Steve just computed the present value of a $10,000 bonus he will receive in the future.
The interest rate he used in this process is referred to as which one of the following?
A. current yield
B. effective rate
C. compound rate
D. simple rate
E. discount rate
Answer:
If a firm sells its crown jewels when threatened with a takeover attempt, the firm is
employing a strategy commonly referred to as a _____ strategy.
A. scorched earth
B. shark repellent
C. bear hug
D. white knight
E. lockup
Answer:
Which one of the following actions will provide you with the right, but not the
obligation, to sell the underlying asset at a specified price during a specified period of
time?
A. purchase of a call option
B. sale of a call option
C. purchase of a put option
D. sale of a put option
E. swap
Answer:
What is the amount of dividends paid in 2011?
A. $0
B. $574
C. $800
D. $2,013
E. $2,174
Answer:
Assume that $1 is equal to ¥98 and also equal to C$1.21. Based on this, you could say
that C$1 is equal to: C$1(¥98/C$1.21) = ¥80.99. The exchange rate of C$1 = ¥80.99 is
referred to as the:
A. open exchange rate.
B. cross-rate.
C. backward rate.
D. forward rate.
E. interest rate.
Answer:
What is the net working capital for 2011?
A. -$175
B. $338
C. $1,262
D. $1,945
E. $4,941
Answer:
Terry is calculating the present value of a bonus he will receive next year. The process
he is using is called:
A. growth analysis.
B. discounting.
C. accumulating.
D. compounding.
E. reducing.
Answer:
The external financing need:
A. will limit growth if unfunded.
B. is unaffected by the dividend payout ratio.
C. must be funded by long-term debt.
D. ignores any changes in retained earnings.
E. considers only the required increase in fixed assets.
Answer:
A new coat costs 3,900 Russian rubles. How much will the identical coat cost in Euros
if absolute purchasing power parity exists and the following exchange rates apply?
A. €97.23
B. €112.97
C. €119.05
D. €181.27
E. €183.99
Answer:
Which one of the following best illustrates an error which you, as a manager, might
make due to overconfidence?
A. overestimating the best outcome expected from a project while underestimating the
possibility of a less favorable outcome
B. assuming that a new project will be profitable since similar projects in the past were
successful
C. assuming that your expectations of the future outcome from a project are more
accurate than the expectations of others within your organization
D. listening to the advice of subordinates with whom you agree while ignoring the
advice of subordinates with whom you tend to disagree
E. downplaying the cost of future failure of an existing project since the project has
already paid for itself
Answer:
Decisions made by financial managers should primarily focus on increasing which one
of the following?
A. size of the firm
B. growth rate of the firm
C. gross profit per unit produced
D. market value per share of outstanding stock
E. total sales
Answer:
Decline, Inc. is trying to determine its cost of debt. The firm has a debt issue
outstanding with 15 years to maturity that is quoted at 107 percent of face value. The
issue makes semiannual payments and has an embedded cost of 9 percent annually.
What is the aftertax cost of debt if the tax rate is 39 percent?
A. 4.99 percent
B. 5.90 percent
C. 6.17 percent
D. 7.37 percent
E. 7.42 percent
Answer:
Parkway Express needs $318,000 a week to pay bills. The standard deviation of the
weekly disbursements is $31,000. The firm has established a lower cash balance limit
of $60,000. The applicable interest rate is 4.5 percent and the fixed cost of transferring
funds is $65. Based on the BAT model, what is the opportunity cost of holding cash?
A. $3,873
B. $4,918
C. $5,207
D. $109,283
E. $110,440
Answer:
High Point Hotel (HPH) has $165,000 in accounts receivable. To finance a major
purchase, the company assigns these receivables to Cross Town Bank. Which one of the
following statements correctly describes this transaction?
A. HPH will immediately receive $165,000 and will have no further obligation related
to these receivables.
B. HPH will receive some amount of cash immediately while maintaining full
responsibility for any uncollected receivables.
C. Cross Town Bank accepts full responsibility for the collection of the accounts
receivables and, in exchange, immediately pays HPH a discounted value for its
receivables.
D. Cross Town Bank accepts full responsibility for collecting the accounts receivables
and pays HPH a discounted price for the accounts collected after the normal collection
period has elapsed.
E. HPH receives the full amount of its receivables upon assignment but must reimburse
Cross Town Bank for any uncollected account.
Answer:
Firm A is being acquired by Firm B for $54,000 worth of Firm B stock. The incremental
value of the acquisition is $5,600. Firm A has 2,400 shares of stock outstanding at a
price of $19 a share. Firm B has 2,700 shares of stock outstanding at a price of $50 a
share. What is the actual cost of the acquisition using company stock?
A. $50,509
B. $52,276
C. $53,200
D. $56,780
E. $60,600
Answer:
The weighted average cost of capital for a firm is the:
A. discount rate which the firm should apply to all of the projects it undertakes.
B. rate of return a firm must earn on its existing assets to maintain the current value of
its stock.
C. coupon rate the firm should expect to pay on its next bond issue.
D. minimum discount rate the firm should require on any new project.
E. rate of return shareholders should expect to earn on their investment in this firm.
Answer:
Southern Shores is considering a project that has an initial cost today of $13,000. The
project has a two-year life with cash inflows of $7,500 a year. Should the firm opt to
wait one year to commence this project, the initial cost will increase by 5 percent and
the cash inflows will increase to $8,500 a year. What is the value of the option to wait if
the applicable discount rate is 12 percent?
A. $614.52
B. $721.56
C. $963.40
D. $967
E. $1,021.66
Answer:
Which one of the following is the relationship between the percentage change in
operating cash flow and the percentage change in quantity sold?
A. degree of sensitivity
B. degree of operating leverage
C. accounting break-even
D. cash break-even
E. contribution margin
Answer:
Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200
in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for
the year. The depreciation was $76,400. What is the average tax rate?
A. 32.83 percent
B. 33.33 percent
C. 38.17 percent
D. 43.39 percent
E. 48.87 percent
Answer:
Selling an option is generally more valuable than exercising the option because of the
option’s:
A. riskless value.
B. intrinsic value.
C. standard deviation.
D. exercise price.
E. time premium.
Answer:
Metal Products Co. has an inventory period of 53 days, an accounts payable period of
68 days, and an accounts receivable turnover rate of 18. What is the length of the cash
cycle?
A. 3.00 days
B. 5.28 days
C. 26.28 days
D. 71.00 days
E. 73.28 days
Answer:
Standard deviation measures which type of risk?
A. total
B. nondiversifiable
C. unsystematic
D. systematic
E. economic
Answer:
Which one of the following refers to the ability of shareholders to undo a firm’s
dividend policy and create an alternative dividend policy by reinvesting dividends or
selling shares of stock?
A. perfect foresight model
B. personalization
C. recapitalization
D. offsetting leverage
E. homemade dividend policy
Answer:
Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued
by Winston Industries. The 11.6 percent is referred to as which one of the following?
A. coupon rate
B. face rate
C. call rate
D. yield to maturity
E. interest rate
Answer:
Fourteen years ago, your parents set aside $7,500 to help fund your college education.
Today, that fund is valued at $26,180. What rate of interest is being earned on this
account?
A. 7.99 percent
B. 8.36 percent
C. 8.51 percent
D. 9.34 percent
E. 10.06 percent
Answer:
Which one of the following is a direct result of a 2-for-1 stock split?
A. a 100 percent increase in the number of shareholders
B. a 100 percent increase in the common stock account balance
C. a 100 percent decrease in the stock price
D. a 50 percent increase in the number of shares outstanding
E. a 50 percent decrease in the par value per share
Answer:
Mountaintop Inns, a Kentucky company, has determined that a majority of its
customers are located in the Pennsylvania area. It therefore is considering using a
lockbox system offered by a bank located in Pittsburgh, Pennsylvania. The bank has
estimated that use of the system will reduce collection time by one day. In addition to
the variable charge shown below, there is also a fixed charge of $4,320 per year for the
lockbox system. Assume a year has 365 days. What is the NPV of the lockbox system
given the following information?
A. -$156,727
B. -$131,301
C. -$74,208
D. $11,507
E. $26,433
Answer:
Up until three years ago, A.C. Dime opened an average of ten new retail stores a year.
One of those stores had to be closed within two years due to poor sales. This 90 percent
success ratio was fairly steady for over 30 years. Starting three years ago, the firm has
opened 40 new stores and every one had significant profits within 6 months.
Management believes their recent success is not just a random event and that all future
stores will be profitable. Thus, the managers have decided to open a minimum of 15
new stores each year. The managers are suffering from:
A. arbitrage limitations.
B. anchoring and adjustment.
C. aversion to ambiguity.
D. the clustering illusion.
E. myopic aversion.
Answer:
You are considering changing jobs. Your goal is to work for three years and then return
to school full-time in pursuit of an advanced degree. A potential employer just offered
you an annual salary of $41,000, $43,000, and $46,000 a year for the next three years,
respectively. All salary payments are made as lump sum payments at the end of each
year. The offer also includes a starting bonus of $3,000 payable immediately. What is
this offer worth to you today at a discount rate of 6.75 percent?
