Long-run exposure to exchange rate risk relates to:
A. daily variations in exchange rates.
B. variances between spot and future rates.
C. unexpected changes in relative economic conditions.
D. differences between future spot rates and related forward rates.
E. accounting gains and losses created by fluctuating exchange rates.
Answer:
Which one of the following best defines the variance of an investment’s annual returns
over a number of years?
A. The average squared difference between the arithmetic and the geometric average
annual returns.
B. The squared summation of the differences between the actual returns and the average
geometric return.
C. The average difference between the annual returns and the average return for the
period.
D. The difference between the arithmetic average and the geometric average return for
the period.
E. The average squared difference between the actual returns and the arithmetic average
return.
Answer:
Mario’s has 18,000 shares of stock outstanding with a par value of $1 per share and a
market price of $4 a share. The balance sheet shows $18,000 in the common stock
account, $368,000 in the paid in surplus account, and $64,000 in the retained earnings
account. The firm just announced a 5-for-1 stock split. What will the paid in surplus
account value be after the split?
A. $336,000
B. $368,000
C. $426,000
D. $548,000
E. $606,000
Answer:
The preferred stock of Casco has a 6.25 percent dividend yield. The stock is currently
priced at $59.30 per share. What is the amount of the annual dividend?
A. $3.30
B. $3.35
C. $3.40
D. $3.71
E. $3.90
Answer:
Butter & Jelly reduced its taxes last year by $350 by increasing its interest expense by
$1,000. Which of the following terms is used to describe this tax savings?
A. interest tax shield
B. interest credit
C. financing shield
D. current tax yield
E. tax-loss interest
Answer:
PC Enterprises wants to commence a new project but is unable to obtain the financing
under any circumstances. This firm is facing:
A. financial deferral.
B. financial allocation.
C. capital allocation.
D. marginal rationing.
E. hard rationing.
Answer:
Steve purchased 300 shares of Alpha Beta stock on May 9. On May 15, he purchased
another 300 shares and then on May 22 he purchased a final 400 shares of Alpha Beta
stock. The company declared a dividend of $1.60 a share on April 30 to holders of
record on Friday, May 23. The dividend is payable on June 2. How much dividend
income will Steve receive on June 2 from Alpha Beta?
A. $0
B. $480
C. $960
D. $1,200
E. $1,600
Answer:
All of Fake Stone’s costs and net working capital vary directly with sales. Sales are
projected to increase by 3.5 percent. What is the pro forma accounts receivable balance
for next year?
A. $1,659.80
B. $1,661.84
C. $1,780.20
D. $1,787.80
E. $1,800.46
Answer:
A bank offers your firm a revolving credit arrangement for up to $115 million at an
interest rate of 2 percent per quarter. The bank also requires you to maintain a
compensating balance of 5 percent against the unused portion of the credit line, to be
deposited in a non-interest-bearing account. Assume you have a short-term investment
account at the bank that pays 1.3 percent per quarter, and assume the bank uses
compound interest on its revolving credit loans. What is the effective annual interest
rate on the revolving credit arrangement if your firm does not borrow any money during
the year?
A. 0 percent
B. 5.0 percent
C. 5.2 percent
D. 5.3 percent
E. 5.5 percent
Answer:
The Burger Hut has sales of $29 million, total assets of $43 million, and total debt of
$13 million. The profit margin is 11 percent. What is the return on equity?
A. 7.42 percent
B. 10.63 percent
C. 11.08 percent
D. 13.31 percent
E. 14.28 percent
Answer:
An analysis which combines scenario analysis with sensitivity analysis is called _____
analysis.
A. forecasting
B. combined
C. complex
D. simulation
E. break-even
Answer:
We are examining a new project. We expect to sell 9,500 units per year at $48 net cash
flow apiece for the next 20 years. In other words, the annual operating cash flow is
projected to be $45 × 9,000 = $405,000. The relevant discount rate is 14 percent, and
the initial investment required is $1,730,000. After the first year, the project can be
dismantled and sold for $1,350,000. If expected sales are revised based on the first
year’s performance, it would make sense to abandon the investment if the sales are less
than which of the following number of units?
A. 4,294 units
B. 4,620 units
C. 4,750 units
D. 4,810 units
E. 5,020 units
Answer:
The Stiller Corporation will pay a $3.80 per share dividend next year. The company
pledges to increase its dividend by 2.4 percent indefinitely. How much are you willing
to pay to purchase this company’s stock today if you require a 6.9 percent return on
your investment?
A. $55.07
B. $63.09
C. $72.22
D. $78.47
E. $84.44
Answer:
The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2
years at $1,054. What is the amount of the call premium on a $1,000 par value bond?
A. $52
B. $54
C. $72
D. $84
E. $89
Answer:
Which two of the following are most apt to cause a cash-out for a firm that is generally
financially sound?
I. fixed expenses
II. fixed asset purchases
III. flexible financing policy
IV. highly seasonal sales
A. I and III only
B. II and IV only
C. III and IV only
D. I, II, and III only
E. II, III, and IV only
Answer:
Val’s Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per
share and a market value of $19 per share. The balance sheet shows $3,500 in the
common stock account, $24,000 in the capital in excess of par account, and $31,400 in
the retained earnings account. The firm just announced a 100 percent stock dividend.
What is the value of the capital in excess of par account after the dividend?
A. $0
B. $20,500
C. $24,000
D. $55,500
E. $87,000
Answer:
Which of the following features do preferred shareholders and bondholders frequently
have in common?
