BT Corporation has decided to build a new facility for its Ramp;D department. The cost
of the facility is estimated at $125 million. BT plans to finance this project using its
traditional debt-equity ratio of .65. The issue cost of equity is 6.1 percent and the issue
cost of debt is 1.8 percent. What is the amount of the total flotation cost?
A. $5,507.575.76
B. $6,003,121.21
C. $6,138,411.92
D. $5,761,427.76
E. $6,202,418.27
Answer:
Which one of these best describes steps of the separation principle?
A. Determine the beta that best fits an investor’s risk tolerance level and then determine
which assets can be combined to create a portfolio that matches that beta.
B. Determine the tangency point between the risk-free rate and the efficient set of risky
assets and determine how to combine the tangency point portfolio with risk-free assets
to match the investor’s risk tolerance level.
C. Determine the appropriate beta for an individual investor and then determine the
most efficient set of risky assets that falls below that beta level.
D. From a pool of assets determine which pairs of assets have the lowest covariances
and then determine how to combine these pairs into a portfolio that matches the
investor’s preferred beta.
E. Determine an investor’s risk tolerance level and then determine which portfolio rate
of return best fits that level of risk tolerance.
Answer:
Stock-based insolvency is a:
A. income statement measurement.
B. balance sheet measurement.
C. a book value measurement only.
D. Both income statement measurement and a book value measurement only.
E. Both balance sheet measurement and a book value measurement only.
Answer:
The tax rates are as shown. Your firm currently has taxable income of $83,200. How
much additional tax will you owe if you increase your taxable income by $24,600?
A.
$8,364
B.
$9,014
C.
$9,594
D.
$8,754
E.
Answer:
Lisa is planning a trip to Australia where a hotel will cost A$165 per night for seven
nights. She expects to spend another A$2,200 for meals, tours, souvenirs, and so forth.
How much will this trip cost her in U.S. dollars if the USD equivalent rate is .8452?
A. $2,835.65
B. $3,599.49
C. $2,782.02
D. $3,969.47
E. $3,926.67
Answer:
You own two call option contracts on ABC stock with a strike price of $15. When you
purchased the contracts the option price was $1.20 and the stock price was $15.90.
What is the total intrinsic value of these options if ABC stock is currently selling for
$14.50 a share?
A. -$280
B. -$180
C. -$100
D. $0
E. $100
Answer:
For absolute purchasing power parity to hold:
A. transaction costs must be observable.
B. interest rates must be uniform on a nominal basis.
C. inflation rates must be uniform in all markets.
D. tariffs must be imposed on all imported goods.
E. products must be identical in all markets.
Answer:
The Meldrum Co. is analyzing a proposed project. The company expects to sell 3,000
units, give or take 15 percent. The expected variable cost per unit is $8 and the expected
fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5
percent range. The depreciation expense is $4,000. The sale price is estimated at $18 a
unit, give or take 2 percent. The project requires $24,000 of fixed assets which will be
worthless when the project ends in six years. Also required is $6,500 of net working
capital for the life of the project. The tax rate is 34 percent and the required rate of
return is 12 percent. What is the net present value of the worst-case scenario?
A. −$2,979.40
B. −$4,008.16
C. −$3,810.29
D. $6,705.72
E. $6,308.15
Answer:
A $218,000 project has equal annual cash flows over its 7-year life. If the discounted
payback period is seven years and the discount rate is 0%, what is the amount of the
cash flow in each of the seven years?
A. $31,142.86 per year for each of the seven years
B. $0 for Years 1 to 6 and $218,000 in Year 7
C. Any amount between $0 and $218,000 for any one year, provided the sum of the
seven cash flows totals $218,000.
D. $218,000 for Year 1 and $0 for Years 2 through 7.
E. $30,421.14 per year for each of the seven years
Answer:
A restrictive short-term financial policy tends to:
A. reduce future sales more so than a flexible policy.
B. grant credit to more customers.
C. incur more carrying costs than a flexible policy does.
D. encourage credit sales over cash sales.
E. reduce order costs as compared to a more flexible policy.
Answer:
One advantage of the EV/EBITDA ratio over the PE ratio is the:
A. inclusion of depreciation charges.
B. increased reliance on leverage.
C. averaging of annual sales.
D. inclusion of all the firm’s cash reserves.
E. lessened impact of leverage on the ratio.
Answer:
The relationship between nominal interest rates on default-free, pure discount securities
and the time to maturity is called the:
A. liquidity effect.
B. Fisher effect.
C. term structure of interest rates.
D. inflation premium.
E. interest rate risk premium.
Answer:
What is the change in the net working capital from 2014 to 2015?
A.
$2,343 million
B.
$1,035 million
C.
$151 million
D.
$305 million
E.
Answer:
Ideally, corporations try to create securities that have the tax benefits:
A. of equity but the bankruptcy benefits of debt.
B. and bankruptcy benefits of debt.
C. and bankruptcy benefits of equity.
D. of debt and the equity benefits of dividends.
E. of debt but the bankruptcy benefits of equity.
Answer:
Assume the spot rate of $1 is .6402. Also assume the expected inflation rate in the U.K.
is 2.1 percent while the U.S. inflation rate is 3.6 percent. What is the expected exchange
rate three years from now if relative purchasing power parity exists?
A. .6694
B. .6306
C. .6355
D. .6118
E. .5667
Answer:
The average annual return on small-company stocks was about _____ percentage points
greater than the average annual return on large-company stocks over the period of 1926
to 2014.