A. $111,406
B. $114,545
C. $116,956
D. $120,212
E. $133,697
Answer:
If a lessor borrows money on a nonrecourse basis to purchase an asset that will be
leased to another party, then:
A. the lessor is responsible for the payments on the borrowed funds whether or not the
lessee pays the lease payments.
B. the lessee must pay both the lease payment and the loan payment.
C. the loan is considered paid in full if the lessee discontinues making the lease
payments or terminates the lease early.
D. the lessor is only obligated to make loan payments as long as the lessor is collecting
the lease payments.
E. the lessor must pursue the lessee if the lessee fails to make the agreed upon lease
payments.
Answer:
Which one of the following involves a payment in shares by a stock issuer that
increases the number of shares a shareholder owns but also decreases the value per
share?
A. cash dividend
B. stock dividend
C. stock repurchase
D. stock split
E. reverse stock split
Answer:
Roger’s Meat Market is a chain of retail stores that limits its sales to fresh-cut meats.
The stores have been very profitable in northern cities. However, when two stores were
opened in the south, both lost money and had to be closed. Roger, the owner, has now
concluded that no southern-based store should be opened as it would not be profitable.
Which one of the following applies to Roger?
A. confirmation bias
B. endowment effect
C. money illusion
D. affect heuristic
E. representativeness heuristic
Answer:
Why might a borrower select an interest-only loan instead of an amortized loan, which
would be cheaper?
Answer:
Mr. Bear, your boss, will only agree to accept a project that, as a minimum, provides a
rate of return equal to the requirement he has set for the project. Given this, explain
how you can use break-even analysis to ascertain which projects will be acceptable to
him as you don’t want to risk hearing him growl if you waste his time presenting him
with a project that is unacceptable.
Answer:
You are considering two annuities, both of which pay a total of $20,000 over the life of
the annuity. Annuity A pays $2,000 at the end of each year for the next 10 years.
Annuity B pays $1,000 at the end of each year for the next 20 years. Which annuity has
the greater value today? Is there any circumstance where the two annuities would have
equal values as of today? Explain.
Answer:
Can the initial cash flow at time zero for a project ever be a positive value? If yes, give
an example. If no, explain why not.
Answer:
Give an example of a situation where a firm should adopt the pure play approach for
determining the cost of capital for a project.
Answer:
Firms encounter several costs when issuing new securities. Identify and describe at least
four of these costs.
Answer:
What is operating leverage and why is it important in the analysis of capital expenditure
projects?
Answer:
Why might firms forego discounts offered by their suppliers even though it is costly to
do so? What steps might a firm pursue to be able to take these discounts?
Answer:
It can be argued that the decision to accept venture capital is one of the most critical
decisions an entrepreneur must make. Explain why.
Answer:
From a liability point of view, what is the difference between investing in a sole
proprietorship and a general partnership?
Answer:
Explain why small shareholders should prefer cumulative voting over straight voting.
Answer:
You want to invest in an index fund which directly correlates to the overall U.S. stock
market. How can you determine if the market risk premium you are expecting to earn is
reasonable for the long-term?
Answer:
Explain why the equity ownership of a firm is equivalent to owning a call option on the
firm’s assets.
Answer:
Which of the following apply to the lessee of a sale and leaseback arrangement?
I. may have option to purchase asset at end of lease term
II. receives cash from the sale of the asset
III. maintains ownership rights
IV. uses the asset
A. I and IV only
B. II and III only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Using currencies A, B, and C construct an example in which triangle arbitrage exists
and then show how to exploit it.
Answer:
How can an investor lose money on a stock while making money on a bond investment
if there is a reward for bearing risk? Aren’t stocks riskier than bonds?
Answer:
Steve is the founder of Jefferson & Westover. Recently, the firm decided to issue an IPO
with Steve retaining 30 percent ownership of the firm. The IPO agreement contained
both a Green Shoe provision and a 6-month lockup agreement. Steve’s cost basis per
share is $15. The offering price for the IPO was $16. On the first day of trading, the
market price per share rose to $28.20 and closed for the day at $25.60. Now, six months
after the IPO release, the stock is valued at $15.40 a share. Explain who benefited the
most during the lockup period, an outside investor or Steve, and why.
Answer: