Assume the single-factor APT model is applied to a security that has a negative factor
beta. The security will:
A. always have a positive rate of return.
B. have an expected return greater than the risk-free rate.
C. have an actual return that is less than the risk-free rate.
D. have an expected return equal to the market rate of return.
E. have an actual rate of return that can be positive, negative, or zero.
Answer:
When computing WACC, you should use the:
A. pretax cost of debt because most corporations pay taxes at the same tax rate.
B. pretax cost of debt because it is the actual rate the firm is paying bondholders.
C. current yield because it is based on the current market price of debt.
D. aftertax cost of debt because interest is tax deductible.
E. pretax yield to maturity because it considers the current market price of debt.
Answer:
Down Under Stores is considering an investment with an initial cost of $236,000. In
Year 4, the project will require an additional investment and finally, the project will be
shut down in Year 7. The annual cash flows for Years 1 to 7, respectively, are projected
as $64,000, $87,000, $91,000, −$48,000, $122,000, $154,000, and −$30,000. If all
negative cash flows are moved to Time 0 using a discount rate of 13 percent, what is the
project’s modified IRR?
A. 15.44%
B. 17.67%
C. 18.54%
D. 14.91%
E. 22.08%
Answer:
In an efficient market, the price of a security will:
A. always rise immediately upon the release of new information with no further price
adjustments related to that information.
B. react to new information over a two-day period after which time no further price
adjustments related to that information will occur.
C. rise sharply when new information is first released and then decline to a new stable
level by the following day.
D. react immediately to any new information that affects the value of the issuing firm.
E. be slow to react for the first few hours after new information is released allowing
time for that information to be reviewed and analyzed.
Answer:
A key underlying assumption of MM Proposition I without taxes is that:
A. financial leverage increases risk.
B. individuals can borrow at lower rates than corporations.
C. individuals and corporations borrow at the same rate.
D. managers always act to maximize the value of the firm.
E. corporations are all-equity financed.
Answer:
A 3-year project is expected to produce a cash flow of $82,400 in the first year and
$148,600 in the second year. The project has a present value of $303,764.34 at a
discount rate of 12.75 percent. What is the expected cash flow in the third year of the
project?
A. $163,100
B. $163,800
C. $164,900
D. $164,400
E. $163,700
Answer:
By getting closer to the source of payment, lockboxes can be used to reduce:
A. availability float.
B. mail float.
C. in-house processing float.
D. disbursement float.
E. clearing float.
Answer:
On a balance sheet, deferred taxes are classified as:
A.stockholders’ equity.
B.a current asset.
C.a long-term liability.
D.a fixed asset.
E.a current liability.
Answer:
You are buying a car for $7,500, paying $900 down in cash, and financing the balance
for 24 months at 6.5 percent, compounded monthly. What is the amount of each
monthly loan payment?
A. $318.64
B. $294.01
C. $302.02
D. $264.78
E. $245.09
Answer:
The systematic response coefficient for productivity, βp, would produce an unexpected
change in any security return of [βP ___] if the expected rate of productivity was 1.8
percent and the actual rate was 2.2 percent.
A. .4%
B. -.4%
C. 2.2%
D. –2.2%
E. 1.8%
Answer:
The upper limit of a warrant’s value is best defined as the:
A. exercise price.
B. MAX(0, Stock price – Exercise price).
C. underlying stock price.
D. MAX(0, Exercise price – Stock price).
E. MIN(0, Stock price – Exercise price).
Answer:
Six months ago, you purchased 100 shares of stock in ABC at a price of $43.26 a share.
The stock pays a quarterly dividend of $.10 a share. Today, you sold all of your shares
for $46.71 per share. What is your holding period total return?
A. 8.24%
B. 7.81%
C. 7.97%
D. 8.44%
E. 8.90%
Answer:
Sun Shade’s has sales of $363,000, total assets of $323,500, and a profit margin of 14.6
percent. The firm has a total debt ratio of 54 percent. What is the return on equity?
A. 28.45%
B. 35.61%
C. 23.29%
D. 31.74%
E. 7.88%
Answer:
The Blue Giant has a profit margin of 6.2 percent and a dividend payout ratio of 40
percent. The capital intensity is 1.08 and the debt-equity ratio is .54. What is the
sustainable rate of growth?
A. 6.30%
B. 5.53%
C. 5.60%
D. 6.41%
E. 5.89%
Answer:
The decisions made by financial managers should all be ones which increase the:
A. size of the firm.
B. growth rate of the firm.
C. marketability of the managers.
D. market value of the existing owners’ equity.
E. firm’s current sales.
Answer:
A firm is evaluating a project with an initial investment at time 0 of $640,000. The
present value of the levered cash flows is $729,400 and the net present value of the
project is $157,000. Using the flow-to-equity method of valuation determine the
amount borrowed.
A. $89,400
B. $246,400
C. $67,600
D. $54,300
E. $64,000
Answer:
You own ten put option contracts on XYZ stock with an exercise price of $25. What is
the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a
share?
A. -$500
B. -$50
C. $0
D. $50
E. $500
Answer:
Western Markets has 150,000 shares outstanding with a market price per share of $15.
Each share is entitled to one right. If the firm sets a rights offer as 5 rights plus $10 for
each new share, what will be the ex-rights price per share?
A. $12.23
B. $14.17
C. $15.83
D. $13.77
E. $14.49
Answer:
Insider trading does not offer any advantages if the financial markets are:
A. weak form efficient.
B. semiweak form efficient.
C. semistrong form efficient.
D. strong form efficient.
E. inefficient.
Answer:
Which one of these statements is correct assuming exchange rates are quoted as units of
foreign currency per dollar?
A. The exchange rate moves opposite to the value of the dollar.
B. The exchange rate rises when the U.S. inflation rate is higher than that of the foreign
country.
C. When a foreign currency appreciates in value it strengthens relative to the dollar.
D. The exchange rate falls as the dollar strengthens.
E. The exchange rate is unaffected by differences in the inflation rates of the two
countries.
Answer:
Which one of the following should be excluded from the analysis of a project?
A. erosion costs
B. incremental fixed costs
C. incremental variable costs
D. sunk costs
E. opportunity costs
Answer:
Not paying dividends on a cumulative preferred issue may result in:
A. preferred dividend arrearages that can be eliminated only after all common dividends
are paid.
B. increased taxes based on the amount of the dividend arrearage.
C. the permanent forfeiture of all unpaid past dividends but the resumption of future
dividends.
D. the issuer being forced into repaying all preferred shareholders the stated value of
their shares.
E. voting rights being granted to preferred shareholders.
Answer:
Transfer or expropriation of wealth from bondholders to stockholders is less likely to
occur when:
A. subordinated straight debt is issued because the senior bondholders provide
protection for the subordinated bondholders.
B. convertible debt is issued because the equity component will reduce agency costs.
C. convertible debt is issued because the holders can more readily sue when a high-risk
project is undertaken.
D. subordinated debt is issued because monitoring is much easier when subordinated
straight debt is issued.
E. straight debt is issued because there is a clearer distinction between creditors and
shareholders.
Answer:
Which one of these statements is correct?
A. Finished goods are classified as a commodity.
B. Work-in-progress may have less resell value than the individual component parts did.
C. Raw materials that are considered to be a commodity are generally illiquid.
D. Raw materials consist of only those goods that are found in nature.
E. Finished goods are highly liquid because they are completed.
Answer:
The Boat Company has a capital structure of 30 percent riskless debt and 70 percent
equity. The tax rate is 35 percent. If the asset beta .9, what is the equity beta?
A. .63
B. .41
C. 1.15
D. 1.20
E. 1.49
Answer:
Last year, Webster Farms had annual revenue of $87,200, depreciation of $11,600, cost
of goods sold of $54,700, and administrative expenses of $8,300. The firm paid $3,200
in dividends and paid taxes of $4,300. What was the operating cash flow?
A.$11,500
B.$8,300
C.$23,100
D.$19,900
E.$16,700
Answer:
The EOQ model assumes inventory:
A. is held at a constant level.
B. is sold at a steady rate until it is depleted.
C. will be available just as it is needed for production.
D. has seasonal fluctuations.
E. can be delivered immediately upon order.
Answer:
Firm A is planning on merging with Firm B. Firm A will pay Firm B’s stockholders the
current value of their stock plus one-half of the synergy, which is $120, in shares of
Firm A. Firm A currently has 4,000 shares of stock outstanding at a market price of $21
a share. Firm B has 1,200 shares outstanding at a price of $10 a share. What is the value
of the merged firm?
A. $88,120
B. $96,240
C. $96,000
D. $84,120
E. $92,360
Answer:
Assume the official USD equivalent of one Canadian dollar is .8831 and the USD
equivalent of the U.K. pound is 1.5602. Further assume you have 100 pounds and have
been offered Can$180 for them. If you use triangle arbitrage and the entire 100, you can
earn a profit of:
A. .56.
B. 1.88.
C. -.87.
D. 1.09.
E. -2.03.
Answer:
Upland Motors recently paid a $1.48 per share annual dividend. Dividends are expected
to increase by 2.5 percent annually. What is one share of this stock worth today if the
appropriate discount rate is 14 percent?
A. $12.87
B. $13.04
C. $14.16
D. $13.19
E. $12.25
Answer:
What are the arithmetic and geometric (Answer in that order.) average returns for a
stock with annual returns of 9.4 percent, 8.2 percent, -7.3 percent, 4.1 percent, and 9.5
percent?
A. 5.61%; 4.58%
B. 5.61%; 4.78%
C. 4.78%; 4.58%
D. 4.58%; 5.61%
E. 4.58%; 4.78%
Answer:
Three months ago, you purchased three put option contracts on WXX stock with a
strike price of $60 and an option price of $.60. The option expires today when the value
of WXX stock is $48.10. Ignoring trading costs and taxes, what is your total profit on
your investment?
A. -$180
B. $3,390
C. -$60
D. $1,130
E. $1,090
Answer: