Cindy is taking out a loan today. The cash amount that she is receiving is equal to the
present value of the lump sum payment that she will be required to pay two years from
today. Which type of loan is this?
A. Principal-only
B. Amortized
C. Interest-only
D. Compound
E. Pure discount
An investment has an initial cost of $462,000 and will generate the net income amounts
shown below. This investment will be depreciated straight-line to zero over the
four-year life of the project. Should this project be accepted based on the average
accounting rate of return if the required rate is 14.75 percent? Why or why not?
A. Yes, because the AAR is equal to 14.75 percent
B. Yes, because the AAR is greater than 14.75 percent
C. Yes, because the AAR is less than 14.75 percent
D. No, because the AAR is greater than 14.75 percent
E. No, because the AAR is less than 14.75 percent
Moore & Moore has just finished projecting its expected cash receipts and expenditures
for next year. What is this projection called?
A. Operating projection
B. Receivables schedule
C. Balance sheet
D. Cash budget
E. Compromise policy
An average individual investor who participates in an IPO:
A. frequently earns high returns when shares are undersubscribed.
B. generally receives his or her full allocation of shares if oversubscription occurs.
C. often encounters the “winner’s curse.”
D. is protected from financial loss by the Green Shoe provision.
E. is subject to the lockup provision.
Accounts receivable financing is the term used to describe which one of the following
types of loans that involve either the assignment or the factoring of a firm’s accounts
receivable?
A. Secured short-term loan
B. Unsecured short-term loan
C. Secured long-term loan
D. Unsecured long-term loan
E. Trust receipt loan
Country Cook’s cost of equity is 16.2 percent and its aftertax cost of debt is 5.8 percent.
What is the firm’s weighted average cost of capital if its debt-equity ratio is .42 and the
tax rate is 34 percent?
A. 12.54 percent
B. 11.47 percent
C. 13.12 percent
D. 12.28 percent
E. 13.01 percent
What is the future value of $25 a week for 40 years at 8.5 percent interest? Assume the
first payment occurs at the end of this week.
A. $441,710.03
B. $414,361.08
C. $469,727.15
D. $350,003.14
E. $335,221.18
Auto Detailers is buying some new equipment at a cost of $188,900. This equipment
will be depreciated on a straight-line basis to a zero book value its eight-year life. The
equipment is expected to generate net income of $11,000 a year for the first four years
and $24,000 a year for the last four years. What is the average accounting rate of
return?
A. 15.48 percent
B. 17.76 percent
C. 18.09 percent
D. 22.68 percent
E. 18.53 percent
Deep Sea Fisheries has current liabilities of $238,620, net working capital of $42,580,
inventory of $262,750, and sales of $1,941,840. What is the quick ratio?
A. .79
B. .34
C. .08
D. 2.94
E. 12.93
There are three open positions on the board of directors of XYZ Enterprises. The
company has 264,000 shares of stock outstanding. Each share is entitled to one vote.
How many shares of stock must you own to guarantee your personal election to the
board of directors if the firm uses cumulative voting?
A. 82,001 shares
B. 75,001 shares
C. 88,001 shares
D. 72,000 shares
E. 66,001 shares
Northwestern Lumber Products currently has 12,400 shares of stock outstanding and no
debt. Patricia, the financial manager, is considering issuing $160,000 of debt at an
interest rate of 6.95 percent and using the proceeds to repurchase shares. Given this,
how many shares of stock will be outstanding once the debt is issued if the break-even
level of EBIT between these two capital structure options is $48,000? Ignore taxes.
A. 2,873 shares
B. 3,051 shares
C. 3,025 shares
D. 2,558 shares
E. 2,667 shares
Taylor, Inc. has sales of $11,898, total assets of $9,315, and a debt-equity ratio of .55. If
its return on equity is 14 percent, what is its net income?
A. $841.35
B. $887.16
C. $904.10
D. $911.16
E. $927.46
Which one of the following statements is the core principle of M&M Proposition I,
without taxes?
A. A firm’s cost of equity is directly related to the firm’s debt-equity ratio.
B. A firm’s WACC is directly related to the firm’s debt-equity ratio.
C. The interest tax shield increases the value of a firm.
D. The capital structure of a firm is totally irrelevant.
E. Levered firms have greater value than unlevered firms.
Which one of the following is specifically designed to compute the rate of return on a
project that has a multiple negative cash flows that are interrupted by one or more
positive cash flows?
A. Average accounting return
B. Profitability index
C. Internal rate of return
D. Indexed rate of return
E. Modified internal rate of return
A firm has sales of $311,000 and net income of $31,600. The price-sales ratio is 3.24
and market price is $36 per share. How many shares are outstanding?
A. 20,608
B. 27,990
C. 28,356
D. 30,515
E. 31,011
Assume a canned soft drink costs $1 in the U.S. and $1.30 in Canada. At the same time,
the currency per U.S. dollar is C$1.30. Which one of the following conditions exists in
this situation?
A. Absolute purchasing power parity
B. Interest rate parity
C. Relative purchasing power parity
D. Translation exposure
E. Equal spot and forward rates
A bond has an average return of 11.2 percent and a standard deviation of 14.6 percent.
What range of returns would you expect to see 68 percent of the time on this security?
A. -18 percent to 43.9 percent
B. -18 percent to 40.1 percent
C. -3.4 percent to 27.8 percent
D. -3.4 percent to 25.8 percent
E. -2.5 percent to 13.9 percent
Holiday Tree Farm has a cash balance of $34 and a short-term loan balance of $180 at
the beginning of Q1. The net cash inflow for the first quarter is $36 and for the second
quarter there is a net cash outflow of $48. All cash shortfalls are funded with short-term
debt. The firm pays 2 percent of its prior quarter’s ending loan balance as interest each
quarter. The minimum cash balance is $20. What is the short-term loan balance at the
end of Q2?
A. $184.3
B. $179.2
C. $138.6
D. $128.4
E. $193.1
Which one of the following is the theory that a firm should borrow up to the point
where the additional tax benefit from an extra dollar of debt equals the additional costs
associated with financial distress from that additional debt?
A. M&M Proposition I, with taxes
B. M&M Proposition II, with taxes
C. M&M Proposition I, without taxes
D. Homemade leverage proposition
E. Static theory of capital structure
You want to create a $72,000 portfolio comprised of two stocks plus a risk-free security.
Stock A has an expected return of 13.6 percent and Stock B has an expected return of
14.7 percent. You want to own $25,000 of Stock B. The risk-free rate is 3.6 percent and
the expected return on the market is 12.1 percent. If you want the portfolio to have an
expected return equal to that of the market, how much should you invest in the risk-free
security?
A. $12,921
B. $12,987
C. $13,550
D. $13,315
E. $12,775
To minimize collection float, a firm should do which of the following?
I. Deposit its collections at least daily
II. Make sure all checks it receives at the sales counter are properly dated and signed
III. Pay its bills in a more timely manner
IV. Eliminate its regional lockboxes and have only one central lockbox located near the
firm’s home office
A. I and II only
B. III and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Which one of the following is a direct bankruptcy cost?
A. Loss of customer goodwill resulting from a bankruptcy filing
B. Legal and accounting fees related to a bankruptcy proceeding
C. Management time spent on a bankruptcy proceeding
D. Any financial distress cost
E. Costs a firm spends trying to avoid bankruptcy
World United stock currently plots on the security market line and has a beta of 1.04.
Which one of the following will increase that stock’s rate of return without affecting the
risk level of the stock, all else constant?
A. An increase in the risk-free rate
B. Decrease in the security’s beta
C. Overpricing of the stock in the marketplace
D. Increase in the market risk-to-reward ratio
E. Decrease in the market rate of return
The market value of a firm’s fixed assets:
A. will always exceed the book value of those assets.
B. is more predictable than the book value of those assets.
C. in addition to the firm’s net working capital reflects the true value of a firm.
D. is decreased annually by the depreciation expense.
E. is equal to the estimated current cash value of those assets.
For which one of the following instruments does a bank guarantee payment by the
buyer?
A. Money market preferred stock
B. Commercial paper
C. Banker’s acceptance
D. Invoice
E. Time draft
The opportunities that a manager has to modify a project once the project has started are
called:
A. sensitivity choices.
B. managerial options.
C. scenario adjustments.
D. restructuring options.
E. erosion control measures.
Which one of the following must equal zero if a firm pays a constant annual dividend?
A. Dividend yield
B. Capital gains yield
C. Total return
D. Par value per share
E. Book value per share
If inflation is expected to steadily decrease in the future, the term structure of interest
rates will most likely be:
A. upward sloping.
B. flat.
C. humped.
D. downward sloping.
E. double-humped.
The Outpost currently sells short leather jackets for $369 each. The firm is considering
selling long coats also. The long coats would sell for $719 each and the company
expects to sell 820 a year. If the company decides to carry the long coat, management
feels that the annual sales of the short jacket will decline from 1,120 to 1,040 units.
Variable costs on the jacket are $228 and $435 on the long coat. The fixed costs for this
project are $23,100, depreciation is $10,400 a year, and the tax rate is 34 percent. What
is the projected operating cash flow for this project?
A. $134,546
B. $131,264
C. $112,212
D. $131,062
E. $128,749
The 6 percent semiannual coupon bonds of IPO, Inc., are selling for $1,087. The bonds
have a face value of $1,000 and mature in 11 years. What is the yield to maturity?
A. 5.42 percent
B. 4.96 percent
C. 4.67 percent
D. 3.68 percent
E. 5.70 percent
The Sports Store is preparing to pay its quarterly dividend of $1.47 a share. The stock
closed at $62.80 a share today and goes ex-dividend tomorrow. What will the
ex-dividend stock price be if the relevant tax rate is 15 percent and all else is held
constant?
A. $62.28
B. $62.20
C. $61.55
D. $61.33
E. $61.28