A. 3.5
B. 4.5
C. 5.5
D. 6.5
E. 7.5
Answer:
The articles of incorporation:
A. can be used to remove company management.
B. are amended annually by the company stockholders.
C. set forth the number of shares of stock that can be issued.
D. set forth the rules by which the corporation regulates its existence.
E. can set forth the conditions under which the firm can avoid double taxation.
Answer:
In the equation R = + U, the three symbols, from left to right, stand for:
A. average return, expected return, and unexpected return.
B. required return, expected return, and unbiased return.
C. actual return, expected return, and unexpected return.
D. required return, expected return, and unbiased risk.
E. required return, expected return, and unsystematic risk.
Answer:
GSX stock is selling for $32.40 a share. A 4-month call on GSX stock with a strike
price of $30 is priced at $3.55. Risk-free assets are currently returning .3 percent per
month. What is the price of a 4-month put on GSX stock with a strike price of $35?
A. $5.46
B. $6.48
C. $7.09
D. $5.73
E. $6.02
Answer:
Which one of the following will cause the value of a call to decrease?
A. lowering the exercise price
B. increasing the time to expiration
C. increasing the risk-free rate
D. lowering the risk level of the underlying security
E. increasing the stock price
Answer:
The exercise of warrants creates new shares which:
A. increases the total number of shares but does not affect share value.
B. increases the total number of shares which can reduce the per share value.
C. does not change the number of shares outstanding, similar to options.
D. increases share value because cash is paid into the firm at the time of warrant
exercise.
E. increases the number of shares outstanding while maintaining the current price per
share.
Answer:
Unsecured corporate debt is called a(n):
A. indenture.
B. debenture.
C. note.
D. mortgage obligation.
E. preferred stock.
Answer:
Net collection float means the:
A. book balance is greater than the ledger balance.
B. the available balance is less than the book balance.
C. disbursement float and book cash.
D. disbursement float exceeds the collection float.
E. collection float equals the disbursement float.
Answer:
There are five seats on the board of directors of Atlas Corp. up for election. The firm
has 120,000 shares of stock outstanding and uses cumulative voting. Each share is
granted one vote per open seat. How many shares must you control if you want to
guarantee your election to the board assuming no one else votes for you?
A. 24,000
B. 23,999
C. 20,001
D. 20,000
E. 24,001
Answer:
The profitability index of an investment project is the ratio of the:
A. average net income to the average investment.
B. internal rate of return to the current market rate of interest.
C. net present value of the project’s cash outflows divided by the net present value of its
inflows.
D. net present value of every project cash flow to the initial cost.
E. present value of the Time 1 and subsequent cash flows to the initial cost.
Answer:
A limit order to buy:
A. guarantees the quantity purchased but not the price.
B. guarantees both the purchase price and the order fulfillment.
C. is executed only if the purchase price is less than the limit amount.
D. guarantees the purchase price but not the order execution.
E. will be executed either at the limit price or at the end-of-day price.
Answer:
The return on equity can be calculated as:
A. ROA Equity multiplier.
B. Profit margin ROA.
C. Profit margin ROA Total asset turnover.
D. ROA (Net income / Total assets).
E. ROA Debt-equity ratio.
Answer:
You just returned from some extensive traveling. You started your trip with $10,000 in
your pocket. You spent 1.32 million pesos in Chile where Ps1 = $.001642. You spent
Ps36,000 in Uruguay where Ps1 = $.04247. Then on the way home, you spent Ps29,000
pesos in Mexico where $1 = Ps13.9334. How many dollars did you have left by the
time you returned to the U.S.?
A. $3,889.07
B. $4,001.84
C. $4,110.27
D. $4,222.31
E. $4,299.03
Answer:
What is the cash coverage ratio for 2015?
A. 11.06
B. 6.02
C. 13.79
D. 14.89
E. 8.78
Answer:
Le Place has sales of $439,000, depreciation of $32,000, and net working capital of
$56,000. The firm has a tax rate of 34 percent and a profit margin of 6 percent. The firm
has no interest expense. What is the amount of the operating cash flow?
A. $49,384
B. $52,616
C. $54,980
D. $58,340
E. $114,340
Answer:
Sunk costs include any cost that:
A. will change if a project is undertaken.
B. will be incurred if a project is accepted.
C. has previously been incurred and cannot be changed.
D. will be paid to a third party and cannot be refunded for any reason whatsoever.
E. will occur if a project is accepted and once incurred, cannot be recouped.
Answer:
A banker considering loaning money to a firm for ten years would most likely prefer the
firm have a debt ratio of _______ and a times interest earned ratio of _______.
A. .50; .75
B. .50; 1.00
C. .45; 1.75
D. .40; .75
E. .40; 1.75
Answer:
Modern Sound has sales of $811,000 and average accounts payable of $87,400. The
cost of goods sold is equivalent to 72 percent of sales. How long does it take the firm to
pay its suppliers?
A. 41.46 days
B. 33.45 days
C. 48.69 days
D. 66.18 days
E. 54.63 days
Answer:
A stock had returns of 8 percent, 39 percent, 11 percent, and -24 percent for the past
four years. Which one of the following best describes the probability that this stock will
not lose more than 43 percent in any one given year?
A. 92.5%
B. 95.0%
C. 97.5%
D. 84.0%
E. 99.5%
Answer:
Stock A is expected to return 12 percent in a normal economy and lose 7 percent in a
recession. Stock B is expected to return 8 percent in a normal economy and 2 percent in
a recession. The probability of the economy being normal is 80 percent and the
probability of a recession is 20 percent. What is the covariance of these two securities?
A. .004203
B. .004115
C. .003280
D. .003876
E. .003915
Answer: