Which statement is true concerning a controlled disbursement account?
A. The number of checks that can be disbursed on any one day is limited.
B. The bank will inform the firm of the amount that needs to be transferred on a daily
basis.
C. The amount that can be disbursed on any given day is limited to the balance in the
account when the bank opens in the morning.
D. The total number of checks that can be written in any one month is limited.
E. The amount of the disbursements is limited to the amount the firm has available on
its bank line of credit.
Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and
your heirs $10,000 per year forever. If the guaranteed rate of return on this investment
is 3.6 percent, how much will you pay for the policy?
A. $266,576.83
B. $277,777.78
C. $254,211.50
D. $267,119.02
E. $241,160.91
The balance sheet of Binger, Inc. has the following balances:
What is the amount of the change in net working capital?
A. -$1,800
B. -$7,400
C. $1,800
D. -$8,100
E. $8,100
Assume the total cost of a college education will be $325,000 when your child enters
college in 16 years. You presently have $40,000 to invest and do not plan to invest
anything further. What annual rate of interest must you earn on your investment to
cover the entire cost of your child’s college education?
A. 12.65 percent
B. 10.40 percent
C. 13.99 percent
D. 14.62 percent
E. 11.08 percent
Healthy Snacks has a target capital structure of 60 percent common stock, 3 percent
preferred stock, and 37 percent debt. Its cost of equity is 16.8 percent, the cost of
preferred stock is 11.4 percent, and the pretax cost of debt is 8.3 percent. What is the
company’s WACC if the applicable tax rate is 34 percent?
A. 13.29 percent
B. 12.61 percent
C. 12.34 percent
D. 12.45 percent
E. 12.83 percent
Florida Farms recently offered 12,000 shares of stock for sale but received payment for
only 10,500 shares since that was all the shares the underwriters could sell. What type
of underwriting was this?
A. Syndicated
B. Firm commitment
C. Private placement
D. Best efforts
E. Dutch auction
Pizza Pie maintains a constant debt-equity ratio of .55. The firm had net income of
$14,800 for the year and paid $12,000 in dividends. The firm has total assets of
$248,000. What is the sustainable growth rate?
A. 3.38 percent
B. 2.27 percent
C. 1.78 percent
D. 3.62 percent
E. 4.97 percent
One year ago, you bought a stock for $29.15 a share. You received a dividend of $1.04
per share last month and sold the stock today for $28.80 a share. What is the capital
gains yield on this investment?
A. 2.37 percent
B. 1.76 percent
C. -1.20 percent
D. -1.62 percent
E. .53 percent
Which one of the following is the most apt to have the largest risk premium in the
future based on the historical record for 1926-2014?
A. U.S. Treasury bills
B. Large-company stocks
C. Long-term government debt
D. Small-company stocks
E. Long-term corporate debt
Which statement is correct?
A. Underwriters exercise the Green Shoe option whenever the market price of an IPO
declines initially.
B. Underwriters guarantee the number of shares to be sold in a best efforts
underwriting.
C. Competitive underwriting is generally more expensive than negotiated underwriting.
D. The majority of equity underwritings in the U.S. are competitive underwritings.
E. Underwriters may receive warrants as part of their compensation.
The price at which a dealer will purchase a bond is referred to as the _____ price.
A. asked
B. face
C. call
D. put
E. bid
This morning, Jeff found an aged bond certificate lying on the street. He picked it up
and noticed that it was a 50-year bond that matured today. He presented the bond to the
bank teller at his local bank and received payment for both the entire principal and the
final interest payment. The bond that Jeff found must have been which one of the
following?
A. Debenture
B. Note
C. Registered-form bond
D. Bearer-form bond
E. Callable bond
The results of the dividend growth model:
A. vary directly with the market rate of return.
B. can only be applied to projects that have a growth rate equal to that of the current
firm.
C. are highly dependent upon the beta used in the model.
D. are sensitive to the rate of dividend growth.
E. are most reliable when the growth rate exceeds 10 percent.
Casper’s is analyzing a proposed expansion project that is much riskier than the firm’s
current operations. Thus, the project will be assigned a discount rate equal to the firm’s
cost of capital plus 2.5 percent. The proposed project has an initial cost of $18.1 million
that will be depreciated on a straight-line basis to a zero book value over 20 years. The
project also requires additional inventory of $428,000 over the project’s life.
Management estimates the facility will generate cash inflows of $2.46 million a year
over its 20-year life. After 20 years, the company plans to sell the facility for an aftertax
amount of$1.4 million. The company has 58,000 shares of common stock outstanding
at a market price of $52 a share. This stock just paid an annual dividend of $2.84 a
share. The dividend is expected to increase by 3.6 percent annually. The firm also has
15,000 shares of 9 percent preferred stock with a market value of $87 a share. The
preferred stock has a par value of $100. The company has $1.2 million of face value
bonds with semiannual payments and a coupon rate of 9 percent. The bonds are
currently priced at 102 percent of face value and mature in 13 years. The tax rate is 35
percent. Should the firm pursue the expansion project at this point in time? Why or why
not?
A. Accept; The NPV is $2.6 million.
B. Accept; The NPV is $1.0 million.
C. Reject; the NPV is -$3.2 million.
D. Reject; the NPV is -$3.0 million.
E. Reject; the NPV is -$1.4 million.
A bond trader just purchased and resold a bond. The amount of profit earned by the
trader from this purchase and resale is referred to as the:
A. market yield.
B. yield-to-call.
C. bid-ask spread.
D. current yield.
E. bond premium.
Swizer Industries has two separate divisions. Division X has less risk so its projects are
assigned a discount rate equal to the firm’s WACC minus .75 percent. Division Y has
more risk and its projects are assigned a rate equal to the firm’s WACC plus 1 percent.
The company has a debt-equity ratio of .48 and a tax rate of 34 percent. The cost of
equity is 15.4 percent and the aftertax cost of debt is 5.4 percent. Presently, each
division is considering a new project. Division Y’s project provides a return of
12.9percent while Division X’s project is expected to earn 11.5 percent. Which
project(s), if any, should the company accept?
A. Accept both X and Y
B. Accept X and reject Y
C. Reject X and accept Y
D. Reject both X and Y
E. The answer cannot be determined based on the information provided.
On which one of the following dates do dividends become a liability of the issuer for
accounting purposes?
A. First day of the fiscal year in which the dividend is expected to be paid
B. Twelve months prior to the expected dividend payment date
C. On the date the board declares the dividend
D. On the date the company announces the dividend to the public
E. On the date of payment
Tuesday, December 1, is the ex-dividend date for Alpha stock. Which one of the
following dates is the record date? Assume there are no banking holidays to consider.
A. Friday, November 27
B. Monday, November 30
C. Wednesday, December 2
D. Thursday, December 3
E. Friday, December 4
Tri-City Grocers is a chain of grocery stores that just hired a new CFO. Which of the
following actions would you expect this CFO to adopt given her statement that she
wants to implement a more flexible financing policy for the firm?
I. Easing the credit terms given to customers
II. Increasing the amount of inventory carried by each grocery store
III. Borrowing funds to keep more cash available for store operations
IV. Decreasing the firms’ investments in marketable securities
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
The Golf Range is considering adding an additional driving range to its facility. The
range would cost $229,000, would be depreciated on a straight-line basis over its
seven-year life, and would have a zero salvage value. The anticipated revenue from the
project is $62,500 a year with $18,400 of that amount being variable cost. The fixed
cost would be $15,700. The firm believes that it will earn an additional $22,500 a year
from its current operations should the driving range be added. The project will require
$3,000 of net working capital, which is recoverable at the end of the project. What is
the internal rate of return on this project at a tax rate of 34 percent?
A. 8.32 percent
B. 8.68 percent
C. 7.47 percent
D. 11.09 percent
E. 12.14 percent
An auction market:
A. is an electronic means of exchanging securities.
B. has a physical trading floor.
C. handles primary market transactions exclusively.
D. is also referred to as an OTC market.
E. is dealer-based.
You purchase a bond with an invoice price of $1,108.48. The bond has a coupon rate of
5.5 percent, semiannual coupons, and there are two months to the next coupon date.
What is the clean price of the bond?
A. $1,086.35
B. $1,090.15
C. $1,050.20
D. $998.50
E. $1,057.50
Which one of the following statements is correct related to the dividend growth model
approach to computing the cost of equity?
A. The rate of growth must exceed the required rate of return.
B. The rate of return must be adjusted for taxes.
C. The annual dividend used in the computation must be for Year 1 if you are Time 0’s
stock price to compute the return.
D. The cost of equity is equal to the return on the stock plus the risk-free rate.
E. The cost of equity is equal to the return on the stock multiplied by the stock’s beta.
A new issue of common stock offered to the general public by a firm that is currently
publicly held is called a(n):
A. initial public offering.
B. private placement.
C. rights offer.
D. venture capital offer.
E. seasoned equity offering.
One year ago, you purchased a $1,000 face value bond for a clean price of $980. The
bond currently has seven years remaining until maturity, pays a coupon payment of $45
every six months, and has a yield to maturity of 6.87 percent. What is the percentage
change in the bond price over the past year?
A. -6.24 percent
B. -14.70 percent
C. 15.48 percent
D. 13.96 percent
E. 6.61 percent
Morris & Morris writes three checks a day for an average amount of $16,410 each.
These checks generally clear the bank 2.5 days after they are written. In addition, the
firm generally receives and deposits checks amounting to $21,618 each day. All
deposits are available the next day. What is the firm’s net float?
A. Net collection float of $21,618
B. Net collection float of $101,457
C. Net collection float of $144,693
D. Net disbursement float of $101,457
E. Net disbursement float of $144,693
New Labs just announced that it has received a patent for a product that will eliminate
all flu viruses. This news is totally unexpected and viewed as a major medical
advancement. Which one of the following reactions to this announcement indicates the
market for New Labs stock is efficient?
A. The price of New Labs stock remains unchanged.
B. The price of New Labs stock increases rapidly and then settles back to its
pre-announcement level.
C. The price of New Labs stock increases rapidly to a higher price and then remains at
that price.
D. All stocks quickly increase in value and then all but New Labs stock fall back to
their original values.
E. The value of all stocks suddenly increase and then level off at their higher values.
Which of the following costs will tend to increase if a firm switches to a restrictive
short-term financial policy from a flexible short-term policy?
I. Lost sales due to out-of-stock items
II. Inventory warehousing costs
III. Cash-outs
IV. Total annual order costs
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
The internal rate of return is the:
A. discount rate that causes a project’s aftertax income to equal zero.
B. discount rate that results in a zero net present value for the project.
C. discount rate that results in a net present value equal to the project’s initial cost.
D. rate of return required by the project’s investors.
E. project’s current market rate of return.
Spiral Staircase is offering preferred stock which is referred to as 10-10 stock. This
stock will pay an annual dividend of $10 a share starting 10 years from now. What is
this stock worth to you today if you require a rate of return of 9.5 percent?
A. $66.70
B. $46.51
C. $49.63
D. $120.52
E. $105.26
The relationship between the present value and the investment time period is best
described as:
A. direct.
B. inverse.
C. unrelated.
D. ambiguous.
E. parallel.