Which one of the following statements is true regarding the period 1926-2014?
A. The returns on small-company stocks were less volatile than the returns on
large-company stocks.
B. The risk-free rate of return remained constant over the time period.
C. U.S. Treasury bills had a positive average real rate of return.
D. Bonds had an average rate of return that exceeded the average return on stocks.
E. The inflation rate was just as volatile as the return on long-term bonds.
Holiday Decor is an all-equity firm with a total market value of $347,000 and12,000
shares of stock outstanding. Management is considering issuing $48,000 of debt at an
interest rate of 7 percent and using the proceeds on a stock repurchase. As an all-equity
firm, management believes its earnings before interest and taxes (EBIT) will be
$33,000 if the economy is normal, $8,000 if it is in a recession, and $41,000 if the
economy booms. Ignore taxes. What will the EPS be if the economy falls into a
recession and the firm maintains its all-equity status?
A. $.75
B. $.67
C. $1.21
D. $1.50
E. $1.33
The DuPont identity can be used to help a financial manager determine the:
I. degree of financial leverage used by a firm.
II. operating efficiency of a firm.
III. utilization rate of a firm’s assets.
IV. rate of return on a firm’s assets.
A. II and III only
B. I and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Which of the following are inversely related to increases in a firm’s current assets?
I. Reorder costs
II. Shortage costs
III. Restocking costs
IV. Carrying costs
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, III, and IV only
A trader in Switzerland just agreed to trade Swiss francs for British pounds based on
today’s exchange rate. The trade is expected to settle tomorrow. What term best
describes this exchange?
A. Arbitrage transaction
B. Forward trade
C. Spot trade
D. Purchasing power parity
E. Interest rate parity
Which of these will tend to decrease the length of the credit period?
A. Decrease in default risk
B. Increase in the cost of the product
C. Increase in competition
D. Decrease in the size of the account
E. Decrease in turnover rate
Cookies and Cream has 5,000 shares of stock outstanding at a market price of $8.29 per
share. What will be the price per share after a stock dividend of 8 percent? Ignore taxes
and market imperfections.
A. $7.24
B. $7.68
C. $7.45
D. $7.96
E. $8.03
Alderson Metals is compiling a cash balance projection by quarter for next year. Which
one of the following adjustments to this projection will decrease the cumulative
surplus?
A. Reducing payroll costs from its current projection amount
B. Decreasing the accounts receivable period by changing the firm’s credit policy
effective the first of next year
C. Receiving more favorable credit terms from the firm’s suppliers
D. Increasing the dividend per share on the firm’s outstanding common stock
E. Refinancing the firm’s long-term debt at a lower interest rate
Black Stone Furnaces wants to build a new facility. The cost of capital for this
investment is primarily dependent on which one of the following?
A. The firm’s overall source of funds
B. Source of the funds used to build the facility
C. Current tax rate
D. The nature of the investment
E. Firm’s historical average rate of return
Fun Stores has to restock a popular electronic game every three days as it completely
sells out in that period of time. What is the inventory turnover rate for this game?
A. 115.00 times
B. 105.25 times
C. 99.68 times
D. 118.33 times
E. 121.67 times
Which one of the following can be defined as a benefit-cost ratio?
A. Net present value
B. Internal rate of return
C. Profitability index
D. Accounting rate of return
E. Modified internal rate of return
What is the net present value of a project with the following cash flows if the discount
rate is 15 percent?
A. -$2,687.98
B. -$1,618.48
C. $1,044.16
D. $1,035.24
E. $9,593.19
The economic order quantity approach states that inventory order sizes should be
determined by:
A. dividing annual item sales by the carrying cost per item and multiplying by 2.
B. computing the average number of items sold each month.
C. equating restocking costs with carrying costs.
D. dividing the inventory into various groups based on the value per item.
E. computing the amount of the derived demand.
Suppose you could buy 1,115 South Korean won or 100 Pakistani rupees last year for
$1. Today, $1 will buy you 1,113 won or 102 rupees. Which one of the following
occurred over the past year?
A. The dollar appreciated against the won.
B. The dollar depreciated against the rupee.
C. The dollar appreciated against both the won and the rupee.
D. The won depreciated against the dollar.
E. The rupee depreciated against the dollar.
You are planning an extended trip to India and have located some housing that you can
lease for 37,250 rupees per month. What is the cost per month in U.S. dollars if the
exchange rate is Rs1 = $.01606?
A. $1,208.15
B. $598.24
C. $1,311.27
D. $695.35
E. $709.30
The graphical representation of the sum of the carrying costs and the opportunity costs
of a credit policy is called the:
A. aging report.
B. economic credit function.
C. optimal credit curve.
D. credit analysis graph.
E. credit cost curve.
Lew has $3,600 that he wants to invest for 5 years. He can invest this amount at his
credit union and earn 2.2 percent simple interest. Or, he can open an account at
Compass Bank and earn 2.15 percent interest, compounded annually. If he decides to
invest at Compass Bank for 5 years, he will:
A. earn $6 more than if he had invested with his credit union.
B. earn $8 more than if he had invested with his credit union.
C. earn the same amount as if he had invested with the credit union.
D. have a total balance of $3,680 in his account after one year.
E. have a total balance of $4,012 in his account after 5 years.
Cromwell’s Interiors is considering a project that is equally as risky as the firm’s current
operations. The firm has a cost of equity of 15.4 percent and a pretax cost of debt of 8.9
percent. The debt-equity ratio is .46 and the tax rate is 34 percent. What is the cost of
capital for this project?
A. 11.97 percent
B. 12.40 percent
C. 11.02 percent
D. 11.62 percent
E. 12.38 percent
Which one of the following is the equity risk arising from the capital structure selected
by a firm?
A. Strategic risk
B. Financial risk
C. Liquidity risk
D. Industry risk
E. Business risk
Which of the following characteristics will tend to cause a firm to adopt a more liberal
credit policy?
I. Repeat customers
II. Excess capacity
III. High variable costs
IV. Limited competition
A. I and II only
B. III and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Flour Mills is an all-equity firm with a total market value of $891,860. The firm has
38,000 shares of stock outstanding. Management is considering issuing $275,000 of
debt at an interest rate of 7.5 percent and using the proceeds on a stock repurchase.
Ignore taxes. How many shares can the firm repurchase if it issues the debt securities?
(Round the number of shares repurchased down to the nearest whole share.)
A. 11,717 shares
B. 11,618 shares
C. 11,647 shares
D. 11,656 shares
E. 11,699 shares
Which one of the following is the date on which the board of directors agrees to pay a
dividend and passes a resolution to do so?
A. Date of record
B. Ex-dividend date
C. Payment date
D. Declaration date
E. Public announcement date
All of the following investors generally receive a tax break on dividend income with the
exception of:
A. corporate shareholders.
B. pension funds.
C. trust funds.
D. endowment funds.
E. individuals.
Assume the current spot rate between the UK and the U.S. is £.6402 per $1. The
expected inflation rate in the U.S. is 2.8 percent. The expected inflation rate in the UK
is 2.4 percent. If relative purchasing power parity exists, what will the exchange rate be
two years from now?
A. £.6549/$1
B. £.6432/$1
C. £.6351/$1
D. £.6382/$1
E. £.6453/$1
Which one of the following is generally considered to be the best form of analysis if
you have to select a single method to analyze a variety of investment opportunities?
A. Payback
B. Profitability index
C. Accounting rate of return
D. Internal rate of return
E. Net present value
Which one of the following is a correct statement, all else held constant?
A. The present value is inversely related to the future value.
B. The future value is inversely related to the period of time.
C. The period of time is directly related to the interest rate.
D. The present value is directly related to the interest rate.
E. The future value is directly related to the interest rate.
Thrill Rides is considering adding a new roller coaster to its amusement park. The
addition is expected to increase its overall ticket sales. In particular, the company
expects to sell more tickets for its current roller coaster and experience extremely high
demand for its new coaster. Sales for its boat ride are expected to decline but food and
beverage sales are expected to increase significantly. All of the following are side
effects associated with the new roller coaster with the exception of the:
A. increased food sales.
B. additional sales for the existing coaster.
C. increased food costs.
D. reduced sales for the boat ride.
E. ticket sales for the new coaster.
Debbie’s Cookies has a return on assets of 12.6 percent and a cost of equity of 14.8
percent. What is the pretax cost of debt if the debt-equity ratio is .38? Ignore taxes.
A. 5.87 percent
B. 95.29 percent
C. 9.04 percent
D. 7.31 percent
E. 6.81 percent
The relationship between nominal returns, real returns, and inflation is referred to as
the:
A. call premium.
B. Fisher effect.
C. conversion ratio.
D. spread.
E. current yield.
Baker’s Supply imposes a payback cutoff of 3.5 years for its international investment
projects. If the company has the following two projects available, which project(s), if
either, should it accept?
A. Reject both Projects A and B
B. Accept Project A but not Project B
C. Accept Project B but not Project A
D. Both Project A and B are acceptable but you can select only one project
E. Accept both Projects A and B
Donut Delites has a beta of 1.06, a dividend growth rate of 1.2 percent, a stock price of
$12a share, and an expected annual dividend of $.68 per share next year. The market
rate of return is 11.4 percent and the risk-free rate is 3.8 percent. What is the firm’s cost
of equity?
A. 7.74 percent
B. 9.36 percent
C. 9.30 percent
D. 9.72 percent
E. 7.46 percent
A negative cash flow to stockholders indicates a firm:
A. had a net loss for the year.
B. had a positive cash flow to creditors.
C. paid dividends that exceeded the amount of the net new equity.
D. repurchased more shares than it sold.
E. received more from selling stock than it paid out to shareholders.
Jamie is analyzing the estimated net present value of a project under various conditions
by revising the sales quantity, sales price, and the cost estimates. The type of analysis
that Jamie is doing is best described as:
A. sensitivity analysis.
B. erosion planning.
C. scenario analysis.
D. benefit planning.
E. opportunity evaluation.