mexico – real
D.Japan – lira
E.United Kingdom – euro
3) New Gadgets is growing at a very fast pace. As a result, the company expects to pay
annual dividends of $0.55, 0.80, and $1.10 per share over the next three years,
respectively. After that, the dividend is projected to increase by 5 percent annually. The
last annual dividend the firm paid was $0.40 a share. What is the current value of this
stock if the required return is 16 percent?
A.$8.50
B.$9.67
C.$10.46
D.$12.23
E.$12.49
4) Which one of the following is an example of a liquidating dividend?
A.Valley Feed Mills recently sold its grain storage facility and is distributing the
proceeds of that sale to its shareholders
B.Kate’s Winery has excess cash that it wishes to distribute to its shareholders in
addition to its normal cash dividend. This extra distribution usually occurs about once
every year
C.Kurt’s Music is planning to increase its quarterly dividend by three percent
D.The Dried Florist is preparing to pay its first annual dividend of $0.08 per share
E.Hi Tek had an extraordinarily profitable year and has decided to do a one-time only
$10 per share cash dividend
5) Which one of the following represents additional compensation provided to
bondholders to offset the possibility that the bond issuer might not pay the interest
and/or principal payments as expected?
A.Interest rate risk premium
B.Inflation premium
C.Liquidity premium
D.Taxability premium
E.Default risk premium
6) Which one of the following statements is correct?
A.The risk-free rate of return has a risk premium of 1.0
B.The reward for bearing risk is called the standard deviation
C.Risks and expected return are inversely related
D.The higher the expected rate of return, the wider the distribution of returns
E.Risk premiums are inversely related to the standard deviation of returns
7) Which one of the following is a web site that enables Lester to sell his shares of ABC
stock directly to Marti?
A.SuperDOT
B.POST
C.ECN
D.SEAT
E.eNET
8) The capital gains yield equals which one of the following?
A.Total yield
B.Current discount rate
C.Market rate of return
D.Dividend yield
E.Dividend growth rate
9) Which one of the following is the rate that most international banks charge when
they loan Eurodollars to other banks?
A.ADR
B.LIBOR
C.Cross rate
D.Gilt rate
E.Swap rate
10) Which one of the following is true if the managers of a firm only accept projects
that have a profitability index greater than 1.5?
A.The firm should increase in value each time the firm accepts a new project
B.The firm is most likely steadily losing value
C.The price of the firm’s stock should remain constant
D.The net present value of each new project is zero
E.The internal rate of return on each new project is zero
11) Firms that compile financial statements according to GAAP:
A.record income and expenses at the time they affect the firm’s cash flows
B.have no discretion over the timing of recording either revenue or expense items
C.must record all expenses when incurred
D.can still manipulate their earnings to some degree
E.record both income and expenses as soon as the amount for each can be ascertained
12) Gabella’s is an all-equity firm that has 21,000 shares of stock outstanding at a
market price of $40 a share. The firm has earnings before interest and taxes of $84,000
and has a 100 percent dividend payout ratio. Ignore taxes. Gabella’s has decided to issue
$160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares.
Travis owns 500 shares of Gabella’s stock and has decided to continue holding those
shares. How will Gabella’s debt issue affect Travis’ annual dividend income?
A.Decrease from $2,400 to $1,840
B.Increase from $2,400 to $2,160
C.Decrease from $2,000 to $1,906
D.Increase from $2,000 to $2,094
E.No change
13) Which one of the following statements is correct concerning a firm’s fixed assets?
A.The market value is the expected selling price in today’s economy
B.The market value is affected by the accounting method selected
C.The market value is equal to the initial cost minus the depreciation to date
D.The book value is equal to the market value minus the accumulated depreciation
E.The book value is the greater of the initial cost or the current market value
14) Kelso’s Pharmacy generates $2 in sales for every $1 the firm has invested in total
assets. Which one of the following ratios would reflect this relationship?
A.Receivables turnover
B.Equity multiplier
C.Profit margin
D.Return on assets
E.Total asset turnover
15) Room and Board has determined that $36,000 is the breakeven level of earnings
before interest and taxes for the two capital structures it is considering. The one
structure consists of all equity with 14,000 shares of stock. The second structure
consists of 10,000 shares of stock and $80,000 of debt. What is the interest rate on the
debt?
A.7.72 percent
B.8.19 percent
C.9.97 percent
D.11.43 percent
E.12.86 percent
16) Tom earned $120 in interest on his savings account last year. Tom has decided to
leave the $120 in his account so that he can earn interest on the $120 this year. This
process of earning interest on prior interest earnings is called:
A.discounting
B.compounding
C.duplicating
D.multiplying
E.indexing
17) Outdoor Sports is considering adding a miniature golf course to its facility. The
course would cost $138,000, would be depreciated on a straight line basis over its
5-year life, and would have a zero salvage value. The estimated income from the
golfing fees would be $72,000 a year with $24,000 of that amount being variable cost.
The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000
in revenue from its existing facilities if the golf course is added. The project will require
$3,000 of net working capital, which is recoverable at the end of the project. What is
the net present value of this project at a discount rate of 12 percent and a tax rate of 34
percent?
A.$11,309
B.$11,628
C.$12,737
D.$14,439
E.$14,901
18) Joseph Turner and Sons has 125,000 shares of stock outstanding. The firm has extra
cash so it announced this morning that it is willing to repurchase 25,000 of its shares.
What type of offer is the firm making?
A.Rights offer
B.Secondary issue
C.Targeted repurchase
D.Tender offer
E.Private issue
19) A proposed project will increase a firm’s accounts payables. This increase is
generally:
A.treated as an erosion cost
B.treated as an opportunity cost
C.a sunk cost and should be ignored
D.a cash outflow at time zero and a cash inflow at the end of the project
E.a cash inflow at time zero and a cash outflow at the end of the project
20) A firm has a weighted average cost of capital of 11.68 percent and a cost of equity
of 15.5 percent. The debt-equity ratio is 0.65. There are no taxes. What is the firm’s cost
of debt?
A.5.80 percent
B.6.27 percent
C.6.44 percent
D.7.23 percent
E.7.81 percent
21) The financial statements of Mark’s Auto Repair reflect cash of $4,600, accounts
receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term
debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to
cease operations today it could sell the inventory for $25,000 and the fixed assets for
$49,000. The firm could also collect 100 percent of its receivables. What is the market
value of the assets?
A.$32,800
B.$39,900
C.$74,000
D.$90,100
E.$97,700
22) You have $2,158 today in your savings account. How long must you wait for your
savings to be worth $4,000 if you are earning 2.1 percent interest, compounded
annually?
A.26.68 years
B.29.69 years
C.32.13 years
D.33.33 years
E.34.14 years
23) Given the following partial stock quote, what is the expected annual dividend?
A.$0.99
B.$1.08
C.$1.13
D.$1.28
E.$1.33
24) The Blue Goose is considering a project with an initial cost of $42,700. The project
will produce cash inflows of $8,000 a year for the first two years and $12,000 a year for
the following three years. What is the payback period?
A.2.87 years
B.3.23 years
C.3.41 years
D.3.79 years
E.4.23 years
25) Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently
announced that all future dividends will be increased by 2.8 percent annually. What is
one share of this stock worth to you if you require a 14 percent rate of return?
A.$12.56
B.$12.95
C.$13.31
D.$13.68
E.$14.07
26) If Treasury bills are currently paying 4.2 percent and the inflation rate is 2.6
percent, what is the approximate real rate of interest? The exact real rate?
A.1.60 percent; 1.56 percent
B.1.60 percent; 1.64 percent
C.6.80 percent; 6.67 percent
D.6.80 percent; 6.87 percent
E.6.80 percent; 6.92 percent
27) Over the last four years, the common stock of Plymouth Shippers has had an
arithmetic average return of 9.3 percent. Three of those four years produced returns of
14.1 percent, 15.6 percent, and 3.4 percent. What is the geometric average return for
this 4-year period?
A.7.72 percent
B.8.41 percent
C.8.93 percent
D.9.16 percent
E.9.368 percent
28) A 9-year project is expected to generate annual revenues of $114,500, variable costs
of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax
rate is 34 percent. What is the annual operating cash flow?
A.$14,301
B.$14,788
C.$15,052
D.$17,506
E.$18,944
29) A firm has net income of $5,890 and interest expense of $2,130. The tax rate is 34
percent. What is the firm’s times interest earned ratio?
A.4.82
B.5.19
C.5.38
D.5.67
E.6.33
30) Twelve days ago, DOG, Inc. declared a dividend of $1.34 a share. The ex-dividend
date is tomorrow. All else constant, which one of the following is the best estimate of
DOG, Inc.’s opening stock price tomorrow?
A.$1.34 lower than today’s closing price
B.today’s closing price minus an amount approximately equal to the aftertax value of
the dividend
C.the same as today’s closing price since the dividend is expected
D.$1.34 higher than today’s closing price
E.today’s closing price plus an amount approximately equal to the aftertax value of the
dividend
31) One year ago, Steven purchased 4,200 shares of KNF stock for $177,072. Today, he
sold those shares for $48.10 a share. What is the capital gains yield on this investment if
the dividend yield is 3.3 percent?
A.10.79 percent
B.11.23 percent
C.12.29 percent
D.14.09 percent
E.14.53 percent
32) Services United is considering a new project that requires an initial cash investment
of $75,000. The project will generate cash inflows of $26,500, $32,700, $18,500, and
$10,000 over each of the next four years, respectively. How long will it take to recover
the initial investment?
A.2.74 years
B.2.85 years
C.2.99 years
D.3.27 years
E.3.68 years
33) Draw a basic flowchart that depicts the components of collection time. Be sure to
label all key points and explain the various components. In addition, offer one
suggestion for decreasing the time required for each component.
34) Explain why investors receive exactly what they pay for in a totally efficient
market.
35) Explain the basic structure and workings of a disbursement system that utilizes
zero-balance accounts.
36) Check kiting has been a means, although neither an ethical nor legal means, of
allowing a firm to use its uncollected cash. How did the Check Clearing Act for the 21st
Century (Check 21) affect this practice?
37) If the stock market in the United States is efficient, how do you explain the fact that
some people make very high returns? Would it be more difficult to reconcile very high
returns with efficient markets if the same people made extraordinary returns year after
year?
38) List the various determinants of bond yields and indicate the type of situation that
would cause each determinant to increase the yield on a bond.
39) Ed has to choose between Project A and Project B, which are mutually exclusive.
Project A has an initial cost of $28,000 and an internal rate of return of 16 percent.
Project B has an initial cost of $47,000 and an internal rate of return of 12 percent.
Explain why the selection of the project with the higher internal rate of return could be
a faulty decision.
40) How are preferred stock dividends treated for tax purposes by the issuer, an
individual shareholder, and a corporate shareholder?
41) Consider an ordinary annuity and the variables that are related to that annuity. For
each of the following sets of variables, identify whether the relationship between the
two variables is direct (D) or inverse (I). Assume all other variables are held constant.