You just settled an insurance claim. The settlement calls for increasing payments over a
10-year period. The first payment will be paid one year from now in the amount of
$10,000. The following payments will increase by 4.5 percent annually. What is the
value of this settlement to you today if you can earn 8 percent on your investments?
A. $76,408.28
B. $80,192.76
C. $82,023.05
D. $84,141.14
E. $85,008.16
Answer:
When Chris balanced her business checkbook, she had an adjusted bank balance of
$11,418. She had 2 outstanding deposits worth $879 each and 11 checks outstanding
with a total value of $3,6 What is the amount of the collection float on this account?
A. -$1,890
B. $1,758
C. $3,648
D. $5,406
E. $6,012
Answer:
You are considering the following two mutually exclusive projects. Both projects will
be depreciated using straight-line depreciation to a zero book value over the life of the
project. Neither project has any salvage value.
Should you accept or reject these projects based on net present value analysis?
A. accept Project A and reject Project B
B. reject Project A and accept Project B
C. accept both Projects A and B
D. reject both Projects A and B
E. You cannot make this decision based on net present value analysis.
Answer:
Samuelson Electronics has a required payback period of three years for all of its
projects. Currently, the firm is analyzing two independent projects. Project A has an
expected payback period of 2.8 years and a net present value of $6,800. Project B has
an expected payback period of 3.1 years with a net present value of $28,400. Which
projects should be accepted based on the payback decision rule?
A. Project A only
B. Project B only
C. Both A and B
D. Neither A nor B
E. Answer cannot be determined based on the information given.
Answer:
Which one of the following is a primary market transaction?
A. sale of currently outstanding stock by a dealer to an individual investor
B. sale of a new share of stock to an individual investor
C. stock ownership transfer from one shareholder to another shareholder
D. gift of stock from one shareholder to another shareholder
E. gift of stock by a shareholder to a family member
Answer:
Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs
$8.6 million to buy land and establish its operations. Currently, the firm has 540,000
shares of stock outstanding at a market price per share of $34.80. If the firm decides to
raise the needed capital through a rights offering, one right will be issued for each share
of stock. The subscription price will be set at $33 a share. How many rights will a
shareholder need to purchase one new share of stock in this offering?
A. 2.07 rights
B. 2.17 rights
C. 2.22 rights
D. 2.50 rights
E. 2.67 rights
Answer:
Which of the following statements are correct?
I. Many professional fund managers are paid well but fail to outperform as expected.
II. Professional fund managers that have tenures in excess of ten years, tend to
consistently outperform the market on a long-term basis.
III. If a market is truly efficient, then all investments in that market are zero net present
value opportunities.
IV. Actively managing a fund appears to be the key to outperforming the market.
A. I and III only
B. II and IV only
C. II and III only
D. I, II, and III only
E. I, II, III, and IV
Answer:
Travis owns a stock that is currently valued at $45.80 a share. He is concerned that the
stock price may decline so he just purchased a put option on the stock with an exercise
price of $45. Which one of the following terms applies to the strategy Travis is using?
A. put-call parity
B. covered call
C. protective put
D. straddle
E. strangle
Answer:
Outdoor Living has agreed to be acquired by New Adventures for $48,000 worth of
New Adventures stock. New Adventures currently has 8,000 shares of stock outstanding
at a price of $32 a share. Outdoor Living has 1,700 shares outstanding at a price of $43
a share. The incremental value of the acquisition is $21,000. What is the value of the
merged firm?
A. $85,500
B. $256,000
C. $277,000
D. $320,500
E. $350,100
Answer:
If a firm does not expect to owe taxes for a few years and needs some equipment, the
firm should:
A. lease the equipment and retain the tax benefits.
B. lease the equipment with the lessor retaining the tax ownership of the asset.
C. borrow the money to buy the asset and then depreciate it using MACRS
depreciation.
D. buy the equipment with cash and depreciate it using MACRS.
E. buy the equipment and depreciate it straight-line over the life of the asset.
Answer:
Charlie’s Chicken has a debt-equity ratio of 2.05. Return on assets is 9.2 percent, and
total equity is $560,000. What is the net income?
A. $105,616
B. $148,309
C. $157,136
D. $161,008
E. $164,909
Answer:
The specified date on which the principal amount of a bond is payable is referred to as
which one of the following?
A. coupon date
B. yield date
C. maturity
D. dirty date
E. clean date
Answer:
Purvis Lawn Products has 18,000 shares of stock outstanding at a market price of $5.50
a share. What will the market price per share be if the company does a 1-for-4 reverse
stock split?
A. $1.38
B. $5.50
C. $11.00
D. $16.50
E. $22.00
Answer:
One year ago, Deltona Motor Parts deposited $16,500 in an investment account for the
purpose of buying new equipment three years from today. Today, it is adding another
$12,000 to this account. The company plans on making a final deposit of $20,000 to the
account one year from today. How much will be available when it is ready to buy the
equipment, assuming the account pays 5.5 interest?
A. $53,408
B. $53,919
C. $56,211
D. $56,792
E. $58,021
Answer:
You just won a national sweepstakes! For your prize, you opted to receive never-ending
payments. The first payment will be $12,500 and will be paid one year from today.
Every year thereafter, the payments will increase by 3.5 percent annually. What is the
present value of your prize at a discount rate of 8 percent?
A. $166,666.67
B. $248,409.19
C. $277,777.78
D. $291,006.12
E. $300,000.00
Answer:
Amy has been investing in stocks so she can accumulate sufficient money to purchase
her own home. These savings are currently valued at $82,500. As recently as last
month, her savings were worth in excess of $110,000. Today, Amy found the perfect
house. She knows she can withdraw her savings to pay on this house and borrow the
remaining balance from her father at zero percent interest. However, Amy is refusing
now to buy any house until her savings increase in value back to their $110,000
previous valuation. Amy is displaying which one of the following behaviors?
A. representativeness heuristic
B. loss aversion
C. house money effect
D. underconfidence
E. confirmation bias
Answer:
Four years ago, Velvet Purses purchased a mailing machine at a cost of $176,000. This
equipment is currently valued at $64,500 on today’s balance sheet but could actually be
sold for $58,900. This is the only fixed asset the firm owns. Net working capital is
$57,200 and long-term debt is $111,300. What is the book value of shareholders’
equity?
A. $4,800
B. $7,700
C. $10,400
D. $222,600
E. $233,000
Answer:
Technical Sales, Inc. has 6.6 percent coupon bonds on the market with 9 years left to
maturity. The bonds make semiannual payments and currently sell for 92.5 percent of
par. What is the effective annual yield?
A. 7.34 percent
B. 7.40 percent
C. 7.52 percent
D. 7.93 percent
E. 8.60 percent
Answer:
Your local travel agent is advertising an upscale winter vacation package for travel three
years from now to Antarctica. The package requires that you pay $20,000 today,
$35,000 one year from today, and a final payment of $45,000 on the day you depart
three years from today. What is the cost of this vacation in today’s dollars if the discount
rate is 9.75 percent?
A. $85,931
B. $88,695
C. $90,219
D. $90,407
E. $92,478
Answer:
Home Canning Products common stock sells for $41.00 a share and has a market rate of
return of 12.8 percent. The company just paid an annual dividend of $1.15 per share.
What is the dividend growth rate?
A. 8.29 percent
B. 8.45 percent
C. 9.23 percent
D. 9.67 percent
E. 9.72 percent
Answer:
The delta of a call option on a firm’s assets is 0.727. This means that a $195,000 project
will increase the value of equity by:
A. $141,765.
B. $180,219.
C. $211,481.
D. $264,909.
E. $268,226.
Answer:
What was the highest annual rate of inflation during the period 1926-2010?
A. between 0 and 3 percent
B. between 3 and 5 percent
C. between 5 and 10 percent
D. between 10 and 15 percent
E. between 15 and 20 percent
Answer:
A bond that pays interest annually yielded 7.47 percent last year. The inflation rate for
the same period was 4 percent. What was the actual real rate of return on this bond for
last year?
A. 2.19 percent
B. 2.25 percent
C. 3.34 percent
D. 3.41 percent
E. 3.49 percent
Answer:
The Sports Store has a $100,000 line of credit with City Bank. The loan agreement
requires that 2 percent of the unused portion of the credit line be deposited in a
non-interest bearing account as a compensating balance. The interest rate on the
borrowed funds is 1.75 percent per quarter. The Sport Store’s short-term investments are
paying 1.5 percent per quarter. What is the effective annual interest rate on the line of
credit if The Sports Store borrows the entire $100,000 for one year? Assume any funds
borrowed or invested use compound interest.
A. 7.19 percent
B. 7.76 percent
C. 8.00 percent
D. 8.08 percent
E. 8.14 percent
Answer:
The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and
interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm
spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the
amount of the cash flow to stockholders?
A. $5,100
B. $7,830
C. $18,020
D. $19,998
E. $20,680
Answer:
When using the equivalent annual cost as a basis for deciding which equipment should
be purchased, the equipment under consideration must fit which two of the following
criteria?
I. differing productive lives
II. differing manufacturers
III. required replacement at end of economic life
IV. differing initial cost
A. I and II
B. I and III
C. I and IV
D. II and IIII
E. II and IV
Answer:
Georga’s Restaurants has 5,000 bonds outstanding with a face value of $1,000 each and
a coupon rate of 8.25 percent. The interest is paid semi-annually. What is the amount of
the annual interest tax shield if the tax rate is 37 percent?
A. $152,625.00
B. $162,411.90
C. $187,750.00
D. $210,420.00
E. $233,887.50
Answer:
A 2/10, net 30 credit policy:
A. is an expensive form of short-term credit if a buyer foregoes the discount.
B. provides cheap financing to the buyer for 30 days.
C. is an inexpensive means of reducing the seller’s collection period if every customer
takes the discount.
D. tends to have little effect on the seller’s collection period.
E. tends to increase a firm’s investment in receivables as compared to a straight net 30
policy.
Answer:
Mutually exclusive projects are best defined as competing projects which:
A. would commence on the same day.
B. have the same initial start-up costs.
C. both require the total use of the same limited resource.
D. both have negative cash outflows at time zero.
E. have the same life span.
Answer:
Which one of the following correctly states one of the conditions established by the IRS
for a lease to be considered valid for tax purposes?
A. The lease should have high payments at the beginning of the lease period and low
payments at the end of the lease period.
B. Any renewal option should be based on a value which is less than the fair market
value of the asset at the time of renewal.
C. The term of the lease must be less than 80 percent of the economic life of the asset.
D. The lessee should have the option to purchase the asset at a discounted price at the
end of the lease term.
E. The lessor must have a reasonable expectation of earning an aftertax profit.
Answer:
A zero coupon bond with a face value of $1,000 is issued with an initial price of
$212.56. The bond matures in 22 years. What is the implicit interest, in dollars, for the
first year of the bond’s life?
A. $14.72
B. $15.50
C. $15.90
D. $16.63
E. $16.89
Answer:
Which one of the following statements is correct concerning the issuance of long-term
debt?
A. A direct long-term loan has to be registered with the SEC.
B. Direct placement debt tends to have more restrictive covenants than publicly issued
debt.
C. Distribution costs are lower for public debt than for private debt.
D. It is easier to renegotiate public debt than private debt.
E. Wealthy individuals tend to dominate the private debt market.
Answer:
Which of the following should be included in the analysis of a new product?
I. money already spent for research and development of the new product
II. reduction in sales for a current product once the new product is introduced
III. increase in accounts receivable needed to finance sales of the new product
IV. market value of a machine owned by the firm which will be used to produce the new
product
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Answer: