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A trader has just agreed to exchange $2 million U.S. dollars for $1.55 million Euros six
months from today. This exchange is an example of a:
A. spot trade.
B. forward trade.
C. currency swap.
D. floating swap.
E. triangle arbitrage.
Steve has invested in twelve different stocks that have a combined value today of
$121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is
a measure of which one of the following?
A. portfolio return
B. portfolio weight
C. degree of risk
D. price-earnings ratio
E. index value
Major Manuscripts, Inc. is currently operating at 85 percent of capacity. All costs and
net working capital vary directly with sales. The tax rate, the profit margin, and the
dividend payout ratio will remain constant. How much additional debt is required if no
new equity is raised and sales are projected to increase by 15 percent?
A. -$810
B. -$756
C. -$642
D. $244
E. $358
Which one of the following statements correctly applies to a legally defined merger?
A. The acquiring firm retains its identity and absorbs only the assets of the acquired
firm.
B. The acquired firm is completely absorbed and ceases to exist as a separate legal
entity.
C. A new firm is created which includes all the assets and liabilities of the acquiring
firm plus the assets only of the acquired firm.
D. A new firm is created from the assets and liabilities of both the acquiring and
acquired firms.
E. A merger reclassifies the acquired firm into a new entity which becomes a subsidiary
of the acquiring firm.
Which one of the following terms applies to the value of an option on its expiration
date?
A. strike price
B. upper limit
C. deadline price
D. time value
E. intrinsic value
Which one of the following methods determines the amount of the change a proposed
project will have on the value of a firm?
A. net present value
B. discounted payback
C. internal rate of return
D. profitability index
E. payback
The Sweet Shoppe and Candy Land are all-equity firms. The Sweet Shoppe has 500
shares outstanding at a market price of $96 a share. Candy Land has 2,500 shares
outstanding at a price of $24 a share. The Sweet Shoppe is acquiring Candy Land for
$62,000 in cash. The incremental value of the acquisition is $3,600. What is the net
present value of acquiring Candy Land to The Sweet Shoppe?
A. $1,100
B. $1,600
C. $2,700
D. $4,200
E. $5,700
Hungry Howie's is currently operating at full capacity. The profit margin and the
dividend payout ratio are held constant. Net working capital and fixed assets vary
directly with sales. Sales are projected to increase by 11 percent. What is the external
financing needed?
A. -$196.50
B. -$148.00
C. -$97.20
D. -$14.50
E. $26.80
Mario's has 18,000 shares of stock outstanding with a par value of $1 per share and a
market price of $4 a share. The balance sheet shows $18,000 in the common stock
account, $336,000 in the paid in surplus account, and $64,000 in the retained earnings
account. The firm just announced a 5-for-1 stock split. What will the paid in surplus
account value be after the split?
A. $66,000
B. $336,000
C. $426,000
D. $548,000
E. $606,000
The profit margin, the debt-equity ratio, and the dividend payout ratio for Fake Stone,
Inc. are constant. Sales are expected to increase by $1,062 next year. What is the
projected addition to retained earnings for next year?
A. $92.34
B. $188.55
C. $1,909.16
D. $2,144.34
E. $2,386.08
Which one of the following will increase net working capital? Assume the current ratio
is greater than 1.0.
A. paying a supplier for a previous purchase
B. paying off a long-term debt
C. selling inventory at cost
D. purchasing inventory on credit
E. selling inventory at a profit on credit
Which one of the following statements related to corporate dividends is correct?
A. Dividends are nontaxable income to shareholders.
B. Dividends reduce the taxable income of the corporation.
C. The Chief Executive Officer of a corporation is responsible for declaring dividends.
D. The Chief Financial Officer of a corporation determines the amount of dividend to
be paid.
E. Corporate shareholders may receive a tax break on a portion of their dividend
income.
The U.S. Securities and Exchange Commission periodically charges individuals with
insider trading and claims those individuals have made unfair profits. Given this, you
would be most apt to argue that the markets are less than _____ form efficient.
A. weak
B. semiweak
C. semistrong
D. strong
E. perfect
The common stock of Gillen Entertainment is selling for $78 a share. The par value per
share is $1. Currently, the firm has a total market value of $936,000. How many shares
of stock will be outstanding if the firm does a 5-for-2 stock split?
A. 4,800 shares
B. 9,600 shares
C. 15,000 shares
D. 30,000 shares
E. 32,200 shares
Over a 34-year period an asset had an arithmetic return of 13 percent and a geometric
return of 10.5 percent. Using Blume's formula, what is your best estimate of the future
annual returns over the next 10 years?
A. 11.18 percent
B. 11.27 percent
C. 11.84 percent
D. 12.32 percent
E. 12.46 percent
You just purchased some equipment that is classified as 5-year property for MACRS.
The equipment cost $147,000. What will the book value of this equipment be at the end
of 4 years should you decide to resell the equipment at that point in time?
A. $8,467.20
B. $25,401.60
C. $42,336.00
D. $121,598.40
E. $138,532.80
Electronic Importers has a pure discount bond with a face value of $25,000 that matures
in one year. The risk-free rate of return is 3.8 percent. The assets of the business are
expected to be worth either $23,000 or $35,000 in one year. Currently, these assets are
worth $27,500. What is the current value of the bond?
A. $17,746
B. $19,207
C. $20,222
D. $22,549
E. $23,048
Consider a project with the following data: accounting break-even quantity = 29,000
units; cash break-even quantity = 15,950 units; life = 10 years; fixed costs = $203,000;
variable costs = $24 per unit; required return = 14 percent; depreciation = straight line.
Ignoring the effect of taxes, what is the financial break-even quantity?
A. 38,723 units
B. 39,201 units
C. 39,458 units
D. 39,624 units
E. 40,969 units
The investment timing decision is the:
A. determination of when an option should be exercised.
B. decision of when to purchase an option on an underlying asset.
C. analysis of determining when an asset should be sold.
D. determination of when a project should be abandoned.
E. evaluation of the optimal time to begin a project.
Sligo Minerals stock is currently trading at $6 a share. The firm believes its primary
clientele can afford to spend between $1,500 and $2,000 to purchase a round lot of 100
shares. The firm should consider a:
A. reverse stock split.
B. liquidating dividend.
C. stock dividend.
D. stock split.
E. special dividend.
Dog Up! Franks is looking at a new sausage system with an installed cost of $397,800.
This cost will be depreciated straight-line to zero over the project's 7-year life, at the
end of which the sausage system can be scrapped for $61,200. The sausage system will
save the firm $122,400 per year in pretax operating costs, and the system requires an
initial investment in net working capital of $28,560. All of the net working capital will
be recovered at the end of the project. The tax rate is 33 percent and the discount rate is
9 percent. What is the net present value of this project?
A. -$41,311
B. -$7,820
C. $81,507
D. $98,441
E. $118,821
T-bills currently yield 6.3 percent. Stock in Pinta Manufacturing is currently selling for
$46 per share. There is no possibility that the stock will be worth less than $39 per share
in one year. What is the value of a call option on this stock if the exercise price is $22
per share?
A. $21.40
B. $22.00
C. $24.00
D. $25.30
E. $25.70
Which two of the following factors cause the yields on a corporate bond to differ from
those on a comparable Treasury security?
I. inflation risk
II. interest rate risk
III. taxability
IV. default risk
A. I and II only
B. III and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Float is defined as the:
A. amount of cash a firm can immediately withdraw from its bank account.
B. difference between book cash and bank cash.
C. change in a firm's cash balance from one accounting period to the next.
D. amount of cash a firm has on hand.
E. cash balance according to a firm's records.
Which one of the following is a source of cash?
A. increase in accounts receivable
B. decrease in common stock
C. decrease in long-term debt
D. decrease in accounts payable
E. decrease in inventory
Which one of the following relationships is stated correctly?
A. The coupon rate exceeds the current yield when a bond sells at a discount.
B. The call price must equal the par value.
C. An increase in market rates increases the market price of a bond.
D. Decreasing the time to maturity increases the price of a discount bond, all else
constant.
E. Increasing the coupon rate decreases the current yield, all else constant.
You are analyzing a project and have gathered the following data:
Based on the internal rate of return of _____ percent for this project, you should _____
the project.
A. 14.67; accept
B. 17.91; accept
C. 14.67; reject
D. 17.91; reject
E. 18.46; reject
Which one of the following can be used to replicate a protective put strategy?
A. riskless investment and stock purchase
B. stock purchase and call option
C. call option and riskless investment
D. riskless investment
E. call option, stock purchase, and riskless investment
Which of the following determines the length of the operating cycle?
I. cash cycle
II. inventory period
III. accounts payable period
IV. accounts receivable period
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
You work for a nuclear research laboratory that is contemplating leasing a diagnostic
scanner (leasing is a very common practice with expensive, high-tech equipment). The
scanner costs $2 million and it would be depreciated straight-line to zero over 4 years.
Because of radiation contamination, it will actually be completely valueless in 4 years.
You can lease it for $500,000 per year for 4 years. Assume the tax rate is 34 percent.
You can borrow at 10 percent before taxes. What is the net advantage to leasing from
the lessor's viewpoint?
A. -$290,988
B. -$267,307
C. -$248,464
D. $26,228
E. $103,511
You are considering the following two mutually exclusive projects. The required rate of
return is 14.6 percent for project A and 13.8 percent for project B. Which project should
you accept and why?
A. project A; because it has the higher required rate of return
B. project A; because its NPV is about $4,900 more than the NPV of project B
C. project B; because it has the largest total cash inflow
D. project B; because it has the largest cash inflow in year one
E. project B; because it has the lower required return
