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You work for a nuclear research laboratory that is contemplating leasing a diagnostic
scanner (leasing is a very common practice with expensive, high-tech equipment). The
scanner costs $2 million and it would be depreciated straight-line to zero over 4 years.
Because of radiation contamination, it will actually be completely valueless in 4 years.
You can lease it for $600,000 per year for 4 years. Assume your company does not
contemplate paying taxes for the next several years. You can borrow at 6 percent before
taxes. What is the net advantage to leasing from your company's standpoint?
A. -$82,711
B. -$79,063
C. -$21,409
D. -$20,818
E. -$18,315
Which one of the following statements concerning net working capital is correct?
A. The lower the value of net working capital the greater the ability of a firm to meet its
current obligations.
B. An increase in net working capital must also increase current assets.
C. Net working capital increases when inventory is sold for cash at a profit.
D. Firms with equal amounts of net working capital are also equally liquid.
E. Net working capital is a part of the operating cash flow.
The Metal Shop produces 1.8 million metal fasteners a year for industrial use. At this
level of production, its total fixed costs are $378,000 and its total costs are $522,000.
The firm can increase its production by 5 percent, without increasing either its total
fixed costs or its variable costs per unit. A customer has made a one-time offer for an
additional 50,000 units at a price per unit of $0.10. Should the firm sell the additional
units at the offered price? Why or why not?
A. yes; The offered price is less than the marginal cost.
B. yes; The offered price is equal to the marginal cost.
C. yes; The offered price is greater than the marginal cost.
D. no; The offered price is less than the marginal cost.
E. no; The offered price is greater than the marginal cost.
You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan
period is 30 years. Payments are made monthly. If you pay the mortgage according to
the loan agreement, how much total interest will you pay?
A. $206,408
B. $229,079
C. $250,332
D. $264,319
E. $291,406
Which of the following questions are appropriate to address during the financial
planning process?
I. Should the firm merge with a competitor?
II. Should additional shares of stock be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced?
A. I, II, and III only
B. I, II, and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
A) What are the assumptions that underlie the internal growth rate and B) what are the
implications of this rate?
Which one of the following compounding periods will yield the smallest present value
given a stated future value and annual percentage rate?
A. annual
B. semi-annual
C. monthly
D. daily
E. continuous
The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The
bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for
$989. What is the yield to maturity?
A. 5.87 percent
B. 5.92 percent
C. 6.08 percent
D. 6.14 percent
E. 6.20 percent
Which one of the following characteristics best describes a project that has a low degree
of operating leverage?
A. high variable costs relative to the fixed costs
B. relatively high initial cash outlay
C. an OCF that is highly sensitive to the sales quantity
D. high level of forecasting risk
E. a high depreciation expense
Steve recently sold an option that requires him to purchase 100 shares of Omega stock
at $40 a share should the option owner decide to exercise the option. What type of
option contract did Steve sell?
A. futures option
B. call option
C. put option
D. straddle
E. strangle
The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of 1.28. The
firm is financed solely with common stock. The risk-free rate of return is 3.4 percent.
What is an appropriate cost of capital for a division within the firm that has an
estimated beta of 1.18?
A. 12.37 percent
B. 12.41 percent
C. 12.54 percent
D. 12.67 percent
E. 12.80 percent
You just won the grand prize in a national writing contest! As your prize, you will
receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is
this prize worth to you today?
A. $172,252.71
B. $178,411.06
C. $181,338.40
D. $185,333.33
E. $190,450.25
You are considering the following two mutually exclusive projects. Both projects will
be depreciated using straight-line depreciation to a zero book value over the life of the
project. Neither project has any salvage value.
Should you accept or reject these projects based on net present value analysis?
A. accept Project A and reject Project B
B. reject Project A and accept Project B
C. accept both Projects A and B
D. reject both Projects A and B
E. You cannot make this decision based on net present value analysis.
Which one of the following statements is correct?
A. Firms with large net operating losses tend to be acquiring firms rather than target
firms.
B. The leverage associated with an acquisition increases the tax liability of the
acquiring firm.
C. If either an increase or a decrease in the level of production causes the average cost
per unit to increase then the firm is currently operating at its optimal production level.
D. Firms can always benefit from economies of scale if they increase the size of their
firm through acquisitions.
E. If a firm uses it surplus cash to acquire another firm then the shareholders of the
acquiring firm immediately incur a tax liability related to the transaction.
You are evaluating a project which requires $230,000 in external financing. The
flotation cost of equity is 11.6 percent and the flotation cost of debt is 5.4 percent. What
is the initial cost of the project including the flotation costs if you maintain a debt-
equity ratio of 0.45?
A. $248,494
B. $249,021
C. $254,638
D. $255,551
E. $255,646
An agent who arranges a transaction between a buyer and a seller of equity securities is
called a:
A. broker.
B. floor trader.
C. capitalist.
D. principal.
E. dealer.
Which one of the following statements concerning NASDAQ is FALSE?
A. It is easier to be listed on NASDAQ than on the NYSE.
B. NASDAQ is an electronic market.
C. NASDAQ is a dealer market.
D. NASDAQ is an OTC market.
E. NASDAQ is an auction market.
West Chester Automation has an inventory turnover of 16 and an accounts payable
turnover of 11. The accounts receivable period is 36 days. What is the length of the cash
cycle?
A. 5.67 days
B. 25.63 days
C. 41.00 days
D. 52.00 days
E. 58.81 days
Henessey Markets has a growth rate of 4.8 percent and is equally as risky as the market.
The stock is currently selling for $17 a share. The overall stock market has a 10.6
percent rate of return and a risk premium of 8.7 percent. What is the expected rate of
return on this stock?
A. 8.7 percent
B. 9.2 percent
C. 10.6 percent
D. 11.3 percent
E. 11.7 percent
Which one of the following statements is correct in regards to credit periods?
A. Perishable items tend to have longer credit periods.
B. Items with low markups tend to have longer credit periods.
C. Smaller accounts tend to have longer credit periods.
D. Different customers may be offered different credit periods by the same firm.
E. Newer products tend to have shorter credit periods.
You currently own 600 shares of JKL, Inc. JKL is an all equity firm that has 75,000
shares of stock outstanding at a market price of $40 a share. The company's earnings
before interest and taxes are $140,000. JKL has decided to issue $1 million of debt at 8
percent interest. This debt will be used to repurchase shares of stock. How many shares
of JKL stock must you sell to unlever your position if you can loan out funds at 8
percent interest?
A. 120 shares
B. 150 shares
C. 180 shares
D. 200 shares
E. 250 shares
Daily Enterprises is contemplating the acquisition of some new equipment. The
purchase price is $46,000. The company expects to sell the equipment at the end of year
4 for $2,500. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44
percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively.
The equipment can be leased for $12,300 a year for 4 years. The firm can borrow
money at 7.5 percent and has a 35 percent tax rate. What is the incremental annual cash
flow for year 4 if the company decides to lease the equipment rather than purchase it?
A. -$14,434
B. -$12,734
C. -$10,813
D. -$9,434
E. -$8,766
A loan where the borrower receives money today and repays a single lump sum on a
future date is called a(n) _____ loan.
A. amortized
B. continuous
C. balloon
D. pure discount
E. interest-only
Which one of the following statements is correct concerning the cash cycle?
A. The longer the cash cycle, the more likely a firm will need external financing.
B. Increasing the accounts payable period increases the cash cycle.
C. A positive cash cycle is preferable to a negative cash cycle.
D. The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E. Offering early payment discounts to customers will tend to increase the cash cycle.
You own a stock that you think will produce a return of 11 percent in a good economy
and 3 percent in a poor economy. Given the probabilities of each state of the economy
occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of
the following terms applies to this 6.5 percent?
A. arithmetic return
B. historical return
C. expected return
D. geometric return
E. required return
Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By
leaving her interest earnings in her account, she increases the amount of interest she
earns each year. The way she is handling her interest income is referred to as which one
of the following?
A. simplifying
B. compounding
C. aggregation
D. accumulation
E. discounting
Today, you sold 200 shares of Indian River Produce stock. Your total return on these
shares is 5.65 percent. You purchased the shares one year ago at a price of $31.10 a
share. You have received a total of $100 in dividends over the course of the year. What
is your capital gains yield on this investment?
A. 3.68 percent
B. 4.04 percent
C. 5.67 percent
D. 7.26 percent
E. 7.41 percent
The common stock of Alpha Manufacturers has a beta of 1.47 and an actual expected
return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of
return is 12.01 percent. Which one of the following statements is true given this
information?
A. The actual expected stock return will graph above the Security Market Line.
B. The stock is underpriced.
C. To be correctly priced according to CAPM, the stock should have an expected return
of 21.95 percent.
D. The stock has less systematic risk than the overall market.
E. The actual expected stock return indicates the stock is currently overpriced.
What is the final day on which an option can be exercised called?
A. payment date
B. ex-option date
C. opening date
D. expiration date
E. intrinsic date
Which one of the following is a source of cash?
A. repurchase of common stock
B. acquisition of debt
C. purchase of inventory
D. payment to a supplier
E. granting credit to a customer
The Educated Horses Corporation needs to raise $20 million to finance its expansion
into new markets. The company will sell new shares of equity via a general cash
offering to raise the needed funds. Suppose the offer price is $40 per share and the
company's underwriters charge an 8 percent spread. The SEC filing fee and associated
administrative expenses of the offering are $660,000. How many shares need to be
sold?
A. 448,907
B. 461,222
C. 511,111
D. 529,937
E. 561,413
Most people would tend to agree that technology stocks were highly overvalued in the
late 1990's. This time period is best described as a technology:
A. crash.
B. circle.
C. bubble.
D. limit.
E. arbitrage.
Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per
quarter. The loan agreement also requires that 2 percent of the unused portion of the
credit line be deposited in a non-interest bearing account as a compensating balance.
Your short-term investments are paying 0.20 percent per month. What is your effective
annual interest rate on this arrangement if you do not borrow any money on this credit
line during the year? Assume any funds borrowed or invested use compound interest.
A. 2.00 percent
B. 2.43 percent
C. 3.18 percent
D. 7.00 percent
E. 7.19 percent
A newly issued bond has a 7 percent coupon with semiannual interest payments. The
bonds are currently priced at par value. The effective annual rate provided by these
bonds must be:
A. 3.5 percent.
B. greater than 3.5 percent but less than 7 percent.
C. 7 percent.
D. greater than 7 percent.
E. Answer cannot be determined from the information provided.
Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent of
the firm's capacity. What is the full capacity level of sales?
A. $31,755
B. $36,250
C. $48,667
D. $51,333
E. $54,500
