The last date on which you can purchase shares of stock and still receive the dividend is
the date which is _____ business days prior to the date of record.
A. 1
B. 2
C. 3
D. 4
E. 5
Answer:
What is an issue of securities that is offered for sale to the general public on a direct
cash basis called?
A. best efforts underwriting
B. firm commitment underwriting
C. general cash offer
D. rights offer
E. herring offer
Answer:
If a firm enters a sale and leaseback agreement, then:
I. the lessee will benefit from an immediate cash inflow.
II. both the lessor and the lessee may benefit if the lessor can benefit more from the tax
benefits of ownership than can the lessee.
III. the lease automatically becomes a nonrecourse lease.
IV. the lessee forfeits the right to repurchase the asset at a later date.
A. I and III only
B. II and IV only
C. I and II only
D. II and III only
E. III and IV only
Answer:
The stock of Cleaner Home Products is currently selling for $26.40 a share. The
company has decided to raise funds through a rights offering wherein every shareholder
will receive one right for each share of stock they own. The new shares being offered
are priced at $25 plus five rights. What is the value of one right?
A. $0.16
B. $0.23
C. $0.25
D. $0.47
E. $0.50
Answer:
Winter Time Adventures is going to pay an annual dividend of $2.86 a share on its
common stock next year. This year, the company paid a dividend of $2.75 a share. The
company adheres to a constant rate of growth dividend policy. What will one share of
this common stock be worth five years from now if the applicable discount rate is 11.7
percent?
A. $43.45
B. $43.87
C. $44.15
D. $45.19
E. $47.00
Answer:
Which one of the following risks is irrelevant to a well-diversified investor?
A. systematic risk
B. unsystematic risk
C. market risk
D. nondiversifiable risk
E. systematic portion of a surprise
Answer:
A stock had annual returns of 3.6 percent, -8.7 percent, 5.6 percent, and 12.5 percent
over the past four years. Which one of the following best describes the probability that
this stock will produce a return of 22 percent or more in a single year?
A. less than 0.1 percent
B. less than 0.5 percent but greater than 0.1 percent
C. less than 1.0 percent but greater the 0.5 percent
D. less than 2.5 percent but greater than 0.5 percent
E. less than 5 percent but greater than 2.5 percent
Answer:
Which one of the following statements concerning financial planning for a firm is
correct?
A. Financial planning for fixed assets is done on a segregated basis within each
division.
B. Financial plans often contain alternative options based on economic developments.
C. Financial plans frequently contain conflicting goals.
D. Financial plans assume that firms obtain no additional external financing.
E. The financial planning process is based on a single set of economic assumptions.
Answer:
In an efficient market, it is believed by some individuals that the actions of traders who
constantly buy and sell on any perceived market mispricings will in effect cause market
prices to correctly reflect asset values. A person who believes that the actions of these
traders will not result in correctly valued prices are most apt to believe in which one of
the following?
A. gambler’s fallacy
B. limits to arbitrage
C. availability bias
D. false consensus
E. clustering illusion
Answer:
You are analyzing a project with an initial cost of £130,000. The project is expected to
return £20,000 the first year, £50,000 the second year and £90,000 the third and final
year. There is no salvage value. The current spot rate is £0.6211. The nominal risk-free
return is 5.5 percent in the U.K. and 6 percent in the U.S. The return relevant to the
project is 14 percent in the U.S. Assume that uncovered interest rate parity exists. What
is the net present value of this project in U.S. dollars?
A. -$19,062
B. -$5,409
C. $5,505
D. $9,730
E. $18,947
Answer:
Cape May Products currently sells 650 units a month at a price of $59 a unit. The firm
believes it can increase its sales by an additional 125 units if it switches to a net 30
credit policy. The monthly interest rate is 0.35 percent and the variable cost per unit is
$38. What is the incremental cash inflow from the proposed credit policy switch?
A. $774
B. $2,625
C. $4,750
D. $5,690
E. $7,375
Answer:
Mason Farms purchased a building for $689,000 eight years ago. Six years ago, repairs
were made to the building which cost $136,000. The annual taxes on the property are
$11,000. The building has a current market value of $840,000 and a current book value
of $494,000. The building is totally paid for and solely owned by the firm. If the
company decides to use this building for a new project, what value, if any, should be
included in the initial cash flow of the project for this building?
A. $494,000
B. $582,000
C. $840,000
D. $865,000
E. $953,000
Answer:
Which one of the following will produce the highest present value interest factor?
A. 6 percent interest for five years
B. 6 percent interest for eight years
C. 6 percent interest for ten years
D. 8 percent interest for five years
E. 8 percent interest for ten years
Answer:
International bonds issued in a single country and denominated in that country’s
currency are called:
A. Treasury bonds.
B. Eurobonds.
C. gilts.
D. Brady bonds.
E. foreign bonds.
Answer:
A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset
currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is
0.85. What percentage of the portfolio is invested in the stock?
A. 71 percent
B. 77 percent
C. 84 percent
D. 89 percent
E. 92 percent
Answer:
You own 15 percent or 13,500 shares of Printers, Etc. These shares have a total market
value of $435,000. By what percentage will the total value of your investment in this
firm change if the company sells an additional 10,000 shares of stock at $30 a share and
you do not buy any?
A. -1.37 percent
B. -1.21 percent
C. -0.69 percent
D. 1.03 percent
E. 1.29 percent
Answer:
Jennifer owns 14,000 shares of Calico Clothing. Currently, there are 1.6 million shares
of stock outstanding. The company has just announced a rights offering whereby
200,000 shares are being offered for sale at a subscription price of $14 a share. The
current stock price is $16 a share. Assume that Jennifer sells her rights and that all
rights are exercised. What percentage of the firm will Jennifer own after the rights
offering?
A. 0.78 percent
B. 0.75 percent
C. 0.86 percent
D. 0.67 percent
E. 1.01 percent
Answer:
The value of a right depends upon:
I. the number of rights required to purchase one new share.
II. the market price of the security.
III. the subscription price.
IV. the price-earnings ratio of the stock.
A. II and III only
B. II and IV only
C. I and II only
D. I, II, and III only
E. I, II, III, and IV
Answer:
Ratios that measure a firm’s financial leverage are known as _____ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. book value
Answer:
The dividend growth model:
A. is only as reliable as the estimated rate of growth.
B. can only be used if historical dividend information is available.
C. considers the risk that future dividends may vary from their estimated values.
D. applies only when a firm is currently paying dividends.
E. uses beta to measure the systematic risk of a firm.
Answer:
Bayside Marina just announced it is decreasing its annual dividend from $1.64 per
share to $1.50 per share effective immediately. If the dividend yield remains at its
pre-announcement level, then you know the stock price:
A. was unaffected by the announcement.
B. increased proportionately with the dividend decrease.
C. decreased proportionately with the dividend decrease.
D. decreased by $0.14 per share.
E. increased by $0.14 per share.
Answer:
You recently purchased a grocery store. At the time of the purchase, the store’s market
value equaled its book value. The purchase included the building, the fixtures, and the
inventory. Which one of the following is most apt to cause the market value of this store
to be lower than the book value?
A. a sudden and unexpected increase in inflation
B. the replacement of old inventory items with more desirable products
C. improvements to the surrounding area by other store owners
D. construction of a new restricted access highway located between the store and the
surrounding residential areas
E. addition of a stop light at the main entrance to the store’s parking lot
Answer:
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value
that matures in one year. The current market value of the firm’s assets is $10,600. The
standard deviation of the return on the firm’s assets is 32 percent per year, and the
annual risk-free rate is 7 percent per year, compounded continuously. What is the
market value of the firm’s debt based on the Black-Scholes model? (Round your answer
to the nearest $100.)
A. $6,415.30
B. $6,900
C. $8,60
D. $8,800
E. $9,200
Answer:
Which of the following variables are included in the BAT model?
I. upper cash limit
II. interest rate on marketable securities
III. opportunity cost of holding cash
IV. fixed cost of each securities trade
A. II only
B. I and III only
C. II and IV only
D. II, III, and IV only
E. I, III, and IV only
Answer:
Hardy Lumber has a capital structure which includes bonds, preferred stock, and
common stock.
Which of the following rights have most likely been granted to the preferred
shareholders?
I. right to share in company profits prior to other shareholders
II. right to elect the corporate directors
III. right to vote on proposed mergers
IV. right to all residual income after the common dividends have been paid
A. I only
B. I and III only
C. I and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
The cash flow related to interest payments less any net new borrowing is called the:
A. operating cash flow.
B. capital spending cash flow.
C. net working capital.
D. cash flow from assets.
E. cash flow to creditors.
Answer:
Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per
share. Assume no market imperfections or tax effects exist. What will the new share
price be if the firm declares a 40 percent stock dividend?
A. $31.12
B. $32.08
C. $35.19
D. $38.57
E. $40.00
Answer:
Consider a 6-year project with the following information: initial fixed asset investment
= $460,000; straight-line depreciation to zero over the 6-year life; zero salvage value;
price = $34; variable costs = $19; fixed costs = $188,600; quantity sold = 90,528 units;
tax rate = 32 percent. What is the sensitivity of OCF to changes in quantity sold?
A. $10.20 per unit
B. $11.16 per unit
C. $11.38 per unit
D. $12.33 per unit
E. $12.54 per unit
Answer:
The Winter Store just purchased $48,300 of goods from its supplier with credit terms of
2/10, net 25. What is the discounted price?
A. $43,470
B. $46,209
C. $47,334
D. $47,929
E. $48,300
Answer:
Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of
14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares
of common stock outstanding at a market price of $27 a share. There are 25,000 shares
of preferred stock outstanding at a market price of $41 a share. The bond issue has a
face value of $550,000 and a market quote of 101.2. The company’s tax rate is 37
percent. What is the firm’s weighted average cost of capital?
A. 10.18 percent
B. 10.84 percent
C. 11.32 percent
D. 12.60 percent
E. 12.81 percent
Answer:
