Rackin Pinion Corporation’s assets are currently worth $1,260. In one year, they will be
worth either $1,200 of $1,610. The risk-free interest rate is 5 percent. Suppose Rackin
Pinion has an outstanding debt issue with a face value of $1,200. What is the current
value of the firm’s debt?
A. $60.00
B. $114.14
C. $1,142.86
D. $1,263.19
E. $1,504.20
The Peace River Corporation has 67,000 shares of stock outstanding at a market price
of $48 a share. The company has just announced a 3-for-2 stock split. How many shares
of stock will be outstanding after the split?
A. 44,667 shares
B. 54,333 shares
C. 89,333 shares
D. 100,500 shares
E. 108,666 shares
A compensating balance:
I. is required when a firm acquires any bank financing other than a line of credit.
II. increases the cost of short-term bank financing.
III. may be required even if a firm never borrows funds.
IV. is often used as a means of paying for banking services received.
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
E. II, III, and IV only
Which of the following are required for an acquisition to be considered tax-free?
I. continuity of equity interest
II. a business purpose, other than avoiding taxes, for the acquisition
III. payment in the form of equity shares for the acquired firm
IV. cash payment for the equity of the acquired firm
A. I and II only
B. II and III only
C. II and IV only
D. I, II, and III only
E. I, II, and IV only
Assume that net working capital and all of the costs of Fake Stone, Inc. increase
directly with sales. Also assume that the tax rate and the dividend payout ratio are
constant. The firm is currently operating at full capacity. What is the external financing
need if sales increase by 4 percent?
A. -$1,214.48
B. -$804.15
C. -$397.19
D. $201.16
E. $525.38
The price of one Euro expressed in U.S. dollars is referred to as a(n):
A. ADR rate.
B. cross inflation rate.
C. depository rate.
D. exchange rate.
The decision to issue additional shares of stock is an example of which one of the
following?
A. working capital management
B. net working capital decision
C. capital budgeting
D. controller’s duties
E. capital structure decision
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-
assisted drilling system for its oil exploration business. Management has decided that it
must use the system to stay competitive; it will provide $550,000 in annual pretax cost
savings. The system costs $3 million and will be depreciated straight-line to zero over 4
years. It is estimated that the equipment will have an aftertax residual value of $500,000
at then end of the lease. Wildcat’s tax rate is 31 percent, and the firm can borrow at 10
percent. Lambert Leasing Company has offered to lease the drilling equipment to
Wildcat for payments of $940,000 per year. Lambert’s policy is to require its lessees to
make payments at the start of the year. What is the maximum lease payment that would
be acceptable to the company?
A. $729,932
B. $734,515
C. $748,200
D. $751,646
E. $762,937
The discount rate assigned to an individual project should be based on:
A. the firm’s weighted average cost of capital.
B. the actual sources of funding used for the project.
C. an average of the firm’s overall cost of capital for the past five years.
D. the current risk level of the overall firm.
E. the risks associated with the use of the funds required by the project.
The balance sheet for Apple Pie Corp. is shown here in market value terms. There are
5,000 shares of stock outstanding.
The company has announced that it is going to repurchase $4,350 worth of stock. What
will the price of the stock be after this repurchase?
A. $35.00
B. $36.19
C. $39.21
D. $42.50
E. $43.33
Money deposited by a borrower with the bank in a low or non-interest-bearing account
as a condition of a loan agreement is called a:
A. compensating balance.
B. secured credit deposit.
C. letter of credit.
D. line of credit.
E. pledge.
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
You would like to purchase a security that is issued by the British government. Which
one of the following should you purchase?
A. Samurai bond
B. kronor
C. Euro
D. LIBOR
E. gilt
Brentwood Industries is selling its tool and die equipment to Upward Financial and then
leasing that equipment from Upward for a period of ten years, which is the useful
remaining life of the equipment. Which type of lease arrangement is this?
A. leveraged lease
B. sale and leaseback
C. operating lease
D. tax-oriented lease
E. straight lease
How many Euros can you get for $2,100 if one euro is worth $1.2762?
A. €1,638.09
B. €1,645.51
C. €2,676.67
D. €2,680.02
E. €2,684.15
You are considering implementing a lockbox system for your firm. The system is
expected to reduce the average collection time by 1.3 days. On an average day, your
firm receives 136 checks with an average value of $219 each. The daily interest rate on
Treasury bills is 0.021 percent. The bank charge per check is $0.22. What is the
anticipated daily cost of the lockbox system?
A. $3.48
B. $6.25
C. $12.60
D. $29.92
E. $36.17
Which one of the following statements concerning interest rates is correct?
A. Savers would prefer annual compounding over monthly compounding.
B. The effective annual rate decreases as the number of compounding periods per year
increases.
C. The effective annual rate equals the annual percentage rate when interest is
compounded annually.
D. Borrowers would prefer monthly compounding over annual compounding.
E. For any positive rate of interest, the effective annual rate will always exceed the
annual percentage rate.
L.A. Clothing has expected earnings before interest and taxes of $48,900, an unlevered
cost of capital of 14.5 percent, and a tax rate of 34 percent. The company also has
$8,000 of debt that carries a 7 percent coupon. The debt is selling at par value. What is
the value of this firm?
A. $222,579.31
B. $223,333.33
C. $224,108.16
D. $225,299.31
E. $225,476.91
Sal’s Pizza has a dividend payout ratio of 10 percent. The firm does not want to issue
additional equity shares but does want to maintain its current debt-equity ratio and its
current dividend policy. The firm is profitable. Which one of the following defines the
maximum rate at which this firm can grow?
A. internal growth rate × (1 – 0.10)
B. sustainable growth rate × (1 – 0.10)
C. internal growth rate
D. sustainable growth rate
E. zero percent
A stock had returns of 14 percent, 13 percent, -10 percent, and 7 percent for the past
four years. Which one of the following best describes the probability that this stock will
lose no more than 10 percent in any one year?
A. greater than 0.5 but less than 1.0 percent
B. greater than 1.0 percent but less than 2.5 percent
C. greater than 2.5 percent but less than 16 percent
D. greater than 84 percent but less than 97.5 percent
E. greater than 95 percent
Operating leverage is the degree of dependence a firm places on its:
A. variable costs.
B. fixed costs.
C. sales.
D. operating cash flows.
E. net working capital.
Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity ratio of 0.3.
Its return on equity is 15 percent. What is the net income?
A. $138.16
B. $141.41
C. $152.09
D. $156.67
E. $161.54
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the
public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders
$16.40 a share on 40,000 shares. Which one of the following terms best describes this
underwriting?
A. best efforts
B. shelf
C. direct rights
D. private placement
E. firm commitment
Which one of the following is least apt to reduce the unsystematic risk of a portfolio?
A. reducing the number of stocks held in the portfolio
B. adding bonds to a stock portfolio
C. adding international securities into a portfolio of U.S. stocks
D. adding U.S. Treasury bills to a risky portfolio
E. adding technology stocks to a portfolio of industrial stocks
Atlas Insurance wants to sell you an annuity which will pay you $3,400 per quarter for
25 years. You want to earn a minimum rate of return of 6.5 percent. What is the most
you are willing to pay as a lump sum today to buy this annuity?
A. $151,008.24
B. $154,208.16
C. $167,489.11
D. $173,008.80
E. $178,927.59
Your insurance agent is trying to sell you an annuity that costs $200,000 today. By
buying this annuity, your agent promises that you will receive payments of $1,225 a
month for the next 30 years. What is the rate of return on this investment?
A. 5.75 percent
B. 5.97 percent
C. 6.20 percent
D. 6.45 percent
E. 6.67 percent
A firm’s cost of capital:
A. will decrease as the risk level of the firm increases.
B. for a specific project is primarily dependent upon the source of the funds used for the
project.
C. is independent of the firm’s capital structure.
D. should be applied as the discount rate for any project considered by the firm.
E. depends upon how the funds raised are going to be spent.
Phone Home, Inc. is considering a new 6-year expansion project that requires an initial
fixed asset investment of $5.994 million. The fixed asset will be depreciated straight-
line to zero over its 6-year tax life, after which time it will be worthless. The project is
estimated to generate $5,328,000 in annual sales, with costs of $2,131,200. The tax rate
is 31 percent. What is the operating cash flow for this project?
A. $1,894,318
B. $2,211,407
C. $2,515,482
D. $2,663,021
E. $2,848,315
J&J Foods wants to issue some 7 percent preferred stock that has a stated liquidating
value of $100 a share. The company has determined that stocks with similar
characteristics provide a 12.8 percent rate of return. What should the offer price be?
A. $37.26
B. $41.38
C. $48.20
D. $54.69
E. $62.60
Which one of the following provides the option of selling a stock anytime during the
option period at a specified price even if the market price of the stock declines to zero?
A. American call
B. European call
C. American put
D. European put
E. either an American or a European put