A project will produce an operating cash flow of $14,600 a year for 8 years. The initial
fixed asset investment in the project will be $48,900. The net aftertax salvage value is
estimated at $11,000 and will be received during the last year of the project’s life. What
is the net present value of the project if the required rate of return is 12 percent?
A. $23,627.54
B. $28,070.26
C. $34,627.54
D. $39,070.26
E. $41,040.83
Forecasting risk emphasizes the point that the correctness of any decision to accept or
reject a project is highly dependent upon the:
A. method of analysis used to make the decision.
B. initial cash outflow.
C. ability to recoup any investment in net working capital.
D. accuracy of the projected cash flows.
E. length of the project.
You just signed a consulting contract that will pay you $35,000, $52,000, and $80,000
annually at the end of the next three years, respectively. What is the present value of
these cash flows given a 10.5 percent discount rate?
A. $133,554
B. $142,307
C. $148,880
D. $151,131
E. $156,910
Winter’s Toyland has a debt-equity ratio of 0.72. The pre-tax cost of debt is 8.7 percent
and the required return on assets is 16.1 percent. What is the cost of equity if you ignore
taxes?
A. 19.31 percent
B. 19.74 percent
C. 20.29 percent
D. 20.46 percent
E. 21.43 percent
R. N. C., Inc. desires a sustainable growth rate of 4.5 percent while maintaining a 40
percent dividend payout ratio and a 6 percent profit margin. The company has a capital
intensity ratio of 1.23. What equity multiplier is required to achieve the company’s
desired rate of growth?
A. 1.33
B. 1.38
C. 1.42
D. 1.47
E. 1.53
The Food Wholesaler generally receives 4 checks a month. The check amounts and the
collection delay for each check are shown below. Given this information, what is the
amount of the average daily float? Assume every month has 30 days.
A. $3,963.89
B. $21,750.00
C. $22,236.67
D. $28,133.33
E. $35,675.00
Changes in the net working capital requirements:
A. can affect the cash flows of a project every year of the project’s life.
B. only affect the initial cash flows of a project.
C. only affect the cash flow at time zero and the final year of a project.
D. are generally excluded from project analysis due to their irrelevance to the total
project.
E. reflect only the changes in the current asset accounts.
Firm A is acquiring Firm B for $75,000 in cash. Firm A has 4,500 shares of stock
outstanding at a market value of $27 a share. Firm B has 2,500 shares of stock
outstanding at a market price of $29 a share. Neither firm has any debt. The incremental
value of the acquisition is $2,200. What is the price per share of Firm A’s stock after the
acquisition?
A. $25.98
B. $26.45
C. $26.93
D. $27.00
E. $27.33
You sold one call option contract with a strike price of $55 when the option was quoted
at $0.80. The option expires today when the value of the underlying stock is $53.70.
Ignoring trading costs and taxes, what is the net profit or loss on this investment?
A. -$250
B. -$80
C. $0
D. $50
E. $80
Interest rate swaps:
I. benefit either the buyer or the seller, but not both.
II. are often used in conjunction with a currency swap.
III. are commonly used in business.
IV. can be used to change the index which determines the variable rate on a firm’s debt.
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Assume the current spot rate is C$1.1875 and the one-year forward rate is C$1.1724.
The nominal risk-free rate in Canada is 4 percent while it is 3 percent in the U.S. Using
covered interest arbitrage you can earn an extra _____ profit over that which you would
earn if you invested $1 in the U.S.
A. $0.018
B. $0.023
C. $0.029
D. $0.031
E. $0.035
The CFO of Edward’s Food Distributors is continually receiving capital funding
requests from its division managers. These requests are seeking funding for positive net
present value projects. The CFO continues to deny all funding requests due to the
financial situation of the company. Apparently, the company is:
A. operating at the accounting break-even point.
B. operating at the financial break-even point.
C. facing hard rationing.
D. operating with zero leverage.
A cash concentration account:
A. is frequently used as a source of funds for short-term investments.
B. cannot be used to cover a compensating balance requirement.
C. cannot be used to transfer funds into zero-balance accounts.
D. is generally the only bank account a firm needs to efficiently manage its cash.
E. is another name for a controlled disbursement account.
All else constant, which one of the following will increase the internal rate of growth?
A. decrease in the retention ratio
B. decrease in net income
C. increase in the dividend payout ratio
D. decrease in total assets
E. increase in costs of goods sold
Lester’s Frozen Foods just paid out $0.50 a share to its shareholders. The cash for these
payments came from a large sale of assets, not from any earnings of the firm. What are
these payments to shareholders called?
A. dividends
B. distributions
C. repurchases
D. payments-in-kind
E. stock splits
Corporations in the U.S. tend to:
A. minimize taxes.
B. underutilize debt.
C. rely less on equity financing than they should.
D. have relatively similar debt-equity ratios across industry lines.
E. rely more heavily on debt than on equity as the major source of financing.
In a direct lease, the lessor:
I. is the end user of the asset.
II. rents the leased asset from the manufacturer.
III. owns the asset.
IV. is generally an independent leasing company.
A. II and III only
B. I and IV only
C. III and IV only
D. II, III, and IV only
E. I, II, III, and IV
What is a seasoned equity offering?
A. an offering of shares by shareholders for repurchase by the issuer
B. shares of stock that have been recommended for purchase by the SEC
C. equity securities held by a firm’s founder that are being offered for sale to the general
public
D. sale of newly issued equity shares by a firm that is currently publicly owned
E. a set number of equity shares that are issued and offered to the public annually
A project with financing type cash flows is typified by a project that has which one of
the following characteristics?
A. conventional cash flows
B. cash flows that extend beyond the acceptable payback period
C. a year or more in the middle of a project where the cash flows are equal to zero
D. a cash inflow at time zero
E. cash inflows which are equal in amount
A $0.60 quarterly cash payment paid by T.L. Jones & Co. to its shareholders in the
normal course of business is called a:
A. repurchase.
B. liquidating dividend.
C. regular cash dividend.
D. special dividend.
E. extra cash dividend.
Adjustment costs is another name for which one of the following?
A. borrowing costs
B. shortage costs
C. cash transfer costs
D. cash wire costs
E. excess cash costs
Dee’s has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91.
Sam’s has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88. Both
companies have similar operations. Based on this information, Dee’s must be doing
which one of the following?
A. utilizing its fixed assets more efficiently than Sam’s
B. utilizing its total assets more efficiently than Sam’s
C. generating $1 in sales for every $1.12 in net fixed assets
D. generating $1.12 in net income for every $1 in net fixed assets
E. maintaining the same level of current assets as Sam’s
A sudden and severe decline in market prices is best described as a market:
A. crash.
B. revolver.
C. bubble.
D. limit.
E. mispricing.
You own 1,000 shares of stock in Avondale Corporation. You will receive an 80-cent
per share dividend in one year. In two years, Avondale will pay a liquidating dividend
of $40 per share. The required return on Avondale stock is 14 percent. What will your
dividend income be this year if you use homemade dividends to create two equal annual
dividend payments?
A. $15,184
B. $15,980
C. $18,667
D. $19,117
E. $20,400
Langley Enterprises pays a constant dividend of $0.60 a share. The company announced
today that it will continue to pay the dividend for another 2 years after which time all
dividends will cease. What is one share of this stock worth today if the required rate of
return is 16.5 percent?
A. $0.92
B. $0.96
C. $1.04
D. $1.09
E. $1.20
You purchased two May futures contracts on silver when the price quote was 10.420.
Given today’s closing prices as shown in the table, your total profit or loss to date is:
Silver – 5,000 troy oz.: dollars and cents per troy oz.
A. -$7,000
B. -$3,500
C. -$700
D. -$350
E. $70
Bill is in charge of the inventory for Home Builder’s Supply. As an inventory item gets
low, he is to restock the item by a quantity that minimizes the total inventory costs for
that item. What is this restocking quantity called?
A. short order quantity
B. refill unit quantity
C. economic order quantity
D. minimum stock level
E. re-order limit
Grill Works and More has 8 percent preferred stock outstanding that is currently selling
for $49 a share. The market rate of return is 14 percent and the firm’s tax rate is 37
percent. What is the firm’s cost of preferred stock?
A. 14.77 percent
B. 15.29 percent
C. 15.67 percent
D. 16.33 percent
E. 16.54 percent
Municipal bonds:
A. are totally risk-free.
B. generally have higher coupon rates than corporate bonds.
C. pay interest that is federally tax-free.
D. are rarely callable.
Yesteryear Productions is considering a project with an initial start up cost of $960,000.
The firm maintains a debt-equity ratio of 0.50 and has a flotation cost of debt of 6.8
percent and a flotation cost of equity of 11.4 percent. The firm has sufficient internally
generated equity to cover the equity cost of this project. What is the initial cost of the
project including the flotation costs?
A. $979,417
B. $982,265
C. $992,386
D. $1,038,513
E. $1,065,089
By definition, which one of the following must equal zero at the accounting break-even
point?
A. net present value
B. internal rate of return
C. contribution margin
D. net income
E. operating cash flow
Webster Iron Works started a new project last year. As it turns out, the project has been
operating at its accounting break-even level of output and is now expected to continue
at that level over its lifetime. Given this, you know that the project:
A. will never pay back.
B. has a zero net present value.
C. is operating at a higher level than if it were operating at its cash break-even level.
D. is operating at a higher level than if it were operating at its financial break-even
level.
E. is lowering the total net income of the firm.