February 26, 2019

Which one of the following variables is the exponent in the present value formula?

A. present value

B. future value

C. interest rate

D. time

E. There is no exponent in the present value formula.

According to the Statement of Cash Flows, a decrease in accounts receivable will

_____ the cash flow from _____ activities.

A. decrease; operating

B. decrease; financing

C. increase; operating

D. increase; financing

E. increase; investment

Decreasing which one of the following will increase the acceptability of a project?

A. sunk costs

B. salvage value

C. depreciation tax shield

D. equivalent annual cost

E. accounts payable requirement

Which one of the following should earn the most risk premium based on CAPM?

A. diversified portfolio with returns similar to the overall market

B. stock with a beta of 1.38

C. stock with a beta of 0.74

D. U.S. Treasury bill

E. portfolio with a beta of 1.01

When constructing a pro forma statement, net working capital generally:

A. remains fixed.

B. varies only if the firm is currently producing at full capacity.

C. varies only if the firm maintains a fixed debt-equity ratio.

D. varies only if the firm is producing at less than full capacity.

E. varies proportionally with sales.

A firm may file for Chapter 11 bankruptcy:

I. in an attempt to gain a competitive advantage.

II. using a prepack.

III. while allowing the current management to continue running the firm.

IV. only after the firm becomes insolvent.

A. I and III only

B. I and II only

C. I, II, and IV only

D. I, II, and III only

E. I, II, III, and IV

Assume that $1 can buy you either 98.48 or 0.6211. If a TV in London costs 990, what

will that identical TV cost in Tokyo if absolute purchasing power parity exists?

A. 58,797

B. 60,554

C. 156,972

D. 161,855

E. 163,542

Kate is attempting to sell her house for $260,000. Fred lives across the street in an

identical house. Fred recently stated to his wife that Kate's house is probably worth only

$250,000 but that once she sells her house, he would like to put their house on the

market at $285,000 and then move into a condominium. Which one of the following

behaviors applies to Fred?

A. myopic loss aversion

B. house money effect

C. money illusion

D. self-attribution bias

E. endowment effect

A project has a discounted payback period that is equal to the required payback period.

Given this, which of the following statements must be true?

I. The project must also be acceptable under the payback rule.

II. The project must have a profitability index that is equal to or greater than 1.0.

III. The project must have a zero net present value.

IV. The project's internal rate of return must equal the required return.

A. I only

B. I and II only

C. II and III only

D. I, III, and IV only

E. I, II, III, and IV

Keyser Mining is considering a project that will require the purchase of $980,000 in

new equipment. The equipment will be depreciated straight-line to a zero book value

over the 7-year life of the project. The equipment can be scraped at the end of the

project for 5 percent of its original cost. Annual sales from this project are estimated at

$420,000. Net working capital equal to 20 percent of sales will be required to support

the project. All of the net working capital will be recouped. The required return is 16

percent and the tax rate is 35 percent. What is the recovery amount attributable to net

working capital at the end of the project?

A. $21,000

B. $54,600

C. $84,000

D. $178,000

E. $196,000

A call option matures in nine months. The underlying stock price is $95, and the stock's

return has a standard deviation of 19 percent per year. The risk-free rate is 3 percent per

year, compounded continuously. The exercise price is $0. What is the price of the call

option?

A. $15.97

B. $52.14

C. $56.37

D. $92.23

E. $95.00

An investment offers a 10.5 percent total return over the coming year. Sam Bernanke

thinks the total real return on this investment will be only 4.5 percent. What does Sam

believe the inflation rate will be for the next year?

A. 5.60 percent

B. 5.67 percent

C. 5.74 percent

D. 6.00 percent

E. 6.21 percent

Which one of the following statements is correct concerning a portfolio of 20 securities

with multiple states of the economy when both the securities and the economic states

have unequal weights?

A. Given the unequal weights of both the securities and the economic states, the

standard deviation of the portfolio must equal that of the overall market.

B. The weights of the individual securities have no effect on the expected return of a

portfolio when multiple states of the economy are involved.

C. Changing the probabilities of occurrence for the various economic states will not

affect the expected standard deviation of the portfolio.

D. The standard deviation of the portfolio will be greater than the highest standard

deviation of any single security in the portfolio given that the individual securities are

well diversified.

E. Given both the unequal weights of the securities and the economic states, an investor

might be able to create a portfolio that has an expected standard deviation of zero.

You are considering implementing a lockbox system for your firm. The system is

expected to reduce the average collection time by 1.2 days. On an average day, your

firm receives 320 checks with an average value of $99 each. The daily interest rate on

Treasury bills is 0.014 percent. What is the anticipated amount of the daily savings if

this system is implemented?

A. $2.61

B. $3.29

C. $4.45

D. $5.32

E. $5.78

Taylor's Hardware is acquiring The Corner Store for $20,000 in cash. Taylor's has 1,500

shares of stock outstanding at a market value of $46 a share. The Corner Store has

2,200 shares of stock outstanding at a market price of $8 a share. Neither firm has any

debt. The incremental value of the acquisition is $3,500. What is the value of Taylor's

Hardware after the acquisition?

A. $49,000

B. $50,300

C. $67,300

D. $70,100

E. $72,400

The optimal capital structure has been achieved when the:

A. debt-equity ratio is equal to 1.

B. weight of equity is equal to the weight of debt.

C. cost of equity is maximized given a pre-tax cost of debt.

D. debt-equity ratio is such that the cost of debt exceeds the cost of equity.

E. debt-equity ratio results in the lowest possible weighted average cost of capital.

Which one of the following statements is correct?

A. The value of a call decreases as the price of the underlying stock increases.

B. The value of a call increases as the exercise price decreases.

C. The value of a put increases as the price of the underlying stock increases.

D. The value of a put decreases as the exercise price increases.

E. The intrinsic value of a put must be zero on the expiration date.

Assume the profit margin and the payout ratio of Major Manuscripts, Inc. are constant.

If sales increase by 6 percent, what is the pro forma retained earnings?

A. $5,220.18

B. $5,721.42

C. $6,021.56

D. $6,648.42

E. $7,028.56

The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt

Corporation. Information about each firm is given here:

Jolie's shareholders will receive one share of Pitt stock for every three shares they hold

in Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio

be for Pitt?

A. 8.4

B. 9.2

C. 9.8

D. 10.5

E. 11.2

Net present value:

A. is the best method of analyzing mutually exclusive projects.

B. is less useful than the internal rate of return when comparing different sized projects.

C. is the easiest method of evaluation for non-financial managers to use.

D. is less useful than the profitability index when comparing mutually exclusive

projects.

E. is very similar in its methodology to the average accounting return.

What is the value of d2 given the following information on a stock?

A. 0.0518

B. 0.0525

C. 0.0533

D. 0.0535

E. 0.0540

Lucinda owns a convertible bond that matures in six years. The bond has a 9 percent

coupon and pays interest annually. The face value of the bond is $1,000 and the

conversion price is $22. Similar bonds have a market return of 8.75 percent. The current

price of the stock is $21.60 per share. What is the conversion value of this bond?

A. $835.60

B. $848.40

C. $942.11

D. $981.82

E. $1,000.00

Seaweed Mfg., Inc. is currently operating at only 81 percent of fixed asset capacity.

Current sales are $550,000. What is the maximum rate at which sales can grow before

any new fixed assets are needed?

A. 14.23 percent

B. 14.47 percent

C. 15.03 percent

D. 22.87 percent

E. 23.46 percent

Morristown Industries has an issue of preferred stock outstanding that pays a $13.25

dividend every year in perpetuity. What is the required return if this issue currently sells

for $80 per share?

A. 16.56 percent

B. 16.72 percent

C. 16.80 percent

D. 16.86 percent

E. 16.95 percent

You would like to give your daughter $75,000 towards her college education 17 years

from now. How much money must you set aside today for this purpose if you can earn

8 percent on your investments?

A. $18,388.19

B. $20,270.17

C. $28,417.67

D. $29,311.13

E. $32,488.37

Net working capital:

A. can be ignored in project analysis because any expenditure is normally recouped at

the end of the project.

B. requirements, such as an increase in accounts receivable, create a cash inflow at the

beginning of a project.

C. is rarely affected when a new product is introduced.

D. can create either a cash inflow or a cash outflow at time zero of a project.

E. is the only expenditure where at least a partial recovery can be made at the end of a

project.

The outstanding bonds of Winter Time Products provide a real rate of return of 3.03

percent. The current rate of inflation is 4.68 percent. What is the actual nominal rate of

return on these bonds?

A. 7.58 percent

B. 7.33 percent

C. 7.71 percent

D. 7.76 percent

E. 7.85 percent

You just received a $5,000 gift from your grandmother. You have decided to save this

money so that you can gift it to your grandchildren 50 years from now. How much

additional money will you have to gift to your grandchildren if you can earn an average

of 8.5 percent instead of just 8 percent on your savings?

A. $47,318.09

B. $52,464.79

C. $55,211.16

D. $58,811.99

E. $60,923.52

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

Which of the following statements concerning bonds are correct?

I. Bonds provide tax benefits to issuers.

II. The risk of a firm financially failing increases when the firm issues bonds.

III. Most long-term bond issues are referred to as unfunded debt.

IV. All bonds are treated equally in a bankruptcy proceeding.

A. II and III only

B. I and II only

C. III and IV only

D. II and IV only

E. I, II, and III only

Fargo North is considering the purchase of some new equipment costing $112,000. 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. $28,684

B. $31,467

C. $31,775

D. $33,719

E. $34,897