The price-sales ratio is especially useful when analyzing firms that have which one of
the following?
A. volatile market prices
B. negative earnings
C. positive PEG ratios
D. a negative Tobin’s Q
E. increasing sales
Answer:
Money market securities have which of the following characteristics?
I. long maturities
II. low default risk
III. high degree of liquidity
IV. low rates of return
A. I and III only
B. II and III only
C. I and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
Ted is analyzing a project using simulation. His focus is limited to the short-term. To
ease the simulation process, he is combining expenses into various categories. Which
one of the following should he include in the fixed cost category?
A. production department payroll taxes
B. equipment insurance
C. sales tax
D. raw materials
E. product shipping costs
Answer:
Jen’s Fashions is growing quickly. Dividends are expected to grow at a 19 percent rate
for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter.
The required return is 12 percent and the company just paid a $3.80 annual dividend.
What is the current share price?
A. $128.96
B. $131.11
C. $135.95
D. $148.87
E. $152.20
Answer:
Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm
is issuing additional shares of stock and that he is being given a chance to purchase
some of these shares prior to the shares being offered to the general public. What is this
type of an offer called?
A. best efforts offer
B. firm commitment offer
C. general cash offer
D. rights offer
E. priority offer
Answer:
Which of the following determines the length of the operating cycle?
I. cash cycle
II. inventory period
III. accounts payable period
IV. accounts receivable period
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
The Green Fiddle has declared a $5 per share dividend. Suppose capital gains are not
taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be
withheld at the time the dividend is paid. Green Fiddle stock sells for $71.50 per share,
and the stock is about to go ex-dividend. What will the ex-dividend price be?
A. $67.25
B. $67.90
C. $78.30
D. $79.50
E. $82.23
Answer:
Which two of the following are the most likely reasons why a stock price might not
react at all on the day that new information related to the stock issuer is released?
I. insiders knew the information prior to the announcement
II. investors need time to digest the information prior to reacting
III. the information has no bearing on the value of the firm
IV. the information was anticipated
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. III and IV only
Answer:
Consider the income statement for Heir Jordan Corporation:
A 22 percent growth rate in sales is projected. What is the pro forma addition to
retained earnings assuming all costs vary proportionately with sales?
A. $6,299
B. $7,303
C. $7,890
D. $8,011
E. $8,164
Answer:
Fargo North is considering the purchase of some new equipment costing $118,000. This
equipment has a 5-year life after which it will be worthless. The firm uses straight-line
depreciation and borrows funds at 9 percent interest. The company’s tax rate is 33
percent. The firm also has the option of leasing the equipment. What is the amount of
the break-even lease payment?
A. $30,220
B. $31,467
C. $31,775
D. $33,719
E. $34,897
Answer:
The secondary market is best defined by which one of the following?
A. market in which subordinated shares are issued and resold
B. market conducted solely by brokers
C. market dominated by dealers
D. market where outstanding shares of stock are resold
E. market where warrants are offered and sold
Answer:
Traci wants to have $16,000 six years from now and wants to deposit just one lump
sum amount today. The annual percentage rate applicable to her investment is 6.8
percent. Which one of the following methods of compounding interest will allow her to
deposit the least amount possible today?
A. annual
B. daily
C. quarterly
D. monthly
E. continuous
Answer:
You own one share of a cumulative preferred stock which pays quarterly dividends. The
firm has recently suffered some financial setbacks and has failed to pay the last two
dividends. However, new funding has been arranged and the firm intends to restore all
dividends, both common and preferred, this quarter. As a preferred shareholder, you
should expect to receive the equivalent of ____ quarter(s) of dividends when the next
dividend is paid.
A. 0
B. 1
C. 2
D. 3
E. either 1, 2, or 3
Answer:
Which one of the following transactions occurs in the primary market?
A. purchase of 500 shares of GE stock from a current shareholder
B. gift of 100 shares of stock to a charitable organization
C. gift of 200 shares of stock by a mother to her daughter
D. a purchase of newly issued stock from AT&T
E. IBM’s purchase of GE stock
Answer:
Which one of the following is a project acceptance indicator given an independent
project with investing type cash flows?
A. profitability index less than 1.0
B. project’s internal rate of return less than the required return
C. discounted payback period greater than requirement
D. average accounting return that is less than the internal rate of return
E. modified internal rate of return that exceeds the required return
Answer:
You are the sole shareholder of a small corporation. Presently, you wish to diversify
your holdings and thus want to sell a portion of your shares but do not want to incur the
costs associated with SEC filings. Which one of the following markets, if any, might be
conducive to this sale?
A. NASDAQ
B. OTCBB
C. Pink Sheets
D. NYSE
Answer:
A financial lease:
I. is generally a fully amortized lease.
II. usually requires the lessee to insure the asset.
III. is generally cancelable without penalty if the lessee provides 30 days advance
notice.
IV. is referred to as a capital lease by accountants.
A. I and III only
B. II and IV only
C. I and II only
D. II, III, and IV only
E. I, II, and IV only
Answer:
Which one of the following statements related to dividend policy is correct?
A. The primary question related to dividend policy is whether or not a firm should ever
pay a dividend.
B. Both dividends and dividend policy are irrelevant.
C. Dividend policy focuses on the timing of dividend payments.
D. Homemade dividends increase the importance of a firm’s dividend policy decisions.
E. Whether or not a firm ever pays a dividend is irrelevant to equity valuation.
Answer:
According to the Rule of 72, you can do which one of the following?
A. double your money in five years at 7.2 percent interest
B. double your money in 7.2 years at 8 percent interest
C. double your money in 5 years at 14.4 percent interest
D. triple your money in 7.2 years at 5 percent interest
E. triple your money at 10 percent interest in 7.2 years
Answer:
Lucas will receive $7,100, $8,700, and $12,500 each year starting at the end of year
one. What is the future value of these cash flows at the end of year five if the interest
rate is 9 percent?
A. $33,418
B. $33,907
C. $34,276
D. $36,411
E. $37,255
Answer:
You are working on a bid to build two city parks a year for the next three years. This
project requires the purchase of $185,000 of equipment that will be depreciated using
straight-line depreciation to a zero book value over the 3-year project life. The
equipment can be sold at the end of the project for $34,000. You will also need $20,000
in net working capital for the duration of the project. The fixed costs will be $18,000 a
year and the variable costs will be $168,000 per park. Your required rate of return is 15
percent and your tax rate is 34 percent. What is the minimal amount you should bid per
park? (Round your answer to the nearest $100)
A. $72,500
B. $128,600
C. $154,300
D. $189,100
E. $219,900
Answer:
Mountain Homes wishes to expand its facilities. The company currently has 7 million
shares outstanding and no debt. The stock sells for $55 per share, but the book value per
share is $43. The firm’s net income is currently $9.1 million. The new facility will cost
$30 million, and it will increase net income by $309,000. Assume the firm issues new
equity to fund this expansion while maintaining a constant price-earnings ratio. What
will be the EPS be after the new equity issue?
A. $1.25
B. $1.30
C. $1.35
D. $1.40
E. $1.45
Answer:
With firm commitment underwriting, the issuing firm:
A. is unsure of the total amount of funds it will receive until after the offering is
completed.
B. is unsure of the number of shares it will actually issue until after the offering is
completed.
C. knows exactly how many shares will be purchased by the general public during the
offer period.
D. retains the financial risk associated with unsold shares.
E. knows up-front the amount of money it will receive from the stock offering.
Answer:
Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and
annual cash costs by $94,000. The project will initially require $110,000 in fixed assets
that will be depreciated straight-line to a zero book value over the 4-year life of the
project. The applicable tax rate is 32 percent. What is the operating cash flow for this
project?
A. $11,220
B. $29,920
C. $43,480
D. $46,480
E. $46,620
Answer:
What is the operating cash flow for 2011?
A. $2,114
B. $2,900
C. $2,985
D. $3,536
E. $4,267
Answer:
You expect interest rates to decline in the near future even though the bond market is
not indicating any sign of this change. Which one of the following bonds should you
purchase now to maximize your gains if the rate decline does occur?
A. short-term; low coupon
B. short-term; high coupon
C. long-term; zero coupon
D. long-term; low coupon
E. long-term; high coupon
Answer:
In actual practice, managers frequently use the:
I. average accounting return method because the information is so readily available.
II. internal rate of return because the results are easy to communicate and understand.
III. discounted payback because of its simplicity.
IV. net present value because it is considered by many to be the best method of analysis.
A. I and III 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:
Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary
to acquire 100 percent of the outstanding shares of Southern Fried Chicken. This
transaction is known as a:
A. proxy contest.
B. management buyout.
C. vertical acquisition.
D. leveraged buyout.
E. unfriendly takeover.
Answer:
Which one of the following formulas correctly describes the relative purchasing power
parity relationship?
A. E(St) = S0 × [1 + (hFC – hUS)]t
B. E(St) = S0 × [1 – (hFC – hUS)]t
C. E(St) = S0 × [1 + (hUS + hFC)]t
D. E(St) = S0 × [1 – (hUS – hFC)]t
E. E(St) = S0 × [1 + (hUS – hFC)]t
Answer:
Which one of the following is defined by its mean and its standard deviation?
A. arithmetic nominal return
B. geometric real return
C. normal distribution
D. variance
E. risk premium
Answer: