The hypothesis that market prices reflect all publicly available information is called
_____ form efficiency.
A. open
B. strong
C. semistrong
D. weak
E. stable
Answer:
Denise will receive annual payments of $10,000 for the next 25 years. The discount rate
is 6.8 percent. What is the difference in the present value of these payments if they are
paid at the beginning of each year rather than at the end of each year?
A. $8,069
B. $9,217
C. $9,706
D. $8,382
E. $8,850
Answer:
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 20 percent next year and then decreasing
the growth rate to a constant 5 percent per year. The company just paid its annual
dividend in the amount of $1 per share. What is the current value of a share if the
required rate of return is 14 percent?
A. $13.28
B. $13.42
C. $13.33
D. $13.19
E. $13.24
Answer:
Joshua Industries is considering a new project with cash inflows of $478,000 for the
indefinite future. Cash costs are 68 percent of the cash inflows. The initial cost of the
investment is $685,000. The tax rate is 34 percent and the unlevered cost of equity is
14.2 percent. The firm is financing $200,000 of the project cost with debt. What is the
adjusted present value of the project?
A. $102,429.67
B. $98,311.16
C. $93,940.85
D. $32,408.18
E. $25,940.85
Answer:
What is the cash flow to creditors for 2015?
A.$120 million
B.$50 million
C.$120 million
D.$220 million
E.$170 million
Answer:
Marguerite is reviewing a project with projected sales of 1,400 units a year, a cash flow
of $39 a unit and a 3-year project life. The initial cost of the project is $94,000. The
relevant discount rate is 14 percent. Marguerite has the option to abandon the project
after one year at which time she feels she could sell the project for $63,000. At what
quantity of sales per year should she be willing to abandon the project after the first
year?
A. 899 units
B. 981 units
C. 967 units
D. 1,199 units
E. 1,006 units
Answer:
A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at
par will have a market price of _____ and interest payments in the amount of _____
each.
A. $1,006; $60
B. $1,060; $30
C. $1,060; $60
D. $1,000; $30
E. $1,000; $60
Answer:
Which one of these statements is correct?
A.Pretax income is equal to net income minus taxes.
B.The addition to retained earnings is equal to net income plus dividends.
C.Operating income is equal to operating revenue minus cost of goods sold.
D.Only current taxes are included in the tax expense.
E.Earnings per share can be negative but dividends per share cannot.
Answer:
Which one of these stock valuation methods is used for a non-dividend paying firm that
is experiencing accounting losses?
A. price-earnings ratio
B. constant-dividend model
C. price-sales ratio
D. differential-growth model
E. constant-growth model
Answer:
Thompson’s Jet Skis has operating cash flow of $11,618. Depreciation is $2,345 and
interest paid is $395. A net total of $485 was paid on long-term debt. The firm spent
$6,180 on fixed assets and decreased net working capital by $420. What is the cash
flow of the firm?
A.$5,858
B.$8,203
C.$9,228
D.$5,018
E.$7,363
Answer:
Determining the optimal credit policy is based on a trade-off between the carrying costs
of granting credit and the:
A. lost sales from refusing credit.
B. cash flows delayed from granting credit.
C. opportunity cost of the delayed payment.
D. variable costs associated with the delayed payment.
E. present value of uncollected sales.
Answer:
Which one of these statements is true regarding promissory notes?
A. Most trade credit arrangements use promissory notes.
B. Promissory notes are used when firms do not anticipate a problem with collections.
C. Promissory notes usually involve no cash discount.
D. A promissory note must be signed and delivered prior to goods being shipped.
E. Promissory notes are used for small orders only.
Answer:
What is the annual percentage rate on a loan that charges interest of 1.65 percent per
quarter?
A. 6.50%
B. 6.45%
C. 6.54%
D. 6.60%
E. 6.72%
Answer:
The inventory turnover for the Lambkin Company was 9.4 times and its days’ sales in
receivables was 46. What is the operating cycle given a 365-day year?
A. 45.63 days
B. 55.40 days
C. 63.25 days
D. 84.83 days
E. 74.29 days
Answer:
Relative purchasing power parity:
A. states that identical items should cost the same regardless of the currency used to
make the purchase.
B. relates differences in inflation rates to changes in exchange rates.
C. compares the real rate of return to the nominal rate of return.
D. looks at the factors that determine the changes in interest rates.
E. analyzes the changes in inflation rates to determine the cause.
Answer:
The risk premium for an individual security is computed by:
A. multiplying the security’s beta by the market risk premium.
B. multiplying the security’s beta by the risk-free rate of return.
C. adding the risk-free rate to the security’s expected return.
D. dividing the market risk premium by the quantity (1 + Beta).
E. dividing the market risk premium by the beta of the security.
Answer:
A financially solid firm is most apt to have a quarterly cash shortfall when it encounters
a:
A. period of relatively constant sales.
B. major fixed asset expenditure.
C. period of rising interest rates.
D. period of declining interest rates.
E. period of increased cash collections.
Answer:
Firms hold cash, in part, to satisfy compensating balance requirements. Compensating
balances are cash balances held at:
A. the firm in excess of its transactions needs.
B. the firm that are below that of its transactions needs.
C. the firm in excess of its cash inflows.
D. commercial banks to pay implicitly for bank services.
E. commercial banks as emergency funds.
Answer:
Last week, you sold a futures contract on 5,000 troy ounces of silver at a settle price of
$16.59. Today, your contract closed at the daily settle price of $16.62. What amount
will you receive from the contract purchaser for the delivery? Assume yesterday’s settle
price was $16.66.
A. $82,950
B. “$350
C. $300
D. $83,100
E. “$300
Answer:
Nu Tech, Inc. is a technology firm with good growth prospects. The firm wishes to do
something to acknowledge the loyalty of its shareholders but needs all of its available
cash to fund its rapid growth. The market price of its stock is currently trading in the
upper end of its preferred trading range. The firm could consider:
A. a liquidating dividend.
B. an extra cash dividend.
C. a reverse stock split.
D. a stock dividend.
E. a cash distribution.
Answer:
An analysis of what happens to the estimate of a project’s net present value when you
examine a vast number of different likely economic situations is called _____ analysis.
A. forecasting
B. scenario
C. sensitivity
D. simulation
E. break-even
Answer:
The Boat Works currently produces boat sails and is considering expanding its
operations to include awnings. The expansion would require the use of land the firm
purchased three years ago at a cost of $197,000 that is currently valued at $209,500.
The expansion could use some equipment that is currently sitting idle if $7,500 of
modifications were made to it. The equipment originally cost $387,500 five years ago,
has a current book value of $132,700, and a current market value of $139,000. Other
capital purchases costing $520,000 will also be required. What is the value of the
opportunity costs that should be included in the initial cash flow for the expansion
project?
A. $425,000
B. $485,000
C. $329,700
D. $348,500
E. $537,200
Answer:
A project has an initial cost of $480,000, projected cash inflows of $311,500, cash costs
of $214,650, a tax rate of 35 percent, and a weighted average cost of capital of 13.8
percent. What is the net present value of the project?
A. $24,411.07
B. $15,494.02
C. $1,003.70
D. -$16,497.28
E. -$23,822.46
Answer:
The use of personal borrowing to change the overall amount of financial leverage to
which an individual is exposed is called:
A. homemade leverage.
B. dividend recapture.
C. the weighted average cost of capital.
D. private debt placement.
E. personal offset.
Answer:
Which three factors are generally considered to be the most important when
determining a target debt-equity ratio?
A. taxes, asset types, and inflation rate
B. asset types, current operating income, and inflation rates
C. taxes, current operating income, and future operating income
D. taxes, asset types, and uncertainty of operating income
E. interest rates, inflation rates, and tax rates
Answer:
Which one of these statements is true?
A. If virtually all projects have embedded options, then ignoring these options does not
affect the value of the projects.
B. Every business will benefit if it exercises its expansion option.
C. Abandoning a project will lower the project’s value.
D. Start-up businesses do not have any options until they have succeeded for one year.
E. Every business idea has at least two possible outcomes.
Answer:
The elements that cause problems with the use of the IRR in projects that are mutually
exclusive are referred to as the:
A. discount rate and scale problems.
B. timing and scale problems.
C. discount rate and timing problems.
D. scale and reversing flow problems.
E. timing and reversing flow problems.
Answer:
The acronym APV stands for:
A. applied present value.
B. all-purpose variable.
C. accepted project verified.
D. adjusted present value.
E. applied projected value.
Answer:
Which statement expresses all accounts as a percentage of total assets?
A. pro forma balance sheet
B. common-size income statement
C. statement of cash flows
D. pro forma income statement
E. common-size balance sheet
Answer:
Jack’s Construction Co. has 80,000 bonds outstanding that are selling at par value.
Bonds with similar characteristics are yielding 8.6 percent. The company also has 4
million shares of common stock outstanding. The stock has a beta of 1.1 and sells for
$40 a share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is
8 percent. Jack’s tax rate is 34 percent. What is Jack’s weighted average cost of capital?
A. 10.10%
B. 11.39%
C. 10.43%
D. 10.65%
E. 11.47%
Answer:
Empirical evidence suggests that:
A. prices may not reflect their true underlying value.
B. financial managers lack any ability to correctly time stock repurchases.
C. managers may profitably speculate in foreign currency.
D. managers cannot boost stock prices through creative accounting.
E. wise accounting choices can impact a firm’s stock price.
Answer:
An agreement to exchange currencies at some point in the future using an exchange rate
agreed upon today is called a _____ trade.
A. spot
B. forward
C. swap
D. floating
E. triangle
Answer:
You sold a put contract on EDF stock at an option price of $.25 and an exercise price of
$22.50. The option expires today when EDF stock is selling for $21.70 a share.
Ignoring transactions costs and taxes, what is your total profit on this investment?
A. -$105
B. -$55
C. $25
D. $55
E. $0
Answer:
Schaeffer Shippers announced on May 1 that it will pay a dividend of $1.20 per share
on June 15 to all holders on record as of May 31st. The firm’s stock price closed today
at $42 a share. Assume all investors are in the 28 percent tax bracket. If tomorrow is the
ex-dividend date, what would you expect the opening price to be tomorrow morning
assuming all else is held constant?
A. $42.00
B. $43.20
C. $41.14
D. $42.94
E. $41.66
Answer:
The Mesa Bank is offering your company the use of their lockbox services. They
estimate that you can reduce your average mail time by 2 days and they can save you a
combined clearing and processing time of 1.5 days by putting the checks into the
clearing system sooner. The firm receives 320 checks a day on with an average value of
$2,500 each. The current T-Bill rate is .015 percent per day. Assume a 365-day year.
What is the annual amount of income the bank can earn if it installs this service?
A. $15,300
B. $14,800
C. $16,400
D. $153,300
E. $148,700
Answer: