Which one of the following categories of securities had the lowest average risk
premium for the period 1926-2007?
A. long-term government bonds
B. small company stocks
C. large company stocks
D. long-term corporate bonds
E. U.S. Treasury bills
An account into which a firm transfers funds, usually from a master account, in an
amount sufficient to cover the checks presented for payment that day is called a _____
account.
A. lockbox
B. cleanup
C. compensating balance
D. revolving
E. controlled disbursement
Any written proof that a customer owes you money for goods or services provided is
referred to as a(n):
A. account document.
B. sales draft.
C. credit instrument.
D. commercial paper.
E. letter of debt.
Your grandmother is gifting you $100 a month for four years while you attend college
to earn your bachelor's degree. At a 5.5 percent discount rate, what are these payments
worth to you on the day you enter college?
A. $4,201.16
B. $4,299.88
C. $4,509.19
D. $4,608.87
E. $4,800.00
The Fluffy Feather sells customized handbags. Currently, it sells 18,000 handbags
annually at an average price of $89 each. It is considering adding a lower-priced line of
handbags that sell for $59 each. The firm estimates it can sell 7,000 of the lower-priced
handbags but will sell 3,000 less of the higher-priced handbags by doing so. What is the
amount of the sales that should be used when evaluating the addition of the lower-
priced handbags?
A. $146,000
B. $275,000
C. $413,000
D. $623,000
E. $680,000
GT Motors regularly issues short-term debt to finance its daily operations. Suddenly,
the credit markets froze and no funds were available for borrowing. Fortunately, the
firm had some cash reserves saved that it was able to use to fund its operations until
additional credit was available. The need to retain cash for situations such as this is
referred to as which one of the following motives for holding cash?
A. speculative
B. float
C. compensating
D. precautionary
E. transaction
The Delta Fish Hatchery factors its accounts receivables immediately at a 1.5 percent
discount. The average collection period is 34 days. Assume that all accounts are
collected in full. What is the effective annual interest rate on this arrangement?
A. 17.61 percent
B. 18.20 percent
C. 18.36 percent
D. 18.78 percent
E. 19.04 percent
Bankruptcy:
A. creates value for a firm.
B. transfers value from shareholders to bondholders.
C. technically occurs when total equity equals total debt.
D. costs are limited to legal and administrative fees.
E. is an inexpensive means of reorganizing a firm.
A mail-order firm processes 5,000 checks per month. Of these, 55 percent are for $55
and 45 percent are for $65. The $55 checks are delayed 2 days on average; the $65
checks are delayed 5 days on average. Assume each month has 30 days. The interest
rate is 6 percent per year. How much should the firm be willing to pay to reduce the
weighted average float by 1.4 days?
A. $4,165
B. $13,883
C. $41,650
D. $138,883
E. $416,500
What is the beta of the following portfolio?
A. 1.04
B. 1.07
C. 1.13
D. 1.16
E. 1.23
Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $280,000.
Today, that lot has a market value of $340,000. At the time of the purchase, the
company spent $15,000 to level the lot and another $20,000 to install storm drains. The
company now wants to build a new facility on that site. The building cost is estimated
at $1.47 million. What amount should be used as the initial cash flow for this project?
A. -$1,470,000
B. -$1,810,000
C. -$1,825,000
D. -$1,845,000
E. -$1,860,000
You have just purchased a new warehouse. To finance the purchase, you've arranged for
a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price. The monthly
payment on this loan will be $11,000. What is the effective annual rate on this loan?
A. 4.98 percent
B. 5.25 percent
C. 5.46 percent
D. 6.01 percent
E. 6.50 percent
You want to be on the board of directors of Wisely Foods. Since you are the only
shareholder that will vote for you, you will need to own more than half of the
outstanding shares of stock if you are to be elected to the board. What is the type of
voting called that requires this level of stock ownership to be successfully elected under
these conditions?
A. democratic
B. cumulative
C. straight
D. deferred
E. proxy
You expect to deliver 40,000 bushels of wheat to the market in July. Today, you hedge
your position by selling futures contracts on half of your expected delivery at the final
price of the day. Assume that the market price turns out to be 582.0 when you actually
deliver the wheat. How much more or less would you have earned if you had not
bought the futures contracts?
Wheat - 5,000 bu.: U.S. cents per bu.
A. $8,000 less
B. $4,000 less
C. neither more nor less
D. $4,000 more
E. $8,000 more
BL Lumber has earnings per share of $1.21. The firm's earnings have been increasing at
an average rate of 3.1 percent annually and are expected to continue doing so. The firm
has 21,500 shares of stock outstanding at a price per share of $18.70. What is the firm's
PEG ratio?
A. 0.48
B. 1.24
C. 2.85
D. 3.97
E. 4.99
A call-protected bond is a bond that:
A. is guaranteed to be called.
B. can never be called.
C. is currently being called.
D. is callable at any time.
The rate of return on the common stock of Lancaster Woolens is expected to be 21
percent in a boom economy, 11 percent in a normal economy, and only 3 percent in a
recessionary economy. The probabilities of these economic states are 10 percent for a
boom, 70 percent for a normal economy, and 20 percent for a recession. What is the
variance of the returns on this common stock?
A. 0.002150
B. 0.002606
C. 0.002244
D. 0.002359
E. 0.002421
Suppose your company needs $14 million to build a new assembly line. Your target
debt-equity ratio is 0.84. The flotation cost for new equity is 9.5 percent, but the
floatation cost for debt is only 2.5 percent. What is the true cost of building the new
assembly line after taking flotation costs into account?
A. 14.82 million
B. 14.94 million
C. 15.07 million
D. 15.12 million
E. 15.23 million
The seller of a forward contract:
A. is obligated to make delivery and accept the forward price.
B. has the option of making delivery and receiving the greater of the spot price or the
contract price.
C. has the option of either making delivery or accepting delivery.
D. is obligated to take delivery and pays the lower of the spot market price or the
contract price.
Wagner Trucking is considering investing in a new project that will cost $13 million
and increase net income by 6.5 percent. This project will be completely funded by
issuing new equity shares. Currently, the firm has 1.25 million shares of stock
outstanding with a market price of $42 per share. The current earnings per share are
$1.82. What will the earnings per share be if the project is implemented?
A. $1.39
B. $1.45
C. $1.55
D. $1.62
E. $1.69
Shortage costs include which of the following?
I. disruption of production schedules
II. inventory ordering costs
III. lost customer goodwill
IV. brokerage costs
A. I and II only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
International bonds issued in multiple countries but denominated solely in the issuer's
currency are called:
A. Treasury bonds.
B. Bulldog bonds.
C. Eurobonds.
D. Yankee bonds.
E. Samurai bonds.
Edwards Farm Products was unable to meet its financial obligations and was forced into
using legal proceedings to restructure itself so that it could continue as a viable
business. The process this firm underwent is known as a:
A. merger.
B. repurchase program.
C. liquidation.
D. reorganization.
E. divestiture.
Cayman Productions is considering either leasing or buying some new underwater
photographic equipment. The lessor will charge $26,500 a year for a 2-year lease. The
purchase price is $48,600. The equipment has a 2-year life after which time it will be
worthless. Cayman uses straight-line depreciation, borrows money at 8 percent, and has
sufficient tax loss carryovers to offset any taxes which otherwise might be owed for the
next 4 years. What is the net advantage to leasing?
A. -$1,315
B. -$1,298
C. $1,343
D. $1,406
E. $1,457
Wicker Imports established a trust fund that provides $90,000 in scholarships each year
for needy students. The trust fund earns a fixed 6 percent rate of return. How much
money did the firm contribute to the fund assuming that only the interest income is
distributed?
A. $1,150,000
B. $1,200,000
C. $1,333,333
D. $1,500,000
E. $1,600,000
A firm can either lease or buy some new equipment. The lease payments would be
$19,700 a year for 4 years. The purchase price is $72,900. The equipment has a 4-year
life after which it is expected to have a resale value of $3,600. The firm uses straight-
line depreciation over the life of the asset, borrows money at 11 percent, and has a 35
percent tax rate. The company does not expect to owe any taxes for at least 4 years
because it has accumulated net operating losses. What is the incremental cash flow for
year 3 if the company decides to lease rather than purchase the equipment?
A. -$29,165
B. -$21,821
C. -$19,700
D. -$18,559
E. -$17,635
Phil is working on a financial plan for the next three years. This time period is referred
to as which one of the following?
A. financial range
B. planning horizon
C. planning agenda
D. short-run
E. current financing period
One year ago, you purchased 200 shares of a stock at a price of $54.18 a share. Today,
you sold those shares for $40.25 a share. During the past year, you received total
dividends of $164 while inflation averaged 4.2 percent. What is your approximate real
rate of return on this investment?
A. -24.20 percent
B. -28.40 percent
C. -20.00 percent
D. 20.00 percent
E. 24.20 percent
Which one of the following is a result of a small stock dividend?
A. increase in retained earnings
B. decrease in total owner's equity
C. decrease in cash
D. decrease in capital in excess of par value
E. increase in common stock
Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of
9.2 percent, and a current price of $895.09. The bonds make semiannual payments.
What is the coupon rate?
A. 7.80 percent
B. 8.00 percent
C. 8.25 percent
D. 8.40 percent
E. 8.65 percent
Home Dcor & More is considering a proposed project with the following cash flows.
Should this project be accepted based on the combination approach to the modified
internal rate of return if both the discount rate and the reinvestment rate are 16 percent?
Why or why not?
A. Yes; The MIRR is 14.78 percent.
B. Yes; The MIRR is 15.64 percent.
C. No; The MIRR is 12.91 percent.
D. No; The MIRR is 14.78 percent.
E. No; The MIRR is 15.64 percent.
A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the
total assets?
A. $6,128.05
B. $7,253.40
C. $9,571.95
D. $11,034.00
E. $12,725.26
The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of
11.8 percent. The company has $22,000 in debt that is selling at par value. The levered
value of the firm is $41,000 and the tax rate is 34 percent. What is the pre-tax cost of
debt?
A. 4.73 percent
B. 6.18 percent
C. 6.59 percent
D. 7.22 percent
E. 9.92 percent
