1. A firm’s current assets and current liabilities are referred to as the firm’s:
A) capital structure.
B) cash equivalents.
C) working capital.
D) net assets.
E) capital interest.
2. The financial statement that summarizes a firm’s operations over a period of time is called a(n):
A) income statement.
B) cash flow statement.
C) production report.
D) balance sheet.
E) periodic operating statement.
3. Which one of the following ratios indicates how long a firm can pay its bills given its current cash balance? A) current ratio
B) debt ratio
C) cash coverage ratio
D) quick ratio
E) cash ratio
4. 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) only at the end of the investment period.
C) only on the initial investment.
D) on both the initial investment and all prior interest payments that are reinvested.
E) only if all previous interest payments are reinvested.
5. A series of unending cash flows of equal amount that occur at equal intervals of time is called a(n):
A) ordinary annuity.
B) annuity due.
C) absolute annuity.
D) perpetuity.
E) perpetuity due.
6. A note is:
A) unsecured debt that is generally payable within the next ten years.
B) a formal loan secured by real estate.
C) long-term debt secured by part, or all, of the assets of the borrower.
D) any liability classified as short-term debt on a financial statement.
E) the formal agreement between a firm and its bondholders.
7. Anthony’s Appliances pays a constant quarterly dividend of $.35 per share. How much are you willing to pay for one share if you require a 9 percent rate of return?
A) $3.89
B) $7.78
C) $11.67
D) $15.56
E) $19.44
8. One year ago, you purchased 200 shares of stock for $29 a share. The stock pays $.60 a share in dividends each year. Today, you sold your shares for $31.60 a share. What is your total dollar return on this investment? A) $480
B) $520
C) $610
D) $640
E) $670
9. The stock of Jensen Shipping has a risk premium of 8.4 percent while the inflation rate is 2.6 percent and the risk-free rate is 4.2 percent. What is the expected return on this stock?
A) 6.8 percent
B) 8.4 percent
C) 11.0 percent
D) 12.6 percent
E) 15.2 percent
10. Last week, Lester’s Electronics paid an annual dividend of $2.10 on its common stock. The company has a longstanding policy of increasing its dividend by 3 percent annually. This policy is expected to continue. What is the firm’s cost of equity if the stock is currently selling for $44.60 a share?
A) 7.66 percent
B) 7.71 percent
C) 7.79 percent
D) 7.85 percent
E) 7.90 percent
11. Atlantic Seafood has determined that $17,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering. The one structure consists of all equity with 12,000 shares of stock. The second structure consists of 9,000 shares of stock and $50,000 of debt. What is the interest rate on the debt?
A) 8.10 percent
B) 8.25 percent
C) 8.50 percent
D) 8.67 percent
E) 8.75 percent
12. Uptown Merchants just announced that it will be paying an annual dividend of $1.60 a share plus an extra dividend of $.40 a share this coming year. The company also announced that its regular dividend, which is all it anticipates paying after this year, will increase by 2 percent annually. What is the anticipated dividend per share 4 years from now?
A) $1.60
B) $1.63
C) $1.70
D) $1.73
E) $2.16
13. The Pasta Maker needs to raise $16 million to update its machinery. Management estimates that it will cost the firm $240,000 for accounting, legal, and other costs related to the issuance of securities for this purpose. The underwriting spread is 8 percent and the issue price is $24 a share. How many shares of stock must The Pasta Maker sell to finance its new machinery?
A) 626,543 shares
B) 676,667 shares
C) 735,507 shares
D) 748,211 shares
E) 794,348 shares
14. A firm has a weighted average cost of capital of 9.6 percent and a cost of equity of 14.5 percent. The debt-equity ratio is .70. There are no taxes. What is the firm’s cost of debt?
A) 2.60 percent
B) 3.18 percent
C) 3.27 percent
D) 3.33 percent
E) 3.59 percent
15. Breakable Gifts is an all-equity firm with a current cost of equity of 17.5 percent. The estimated earnings before interest and taxes are $224,000 annually forever. Currently, the firm has no debt but is in the process of borrowing $300,000 at 7.5 percent interest. The tax rate is 32 percent. What is the value of the unlevered firm?
A) $870,400
B) $872,200
C) $938,700
D) $962,500
E) $966,400
16. Carter’s Home Supply has a $35 million bond issue outstanding with a coupon rate of 8.5 percent. The tax rate is 38 percent. What is the present value of the tax shield?
A) $9.7 million
B) $10.2 million
C) $10.4 million
D) $12.8 million
E) $13.3 million
17. Office Supplies and More is a retail outlet. The company went public a year ago at an offering price of $14 a share. Today, the stock is priced at $2.80 a share. The firm has decided to do a reverse stock split to return the stock to its original offering price. Which one of the following split ratios will best accomplish this goal?
A) 2-for-7
B) 1-for-5
C) 1-for-7
D) 5-for-1
E) 7-for-1
18. Ziegler’s has the following equity account balances: common stock of $42,000 with a $1 par value, capital surplus of $228,000, and retained earnings of $509,000. The stock has a market value of $38 a share. Assume the company issues a 20 percent stock dividend. How many shares of stock will the firm distribute as a result of this dividend?
A) 8,400 shares
B) 9,200 shares
C) 43,750 shares
D) 45,600 shares
E) 101,800 shares
19. The Pickle Jar issued 300,000 shares of stock last week. The underwriters charged a 7.5 percent spread in exchange for agreeing to a firm commitment. The legal and accounting fees were $420,000. The company incurred $110,000 in indirect costs related to management time and other internal expenses. The offer price was $14 a share. Within the hour of trading, the stock was selling for $17.50 a share. What was the flotation cost as a percentage of the funds raised?
A) 27.33 percent
B) 38.07 percent
C) 41.41 percent
D) 56.48 percent
E) 63.40 percent
20. AB Cutter has a cash balance of $10 and a beginning short-term loan balance of $100 at the beginning of quarter one. The net cash inflow for the first quarter is $79 and for the second quarter there is a net cash outflow of $27. All cash shortfalls are funded with short-term debt. The firm pays 3 percent of its prior quarter’s ending loan balance as interest each quarter. The minimum cash balance is $10. What is the short-term loan balance at the end of the first quarter?
A) $18
B) $24
C) $76
D) $100
E) $110
21. The Green Elephant has a line of credit with a local bank that permits it to borrow up to $3.5 million at any time. The interest rate is 0.46 percent per month. The bank charges compound interest and also requires that 4 percent of the amount borrowed be deposited into a noninterest-bearing account. What is the effective annual interest rate on this loan?
A) 5.90 percent
B) 5.98 percent
C) 6.03 percent
D) 6.08 percent
E) 6.14 percent
22. California Wines offers credit terms of 2/5, net 25. What is the effective annual rate on a $8,000 purchase of wines if you forgo the discount?
A) 38.76 percent
B) 44.59 percent
C) 47.23 percent
D) 54.08 percent
E) 61.20 percent
23. The Purple Fiddle generally receives 3 checks a month in the amounts of $18,200, $22,000, and $57,900. On average, it takes 2 days for the funds from these checks to be added to the firm’s available balance at the bank once they have been deposited. What is the amount of the average daily float?
A) $3,270
B) $4,670
C) $4,920
D) $6,540
E) $6,610
24. Your German friend has decided to come and visit you in the U.S. You estimate the cost of her trip at $4,800. What is the cost to her in euros if the U.S. dollar equivalent of the euro 1.35?
A) €3,555.56
B) €3,592.40
C) €6,220.00
D) €6,480.00
E) €6,521.28
25. Your favorite running shoes cost $74 in the U.S. while the identical shoes cost C$79 in Canada. According to purchasing power parity, the C$/$ exchange rate is:
A) C$.937/$1
B) C$.942/$1
C) C$.949/$1
D) C$1.01/$1
E) C$1.07/$1
