Currently, Glasgow Importers sells 280 units a month at a price of $729 a unit. The firm
believes it can increase its sales by an additional 40 units if it switches to a net 30 credit
policy. The monthly interest rate is 0.5 percent and the variable cost per unit is $480.
What is the net present value of the proposed credit policy switch?
A. -$213,360
B. -$9,240
C. $190,200
D. $1,287,520
E. $1,768,680
Answer:
The interest rate risk premium is the:
A. additional compensation paid to investors to offset rising prices.
B. compensation investors demand for accepting interest rate risk.
C. difference between the yield to maturity and the current yield.
D. difference between the market interest rate and the coupon rate.
E. difference between the coupon rate and the current yield.
Answer:
You own 1,500 shares of stock in Avondale Corporation. You will receive a $0.80 per
share dividend in one year. In two years, Avondale will pay a liquidating dividend of
$35 per share. The required return on Avondale stock is 16 percent. You only want $200
total in dividends in year one and accomplish this by using homemade dividends. What
will your total dividend amount be in year two?
A. $35,696
B. $40,764
C. $53,660
D. $61,402
E. $63,878
Answer:
Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The
market price of the stock is $19.60 and the growth rate is 5 percent. What is the firm’s
cost of equity?
A. 7.58 percent
B. 7.91 percent
C. 8.24 percent
D. 9.08 percent
E. 10.00 percent
Answer:
Applying the discounted payback decision rule to all projects may cause:
A. some positive net present value projects to be rejected.
B. the most liquid projects to be rejected in favor of the less liquid projects.
C. projects to be incorrectly accepted due to ignoring the time value of money.
D. a firm to become more long-term focused.
E. some projects to be accepted which would otherwise be rejected under the payback
rule.
Answer:
Which one of the following statements is correct?
A. Money market accounts are low-risk, high-return investments.
B. The rate of return earned on short-term securities tends to exceed that earned on
long-term securities.
C. U.S. Treasury bills are well suited for short-term investments.
D. The income earned on U.S. Treasury bills is exempt from all taxation.
E. Short-term investments tend to have high levels of default risk.
Answer:
Jill is the CFO of Summertime Adventures which is a seasonal firm specializing in
products related to water sports. The firm purchases inventory one month before it is
sold and pays for its purchases 60 days after the invoice date. Sales are highest during
July and August. Currently, Jill is preparing the cash disbursements section of the firm’s
cash budget. Which one of the following statements is supported by this information?
A. Inventory purchases will be highest during the months of July and August.
B. Inventory purchases will be highest during the months of May and June.
C. Payments to suppliers will be highest during the months of June and July.
D. Payments to suppliers will be highest during the months of July and August.
E. Payments to suppliers will be highest during the months of August and September.
Answer:
A project produces annual net income of $46,200, $51,800, and $62,900 over its 3-year
life, respectively. The initial cost of the project is $675,000. This cost is depreciated
straight-line to a zero book value over three years. What is the average accounting rate
of return if the required discount rate is 14.5 percent?
A. 15.89 percent
B. 16.67 percent
C. 18.98 percent
D. 20.25 percent
E. 23.84 percent
Answer:
What is debt-equity ratio? (Use 2012 values)
A. 0.52
B. 0.87
C. 0.94
D. 0.99
E. 1.06
Answer:
Which of the following statements are correct?
I. The SML approach is dependent upon a reliable measure of a firm’s unsystematic
risk.
II. The SML approach can be applied to firms that retain all of their earnings.
III. The SML approach assumes a firm’s future risks are similar to its past risks.
IV. The SML approach assumes the reward-to-risk ratio is constant.
A. I and III only
B. II and IV only
C. III and IV only
D. I, II, and III only
E. II, III, and IV only
Answer:
Costs that increase as a firm acquires additional current assets are called _____ costs.
A. carrying
B. shortage
C. order
D. safety
E. trading
Answer:
On this date last year, you borrowed $3,400. You have to repay the loan principal plus
all of the interest six years from today. The payment that is required at that time is
$6,000. What is the interest rate on this loan?
A. 8.01 percent
B. 8.45 percent
C. 8.78 percent
D. 9.47 percent
E. 9.93 percent
Answer:
Which one of the following is most likely the primary reason why a lessee opts to lease
an asset on a short-term basis rather than buy that asset?
A. keep the asset off the balance sheet
B. tax avoidance
C. lower total cost
D. increased collateral
E. nonrecourse protection
Answer:
Amy is the chief financial officer of a retail toy store. Recently, she decided that the
firm should expand its operations and open two additional stores. Within a very brief
period, it was obvious that Amy had made a very bad decision in opening those stores,
given that the economy is in the middle of a severe recession. In reflecting back on her
decision, Amy realizes that she made a bad decision due to a reasoning error. Which
one of the following areas of study best applies to this situation?
A. corporate ethics
B. financial statement analysis
C. managerial finance
D. debt management
E. behavioral finance
Answer:
What is the net present value of a project with the following cash flows if the required
rate of return is 9 percent?
A. -$1,574.41
B. -$1,208.19
C. $5,904.65
D. $6,029.09
E. $6,311.16
Answer:
Which one of the following terms is applied to the financial planning method which
uses the projected sales level as the basis for determining changes in balance sheet and
income statement account values?
A. percentage of sales method
B. sales dilution method
C. sales reconciliation method
D. common-size method
E. trend method
Answer:
The Corner Bakery has a debt-equity ratio of 0.62. The firm’s required return on assets
is 14.2 percent and its cost of equity is 16.1 percent. What is the pre-tax cost of debt
based on M & M Proposition II with no taxes?
A. 7.10 percent
B. 10.68 percent
C. 11.14 percent
D. 17.56 percent
E. 18.40 percent
Answer:
Brad owns a convertible bond. Which one of the following terms would apply to the
value of this bond if he were to convert it into shares of stock today?
A. conversion premium
B. straight bond value
C. conversion value
D. inverted value
E. prescribed value
Answer:
Merchantile Exchange is being acquired by National Sales. The incremental value of
the acquisition is $1,800. Merchantile Exchange has 1,500 shares of stock outstanding
at a price of $18 a share. National Sales has 3,500 shares of stock outstanding at a price
of $54 a share. What is the net present value of the acquisition given that the actual cost
of the acquisition using company stock is $28,780?
A. $8
B. $11
C. $20
D. $37
E. $46
Answer:
You have computed the break-even point between a levered and an unlevered capital
structure. Assume there are no taxes. At the break-even level, the:
A. firm is just earning enough to pay for the cost of the debt.
B. firm’s earnings before interest and taxes are equal to zero.
C. earnings per share for the levered option are exactly double those of the unlevered
option.
D. advantages of leverage exceed the disadvantages of leverage.
E. firm has a debt-equity ratio of .50.
Answer:
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 $3.5 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 $875,000 per year for 4 years. Assume the tax rate is 33 percent.
You can borrow at 10 percent before taxes. What is the net advantage to leasing from
your company’s standpoint?
A. $468,216
B. $491,319
C. $516,007
D. $530,468
E. $541,747
Answer:
You are considering an investment with the following cash flows. If the required rate of
return for this investment is 15.5 percent, should you accept the investment based solely
on the internal rate of return rule? Why or why not?
A. Yes; The IRR exceeds the required return.
B. Yes; The IRR is less than the required return.
C. No; The IRR is less than the required return.
D. No; The IRR exceeds the required return.
E. You cannot apply the IRR rule in this case.
Answer:
Assigning discount rates to individual projects based on the risk level of each project:
A. may cause the firm’s overall weighted average cost of capital to either increase or
decrease over time.
B. will prevent the firm’s overall cost of capital from changing over time.
C. will cause the firm’s overall cost of capital to decrease over time.
D. decreases the value of the firm over time.
E. negates the firm’s goal of creating the most value for the shareholders.
Answer:
R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a
share. Next year’s annual dividend is expected to be $1.55 a share. The dividend growth
rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000
per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in
7.5 years. The bonds are selling at 98 percent of face value. The company’s tax rate is
34 percent. What is the firm’s weighted average cost of capital?
A. 5.4 percent
B. 6.2 percent
C. 7.5 percent
D. 8.5 percent
E. 9.6 percent
Answer:
A lockbox is a:
A. special safe used by a firm for overnight storage of any cash or undeposited checks.
B. special safe used by a firm that can only be opened at prespecified times of the day.
C. box located in a bank’s vault that is rented by a firm and used to hold unprocessed
checks.
D. special post office box which can only be opened by prespecified postal inspectors
for direct delivery to the addressee.
E. post office box strategically located so that a firm’s receivables can be collected
faster.
Answer:
Day Interiors is considering a project with the following cash flows. What is the IRR of
this project?
A. 6.42 percent
B. 7.03 percent
C. 7.48 percent
D. 8.22 percent
E. 8.56 percent
Answer:
The home currency approach:
A. discounts all of a project’s foreign cash flows using the current spot rate.
B. employs uncovered interest parity to project future exchange rates.
C. computes the net present value (NPV) of a project in the foreign currency and then
converts that NPV into U.S. dollars.
D. utilizes the international Fisher effect to compute the NPV of foreign cash flows in
the foreign currency.
E. utilizes the international Fisher effect to compute the relevant exchange rates needed
to compute the NPV of foreign cash flows in U.S. dollars.
Answer:
You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent
plus 5 points. A point on a loan is simply 1 percent (one percentage point) of the loan
amount. Quotes similar to this one are very common with home mortgages. The interest
rate quotation in this example requires the borrower to pay 5 points to the lender up
front and repay the loan later with 10 percent interest. What is the actual rate you are
paying on this loan?
A. 13.00 percent
B. 13.47 percent
C. 13.55 percent
D. 13.68 percent
E. 13.84 percent
Answer:
Check kiting is:
A. used by most firms as an ethical means of handling its cash reserves.
B. the process of withdrawing all funds from a bank account as soon as the funds are
available.
C. the central core of a good cash management system.
D. using uncollected cash to invest in short-term, liquid assets.
E. increasingly popular due to recent banking law changes.
Answer:
Last week, you purchased a call option on Edgewater stock with a strike price of $40.
The stock price was $39.80 and the option price was $0.45 at that time. What is the
intrinsic value per share if the stock is currently priced at $39.10?
A. -$90
B. -$70
C. $0
D. $70
E. $90
Answer:
For the equity of a firm to be considered a call option on the firm’s assets, the firm
must:
A. be in default.
B. be leveraged.
C. pay dividends.
D. have a negative cash flow from operations.
E. have a negative cash flow from assets.
Answer:
You are going to loan a friend $550 for one year at a 6 percent rate of interest,
compounded annually. How much additional interest could you have earned if you had
compounded the rate continuously rather than annually?
A. $0.84
B. $1.01
C. $1.10
D. $1.23
E. $1.28
Answer:
Ratios that measure how efficiently a firm manages its assets and operations to generate
net income are referred to as _____ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. turnover
Answer:
Which of the following are associated with a restrictive short-term financial policy?
I. little, if any, investment in marketable securities
II. liberal credit terms for customers
III. low cash balances
IV. increasing inventory levels
A. I and III only
B. II and IV only
C. I and IV only
D. III and IV only
E. I, II, and III only
Answer: