Fin CH1, Fin Ch2, Fin ch 3, ch4 Fin, CH 5 Fin, Ch 6 Fin, Ch 7 Fin, CH 8 Fin, Chapter 11 test 3, finance chapter 12 info, FIN3060 Chapter 13
The capital asset pricing model:
considers the time value of money.
lester lent money to the corner store by purchasing bonds issued by the store. the rate of return that he and the other lenders require os referred to as the:
cost of debt
Jamie is employed as a commercial loan officer for a regional bank centered in the Midwestern section of the U.S. Her job falls into which one of the following areas of finance? A. International finance B. Financial institutions C. Corporate finance D. Capital management E. Investments
B. Financial institutions
Which one of the following refers to the relationship between nominal returns, real returns, and inflation? A. Call premium B. Fisher effect C. Conversion ratio D. Bid-ask spread E. Clean-dirty spread
B. Fisher effect
The relationship between the present value and the time period is best described as: A. direct. B. inverse. C. unrelated. D. ambiguous. E. parallel.
B. inverse.
A corporation: A. is ultimately controlled by its board of directors. B. is a legal entity separate from its owners. C. is prohibited from entering into contractual agreements. D. has its identity defined by its bylaws. E. has its existence regulated by the rules set forth in its charter
B. is a legal entity separate from its owners.
When a bond's yield to maturity is less than the bond's coupon rate, the bond: A. had to be recently issued. B. is selling at a premium. C. has reached its maturity date. D. is priced at par. E. is selling at a discount.
B. is selling at a premium.
A $100,000 Treasury bond has a bid price quote of 115:21 and an asked quote of 115:22. In dollars, what is the value of the bid-ask spread on this bond? A. $0.31 B. $3.12 C. $31.25 D. $312.50 E. $3,125.00
C. $31.25
Paddle Fans & More has a marginal tax rate of 34 percent and an average tax rate of 23.7 percent. If the firm earns $138,500 in taxable income, how much will it owe in taxes? A. $31,366.67 B. $31,500.00 C. $32,824.50 D. $39,957.25 E. $47,090.00
C. $32,824.50
Plato's Foods has ending net fixed assets of $84,400 and beginning net fixed assets of $79,900. During the year, the firm sold assets with a total book value of $13,600 and also recorded $14,800 in depreciation expense. How much did the company spend to buy new fixed assets? A. -$23,900 B. $3,300 C. $32,900 D. $36,800 E. $37,400
C. $32,900
Which one of the following statements related to the static theory of capital structure is correct?
A firm's value is maximized when a firm operates at its optimal debt level.
You want to have $25,000 for a down payment on a house 6 years from now. If you can earn 6.5 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal? A. $17,133.35 B. $17,420.73 C. $17,880.69 D. $18,211.17 E. $18,886.40
A. $17,133.35
Precision Engineering invested $110,000 at 6.5 percent interest, compounded annually for 4 years. How much interest on interest did the company earn over this period of time? A. $2,481.25 B. $2,911.30 C. $3,014.14 D. $3,250.00 E. $3,333.33
B. $2,911.30
River Rock, Inc. just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past ten years and expects to continue doing so. What will a share of this stock be worth six years from now if the required return is 16 percent? A. $23.60 B. $24.65 C. $25.08 D. $25.50 E. $26.90
B. $24.65
Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a 6 percent coupon and pays interest semiannually. There are 2 months until the next coupon date. What is the clean price of this bond? A. $947 B. $957 C. $967 D. $977 E. $987
C. $967
Wilson's Realty has total assets of $46,800, net fixed assets of $37,400, current liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio? A. 0.41 B. 0.60 C. 0.66 D. 0.78 E. 0.86
C. 0.66
Aardvaark & Co. has sales of $291,200, cost of goods sold of $163,300, net profit of $11,360, net fixed assets of $154,500, and current assets of $89,500. What is the total asset turnover rate? A. 1.08 B. 1.11 C. 1.19 D. 1.24 E. 1.28
C. 1.19
A firm has net working capital of $3,800 and current assets of $11,700. What is the current ratio? A. 0.34 B. 0.60 C. 1.48 D. 1.65 E. 2.92
C. 1.48
The common stock of The Burger Hut is selling for $16.25 a share. The company has earnings per share of $0.42 and a book value per share of $9.28. What is the market-to-book ratio? A. 1.58 B. 1.69 C. 1.75 D. 1.87 E. 1.92
C. 1.75
Which one of the following is an advantage of being a limited partner? A. Non-taxable share of any profits B. Control over the daily operations of the firm C. Losses limited to capital invested D. Unlimited profits without risk of incurring a loss E. Active market for ownership interest
C. Losses limited to capital invested
Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns? A. Average tax rate B. Variable tax rate C. Marginal tax rate D. Absolute tax rate E. Contingent tax rate
C. Marginal tax rate
Textile Mills has sales of $923,000, cost of goods sold of $748,000, and accounts receivable of $106,700. How long on average does it take the firm's customers to pay for their purchases? A. 8.65 days B. 11.28 days C. 25.01 days D. 42.19 days E. 45.33 days
D. 42.19 days
The Deltona Instrument Company has 9 percent coupon bonds on the market with 6 years left to maturity. The bonds make annual payments. If the bond currently sells for $974.60, what is its YTM? A. 8.82 percent B. 8.90 percent C. 8.98 percent D. 9.58 percent E. 9.63 percent
D. 9.58 percent
The Toy Box pays an annual dividend of $2.40 per share and sells for $46.60 a share based on a market rate of return of 15 percent. What is the capital gains yield? A. 7.35 percent B. 7.78 percent C. 9.23 percent D. 9.85 percent E. 10.11 percent
D. 9.85 percent
A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $27.50 each and matures in 6 years. What is the coupon rate? A. 2.72 percent B. 2.75 percent C. 5.00 percent D. 5.43 percent E. 5.50 percent
E. 5.50 percent
A stock has paid dividends of $1.80, $1.85, $2.00, $2.20, and $2.25 over the past five years, respectively. What is the average capital gains yield? A. 2.80 percent B. 3.24 percent C. 4.45 percent D. 5.34 percent E. 5.79 percent
E. 5.79 percent
A firm has $42,900 in receivables and $211,800 in total assets. The total asset turnover rate is 1.45 and the profit margin is 4.2 percent. How long on average does it take the firm to collect its receivables? A. 7.16 days B. 9.45 days C. 11.68 days D. 31.25 days E. 50.99 days
E. 50.99 days
Which one of the following statements is the core principle of M&M Proposition I, without taxes?
The capital structure of a firm is totally irrelevant.
What is the principal amount of a bond that is repaid at the end of the loan term called? A. Coupon B. Market price C. Accrued price D. Dirty price E. Face value
E. Face value
Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts? A. Sole proprietorship B. Limited partnership C. Corporation D. Joint stock company E. General partnership
E. General partnership
Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the: A. annual percentage rate. B. compounded rate. C. quoted rate. D. stated rate. E. effective annual rate.
E. effective annual rate.
Discounted cash flow valuation is the process of discounting an investment's: A. assets. B. future profits. C. liabilities. D. costs. E. future cash flows.
E. future cash flows.
Municipal bonds are: A. generally purchased by tax-exempt investors. B. risk-free. C. issued by federal, state, and local governmental bodies. D. zero-coupon bonds. E. generally callable.
E. generally callable.
A $36,000 portfolio is invested in a risk-free security and two stocks. The beta of Stock A is 1.29 while the beta of Stock B is 0.90. One-half of the portfolio is invested in the risk-free security. How much is invested in Stock A if the beta of the portfolio is 0.58?
$12,000
A portfolio has an expected return of 12.3 percent. This portfolio contains two stocks and one risk-free security. The expected return on Stock X is 9.7 percent and on Stock Y it is 17.7 percent. The risk-free rate is 3.8 percent. The portfolio value is $78,000 of which $18,000 is the risk-free security. How much is invested in Stock X?
$21,375
You own a $222,000,000 portfolio that is invested in Stocks A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 18.7 percent and has a beta of 1.42. Stock B has a beta of 0.88. What is the value of your investment in Stock A?
$49,333
Beasley Enterprises stock has an expected return of 11.5 percent. Given the information below, what is the expected return if the economy is in a recession?
-5.72 percent
Consider the following information:What is the variance of a portfolio invested 30 percent each in Stocks A and B and 40 percent in Stock C? Boom, (.72, .06, .11, .17)
0.000065
You currently own a portfolio valued at $56,000 that has a beta of 1.28. You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.20. What does the beta of the new investment have to be?
0.75
What is the beta of the following portfolio? B, (S, .97. T, 1.26, U, .79, V, 1.48)
1.02
You currently own a portfolio valued at $80,000 that is equally as risky as the market. Given the information below, what is the beta of Stock C? B, (A, 1.14, B, 1.06)
1.04
What is the beta of the following portfolio? B, (J, 1.48, K, 1.13, L, .99, M, 1.08)
1.13
BJB, Inc. stock has an expected return of 15.15 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta?
1.32
A stock has an expected return of 15.0 percent, the risk-free rate is 3.2 percent, and the market risk premium is 8.1 percent. What must the beta of this stock be?
1.46
Currently, the risk-free rate is 4.0 percent. Stock A has an expected return of 9.6 percent and a beta of 1.08. Stock B has an expected return of 13.5 percent. The stocks have equal reward-to-risk ratios. What is the beta of Stock B?
1.83
You own a stock that has an expected return of 16.00 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?
12.94 percent
Fiddler's Music Stores' stock has a risk premium of 9.6 percent while the inflation rate is 4.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?
13.5 percent
You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio? ER, (W, 8.9, X, 11.6. Y, 28.4, 12.7)
14.20 percent
Stock A has a beta of 1.47 while Stock B has a beta of 1.08 and an expected return of 13.2 percent. What is the expected return on Stock A if the risk-free rate is 4.5 percent and both stocks have equal reward-to-risk premiums?
16.34 percent
Stock J has a beta of 1.47 and an expected return of 15.8 percent. Stock K has a beta of 1.05 and an expected return of 11.9 percent. What is the risk-free rate if these securities both plot on the security market line?
2.15 percent
Stock Y has a beta of 1.28 and an expected return of 13.7 percent. Stock Z has a beta of 1.02 and an expected return of 11.4 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?
2.38 percent
A stock has a beta of 1.86, the expected return on the market is 14.72, and the risk-free rate is 4.65. What must the expected return on this stock be?
23.38 percent
You own a $46,000 portfolio comprised of four stocks. The values of Stocks A, B, and C are $6,600, $16,700, and $11,400, respectively. What is the portfolio weight of Stock D?
24.57 percent
Given the following information, what is the standard deviation of the returns on this stock? B, .04, N, .74, R, .22
25.52 percent
You own a portfolio that is invested as follows: $11,400 of Stock A, $8,800 of Stock B, $14,900 of Stock C, and $3,200 of Stock D. What is the portfolio weight of Stock C?
38.90 percent
Consider the following information on a portfolio of three stocks: The portfolio is invested 35 percent in each Stock A and Stock B and 30 percent in Stock C. If the expected T-bill rate is 3.90 percent, what is the expected risk premium on the portfolio? Boom, (.15, .05, .21, .18)
6.19 percent
Ben & Terry's has an expected return of 12.9 percent and a beta of 1.25. The expected return on the market is 11.7 percent. What is the risk-free rate?
6.92 percent
A stock has an expected return of 17.2 percent and a beta of 1.65. The risk-free rate is 5.1 percent. What is the slope of the security market line?
7.33 percent
A risky security has less risk than the overall market. What must the beta of this security be?
> 0 but < 1
A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?
A decrease in the probability of an economic boom
Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else constant?
A decrease in the risk-free rate given a security beta of 1.06
Given the following partial stock quote, what is the expected annual dividend? A. $0.99 B. $1.08 C. $1.13 D. $1.28 E. $1.33
A. $0.99
The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17 percent rate of return? A. $2.38 B. $2.43 C. $2.56 D. $2.60 E. $2.64
A. $2.38
This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be on this stock if you sell it three years from now? A. $2.43 B. $2.51 C. $2.63 D. $2.87 E. $2.92
A. $2.43
Circle Stores has net income of $41,000, a profit margin of 6.7 percent, and a return on assets of 9 percent. What is the capital intensity ratio? A. 0.74 B. 0.86 C. 1.16 D. 1.34 E. 1.38
A. 0.74
Western States Life Insurance offers a perpetuity that pays annual payments of $10,000. This contract sells for $275,000 today. What is the interest rate? A. 3.64 percent B. 3.87 percent C. 4.10 percent D. 4.21 percent E. 4.39 percent
A. 3.64 percent
You have been told that you need $21,600 today in order to have $100,000 when you retire 42 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually. A. 3.72 percent B. 3.89 percent C. 4.01 percent D. 4.23 percent E. 4.28 percent
A. 3.72 percent
Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is 6 years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have? A. Interest-only B. Pure discount C. Compound D. Amortized E. Complex
A. Interest-only
Which one of the following bonds is most apt to have the smallest liquidity premium? A. Treasury bill B. Corporate bond issued by a new firm C. Municipal bond issued by the State of New York D. Municipal bond issued by a rural city in Alaska E. Corporate bond issued by General Motors (GM)
A. Treasury bill
Which one of the following statements is correct?
An underpriced security will plot above the security market line.
You purchase a bond with an invoice price of $1,120. The bond has a coupon rate of 7.5 percent, semiannual coupons, and there are four months to the next coupon date. What is the clean price of the bond? A. $1,095.00 B. $1,107.50 C. $1,114.00 D. $1,132.50 E. $1,157.50
B. $1,107.50
Given the following partial stock quote, what is the amount of the next annual dividend if yesterday's closing price was $32.60? A. $1.07 B. $1.11 C. $1.15 D. $1.19 E. $1.23
B. $1.11
Blasco Printing has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $35,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm does not pay dividends. What is the amount of the net new equity raised during the year? A. $18,000 B. $21,500 C. $32,700 D. $48,900 E. $48,310
B. $21,500
The balance sheet of a firm shows current liabilities of $46,300 and long-term debt of $189,200 as of last year. Current liabilities are $56,900 and long-term debt is $248,750 as of today, which is the end of the current year. The financial statements for the current year reflect an interest paid amount of $18,700 and dividends of $22,000. What is the amount of the net new borrowing? A. $51,450 B. $59,550 C. $64,750 D. $70,150 E. $78,250
B. $59,550
Eastern Shore Builders is offering preferred stock for sale with a 7.75 percent rate of return. What is the amount of the annual dividend on this stock if the current market price per share is $83.87? A. $6.33 B. $6.50 C. $7.00 D. $7.50 E. $7.75
B. $6.50
Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002? A. Increase the costs of going public B. Increase protection against corporate fraud C. Limit secondary issues of corporate securities D. Decrease the number of publicly traded firms E. Increase the number of firms that "go dark"
B. Increase protection against corporate fraud
Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called: A. discounting. B. compounding. C. duplicating. D. multiplying. E. indexing.
B. compounding.
An agent who buys and sells securities from inventory is called a: A. floor trader. B. dealer. C. commission broker. D. broker. E. floor broker.
B. dealer.
Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n): A. interest-only loan. B. pure discount loan. C. quoted rate loan. D. compound interest loan. E. amortized loan.
B. pure discount loan.
Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?
Beta coefficient
Which one of the following is the equity risk arising from the daily operations of a firm?
Business risk
The common stock of Green Garden Flowers is selling for $24 a share. The company pays a constant annual dividend and has a total return of 3.8 percent. What is the amount of the dividend? A. $0.38 B. $0.76 C. $0.91 D. $1.38 E. $1.54
C. $0.91
During the past year, Ernst Electrical Services paid $36,800 in interest along with $48,000 in dividends. The company issued $130,000 of stock and $100,000 of new debt. The company reduced the balance due on the old debt by $225,000. What is the amount of the cash flow to creditors? A. -$88,200 B. -$51,400 C. $161,800 D. $211,600 E. $231,500
C. $161,800
Today, you are borrowing $13,800 to purchase a car. What will be your monthly payment amount if the loan is for 4 years at 7.5 percent interest? A. $298.40 B. $321.150 C. $333.67 D. $380.24 E. $400.10
C. $333.67
If today is Year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 6.9 percent per year. A. $35,211.57 B. $36,666.67 C. $38,604.00 D. $40,020.50 E. $42,141.41
C. $38,604.00
If you put up $46,000 today in exchange for a 6.75 percent 15-year annuity, what will the annual cash flow be? A. $4,519.27 B. $4,666.67 C. $4,971.10 D. $5,203.16 E. $5,338.09
C. $4,971.10
Last year, The Pizza Joint added $4,100 to retained earnings from sales of $93,600. The company had costs of $74,400, dividends of $2,500, and interest paid of $1,400. The tax rate was 34 percent. What was the amount of the depreciation expense? A. $7,300 B. $7,500 C. $7,800 D. $8,100 E. $8,400
C. $7,800
Albertson and Roberts reports the following account balances: inventory of $27,600, equipment of $128,300, accounts payable of $24,700, cash of $11,900, and accounts receivable of $31,900. What is the amount of the current assets? A. $46,700 B. $56,000 C. $71,400 D. $175,000 E. $199,700
C. $71,400
A 5.5 percent $1,000 bond matures in 7 years, pays interest semiannually, and has a yield to maturity of 6.23 percent. What is the current market price of the bond? A. $945.08 B. $947.21 C. $959.09 D. $959.60 E. $962.40
C. $959.09
Webster & Jones has net income of $49,200, sales of $936,800, a capital intensity ratio of 0.74, and an equity multiplier of 1.5. What is the return on equity? A. 6.67 percent B. 8.98 percent C. 10.65 percent D. 12.21 percent E. 14.09 percent
C. 10.65 percent
The Veggie Hut has net income of $26,400, total equity of $102,700, and total assets of $189,500. The dividend payout ratio is 0.30. What is the internal growth rate? A. 7.99 percent B. 8.57 percent C. 10.81 percent D. 16.87 percent E. 21.94 percen
C. 10.81 percent
A credit card has a stated interest rate of 13.9 percent. What is the APR if interest is compounded monthly? A. 13.09 percent B. 13.46 percent C. 13.90 percent D. 14.56 percent E. 14.82 percent
C. 13.90 percent
Today is your 21st birthday and you just decided to start saving money so you can retire early. Thus, you are going to save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn an average of 8 percent on your savings, how old will you be when you retire? A. 33.39 years old B. 42.87 years old C. 54.39 years old D. 64.71 years old E. 63.87 years old
C. 54.39 years old
The Next Life has sales of $428,300, total assets of $389,100, and a profit margin of 6.2 percent. What is the return on assets? A. 6.29 percent B. 6.54 percent C. 6.83 percent D. 7.01 percent E. 7.27 percen
C. 6.83 percent
Which one of the following analytical methods is based on net income? A. Profitability index B. Internal rate of return C. Average accounting return D. Modified internal rate of return E. Payback
C. Average accounting return
Which of the following are determinants of a firm's sustainable rate of growth? I. Amount of sales generated from each dollar invested in assets II. Amount of debt per dollar of equity III. Amount of current assets per dollar of current liabilities IV. Percent of net income distributed as dividends 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
C. I, II, and IV only
Which of the following ratings indicate that a bond is low-quality? I. Baa II. BB III. B IV. Ba A. II only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV
C. II, III, and IV only
The concept of marginal taxation is best exemplified by which one of the following? A. Kirby's paid $120,000 in taxes while its primary competitor only paid $80,000 in taxes. B. Johnson's Retreat only paid $45,000 on total revenue of $570,000 last year. C. Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes. D. Burlington Centre paid no taxes last year due to carryforward losses. E. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.
C. Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.
Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows.
C. The payback period ignores the time value of money.
The annual interest divided by the face value of a bond is referred to as the: A. market rate. B. call rate. C. coupon rate. D. current yield. E. yield-to-maturity.
C. coupon rate.
Many of the smaller sell orders sent to the floor of the NYSE are: A. handled by the floor traders. B. purchased by the commission brokers. C. electronically transmitted to the specialists. D. executed on an ECN. E. executed in the primary market.
C. electronically transmitted to the specialists.
The owner of a trading license who trades on the floor of the NYSE for his or her personal account is called a(n): A. specialist. B. independent broker. C. floor trader. D. stand-alone agent. E. dealer.
C. floor trader.
A registered form bond is defined as a bond that: A. is a bearer bond. B. is held in street name. C. pays coupon payments directly to the owner of record. D. is listed with the Securities Exchange Commission (SEC). E. is unsecured.
C. pays coupon payments directly to the owner of record.
Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?
Cost of capital
A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond matures in 3 years and pays interest annually. The coupon rate is 7 percent. What is the current price of this bond? A. $948.01 B. $949.60 C. $1,005.26 D. $1,008.18 E. $1,010.13
D. $1,008.18
Skyline Industries will need $1.8 million 5 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 5.25 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase? A. $1,279,947.20 B. $1,298,407.21 C. $1,350,868.47 D. $1,393,676.52 E. $1,412,308.18
D. $1,393,676.52
Katie's Dinor spent $84,000 to refurbish its current facility. The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for 5 years. What is the amount of each monthly payment? A. $1,108.91 B. $1,282.16 C. $1,333.33 D. $1,401.49 E. $1,487.06
D. $1,401.49
You have just made your first $3,000 contribution to your individual retirement account. Assuming you earn a 9 percent rate of return and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing? A. $48,507.26; $42,614.08 B. $57,311.20; $39,803.04 C. $57,311.20; $42,614.08 D. $61,241.90; $39,803.04 E. $61,241.90; $42.614.08
D. $61,241.90; $39,803.04
The net present value of a project's cash inflows is $8,216 at a 14 percent discount rate. The profitability index is 1.03 and the firm's tax rate is 34 percent. What is the initial cost of the project? A. $6,900.00 B. $7,018.50 C. $7,428.32 D. $7,976.70 E. $8,066.67
D. $7,976.70
A new financial services company just opened in your town. To attract customers, it is offering a "9-10" loan special. The company will lend $9 today in exchange for a payment of $10 one year from today. What is the APR on this loan? A. 10.00 percent B. 10.38 percent C. 10.92 percent D. 11.11 percent E. 11.54 percent
D. 11.11 percent
What is the effective annual rate of 13.9 percent compounded quarterly? A. 13.23 percent B. 13.82 percent C. 14.37 percent D. 14.64 percent E. 15.01 percent
D. 14.64 percent
The Saw Mill has a return on assets of 6.1 percent, a total asset turnover rate of 1.8, and a debt-equity ratio of 1.6. What is the return on equity? A. 4.26 percent B. 9.76 percent C. 12.28 percent D. 15.86 percent E. 19.03 percent
D. 15.86 percent
When you refer to a bond's coupon, you are referring to which one of the following? A. Difference between the purchase price and the face value B. Annual interest divided by the current bond price C. Difference between the bid and ask price D. Annual interest payment E. Principal amount of the bond
D. Annual interest payment
Which one of the following qualifies as an annuity? A. Weekly grocery bill B. Clothing purchases C. Car repairs D. Auto loan payment E. Medical bills
D. Auto loan payment
The primary goal of financial management is to maximize which one of the following for a corporation? A. Current profits B. Market share C. Number of shares outstanding D. Market value of existing stock E. Revenue growth
D. Market value of existing stock
Which one of the following is the best example of systematic risk?
Decrease in gross domestic product
Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?
Diversification
Your parents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 7 percent interest? A. $678,342 B. $700,000 C. $1,211,516 D. $1,389,407 E. $1,428,571
E. $1,428,571
You're trying to save to buy a new $210,000 Ferrari. You have $38,000 today that can be invested at your bank. The bank pays 4.1 percent annual interest on its accounts. How long will it be before you have enough to buy the car? A. 39.13 years B. 39.29 years C. 40.67 years D. 41.08 years E. 42.54 years
E. 42.54 years
Delmont Movers has a profit margin of 6.2 percent and net income of $48,900. What is the common-size percentage for the cost of goods sold if that expense amounted to $379,000 for the year? A. 12.90 percent B. 23.50 percent C. 33.25 percent D. 41.06 percent E. 48.05 percent
E. 48.05 percent
The stock price of Samuelson, Inc., is $71. Investors require a 15 percent rate of return on similar stocks. If the company plans to pay a dividend of $4.20 next year, what growth rate is expected for the company's stock price? A. 6.01 percent B. 7.56 percent C. 7.78 percent D. 8.24 percent E. 9.08 percent
E. 9.08 percent
Morrison Motors has total equity of $289,100 and net income of $64,500. The debt-equity ratio is 0.45 and the total asset turnover is 1.6. What is the profit margin? A. 3.10 percent B. 5.23 percent C. 5.67 percent D. 8.21 percent E. 9.62 percent
E. 9.62 percent
When you were born, your parents opened an investment account in your name and deposited $500 into the account. The account has earned an average annual rate of return of 4.8 percent. Today, the account is valued at $36,911.22. How old are you? A. 74.47 years B. 76.67 years C. 81.08 years D. 87.33 years E. 91.75 years
E. 91.75 years
The Du Pont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets. A. II and III only B. I and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV
E. I, II, III, and IV
Which one of the following will decrease the net working capital of a firm? A. Obtaining a 3-year loan and using the proceeds to buy inventory B. Collecting a payment from a credit customer C. Obtaining a 5-year loan to buy equipment D. Selling inventory at a profit E. Making a payment on a long-term debt
E. Making a payment on a long-term debt
Which one of the following statements is correct? A. The APR is equal to the EAR for a loan that charges interest monthly. B. The EAR is always greater than the APR. C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1. D. The APR is the best measure of the actual rate you are paying on a loan. E. The EAR, rather than the APR, should be used to compare both investment and loan options.
E. The EAR, rather than the APR, should be used to compare both investment and loan options.
Which one of the following terms is inclusive of both direct and indirect bankruptcy costs?
Financial distress costs
Which one of the following statements is correct? A. Peer group analysis is easier when a firm is a conglomerate versus when it only has a single B. line of business. C. Peer group analysis is easier when seasonal firms have different fiscal years. D. Peer group analysis is simplified when firms use varying methods of depreciation. E. Comparing results across geographic locations is easier since all countries now use a common F. set of accounting standards. G Adjustments have to be made when comparing the income statements of firms which use different . methods of accounting for inventory.
G Adjustments have to be made when comparing the income statements of firms which use different . methods of accounting for inventory.
Which one of the following best describes a portfolio?
Group of assets held by an investor
which of the following features are advantages of the dividend growth model
I and II only I-easy to understand II-constant dividend growth rate
The expected return on a security depends on which of the following? I. Risk-free rate of return II. Amount of the security's unique risk III Market rate of return IV. Standard deviation of returns
I and III only
all else held constant, which of the following will increase the aftertax cost of debt for a firm?
I and IV only I- increase in the YTM of the firms outstanding debt IV-decrease in the firms tax rate
Which of the following terms can be used to describe unsystematic risk? I. Asset-specific risk II. Diversifiable risk III. Market risk IV. Unique risk
I, II, and IV only
Based on the capital asset pricing model, investors are compensated based on which of the following? I. Market risk premium II. Portfolio standard deviation III. Portfolio beta IV. Risk-free rate
I, III, and IV only
Which one of the following is an example of a direct bankruptcy cost?
Incurring legal fees for the preparation of bankruptcy filings
The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. Which of the following changes will decrease the expected return on this security? I. An increase in the probability of an economic boom II. A decrease in the rate of return given a normal economy III. An increase in the probability of a normal economy IV. An increase in the rate of return given an economic boom
II and III only
the after tax cost of which of the following are affected by a change in a firms tax rate?**
II and IV only II- debt IV- capital
which of the following are weaknesses of the dividend growth model? ***
II and IV only II-lack of dividends for some firms IV-sensitivity of model to dividend growth rate
Which of the following statements correctly relate to M&M Proposition I, with taxes? I. Debt decreases the value of a firm. II. The levered value of a firm exceeds the firm's unlevered value. III. The weighted average cost of capital (WACC) is constant. IV. The optimal capital structure is zero debt.
II only
Which one of the following statements is correct?
If a risky security is correctly priced, its expected risk premium will be positive.
Which one of the following is an example of systematic risk?
Increase in consumption created by a reduction in personal tax rates
Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship?
Interest tax shield
Which one of the following is a direct bankruptcy cost?
Legal and accounting fees related to a bankruptcy proceeding
The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?
Market risk
Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?
Portfolio weight
Peterboro recently defaulted on a bank loan. To avoid a bankruptcy proceeding, the bank agreed to a composition. This composition would do which one of the following?
Reduce the amount of the loan payments so Peterboro can pay timely
Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?
Reduce the portfolio's unique risks
Greenwood Motels has filed a petition for bankruptcy but hopes to continue its operations both during and after the bankruptcy process. Which one of the following terms best applies to this situation?
Reorganization
Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?
Right granted to creditors to file their own reorganization plan once a firm is in bankruptcy for 18 months
Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?
Statement by a firm that it has just discovered a manufacturing defect and is recalling its product
The risk premium for an individual security is based on which one of the following types of risk?
Systematic
Which one of the following represents the present value of the interest tax shield?
Tc × D
Which one of the following statements matches M&M Proposition I?
The cost of equity capital varies in response to changes in a firm's capital structure.
Which one of the following is correct based on the static theory of capital structure?
The costs of financial distress decrease the value of a firm.
Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?
The portfolio expected rate of return must be the same for each economic state.
You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task?
The summation of the return deviation from the portfolio expected return for each economic state must equal zero.
Which one of the following is an implication of M&M Proposition II, without taxes?
The risk of equity depends on both the degree of financial leverage and the riskiness of the firm's operations.
Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered. Which one of the following statements is correct regarding these two firms?
The unlevered firm will have higher EPS at relatively low levels of EBIT.
Which one of the following best exemplifies unsystematic risk?
Unexpected increase in the variable costs for a firm
Portfolio diversification eliminates which one of the following?
Unsystematic risk
Which one of the following is minimized when the value of a firm is maximized?
WACC
When is a firm insolvent from an accounting perspective?
When the firm has a negative net worth
Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?
Zero
which one of the following statements is correct, all else helming constant?
a decrease in a firms WACC will increase the attractiveness of the firms investment options
Boone brothers remodels homes and replaces windows. ace builders constructs new homes. if Boone brothers considers expanding into new home construction, it should evaluate the expansion project using which of the following as the required return for the project
ace brothers cost of capital
a firm has multiple divisions of similar nature, yet varying degrees of risk. which one of the following would be the most appropriate, yet relatively easy, means of assigning discount rates to each of its proposed investments?
assign every project a rate equal to the firms WACC plus or minus a subjective adjustment
when using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return which:
best matches the risk level of the proposed investment
The level of financial risk to which a firm is exposed is dependent upon the firm's:
debt-equity ratio.
you need to use the pure play approach to assign a cost of capital to a proposed investment. which one of the following characteristics should you most concentrate on as you search for an appropriate pure play firm?
firm operations
a firm that uses its WACC as the required return for all of its investments will
increase the risk level of the firm over time
The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as:
homemade leverage.
the cost of capital for a project depends primarily on which of the following?
how the project uses its funds
which one of the following will decrease the aftertax cost of debt for a firm?
increase in tax rates
which one of the following will increase the cost of equity, all else held constant?
increase in the dividend growth rate
the cost of preferred stock
is equal to the stocks dividend yield
The static theory of capital structure assumes a firm:
is fixed in terms of its assets.
A prepack:
is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan.
which one of the following is the primary determent of an investments cost of capital?
level of risk
The addition of a risky security to a fully diversified portfolio:
may or may not affect the portfolio beta.
Systematic risk is:
measured by beta.
If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____.
more; overpriced
Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:
of each security must equal the slope of the security market line.
The beta of a risky portfolio cannot be less than _____ nor greater than ____.
the lowest individual beta in the portfolio; the highest individual beta in the portfolio
farmers supply inc is considering opening a clothing store, which would be a new Line of business for the firm. management has decided to use the cost of capital of a similar clothing store as the discount rate that should be used to evaluate this proposed expansion. which one of the following terms is used to describe the approach farmers supply is taking to establish an appropriate discount rate for the project?
pure play approach
Kelly's uses the firms WACC as the required return for some of is projects. for other projects, the firm. uses a rate equal to WACC plus 1 percent, while another set of projects is assigned rates equal to WACC minus some amount. which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning the project a discount rate?
risk level of project
ted is trying to decide what cost of capital he should assign to a project. which one of the following should be his primary consideration in this decision?
risk level of the project
the computation of which one of the following requires assigning every proposed investment to a particular risk class?
subjective cost of capital
kate is the CFO of a major firm and has age job of assigning discount rates to each project that is under consideration. kate's method of doing this is incrementally higher rate as the sir lvl of the project increase over that of the firm. likewise, she assigns lower rates as the risk level declines. which one of the following approaches is kate using to assign the discount rates?
subjunctive appraoch
which one of the following statements is correct related to the dividend growth Model approach to computing the cost of equity?
the annual dividend used in the computation must be for 1 year if you are using today's stock price to compute the return.
black stone furnaces wants to build a new facility. the cost of capital for this investment is primarily dependent upon which of the following
the nature of the investment
which one of the following statements is correct concerning capital structure weights?
the repurchase of a preferred stock will increase the weight of debt
Miller's Hardware has 185,000 shares of stock outstanding with a current market value of $27 a share. You own 38,000 of those shares. Next month, the election will be held to select four new members to the board of directors. The firm uses a cumulative voting system. How much additional money do you need to spend to guarantee that you will be elected to the board assuming that everyone else votes for one of the other candidates? A. $0 B. $28,512 C. $34,047 D. $222,777 E. $311,027
A. $0
Miller Brothers is considering a project that will produce cash inflows of $61,500, $72,800, $84,600, and $68,000 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $225,000? A. 9.39 percent B. 10.22 percent C. 11.47 percent D. 11.62 percent E. 12.24 percent
B. 10.22 percent
At 14 percent interest, how long does it take to quadruple your money? A. 10.42 years B. 10.58 years C. 11.03 years D. 11.21 years E. 11.36 years
B. 10.58 years
The Inside Door has total debt of $78,600, total equity of $214,000, and a return on equity of 14.5 percent. What is the return on assets? A. 9.14 percent B. 10.61 percent C. 21.45 percent D. 34.61 percent E. 39.48 percent
B. 10.61 percent
Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments? A. Callable B. Income C. Zero coupon D. Convertible E. Tax-free
C. Zero coupon
A callable bond: A. is generally call protected during the entire term of the bond issue. B. generally will have a call protection period during the final three years prior to maturity. C. may be structured to pay bondholders the current value of the bond on the date of call. D. is prohibited from having a sinking fund also. E. is frequently called at a price that is less than par value.
C. may be structured to pay bondholders the current value of the bond on the date of call.
To be a member of the NYSE, you must: A. be a primary dealer. B. buy a seat. C. own a trading license. D. be registered as a floor trader. E. be a specialist.
C. own a trading license.
You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options? A. To be the perpetuity, the payments must occur on the first day of each monthly period. B. The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years. C.The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due. D. The future value of all three investments must be equal. E. The present value of all three investments must be equal.
C.The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.
The required return on Mountain Meadow stock is 14 percent and the dividend growth rate is 3.5 percent. The stock is currently selling for $11.80 a share. What is the dividend yield? A. 7.50 percent B. 8.00 percent C. 9.75 percent D. 10.50 percent E. 12.50 percent
D. 10.50 percent
Taylor Farms is borrowing $75,000 for 3 years at an APR of 9 percent. The loan calls for the principal balance to be reduced by equal amounts over the life of the loan. Interest is to be paid in full each year. The payments are to be made annually at the end of each year. How much will Taylor Farms pay in interest over the life of this loan? A. $12,311.67 B. $12,484.90 C. $12,840.00 D. $13,500.00 E. $13,887.32
D. $13,500.00
Blooming Gardens has an inventory turnover of 16, This means the firm: A. sells its entire inventory every 16 days. B. only stocks its inventory every 16 days. C. buys 16 days of inventory with each order. D. sells its inventory by granting customers 16 days credit. E. sells its inventory an average of 16 times each year.
E. sells its inventory an average of 16 times each year.
The federal government has a tax claim on the cash flows of The Window Store. This claim is defined as a claim by one of the firm's: A. residual owners. B. shareholders. C. financiers. D. provisional partners. E. stakeholders.
E. stakeholders.
An upward-sloping term structure of interest rates indicates: A. the real rate of return is lower for short-term bonds than for long-term bonds. B. there is an indirect relationship between real interest rates and time to maturity. C. there is an indirect relationship between nominal interest rates and time to maturity. D. the nominal rate is declining as the real rate rises as the time to maturity increases. E. the nominal rate is increasing even though the real rate is constant as the time to maturity increases.
E. the nominal rate is increasing even though the real rate is constant as the time to maturity increases.
A firm has an equity multiplier of 1.5. This means that the firm has a: A. debt-equity ratio of 0.67. B. debt-equity ratio of 0.33. C. total debt ratio of 0.50. D. total debt ratio of 0.67. E. total debt ratio of 0.33.
E. total debt ratio of 0.33.
The security market line is a linear function that is graphed by plotting data points based on the relationship between which two of the following variables?
Expected return and beta
Which one of the following is the equity risk arising from the capital structure selected by a firm?
Financial risk
Which of the following will increase the value of a levered firm according to M&M Proposition I, with taxes? I. decrease in the amount of the debt II. increase in the value of the unlevered firm III. decrease in the tax rate IV. increase in the interest rate on the debt
II only
Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?
Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0
Sugar and Spice stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?
10.05 percent
What is the expected return on a security given the following information? R, .14, N, .75, B, .11
10.22 percent
You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 14.2 percent and Stock B has an expected return of 17.8 percent. You want to own $20,000 of Stock B. The risk-free rate is 4.8 percent and the expected return on the market is 13.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?
$15,266
You would like to invest $19,000 and have a portfolio expected return of 12.3 percent. You are considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an expected return of 10.3 percent. How much should you invest in Stock A if you invest the balance in Stock B?
$7,170
Currently, you own a portfolio comprised of the following three securities. How much of the riskiest security should you sell and replace with risk-free securities if you want your portfolio beta to equal 90 percent of the market beta? B, (A, 1.06, B, 1.32. C, .98)
$9,613.64
Given the following information, what is the variance of the returns on this stock? B, .30, N, .65, R, .05
0.002759
Given the following information, what is the variance of the returns on a portfolio that is invested 40 percent in both Stocks A and B, and 20 percent in Stock C? RoR, (A, 13.4, B, 17.6, C, 9.3)
0.005746
Given the following information, what is the variance of the returns on this stock? B, .18, N, .77, R, .05
0.021449
Stock A has an expected return of 15.6 percent and a beta of 1.27. Stock B has an expected return of 11.4 percent and a beta of 0.89. Both stocks have the same reward-to-risk ratio. What is the risk-free rate?
1.56 percent
You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. One stock has a beta of 1.15. What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?
1.85
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.12 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
1.88
You own a portfolio of two stocks, A and B. Stock A is valued at $6,500 and has an expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. What is the expected return on the portfolio if the portfolio value is $9,500?
10.22 percent
look ch12 number 36
100
The stock of Wiley United has a beta of 0.92. The market risk premium is 8.6 percent and the risk-free rate is 3.2 percent. What is the expected return on this stock?
11.11 percent
Given the following information, what is the standard deviation of the returns on a portfolio that is invested 40 percent in Stock A, 35 percent in Stock B, and the remainder in Stock C? RoR, (A, 14.3, B, 16.7, C, 18.2)
11.86 percent
Given the following information, what is the expected return on a portfolio that is invested 30 percent in both Stocks A and C, and 40 percent in Stock B? RoR, (A, 7.8, B, 23.6, C, 18.4)
11.97 percent
Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has a beta of 0.68 and an expected return of 7.6 percent. You want a portfolio with the same risk as the market. What is the expected return of your portfolio?
12.04 percent
You own a portfolio that is invested 38 percent in Stock A, 43 percent in Stock B, and the remainder in Stock C. The expected returns on these stocks are 10.9 percent, 15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio?
12.49 percent
You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 15 percent, respectively, what is the expected return on the portfolio?
12.52 percent
Given the following information, what is the expected return on a portfolio that is invested 35 percent in Stock A, 45 percent in Stock B, and the balance in Stock C? RoR, (A, 11.4, B, 31.2, C, 7.3)
12.53 percent
You want to create a $48,000 portfolio that consists of three stocks and has an expected return of 14.5 percent. Currently, you own $16,700 of Stock A and $24,200 of Stock B. The expected return for Stock A is 18.7 percent, and for Stock B it is 11.2 percent. What is the expected rate of return for Stock C?
15.87 percent
Southern Wear stock has an expected return of 14.6 percent. Given the information below, what is the expected return on this stock if the economy is normal? Round your answer to the nearest whole percentage.
18 percent
Bama Entertainment has common stock with a beta of 1.46. The market risk premium is 9.2 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?
18.03 percent
Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? RoR, (A, 16.4, B, 31.8, C, 11.4)
2.77 percent
Noah's Landing stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?
4.05 percent
Given the following information, what is the standard deviation of the returns on this stock? B, .20, N, .70, R, .10
7.80 percent
A stock has a beta of 1.47 and an expected return of 16.6 percent. The risk-free rate is 4.8 percent. What is the slope of the security market line?
8.03 percent
A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the security market line. A risk-free asset is yielding 2.8 percent. You want to create a $6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio beta is 0.65. What rate of return should you expect to earn on your portfolio?
8.50 percent
Which one of the following statements is correct? A. All Chapter 7 bankruptcy filings must include a "workout" agreement. B. Firms must remain in bankruptcy for at least 18 months. C. Key employee retention plans (KERPS) are no longer legal. D. Labor contracts cannot be modified through the bankruptcy process. E. A firm can file for Chapter 11 bankruptcy even if the firm is solvent.
A firm can file for Chapter 11 bankruptcy even if the firm is solvent.
Which one of the following best defines legal bankruptcy?
A legal proceeding for liquidating or reorganizing a business
Which one of the following portfolios will have a beta of zero?
A portfolio comprised solely of U. S. Treasury bills
Which one of the following statements related to the security market line is correct?
A security with a beta of 1.54 will plot on the security market line if it is correctly priced.
Which one of the following is the best example of unsystematic risk?
A warehouse fire
You purchase a bond with a coupon rate of 8 percent, semiannual coupons, and a clean price of $1,011. If the next coupon payment is due in five months, what is the invoice price? A. $1,017.67 B. $1,024.33 C. $1,031.00 D. $1,037.67 E. $1,044.33
A. $1,017.67
You want to buy a new sports car from Roy's Cars for $51,800. The contract is in the form of a 48-month annuity due at a 9.2 percent APR. What will your monthly payment be? A. $1,284.13 B. $1,309.29 C. $1,345.70 D. $1,352.98 E. $1,384.32
A. $1,284.13
You want to purchase a new condominium which costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment? A. $1,736.25 B. $1,833.33 C. $1,908.16 D. $2,221.43 E. $2,406.11
A. $1,736.25
Kristina started setting aside funds 3 years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved for her down payment? A. $11,542.10 B. $12,388.19 C. $15,209.80 D. $15,366.67 E. $16,023.13
A. $11,542.10
Swanton Foods has a book value per share of $12.68, earnings per share of $1.21, and a price-earnings ratio of 17.6. What is the market-to-book ratio? A. 1.32 B. 1.68 C. 1.99 D. 2.47 E. 2.61
B. 1.68
Curtis Builders is borrowing $140,000 today for 5 years. The loan is an interest-only loan with an APR of 9.5 percent. Payments are to be made annually. What is the amount of the first annual payment? A. $13,300.00 B. $21,500.00 C. $31,280.40 D. $36,461.10 E. $41,300.00
A. $13,300.00
You are scheduled to receive $7,500 in three years. When you receive it, you will invest it for eight more years at 7.5 percent per year. How much will you have in eleven years? A. $13,376.08 B. $14,428.09 C. $15,110.24 D. $16,113.33 E. $16,617.07
A. $13,376.08
Plastics, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2.25 percent annually. How much are you willing to pay for one share of this stock if you require a 16 percent return? A. $13.45 B. $13.61 C. $13.76 D. $14.02 E. $14.45
A. $13.45
What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the end of this week. A. $14,239.14 B. $14,361.08 C. $14,727.15 D. $15,003.14 E. $15,221.80
A. $14,239.14
Lester's Fried Chick'n purchased its building 11 years ago at a cost of $139,000. The building is currently valued at $179,000. The firm has other fixed assets that cost $66,000 and are currently valued at $58,000. To date, the firm has recorded a total of $79,000 in depreciation on the various assets. The company has current liabilities of $36,600 and net working capital of $18,400. What is the total book value of the firm's assets? A. $181,000 B. $241,000 C. $331,000 D. $339,000 E. $379,000
A. $181,000
Janice plans to save $75 a month, starting today, for 20 years. Kate plans to save $80 a month for 20 years, starting one month from today. Both Janice and Kate expect to earn an average return of 5.5 percent on their savings. At the end of the 20 years, Kate will have approximately _____ more than Janice. A. $2,028.39 B. $2,066.67 C. $2,091.50 D. $2,178.14 E. $2,189.12
A. $2,028.39
You are making a $120,000 investment and feel that a 10 percent rate of return is reasonable given the nature of the risks involved. You feel you will receive $48,000 in the first year, $54,000 in the second year, and $56,000 in the third year. You expect to pay out $12,000 as an additional investment in the fourth year. What is the net present value of this investment given your expectations? A. $2,141.93 B. $5,607.16 C. $14,206.10 D. $16,233.33 E. $18,534.25
A. $2,141.93
The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income? A. $2,904 B. $8,382 C. $11,204 D. $14,660 E. $16,682
A. $2,904
Curtis is considering a project with cash inflows of $918, $867, $528, and $310 over the next four years, respectively. The relevant discount rate is 11 percent. What is the net present value of this project if it the start up cost is $2,100? A. $20.98 B. $46.48 C. $52.14 D. $74.22 E. $80.81
A. $20.98
Keyser Materials paid $7,500 in dividends and $28,311 in interest over the past year while net working capital increased from $13,506 to $18,219. The company purchased $42,000 in net new fixed assets and had depreciation expenses of $16,805. During the year, the firm issued $25,000 in net new equity and paid off $11,000 in long-term debt. What is the amount of the cash flow from assets? A. $21,811 B. $30,811 C. $36,189 D. $49,811 E. $71,811
A. $21,811
The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year? A. $21,883.25 B. $22,193.95 C. $22,833.24 D. $23,783.24 E. $30,393.95
A. $21,883.25
Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at the level through year three, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share? A. $25.51 B. $26.08 C. $24.57 D. $26.02 E. $26.84
A. $25.51
Granger Corp. stock currently sells for $48.29 per share. The market requires a 13 percent return on the firm's stock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent annual dividend per share paid on the stock? A. $3.43 B. $3.57 C. $3.90 D. $4.15 E. $4.36
A. $3.43
Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at a required return of 14 percent. What is the amount of the last dividend this company paid? A. $3.50 B. $3.55 C. $3.60 D. $3.65 E. $3.70
A. $3.50
A 6 percent bond has a yield to maturity of 6.5 percent. The bond matures in 7 years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment? A. $30.00 B. $32.50 C. $60.00 D. $62.50 E. $65.00
A. $30.00
A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent compounded semiannually, what is the value of this annuity 4 years from now? A. $37,139.58 B. $38,399.20 C. $40,687.14 D. $41,811.67 E. $42,618.52
A. $37,139.58
Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. Afterwards, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return on the stock is 14 percent, what is the current share price? A. $37.92 B. $41.06 C. $43.18 D. $46.09 E. $49.31
A. $37.92
Frank Town Farms has sales of $481,600, costs of $379,700, depreciation expense of $32,100, and interest paid of $8,400. The tax rate is 32 percent. How much net income did the firm earn for the period? A. $41,752 B. $43,090 C. $43,380 D. $45,671 E. $45,886
A. $41,752
Kurt wants to have $25,000 in an investment account 4 years from now. The account will pay 0.2 percent interest per month. If he saves money every month, starting one month from now, how much will he have to save each month to reach his goal? A. $496.75 B. $497.03 C. $497.75 D. $501.03 E. $502.14
A. $496.75
Green Roofs, Inc. has current liabilities of $14,300 and accounts receivable of $7,800. The firm has total assets of $43,100 and net fixed assets of $23,700. The owners' equity has a book value of $21,400. What is the amount of the net working capital? A. $5,100 B. $5,700 C. $6,500 D. $8,200 E. $9,400
A. $5,100
Donner United has total owner's equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt? A. $5,400 B. $12,500 C. $13,700 D. $29,800 E. $43,000
A. $5,400
New Steel Products has total assets of $991,000, a total asset turnover rate of 1.1, a debt-equity ratio of 0.6, and a return on equity of 8.7 percent. What is the firm's net income? A. $53,885.63 B. $58,303.33 C. $64,624.14 D. $70,548.09 E. $77,236.67
A. $53,885.63
Business Services, Inc. is expected to pay its first annual dividend of $0.80 per share three years from now. Starting in year six, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent? A. $6.16 B. $6.47 C. $6.63 D. $7.22 E. $7.47
A. $6.16
Six years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 6.5 percent interest, compounded annually? A. $68,533.41 B. $70,008.21 C. $72,419.05 D. $72,798.47 E. $74,003.15
A. $68,533.41
Uptown Insurance offers an annuity due with semi-annual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment? A. $7,546.70 B. $7,600.00 C. $7,773.10 D. $7,800.00 E. $7,856.25
A. $7,546.70
New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent? A. $8.50 B. $9.67 C. $10.46 D. $12.23 E. $12.49
A. $8.50
Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow? A. $9,672.48 B. $9,734.95 C. $9,899.60 D. $10,022.15 E. $10,422.09
A. $9,672.48
A proposed project requires an initial cash outlay of $749,000 for equipment and an additional cash outlay of $48,500 in year one to cover operating costs. During years 2 through 4, the project will generate cash inflows of $354,000 a year. What is the net present value of this project at a discount rate of 16 percent? A. -$105,427 B. -$41,209 C. $67,333 D. $128,612 E. $239,602
A. -$105,427
For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing? A. -$14,300 B. -$9,700 C. $12,300 D. $14,300 E. $18,900
A. -$14,300
Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next 5 years. The discount rate is 15 percent. What is the benefit of the remodeling project to Professional Properties? A. -$651,233 B. -$489,072 C. $5,214 D. $128,399 E. $311,417
A. -$651,233
Martha's Fabric House has sales of $137,200, total equity of $74,400, and a debt-equity ratio of 0.45. What is the capital intensity ratio? A. 0.79 B. 0.83 C. 1.06 D. 1.20 E. 1.27
A. 0.79
The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year four. The cost of the project is $38,000. What is the profitability index if the discount rate is 7 percent? A. 0.96 B. 0.99 C. 1.04 D. 1.09 E. 1.12
A. 0.96
If Treasury bills are currently paying 4.2 percent and the inflation rate is 2.6 percent, what is the approximate real rate of interest? The exact real rate? A. 1.60 percent; 1.56 percent B. 1.60 percent; 1.64 percent C. 6.80 percent; 6.67 percent D. 6.80 percent; 6.87 percent E. 6.80 percent; 6.92 percent
A. 1.60 percent; 1.56 percent
A firm earns $0.17 in profit for every $1 of equity in the firm. The company borrows $0.60 for every $1 of equity. What is the firm's return on assets? A. 10.63 percent B. 13.53 percent C. 25.15 percent D. 26.07 percent E. 28.33 percent
A. 10.63 percent
You just won $25,000 and deposited your winnings into an account that pays 6.2 percent interest, compounded annually. How long will you have to wait until your winnings are worth $50,000? A. 11.52 years B. 12.00 years C. 12.29 years D. 12.67 years E. 12.90 years
A. 11.52 years
Alpha Zeta is considering purchasing some new equipment costing $390,000. The equipment will be depreciated on a straight line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $18,900, $21,300, $26,700, and $25,000. What is the average accounting rate of return? A. 11.78 percent B. 11.93 percent C. 12.01 percent D. 12.49 percent E. 13.20 percent
A. 11.78 percent
The Gift House offers credit to its customers and charges interest of 1.1 percent per month. What is the annual percentage rate? A. 13.20 percent B. 13.39 percent C. 13.84 percent D. 14.03 percent E. 14.24 percent
A. 13.20 percent
A loan that compounds interest monthly has an EAR of 15.40 percent. What is the APR? A. 14.41 percent B. 14.58 percent C. 14.87 percent D. 14.99 percent E. 15.02 percent
A. 14.41 percent
A firm has sales of $311,000 and net income of $21,600. Currently, there are 18,000 shares outstanding at a market price of $36 per share. What is the price-sales ratio? A. 2.08 B. 3.11 C. 4.26 D. 5.15 E. 6.95
A. 2.08
The Berry Patch has sales of $438,000, cost of goods sold of $369,000, depreciation of $37,400, and interest expense of $13,800. The tax rate is 35 percent. What is the times interest earned ratio? A. 2.29 B. 3.46 C. 3.87 D. 4.38 E. 4.79
A. 2.29
AB Builders, Inc. has 12-year bonds outstanding with a face value of $1,000 and a market price of $974. The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate? A. 3.75 percent B. 4.20 percent C. 4.25 percent D. 7.50 percent E. 8.40 percent
A. 3.75 percent
There are four open positions on the board of directors of Double Tree Restaurants. The company has 180,000 shares of stock outstanding. Each share is entitled to one vote. How many shares of stock must you own to guarantee your personal election to the board of directors if the firm uses cumulative voting? A. 36,001 shares B. 37,501 shares C. 38,501 shares D. 40,001 shares E. 42,001 shares
A. 36,001 shares
A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $12,100, total equity of $94,000, total assets of $156,000, and a 40 percent dividend payout ratio? A. 4.88 percent B. 5.11 percent C. 6.62 percent D. 7.67 percent E. 8.37 percent
A. 4.88 percent
Pluto, Inc., has an issue of preferred stock outstanding that pays a $4.50 dividend every year, in perpetuity. If this issue currently sells for $82.30 per share, what is the required return? A. 5.47 percent B. 6.89 percent C. 7.70 percent D. 8.23 percent E. 8.98 percent
A. 5.47 percent
You have just won a contest! You can either receive $10,000 a year for 15 years or $100,000 as a lump sum payment today. What is the interest rate on the annuity option? A. 5.56 percent B. 5.68 percent C. 6.20 percent D. 6.39 percent E. 6.50 percent
A. 5.56 percent
Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity? A. 5.77 percent B. 5.84 percent C. 6.00 percent D. 6.13 percent E. 6.27 percent
A. 5.77 percent
The Tourist Stop takes an average of 63 days to sell its inventory and an average of 1.5 days to collect payment on its sales. What is the inventory turnover rate? A. 5.79 B. 7.29 C. 8.68 D. 10.18 E. 11.42
A. 5.79
Suppose that in 2010, a $10 silver certificate from 1898 sold for $11,200. For this to have been true, what would the annual increase in the value of the certificate have been? A. 6.47 percent B. 6.81 percent C. 7.23 percent D. 7.49 percent E. 7.97 percent
A. 6.47 percent
Tessler Farms has a return on equity of 12.71 percent, a debt-equity ratio of 0.75, and a total asset turnover of 0.9. What is the return on assets? A. 7.26 percent B. 8.06 percent C. 13.67 percent D. 15.24 percent E. 17.41 percent
A. 7.26 percent
The Steel Factory is considering a project that will produce annual cash flows of $36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $135,000? A. 7.56 percent B. 9.19 percent C. 11.28 percent D. 12.24 percent E. 12.83 percent
A. 7.56 percent
You have just purchased a new warehouse. To finance the purchase, you've arranged for a 25-year mortgage for 80 percent of the $1,800,000 purchase price. The monthly payment on this loan will be $10,800. What is the APR? The EAR? A. 7.67 percent; 7.94 percent B. 7.67 percent; 8.03 percent C. 7.72 percent; 7.94 percent D. 7.72 percent; 8.03 percent E. 7.75 percent; 8.03 percent
A. 7.67 percent; 7.94 percent
Keyser Materials has 8 percent coupon bonds on the market with 19 years to maturity. The bonds make semiannual payments and currently sell for 102 percent of par. What is the current yield on Keyser Materials bonds? The YTM? The effective annual yield? A. 7.84 percent; 7.80 percent; 7.95 percent B. 7.84 percent; 7.92 percent; 7.95 percent C. 7.84 percent; 7.92 percent; 7.97 percent D. 7.80 percent; 7.84 percent; 7.92 percent E. 7.80 percent; 7.92 percent; 7.95 percent
A. 7.84 percent; 7.80 percent; 7.95 percent
Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny? A. 8 percent simple interest B. 8 percent interest, compounded annually C. 8.5 percent simple interest D. 8.5 percent interest, compounded annually E. 9 percent interest, compounded annually
A. 8 percent simple interest
The Green House has a profit margin of 5.6 percent on sales of $311,200. The firm currently has 15,000 shares of stock outstanding at a market price of $11.60 per share. What is the price-earnings ratio? A. 9.98 B. 10.02 C. 11.50 D. 11.93 E. 12.84
A. 9.98
Which one of the following statements is true concerning the price-earnings (PE) ratio? A. A high PE ratio may indicate that a firm is expected to grow significantly. B. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. C. PE ratios are unaffected by the accounting methods employed by a firm. D. The PE ratio is classified as a profitability ratio. E. The PE ratio is a constant value for each firm.
A. A high PE ratio may indicate that a firm is expected to grow significantly.
Which one of the following parties can sell shares of ABC stock in the primary market? A. ABC company B. Any corporation, other than the ABC company C. Institutional shareholder D. Private individual shareholder E. Any of the above
A. ABC company
Bill just financed a used car through his credit union. His loan requires payments of $275 a month for 5 years. Assuming that all payments are paid timely, his last payment will pay off the loan in full. What type of loan does Bill have? A. Amortized B. Complex C. Pure discount D. Lump sum E. Interest-only
A. Amortized
Letitia borrowed $6,000 from her bank 2 years ago. The loan term is 4 years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have? A. Amortized B. Blended discount C. Interest-only D. Pure discount E. Complex
A. Amortized
Which one of the following terms is defined as the total tax paid divided by the total taxable income? A. Average tax rate B. Variable tax rate C. Marginal tax rate D. Absolute tax rate E. Contingent tax rate
A. Average tax rate
If your nominal rate of return is 14.38 percent and your real rate of return is 3.97 percent, what is the inflation rate? A. 8.47 percent B. 10.01 percent C. 10.54 percent D. 18.35 percent E. 18.92 percent
B. 10.01 percent
Which one of the following statements is correct? A. Both preferred stock and corporate bonds can be callable. B. Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each. C Interest payments to bondholders as well as dividend payments to preferred shareholders are tax deductible expenses for the issuing firm. D. Bondholders generally receive a fixed payment while preferred shareholders receive a variable payment. E. Preferred shareholders receive preferential treatment over bondholders in a liquidation.
A. Both preferred stock and corporate bonds can be callable.
Which one of the following is the annuity present value formula? A. C × {{1 - [1/(1 + r)t]}/r} B. C×{1-[1/(1+r)t]}-r C. C × {1 - [r/(1 + r)t]}/r D. C×{{1-[1/(1×r)t]}×r} E. C×{1-[r/(1×r)t]}×r
A. C × {{1 - [1/(1 + r)t]}/r}
Which one of the following will decrease the liquidity level of a firm? A. Cash purchase of inventory B. Credit sale of inventory C. Cash sale of inventory D. Collection of an account receivable E. Proceeds from a long-term loan
A. Cash purchase of inventory
A perpetuity in Canada is frequently referred to as which one of the following? A. Consul B. Infinity C. Forever cash D. Dowry E. Forevermore
A. Consul
Which one of the following terms denotes for certain that a bond is unsecured? A. Debenture B. Bearer form C. Call provision D. Sinking fund E. Blanket mortgage
A. Debenture
Which one of the following is the price that an investor pays to purchase an outstanding bond? A. Dirty price B. Face value C. Call price D. Bid price E. Clean price
A. Dirty price
Which one of the following statements is correct? A. From a legal perspective, preferred stock is a form of corporate equity. B. All classes of stock must have equal voting rights per share. C.Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions. D. Dividends are tax-free income for individual investors. E. Shareholders prefer noncumulative dividends over cumulative dividends.
A. From a legal perspective, preferred stock is a form of corporate equity.
A real rate of return is defined as a rate that has been adjusted for which one of the following? A. Inflation B. Interest rate risk C. Taxes D. Liquidity E. Default risk
A. Inflation
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of 3 years. What type of loan did you obtain? A. Interest-only B. Amortized C. Perpetual D. Pure discount E. Lump sum
A. Interest-only
Which one of the following is most closely related to the net present value profile? A. Internal rate of return B. Average accounting return C. Profitability index D. Payback E. Discounted payback
A. Internal rate of return
Payback is best used to evaluate which type of projects? A. Low-cost, short-term B. High-cost, short-term C. Low-cost, long-term D. High-cost, long-term E. Any size of long-term project
A. Low-cost, short-term
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? A. Mutually exclusive B. Conventional C. Multiple choice D. Dual return E. Crosswise
A. Mutually exclusive
Which one of the following statements is correct? A. NASDAQ has more listed stocks than does the NYSE. B. The NYSE is a dealer market. C. NASDAQ is an auction market. D. NASDAQ has the most stringent listing requirements of any U.S. exchange. E. The trading floor for NASDAQ is located in Chicago.
A. NASDAQ has more listed stocks than does the NYSE.
Which one of the following is the rate of return an investor earns on a bond before adjusting for inflation? A. Nominal rate B. Real rate C. Dirty rate D. Coupon rate E. Clean rate
A. Nominal rate
Which one of the following is an equity account? A. Paid in surplus B. Bonds payable C. Patent D. Depreciation E. Net fixed assets
A. Paid in surplus
Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626? A. Present value B. Compound value C. Future value D. Complex value E. Factor value
A. Present value
New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation? A. Price-sales ratio B. Market-to-book ratio C. Profit margin D. ROE E. ROA
A. Price-sales ratio
Which one of the following is contained in the corporate bylaws? A. Procedures for electing corporate directors B. State of incorporation C. Number of authorized shares D. Intended life of the corporation E. Business purpose of the corporation
A. Procedures for electing corporate directors
Which one of the following indicates that a project is definitely acceptable? A. Profitability index greater than 1.0 B. Negative net present value C. Modified internal rate return that is lower than the requirement D. Zero internal rate of return E. Positive average accounting return
A. Profitability index greater than 1.0
Which one of the following statements is correct? A. Shareholders' equity is the residual value of a firm. B. Net working capital must be a positive value. C. An increase in cash reduces the liquidity of a firm. D. Equipment is generally considered a highly liquid asset. E. Depreciation increases total assets
A. Shareholders' equity is the residual value of a firm
Margie opened a used book store and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts? A. Sole proprietorship B. Limited partnership C. Corporation D. Joint stock company E. General partnership
A. Sole proprietorship
Which one of the following players on the floor of the NYSE is obligated to maintain a fair, orderly market for a limited number of securities? A. Specialist B. Floor trader C. $2 broker D. Commission broker E. Floor broker
A. Specialist
Which one of the following is true if the managers of a firm only accept projects that have a profitability index greater than 1.5? A. The firm should increase in value each time the firm accepts a new project. B. The firm is most likely steadily losing value. C. The price of the firm's stock should remain constant. D. The net present value of each new project is zero. E. The internal rate of return on each new project is zero.
A. The firm should increase in value each time the firm accepts a new project.
Which one of the following statements is correct concerning a firm's fixed assets? A. The market value is the expected selling price in today's economy. B. The market value is affected by the accounting method selected. C. The market value is equal to the initial cost minus the depreciation to date. D. The book value is equal to the market value minus the accumulated depreciation. E. The book value is the greater of the initial cost or the current market value.
A. The market value is the expected selling price in today's economy.
Which one of the following is an example of a perpetuity? A. Trust income of $1,200 a year forever B. Retirement pay of $2,200 a month for 20 years C. Lottery winnings of $1,000 a month for life D. Car payment of $260 a month for 60 months E. Apartment rent payment of $800 a month for one year
A. Trust income of $1,200 a year forever
Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the: A. annual percentage rate. B. compounded rate. C. effective annual rate. D. perpetual rate. E. simple rate.
A. annual percentage rate.
The price at which an investor can purchase a bond from a dealer is called the _____ price. A. asked B. coupon C. call D. face E. bid
A. asked
Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's: A. capital structure. B. capital budget. C. asset allocation. D. working capital. E. risk structure.
A. capital structure.
The net present value: A. decreases as the required rate of return increases. B. is equal to the initial investment when the internal rate of return is equal to the required return. C. method of analysis cannot be applied to mutually exclusive projects. D. is directly related to the discount rate. E. is unaffected by the timing of an investment's cash flows.
A. decreases as the required rate of return increases.
Net capital spending is equal to: A. ending net fixed assets minus beginning net fixed assets plus depreciation. B. beginning net fixed assets minus ending net fixed assets plus depreciation. C. ending net fixed assets minus beginning net fixed assets minus depreciation. D. ending total assets minus beginning total assets plus depreciation. E. ending total assets minus beginning total assets minus depreciation.
A. ending net fixed assets minus beginning net fixed assets plus depreciation.
The ratios that are based on financial statement values and used for comparison purposes are called: A. financial ratios. B. industrial statistics. C. equity standards. D. accounting returns. E. analytical standards.
A. financial ratios
An individual who executes buy and sell orders on the floor of an exchange for a fee is called a: A. floor broker. B. specialist. C. floor trader. D. proxy. E. flow specialist.
A. floor broker.
The present value of a lump sum future amount: A. increases as the interest rate decreases. B. decreases as the time period decreases. C. is inversely related to the future value. D. is directly related to the interest rate. E. is directly related to the time period.
A. increases as the interest rate decreases.
The written agreement that contains the specific details related to a bond issue is called the bond: A. indenture. B. debenture. C. document. D. registration statement. E. issue paper.
A. indenture.
Cash flow to creditors is defined as: A. interest paid minus net new borrowing. B. interest paid plus net new borrowing. C. the operating cash flow minus net capital spending minus change in net working capital. D. dividends paid plus net new borrowing. E. cash flow from assets plus net new equity.
A. interest paid minus net new borrowing.
The profitability index reflects the value created per dollar: A. invested. B. of sales. C. of net income. D. of taxable income. E. of shareholders' equity.
A. invested.
The Sarbanes-Oxley Act: A. makes the officers of a public corporation personally responsible for the firm's financial statements. B. requires all corporations to fully disclose its financial dealings to the general public. C. places the responsibility for a firm's financial statements solely on the chief financial officer. D. requires that the board of directors be solely responsible for the firm's financial dealings. E. places total responsibility for the financial statements of a firm on the auditor who certifies the statements.
A. makes the officers of a public corporation personally responsible for the firm's financial statements.
If a firm has a negative cash flow from assets every year for several years, the firm: A. may be continually increasing in size. B. must also have a negative cash flow from operations each year. C. is operating at a high level of efficiency. D. is repaying debt every year. E. has annual net losses
A. may be continually increasing in size.
The average accounting return: A. measures profitability rather than cash flow. B. discounts all values to today's dollars. C. is expressed as a percentage of an investment's current market value. D. will equal the required return when the net present value equals zero. E. is used more often by CFOs than the internal rate of return.
A. measures profitability rather than cash flow.
The equity multiplier is equal to: A. one plus the debt-equity ratio. B. one plus the total asset turnover. C. total debt divided by total equity. D. total equity divided by total assets. E. one divided by the total asset turnov
A. one plus the debt-equity ratio.
The stream of customer instructions to buy and sell securities is called the: A. order flow. B. market maker. C. execution stream. D. operations flow. E. buyer's stream.
A. order flow.
A preferred stock sells for $48.20 a share and has a market return of 15.65 percent. What is the dividend amount? A. $6.93 B. $6.80 C. $7.25 D. $7.42 E. $7.54
E. $7.54
Given an interest rate of zero percent, the future value of a lump sum invested today will always: A. remain constant, regardless of the investment time period. B. decrease if the investment time period is shortened. C. decrease if the investment time period is lengthened. D. be equal to $0. E. be infinite in value.
A. remain constant, regardless of the investment time period.
A note is: A. unsecured debt that is generally payable within the next ten years. B. a formal type of loan that is secured by real estate. C. long-term debt secured by part, or all, of the assets of the borrower. D. debt that is secured by a borrower's accounts receivables. E. the written agreement which details the information relative to a bond issue.
A. unsecured debt that is generally payable within the next ten years.
If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is: A. zero percent. B. 100 percent. C. equal to the ROA. D. negative. E. infinite.
A. zero percent.
In the process of liquidation, some types of claims receive preference over other claims. Which one of the following determines which type of claim is paid first?
Absolute priority rule
Keller Metals common stock is selling for $36 a share and has a dividend yield of 3.2 percent. What is the dividend amount? A. $0.32 B. $1.15 C. $3.49 D. $11.25 E. $11.52
B. $1.15
Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital? A. $9,800 B. $10,400 C. $18,900 D. $21,300 E. $23,200
B. $10,400
Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting one year from today. What is the amount of each payment? A. $9,511.08 B. $10,462.15 C. $10,754.40 D. $11,013.20 E. $12,208.19
B. $10,462.15
Klaus Toys just paid its annual dividend of $1.40. The required return is 16 percent and the dividend growth rate is 2 percent. What is the expected value of this stock five years from now? A. $11.04 B. $11.26 C. $11.67 D. $12.41 E. $12.58
B. $11.26
Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account? A. $129,411.20 B. $132,827.88 C. $134,616.56 D. $141,919.67 E. $142,003.12
B. $132,827.88
Billingsley, Inc. is borrowing $60,000 for 5 years at an APR of 8 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for year 3 of this loan? A. $13,920 B. $14,880 C. $15,220 D. $15,840 E. $16,800
B. $14,880
Central Staircase is offering preferred stock which is commonly 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 desire a 16 percent rate of return? A. $14.48 B. $16.43 C. $17.07 D. $17.84 E. $18.21
B. $16.43
Eastern Hardwood Sales has total equity of $89,000, a profit margin of 4.8 percent, an equity multiplier of 1.5, and a total asset turnover of 1.3. What is the amount of the firm's sales? A. $168,200 B. $173,550 C. $181,430 D. $185,620 E. $187,500
B. $173,550
Eastern Shore 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 required return on this investment is 5.5 percent, how much will you pay for the policy? A. $178,407.26 B. $181,818.18 C. $185,000.00 D. $187,511.02 E. $191,001.74
B. $181,818.18
Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares? A. $18,824.17 B. $19,007.99 C. $19,580.92 D. $20,515.08 E. $22,449.92
B. $19,007.99
Jodie's Fashions has just signed a $2.2 million contract. The contract calls for a payment of $0.6 million today, $0.8 million one year from today, and $0.8 million two years from today. What is this contract worth today if the firm can earn 7.2 percent on its money? A. $2,038,616.67 B. $2,042,414.79 C. $2,108,001.32 D. $2,124,339.07 E. $2,202,840.91
B. $2,042,414.79
You and your brother are planning a large anniversary party 3 years from today for your grandparents' 50th wedding anniversary. You have estimated that you will need $2,500 for this party. You can earn 3.5 percent compounded annually on your savings. How much would you and your brother have to deposit today in one lump sum to pay for the entire party? A. $2,199.74 B. $2,254.86 C. $2,308.16 D. $2,334.90 E. $2,368.81
B. $2,254.86
Given an interest rate of 4.85 percent per year, what is the value at year t = 8 of a perpetual stream of $2,500 payments that begin at year t = 25? A. $23,042.78 B. $24,160.35 C. $48,211.12 D. $50,877.64 E. $51,546.49
B. $24,160.35
Better Plastics is a mature manufacturing firm. The company just paid a $4 annual dividend, but management expects to reduce the payout by 3 percent per year, indefinitely. If you require a 12 percent return on this stock, what will you pay for a share today? A. $23.09 B. $25.87 C. $27.14 D. $28.56 E. $30.02
B. $25.87
Wesson Metals has an outstanding loan that calls for equal annual payments of $9,768.46 over the life of the loan. The original loan amount was $50,000 at an APR of 8.5 percent. How much of the second loan payment is interest? A. $3,525.61 B. $3,780.93 C. $4,250.00 D. $5,409.16 E. $5,987.53
B. $3,780.93
Second Union Bank pays 5 percent simple interest on its savings account balances, whereas Third Street Bank pays 5 percent compounded annually. If you made a $12,000 deposit in each bank, how much more money would you earn from your Third Street Bank account at the end of 15 years? A. $3,602.89 B. $3,947.14 C. $4,008.01 D. $4,221.15 E. $4,414.14
B. $3,947.14
The Closet Shoppe has total sales of $713,200 and a profit margin of 5.8 percent. Currently, the firm has 12,500 shares outstanding. What are the earnings per share? A. $2.98 B. $3.31 C. $3.56 D. $3.89 E. $4.02
B. $3.31
The Import Store has cash of $34,600 and accounts receivable of $54,200. The inventory cost $92,300 and can be sold today for $146,900. The fixed assets were purchased at a cost of $234,500 of which $87,900 has been depreciated. The fixed assets can be sold today for $199,000. What is the total book value of the firm's assets? A. $309,900 B. $327,700 C. $346,800 D. $382,300 E. $434,700
B. $327,700
Arts and Crafts Warehouse wants to issue 15-year, zero coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is $1,000? (Assume semi-annual compounding.) A. $308.15 B. $331.40 C. $356.08 D. $362.14 E. $369.94
B. $331.40
A bond has a par value of $1,000, a current yield of 7.606 percent, and semi-annual interest payments. The bond quote is 98.6. What is the amount of each coupon payment? A. $32.50 B. $37.50 C. $38.03 D. $72.31 E. $75.00
B. $37.50
Today, Tony is investing $16,000 at 6.5 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually? A. $323.22 B. $389.28 C. $401.16 D. $442.79 E. $484.08
B. $389.28
Suppose you know that a company's stock currently sells for $65 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? A. $3.67 B. $4.25 C. $4.64 D. $5.01 E. $5.28
B. $4.25
Blackwell Ink is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 5 percent annually. What is a share of this stock worth today at a required return of 15 percent? A. $4.07 B. $4.28 C. $4.49 D. $4.72 E. $4.95
B. $4.28
Taylor Tools is a young start-up company. No dividends will be paid on the stock over the next 7 years because the firm needs to plow back its earnings to fuel growth. The company will then pay a $9 per share dividend in year 8 and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price? A. $47.76 B. $50.89 C. $64.30 D. $92.08 E. $112.50
B. $50.89
In 2009, the Obama administration established a maximum limit on executive salaries for firms that received bailout funds. What was the amount of that salary limit? A. $250,000 B. $500,000 C. $750,000 D. $1,000,000 E. $1,500,000
B. $500,000
Deltona Motors just issued 225,000 zero coupon bonds. These bonds mature in 20 years, have a par value of $1,000, and have a yield to maturity of 7.45 percent. What is the approximate total amount of money the company raised from issuing these bonds? (Assume semi-annual compounding) A. $48.20 million B. $52.10 million C. $55.14 million D. $162.08 million E. $225.00 million
B. $52.10 million
The Walters Co. has beginning long-term debt of $54,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt? A. $45,100 B. $53,300 C. $58,200 D. $65,500 E. $85,900
B. $53,300
Webster Mining is considering the purchase of a new sorting machine. The quote consists of a quarterly payment of $29,600 for 7 years at 8 percent interest. What is the purchase price of the equipment? A. $621,380.92 B. $629,925.66 C. $687,418.22 D. $774,311.28 E. $836,267.35
B. $629,925.66
Roger just deposited $13,000 into his account at Market Place Bank. The bank will pay 2.3 percent interest, compounded annually, on this account. How much interest on interest will he earn over the next 15 years? A. $638.16 B. $799.28 C. $821.03 D. $906.15 E. $923.70
B. $799.28
What is the future value of $4,900 invested for 8 years at 7 percent compounded annually? A. $8,397.74 B. $8,419.11 C. $8,511.15 D. $8,513.06 E. $8,520.22
B. $8,419.11
The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 15 percent rate of return? A. $7.86 B. $8.33 C. $10.87 D. $11.04 E. $11.38
B. $8.33
Jeffries, Inc. has 6 percent coupon bonds on the market that have 11 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 7.4 percent, what is the current bond price? A. $895.88 B. $897.08 C. $903.14 D. $921.42 E. $933.33
B. $897.08
The Egg House just borrowed $260,000 to build a new restaurant. The loan terms call for equal annual payments at the end of each year. The loan is for 15 years at an APR of 8 percent. How much of the first annual payment will be used to reduce the principal balance? A. $8,311.62 B. $9,575.68 C. $10,211.08 D. $10,554.60 E. $11,420.90
B. $9,575.68
Your firm has cash of $3,800, accounts receivable of $9,600, inventory of $33,100, and net working capital of $1,100. What is the cash ratio? A. 0.04 B. 0.08 C. 0.87 D. 1.21 E. 3.45
B. 0.08
Slightly Used Goods has cash of $2,150, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio? A. 0.08 B. 0.18 C. 0.32 D. 0.46 E. 0.51
B. 0.18
Denton, Inc. has total equity of $389,600, long-term debt of $116,400, net working capital of $1,600, and total assets of $527,600. What is the total debt ratio? A. 0.22 B. 0.26 C. 0.67 D. 1.49 E. 3.85
B. 0.26
The Jelly Jar has total assets of $79,600 and an equity multiplier of 1.35. What is the debt-equity ratio? A. 0.28 B. 0.35 C. 0.47 D. 0.58 E. 0.67
B. 0.35
Tressler Dry Cleaners has inventory of $1,700, accounts payable of $4,200, cash of $1,950, and accounts receivable of $3,680. What is the cash ratio? A. 0.24 B. 0.46 C. 0.53 D. 0.98 E. 1.34
B. 0.46
A firm has total assets of $523,100, current assets of $186,500, current liabilities of $141,000, and total debt of $215,000. What is the debt-equity ratio? A. 0.48 B. 0.70 C. 1.10 D. 1.43 E. 2.13
B. 0.70
The Donut Hut has sales of $68,000, current assets of $11,300, net income of $5,100, net fixed assets of $54,900, total debt of $23,800, and dividends of $800. What is the sustainable growth rate? A. 10.48 percent B. 11.29 percent C. 11.79 percent D. 12.08 percent E. 12.39 percent
B. 11.29 percent
What is the effective annual rate of 11 percent compounded semi-annually? A. 11.26 percent B. 11.30 percent C. 11.37 percent D. 11.41 percent E. 11.45 percent
B. 11.30 percent
It takes The Corner Store an average of 51 days to sell its inventory and 32 days to collect its accounts receivable. The firm has sales of $568,700 and costs of goods sold of $398,800. What is the accounts receivable turnover rate? A. 11.23 B. 11.41 C. 11.78 D. 12.23 E. 12.55
B. 11.41
Friendly Credit Corp. wants to earn an effective annual return on its consumer loans of 13 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? A. 11.98 percent B. 12.22 percent C. 13.00 percent D. 13.57 percent E. 13.88 percent
B. 12.22 percent
Tally Ho Inn has annual sales of $737,000. Earnings before interest and taxes is equal to 21 percent of sales. For the period, the firm paid $7,900 in interest. What is the profit margin if the tax rate is 35 percent? A. 12.46 percent B. 12.95 percent C. 13.33 percent D. 15.29 percent E. 16.11 percent
B. 12.95 percent
You have an outstanding loan with an EAR of 14.6 percent. What is the APR if interest is compounded monthly? A. 13.48 percent B. 13.71 percent C. 14.60 percent D. 15.41 percent E. 15.62 percent
B. 13.71 percent
Friendly Finance is offering a special on one-year loans. The company will loan you $5,000 today in exchange for one payment of $5,700 one year from now. What is the APR on this loan? A. 13.67 percent B. 14.00 percent C. 14.40 percent D. 14.93 percent E. 15.04 percent
B. 14.00 percent
Glamour Clothing charges a daily rate of 0.05 percent on its store credit cards. What interest rate is the company required by law to report to potential customers? A. 17.99 percent B. 18.25 percent C. 19.50 percent D. 20.02 percent E. 20.24 percent
B. 18.25 percent
Services United is considering a new project that requires an initial cash investment of $75,000. The project will generate cash inflows of $26,500, $32,700, $18,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment? A. 2.74 years B. 2.85 years C. 2.99 years D. 3.27 years E. 3.68 years
B. 2.85 years
You have $2,158 today in your savings account. How long must you wait for your savings to be worth $4,000 if you are earning 2.1 percent interest, compounded annually? A. 26.68 years B. 29.69 years C. 32.13 years D. 33.33 years E. 34.14 years
B. 29.69 years
Your parents loaned you money at 0.25 percent interest per month. What is the APR of this loan? A. 2.97 percent B. 3.00 percent C. 3.04 percent D. 4.00 percent E. 4.07 percent
B. 3.00 percent
Caldweiler & Co. owes a total of $21,684 in taxes for this year. The taxable income is $71,509. If the firm earns $100 more in income, it will owe an additional $36 in taxes. What is the average tax rate on income of $71,609? A. 28.00 percent B. 30.33 percent C. 33.33 percent D. 34.00 percent E. 36.00 percent
B. 30.33 percent
Russell's Hardware has inventory of $218,000, equity of $421,800, total assets of $647,700, and sales of $587,200. What is the common-size percentage for the inventory account? A. 26.81 percent B. 33.66 percent C. 37.12 percent D. 49.09 percent E. 51.68 percent
B. 33.66 percent
A firm has two open positions on its board of directors. How many shares do you need to own to guarantee your own election to the board if the firm has 12,500 shares of stock outstanding and uses cumulative voting? Each share is granted one vote. A. 3,334 shares B. 4,168 shares C. 5,251 shares D. 5,501 shares E. 6,251 shares
B. 4,168 shares
The Global Network has sales of $418,700, cost of goods sold of $264,900, and inventory of $61,900. What is the inventory turnover rate? A. 1.33 B. 4.28 C. 6.76 D. 7.14 E. 8.47
B. 4.28
Goshen Industrial Sales has sales of $828,900, total equity of $539,200, a profit margin of 4.6 percent and a debt-equity ratio of 0.55. What is the return on assets? A. 3.89 percent B. 4.56 percent C. 6.67 percent D. 12.86 percent E. 13.33 percent
B. 4.56 percent
Lester's Feed Mill is spending $230,000 to update its facility. The company estimates that this investment will improve its cash inflows by $46,500 a year for 10 years. What is the payback period? A. 4.03 years B. 4.95 years C. 5.39 years D. 5.67 years E. The project never pays back.
B. 4.95 years
A firm has net income of $5,890 and interest expense of $2,130. The tax rate is 34 percent. What is the firm's times interest earned ratio? A. 4.82 B. 5.19 C. 5.38 D. 5.67 E. 6.33
B. 5.19
Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest annually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the current yield? A. 5.39 percent B. 5.43 percent C. 5.50 percent D. 5.61 percent E. 5.77 percent
B. 5.43 percent
The Solvent Insurance Co. will pay you $2,500 a year for 20 years in exchange for $30,000 today. What interest rate will you earn on this annuity? A. 5.40 percent B. 5.45 percent C. 5.50 percent D. 5.55 percent E. 5.60 percent
B. 5.45 percent
In relation to bonds, which one of the following terms has the same meaning as the term "crossover"? A. Speculative B. 5B C. Fallen angel D. Junk E. Triple A
B. 5B
Cross Hairs Gun Shop has sales of $189,000, a profit margin of 4.8 percent, and a capital intensity ratio of 0.79. What is the return on assets? A. 5.67 percent B. 6.08 percent C. 6.39 percent D. 6.42 percent E. 6.67 percent
B. 6.08 percent
Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50/ 50 basis. Which type of entity did they create if they have no personal liability for the firm's debts? A. Limited partnership B. Corporation C. Sole proprietorship D. General partnership E. Public company
B. Corporation
The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value. The bonds mature in 8 years and pay interest semiannually. These bonds have current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent. A. 6.12; 6.32; 6.36 B. 6.12; 6.32; 6.42 C. 6.12; 6.36; 6.42 D. 6.23; 6.32; 6.36 E. 6.23; 6.36; 6.42
B. 6.12; 6.32; 6.42
Quick Foods has sales of $238,900, total assets of $217,000, total equity of $121,300, net income of $18,700, and dividends paid of $6,000. What is the internal growth rate? A. 5.48 percent B. 6.22 percent C. 6.67 percent D. 7.34 percent E. 7.92 percent
B. 6.22 percent
You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan? A. 5.84 years B. 6.37 years C. 6.80 years D. 7.33 years E. 7.59 years
B. 6.37 years
The 7 percent annual coupon bonds of TPO, Inc. are selling for $1,021. The bonds have a face value of $1,000 and mature in 6.5 years. What is the yield to maturity? A. 6.42 percent B. 6.59 percent C. 6.63 percent D. 6.68 percent E. 6.70 percent
B. 6.59 percent
A bond has a $1,000 face value, a market price of $1,036, and pays interest payments of $70 every year. What is the coupon rate? A. 6.76 percent B. 7.00 percent C. 7.12 percent D. 13.51 percent E. 14.00 percent
B. 7.00 percent
Joshua's Antiques has a total asset turnover rate of 1.2, an equity multiplier of 1.4, a profit margin of 5 percent, a retention ratio of 0.8, and total assets of $120,000. What is the sustainable growth rate? A. 6.98 percent B. 7.20 percent C. 7.33 percent D. 7.54 percent E. 7.91 percent
B. 7.20 percent
The 8 percent, $1,000 face value bonds of Glenmore Foods are currently selling at $1,027. These bonds have 16 years left until maturity. What is the current yield? A. 7.71 percent B. 7.79 percent C. 8.00 percent D. 8.23 percent E. 8.28 percent
B. 7.79 percent
Investors receive a total return of 13.7 percent on the common stock of Dexter International. The stock is selling for $41.68 a share. What is the dividend growth rate if the company plans to pay an annual dividend of $2.10 a share next year? A. 7.42 percent B. 8.66 percent C. 10.75 percent D. 11.60 percent E. 13.70 percent
B. 8.66 percent
Kessler, Inc. has accounts receivable of $31,600, total assets of $311,500, cost of goods sold of $208,400, and a capital intensity ratio of 1.08. What is the accounts receivables turnover rate? A. 8.99 B. 9.13 C. 9.42 D. 9.61 E. 9.72
B. 9.13
T.L.C., Inc. is considering an investment with an initial cost of $175,000 that would be depreciated straight line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return? A. 9.27 percent B. 9.98 percent C. 10.62 percent D. 10.79 percent E. 11.58 percent
B. 9.98 percent
Which one of the following is included in net working capital? A. Land B. Accounts payable C. Equipment D. Depreciation E. Dividend
B. Accounts payable
Which one of the following statements concerning annuities is correct? A. The present value of an annuity is equal to the cash flow amount divided by the discount rate. B. An annuity due has payments that occur at the beginning of each time period. C. The future value of an annuity decreases as the interest rate increases. D. If unspecified, you should assume an annuity is an annuity due. E. An annuity is an unending stream of equal payments occurring at equal intervals of time.
B. An annuity due has payments that occur at the beginning of each time period.
Travis is buying a car and will finance it with a loan which requires monthly payments of $265 for the next 4 years. His car payments can be described by which one of the following terms? A. Perpetuity B. Annuity C. Consol D. Lump sum E. Factor
B. Annuity
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments? A. Ordinary annuity B. Annuity due C. Consol D. Ordinary perpetuity E. Perpetuity due
B. Annuity due
Which one of the following applies to a general partnership? A. The firm's operations must be controlled by a single partner. B. Any one of the partners can be held solely liable for all of the partnership's debt. C. The profits of the firm are taxed as a separate entity. D. Each partner's liability for the firm's debts is limited to each partner's investment in the firm. E. The profits of a general partnership are taxed the same as those of a corporation.
B. Any one of the partners can be held solely liable for all of the partnership's debt.
Which one of the following must equal zero if a firm pays a constant annual dividend? A. Dividend yield B. Capital gains yield C. Total return D. Market value per share E. Book value per share
B. Capital gains yield
Which one of the following has nearly the same meaning as free cash flow? A. Net income B. Cash flow from assets C. Operating cash flow D. Cash flow to shareholders E. Addition to retained earnings
B. Cash flow from assets
Which one of the following is most apt to align management's priorities with shareholders' interests? A. Increasing employee retirement benefits B. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold C.Allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or more D. Increasing the number of paid holidays that long-term employees are entitled to receive E. Allowing employees to retire early with full retirement benefits
B. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold
The Sarbanes-Oxley Act in 2002 was prompted by which one of the following from the 1990's? A. Increased stock market volatility B. Corporate accounting and financial fraud C. Increased executive compensation D. Increased foreign investment in U.S. stock markets E. Increased use of tax loopholes
B. Corporate accounting and financial fraud
Which one of the following is an intangible fixed asset? A. Inventory B. Machinery C. Copyright D. Account receivable E. Building
C. Copyright
Which one of the following statements related to securities dealers is correct? A. Dealers match buyers with sellers. B. Dealers buy and sell from their own inventory. C. Dealers operate on a physical trading floor. D. Dealers operate exclusively in auction markets. E. Dealers are limited to trading non-listed stocks.
B. Dealers buy and sell from their own inventory.
Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? A. Decrease in the total asset turnover B. Decrease in the capital intensity ratio C. Increase in days' sales in receivables D. Decrease in the profit margin E. Decrease in the inventory turnover rate
B. Decrease in the capital intensity ratio
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? A. Project's initial cost B. Discount rate C. Timing of the project's cash inflows D. Inflation rate E. Real rate of return
B. Discount rate
Which one of the following defines the internal rate of return for a project? A. Discount rate that creates a zero cash flow from assets B. Discount rate which results in a zero net present value for the project C. Discount rate which results in a net present value equal to the project's initial cost D. Rate of return required by the project's investors E. The project's current market rate of return
B. Discount rate which results in a zero net present value for the project
Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias
B. Ease of use
The Du Pont identity can be totally defined by which one of the following? A. Return on equity, total asset turnover, and equity multiplier B. Equity multiplier and return on assets C. Profit margin and return on equity D. Total asset turnover, profit margin, and debt-equity ratio E. Equity multiplier, return on assets, and profit margin
B. Equity multiplier and return on assets
Which one of the following is a capital structure decision? A. Determining the optimal inventory level B. Establishing the preferred debt-equity level C. Selecting new equipment to purchase D. Setting the terms of sale for credit sales E. Determining when suppliers should be paid
B. Establishing the preferred debt-equity level
Which one of the following can NOT be computed? A. Future value of an ordinary annuity B. Future value of a perpetuity C. Present value of a perpetuity D. Present value of an annuity due E. Present value of an ordinary annuity
B. Future value of a perpetuity
Which of the following will increase the present value of an annuity, all else held constant? I. Increase in the number of payments II. Increase in the interest rate III. Decrease in the interest rate IV. Decrease in the payment amount A. I and II only B. I and III only C. II and IV only D. I, II, and IV only E. I, III, and IV only
B. I and III only
Which of the following characteristics apply to a perpetuity? I. Constant cash flow dollar amount II. Unequal cash flow dollar amount III. Limited time period IV. Infinite time period A. I and III only B. I and IV only C. II and III only D. II and IV only E. I plus either III or IV
B. I and IV only
Which of the following characteristics are most commonly associated with corporate bonds issued in the U.S.? I. registered form II. bearer form III. quarterly coupon payments IV. semiannual coupon payments A. I and III only B. I and IV only C. II and III only D. II and IV only E. III only
B. I and IV only
Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity A. I and II only B. II and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV
B. II and III only
Kate owns a stock with a market price of $31 per share. This stock pays a constant annual dividend of $0.60 per share. If the price of the stock suddenly increases to $36 a share, you would expect the: I. dividend yield to increase. II. dividend yield to decrease. III. capital gains yield to increase. IV. capital gains yield to decrease. A. I only B. II only C. III only D. I and III only E. II and IV only
B. II only
Which of the following will increase the sustainable rate of growth for a firm? I. Decreasing the profit margin II. Increasing the dividend payout ratio III. Decreasing the capital intensity ratio IV. Increasing the target debt-equity ratio A. I and II only B. III and IV only C. II and IV only D. I, III, and IV only E. I, II, III, and IV
B. III and IV only
All else equal, an increase in which one of the following will decrease owners' equity? A. Increase in inventory B. Increase in accounts payable C. Increase in accounts receivable D. Increase in net working capital E. Increase in net fixed assets
B. Increase in accounts payable
Which one of the following features applies to NASDAQ but not the NYSE? A. Trading in the crowd B. Multiple market maker system C. SuperDot D. Broker market E. Physical trading floor
B. Multiple market maker system
Which one of the following parties on the NYSE floor post bid and asked prices? A. Floor traders B. Specialists C. Floor brokers D. Commission brokers E. Fee brokers
B. Specialists
The electronic system that transmits buy and sell orders directly to a specialist on the floor of the NYSE is called: A. NASDAQ. B. SuperDOT. C. TICKER. D. ECN. E. ORDFLOW.
B. SuperDOT.
Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested? A. Terry will earn the same amount of interest each year. B. Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest. C. Terry will earn an increasing amount of interest each and every year even if he should decide to . withdraw the interest annually rather than reinvesting the interest. D. Terry's interest for year two will be equal to $2,000 × 0.065 × 2. E. Terry will be earning simple interest.
B. Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest.
You've just found a 7 percent coupon bond on the market that sells for par value. What is the maturity on this bond? A. The bond must mature in one year. B. The bond could have any maturity date. C. The bond must be maturing today. D. The bond must mature in 10 years. E. None of the other answers.
B. The bond could have any maturity date.
Which one of the following statements concerning market and book values is correct? A. The market value of accounts receivable is generally higher than the book value of those receivables. B. The market value tends to provide a better guide to the actual worth of an asset than does the book value. C. The market value of fixed assets will always exceed the book value of those assets. D. Book values represent the amount of cash that will be received if an asset is sold. E. The current book value of equipment purchased last year is equal to the initial cost of the equipment.
B. The market value tends to provide a better guide to the actual worth of an asset than does the book value.
Which one of the following statements is correct? A. The internal rate of return is the most reliable method of analysis for any type of investment decision. B. The payback method is biased towards short-term projects. C. The modified internal rate of return is most useful when projects are mutually exclusive. D. The average accounting return is the most difficult method of analysis to compute. E. The net present value method is only applicable if a project has conventional cash flows.
B. The payback method is biased towards short-term projects.
Which one of the following will occur when the internal rate of return equals the required return? A. The average accounting return will equal 1.0. B. The profitability index will equal 1.0. C. The profitability index will equal 0. D. The net present value will equal the initial cash outflow. E. The profitability index will equal the average accounting return.
B. The profitability index will equal 1.0.
The modified internal rate of return is specifically designed to address the problems associated with which one of the following? A. Mutually exclusive projects B. Unconventional cash flows C. Long-term projects D. Negative net present values E. Crossover points
B. Unconventional cash flows
The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine? Why or why not? A. Yes; because the IRR is 10.75 percent B. Yes; because the IRR is 12.74 percent C. No; because the IRR is 10.75 percent D. No; because the IRR is 12.74 percent E. The answer cannot be determined as there are multiple IRRs.
B. Yes; because the IRR is 12.74 percent
Which one of the following terms refers to a bond's rate of return that is required by the market place? A. Coupon rate B. Yield to maturity C. Dirty yield D. Call yield E. Discount rate
B. Yield to maturity
If a trade is made "in the crowd", the trade has occurred: A. between a broker and a specialist. B. between two brokers. C. electronically on NASDAQ. D. on SuperDOT. E. on an ECN.
B. between two brokers.
The value of a bond is dependent upon the: A. coupon rate and the current yield. B. coupon rate and the yield to maturity. C. current yield and the yield to maturity. D. coupon rate but neither the current yield nor the yield to maturity. E. yield to maturity but neither the current yield nor the coupon rate.
B. coupon rate and the yield to maturity.
Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called: A. aggregating. B. discounting. C. simplifying. D. compounding. E. extrapolating.
B. discounting.
Scott has $4,800 that he wants to invest for 3 years. He can invest this amount at his credit union and earn 4 percent simple interest. Or, he can open an account at Trust Bank and earn 3.65 percent interest, compounded annually. If he decides to invest at Trust Bank for 3 years, he will: A. earn $15.02 more than if he had invested with his credit union. B. earn $30.98 less than if he had invested with his credit union. C. earn the same amount as if he had invested with the credit union. D. have a total balance of $4,992 in his account after one year. E. have a total balance of $4,876 in his account after one year.
B. earn $30.98 less than if he had invested with his credit union.
Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the: A. true value. B. future value. C. present value. D. discounted value. E. complex value.
B. future value.
Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital: A. had to increase. B. had to decrease. C could have remained constant if the amount of the decrease in current assets equaled the amount of the . increase in current liabilities. D. could have either increased, decreased, or remained constant. E. was unaffected as the changes occurred in the firm's current accounts.
B. had to decrease.
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
B. has a physical trading floor.
The accounting statement which measures the revenues, expenses, and net income of a firm over a period of time is called the: A. statement of cash flows. B. income statement. C. GAAP statement. D. balance sheet. E. net working capital schedule.
B. income statement.
Aardvark, Inc. pays a constant annual dividend. At the end of trading on Wednesday, the price of its stock was $28. At the end of trading on the following day, the stock price was $27. As a result of the decline in the stock's price, the dividend yield _____ while the capital gains yield _____. A. remained constant; remained constant B. increased; remained constant C. increased; increased D. decreased; remained constant E. decreased; decreased
B. increased; remained constant
Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10- year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds? A. real rate B. liquidity premium C. interest rate risk premium D. inflation premium E. taxability premium
B. liquidity premium
A limited liability company: A. is a hybrid between a sole proprietorship and a partnership. B. prefers its profits be taxed as personal income to its owners. C. that meets the IRS criteria to be an LLC will be taxed like a corporation. D. provides limited liability for some, but not all, of its owners. E. cannot be created for professional service firms, such as accountants and attorneys.
B. prefers its profits be taxed as personal income to its owners.
Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. A. annual B. semi-annual C. quarterly D. monthly E. daily
B. semi-annual
There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting. A. simultaneous B. straight C. proxy D. cumulative E. sequential
B. straight
Operating cash flow is defined as: A. a firm's net profit over a specified period of time. B. the cash that a firm generates from its normal business activities. C. a firm's operating margin. D. the change in the net working capital over a stated period of time. E. the cash that is generated and added to retained earnings.
B. the cash that a firm generates from its normal business activities.
The daily financial operations of a firm are primarily controlled by managing the: A. total debt level. B. working capital. C. capital structure. D. capital budget. E. long-term liabilities.
B. working capital.
Which one of the following will generally receive the highest priority in a bankruptcy liquidation, assuming the absolute priority rule is followed?
Bankruptcy administrative expenses
Which one of the following statements is correct? A. A prepack is a plan of liquidation used to distribute a firm's assets. B. Bankruptcy courts have "cram-down" powers. C. The absolute priority rule must be strictly followed in all bankruptcy proceedings. D. Creditors cannot force a firm into bankruptcy even though they might like to do so. E. A reorganization plan can only be approved if the firm's creditors all agree with the plan.
Bankruptcy courts have "cram-down" powers.
Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 13.5 years. What is the current price of these bonds if the yield to maturity is 6.82 percent? A. $989.50 B. $994.56 C. $1,015.72 D. $1,018.27 E. $1,020.00
C. $1,015.72
You are buying a bond at a clean price of $1,140. The bond has a face value of $1,000, an 8 percent coupon, and pays interest semiannually. The next coupon payment is 1 month from now. What is the dirty price of this bond? A. $1,000.00 B. $1,146.67 C. $1,173.33 D. $1,176.67 E. $1,180.00
C. $1,173.33
The manager of Gloria's Boutique has approved Carla's application for credit. The maximum payment that has been approved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carla can make given this credit approval? A. $1,288.90 B. $1,300.00 C. $1,331.42 D. $1,350.00 E. $1,428.46
C. $1,331.42
Andre's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital? A. -$2,800 B. -$1,400 C. $1,400 D. $2,100 E. $2,800
C. $1,400
What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $8,000 a year for 11 years if the discount rate is 15 percent? A. $798.48 B. $1,240.23 C. $1,869.69 D. $2,111.41 E. $2,470.01
C. $1,869.69
Today, you are borrowing money from your local bank. The loan is to be repaid in one lump sum payment of $14,000 one year from now. How much money are you borrowing today if the APR is 9.6 percent? A. $11,899.48 B. $12,550.00 C. $12,773.72 D. $13,221.64 E. $14,000.00
C. $12,773.72
The Market Place recently announced that it will pay its first annual dividend two years from today. The first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that, the dividend is expected to increase by 4 percent annually. What is the value of this stock today if the required return is 15 percent? A. $11.68 B. $12.47 C. $12.99 D. $14.02 E. $14.94
C. $12.99
What is the value today of $3,600 received at the end of each year for 7 years if the first payment is paid at the end of year 3 and the discount rate is 12 percent? A. $11,694.21 B. $12,484.57 C. $13,097.52 D. $15,089.23 E. $16,429.52
C. $13,097.52
Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return? A. $12.56 B. $12.95 C. $13.31 D. $13.68 E. $14.07
C. $13.31
The Medicine Cabinet has a return on equity of 18.2 percent, a profit margin of 11.6 percent, and total equity of $738,000. What is the net income? A. $85,608 B. $113,875 C. $134,316 D. $142,311 E. $149,897
C. $134,316
Auto Transmissions is expected to pay annual dividends of $1.90 and $2.10 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of this stock at a required return of 15 percent? A. $13.67 B. $14.21 C. $14.83 D. $15.08 E. $15.60
C. $14.83
Handy Hardware sells its inventory in 85 days, on average. Costs of goods sold for the year are $631,800. What is the average value of the firm's inventory? A. $114,706 B. $123,506 C. $147,132 D. $161,096 E. $182,513
C. $147,132
A local magazine is offering a $2,500 grand prize to one lucky winner. $1,000 will be paid on the day of the drawing. The remaining $1,500 will be paid in three annual payments of $500 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 9 percent on your money? A. $2,048.18 B. $2,164.29 C. $2,265.65 D. $2,450.14 E. $2,545.54
C. $2,265.65
Tom is planning to invest the following amounts at 4 percent interest. How much money will he have saved at the end of year 3? A. $2,200.00 B. $2,238.47 C. $2,272.80 D. $2,309.16 E. $2,363.71
C. $2,272.80
Webster Industrial Products has both common and noncumulative preferred stock outstanding. The dividends on these stocks are $1.10 per quarter per share of common and $2.50 per quarter per share of preferred. The company has not paid any dividends for the past two quarters but is expected to pay dividends on both the common and the preferred stock next quarter. What is the minimum amount the firm must pay per share to its preferred stockholders next quarter if it plans to pay a common dividend? A. $0 B. $1.10 C. $2.50 D. $5.00 E. $7.50
C. $2.50
The common stock of Mid-Towne Movers is selling for $33 a share and has a 9 percent rate of return. The growth rate of the dividends is 1 percent annually. What is the amount of the next annual dividend? A. $2.58 B. $2.61 C. $2.64 D. $2.67 E. $2.70
C. $2.64
A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1.00 a share. What is the current value of this stock if the required rate of return is 12 percent? A. $17.71 B. $18.97 C. $20.50 D. $21.08 E. $21.69
C. $20.50
You have $5,000 you want to invest for the next 45 years. You are offered an investment plan that will pay you 6 percent per year for the next 15 years and 10 percent per year for the last 30 years. How much will you have at the end of the 45 years? How much will you have if the investment plan pays you 10 percent per year for the first 15 years and 6 percent per year for the next 30 years? A. $201,516.38 ; $201,516.38 B. $209,092.54; $201,516.38 C. $209,092.54; $119,959.94 D. $209,092.54; $209,092.52 E. $221,408.97; $119,949.94
C. $209,092.54; $119,959.94
A firm has earnings before interest and taxes of $25,380 with a net income of $14,220. The taxes amounted to $5,400 for the year. During the year, the firm paid out $43,800 to pay off existing debt and then later borrowed an additional $24,000. What is the amount of the cash flow to creditors? A. -$14,040 B. $19,800 C. $25,560 D. $28,440 E. $29,790
C. $25,560
You want to have $35,000 in cash to buy a car 4 years from today. You expect to earn 8 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose? A. $23,618.92 B. $24,511.68 C. $25,726.04 D. $26,013.01 E. $26,311.15
C. $25,726.04
Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years? A. $0 B. $2,109.16 C. $3,266.49 D. $7,109.16 E. $8,266.49
C. $3,266.49
Elaine has just received an insurance settlement of $25,000. She wants to save this money until her daughter goes to college. If she can earn an average of 6.5 percent, compounded annually, how much will she have saved when her daughter enters college 8 years from now? A. $38,000.00 B. $40,929.02 C. $41,374.89 D. $41,899.60 E. $42,000.00
C. $41,374.89
Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years? A. $96.00 B. $101.15 C. $480.00 D. $492.16 E. $519.97
C. $480.00
Capstone Crowns is considering a project that will produce cash inflows of $11,000 in year one, $24,000 in year two, and $36,000 in year three. What is the present value of these cash inflows if the company assigns the project a discount rate of 14 percent? A. $40,331.89 B. $46,564.28 C. $52,415.32 D. $54,868.15 E. $60,978.35
C. $52,415.32
Kathryn owns 18,700 shares of Global Importers. Her shares have a total market value of $787,270. In total, the firm has 65,000 shares outstanding. Each share is entitled to one vote under the straight voting policy of the firm. The next election is in four months at which time two directors are up for election. How much more must Kathryn invest in this firm to guarantee that she is elected to the board? A. $0 B. $513,361 C. $581,022 D. $647,280 E. $711,010
C. $581,022
Charles Henri is considering investing $36,000 in a project that is expected to provide him with cash inflows of $12,000 in each of the first two years and $18,000 for the following year. At a discount rate of zero percent this investment has a net present value of _____, but at the relevant discount rate of 17 percent the project's net present value is _____. A. $0; -$5,739 B. $0; -$3,406 C. $6,000; -$5,739 D. $6,000; -$3,406 E. $6,000; $1,897
C. $6,000; -$5,739
Graphic Designs has 120,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid $1.50 per quarter per share in dividends. However, the firm has encountered financial problems and has not paid any dividends for the past three quarters. How much will the firm have to pay per share of preferred next quarter if the firm also wishes to pay a common stock dividend? A. $3.00 B. $4.50 C. $6.00 D. $7.50 E. $9.00
C. $6.00
A recent alumnus of your university gifted money to the school to fund annual scholarships for needy students. The school expects to earn an average rate of return of 6.5 percent and distribute $40,000 annually in scholarships. What was the amount of the gift? A. $260,000.00 B. $328,500.00 C. $615,384.62 D. $658,929.38 E. $661,423.33
C. $615,384.62
The Good Life Store has a 6-year, interest-only loan at 9 percent interest. The firm originally borrowed $125,000. How much will the firm pay in total interest over the life of the loan? A. $42,189.84 B. $53,666.67 C. $67,500.00 D. $69,000.00 E. $74,500.00
C. $67,500.00
For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid? A. $100 B. $7,500 C. $7,600 D. $15,100 E. $16,700
C. $7,600
Gino's Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners' equity? A. $36,900 B. $66,700 C. $71,600 D. $89,400 E. $106,300
C. $71,600
If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows? A. $71,407.19 B. $74,221.80 C. $78,270.77 D. $80,407.16 E. $81,121.03
C. $78,270.77
A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500 and finally in year four, $4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project? A. $7,899.16 B. $8,098.24 C. $8,166.19 D. $9,211.06 E. $9,250.00
C. $8,166.19
You just won a contest! You will receive $100,000 a year for 20 years, starting today. If you can earn 12 percent on your investments, what are your winnings worth today? A. $750,000.00 B. $833,333.33 C. $836,577.69 D. $850,000.00 E. $887,450.72
C. $836,577.69
Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following 3 years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7? A. ($1.10) (1.08 × 3) (1.02 × 4) B. ($1.10) (1.08 × 3) (1.02 × 3) C. ($1.10) (1.08)3 (1.02)4 D. ($1.10) (1.08)3 (1.02)3 E. ($1.10) (1.08)3 (1.02)2
C. ($1.10) (1.08)3 (1.02)4
Tasty Dee-Lite has current liabilities of $6,630, net working capital of $2,180, inventory of $2,750, and sales of $36,800. What is the quick ratio? A. 0.76 B. 0.84 C. 0.91 D. 1.09 E. 1.19
C. 0.91
Assume the total cost of a college education will be $285,000 when your child enters college in 22 years. You presently have $35,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education? A. 8.65 percent B. 9.40 percent C. 10.00 percent D. 10.60 percent E. 11.00 percent
C. 10.00 percent
Foreign Travel Services has net income of $48,400, total assets of $219,000, total equity of $154,800, and total sales of $311,700. What is the common-size percentage for the net income? A. 9.00 percent B. 13.90 percent C. 15.53 percent D. 22.10 percent E. 31.27 percent
C. 15.53 percent
Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of 7.75 percent and monthly payments of $310. Your financial situation recently changed such that you can no longer afford these payments. After talking with your banker and explaining the situation, he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 percent. How much longer will it take you to repay this loan than you had originally planned? A. 12.29 months B. 14.47 months C. 15.84 months D. 17.19 months E. 19.90 months
C. 15.84 months
Baxter & Baxter has total assets of $710,000. There are 45,000 shares of stock outstanding with a market value of $28 a share. The firm has a profit margin of 7.1 percent and a total asset turnover of 1.29. What is the price-earnings ratio? A. 16.38 B. 17.99 C. 19.38 D. 20.12 E. 22.41
C. 19.38
The Men's Store charges 1.5 percent interest per month. What rate of interest are its credit customers actually paying? A. 18.00 percent B. 18.92 percent C. 19.56 percent D. 19.90 percent E. 20.23 percent
C. 19.56 percent
A firm has net income of $114,000, a return on assets of 12.6 percent, and a debt-equity ratio of 0.60. What is the return on equity? A. 17.11 percent B. 18.98 percent C. 20.16 percent D. 22.20 percent E. 24.60 percent
C. 20.16 percent
Kurt's Forest Products is currently issuing both 5-year and 10-year bonds at par. The bonds each pay 6.5 percent annual interest and have face values of $1,000. You decide to purchase one of each of these bonds. Assume the yield to maturity on each of these bonds is 7.4 percent one year from now. Given this, you will realize _____ percent price depreciation on the 5-year bond and _____ percent price depreciation on the 10-year bond. A. 3.02; 3.39 B. 3.02; 4.08 C. 3.02; 5.77 D. 3.39; 4.08 E. 3.39; 5.77
C. 3.02; 5.77
Your friend claims that he invested $5,000 seven years ago and that this investment is worth $38,700 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounds annually. A. 28.87 percent B. 31.39 percent C. 33.96 percent D. 36.01 percent E. 37.87 percent
C. 33.96 percent
Last year, Blakely's Fashions earned net income of $68,400 and had 12,000 shares of stock outstanding. The dividends per share were $2.20. What is the dividend payout ratio? A. 32.98 percent B. 34.00 percent C. 38.60 percent D. 40.21 percent E. 44.14 percent
C. 38.60 percent
A firm has inventory of $11,400, accounts payable of $9,800, cash of $850, net fixed assets of $12,150, long-term debt of $9,500, accounts receivable of $6,600, and total equity of $11,700. What is the common-size percentage for the net fixed assets? A. 19.60 percent B. 26.67 percent C. 39.19 percent D. 42.08 percent E. 48.75 percent
C. 39.19 percent
A corporate bond pays 7 percent interest. How much would a municipal bond have to pay to be equivalent to this on an after-tax basis if you are in the 28 percent tax bracket? A. 1.96 percent B. 2.28 percent C. 5.04 percent D. 9.72 percent E. 11.47 percent
C. 5.04 percent
A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield? A. 4.13 percent B. 4.84 percent C. 5.21 percent D. 5.52 percent E. 5.78 percent
C. 5.21 percent
Stanley Enterprises is acquiring Berkley, Inc. for $899,000. Berkley has agreed to accept annual payments of $210,000 at an interest rate of 7.5 percent. How many years will it take Stanley Enterprises to pay for this purchase? A. 5.00 years B. 5.14 years C. 5.35 years D. 5.47 years E. 5.60 years
C. 5.35 years
Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share. What is the rate of return? A. 4.56 percent B. 5.39 percent C. 5.61 percent D. 6.63 percent E. 6.91 percent
C. 5.61 percent
Town Centre Market has sales of $311,800, a profit margin of 2.9 percent, and dividends of $4,500. What is the plowback ratio? A. 46.32 percent B. 49.78 percent C. 50.23 percent D. 51.15 percent E. 53.68 percent
C. 50.23 percent
One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent and pay interest annually. Today, the market rate of interest on these bonds is 7.2 percent. How does the price of these bonds today compare to the issue price? A. 4.99 percent lower B. 5.38 percent lower C. 6.05 percent lower D. 0.07 percent higher E. 1.36 percent higher
C. 6.05 percent lower
Last year, when the stock of Alpha Minerals was selling for $55 a share the dividend yield was 3.2 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.5 percent? A. 6.13 percent B. 6.58 percent C. 6.90 percent D. 7.47 percent E. 7.40 percent
C. 6.90 percent
Western Beef stock is valued at $62.10 a share. The company pays a constant annual dividend of $4.40 per share. What is the total return on this stock? A. 6.62 percent B. 6.81 percent C. 7.09 percent D. 7.49 percent E. 7.82 percent
C. 7.09 percent
A corporate bond pays 8.5 percent interest. You are in the 15 percent tax bracket. What is your after-tax yield on this bond? A. 1.28 percent B. 2.23 percent C. 7.23 percent D. 8.35 percent E. 9.78 percent
C. 7.23 percent
The Road House would like to issue some semiannual coupon bonds at par. Comparable bonds have a current yield of 8.16 percent, an effective annual yield of 8.68 percent, and a yield to maturity of 8.50 percent. What coupon rate should The Road House set on its bonds? A. 8.00 percent B. 8.16 percent C. 8.50 percent D. 8.68 percent E. 9.00 percent
C. 8.50 percent
A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was 4.75 percent. What was the actual nominal rate of return? A. 8.58 percent B. 8.60 percent C. 8.80 percent D. 9.28 percent E. 9.36 percent
C. 8.80 percent
A bond has a yield to maturity of 9.38 percent, a 7.5 percent annual coupon, a $1,000 face value, and a maturity date 21 years from today. What is the current yield? A. 7.91 percent B. 8.47 percent C. 9.04 percent D. 9.38 percent E. 9.46 percent
C. 9.04 percent
Blue Water Cafe has $28,700 in total assets, depreciation of $3,100, and interest of $1,400. The total asset turnover rate is 1.2. Earnings before interest and taxes are equal to 28 percent of sales. What is the cash coverage ratio? A. 6.33 B. 7.51 C. 9.10 D. 10.23 E. 10.98
C. 9.10
Valentino's maintains a constant debt-equity ratio of 0.45. The firm had net income of $11,800 for the year and paid $6,500 in dividends. The firm has total assets of $92,000. What is the sustainable growth rate? A. 7.38 percent B. 8.27 percent C. 9.11 percent D. 9.62 percent E. 10.38 percent
C. 9.11 percent
The next dividend payment by Swenson, Inc., will be $1.80 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells for $48.50 per share, what is the required return? A. 8.20 percent B. 8.88 percent C. 9.21 percent D. 9.74 percent E. 10.02 percent
C. 9.21 percent
You own two bonds. Both bonds pay annual interest, have 6 percent annual coupons, $1,000 face values, and currently have 6 percent yields to maturity. Bond A has 12 years to maturity and Bond B has 4 years to maturity. If the market rate of interest rises unexpectedly to 7 percent, Bond _____ will be the most volatile with a price decrease of _____ percent. A. A; 5.73 B. A; 6.08 C. A; 7.94 D. B; 3.39 E. B; 4.51
C. A; 7.94
Which one of the following statements is correct? A. All secondary markets are dealer markets. B. All secondary markets are broker markets. C. All stock trades between existing shareholders are secondary market transactions. D. All stock transactions are secondary market transactions. E. All Dutch auction sales are secondary market transaction
C. All stock trades between existing shareholders are secondary market transactions.
Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant? A. An increase in net capital spending B. A decrease in the cash flow to creditors C. An increase in depreciation D. An increase in the change in net working capital E. A decrease in dividends paid
C. An increase in depreciation
Which one of the following statements is correct? A. Bonds are generally called at par value. B. A current list of all bondholders is maintained whenever a firm issues bearer bonds. C. An indenture is a contract between a bond's issuer and its holders. D. Collateralized bonds are called debentures. E. A bondholder has the right to determine when his or her bond is called.
C. An indenture is a contract between a bond's issuer and its holders.
Which one of the following statements concerning the balance sheet is correct? A. Total assets equal total liabilities minus total equity. B. Net working capital is equal total assets minus total liabilities. C. Assets are listed in descending order of liquidity. D. Current assets are equal to total assets minus net working capital. E. Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.
C. Assets are listed in descending order of liquidity.
Which one of the following methods of analysis ignores cash flows? A. Profitability index B. Net present value C. Average accounting return D. Modified internal rate of return E. Internal rate of return
C. Average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? A. Internal rate of return B. Profitability index C. Average accounting return D. Net present value E. Payback
C. Average accounting return
Which one of the following types of bonds permits its issuer to forego paying interest payments if certain natural events cause significant losses? A. PETS B. PUT C. CAT D. PINES E. LIBOR
C. CAT
Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0. A. Cash purchase of inventory B. Cash payment of an account receivable C. Cash payment of an account payable D. Credit sale of inventory at cost E. Cash sale of inventory at a loss
C. Cash payment of an account payable
Which one of the following types of securities has no priority in a bankruptcy proceeding? A. Convertible bond B. Senior debt C. Common stock D. Preferred stock E. Straight bond
C. Common stock
Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past 3 years determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes? A. Income statement B. Balance sheet C. Common-size income statement D. Common-size balance sheet E. Statement of cash flows
C. Common-size income statement
Which one of the following is a unique characteristic of an income bond? A. Interest income is tax-free B. Interest income is paid at the time of issuance C. Coupon payments are dependent upon the issuer's income D. Coupon payments are paid on a regular monthly basis E. Coupon payments can be converted into equity shares
C. Coupon payments are dependent upon the issuer's income
Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are 3 open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting? A. Proxy B. Aggregate C. Cumulative D. Straight E. Condensed
C. Cumulative
Which one of the following occupations best fits into the international area of finance? A. Bank teller B. Treasury bill analyst C. Currency trader D. Insurance risk manager E. Local bank manag
C. Currency trader
Working capital management includes which one of the following? A. Deciding which new projects to accept B. Deciding whether to purchase a new machine or fix a current machine C. Determining which customers will be granted credit D. Determining how many new shares of stock should be issued E. Establishing the target debt-equity ratio
C. Determining which customers will be granted credit
The required return on a stock is equal to which one of the following if the dividend on the stock decreases by 1 percent per year? A. (P0/D1)-g B. (D1/P0)/g C. Dividend yield + capital gains yield D. Dividend yield - capital gains yield E. Dividend yield × capital gains yield
C. Dividend yield + capital gains yield
Which one of the following is a web site that enables Lester to sell his shares of ABC stock directly to Marti? A. SuperDOT B. POST C. ECN D. SEAT E. eNET
C. ECN
Which one of the following is a measure of long-term solvency? A. Price-earnings ratio B. Profit margin C. Equity multiplier D. Receivables turnover E. Quick ratio
C. Equity multiplier
Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA? A. Debenture B. Covenant C. Fallen angel D. Sinking E. Triple B
C. Fallen angel
Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment A. I and III only B. I and IV only C. II and III only D. II and IV only E. II, III, and IV only
C. II and III only
Which two of the following determine when revenue is recorded on the financial statements based on the recognition principle? I. Payment is collected for the sale of a good or service II. The earnings process is virtually complete III. The value of a sale can be reliably determined IV. The product is physically delivered to the buyer A. I and II only B. I and IV only C. II and III only D. II and IV only E. I and III only
C. II and III only
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? A. Taxability risk premium B. Default risk premium C. Interest rate risk premium D. Real rate of return E. Bond premium
C. Interest rate risk premium
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? A. Payback and net present value B. Payback and internal rate of return C. Internal rate of return and net present value D. Net present value and profitability index E. Profitability index and internal rate of return
C. Internal rate of return and net present value
Which one of the following is an indicator that an investment is acceptable? A. Modified internal rate of return equal to zero B. Profitability index of zero C. Internal rate of return that exceeds the required return D. Payback period that exceeds the required period E. Negative average accounting return
C. Internal rate of return that exceeds the required return
What is the primary purpose of bond covenants? A. Meet regulatory requirements B. Describe repayment terms C. Lender protection D. Define a bond's rating E. Increase a bond's seniority position
C. Lender protection
Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? A. Sole proprietorship B. General partnership C. Limited partnership D. Limited liability company E. Corporation
C. Limited partnership
Which one of the following might be included in a bond's list of negative covenants? A. Maintaining a current ratio of 1.2 or more B. Maintaining a minimum cash balance of $1.2 million C. Limiting cash dividends to $1 per share or less D. Maintaining a times interest earned ratio of 2 or more E. Providing audited financial statements in a timely manner
C. Limiting cash dividends to $1 per share or less
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? A. Interest rate risk premium B. Inflation premium C. Liquidity premium D. Taxability premium E. Default risk premium
C. Liquidity premium
A specialist is a(n): A. employee who executes orders to buy and sell for clients of his or her brokerage firm. B. individual who trades on the floor of an exchange for his or her personal account. C. NYSE member who functions as a dealer for a limited number of securities. D. broker who buys and sells securities from a market maker. E. trader who only deals with primary offerings.
C. NYSE member who functions as a dealer for a limited number of securities.
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? A. Internal rate of return B. Profitability index C. Net present value D. Modified internal rate of return E. Average accounting return
C. Net present value
Which one of the following decreases net income but does not affect the operating cash flow of a firm which owes no taxes for the current year? A. Indirect cost B. Direct cost C. Noncash item D. Period cost E. Variable cost
C. Noncash item
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 declaration date D. On the date of record E. On the date of payment
C. On the declaration date
Dividends are which one of the following? A. Payable at the discretion of a firm's president B. Treated as a tax-deductible expense to the paying firm C. Paid out of aftertax profits D. Paid to holders of record as of the declaration date E. Only partially taxable to high-income individual shareholders
C. Paid out of aftertax profits
Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC? A. NASDAQ Capital Market B. Over-the-Counter Bulletin Board C. Pink sheets D. NASDAQ Global Market E. NYSE
C. Pink sheets
Which one of the following indicates that a project is expected to create value for its owners? A. Profitability index less than 1.0 B. Payback period greater than the requirement C. Positive net present value D. Positive average accounting rate of return E. Internal rate of return that is less than the requirement
C. Positive net present value
Which one of the following can be defined as a benefit-cost ratio? A. Net present value B. Internal rate of return C. Profitability index D. Accounting rate of return E. Modified internal rate of return
C. Profitability index
Which one of the following will increase cash flow from assets but not affect the operating cash flow? A. Increase in depreciation B. Increase in accounts receivable C. Sale of a fixed asset D. Decrease in cost of goods sold E. Increase in sales
C. Sale of a fixed asset
What is the market called that allows shareholders to resell their shares to other investors? A. Primary B. Proxy C. Secondary D. Inside E. Initial
C. Secondary
Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie's purchase occurred in which market? A. Dealer market B. Over-the-counter market C. Secondary market D. Primary market E. Tertiary market
C. Secondary market
Which one of the following is most apt to create a situation where an agency conflict could arise? A. Increasing the size of a firm's operations B. Downsizing a firm C. Separating management from ownership D. Decreasing employee turnover E. Reducing both management and non-management salaries
C. Separating management from ownership
Which one of the following transactions occurred in the primary market? A. Maria gave 100 shares of Alto stock to her best friend. B. Gene purchased 300 shares of Alto stock from Ted. C. South Wind Products sold 1,000 shares of newly issued stock to Mike. D. Terry sold 3,000 shares of Uno stock to his brother. E. The president of Trecco, Inc. sold 500 shares of Trecco stock to his son.
C. South Wind Products sold 1,000 shares of newly issued stock to Mike
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? A. The internal rate of return exceeds the required rate of return. B. The investment never pays back. C. The net present value is equal to zero. D. The average accounting return is 1.0. E. The net present value is greater than 1.0.
C. The net present value is equal to zero.
Which one of the following statements about a limited partnership is correct? A. All partners have their losses limited to their capital investment in the partnership. B. All partners are treated equally. C. There must be at least one general partner. D. Equity financing is easy to obtain and unlimited. E. Any partner can transfer his or her ownership interest without ending the partnership.
C. There must be at least one general partner.
Which one of the following is a general characteristic of a securities broker? A. Trades from his or her own inventory B. Trades only foreign securities C. Trades listed securities in an auction market D. Trades electronically from any geographic location E. Is the principal trader of debt securities
C. Trades listed securities in an auction market
Which one of the following statements is correct? A. If the IRR exceeds the required return, the profitability index will be less than 1.0. B. The profitability index will be greater than 1.0 when the net present value is negative. C. When the internal rate of return is greater than the required return, the net present value is positive. D. Projects with conventional cash flows have multiple internal rates of return. E. If two projects are mutually exclusive, you should select the project with the shortest payback period.
C. When the internal rate of return is greater than the required return, the net present value is positive.
Major Importers would like to spend $211,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $211,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $48,000 in the first year, $139,000 in the second year, and $210,000 a year for the following two years. Should the firm expand at this time? Why or why not? A. Yes; because the money will be recovered in 1.69 years B. Yes; because the money will be recovered in 1.87 years C. Yes; because the money will be recovered in 2.11 years D. No; because the project never pays back E. No; because the money will not be recovered in time to repay the loan
C. Yes; because the money will be recovered in 2.11 years
Gleason, Inc. elects its board of directors on a staggered basis using cumulative voting. This implies that: A if there are two open seats, then the candidate with the highest number of votes and the candidate with . thelowestnumberofvoteswillbeselected. B. the candidates for the open seats are voted for in individual elections. C. all open positions are filled with one round of voting, assuming there are no tie votes. D. shareholders can accumulate their votes over multiple years and cast all those votes in one election. E. the firm's entire board of directors is elected annually in one combined election.
C. all open positions are filled with one round of voting, assuming there are no tie votes.
The primary purpose of protective covenants is to help: A. reduce interest rate risk. B. the issuer in case of default. C. protect bondholders from issuer actions. D. bondholders whose bonds are called. E. convert bearer bonds into registered form.
C. protect bondholders from issuer actions.
Cash flow to creditors is equal to: A. cash flow from assets plus cash flow to stockholders. B. beginning total liabilities minus ending total liabilities plus interest paid. C. beginning long-term debt minus ending long-term debt plus interest paid. D. ending total debt minus beginning total debt plus interest paid. E. ending long-term debt minus beginning long-term debt plus interest paid.
C. beginning long-term debt minus ending long-term debt plus interest paid.
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.
C. bid-ask spread.
Dividends are best defined as: A. cash payments to shareholders. B. cash payments to either bondholders or shareholders. C. cash or stock payments to shareholders. D. cash or stock payments to either bondholders or shareholders. E. distributions of stock to current shareholders.
C. cash or stock payments to shareholders.
A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must: A. have a one-year term. B. have a zero percent interest rate. C. charge interest annually. D. must be an interest-only loan. E. require the accrued interest be paid in full with each monthly payment.
C. charge interest annually.
The net present value of an investment represents the difference between the investment's: A. cash inflows and outflows. B. cost and its net profit. C. cost and its market value. D. cash flows and its profits. E. assets and liabilities
C. cost and its market value.
Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a: A. note. B. bearer form bond. C. debenture. D. registered form bond. E. call protected bond.
C. debenture.
The interest rate used to compute the present value of a future cash flow is called the: A. prime rate. B. current rate. C. discount rate. D. compound rate. E. simple rate.
C. discount rate.
Corporate shareholders: A. are proportionately liable for the firm's debts. B. are protected from all losses. C. have the ability to change the corporation's bylaws. D. receive tax-free distributions since all profits are taxed at the corporate level. E. have basically no control over the actual corporation.
C. have the ability to change the corporation's bylaws.
If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be: A. upward-sloping. B. flat. C. humped. D. downward-sloping. E. double-humped.
C. humped.
A common-size balance sheet helps financial managers determine: A. which customers are paying on a timely basis. B. if costs are increasing faster or slower than sales. C. if changes are occurring in a firm's mix of assets. D. if a firm is generating more or less sales per dollar of assets than in prior years. E. the rate at which the firm's dividends are changing.
C. if changes are occurring in a firm's mix of assets.
The yield to maturity on a discount bond is: A. equal to both the coupon rate and the current yield. B. is equal to the current yield but greater than the coupon rate. C. is greater than both the current yield and the coupon rate. D. is less than the current yield but greater than the coupon rate. E. is less than both the current yield and the coupon rate.
C. is greater than both the current yield and the coupon rate.
The NYSE: A. presently conducts all of its trading through SuperDOT. B. is a dealer market. C. is in the business of attracting order flow. D. is solely a primary market. E. is based on a multiple market maker system.
C. is in the business of attracting order flow.
Inside quotes are defined as the: A. bid and asked prices presented by NYSE specialists. B. last bid and asked price offered prior to the market close. C. lowest asked and highest bid offers. D. daily opening bid and asked quotes. E. last traded bid and asked prices.
C. lowest asked and highest bid offers.
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. A. face value B. market price C. maturity D. coupon rate E. issue date
C. maturity
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as: A. duplication. B. the net present value profile. C. multiple rates of return. D. the AAR problem. E. the dual dilemma.
C. multiple rates of return.
Shareholders' equity is equal to: A. total assets plus total liabilities. B. net fixed assets minus total liabilities. C. net fixed assets minus long-term debt plus net working capital. D. net working capital plus total assets. E. total assets minus net working capital.
C. net fixed assets minus long-term debt plus net working capital
The dividend yield is defined as: A. the current annual cash dividend divided by the current market price per share. B. the current annual cash dividend divided by the current book value per share. C. next year's expected cash dividend divided by the current market price per share. D. next year's expected cash dividend divided by the current book value per share. E. next year's expected cash dividend divided by next year's expected market price per share.
C. next year's expected cash dividend divided by the current market price per share.
By definition, a bank that pays simple interest on a savings account will pay interest: A. only at the beginning of the investment period. B. on interest. C. only on the principal amount originally invested. D. on both the principal amount and the reinvested interest. E. only if all previous interest payments are reinvested.
C. only on the principal amount originally invested.
Cash flow from assets is defined as: A. the cash flow to shareholders minus the cash flow to creditors. B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. C. operating cash flow minus the change in net working capital minus net capital spending. D. operating cash flow plus net capital spending plus the change in net working capital. E. cash flow to shareholders minus net capital spending plus the change in net working capital.
C. operating cash flow minus the change in net working capital minus net capital spending.
Financial statement analysis: A. is primarily used to identify account values that meet the normal standards. B. is limited to internal use by a firm's managers. C. provides useful information that can serve as a basis for forecasting future performance. D. provides useful information to shareholders but not to debt holders. E. is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods.
C. provides useful information that can serve as a basis for forecasting future performance.
The specific location on the floor of an exchange where a particular security is traded is called a: A. box office. B. figure 6. C. specialist's post. D. trading booth. E. seat.
C. specialist's post.
The matching principle states that: A. costs should be recorded on the income statement whenever those costs can be reliably determined. B. costs should be recorded when paid. C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue. D. sales should be recorded when the payment for that sale is received. E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.
C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.
In a general partnership, each partner is personally liable for: A. the partnership debts that he or she created. B. his or her proportionate share of all partnership debts regardless of which partner incurred that debt. C. the total debts of the partnership, even if he or she was unaware of those debts. D. the debts of the partnership up to the amount he or she invested in the firm. E. all personal and partnership debts incurred by any partner, even if he or she was unaware of those
C. the total debts of the partnership, even if he or she was unaware of those debts.
High Tower Pharmacy pays a fixed percentage of its net income out to its shareholders in the form of annual dividends. Given this, the percent shown on a common-size income statement for the dividend account will: A. remain constant over time. B. be equal to the dividend amount divided by the net income. C. vary in direct relation to the net profit percentage. D. vary in direct relation to changes in the sales level. E. vary but not in direct relation to any other variable.
C. vary in direct relation to the net profit percentage.
Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's: A. capital structure. B. cash equivalents. C. working capital. D. net assets. E. fixed accounts.
C. working capital.
If an investment is producing a return that is equal to the required return, the investment's net present value will be: A. positive. B. greater than the project's initial investment. C. zero. D. equal to the project's net profit. E. less than, or equal to, zero.
C. zero.
Which one of the following statements concerning financial leverage is correct? A. The benefits of leverage are unaffected by the amount of a firm's earnings. B. The use of leverage will always increase a firm's earnings per share. C. The shareholders of a firm are exposed to less risk anytime a firm uses financial leverage. D. Changes in the capital structure of a firm will generally change the firm's earnings per share. E. Financial leverage is beneficial to a firm only when the firm has negative earnings.
Changes in the capital structure of a firm will generally change the firm's earnings per share.
Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for year 5 if the firm increases its dividend by 2 percent annually? A. $1.50 × (1.02)1 B. $1.50 × (1.02)2 C. $1.50 × (1.02)3 D. $1.50 × (1.02)4 E. $1.50 × (1.02)5
D. $1.50 × (1.02)4
Dressler Engine Tuning just decided to save money each year for the next 4 years to help fund a new building. If it earns 5.5 percent on its savings, how much will the firm have saved at the end of year 4? A. $107,525.40 B. $108,392.69 C. $110,414.14 D. $111,737.43 E. $117,882.99
D. $111,737.43
Gallagher's Supply has sales of $387,000 and costs of $294,500. The depreciation expense is $43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The tax rate is 35 percent. What is the addition to retained earnings? A. $10,775 B. $11,460 C. $13,120 D. $13,325 E. $15,450
D. $13,325
You will receive annual payments of $2,400 at the end of each year for 15 years. The first payment will be received in year 6. What is the present value of these payments if the discount rate is 7 percent? A. $11,465.20 B. $12,018.52 C. $13,299.80 D. $15,585.16 E. $16,856.60
D. $15,585.16
Given the following partial stock quote, what was the closing price on the previous trading day if the firm's earnings per share are $1.85? A. $16.71 B. $16.77 C. $16.89 D. $17.09 E. $17.40
D. $17.09
You want to save $200 a month for the next 24 years and hope to earn an average rate of return of 11 percent. How much more will you have at the end of the 24 years if you invest your money at the beginning of each month rather than the end of each month? A. $1,611.29 B. $1,807.70 C. $2,238.87 D. $2,569.14 E. $2,707.27
D. $2,569.14
The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5? A. $2.39 B. $2.41 C. $2.46 D. $2.53 E. $2.58
D. $2.53
Kristi is considering an investment that will pay $5,000 a year for 7 years, starting one year from today. How much should she pay for this investment if she wishes to earn a 12 percent rate of return? A. $17,899.08 B. $18,023.88 C. $20,186.75 D. $22,818.78 E. $24,507.19
D. $22,818.78
Your parents just gave you a gift of $15,000. You are investing this money for 12 years at 5 percent simple interest. How much money will you have at the end of the 12 years? A. $15,750 B. $16,000 C. $17,375 D. $24,000 E. $26,938
D. $24,000
Webster Bank is offering 2.8 percent compounded daily on its savings accounts. If you deposit $2,500 today, how much will you have in the account in 15 years? A. $3,465.24 B. $3,611.09 C. $3,727.48 D. $3,804.84 E. $3,890.62
D. $3,804.84
A firm has a return on equity of 16 percent, a return on assets of 11 percent, and a 40 percent dividend payout ratio. What is the sustainable growth rate? A. 5.72 percent B. 6.84 percent C. 7.12 percent D. 9.58 percent E. 10.62 percent
E. 10.62 percent
Your coin collection contains ten 1949 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2050, assuming they appreciate at a 6.1 percent annual rate? A. $3,550.61 B. $3,697.29 C. $3,728.54 D. $3,955.98 E. $4,197.29
D. $3,955.98
Suppose your company needs to raise $28 million and you want to issue 15-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you're evaluating two issue alternatives: an 8 percent annual coupon and a zero coupon bond. Your company's tax rate is 35 percent. In 15 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? (Assume annual compounding on the zero coupon bond). A. $28.00 million; $122.12 million B. $28.00 million; $88.82 million C. $30.00 million; $122.12 million D. $30.24 million; $88.82 million E. $30.24 million; $122.12 million
D. $30.24 million; $88.82 million
The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year? A. $20,445 B. $22,695 C. $27,375 D. $32,055 E. $35,255
D. $32,055
Kris will receive $800 a month for the next 5 years from an insurance settlement. The interest rate is 4 percent, compounded monthly, for the first 2 years and 5 percent, compounded monthly, for the final 3 years. What is this settlement worth to him today? A. $36,003.18 B. $38,219.97 C. $41,388.71 D. $43,066.22 E. $45,115.16
D. $43,066.22
Global Exporters has total assets of $84,300, net working capital of $22,900, owner's equity of $38,600, and long-term debt of $23,900. What is the value of the current assets? A. $21,600 B. $24,300 C. $38,900 D. $44,700 E. $46,100
D. $44,700
Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every 3 months? A. $425.15 B. $428.67 C. $431.09 D. $443.13 E. $462.25
D. $443.13
The Paper Moon has an operating cash flow of $187,000 and a cash flow to creditors of $61,400 for the past year. During that time, the firm invested $28,000 in net working capital and incurred net capital spending of $48,900. What is the amount of the cash flow to stockholders for the last year? A. -$171,500 B. -$86,700 C. $21,200 D. $48,700 E. $110,100
D. $48,700
The financial statements of Edgewater Marina reflect depreciation expenses of $21,600 and interest expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets increased by $28,600. What is the amount of the net capital spending for the year? A. $7,000 B. $21,600 C. $28,600 D. $50,200 E. $53,400
D. $50,200
A preferred stock pays an annual dividend of $7. What is one share of this stock worth to you today if you require a 14 percent rate of return? A. $6.14 B. $7.98 C. $43.00 D. $50.00 E. $98.00
D. $50.00
Jack's Fried Chicken just took out a 7 percent interest-only loan of $50,000 for 3 years. Payments are to be made at the end of each year. What is the amount of the payment that will be due at the end of year 3? A. $19,052.58 B. $20,166.67 C. $50,000.00 D. $53,500.00 E. $61,252.15
D. $53,500.00
At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now? A. $389,406.19 B. $401,005.25 C. $540,311.67 D. $566,190.22 E. $603,289.01
D. $566,190.22
Pete's Warehouse has net working capital of $2,400, total assets of $19,300, and net fixed assets of $10,200. What is the value of the current liabilities? A. -$6,700 B. -$2,900 C. $2,900 D. $6,700 E. $11,500
D. $6,700
The Food Store is planning a major expansion for 4 years from today. In preparation for this, the company is setting aside $35,000 each quarter, starting today, for the next 4 years. How much money will the firm have when it is ready to expand if it can earn an average of 6.25 percent on its savings? A. $528,409.29 B. $540,288.16 C. $610,411.20 D. $640,516.63 E. $662,009.14
D. $640,516.63
101.Berkeley, Inc. just paid an annual dividend of $2.60 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent return on this stock, what will the price be in 12 years? A. $66.46 B. $67.84 C. $69.16 D. $70.89 E. $74.08
D. $70.89
The Corner Store currently has $3,600 in cash. The company owes $31,800 to suppliers for merchandise and $21,500 to the bank for a long-term loan. Customers owe The Corner Store $19,000 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $71,200. If the store compiled a balance sheet as of today, what would be the book value of the current assets? A. $46,800 B. $55,600 C. $64,700 D. $75,900 E. $96,500
D. $75,900
Home Repairs, Inc. incurred depreciation expenses of $21,900 last year. The sales were $811,400 and the addition to retained earnings was $14,680. The firm paid interest of $9,700 and dividends of $1,100. The tax rate was 34 percent. What was the amount of the costs incurred by the firm? A. $665,200.00 B. $689,407.67 C. $742,306.08 D. $755,890.91 E. $780,400.21
D. $755,890.91
The owners' equity for The Buck Store was $58,900 at the beginning of the year. During the year, the company had aftertax income of $34,200, of which $2,200 was paid in dividends. Also during the year, the company repurchased $6,500 of stock from one of the shareholders. What is the value of the owners' equity at year end? A. $54,500 B. $56,700 C. $82,200 D. $84,400 E. $90,900
D. $84,400
Pitt Metal Works had $87,600 in net fixed assets at the beginning of the year. During the year, the company purchased $6,400 in new equipment. It also sold, at a price of $2,300, some old equipment with a book value of $1,100. The depreciation expense for the year was $4,700. What is the net fixed asset balance at the end of the year? A. $76,400 B. $78,800 C. $80,000 D. $88,200 E. $89,400
D. $88,200
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Marine Enterprises. Unfortunately, you will be the only individual voting for you. If Marine Enterprises has 350,000 shares outstanding and the stock currently sells for $52, how much will it cost you to buy a seat if the company uses straight voting? Assume Marine Enterprises uses cumulative voting and there are five open seats in the current election; how much will it cost you to buy a seat now? A. $9,100,000; $3,640,000 B. $9,100,000; $3,033,385 C. $9,100,052; $3,548,052 D. $9,100,052; $3,033,385 E. $9,100,052; $3,640,000
D. $9,100,052; $3,033,385
The financial statements of Mark's Auto Repair reflect cash of $4,600, accounts receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $25,000 and the fixed assets for $49,000. The firm could also collect 100 percent of its receivables. What is the market value of the assets? A. $32,800 B. $39,900 C. $74,000 D. $90,100 E. $97,700
D. $90,100
The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 34 percent? A. $87,620 B. $89,540 C. $91,220 D. $93,560 E. $95,240
D. $93,560
A firm is reviewing a project that has an initial cost of $71,000. The project will produce annual cash inflows, starting with year 1, of $8,000, $13,400, $18,600, $33,100 and finally in year five, $37,900. What is the profitability index if the discount rate is 11 percent? A. 0.92 B. 0.98 C. 1.02 D. 1.07 E. 1.12
D. 1.07
Holiday House has sales of $648,000, a profit margin of 6.1 percent, and a capital intensity ratio of 0.84. What is the total asset turnover rate? A. 1.04 B. 1.08 C. 1.13 D. 1.19 E. 1.26
D. 1.19
You are analyzing a company that has cash of $11,200, accounts receivable of $27,800, fixed assets of $124,600, accounts payable of $31,300, and inventory of $56,900. What is the quick ratio? A. 0.30 B. 0.67 C. 0.80 D. 1.25 E. 1.37
D. 1.25
A firm has sales of $428,000 for the year. The profit margin is 3.4 percent and the retention ratio is 60 percent. What is the common-size percentage for the dividends paid? A. 0.99 percent B. 1.18 percent C. 1.21 percent D. 1.36 percent E. 1.42 percent
D. 1.36 percent
Peter's Motor Works has total assets of $689,400, long-term debt of $299,500, total equity of $275,000, net fixed assets of $497,800, and sales of $721,500. The profit margin is 4.6 percent. What is the current ratio? A. 0.60 B. 0.91 C. 1.01 D. 1.67 E. 2.16
D. 1.67
Preston's Market has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.6, and a profit margin of 2.4 percent. What is the equity multiplier? A. 0.60 B. 0.63 C. 1.83 D. 2.60 E. 2.84
D. 2.60
You have $1,100 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually? A. 18.08 percent B. 19.90 percent C. 22.15 percent D. 24.57 percent E. 27.21 percent
D. 24.57 percent
Jones Brothers Farm Equipment owes $48,329 in tax on a taxable income of $549,600. The company has determined that it will owe $56,211 in tax if its taxable income rises to $575,000. What is the marginal tax rate at this level of income? A. 29.08 percent B. 30.00 percent C. 30.67 percent D. 31.03 percent E. 32.00 percent
D. 31.03 percent
Delphin's Marina is expected to pay an annual dividend of $0.58 next year. The stock is selling for $8.53 a share and has a total return of 12 percent. What is the dividend growth rate? A. 3.82 percent B. 4.03 percent C. 4.28 percent D. 5.20 percent E. 5.49 percent
D. 5.20 percent
One year ago, you purchased a 7.5 percent annual coupon bond for a clean price of $980. The bond now has 7 years remaining until maturity. Today, the yield to maturity on this bond is 6.87 percent. How does today's clean price of this bond compare to your purchase price? A. 4.24 percent lower B. 4.70 percent lower C. 5.48 percent lower D. 5.52 percent higher E. 6.61 percent higher
D. 5.52 percent higher
EEG, Inc. is considering a new project that will require an initial cash investment of $388,000. The project will produce no cash flows for the first two years. The projected cash flows for years 3 through 7 are $69,000, $88,000, $102,000, $140,000, and $160,000, respectively. How long will it take the firm to recover its initial investment in this project? A. 3.81 years B. 3.98 years C. 5.57years D. 5.92 years E. The project never pays back.
D. 5.92 years
Jensen Shipping has four open seats on its board of directors. How many shares will a shareholder need to control to ensure that his or her candidate is elected to the board given the fact that the firm uses straight voting? Assume one share equals one vote. A. 20 percent of the shares plus one vote B. 25 percent of the shares plus one vote C. 1/3 of the shares plus one vote D. 50 percent of the shares plus one vote E. 51 percent of the shares plus one vote
D. 50 percent of the shares plus one vote
Galaxy Sales has sales of $746,700, cost of goods sold of $603,200, and inventory of $94,300. How long on average does it take the firm to sell its inventory? A. 6.40 days B. 7.23 days C. 48.68 days D. 57.06 days E. 61.10 days
D. 57.06 days
Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semi-annually C. 6 percent compounded quarterly D. 6 percent compounded monthly E. All the other answers have the same effective annual rate.
D. 6 percent compounded monthly
Diamond Enterprises is considering a project that will produce cash inflows of $238,000 a year for three years followed by $149,000 in year four. What is the internal rate of return if the initial cost of the project is $749,000? A. 3.43 percent B. 4.29 percent C. 5.81 percent D. 6.32 percent E. 7.55 percent
D. 6.32 percent
Last year, you earned a rate of return of 11.29 percent on your bond investments. During that time, the inflation rate was 4.6 percent. What was your real rate of return? A. 5.30 percent B. 5.60 percent C. 5.75 percent D. 6.40 percent E. 6.70 percent
D. 6.40 percent
The Chip Dip Co. has 15,500 shares of stock outstanding, grants one vote per share, and uses straight voting. How many shares must you control to guarantee that you will be elected to the firm's board of directors if there are three open seats? A. 5,167 shares B. 5,134 shares C. 3,876 shares D. 7,751 shares E. 7,134 shares
D. 7,751 shares
A bond has a 7 percent coupon rate, a face value of $1,000, semiannual payments, and sells at par. The current yield is _____ percent and the effective annual yield is _____ percent. A. 6.76; 6.87 B. 6.76; 6.96 C. 7.00; 7.00 D. 7.00; 7.12 E. 7.23; 7.23
D. 7.00; 7.12
Smiley Industrial Goods has bonds on the market making annual payments, with 13 years to maturity, and selling for $1,095. At this price, the bonds yield 6.4 percent. What must the coupon rate be on these bonds? A. 6.67 percent B. 6.84 percent C. 7.23 percent D. 7.50 percent E. 7.83 percent
D. 7.50 percent
Gabriel Furniture has a profit margin of 8.2 percent and a dividend payout ratio of 30 percent. What is the plowback ratio? A. 10.66 percent B. 27.33 percent C. 54.60 percent D. 70.00 percent E. 78.20 percent
D. 70.00 percent
Which one of the following bonds is the least sensitive to changes in market interest rates? A. Zero-coupon, 10 year B. 6 percent annual coupon, 10 year C. Zero-coupon, 4 year D. 8 percent annual coupon, 4 year E. 6 percent annual coupon, 4 year
D. 8 percent annual coupon, 4 year
Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money? A. 6 percent interest for 3 years B. 12 percent interest for 5 years C. 7 percent interest for 9 years D. 8 percent interest for 9 years E. 6 percent interest for 10 years
D. 8 percent interest for 9 years
You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 8 percent interest. Approximately how long must you wait for your investment to double in value? A. 6 years B. 7 years C. 8 years D. 9 years E. 10 years
D. 9 years
A 6-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate? A. 4.50 percent B. 4.60 percent C. 6.00 percent D. 9.00 percent E. 9.19 percent
D. 9.00 percent
Underwood Enterprises earns $0.07 in profit on every $1 of sales and has $0.67 in assets for every $1 of sales. The firm pays out 20 percent of its profits to its shareholders. What is the internal growth rate? A. 6.37 percent B. 7.76 percent C. 8.80 percent D. 9.12 percent E. 9.65 percent
D. 9.12 percent
You want to borrow $36,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $750, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan? A. 8.90 percent B. 8.95 percent C. 9.00 percent D. 9.15 percent E. 9.20 percent
D. 9.15 percent
You recently sold an antique car you owned and valued greatly. However, you needed money and agreed to sell the car at a price of $48,000, to be paid in monthly payments of $1,200 each for 48 months. What interest rate did you charge for financing the sale? A. 8.65 percent B. 8.75 percent C. 8.88 percent D. 9.24 percent E. 9.49 percent
D. 9.24 percent
The Noodle Place has total assets of $123,800, a debt-equity ratio of 0.65, and net income of $7,100. What is the return on equity? A. 3.48 percent B. 3.73 percent C. 8.01 percent D. 9.46 percent E. 13.61 percent
D. 9.46 percent
The common stock of Tasty Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividend to be $0.20 per share. What is the total rate of return on this stock? A. 8.64 percent B. 9.12 percent C. 9.40 percent D. 9.85 percent E. 10.64 percent
D. 9.85 percent
The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict? A. Organizational B. Structure C. Formation D. Agency E. Territorial
D. Agency
Which one of the following statements is true concerning annuities? A. All else equal, an ordinary annuity is more valuable than an annuity due. B. All else equal, a decrease in the number of payments increases the future value of an annuity due. C. An annuity with payments at the beginning of each period is called an ordinary annuity. D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. E All else equal, an increase in the number of annuity payments decreases the present value and increases . thefuturevalueofanannuity.
D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information? A. The present value of Annuity A is equal to the present value of Annuity B. B. Annuity B will pay one more payment than Annuity A will. C. The future value of Annuity A is greater than the future value of Annuity B. D. Annuity B has both a higher present value and a higher future value than Annuity A. E. Annuity A has a higher future value but a lower present value than Annuity B.
D. Annuity B has both a higher present value and a higher future value than Annuity A.
This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it up and noticed that the bond matured today. He presented the bond to the bank teller and received both the principal and 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
D. Bearer form bond
Which one of the following statements is correct? A. Bond markets have less daily trading volume than equity markets. B. There are less bond issues than there are equity issues. C. Municipal bond prices are highly transparent. D. Bond markets are dealer based. E. Most bond trades occur on the NYSE.
D. Bond markets are dealer based.
The call premium is the amount by which the: A. market price exceeds the par value. B. market price exceeds the call price. C. face value exceeds the market price. D. call price exceeds the par value. E. call price exceeds the market price.
D. call price exceeds the par value.
You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future? A. Times interest earned = 1.7; debt-equity ratio = 1.6 B. Times interest earned = 1.5; debt-equity ratio = 1.2 C. Cash coverage ratio = 0.8; debt-equity ratio = 0.8 D. Cash coverage ratio = 2.6; debt-equity ratio = 0.3 E. Cash coverage ratio = 0.5; total debt ratio = 0.2
D. Cash coverage ratio = 2.6; debt-equity ratio = 0.3
Which one of the following functions should be assigned to the treasurer rather than the controller? A. Data processing B. Cost accounting C. Tax management D. Cash management E. Financial accounting
D. Cash management
You have agreed to pay a five percent commission to your best friend if he can locate a buyer for your car. This arrangement is most similar to the compensation arrangement for which one of these individuals who is involved with the stock market? A. Specialist B. Floor trader C. Market maker D. Commission broker E. Dealer
D. Commission broker
Which one of the following transactions will increase the liquidity of a firm? A. Cash purchase of new production equipment B. Payment of an account payable C. Cash purchase of inventory D. Credit sale of inventory at cost E. Cash payment of employee wages
D. Credit sale of inventory at cost
Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred? A. Cumulative common B. Noncumulative common C. Noncumulative preferred D. Cumulative preferred E. Senior common
D. Cumulative preferred
The current yield on a bond is equal to the annual interest divided by which one of the following? A. Issue price B. Maturity value C. Face amount D. Current market price E. Current par value
D. Current market price
Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested. A. Increase in the time period B. Increase in the interest rate C. Decrease in the future value D. Decrease in the interest rate E. None of the above
D. Decrease in the interest rate
Which one of the following will increase the profit margin of a firm, all else constant? A. Increase in interest paid B. Increase in fixed costs C. Increase in depreciation expense D. Decrease in the tax rate E. Decrease in sales
D. Decrease in the tax rate
Which of the following combinations is assured to decrease the interest rate sensitivity of a bond? A. Increase in both the time to maturity and the coupon rate B. Increase in the time to maturity and a decrease in the coupon rate C. Decrease in both the time to maturity and the coupon rate D. Decrease in the time to maturity and an increase in the coupon rate E. A decrease in the time to maturity and an increase in the face value
D. Decrease in the time to maturity and an increase in the coupon rate
What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount? A. Stock pricing model B. Equity pricing model C. Capital gain model D. Dividend growth model E. Present value model
D. Dividend growth model
Donovan Brothers, Inc. would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal? A. Return on assets B. Net income C. Retention ratio D. Dividend payout ratio E. Return on equity
D. Dividend payout ratio
Which one of the following can be classified as an annuity but not as a perpetuity? A. Increasing monthly payments forever B. Increasing quarterly payments for 6 years C. Unequal payments each year for 9 years D. Equal annual payments for life E. Equal weekly payments forever
D. Equal annual payments for life
Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years? A. FV = $500/[(1 + 0.08) × 7] B. FV = $500/[(1 + 0.07) × 8] C. FV = $500/(0.07 × 8) D. FV = $500 (1 + 0.07)8 E. FV = $500 (1 + 0.08)7
D. FV = $500 (1 + 0.07)8
Manning, Inc. originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. Which one of the following terms applies to this situation? A. Called bond B. Converted bond C. Protected covenant D. Fallen angel E. Floating bond
D. Fallen angel
The "Say on Pay" bill requires corporations to do which one of the following? A. Give the chairman of the board the final say on executive pay B. Give the firm's creditors a nonbinding say on executive pay C. Give the firm's creditors a binding say on executive pay D. Give shareholders a nonbinding vote on executive pay E. Give shareholders a binding vote on executive pay
D. Give shareholders a nonbinding vote on executive pay
The more actively traded large companies that are listed on NASDAQ are traded in which one of the NASDAQ markets? A. National B. Capital C. Regional D. Global Select E. Global
D. Global Select
The dividend growth model can be used to value the stock of firms which pay which type of dividends? I. constant annual dividend II. annual dividend with a constant increasing rate of growth III. annual dividend with a constant decreasing rate of growth IV. zero dividend A. I only B. II only C. II and III only D. I, II, and III only E. I, II, III, and IV
D. I, II, and III only
The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity A. I and II only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV
D. I, II, and IV only
The term structure of interest rates is affected by which of the following? I. interest rate risk premium II. real rate of interest III. default risk premium IV. inflation premium A. I and II only B. II and III only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and I
D. I, II, and IV only
Which of the following are advantages of the corporate form of organization? I. Ability to raise large sums of equity capital II. Ease of ownership transfer III. Profits taxed at the corporate level IV. Limited liability for all owners A. I and II only B. III and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV
D. I, II, and IV only
Which of the following can generally be found in a bond's indenture agreement? I. terms of repayment II. names of registered shareholders III. protective covenants IV. total amount of the bond issue A. I and III only B. II, III, and IV only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV
D. I, III, and IV only
Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. E. Net present value is equal to an investment's cash inflows discounted to today's dollars.
D. If the internal rate of return equals the required return, the net present value will equal zero.
Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing? A. Du Pont rate B. External growth rate C. Sustainable growth rate D. Internal growth rate E. Cash flow rate
D. Internal growth rate
Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent interest, compounded annually. At the end of three years: A. Both Jeff and Kurt will have accounts of equal value. B. Kurt will have twice the money saved that Jeff does. C. Kurt will earn exactly twice the amount of interest that Jeff earns. D. Kurt will have a larger account value than Jeff will. E. Jeff will have more money saved than Kurt.
D. Kurt will have a larger account value than Jeff will.
Depreciation does which one of the following for a profitable firm? A. Increases net income B. Increases net fixed assets C. Decreases net working capital D. Lowers taxes E. Has no effect on net income
D. Lowers taxes
On which one of the following dates is the principal amount of a bond repaid? A. Coupon date B. Issue date C. Discount date D. Maturity date E. Face date
D. Maturity date
What is the goal of financial management for a sole proprietorship? A. Maximize net income given the current resources of the firm B. Decrease long-term debt to reduce the risk to the owner C. Minimize the tax impact on the proprietor D. Maximize the market value of the equity E. Minimize the reliance on fixed costs
D. Maximize the market value of the equity
Which one of the following statements related to the income statement is correct? A. Depreciation has no effect on taxes. B. Interest paid is a noncash item. C. Taxable income must be a positive value. D. Net income is distributed either to dividends or retained earnings. E. Taxable income plus interest and depreciation equals earnings before interest and taxes.
D. Net income is distributed either to dividends or retained earnings.
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? A. Internal rate of return B. Payback C. Average accounting rate of return D. Net present value E. Profitability index
D. Net present value
The Drive-Thru requires an average accounting return (AAR) of at least 17 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $168,000. This equipment will have a 4-year life over which time it will be depreciated on a straight line basis to a zero book value. The annual net income from this equipment is estimated at $8,100, $10,300, $17,900, and $19,600 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not? A. Yes; because the AAR is less than 17 percent B. Yes; because the AAR is equal to 17 percent C. Yes; because the AAR is greater than 17 percent D. No; because the AAR is less than 17 percent E. No; because the AAR is greater than 17 percent
D. No; because the AAR is less than 17 percent
You are considering an investment for which you require a 14 percent rate of return. The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not? A. Yes; because the IRR is 13.13 percent B. Yes; because the IRR is 13.65 percent C. Yes; because the IRR is 13.67 percent D. No; because the IRR is 13.13 percent E. No; because the IRR is 13.65 percent
D. No; because the IRR is 13.13 percent
Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent. A. PV=$600(1+6)7 B. PV = $600 (1 + 0.07)6 C. PV=$600×(0.07×6) D. PV = $600/(1 + 0.07)6 E. PV = $600/(1 + 6)0.07
D. PV = $600/(1 + 0.07)6
Which one of the following methods of analysis ignores the time value of money? A. Net present value B. Internal rate of return C. Discounted cash flow analysis D. Payback E. Profitability index
D. Payback
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms? A. Ordinary annuity B. Annuity due C. Amortized payment D. Perpetuity E. Continuation
D. Perpetuity
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? A. Internal rate of return B. Modified internal rate of return C. Net present value D. Profitability index E. Payback
D. Profitability index
Which one of the following indicates that a project should be rejected? A. Average accounting return that exceeds the requirement B. Payback period that is shorter than the requirement period C. Positive net present value D. Profitability index less than 1.0 E. Internal rate of return that exceeds the required return
D. Profitability index less than 1.0
Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for 6 years. Project 2 will produce cash flows of $48,000 a year for 8 years. The company requires a 15 percent rate of return. Which project should the company select and why? A. Project 1; because the annual cash flows are greater than those of Project 2 B. Project 1; because the present value of its cash inflows exceeds those of Project 2 by $14,211.62 C. Project 2; because the total cash inflows are $70,000 greater than those of Project 1 D. Project 2; because the present value of the cash inflows exceeds those of Project 1 by $18,598.33 E. It does not matter as both projects have almost identical present values.
D. Project 2; because the present value of the cash inflows exceeds those of Project 1 by $18,598.33
Kate could not attend the last shareholders meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which one of the following terms is used to describe the method by which Kate's shares were voted? A. Straight B. Cumulative C. Consent-form D. Proxy E. In absentia
D. Proxy
Which one of the following situations is most apt to create an agency conflict? A. Compensating a manager based on his or her division's net income B. Giving all employees a bonus if a certain level of efficiency is maintained C. Hiring an independent consultant to study the operating efficiency of the firm D. Rejecting a profitable project to protect employee jobs E. Selling an underproducing segment of the firm
D. Rejecting a profitable project to protect employee jobs
Which one of the following is included in the market value of a firm but not in the book value? A. Raw materials B. Partially-built inventory C. Tax liability D. Reputation of the firm E. Value of a partially-depreciated machine
D. Reputation of the firm
Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations? A. BEC B. SED C. BID D. SIC E. SBC
D. SIC
What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early? A. Registered account B. Bearer account C. Call account D. Sinking fund E. Premium fund
D. Sinking fund
Which one of the following statements concerning sinking funds is correct? A. Bond issuers must fund a sinking fund at the time the bonds are issued. B. Sinking funds must include at least one "balloon payment". C. Sinking funds must be funded annually, starting on the issue date. D. Sinking funds may be used to purchase bonds in the open market. E. Sinking funds can only be used to call bonds.
D. Sinking funds may be used to purchase bonds in the open market.
Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following? A. Non-dividend-paying stock B. Stock with a constant dividend C. Stock with irregular dividends D. Stock with a constant growth dividend E. Stock with growing dividends for a limited period of time
D. Stock with a constant growth dividend
Which one of the following premiums is paid on a corporate bond due to its tax status? A. Interest rate risk premium B. Inflation premium C. Liquidity premium D. Taxability premium E. Default risk premium
D. Taxability premium
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? A. One of the time periods within the investment period has a cash flow equal to zero B. The initial cash flow is negative C. The investment has cash inflows that occur after the required payback period D. The investment is mutually exclusive with another investment under consideration E. The cash flows are conventional
D. The investment is mutually exclusive with another investment under consideration
You are using a net present value profile to compare investments A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? A. The internal rate of return for project A equals that of project B, but generally does not equal zero. B. The internal rate of return of each project is equal to zero. C. The net present value of each project is equal to zero. D. The net present value of project A equals that of project B, but generally does not equal zero. E. The net present value of each project is equal to the respective project's initial cost.
D. The net present value of project A equals that of project B, but generally does not equal zero.
The payback method of analysis ignores which one of the following? A. Initial cost of an investment B. Arbitrary cutoff point C. Cash flow direction D. Time value of money E. Timing of each cash inflow
D. Time value of money
Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? A. The present value of the car is equal to $500 + (36 × $450). B. The $500 is the present value of the purchase. C. The car loan is an annuity due. D. To compute the initial loan amount, you must use a monthly interest rate. E. The future value of the loan is equal to 36 × $450.
D. To compute the initial loan amount, you must use a monthly interest rate.
The cash coverage ratio is used to evaluate the: A. liquidity of a firm. B. speed at which a firm generates cash. C. length of time that a firm can pay its bills if no additional cash becomes available. D. ability of a firm to pay the interest on its debt. E. relationship between the firm's cash balance and its current liabilities.
D. ability of a firm to pay the interest on its debt.
A bond dealer sells at the _____ price and buys at the _____ price. A. clean; dirty B. dirty; clean C. bid; asked D. asked; bid E. asked; asked
D. asked; bid
The average net income of a project divided by the project's average book value is referred to as the project's: A. required return. B. market rate of return. C. internal rate of return. D. average accounting return. E. discounted rate of return.
D. average accounting return.
The financial statement that summarizes a firm's accounting value as of a particular date is called the: A. income statement. B. cash flow statement. C. liquidity position. D. balance sheet. E. periodic operating statement
D. balance sheet
A bond has a make-whole call provision. Given this, you know that the: A. bond will always sell at par. B. call premium must equal the annual coupon payment. C. call price is directly related to the market rate of interest. D. call price is inversely related to the market rate of interest. E. bond must be a zero-coupon bond.
D. call price is inversely related to the market rate of interest.
Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be: A. subject to a sinking fund provision. B. a debenture. C. a "fallen angel". D. call protected. E. unrated.
D. call protected.
Highly liquid assets: A. increase the probability a firm will face financial distress. B. appear on the right side of a balance sheet. C. generally produce a high rate of return. D. can be sold quickly at close to full value. E. include all intangible assets.
D. can be sold quickly at close to full value.
Firms that compile financial statements according to GAAP: A. record income and expenses at the time they affect the firm's cash flows. B. have no discretion over the timing of recording either revenue or expense items. C. must record all expenses when incurred. D. can still manipulate their earnings to some degree. E. record both income and expenses as soon as the amount for each can be ascertained.
D. can still manipulate their earnings to some degree.
Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of: A. capital structure management. B. asset allocation. C. risk management. D. capital budgeting. E. working capital management.
D. capital budgeting.
A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a: A. floor trader. B. specialist. C. runner. D. commission broker. E. market maker.
D. commission broker.
The goal of financial management is to increase the: A. future value of the firm's total equity. B. book value of equity. C. dividends paid per share. D. current market value per share. E. number of shares outstanding
D. current market value per share
A bond for which no specific property has been pledged as security is classified as a: A. bearer bond. B. trust deed bond. C. registered bond. D. debenture. E. sinking fund bond.
D. debenture.
Dexter, Inc. has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first three years. This provision is referred to as the _____ provision. A. safeguard B. market C. liquidity D. deferred call E. sinking fund
D. deferred call
Cash flow to stockholders is defined as: A. cash flow from assets plus cash flow to creditors. B. operating cash flow minus cash flow to creditors. C. dividends paid plus the change in retained earnings. D. dividends paid minus net new equity raised. E. net income minus the addition to retained earnings.
D. dividends paid minus net new equity raised.
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: A. upward-sloping. B. flat. C. humped. D. downward-sloping. E. double-humped.
D. downward-sloping.
A sole proprietorship: A. provides limited liability for its owner. B. involves significant legal costs during the formation process. C. has an unlimited life. D. has its profits taxed as personal income. E. can generally raise significant capital from non-owner sources.
D. has its profits taxed as personal income.
The stated interest rate is the interest rate expressed: A. as if it were compounded one time per year. B. as the quoted rate compounded by 12 periods per year. C. in terms of the rate charged per day. D. in terms of the interest payment made each period. E. in terms of an effective rate.
D. in terms of the interest payment made each period.
Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as: A. simple interest. B. complex interest. C. accrued interest. D. interest on interest. E. discounted interest.
D. interest on interest.
A protective covenant: A. protects the borrower from unscrupulous practices by the lender. B. is designed to protect the bond dealer from potential legal liability related to the bond issue. C. prevents a bond from being called. D. limits the actions of the borrower. E. guarantees that a bond will be repaid in full with interest.
D. limits the actions of the borrower.
Any person who owns a license to trade on the NYSE is called a: A. dealer. B. floor trader. C. specialist. D. member. E. proxy
D. member.
Marti had an unexpected surprise when she ate her Lotsa Good cereal this morning. She found a piece of metal mixed in her cereal. The potential claim which Marti has against this firm is that of a(n): A. general creditor. B. debtholder. C. shareholder. D. stakeholder. E. agent.
D. stakeholder.
Delivery trucks are classified as: A. non-cash expenses. B. current liabilities. C. current assets. D. tangible fixed assets. E. intangible fixed assets.
D. tangible fixed assets.
Common-size financial statements present all balance sheet account values as a percentage of: A. the forecasted budget. B. sales. C. total equity. D. total assets. E. last year's account value.
D. total assets.
What is the price of a $1,000 face value bond if the quoted price is 102.1? A. $102.10 B. $1,002.10 C. $1,020.01 D. $1,020.10 E. $1,021.00
E. $1,021.00
Julie is borrowing $12,800 to purchase a car. The loan terms are 36 months at 7.5 percent interest. How much interest will she pay on this loan if she pays the loan as agreed? Round your answer to the nearest whole dollar. A. $1,338 B. $1,414 C. $1,459 D. $1,506 E. $1,534
E. $1,534
Anne plans to save $40 a week for the next 5 years. She expects to earn 3 percent for the first 2 years and 5 percent for the last 3 years. How much will her savings be worth at the end of the 5 years? A. $10,215.60 B. $10,684.29 C. $10,983.58 D. $11,014.88 E. $11,708.15
E. $11,708.15
You want to buy a new sports coupe for $84,600, and the finance office at the dealership has quoted you a 7.1 percent APR loan for 48 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan? A. $2,017.84; 7.24 percent B. $2,017.84; 7.29 percent C. $2,017.84; 7.34 percent D. $2,029.78; 7.29 percent E. $2,029.78; 7.34 percent
E. $2,029.78; 7.34 percent
Steve is considering investing $3,600 a year for 40 years. How much will this investment be worth at the end of the 40 years if he earns an average annual rate of return of 11.6 percent? Assume Steve invests his first payment of the end of this year. A. $1,887,411.26 B. $1,919,200.08 C. $2,103,018.90 D. $2,311,416.67 E. $2,471,685.70
E. $2,471,685.70
Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously delinquent so your firm has offered to arrange a payment plan in the hopes that it might at least collect a portion of this receivable. Your firm's offer consists of weekly payments for one year at an interest rate of 3 percent. What is the amount of each payment? A. $2,229.90 B. $2,318.11 C. $2,409.18 D. $2,599.04 E. $2,706.33
E. $2,706.33
Appalachian Bank offers you a $135,000, 9-year term loan at 7.5 percent annual interest. What will your annual loan payment be? A. $18,507.16 B. $19,229.08 C. $20,660.02 D. $20,889.20 E. $21,163.57
E. $21,163.57
Mill Stone Bakery needs $210,000 today to fund a new project. The project will not produce any cash flows for 2 years and thus the firm agreed to a 2-year, pure discount loan at 8.6 percent interest. How much will the firm owe on this loan at the time it must be repaid? A. $228,060.00 B. $237,540.21 C. $240,860.00 D. $246,120.00 E. $247,673.16
E. $247,673.16
Which one of the following is an ordinary annuity, but not a perpetuity? A. $75 paid at the beginning of each month period for 50 years B. $15 paid at the end of each monthly period for an infinite period of time C. $40 paid quarterly for five years, starting today D. $50 paid every year for ten years, starting today E. $25 paid weekly for one year, starting one week from today
E. $25 paid weekly for one year, starting one week from today
The Printing Company stock is selling for $32.60 a share based on a 14 percent rate of return. What is the amount of the next annual dividend if the dividends are increasing by 2.5 percent annually? A. $3.48 B. $3.52 C. $3.57 D. $3.66 E. $3.75
E. $3.75
How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 6 percent. A. $324,642.24 B. $331,288.67 C. $333,333.33 D. $340,025.00 E. $344,120.78
E. $344,120.78
The Border Crossing just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 14 percent? A. $30.04 B. $32.18 C. $33.33 D. $35.80 E. $36.75
E. $36.75
General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for 5 years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per share. What is the current value of this stock if the required return is 18 percent? A. $3.01 B. $3.55 C. $3.89 D. $4.27 E. $4.88
E. $4.88
The Pizza Parlor paid $3,500 in dividends and $17,600 in interest over the past year. Sales totaled $211,800 with costs of $167,900. The depreciation expense was $16,500. The applicable tax rate is 34 percent. What is the amount of the operating cash flow? A. $14,232 B. $15,306 C. $28,222 D. $39,988 E. $40,568
E. $40,568
Bridgewater Furniture has sales of $811,000, costs of $658,000, and interest paid of $21,800. The depreciation expense is $56,100 and the tax rate is 34 percent. At the beginning of the year, the firm had retained earnings of $318,300 and common stock of $250,000. At the end of the year, the firm has retained earnings of $322,500 and common stock of $280,000. What is the amount of the dividends paid for the year? A. $15,266 B. $19,466 C. $31,566 D. $41,066 E. $45,366
E. $45,366
The Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first three years. Starting in year four, the project will produce cash inflows of $721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 17 percent. What is the project's net present value? A. $382,507.17 B. $389,211.76 C. $414,141.41 D. $451,329.69 E. $469,691.45
E. $469,691.45
Webster Industrial Products just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 5 percent on its savings? A. $397,425.35 B. $402,311.19 C. $460,000.00 D. $478,887.78 E. $483,073.00
E. $483,073.00
Six months ago, Altman Metal Works repurchased $20,000 of its common stock. The company pays regular quarterly dividends totaling $7,500 per quarter. What is the amount of the cash flow to stockholders for the past year if no additional shares were issued? A. -$10,000 B. $20,000 C. $27,500 D. $30,000 E. $50,000
E. $50,000
Morgantown Movers has net working capital of $11,300, current assets of $31,200, equity of $53,400, and long-term debt of $11,600. What is the amount of the net fixed assets? A. $31,800 B. $32,900 C. $45,500 D. $48,100 E. $53,700
E. $53,700
Thirteen years ago, you deposited $2,400 into an account. Eight years ago, you added an additional $1,000 to this account. You earned 8 percent, compounded annually, for the first 5 years and 5.5 percent, compounded annually, for the last 8 years. How much money do you have in your account today? A. $4,666.67 B. $4,717.29 C. $5,411.90 D. $6,708.15 E. $6,946.59
E. $6,946.59
The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending? A. -$22,360 B. -$4,780 C. $23,720 D. $58,340 E. $69,800
E. $69,800
The Outlet needs to raise $3.2 million for an expansion project. The firm wants to raise this money by selling zero coupon bonds with a par value of $1,000 that mature in 20 years. The market yield on similar bonds is 7.8 percent. How many bonds must The Outlet sell to raise the money it needs? (Assume semi- annual compounding.) A. 3,200 bond B. 3,450 bond C. 11,508 bond D. 13,797 bond E. 14,783 bonds
E. 14,783 bonds
What is the effective annual rate of 14.9 percent compounded monthly? A. 14.48 percent B. 14.67 percent C. 15.23 percent D. 15.74 percent E. 15.96 percent
E. 15.96 percent
The Furniture Hut is offering a bedroom suite for $1,999. The credit terms are 60 months at $50 per month. What is the interest rate on this offer? A. 16.33 percent B. 16.50 percent C. 16.65 percent D. 17.15 percent E. 17.30 percent
E. 17.30 percent
A firm has net income of $31,300, depreciation of $5,100, taxes of $14,600, and interest paid of $3,100. What is the cash coverage ratio? A. 8.78 B. 10.10 C. 14.14 D. 16.32 E. 17.45
E. 17.45
Used Motors will sell you a $13,000 car for $380 a month for 48 months. What is the interest rate? A. 16.55 percent B. 16.67 percent C. 16.99 percent D. 17.58 percent E. 17.72 percent
E. 17.72 percent
The Furniture Showroom offers credit to its customers at a rate of 1.4 percent per month. What is the effective annual rate of this credit offer? A. 15.97 percent B. 16.52 percent C. 16.80 percent D. 17.34 percent E. 18.16 percent
E. 18.16 percent
How long will it take to double your savings if you earn 3.6 percent interest, compounded annually? A. 17.78 years B. 18.04 years C. 18.67 years D. 19.42 years E. 19.60 years
E. 19.60 years
Underwood Homes Sales has total assets of $589,900 and total debt of $318,000. What is the equity multiplier? A. 0.46 B. 0.54 C. 1.21 D. 1.85 E. 2.17
E. 2.17
Healthy Foods has total assets of $129,800, net fixed assets of $71,500, long-term debt of $52,000, and total debt of $78,700. If inventory is $31,800, what is the current ratio? A. 0.33 B. 0.46 C. 0.84 D. 1.18 E. 2.18
E. 2.18
Isaac only has $690 today but needs $800 to buy a new laptop. How long will he have to wait to buy the laptop if he earns 5.4 percent compounded annually on his savings? A. 2.29 years B. 2.48 years C. 2.51 years D. 2.77 years E. 2.81 years
E. 2.81 years
Last year, a firm earned $31,200 in net income on sales of $217,600. The company paid $7,500 in dividends. What is the dividend payout ratio? A. 3.45 percent B. 4.71 percent C. 14.34 percent D. 22.85 percent E. 24.04 percent
E. 24.04 percent
The Auto Shop is buying some new equipment at a cost of $218,900. This equipment will be depreciated on a straight line basis to a zero book value its 8-year life. The equipment is expected to generate net income of $36,000 a year for the first four years and $22,000 a year for the last four years. What is the average accounting rate of return? A. 15.48 percent B. 17.76 percent C. 18.09 percent D. 23.72 percent E. 26.50 percent
E. 26.50 percent
You expect to receive $12,000 at graduation one year from now. You plan on investing it at 8 percent until you have $100,000. How long will you wait from now? A. 27.47 years B. 27.51 years C. 27.55 years D. 28.47 years E. 28.55 years
E. 28.55 years
The Blue Goose is considering a project with an initial cost of $42,700. The project will produce cash inflows of $8,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period? A. 2.87 years B. 3.23 years C. 3.41 years D. 3.79 years E. 4.23 years
E. 4.23 years
Computer Geeks has sales of $521,000, a profit margin of 14.8 percent, a total asset turnover rate of 2.16, and an equity multiplier of 1.30. What is the return on equity? A. 8.91 percent B. 12.67 percent C. 18.28 percent D. 32.11 percent E. 41.56 percent
E. 41.56 percent
Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60? A. 28.24 months B. 31.33 months C. 36.74 months D. 39.20 months E. 41.79 months
E. 41.79 months
For the past six years, the price of Slate Rock stock has been increasing at a rate of 8.6 percent a year. Currently, the stock is priced at $47 a share and has a required return of 14 percent. What is the dividend yield? A. 1.20 percent B. 2.87 percent C. 3.39 percent D. 4.28 percent E. 5.40 percent
E. 5.40 percent
The Blue Lantern has a return on equity of 17.8 percent, an equity multiplier of 1.9, and a total asset turnover of 1.45. What is the profit margin? A. 2.76 percent B. 3.57 percent C. 4.90 percent D. 5.28 percent E. 6.46 percent
E. 6.46 percent
A 12-year, semiannual coupon bond is priced at $1,102.60. The bond has a $1,000 face value and a yield to maturity of 5.33 percent. What is the coupon rate? A. 5.00 percent B. 5.25 percent C. 5.50 percent D. 6.00 percent E. 6.50 percent
E. 6.50 percent
LKM, Inc. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 6.5 percent coupon bonds on the market that sell for $972.78, make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? A. 6.25 percent B. 6.37 percent C. 6.50 percent D. 6.67 percent E. 6.75 percent
E. 6.75 percent
The Hot Dog Shack wants to raise $1.2 million by selling some coupon bonds at par. Comparable bonds in the market have a 6.5 percent annual coupon, 15 years to maturity, and are selling at 97.687 percent of par. What coupon rate should The Hot Dog Shack set on its bonds? A. 6.25 percent B. 6.38 percent C. 6.50 percent D. 6.67 percent E. 6.75 percent
E. 6.75 percent
Ratzell's Place has a market-to-book ratio of 2.7, net income of $68,400, a book value per share of $37, and 45,000 shares of stock outstanding. What is the price-earnings ratio? A. 24.34 B. 28.16 C. 55.10 D. 59.09 E. 65.72
E. 65.72
Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value? A. 5 percent simple interest B. 5 percent interest, compounded annually C. 6 percent interest, compounded annually D. 7 percent simple interest E. 7 percent interest, compounded annually
E. 7 percent interest, compounded annually
Berkley Trucking recently purchased a new truck costing $147,800. The firm financed this purchase at 7.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt? A. 6.50 years B. 6.67 years C. 7.48 years D. 7.60 years E. 7.79 years
E. 7.79 years
The $1,000 face value bonds of Jasper International have a 7.5 percent coupon and pay interest annually. Currently, the bonds are quoted at 98.27 and mature in 3.5 years. What is the yield to maturity? A. 6.97 percent B. 7.10 percent C. 7.24 percent D. 7.78 percent E. 8.09 percent
E. 8.09 percent
Friendly's Shoe Store has earnings before interest and taxes of $21,680 and net income of $12,542. The tax rate is 34 percent. What is the times interest earned ratio? A. 0.88 B. 1.67 C. 3.09 D. 5.59 E. 8.10
E. 8.10
Freedom Health Centers has total equity of $861,300, sales of $1.48 million, and a profit margin of 5.2 percent. What is the return on equity? A. 5.82 percent B. 6.49 percent C. 7.18 percent D. 8.68 percent E. 8.94 percent
E. 8.94 percent
Which one of the following statements is true? A. The current yield on a par value bond will exceed the bond's yield-to-maturity. B. The yield to maturity on a premium bond exceeds the bond's coupon rate. C. The current yield on a premium bond is equal to the bond's coupon rate. D. A premium bond has a current yield that exceeds the bond's coupon rate. E. A discount bond has a coupon rate that is less than the bond's yield to maturity.
E. A discount bond has a coupon rate that is less than the bond's yield to maturity.
The lowest rating a bond can receive from Moody's and still be classified as an investment-quality bond is: A. BB B. BBB C. B D. Ba E. Baa
E. Baa
Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has? A. Current ratio B. Debt ratio C. Cash coverage ratio D. Quick ratio E. Cash ratio
E. Cash ratio
Which one of the following is the quoted price of a bond? A. Par value B. Discount price C. Face value D. Dirty price E. Clean price
E. Clean price
The price of a stock at year 4 can be expressed as: A. D0 /(R+G4). B. D0 ×(1+R)5. C. D1 ×(1+R)5. D. D4/(R-g). E. D5/(R-g).
E. D5/(R-g).
Which one of the following will decrease the present value of an annuity? A. Increase in the annuity's future value B. Increase in the payment amount C. Increase in the time period D. Decrease in the discount rate E. Decrease in the annuity payment
E. Decrease in the annuity payment
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? A. Interest rate risk premium B. Inflation premium C. Liquidity premium D. Taxability premium E. Default risk premium
E. Default risk premium
An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? A. Fixed expenses B. Interest paid C. Net capital spending D. Inventory E. Depreciation
E. Depreciation
The capital gains yield equals which one of the following? A. Total yield B. Current discount rate C. Market rate of return D. Dividend yield E. Dividend growth rate
E. Dividend growth rate
An increase in which one of the following will increase net income? A. Fixed costs B. Depreciation C. Marginal tax rate D. Revenue E. Dividends
E. Dividends
Which one of the following individuals is most apt to purchase a municipal bond? A. Minimum-wage employee B. Retired individual with minimal current income C. Recent college graduate D. Tax-exempt organization E. Highly-compensated business owner
E. Highly-compensated business owner
Which one of the following is a working capital decision? A. How should the firm raise additional capital to fund its expansion? B. What debt-equity ratio is best suited to our firm? C. What is the cost of debt financing? D. Which type of debt is best suited to finance our inventory? E. How much cash should the firm keep in reserve?
E. How much cash should the firm keep in reserve?
Maria is the sole proprietor of an antique store which she has operated at the same location for the past 16 years. The store rents the space in which it is located but does own all of the inventory and fixtures. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific loan covenants or assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and use the cash raised to apply to the debt II. Sell the store fixtures and use the cash raised to apply to the debt III. Take funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt A. I only B. III only C. I and II only D. I, II, and III only E. I, II, III, and IV
E. I, II, III, and IV
Which of the following are effective means of aligning management goals with shareholder interests? I. Employee stock options II. Threat of a takeover III. Management bonuses tied to performance goals IV. Threat of a proxy fight A. I and III only B. II and IV only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV
E. I, II, III, and IV
Which of the following individuals commonly use finance in the course of their job? I. Chief financial officers II. Accountants III. Security analysts IV. Strategic managers A. I and II only B. III and IV only C. I and III only D. I, II, and III only E. I, II, III, and IV
E. I, II, III, and IV
Newly issued securities are sold to investors in which one of the following markets? A. Proxy B. Stated value C. Inside D. Secondary E. Primary
E. Primary
Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value. I. Increase in the interest rate II. Decrease in the lump sum amount III. Increase in the investment time period IV. Decrease in the investment time period A. I and III only B. I and IV only C. I, II, and III only D. II and III only E. II and IV only
E. II and IV only
Which one of the following relates to a negative change in net working capital? A. Increase in the inventory level B. Sale of net fixed assets C. Purchase of net fixed assets D. Increase in current assets and decrease in current liabilities for the period E. Increase in current liabilities with no change in current assets for the period
E. Increase in current liabilities with no change in current assets for the period
Which one of the following will increase the current value of a stock? A. Decrease in the dividend growth rate B. Increase in the required return C. Increase in the market rate of return D. Decrease in the expected dividend for next year E. Increase in the capital gains yield
E. Increase in the capital gains yield
Sara is investing $1,000 today. Which one of the following will increase the future value of that amount? A. Shortening the investment time period B. Paying interest only on the principal amount C. Paying simple interest rather than compound interest D. Paying interest only at the end of the investment period rather than throughout the investment period E. Increasing the interest rate
E. Increasing the interest rate
Which one of the following best matches the primary goal of financial management? A. Increasing the dollar amount of each sale B. Increasing traffic flow within the firm's stores C. Transforming fixed costs into variable costs D. Increasing the firm's liquidity E. Increasing the market value of firm
E. Increasing the market value of firm
In which one of the following situations would the payback method be the preferred method of analysis? A. A project that can easily be expanded B. Two mutually exclusive projects C. A proposed expansion of a firm's current operations D. Different-sized projects E. Investment funds available only for a limited period of time
E. Investment funds available only for a limited period of time
Which one of the following statements is correct regarding mortgage backed securities (MBSs)? A. There is a separate MBS for each individual mortgage processed by a mortgage broker. B. A MBS is a type of a debenture. C. The originating bank is the seller of MBSs to investors. D. Investors in MBSs are protected from default. E. Investors in MBSs are subject to real estate deflation risk.
E. Investors in MBSs are subject to real estate deflation risk.
Which one of the following is included in net working capital? A. Newly purchased equipment with a useful life of six years B. Mortgage on a building payable over the next 12 years C. Interest on a long-term debt D. 10-year bonds issued to the general public E. Invoice from a supplier for inventory purchased
E. Invoice from a supplier for inventory purchased
Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows? A. Average accounting return B. Profitability index C. Internal rate of return D. Indexed rate of return E. Modified internal rate of return
E. Modified internal rate of return
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? A. Payback B. Profitability index C. Accounting rate of return D. Internal rate of return E. Net present value
E. Net present value
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions? A. No new external financing of any kind B. No new debt but additional external equity equal to the increase in retained earnings C. New debt and external equity in equal proportions D. New debt and external equity, provided the debt-equity ratio remains constant E. No new equity and a constant debt-equity ratio
E. No new equity and a constant debt-equity ratio
The term structure of interest rates represents the relationship between which of the following? A. Nominal rates on risk-free and risky bonds B. Real rates on risk-free and risky bonds C. Nominal and real rates on default-free, pure discount bonds D. Market and coupon rates on default-free, pure discount bonds E. Nominal rates on default-free, pure discount bonds and time to maturity
E. Nominal rates on default-free, pure discount bonds and time to maturity
Which one of the following statements correctly applies to a sole proprietorship? A. The business entity has an unlimited life. B. The ownership can easily be transferred to another individual. C. The owner enjoys limited liability for the firm's debts. D. Debt financing is easy to arrange in the firm's name. E. Obtaining additional equity is dependent on the owner's personal finances.
E. Obtaining additional equity is dependent on the owner's personal finances.
Which one of the following methods of analysis has the greatest bias towards short-term projects? A. Net present value B. Internal rate of return C. Average accounting return D. Profitability index E. Payback
E. Payback
Which one of the following indicators offers the best assurance that a project will produce value for its owners? A. PI equal to zero B. Negative rate of return C. Positive AAR D. Positive IRR E. Positive NPV
E. Positive NPV
Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? A. Positive operating cash flow B. Negative cash flow to creditors C. Positive cash flow to stockholders D. Negative net capital spending E. Positive cash flow from assets
E. Positive cash flow from assets
Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued? A. Positive operating cash flow B. Negative cash flow from assets C. Negative cash flow to stockholders D. Negative operating cash flow E. Positive cash flow to stockholder
E. Positive cash flow to stockholder
All else constant, which one of the following will decrease if a firm increases its net income? A. Return on assets B. Profit margin C. Return on equity D. Price-sales ratio E. Price-earnings ratio
E. Price-earnings ratio
Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment which she will be required to pay 2 years from today. Which type of loan is this? A. Principal-only B. Amortized C. Interest-only D. Compound E. Pure discount
E. Pure discount
Ted currently owns 100 shares of a publicly traded stock which he would like to sell. Which one of the following provides the most efficient means for Ted to sell his shares? A. Issuer sponsored Dutch auction B. Proxy statement C. Private placement transaction D. Stakeholder purchase E. Secondary market transaction
E. Secondary market transaction
Capital budgeting includes the evaluation of which of the following? A. Size of future cash flows only B. Size and timing of future cash flows only C. Timing and risk of future cash flows only D. Risk and size of future cash flows only E. Size, timing, and risk of future cash flows
E. Size, timing, and risk of future cash flows
Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power? A. OTC B. Death C. CAT D. PETS E. TIPS
E. TIPS
Sixty years ago, your grandparents opened two savings accounts and deposited $200 in each account. The first account was with City Bank at 3 percent, compounded annually. The second account was with Country Bank at 3.5 percent, compounded annually. Which one of the following statements is true concerning these accounts? A. The City Bank account is currently worth $1,201.54. B. The City Bank account has earned $211.19 more in interest than the Country Bank account. C. The Country Bank account is currently worth $1,526.08. D. The Country Bank account has paid $367.48 more in interest than the City Bank account. E. The Country Bank account has paid $397.30 more in interest than the City Bank account.
E. The Country Bank account has paid $397.30 more in interest than the City Bank account.
First Bank offers personal loans at 7.6 percent compounded monthly. Second Bank offers similar loans at 7.75 percent compounded semi-annually. Which one of the following statements is correct concerning these loans? A. The First Bank loan has an effective rate of 7.67 percent. B. The Second Bank loan has an effective rate of 8.03 percent. C. The annual percentage rate for the Second Bank loans is 7.90 percent. D. Borrowers should prefer the loans offered by Second Bank. E. The First Bank offers the best deal on loans.
E. The First Bank offers the best deal on loans.
Which one of the following correctly defines a common chain of command within a corporation? A. The controller reports directly to corporate treasurer. B. The treasurer reports directly to the board of directors. C. The chief financial officer reports directly to the board of directors. D. The credit manager reports directly to the controller. E. The controller reports directly to the chief financial officer.
E. The controller reports directly to the chief financial officer.
Which one of the following is a correct statement, all else held constant? A. The present value is inversely related to the future value. B. The future value is inversely related to the period of time. C. The period of time is directly related to the interest rate. D. The present value is directly related to the interest rate. E. The future value is directly related to the interest rate.
E. The future value is directly related to the interest rate.
Today, Courtney wants to invest less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct? A. The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest. B. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal. C. She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest. D. The length of time she has to wait to reach her goal is directly related to the interest rate she earns. E. The period of time she has to wait decreases as the amount she invests today increases.
E. The period of time she has to wait decreases as the amount she invests today increases.
Which one of the following statements is correct? A. All of the major stock exchanges are U.S. based. B. The NYSE was created by the National Association of Securities Dealers in the early 1970's. C. The American Stock Exchange is a dealer market. D. OTC markets have a physical trading floor generally located in either New York City or Chicago. E. The primary purpose of the NYSE is to match buyers with sellers.
E. The primary purpose of the NYSE is to match buyers with sellers.
Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the company expects its cash flows to increase by $62,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment? A. 3.97 years B. 4.18 years C. 4.46 years D. 4.70 years E. The project never pays back.
E. The project never pays back
Which one of the following features distinguishes an ordinary annuity from an annuity due? A. Number of equal payments B. Amount of each payment C. Frequency of the payments D. Annuity interest rate E. Timing of the annuity payments
E. Timing of the annuity payments
Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship? A. Receivables turnover B. Equity multiplier C. Profit margin D. Return on assets E. Total asset turnover
E. Total asset turnover
A "floater" bond frequently has a: A. flexible deferred call period. B. fixed yield-to-maturity but a flexible coupon payment. C. a government guarantee. D. fixed-dollar obligation. E. a put provision.
E. a put provision.
The price at which a dealer will purchase a bond is called the _____ price. A. asked B. face C. call D. put E. bid
E. bid
A broker is an agent who: A. trades on the floor of an exchange for himself or herself. B. buys and sells from inventory. C. offers new securities for sale to dealers only. D. who is ready to buy or sell at any time. E. brings buyers and sellers together.
E. brings buyers and sellers together.
The inflation premium: A. increases the real return. B. is inversely related to the time to maturity. C. remains constant over time. D. rewards investors for accepting interest rate risk. E. compensates investors for expected price increases.
E. compensates investors for expected price increases.
Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as: A. simple interest. B. interest on interest. C. discounted interest. D. complex interest. E. compound interest.
E. compound interest.
The reinvestment approach to the modified internal rate of return: A. individually discounts each separate cash flow back to the present. B. reinvests all the cash flows, including the initial cash flow, to the end of the project. C. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. D. discounts all negative cash flows back to the present and combines them with the initial cost. E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.
E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.
An unexpected decrease in market interest rates will cause a: A. coupon bond's current yield to increase. B. zero coupon bond's price to decrease. C. fixed-rate bond's coupon rate to decrease. D. zero-coupon bond's current yield to decrease. E. coupon bond's yield-to-maturity to decrease.
E. coupon bond's yield-to-maturity to decrease.
Zero-coupon bonds: A. are valued using simple interest. B. are only issued by the U.S. Treasury. C. create a tax deduction for the issuer only at maturity. D. are issued at a premium. E. create annual taxable income to individual bondholders.
E. create annual taxable income to individual bondholders.
Net working capital is defined as: A. the depreciated book value of a firm's fixed assets. B. the value of a firm's current assets. C. available cash minus current liabilities. D. total assets minus total liabilities. E. current assets minus current liabilities.
E. current assets minus current liabilities.
Computing the present value of a future cash flow to determine what that cash flow is worth today is called: A. compounding. B. factoring. C. time valuation. D. simple cash flow valuation. E. discounted cash flow valuation.
E. discounted cash flow valuation.
A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm: A. pays cash for its inventory. B. has more than half its current assets invested in inventory. C. has more cash than inventory. D. has more current liabilities than it does current assets. E. has positive net working capital.
E. has positive net working capital.
If a project with conventional cash flows has a profitability index of 1.0, the project will: A. never pay back. B. have a negative net present value. C. have a negative internal rate of return. D. produce more cash inflows than outflows in today's dollars. E. have an internal rate of return that equals the required return.
E. have an internal rate of return that equals the required return.
If shareholders are granted a preemptive right they will: A. be given the choice of receiving dividends either in cash or in additional shares of stock. B. be paid dividends prior to the preferred shareholders during the preemptive period. C. be entitled to two votes per share of stock. D. be able to choose the timing and amount of any future dividends. E. have priority in the purchase of any newly issued shares.
E. have priority in the purchase of any newly issued shares.
When comparing savings accounts, you should select the account that has the: A. lowest annual percentage rate. B. highest annual percent rate. C. highest stated rate. D. lowest effective annual rate. E. highest effective annual rate.
E. highest effective annual rate.
Financial leverage: A. increases as the net working capital increases. B. is equal to the market value of a firm divided by the firm's book value. C. is inversely related to the level of debt. D. is the ratio of a firm's revenues to its fixed expenses. E. increases the potential return to the shareholders.
E. increases the potential return to the shareholders.
If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas? A. international finance B. private placements C. corporate finance D. capital management E. investments
E. investments
The market value of a firm's fixed assets: A. must exceed the book value of those assets. B. is more predictable than the book value of those assets. C. in addition to the firm's net working capital reflects the true value of a firm. D. is decreased annually by the depreciation expense. E. is equal to the estimated current cash value of those assets.
E. is equal to the estimated current cash value of those assets.
The Sarbanes-Oxley Act of 2002 has: A. reduced the annual compliance costs of all publicly traded firms in the U.S. B. decreased senior management's involvement in the corporate annual report. C. greatly increased the number of U.S. firms that are going public for the first time. D. decreased the number of U.S. firms going public on foreign exchanges. E. made officers of publicly traded firms personally responsible for the firm's financial statements.
E. made officers of publicly traded firms personally responsible for the firm's financial statements.
The corporate tax structure in the U.S. is based on a: A. maximum tax rate of 38 percent. B. minimum tax rate of 10 percent. C. flat rate of 34 percent for the highest income earners. D. flat-rate tax. E. modified flat-rate tax.
E. modified flat-rate tax.
The "R" in the Fisher effect formula represents the: A. current yield. B. real return. C. coupon rate. D. inflation rate. E. nominal return.
E. nominal return.
A call provision grants the bond issuer the: A. right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds. B. option to exchange the bonds for equity securities. C. right to automatically extend the bond's maturity date. D. right to repurchase the bonds on the open market prior to maturity. E. option of repurchasing the bonds prior to maturity at a pre-specified price.
E. option of repurchasing the bonds prior to maturity at a pre-specified price.
A stock has a beta of 1.56 and an expected return of 17.3 percent. A risk-free asset currently earns 5.1 percent. If a portfolio of the two assets has a beta of 1.06, what are the portfolio weights?
Stock weight = 0.68; risk-free weight = 0.32
Limited liability companies are primarily designed to: A.allow a portion of its owners to enjoy limited liability while granting the other portion of its owners control over the entity. B. provide the benefits of the corporate structure to foreign-based entities. C. spin-off a wholly-owned subsidiary. D. allow companies to reorganize themselves through the bankruptcy process. E. provide limited liability while avoiding double taxation.
E. provide limited liability while avoiding double taxation.
A negative cash flow to stockholders indicates a firm: A. had a negative cash flow from assets. B. had a positive cash flow to creditors. C. paid dividends that exceeded the amount of the net new equity. D. repurchased more shares than it sold. E. received more from selling stock than it paid out to shareholders.
E. received more from selling stock than it paid out to shareholders.
An income statement prepared according to GAAP: A. reflects the net cash flows of a firm over a stated period of time. B. reflects the financial position of a firm as of a particular date. C. distinguishes variable costs from fixed costs. D. records revenue when payment for a sale is received. E. records expenses based on the matching principle.
E. records expenses based on the matching principle.
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: A. produce a positive annual cash flow. B. produce a positive cash flow from assets. C. offset its fixed expenses. D. offset its total expenses. E. recoup its initial cost.
E. recoup its initial cost.
The recognition principle states that: A. costs should be recorded on the income statement whenever those costs can be reliably determined. B. costs should be recorded when paid. C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue. D. sales should be recorded when the payment for that sale is received. E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.
E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined
Centre Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today: A. is the same regardless of which bank you choose because they both pay compound interest. B. is the same regardless of which bank you choose because they both pay simple interest. C. is the same regardless of which bank you choose because the time period is the same for both banks. D. will be greater if you invest with Centre Bank. E. will be greater if you invest with Country Bank.
E. will be greater if you invest with Country Bank.
A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: A. will be less than 12.9 percent. B. can either be less than or equal to 12.9 percent. C. is 12.9 percent. D. can either be greater than or equal to 12.9 percent. E. will be greater than 12.9 percent.
E. will be greater than 12.9 percent.
Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?
Expected return
The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?
Expected return and beta
Which one of the following statements concerning financial leverage is correct? A. Financial leverage increases profits and decreases losses. B. Financial leverage has no effect on a firm's return on equity. C. Financial leverage refers to the use of common stock. D. Financial leverage magnifies both profits and losses. E. Increasing financial leverage will always decrease the earnings per share.
Financial leverage magnifies both profits and losses.
which of the following will increase the cost of equity for a firm with a beta of 1.1? **
III only III- decrease the risk free rate
World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock's rate of return without affecting the risk level of the stock, all else constant?
Increase in the market risk-to-reward ratio
Which one of the following terms applies to the costs incurred by a firm which is trying to avoid filing for bankruptcy?
Indirect bankruptcy costs
kurt, who is a divisional manage, continually brags that his divisions required return for its projects is 1 percent lower than the required return for an other division go the firm. Which one of the following most likely contributes to the lower rate requirement for hurts division?
Kurt's division is less risky than other divisions
Which one of the following terms refers to the termination of a firm as a going concern?
Liquidation
Which one of the following supports the theory that the value of a firm increases as the firm's level of debt increases?
M&M Proposition I, with taxes
Which one of the following states that a firm's cost of equity capital is a positive linear function of the firm's capital structure?
M&M Proposition II
Which one of the following is the slope of the security market line?
Market risk premium
The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.75 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?
No, Stock A is overpriced and Stock B is underpriced.
Which one of the following describes systemic risk?
Risk that affects a large number of assets
Which one of the following is the vertical intercept of the security market line?
Risk-free rate
Which one of the following is the theory that a firm should borrow up to the point where the additional tax benefit from an extra dollar of debt equals the additional costs associated with financial distress from that additional debt?
Static theory of capital structure
The expected rate of return on Delaware Shores, Inc. stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?
The variance must be positive provided that each state of the economy produces a different expected rate of return.
which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?
WACC
Which one of the following conditions exists at the point where a firm maximizes its value?
WACC is minimized.
which one of the following statements is correct? assume the pre-tax cost of debt is less than the cost of equity
a firm may change its capital structure if the government changes its tax policies
Assume both corporate taxes and financial distress costs apply to a firm. Given this, the static theory of capital structure illustrates that:
a firm's value and its weighted average cost of capital are inversely related.
which one of the following statements is accurate for a levered firm?
a reduction in the risk level of a firm will tend to decrease the firms WACC
Derek's is a brick and mortar toy store. the firm is considering expanding its operations to include internet sales. which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?
a toy store than only sells online
old town industries has 3 divisions. DX has been in existence the longest and has the most stable sales. DY has been in existence for 5 years and is slightly less risky than the overall firm. DZ is the R&D side of the business. when allocating fund, the firm should probably:
assign the highest cost of capital to DZ bc it is most likely the riskiest of the 3 divisions
a firm uses its own WACC to evaluate the proposed projects for all of its varying divisions. by doing so, the firm:
automatically gives preferential treatment in the allocation of funds to its riskiest division.
Katie owns 100 shares of ABC stock. which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?
cost of equity
the WACC is defined as the weighted average of a firm's
cost of equity and its aftertax cost of debt
M&M Proposition II, without taxes, states that the:
cost of equity increases as a firm increases its debt-equity ratio.
which one of the following will affect the capital structure weights used to computer a firms WACC?
increase in the market value of the firms common stock
in an efficient market, the cost of equity for a risky firm does which one of the following according to the SML?
increases in direct relation to the stocks systematic risk
a firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and an aftertax cost od debt of 6 percent. given this, which one of the following will increase the firms WACC?
increasing the firms beta
T.L. C. Enterprises just revised its capital structure from a debt-equity ratio of 0.30 to a debt-equity ratio of 0.45. The firm's shareholders who prefer the old capital structure should:
sell some shares and loan out the sale proceeds.
which one of the following is most apt to cause a wise manager to increase a projects cost of capital?
she learns the project is riskier than previously believed
a firm has a return on equity of 12.4 percent according to the dividend growth model and a return go 18.7 percent according to the capital asset pricing model. the market rate of return is 13.5 percent. what rate should the firm use as the cost of equity when computing the firms WACC?
the arithmetic average of 12.4 and the 18.7
which of the following statements is correct
the cost of preferred stock is unaffected by the issuers tax rate
all else constant, the WACC for a risky, levered firm will decrease if:
the firm's bonds start selling at a premium rather than at a discount
Standard deviation measures _____ risk while beta measures _____ risk.
total; systematic
which of the following is a pre-tax cost of debt?
weighted average YTM on the firms outstanding debt
You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm:
whenever EBIT exceeds $428,000.
A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is 0.74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:
will be greater than or equal to 0.74 but less than or equal to 1.51.
all else held constant, an increase in a firms cost of debt:
will result in an increase in the firms cost of capital
Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.
β[E(RM) - Rf]
