360-1

62. A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio? A. 12.82 B. 7.69 C. 8.33 D. 9.46

B. 7.69

61. A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio? A. 12.00 B. 8.33 C. 10.25 D. 18.55

B. 8.33

55. Ace Frisbee Corporation produces a good that is very mature in their product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3.00, a dividend in year 2 of $2.00, and a dividend in year 3 of $1.00. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today. A. $13.07 B. $13.58 C. $18.25 D. $18.78

A. $13.07

79. The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the market value of the firm if the FCFE grows at 3% and the cost of equity is 14%? A. $1,893 billion B. $2,497 billion C. $2,585 billion D. $3,098 billion

A. $1,893 billion

51. Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4.00. Using the constant growth DDM, the intrinsic value of the stock is _________. A. $10.00 B. $22.73 C. $27.78 D. $41.67

A. $10.00

25. A firm has a P/E ratio of 24 and a ROE of 12%. Its market-to-book-value ratio is _________. A. 2.88 B. 2.00 C. 1.75 D. 0.69

A. 2.88

87. Estimates of a stock's intrinsic value calculated with the free cash flow methodology depends most critically on _______. A. the terminal value used B. whether one uses FCFF or FCFE C. the time period used to estimate the cash flows D. whether the firm is currently paying dividends

A. the terminal value used

13. Common size balance sheets are prepared by dividing all quantities by ____________. A. total assets B. total liabilities C. shareholder's equity D. fixed assets

A. total assets

24. You wish to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant growth DDM, the intrinsic value of stock A _________. A. will be higher than the intrinsic value of stock B B. will be the same as the intrinsic value of stock B C. will be less than the intrinsic value of stock B D. more information is necessary to answer this question

A. will be higher than the intrinsic value of stock B

64. When assessing sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources? A. Cash flow from investment activities B. Cash flow from operating activities C. Cash flow from financing D. Cash flow from extraordinary events

B. Cash flow from operating activities

86. At what point in an industry life cycle are inefficiencies in competitors most likely to be removed? A. Start up stage B. Consolidation stage C. Maturity stage D. Relative decline stage

B. Consolidation stage

10. In 2006 Hewlett Packard repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million and Hewlett-Packard's total cash flow from financing was -$6,077 million. How much did the long term debt accounts of Hewlett Packard change? A. Increased $138 million B. Decreased $138 million C. Increased $836 million D. Decreased $836 million

B. Decreased $138 million

79. The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ___________. A. expanding economy B. increased inflation C. interest rate declines D. lower GDP

B. increased inflation

52. The discount rate is the ________. A. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed B. interest rate the Fed charges commercial banks on short term loans C. interest rate that the U.S. Treasury pays on its bills D. interest rate that banks charge their best corporate customers

B. interest rate the Fed charges commercial banks on short term loans

31. In macroeconomic terms an increase in the price of imported oil or a decrease in the availability of oil is an example of a _________. A. demand shock B. supply shock C. monetary shock D. refinery shock

B. supply shock

41. Firm A is high risk and Firm B is low risk. Everything else equal, which firm would you expect to have a higher P/E ratio? A. Firm A B. Firm B C. Both would have the same P/E if they were in the same industry D. There is not any necessary linkage between risk and P/E ratios

C. Both would have the same P/E if they were in the same industry

14. Operating ROA is calculated as __________ while ROE is calculated as _________. A. EBIT/Total Assets; Net Profit/Total Assets B. Net Profit/Total Assets; EBIT/Total Assets C. EBIT/Total Assets; Net Profit/Equity D. Net Profit/EBIT; Sales/Total Assets

C. EBIT/Total Assets; Net Profit/Equity

48. Which of the following describes the ratio of the number of people classified as out of work to the total labor force? A. The capacity utilization rate B. The participation rate C. The unemployment rate D. The natural rate

C. The unemployment rate

50. An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis. A. bottom-up B. outside-inside C. top-down D. upside-down

C. top-down

31. A preferred share of Coquihalla Corporation will pay a dividend of $8.00 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 7% on this stock. Using the constant growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________. A. $13.50 B. $45.50 C. $91.00 D. $114.29

D. $114.29

5. Firm A acquires Firm B when Firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for Firm B. This purchase would result in goodwill for Firm A equal to A. $175 million B. $155 million C. $120 million D. $55 million

D. $55 million

36. Which of the following affects a firm's sensitivity of its earnings to the business cycle? I. Financial leverage II. Operating leverage III. Type of product A. II only B. I and II only C. I and III only D. I, II and III

D. I, II and III

59. Everything equal, which variable is negatively related to intrinsic value of a company? A. D1 B. D0 C. g D. k

D. k

17. GDP refers to _________. A. the amount of personal disposable income in the economy B. the difference between government spending and government revenues C. the total manufacturing output in the economy D. the total production of goods and services in the economy

D. the total production of goods and services in the economy

65. A stock is priced at $45 per share. The stock has earnings per share of $3.00 and a market capitalization rate of 14%. What is the stock's PVGO? A. $23.57 B. $15.00 C. $19.78 D. $21.34

A. $23.57

38. Ace Ventura, Inc. has expected earnings of $5 per share for next year. The firm's ROE is 15% and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities? A. $25 B. $50 C. $75 D. $100

A. $25

39. Annie's Donut Shops, Inc. has expected earnings of $3.00 per share for next year. The firm's ROE is 18% and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities? A. $25.00 B. $50.00 C. $83.33 D. $208

A. $25.00

77. The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33, what is the free cash flow to the equity holders of the firm? A. $269 million B. $296 million C. $305 million D. $327 million

A. $269 million

76. The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50, what is the free cash flow to the equity holders of the firm? A. $406 million B. $454 million C. $505 million D. $553 million

A. $406 million

71. A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations? A. $50 increase B. $100 increase C. $150 increase D. $250 increase

A. $50 increase

3. Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of -0.50. Using the constant growth DDM, the intrinsic value of the stock is _________. A. $50.00 B. $100.00 C. $150.00 D. $200.00

A. $50.00

29. Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate? A. 0.5% B. 1.0% C. 1.5% D. 2.0%

A. 0.5%

67. A firm has a stock price of $54.75 per share. The firm's earnings are $75 million and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio? A. 1.50 B. 1.25 C. 1.10 D. 1.00

A. 1.50

11. A firm has current assets which could be sold for their book value of $10 million. The book value of its fixed assets is $60 million but they could be sold for $95 million today. The firm has total debt at a book value of $40 million but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market to book ratio is ________. A. 1.83 B. 1.50 C. 1.35 D. 1.46

A. 1.83

56. The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be _________. A. 2.91% B. 3.85% C. 1.45% D. 2.12%

A. 2.91%

2. In 1980 the dollar to yen exchange rate was about $0.0045. In 2007 the yen to dollar exchange rate was about 121 yen per dollar. A Japanese producer would have had to increase the dollar price of a good sold in the U.S. by _____ to maintain the same yen price in 2007. A. 83.7% B. 79.5% C. 65.4% D. 59.3%

A. 83.7%

29. Which of the following statements is true concerning Economic Value Added? A. A growing number of firms tie managers' compensation to EVA. B. A profitable firm will always have a positive EVA. C. EVA recognizes that the cost of capital is not a real cost. D. If a firm has positive present value of growth opportunities it will have positive EVA.

A. A growing number of firms tie managers' compensation to EVA.

68. Which of the following transactions will result in a decrease in cash flow from investments? A. Acquisition of another business B. Capital gain from sale of a subsidiary C. Decrease in net investments D. Sale of equipment

A. Acquisition of another business

77. What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets? A. Asset turnover B. Current ratio C. Liquidity ratio D. Quick ratio

A. Asset turnover

10. Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding? A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q

A. Book value per share

13. Which one of the following is the ratio of actual output from factories to potential output from factories? A. Capacity utilization B. Participation rate C. Durable goods orders D. Industrial production

A. Capacity utilization

4. Depreciation expense is in what broad category of expenditures? A. Cost of goods sold B. General and administrative expenses C. Debt interest expense D. Tax expenditures

A. Cost of goods sold

18. The process of decomposing ROE into a series of component ratios is called ______________. A. DuPont analysis B. technical analysis C. comparative analysis D. liquidity analysis

A. DuPont analysis

30. Which one of the following is probably the most direct and immediate way to stimulate or slow the economy although it is not very useful for fine tuning economic performance? A. Fiscal policy B. Monetary policy C. Supply-side policy D. Rising minimum wages

A. Fiscal policy

15. The market value of all goods and services produced during a given time period is called ______. A. GDP B. industrial production C. capacity utilization D. factory orders

A. GDP

69. Counter-cyclical fiscal policy is best described by which of the following statements? A. Government surpluses are planned during economic booms, and deficits are planned during economic recessions. B. The annual budget should always be balanced. C. Deficits should always equal surpluses. D. Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

A. Government surpluses are planned during economic booms, and deficits are planned during economic recessions.

15. A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information which of the following statement(s) is/are correct? I. All else equal the firm's growth rate will accelerate after the payout change II. All else equal the firm's stock price will go up after the payout change III. All else equal the firm's P/E ratio will increase after the payout change A. I only B. I and II only C. II and III only D. I, II and III

A. I only

58. Order the following stages in the industry life cycle from earliest to latest that occur after the start up phase ________. I. maturity II. relative decline III. consolidation A. III, I, II B. I, III, II C. III, II, I D. I, II, III

A. III, I, II

2. The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle? A. Start up phase B. Consolidation C. Maturity D. Relative decline

A. Start up phase

28. Economic Value Added (EVA) is: A. The difference between the return on assets and the opportunity cost of capital times the capital base B. ROA x ROE C. A measure of the firm's abnormal return D. Largest for high growth firms

A. The difference between the return on assets and the opportunity cost of capital times the capital base

3. An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker, Toyota, to either _____________ on its U.S. sales. A. lose market share or reduce its profit margin B. gain market share or reduce its profit margin C. lose market share or increase its profit margin D. gain market share or increase its profit margin

A. lose market share or reduce its profit margin

16. A big increase in government spending is an example of _________. A. a positive demand shock B. a positive supply shock C. a negative demand shock D. a negative supply shock

A. a positive demand shock

26. If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions. A. below average B. average C. above average D. since growth is expected to be slow, sensitivity to economic conditions is not an issue

A. below average

1. The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________. A. book value B. market value C. liquidation value D. Tobin's q

A. book value

56. A firm has a ROE equal to the industry average but its price to book ratio is below the industry average. You know that the firm's _________. A. earnings yield is above the industry average B. P/E ratio is above the industry average C. dividend payout ratio is too high D. interest burden must be below the industry average

A. earnings yield is above the industry average

8. Earnings yields tend to _______ when Treasury yields fall. A. fall B. rise C. remain unchanged D. fluctuate wildly

A. fall

6. If you believe the economy is about to go into a recession you might change your asset allocation by selling _______ and buying ______. A. growth stocks; long-term bonds B. long-term bonds; growth stocks C. defensive stocks; growth stocks D. defensive stocks; long-term bonds

A. growth stocks; long-term bonds

42. Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates. A. higher than B. equal to C. lower than D. There is not necessarily any linkage between risk and P/E ratios

A. higher than

43. Value stocks are more likely to have a PEG ratio _____. A. less than one B. equal to one C. greater than one D. less than zero

A. less than one

47. A firm in the early stages of its industry life cycle will likely have _________. A. low dividend payout rates B. low rates of investment C. low rates of return on investment D. low R&D spending

A. low dividend payout rates

21. Operating ROA can be found as the product of ______. A. return on sales x ATO B. tax burden x Interest burden C. interest burden x Leverage ratio D. ROE x Dividend payout ratio

A. return on sales x ATO

22. You wish to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant growth DDM, the intrinsic value of stock A _________. A. will be higher than the intrinsic value of stock B B. will be the same as the intrinsic value of stock B C. will be less than the intrinsic value of stock B D. more information is necessary to answer this question

A. will be higher than the intrinsic value of stock B

23. Each of two stocks, A and B, are expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant growth DDM, the intrinsic value of stock A _________. A. will be higher than the intrinsic value of stock B B. will be the same as the intrinsic value of stock B C. will be less than the intrinsic value of stock B D. more information is necessary to answer this question

A. will be higher than the intrinsic value of stock B

72. The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60 and the increase in net working capital is $30. What is the free cash flow to the firm? A. $85 B. $125 C. $185 D. $305

B. $125

74. The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14% and the WACC is 10%. If the market value of the debt is $1.0 billion, what is the value of the equity using the free cash flow valuation approach? A. $1 billion B. $2 billion C. $3 billion D. $4 billion

B. $2 billion

78. The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25, what is the market value of the firm if the FCFE grows at 2% and the cost of equity is 11%? A. $2,168 billion B. $2,397 billion C. $2,565 billion D. $2,998 billion

B. $2,397 billion

63. A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5 percent and the risk premium for this stock is 4 percent. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock? A. $17.78 B. $20.00 C. $40.00 D. None of the above

B. $20.00

28. Weyerhaeuser Incorporated has a balance sheet which lists $70 million in assets, $45 million in liabilities and $25 million in common shareholders' equity. It has 1,000,000 common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________. A. $16.67 B. $25.00 C. $37.50 D. $40.83

B. $25.00

83. Next year's earnings are estimated to be $6.00. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities? A. $6.00 B. $25.00 C. $44.44 D. $75.00

B. $25.00

47. Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.20. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________. A. $24.29 B. $27.39 C. $31.13 D. $34.52

B. $27.39

25. You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for one year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return. A. $31.25 B. $32.37 C. $38.47 D. $41.32

B. $32.37

81. A firm is expected to produce earnings next year of $3.00 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity if 11%, what should be the value of the stock? A. $27.27 B. $50.00 C. $66.67 D. $70.00

B. $50.00

37. Grott and Perrin, Inc. has expected earnings of $3 per share for next year. The firm's ROE is 20% and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A. $20 B. $70 C. $90 D. $115

B. $70

65. The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9% and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS? A. $8 million B. -$6 million C. $3 million D. -$4 million

B. -$6 million

83. The firms leverage ratio is 1.2, interest burden ratio is .81, profit margin is .24, and its asset turnover is 1.25. What is the firm's ROA? A. .250 B. .300 C. .335 D. .372

B. .300

45. Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The riskfree rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock, and the constant growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84.00. Using the constant growth DDM and the CAPM, the beta of the stock is _________. A. 1.4 B. 0.9 C. 0.8 D. 0.5

B. 0.9

64. Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant growth rate of TTT dividends? A. 5% B. 10% C. 20% D. None of the above

B. 10%

48. Todd Mountain development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of 0.75. Using the CAPM, the return you should require on the stock is _________. A. 7.25% B. 10.25% C. 14.75% D. 21.00%

B. 10.25%

30. Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of it earnings as dividends, its dividend growth rate will be _____. A. 4.5% B. 10.5% C. 15.0% D. 30.0%

B. 10.5%

19. Stockholders of Dog's R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating a ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next five years. Given this the firm's optimal dividend payout ratio is now ______. A. 0% B. 100% C. between 0% and 50% D. between 50% and 100%

B. 100%

22. A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________. A. 8.40 B. 11.90 C. 17.62 D. 47.60

B. 11.90

36. Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The riskfree rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate, and the constant growth DDM to determine the value of the stock. The stock's current price is $84.00. Using the constant growth DDM, the market capitalization rate is _________. A. 9% B. 12% C. 14% D. 18%

B. 12%

26. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plow-back ratio is 50%, its P/E ratio will be _________. A. 8.33 B. 12.50 C. 19.23 D. 24.15

B. 12.50

27. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plow-back ratio is 60%, its P/E ratio will be _________. A. 7.14 B. 14.29 C. 16.67 D. 22.22

B. 14.29

50. A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 1.5, a (pretax profit/EBIT) of 0.7, an asset turnover ratio of 4, a current ratio of 2, and a return on sales ratio of 6%. Its ROE is _________. A. 7.56% B. 15.12% C. 20.16% D. 30.24%

B. 15.12%

51. A firm has an ROA of 19%, a debt/equity ratio of 1.8, a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________. A. 15.12% B. 28.42% C. 37.24% D. 40.60%

B. 28.42%

84. When Google's share price reached $475 per share Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. What percentage of Google's stock price was represented by PVGO? A. 92% B. 87% C. 77% D. 64%

B. 87%

29. Which one of the following describes the amount by which government spending exceeds government revenues? A. Balance of trade B. Budget deficit C. Gross domestic product D. Output gap

B. Budget deficit

19. Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis? A. Technical analysis B. Fundamental analysis C. Both technical analysis and fundamental analysis D. Indexing

B. Fundamental analysis

17. __________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q

B. Liquidation value per share

5. New-economy companies generally have higher _______ than old-economy companies. A. book value per share B. P/E multiples C. profits D. asset values

B. P/E multiples

1. A top-down analysis of a firm's prospects starts with an analysis of the ____. A. firm's position in its industry B. U.S. economy or even the global economy C. industry D. specific firm under consideration

B. U.S. economy or even the global economy

6. One of the biggest impediments to a global capital market is _________. A. volatile exchange rates B. the lack of common accounting standards C. lower disclosure standards in the U.S. than abroad D. the lack of transparent reporting standards across the EU

B. the lack of common accounting standards

58. A company with an expected earnings growth rate which is greater than that of the typical company in the same industry, most likely has _________________. A. a dividend yield which is greater than that of the typical company B. a dividend yield which is less than that of the typical company C. less risk than the typical company D. less sensitivity to market trends than the typical company

B. a dividend yield which is less than that of the typical company

23. Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________. A. buy long-term bonds B. buy short-term bonds C. buy common stocks D. buy preferred stocks

B. buy short-term bonds

42. Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle. A. peak B. contraction C. trough D. expansion

B. contraction

64. The goal of supply side policies is to _______. A. increase government involvement in the economy B. create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods C. maximize tax revenues of the government D. focus more on wealth redistribution policies

B. create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods

44. Generally speaking, as the firm progresses through the industry life cycle you would expect the PVGO to ________ as a percent of share price. A. increase B. decrease C. stay the same D. no typical pattern can be expected

B. decrease

16. A firm cuts its dividend payout ratio. As a result you know that the firm's _______. A. return on assets will increase B. earnings retention ratio will increase C. earnings growth rate will fall D. stock price will fall

B. earnings retention ratio will increase

62. The Fed funds rate is the __________. A. interest rate that banks charge their best corporate customers B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed C. interest rate the Fed charges commercial banks on short term loans D. interest rate that the U.S. Treasury pays on its bills

B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

22. Inflation is caused by ________________. A. unions B. rapid growth of money supply C. excess supply D. low rates of capacity utilization

B. rapid growth of money supply

34. The ratio of the purchasing power of two economies is termed the _______. A. balance of trade B. real exchange rate C. real interest rate D. nominal exchange rate

B. real exchange rate

24. You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________. A. the firm's use of financial leverage is positively contributing to ROE B. the firm's use of financial leverage is negatively contributing to ROE C. the firm's use of operating leverage is positively contributing to ROE D. the firm's use of operating leverage is negatively contributing to ROE

B. the firm's use of financial leverage is negatively contributing to ROE

13. A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________. A. has a Tobin's Q value < 1 B. will generate a positive alpha C. has an expected return less than its required return D. has a beta > 1

B. will generate a positive alpha

82. Next year's earnings are estimated to be $5.00. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? A. $9.09 B. $10.10 C. $11.11 D. $12.21

C. $11.11

35. Rose Hill Trading Company is expected to have EPS in the upcoming year of $6.00. The expected ROE is 18.0%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________. A. $20.93 B. $69.77 C. $128.57 D. $150.00

C. $128.57

33. A firm is planning on paying its first dividend of $2 after two years. Then dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today? A. $25.00 B. $16.87 C. $19.24 D. $20.99

C. $19.24

34. Rose Hill Trading Company is expected to have EPS in the upcoming year of $8.00. The expected ROE is 18.0%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be _________. A. $1.12 B. $1.44 C. $2.40 D. $5.60

C. $2.40

60. Sanders, Inc., paid a $4.00 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________. A. $26.67 B. $35.19 C. $42.94 D. $59.89

C. $42.94

54. Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2.00, a dividend in year 2 of $3.00, and a dividend in year 3 of $4.00. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today. A. $63.80 B. $65.13 C. $67.95 D. $85.60

C. $67.95

73. A firm reports EBIT of $100 million. The income statement shows depreciation of $20 millions. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm? A. $57 B. $65 C. $75 D. $95

C. $75

75. If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%? A. $679 million B. $715 million C. $769 million D. $803 million

C. $769 million

46. Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.20. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________. A. 8.0% B. 10.8% C. 15.6% D. 16.8%

C. 15.6%

27. A firm has a tax burden of 0.7, a leverage ratio of 1.3, an interest burden of 0.8, and a return on sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE? A. 12.4% B. 14.5% C. 16.6% D. 17.8%

C. 16.6%

32. Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earning in the form of dividends. A. 5.0% B. 15.0% C. 17.5% D. 45.0%

C. 17.5%

57. The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be _________. A. -6.00% B. 4.00% C. 5.77% D. 14.40%

C. 5.77%

63. Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 40%. What is the breakeven number of gadgets B must sell to make a zero after tax profit? A. 300,000 B. 400,000 C. 500,000 D. 600,000

C. 500,000

26. A firm has an ROA of 8%, a debt/equity ratio of 0.5, its ROE is _________. A. 4% B. 6% C. 8% D. 12%

C. 8%

75. What economic variable is most closely associated with increasing corporate profits? A. Exchange rates B. Inflation C. Gross domestic product D. Budget deficits

C. Gross domestic product

35. Everything else equal, an increase in the government budget deficit would ______. I. increase the government's demand for funds II. shift the demand curve for funds to the left III. increase the interest rate in the economy A. II only B. I and II only C. I and III only D. I, II and III

C. I and III only

55. A high price to book ratio may indicate which one of the following? A. The firm expanded its plant and equipment in the past few years. B. The firm is doing a better job controlling its inventory expense than other related firms. C. Investors may believe that this firm has opportunities of earnings a rate of return excess of the market capitalization rate. D. The firm's P/E ratio is too high.

C. Investors may believe that this firm has opportunities of earnings a rate of return excess of the market capitalization rate.

9. Which one of the following is a common term for the market consensus value of the required return on a stock? A. Dividend payout ratio B. Intrinsic value C. Market capitalization rate D. Plowback ratio

C. Market capitalization rate

70. A supply side economist would likely agree with which of the following statements? A. Real output and aggregate employment are primarily determined by aggregate demand. B. Real income will rise when government expenditures and tax rates increase. C. Real output and aggregate employment are primarily determined by tax rates. D. Increasing the money supply will increase real output without causing higher inflation.

C. Real output and aggregate employment are primarily determined by tax rates.

9. Which of the following is not one of the three key financial statements available to investors in publicly traded firms? A. Income statement B. Balance sheet C. Statement of operating earnings D. Statement of cash flows

C. Statement of operating earnings

49. Which of the following is the rate at which the general level of prices for goods and services is rising? A. The exchange rate B. The gross domestic product growth rate C. The inflation rate D. The real interest rate

C. The inflation rate

18. An underpriced stock provides an expected return which is ____________ the required return based on the capital asset pricing model (CAPM). A. less than B. equal to C. greater than D. greater than or equal to

C. greater than

20. The constant growth dividend discount model (DDM) can be used only when the ___________. A. growth rate is less than or equal to the required return B. growth rate is greater than or equal to the required return C. growth rate is less than the required return D. growth rate is greater than the required return

C. growth rate is less than the required return

6. P/E ratios tend to be _______ when inflation is ______. A. higher; higher B. lower; lower C. higher; lower D. they are unrelated

C. higher; lower

88. The greatest value to an analyst from calculating a stock's intrinsic value is _______. A. how easy it is to come up with accurate model inputs B. the precision of the value estimate C. how the process forces analysts to understand the critical variables that have the greatest impact on value D. how all the different models typically yield identical value results

C. how the process forces analysts to understand the critical variables that have the greatest impact on value

12. The most widely used monetary policy tool is _________. A. altering the discount rate B. altering reserve requirements C. open market operations D. increasing the budget deficit

C. open market operations

3. Many observers believe that firms "manage" their income statements to _______. A. minimize taxes over time B. maximize expenditures C. smooth their earnings over time D. generate level sales

C. smooth their earnings over time

14. According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates which improved the incentives for people to work. A. Keynesian B. monetarist C. supply-side D. demand-side

C. supply-side

43. Capital goods industries such as industrial equipment, transportation or construction would be good investments during the _____ stage of the business cycle. A. peak B. contraction C. trough D. expansion

C. trough

61. Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession it will sell only half as many gadgets. If the economy is strong, the after-tax profit of Firm B will be _________. A. $90,000 B. $210,000 C. $300,000 D. $630,000

D. $630,000

21. Suppose that in 2009 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant growth formula for valuation, if interest rates increase to 9% the value of the market will change by _____. A. -10% B. -20% C. -25% D. -33%

D. -33%

49. Todd Mountain Development Corporation is expected to pay a dividend of $3.00 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of 0.75. Using the constant growth DDM, the intrinsic value of the stock is _________. A. 4.00 B. 17.65 C. 37.50 D. 50.00

D. 50.00

85. A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment? A. 27 years B. 37 years C. 55 years D. 75 years

D. 75 years

52. Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of -0.50. Using the CAPM, the return you should require on the stock is _________. A. 2% B. 5% C. 8% D. 9%

D. 9%

14. Bill, Jim and Shelly are all looking to buy the same stock that pays dividends. Bill plans on holding the stock for one year. Jim plans on holding the stock for three years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct? A. Bill will be willing to pay the most for the stock because he will get his money back in one year when he sells. B. Jim should be willing to pay three times as much for the stock as Bill because his expected holding period is three times as long as Bill's. C. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence she will get the most dividends. D. All three should be willing to pay the same amount for the stock regardless of their holding period.

D. All three should be willing to pay the same amount for the stock regardless of their holding period.

25. Which of the following would not be considered a supply shock? A. A change in the price of imported oil B. Frost damage to the orange crop C. A change in the level of education of the average worker D. An increase in the level of government spending

D. An increase in the level of government spending

10. Which of the following industries would most analysts classify as mature? A. Internet service providers B. Biotechnology C. Wireless communication D. Auto manufacturing

D. Auto manufacturing

17. Which one of the following ratios is used to calculate the times interest earned ratio? A. Net profit/Interest expense B. Pretax profit/EBIT C. EBIT/Sales D. EBIT/Interest expense

D. EBIT/Interest expense

19. Which of the following is not a ratio used in the DuPont analysis? A. Interest burden B. Profit margin C. Asset turnover D. Earnings yield ratio

D. Earnings yield ratio

40. Which one of the following is not a demand shock? A. Increase in government spending B. Increases in the money supply C. Reductions in consumer spending D. Improvements in education of U.S. workers

D. Improvements in education of U.S. workers

69. Which of the following results in an increase in cash to the firm? A. Dividends paid B. A delay in collecting on accounts receivable C. Net new investments D. Increase in accounts payable

D. Increase in accounts payable

77. An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy? A. An economic slowdown is likely B. Employment trends will reverse and unemployment will occur C. Government deficits will result from capacity utilization D. Inflation may result from upward wage pressures

D. Inflation may result from upward wage pressures

7. Which one of the following statements about market and book value is correct? A. All firms sell at a market to book ratio above 1. B. All firms sell at a market to book ratio greater than or equal to 1. C. All firms sell at a market to book ratio below 1. D. Most firms have a market to book ratio above 1, but not all.

D. Most firms have a market to book ratio above 1, but not all.

89. Which of the following valuation measures is often used to compare firms which have no earnings? A. Price-to-book ratio B. P/E ratio C. Price-to-cash flow ratio D. Price-to-sales ratio

D. Price-to-sales ratio

63. Which of the following would result in a cash inflow under the heading cash flow from investing in the statement of cash flows? A. Purchase of capital equipment B. Payments to suppliers for inventory C. Collections on receivables D. Sale of production machinery

D. Sale of production machinery

37. Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment? A. The nominal exchange rate B. The nominal interest rate C. The real exchange rate D. The real interest rate

D. The real interest rate

86. In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price? A. Import/export trade B. Software C. Telecommunications D. Utility

D. Utility

8. If the interest rate on debt is higher than the ROA, then a firm's ROE will _________. A. decrease B. increase C. not change D. change but in an indeterminable manner

D. change but in an indeterminable manner

66. A firm increases its dividend plowback ratio. All else equal you know that _____________. A. earnings growth will increase and the stock's P/E will increase B. earnings growth will decrease and the stock's P/E will increase C. earnings growth will increase and the stock's P/E will decrease D. earnings growth will increase and the stock's P/E may or may not increase

D. earnings growth will increase and the stock's P/E may or may not increase

50. Generally speaking the higher a firm's ROA the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings. A. higher; lower B. higher; higher C. lower; lower D. lower; higher

D. lower; higher

3. If a firm increases its plowback ratio this will probably result in a(n) _______ P/E ratio. A. higher B. lower C. unchanged D. unable to determine

D. unable to determine