I. lack of voting rights
II. conversion option into common stock
III. annuity payments
IV. fixed liquidation value
A. I and II only
B. III and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Answer:
A manufacturing firm has a 90-day collection period. The firm produces seasonal
merchandise and thus has the least sales during the first quarter of a year and the
highest level of sales during the fourth quarter of a year. The firm maintains a relatively
steady level of production which means that its cash disbursements are fairly equal in
all quarters. The firm is most apt to face a cash-out situation in:
A. the first quarter.
B. the second quarter.
C. the third quarter.
D. the fourth quarter.
E. any quarter with equal probabilities of occurrence.
Answer:
Which one of the following terms is used to describe a loan that calls for periodic
interest payments and a lump sum principal payment?
A. amortized loan
B. modified loan
C. balloon loan
D. pure discount loan
E. interest-only loan
Answer:
Firms A and B formally agree to each put up $25 million to create firm C. Firm C will
perform environmental testing on the products produced by both Firm A and Firm B.
Which one of the following terms describes Firm C?
A. joint venture
B. going-private transaction
C. conglomerate
D. subsidiary
E. leveraged buyout
Answer:
A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900,
and $7,500 over three years, respectively. What is the discounted payback period if the
required rate of return is 16 percent?
A. 2.31 years
B. 2.45 years
C. 2.55 years
D. 2.62 years
E. never
Answer:
Which one of the following statements concerning interest rates is correct?
A. Savers would prefer annual compounding over monthly compounding.
B. The effective annual rate decreases as the number of compounding periods per year
increases.
C. The effective annual rate equals the annual percentage rate when interest is
compounded annually.
D. Borrowers would prefer monthly compounding over annual compounding.
E. For any positive rate of interest, the effective annual rate will always exceed the
annual percentage rate.
Answer:
Your grandmother has promised to give you $5,000 when you graduate from college.
She is expecting you to graduate two years from now. What happens to the present
value of this gift if you delay your graduation by one year and graduate three years
from now?
A. remains constant
B. increases
C. decreases
D. becomes negative
E. cannot be determined from the information provided
Answer:
The June Bug has a $270,000 bond issue outstanding. These bonds have a 7.5 percent
coupon, pay interest semiannually, and have a current market price equal to 98.6
percent of face value. The tax rate is 39 percent. What is the amount of the annual
interest tax shield?
A. $3,948.75
B. $4,112.60
C. $5,311.22
D. $7,897.50
E. $8,225.20
Answer:
You are trying to compare the present values of two separate streams of cash flows
which have equivalent risks. One stream is expressed in nominal values and the other
stream is expressed in real values. You decide to discount the nominal cash flows using
a nominal annual rate of 8 percent. What rate should you use to discount the real cash
flows?
A. 8 percent
B. EAR of 8 percent compounded monthly
C. comparable risk-free rate
D. comparable real rate
E. You cannot compare the present values of these two streams of cash flows.
Answer:
Yesteryear Productions pays no dividend at the present time. The company plans to start
paying an annual dividend in the amount of $0.40 a share for two years commencing
four years from today. After that time, the company plans on paying a constant $0.75 a
share annual dividend indefinitely. How much are you willing to pay to buy a share of
this stock today if your required return is 11.6 percent?
A. $3.78
B. $4.22
C. $4.37
D. $4.71
E. $4.98
Answer:
The Dockside Inn has net income for the most recent year of $8,450. The tax rate was
35 percent. The firm paid $1,300 in total interest expense and deducted $1,900 in
depreciation expense. What was the cash coverage ratio for the year?
A. 10.48 times
B. 11.48 times
C. 12.39 times
D. 12.46 times
E. 13.07 times
Answer:
You want to be on the board of directors of Wisely Foods. Since you are the only
shareholder that will vote for you, you will need to own more than half of the
outstanding shares of stock if you are to be elected to the board. What is the type of
voting called that requires this level of stock ownership to be successfully elected under
these conditions?
A. democratic
B. cumulative
C. straight
D. deferred
E. proxy
Answer:
A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of
$8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the
shareholders’ equity?
A. $6,900
B. $15,300
C. $18,700
D. $23,700
E. $35,500
Answer:
The financial planning process tends to place the least emphasis on which one of the
following?
A. growth limitations
B. capacity utilization
C. market value of a firm
D. capital structure of a firm
E. dividend policy
Answer:
The tax rates are as shown. Nevada Mining currently has taxable income of $97,800.
How much additional tax will the firm owe if taxable income increases by $21,000?
A. $8,080
B. $8,130
C. $8,155
D. $8,170
E. $8,190
Answer:
Suppose you sell nine September silver futures contracts at the last price of the day as
shown in the table below. What will be your profit or loss on this contract if the price
turns out to be $12.09 per ounce at expiration?
Futures:
Silver – 5,000 troy oz, U.S. cents per troy oz.
A. loss of $25,425
B. loss of $7,050
C. loss of $3,025
D. profit of $3,025
E. profit of $25,425
Answer:
The business risk of a firm:
A. depends on the firm’s level of unsystematic risk.
B. is inversely related to the required return on the firm’s assets.
C. is dependent upon the relative weights of the debt and equity used to finance the
firm.
D. has a positive relationship with the firm’s cost of equity.
E. has no relationship with the required return on a firm’s assets according to M & M
Proposition II.
Answer:
An unlevered firm has a cost of capital of 17.5 percent and earnings before interest and
taxes of $327,500. A levered firm with the same operations and assets has both a book
value and a face value of debt of $650,000 with a 7.5 percent annual coupon. The
applicable tax rate is 38 percent. What is the value of the levered firm?
A. $1,397,212
B. $1,398,256
C. $1,402,509
D. $1,407,286
E. $1,414,414
Answer: