A firm has a weighted average cost of capital of 11.28 percent and a cost of equity of
14.7 percent. The debt-equity ratio is .72. There are no taxes. What is the firm’s cost of
debt?
A. 6.53 percent
B. 6.27 percent
C. 6.44 percent
D. 7.23 percent
E. 7.08 percent
A credit card has an annual percentage rate of 12.9 percent and charges interest
monthly. The effective annual rate on this account:
A. will be less than 12.9 percent.
B. can either be less than or equal to 12.9 percent.
C. is 12.9 percent.
D. can either be greater than or equal to 12.9 percent.
E. will be greater than 12.9 percent.
Which one of the following is an example of a liquidating dividend?
A. Valley Feed Mills recently sold its grain storage facility and is distributing the
proceeds of that sale to its shareholders.
B. Kate’s Winery has excess cash that it wishes to distribute to its shareholders in
addition to its normal cash dividend. This extra distribution usually occurs about once
every year.
C. Kurt’s Music is planning to increase its quarterly dividend by 3 percent.
D. The Dried Florist is preparing to pay its first annual dividend of $.08 per share.
E. Hi Tek had an extraordinarily profitable year and has decided to do a one-time only
$10 per share cash dividend.
Which of these is the best example of a raw material?
A. Set of tires for an automaker
B. Partially assembled airplane
C. Cabinets ready to be shipped
D. Can of paint waiting to be sold
E. Completed product awaiting customer delivery
A market value balance sheet shows cash of $91,000; fixed assets of $327,000, and
equity of $418,000. There are 16,000 shares of stock outstanding. The company has
declared a dividend of $.82 per share. The stock goes ex-dividend tomorrow. Ignore any
tax effects. What will be the firm’s market equity value after the dividend is paid?
A. $372,020
B. $404,880
C. $419,560
D. $418,000
E. $397,810
A limited liability company (LLC):
A. is a hybrid between a sole proprietorship and a partnership.
B. prefers its profits be taxed as personal income to its owners.
C. that meets the IRS criteria to be an LLC will be taxed like a corporation.
D. provides limited liability for some, but not all, of its owners.
E. cannot be created for professional service firms, such as accountants and attorneys.
Hercules Movers pays a constant annual dividend of $1.48 per share on its stock. Last
year at this time, the market rate of return on this stock was 15.7 percent. Today, the
market rate has fallen to 13.3 percent. What would your capital gains yield have been if
you had purchased this stock one year ago and then sold the stock today?
A. -15.29 percent
B. -22.03 percent
C. 8.16 percent
D. 16.47 percent
E. 18.05 percent
The 6.3 percent, semi-annual coupon bonds of PE Engineers mature in 13 years and
have a price quote of 99.2. These bonds have a current yield of _____ percent, a yield to
maturity of _____ percent, and an effective annual yield of _____ percent.
A. 6.35; 6.32; 6.29
B. 6.35; 6.39; 6.49
C. 6.12; 6.36; 6.42
D. 6.23; 6.20; 6.16
E. 6.23; 6.36; 6.42
Starlite Industries will need $2.2 million 4.5 years from now to replace some
equipment. Currently, the firm has some extra cash and would like to establish a
savings account for this purpose. The account pays 3.6 percent interest, compounded
annually. How much money must the company deposit today to fully fund the
equipment purchase?
A. $1,679,947.20
B. $1,798,407.21
C. $1,350,868.47
D. $1,876,306.49
E. $1,412,308.18
You own a stock that has an expected return of 15.72 percent and a beta of 1.33. The
U.S. Treasury bill is yielding 3.82 percent and the inflation rate is 2.95 percent. What is
the expected rate of return on the market?
A. 12.07 percent
B. 12.77 percent
C. 13.64 percent
D. 14.09 percent
E. 13.42 percent
Angela has just received an insurance settlement of $22,500. She wants to save this
money until her daughter goes to college. If she can earn an average of 4.7 percent,
compounded annually, how much will she have saved when her daughter enters college
6 years from now?
A. $30,106.14
B. $30,929.02
C. $31,374.89
D. $29,875.06
E. $29,638.94
You have just won the lottery! You can either receive $6,500 a year for 20 years or
$100,000 as a lump sum payment today. What is the interest rate on the annuity option?
A. 2.64 percent
B. 1.68 percent
C. 2.20 percent
D. 2.45 percent
E. 1.95 percent
The treasurer of a major U.S. firm has $8.2 million to invest for three months. The
interest rate in the U.S. is .53 percent per month. The interest rate in the UK is .54
percent per month. The spot exchange rate is £.64, and the three-month forward rate is
£.65. Ignore transaction costs. The treasurer should invest the funds in the ____
because he can earn an additional ____.
A. US; $131,072.23
B. US;$125,722.20
C. UK; $9,418.02
D. UK; $38,522.47
E. UK; $121,510.67
The capital asset pricing model:
A. assumes the market has a beta of zero and the risk-free rate is positive.
B. rewards investors based on total risk assumed.
C. considers the relationship between the fluctuations in a security’s returns versus the
market’s returns.
D. applies to portfolios but not to individual securities.
E. assumes the market risk premium is constant over time.
You own a portfolio consisting of the securities listed below. The expected return for
each security is as shown. What is the expected return on the portfolio?
A. 11.76 percent
B. 10.86 percent
C. 11.23 percent
D. 12.09 percent
E. 11.41 percent
A perpetuity in Canada is frequently referred to as:
A. a consul.
B. an infinity.
C. forever cash.
D. a dowry.
E. a forevermore.
What is the payback period for a $16,700 investment with the following cash flows?
A. 3.12 years
B. 3.89 years
C. 2.12 years
D. 3.44 years
E. 3.67 years
You are analyzing a project and have developed the following estimates. The
depreciation is $47,900 a year and the tax rate is 35 percent. What is the worst-case
operating cash flow?
A. -$2,545
B. $11,145
C. $88,855
D. $27,556
E. $61,095
The primary purpose of bond covenants is to:
A. meet regulatory requirements.
B. define the bond’s repayment terms.
C. protect the bondholders.
D. identify the bond’s rating.
E. protect the bond issuer from lawsuits.
You’ve observed the following returns on Blast It Corporation’s stock over the past five
years: 19 percent, -23 percent, 31 percent, 18 percent, and -7 percent, respectively.
What was the variance of the returns over this period?
A. .03598
B. .04838
C. .03692
D. .04714
E. .03781
Which one of the following bonds is most apt to have the smallest liquidity premium?
A. Treasury bill
B. Corporate bond issued by a new firm
C. Municipal bond issued by the State of New York
D. Municipal bond issued by a rural city in Alaska
E. Corporate bond issued by General Motors (GM)
Which one of the following terms applies to the costs incurred by a firm that is trying to
avoid filing for bankruptcy?
A. Indirect bankruptcy costs
B. Direct bankruptcy costs
C. Static theory cost
D. Optimal capital structure cost
E. Reorganization costs
Bleu Berri Farms had equity of $58,900 at the beginning of the year. During the year,
the company earned net income of $8,200 and paid $2,500 in dividends. Also during the
year, the company repurchased $3,500 of stock from one of its shareholders. What is
the value of the owners’ equity at year end?
A. $61,100
B. $67,600
C. $64,900
D. $64,400
E. $68,100
A stock has a beta of 1.32, the expected return on the market is 12.72, and the risk-free
rate is 4.05. What must the expected return on this stock be?
A. 16.67 percent
B. 14.75 percent
C. 17.10 percent
D. 20.46 percent
E. 15.49 percent
Big Red’s purchases from suppliers in a quarter are equal to 71 percent of the next
quarter’s forecast sales. The payables period is 60 days; other expenses are paid when
incurred Wages, taxes, and other expenses are 24 percent of sales, and interest and
dividends are $40 per quarter. No capital expenditures are planned. Projected quarterly
sales, starting with Q1, are $1,520, $1,580, $1,630, and $1,590, respectively. Sales for
the first quarter of the following year are projected at $1,540. What is the amount of the
total disbursements for Q2?
A. $1,564
B. $1,520
C. $1,601
D. $1,538
E. $1,553
Assume you can exchange $1 for either C$1.1417 or ¥118.62. What is the cross-rate
between the Canadian dollar and the Japanese yen?
A. C$.009625/¥1
B. C$.003723/¥1
C. C$.004582/¥1
D. C$138.2191/¥1
E. C$135.43/¥1
Assume the current spot rate between the UK and the U.S. is £.6379 per $1, the
expected inflation rate in the U.S. is 1.9 percent, and the expected inflation rate in the
UK is 2.8 percent. If relative purchasing power parity exists, what will the exchange
rate be next year?
A. £.6389/$1
B. £.6436/$1
C. £.6823/$1
D. £.6322/$1
E. £.6336/$1
Which one of the following terms refers to the termination of a firm as a going
concern?
A. Insolvency
B. Reorganization
C. Chapter 11 bankruptcy
D. Prepack
E. Liquidation
Donegal’s has compiled the following information:
What is the operating cash flow for the year?
A. $90,900
B. $96,700
C. $114,700
D. $93,500
E. $102,600
Which one of the following statements is correct? Assume the pretax cost of debt is less
than the cost of equity.
A. A firm may change its capital structure if the government changes its tax policies.
B. A decrease in the dividend growth rate increases the cost of equity.
C. A decrease in the systematic risk of a firm will increase the firm’s cost of capital.
D. A decrease in a firm’s debt-equity ratio will decrease the firm’s cost of capital.
E. The cost of preferred stock decreases when the tax rate increases.
Which one of the following can be classified as an annuity but not as a perpetuity?
A. Increasing monthly payments forever
B. Increasing quarterly payments for six years
C. Unequal payments each year for nine years
D. Equal annual payments for life
E. Equal weekly payments forever
Dixie’s has a market value balance sheet as shown below. The firm currently has 2,200
shares of stock outstanding and net income of $10,500.
The firm has decided to spend $6,500 on new equipment and use the remaining excess
cash to pay an extra cash dividend. What will the firm’s PE ratio be after this dividend
is paid, all else held constant? Ignore taxes.
A. 14.20
B. 16.67
C. 13.08
D. 11.22
E. 14.57
The pro forma income statements for a proposed investment should include all of the
following except:
A. fixed costs.
B. forecasted sales.
C. depreciation expense.
D. taxes.
E. changes in net working capital.
JL Tools is a young start-up company. The company expects to pay its first dividend of
$.20 a share in Year 6 with annual dividend increases of 1.5 percent thereafter. At a
required return of 12 percent, what is the current share price?
A. $1.77
B. $1.08
C. $1.23
D. $1.90
E. $2.13