Farmer’s Supply is considering opening a clothing store, which would be a new line of
business for the firm. Management has decided to use the cost of capital of a similar
clothing store as the discount rate to evaluate this proposed expansion. Which one of
the following terms describes this evaluation approach?
A. Equity approach
B. Aftertax approach
C. Subjective approach
D. Market play
E. Pure play approach
TAC Co. has 4.8 percent, semiannual coupon bonds on the market with four years left
to maturity. If the bond currently sells for $908.60, what is its YTM?
A. 8.02 percent
B. 7.90 percent
C. 8.10 percent
D. 7.49 percent
E. 6.78 percent
Appalachian Bank offers you a $30,000, 2-year term loan at an APR of 5.5 percent,
compounded monthly. What will be your monthly loan payment?
A. $1,307.16
B. $1,250.00
C. $1,960.02
D. $1,389.20
E. $1,322.87
Kurt wants to have $835,000 in an investment account six years from now. The account
will pay .67 percent interest per month. If he saves money every month, starting one
month from now, how much will he have to save each month to reach his goal?
A. $9,062.07
B. $9,497.03
C. $8,838.22
D. $8,501.03
E. $8,808.11
Room and Board has determined that $41,650 is the break-even level of earnings before
interest and taxes for the two capital structures it is considering. The one structure
consists of all equity with 15,500 shares of stock. The second structure consists of
12,500 shares of stock and $65,000 of debt. What is the interest rate on the debt?
A. 7.72 percent
B. 8.19 percent
C. 9.38 percent
D. 11.55 percent
E. 12.40 percent
The addition of a risky security to a fully diversified portfolio:
A. must decrease the portfolio’s expected return.
B. must increase the portfolio beta.
C. may or may not affect the portfolio beta.
D. will increase the unsystematic risk of the portfolio.
E. will have no effect on the portfolio beta or its expected return.
You are analyzing a project and have developed the following estimates. The
depreciation is $5,800 a year and the tax rate is 35 percent. What is the best-case
operating cash flow?
A. $7,473.00
B. $4,196.80
C. $5,377.50
D. $6,701.40
E. $8,627.50
The ability to delay an investment:
A. is commonly referred to as the best-case scenario.
B. is valuable provided there are conditions under which the investment will have a
positive net present value.
C. ensures that the investment will have an expected net present value that is positive.
D. offsets the need to conduct sensitivity analysis.
E. is referred to as the option to abandon.
Which one of the following statements concerning capital structure weights is correct?
A. Target capital structure rates for a firm are irrelevant to individual projects.
B. The weights are unaffected when a bond issue matures.
C. An increase in the debt-equity ratio will increase the weight of the common stock.
D. The repurchase of preferred stock will increase the weight of debt.
E. The issuance of additional shares of common stock will increase the weight of both
the common and preferred stock.
A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest
paid of $2,605. What is the cash coverage ratio?
A. 8.78
B. 20.10
C. 14.14
D. 16.32
E. 19.55
A good steak dinner in the U.S. costs 59USDwhile the exact meal costs 825MXN
across the border in Mexico. Based on purchasing power parity, what is the implied
MXN/USD exchange rate?
A. 13.76MXN/1USD
B. 13.98MXN/1USD
C. 14.04MXN/1USD
D. 14.23MXN/1USD
E. 14.11MXN/1USD
When, if ever, will the geometric average return exceed the arithmetic average return
for a given set of returns?
A. When the set of returns includes only risk-free rates
B. When the set of returns has a wide frequency distribution
C. When the set of returns has a very narrow frequency distribution
D. When all of the rates of return in the set of returns are equal to each other
E. Never
Which one of the following is the primary determinant of an investment’s cost of
capital?
A. Life of the investment
B. Amount of the initial cash outlay
C. The investment’s level of risk
D. The source of funds used for the investment
E. The investment’s net present value
What is the net present value of the following cash flows if the relevant discount rate is
5.75 percent?
A. -$1,482.15
B. -$1,232.68
C. $507.19
D. $1,211.40
E. $1,402.02
Suppose you bought a$1,000 face value bond with a 5 percent coupon one year ago for
$1,020. The bond sells today for $986. If the inflation rate last year was 2.3 percent,
what was your total real rate of return on this investment?
A. .02 percent
B. -.71 percent
C. .31 percent
D. .89 percent
E. -.48 percent
Russell’s has a bond issue outstanding. The issue’s indenture provision prohibits the
firm from redeeming the bonds during the first five years following issuance. This
provision is referred to as the _____ provision.
A. safeguard
B. market
C. liquidity
D. deferred call
E. sinking fund
Which statement is true?
A. A decrease in the accounts receivable turnover rate decreases the cash cycle.
B. Paying a supplier within the discount period rather than waiting until the end of the
normal credit period will decrease the cash cycle.
C. The number of days in the cash cycle can be positive, negative, or equal to zero.
D. An increase in the inventory turnover rate must increase the cash cycle.
E. The payables period must be shorter than the receivables period.
Which one of the following terms refers to the best option that was foregone when a
particular investment is selected?
A. Side effect
B. Erosion
C. Sunk cost
D. Opportunity cost
E. Marginal cost
The Corner Market has decided to expand its retail store by building on a vacant lot it
currently owns. This lot was purchased four years ago at a cost of $299,000, which the
firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all
of which was also paid in cash. Today, the lot has a market value of $329,000. What
value should be included in the analysis of the expansion project for the cost of the
land?
A. The sum of the cash paid to date for both the lot and the improvements
B. The original purchase price only
C. The current market value of the land plus the cash paid for the improvements
D. The current market value of the land
E. Zero because the land and the improvements were previously purchased with cash
Global Traders has common stock outstanding at a market price of $46 per share. The
total market value of the firm is $5,754,600. The firm plans on liquidating one of its
divisions for $620,000 in cash, after taxes, and distributing the proceeds to the
shareholders in the form of a liquidating dividend. What will be the amount per share of
that dividend?
A. $5.197
B. $4.956
C. $4.620
D. $4.708
E. $4.782
One year ago, LaTresa purchased 300 shares of Outland Co. stock for $7,092. The stock
does not pay any regular dividends but it did pay a special dividend of $.43 a share last
week. This morning, she sold her shares for $24.05 a share. What was the total
percentage return on this investment?
A. 7.67 percent
B. 4.83 percent
C. 2.50 percent
D. 3.55 percent
E. 8.24 percent
You are analyzing a project and have developed the following estimates: unit sales =
2,600, price per unit = $109, variable cost per unit = $67, fixed costs per year =
$38,000. The depreciation is $12,000 a year and the tax rate is 34 percent. What effect
would the sale of one more unit have on the operating cash flow?
A. $24.18
B. $16.66
C. $13.10
D. $27.72
E. $15.70
Which one of the following is defined as a bell-shaped frequency distribution that is
defined by its average and its standard deviation?
A. Arithmetic average return
B. Variance
C. Standard deviation
D. Probability curve
E. Normal distribution
All else constant, an increase in a firm’s cost of debt:
A. could be caused by an increase in the firm’s tax rate.
B. will result in an increase in the firm’s cost of capital.
C. will lower the firm’s weighted average cost of capital.
D. will lower the firm’s cost of equity.
E. will increase the firm’s capital structure weight of debt.
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield
and reported in your textbook, are based on the:
A. largest 20 percent of the stocks traded on the NYSE.
B. stock returns for the largest 10 percent of the publicly traded firms in the U.S.
C. returns of the 100 largest firms in the U.S.
D. returns of all the stocks listed on the NYSE.
E. stocks of the 500 companies included in the S&P 500 index.
Which statement is correct?
A. IPO underpricing is minimal in China.
B. IPO underpricing is limited to the U.S. markets.
C. The percentage of underpricing remains stable over time in the U.S.
D. The only period in the U.S. when underpricing produced first day returns of 50
percent or more was during the tech bubble of 1999-2000.
E. Some of the greatest IPO underpricing has occurred in Saudi Arabia.
Which one of the following is a graphical representation of the operating and cash
cycles?
A. Operations line
B. Production period
C. Cash flow time line
D. Inventory flow chart
E. Customer service line
Today, you are borrowing money and must repay the lender one year from now with a
lump-sum payment of $12,800.How much money are you borrowing if the interest rate
is 8.45 percent, compounded monthly?
A. $12,000.00
B. $10,550.00
C. $11,766.32
D. $10,762.14
E. $11,802.67
Forecasting risk is best defined as:
A. reality risk.
B. value risk.
C. potential risk.
D. management risk.
E. estimation risk.
Which of these is most apt to decrease the accounts receivable period for a store that
has both cash and credit sales?
A. Increasing the time granted to customers to pay for purchases
B. Lengthening the cash cycle
C. Increasing customer discounts for cash payment
D. Selling inventory slower
E. Paying suppliers faster
Mistletoe Gifts has $93,840 in total assets, depreciation of $2,106, and interest of
$1,214. The total asset turnover rate is .94. Earnings before interest and taxes are equal
to 19 percent of sales. What is the cash coverage ratio?
A. 6.33
B. 7.51
C. 15.54
D. 10.23
E. 13.98