Which of the following statements are true based on the historical record for
1926-2010?
I. Risk and potential reward are inversely related.
II. Risk-free securities produce a positive real rate of return each year.
III. Returns are more predictable over the short-term than they are over the long-term.
IV. Bonds are generally a safer investment than are stocks.
A. I only
B. IV only
C. II and III only
D. II and IV only
E. II, III, and IV only
Answer:
Which of the following relationships apply to a par value bond?
I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. II, III, and IV only
Answer:
Roger is a major shareholder in RB Industrial Supply. Currently, Roger is quite
unhappy with the direction the firm is headed and is rumored to be considering an
attempt to take over the firm by soliciting the votes of other shareholders. To head off
this potential attempt, the board of RB Industrial Supply has decided to offer Roger $35
a share for all the shares he owns in the firm. The current market value per share is $32.
This offer to purchase Roger’s shares is commonly referred to as:
A. a golden parachute.
B. standstill payments.
C. greenmail.
D. a poison pill.
E. a white knight.
Answer:
Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent.
The firm does not issue preferred stock. The pre-tax cost of debt is 9.8 percent. There
are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a
share. The current market risk premium is 8.5 percent and the current risk-free rate is
3.6 percent. This year, the firm paid an annual dividend of $1.10 a share and expects to
increase that amount by 2 percent each year. Using an average expected cost of equity,
what is the weighted average cost of capital?
A. 8.44 percent
B. 8.78 percent
C. 8.96 percent
D. 9.13 percent
E. 9.20 percent
Answer:
Which one of the following is probably the most successful means of finding venture
capital?
A. internet searches
B. Dutch auctions
C. newspaper advertisements
D. personal contacts
E. personal letters to venture capital firms
Answer:
Combined Communications is a new firm in a rapidly growing industry. The company
is planning on increasing its annual dividend by 15 percent a year for the next 4 years
and then decreasing the growth rate to 3.5 percent per year. The company just paid its
annual dividend in the amount of $0.20 per share. What is the current value of one share
of this stock if the required rate of return is 15.5 percent?
A. $1.82
B. $2.04
C. $2.49
D. $2.71
E. $3.05
Answer:
Chemical Mines has 5,000 shareholders and is preparing to elect two new board
members.
You do not own enough shares to personally control the elections but are determined to
oust the current leadership. Likewise, no other single shareholder owns sufficient shares
to personally control the outcome of the election. Which one of the following is the
most likely outcome of this situation given that some shareholders are happy with the
existing management?
A. negotiated settlement where each side is granted control over one of the open seats
B. protracted legal battle over control of the board of directors
C. arbitrated settlement where the arbitrator determines who will be elected to the board
D. control of the board decided without your influence
E. proxy fight for control of the board
Answer:
The present value of the following cash flow stream is $5,933.86 when discounted at 11
percent annually. What is the value of the missing cash flow?
A. $1,500
B. $1,750
C. $2,000
D. $2,250
E. $2,500
Answer:
Activities of a firm which require the spending of cash are known as:
A. sources of cash.
B. uses of cash.
C. cash collections.
D. cash receipts.
E. cash on hand.
Answer:
The Buck Store is considering a project that will require additional inventory of
$216,000 and will increase accounts payable by $181,000. Accounts receivable are
currently $525,000 and are expected to increase by 9 percent if this project is accepted.
What is the project’s initial cash flow for net working capital?
A. -$82,250
B. -$12,250
C. $12,250
D. $36,250
E. $44,250
Answer:
Home Care Providers is paying an annual dividend of $1.10 every other year. The last
dividend was paid two years ago. The firm will continue this policy until 3 more
dividend payments have been paid. One year after the last dividend normal payment,
the company plans to pay a final liquidating dividend of $40 per share. What is the
current market value of this stock if the required return is 17 percent?
A. $18.92
B. $20.74
C. $23.16
D. $24.14
E. $24.53
Answer:
Which of the following have been offered as factors contributing to the market crash of
1987?
I. requirement for only a 10 percent cash payment to purchase a stock
II. program trading
III. irrational investors
IV. preceeding bear market
A. I and III only
B. I and IV only
C. II and III only
D. I, II, and III only
E. I, II, and IV only
Answer:
Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925.
The nominal risk-free rate in Canada is 3 percent while it is 4 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. $0.005
B. $0.006
C. $0.008
D. $0.015
E. $0.018
Answer:
A firm should select the capital structure that:
A. produces the highest cost of capital.
B. maximizes the value of the firm.
C. minimizes taxes.
D. is fully unlevered.
E. equates the value of debt with the value of equity.
Answer:
Hollister & Hollister is considering a new project. The project will require $535,000 for
new fixed assets, $218,000 for additional inventory, and $39,000 for additional
accounts receivable. Short-term debt is expected to increase by $165,000. The project
has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value
over the life of the project. At the end of the project, the fixed assets can be sold for 20
percent of their original cost. The net working capital returns to its original level at the
end of the project. The project is expected to generate annual sales of $875,000 and
costs of $640,000. The tax rate is 31 percent and the required rate of return is 14
percent. What is the amount of the aftertax cash flow from the sale of the fixed assets at
the end of this project?
A. $35,496
B. $73,830
C. $104,400
D. $287,615
E. $344,520
Answer:
A corporate bond is quoted at a price of 103.16 and carries a 5.20 percent coupon. The
bond pays interest semiannually. What is the current yield on one of these bonds?
A. 4.24 percent
B. 5.04 percent
C. 5.36 percent
D. 5.62 percent
E. 5.66 percent
Answer:
Which one of the following is a suggested method of reducing a U.S. importer’s
short-run exposure to exchange rate risk?
A. entering a forward exchange agreement timed to match the invoice date
B. investing U.S. dollars when an order is placed and using the investment proceeds to
pay the invoice
C. exchanging funds on the spot market at the time an order is placed with a foreign
supplier
D. exchanging funds on the spot market at the time an order is received
E. exchanging funds on the spot market at the time an invoice is payable
Answer:
Which one of the following statements related to an income statement is correct?
A. Interest expense increases the amount of tax due.
B. Depreciation does not affect taxes since it is a non-cash expense.
C. Net income is distributed to dividends and paid-in surplus.
D. Taxes reduce both net income and operating cash flow.
E. Interest expense is included in operating cash flow.
Answer:
What is the net working capital to total assets ratio for 2012?
A. 24.18 percent
B. 36.82 percent
C. 45.49 percent
D. 51.47 percent
E. 65.83 percent
Answer:
A floor broker on the NYSE does which one of the following?
A. supervises the commission brokers for a financial firm
B. trades for his or her personal inventory
C. executes orders on behalf of a commission broker
D. maintains an inventory and takes the role of a specialist
E. is charged with maintaining a liquid, orderly market
Answer:
On a common-size balance sheet all accounts are expressed as a percentage of:
A. sales for the period.
B. the base year sales.
C. total equity for the base year.
D. total assets for the current year.
E. total assets for the base year.
Answer:
Which one of the following business types is best suited to raising large amounts of
capital?
A. sole proprietorship
B. limited liability company
C. corporation
D. general partnership
E. limited partnership
Answer:
Supernormal growth is a growth rate that:
A. is both positive and follows a year or more of negative growth.
B. exceeds a firm’s previous year’s rate of growth.
C. is generally constant for an infinite period of time.
D. is unsustainable over the long term.
E. applies to a single, abnormal year.
Answer:
Nadine’s Boutique has a 30 day accounts payable period. The firm has expected
quarterly sales of $1,100, $1,400, $1,600, and $2,100, respectively, for next year. The
quarterly cost of goods sold is equal to 68 percent of the next quarter’s sales. The firm
has a beginning accounts payable balance of $550 as of Quarter 1. What is the amount
of the projected cash disbursements for accounts payable for Quarter 3 of the next year?
Assume a year has 360 days.
A. $1,195
B. $1,208
C. $1,247
D. $1,315
E. $1,337
Answer:
A firm has net working capital of $640. Long-term debt is $4,180, total assets are
$6,230, and fixed assets are $3,910. What is the amount of the total liabilities?
A. $2,050
B. $2,690
C. $4,130
D. $5,590
E. $5,860
Answer:
An 8 percent corporate bond that pays interest semi-annually was issued last year.
Which two of the following most likely apply to this bond today if the current
yield-to-maturity is 7 percent?
I. a structure as an interest-only loan
II. a current yield that equals the coupon rate
III. a yield-to-maturity equal to the coupon rate
IV. a market price that differs from the face value
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only
Answer:
Brubaker & Goss has received requests for capital investment funds for next year from
each of its five divisions. All requests represent positive net present value projects. All
projects are independent. Senior management has decided to allocate the available
funds based on the profitability index of each project since the company has insufficient
funds to fulfill all of the requests. Management is following a practice known as:
A. scenario analysis.
B. sensitivity analysis.
C. leveraging.
D. hard rationing.
E. soft rationing.
Answer:
An operating lease has which of the following characteristics?
I. lessee has responsibility for the maintenance and insurance
II. lease payments cover the full cost of the asset
III. economic life of the asset exceeds the lease term
IV. lessee can cancel the lease prior to the expiration date
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I, II, and III only
Answer:
A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses
some of its cash to decrease its debt while maintaining its current equity and net
income. Which one of the following will decrease as a result of this action?
A. equity multiplier
B. total asset turnover
C. profit margin
D. return on assets
E. return on equity
Answer:
Crafter’s Supply purchased some fixed assets 2 years ago at a cost of $38,700. It no
longer needs these assets so it is going to sell them today for $25,000. The assets are
classified as 5-year property for MACRS. What is the net cash flow from this sale if the
firm’s tax rate is 30 percent?
A. $13,122.20
B. $18,576.00
C. $20,843.68
D. $23,072.80
E. $25,211.09
Answer: