A trading opportunity that offers a riskless profit is called a(n):
A. put option.
B. call option.
C. market equilibrium.
D. arbitrage.
E. cross-hedge.
Answer:
Marshall’s purchased a corner lot five years ago at a cost of $498,000 and then spent
$63,500 on grading and drainage so the lot could be used for storing outdoor inventory.
The lot was recently appraised at $610,000. The company now wants to build a new
retail store on the site. The building cost is estimated at $1.1 million. What amount
should be used as the initial cash flow for this building project?
A. $1,661,500
B. $1,100,000
C. $1,208,635
D. $1,710,000
E. $1,498,000
Answer:
You are considering a project with the following data: Internal rate of return 8.7%
Profitability ratio .98 Net present value −$393 Payback period 2.44 years Required
return 9.5% Which one of the following is correct given this information?
A. The discount rate used in computing the net present value must have been less than
8.7%.
B. The discounted payback period will have to be less than 2.44 years.
C. The discount rate used to compute the profitability ratio was equal to the internal rate
of return.
D. This project should be accepted based on the profitability ratio.
E. This project should be rejected based on the internal rate of return.
Answer:
In calculating NPV using the flow-to-equity approach the discount rate is the:
A. all-equity cost of capital.
B. cost of equity for the levered firm.
C. all-equity cost of capital minus the weighted average cost of debt.
D. weighted average cost of capital.
E. all-equity cost of capital plus the weighted average cost of debt.
Answer:
Sue purchased a house for $89,000, spent $56,000 upgrading it, and currently had it
appraised at $212,900. The house is being rented to a family for $1,200 a month, the
maintenance expenses average $200 a month, and the property taxes are $4,800 a year.
If she sells the house she will incur $20,000 in expenses. She is considering converting
the house into professional office space. What opportunity cost, if any, should she
assign to this property if she has been renting it for the past two years? A. $178,500
A. $120,000
B. $185,000
C. ANSD. $192,900
D. $232,900
Answer:
The international Fisher effect says that _____ rates are equal across countries.
A. spot
B. one-year future
C. nominal
D. inflation
E. real
Answer:
Baker’s Confectionery has a bank balance of $16,218 and a book balance of $16,309.
The firm just received a check from a customer for $1,289 that it has recorded in its
checkbook but has not yet deposited into the bank. All of the firm’s other deposits have
cleared and those funds are currently available. What is the amount of the disbursement
float?
A. $91
B. $246
C. $1,198
D. $2,487
E. $1,807
Answer:
The studies conducted by Fama and French show that:
A. value stocks have higher average returns than growth stocks around the world.
B. growth stocks have higher average returns than value stocks around the world.
C. value stocks outperform in the U.S. while growth stocks outperform elsewhere.
D. growth stocks outperform in the U.S. while value stocks outperform elsewhere.
E. value and growth stocks perform relatively the same over longer periods of time.
Answer:
A stock had annual returns of 8 percent, 14 percent, and 2 percent for the past three
years. Based on these returns, what is the probability that this stock will earn at least 20
percent in any one given year?
A. .5%
B. 1.0%
C. 2.5%
D. 5.0%
E. 16.0%
Answer:
To protect against interest rate risk, the mortgage banker should:
A. buy futures, as this position will hedge losses if rates rise.
B. sell futures, as this position will hedge losses if rates rise.
C. sell futures, as this position will add to his gains if rates rise.
D. buy futures, as this position will add to his gains if rates rise.
E. avoid the futures market.
Answer:
Comparing two otherwise equivalent firms, the beta of the common stock of a levered
firm is _______ the beta of the common stock of an unlevered firm.
A. roughly equivalent to
B. significantly less
C. slightly less
D. greater than
E. equal to
Answer:
All else constant, a bond will sell at _____ when the yield to maturity is _____ the
coupon rate.
A. a premium; greater than
B. a premium; equal to
C. at par; greater than
D. at par; less than
E. a discount; greater than
Answer:
Russell’s has annual revenue of $387,000 with costs of $216,400.Depreciation is
$48,900 and the tax rate is 30 percent. The firm has debt outstanding with a market
value of $182,000 along with 9,500 shares of stock that is selling at $67 a share. The
firm has $48,000 of cash of which $29,500 is needed to run the business.What is the
firm’s EV/EBITDA ratio?
A. 5.57
B. 4.34
C. 3.39
D. 3.93
E. 6.20
Answer:
Which one of these applies to the dividend growth model of stock valuation?
A. The dividend must be for the same time period as the stock price.
B. The growth rate must be less than the discount rate.
C. The rate of growth must be positive.
D. The model cannot be applied if the growth rate is zero.
E. The dividend amount must be constant over time.
Answer:
The intercept point of the security market line is the rate of return which corresponds to:
A. the risk-free rate of return.
B. the market rate of return.
C. a value of zero.
D. a value of 1.0.
E. the beta of the market.
Answer:
Home Systems has sales of $312,800, cost of goods sold of $218,400, inventory of
$46,300, and accounts receivable of $62,700. How many days, on average, does it take
the firm to both sell its inventory and collect payment on the sale?
A. 142.10
B. 96.37
C. 178.21
D. 150.54
E. 124.03
Answer:
You borrow $199,000 to buy a house. The mortgage rate is 5.5 percent, compounded
monthly. The loan period is 30 years, and payments are made monthly. If you pay for
the house according to the loan agreement, how much total interest will you pay?
A. $218,086
B. $198,161
C. $207,764
D. $211,086
E. $185,059
Answer:
The operating cycle can be decreased by:
A. paying accounts payable faster.
B. discontinuing the discount given for early payment of an accounts receivable.
C. decreasing the inventory turnover rate.
D. collecting accounts receivable faster.
E. increasing the accounts payable turnover rate.
Answer:
Which one of these equations is an accurate expression of the balance sheet?
A.Assets Liabilities Stockholders’ equity
B.Stockholders’ equity Assets + Liabilities
C.Liabilities Stockholders’ equity Assets
D.Assets Stockholders’ equity Liabilities
E.Stockholders’ equity Assets Liabilities
Answer:
The interest rate charged per period multiplied by the number of periods per year is
called the _____ rate.
A. effective annual
B. annual percentage
C. periodic interest
D. compound interest
E. daily interest
Answer:
Credit analysis is best described as the process of:
A. collecting on an accounts receivable.
B. determining the optimal credit terms.
C. establishing the length of the credit period.
D. setting the amount of discount to be granted.
E. determining the probability that a customer will not pay.
Answer:
The average squared difference between the actual return and the average return is
called the:
A. volatility return.
B. variance.
C. standard deviation.
D. risk premium.
E. excess return.
Answer:
T&P common stock sells for $23.43 a share at a market rate of return of 11.65 percent.
The company just paid its annual dividend of $1.20. What is the dividend growth rate?
A. 5.87%
B. 6.43%
C. 5.91%
D. 6.07%
E. 6.21%
Answer:
A firm has debt of $7,000, equity of $12,000, a cost of debt of 7 percent, a cost of
equity of 14 percent, and a tax rate of 30 percent. What is the firm’s weighted average
cost of capital?
A. 8.45%
B. 9.90%
C. 10.65%
D. 12.50%
E. 14.00%
Answer:
Longmont Inc. is a levered firm with a cost of equity of 12 percent and a cost of debt of
6 percent. The required return on the assets is 10 percent. What is the firm’s debt-equity
ratio if there are no taxes?
A. .45
B. .50
C. .55
D. .60
E. .65
Answer:
One year ago, you purchased a stock at a price of $32.50. The stock pays quarterly
dividends of $.40 per share. Today, the stock is worth $34.60 per share. What is the total
dollar return per share to date from this investment?
A. $3.40
B. $3.70
C. $2.10
D. $2.50
E. $3.70
Answer:
Oscar’s Dog Treats had a cash flow to creditors of $2,840, a cash flow to stockholders
of $1,630 last year. The firm spent a net of $1,420 on fixed assets and reduced net
working capital by $330. What was the operating cash flow?
A.$6,190
B.$5,560
C.$3,500
D.$1,320
E.$4,9001
Answer:
Which one of these accounts is classified as a current asset on the balance sheet?
A.intangible asset
B.accounts payable
C.preferred stock
D.inventory
E.net plant and equipment
Answer:
Marcie’s Mercantile wants to maintain its current dividend policy, which is a payout
ratio of 35 percent. The firm does not want to increase its equity financing but is willing
to maintain its current debt-equity ratio. Given these requirements, the maximum rate at
which Marcie’s can grow is equal to:
A. 35 percent of the internal rate of growth.
B. 65 percent of the internal rate of growth.
C. the internal rate of growth.
D. the sustainable rate of growth.
E. 65 percent of the sustainable rate of growth.
Answer:
Underwood United has been approached by a new customer who has asked the firm to
extend credit for 30 days on a one-time purchase of $499. The firm’s required return on
receivables is 1.8 percent per month and the variable cost of the desired item is $327.
What is the NPV of granting credit if the firm estimates the probability of default is 15
percent?
A. $62.93
B. $108.40
C. $89.65
D. $94.15
E. $76.67
Answer: