The return earned in an average year over a multi-year period is called the _____
average return.
A. arithmetic
B. standard
C. variant
D. geometric
E. real
Combined Communications is a new firm in a rapidly growing industry. The company
is planning on increasing its annual dividend by 15 percent a year for the next 4 years
and then decreasing the growth rate to 3.5 percent per year. The company just paid its
annual dividend in the amount of $0.20 per share. What is the current value of one share
of this stock if the required rate of return is 15.5 percent?
A. $1.82
B. $2.04
C. $2.49
D. $2.71
E. $3.05
Three months ago, Toy Town introduced a new toy for pre-school children. The store
expected this toy to be an instant success and a fast moving item. To their surprise,
children have zero interest in this toy so sales have been abysmal. Which one of the
following options should Toy Town consider in respect to this toy?
A. suspension
B. expansion
C. abandonment
D. contraction
E. re-introduction
You are viewing a graph which compares costs with the amount of credit extended.
Both the carrying costs and the opportunity costs of credit are depicted. What is the
function called that represents the summation of these carrying and opportunity costs?
A. opportunity cost curve
B. credit extension curve
C. credit cost curve
D. terms of sale graph
E. optimal sales graph
The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio. What
is the internal growth rate?
A. 6.50 percent
B. 6.75 percent
C. 6.97 percent
D. 7.24 percent
E. 7.38 percent
Lancaster Toys has a profit margin of 9.6 percent, a total asset turnover of 1.71, and a
return on equity of 21.01 percent. What is the debt-equity ratio?
A. 0.22
B. 0.28
C. 0.46
D. 0.72
E. 0.78
You are analyzing a project with an initial cost of 48,000. The project is expected to
return 11,000 the first year, 36,000 the second year and 38,000 the third and final year.
There is no salvage value. The current spot rate is 0.6211. The nominal return relevant
to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 4 percent
while it is 5 percent in the U.K. Assume that uncovered interest rate parity exists. What
is the net present value of this project in U.S. dollars?
A. $23,611
B. $25,938
C. $26,930
D. $29,639
E. $30,796
Roger’s Meat Market is considering two independent projects. The profitability index
decision rule indicates that both projects should be accepted. This result most likely
does which one of the following?
A. conflicts with the results of the net present value decision rule
B. assumes the firm has sufficient funds to undertake both projects
C. agrees with the decision that would also apply if the projects were mutually
exclusive
D. bases the accept/reject decision on the same variables as the average accounting
return
E. fails to provide useful information as the firm must reject at least one of the projects
Which two of the following are the key elements in determining whether or not a switch
from a no-credit policy to a credit policy is advisable?
I. variable cost per unit
II. cash discount percentage
III. credit price
IV. default rate
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
E. III and IV only
Which one of the following is the legal proceeding under which an insolvent firm can
be reorganized?
A. restructure process
B. bankruptcy
C. forced merger
D. legal takeover
E. rights offer
The internal rate of return is defined as the:
A. maximum rate of return a firm expects to earn on a project.
B. rate of return a project will generate if the project in financed solely with internal
funds.
C. discount rate that equates the net cash inflows of a project to zero.
D. discount rate which causes the net present value of a project to equal zero.
E. discount rate that causes the profitability index for a project to equal zero.
The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 4.8
percent and the firm has a 30 percent dividend payout ratio. What is the projected
increase in retained earnings?
A. $14,700
B. $17,500
C. $18,300
D. $20,600
E. $21,000
Jefferson Refining is issuing a rights offering wherein every shareholder will receive
one right for each share of stock they own. The new shares in this offering are priced at
$21 plus 3 rights. The current market price of the stock is $23 a share. What is the value
of one right?
A. $0.25
B. $0.50
C. $1.00
D. $1.50
E. $2.00
Which of the following have been suggested as reasons why the stockholders in
acquiring firms may not benefit to any significant degree from an acquisition?
I. the price paid for the target firm might equal the target firm’s total value
II. management may have priorities other than the interest of the stockholders
III. the takeover market may not be competitive
IV. anticipated merger gains may not be fully achieved
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
Which one of the following supports the idea that real interest rates are equal across
countries?
A. unbiased forward rates condition
B. uncovered interest rate parity
C. international Fisher effect
D. purchasing power parity
E. interest rate parity
Western Industrial Products is considering a project with a four-year life and an initial
cost of $212,000. The discount rate for the project is 16 percent. The firm expects to
sell 9,600 units on the last day of each year. The cash flow per unit is $50. The firm will
have the option to abandon this project at the end of year one (after year one’s sales) at
which time the project’s assets could be sold for an estimated $125,000. The firm
should abandon the project at the end of year one if the expected level of annual sales,
starting with year 2, falls to _____ units or less. Ignore taxes.
A. 1,113 units
B. 1,267 units
C. 1,922 units
D. 2,034 units
E. 2,108 units
Dividend payments are mailed on which one of the following dates?
A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date
Suppose the spot exchange rate for the Canadian dollar is C$1.28 and the six-month
forward rate is C$1.33. The U.S. dollar is selling at a _____ relative to the Canadian
dollar and the U.S. dollar is expected to _____ relative to the Canadian dollar.
A. discount; appreciate
B. discount; depreciate
C. premium; appreciate
D. premium; depreciate
E. premium; remain constant
East Side, Inc. has no debt outstanding and a total market value of $136,000. Earnings
before interest and taxes, EBIT, are projected to be $12,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 27 percent
higher. If there is a recession, then EBIT will be 55 percent lower. East Side is
considering a $54,000 debt issue with a 5 percent interest rate. The proceeds will be
used to repurchase shares of stock. There are currently 2,000 shares outstanding. Ignore
taxes. If the economy enters a recession, EPS will change by ____ percent as compared
to a normal economy, assuming that the firm recapitalizes.
A. -70.97 percent
B. -63.15 percent
C. -58.08 percent
D. -42.29 percent
E. -38.87 percent
Suppose that the first comic book of a classic series was sold in 1954. In 2000, the
estimated price for this comic book in good condition was about $340,000. This
represented a return of 27 percent per year. For this to be true, what was the original
price of the comic book in 1954?
A. $5.00
B. $5.28
C. $5.50
D. $5.71
E. $6.00
Cash flow from assets is also known as the firm’s:
A. capital structure.
B. equity structure.
C. hidden cash flow.
D. free cash flow.
E. historical cash flow.
The primary purpose of Blume’s formula is to:
A. compute an accurate historical rate of return.
B. determine a stock’s true current value.
C. consider compounding when estimating a rate of return.
D. determine the actual real rate of return.
E. project future rates of return.
Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The
bonds have a 5 percent coupon rate. What is the current yield on these bonds?
A. 4.67 percent
B. 4.78 percent
C. 5.08 percent
D. 5.33 percent
E. 5.54 percent
Which of the following variables will be at their highest expected level under a worst
case scenario?
I. fixed cost
II. sales price
III. variable cost
IV. sales quantity
A. I only
B. III only
C. II and III only
D. I and III only
E. I, III, and IV only
Small-company stocks, as the term is used in the textbook, are best defined as the:
A. 500 newest corporations in the U.S.
B. firms whose stock trades OTC.
C. smallest twenty percent of the firms listed on the NYSE.
D. smallest twenty-five percent of the firms listed on NASDAQ.
E. firms whose stock is listed on NASDAQ.
One year ago, you purchased 500 shares of Best Wings, Inc. stock at a price of $9.60 a
share. The company pays an annual dividend of $0.10 per share. Today, you sold all of
your shares for $15.60 a share. What is your total percentage return on this investment?
A. 38.46 percent
B. 39.10 percent
C. 39.72 percent
D. 62.50 percent
E. 63.54 percent
The costs incurred by a business in an effort to avoid bankruptcy are classified as _____
costs.
A. flotation
B. direct bankruptcy
C. indirect bankruptcy
D. financial solvency
E. capital structure
In general, the capital structures used by U.S. firms:
A. tend to overweigh debt in relation to equity.
B. generally result in debt-equity ratios between 0.45 and 0.60.
C. are fairly standard for all SIC codes.
D. tend to be those which maximize the use of the firm’s available tax shelters.
E. vary significantly across industries.
The type of exchange rate risk known as translation exposure is best described as:
A. the risk that a positive net present value (NPV) project could turn into a negative
NPV project because of changes in the exchange rate between two countries.
B. the problem encountered by an accountant of an international firm who is trying to
record balance sheet account values.
C. the fluctuation in prices faced by importers of foreign goods.
D. the variance in relative pay rates based on the currency used to pay an employee.
You purchased an investment which will pay you $8,000, in real dollars, a year for the
next three years. Each payment will be received at the end of the period with the first
payment occurring one year from today. The nominal discount rate is 7.5 percent and
the inflation rate is 2.9 percent. What is the present value of these payments?
A. $21,720
B. $22,004
C. $22,511
D. $23,406
E. $23,529