Essentials of Corporate Finance 11th Edition Test Bank by Ace Test Banks

Essentials of Corporate Finance 11th Edition Test Bank

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Nishaa has been promoted and is now in charge of all external financing. In other words, she is in charge of: A) capital structure management. B) asset allocation. C) risk management. D) capital budgeting. E) working capital management.

2) Uptown Markets is financed with 45 percent debt and 55 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.

3) Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as: A) capital structure decisions. B) capital budgeting decisions. C) working capital management. D) operating management. E) fixed account structure.

4) Vera opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Vera own if she is personally liable for all the store's debts?

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A) Sole proprietorship B) Limited partnership C) Corporation D) Joint stock company E) General partnership

5) Deandre and Mason 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. Deandre and Mason will equally share in the decision making and in the business 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

6) Jordan and Carmen created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 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

7) The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

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A) Organizational B) Structural C) Formative D) Agency E) Territorial

8) An employee has a claim on the cash flows of Westlake Machines. 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.

9) The shareholders of Qiang’s Markets would benefit if the firm were to be acquired by Better Foods. However, Weil’s board of directors rejects the acquisition offer. This is an example of: A) a corporate takeover. B) a capital structure issue. C) a working capital decision. D) an agency conflict. E) a compensation issue.

10)

When conducting a financial analysis of a firm, financial analysts:

A) cannot use accounting information as it is historical. B) rely solely on accounting information. C) frequently use accounting information. D) ignore accounting information but do use marketing information. E) assume the future will be a repeat of the past as reflected in the firm’s accounting reports.

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11) Silvia is employed as a currency trader in the Japanese yen market. 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) Personal finance

12) 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

13)

Which one of the following occupations best fits into the corporate area of finance? A) Mortgage broker B) Treasury bill analyst C) Chief financial officer D) Insurance risk manager E) Local bank manager

14) Which one of the following functions is generally a responsibility assigned to the corporate treasurer? A) Cost accounting B) Data processing C) Corporate taxes D) Financial accounting E) Capital expenditures

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15) Which one of the following functions should be assigned to the corporate treasurer rather than to the controller? A) Data processing B) Cost accounting C) Tax management D) Cash management E) Financial accounting

16) Which one of the following correctly defines a common chain of command within a corporation? A) The controller reports directly to the 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.

17)

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

18)

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 the firm? C) What is the cost of debt financing? D) Should the firm borrow money for five or for ten years? E) How much cash should the firm keep in reserve?

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19)

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

20)

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 currently owned 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

21)

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.

22)

A sole proprietorship: A) provides limited financial 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.

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23) 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

24) Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific 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? 1.Sell the inventory and apply the proceeds to the debt 2.Sell the lighting fixtures from the building and apply the proceeds to the debt 3.Withdraw funds from Maria’s personal account at the bank to pay the store’s debt 4.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, III, and IV only

25)

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.

26)

Which one of the following applies to a general partnership?

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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.

27)

In a general partnership, each partner is personally liable for:

A) only the partnership debts that he or she personally 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 debts.

28)

Which one of the following is an advantage of being a limited partner? A) Nontaxable 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

29)

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.

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30)

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.

31)

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

32)

One advantage of the corporate form of organization is the: A) taxation of the corporate profits. B) unlimited liability for its shareholders. C) double taxation of profits. D) ability to raise larger sums of equity capital than other organizational forms. E) ease of formation compared to other organizational forms.

33)

Corporate shareholders: A) are proportionately liable for the firm's debts. B) are protected from all financial 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.

34)

A limited liability company (LLC):

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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.

35)

Limited liability companies are primarily designed to:

A) allow a portion of their owners to enjoy limited liability while granting the other portion of their owners control over the entity. B) provide the benefits of the corporate structure only 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.

36)

The primary goal of financial management is to maximize: A) current profits. B) market share. C) current dividends. D) the market value of existing stock. E) revenue growth.

37)

The primary goal of financial management is most associated with increasing the: A) dollar amount of each sale. B) traffic flow within the firm's stores. C) fixed costs while lowering the variable costs. D) firm's liquidity. E) market value of the firm.

38)

The goal of financial management is to increase the:

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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.

39)

What is the primary 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

40) The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s? 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

41)

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) essentially made officers of publicly traded firms personally responsible for the firm's financial statements.

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42) Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002? A) Decrease the number of corporations that can be publicly traded B) Increase the protections against corporate fraud C) Limit secondary issues of corporate securities D) Increase the dividends paid to shareholders E) Increase the number of firms that "go dark"

43)

The Sarbanes-Oxley Act:

A) requires the corporate officers to personally attest that the financial statements are a fair representation of the company’s financial results. 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.

44)

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) Basing management bonuses on the length of employment E) Laying off employees during a slack period

45)

An agency issue is most apt to develop when:

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A) a firm encounters a period of stagnant growth. B) a firm downsizes. C) the control of a firm is separated from the firm’s ownership. D) the firm’s owner is also its key manager. E) a firm is structured as a general partnership.

46) Which one of the following is most apt to align management's priorities with shareholders' interests? A) Holding corporate and shareholder meetings at high-end resort-type locations preferred by managers B) Compensating managers with shares of stock that must be held for a minimum of three years C) Paying a special management bonus on every fifth year of employment 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

47) Probably the least effective means of aligning management goals with shareholder interests is: A) the potential for a proxy fight by an unhappy segment of shareholders. B) basing all management bonuses on performance goals. C) holding management salaries steady while increasing stock option grants. D) the threat of a takeover of the firm. E) automatically increasing management salaries on an annual basis.

48) Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n):

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A) general creditor. B) debtholder. C) shareholder. D) stakeholder. E) agent.

49)

One example of a primary market transaction would be the: A) sale of 100 shares of stock by Maria to her best friend. B) purchase by Theo of 5,000 shares of stock from his father. C) sale of 1,000 shares of newly issued stock by Alt Company to Miquel. D) sale by Terry of 50,000 shares of stock to his brother. E) sale of 5,000 shares of stock owned by a corporate CEO to his son.

50) You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the: A) dealer market. B) over-the-counter market. C) secondary market. D) primary market. E) tertiary market.

51)

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 primary market transactions. D) All stock transactions are secondary market transactions. E) All over-the-counter sales occur in dealer markets.

52) The issuer of a security must be involved in all _____ transactions involving that security.

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A) exchange-listed B) secondary market C) over-the-counter D) dealer market E) primary market

53)

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) Any institutional shareholder D) Any private individual shareholder E) Only officers and directors of ABC Company

54)

Security dealers: A) match buyers with sellers. B) buy and sell from their own inventory. C) operate on a physical trading floor. D) operate exclusively in auction markets. E) are limited to trading non-listed stocks.

55)

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.

56)

Which one of the following statements is correct?

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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.

57)

A private placement is most apt to involve: A) a large number of private investors. B) only foreign investors. C) a life-insurance company. D) several private securities dealers. E) the U.S. Treasury department.

58)

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

1930s. C) The Chicago 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.

59)

Which of the following statements is false?

A) Stock trading apps allow investors to trade stocks commission-free. B) Acorns is a creative crowdfunding app, allowing smaller investors to join together to fund design ventures. C) Apps allow small investors to participate in the stock market much more easily. D) Robo-advisors provide investment advice based on mathematical rules or algorithms. E) Budgeting apps allow people to keep track of income, monthly payments, expenditures, and more, right on a mobile phone.

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60)

Which of the following is not a basic area of finance as described by the text? A) Corporate finance B) Investments C) Accounting D) International finance E) Fintech

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Answer Key Test name: Chapter 01 Test Bank - Static 1) A 2) A 3) C 4) A 5) E 6) B 7) D 8) E 9) D 10) C 11) A 12) E 13) C 14) E 15) D 16) E 17) E 18) E 19) B 20) C 21) B 22) D 23) C 24) E 25) E 26) B Version 1

27) C 28) C 29) C 30) B 31) A 32) D 33) C 34) B 35) E 36) D 37) E 38) D 39) D 40) B 41) E 42) B 43) A 44) D 45) C 46) B 47) E 48) D 49) C 50) C 51) E 52) E 53) A 54) B 55) B 56) A Version 1

57) C 58) E 59) B 60) C

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) A firm has common stock of $97, paid-in surplus of $340, total liabilities of $445, current assets of $460, and net fixed assets of $670. What is the amount of the shareholders' equity? A) $225 B) $1,130 C) $882 D) $685 E) $565

2) Recently, the owner of Martha's Wares encountered severe legal problems and is trying to sell her business. The company built a building at a cost of $1,300,000 that is currently appraised at $1,500,000. The equipment originally cost $780,000 and is currently valued at $527,000. The inventory is valued on the balance sheet at $470,000 but has a market value of only one-half of that amount. The owner expects to collect 98 percent of the $255,200 in accounts receivable. The firm has $11,100 in cash and owes a total of $1,500,000. The legal problems are personal and unrelated to the actual business. What is the market value of this firm? A) $1,513,396 B) $1,023,196 C) $762,000 D) $1,258,196 E) $1,983,396

3) Ivan's, Incorporated, paid $468 in dividends and $579 in interest this past year. Common stock increased by $189 and retained earnings decreased by $115. What is the net income for the year? A) $579 B) $768 C) $353 D) $932 E) $468

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The tax rates for an individual for a particular year are shown below: Taxable Income $0 − 9,950 9,950 − 40,525 40,525 − 86,375 86,375 − 164,925

Tax Rate 10% 12% 22% 24%

What is the average tax rate for an individual with taxable income of $103,500? A) 24.00% B) 18.22% C) 19.25% D) 19.90% E) 17.36%

The tax rates are as shown below: Taxable Income $0 − 50,000 50,001 − 75,000 75,001 − 100,000 100,001 − 335,000

Tax Rate 15% 25% 34% 39%

The taxable income is $81,700. How much additional tax will you owe if you increase your taxable income by $22,900? A) $8,931 B) $7,786 C) $7,636 D) $7,626 E) $8,016

6) Your firm has net income of $234 on total sales of $1,120. Costs are $630 and depreciation is $130. The tax rate is 23 percent. The firm does not have interest expenses. What is the operating cash flow?

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A) $326 B) $407 C) $366 D) $448 E) $265

7) Teddy's Pillows had beginning net fixed assets of $476 and ending net fixed assets of $560. Assets valued at $324 were sold during the year. Depreciation was $52. What is the amount of net capital spending? A) $460 B) $136 C) $32 D) $288 E) $84

8) At the beginning of the year, a firm has current assets of $332 and current liabilities of $236. At the end of the year, the current assets are $501 and the current liabilities are $276. What is the change in net working capital? A) −$129 B) $209 C) $129 D) $0 E) $169

9) At the beginning of the year, long-term debt of a firm is $288 and total debt is $329. At the end of the year, long-term debt is $259 and total debt is $339. The interest paid is $25. What is the amount of the cash flow to creditors?

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A) −$54 B) $54 C) $25 D) $29 E) −$29

10) Peggy Grey's Cookies has net income of $420. The firm pays out 37 percent of the net income to its shareholders as dividends. During the year, the company sold $87 worth of common stock. What is the cash flow to stockholders? A) $123.21 B) $264.60 C) $68.40 D) $242.40 E) $155.40

11) A company has total equity of $1,965, net working capital of $175, long-term debt of $940, and current liabilities of $1,770. What is the company's net fixed assets? A) $2,795 B) $4,675 C) $2,730 D) $2,905 E) $1,945

12) Disturbed, Incorporated, had the following operating results for the past year: sales = $22,547; depreciation = $1,310; interest expense = $1,056; costs = $16,490. The tax rate for the year was 23 percent. What was the company's operating cash flow? A) $6,906 B) $3,691 C) $2,842 D) $5,208 E) $2,402

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13) A company has net working capital of $1,726. If all its current assets were liquidated, the company would receive $5,663. What are the company's current liabilities? A) $3,937 B) $4,800 C) $7,389 D) $7,044 E) $3,695

14) You are examining a company's balance sheet and find that it has total assets of $20,280, a cash balance of $2,100, inventory of $4,785, current liabilities of $5,573, and accounts receivable of $2,623. What is the company's net working capital? A) $850 B) $14,707 C) $1,835 D) $3,935 E) $5,635

15) You find the following financial information about a company: net working capital = $1,248; fixed assets = $6,601; total assets = $8,798; and long-term debt = $4,775. What are the company's total liabilities? A) $1,831 B) $6,023 C) $5,724 D) $8,967 E) $8,384

16) You find the following financial information about a company: net working capital = $855; fixed assets = $6,785; total assets = $11,430; and long-term debt = $4,173. What is the company's total equity?

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A) $4,645 B) $8,435 C) $3,467 D) $6,785 E) $7,963

17) Hoodoo Voodoo Company has total assets of $66,000, net working capital of $20,200, owners' equity of $32,160, and long-term debt of $23,540. What is the company's current assets? A) $30,500 B) $35,500 C) $32,160 D) $45,800 E) $55,700

18) A company has net working capital of $2,781, current assets of $6,750, equity of $22,710, and long-term debt of $10,700. What is the company's net fixed assets? A) $30,629 B) $40,160 C) $29,441 D) $26,660 E) $25,491

19) Micro, Incorporated, started the year with net fixed assets of $75,175. At the end of the year, there was $96,525 in the same account, and the company's income statement showed depreciation expense of $13,175 for the year. What was the company's net capital spending for the year? A) $34,525 B) $42,420 C) $40,010 D) $21,350 E) $83,350

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20) At the beginning of the year, Shinedown Corporation had a long-term debt balance of $46,630. During the year, the company repaid a long-term loan in the amount of $12,455. The company paid $4,700 in interest during the year, and opened a new long-term loan for $11,000. How much is the ending long-term debt account on the company's balance sheet? A) $45,175 B) $48,085 C) $6,155 D) $52,930 E) $49,875

21) At the beginning of the year, Nothing More Corporation had a long-term debt balance of $36,429. During the year, the company repaid a long-term loan in the amount of $8,739. The company paid $3,095 in interest during the year, and opened a new long-term loan for $7,785. What was the cash flow to creditors during the year? A) $5,644 B) $4,049 C) $954 D) $4,690 E) $16,810

22) For the past year, Momsen Limited had sales of $46,382, interest expense of $3,854, cost of goods sold of $16,659, selling and administrative expense of $11,766, and depreciation of $6,415. If the tax rate was 23 percent, what was the company's net income? A) $5,033 B) $14,980 C) $7,688 D) $5,920 E) $5,382

23) For the past year, Kayla, Incorporated, has sales of $46,772, interest expense of $4,010, cost of goods sold of $17,009, selling and administrative expense of $11,956, and depreciation of $6,705. If the tax rate is 25 percent, what is the operating cash flow? Version 1

A) $16,034 B) $5,319 C) $12,024 D) $14,661 E) $7,092

24) HUD Company had a beginning retained earnings of $29,630. For the year, the company had net income of $6,365 and paid dividends of $2,455. The company also issued $4,305 in new stock during the year. What is the ending retained earnings balance? A) $32,085 B) $29,235 C) $37,845 D) $33,935 E) $33,540

25) At the beginning of the year, Vendors, Incorporated, had owners' equity of $48,680. During the year, net income was $5,100 and the company paid dividends of $3,680. The company also repurchased $7,480 in equity. What was the owners' equity account at the end of the year? A) $42,620 B) $41,200 C) $37,520 D) $36,100 E) $47,380

26) At the beginning of the year, Vendors, Incorporated, had owners' equity of $48,680. During the year, net income was $5,100 and the company paid dividends of $3,680. The company also repurchased $7,480 in equity. What was the cash flow to stockholders for the year?

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A) $11,160 B) $3,800 C) −$3,800 D) $8,900 E) −$11,160

27) Simon's Hot Chicken purchased its building seven years ago at a price of $141,580. The building could be sold for $181,100 today. The company spent $67,140 on other fixed assets that could be sold for $59,740. The company has accumulated depreciation of $82,300 on its fixed assets. Currently, the company has current liabilities of $37,920 and net working capital of $19,420. What is the ending book value of net fixed assets? A) $126,420 B) $170,800 C) $164,340 D) $158,540 E) $208,720

28) Last year, Bad Tattoo Company had additions to retained earnings of $5,545 on sales of $97,765. The company had costs of $77,205, dividends of $3,520, and interest expense of $2,760. If the tax rate was 22 percent, what the depreciation expense? A) $9,065 B) $7,526 C) $6,178 D) $13,287 E) $6,575

29) Kyra had taxable income of $128,267 last year. Her marginal tax rate was 35 percent and her average tax rate was 24 percent. How much did she have to pay in taxes for the year?

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A) $29,541 B) $44,893 C) $29,197 D) $30,784 E) $27,839

30) Red Barchetta Company paid $27,905 in dividends and $28,878 in interest over the past year. During the year, net working capital increased from $13,722 to $18,444. The company purchased $42,990 in fixed assets and had a depreciation expense of $17,210. During the year, the company issued $25,225 in new equity and paid off $21,315 in long-term debt. What was the company's cash flow from assets? A) $52,873 B) $53,270 C) $54,221 D) $46,349 E) $51,894

31) Evil Pop Company began the year with net fixed assets of $16,943 and had $18,050 in the account at the end of the year. During the year, the company paid $4,030 in interest and expensed $3,515 in depreciation. The company purchased $7,510 in fixed assets during the year. How much in fixed assets did the company sell during the year? A) $8,656 B) $592 C) $3,336 D) $4,587 E) $2,888

32) The Primus Corporation began the year with $6,911 in its long-term debt account and ended the year with $8,361 in long-term debt. The company paid $771 in interest during the year and issued $2,135 in new long-term debt. How much in long-term debt must the company have paid off during the year?

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A) −$1,450 B) $448 C) $685 D) −$679 E) $1,450

33) Rousey, Incorporated, had a cash flow to creditors of $16,560 and a cash flow to stockholders of $6,992 over the past year. The company also had net fixed assets of $49,480 at the beginning of the year and $56,860 at the end of the year. Additionally, the company had a depreciation expense of $12,036 and an operating cash flow of $50,533. What was the change in net working capital during the year? A) $9,568 B) $6,840 C) $7,565 D) $6,133 E) $7,380

34) A company is obligated to pay its creditors $6,685 at the end of the year. If the value of the company's assets equals $6,909 at that time, what is the value of shareholders' equity? A) −$224 B) $0 C) $13,594 D) −$112 E) $224

35) Maynard Enterprises paid $1,440 in dividends and $1,165 in interest over the past year. The common stock account increased by $1,320 and retained earnings decreased by $425. What was the company's net income?

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A) $1,865 B) $895 C) $1,745 D) $2,335 E) $1,015

36) Mariota Industries has sales of $399,420 and costs of $213,610. The company paid $34,310 in interest and $14,950 in dividends. It also increased retained earnings by $71,030 during the year. If the company's depreciation was $20,855, what was its average tax rate? A) 11.18% B) 34.19% C) 29.25% D) 51.95% E) 25.98%

37) During the past year, a company had cash flow to creditors, an operating cash flow, and net capital spending of $30,252, $68,391, and $29,440, respectively. The net working capital at the beginning of the year was $12,091 and it was $14,200 at the end of the year. What was the company's cash flow to stockholders during the year? A) $10,808 B) $4,844 C) $6,590 D) $8,699 E) $2,109

38) During the past year, a company had cash flow to stockholders, an operating cash flow, and net capital spending of $14,915, $34,500, and $14,060, respectively. The net working capital at the beginning of the year was $5,865 and it was $6,830 at the end of the year. What was the company's cash flow to creditors during the year?

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A) $6,490 B) $965 C) $4,560 D) $5,525 E) $2,814

39) Hurricane Industries had a net income of $126,200 and paid 45 percent of this amount to shareholders in dividends. During the year, the company sold $78,000 in new common stock. What was the company's cash flow to stockholders? A) $56,790 B) $21,210 C) −$56,790 D) $48,200 E) −$21,210

40) A company has $565 in inventory, $1,840 in net fixed assets, $246 in accounts receivable, $105 in cash, and $282 in accounts payable. What are the company's total current assets? A) $916 B) $1,198 C) $952 D) $2,756 E) $670

41) A company has $1,287 in inventory, $4,710 in net fixed assets, $586 in accounts receivable, $246 in cash, $522 in accounts payable, $874 in long-term debt, and $5,305 in equity. What are the company's total assets?

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A) $7,351 B) $7,818 C) $10,015 D) $12,134 E) $6,829

42) A company has $1,280 in inventory, $4,701 in net fixed assets, $580 in accounts receivable, $242 in cash, $514 in accounts payable, and $5,296 in equity. What is the company's long-term debt? A) $1,441 B) $993 C) $1,030 D) $1,507 E) $1,172

43) Lola Corporation has shareholders' equity of $134,200. The company has a total debt of $125,350, of which 55 percent is payable in the next 12 months. The company also has net fixed assets of $180,150. What is the company's net working capital? A) $14,770 B) $8,850 C) $54,800 D) $10,458 E) $11,447

44) Smashed Pumpkins Company paid $176 in dividends and $603 in interest over the past year. The company increased retained earnings by $504 and had accounts payable of $654. Sales for the year were $16,440 and depreciation was $740. The tax rate was 22 percent. What was the company's EBIT?

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A) $1,475 B) $1,249 C) $1,746 D) $872 E) $3,617

45) Kerch Company had beginning net fixed assets of $216,494, ending net fixed assets of $211,666, and depreciation of $40,423. During the year, the company sold fixed assets with a book value of $7,942. How much did the company purchase in new fixed assets? A) $34,191 B) $35,595 C) $32,481 D) $41,374 E) $43,537

46) Adison Winery had beginning long-term debt of $39,476 and ending long-term debt of $44,875. The beginning and ending total debt balances were $48,835 and $53,888, respectively. The company paid interest of $4,327 during the year. What was the company's cash flow to creditors? A) −$726 B) −$1,072 C) $9,380 D) $726 E) $5,399

47) A company has net working capital of $726. Long-term debt is $4,159, total assets are $6,309, and fixed assets are $4,029. What is the amount of total liabilities?

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A) $5,583 B) $8,188 C) $5,713 D) $4,885 E) $7,035

48) Muffy's Muffins had net income of $2,395. The firm retains 70 percent of net income. During the year, the company sold $355 in common stock. What was the cash flow to shareholders? A) $719 B) $1,074 C) $364 D) $2,032 E) $1,322

49) A firm has $776 in inventory, $1,515 in fixed assets, $551 in accounts receivable, $317 in net working capital, and $177 in cash. What is the amount of current liabilities? A) $1,010 B) $1,187 C) $1,045 D) $739 E) $1,821

50) A balance sheet has total assets of $1,892, fixed assets of $1,306, long-term debt of $692, and short-term debt of $233. What is the net working capital? A) $381 B) $1,200 C) $586 D) $459 E) $353

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Answer Key Test name: Chapter 02 Test Bank - Algo 1) D Shareholders' equity = Current assets + Net fixed assets − Total liabilities Shareholders’ equity = $460 + 670 − 445 = $685 2) B Market value = $1,500,000 (building) + 527,000 (equipment) + (.5 × $470,000) (inventory) + (.98 × $255,200) (accounts receivable) + 11,100 cash − 1,500,000 (amount owed) Market value = $1,023,196 3) C Net income = Dividends paid + Change in retained earnings Net income = $468 + (− $115) = $353 In this case, the change in retained earnings was a negative value. 4) B Taxes paid = .10($9,950) + .12($40,525 − 9,950) + .22($86,375 − 40,525) + .24($103,500 − 86,375) Taxes paid = $18,861.00 Average tax rate = $18,861.00/$103,500 Average tax rate = .1822, or 18.22% 5) E Taxes on $81,700 income = .15($50,000) + .25($75,000 − 50,000) + .34($81,700 − 75,000) = $16,028 New taxable income = $81,700 + 22,900 = $104,600 Taxes on $104,600 income = .15($50,000) + .25($75,000 − 50,000) + .34($100,000 − 75,000) + .39($104,600 − 100,000) = $24,044 Additional tax = $24,044 − 16,028 = $8,016 Version 1

6) B EBIT = $1,120 − 630 − 130 = $360 (Sales − Costs − Depreciation) Taxes = .23 × $360 = $83 (Tax rate × EBIT) OCF = $360 + 130 − 83 = $407 (EBIT + Depreciation − Taxes) 7) B Net capital spending = $560 (ending net fixed assets) + 52 (Depreciation) − 476 (beginning net fixed assets) Net capital spending = $136 8) C Change in net working capital = ($501 − 276) − ($332 − 236) = $129 9) B CFC = $25 − ($259 − 288) = $54 10) C CFS = (.37 × $420) − $87 = $68.40 11) C Total liabilities and equity = Total assets = $1,965 + 940 + 1,770 = $4,675 NWC = Current assets − Current liabilities $175 = CA − $1,770 Current assets = $1,945 Net fixed assets = $4,675 − 1,945 = $2,730 12) D EBIT = $22,547 − 16,490 − 1,310 = $4,747 EBT = $4,747 − 1,056 = $3,691 Taxes = $3,691(.23) = $849 OCF = $4,747 + 1,310 − 849 = $5,208 13) A NWC = Current assets − Current liabilities $1,726 = $5,663 − CL CL = $3,937 Version 1

14) D NWC = Current assets − Current liabilities NWC = ($2,100 + 2,623 + 4,785) − 5,573 NWC = $3,935 15) C Current assets = $8,798 − 6,601 = $2,197 $1,248 = $2,197 − CL CL = $949 Total liabilities = $949 + 4,775 = $5,724 16) C Current assets = $11,430 − 6,785 = $4,645 $855 = $4,645 − CL CL = $3,790 Total equity = $11,430 − 4,173 − 3,790 = $3,467 17) A Current liabilities = $66,000 − 32,160 − 23,540 = $10,300 Current assets = $20,200 + 10,300 = $30,500 18) A Current liabilities = $6,750 − 2,781 = $3,969 Total liabilities and equity = Total assets = $22,710 + 10,700 + 3,969 = $37,379 Net fixed assets = $37,379 − 6,750 = $30,629 19) A Net capital spending = $96,525 − 75,175 + 13,175 = $34,525 20) A Ending long-term debt = $46,630 + 11,000 − 12,455 = $45,175 21) B Cash flow to creditors = $8,739 + 3,095 − 7,785 = $4,049 22) D

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EBT = $46,382 − 16,659 − 11,766 − 6,415 − 3,854 = $7,688 Taxes = $7,688(.23) = $1,768 Net income = $7,688 − 1,768 = $5,920 23) A EBIT = $46,772 − 17,009 − 11,956 − 6,705 = $11,102 EBT = $11,102 − 4,010 = $7,092 Taxes = $7,092(.25) = $1,773 OCF = $11,102 + 6,705 − 1,773 = $16,034 24) E Retained earnings = $29,630 + (6,365 − 2,455) = $33,540 25) A Ending owners' equity = $48,680 + 5,100 − 3,680 − 7,480 = $42,620 26) A Cash flow to stockholders = $3,680 + 7,480 = $11,160 27) A Net fixed assets = $141,580 + 67,140 − 82,300 = $126,420 28) C EBIT = ($5,545 + 3,520)/(1 − .22) + 2,760 = $14,382 Depreciation = $97,765 − 77,205 − 14,382 = $6,178 29) D Taxes = $128,267(.24) = $30,784 30) A Cash flow from assets = ($28,878 + 21,315) + ($27,905 − 25,225) = $52,873 31) E Net capital spending = $18,050 − 16,943 + 3,515 = $4,622 Fixed assets sold = $7,510 − 4,622 = $2,888 32) C Net new borrowing = $8,361 − 6,911 = $1,450 Debt retired = $2,135 − 1,450 = $685 Version 1

33) C Cash flow from assets = $16,560 + 6,992 = $23,552 Net capital spending = $56,860 − 49,480 + 12,036 = $19,416 Change in net working capital = $50,533 − 19,416 − 23,552 = $7,565 34) E Equity = Max[($6,909 − 6,685), 0] = $224 35) E Net income = $1,440 − 425 = $1,015 36) B Net income = $14,950 + 71,030 = $85,980 EBT = $399,420 − 213,610 − 20,855 − 34,310 = $130,645 Taxes = $130,645 − 85,980 = $44,665 Average tax rate = $44,665/$130,645 = .3419, or 34.19% 37) C Change in NWC = $14,200 − 12,091 = $2,109 CFA = $68,391 − 29,440 − 2,109 = $36,842 Cash flow to stockholders = $36,842 − 30,252 = $6,590 38) C Change in NWC = $6,830 − 5,865 = $965 CFA = $34,500 − 14,060 − 965 = $19,475 Cash flow to creditors = $19,475 − 14,915 = $4,560 39) E Cash flow to stockholders = $126,200(.45) − 78,000 = −$21,210 40) A Current assets = $105 + 246 + 565 = $916 41) E Total assets = $246 + 586 + 1,287 + 4,710 = $6,829 42) B Total assets = $242 + 580 + 1,280 + 4,701 = $6,803 Long-term debt = $6,803 − 514 − 5,296 = $993 Version 1

43) D Current liabilities = .55($125,350) = $68,943 Total L&E = Total assets = $125,350 + 134,200 = $259,550 Current assets = $259,550 − 180,150 = $79,400 Net working capital = $79,400 − 68,943 = $10,458 44) A Net income = $176 + 504 = $680 EBT = $680/( 1 − .22) = $872 EBIT = $872 + 603 = $1,475 45) E Net capital spending = $211,666 − 216,494 + 40,423 = $35,595 Fixed assets bought = $35,595 + 7,942 = $43,537 46) B Cash flow to creditors = $4,327 − ($44,875 − 39,476) = −$1,072 47) C Current assets = $6,309 − 4,029 = $2,280 Current liabilities = $2,280 − 726 = $1,554 Total liabilities = $1,554 + 4,159 = $5,713 48) C Cash flow to stockholders = (1 − .70) × $2,395 − 355 = $364 49) B Current liabilities = ($177 + 551 + 776) − $317 = $1,187 50) E Net working capital = ($1,892 − 1,306) − $233 = $353

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) 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.

2) The accounting statement that measures the revenues, expenses, and net income of a firm over a period is called the: A) statement of cash flows. B) income statement. C) GAAP statement. D) balance sheet. E) net working capital schedule.

3) 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.

4) Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

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A) Indirect cost B) Direct cost C) Noncash item D) Period cost E) Variable cost

5) 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

6) The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the: A) average tax rate. B) variable tax rate. C) marginal tax rate. D) fixed tax rate. E) ordinary tax rate.

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.

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Operating cash flow is defined as: A) a firm's net profit over a specified period. 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. E) the cash that is generated and added to retained earnings.

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

10)

Cash flow to creditors is defined as: A) interest paid minus net new borrowing. B) interest paid plus net new borrowing. C) operating cash flow minus net capital spending minus the change in net working

capital. D) dividends paid plus net new borrowing. E) cash flow from assets plus net new equity.

11)

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.

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12)

Which one of the following is an intangible fixed asset? A) Inventory B) Machinery C) Copyright D) Account receivable E) Building

13)

Production equipment is classified as: A) a net working capital item. B) a current liability. C) a current asset. D) a tangible fixed asset. E) an intangible fixed asset.

14)

Net working capital includes: A) a land purchase. B) an invoice from a supplier. C) noncash expenses. D) fixed asset depreciation. E) the balance due on a 15-year mortgage.

15) 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) remained constant. D) could have either increased, decreased, or remained constant. E) was unaffected as the changes occurred in the firm's current accounts.

16)

Net working capital increases when:

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A) fixed assets are purchased for cash. B) inventory is purchased on credit. C) inventory is sold at cost. D) a credit customer pays for his or her purchase. E) inventory is sold at a profit.

17)

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.

18)

Paid-in surplus is classified as: A) owners’ equity. B) net working capital. C) a current asset. D) a cash expense. E) long-term debt.

19)

Shareholders’ equity is best defined as: A) the residual value of a firm. B) positive net working capital. C) the net liquidity of a firm. D) cash inflows minus cash outflows. E) the cumulative profits of a firm over time.

20)

All else held constant, the book value of owners’ equity will decrease when:

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A) the market value of inventory increases. B) dividends exceed net income for a period. C) cash is used to pay an accounts payable. D) a long-term debt is repaid. E) taxable income increases.

21)

Net working capital decreases when: A) a new 3-year loan is obtained with the proceeds used to purchase inventory. B) a credit customer pays his or her bill in full. C) depreciation increases. D) a long-term debt is used to finance a fixed asset purchase. E) a dividend is paid to current shareholders.

22)

A firm’s liquidity level decreases when: A) inventory is purchased with cash. B) inventory is sold on credit. C) inventory is sold for cash. D) an account receivable is collected. E) proceeds from a long-term loan are received.

23)

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.

24)

Financial leverage:

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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 stockholders.

25)

The market value of:

A) accounts receivable is generally higher than the book value of those receivables. B) an asset tends to provide a better guide to the actual worth of that asset than does the book value. C) fixed assets will always exceed the book value of those assets. D) an asset is reflected in the balance sheet. E) an asset is lowered each year by the amount of depreciation expensed for that asset.

26) 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) Long-term debt D) Reputation of the firm E) Value of a partially depreciated machine

27)

The market value of a firm's fixed assets: A) will always 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.

28)

Market values:

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A) reflect expected selling prices given the current economic situation. B) are affected by the accounting methods selected. C) are equal to the initial cost minus the depreciation to date. D) either remain constant or increase over time. E) are equal to the greater of the initial cost or the current expected sales value.

29)

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 longterm debt.

30)

An income statement prepared according to GAAP: A) reflects the net cash flows of a firm over a stated period. 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.

31)

Net income increases when: A) fixed costs increase. B) depreciation increases. C) the average tax rate increases. D) revenue increases. E) dividends cease.

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32) Based on the recognition principle, revenue is recorded on the financial statements when the: 1.payment is collected for the sale of a good or service. 2.earnings process is virtually complete. 3.value of a sale can be reliably determined. 4.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

33)

Given a profitable firm, depreciation: A) increases net income. B) increases net fixed assets. C) decreases net working capital. D) lowers taxes. E) has no effect on net income.

34)

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) 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.

35)

The matching principle states that:

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36)

Which one of these 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 equals net income multiplied by (1 + Average tax rate).

37)

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.

38)

The concept of marginal taxation is best exemplified by which one of the following? A) Fazzari's paid $120,000 in taxes while its primary competitor paid only $80,000 in

taxes. B) Mariano's Retreat paid only $45,000 in taxes on total revenue of $570,000 last year. C) Burke's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes. D) Edwardsville Centre paid no taxes last year due to carryforward losses. E) Sunset Charters paid $2.20 in taxes for every $10 of revenue last year.

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39) 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

40)

A negative cash flow to stockholders indicates a firm: A) had a net loss for the year. 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.

41)

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.

42) An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? A) Fixed expenses B) Marginal tax rate C) Net capital spending D) Inventory E) Depreciation

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43) 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) Positive net income D) Negative operating cash flow E) Positive cash flow to stockholders

44)

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.

45)

In 2021, what was the maximum average tax rate for corporations? A) 38% B) 25% C) 33% D) 39% E) 21%

46) Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow? A) Increase in depreciation B) Increase in accounts receivable C) Increase in accounts payable D) Decrease in cost of goods sold E) Increase in sales

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47)

Cash flow to creditors increases when: A) interest rates on debt decline. B) accounts payable decrease. C) long-term debt is repaid. D) current liabilities are repaid. E) new long-term loans are acquired.

48) 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

49) Gracie Art Gallery has total assets of $263,450, net working capital of $28,523, owners' equity of $128,659, and long-term debt of $105,000 What is the value of the current assets? A) $85,413 B) $31,314 C) $63,595 D) $79,628 E) $105,000

50) De la Cruz Automotive has net working capital of $22,600, current assets of $56,500, equity of $62,700, and long-term debt of $31,900. What is the amount of the net fixed assets? A) $9,300 B) $49,400 C) $94,600 D) $103,900 E) $72,000

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51) Al-Sadiq Plumbing Supply currently has $10,500 in cash. The company owes $26,900 to suppliers for merchandise and $47,500 to the bank for a long-term loan. Customers owe the company $33,000 for their purchases. The inventory has a book value of $62,400 and an estimated market value of $65,600. If the store compiled a balance sheet as of today, what would be the book value of the current assets? A) $100,700 B) $79,500 C) $85,700 D) $105,900 E) $117,500

52) Nikki Heart Photography has total assets of $31,300, long-term debt of $8,600, net fixed assets of $25,600, and owners' equity of $20,540. What is the value of the net working capital?

A) $9,800 B) $104,595 C) $18,900 D) $3,540 E) $23,200

53) Lopez Bakery had $236,400 in net fixed assets at the beginning of the year. During the year, the company purchased $53,200 in new equipment. It also sold, at a price of $22,000, some old equipment that had a book value of $5,900. The depreciation expense for the year was $13,400. What is the net fixed asset balance at the end of the year? A) $260,000 B) $283,700 C) $276,200 D) $270,300 E) $289,600

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54) Preston Financial has ending net fixed assets of $98,700 and beginning net fixed assets of $84,900. During the year, the firm sold assets with a total book value of $13,200 and also recorded $9,800 in depreciation expense. How much did the company spend to buy new fixed assets? A) −$47,800 B) $18,400 C) $36,800 D) $81,400 E) $73,600

55) McKendree Industries has current liabilities of $54,900 and accounts receivable of $88,700. The firm has total assets of $395,000 and net fixed assets of $265,100. The owners' equity has a book value of $147,500. What is the amount of the net working capital? A) $77,400 B) $75,000 C) $33,800 D) −$8,500 E) −$2,400

56) St. Louis Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities? A) $61,700 B) $88,400 C) $102,900 D) $96,700 E) $111,500

57) Chun Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is the amount of the current assets?

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A) $46,700 B) $56,000 C) $783,400 D) $975,000 E) $699,700

58) Swearingen United has total owners' 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 longterm debt? A) $5,400 B) $12,500 C) $13,700 D) $29,800 E) $43,000

59) Utamuro Markets has beginning long-term debt of $64,500, 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) $63,300 E) $85,900

60) Earley Construction has beginning retained earnings of $284,300. For the year, the company earned net income of $13,700 and paid dividends of $9,000. The company also issued $25,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

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A) $287,204 B) $289,454 C) $294,134 D) $289,000 E) $314,000

61) The Milwaukee Printing Company has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, 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 paid dividends of $32,500. What is the amount of the net new equity raised during the year? A) $34,000 B) $42,500 C) $25,000 D) $21,500 E) $0

62) Kahlan Opinion Surveys had beginning retained earnings of $24,600. During the year, the company reported sales of $105,700, costs of $78,300, depreciation of $9,000, dividends of $1,200, and interest paid of $635. The tax rate is 21 percent. What is the retained earnings balance at the end of the year? A) $35,835.50 B) $36,082.15 C) $36,121.44 D) $37,671.44 E) $37,434

63) Bolivar Farms had equity of $58,900 at the beginning of the year. During the year, the company earned net income of $8,200 and paid $2,500 in dividends. Also during the year, the company repurchased $3,500 of stock from one of its shareholders. What is the value of the owners' equity at year end?

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A) $61,100 B) $67,600 C) $64,900 D) $64,400 E) $68,100

64) Di Bacco 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

65) Medeiros Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be collected. The inventory cost $82,300 and can be sold today for $116,500. The fixed assets were purchased at a total cost of $234,500 of which $118,900 has been depreciated. The fixed assets can be sold today for $138,000. What is the total book value of the firm's assets? A) $327,800 B) $293,200 C) $346,800 D) $412,100 E) $415,600

66) Lester's Fried Chick'n purchased its building 11 years ago at a cost of $189,000. The building is currently valued at $209,000. The firm has other fixed assets that cost $56,000 and are currently valued at $32,000. To date, the firm has recorded a total of $49,000 in depreciation on the various assets it currently owns. Current liabilities are $36,600 and net working capital is $18,400. What is the total book value of the firm's assets?

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A) $251,000 B) $241,000 C) $232,600 D) $214,400 E) $379,000

67) Devante’s Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900, inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for $349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market value of the firm’s assets? A) $332,800 B) $458,200 C) $374,200 D) $495,500 E) $487,100

68) Trinity Industries has sales of $179,600, depreciation of $14,900, costs of goods sold of $138,200, and other costs of $28,400. The tax rate is 21 percent. What is the net income? A) −$1,900 B) $382 C) −$1,204 D) $14,660 E) $13,665

69) Last year, Northside Pizza added $6,230 to retained earnings from sales of $104,650. The company had costs of $87,300, dividends of $2,500, and interest paid of $1,620. Given a tax rate of 21 percent, what was the amount of the depreciation expense?

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A) $2,407 B) $3,908 C) $4,679 D) $4,102 E) $4,414

70) Dakota Pride Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400. The tax rate is 21 percent. How much net income did the firm earn for the period? A) $7,778 B) $9,324 C) $10,231 D) $8,671 E) $5,886

71) 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

72) Norris Company incurred depreciation expenses of $28,900 last year. The sales were $755,000 and the addition to retained earnings was $10,200. The firm paid interest of $6,200 and dividends of $5,000. The tax rate was 21 percent. What was the amount of the costs incurred by the company?

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A) $691,013 B) $707,413 C) $700,659 D) $697,213 E) $719,900

73) For the year, Bethalto Furniture had sales of $818,790, costs of $748,330, and interest paid of $24,450. The depreciation expense was $56,100 and the tax rate was 21 percent. At the beginning of the year, the firm had retained earnings of $172,270 and common stock of $260,000. At the end of the year, retained earnings was $158,713 and common stock was $280,000. Any tax losses can be used. What is the amount of the dividends paid for the year? A) $5,586 B) $6,466 C) $7,566 D) $7,066 E) $6,898

74) Pyri Flours, a sole proprietorship, owes $9,741 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $22 in taxes. What is the average tax rate on income of $61,609? A) 15.00% B) 30.33% C) 33.33% D) 35.00% E) 15.85%

75) Porter Jewelers, a sole proprietorship has a marginal tax rate of 32 percent and an average tax rate of 20.9 percent. If the firm owes $34,330 in taxes, how much taxable income did it earn?

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A) $127,584 B) $116,649 C) $164,258 D) $157,500 E) $168,500

76) LaMarcus Photography, a sole proprietorship owes $190,874 in taxes on a taxable income of $608,606. The company has determined that it will owe $195,246 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this level of income? A) 39% B) 38% C) 37% D) 35% E) 32%

77) The Riverside Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: Beginning Balance

Ending Balance

$ 138,590 599,608 143,215 408,660

$ 129,204 597,913 139,827 402,120

Current assets Net fixed assets Current liabilities Long-term debt

What is the amount of the cash flow from assets? A) $26,359 B) $47,949 C) $61,487 D) $43,909 E) $35,953

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78) National Importers paid $38,600 in dividends and $24,615 in interest over the past year while net working capital increased from $15,506 to $17,411. The company purchased $38,700 in net new fixed assets and had depreciation expenses of $14,784. During the year, the firm issued $20,000 in net new equity and paid off $23,800 in long-term debt. What is the amount of the cash flow from assets? A) $21,811 B) $41,194 C) $36,189 D) $26,410 E) $67,015

79) Girabaldi’s Preztels, general partnership, 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 21 percent? A) $97,620 B) $104,900 C) $99,220 D) $104,740 E) $105,240

80) Outdoor Sports paid $12,500 in dividends and $9,310 in interest over the past year. Sales totaled $361,820 with costs of $267,940. The depreciation expense was $16,500 and the tax rate was 21 percent. What was the amount of the operating cash flow? A) $64,232 B) $65,306 C) $57,556 D) $70,056 E) $79,585

81) 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?

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A) −$22,360 B) −$4,780 C) $23,720 D) $58,340 E) $69,800

82) The financial statements of the Santa Domingo Marina reflect depreciation expenses of $41,600 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) $13,000 B) $21,600 C) $28,600 D) $60,400 E) $70,200

83) Kahlil'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

84)

The balance sheet of Koehn, Incorporated, has the following balances:

Cash Accounts receivable Inventory Net fixed assets

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Beginning balance

Ending balance

$ 30,300 48,200 126,500 611,900

$ 32,800 51,600 129,200 574,300 24

Accounts payable Long-term debt

43,200 415,000

53,600 304,200

What is the amount of the change in net working capital? A) −$1,800 B) −$7,400 C) $1,800 D) −$8,100 E) $8,100

85) During the past year, Rend Yard Services paid $36,800 in interest along with $2,000 in dividends. The company issued $3,000 of stock and $16,000 of new debt. The company reduced the balance due on its old debt by $18,400. What is the amount of the cash flow to creditors? A) $8,200 B) $55,200 C) $2,400 D) $39,200 E) $15,800

86) A firm has earnings before interest and taxes of $27,130, net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors? A) −$14,040 B) $0 C) −$4,940 D) $14,040 E) $4,660

87) A balance sheet shows beginning values of $56,300 for current liabilities and $289,200 for long-term debt. The ending values are $61,900 and $318,400, respectively. The income statement shows interest paid of $29,700 and dividends of $19,000. What is the amount of the net new borrowing?

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A) $29,200 B) $40,450 C) $34,800 D) $70,150 E) $58,900

88) For the past year, LP Gas, Incorporated, 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

89) The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400 for the past year. The firm reduced its net working capital by $28,000 and incurred net capital spending of $47,900. What is the amount of the cash flow to stockholders for the last year? A) −$171,500 B) −$86,700 C) $21,200 D) $95,700 E) $39,700

90)

Donegal’s has compiled the following information:

Sales Interest paid Long-term debt Owners' equity Depreciation Accounts receivable

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$ 406,300 21,200 248,700 211,515 23,800 24,400

Other costs Inventory Accounts payable Cost of goods sold Cash Taxes

38,600 41,500 22,600 218,900 16,300 34,100

What is the operating cash flow for the year? A) $90,900 B) $96,700 C) $114,700 D) $93,500 E) $102,600

91) The DeGrange Carpentry Shop, a sole proprietorship has sales of $398,600, costs of $254,800, depreciation expense of $26,400, interest expense of $1,600, and a tax rate of 21 percent. What is the net income for this firm? A) $91,930 B) $96,211 C) $97,516 D) $91,482 E) $89,219

92) Prospect Avenue Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 21 percent. The firm paid out $23,400 in dividends. What is the addition to retained earnings? A) $36,909 B) $34,645 C) $47,147 D) $37,208 E) $40,615

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93) Zhang's fixed assets were purchased three years ago for $1.8 million. These assets can be sold to Stewart's today for $1.2 million. Roscoe's current balance sheet shows net fixed assets of $960,000, current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated today, the company would receive $518,000 cash. The book value of the firm's assets today is _____ and the market value is ____. A) $1,081,000; $1,308,000 B) $1,081,000; $1,718,000 C) $1,307,000; $1,429,000 D) $1,429,000; $1,308,000 E) $1,429,000; $1,718,000

94) Omar's Market, a sole proprietorship has sales of $43,800, costs of $40,400, depreciation expense of $2,500, and interest expense of $1,100. If the tax rate is 21 percent, what is the operating cash flow, OCF? Assume tax losses can be carried forward and utilized. A) $3,332 B) $3,279 C) $3,511 D) $3,442 E) $3,013

95) On December 31, 2020, The Water Street Theatre had net fixed assets of $812,650 while the December 31, 2021 balance sheet showed net fixed assets of $784,900. Depreciation for 2021 was $84,900. What was the firm's net capital spending for 2021? A) $51,600 B) $42,410 C) $57,150 D) $54,400 E) $46,620

96) Pacheo's Market had long-term debt of $638,100 at the beginning of the year compared to $574,600 at year-end. If the interest expense was $42,300, what was the firm's cash flow to creditors?

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A) $21,200 B) $26,700 C) $54,900 D) $102,400 E) $105,800

97) Assume a company has sales of $423,800, production costs of $297,400, other expenses of $18,500, depreciation expense of $36,300, interest expense of $2,100, taxes of $23,600, and dividends of $12,000. In addition, you're told that during the year the firm issued $4,500 in new equity and redeemed $6,500 in outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition to net working capital? A) $11,500 B) $24,500 C) $15,800 D) $37,500 E) $30,400

98) Raymonds’s sales for the year were $1,678,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $1,141,000, $304,000, and $143,000, respectively. In addition, the company had an interest expense of $74,000 and a tax rate of 21 percent. What is the operating cash flow for the year? A) $227,560 B) $271,420 C) $229,640 D) $285,400 E) $217,700

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99) For Year 2020, Precision Masters had sales of $42,900, cost of goods sold of $26,800, depreciation expense of $1,900, interest expense of $1,300, and dividends paid of $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate was 21 percent. What is the cash flow from assets for 2020? A) $9,914 B) $11,114 C) $9,360 D) $12,191 E) $11,970

100) The passage of the Tax Cuts and Jobs Act of 2017 created a revised progressive tax structure, which applies to all of the following except: A) unmarried individuals. B) sole proprietorships. C) LLCs. D) partnerships. E) corporations.

101) GAAP, as they relate to the income statement includes the recognition principle: to recognize revenue when the earnings process is virtually complete, and the value of an exchange of goods or services is known or can be reliably determined. Which of the following statements is true with regard to this principle? A) Income and expense items can be recorded at any time the company deems appropriate. B) Revenue is recognized at the time of sale. Costs associated with the sale of that product likewise would be recognized at that time. C) Revenues must be reported only when cash is collected. D) Expenses can be smoothed to make earnings appear greater.

102)

The term “free cash flow” is another term to describe:

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A) operating cash flow. B) cash that comes “free” to the company. C) cash flow from assets. D) increases in cash account each year.

103) Sunny Disposition, Incorporated, has net working capital of $32,500, current assets of $59,000, equity of $74,500, and long-term debt of $42,500. What is the amount of the net fixed assets? A) $58,000 B) $111,000 C) $94,600 D) $63,900 E) $84,500

104) Kat Outfitting currently has $22,500 in cash. The company owes $49,500 to suppliers for merchandise and $52,500 to the bank for a long-term loan. Customers owe the company $41,000 for their purchases. The inventory has a book value of $76,800 and an estimated market value of $72,000. If the store compiled a balance sheet as of today, what would be the book value of the current assets? A) $135,500 B) $79,500 C) $86,000 D) $140,300 E) $144,000

105) Zoey Pet Supply had $314,000 in net fixed assets at the beginning of the year. During the year, the company purchased $98,200 in new equipment. It also sold, at a price of $10,000, some old equipment that had a book value of $12,500. The depreciation expense for the year was $24,500. What is the net fixed asset balance at the end of the year?

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A) $260,000 B) $283,700 C) $424,200 D) $375,200 E) $277,000

106) Joie’s Fashions has current liabilities of $45,600 and accounts receivable of $59,700. The firm has total assets of $275,000 and net fixed assets of $205,500. The owners' equity has a book value of $107,500. What is the amount of the net working capital? A) $121,900 B) $23,900 C) $9,800 D) $83,600 E) −$35,800

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Answer Key Test name: Chapter 02 Test Bank - Static 1) E 2) B 3) D 4) C 5) A 6) C 7) C 8) B 9) B 10) A 11) D 12) C 13) D 14) B 15) B 16) E 17) C 18) A 19) A 20) B 21) E 22) A 23) D 24) E 25) B 26) D Version 1

27) E 28) A 29) C 30) E 31) D 32) C 33) D 34) E 35) C 36) D 37) D 38) C 39) C 40) E 41) A 42) E 43) E 44) A 45) E 46) C 47) C 48) E 49) B Current liabilities = $236,450 − 105,000 − 128,659 = $2,791 Current assets = $28,523 + 2,791 = $31,314 50) E Net fixed assets = $31,900 + 62,700 − 22,600 = $72,000 51) D Current assets = $10,500 + 33,000 + 62,400 = $105,900 52) D Version 1

Current assets = $31,300 − 25,600 = $5,700 Current liabilities = $31,300 − 20,540 − 8,600 = $2,160 NWC = $5,700 − 2,160 = $3,540 53) D Ending net fixed assets = $236,400 + 53,200 − 5,900 − 13,400 = $270,300 54) E New fixed asset purchases = $197,400 + 19,600 + 26,400 − 169,800 = $73,600 55) B Net working capital = $395,000 − 265,100 − 54,900 = $75,000 56) D Current liabilities = $519,300 − 380,200 − 42,400 = $96,700 57) C Current assets = $51,900 + 313,900 + 417,600 = $783,400 58) A Long-term debt = $36,400 − 18,800 − 12,200 = $5,400 59) D Ending long-term debt = $64,500 − 16,300 + 4,100 + 11,000 = $63,300 60) D Retained earnings = $284,300 + 13,700 − 9,000 = $289,000 61) A Net new equity = $142,430 − 55,000 − 11,200 − ($48,420 + 26,310 − 32,500) = $34,000 62) E EBT = $105,700 − 78,300 − 9,000 − 635 = $17,765 Net Income = $17,765 × .79 = $14,034 Balance of Retained Earnings = $24,600 + 14,034 − 1,200 = $37,434 Version 1

63) A Ending owners' equity = $58,900 + 8,200 − 2,500 − 3,500 = $61,100 64) C Owners' equity = $29,800 + 64,800 − 23,000 = $71,600 65) B Total book value = $41,100 + 54,200 + 82,300 + 234,500 − 118,900 = $293,200 66) A Book value = $189,000 + 56,000 − 49,000 + 18,400 + 36,600 = $251,000 67) E Market value = $18,600 + 34,500 + 85,000 + 349,000 = $487,100 68) A EBT = $179,600 − 138,200 − 28,400 − 14,900 = –$1,900. EBT is negative so tax is zero; Net Income = −$1,900 69) C Earnings before interest and taxes = [($6,230 + 2,500)/(1 − .21)] + $1,620 = $12,671 Depreciation = $104,650 − 87,300 − 12,671 = $4,679 70) C Net income = ($509,600 − 448,150 − 36,100 − 12,400) × (1 − .21) = $10,231 71) C Dividends paid = $31,800 − 24,200 = $7,600 72) C Earnings before interest and taxes = [($5,000 + 10,200)/(1 − .21)] + $6,200 = $25,440.51 Costs = $755,000 − 28,900 − 25,440.51 = $700,659 73) A

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Net income = [($818,790 − 748,330 − 56,100 − 24,450) × (1 − .21)] = −$7,971 Dividends paid = −$7,971 − ($158,713 − 172,270) = $5,586 74) E Average tax rate = ($9,741 + 22)/$61,609 = .1585, or 15.85% 75) C Taxable income = $34,330/.209 = $164,258 76) C Marginal tax rate = ($195,246 − 190,874)/($620,424 − 608,606) = .37, or 37% 77) B Cash flow from assets = $83,770 − ($597,913 − 599,608 + 43,514) − [($129,204 − 139,827) − ($138,590 − 143,215)] = $47,949 78) E Cash flow from assets = ($24,615 + 23,800) + ($38,600 − 20,000) = $67,015 79) D EBIT = $821,300 − 698,500 − 28,400 = $94,400 Tax = ($94,400 − 8,400) × .21 = $18,060 OCF = $94,400 + 28,400 − 18,060 = $104,740 80) E EBIT = $361,820 − 267,940 − 16,500 = $77,380 Tax = ($77,380 − 9,310) × .21 = $14,294.70 OCF = $77,380 + 16,500 − 14,294.70 = $79,585 81) E Net capital spending = $371,920 − 348,200 + 46,080 = $69,800 82) E Net capital spending = $28,600 + 41,600 = $70,200 83) C

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Change in net working capital = ($82,600 − 85,100) − ($67,200 − 71,100) = $1,400 84) A Change in net working capital = ($32,800 + 51,600 + 129,200 − 53,600) − ($30,300 + 48,200 + 126,500 − 43,200) = −$1,800 85) D Cash flow to creditors = $36,800 − 16,000 + 18,400 = $39,200 86) C Interest = $27,130 − 16,220 − 5,450 = $5,460 Cash flow to creditors = $5,460 + 31,600 − 42,000 = −$4,940 87) A Net new borrowing = $318,400 − 289,200 = $29,200 88) A Cash flow to creditors = $38,100 − 21,500 = $16,600 Net new borrowing = $2,300 − 16,600 = −$14,300 89) D Cash flow to stockholders = [$187,000 − 47,900 − (−$28,000)] − $71,400 = $95,700 90) C Operating cash flow = $406,300 − 218,900 − 38,600 − 34,100 = $114,700

91) D Net income = ($398,600 − 254,800 − 26,400 − 1,600)(1 − .21) = $91,482 92) C Addition to retained earnings = [($318,400 − 199,400 − 28,600 − 1,100) × (1 − .21)] − $23,400 Addition to retained earnings = $47,147 93) E Book value = $121,000 + 348,000 + 960,000 = $1,429,000 Market value = $518,000 + 1,200,000 = $1,718,000

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94) D EBIT = $43,800 − 40,400 − 2,500 = $900 Tax = ($900 − 1,100) × .21 = −$42 OCF = $900 + 2,500 − (−$42) = $3,442 95) C Net capital spending = $784,900 − 812,650 + 84,900 = $57,150 96) E Cash flow to creditors = $42,300 − ($574,600 − 638,100) = $105,800 97) B OCF = $423,800 − 297,400 − 18,500 − 23,600 = $84,300 NCS = $7,400 + 36,300 = $43,700 CFA = CFC + CFS = [$2,100 − (−6,500)] + [$12,000 − 4,500] = $16,100 Add to NWC = OCF − NCS − CFA = $84,300 − 43,700 − 16,100 = $24,500 98) C EBIT = ($1,678,000 − 1,141,000 − 304,000 − 143,000 = $90,000 Tax = ($90,000 − 74,000) × .21 = $3,360 OCF = $90,000 + 143,000 − 3,360 = $229,640 99) D EBIT = ($42,900 − 26,800 − 1,900) = $14,200 Taxes = ($14,200 − 1,300)(.21) = $2,709 OCF = $14,200 + 1,900 − 2,709 = $13,391 CFA = $13,391 − ($13,900 − 14,300 + 1,900) − [($9,200 − 7,400) − ($8,700 − 6,600)] = $12,191 100) E 101) B 102) C 103) E Net fixed assets = $42,500 + 74,500 − 32,500 = $84,500 Version 1

104) D Current assets = $22,500 + 41,000 + 76,800 = $140,300 105) D Ending net fixed assets = $314,000 + 98,200 − 12,500 − 24,500 = $375,200 106) B Net working capital = $275,000 − 205,500 − 45,600 = $23,900

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) A firm has sales of $1,210, net income of $225, net fixed assets of $542, and current assets of $298. The firm has $100 in inventory. What is the common-size balance sheet value of inventory? A) 44.44% B) 33.56% C) 8.26% D) 18.45% E) 11.90%

2) A firm has total debt of $1,370 and a debt-equity ratio of .22. What is the value of the total assets? A) $7,597.27 B) $6,227.27 C) $3,014.00 D) $1,671.40 E) $2,200.00

3) A firm has sales of $4,660, costs of $2,655, interest paid of $161, and depreciation of $457. The tax rate is 24 percent. What is the cash coverage ratio?

A) 14.32 times B) 12.45 times C) 14.94 times D) 15.57 times E) 13.70 times

4) Mario's Home Systems has sales of $2,910, costs of goods sold of $2,250, inventory of $522, and accounts receivable of $439. How many days, on average, does it take Mario's to sell its inventory? Assume a 365-day year. Version 1

A) 71.22 days B) 83.52 days C) 65.47 days D) 55.06 days E) 84.68 days

5) A firm has net working capital of $520, net fixed assets of $2,266, sales of $6,300, and current liabilities of $830. How many dollars worth of sales are generated from every $1 in total assets? A) $2.78 B) $2.26 C) $1.60 D) $2.03 E) $1.74

6) Lee Sun's has sales of $4,250, total assets of $3,950, and a profit margin of 6 percent. The firm has a total debt ratio of 42 percent. What is the return on equity? A) 8.98% B) 6.07% C) 6.00% D) 6.46% E) 11.13%

7) Jupiter Explorers has $9,600 in sales. The profit margin is 4 percent. There are 6,400 shares of stock outstanding, with a price of $1.70 per share. What is the company's priceearnings ratio? A) 10.20 times B) 11.56 times C) 28.33 times D) 14.17 times E) 28.24 times

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8) Samuelson's has a debt-equity ratio of 30 percent, sales of $12,000, net income of $700, and total debt of $3,700. What is the return on equity? A) 3.00% B) 4.37% C) 5.83% D) 18.92% E) 5.68%

9) A firm has a return on equity of 21 percent. The total asset turnover is 2.9 and the profit margin is 8 percent. The total equity is $8,000. What is the net income? A) $1,856 B) $640 C) $4,872 D) $579 E) $1,680

10)

Use the following information to answer this question.

Windswept, Incorporated 2022 Income Statement (in millions) Net sales $ 9,320 Cost of goods sold 7,610 Depreciation 450 Earnings before $ interest and taxes 1,260 Interest paid 98 Taxable income $ 1,162 Taxes 407 Net income

$ 755 Windswept, Incorporated 2021 and 2022 Balance Sheets (in millions)

Version 1

2021

2022

Cash

$ 200

$ 230

Accounts receivable Inventory Total

940 1,720 $ 2,860 3,350

840 1,650 $ 2,720 3,880

$ 6,210

$ 6,600

Net fixed assets Total assets

2021

2022

Accounts payable

$ 1,250 Long-term debt 1,070 Common stock 3,280 Retained earnings 610

$ 1,310 1,270 3,160 860

Total liabilities $ & equity 6,210

$ 6,600

What is the quick ratio for 2022? A) 2.08 times B) .82 times C) 1.90 times D) 1.26 times E) .79 times

11)

Use the following information to answer this question.

Windswept, Incorporated 2022 Income Statement (in millions) Net sales $ 9,360 Cost of goods sold 7,740 Depreciation 450 Earnings before $ interest and taxes 1,170 Interest paid 104 Taxable income $ 1,066 Taxes 373 Net income

$ 693 Windswept, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Version 1

2021

2022

Cash

$ 220

$ 250

Accounts receivable Inventory Total

980 1,790 $ 2,990 3,430

880 1,670 $ 2,800 3,900

$ 6,420

$ 6,700

Net fixed assets Total assets

Accounts payable

$ 1,350 Long-term debt 1,110 Common stock 3,360 Retained earnings 600

$ 1,535 1,305 3,010 850

Total liabilities $ & equity 6,420

$ 6,700

What is the days' sales in receivables for 2022? A) 47.94 days B) 36.27 days C) 72.39 days D) 33.85 days E) 34.32 days

12)

Use the following information to answer this question.

Windswept, Incorporated 2022 Income Statement (in millions) Net sales $ 9,050 Cost of goods sold 7,280 Depreciation 430 Earnings before $ interest and taxes 1,340 Interest paid 84 Taxable income $ 1,256 Taxes 440 Net income

$ 816 Windswept, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash

Version 1

$ 130

$ 160

Accounts payable

2021

2022

Accounts receivable Inventory Total Net fixed assets Total assets

820 1,540 $ 2,490 3,270

720 1,540 $ 2,420 3,680

$ 5,760

$ 6,100

1,020 Long-term debt 980 Common stock 3,210 Retained earnings 550

1,130 1,260 2,910 800

Total liabilities $ & equity 5,760

$ 6,100

What is the fixed asset turnover for 2022? A) 2.23 times B) 1.48 times C) 3.74 times D) .41 times E) 2.46 times

13)

Use the following information to answer this question.

Windswept, Incorporated 2022 Income Statement (in millions) Net sales $ 9,750 Cost of goods sold 7,600 Depreciation 385 Earnings before $ interest and taxes 1,765 Interest paid 97 Taxable income $ 1,668 Taxes 584 Net income

$ 1,084 Windswept, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash

Version 1

$ 210

$ 240

Accounts payable

2021

2022

Accounts receivable Inventory Total Net fixed assets Total assets

970 1,720 $ 2,900 3,340

870 1,640 $ 2,750 3,850

$ 6,240

$ 6,600

1,500 Long-term debt 1,000 Common stock 3,220 Retained earnings 520

1,587 1,283 2,960 770

Total liabilities $ & equity 6,240

$ 6,600

What is the equity multiplier for 2022? A) 2.23 times B) 2.61 times C) 1.77 times D) 1.30 times E) 3.29 times

14)

Use the following information to answer this question.

Windswept, Incorporated 2022 Income Statement (in millions) Net sales $ 9,000 Cost of goods sold 7,450 Depreciation 360 Earnings before $ interest and taxes 1,190 Interest paid 93 Taxable income $ 1,097 Taxes 384 Net income

$ 713 Windswept, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash

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$ 170

$ 200

Accounts payable

2021

2022

$ 1,270

$ 1,492

Accounts receivable Inventory Total Net fixed assets Total assets

980 1,580 $ 2,730 3,350

880 1,605 $ 2,685 3,760

Long-term debt 1,050 Common stock 3,270 Retained earnings 490

1,283 2,930 740

$ 6,080

$ 6,445

Total liabilities $ & equity 6,080

$ 6,445

What is the cash coverage ratio for 2022? A) 7.75 times B) 16.67 times C) 2.15 times D) 3.56 times E) 12.80 times

15)

Use the following information to answer this question.

Windswept, Incorporated 2022 Income Statement (in millions) Net sales $ 9,000 Cost of goods sold 7,490 Depreciation 420 Earnings before $ interest and taxes 1,090 Interest paid 88 Taxable income $ 1,002 Taxes 351 Net income

$ 651 Windswept, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash Accounts receivable

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$ 180

$ 215

Accounts payable

980

880

Long-term debt

2021

2022

$ 1,270 1,030

$ 1,485 1,295

Inventory Total Net fixed assets Total assets

1,580 $ 2,740 3,320

1,595 $ 2,690 3,760

Common stock 3,270 Retained earnings 490

2,930 740

$ 6,060

$ 6,450

Total liabilities $ & equity 6,060

$ 6,450

What is the return on equity for 2022? A) 21.00% B) 29.70% C) 17.74% D) 22.22% E) 37.20%

16)

Use the following information to answer this question.

Windswept, Incorporated 2022 Income Statement (in millions) Net sales $ 8,650 Cost of goods sold 7,250 Depreciation 300 Earnings before $ interest and taxes 1,100 Interest paid 70 Taxable income $ 1,030 Taxes 309 Net income

$ 721 Windswept, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash

$ 140

$ 155

Accounts payable

Accounts receivable Inventory

900 1,500

710 1,520

Long-term debt Common stock

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2021

2022

$ 1,160 940 3,190

$ 1,302 1,118 2,890

Total Net fixed assets Total assets

$ 2,540 3,200

$ 2,385 3,650

Retained earnings

450

725

$ 5,740

$ 6,035

Total liabilities $ & equity 5,740

$ 6,035

Windswept, Incorporated, has 250 million shares of stock outstanding. Its price-earnings ratio for 2022 is 15. What is the market price per share of stock? A) $43.26 B) $66.00 C) $27.00 D) $43.50 E) $28.84

17)

Use the following information to answer this question.

Windswept, Incorporated 2022 Income Statement (in millions) Net sales $ 10,700 Cost of goods sold 8,050 Depreciation 380 Earnings before $ 2,270 interest and taxes Interest paid 104 Taxable income $ 2,166 Taxes 650 Net income

$ 1,516 Windswept, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash

$ 390

$ 415

Accounts payable

Accounts receivable 1,150 Inventory 1,920 Total $ 3,460

1,050 1,790 $

Long-term debt Common stock Retained

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2021

2022

$ 1,970 1,090 3,400 670

$ 1,885 1,550 3,160 920

Net fixed assets Total assets

3,670 $ 7,130

3,255 4,260

earnings

$ 7,515

Total liabilities & equity

$ 7,130

$ 7,515

2021

2022

$ 1,710 Long-term debt 880 Common stock 3,380 Retained earnings 950

$ 1,770 680 3,350 1,200

What were the total dividends paid for 2022? A) $1,266 million B) $505 million C) $795 million D) $1,101 million E) $250 million

18)

Use the following information to answer this question.

Bayside, Incorporated 2022 Income Statement (in millions) Net sales $ 6,170 Cost of goods sold 4,590 Depreciation 395 Earnings before $ interest and taxes 1,185 Interest paid 44 Taxable income $ 1,141 Taxes 399 Net income

$ 742 Bayside, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash

$ 145

$ 250

Accounts receivable Inventory Total

1,130 1,805 $

970 2,130 $

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Accounts payable

Net fixed assets Total assets

3,080 3,840

3,350 3,650

$ 6,920

$ 7,000

Total liabilities $ & equity 6,920

$ 7,000

How many dollars of sales were generated from every dollar of fixed assets during 2022? A) $1.65 B) $.88 C) $1.61 D) $1.69 E) $.89

19)

Use the following information to answer this question.

Bayside, Incorporated 2022 Income Statement (in millions) Net sales $ 7,220 Cost of goods sold 4,540 Depreciation 385 Earnings before $ interest and taxes 2,295 Interest paid 42 Taxable income $ 2,253 Taxes 789 Net income

$ 1,464 Bayside, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash

$ 140

$ 245

Accounts receivable Inventory Total

1,110 1,800 $

950 2,130 $

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2021

2022

$ 1,690 Long-term debt 870 Common stock 3,360 Retained earnings 940

$ 2,095 670 3,140 1,190

Accounts payable

Net fixed assets Total assets

3,050 3,810

3,325 3,770

$ 6,860

$ 7,095

Total liabilities $ & equity 6,860

$ 7,095

What is the equity multiplier for 2022? A) 2.15 times B) 1.01 times C) 2.26 times D) .55 times E) 1.64 times

20)

Use the following information to answer this question.

Bayside, Incorporated 2022 Income Statement (in millions) Net sales $ 6,290 Cost of goods sold 4,700 Depreciation 450 Earnings before $ interest and taxes 1,140 Interest paid 42 Taxable income $ 1,098 Taxes 329 Net income

$ 769 Bayside, Incorporated 2021 and 2022 Balance Sheets (in millions) 2021 2022

Cash

$ 165

$ 270

Accounts receivable Inventory Total

1,190 1,905 $ 3,260

1,030 2,140 $ 3,440

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2021

2022

$ 1,830 Long-term debt 910 Common stock 3,440 Retained earnings 980

$ 1,860 710 3,380 1,230

Accounts payable

Net fixed assets

3,900

3,740

Total assets

$ 7,160

$ 7,180

Total liabilities $ & equity 7,160

$ 7,180

What is the return on equity for 2022? A) 17.40% B) 23.82% C) 17.04% D) 10.71% E) 16.68%

21) The Green Giant has a 6 percent profit margin and a 65 percent dividend payout ratio. The total asset turnover is 1.5 times and the equity multiplier is 1.6 times. What is the sustainable rate of growth? A) 14.40% B) 8.50% C) 26.00% D) 2.40% E) 5.31%

22) A firm wants a sustainable growth rate of 3.43 percent while maintaining a dividend payout ratio of 33 percent and a profit margin of 7 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth? A) .41 times B) .67 times C) .71 times D) .22 times E) .59 times

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Answer Key Test name: Chapter 03 Test Bank - Algo 1) E Total assets = $542 + 298 = $840 Common-size value of inventory = $100/$840 = .1190, or 11.90% 2) A $1,370/Total equity = .22 Total equity = $6,227.27 Total assets = $1,370 + 6,227.27 = $7,597.27 3) B EBIT = $4,660 − 2,655 − 457 = $1,548 Cash coverage ratio = ($1,548 + 457)/$161 = 12.45 times 4) E Inventory turnover = $2,250/$522 = 4.3103 Days’ sales in inventory = 365 days/4.3103 = 84.68 days 5) E Current assets = $520 + 830 = $1,350 Total asset turnover = $6,300/($1,350 + 2,266) = 1.74 Sales generated by $1 in total assets = $1 × 1.74 = $1.74 6) E Net income = $4,250 × .06 = $255.00 Total debt ratio = .42 = ($3,950 − Total equity)/$3,950 Total equity = $2,291.00 Return on equity = $255.00/$2,291.00 = .1113, or 11.13% 7) C Earnings per share = ($9,600 × .04)/6,400 = $.06000 Price-earnings ratio = $1.70/$.06000 = 28.33 times 8) E Version 1

Debt-equity ratio = .30 = $3,700/Total equity Total equity = $12,333.33 Return on equity = $700/$12,333.33 = .0568, or 5.68% 9) E Net income = .21 × $8,000 = $1,680 10) B Quick ratio = ($2,720 − 1,650)/$1,310 = .82 times 11) E Receivables turnover = $9,360/$880 = 10.6364 times Days’ sales in receivables = 365 days/10.6364 = 34.32 days 12) E Fixed asset turnover = $9,050/$3,680 = 2.46 times 13) C Equity multiplier = $6,600/($2,960 + 770) = 1.77 times 14) B Cash coverage ratio = ($1,190 + 360)/$93 = 16.67 times 15) C Return on equity = $651/($2,930 + 740) = .1774, or 17.74% 16) A Earnings per share = $721/250 = $2.884000 Price = $2.884000 × 15 = $43.26 17) A Retention ratio = ($920 million − 670 million)/$1,516 million = .165 Dividends paid = (1 − .165) × $1,516 million = $1,266 million 18) D Fixed asset turnover = $6,170/$3,650 = 1.69 Sales generated = $1 × 1.69 = $1.69 19) E Equity multiplier = $7,095/($3,140 + 1,190) = 1.64 times 20) E Version 1

Return on equity = $769/($3,380 + 1,230) = .1668, or 16.68% 21) E Return on equity = .06 × 1.50 × 1.60 = .144 Sustainable rate of growth = [.144 × (1 − .65)]/{1 − [.144 × (1 − .65)]} = .0531, or 5.31% 22) A Sustainable growth rate = .0343 = [ROE × (1 − .33)]/{1 − [ROE × (1 − .33)]} ROE = .04950 ROE = .04950 = .07 × 1/2 × Equity multiplier Equity multiplier = 1.41 Debt-equity ratio = 1.41 − 1 = .41 times

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) 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.

2) 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.

The DuPont identity can be accurately defined as: A) Return on equity × Total asset turnover × Equity multiplier. B) Equity multiplier × Return on assets. C) Profit margin × Return on equity. D) Total asset turnover × Profit margin × Debt-equity ratio. E) Equity multiplier × Return on assets × Profit margin.

4) Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

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A) DuPont rate B) External growth rate C) Sustainable growth rate D) Internal growth rate E) Cash flow rate

5) 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 external equity and a constant debt-equity ratio

6) 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

7) 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 three years to 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

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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 dividend payout is changing.

9) Quincy Real Estate pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage 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.

10)

Which one of these 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

11) 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 on 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

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12) A firm has a current ratio of 1.4 and a quick ratio of .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.

13) Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due. A) Current ratio B) Debt ratio C) Cash coverage ratio D) Cash ratio E) Quick ratio

14)

Which one of the following is a measure of long-term solvency? A) Price-earnings ratio B) Profit margin C) Cash coverage ratio D) Receivables turnover E) Quick ratio

15)

The cash 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.

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16)

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 turnover.

17)

If a firm has an inventory turnover of 15, the firm: A) sells its entire inventory every 15 days. B) stocks its inventory only once every 15 days. C) delivers inventory to its customers every 15 days. D) sells its inventory by granting customers 15 days of free credit. E) sells its entire inventory an average of 15 times each year.

18) Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? A) A decrease in the total asset turnover B) A decrease in the capital intensity ratio C) An increase in days' sales in receivables D) A decrease in the profit margin E) A decrease in the inventory turnover rate

19) Scranton Paper Company generates $.97 in sales for every $1 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

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20) Which one of the following will increase the profit margin of a firm, all else held 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

21) 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 = .8; debt-equity ratio = .8 D) Cash coverage ratio = 2.6; debt-equity ratio = .3 E) Cash coverage ratio = .5; total debt ratio = .2

22) All else held 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

23)

Which one of these statements is true concerning the price-earnings (PE) ratio?

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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.

24)

Which ratio was primarily designed to monitor firms with negative earnings? A) Price-sales ratio B) Market-to-book ratio C) Profit margin D) ROE E) ROA

25) The DuPont identity can be used to help a financial manager determine the: 1.degree of financial leverage used by a firm. 2.operating efficiency of a firm. 3.utilization rate of a firm's assets. 4.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

26) Mader’s Camping Supply reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios? 1. Profit margin 2. Return on assets 3. Total asset turnover 4. Return on equity

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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

27) LaVerne’s Candies reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? 1.Capital intensity ratio 2.Return on assets 3.Total asset turnover 4.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

28) Alameda Markets 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

29) is:

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm

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A) zero percent. B) 100 percent. C) equal to the ROA. D) negative. E) infinite.

30)

The sustainable growth rate is based on the premise that:

A) an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued. B) no additional equity will be added to the firm. C) the debt-equity ratio will be held constant. D) the dividend payout ratio will be zero. E) the dividend payout ratio will increase at a steady rate.

31)

A firm can increase its sustainable rate of growth by decreasing its: A) profit margin. B) dividends. C) total asset turnover. D) target debt-equity ratio. E) equity multiplier.

32)

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 debtholders. E) is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods.

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33)

Which one of the following statements is correct?

A) Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business. B) Peer group analysis is easier when seasonal firms have different fiscal years. C) Peer group analysis is simplified when firms use varying methods of depreciation. D) Comparing results across geographic locations is easier since all countries now use a common set of accounting standards. E) Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

34) Prisqua Rentals has inventory of $147,500, equity of $320,000, total assets of $658,800, and sales of $800,780. What is the common-size percentage for the inventory account? A) 15.07% B) 18.42% C) 20.36% D) 22.39% E) 39.96%

35) A firm has inventory of $46,500, accounts payable of $17,400, cash of $1,250, net fixed assets of $318,650, long-term debt of $109,500, and accounts receivable of $16,600. What is the common-size percentage of the equity? A) 70.60% B) 70.12% C) 66.87% D) 42.08% E) 68.75%

36) Saki Kale Farms has net income of $96,320, total assets of $975,200, total equity of $555,280, and total sales of $1,141,275. What is the common-size percentage for the net income?

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A) 7.90% B) 8.44% C) 13.88% D) 48.65% E) 74.57%

37) Xinya Controls has a profit margin of 7.5 percent and net income of $112,545. What is the common-size percentage for the cost of goods sold if that expense amounted to $855,425 for the year? A) 12.19% B) 23.50% C) 56.99% D) 61.06% E) 58.25%

38) A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the retention ratio is 56 percent. What is the common-size percentage for the dividends paid? A) 1.99% B) 2.86% C) 1.21% D) 2.24% E) 1.42%

39) Stowell Horse Farms has total assets of $689,400, long-term debt of $198,375, total equity of $364.182, net fixed assets of $512,100, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio? A) .95 B) 1.12 C) 1.26 D) 1.40 E) 1.50

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40) Lilly K’s has total assets of $726,030, net fixed assets of $556,740, long-term debt of $437,265, and total debt of $583,050. If inventory is $234,765, what is the current ratio? A) 2.01 B) .52 C) .84 D) 1.16 E) 1.94

41) A firm has net working capital of $8,200 and current assets of $37,500. What is the current ratio? A) .69 B) .78 C) 1.28 D) 1.45 E) 1.67

42) Tarik’s Used Books has cash of $2,950, 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) .08 B) .25 C) .30 D) .46 E) .51

43) You are analyzing a company that has cash of $11,880, accounts receivable of $17,380, fixed assets of $100,000, accounts payable of $54,405, and inventory of $51,590. What is the quick ratio?

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A) .54 B) .67 C) .83 D) .61 E) 1.64

44) Southwestern Agricultural Cooperative has current liabilities of $162,500, net working capital of $28,560, inventory of $175,800, and sales of $1,941,840. What is the quick ratio? A) .07 B) .16 C) .09 D) 1.08 E) 1.18

45) Copper Hill Winery has inventory of $431,700, accounts payable of $94,200, cash of $51,950, and accounts receivable of $103,680. What is the cash ratio? A) .64 B) .55 C) .53 D) .98 E) 1.34

46) DeSmet Real Estate has cash of $7,800, accounts receivable of $15,600, inventory of $48,850, and net working capital of $5,000. What is the cash ratio? A) .08 B) .12 C) .15 D) .42 E) .45

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47) Khalid Warehouse has total assets of $485,390, net fixed assets of $250,000, current liabilities of $23,456, and long-term liabilities of $148,000. What is the total debt ratio? A) .30 B) .35 C) .69 D) .53 E) .68

48) Efran’s Auto Repair has total equity of $815,280, long-term debt of $391,900, net working capital of $49,500, and total assets of $1,292,485. What is the total debt ratio? A) .50 B) .37 C) .64 D) .46 E) .60

49) A firm has total assets of $958,090, current assets of $304,522, current liabilities of $183,012, and total debt of $382,901. What is the debt-equity ratio? A) 1.03 B) 1.20 C) 1.31 D) 1.43 E) .67

50) Steamboat Bike Shoppe has total assets of $536,712 and an equity multiplier of 1.36. What is the debt-equity ratio? A) .68 B) .24 C) 1.24 D) .36 E) 1.36

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51) Varya’s Dance Supply has total assets of $550,000 and total debt of $295,000. What is the equity multiplier? A) .46 B) 1.0 C) 1.075 D) 1.86 E) 2.16

52)

A firm has an equity multiplier of 1.5. This means that the firm has a: A) debt-equity ratio of .67. B) debt-equity ratio of .50. C) total debt ratio of .50. D) total debt ratio of .67. E) total debt ratio of .33.

53) Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.43, and a profit margin of 4.8 percent. What is the equity multiplier? A) .30 B) .43 C) 1.93 D) 2.43 E) 2.30

54) Assume earnings before interest and taxes of $56,850 and net income of $23,954. The tax rate is 21 percent. What is the times interest earned ratio? A) 1.51 B) 2.73 C) 2.41 D) 2.77 E) 2.14

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55) Tribeca Movers has sales of $645,560, cost of goods sold of $425,890, depreciation of $32,450, and interest expense of $12,500. The tax rate is 21 percent. What is the times interest earned ratio? A) 14.98 B) 12.75 C) 11.63 D) 6.25 E) 2.75

56) A firm has net income of $4,238 and interest expense of $898. The tax rate is 21 percent. What is the firm's times interest earned ratio? A) 7.33 B) 7.26 C) 6.97 D) 8.26 E) 9.33

57) A firm has net income of $86,220, depreciation of 18,510, taxes of $13,420, and interest paid of $7,815. What is the cash coverage ratio? A) 8.78 B) 20.10 C) 14.14 D) 16.12 E) 19.55

58) Ennis Hotel Group has $126,500 in total assets, depreciation of 3,500, and interest of $1,850. The total asset turnover rate is 1.02. Earnings before interest and taxes are equal to 24 percent of sales. What is the cash coverage ratio?

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A) 9.37 B) 16.74 C) 18.63 D) 20.72 E) 22.82

59) Firefly, Incorporated, has sales of $1,366,400, cost of goods sold of $897,575, and inventory of $148,630. What is the inventory turnover rate? A) 7.33 times B) 6.90 times C) 5.70 times D) 6.04 times E) 8.47 times

60) SRC, Incorporated, sells its inventory in an average of 52 days and collects its receivables in 3.6 days, on average. What is the inventory turnover rate? Assume a 365-day year. A) 8.49 B) 7.29 C) 8.68 D) 10.18 E) 7.02

61) McHenry Sales has sales of $938,300, cost of goods sold of $688,050, and inventory of $98,880. How long, on average, does it take the firm to sell its inventory? A) 6.40 days B) 52.45 days C) 48.68 days D) 59.01 days E) 61.10 days

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62) Napolitano Art Gallery sells its inventory in 68 days, on average. Costs of goods sold for the year are $313,256. What is the average value of the firm's inventory? Assume a 365-day year. A) $20,129 B) $47,698 C) $58,360 D) $61,096 E) $32,513

63) Lopez Technology has accounts receivable of $35,680, total assets of $538,500, cost of goods sold of $325,400, and a capital intensity ratio of .90. What is the accounts receivable turnover rate? A) 15.56 B) 16.77 C) 9.12 D) 10.13 E) 10.31

64) It takes Leila’s Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year. A) 23.69 B) 11.41 C) 21.73 D) 24.23 E) 19.55

65) Simmons Medical Group has sales of $980,000, cost of goods sold of $765,250, and accounts receivable of $88,640. How long, on average, does it take the firm's customers to pay for their purchases? Assume a 365-day year.

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A) 8.63 days B) 15.5 days C) 32.56 days D) 33.01 days E) 42.56 days

66) Belleville Sports Wear has $38,100 in receivables and $523,700 in total assets. The total asset turnover rate is 1.17 and the profit margin is 7.3 percent. How long, on average, does it take to collect the receivables? Assume a 365-day year. A) 26.91 days B) 19.45 days C) 11.68 days D) 31.07 days E) 22.70 days

67) Westlake Human Resource Consulting has total revenue of $285,400, cost of goods sold equal to 68 percent of sales, and a profit margin of 9.2 percent. Net fixed assets are $126,400 and current assets are $65,880. What is the total asset turnover rate? A) 1.01 B) 1.30 C) 1.48 D) 1.84 E) 4.81

68) Whitt's BBQ has sales of $1,318,000, a profit margin of 7.4 percent, and a capital intensity ratio of .78. What is the total asset turnover rate? A) 1.04 B) 1.08 C) 1.13 D) 1.43 E) 1.28

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69) Maren’s House of Pancakes has sales of $635,400, total equity of $268,000, and a debtequity ratio of .6. What is the capital intensity ratio? A) .67 B) .59 C) .72 D) .89 E) 1.67

70) Discount Outlet has net income of $389,100, a profit margin of 2.8 percent, and a return on assets of 8.6 percent. What is the capital intensity ratio? A) .33 B) .67 C) 1.49 D) 1.34 E) 3.07

71) Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes are equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 21 percent? A) −2.43% B) 1.87% C) 3.33% D) −5.29% E) −6.11%

72) Galway Plumbing Supply has a return on equity of 19.3 percent, a profit margin of 10.1 percent, and total equity of $645,685. What is the net income?

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A) $65,214.19 B) $123,383.71 C) $124,617.21 D) $189,831.40 E) $125,863.40

73) Spring Falls Gifts has sales of $680,300, total assets of $589,100, and a profit margin of 4.3 percent. What is the return on assets? A) 4.30% B) 6.54% C) 3.83% D) 7.01% E) 4.97%

74) Prime Electronic Sales has sales of $723,450, total equity of $490,000, a profit margin of 9.3 percent, and a debt-equity ratio of .42. What is the return on assets? A) 5.05% B) 10.07% C) 9.03% D) 9.67% E) 23.02%

75) If sales are $211,000, the profit margin is 6.3 percent, and the capital intensity ratio is .94, what is the return on assets? A) 4.42% B) 6.08% C) 6.39% D) 6.92% E) 6.70%

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76) Raynar Enterprises has total equity of $645,500, sales of $1.15 million, and a profit margin of 3.6 percent. What is the return on equity? A) 4.16% B) 6.44% C) 7.13% D) 6.41% E) 7.07%

77) Element Trucking has total sales of $911,300, a total asset turnover of 1.1, and a profit margin of 5.87 percent. Currently, the firm has 18,500 shares outstanding. What are the earnings per share? A) $2.92 B) $2.97 C) $2.86 D) $2.58 E) $2.89

78) AMC Supply has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio? A) 6.38 B) 7.99 C) 6.65 D) 5.12 E) 7.41

79) Northside City Mart has a market-to-book ratio of 2.8, net income of $323,500, a book value per share of $31.25, and 7,500 shares of stock outstanding. What is the price-earnings ratio?

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A) 2.03 B) 3.16 C) 2.61 D) 6.25 E) 5.26

80) Frey’s has a profit margin of 3.8 percent on sales of $287,200. The firm currently has 5,000 shares of stock outstanding at a market price of $7.11 per share. What is the price-earnings ratio? A) 3.26 B) 8.02 C) 11.50 D) 5.93 E) 12.84

81) A firm has sales of $311,000 and net income of $31,600. The price-sales ratio is 3.24 and market price is $36 per share. How many shares are outstanding? A) 20,608 B) 27,990 C) 28,356 D) 30,515 E) 31,011

82) Castaway Resort common stock is selling for $42.50 a share. The company has earnings per share of $.79 and a book value per share of $17.50. What is the market-to-book ratio? A) 2.43 B) 7.69 C) 2.96 D) 3.97 E) 5.92

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83) Healthy Foods has a book value per share of $27.89 earnings per share of $2.78, and a price-earnings ratio of 14.5. What is the market-to-book ratio? A) 1.08 B) 1.59 C) 1.99 D) 1.45 E) 2.16

84) The Inside Door has total debt of $208,600, total equity of $343,560, and a return on equity of 13.27 percent. What is the return on assets? A) 8.26% B) 9.14% C) 11.45% D) 9.61% E) 9.48%

85) Darnell's Place has total assets of $152,080, a debt-equity ratio of .62, and net income of $14,342 What is the return on equity? A) 13.48% B) 13.73% C) 15.74% D) 15.28% E) 14.61%

86) Computer Geeks has sales of $618,900, a profit margin of 13.2 percent, a total asset turnover rate of 1.54, and an equity multiplier of 1.06. What is the return on equity?

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A) 18.91% B) 12.67% C) 18.28% D) 22.11% E) 21.55%

87) Goshen Pools has total equity of $358,200 and net income of $47,500. The debt-equity ratio is .68 and the total asset turnover is 1.2. What is the profit margin? A) 4.82% B) 5.23% C) 5.67% D) 6.58% E) 7.31%

88) A firm has net income of $197,400, a return on assets of 9.7 percent, and a debt-equity ratio of .85. What is the return on equity? A) 11.67% B) 18.98% C) 14.45% D) 16.22% E) 17.95%

89) The Blue Heron Company has a return on equity of 23.62 percent, an equity multiplier of 1.48, and a capital intensity ratio of 1.06. What is the profit margin? A) 15.06% B) 13.57% C) 15.84% D) 16.92% E) 14.60%

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90) The Saw Mill has a return on assets of 7.92 percent, a total asset turnover rate of 1.18, and a debt-equity ratio of 1.46. What is the return on equity? A) 14.26% B) 13.64% C) 12.28% D) 19.48% E) 12.03%

91) Rogers Radiators has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity? A) 6.77% B) 5.93% C) 8.95% D) 12.21% E) 14.09%

92) McClellan Exports has total assets of $938,280, a total asset turnover rate of 1.18, a debtequity ratio of .47, and a return on equity of 18.7 percent. What is the firm's net income? A) $119,359.43 B) $88,303.33 C) $104,624.14 D) $121,548.09 E) $92,236.67

93) Western Hardwoods has total equity of $318,456, a profit margin of 3.79 percent, an equity multiplier of 1.68, and a total asset turnover of .97. What is the amount of the firm's sales? A) $518,956 B) $473,550 C) $195,420 D) $190,839 E) $639,440

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94) Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets? A) 5.56% B) 8.06% C) 13.67% D) 15.24% E) 17.41%

95) Al’s Markets earns $.12 in profit for every $1 of equity and borrows $.65 for every $1 of equity. What is the firm's return on assets? A) 12.00% B) 7.27% C) 15.15% D) 13.75% E) 8.33%

96) Good Foods has net income of $82,490, total equity of $518,700, and total assets of $1,089,500. The dividend payout ratio is .30. What is the internal growth rate? A) 2.32% B) 3.57% C) 5.60% D) 2.87% E) 4.94%

97) Fried Donuts has sales of $764,900, total assets of $687,300, total equity of $401,300, net income of $68,200, and dividends paid of $27,000. What is the internal growth rate?

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A) 5.48% B) 6.38% C) 5.98% D) 7.34% E) 7.92%

98) 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 $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio? A) 5.11% B) 4.88% C) 6.62% D) 7.67% E) 8.37%

99) Lookin’ Up earns $.094 in profit on every $1 of sales and has $1.21 in assets for every $1 of sales. The firm pays out 45 percent of its profits to its shareholders. What is the internal growth rate? A) 6.37% B) 2.76% C) 3.82% D) 4.46% E) 2.65%

100) Amir’s has a total asset turnover rate of 1.13, an equity multiplier of 1.46, a profit margin of 5.28 percent, a retention ratio of .74, and total assets of $138,000. What is the sustainable growth rate?

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A) 6.98% B) 6.89% C) 7.33% D) 7.04% E) 7.21%

101) A firm has a return on equity of 17.8 percent, a return on assets of 11.3 percent, and a 65 percent dividend payout ratio. What is the sustainable growth rate? A) 5.72% B) 6.84% C) 7.12% D) 11.38% E) 6.64%

102) Pizza Pie maintains a constant debt-equity ratio of .55. The firm had net income of $14,800 for the year and paid $12,000 in dividends. The firm has total assets of $248,000. What is the sustainable growth rate? A) 3.38% B) 2.27% C) 1.78% D) 3.62% E) 4.97%

103) 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% B) 11.29% C) 11.79% D) 12.08% E) 12.39%

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104) Last year, a firm earned $67,800 in net income on sales of $934,600. Total assets increased by $62,000 and total equity increased by $43,500 for the year. No new equity was issued, and no shares were repurchased. What is the retention ratio? A) 29.62% B) 35.84% C) 56.25% D) 70.38% E) 64.16%

105) Last year, Teresa's Fashions earned $2.03 per share and had 15,000 shares of stock outstanding. The firm paid a total of $16,672 in dividends. What is the retention ratio? A) 45.25% B) 64.07% C) 52.00% D) 40.21% E) 54.75%

106) Adell Furniture has a profit margin of 8.2 percent on sales of $211,000. The common size ratio of dividends is .03 and total assets are $196,000. What is the plowback ratio? A) 58.20% B) 27.33% C) 54.60% D) 63.41% E) 68.20%

107) Lawler's BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio?

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A) 46.32% B) 49.78% C) 50.23% D) 58.09% E) 62.99%

108) Suppose Healey Corporation has the following characteristics: Shares outstanding: 68,500 Current share price: $13.50 Total debt: $438,500 Total cash: $63,100 Based on the formula above, what is the enterprise value of this company? A) $948,850 B) $1,300,150 C) $1,500,400 D) $880,900 E) $1,125,600

109) Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year. A) 24.78 days B) 26.78 days C) 29.09 days D) 31.15 days E) 33.33 days

110) Sunshine Rentals has a debt-equity ratio of .67. The return on assets is 8.1 percent, and total equity is $595,000. What is the net income?

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A) $82,147.09 B) $81,311.29 C) $80,485.65 D) $78,887.02 E) $83,013.69

111) Turner's Store had a profit margin of 6.8 percent, sales of $498,200, and total assets of $542,000. If management set a goal of increasing the total asset turnover to 1.10 times, what would the new sales figure need to be, assuming no increase in total assets? A) $467,185 B) $492,727 C) $488,500 D) $596,200 E) $657,480

112) High Road Transport has a current stock price of $5.60. For the past year, the company had net income of $287,400, total equity of $992,300, sales of $1,511,000, and 750,000 shares outstanding. What is the market-to-book ratio? A) 3.54 B) 3.81 C) 3.99 D) 4.47 E) 4.23

113) Taylor, Incorporated, has sales of $11,898, total assets of $9,315, and a debt-equity ratio of .55. If its return on equity is 14 percent, what is its net income? A) $841.35 B) $887.16 C) $904.10 D) $911.16 E) $927.46

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114) Mercier United has net income of $128,470. There are currently 32.67 days' sales in receivables. Total assets are $1,419,415, total receivables are $122,306, and the debt-equity ratio is .40. What is the return on equity? A) 13.48% B) 15.03% C) 11.42% D) 12.67% E) 13.09%

115) For the most recent year, Wilson Enterprises had sales of $689,000, cost of goods sold of $492,300, depreciation expense of $61,200, additions to retained earnings of $48,560, and dividends per share of $2.18. There are 12,000 shares of common stock outstanding and the tax rate is 21 percent. What is the times interest earned ratio? A) 4.47 B) 4.09 C) 3.31 D) 3.15 E) 3.67

116) A fire has destroyed a large percentage of the financial records of the Strongwell Company You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was .42, and total debt was $548,000. What is the return on assets? A) 6.92% B) 8.00% C) 8.45% D) 9.03% E) 9.29%

117) Donegal's Industrial Products wishes to maintain a growth rate of 6 percent a year, a debt-equity ratio of .45, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 1.25. What profit margin must the firm achieve? Version 1

A) 4.68% B) 5.29% C) 6.33% D) 6.97% E) 8.19%

118) A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout ratio of 60 percent. The current profit margin is 7.5 percent, and the firm uses no external financing sources. What must be the total asset turnover? A) .98 B) 1.06 C) 1.21 D) 1.44 E) 1.59

119) It is important to review not just the current ratio, but also the quick ratio and cash ratio because: A) the cash ratio must always provide a greater statistic than the current ratio and quick ratio. B) the quick ratio includes inventory that can be easily liquidated for cash. C) a low current ratio may not necessarily indicate a problem with a company. D) companies can operate with a cash ratio close to zero and maintain liquidity. E) GAAP requires it.

120)

Financial ratios are traditionally grouped in all but which of the following categories? A) Short- and long-term solvency B) Asset management C) Working capital management D) Profitability ratios E) Market value ratios

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121)

Ratio analysis cannot be taken at face value for all of the following except which reason? A) No underlying theory exists to pinpoint exact benchmarks. B) While GAAP is consistent across the globe, multiple currencies may be considered. C) Large conglomerates can cross more than one industry type. D) Different standards and procedures can exist from country to country. E) Benchmarks can vary based on industry and company size.

122)

Which of the following is true regarding the internal growth rate?

A) It represents the maximum possible growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio. B) It represents the maximum possible growth rate a firm can achieve without external financing of any kind. C) It represents the potential growth of the company based only on internal management controls. D) It represents the potential growth of the company after the addition of fixed assets. E) It represents the potential growth of the company if more common stock is issued and sold.

123) The Texas Rustler has total assets of $645,563 and an equity multiplier of 1.22. What is the debt-equity ratio? A) .44 B) .32 C) 1.22 D) .22 E) 1.36

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Answer Key Test name: Chapter 03 Test Bank - Static 1) D 2) A 3) B 4) D 5) E 6) D 7) C 8) C 9) C 10) D 11) C 12) E 13) E 14) C 15) C 16) A 17) E 18) B 19) E 20) D 21) D 22) E 23) A 24) A 25) E 26) D Version 1

27) B 28) D 29) A 30) C 31) B 32) C 33) E 34) D Inventory common-size percentage = $147,500/$658,800 = .2239, or 22.39% 35) C Total assets = Total liabilities and equity = $1,250 + 16,600 + 46,500 + 318,650 = $383,000 Equity common-size percentage = ($383,000 − 17,400 − 109,500)/$383,000 = .6687, or 66.87% 36) B Net income common-size percentage = $96,320/$1,141,275 = .0844, or 8.44% 37) C COGS common-size percentage = $855,245/($112,545/.075) = .5699, or 56.99% 38) D Dividends paid common-size percentage = [$811,000 × .051 × (1 − .56)]/$811,000 = .0224, or 2.24% 39) D Current ratio = ($689,400 − 512,100)/($689,400 − 364,182 − 198,375) = 1.40 40) D Current ratio = ($726,030 − 556,740)/($583,050 − 437,265) = 1.16 41) C Version 1

Current ratio = $37,500/($37,500 − 8,200) = 1.28 42) B Cash ratio = $2,950/$11,900 = .25 43) A Quick ratio = ($11,880 + 17,380)/$54,405 = .54 44) C Quick ratio = ($28,560 + 162,500 − 175,800)/$162,500 = .09 45) B Cash ratio = $51,950/$94,200 = .55 46) B Cash ratio = $7,800/($7,800 + 15,600 + 48,850 − 5,000) = .12 47) B Total debt ratio = ($23,456 + 148,000)/$485,390 = .35 48) B Total debt ratio = ($1,292,485 − 815,280)/$1,292,485 = .37 49) E Debt-equity ratio = $382,901/($958,090 − 382,901) = .67 50) D Debt-equity ratio = 1.36 − 1 = .36 51) E Equity multiplier = $550,000/($550,000 − 295,000) = 2.16 52) B Debt-equity ratio = (1.5 − 1)/1 = .50 53) D Equity multiplier = 1 + 1.43 = 2.43 54) E Times interest earned ratio = $56,850/{$56,850 − [$23,954/(1 − .21)]} = 2.14 55) A

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Times interest earned ratio = ($645,560 − 425,890 − 32,450)/$12,500 = 14.98 56) C Times interest earned ratio = {[$4,238/(1 − .21)] + $898}/$898 = 6.97 57) D Cash coverage ratio = ($86,220 + 13,420 + 7,815 + 18,510)/$7,815 = 16.12 58) C Cash coverage ratio = [(.24 × 1.02 × $126,500) + $3,500]/$1,850 = 18.63 59) D Inventory turnover = $897,575/$148,630 = 6.04 times 60) E Inventory turnover = 365/52 = 7.02 times 61) B Days' sales in inventory = 365/($688,050/$98,880) = 52.45 days 62) C Inventory = $313,256 × 68/365 = $58,360 63) B Accounts receivable turnover = ($538,500/.90)/$35,680 = 16.77 64) C Accounts receivable turnover = 365/16.8 = 21.73 65) D Days' sales in receivables = 365/($980,000/$88,640) = 33.01 days 66) E Days' sales in receivables = 365/[(1.17 × $523,700)/$38,100] = 22.70 days 67) C Total asset turnover = $285,400/($126,400 + 65,880) = 1.48 68) E Version 1

Total asset turnover = 1/.78 = 1.28 69) A Capital intensity ratio = [(1 + .6) × $268,000]/$635,400 = .67 70) A Capital intensity ratio = ($389,100/.086)/($389,100/.028) = .33 71) B Profit margin = {[(.058 × $137,000) − $4,700] × (1 − .21)}/$137,000 = .0187, or 1.87% 72) C Net income = .193 × $645,685 = $124,617.21 73) E Return on assets = (.043 × $680,300)/$589,100 = .0497, or 4.97% 74) D Return on assets = (.093 × $723,450)/[(1 + .42) × $490,000)] = .0967, or 9.67% 75) E Return on assets = (.063 × $211,000)/(.94 × $211,000) = .0670, or 6.70% 76) D Return on equity = (.036 × $1,150,000)/$645,500 = .0641, or 6.41% 77) E Earnings per share = (.0587 × $911,300)/18,500 = $2.89 78) C Price-earnings ratio = $13/{[.062 × ($613,000 × 1.08)]/21,000} = 6.65 79) A Price-earnings ratio = (2.8 × $31.25)/($323,500/7,500) = 2.03 80) A Price-earnings ratio = $7.11/[(.038 × $287,200)/5,000] = 3.26 81) B

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Price-sales ratio = 3.24 = $36/($311,000/Outstanding shares) Outstanding shares = 27,990 82) A Market-to-book ratio = $42.50/$17.50 = 2.43 83) D Market-to-book ratio = ($2.78 × 14.5)/$27.89 = 1.45 84) A Return on assets = (.1327 × $343,560)/($208,600 + 343,560) = .0826, or 8.26% 85) D Return on equity = ($14,342/$152,080) × (1 + .62) = .1528, or 15.28% 86) E Return on equity = .132 × 1.54 × 1.06 = .2155, or 21.55% 87) D Profit margin = ($47,500/$358,200)/[1.2 × (1 + .68)] = .0658, or 6.58% 88) E Return on equity = .097 × (1 + .85) = .1795, or 17.95% 89) D Profit margin = .2362/[(1/1.06) × 1.48] = .1692, or 16.92% 90) D Return on equity = .0792 × (1 + 1.46) = .1948, or 19.48% 91) C Return on equity = ($48,200/$947,100) × (1/.87) × 1.53 = .0895, or 8.95% 92) A Return on equity = .187 = (Net income/$938,280) × (1 + .47) Net income = $119,359.43 93) A Sales = $318,456 × 1.68 × .97 = $518,956 94) A Version 1

Return on assets = .1128/(1 + 1.03) = .0556, or 5.56% 95) B ROE = ($.12/$1) = ROA × [($1 + .65)/$1] ROA = .0727, or 7.27% 96) C Internal growth rate = [($82,490/$1,089,500) × (1 − .30)]/{1 − [($82,490/$1,089,500) × (1 − .30)]} = .0560, or 5.60% 97) B Internal growth rate = {($68,200/$687,300) × [($68,200 − 27,000)/$68,200]}/(1 − {($68,200/$687,300) × [($68,200 − 27,000)/$68,200]}) = .0638, or 6.38% 98) A Internal growth rate = [($32,600/$503,000) × (1 − .25)]/{1 − [($32,600/$503,000) × (1 − .25)]} = .0511, or 5.11% 99) D Internal growth rate = [($.094/$1.21) × (1 − .45)]/{1 − [($.094/$1.21) × (1 − .45)]} = .0446, or 4.46% 100) B Sustainable growth rate = [(.0528 × 1.13 × 1.46) × .74]/{1 − [(.0528 × 1.13 × 1.46) × .74]} = .0689, or 6.89% 101) E Sustainable growth rate = [.178 × (1 − .65)]/{1 − [.178 × (1 − .65)]} = .0664 or 6.64% 102) C Sustainable growth rate = {[($14,800/$248,000) × (1 + .55)] × [($14,800 − 12,000)/$14,800]}/(1 − {[($14,800/$248,000) × (1 + .55)] × [($14,800 − 12,000)/$14,800]}) = .0178, or 1.78% 103) B

Version 1

Sustainable growth rate = {[$5,100/($11,300 + 54,900 − 23,800)] × [($5,100 − 800)/$5,100]}/(1 − {[$5,100/($11,300 + 54,900 − 23,800)] × [($5,100 − 800)/$5,100]}) = .1129, or 11.29% 104) E Plowback ratio = $43,500/$67,800 = .6416, or 64.16% 105) A Plowback ratio = 1 − [($16,672/15,000)/$2.03] = .4525, or 45.25% 106) D Plowback ratio = [(.082 × $211,000) − (.03 × $211,000)]/(.082 × $211,000) = .6341, or 63.41% 107) E Plowback ratio = 1 − [$4,500/(.039 × $311,800)] = .6299, or 62.99% 108) B Enterprise value = (68,500 × $13.50) + $438,500 − 63,100 = $1,300,150 109) B Days' sales in receivables = 365/($5,338,411/$391,648) = 26.78 days 110) C Net income = .081 × (1 + .67) × $595,000 = $80,485.65 111) D Total asset turnover = 1.10 × $542,000 = $596,200 112) E Market-to-book = $5.60/($992,300/750,000) = 4.23 113) A Net income = [$9,315/(1 + .55)] × .14 = $841.35 114) D Return on equity = ($128,470/$1,419,415) × (1 + .40) = .1267, or 12.67% 115) C

Version 1

Net income = $48,560 + ($2.18 × 12,000) = $74,720 Earnings before taxes = [$74,720/(1 − .21)] = $94,582.28 Earnings before interest and taxes = $689,000 − 492,300 − 61,200 = $135,500 Interest = $135,500 − 94,582.28 = $40,917.72 Times interest earned = $135,500/$40,917.72 = 3.31 116) B Debt-equity ratio = .42/(1 − .42) = .72414 Return on assets = .138/(1 + .72414) = .0800, or 8.00% 117) D Sustainable growth = .06 = {[PM × (1/1.25) × (1 + .45)] × (1 − .30)}/(1 − {[PM × (1/1.25) × (1 + .45)] × (1 − .30)}) = .0697, or 6.97% 118) D Internal growth rate = .045 = [.075 × TAT × (1 − .60)]/{1 − [.075 × TAT × (1 − .60)]} TAT = 1.44 119) C 120) C 121) B 122) A 123) D Debt-equity ratio = 1.22 − 1 = .22

Version 1

Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Thomas invests $121 in an account that pays 6 percent simple interest. How much money will Thomas have at the end of 4 years? A) $150.04 B) $152.76 C) $157.30 D) $144.11 E) $142.78

2) Beatrice invests $1,290 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had been compounded annually? A) $31.28 B) $21.48 C) $18.08 D) $107.41 E) $25.02

3) You can invest in an account that pays simple interest or an account that pays compound interest. In either case, you plan to invest $1,500 today and both accounts have an annual interest rate of 8 percent. How much more interest will you receive in the 8th year in the account that pays compound interest? A) $85.66 B) $99.33 C) $98.51 D) $102.82 E) $120.00

4) What is the future value of $2,998 invested for 9 years at 5.2 percent compounded annually?

Version 1

A) $7,303.87 B) $3,777.09 C) $4,731.22 D) $3,766.19 E) $7,466.46

5) Five years from today, you plan to invest $2,650 for 6 additional years at 6.1 percent compounded annually. How much will you have in your account 11 years from today? A) $4,580.11 B) $3,571.59 C) $3,780.40 D) $4,075.27 E) $3,958.04

6) Today, your dream car costs $55,600. You feel that the price of the car will increase at an annual rate 2.5 percent. If you plan to wait 5 years to buy the car, how much will it cost at that time? A) $61,372.00 B) $64,478.95 C) $62,906.30 D) $63,409.98 E) $64,455.64

7) You are going to deposit $3,700 in an account that pays .63 percent interest per quarter. How much will you have in 9 years? A) $4,643.79 B) $4,628.91 C) $4,638.64 D) $4,667.86 E) $4,609.60

Version 1

8) You are going to deposit $2,600 in an account that pays .32 percent interest per month. How much will you have in 6 years? A) $3,272.47 B) $3,259.58 C) $3,262.03 D) $3,275.74 E) $3,282.94

9) Retirement Investment Advisors, Incorporated, has just offered you an annual interest rate of 6 percent until you retire in 40 years. You believe that interest rates will increase over the next year and you would be offered 6.6 percent per year one year from today. If you plan to deposit $18,000 into the account either this year or next year, how much more will you have when you retire if you wait one year to make your deposit? A) $12,219.43 B) $48,043.26 C) $49,213.56 D) $32,529.54 E) $22,866.08

10) You just purchased two coins at a price of $430 each. Because one of the coins is more collectible, you believe that its value will increase at a rate of 6.7 percent per year, while you believe the second coin will only increase at 6.1 percent per year. If you are correct, how much more will the first coin be worth in 25 years? A) $286.07 B) $145.77 C) $69.36 D) $499.36 E) $402.00

11) You are going to deposit $18,500 today. You will earn an annual rate of 3.1 percent for 10 years, and then earn an annual rate of 2.5 percent for 13 years. How much will you have in your account in 23 years? Version 1

A) $25,104.89 B) $34,607.37 C) $37,335.42 D) $32,136.39 E) $32,645.30

12) You Save Bank has a unique account. If you deposit $5,750 today, the bank will pay you an annual interest rate of 6 percent for 3 years, 6.6 percent for 2 years, and 7.3 percent for 6 years. How much will you have in your account in 11 years? A) $10,915.22 B) $8,102.50 C) $8,959.82 D) $11,419.39 E) $11,876.77

13) The most recent census for a city indicated that there were 1,054,773 residents. The population of the city is expected to increase at an annual rate of 5 percent each year for the next 16 years. What will the population be at that time? A) 2,417,559 B) 2,322,751 C) 2,484,268 D) 2,538,437 E) 2,302,437

14) What is the present value of $12,350 to be received 4 years from today if the discount rate is 5 percent? A) $10,588.13 B) $10,668.39 C) $10,150.80 D) $10,160.38 E) $7,410.00

Version 1

15) You need to have $35,000 for a down payment on a house in 7 years. If you can earn an annual interest rate of 3.4 percent, how much will you have to deposit today? A) $22,662.15 B) $26,241.82 C) $27,696.46 D) $26,776.83 E) $26,785.75

16) A company has a pension liability of $490,000,000 that it must pay in 27 in years. If it can earn an annual interest rate of 4.5 percent, how much must it deposit today to fund this liability? A) $131,245,676.31 B) $149,298,772.80 C) $121,515,046.67 D) $47,537,100.25 E) $142,869,639.05

17) You want to have $92,000 in 18 years to help your child attend college. If you can earn an annual interest rate of 4.8 percent, how much will you have to deposit today? A) $36,314.26 B) $39,562.59 C) $17,829.65 D) $37,750.57 E) $34,501.45

18) A small business has determined that the machinery they currently use will wear out in 18 years. To replace the new machine when it wears out, the company wants to establish a savings account today. If the interest rate on the account is 2.1 percent per quarter and the cost of the machinery will be $335,000, how much will the company have to deposit today?

Version 1

A) $78,436.41 B) $75,022.47 C) $76,022.77 D) $230,452.51 E) $76,689.64

19) You want to have $17,000 in 10 years for a dream vacation. If you can earn an interest rate of .4 percent per month, how much will you have to deposit today? A) $10,669.79 B) $16,334.72 C) $10,529.39 D) $10,637.41 E) $10,763.38

20) Your bank will pay you an interest rate of .157 percent per week. You want to have $28,000 in 9 years. How much will you have to deposit today? Assume 52 weeks per year. A) $13,437.12 B) $13,816.99 C) $13,735.72 D) $13,616.28 E) $25,806.56

21) Both you and your older brother would like to have $24,500 in 12 in years. Because of your success in this class, you feel that you are a more savvy investor than your brother and will be able to earn an annual return of 11.3 percent compared to your brother's 9.8 percent. How much less than your brother will you have to deposit today? A) $1,498.62 B) $1,079.01 C) $2,049.49 D) $1,198.89 E) $1,332.11

Version 1

22) You need to have $33,500 in 7 years. You can earn an annual interest rate of 5 percent for the first 4 years, and 5.6 percent for the next 3 years. How much do you have to deposit today? A) $22,037.25 B) $23,404.31 C) $22,876.91 D) $23,807.82 E) $21,179.93

23) You need to have $34,750 in 11 years. You can earn an annual interest rate of 6 percent for the first 3 years, 6.6 percent for the next 2 years, and 7.3 percent for the final 6 years. How much do you have to deposit today? A) $16,823.81 B) $17,403.74 C) $13,655.22 D) $18,305.87 E) $16,546.42

24) Two years ago, you invested $3,000. Today, it is worth $3,750. What rate of interest did you earn? A) 5.90% B) 11.80% C) 4.00% D) .98% E) 5.00%

25) You need to have $33,750 in 11 in years. You can earn an annual interest rate of 6 percent for the first 3 years, 6.6 percent for the next 2 years, and 7.3 percent for the final 6 years. How much do you have to deposit today?

Version 1

A) $13,262.27 B) $16,902.91 C) $16,339.68 D) $16,045.59 E) $17,779.08

26) When your father was born 47 years ago, his grandparents deposited $175 in an account for him. Today, that account is worth $1,900. What was the annual rate of return on this account? A) 5.00% B) 5.21% C) 5.73% D) 4.86% E) 3.89%

27) Rick deposited $2,450 into an account 11 years ago for an emergency fund. Today, that account is worth $4,950. What annual rate of return did Rick earn on this account assuming no other deposits and no withdrawals? A) 6.34% B) 7.26% C) 6.60% D) 4.93% E) 6.16%

28) An investor who was not as astute as he believed invested $273,500 into an account 11 years ago. Today, that account is worth $211,200. What was the annual rate of return on this account?

Version 1

A) −2.03% B) 2.77% C) −2.17% D) 2.38% E) −2.32%

29) You made an investment of $15,000 into an account that paid you an annual interest rate of 3.8 percent for the first 8 years and 8.2 percent for the next 10 years. What was your annual rate of return over the entire 18 years? A) 6.00% B) 6.91% C) 5.60% D) 4.98% E) 6.22%

30) You purchased a bond at a price of $4,000. In 25 years when the bond matures, the bond will be worth $20,000. It is exactly 19 years after you purchased the bond and you can sell the bond today for $12,600. If you hold the bond until it matures, what annual rate of return will you earn from today? A) 8.0% B) 6.6% C) 8.9% D) 6.2% E) 7.2%

31) Bob bought some land costing $16,340. Today, that same land is valued at $46,717. How long has Bob owned this land if the price of land has been increasing at 4 percent per year?

Version 1

A) 26.78 years B) 28.96 years C) 11.00 years D) 27.85 years E) 11.44 years

32) Maxxie purchased a tract of land for $29,000. Today, the same land is worth $47,900. How many years have passed if the price of the land has increased at an annual rate of 7 percent?

A) 6.36 years B) 6.59 years C) 6.68 years D) 7.42 years E) 5.56 years

33) You expect to receive a payout from a trust fund in 5 years. The payout will be for $12,200. You plan to invest the money at an annual rate of 6.9 percent until the account is worth $20,800. How many years do you have to wait from today? A) 13.00 years B) 11.70 years C) 11.55 years D) 9.75 years E) 8.00 years

34) You have $11,000 and will invest the money at an interest rate of .33 percent per month until the account is worth $17,200. How many years do you have to wait until you reach your target account value?

Version 1

A) 12.18 years B) 9.89 years C) 11.51 years D) 11.31 years E) 10.55 years

35) You expect to receive $2,500 upon your graduation and will invest your windfall at an interest rate of .31 percent per quarter until the account is worth $4,300. How many years do you have to wait until you reach your target account value? A) 44.01 years B) 47.17 years C) 40.88 years D) 43.80 years E) 38.33 years

36) If you earn an annual interest rate of 9.1 percent, how many years will it take to quadruple your money? A) 13.93 years B) 12.73 years C) 15.92 years D) 14.47 years E) 14.69 years

37) You currently have $6,400. First United Bank will pay you an annual interest rate of 7.5, while Second National Bank will pay you an annual interest rate of 8.8. How many fewer years must you wait for your account value to grow to $22,900 at Second National Bank? A) 3.01 years B) 2.28 years C) 2.32 years D) 2.51 years E) 2.83 years

Version 1

38) Your sister just deposited $7,500 into an investment account. She believes that she will earn an annual return of 9.2 percent for the next 10 years. You believe that you will only be able to earn an annual return of 8.4 percent over the same period. How much more must you deposit today in order to have the same amount as your sister in 10 years? A) $572.25 B) $1,250.32 C) $53.27 D) $534.10 E) $610.40

39) The winner of the first annual Tom Morris Golf Invitational won $145 in the competition which was held in 1907. In 2015, the winner received $1,540,000. If the winner's purse continues to increase at the same interest rate, how much will the winner receive in 2041? A) $14,347,614.81 B) $13,243,952.13 C) $13,043,286.19 D) $16,141,066.66 E) $11,478,091.85

40) You have just deposited $6,000 into an account that promises to pay you an annual interest rate of 5.5 percent each year for the next 6 years. You will leave the money invested in the account and 10 years from today, you need to have $12,800 in the account. What annual interest rate must you earn over the last 4 years to accomplish this goal?

A) 11.53% B) 10.64% C) 10.48% D) 12.97% E) 9.22%

Version 1

Answer Key Test name: Chapter 04 Test Bank - Algo 1) A Balance Year 4 = $121 + ($121 × 0.06 × 4) = $150.04 2) B Balance Year 5 with simple interest = $1,290 + ($1,290 × 0.04 × 5) = $1,548.00 Balance Year 5 with compound interest = $1,290 × 1.045 = $1,569.48 Additional interest = $1,569.48 − 1,548.00 = $21.48 3) A Simple interest: Interest per year = $1,500 × .08 = $120 Compound interest: Value after 7 years = $1,500 × 1.087 = $2,570.74 Interest in Year 8 = $2,570.74 × .08 = $205.66 Difference = $205.66 − 120 = $85.66 4) C FV = $2,998 × 1.0529 = $4,731.22 Enter

Solve for

5.2%

−$2,998

I/Y

PMT

$4,731.22

5) C Version 1

FV = $2,650 × 1.0616 = $3,780.40 Enter

6.1%

−$2,650

I/Y

PMT

Solve for

$3,780.40

6) C FV = $55,600 × 1.0255 = $62,906.30 Enter

2.5%

−$55,600

I/Y

PMT

Solve for

$62,906.30

7) C FV = $3,700 × 1.006336 = $4,638.64 Enter

Solve for

Version 1

9 × 4

.63%

−$3,700

I/Y

PMT

$4,638.64

8) A FV = $2,600 × 1.003272 = $3,272.47 Enter

6 × 12

.32%

−$2,600

I/Y

PMT

Solve for

$3,272.47

9) D FV = $18,000 × 1.06040 = $185,142.92 FV = $18,000 × 1.06639 = $217,672.46 Difference = $217,672.46 − 185,142.92 = $32,529.54 Enter

−$18,000

I/Y

PMT

Solve for

Enter

Version 1

$185,142.92

6.6%

−$18,000

I/Y

PMT

Solve for

$217,672.46

10) A FV = $430 × 1.06725 = $2,175.60 FV = $430 × 1.06125 = $1,889.53 Difference = $2,175.60 − 1,889.53 = $286.07 Enter

6.7%

−$430

I/Y

PMT

Solve for

Enter

$2,175.60

6.1%

−$430

I/Y

Solve for

PMT

$1,889.53

11) B FV = $18,500 × 1.03110 = $25,104.89 FV = $25,104.89 × 1.02513 = $34,607.37 Enter

Version 1

3.1%

−$18,500

I/Y

PMT

Solve for

Enter

$25,104.89

2.5%

−$25,104.89

I/Y

PMT

Solve for

$34,607.37

12) E FV = $5,750 × 1.0603 = $6,848.34 FV = $6,848.34 × 1.0662 = $7,782.15 FV = $7,782.15 × 1.0736 = $11,876.77 Enter

Solve for

Version 1

−$5,750

I/Y

PMT

$6,848.34

Enter

6.6%

−$6,848.34

I/Y

PMT

Solve for

Enter

$7,782.15

7.3%

−$7,782.15

I/Y

PMT

Solve for

$11,876.77

13) E FV = 1,054,773 × 1.05016 = 2,302,437 Enter

−1,054,773

I/Y

Solve for

PMT

2,302,437.00

14) D PV = $12,350/1.054 = $10,160.38 Version 1

Enter

I/Y

−$12,350

Solve for

PMT

$10,160.38

15) C PV = $35,000/1.0347 = $27,696.46 Enter

3.4%

I/Y

Solve for

−$35,000

PMT

$27,696.46

16) B PV = $490,000,000/1.04527 = $149,298,772.80 Enter

Solve for

Version 1

4.5%

I/Y

−$490,000,000

PMT

$149,298,772.80

17) B PV = $92,000/1.04818 = $39,562.59 Enter

4.8%

I/Y

Solve for

−$92,000

PMT

$39,562.59

18) B PV = $335,000/1.02118 × 4 = $75,022.47 Enter

18 × 4

2.1%

I/Y

Solve for

−$335,000

PMT

$75,022.47

19) C PV = $17,000/1.00410 × 12 = $10,529.39 Enter

Version 1

10 × 12

.4%

I/Y

−$17,000

PMT

Solve for

$10,529.39

20) A PV = $28,000/1.001579 × 52 = $13,437.12 Enter

9 × 52

.157%

I/Y

Solve for

−$28,000

PMT

$13,437.12

21) D You: PV = $24,500/1.11312 = $6,779.91 Brother: PV = $24,500/1.09812 = $7,978.81 Difference = $7,978.81 − 6,779.91 = $1,198.89 Enter

11.3%

I/Y

Solve for

Enter

Version 1

−$24,500

PMT

$6,779.91

9.8%

−$24,500

I/Y

Solve for

PMT

$7,978.81

22) B PV = $33,500/1.0563 = $28,448.09 PV = $28,448.09/1.0504 = $23,404.31 Enter

5.6%

I/Y

Solve for

Enter

Solve for

−$33,500

PMT

$28,448.09

I/Y

−$28,448.09

PMT

$23,404.31

23) A

Version 1

PV = $34,750/1.0736 = $22,769.66 PV = $22,769.66/1.0662 = $20,037.43 PV = $20,037.43/1.0603 = $16,823.81 Enter

7.3%

I/Y

Solve for

Enter

Solve for

PMT

$22,769.66

6.6%

I/Y

Solve for

Enter

−$34,750

−$22,769.66

PMT

$20,037.43

I/Y

−$20,037.43

PMT

$16,823.81

24) B Version 1

FV = $3,750 = $3,000 × (1 + r)2 r = .1180, or 11.80% Enter

Solve for

−$3,000

I/Y

$3,750

PMT

11.80%

25) C PV = $33,750/1.0736 = $22,114.41 PV = $22,114.41/1.0662 = $19,460.82 PV = $19,460.82/1.0603 = $16,339.68 Enter

7.3%

I/Y

Solve for

Enter

Version 1

−$33,750

PMT

$22,114.41

6.6%

I/Y

−$22,114.41

PMT

Solve for

Enter

$19,460.82

I/Y

Solve for

−$19,460.82

PMT

$16,339.68

26) B $1,900 = $175(1 + r)47 r = ($1,900/$175)1/47 − 1 r = .0521, or 5.21% Enter

Solve for

$175

I/Y

−$1,900

PMT

5.21%

27) C $4,950 = $2,450(1 + r)11 r = ($4,950/$2,450)1/11 − 1 r = .0660, or 6.60% Enter

Version 1

$2,450

−$4,950

Solve for

I/Y

PMT

6.60%

28) E $211,200 = $273,500(1 + r)11 r = ($211,200/$273,500)1/11 − 1 r = −.0232, or −2.32% Enter

Solve for

$273,500

I/Y

−$211,200

PMT

−2.32%

29) E FV = $15,000 × 1.0388 = $20,214.83 FV = $20,214.83 × 1.08210 = $44,457.26 $44,457.26 = $15,000 × (1 + r)18 r = ($44,457.26/$15,000)1/18 − 1 r = .0622, or 6.22% Enter

Version 1

3.8%

−$15,000

I/Y

PMT

Solve for

Enter

$20,214.83

8.2%

−$20,214.83

I/Y

PMT

Solve for

Enter

$44,457.26

−$15,000

I/Y

Solve for

$44,457.26

PMT

6.22%

30) A $20,000 = $12,600 × (1 + r)6 r = ($20,000/$12,600)1/6 − 1 r = .080, or 8.0% Enter

6 N

Version 1

−$12,600 I/Y

$20,000 PMT

Solve for

8.0%

31) A $46,717 = $16,340 × 1.04t 2.85906 = 1.04t t = ln 2.85906/ln 1.04 t = 1.05049/0.03922 t = 26.78 years 32) D $47,900 = $29,000(1.070) t t = 7.42 years Enter N

Solve for

$29,000

I/Y

−$47,900 PMT

7.42

33) A $20,800 = $12,200(1.069) t t = 8.00 years Years to wait = 8.00 + 5 = 13.00 years Enter

Version 1

6.9%

$12,200

I/Y

−$20,800

PMT

Solve for

8.00

34) D $17,200 = $11,000(1.0033) t t = 135.68 months Years to wait = 135.68/12 = 11.31 years Enter

Solve for

.33%

$11,000

I/Y

−$17,200

PMT

135.68

35) D $4,300 = $2,500(1.0031) t t = 175.21 quarters Years to wait = 175.21/4 = 43.80 years Enter

Solve for

.31%

$2,500

I/Y

−$4,300

PMT

175.21

36) C Version 1

$4 = $1(1.091) t t = 15.92 years Enter

Solve for

9.1%

I/Y

−$4

PMT

15.92

37) D First United $22,900 = $6,400(1.075) t t = 17.63 years Second National $22,900 = $6,400(1.088) t t = 15.12 years Difference = 17.63 − 15.12 = 2.51 years Enter

Solve for

Enter

Version 1

7.5%

$6,400

I/Y

8.8%

$6,400

−$22,900

PMT

17.63

−$22,900

Solve for

I/Y

PMT

15.12

38) A FV = $7,500 × 1.09210 = $18,083.71 PV = $18,083.71/1.08410 = $8,072.25 Difference = $8,072.25 − 7,500 = $572.25 Enter

9.2%

−$7,500

I/Y

Solve for

Enter

Solve for

$18,083.71

8.4%

I/Y

−$18,083.71

PMT

$8,072.25

39) A

Version 1

$1,540,000 = $145 × (1 + r)108 r = .0896, or 8.96% FV = $1,540,000(1.0896)26 = $14,347,614.81 Enter

108

I/Y

Solve for

Enter

−$145

$1,540,000

PMT

8.96%

−$1,540,000

I/Y

Solve for

$14,347,614.81

40) A FV = $6,000 × 1.0556 = $8,273.06 $12,800 = $8,273.06(1 + r)4 r = .1153, or 11.53% Enter

Version 1

5.5%

−$6,000

I/Y

PMT

Solve for

Enter

$8,273.06

Solve for

Version 1

−$8,273.06

I/Y

$12,800.00

PMT

11.53%

Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the: A) true value. B) future value. C) present value. D) discounted value. E) complex value.

2) Tomas earned $89 in interest on his savings account last year and has decided to leave the $89 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called: A) discounting. B) compounding. C) duplicating. D) multiplying. E) indexing.

3) Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year’s interest earnings is called: A) simple interest. B) complex interest. C) accrued interest. D) interest on interest. E) discounted interest.

Version 1

4) 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.

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.

6) Katlyn needs to invest $5,318 today for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318? A) Present value B) Compound value C) Future value D) Complex value E) Factor value

7) Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called:

Version 1

A) aggregating. B) discounting. C) simplifying. D) compounding. E) extrapolating.

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.

9) 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.

10) Kendall is investing $3,333 today at 3 percent annual interest for three years. 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

Version 1

11) Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value? A) 3 percent simple interest B) 3 percent interest, compounded annually C) 2 percent interest, compounded annually D) 4 percent simple interest E) 4 percent interest, compounded annually

12) Jenny needs to borrow $5,500 for four 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) 6.5 percent simple interest B) 6.5 percent interest, compounded annually C) 6.6 percent simple interest D) 6.75 percent interest, compounded annually E) 6.80 percent interest, compounded annually

13)

The future value of a lump-sum investment will increase if you: A) decrease the interest rate. B) decrease the number of compounding periods. C) increase the time period. D) decrease the time period. E) decrease the lump-sum amount.

14) Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years? A) PV = $600/[(1 + .06) × 5] B) PV = $600/[(1 +.05) × 6] C) PV = $600/(.06 × 5) D) PV = $600/(1 + .05)6 E) PV = $600/(1 + .06)5

Version 1

15) 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.

16) Jessica 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) She will earn the same amount of interest each year. B) She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest. C) She will earn an increasing amount of interest each year even if she should decide to withdraw the interest annually rather than reinvesting the interest. D) Her interest for Year 2 will be equal to $2,000 × .065 × 2. E) She will be earning simple interest.

17)

All else held constant, the future value of a lump-sum investment will decrease if the: A) amount of the lump-sum investment increases. B) time period is increased. C) interest is left in the investment. D) interest rate increases. E) interest is changed to simple interest from compound interest.

18) Which one of the following will increase the present value of a lump-sum future amount to be received in 15 years?

Version 1

A) An increase in the time period B) An increase in the interest rate C) A decrease in the future value D) A decrease in the interest rate E) Changing to compound interest from simple interest

19) Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years: A) both Stacey and Kurt will have accounts of equal value. B) Kurt will have twice the money saved that Stacey does. C) Kurt will earn exactly twice the amount of interest that Stacey earns. D) Kurt will have a larger account value than Stacey will. E) Stacey will have more money saved than Kurt.

20) 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

21) 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 + .06)7 B) PV = $600(1 + .07)6 C) PV = $600(.07 × 6) D) PV = $600/(1 + .07)6 E) PV = $600/(1 + 6).07

Version 1

22) South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern 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 the same rate of 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 South Central Bank. E) will be greater if you invest with Northern Bank.

23)

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.

24) The relationship between the present value and the investment time period is best described as: A) direct. B) inverse. C) unrelated. D) ambiguous. E) parallel.

25) Today, Charity wants to invest less than $3,000 with the goal of receiving $3,000 back some time in the future. Which one of the following statements is correct?

Version 1

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 must 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 increases.

26)

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.

27) You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 9 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) 12 years E) 14 years

28) Today, you deposit $2,500 in a bank account that pays 3.6 percent simple interest. How much interest will you earn over the next 5 years?

Version 1

A) $90.00 B) $120.00 C) $450.00 D) $483.59 E) $492.27

29) Your grandparents just gave you a gift of $3,000. You are investing this money at 3 percent simple interest. How much money will you have at the end of the 10 years? A) $3.090 B) $3,270 C) $3,450 D) $3,900 E) $4,031.75

30) Precision Engineering invested $95,000 at 5.5 percent interest, compounded annually for 2 years. How much interest did the company earn over this period of time? A) $95,000 B) $10,737.38 C) $10,450.00 D) $10,931.36 E) $2,612.50

31) Roberto just deposited $11,500 into his savings account at Security Savings Bank. The bank will pay .55 percent interest, compounded annually, on this account. How much interest on interest will he earn over the next 6 years? A) $6.78 B) $5.26 C) $87.03 D) $7.60 E) $7.84

Version 1

32) Ben invested $1,500 fifteen years ago with an insurance company that has paid him 4 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 4 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 15 years? A) $0 B) $6,827.04 C) $1,004.72 D) $7,109.16 E) $8,266.49

33) Lew has $3,600 that he wants to invest for 5 years. He can invest this amount at his credit union and earn 2.2 percent simple interest. Or, he can open an account at Compass Bank and earn 2.15 percent interest, compounded annually. If he decides to invest at Compass Bank for 5 years, he will: A) earn $6 more than if he had invested with his credit union. B) earn $8 more 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 $3,680 in his account after one year. E) have a total balance of $4,012 in his account after 5 years.

34) What is the future value of $8,000 invested today and held for 15 years at 8.5 percent compounded annually? A) $25,377.35 B) $27,197.94 C) $29,139.86 D) $29,509.77 E) $10,200.00

35) Theodoro has just received an insurance settlement of $18,500. She wants to save this money until her daughter goes to college. If she can earn an average of 5.2 percent, compounded annually, how much will she have saved when her daughter enters college 9 years from now?

Version 1

A) $29,662.53 B) $30,485.41 C) $30,931.28 D) $29,431.45 E) $29,195.33

36) Travis invests $4,500 today into a retirement account. He expects to earn 11 percent, compounded annually, on his money for the next 12 years. After that, he wants to be more conservative, so only expects to earn 9 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account? A) $29,411.20 B) $34,747.80 C) $34,616.56 D) $48,265.05 E) $42,003.12

37) Ten years ago, you deposited $5,500 into an account. Five years ago, you added an additional $2,500 to this account. You earned 6.5 percent, compounded annually, for the first 5 years and 5.0 percent, compounded annually, for the last 5 years. How much money do you have in your account today? A) $8,666.67 B) $11,391.09 C) $12,149.62 D) $12,808.09 E) $13,042.61

38) Your parents spent $7,800 to buy 200 shares of stock in a new company 15 years ago. The stock has appreciated 12.6 percent per year on average. What is the current value of those 200 shares?

Version 1

A) $36,408.70 B) $40,023.03 C) $39,580.92 D) $46,256.25 E) $37,449.92

39) You just won $17,500 and deposited your winnings into an account that pays 6.7 percent interest, compounded annually. How long will you have to wait until your winnings are worth $50,000? A) 15.1 years B) 15.31 years C) 15.52 years D) 15.73 years E) 16.19 years

40) When you were born, your parents opened an investment account in your name and deposited $1,500 into the account. The account has earned an average annual rate of return of 5.5 percent. Today, the account is valued at $42,856. How old are you? A) 71.47 years old B) 70.67 years old C) 62.61 years old D) 67.33 years old E) 64.91 years old

41) Today, Georgia is investing $24,000 at 5.5 percent, compounded annually, for 6 years. How much additional income could she earn if she had invested this amount at 6.5 percent, compounded annually?

Version 1

A) $1,515.04 B) $1,927.19 C) $2,007,49 D) $2,515.04 E) $2.927.19

42) Sixty years ago, your grandparents opened two savings accounts and deposited $250 in each account. The first account was with City Bank at 3.6 percent, compounded annually. The second account was with Country Bank at 3.65 percent, compounded annually. Which one of the following statements is true concerning these accounts? A) The City Bank account is currently worth $2,076.42. B) The City Bank account has paid $48.19 more in interest than the Country Bank account. C) The Country Bank account is currently worth $2,170.32. D) The Country Bank account has paid $72.24 more in interest than the City Bank account. E) The Country Bank account has paid $61.30 more in interest than the City Bank account.

43) Twelve years from now, you will be inheriting $60,000 What is this inheritance worth to you today if you can earn 6.0 percent interest, compounded annually? A) $29,818.16 B) $29,945.94 C) $58,419.05 D) $61,798.47 E) $53,003.15

44) You want to have $32,000 for a down payment on a house 5 years from now. If you can earn 4.3 percent, compounded annually on your savings, how much do you need to deposit today to reach your goal?

Version 1

A) $25,925.58 B) $28,179.77 C) $21,639.73 D) $21,970.21 E) $24,625.44

45) You need to have $35,000 in cash in three years to pay for an important family event. You want a reasonably safe investment vehicle but would like to earn some interest on your funds. How much would you have to invest today into a 5-year CD earning 1.1 percent annual interest to have exactly $35,000 available in five years? A) $32,618.92 B) $34,511.68 C) $33,136.93 D) $31,476.67 E) $30,156.19

46) Adirondack Corporation will need $1.75 million 3 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 2.75 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase? A) $1,613,216.13 B) $1,798,407.21 C) $1,350,868.47 D) $1,876,306.49 E) $1,412,308.18

47) You and your sister are planning a large anniversary party 3 years from today for your parents' 50th wedding anniversary. You have estimated that you will need $6,500 for this party. You can earn 1.5 percent compounded annually on your savings. How much would you and your sister have to deposit today in one lump sum to pay for the entire party?

Version 1

A) $6,076.55 B) $6,018.26 C) $6,308.16 D) $6,216.06 E) $5,868.81

48) Isaac only has $2,300 today but needs $2,500 to buy a new computer and add a virus protection package, as he does not trust the base defender. How long will he have to wait to buy the computer if he earns 5 percent compounded annually on his savings? Assume the price of the computer remains constant. A) 1.83 years B) 1.48 years C) 2.51 years D) 2.77 years E) 1.71 years

49) How long will it take to double your savings if you earn 6.9 percent interest, compounded annually? A) 11.89 years B) 12.02 years C) 11.39 years D) 11.17 years E) 10.39 years

50) You have $300 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually? A) 16.99% B) 23.78% C) 23.28% D) 24.57% E) 31.61%

Version 1

51) You have been told that you need $15,000 today for every $50,000 you want when you retire 30 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually. A) 4.09% B) 4.15% C) 4.37% D) 4.29% E) 4.53%

52) Stephen claims that he invested $2,200 six years ago and that this investment is worth $10,500 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounded annually. A) 29.76% B) 31.39% C) 29.80% D) 26.01% E) 27.87%

53) You have $2,000 today in your savings account. How long must you wait for your savings to be worth $4,500 if you are earning 1.25 percent interest, compounded annually? A) 89.66 years B) 62.78 years C) 70.92 years D) 67.98 years E) 65.28 years

54) Western Bank pays 5 percent simple interest on its savings account balances, whereas Eastern Bank pays 5 percent compounded annually. If you deposited $6,000 in each bank, how much more money would you earn from the Eastern Bank account at the end of 3 years?

Version 1

A) $55.84 B) $45.75 C) $60.47 D) $40.09 E) $50.14

55) Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education? A) 12.65% B) 10.40% C) 13.99% D) 14.62% E) 11.08%

56)

At 12.5 percent interest, how long does it take to triple your money? A) 14.33 years B) 11.53 years C) 9.33 years D) 10.36 years E) 10.56 years

57) You're trying to save to buy a new car valued at $42,650. You have $40,000 today that can be invested at your bank. The bank pays 4.2 percent annual interest on its accounts. How long will it be before you have enough to buy the car for cash? Assume the price of the car remains constant.

Version 1

A) 1.17 years B) 2.12 years C) 1.06 years D) 1.61 years E) 1.56 years

58) Your coin collection contains ten 1949 silver dollars. If your grandparents purchased the coins for their face value when they were new, how much will your collection be worth when you retire in 2065, assuming the coins appreciate at an annual rate of 5.1 percent? A) $3,440.63 B) $2,329.29 C) $3,348.98 D) $3,205.64 E) $2,644.29

59) Suppose that in 2015, a $10 silver certificate from 1898 sold for $17,100. For this to have been true, what would the annual increase in the value of the certificate have been? A) 6.22% B) 6.01% C) 7.23% D) 6.57% E) 7.07%

60) You have just made your first $5,000 contribution to your retirement account. Assuming you earn a rate of return of 5 percent 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) $26,335.37; $23,011.60 B) $27,311.20; $29,803.04 C) $27,311.20; $22,614.08 D) $27,580.08; $21,609.71 E) $31,241.90; $32,614.08

Version 1

61) You are scheduled to receive $5,000 in two years. When you receive it, you will invest it at 6.5 percent per year. How much will your investment be worth eight years from now? A) $7,295.71 B) $8,274.98 C) $6,850.43 D) $10,665.75 E) $7,302.27

62) You expect to receive $5,000 at graduation one year from now. Your plan is to invest this money at 6.5 percent, compounded annually, until you have $50,000. At that time, you plan to travel around the world. How long from now will it be until you can begin your travels? A) 36.57 years B) 31.08 years C) 34.55 years D) 32.08 years E) 37.57 years

63) You have $12,500 you want to invest for the next 30 years. You are offered an investment plan that will pay you 7 percent per year for the next 10 years and 9.5 percent per year for the last 20 years. How much will you have at the end of the 30 years? A) $101,516.38 B) $119,874.49 C) $151,018.51 D) $190,253.91 E) $209,092.54

64) Calculating the present value of a future cash flow to determine its worth today is commonly called:

Version 1

A) present value. B) discounting. C) discounting cash flow valuation. D) evaluating investments. E) compounding.

65) You are due to receive a lump-sum payment of $1,350 in five years. If you could invest that money at 4.5 percent interest for three years, how much would it be worth eight years from now? A) $1,410.75 B) $1,474.23 C) $1,540.57 D) $1,682.35 E) $1,919.84

66) You are due to receive a lump-sum payment of $1,675 in two years. If you could invest that money at 5.3 percent interest for four years, how much would it be worth six years from now? A) $1,857.26 B) $1,955.69 C) $2,059.34 D) $2.168.49 E) $2,283.42

67) You are due to receive a lump-sum payment of $1,650 in five years. Assuming a discount rate of 3.5 percent interest, what would be the value of the payment in Year 3? A) $1,488.21 B) $1,540.29 C) $1594.20 D) $1,389.26 E) $1,296.89

Version 1

68) You are due to receive a lump-sum payment of $2,350 in seven years. Assuming a discount rate of 2.5 percent interest, what would be the value of the payment in Year 4? A) $1,976.97 B) $2,292.68 C) $2,182.21 D) $2,128.98 E) $2,236.76

69) You are due to receive a lump-sum payment of $1,350 in four years and an additional lump-sum payment of $1,450 in five years. Assuming a discount rate of 2.0 percent interest, what would be the value of the payments today? A) $2,663.31 B) $2,536.05 C) $2,586.77 D) $2,560.50 E) $2,205.50

70) You are due to receive a lump-sum payment of $1,750 in three years and an additional lump-sum payment of $1,850 in five years. Assuming a discount rate of 3.0 percent interest, what would be the value of the payments today? A) $3,105.39 B) $3,197.32 C) $3,202.58 D) $3,294.51 E) $3,443.01

71) You deposit $1,675 into an account that earns 2.35 percent interest in two years. If you deposit an additional $1,950 in the same account 2 years later, how much would be in the account six years from now?

Version 1

A) $3,397.38 B) $3,797.38 C) $3,880.81 D) $3,894.51 E) $3,977.95

72) You deposit $1,200 into an account that earns 1.75 percent interest in three years. If you deposit an additional $1,200 in the same account 2 years later, how much would be in the account six years from now? A) $2,485.11 B) $2,506.48 C) $2,528.22 D) $2,572.46 E) $2,663.29

Version 1

Answer Key Test name: Chapter 04 Test Bank - Static 1) B 2) B 3) D 4) E 5) C 6) A 7) B 8) C 9) E 10) E 11) E 12) A 13) C 14) D 15) A 16) B 17) E 18) D 19) D 20) D 21) D 22) E 23) A 24) B 25) E 26) E Version 1

27) C Approximate time period = 72/9 = 8 years 28) C Interest = $2,500 × .036 × 5 = $450 29) D Future value = $3,000 + ($3,000 × .03 × 10) = $3,900 30) B Enter

Solve for

5.5%

−$95,000

I/Y

PMT

$105,737.38

$105,737.38 − 95,000 = $10,737.38 31) B Interest on interest = $11,500 × (1 + .0055)6 − [$11,500 + ($11,500 × .0055 × 6)] = $5.26 32) C Interest on interest = $5,000 × (1 + .04)15 − [$5,000 + ($5,000 × .04 × 15)] = $1.004.72 33) B Credit union future value = $3,600 + ($3,600 × .022 × 5) = $3,996 Compass Bank future value = $3,600 × (1 + .0215)5 = $4,004 Difference = $4,004 − 3,996 = $8 34) B Future value = $8,000 × 1.08515 = $27,197.94 35) E

Version 1

Future value = $18,500 × (1 + .052)9 = $29,195.33 36) D Enter

11%

−$4,500.00

I/Y

PMT

Solve for

Enter

$15,743.03

I/Y

−$15,743.03

PMT

Solve for

$48,265.05

37) D Future value = {[$5,500 × (1 + .065)5] + $2,500} × (1 + .05)5 = $12,808.09 38) D Enter

Version 1

12.6%

−$7,800.00

I/Y

PMT

Solve for

$46,256.25

39) E Enter

6.7%

−$17,500

I/Y

5.5%

−$1,500.00

I/Y

5.5%

−$24,000

I/Y

Solve for

$50,000

PMT

16.19

40) C Enter

Solve for

$42,856.00

PMT

62.61

41) B Enter

Version 1

Solve for

$33,092.23

Enter

6.5%

−$24,000

I/Y

PMT

Solve for

$35,019.42

Difference $35,019.42 − 33,092.23 = $1,927.19 42) E Future valueCity Bank = $250 × (1 + .036)60 = $2,087.01 Future valueCountry Bank = $250 × (1 + .0365)60 = $2,148.32 Difference = $250 × [(1 + .0365)60 − (1 + .036)60] = $61.30 43) A Present value = $60,000/(1 + .06)12 = $29,818.16 44) A Enter

Solve for

4.3%

I/Y

−$32,000.00

PMT

$25,925.58

45) C

Version 1

Present value Enter

1.1%

I/Y

Solve for

−$35,000.00

PMT

$33,136.93

46) A Present value Enter

2.75%

I/Y

Solve for

−$1,750,000.00

PMT

$1,613,216.13

47) D Present value Enter

Solve for

Version 1

1.5%

I/Y

−$6,500.00

PMT

$6,216.06

48) E Enter

Solve for

−$2,300.00

I/Y

$2,500.00

PMT

1.71

49) E Enter

Solve for

6.9%

−$1.00

I/Y

$2.00

PMT

10.39

50) D $900 = $300 × (1 + r)5 r = .2457, or 24.57% Enter

Version 1

−$300

I/Y

$900

PMT

Solve for

24.57%

51) A $50,000 = $15,000 × (1 + r)30 r = .0409, or 4.09% Enter

Solve for

−$15,000

I/Y

$50,000

PMT

4.09%

52) A Enter

Solve for

−$2,200.00

I/Y

$10,500.00

PMT

29.76%

53) E $4,500 = $2,000 × (1 + .0125) t t = 65.28 years Enter

Version 1

1.25%

−$2,000

$4,500

Solve for

I/Y

PMT

65.28

54) B Future valueWestern = $6,000 + ($6,000 × .05 × 3) = $6,900 Future valueEastern = $6,000 × (1 + .05)3 = $6,945.75 Difference = $6,945.75 − 6,900 = $45.75 55) C $325,000 = $40,000 × (1 + r)16 r = .1399, or 13.99% 56) C Enter

Solve for

12.5%

−$1.00

I/Y

$3.00

PMT

9.33

57) E $46,650 = $40,000 × (1 + .042) t t = 1.56 years Enter

Version 1

4.2%

−$40,000

$42,650

Solve for

I/Y

PMT

1.56

58) D Future value = $10 × (1 + .051)(2065−1949) = $3,205.64 59) D Enter

117

Solve for

−$10.00

I/Y

$17,100.00

PMT

6.57%

60) D Future value35 years = $5,000 × (1 + .05)35 = $27,580.08 Future value30 years = $5,000 × (1 + .05)30 = $21,609.71 61) A Future value = $5,000 × (1 + .065)(8 − 2) = $7,295.71 62) E $50,000 = $5,000 × (1 + .065) t t = 36.57 years Wait time = 1 + 36.57 = 37.57 years 63) C Future value = $12,500 × (1 + .07)10 × (1 + .095)20 = $151,018.51 Enter

Version 1

−$12,500

I/Y

PMT

Solve for

Enter

−$24,589.39

9.5%

−$24,589.39

I/Y

PMT

Solve for

$151,018.51

64) C 65) C Enter

4.5%

−$1,350

I/Y

PMT

Solve for

$1,540.57

66) C Enter

Version 1

5.3%

−$1,675.00

I/Y

PMT

Solve for

$2,059.34

67) B Enter

3.5%

I/Y

Solve for

−$1,650

PMT

$1,540.29

68) C Enter

2.5%

I/Y

Solve for

−$2,350.00

PMT

$2,182.21

69) D Enter

Version 1

−$1,350.00

I/Y

Solve for

Enter

PMT

$1,247.19

I/Y

Solve for

−$1,450.00

PMT

$1,313.31

$1,247.19 + 1,313.31 = $2,560.50 70) B Enter

I/Y

Solve for

Enter

Version 1

−$1,750.00

PMT

$1,601.50

I/Y

−$1,850.00

PMT

Solve for

$1,595.83

$1,601.5 + 1,595.83 = $3,197.32 71) C Enter

2.35%

−$1,675.00

I/Y

PMT

Solve for

Enter

$1,838.09

2.35%

−$1,950.00

I/Y

PMT

Solve for

$2,042.73

$1,838.09 + 2,042.73 = $3,880.81 72) A Enter

Version 1

1.75%

−$1,200.00

I/Y

PMT

Solve for

Enter

$1,264.11

1.75%

−$1,200.00

I/Y

Solve for

PMT

$1,221.00

$1,234.11 + 1,221.00 = $2,485.11

Version 1

Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Marko, Incorporated, is considering the purchase of ABC Company Marko believes that ABC Company can generate cash flows of $6,500, $11,500, and $17,700 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Company? A) $35,700.00 B) $38,734.50 C) $27,569.81 D) $29,109.63 E) $25,415.81

2) Myca Corporation has a project with the following cash flows. What is the value of the cash flows today assuming an annual interest rate of 10.8 percent? Year 1 2 3 4

Cash Flow $ 1,980 2,540 2,920 2,930

A) $7,946.69 B) $8,804.93 C) $7,063.72 D) $10,370.00 E) $9,158.35

3) You are in talks to settle a potential lawsuit. The defendant has offered to make annual payments of $20,000, $27,500, $50,000, and $75,000 to you each year over the next four years, respectively. All payments will be made at the end of the year. If the appropriate interest rate is 4.2 percent, what is the value of the settlement offer today?

Version 1

A) $162,417.76 B) $172,500.00 C) $152,335.53 D) $158,733.62 E) $135,409.36

4) The value today of the following cash flows is $6,300.69 at an interest rate of 4.8 percent. What is the value of the Year 3 cash flow? Year 1 2 3 4

Cash Flow $ 1,515 1,645 ? 2,255

A) $3,622.82 B) $1,487.92 C) $1,600.27 D) $1,712.63 E) $885.69

5) One year ago, the Jenkins Family Fun Center deposited $4,900 into an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $6,700 to this account. They plan on making a final deposit of $8,900 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a rate of return of 6 percent? A) $24,325.49 B) $24,372.83 C) $23,103.06 D) $24,899.62 E) $25,615.94

6) Assuming an interest rate of 6.2 percent, what is the value of the following cash flows four years from today? Year

Version 1

Cash Flow 2

1 2 3 4

$ 3,200 4,200 6,085 8,215

A) $23,756.41 B) $22,317.20 C) $24,378.35 D) $25,000.30 E) $23,247.08

7) Assuming an interest rate of 5.6 percent, what is the value of the following cash flows five years from today? Year 1 2 3 4

Cash Flow $ 3,365 4,515 5,455 6,700

A) $22,659.53 B) $21,457.89 C) $21,753.15 D) $22,207.58 E) $22,957.27

8) The value of the following cash flows four years from today is $8,210.59. The interest rate is 5.4 percent. What is the value of the Year 3 cash flow? Year 1 2 3 4

Version 1

Cash Flow $ 1,675 1,872 ? 2,915

A) $1,254.69 B) $1,071.56 C) $1,190.41 D) $1,322.44 E) $1,129.42

9) Your parents are giving you $255 a month for 4 years while you are in college. At an interest rate of .58 percent per month, what are these payments worth to you when you first start college? A) $10,301.87 B) $10,463.92 C) $10,657.11 D) $10,124.25 E) $14,066.88

10) We Pay Insurance Company will pay you $1,100 each quarter for 24 years. You want to earn a minimum interest rate of .85 percent per quarter. What is the most you are willing to pay today for these payments? A) $68,389.17 B) $162,237.18 C) $69,588.98 D) $71,500.50 E) $71,988.60

11) Todd can afford to pay $420 per month for the next 7 years in order to purchase a new car. The interest rate is 7.4 percent compounded monthly. What is the most he can afford to pay for a new car today?

Version 1

A) $27,220.19 B) $26,097.25 C) $28,386.48 D) $27,470.79 E) $46,041.01

12) You just won the $92.5 million Ultimate Lotto jackpot. Your winnings will be paid as $3,700,000 per year for the next 25 years. If the appropriate interest rate is 7 percent, what is the value of your windfall? A) $46,136,535.80 B) $40,962,344.87 C) $43,118,257.76 D) $44,555,533.02 E) $42,436,535.80

13) Your crazy uncle left you a trust that will pay you $20,000 per year for the next 31 years with the first payment received one year from today. If the appropriate interest rate is 5.3 percent, what is the value of the payments today? A) $286,180.59 B) $297,208.59 C) $270,281.67 D) $311,284.15 E) $301,242.73

14) You will receive 29 annual payments of $23,500. The first payment will be received 8 years from today and the interest rate is 5.2 percent. What is the value of the payments today? A) $230,502.96 B) $382,663.13 C) $244,061.96 D) $231,998.06 E) $252,197.36

Version 1

15) A friend wants to borrow money from you. He states that he will pay you $4,400 every 6 months for 12 years with the first payment exactly 7 years and six months from today. The interest rate is an APR of 6.7 percent with semiannual compounding. What is the value of the payments today? A) $45,255.90 B) $46,764.43 C) $43,788.97 D) $46,517.89 E) $45,590.15

16) What is the future value of $3,550 per year for 26 years at an interest rate of 7.47 percent? A) $252,747.25 B) $240,275.37 C) $250,392.46 D) $251,024.65 E) $261,773.94

17) You have just started a new job and plan to save $4,950 per year for 41 years until you retire. You will make your first deposit in one year. How much will you have when you retire if you earn an annual interest rate of 9.89 percent? A) $2,341,579.57 B) $2,260,835.45 C) $2,233,957.31 D) $2,239,771.77 E) $2,126,335.04

18) To fund your dream around-the-world vacation, you plan to save $1,550 per year for the next 12 years starting one year from now. If you can earn an interest rate of 6.43 percent, how much will you have saved for your vacation?

Version 1

A) $25,276.19 B) $25,889.74 C) $23,738.02 D) $26,814.37 E) $25,648.53

19) Bob has saved $465 each month for the last 5 years to make a down payment on a house. The account earned an interest rate of .36 percent per month. How much money is in Bob's account? A) $30,416.96 B) $29,728.91 C) $30,008.49 D) $31,080.22 E) $27,900.00

20) Your employer contributes $70 at the end of each week to your retirement account. The account will earn a weekly interest rate of .14 percent. How much will the account be worth when you retire in 35 years? A) $548,742.11 B) $562,375.46 C) $534,960.81 D) $127,400.00 E) $587,937.98

21) You plan to save $6,900 per year for the next 12 years. After the last deposit, you will keep the money in the account for 6 more years. The account will earn an interest rate of 7.2 percent. How much will there be in the account 18 years from today?

Version 1

A) $189,542.49 B) $436,560.06 C) $239,149.64 D) $124,892.93 E) $49,607.15

22) Noma plans to save $4,400 per year for the next 35 years. If she can earn an annual interest rate of 10.2 percent, how much will she have in 35 years? A) $154,000.00 B) $1,376,069.06 C) $1,248,701.51 D) $1,165,454.74 E) $1,194,410.14

23) Gerritt wants to buy a car that costs $25,500. The interest rate on his loan is 5.23 percent compounded monthly and the loan is for 5 years. What are his monthly payments? A) $493.95 B) $508.10 C) $483.91 D) $467.78 E) $481.81

24) You want to buy a house and will need to borrow $185,000. The interest rate on your loan is 5.05 percent compounded monthly and the loan is for 30 years. What are your monthly mortgage payments? A) $965.49 B) $1,008.60 C) $998.78 D) $1,048.72 E) $994.60

Version 1

25) You want to buy a house that costs $305,000. You will make a down payment equal to 10 percent of the price of the house and finance the remainder with a loan that has an APR of 5.57 percent compounded monthly. If the loan is for 20 years, what are your monthly mortgage payments? A) $1,925.30 B) $1,994.08 C) $1,890.35 D) $1,835.82 E) $1,899.12

26) Your grandparents put $10,400 into an account so that you would have spending money in college. You put the money into an account that will earn an APR of 4.23 percent compounded. If you expect that you will be in college for 4 years, how much can you withdraw each month? A) $247.69 B) $228.03 C) $240.05 D) $235.07 E) $235.89

27) Ken just purchased new furniture for his house at a cost of $16,000. The loan calls for weekly payments for the next 7 years at an annual interest rate of 10.75 percent. How much are his weekly payments? A) $62.59 B) $64.68 C) $43.96 D) $65.72 E) $64.77

Version 1

28) You have just won the lottery and will receive a lump-sum payment of $23.41 million after taxes. Instead of immediately spending your money, you plan to deposit all of the money into an account that will earn 5.47 percent. If you make equal annual withdrawals for the next 35 years, how much can you withdraw each year starting exactly one year from now? A) $1,436,916.59 B) $1,566,033.12 C) $1,591,291.72 D) $1,515,515.92 E) $668,857.14

29) The Nashville Geetars, a professional foosball team, has just signed its star player Harold "The Wrist" Thornton to a new contract. One of the terms requires the team to make a lump-sum payment of $13.63 million to the The Wrist exactly 12 years from today. The team plans to make equal annual deposits into an account that will earn 5.53 percent in order to fund the payment. How much must the team deposit each year? A) $786,865.02 B) $1,135,833.33 C) $830,378.65 D) $1,625,636.59 E) $1,584,117.65

30) You want to retire exactly 30 years from today with $2,070,000 in your retirement account. If you think you can earn an interest rate of 10.55 percent compounded monthly, how much must you deposit each month to fund your retirement? A) $806.68 B) $5,750.00 C) $813.78 D) $868.03 E) $944.62

31) Starling wants to retire with $2,020,000 in his retirement account exactly 32 years from today. He will make annual deposits at the end of each year to fund his retirement account. If he can earn 9.37 percent per year, how much must he deposit each year? Version 1

A) $10,056.40 B) $12,185.07 C) $63,125.00 D) $10,444.82 E) $11,423.50

32) Travis International has a debt payment of $2.15 million that it must make 3 years from today. The company does not want to come up with the entire amount at that time, so it plans to make equal monthly deposits into an account starting 1 month from now to fund this liability. If the company can earn a return of 4.38 percent compounded monthly, how much must it deposit each month? A) $55,789.52 B) $55,993.15 C) $57,181.12 D) $59,722.22 E) $59,726.02

33) You want to have $20,000 saved 3 years from today in order to make a down payment on a house. To fund this, you will make deposits each week from your paycheck into an account that will earn 4.38 percent compounded weekly. How much must you deposit each week? A) $120.02 B) $128.21 C) $128.02 D) $122.75 E) $132.02

34) One of your customers has just made a purchase in the amount of $16,000. You have agreed to payments of $315 per month and will charge a monthly interest rate of 0.99 percent. How many months will it take for the account to be paid off?

Version 1

A) 50.79 months B) 70.94 months C) 76.40 months D) 41.35 months E) 66.21 months

35) You have just received an offer in the mail from Friendly Loans. The company is offering to loan you $3,750 with low monthly payments of $80 per month. If the interest rate on the loan is an APR of 15.1 percent compounded monthly, how long will it take for you to pay off the loan? A) 76.75 months B) 14.86 months C) 46.88 months D) 71.27 months E) 66.52 months

36) Thom owes $5,000 on his credit card. The credit card carries an APR of 17.3 percent compounded monthly. If Thom makes monthly payments of $170 per month, how long will it take for him to pay off the credit card assuming that he makes no additional charges? A) 38.54 months B) 41.51 months C) 35.97 months D) 11.32 months E) 29.41 months

37) You have a credit card with a balance of $15,400 and an APR of 18.6 percent compounded monthly. You have been making monthly payments of $290 per month, but you have received a substantial raise and will increase your monthly payments to $365 per month. How many months quicker will you be able to pay off the account?

Version 1

A) 10.91 months B) 37.39 months C) 39.26 months D) 40.71 months E) 43.62 months

38) Bad Company, Incorporated, has a major outlay of $1.35 million that is needed to renovate the company's manufacturing facility. Because the company's management is conservative, it won't undertake the renovation until it has the cash necessary to fund the renovation. The company plans to deposit $113,000 each quarter into an account that will earn 1.7 percent per quarter. How many years will it be until the company has the money saved for the renovation? A) 2.74 years B) 2.53 years C) 2.35 years D) 2.99 years E) 2.94 years

39) You feel that you will need $2.9 million in your retirement account and when you reach that amount, you plan to retire. You feel you can earn an APR of 10.9 percent compounded monthly and plan to save $410 per month until you reach your goal. How many years will it be until you reach your goal and retire? A) 38.51 years B) 49.12 years C) 35.54 years D) 40.39 years E) 33.01 years

40) You have researched your dream around-the-world vacation and determined that the total cost of the vacation will be $40,000. You feel you can earn an APR of 10.4 percent compounded monthly and plan to save $500 per month until you reach your goal. How many years will it be until you reach your goal and enjoy your well-deserved vacation?

Version 1

A) 5.32 years B) 5.81 years C) 4.70 years D) 6.67 years E) 5.09 years

41) You want to have $2.2 million when you retire in 37 years. You feel that you can save $410 per month until you retire. What APR do you have to earn in order to achieve your goal? A) 11.68% B) 12.01% C) 9.70% D) 10.51% E) 11.22%

42) Fifth Fourth National Bank has a savings program which will guarantee you $14,500 in 11 years if you deposit $95 per month. What APR is the bank offering you on this savings plan? A) 2.89% B) 2.60% C) 2.87% D) 2.40% E) 2.97%

43) Bob has been investing $4,500 in stock at the end of every year for the past 13 years. If the account is currently worth $115,000, what was his annual return on this investment? A) 9.80% B) 11.80% C) 12.14% D) 10.62% E) 10.09%

Version 1

44) You have just purchased a car and, to fund the purchase, you borrowed $30,000. If your monthly payments are $429.87 for the next 7 years, what is the APR of the loan? A) 4.86% B) 5.41% C) 5.53% D) 5.00% E) 6.19%

45) Fancy Cat Products has a project that will cost $269,600 today and will generate monthly cash flows of $5,520 for the next 77 months. What is the rate of return of this project when expressed as an APR? A) 17.51% B) 15.60% C) 15.32% D) 13.93% E) 14.14%

46) You want to purchase a new motorcycle that costs $30,400. The most you can pay each month is $535 over the life of the 72-month loan. What is the highest APR that you could afford? A) 9.30% B) 7.51% C) 7.21% D) 8.33% E) 8.13%

47) Your insurance agent is trying to sell you an annuity that costs $60,000 today. By buying this annuity, your agent promises that you will receive payments of $315 per month for 30 years. What is the rate of return expressed as an APR on this investment?

Version 1

A) 4.00% B) 4.81% C) 4.44% D) 5.49% E) 4.72%

48) George Jefferson established a trust fund that will provide $215,500 per year in scholarships. The trust fund earns an annual return of 3.6 percent. How much money did Mr. Jefferson contribute to the fund assuming that only income is distributed? A) $5,986,111.11 B) $4,988,425.93 C) $5,525,641.03 D) $6,841,269.84 E) $5,237,847.22

49) Your grandparents would like to establish a trust fund that will pay you and your heirs $200,000 per year forever with the first payment one year from today. If the trust fund earns an annual return of 3.9 percent, how much must your grandparents deposit today? A) $5,860,805.86 B) $5,128,205.13 C) $4,273,504.27 D) $4,487,179.49 E) $4,733,727.81

50) Your grandparents would like to establish a trust fund that will pay you and your heirs $220,000 per year forever with the first payment 8 years from today. If the trust fund earns an annual return of 4.3 percent, how much must your grandparents deposit today?

Version 1

A) $3,810,342.95 B) $3,502,639.57 C) $5,116,279.07 D) $4,722,719.14 E) $4,263,565.89

51) You just paid $445,000 for a policy that will pay you and your heirs $17,900 per year forever with the first payment in one year. What rate of return are you earning on this policy? A) 3.87% B) 4.02% C) 4.16% D) 4.22% E) 4.29%

52) A prominent alumnus of your university has just donated $2,800,000 to fund a scholarship that will distribute $104,000 per year forever beginning in one year. For this to be true, what rate of return is expected on the donation? A) 3.84% B) 3.58% C) 3.90% D) 3.71% E) 3.96%

53) You have just leased a car that has monthly payments of $395 for the next 4 years with the first payment due today. If the APR is 7.56 percent compounded monthly, what is the value of the payments today? A) $15,854.48 B) $14,927.69 C) $17,053.08 D) $16,317.65 E) $16,420.45

Version 1

54) Jenny Enterprises has just entered a lease agreement for a new manufacturing facility. Under the terms of the agreement, the company agreed to pay rent of $20,500 per month for the next 8 years with the first payment due today. If the APR is 8.4 percent compounded monthly, what is the value of the payments today? A) $1,429,485.08 B) $1,439,491.48 C) $1,392,464.09 D) $1,509,431.08 E) $1,308,628.62

55) Red Sun Rising Corporation has just signed a lease for its new manufacturing facility. The lease agreement calls for annual payments of $1,900,000 for 25 years with the first payment due today. If the interest rate is 3.57 percent, what is the value of this liability today? A) $33,797,199.28 B) $31,078,313.06 C) $32,992,504.06 D) $29,524,397.41 E) $32,187,808.83

56) You have decided to buy a car that costs $26,600. Since you do not have a big down payment, the lender offers you a loan with an APR of 6.05 percent compounded monthly for 5 years with the first monthly payment due today. What is the amount of your loan payment? A) $512.29 B) $446.53 C) $380.76 D) $378.85 E) $514.87

57) Roger has just lost a lawsuit and has agreed to make equal annual payments of $13,950 for the next 8 years with the first payment due today. The value of this liability today is $93,000. What is the interest rate on the payments?

Version 1

A) 4.82% B) 4.24% C) 5.29% D) 4.07% E) 5.58%

58) You plan to save $360 per month starting today for the next 45 years "just to start the month off right." You feel that you can earn an interest rate of 9.8 percent compounded monthly. How much will there be in the account 45 years from today? A) $3,202,211.73 B) $3,518,116.72 C) $3,217,260.42 D) $2,916,404.13 E) $3,546,848.00

59) Your credit card company charges you 1.34 percent per month. What is the APR on your credit card? A) 16.08% B) 16.70% C) 17.32% D) 15.28% E) 18.19%

60) Your credit card company charges you 1.34 percent per month. What is the EAR on your credit card? A) 15.28% B) 18.19% C) 16.08% D) 17.32% E) 16.70%

Version 1

61)

What is the effective annual rate for an APR of 10.70 percent compounded quarterly? A) 10.68% B) 11.19% C) 11.14% D) 11.69% E) 11.24%

62)

What is the effective annual rate for an APR of 15.60 percent compounded monthly? A) 16.77% B) 15.71% C) 16.54% D) 17.60% E) 16.65%

63) You are considering the purchase of new living room furniture that costs $1,260. The store will allow you to make weekly payments of $27.43 for one year to pay off the loan. What is the EAR of this arrangment? A) 24.90% B) 23.65% C) 29.61% D) 28.20% E) 26.55%

64) Mo will receive a perpetuity of $21,000 per year forever, while Curly will receive the same annual payment for the next 35 years. If the interest rate is 6.5 percent, how much more are Mo's payments worth?

Version 1

A) $35,650.83 B) $37,433.37 C) $31,751.52 D) $33,422.65 E) $34,536.74

65) You are set to receive an annual payment of $12,500 per year for the next 12 years. Assume the interest rate is 7.4 percent. How much more are the payments worth if they are received at the beginning of the year rather than the end of the year? A) $6,968.11 B) $6,406.16 C) $7,192.88 D) $7,552.53 E) $6,743.33

Version 1

Answer Key Test name: Chapter 05 Test Bank - Algo 1) C PV = $6,500/1.12 + $11,500/1.122 + $17,700/1.123 = $27,569.81 CFo

C01

$6,500

F01

C02

$11,500

F02

C03

$17,700

F03

I = 12 NPV CPT $27,569.81

2) A Version 1

PV = $1,980/1.108 + $2,540/1.1082 + $2,920/1.1083 + $2,930/1.1084 = $7,946.69 CFo

C01

$1,980

F01

C02

$2,540

F02

C03

$2,920

F03

C04

$2,930

F04

I = 10.8 NPV CPT $7,946.69

Version 1

3) C PV = $20,000/1.042 + $27,500/1.0422 + $50,000/1.0423 + $75,000/1.0424 = $152,335.53 CFo

C01

$20,000

F01

C02

$27,500

F02

C03

$50,000

F03

C04

$75,000

F04

I = 4.2

Version 1

NPV CPT $152,335.53

4) D PV = $1,515/1.048 + $1,645/1.0482 + $2,255/1.0484 = $4,812.77 Difference = $6,300.69 − 4,812.77 = $1,487.92 FV = $1,487.92(1.048)3 = $1,712.63 CFo

C01

$1,515

F01

C02

$1,645

F02

C03

F03

C04

$2,255

F04

Version 1

I = 4.8 NPV CPT $4,812.77

Difference = $6,300.69 − 4,812.77 = $1,487.92 Enter

4.8%

−$1,487.92

I/Y

PMT

Solve for

$1,712.63

5) E FV = $4,900(1 + 0.06)5 + $6,700(1 + 0.06)4 + $8,900(1 + 0.06)3 = $25,615.94 6) E FV = $3,200(1.062)3+ $4,200(1.062)2 + $6,085(1.062) + $8,215 = $23,247.08 7) A FV = $3,365(1.056)4 + $4,515(1.056)3 + $5,455(1.056)2 + $6,700(1.056) = $22,659.53 8) C FV = $1,675(1.054)3 + $1,872(1.054)2 + $2,915 = $6,955.90 Difference = $8,210.59 − 6,955.90 = $1,254.69 PV = $1,254.69/1.054 = $1,190.41 9) C PV = $255[(1 − 1/1.00584×12)/.0058] = $10,657.11 Enter

Version 1

4 × 12

.58%

−$255

I/Y

Solve for

PMT

$10,657.11

10) E PV = $1,100[(1 − 1/1.008524×4)/.0085] = $71,988.60 Enter

24 × 4

.85%

I/Y

Solve for

−$1,100

PMT

$71,988.60

11) D PV = $420[(1 − 1/(1 + .074/12)7×12)/(.074/12)] = $27,470.79 Enter

Solve for

7 × 12

7.4%/12

I/Y

−$420

PMT

$27,470.79

12) C Version 1

PV = $3,700,000[(1 − 1/1.07025)/.070] = $43,118,257.76 Enter

7.0%

I/Y

Solve for

−$3,700,000

PMT

$43,118,257.76

13) E PV = $20,000[(1 − 1/1.053031)/.0530] = $301,242.73 Enter

5.3%

I/Y

Solve for

−$20,000

PMT

$301,242.73

14) C PV = $23,500[(1 − 1/1.052029)/.0520] = $348,024.87 PV = $348,024.87/1.05207 = $244,061.96 Enter

Version 1

5.2%

I/Y

−$23,500

PMT

Solve for

Enter

$348,024.87

5.2%

I/Y

Solve for

−$348,024.87

PMT

$244,061.96

15) A PV = $4,400[(1 − 1/(1 + .067/2)12×2)/(.067/2)] = $71,783.06 PV = $71,783.06/(1 + .067/2)7×2 = $45,255.90 Enter

12 × 2

6.7%/2

I/Y

Solve for

Enter

Version 1

−$4,400

PMT

$71,783.06

7 × 2

6.7%/2

I/Y

−$71,783.06

PMT

Solve for

$45,255.90

16) E FV = $3,550[(1.074726 − 1)/.0747] = $261,773.94 Enter

7.47%

I/Y

−$3,550

PMT

Solve for

$261,773.94

17) A FV = $4,950[(1.098941 − 1)/.0989] = $2,341,579.57 Enter

9.89%

I/Y

−$4,950

PMT

Solve for

$2,341,579.57

18) D FV = $1,550[(1.064312 − 1)/.0643] = $26,814.37 Enter

Version 1

6.43%

−$1,550

I/Y

PMT

Solve for

$26,814.37

19) D FV = $465[(1.00365×12 − 1)/.0036] = $31,080.22 Enter

5 × 12

.36%

I/Y

−$465

PMT

Solve for

$31,080.22

20) E FV = $70[(1.001435×52 − 1)/.0014] = $587,937.98 Enter

Solve for

35 × 52

.14%

I/Y

−$70

PMT

$587,937.98

21) A

Version 1

FV = $6,900[(1.07212 − 1)/.072] = $124,892.93 FV = $124,892.93(1.072)6 = $189,542.49 Enter

7.2%

I/Y

−$6,900

PMT

Solve for

Enter

$124,892.93

7.2%

−$124,892.93

I/Y

PMT

Solve for

$189,542.49

22) C FV = $4,400[1.102035 − 1)/.1020] = $1,248,701.51 Enter

Solve for

Version 1

10.20%

I/Y

−$4,400

PMT

$1,248,701.51

23) C $25,500 = C{[1 − (1/(1 + .0523/12)60)]/(.0523/12)} C = $483.91 Enter

5 × 12

5.23%/12

−$25,500

I/Y

Solve for

PMT

$483.91

24) C $185,000 = C{[1 − (1/(1 + .0505/12)360)]/(.0505/12)} C = $998.78 Enter

30 × 12

5.05%/12

−$185,000

I/Y

Solve for

PMT

$998.78

25) E $305,000(.90) = C{[1 − (1/(1 + .0557/12)240)]/(.0557/12)} C = $1,899.12 Enter

Version 1

20 × 12

5.57%/12

−$305,000(.90)

I/Y

Solve for

PMT

$1,899.12

26) E $10,400 = C{[1 − (1/(1 + .0423/12)48)]/(.0423/12)} C = $235.89 Enter

4 × 12

4.23%/12

−$10,400

I/Y

Solve for

PMT

$235.89

27) A $16,000 = C{[1 − (1/(1 + .1075/52)364)]/(.1075/52)} C = $62.59 Enter

Solve for

Version 1

7 × 52

10.75%/52

−$16,000

I/Y

PMT

$62.59

28) D $23,410,000 = C{[1 − (1/1.054735)]/.0547} C = $1,515,515.92 Enter

5.47%

−$23,410,000

I/Y

Solve for

PMT

$1,515,515.92

29) C $13,630,000 = C{[1 − (1/1.055312)]/.0553} C = $830,378.65 Enter

5.53%

I/Y

Solve for

−$13,630,000

PMT

$830,378.65

30) C $2,070,000 = C{[(1 + .1055/12)360 − 1]/(.1055/12)} C = $813.78 Enter

Version 1

30 × 12

10.55%/12

−$2,070,000

I/Y

Solve for

PMT

$813.78

31) E $2,020,000 = C[(1.093732 − 1)/.0937] C = $11,423.50 Enter

9.37%

I/Y

−$2,020,000

Solve for

PMT

$11,423.50

32) B $2,150,000 = C{[(1 + .0438/12)36 − 1]/(.0438/12)} C = $55,993.15 Enter

Solve for

Version 1

3 × 12

4.38%/12

I/Y

−$2,150,000

PMT

$55,993.15

33) A $20,000 = C{[(1 + .0438/52)156−1]/(.0438/52)} C = $120.02 Enter

3 × 52

4.38%/52

I/Y

−$20,000

Solve for

PMT

$120.02

34) B $16,000 = $315[(1 − 1/1.0099t)/.0099] t = 70.94 months Enter

Solve for

.99%

−$16,000

I/Y

$315

PMT

70.94

35) D $3,750 = $80{[1 − 1/(1 + .151/12)t]/(.151/12)} t = 71.27 months Enter

Version 1

15.1%/12

−$3,750

$80

Solve for

I/Y

PMT

71.27

36) A $5,000 = $170{[1 − 1/(1 + .173/12)t]/(.173/12)} t = 38.54 months Enter

Solve for

17.3%/12

−$5,000

I/Y

$170

PMT

38.54

37) E $15,400 = $290{[1 − 1/(1 + .1860/12)t]/(.1860/12)} t = 112.62 months $15,400 = $365{[1 − 1/(1 + .1860/12)t]/(.1860/12)} t = 69.00 months Difference = 112.62 months − 69.00 months = 43.62 months Enter

Version 1

18.60%/12

−$15,400

I/Y

$290

PMT

Solve for

112.62

Enter

Solve for

18.60%/121

−$15,400

I/Y

$365

PMT

69.00

38) A $1,350,000 = $113,000{[(1 + .0170)t − 1]/.0170} t = 10.97 quarters t = 10.97/4 = 2.74 years Enter

1.70%

Solve for

I/Y

$113,000

−$1,350,000

PMT

10.97

39) A $2,900,000 = $410{[1 - 1/(1 + .1090/12)t]/.1090} t = 462.07 months t = 462.07/12 = 38.51 years Enter

Version 1

10.90%/12

$410

−$2,900,000

Solve for

I/Y

PMT

462.07

40) E $40,000 = $500{[(1 + 0.1040/12)t − 1]/(0.1040/12)} t = 61.04 months t = 61.04/12 = 5.09 years Enter

10.40%/12

Solve for

I/Y

$500

PMT

−$40,000

61.04

41) D $2,200,000 = $410{[(1 + r)444 − 1]/ r} r = .0088, or .88% r = .88% × 12 = 10.51% Enter

37 × 12

Version 1

I/Y

$410

PMT

−$2,200,000

Solve for

.88%

42) B $14,500 = $95{[(1 + r)132 − 1]/r} r = .0022, or .22% r = .22% × 12 = 2.60% Enter

11 × 12

Solve for

I/Y

$95

−$14,500

PMT

.22%

43) D $115,000 = $4,500{[(1 + r)13 − 1]/r} r = .1062, or 10.62% Enter

Solve for

$4,500

I/Y

PMT

−$115,000

10.62%

44) B

Version 1

$30,000 = $429.87{[1 − 1/(1 + r)84]/r} r = .0045, or .45% r = .45% × 12 = 5.41% Enter

7 × 12

Solve for

−$30,000

I/Y

$429.87

PMT

.45%

45) C $269,600 = $5,520{[1 − 1/(1 + r)77]/r} r = .0128, or 1.28% r = 1.28% × 12 = 15.32% Enter

Solve for

−$269,600

I/Y

$5,520

PMT

1.28%

46) E $30,400 = $535{[1 − 1/(1 + r)72]/r} r = .0068, or .68% r = .68% × 12 = 8.13% Enter

Version 1

−$30,400

$535

Solve for

I/Y

PMT

.68%

47) B $60,000 = $315{[1 − 1/(1 + r)360]/r} r = .0040, or .40% r = .40% × 12 = 4.81% Enter

30 × 12

−$60,000

Solve for

I/Y

$315

PMT

.40%

48) A PV = $215,500/.036 = $5,986,111.11 49) B PV = $200,000/.039 = $5,128,205.13 50) A PV = $220,000/.043 = $5,116,279.07 PV = $5,116,279.07/1.0437 = $3,810,342.95 Enter

Version 1

4.3%

−$5,116,279.07

I/Y

Solve for

PMT

$3,810,342.95

51) B R = $17,900/$445,000 = .0402, or 4.02% 52) D R = $104,000/$2,800,000 = .0371, or 3.71% 53) E PV = $395(1.0063)[(1 − 1/1.006348)/.0063] = $16,420.45 2nd BGN 2nd SET Enter

.63%

I/Y

Solve for

−$395

PMT

$16,420.45

54) B PV = $20,500(1.0070)[(1 − 1/1.007096)/.0070] = $1,439,491.48 2nd BGN 2nd SET Enter

Version 1

.70%

I/Y

−$20,500

PMT

Solve for

$1,439,491.48

55) E $1,900,000 = C(1.0357)[(1 − 1/1.035725)/.0357] C = $32,187,808.83 2nd BGN 2nd SET Enter

3.57%

I/Y

Solve for

−$1,900,000

PMT

$32,187,808.83

56) A $26,600 = C(1 + .0605/12)[(1 − 1/(1 + .0605/12)60)/(.0605/12)] C = $512.29 2nd BGN 2nd SET Enter

Solve for

6.05%/12

−$26,600

I/Y

PMT

$512.29

57) E Version 1

$93,000 = $13,950(1 + r){[1 − 1/(1 + r)8]/r} r = .0558, or 5.58% 2nd BGN 2nd SET Enter

Solve for

−$93,000

I/Y

$13,950

PMT

5.58%

58) E FV = $360(1 + .098/12)[(1 + .098/12)540 − 1)/(.098/12)] = $3,546,848.00 2nd BGN 2nd SET Enter

45 × 12

9.8%/12

I/Y

−$360

Solve for

PMT

$3,546,848.00

59) A APR = 1.34% × 12 = 16.08% 60) D EAR = (1 + .0134)12 - 1 = .1732, or 17.32% 61) C EAR = (1 + .1070/4)4 - 1 = .1114, or 11.14%

Version 1

62) A EAR = (1 + .1560/12)12 = .1677, or 16.77% 63) D $1,260 = $27.43{[1 − 1/(1 + r)t]/r} r = .0048 EAR = (1 + .0048)52 − 1 = .2820, or 28.20% Enter

Solve for

−$1,260

I/Y

$27.43

PMT

.48%

64) A PV = $21,000/.0650 = $323,076.92 PV = $21,000{[1 − (1/1.065035)]/.0650} = $287,426.09 Difference = $323,076.92 − 287,426.09 = $35,650.83 Enter

Solve for

6.5%

I/Y

−$21,000

PMT

$287,426.09

65) C

Version 1

PV = $12,500(1.074){[1 − (1/1.07412)]/.074} = $104,394.01 PV = $12,500{[1 − (1/1.07412)]/.074} = $97,201.13 Difference = $104,394.01 − 97,201.13 = $7,192.88 2nd BGN 2nd SET Enter

7.4%

I/Y

Solve for

Enter

Solve for

Version 1

−$12,500

PMT

$104,394.01

7.4%

I/Y

−$12,500

PMT

$97,201.13

Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms? A) Perpetuity B) Annuity C) Consol D) Lump sum E) Present value

2) 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

3) The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are: A) an ordinary annuity. B) an annuity due. C) amortized payments. D) a perpetuity. E) a perpetuity due.

A perpetuity in Canada is frequently referred to as:

Version 1

A) a consol. B) an infinity. C) forever cash. D) a dowry. E) a forevermore.

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.

6) Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the: A) annual percentage rate. B) simplified rate. C) quoted rate. D) stated rate. E) effective annual rate.

7) Lee pays 1 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.

All else held constant, the present value of an annuity will decrease if you:

Version 1

A) increase the annuity's future value. B) increase the payment amount. C) increase the time period. D) decrease the discount rate. E) decrease the annuity payment.

9) Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 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.

10)

Which statement is true?

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 the future value of an annuity.

11)

Which one of the following is the annuity present value formula?

Version 1

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)

12)

Which one of these is 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) Rental payment of $800 a month for one year

13)

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 six years C) Unequal payments each year for nine years D) Equal annual payments for life E) Equal weekly payments forever

14)

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.

15)

Which one of the following qualifies as an annuity payment?

Version 1

A) Weekly grocery bill B) Clothing purchases C) Car repairs D) Auto loan payment E) Medical bills

16)

Perpetuities have: A) irregular payments but constant payment periods. B) equal payments and an infinite life. C) equal payments and a set number of equal payment periods. D) less value than comparable annuities. E) no application in today’s world.

17)

All else held constant, the future value of an annuity will increase if you: A) decrease both the interest rate and the time period. B) increase the time period. C) decrease the present value. D) decrease the payment amount. E) decrease the interest rate.

18) 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.

Version 1

19) due?

Which one of the following features distinguishes an ordinary annuity from an annuity

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

20)

Which one of the following is an ordinary annuity, but not a perpetuity? A) $75 paid at the beginning of each monthly 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 5 years, starting today D) $50 paid every year for ten years, starting today E) $25 paid weekly for 1 year, starting one week from today

21)

A 30-year home mortgage is a classic example of: A) a set of unequal cash flows. B) an ordinary annuity. C) a perpetuity. D) an annuity due. E) a consol.

22) You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. 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?

Version 1

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 must 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.

23)

Which one of the following has the highest effective annual rate? A) 6 percent compounded annually B) 6 percent compounded semiannually C) 6 percent compounded quarterly D) 6 percent compounded daily E) 6 percent compounded every 2 years

24) Assume all else is equal. 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.

25) 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.

Version 1

26)

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.

27)

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 partially amortized with each loan payment. E) require the accrued interest be paid in full with each monthly payment.

28) Scott borrowed $2,500 today at an APR of 7.4 percent. 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.

29) Cindy is taking out a loan today. The cash amount that she is receiving is equal to the present value of the lump-sum payment that she will be required to pay two years from today. Which type of loan is this?

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A) Principal-only B) Amortized C) Interest-only D) Compound E) Pure discount

30) Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six 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

31) Letitia borrowed $6,000 from her bank two years ago. The loan term is four 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

32) Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, 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

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33) 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 three years. What type of loan did you obtain? A) Interest-only B) Amortized C) Perpetual D) Pure discount E) Lump sum

34) Krystal plans to save $500 at the end of Year 1, $600 at the end of Year 2, and $800 at the end of Year 3. If she earns 2.8 percent on her savings, how much money will she have saved at the end of Year 3? A) $1,676.51 B) $1,714.97 C) $1,945.19 D) $1,785.66 E) $1,878.69

35) Retreaded Tires plans to save $23,500, $24,500, $26,500, and $28,000 at the end of each year for Years 1 to 4, respectively. If it earns 2.1 percent on its savings, how much will the firm have saved at the end of Year 4? A) $100,878.30 B) $102,140.20 C) $105,608.11 D) $104,174.00 E) $111,860.57

36) Moonlight Industries just signed a sales contract with a new customer. JK will receive annual payments in the amount of $50,000, $96,000, $123,000, and $138,000 at the end of Years 1 to 4, respectively. What is this contract worth at the end of Year 4 if the firm earns 3.75 percent on its savings?

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A) $443,571.88 B) $348,457.72 C) $431,417.66 D) $412,264.53 E) $424,786.07

37) Oakville Trucking just signed a $5.0 million contract. The contract calls for a payment of $1.25 million today, $1.75 million one year from today, and $2.0 million two years from today. What is this contract worth today at a discount rate of 7.25 percent? A) $4,620,444.63 B) $4,923,275.74 C) $3,247,628.58 D) $4.341,851.15 E) $4,342,468.17

38) Tiger Trucking Company is considering a project that will produce cash inflows of $18,000 at the end of Year 1, $32,000 in Year 2, and $45,000 in Year 3. What is the present value of these cash inflows at a discount rate of 9 percent? A) $65,615.21 B) $70,181.89 C) $78.195.78 D) $78,485.76 E) $87,112.15

39) Chandler Tire Company 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 $30,664.32 per year for ten years. Project 2 will produce cash flows of $27,482.29 per year for twelve years. The company requires a 9 percent rate of return. Which project should the company select and why?

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A) Project 1, because the annual cash flows are greater by $4,000 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 $72,000 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.

40) Jorge is considering an investment that will pay $4,650 a year for five years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 9.0 percent? A) $17,736.81 B) $18,566.10 C) $15,064.70 D) $18,086.88 E) $20,859.52

41) How much money does Yvette need to have in her retirement savings account today if she wishes to withdraw $36,000 a year for 30 years? She expects to earn an average rate of return of 8.25 percent. A) $405,280.20 B) $395,904.99 C) $339,752,80 D) $393,388.77 E) $354,049.89

42) Bob can afford car payments of $365 per month for 5 years. If the interest rate is 4.9 percent, how much money can he afford to borrow?

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A) $7,026,73 B) $15,880.60 C) $19,819.16 D) $19,388.64 E) $21,247.83

43) The manager of Steve’s Audio has approved Daisy's application for 24 months of credit with maximum monthly payments of $45. If the APR is 19.2 percent, what is the maximum initial purchase that Daisy can buy on credit? A) $501.36 B) $1,024.35 C) $890.99 D) $980.99 E) $1,134.57

44) Postal Express is considering the purchase of a new sorting machine. The sales quote consists of quarterly payments of $41,650 for five years at 7.6 percent interest. What is the purchase price? A) $621,380.92 B) $614,184.40 C) $687,655.38 D) $774,311.28 E) $836,267.35

45) You want to purchase a new condominium that costs $325,000. Your plan is to pay 20 percent down in cash and finance the balance over 15 years at 4.1 percent. What will be your monthly mortgage payment including principal and interest?

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A) $1,936.24 B) $2,185.56 C) $2,560.39 D) $2,420.30 E) $2,258.34

46) Today, you are purchasing a 15-year, 6.5 percent annuity at a cost of $36,500. The annuity will pay annual payments starting one year from today. What is the amount of each payment? A) $4,177.59 B) $3,881.88 C) $2,420.91 D) $3,679.71 E) $4,874.70

47) Varian wants to have $500,000 in an investment account six years from now. The account will pay .58 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) $5,614.90 B) $6,049.86 C) $5,391.05 D) $5,053.86 E) $5,360.94

48) Max’s Kennels spent $220,000 to refurbish its current facility. The firm borrowed 60 percent of the refurbishment cost at 5.95 percent interest for six years. What is the amount of each monthly payment?

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A) $1,985.25 B) $2,205.36 C) $2,356.23 D) $2,184.51 E) $1,895.32

49) Your grandfather started his own business 52 years ago. He opened an investment 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 7.45 percent annually. Today, his account is valued at $289,209.11. How much did your grandfather save every three months assuming he saved the same amount each time? A) $284.02 B) $118.52 C) $331.09 D) $226.78 E) $262.25

50) Industrial Tools owes you $38,600. This amount is seriously delinquent, so you have offered to accept weekly payments for one year at an interest rate of 6.24 percent to settle this debt in full. What is the amount of each payment? A) $766.15 B) $599.04 C) $829.90 D) $753.71 E) $609.18

51) Forni’s Furniture is offering a bedroom suite for $2,700. The credit terms are 60 months at $73.00 per month. What is the interest rate on this offer?

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A) 20.97% B) 20.05% C) 19.26% D) 21.75% E) 1.75%

52) RB Farworth will pay you $2,500 a year for 15 years in exchange for $25,000 today. What interest rate will you earn on this annuity?

A) 6.23% B) 5.56% C) 7.46% D) 4.23% E) 4.56%

53) London Motors will sell a $24,000 car for $470 per month for 60 months. What is the interest rate?

A) 8.95% B) 7.15% C) 6.90% D) 17.59% E) 6.54%

54) You have just won the lottery! You can either receive $183,555 per year for 20 years or $2,300,000 as a lump sum payment today. What is the interest rate on the annuity option? A) 4.94% B) 3.98% C) 5.50% D) 4.75% E) 4.25%

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55) Recently, you needed money and agreed to sell a car you had inherited at a price of $55,000, to be paid in monthly payments of $800 for 60 months. What interest rate did you charge for financing the sale? A) 6.84% B) 5.23% C) 7.78% D) 6.50% E) 8.33%

56) Lionheart Trucking recently purchased a new truck costing $178,000. The firm financed this purchase at 6.6 percent interest with monthly payments of $2,400. How many years will it take the firm to pay off this debt? A) 7.96 years B) 8.95 years C) 8.83 years D) 6.89 years E) 9.26 years

57) Cromwell is acquiring some land for $1,750,000 in exchange for semiannual payments of $100,000 at an interest rate of 6.35 percent. How many years will it take Cromwell to pay for this purchase? A) 11.00 years B) 12.97 years C) 11.35 years D) 10.47 years E) 11.80 years

58) So you can retire early, you have decided to start saving $750 a month starting one month from now. You plan to retire as soon as you can accumulate $1.3 million. If you can earn 5 percent on your savings, how many years will it be before you can retire?

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A) 33.39 years B) 42.22 years C) 44.76 years D) 44.71 years E) 33.87 years

59) You just received a loan offer from Mako Loans. The company is offering you $8,000 at 6.25 percent interest. The monthly payment is only $200. If you accept this offer, how long will it take you to pay off the loan? A) 4.30 years B) 3.75 years C) 5.26 years D) 4.99 years E) 6.05 years

60) Jake owes $3,990 on a credit card with an APR of 13.9 percent. How much more will it cost him to pay off this balance if he makes monthly payments of $50 rather than $60? Assume he does not charge any further purchases. A) $2,409 B) $2,811 C) $1,648 D) $1,018 E) $3,545

61) You owe $6,800 on a car loan that has an interest rate of 6.75 percent and monthly payments of $310. You lost your job and your new job pays less, so your lender just agreed to lower the monthly payments to $225 while keeping the interest rate at 6.75 percent. How much longer will it take you to repay this loan than you had originally planned?

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A) 10.50 months B) 11.47 months C) 9.74 months D) 12.19 months E) 18.90 months

62) Karley’s setting aside $32,000 each quarter for the next three years for an expansion project. How much money will the firm have at the end of the three years if it can earn an average of 5.45 percent on its savings? A) $428,409.29 B) $414,123.86 C) $390,411.20 D) $419,766.30 E) $362,009.14

63) Kate plans to save $100 a month, starting today, for 20 years. Jane plans to save $100 a month for 20 years, starting one month from today. Both Kate and Jane 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 Jane. A) $159.73 B) $66.67 C) $0 D) $78.14 E) $299.66

64) What is the future value of $25 a week for 40 years at 8.5 percent interest? Assume the first payment occurs at the end of this week.

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A) $441,710.03 B) $414,361.08 C) $469,727.15 D) $350,003.14 E) $335,221.18

65) At the end of this month, Les will start saving $200 a month for retirement through his company's retirement plan. His employer will contribute an additional $.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 8.25 percent on his retirement savings, how much will he have in his retirement account 30 years from now? A) $589,406.19 B) $401,005.25 C) $540,311.67 D) $470,465.70 E) $503,289.01

66) Freya plans to invest $3,200 a year for 25 years starting at the end of this year. How much will this investment be worth at the end of the 25 years if she earns an average annual rate of return of 8.2 percent? A) $263,837.69 B) $381,324.92 C) $245,897,34 D) $219,672.01 E) $240,885.11

67) Kristina started setting aside funds five years ago to save for a down payment on a house. She has saved $600 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved?

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A) $11,542.10 B) $13,471.72 C) $15,209.80 D) $15,366.67 E) $16,023.13

68) Uptown Insurance offers an annuity due with semiannual payments for 20 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) $8,400.46

69) Leann will receive $95,000 a year for 7 years, starting today. If the rate of return is 6.8 percent, what are these payments worth today? A) $568,346.72 B) $531,019.80 C) $550,630.68 D) $564,009.27 E) $518,571,80

70) You plan to save $250 a month for the next 24 years and hope to earn an average rate of return of 10.6 percent. How much more will you have at the end of the 24 years if you invest your money at the beginning rather than the end of each month? A) $1,911.29 B) $1,807.70 C) $2,238.87 D) $2,317.82 E) $2,897.27

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71) A local magazine is offering a $5,000 grand prize to one lucky winner. The prize will be paid in five annual payments of $1,000 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 8 percent on your money? A) $4,823.45 B) $4,622.88 C) $3,992.71 D) $4,312.13 E) $3,312.13

72) A preferred stock pays an annual dividend of $2.95. What is one share of this stock worth to you today if you require a rate of return of 8.2 percent? A) $51.21 B) $33.03 C) $38.00 D) $35.98 E) $33.49

73) You would like to establish a trust fund that would provide annual scholarships of $100,000 forever. How much would you have to deposit today in one lump sum to achieve this goal if you can earn a guaranteed 5.4 percent rate of return? A) $1,678,342 B) $1,851,852 C) $2,413,435 D) $1,620,975 E) $2,222,222

74) Standards Life Insurance offers a perpetuity that pays annual payments of $12,000. This contract sells for $250,000 today. What is the interest rate?

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A) 4.80% B) 3.87% C) 4.10% D) 4.21% E) 4.39%

75) A preferred stock offers a rate of return of 5.45 percent and sells for $78.20? What is the annual dividend amount? A) $4.26 B) $4.09 C) $3.53 D) $4.50 E) $3.87

76) Assume your university earns an average rate of return of 5.65 percent on its endowment funds. If a new gift permanently increases annual scholarships by $32,000, what was the amount of the gift? A) $784,090.91 B) $485,293.05 C) $615,384.62 D) $658,929.38 E) $566,371.68

77) Kurt will receive $1,200 a month for five years from an insurance settlement. If he invests the full amount of each payment at a guaranteed 6.15 percent rate, how much will he have saved at the end of the five years? A) $76,003.18 B) $84,047.58 C) $91,388.71 D) $89,216.51 E) $95,115.16

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78) Anne plans to save $40 a week, starting next week, for ten years and earn a rate of return of 4.6 percent, compounded weekly. After the ten years, she will discontinue saving and invest her account at 6.5 percent, compounded annually. How long from now will it be before she has accumulated a total of $50,000? A) 10.32 years B) 21.14 years C) 15.08 years D) 11.14 years E) 20.32 years

79) What is the value today of $3,600 received at the end of each year for eight years if the first payment is paid exactly four years from today and the discount rate is 12 percent? A) $11,694.21 B) $12,484.57 C) $12,729.12 D) $15,089.23 E) $14,429.52

80) You will receive annual payments of $800 at the end of each year for 12 years. The first payment will be received three years from today. What is the present value of these payments if the discount rate is 7 percent? A) $5,465.20 B) $6,018.52 C) $6,299.80 D) $5,549.96 E) $6,856.60

81)

What is the effective annual rate of 8.25 percent compounded quarterly?

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A) 8.25% B) 8.49% C) 8.38% D) 8.51% E) 8.56%

82)

What is the effective annual rate of 9.6 percent compounded semiannually? A) 9.71% B) 9.83% C) 9.79% D) 9.68% E) 9.92%

83) Round House Furniture offers credit to its customers at a rate of 1.15 percent per month. What is the effective annual rate of this credit offer? A) 14.13% B) 13.80% C) 14.41% D) 15.04% E) 14.71%

84) First Bank offers personal loans at 7.7 percent compounded monthly. Second Bank offers similar loans at 7.4 percent compounded daily. Which one of the following statements is correct concerning these loans? Assume a 365-day year. A) The First Bank loan has an effective rate of 7.98 percent. B) The Second Bank loan has an effective rate of 8.01 percent. C) The annual percentage rate for the Second Bank loans is 7.68 percent. D) Borrowers should prefer the loans offered by First Bank. E) Both banks offer the same effective rate.

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85)

What is the effective annual rate of 14.9 percent compounded quarterly? A) 14.48% B) 14.67% C) 15.23% D) 15.54% E) 15.75%

86)

A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR? A) 13.53% B) 13.59% C) 13.96% D) 14.07% E) 14.10%

87) An amortized, 3-year loan has annual payments and an effective annual rate of 14.56 percent. What is the APR? A) 13.09% B) 13.46% C) 13.90% D) 14.56% E) 14.82%

88) Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan? A) 11.88% B) 12.00% C) 12.16% D) 16.00% E) 16.28%

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89) Walker’s charges a daily rate of .049 percent on its store credit cards. What interest rate is the company required by law to report to potential customers? Assume each quarter has exactly 91.25 days. A) 15.98% B) 17.89% C) 16.67% D) 17.45% E) 16.65%

90) Dixie’s Markets offers credit to its customers and charges interest of 1.2 percent per month. What is the effective annual rate? A) 15.39% B) 14.61% C) 15.10% D) 15.51% E) 15.73%

91) Sporting Goods charges .85 percent interest per month. What rate of interest are its credit customers actually paying? A) 11.00% B) 11.92% C) 10.26% D) 9.31% E) 10.69%

92) Today, you are borrowing $18,200 to purchase a car. What will be your monthly payment if the loan is for three years at 7.0 percent interest?

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A) $608.40 B) $621.50 C) $561.96 D) $580.24 E) $600.10

93) You have an outstanding loan with an EAR of 14.61 percent. What is the APR if interest is compounded monthly? A) 13.48% B) 13.71% C) 14.60% D) 15.41% E) 15.62%

94) Today, you are borrowing money and must repay the lender one year from now with a lump-sum payment of $12,800. How much money are you borrowing if the interest rate is 8.45 percent, compounded monthly? A) $12,000.00 B) $10,550.00 C) $11,766.32 D) $10,762.14 E) $11,802.67

95) E-Z Loans is offering a special on one-year loans. The company will loan you $1,500 today with no waiting and no credit check, in exchange for one payment of $2,000 one year from now. What is the APR on this loan? A) 30.63% B) 21.20% C) 25.63% D) 17.93% E) 33.33%

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96) The Corner Bakery needs $86,000 today for remodeling. They have obtained a 2-year, pure-discount loan at an interest rate of 6.8 percent, compounded annually. How much must they repay in two years? A) $94,064.20 B) $89,540.21 C) $90,860.00 D) $91,159.39 E) $98,093.66

97) What effective annual rate can a bank earn on an APR of 10.5 percent, compounded monthly? A) 10.50% B) 10.76% C) 11.84% D) 11.02% E) 13.08%

98) Hometown Builders is borrowing $195,000 today for four years. The loan is an interestonly loan with an APR of 7.65 percent. Payments are to be made annually. What is the amount of the first annual payment? A) $14,917.50 B) $20,610.90 C) $18,029.18 D) $58,416.55 E) $63,667.50

99) Best’s Fried Chicken just took out an interest-only loan of $50,000 for three years with an interest rate of 8.15 percent. 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?

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A) $19,454.21 B) $20,166.67 C) $50,000.00 D) $54,075.00 E) $52,824.60

100) The Rent-to-Own Store has a six-year, interest-only loan at 7.6 percent interest. The firm originally borrowed $115,000. How much will the firm pay in total interest over the life of the loan? A) $32,451.13 B) $53,666.67 C) $47,500.00 D) $69,000.00 E) $52,440.00

101) Jeffries & Sons is borrowing $95,000 for four years at an APR of 7.05 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) $28,224.90 B) $27,098.75 C) $25,424.38 D) $30,447.50 E) $28,773.13

102) Julie is borrowing $14,950 to purchase a car. The loan terms are 48 months at 6.95 percent interest, compounded monthly. How much interest, rounded to the nearest dollar, will she pay on this loan if she pays the loan as agreed?

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A) $2,338 B) $2,414 C) $1,959 D) $1,806 E) $2,217

103) The Egg House just borrowed $660,000 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 8.35 percent. How much of the first annual payment will be used to reduce the principal balance? A) $21,311.62 B) $23,653.18 C) $18,211.08 D) $48,911.08 E) $51,420.90

104) Sheet Metals has an outstanding loan that calls for equal annual payments of $12,600.47 over the life of the loan. The original loan amount was $72,000 at an APR of 8.15 percent. How much of the third loan payment is interest? A) $5,868.00 B) $4,725.89 C) $4,896.48 D) $5,009.16 E) $4,687.53

105) JK’s is borrowing $132,000 for three years at an APR of 7.6 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 be paid in interest over the life of this loan?

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A) $10,032 B) $30,096 C) $12,840 D) $20,064 E) $18,667

106) Assume you pay $24,000 today in exchange for an annuity with monthly payments, an APR of 6.75 percent, and a life of 15 years. What is the payment amount? A) $319.27 B) $266.67 C) $212.38 D) $203.16 E) $338.09

107) Appalachian Bank offers you a $30,000, 2-year term loan at an APR of 5.5 percent, compounded monthly. What will be your monthly loan payment? A) $1,307.16 B) $1,250.00 C) $1,960.02 D) $1,389.20 E) $1,322.87

108) Alfa Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the guaranteed rate of return on this investment is 3.6 percent, how much will you pay for the policy? A) $266,576.83 B) $277,777.78 C) $254,211.50 D) $267,119.02 E) $241,160.91

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109) City Loans wants to earn an effective annual return on its consumer loans of 18.9 percent per year. The bank applies daily compounding. What interest rate is the firm required by law to report to potential borrowers? A) 17.47% B) 17.32% C) 17.86% D) 16.39% E) 18.90%

110) Compass Bank is offering an APR of .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) $2,567.15 B) $2,675.10 C) $2,761.32 D) $2,818.74 E) $2,890.62

111) You want to buy a new sports coupe for $84,600 and the finance office at the dealership has quoted you an APR of 7.1 percent, compounded monthly, for 72 months. How much interest will you pay over the life of the loan assuming you make all payments on a timely basis? A) $17,204 B) $16,048 C) $23,911 D) $20,686 E) $19,542

112) Assume a project will produce cash flows of $22,400, $28,700, $30,300, $10,900 at the end of Years 1 to 4, respectively. If the discount rate is 14.7 percent, what is the current value of these cash flows?

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A) $69,407.19 B) $64,221.80 C) $67,721.24 D) $70,407.16 E) $71,121.03

113) 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 an APR of 7.8 percent, compounded monthly. What would be your monthly payment? A) $1,251.60 B) $1,109.29 C) $1,245.70 D) $1,152.98 E) $1,084.32

114) You want to borrow $3,600 for 36 months and can afford monthly payments of $110, but no more. Assuming monthly compounding, what is the highest APR rate you can afford? A) 5.45% B) 5.84% C) 6.29% D) 5.78% E) 6.68%

115) Bulk Purchases just purchased a new warehouse. To finance the purchase, the firm arranged for a 25-year mortgage for 80 percent of the $1,800,000 purchase price. The monthly payment is $10,800. What is the APR? The EAR? A) 7.67%; 7.94% B) 7.67%; 8.03% C) 7.72%; 8.03% D) 7.75%; 8.03% E) 7.72%; 7.94%

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116) 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

117) Given an interest rate of 9.3 percent per year, what is the value at t = 6 of a perpetual stream of $1,000 annual payments that begin t = 21? A) $2,412.02 B) $3,096.24 C) $3,384.19 D) $2,832.79 E) $1,273.43

118) Assume you can save $8,500 at the end of Year 2, $9,300 at the end of Year 3, and $7,100 at the end of Year 6. If today is Year 0, what is the future value of your savings 10 years from now if the rate of return is 7.8 percent annually? A) $35,211.57 B) $37,235.16 C) $40,822.55 D) $42,321.68 E) $44,564.54

119) George is considering an investment that will pay $3,250 a year for eight years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 8.0 percent?

Version 1

A) $17,736.81 B) $18,566.10 C) $16,920.70 D) $18,676.58 E) $20,302.39

120) How much money does Yvonne need to have in her retirement savings account today if she wishes to withdraw $54,000 a year for 25 years? She expects to earn an average rate of return of 8.0 percent. A) $607,920.30 B) $405,280.20 C) $480,364.93 D) $527,385.93 E) $576,437.91

121) Roberto can afford car payments of $450 per month for 4 years. If the interest rate is 5.3 percent, how much money can he afford to borrow? A) $7,778.74 B) $24,736.49 C) $19,425.49 D) $23,673.02 E) $19,540.33

122) The manager of Furniture For Less has approved Mac's application for 36 months of credit with maximum monthly payments of $32. If the APR is 20.2 percent, what is the maximum initial purchase that Mac can buy on credit? A) $858.70 B) $1,047.91 C) $627.53 D) $617.19 E) $870.58

Version 1

123) You want to purchase a new condominium that costs $285,000. Your plan is to pay 30 percent down in cash and finance the balance over 30 years at 5.2 percent. What will be your monthly mortgage payment including principal and interest? A) $1,095.48 B) $1,598.50 C) $1,076.96 D) $1,564.97 E) $1,258.34

124) Today, you are purchasing a 10-year, 4.8 percent annuity at a cost of $50,000. The annuity will pay annual payments starting one year from today. What is the amount of each payment? A) $13,619.19 B) $6,412.49 C) $13,189.57 D) $6,679.71 E) $6,874.70

125) Antonio wants to have $230,000 in an investment account ten years from now. The account will pay .42 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) $1,478.01 B) $1,049.86 C) $1,391.05 D) $1,053.86 E) $1,360.94

126) Oscar’s Kennels spent $130,000 to refurbish its current facility. The firm borrowed 70 percent of the refurbishment cost at 4.5 percent interest for five years. What is the amount of each monthly payment?

Version 1

A) $1,985.25 B) $1,444.54 C) $2,423.59 D) $1,696.51 E) $1,895.32

Version 1

Answer Key Test name: Chapter 05 Test Bank - Static 1) B 2) B 3) D 4) A 5) D 6) E 7) A 8) E 9) D 10) D 11) A 12) A 13) D 14) B 15) D 16) B 17) B 18) D 19) E 20) E 21) B 22) C 23) D 24) E 25) E 26) E Version 1

27) C 28) B 29) E 30) A 31) A 32) A 33) A 34) C FV = ($500 × 1.0282) + ($600 × 1.0281) + $800 = $1,945.19 35) C FV = ($23,500 × 1.0213) + ($24,500 × 1.0212) + ($26,500 × 1.0211) + $28,000 = $105,608.11 36) E FV = ($50,000 × 1.03753) + ($96,000 × 1.03752) + ($123,000 × 1.03751) + $138,000 = $424,786.07 37) A PV = $1.25 million + ($1.75 million/1.0725) + ($2.0 million/1.07252) = $4,620,444.63 38) C PV = ($18,000/1.09) + ($32,000/1.092) + ($45,000/1.093) = $78,195.78 39) E Enter

Solve for

Version 1

I/Y

$30,664.32

PMT

−$196,793.11

Enter

I/Y

Solve for

$27,482.29

PMT

−$196,793.13

40) D Enter

I/Y

Solve for

−$4,650.00

PMT

$18,086.88

41) B Enter

Solve for

8.25%

I/Y

$36,000.00

PMT

−$395,904.99

42) D

Version 1

Enter

5 × 12

4.6%/12

I/Y

Solve for

−$365.00

PMT

$19,388.64

43) C Enter

19.2%/12

I/Y

Solve for

−$45.00

PMT

$890.99

44) C Enter

Solve for

1.9%

I/Y

−$41,650.00

PMT

$687,655.38

45) A Amount financed = (1 − .20) × $325,000 = $260,000 Version 1

Enter

15 × 12

4.1%/12

−$260,000.00

I/Y

PMT

Solve for

$1,936.24

46) B Enter

6.5%

−$36,500.00

I/Y

Solve for

PMT

$3,881.88

47) A Enter

Solve for

.58%

I/Y

−$500,000.00

PMT

$5,614.90

48) D

Version 1

Amount borrowed = .60 × $220,000 = $132,000 Enter

6 × 12

5.95%/12

−$132,000.00

I/Y

PMT

Solve for

$2,184.51

49) B Enter

52 × 4

7.45%/4

−$289,209.11

I/Y

Solve for

PMT

$118.52

50) A Enter

Solve for

Version 1

6.24%/52

−$38,600.00

I/Y

PMT

$766.15

51) A Enter

$2,700.00

Solve for

I/Y

−$73.00

PMT

$25,000.00

−$2,500.00

PMT

$24,000.00

−$470.00

PMT

1.74758%

1.741758% × 12 = 20.97% 52) B Enter

15 N

Solve for

I/Y

5.56%

53) E Enter

60 N

Solve for

I/Y

.5477%

.5477% × 12 = 6.54% 54) A

Version 1

Enter

20 N

$2,300,000.00

−$183,555.00

PMT

$55,000.00

−$800.00

PMT

6.6%/12

$178,000.00

−$2,400.00

I/Y

PMT

6.35%/2

$1,750,000

−$100,000.00

I/Y

PMT

I/Y

Solve for

4.94%

55) B Enter

60 N

Solve for

I/Y

.4360%

r = .436% × 12 = 5.23% 56) A Enter N

Solve for

95.55

95.55 months/12 = 7.96 years 57) B Enter N

Version 1

Solve for

25.95

Years = 25.95/2 = 12.97 58) B Enter

5%/12

−$750.00

$1,300,000.00

I/Y

PMT

Solve for

506.69

Years = 506.69/12 = 42.22 59) B Enter N

Solve for

6.25%/12

$8,000.00

−$200.00

I/Y

PMT

44.97

44.97 months/12 = 3.75 Years 60) E PV = $3,990 = $50 × (1 − {1/[1 + (.139 / 12)] t})/(.139/12) t = 224.16 months PV = $3,990 = $60 × (1 − {1/[1 + (.139/12)] t})/(.139/12) t = 127.72 months Additional cost = (224.16 × $50) − (127.72 × $60) = $3,545 61) C Version 1

PV = $6,800 = $310 × (1 − {1/[1 + (.0675/12)] t})/(.0675/12) t = 23.48 months PV = $6,800 = $225 × (1 − {1/[1 + (.0675/12)] t})/(.0675/12) t = 33.22 months Difference = 33.22 − 23.48 = 9.74 months 62) B Enter

3 × 4

5.45%/4

−$32,000

I/Y

PMT

Solve for

$414,123.86

63) E Enter

20 × 12

5.5%/12

−$100

I/Y

PMT

Solve for

Enter

$43,562.74

5.5%/12

−$43,562.74

−$100

I/Y

PMT

Solve for

$43,862.40

Difference = $43,562.74 − 43,862.40 = $299.66

Version 1

64) A FV = $25 × {[1 + (.085/52)]2,080 − 1}/(.085/52) = $441,710.03 65) D Total monthly contribution = $200 + (.5 × $200) = $300 FV = $300 × {[1 + (.0825/12)]360 − 1}/(.0825/12) = $470,465.70 66) E Enter

8.2%

−$3,200

I/Y

PMT

Solve for

$240,885.11

67) B Enter

1.2%

−$600.00

I/Y

PMT

Solve for

$13,471.72

68) E BEGIN MODE Enter

Solve for

Version 1

−$200,000.00

I/Y

0 PMT

$8,400.46

69) C PV = $95,000 × ({1 − [1/(1 + .068)7]}/.068) × (1 + .068) → PV = $550,630.68 70) E BEGIN MODE Enter

24 × 12

10.6%/12

−$250.00

I/Y

PMT

Solve for

$330,890.09

Clear BEGIN MODE Enter

24 × 12

10.6%/12

−$250.00

I/Y

PMT

Solve for

$327,992.82

Difference = $330,890.09 − 327,992.82 = $2,897.27 71) C Enter

Solve for

Version 1

I/Y

−$1,000.00

PMT

$3,992.71

72) D P = $2.95/.082 = $35.98 73) B P = $100,000/.054 = $1,851,852 74) A r = $12,000/$250,000 = .0480, or 4.80% 75) A C = .0545 × $78.20 = $4.26 76) E P = $32,000/.0565 = $566,371.68 77) B Enter

Solve for

5 × 12

6.15%/12

−$1,200.00

I/Y

PMT

$84,047.58

78) E FV = $40 × ({[1 + (.046/52)]520 − 1}/(.046/52)) = $26,395.74 FV = $50,000 = $26,395.74 × (1 + .065) t t = 10.32 years Total time = 10 + 10.32 = 20.32 years 79) C PV3 = $3,600 × ({1 − [1/(1 + .12)8]}/.12) × (1 + .12) = $17,883.50 PV0 = $17,883.50/(1 + .12)3 = $12,729.12 80) D PV2 = $800 × ({1 − [1/(1 + .07)12]}/.07) = $6,354.15 PV0 = $6,354.15/(1 + .07)2 = $5,549.96 81) D Version 1

EAR = [1 + (.0825/4)]4 − 1 = .0851, or 8.51% 82) B EAR = [1 + (.096/2)]2 − 1 = .0983, or 9.83% 83) E EAR = (1 + .0115)12 − 1 = .1471, or 14.71% 84) A EARFirst Bank = [1 + (.077/12)]12 − 1 = .0798, or 7.98% EARSecond Bank = [1 + (.074/365)]365 − 1 = .0768, or 7.68% 85) E EAR = [1 + (.149/4)]4 − 1 = .1575, or 15.75% 86) A EAR = .1440 = [1 + (APR/12)]12 − 1 APR = .1353, or 13.53% 87) D The APR equals the EAR when interest rate compounding is annual. 88) B APR = 1.00 × 12 = 12% 89) B APR = .049 percent × 365 = .1789, or 17.89% 90) A EAR = (1 + .012)12 − 1 = .1539, or 15.39% 91) E EAR = (1 + .0085)12 − 1 = .1069, or 10.69% 92) C Enter

Solve for

Version 1

3 × 12

7%/12

−$18,200.00

I/Y

0 PMT

$561.96

93) B EAR = .1461 = [1 + (APR/12)]12 − 1 APR = .1371, or 13.71% 94) C PV = $12,800/[1 + (.0845/12)]12 = $11,766.32 95) E FV = $2,000 = $1,500 × (1 + APR)1 APR = .3333, or 33.33% 96) E FV = $86,000 × (1 + .068)2 = $98,093.66 97) D EAR = [1 + (.105/12)]12 − 1 = .1102, or 11.02% 98) A PaymentYear 1 = $195,000 × .0765 = $14,917.50 99) D PaymentYear 3 = $50,000 + ($50,000 × .0815) = $54,075.00 100) E Total interest = $115,000 × .076 × 6 = $52,440.00 101) B Year 1 2 3 4

Beginning Balance $ 95,000 71,250 47,500 23,750

Total Payment $ 30,447.50 28,773.13 27,098.75 25,424.38

Interest Paid $ 6,697.50 5,023.13 3,348.75 1,674.38

Principal Paid $ 23,750 23,750 23,750 23,750

Ending Balance $ 71,250 47,500 23,750 0

102) E PV = $14,950 = C × [(1 − {1/[1 + (.0695/12)]48})/(.0695/12)] C = $357.65 Total interest paid = ($357.65 × 48) − $14,950 = $2,217 103) B

Version 1

PV = $660,000 = C × ({1 − [1/(1 + .0835)15]}/.0835) C = $78,763.18 Principal payment = $78,763.18 − ($660,000 × .0835) = $23,653.18 104) B Year 1 2 3

Beginning Balance $ 72,000.00 65,267.53 57,986.36

Total Payment

Beginning Balance $ 132,000 88,000 44,000

Total Payment

$ 12,600.47 12,600.47 12,600.47

Interest Principal Paid Paid $ 5,868.00 $ 6,732.47 5,319.30 7,281.17 4,725.89 7,874.58

Ending Balance $ 65,267.53 57,986.36 50,111.78

105) D Year 1 2 3

$ 54,032 50,688 47,344

Interest Paid $ 10,032 6,688 3,344

Total

$ 20,064

Principal Paid $ 44,000 44,000 44,000

Ending Balance $ 88,000 44,000 0

106) C PV = $24,000 = C × [(1 − {1/[1 + (.0675/12)]180})/(.0675/.12)] C = $212.38 107) E PV = $30,000 = C × [(1 − {1/[1 + (.055/12)]24})/(.055/.12)] C = $1,322.87 108) B PV = $10,000/.036 = $277,777.78 109) B EAR = .189 = [1 + (APR/365)]365 − 1 APR = .1732, or 17.32% 110) D FV = $2,500 × [1 + (.008/365)]5,475 = $2,818.74 111) E

Version 1

PV = $84,600 = C × [(1 − {1/[1 + (.071/12)]72})/(.071/.12)] C = $1,446.41 Total interest = ($1,446.41 × 72) − $84,600 = $19,542 112) C PV = $22,400/1.147 + $28,700/1.1472 + $30,300/1.1473 + $10,900/1.1474 = $67,721.24 113) A PV = $51,800 = C × [(1 − {1/[1 + (.078/12)]48})/(.078/12)] × [1 + (.078/12)] C = $1,251.60 114) C Enter

36 N

Solve for

I/Y

$3,600.00

−$110.00

PMT

.52%

.52% × 12 = 6.29% 115) A Loan amount = .80 × $1,800,000 = $1,440,000 PV = .80($1,800,000) = $10,800 × [(1 − {1/[1 + ( r/12)]300})/( r/12)] r = 7.6687, or 7.67% EAR = [1 + (.076687/12)]12 − 1 = .0794, or 7.94% 116) A PV6 = $6,200 × [(1 − {1/[1 + (.07/2)]8})/(.07/2)] = $42,618.52 PV4 = $42,618.52/[1 + (.07/2)]4 = $37,139.58 117) B

Version 1

PV20 = $1,000/.093 = $10,752.69 PV6 = $10,752.69/1.09314 = $3,096.24 118) C FVYear 10 = [$8,500 × (1 + .078)8] + [$9,300 × (1 + .078)7] + [$7,100 × (1 + .078)4] = $40,822.55 119) D Enter

I/Y

Solve for

−$3,250.00

PMT

−$54,000.00

PMT

−$450.00

PMT

$18,676.58

120) E Enter

I/Y

Solve for

$576,437.91

121) C Enter

Solve for

Version 1

4 × 12

5.3%/12

I/Y

$19,425.49

122) A Enter

20.2%/12

I/Y

Solve for

−$32.00

PMT

$858.70

123) A Amount financed = (1 − .30) × $285,000 = $199,500 Enter

30 × 12

5.2%/12

−$199,500.00

I/Y

Solve for

0 PMT

$1,095.48

124) B Enter

4.8%

−$50,000.00

I/Y

Solve for

0 PMT

$6,412.49

125) A Enter

Version 1

120

.42%

I/Y

−$230,000.00 PMT

Solve for

$1,478.01

126) D Amount borrowed = .70 × $130,000 = $91,000 Enter

Solve for

Version 1

5 × 12

4.5%/12

−$91,000.00

I/Y

0 PMT

$1,696.51

Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) An investment had a nominal return of 10.2 percent last year. The inflation rate was 3.7 percent. What was the real return on the investment? A) 10.09% B) 14.28% C) 6.27% D) 5.90% E) 6.96%

2) An investment had a nominal return of 10.4 percent last year. If the real return on the investment was only 5.9 percent, what was the inflation rate for the year? A) 4.25% B) 16.91% C) 10.49% D) 4.72% E) 4.08%

3) The inflation rate over the past year was 3.9 percent. If an investment had a real return of 6.8 percent, what was the nominal return on the investment? A) 11.57% B) 10.97% C) 2.79% D) 12.18% E) 2.72%

4) A bond that pays interest annually yields a rate of return of 7.50 percent. The inflation rate for the same period is 2 percent. What is the real rate of return on this bond?

Version 1

A) 9.50% B) 1.05% C) 2.00% D) 5.39% E) 3.75%

5) Gugenheim, Incorporated, has a bond outstanding with a coupon rate of 6.1 percent and annual payments. The yield to maturity is 7.3 percent and the bond matures in 17 years. What is the market price if the bond has a par value of $2,000? A) $1,805.88 B) $1,775.53 C) $1,768.40 D) $1,773.20 E) $1,770.47

6) Whatever, Incorporated, has a bond outstanding with a coupon rate of 6.02 percent and semiannual payments. The yield to maturity is 5.9 percent and the bond matures in 16 years. What is the market price if the bond has a par value of $1,000? A) $1,032.56 B) $1,012.21 C) $1,012.32 D) $1,013.87 E) $1,015.21

7) Lincoln Park Company has a bond outstanding with a coupon rate of 5.73 percent and semiannual payments. The yield to maturity is 6.7 percent and the bond matures in 23 years. What is the market price if the bond has a par value of $2,000?

Version 1

A) $1,809.53 B) $1,774.05 C) $1,775.60 D) $1,779.11 E) $1,776.78

8) Harpeth Valley Water District has a bond outstanding with a coupon rate of 2.91 percent and semiannual payments. The bond matures in 14 years, with a yield to maturity of 3.63 percent, and a par value of $5,000. What is the market price of the bond? A) $4,607.60 B) $4,614.68 C) $4,610.27 D) $4,620.76 E) $4,699.75

9) Kasey Corporation has a bond outstanding with a coupon rate of 5.62 percent and semiannual payments. The bond has a yield to maturity of 7 percent, a par value of $2,000, and matures in 14 years. What is the quoted price of the bond? A) 1,756.20 B) 88.06 C) 1,931.81 D) 87.81 E) 89.57

10) Footsteps Company has a bond outstanding with a coupon rate of 6 percent and annual payments. The bond currently sells for $980.26, matures in 24 years, and has a par value of $1,000. What is the YTM of the bond?

Version 1

A) 5.13% B) 5.54% C) 6.16% D) 6.00% E) 6.12%

11) Broke Benjamin Company has a bond outstanding that makes semiannual payments with a coupon rate of 6 percent. The bond sells for $981.45 and matures in 24 years. The par value is $1,000. What is the YTM of the bond? A) 6.15% B) 4.61% C) 5.84% D) 5.53% E) 3.07%

12) Crossfade Corporation has a bond with a par value of $2,000 that sells for $1,910.50. The bond has a coupon rate of 7.05 percent and matures in 19 years. If the bond makes semiannual coupon payments, what is the YTM of the bond? A) 7.12% B) 5.62% C) 3.75% D) 6.75% E) 7.50%

13) There is a bond that has a quoted price of 92.187 and a par value of $2,000. The coupon rate is 6.45 percent and the bond matures in 11 years. If the bond makes semiannual coupon payments, what is the YTM of the bond?

Version 1

A) 7.51% B) 5.63% C) 4.12% D) 6.76% E) 3.75%

14) A bond has a par value of $1,000, a current yield of 6.93 percent, and semiannual coupon payments. The bond is quoted at 101.56. What is the amount of each coupon payment? A) $35.19 B) $34.65 C) $39.59 D) $70.38 E) $69.30

15) A bond has a par value of $1,000, a current yield of 7.61 percent, and semiannual coupon payments. The bond is quoted at 105.32. What is the coupon rate of the bond? A) 16.03% B) 15.22% C) 9.02% D) 8.01% E) 7.61%

16) A 18-year, semiannual coupon bond sells for $1,020.37. The bond has a par value of $1,000 and a yield to maturity of 6.66 percent. What is the bond's coupon rate? A) 6.51% B) 3.43% C) 6.17% D) 6.86% E) 5.14%

Version 1

17) AB Builders, Incorporated, has 21-year bonds outstanding with a par value of $2,000 and a quoted price of 96.187. The bonds pay interest semiannually and have a yield to maturity of 6.95 percent. What is the coupon rate? A) 5.94% B) 6.60% C) 13.20% D) 9.90% E) 6.27%

18) A bond that pays interest semiannually has a price of $955.25 and a semiannual coupon payment of $29.75. If the par value is $1,000, what is the current yield? A) 6.23% B) 2.98% C) 5.95% D) 5.92% E) 3.11%

19) Sweet Sue Foods has bonds outstanding with a coupon rate of 5.53 percent paid semiannually and sell for $1,910.50. The bonds have a par value of $2,000 and 17 years to maturity. What is the current yield for these bonds? A) 2.89% B) 6.27% C) 5.79% D) 5.53% E) 5.50%

20) A bond that pays interest semiannually has a coupon rate of 5.35 percent and a current yield of 4.85 percent. The par value is $1,000. What is the bond's price?

Version 1

A) $1,084.71 B) $1,103.09 C) $1,051.55 D) $906.54 E) $1,195.02

21) A bond with 16 years to maturity and a semiannual coupon rate of 5.23 percent has a current yield of 5.49 percent. The bond's par value is $2,000. What is the bond's price? A) $2,064.06 B) $1,905.28 C) $2,099.43 D) $1,873.53 E) $1,952.64

22) A municipal bond has a coupon rate of 5.92 percent and a YTM of 5.59 percent. If an investor has a marginal tax rate of 39 percent, what is the equivalent pretax yield on a taxable bond? A) 3.41% B) 3.61% C) 9.70% D) 9.16% E) 6.39%

23) A taxable bond has a coupon rate of 6.10 percent and a YTM of 5.71 percent. If an investor has a marginal tax rate of 30 percent, what is the equivalent aftertax yield? A) 4.27% B) 8.16% C) 8.71% D) 6.21% E) 4.00%

Version 1

24) A municipal bond has a YTM of 3.99 percent while the YTM of a comparable taxable bond is 5.74 percent. What is the tax rate that will make an investor indifferent between the municipal bond and the taxable bond? A) 37.17% B) 30.49% C) 33.54% D) 43.86% E) 38.70%

25) Navarro, Incorporated, plans to issue new zero coupon bonds with a par value of $1,000 to fund a new project. The bonds will have a YTM of 5.73 percent and mature in 25 years. If we assume semiannual compounding, at what price will the bonds sell? A) $233.82 B) $237.48 C) $243.57 D) $248.34 E) $235.45

26) There are zero coupon bonds outstanding that have a YTM of 5.43 percent and mature in 20 years. The bonds have a par value of $10,000. If we assume semiannual compounding, what is the price of the bonds? A) $3,339.26 B) $3,310.72 C) $3,424.88 D) $3,287.88 E) $3,473.09

27) There is a zero coupon bond that sells for $331.08 and has a par value of $1,000. If the bond has 22 years to maturity, what is the yield to maturity? Assume semiannual compounding.

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A) 4.88% B) 4.92% C) 4.96% D) 5.09% E) 5.15%

28) There is a zero coupon bond that sells for $4,187.32 and has a par value of $10,000. If the bond has 11 years to maturity, what is the yield to maturity? Assume semiannual compounding. A) 7.87% B) 7.80% C) 8.07% D) 7.75% E) 8.24%

29) You purchase a zero coupon bond with 13 years to maturity and a yield to maturity of 4.97 percent. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding. A) $25.92 B) $23.26 C) $25.52 D) $25.69 E) $26.58

30) An investor purchases a zero coupon bond with 15 years to maturity at a price of $481.50. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding. A) $23.24 B) $24.64 C) $21.04 D) $22.90 E) $24.04

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31) You purchase a bond with an invoice price of $1,001. The bond has a coupon rate of 5.33 percent, it makes semiannual payments, and there are 4 months to the next coupon payment. The par value is $1,000. What is the clean price of the bond? A) $974.35 B) $1,027.65 C) $983.23 D) $992.12 E) $1,009.88

32) The bond has a coupon rate of 5.69 percent, it makes semiannual payments, and there are 4 months to the next coupon payment. A clean price of $935 and the par value is $1,000. What is the invoice price? A) $925.52 B) $906.55 C) $963.45 D) $944.48 E) $916.03

33) A bond with a coupon rate of 5.12 percent and semiannual coupon payments matures in 11 years. The YTM is 6.34 percent. What is the effective annual yield? A) 5.19% B) 6.44% C) 6.70% D) 5.12% E) 6.34%

34) There is a bond that has a quoted price of 105.039 and a par value of $2,000. The coupon rate is 6.87 percent and the bond matures in 25 years. If the bond makes semiannual coupon payments, what is the effective annual interest rate?

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A) 3.14% B) 5.91% C) 6.46% D) 6.57% E) 3.23%

35) Setrakian Industries needs to raise $55.7 million to fund a new project. The company will sell bonds that have a coupon rate of 5.64 percent paid semiannually and that mature in 30 years. The bonds will be sold at an initial YTM of 6.25 percent and have a par value of $2,000. How many bonds must be sold to raise the necessary funds? A) 37,930 bonds B) 55,700 bonds C) 103,104 bonds D) 27,850 bonds E) 30,344 bonds

36) Whipple Corporation just issued 230,000 bonds with a coupon rate of 5.72 percent paid semiannually that mature in 15 years. The bonds have a YTM of 6.16 percent and have a par value of $2,000. How much money was raised from the sale of the bonds? A) $845.51 million B) $422.75 million C) $411.01 million D) $440.37 million E) $460.00 million

37) A bond with a par value of $5,000 is quoted at 103.385. What is the dollar price of the bond?

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A) $5,169.25 B) $5,139.71 C) $4,829.95 D) $5,120.02 E) $5,203.71

38) A bond with a current yield of 6.92 percent is quoted at 97.267. What is the coupon rate of the bond? A) 6.28% B) 7.18% C) 6.63% D) 6.39% E) 6.73%

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Answer Key Test name: Chapter 06 Test Bank - Algo 1) C r = [(1 + .102)/(1 + .037)] − 1 = .0627, or 6.27% 2) A h = [(1 + .104)/(1 + .059)] − 1 = .0425, or 4.25% 3) B R = [(1 + .068) × (1 + .039)] − 1 = .1097, or 10.97% 4) D 1 + .0750 = (1 + r) × (1 + .02) r = 1.0750/1.02 − 1 = .0539, or 5.39% 5) E PV = $122{[1 − (1/1.07317)]/.073} + $2,000/1.07317 PV = $1,770.47 Enter

7.3%

I/Y

Solve for

−$122

PMT

−$2,000

$1,770.47

6) C PV = $30.10{[1 − (1/1.029532)]/.0295} + $1,000/1.029532 PV = $1,012.32 Enter

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5.9/2%

−$30.10

−$1,000

I/Y

Solve for

PMT

$1,012.32

7) B PV = $57.30{[1 − (1/1.033546)]/.0335} + $2,000/1.033546 PV = $1,774.05 Enter

6.7/2%

I/Y

Solve for

−$57.30

−$2,000

PMT

$1,774.05

8) A PV = $72.75{[1 − (1/1.0181528)]/.01815} + $5,000/1.0181528 PV = $4,607.60 Enter

Solve for

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3.63/2%

I/Y

−$72.75

−$5,000

PMT

$4,607.60

9) D PV = $56.20{[1 − (1/1.035028)]/.0350} + $2,000/1.035028 PV = $1,756.20 Quoted price = $1,756.20/$2,000 × 100 = 87.81 Enter

14 × 2

7.0%/2

I/Y

Solve for

−$56.20

−$2,000

PMT

$1,756.20

10) C $980.26 = $60{[1 − 1/(1 + YTM)24]/YTM} + $1,000/(1 + YTM)24 YTM = .0616, or 6.16% Enter

Solve for

−$980.26

I/Y

$60

PMT

$1,000

6.16%

11) A $981.45 = $30.00{[1 − 1/(1 + r)48]/r} + $1,000/(1 + r)48 r = .0307, or 3.07% YTM = 3.07% × 2 = 6.15% Enter

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24 × 2

−$981.45

$30.00

$1,000

I/Y

Solve for

PMT

3.07%

12) E $1,910.50 = $70.50{[1 − 1/(1 + r)38]/r} + $2,000/(1 + r)38 r = .0375, or 3.75% YTM = 3.75% × 2 = 7.50% Enter

19 × 2

Solve for

−$1,910.50

I/Y

$70.50

$2,000

PMT

3.75%

13) A $1,843.74 = $64.50{[1 − 1/(1 + r)22]/r} + $2,000/(1 + r)22 r = .0375, or 3.75% YTM = 3.75% × 2 = 7.51% Enter

11 × 2

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−$1,843.74

I/Y

$64.50

$2,000

PMT

Solve for

3.75%

14) A Coupon payment = [.0693 × (1.0156 × $1,000)/2] = $35.19 15) D Coupon payment = [.0761 × (1.0532 × $1,000)/2] = $40.07 Coupon rate = ($40.07 × 2)/$1,000 = .0801, or 8.01% 16) D $1,020.37 = C{[1 − 1/(1 + .0666/2)36]/(.0666/2)} + $1,000/(1 + .0666/2)36 C = $34.28 Coupon rate = ($34.28 × 2)/$1,000 = .0686, or 6.86% Enter

18 × 2

6.66%/2

−$1,020.37

I/Y

Solve for

$1,000

PMT

$34.28

17) B $1,923.74 = C{[1 − 1/(1 + .0695/2)42]/(.0695/2)} + $2,000/(1 + .0695/2)42 C = $66.02 Coupon rate = ($66.02 × 2)/$2,000 = .0660, or 6.60% Enter

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21 × 2

6.95%/2

−$1,923.74

$2,000

I/Y

Solve for

PMT

$66.02

18) A Current yield = ($29.75 × 2)/$955.25 = .0623, or 6.23% 19) C Current yield = (.0553 × $2,000)/$1,910.50 = .0579, or 5.79% 20) B Coupon payment = .0535 × $1,000 = $53.50 Price = $53.50/.0485 = $1,103.09 21) B Coupon payment = .0523 × $2,000 = $104.60 Price = $104.60/.0549 = $1,905.28 22) D Pretax yield = 5.59%/(1 − .39) = 9.16% 23) E Aftertax yield = 5.71% × (1 − .30) = 4.00% 24) B Critical tax rate = 1 − .0399/.0574 = .3049, or 30.49% 25) C PV = $1,000/(1 + .0573/2)50 PV = $243.57 Enter

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5.73/2%

I/Y

−$1,000

PMT

Solve for

$243.57

26) C PV = $10,000/(1 + .0543/2)40 PV = $3,424.88 Enter

5.43%/2

I/Y

Solve for

−$10,000

PMT

$3,424.88

27) D $331.00 = $3/(1 + r)44 r = .0254, or 2.54% YTM = 2.54% × 2 = 5.09% Enter

Solve for

−$331.08

I/Y

$1,000

PMT

2.54%

28) C

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$4,187.00 = $4/(1 + r)22 r= .0404, or 4.04% YTM = 4.04% × 2 = 8.07% Enter

Solve for

−$4,187.32

I/Y

$10,000

PMT

4.04%

29) E PV = $1,000/(1 + .0497/2)26 = $528.24 PV = $1,000/(1 + .0497/2)24 = $554.82 Implicit interest = $554.82 − 528.24 = $26.58 Enter

4.97%/2

I/Y

Solve for

Enter

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−$1,000

PMT

$528.24

4.97%/2

I/Y

−$1,000

PMT

Solve for

$554.82

30) E $481.50 = $1,000/(1 + r)30 r = .0247, or 2.47% YTM = 2.47% × 2 = 4.93% PV = $1,000/(1 + .0247)28 = $505.54 Implicit interest = $505.54 − 481.50 = $24.04 Enter

Solve for

Enter

Solve for

$481.50

I/Y

−$1,000

PMT

2.47%

4.93%/2

I/Y

−$1,000

PMT

$505.54

31) D

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Coupon payment = .0533($1,000)/2 = $26.65 Accrued interest = $26.65[(6 − 4)/6] = $8.88 Clean price = $1,001 − 8.88 = $992.12 32) D Coupon payment = .0569($1,000)/2 = $28.45 Accrued interest = $28.45[(6 − 4)/6] = $9.48 Invoice price = $935 + 9.48 = $944.48 33) B Effective rate = (1 + .0634/2)2 − 1 = .0644, or 6.44% 34) D $2,100.78 = $68.70{[1 − 1/(1 + r)50]/r} + $2,000/(1 + r)50 r = .0323, or 3.23% Effective annual rate = (1 + .0323)2 − 1 = .0657, or 6.57% Enter

25 × 2

Solve for

−$2,100.78

I/Y

$68.70

$2,000

PMT

3.23%

35) E PV = $56.40{1 − [1/(1 + .0625/2)60]}/(.0625/2) + $2,000/(1 + .0625/2)60 PV = $1,835.61 Bonds to sell = $55,700,000/$1,835.61 = 30,344 Enter

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30 × 2

6.25%/2

I/Y

−$56.40

−$2,000

PMT

Solve for

$1,835.61

36) D PV = $57.20{1 − [1/(1 + .0616/2)30]}/{.0616/2} + $2,000/(1 + .0616/2)30 PV = $1,914.64 Amount raised = $1,914.64 × 230,000 = $440,367,200 Enter

Solve for

15 × 2

6.16%/2

I/Y

−$57.20

−$2,000

PMT

$1,914.64

37) A Price = 103.385/100 × $5,000 = $5,169.25 38) E Annual coupon = .0692 × ($97.267 × 10) = $67.31 Coupon rate = $67.31/$1,000 = .0673, or 6.73% Note: The par value is irrelevant.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) What condition must exist if a bond’s coupon rate is to equal both the bond’s current yield and its yield to maturity? Assume the market rate of interest for this bond is positive. A) The clean price of the bond must equal the bond’s dirty price. B) The bond must be a zero-coupon bond and mature in exactly one year. C) The market price must exceed the par value by the value of one year’s interest. D) The bond must be priced at par. E) There is no condition under which this can occur.

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

A bond’s annual interest divided by its face value is referred to as the: A) market rate. B) call rate. C) coupon rate. D) current yield. E) yield to maturity.

4) On which one of the following dates is the principal amount of a semiannual coupon bond repaid?

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A) A portion of the principal is repaid on each coupon date. B) The entire bond is repaid on the issue date. C) Half of the principal is repaid evenly over each coupon period with the remainder paid on the issue date. D) The entire bond is repaid on the maturity date. E) Half of the principal is repaid evenly over each coupon period with the remainder paid on the maturity date.

The market-required rate of return on a bond that is held for its entire life is called the: A) coupon rate. B) yield to maturity. C) dirty yield. D) call premium. E) current yield.

The current yield on a bond is equal to the annual interest divided by the: A) issue price. B) maturity value. C) face amount. D) current market price. E) current par value.

7) 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.

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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 and Exchange Commission (SEC). E) is unsecured.

9) This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final 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

10) 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.

11) What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

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A) Registered account B) Bearer account C) Call account D) Sinking fund E) Premium fund

12)

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 prespecified price.

13)

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.

14) Russell’s has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance. This provision is referred to as the _____ provision. A) safeguard B) market C) liquidity D) deferred call E) sinking fund

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15) 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.

16)

A protective covenant: A) protects the borrower from unscrupulous practices by the lender. B) guarantees the interest and principal payments will be paid in full on a timely basis. C) prevents a bond from being called. D) limits the actions of the borrower. E) guarantees the market price of a bond will never be less than par value.

17) A company originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. These bonds are referred to as: A) called bonds. B) converted bonds. C) unprotected bonds. D) fallen angels. E) floaters.

18) Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders? A) Callable B) Income C) Zero coupon D) Convertible E) Tax-free

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19)

The price at which a dealer will purchase a bond is referred to as the _____ price. A) asked B) face C) call D) put E) bid

20)

The price at which an investor can purchase in the bond market is called the _____ price. A) asked B) coupon C) call D) face E) bid

21) 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.

22)

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

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23) 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

24) 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

25)

The rate of return an investor earns on a bond prior to adjusting for inflation is called the: A) nominal rate. B) real rate. C) dirty rate. D) coupon rate. E) clean rate.

26)

The relationship between nominal returns, real returns, and inflation is referred to as the: A) call premium. B) Fisher effect. C) conversion ratio. D) spread. E) current yield.

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27) 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

28)

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.

29) 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

30) 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

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31) 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

32)

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

33) 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

34)

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.

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35)

The yield to maturity on a discount bond is: A) equal to both the coupon rate and the current yield. B) equal to the current yield but greater than the coupon rate. C) greater than both the current yield and the coupon rate. D) less than the current yield but greater than the coupon rate. E) less than both the current yield and the coupon rate.

36)

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.

37)

All else held constant, the present value of a bond increases when the: A) coupon rate decreases. B) yield to maturity decreases. C) current yield increases. D) time to maturity of a premium bond decreases. E) time to maturity of a zero coupon bond increases.

38)

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. A) annual B) semiannual C) quarterly D) monthly E) daily

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39) Which one of the following bonds is the most sensitive to changes in market interest rates? A) 5-year, zero coupon B) 5-year, 5 percent coupon C) 5-year, 8 percent coupon D) 10-year, zero coupon E) 10-year, 5 percent coupon

40)

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.

41) Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in: A) 5-year, 7 percent coupon bonds. B) 20-year, 6 percent coupon bonds. C) 20-year, zero coupon bonds. D) 2-year, 7 percent coupon bonds. E) 3-year, zero coupon bonds.

42)

Which statement is true? 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.

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43)

A bond's indenture agreement generally includes all the following except the : A) terms of repayment. B) details of protective covenants. C) total amount of the bond issue. D) names of registered shareholders. E) description of property used as security.

44)

Which one of the following might be included in a bond's list of negative covenants? A) Maintain a current ratio of 1.2 or more B) Maintain a minimum cash balance of $1.2 million C) Limit cash dividends to $1 per share or less D) Maintain a times interest earned ratio of 2 or more E) Provide audited financial statements in a timely manner

45)

A debenture is: A) an unsecured bond. B) a bearer form bond. C) a bond with a call provision. D) a bond with a sinking fund provision. E) a bond secured by a blanket mortgage.

46)

The purpose of a bond sinking fund is to: A) accumulate funds needed to pay the tax liability on the bond proceeds. B) accumulate funds to pay the regular interest payments. C) hold the bond proceeds until the funds need disbursed. D) repay bonds early either through purchases or calls. E) repay bondholders from a trust fund if the issuer defaults.

47)

Which one of the following statements concerning sinking funds is correct?

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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 be used only to call bonds.

48)

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.

49)

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.

50)

The primary purpose of bond covenants is to: A) meet regulatory requirements. B) define the bond’s repayment terms. C) protect the bondholders. D) identify the bond's rating. E) protect the bond issuer from lawsuits.

51)

The primary purpose of protective covenants is to help:

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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.

52) The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is: A) BB. B) B. C) Ba. D) BBB. E) A.

53) 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

54) 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 ship E) Trust deed

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55)

Bond ratings classify bonds based on: A) liquidity, market, and default risk. B) liquidity, interest rate, and default risk. C) default risk only. D) interest rate, inflation rate, and default risk. E) default and liquidity risks.

56)

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.

57)

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

58)

Zero coupon bonds: A) are valued using simple interest. B) are issued only 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.

59)

A floating-rate bond frequently has a:

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A) flexible deferred call period. B) fixed yield to maturity but a flexible coupon payment. C) government guarantee. D) fixed-dollar obligation. E) put provision.

60)

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 on the issuer's income. D) Coupon payments are paid on a regular monthly basis. E) Coupon payments can be converted into equity shares.

61) 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

62) 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

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63)

Which statement is correct? A) Bond markets have less daily trading volume than equity markets. B) There are fewer bond issues outstanding 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.

64)

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

65)

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

66)

The R in the Fisher effect formula represents the: A) current yield. B) real return. C) coupon rate. D) inflation rate. E) nominal return.

67)

An upward-sloping term structure of interest rates indicates:

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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.

68) 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.

69) 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.

70) The term structure of interest rates is primarily based on which three of the following? 1.I. Interest rate risk premium 2.II. Real rate of interest 3.III. Default risk premium 4.IV. Inflation premium 5.V. Liquidity premium

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A) I, II, and V B) I, III, and V C) II, III, and IV D) I, II, and IV E) II, IV, and V

71) 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

72)

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)

73) A bond has a $1,000 face value, a market price of $989, and pays interest payments of $69.50 every year. What is the coupon rate? A) 6.76% B) 7.00% C) 7.03% D) 6.95% E) 8.14%

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74) A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $28.75 each and matures in six years. What is the coupon rate? A) 5.75% B) 2.85% C) 4.46% D) 2.25% E) 4.50%

75) The 7.2 percent bond of Blackford, Incorporated, has a yield to maturity of 7.3 percent. The bond matures in seven 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) $36.00 C) $72.00 D) $34.10 E) $65.00

76) A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments. The bond quote is 102. What is the amount of each coupon payment? A) $63.00 B) $31.50 C) $37.50 D) $62.50 E) $31.25

77) The 5.3 percent bond of Dominic Cycle Parts has a face value of $1,000, a maturity of 12 years, semiannual interest payments, and a yield to maturity of 6.12 percent. What is the current market price of the bond?

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A) $945.08 B) $959.33 C) $931.01 D) $1,072.13 E) $912.40

78) A $1,000 face value bond currently has a yield to maturity of 6.03 percent. The bond matures in thirteen years and pays interest semiannually. The coupon rate is 6.25 percent. What is the current price of this bond? A) $987.42 B) $980.02 C) $1,005.26 D) $1,019.63 E) $1,011.69

79) Lake Industries bonds have a face value of $1,000, a coupon rate of 7.2 percent, semiannual interest payments, and mature in 15 years. What is the current price of these bonds if the yield to maturity is 6.98 percent? A) $1,020.26 B) $988.39 C) $1,012.78 D) $1,010.68 E) $1,000.00

80) A 14-year, semiannual coupon bond is selling for $898.56. The bond has a face value of $1,000 and a yield to maturity of 6.03 percent. What is the coupon rate? A) 9.54% B) 4.23% C) 6.03% D) 4.95% E) 10.54%

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81) A 15-year, annual coupon bond is priced at $984.56. The bond has a $1,000 face value and a yield to maturity of 6.5 percent. What is the coupon rate? A) 3.17% B) 2.50% C) 6.74% D) 6.38% E) 6.34%

82) AB Builders has 15-year bonds outstanding with a face value of $1,000 and a market price of $985. The bonds pay interest semiannually and have a yield to maturity of 4.03 percent. What is the coupon rate? A) 3.80% B) 4.20% C) 4.25% D) 3.75% E) 3.90%

83) The 7 percent semiannual coupon bonds of Over The Counter, Incorporated, are selling for $1,102.25. The bonds have a face value of $1,000 and mature in 18 years. What is the yield to maturity? A) 5.54% B) 6.06% C) 12.55% D) 6.27% E) 12.1%

84) New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 20 years, and have a 5.8 percent coupon. The current price is quoted at 103.25. What is the yield to maturity?

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A) 5.38% B) 5.53% C) 11.19% D) 11.05% E) 5.27%

85) The $1,000 face value bonds of Galaxies International have coupon of 5.5 percent and pay interest semiannually. Currently, the bonds are quoted at 98.02 and mature in 12 years. What is the yield to maturity? A) 5.90% B) 6.16% C) 7.32% D) 6.93% E) 5.73%

86) American Hat has $1,000 face value bonds outstanding with a market price of $1,150. The bonds pay interest semiannually, mature in 8 years, and have a yield to maturity of 5.98 percent. What is the current yield? A) 6.44% B) 7.06% C) 7.28% D) 6.15% E) 7.61%

87) The 6.75 percent, $1,000 face value bonds of Mahalo Pineapples are currently selling at $989.50. These bonds have 12 years left until maturity. What is the current yield? A) 6.58% B) 6.82% C) 6.75% D) 7.59% E) 7.62%

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88) A bond has a yield to maturity of 9.25 percent, a coupon of 7.25 percent paid semiannually, a $1,000 face value, and a maturity date 21 years from today. What is the current yield? A) 9.38% B) 7.91% C) 9.46% D) 8.88% E) 9.05%

89) The 6.3 percent, semiannual coupon bonds of PE Engineers mature in 13 years and have a price quote of 99.2. These bonds have a current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent. A) 6.35; 6.32; 6.29 B) 6.35; 6.39; 6.49 C) 6.12; 6.36; 6.42 D) 6.23; 6.20; 6.16 E) 6.23; 6.36; 6.42

90) A bond has a coupon rate of 5.65 percent, 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) 5.73; 5.81 B) 5.73; 5.65 C) 5.73; 5.73 D) 5.65; 5.73 E) 5.65; 5.81

91) Warson Motors wants to raise $2 million by selling 20-year coupon bonds at par. Comparable bonds in the market have a coupon rate of 6.3 percent, semiannual payments, 20 years to maturity, and are selling at 96.5 percent of par. What coupon rate should Warson Motors set on its bonds?

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A) 6.25% B) 6.40% C) 3.31% D) 6.79% E) 6.62%

92) Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds? A) 9.00% B) 9.16% C) 9.50% D) 9.68% E) 10.00%

93) One year ago, Alpha Supply issued 20-year bonds at par. The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 7.2 percent. What is the percentage change in the bond price over the past year? A) 5.94% B) 5.38% C) −6.11% D) −7.19% E) The bond price did not change.

94) One year ago, you purchased a $1,000 face value bond for a clean price of $980. The bond currently has seven years remaining until maturity, pays a coupon payment of $45 every six months, and has a yield to maturity of 6.87 percent. What is the percentage change in the bond price over the past year?

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A) −6.24% B) −14.70% C) 15.48% D) 13.96% E) 6.61%

95) You own two bonds, each of which currently pays semiannual interest, has a coupon rate of 6 percent, a $1,000 face value, and 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; 3.44 C) A; 8.03 D) B; 7.97 E) B; 4.51

96) Last year, Forest Products issued both 5-year and 10-year bonds at par. The bonds each have a coupon rate of 5.5 percent, paid semiannually, and a face value of $1,000. Assume the yield to maturity on each of these bonds is now 7.4 percent. What is the percentage change in the price of the 5-year bond since it was issued? The 10-year bond? A) −3.39%; −6.08% B) −6.08%; −6.33% C) −6.48%; –12.33% D) −6.48%; −10.87% E) −3.39%; −5.77%

97) A U.S. Treasury bond pays 2.80 percent interest. You are in the 27 percent marginal tax bracket. What is your aftertax yield on this bond?

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A) 2.89% B) 2.14% C) 2.04% D) 1.97% E) 2.22%

98) A corporate bond pays 6.25 percent interest. How much would a municipal bond have to pay to be equivalent to this on an aftertax basis if you are in the 28 marginal percent tax bracket? A) 7.82% B) 5.79% C) 4.50% D) 7.26% E) 8.38%

99) The App Store needs to raise $2.8 million for expansion. The firm wants to raise this money by selling 20-year, zero coupon bonds with a par value of $1,000. The market yield on similar bonds is 7.19 percent. How many bonds must the company sell to raise the money it needs? Assume semiannual compounding. A) 2,800 bonds B) 9,450 bonds C) 11,500 bonds D) 10,315 bonds E) 10,044 bonds

100) Variance Logistics wants to issue 20-year, zero coupon bonds that yield 6.2 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding.

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A) $288.15 B) $294.89 C) $543.03 D) $562.03 E) $326.45

101) Deltona Motors just issued 230,000 zero coupon bonds. These bonds mature in 18 years, have a par value of $1,000, and have a yield to maturity of 6.3 percent. What is the approximate total amount of money the company raised from issuing these bonds? Assume semiannual compounding. A) $88.20 million B) $80.76 million C) $75.31 million D) $62.08 million E) $91.84 million

102) Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a coupon rate of 6 percent and pays interest semiannually. There are two months until the next coupon date. What is the clean price of this bond? A) $947 B) $957 C) $967 D) $977 E) $987

103) You are buying a bond at a clean price of $1,140. The bond has a face value of $1,000, a coupon rate of 3.8 percent, and pays interest semiannually. The next coupon payment is one month from now. What is the dirty price of this bond?

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A) $1,000.00 B) $1,146.67 C) $1,155.83 D) $1,176.67 E) $1,180.00

104) Last year, you earned a rate of return of 5.89 percent on your bond investments. During that time, the inflation rate was 1.2 percent. What was your real rate of return? A) 4.58% B) 4.69% C) 4.72% D) 4.63% E) 4.60%

105) A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was 2.75 percent. What was the actual nominal rate of return? A) 87.58% B) 6.73% C) 7.77% D) 8.28% E) .36%

106) If your nominal rate of return is 8.68 percent and your real rate of return is 2.05 percent, what is the inflation rate? A) 5.32% B) 6.50% C) 6.29% D) 6.63% E) 16.77%

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107) Jeffries, Incorporated, has semiannual, 6 percent coupon bonds on the market that currently have 11 years left to maturity. If the market rate of return for this bond is 7.13 percent three years from now, what will be the bond’s clean price at that time? A) $925.88 B) $932.00 C) $903.14 D) $921.42 E) $933.33

108) Clock and Cane Company has 6.8 percent, semiannual coupon bonds on the market with twelve years left to maturity. If the bond currently sells for $989.45, what is its YTM? A) 8.02% B) 7.90% C) 8.10% D) 6.93% E) 6.78%

109) Smiley Industrial Goods has $1,000 face value bonds on the market with semiannual interest payments, 13.5 years to maturity, and a market price of $1,023. At this price, the bonds yield 6.4 percent. What must be the coupon rate on these bonds? A) 3.33% B) 3.75% C) 7.33% D) 6.66% E) 7.50%

110) If Treasury bills are currently paying 3.05 percent and the inflation rate is 1.89 percent, what is the approximate real rate of interest? The exact real rate?

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A) 1.16%; 1.14% B) 1.21%; 1.14% C) 1.20%; 1.21% D) 1.19%; 1.16% E) 1.19%; 1.21%

111) Keyser Materials has 6.5 percent coupon bonds on the market with 15 years to maturity. The bonds make semiannual payments and currently sell for 102 percent of par. What is the current yield? The YTM? The effective annual yield? A) 6.37%; 6.29%; 6.39% B) 7.84%; 7.92%; 7.95% C) 7.84%; 7.92%; 7.97% D) 7.80%; 7.84%; 7.92% E) 7.80%; 7.92%; 6.39%

112) GN Supply wants to issue new 10-year, $1,000 face value bonds at par. The company currently has 6.35 percent coupon bonds on the market that sell for $983.20, make semiannual interest payments, and mature in 10 years. What coupon rate should the company set on its new bonds? A) 6.38% B) 6.37% C) 6.50% D) 6.47% E) 6.58%

113) You purchase a bond with an invoice price of $1,108.48. The bond has a coupon rate of 5.5 percent, semiannual coupons, and there are two months to the next coupon date. What is the clean price of the bond?

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A) $1,086.35 B) $1,090.15 C) $1,050.20 D) $998.50 E) $1,057.50

114) You purchase a bond with a coupon rate of 6.15 percent, semiannual coupons, and a clean price of $998.40. If the next coupon payment is due in two months, what is the invoice price? A) $1,018.90 B) $1,019.36 C) $1,001.60 D) $1,027.67 E) $1,004.33

115) A company needs to raise $22 million and plans to issue 20-year bonds for this purpose. The required rate of return is 7.6 percent in the current market. The company has two issue alternatives: a 7.6 percent coupon and a zero coupon bond. The company’s tax rate is 34 percent. At bond maturity, how much will the company need to pay to its bondholders if it issues the coupon bonds? What if it issue the zeros? Assume semiannual compounding for both bond issues. (For simplicity’s sake, assume the company can issue a partial bond.) A) $21.407 million; $102.12 million B) $23.672 million; $97.795 million C) $22.836 million; $102.12 million D) $22.836 million; $97.795 million E) $23.672 million; $102.12 million

116) A semiannual 5.4 percent coupon bond currently sells for par value. What is the maturity on this bond?

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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) The bond must be a perpetual security.

117) A bond has a $1,000 face value, a market price of $1,023.32, and pays interest payments of $54.00 every year. What is the coupon rate? A) 6.76% B) 4.50% C) 5.27% D) 5.40% E) 5.35%

118) The 6.4 percent bond of Berberich, Incorporated, has a yield to maturity of 6.9 percent. The bond matures in eleven 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) $32.00 C) $34.50 D) $69.00 E) $64.00

119) The 6.9 percent bond of Peters Pickles has a face value of $1,000, a maturity of 15 years, semiannual interest payments, and a yield to maturity of 7.11 percent. What is the current market price of the bond? A) $990.80 B) $987.95 C) $980.82 D) $1,081.28 E) $952.60

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120) A $1,000 face value bond currently has a yield to maturity of 7.14 percent. The bond matures in sixteen years and pays interest semiannually. The coupon rate is 6.95 percent. What is the current price of this bond? A) $1,138.63 B) $987.42 C) $988.57 D) $1,001.52 E) $982.05

121) Phili Manufacturing, Incorporated, bonds have a face value of $1,000, a coupon rate of 6.5 percent, semiannual interest payments, and mature in 19 years. What is the current price of these bonds if the yield to maturity is 6.65 percent? A) $972.46 B) $989.56 C) $983.95 D) $639.17 E) $1,001.28

122) A 17-year, semiannual coupon bond is selling for $1,030. The bond has a face value of $1,000 and a yield to maturity of 5.95 percent. What is the coupon rate? A) 2.65% B) 5.95% C) 6.40% D) 6.23% E) 3.12%

123) A 25-year, annual coupon bond is priced at $1,105.63. The bond has a $1,000 face value and a yield to maturity of 7.28 percent. What is the coupon rate?

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A) 7.28% B) 4.10% C) 8.54% D) 8.35% E) 8.21%

124) The 5 percent semiannual coupon bonds of Under The Counter, Incorporated, are selling for $995.25. The bonds have a face value of $1,000 and mature in 12 years. What is the yield to maturity? A) 5.09% B) 5.05% C) 10.07% D) 5.26% E) 11.1%

125) Old World Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 13 years, and have a 5.3 percent coupon. The current price is quoted at 98.25. What is the yield to maturity? A) 5.34% B) 5.49% C) 11.15% D) 11.01% E) 5.23%

126) The $1,000 face value bonds of Universe International have coupon of 6.8 percent and pay interest semiannually. Currently, the bonds are quoted at 103.5 and mature in 16 years. What is the yield to maturity?

Version 1

A) 5.75% B) 6.24% C) 12.89% D) 6.92% E) 6.45%

Version 1

Answer Key Test name: Chapter 06 Test Bank - Static 1) D 2) E 3) C 4) D 5) B 6) D 7) A 8) C 9) D 10) C 11) D 12) E 13) D 14) D 15) D 16) D 17) D 18) C 19) E 20) A 21) C 22) E 23) A 24) A 25) A 26) B Version 1

27) E 28) E 29) C 30) C 31) E 32) D 33) C 34) B 35) C 36) E 37) B 38) B 39) D 40) E 41) D 42) C 43) D 44) C 45) A 46) D 47) D 48) C 49) D 50) C 51) C 52) D 53) B 54) C 55) C 56) E Version 1

57) E 58) E 59) E 60) C 61) E 62) C 63) D 64) E 65) D 66) E 67) E 68) D 69) C 70) D 71) B 72) A 73) D Coupon rate = $69.50/$1,000 = .0695, or 6.95% 74) A Coupon rate = ($28.75 × 2)/$1,000 = .0575, or 5.75% 75) B Coupon payment = ($1,000 × .072)/2 = $36.00 76) C Coupon payment = [.0625 × (1.2 × $1,000)]/2 = $37.50 77) C Enter

Version 1

3.06%

I/Y

−$26.5

PMT

−$1,000.00

Solve for

$931.01

78) D Enter

3.015%

I/Y

Solve for

−$31.25

PMT

−$1,000.00

$1,019.63

79) A Enter

3.49%

I/Y

Solve for

−$36

PMT

−$1,000

$1,020.26

80) D Enter

Version 1

3.015%

−$898.56

I/Y

$1,000.00

PMT

Solve for

$24.73

Coupon rate = (2 × $24.73)/$1,000 = .0495, or 4.95% 81) E Enter

6.5%

−$984.56

I/Y

Solve for

$1,000.00

PMT

$63.36

Coupon rate = $63.36/$1,000 = .0634, or 6.34% 82) E Enter

2.015%

−$985.00

I/Y

Solve for

$1,000.00

PMT

$19.48

$19.48 × 2 = $38.96; $38.96/$1,000 = .0390, or 3.90% 83) B Enter

Version 1

−$1,102.25

$35

$1,000.00

Solve for

I/Y

PMT

3.030%

3.030% × 2 = 6.06% 84) B Enter

Solve for

−$1,032.50

I/Y

$29

PMT

$1,000.00

2.765%

2.765% × 2 = 5.53% 85) E Enter

Solve for

−$980.20

I/Y

$27.5

PMT

$1,000.00

2.865%

2.865% × 2 = 5.73% 86) C

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Enter

2.99%

−$1,150.00

I/Y

Solve for

$1,000.00

PMT

$41.83

Current yield = (2 × $41.83)/$1,150 Current yield = .0728. or 7.28% 87) B Current yield = (.0675 × $1,000)/$989.50 Current yield = .0682, or 6.82% 88) D Enter

4.625%

I/Y

Solve for

−$36.25

PMT

−$1,000.00

$816.16

$72.50/$816.16 = .0888, or 8.88% 89) B

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Current yield = (.063 × $1,000)/(.992 ×$1,000) Current yield = .0635, or 6.35% PV = $992 = (.063 × $1,000/2) × {(1 − {1/[1 + ( r/2)]26})/( r/2)} + $1,000/[1 + ( r/2)]26 r = .0639, or 6.39% EAR = [1 + (.0639/2)]2 − 1 EAR = .0649, or 6.49% 90) D Since the bond sells at par: Current yield = Coupon rate = Yield to maturity = 5.65% EAR = [1 + (.0565/2)]2 − 1 EAR = .0573, or 5.73% 91) E Enter

Solve for

−$965.00

I/Y

$31.5

PMT

$1,000.00

3.309%

3.309% × 2 = 6.62% Since the current yield to maturity on comparable bonds is 6.62 percent, Warson Motors should set its coupon rate at 6.62 percent if it wants its bonds to sell at par. 92) C To sell bonds at par, the coupon rate must be set equal to the yield to maturity on comparable bonds, which in this case is 9.50 percent . 93) D

Version 1

Enter

Solve for

3.6%

I/Y

$32.50

PMT

$1,000.00

−$928.13

−$928.13 + 1,000.00 = $71.87; $71.87/$1,000.00 = −.0719, or −7.19% 94) D PV = $45.00 × {(1 − {1/[1 + (.0687/2)]14})/(.0687/2)} + $1,000/[1 + (.0687/2)]14 PV = $1,116.81 Percentage price change = ($1,116.81 − 980)/$980 Percentage price change =.1396, or 13.96% 95) C Both bonds have a starting price of $1,000 since their coupon rates are equal to their yields to maturity. PVA = [(.06 × $1,000)/2] × {(1 − {1/[1 + (.07/2)]24})/(.07/2)} + $1,000/[1 + (.07/2)]24 PVA = $919.71 Percentage change in priceA = ($919.71 − 1,000)/$1,000 Percentage change in priceA = −.0803, or −8.03% PVB = [(.06 × $1,000)/2] × {(1 − {1/[1 + (.07/2)]8})/(.07/2)} + $1,000/[1 + (.07/2)]8 PVB = $965.63 Percentage change in priceB = ($965.63 − 1,000)/$1,000 Percentage change in priceB = −.0344, or −3.44% 96) C

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PV5 = [(.055 × $1,000)/2] × {(1 − {1/[1 + (.074/2)]8})/(.074/2)} + $1,000/[1 + (.074/2)]8 PV5 = $935.24 Percentage change in price5 = ($935.24 − 1,000)/$1,000 Percentage change in price5 = −.0648, or −6.48% PV10 = [(.055 × $1,000)/2] × {(1 − {1/[1 + (.074/2)]18})/(.074/2)} + $1,000/[1 + (.074/2)]18 PV10 = $876.75 Percentage change in price10 = ($876.75 − 1,000)/$1,000 Percentage change in price10 = −.1233, or −12.33% 97) C Aftertax yield = .0280 × (1 − .27) = .0204, or 2.04% 98) C Aftertax yield = .0625 × (1 − .28) = .0450, or 4.50% 99) C Number of bonds = $2,800,000/{$1,000/[1 + (.0719/2)]40} Number of bonds = 11,500 bonds 100) B Enter

3.1%

I/Y

Solve for

−$1,000.00

PMT

$294.89

101) C Enter

Version 1

3.15%

−$1,000.00

Solve for

I/Y

PMT

$327.42

$327.42 × 230,000 = $75,307,021.83 102) C Clean price = $987 − [(.06 × $1,000)/2 × 4/6] Clean price = $967 103) C Dirty price = $1,140 + [(.038 × $1,000)/2 × 5/6] Dirty price = $1,155.83 104) D (1 + .0589) = (1 + r)(1 + .012) r = .0463, or 4.63% 105) B R = (1 + .0387)(1 + .0275) − 1 R = .0673, or 6.73% 106) B (1 + .00868) = (1 + .0205)(1 + h) h = .06496, or 6.50% 107) B PV = [(.06 × $1,000)/2] × {(1 − {1/[1 + (.0713/2)]16})/(.0713/2)} + $1,000/[1 + (.0713/2)]16 PV = $932.00 108) D

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PV = $989.45 = [(.068 × $1,000)/2] × {(1 - {1/[1 + (r/2)]24})/(r/2)} + $1,000/[1 + (r/2)]24 r = .0693, or 6.93% 109) D PV = $1,023 = C × {(1 − {1/[1 + (.064/2)]27})/(.064/2)} + $1,000/[1 + (.064/2)]27 C = $33.28 Coupon rate = ($33.28 × 2)/$1,000 Coupon rate = .0666, or 6.66% 110) A Approximate rate = 3.05% − 1.89% = 1.16% Exact rate = [(1 + .0305)/(1 + .0189)] − 1 = .0114, or 1.14% 111) A Current yield = (.065 × $1,000)/(1.02 × $1,000) = .0637, or 6.37% PV = $1,020 = [(.065 × $1,000)/2] × {(1 - {1/[1 + ( r/2)]30})/( r/2)} + $1,000/[1 + ( r/2)]30 r = .0629, or 6.29% Effective yield = [1 + (.0629/2)]2 − 1 = .0639, or 6.39% 112) E PV = $983.20 = [(.0635 × $1,000)/2] × {(1 - {1/[1 + ( r/2)]20})/( r/2)} + $1,000/[1 + ( r/2)]20 r = .0658, or 6.58% The coupon rate must equal the current market rate of 6.58 percent if the bonds are to be sold at par. 113) B Clean price = $1,108.48 − [(.055 × $1,000)/2] × 4/6 = $1,090.15 114) A Invoice price = $998.40 + [(.0615 × $1,000)/2] × 4/6 = $1,018.90 115) D

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Coupon bond payment = $22 million + [(.076 × $22 million)/2] = $22.836 million PV of a $1,000 face value zero coupon bond = $1,000/[1 + (.076/2)]40 = $224.9603 Number of zero coupon bonds required = $22 million/$224.9603 = 97,795.04 bonds Payment on zero coupon bonds = $1,000 × 97,795.04 = $97.795 million 116) B Since the bond sells for par, the maturity is indeterminate. 117) D Coupon rate = $54.00/$1,000 = .054, or 5.40% 118) B Coupon payment = ($1,000 × .064)/2 = $32.00 119) C Enter

3.555%

I/Y

Solve for

−$34.5

PMT

−$1,000.00

$980.82

120) E Enter

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3.57%

I/Y

−$34.75

PMT

−$1,000.00

Solve for

$982.05

121) C Enter

3.325%

I/Y

Solve for

−$32.5

PMT

−$1,000.00

$983.95

122) D Enter

2.975%

−$1,030.00

I/Y

Solve for

$1,000.00

PMT

$31.16

Coupon rate = (2 × $31.16)/$1,000 = .0623, or 6.23% 123) E Enter

Version 1

7.28%

−$1,105.63

I/Y

$1,000.00

PMT

Solve for

$82.09

Coupon rate = $82.09/$1,000 = .0821, or 8.21% 124) B Enter

Solve for

−$995.25

I/Y

$25

$1,000.00

PMT

2.527%

2.527% × 2 = 5.05% 125) B Enter

Solve for

−$982.50

I/Y

$26.5

PMT

$1,000.00

2.745%

2.745% × 2 = 5.49% 126) E Enter

Version 1

−$1,035.00

$34

$1,000.00

Solve for

I/Y

PMT

3.223%

3.223% × 2 = 6.45%

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) You want a seat on the board of directors of Four Keys, Incorporated. The company has 245,000 shares of stock outstanding and the stock sells for $76 per share. There are currently 5 seats up for election. The company uses straight voting. How many shares do you need to guarantee that you will be elected to the board? A) 110,251 shares B) 81,668 shares C) 49,000 shares D) 122,501 shares E) 40,834 shares

2) You want a seat on the board of directors of Red Cow, Incorporated. The company has 315,000 shares of stock outstanding and the stock sells for $52 per share. There are currently 4 seats up for election. The company uses straight voting. How much will it cost you to guarantee that you will be elected to the board? A) $4,095,000 B) $3,276,052 C) $5,733,052 D) $7,371,047 E) $8,190,052

3) You want a seat on the board of directors of Four Keys, Incorporated. The company has 240,000 shares of stock outstanding and the stock sells for $57 per share. There are currently 3 seats up for election. If the company uses cumulative voting, how many shares do you need to guarantee that you will be elected to the board? A) 54,001 shares B) 60,001 shares C) 90,001 shares D) 80,000 shares E) 120,001 shares

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4) You want a seat on the board of directors of Zeph, Incorporated. The company has 310,000 shares of stock outstanding and the stock sells for $49 per share. There are currently 5 seats up for election. If the company uses cumulative voting, how much will it cost you to guarantee that you will be elected to the board? A) $13,020,084 B) $2,531,716 C) $3,906,076 D) $8,680,084 E) $5,208,000

5) Michael's, Incorporated, just paid $2.15 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.7 percent. If you require a rate of return of 8.9 percent, how much are you willing to pay today to purchase one share of the company's stock? A) $55.75 B) $16.55 C) $53.60 D) $26.80 E) $25.29

6) Stoneheart Group is expected to pay a dividend of $3.05 next year. The company's dividend growth rate is expected to be 4.5 percent indefinitely and investors require a return of 11.1 percent on the company's stock. What is the stock price? A) $48.29 B) $41.59 C) $43.90 D) $46.21 E) $27.48

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7) You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 4.2 percent indefinitely. The company just paid a dividend of $3.53 and you feel that the required return on the stock is 11.4 percent. What is the price per share of the company's stock? A) $49.03 B) $45.98 C) $48.53 D) $51.09 E) $30.96

8) Symon's Suppers Company has announced that it will pay a dividend of $4.27 per share one year from today. Additionally, the company expects to increase its dividend by 4.6 percent annually. The required return on the company's stock is 10.8 percent. What is the current share price? A) $64.84 B) $39.54 C) $65.43 D) $68.87 E) $72.04

9) A stock currently sells for $60. The dividend yield is 3.8 percent and the dividend growth rate is 5.1 percent. What is the amount of the dividend that was just paid? A) $1.90 B) $2.06 C) $2.28 D) $2.05 E) $2.17

10) A stock currently sells for $73. The dividend yield is 3.1 percent and the dividend growth rate is 4.4 percent. What is the amount of the dividend to be paid in one year?

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A) $1.90 B) $2.26 C) $2.17 D) $2.11 E) $2.06

11) A stock is expected to maintain a constant dividend growth rate of 4.3 percent indefinitely. If the stock has a dividend yield of 5.6 percent, what is the required return on the stock? A) 9.9% B) 9.2% C) 9.4% D) 8.2% E) 8.9%

12) A stock just paid a dividend of $5.45 and is expected to maintain a constant dividend growth rate of 4.5 percent indefinitely. If the current stock price is $79, what is the required return on the stock? A) 11.40% B) 10.93% C) 11.71% D) 10.83% E) 9.97%

13) CDB stock is currently priced at $83. The company will pay a dividend of $5.61 next year and investors require a return of 11.7 percent on similar stocks. What is the dividend growth rate on this stock?

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A) 4.61% B) 5.91% C) 4.94% D) 4.69% E) 6.76%

14) Kindzi Company has preferred stock outstanding that is expected to pay an annual dividend of $4.32 every year in perpetuity. If the required return is 4.29 percent, what is the current stock price? A) $100.70 B) $96.56 C) $93.99 D) $105.02 E) $90.63

15) Voltanis Corporation has preferred stock outstanding that will pay an annual dividend of $4.23 every year in perpetuity. If the stock currently sells for $100.69 per share, what is the required return? A) 3.78% B) 2.38% C) 4.80% D) 3.93% E) 4.20%

16) Stana, Incorporated, has preferred stock outstanding that sells for $100.28 per share. If the required return is 3.96 percent, what is the annual dividend? A) $3.82 B) $3.57 C) $3.97 D) $4.13 E) $3.72

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17) McKerley Corporation has preferred stock outstanding that will pay an annual dividend of $3.40 per share with the first dividend exactly 12 years from today. If the required return is 3.54 percent, what is the current price of the stock? A) $63.27 B) $61.10 C) $65.51 D) $92.76 E) $96.05

18) Asonia Company will pay a dividend of $4.60, $8.70, $11.55, and $13.30 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 10.8 percent on the company's stock, what is the stock price? A) $41.00 B) $33.40 C) $35.20 D) $28.55 E) $31.01

19) Knightmare, Incorporated, will pay a dividend of $6.85, $10.95, and $14.15 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 10.6 percent on the company's stock. What is the current stock price? A) $25.60 B) $30.52 C) $28.34 D) $37.33 E) $32.14

20) Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $1.70 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 11.50 percent on your equity investments?

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A) $13.20 B) $6.76 C) $19.55 D) $14.78 E) $9.80

21) The common stock of Eddie's Engines, Incorporated, sells for $36.83 a share. The stock is expected to pay a dividend of $2.80 per share next year. Eddie's has established a pattern of increasing their dividends by 4.9 percent annually and expects to continue doing so. What is the market rate of return on this stock? A) 13.15% B) 7.60% C) 12.50% D) 5.95% E) 16.10%

22) Shares of common stock of the Samson Company offer an expected total return of 15.80 percent. The dividend is increasing at a constant 5.00 percent per year. The dividend yield must be: A) 15.80%. B) 3.16%. C) 10.80%. D) 20.80%. E) 5.00%.

23) Weisbro and Sons common stock sells for $42 a share and pays an annual dividend that increases by 4.3 percent annually. The market rate of return on this stock is 10 percent. What is the amount of the last dividend paid by Weisbro and Sons?

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A) $2.50 B) $2.30 C) $4.03 D) $1.73 E) $2.25

24) The Bell Weather Company is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.60 per share. What is the current value of one share of this stock if the required rate of return is 8.10 percent? A) $77.11 B) $93.01 C) $90.41 D) $105.30 E) $107.90

25) NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.31 a share. The following dividends will be $.36, $.51, and $.81 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.5 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 10 percent? A) $2.27 B) $11.38 C) $9.08 D) $11.35 E) $11.07

26) The Red Bud Company pays a constant dividend of $1.60 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.2 percent?

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A) $1.78 B) $1.72 C) $2.88 D) $4.48 E) $3.20

27) Railway Cabooses just paid its annual dividend of $3.90 per share. The company has been reducing the dividends by 12.4 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent? A) $16.60 B) $31.45 C) $12.94 D) $17.40 E) $13.26

28) Keidis Industries will pay a dividend of $3.95, $5.05, and $6.25 per share for each of the next three years, respectively. In four years, you believe that the company will be acquired for $57.00 per share. The return on similar stocks is 11.1 percent. What is the current stock price? A) $65.22 B) $49.62 C) $55.77 D) $49.07 E) $52.84

29) Braxton's Cleaning Company stock is selling for $34.75 per share based on a required return of 10.4 percent. What is the the next annual dividend if the growth rate in dividends is expected to be 3.9 percent indefinitely?

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A) $2.17 B) $2.26 C) $2.35 D) $2.05 E) $2.49

30) The stock in Up-Towne Movers is selling for $47.60 per share. Investors have a required return of 10.4 percent and expect the dividends to grow at 3.9 percent indefinitely. What was the dividend the company just paid? A) $3.09 B) $2.91 C) $2.97 D) $3.42 E) $2.70

31) Santa Klaus Toys just paid a dividend of $1.60 per share. The required return is 8.9 percent and the perpetual dividend growth rate is 2.5 percent. What price should this stock sell for five years from today? A) $27.60 B) $29.72 C) $28.29 D) $28.99 E) $25.00

32) This morning you purchased a stock that just paid an annual dividend of $4.00 per share. You require a return of 11.4 percent and the dividend will increase at an annual growth rate of 3.3 percent. If you sell this stock in three years, what will your capital gain be?

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A) $4.26 B) $6.85 C) $5.22 D) $3.30 E) $1.68

33) The common stock of Sweet Treats is selling for $51.95 per share. The company is expected to have an annual dividend increase of 4 percent indefinitely and pay a dividend of $4.00 in one year. What is the total return on this stock? A) 13.21% B) 11.70% C) 12.45% D) 13.21% E) 12.01%

34) Brickhouse is expected to pay a dividend of $3.15 and $2.46 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.9 percent. What is the stock price today if the required return is 11.3 percent? A) $27.87 B) $32.68 C) $37.29 D) $30.70 E) $35.01

35) Red Sun Rising just paid a dividend of $2.10 per share. The company said that it will increase the dividend by 20 percent and 15 percent over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.4 percent. If the required return is 10.4 percent, what is the stock price today?

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A) $37.40 B) $39.78 C) $38.59 D) $15.00 E) $35.12

36) General Importers announced that it will pay a dividend of $3.40 per share one year from today. After that, the company expects a slowdown in its business and will not pay a dividend for the next 7 years. Then, 9 years from today, the company will begin paying an annual dividend of $1.50 forever. The required return is 10.9 percent. What is the price of the stock today? A) $8.49 B) $9.74 C) $9.08 D) $3.07 E) $13.76

37) New Gadgets, Incorporated, currently pays no dividend but is expected to pay its first annual dividend of $4.50 per share exactly 5 years from today. After that, the dividends are expected to grow at 2.7 percent forever. If the required return is 10.5 percent, what is the price of the stock today? A) $45.15 B) $38.70 C) $57.69 D) $35.02 E) $51.86

38) For the past six years, the stock price of Slippery Rock Mining has been increasing at a rate of 8 percent per year. Currently, the stock is selling for $81 per share and has a required return of 9.9 percent. What is the dividend yield?

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A) 8.8% B) 5.2% C) 1.9% D) 3.8% E) 8.0%

39) Graphical Designs is offering 20-20 preferred stock. The stock will pay an annual dividend of $20 with the first dividend payment occurring 20 years from today. The required return on this stock is 5.10 percent. What is the price of the stock today? A) $137.98 B) $141.49 C) $152.41 D) $145.01 E) $392.16

40) Mariota Corporation just paid a dividend of $3.30 per share on its stock. The dividend growth rate is expected to be 4.2 forever and investors require a return of 11.6 percent on this stock. What will the stock price be in 8 years? A) $61.98 B) $26.84 C) $64.58 D) $57.87 E) $41.20

41) Sankey Company has earnings per share of $4.10. The benchmark PE is 19.1 times. What stock price would you consider appropriate? A) $23.20 B) $62.45 C) $46.59 D) $78.31 E) $44.72

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42) Flex Company just paid total dividends of $1,075,000 and reported additions to retained earnings of $3,225,000. The company has 715,000 shares of stock outstanding and a benchmark PE of 17.3 times. What stock price would you consider appropriate? A) $26.01 B) $104.04 C) $98.84 D) $78.03 E) $93.64

43) Gnomes R Us just paid a dividend of $1.88 per share. The company has a dividend payout ratio of 60 percent. If the PE ratio is 16.7 times, what is the stock price? A) $65.41 B) $52.33 C) $18.84 D) $78.49 E) $31.40

44) Ghost Riders Company has an EPS of $1.67 that is expected to grow at 8.7 percent per year. If the PE ratio is 19.35 times, what is the projected stock price in 6 years? A) $49.04 B) $53.31 C) $57.94 D) $55.62 E) $46.26

45) Fowler is expected to pay a dividend of $1.53 one year from today and $1.68 two years from today. The company has a dividend payout ratio of 45 percent and the PE ratio is 17.55 times. If the required return on the company's stock is 10.5 percent, what is the current stock price?

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A) $58.68 B) $46.66 C) $25.53 D) $53.66 E) $56.42

46) The Ronnie Company has sales per share of $25.52. If the PS ratio is 1.62 times, what is the stock price? A) $15.17 B) $43.96 C) $41.34 D) $36.06 E) $15.80

47) Blitz Corporation had total sales of $2,930,000 last year and has 104,000 shares of stock outstanding. The benchmark PS is 1.56 times. What stock price would you consider appropriate? A) $39.56 B) $43.95 C) $35.16 D) $18.06 E) $41.02

48) Silky Smooth has an EPS of $3.35 per share and a profit margin of 7.7 percent. If the PS ratio is 1.98 times, what is the stock price? A) $25.80 B) $93.32 C) $96.91 D) $86.14 E) $100.50

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49) Rise Above This has sales per share of $20.03 that is expected to grow at 4.5 percent per year. The PS ratio is 1.69 times. What is the projected stock price in 4 years? A) $36.57 B) $42.18 C) $40.37 D) $41.28 E) $38.63

50) Erna Company is expected to pay a dividend of $2.51 one year from today and $2.66 two years from today. The company's sales in two years are expected to be $15,700,000. The company has a PS ratio of 1.69 times, and 524,000 shares outstanding. If the required return on the company's stock is 10.9 percent, what is the current stock price? A) $41.17 B) $5.92 C) $45.60 D) $47.42 E) $4.43

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Answer Key Test name: Chapter 07 Test Bank - Algo 1) D Shares necessary = 245,000/2 + 1 = 122,501 shares 2) E Shares necessary = 315,000/2 + 1 = 157,501 shares Cost = 157,501($52) = $8,190,052 3) B Shares necessary = {[1/(1 + 3)] × 240,000} + 1 = 60,001 shares 4) B Shares necessary = {[1/(1 + 5)] × 310,000} + 1 = 51,668 shares Cost = 51,668($49) = $2,531,716 5) C P0 = [$2.15 × (1 + .047)]/(.089 – .047) = $53.60 6) D P0 = $3.05/(.111 − .045) = $46.21 7) D P0 = [$3.53 × (1 + .042)]/(.114 − .042) = $51.09 8) D P0 = $4.27/(.108 − .046) = $68.87 9) E D1 = .038($60) = $2.28 D0 = $2.28/(1 + .051) = $2.17 10) B D1 = .031($73) = $2.26 11) A Required return = 4.3% + 5.6% = 9.9% 12) C Version 1

Dividend yield = [$5.45(1 + .045)]/$79 = .0721, or 7.21% Required return = 4.5% + 7.21% = 11.71% 13) C Dividend yield = $5.61/$83 = .0676, or 6.76% Dividend growth rate = 11.70% − 6.76% = 4.94% 14) A P0 = $4.32/.0429 = $100.70 15) E R = $4.23/$100.69 = .0420, or 4.20% 16) C D = $100.28 × .0396 = $3.97 17) C P11 = $3.40/.0354 = $96.05 P0 = $96.05/(1 + .0354)11 = $65.51 18) D P = $4.60/(1 + .108) + $8.70/(1 + .108)2 + $11.55/(1 + .108)3 + $13.30/(1 + .108)4 P = $28.55 19) A P = $6.85/(1 + .106) + $10.95/(1 + .106)2 + $14.15/(1 + .106)3 P = $25.60 20) D P = $1.70/.1150 = $14.78 21) C R = $2.80/$36.83 + .049 = .1250, or 12.50% 22) C Dividend yield = 15.80% – 5.00% = 10.80% 23) B P0 = $42 = [D0 × (1 + .043)]/(.1000 − .043) D0 = $2.30 Version 1

24) C P4 = ($2.60 × 1.194 × 1.03)/(.081 − .03) = $105.30 P0 = ($2.60 × 1.19)/1.081 + ($2.60 × 1.192)/1.0812 + ($2.60 × 1.193)/1.0813 + ($2.60 × 1.194)/1.0814 + $105.30/1.0814 = $90.41 25) C P4 = ($.81 × 1.025)/(.10 − .025) = $11.07 P0 = $.31/1.10 + $.36/1.102 + $.51/1.103 + $.81/1.104 + $11.07/1.104 = $9.08 26) C P0 = $1.60/1.072 + $1.60/1.0722 = $2.88 27) C P0 = [$3.90 × [1 + (− .124)]]/[.14 − (− .124)] = $12.94 28) B P = $3.95/(1 + .111) + $5.05/(1 + .111)2 + $6.25/(1 + .111)3+ $57.00/(1 + .111)4 P = $49.62 29) B $34.75 = D1/(.1040 − .0390) D1 = $2.26 30) C $47.60 = D1/(.1040 − .0390) D1 = $3.09 D0 = $3.09/(1 + .0390) D0 = $2.97 31) D P = [$1.60(1 + .025)6]/(.089 − .025) P = $28.99 32) C

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P0 = [$4.00(1 + .033)]/(.114 − .033) = $51.01 P3 = [$4.00(1 + .033)4]/(.114 − .033) = $56.23 Capital gains = $56.23 − 51.01 = $5.22 33) B R = ($4.00/$51.95) + .040 = .1170, or 11.70% 34) B P2 = [$2.46(1 + .039)]/(.113 − .039) = $34.52 P0 = $3.15/1.113 + ($2.46 + 34.52)/1.1132 = $32.68 35) B P2 = [$2.10(1.200)]/1.104 + [$2.10(1.200)(1.150)]/1.1042 + {[$2.10(1.200)(1.150)(1.034)]/(.104 − .034)}/1.1042 P0 = $39.78 36) C P8 = $1.50/.109 = $13.76 P0 = $3.40/1.109 + $13.76/1.1098 P0 = $9.08 37) B P4 = $4.50/(.105 − .027) = $57.69 P0 = $57.69/1.1054 P0 = $38.70 38) C Dividend yield = 9.9% − 8.0% = 1.9% 39) C P19 = $20.00/.0510 = $392.16 P0 = $392.16/1.051019 P0 = $152.41 40) C P8 = [$3.30(1.0420)9]/(.1160 − .0420) = $64.58 41) D P = $4.10(19.1) = $78.31 Version 1

42) B EPS = ($1,075,000 + 3,225,000)/715,000 = $6.01 P = $6.01(17.30) = $104.04 43) B EPS = $1.88/.60 = $3.13 P = $3.13(16.70) = $52.33 44) B EPS6 = $1.67(1.087)6 = $2.75 P6 = $2.75(19.35) = $53.31 45) E EPS2 = $1.68/.45 = $3.73 P = $1.53/1.105 + $1.68/1.1052 + ($3.73 × 17.55)/1.1052 = $56.42 46) C P = $25.52(1.62) = $41.34 47) B Sales per share = $2,930,000/104,000 = $28.17 P = $28.17(1.56) = $43.95 48) D Sales per share = $3.35/.077 = $43.51 P = $43.51(1.98) = $86.14 49) C EPS4 = $20.03(1.045)4 = $23.89 P4 = $23.89(1.69) = $40.37 50) C Sales per share2 = $15,700,000/524,000 = $29.96 P = $2.51/1.109 + $2.66/1.1092 + ($29.96 × 1.69)/1.1092 = $45.60

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) When valuing a stock using the constant-growth model, D1 represents the: A) expected difference in the stock price over the next year. B) expected stock price in one year. C) last annual dividend paid. D) next expected annual dividend. E) discount rate.

The dividend yield is defined as: A) the last annual dividend divided by the current market price per share. B) the last annual dividend divided by the current book value per share. C) next year's expected dividend divided by the current market price per share. D) next year's expected dividend divided by the current book value per share. E) next year's expected dividend divided by the par value per share.

The capital gains yield equals which one of the following? A) Total yield B) Required rate of return C) Market rate of return D) Dividend yield E) Dividend growth rate

4) Which one of the following types of securities has the lowest priority in a bankruptcy proceeding?

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A) Convertible bond B) Senior debt C) Common stock D) Preferred stock E) Straight bond

5) Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three 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

6) 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

7) 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 term applies to this granting of authority? A) Straight B) Cumulative C) Consent-form D) Proxy E) In absentia

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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.

9) Which type of stock 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) Noncumulative preferred B) Cumulative preferred C) Senior common D) Cumulative common E) Noncumulative common

10)

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

11)

What is the market called that facilitates the sale of shares between individual investors? A) Primary B) Proxy C) Secondary D) Inside E) Initial

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12)

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.

13)

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) is ready to buy or sell at any time. E) brings buyers and sellers together.

14)

Any person who owns a license to trade on the NYSE is called a: A) dealer. B) floor trader. C) DMM. D) member. E) proxy.

15) A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a: A) supplemental liquidity provider (SLP). B) designated market maker (DMM). C) runner. D) floor broker. E) market maker.

16)

A DMM is a(n):

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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 deals only with primary offerings.

17)

Supplemental liquidity providers (SLPs) trade securities on behalf of: A) their own accounts. B) the customers of a specific brokerage firm. C) designated market makers. D) any stock exchange member. E) any stock exchange customer.

18)

Most trades on the NYSE are executed: A) by floor brokers on the exchange floor. B) independent brokers on the exchange floor. C) electronically. D) by designated market makers of the floor of the exchange. E) by dealers.

19)

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.

20) The specific location on the floor of an exchange where a particular security is traded is called a:

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A) box office. B) Figure 6. C) post. D) trading booth. E) seat.

21)

Inside quotes are defined as the: A) bid and asked prices presented by NYSE DMMs. 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.

22)

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

23)

The price of a stock at Year 3 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).

24) Far West Trading expects to pay an annual dividend of $1.75 per share next year. What is the anticipated dividend for Year 3 if the firm increases its dividend by 3 percent annually?

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A) $1.75 × 1.031 B) $1.75 × 1.032 C) $1.75 × 1.033 D) $1.75 × 1.034 E) $1.75 × 1.035

25) The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant 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

26) Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four 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) $1.23 × (1.08 × 4) × (1.02 × 3) B) $1.23 × (1.08 × 4) × (1.02 × 2) C) $1.23 × 1.084 × 1.022 D) $1.23 × 1.084 × 1.023 E) $1.23 × 1.084 × 1.024

27)

The dividend yield on a stock will increase if the: A) dividend growth rate decreases. B) stock price decreases. C) capital gains rate decreases. D) stock price increases. E) tax rate on dividends increases.

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28)

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) Par value per share E) Book value per share

29) The constant growth model can be used to value the stock of firms that have which type(s) of dividends? A) Dividends that change by either a constant amount or a constant rate B) Dividends that change annually by a constant amount or that are zero C) Dividends that change annually by a constant amount D) Dividends that are either constant or change annually at a constant rate E) Only dividends that increase at a constant rate

30) 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

31) 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 each share receives one vote.

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A) Twenty percent of the shares plus one share B) Twenty-five percent of the shares plus one share C) One-third of the shares plus one share D) Fifty percent of the shares plus one share E) Fifty-one percent of the shares plus one share

32) Gleason, Incorporated, 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 the lowest number of votes will be selected. 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.

33)

Which statement is true?

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) Preferred dividends provide tax-free income to individual investors. E) Preferred shareholders prefer noncumulative dividends over cumulative dividends.

34)

Which one of the following statements is correct?

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A) Preferred stock can be callable. B) Preferred stock generally has a stated liquidation value of $1,000 per share. C) Dividend payments to preferred shareholders are tax-deductible expenses for the issuing firm. D) Preferred dividends are generally variable in amount. E) Preferred shareholders receive preferential treatment over bondholders in a liquidation.

35)

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.

36) 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 date the board declares the dividend D) On the date the company announces the dividend to the public E) On the date of payment

37)

Dividends are: A) payable at the discretion of a firm's president. B) treated as a tax-deductible expense of the issuing firm. C) paid out of aftertax profits. D) paid only to preferred stockholders. E) only partially taxable to high-income individual shareholders.

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38)

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 DMM.

39) Which one of the following players on the floor of the NYSE is obligated to maintain a two-sided, orderly market for a limited number of securities? A) Designated market maker B) Floor sweeper C) Investment firms D) Supplemental liquidity provider E) Floor broker

40)

The NYSE: A) presently conducts all 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.

41)

In November 2013, the NYSE was acquired by: A) the Amsterdam Exchange. B) the Intercontinental Exchange. C) the Securities Exchange Commission. D) Euronext. E) the American Stock Exchange.

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42)

Nasdaq is best described as: A) a modern-day trading floor with locations in Chicago and London. B) an electronic communication network. C) an electronic network of securities dealers. D) an internet broker’s market. E) a primary market.

43)

If a trade is made "in the crowd," the trade has occurred: A) between a broker and a DMM. B) between two brokers. C) electronically on Nasdaq. D) onSuperDOT. E) on an ECN.

44) 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

45)

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

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46) 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

47) Opulance Corporation common stock is selling for $44.25 a share and has a dividend yield of 1.9 percent. What is the dividend amount? A) $.42 B) $.84 C) $4.20 D) $6.20 E) $8.40

48) The Glass Ceiling paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.1 percent annually. What is the amount of the expected dividend in Year 6? A) $1.43 B) $1.75 C) $1.46 D) $1.77 E) $1.58

49) Gator Tires pays a constant annual dividend of $1.21 per share. How much are you willing to pay for one share if you require a rate of return of 9.3 percent?

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A) $14.72 B) $13.01 C) $6.50 D) $1.39 E) $13.90

50) Sweet Treats pays a constant annual dividend of $2.54 a share and currently sells for $52.60 a share. What is the rate of return? A) 4.56% B) 5.39% C) 4.52% D) 4.83% E) 5.91%

51) The common stock of Federal Logistics is selling for $57.56 per share. The company pays a constant annual dividend and has a total return of 10.13 percent. What is the amount of the dividend? A) $3.53 B) $3.55 C) $5.83 D) $6.20 E) $5.31

52) Healthy Foods just paid its annual dividend of $1.62 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 rate of return of 15.7 percent? A) $11.91 B) $12.91 C) $12.16 D) $10.54 E) $13.07

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53) Polar Mechanical Systems will pay an annual dividend of $1.88 per share next year. The company just announced that future dividends will be increasing by 1.2 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 9.68 percent? A) $18.30 B) $22.17 C) $22.94 D) $19.28 E) $22.48

54) Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.9 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually? A) $2.71 B) $3.75 C) $2.78 D) $2.86 E) $3.72

55) The common stock of Zeta Group sells for $42 per share, has a rate of return of 12.2 percent, and a dividend growth rate of 1.8 percent annually. What was the amount of the last annual dividend paid? A) $3.82 B) $3.85 C) $4.29 D) $4.57 E) $4.35

56) Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.35 percent. What is the dividend growth rate?

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A) .82% B) 1.03% C) 1.28% D) .95% E) .66%

57) River City Recycling just paid its annual dividend of $1.15 per share. The required return is 12.3 percent, and the dividend growth rate is 0.75 percent. What is the expected value of this stock five years from now? A) $10.16 B) $10.41 C) $12.03 D) $8.42 E) $9.75

58) 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 dividend increases at 3.25 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now? A) $2.43 B) $2.51 C) $2.63 D) $2.87 E) $2.19

59) Great Lakes Steel Supply is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $1.30 per share but all future dividends will be decreased by 2.75 percent annually. What is a share of this stock worth today at a required return of 15.5 percent?

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A) $6.09 B) $6.93 C) $6.50 D) $6.68 E) $6.98

60) Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 17 percent. What is the amount of the last dividend this company paid? A) $1.05 B) $1.55 C) $1.60 D) $1.42 E) $1.30

61) The common stock of Big Marvin Treats has a total return of 10.25 percent, a stock price of $28.75, and recently paid an annual dividend of $1.65. What is the capital gains rate if the company maintains a constant dividend? A) 7.54% B) 15.76% C) 10.37% D) 4.51% E) 3.79%

62) River Rock, Incorporated, just paid an annual dividend of $2.80. The company has increased its dividend by 2.7 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent?

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A) $23.60 B) $24.65 C) $25.08 D) $25.37 E) $26.90

63) Ferris Athletic Equipment plans to pay an annual dividend of $1.90 per share next year, $1.25 per share a year for the following two years, and then a final liquidating dividend of $11.50 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 19.65 percent of this risky investment? A) $8.80 B) $7.54 C) $6.74 D) $11.77 E) $9.47

64) 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 that level through Year 3, 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

65) Flash Freeze Frozen Foods is expected to pay annual dividends of $1.34 and $1.45 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.50 a share. What is the value of this stock at a required return of 15.1 percent?

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A) $7.77 B) $10.25 C) $9.76 D) $12.78 E) $9.93

66) The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 15 percent, what is this stock worth today? A) $0 B) $1.66 C) $2.78 D) $1.03 E) $1.21

67) Software Sales Supply is expected to pay its first annual dividend of $1.10 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 3.2 percent per year. What is the value of this stock today, Year 0, at a required return of 13.1 percent? A) $8.22 B) $11.31 C) $11.49 D) $10.35 E) $12.66

68) Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends of $.62, .80, and $1.05 per share over the next three years, respectively. After that, the dividend is projected to increase by 4 percent annually. What is the current value of this stock if the required return is 16 percent?

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A) $7.63 B) $9.67 C) $10.46 D) $6.58 E) $8.49

69) Car Parts Center recently announced that it will pay annual dividends at the end of the next two years of $1.20 and $1.35 per share, respectively. Then, in Year 5 it plans to pay a final dividend of $11.75 a share before closing its doors permanently. At a required return of 17 percent, what should this stock sell for today? A) $1.18 B) $14.14 C) $7.37 D) $11.27 E) $10.64

70) Dixie Mart plans to pay dividends of $1.36, $1.15, $1.35, and $.40 at the end of the next four years, respectively. After that, the company will be sold, and shareholders are expected to receive $82.40 per share in Year 6 when the sale should be finalized. If the required return is 11.4 percent, what is the current value of one share of this stock? A) $47.71 B) $51.87 C) $46.50 D) $51.08 E) $47.29

71) Canine Crates just paid an annual dividend of $.45 per share but plans to double that amount each year for three years. After that, the firm expects to maintain a constant dividend. What is the value of this stock today if the required return is 13 percent?

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A) $24.48 B) $26.45 C) $23.46 D) $19.91 E) $23.89

72) Village East expects to pay an annual dividend of $1.40 per share next year, and $1.68 per share for the following two years. After that, the company plans to increase the dividend by 3.4 percent annually. What is this stock’s current value at a discount rate of 13.7 percent? A) $14.09 B) $17.28 C) $15.15 D) $16.08 E) $18.18

73) The required return on Mountain Brook stock is 14.1 percent and the dividend growth rate are 3.64 percent. The stock is currently selling for $32.80 a share. What is the dividend yield? A) 10.16% B) 8.93% C) 11.75% D) 10.46% E) 13.36%

74) For the past six years, the price of Slippery Rock stock has been increasing at a rate of 8.21 percent a year. Currently, the stock is priced at $43.40 a share and has a required return of 11.65 percent. What is the dividend yield?

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A) 3.20% B) 2.75% C) 3.69% D) 4.28% E) 3.44%

75) A stock has paid dividends of $1.70, $1.85, $2.00, $2.20, and $2.50 over the past five years, respectively. What is the average capital gains yield? A) 8.86% B) 3.24% C) 9.45% D) 5.34% E) 10.14%

76) The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield? A) 7.35% B) 7.78% C) 9.23% D) 6.20% E) 4.49%

77) A stock is priced at $38.24 a share and has a market rate of return of 9.65 percent. What is the dividend growth rate if the company plans to pay an annual dividend of $.48 a share next year? A) 7.42% B) 8.39% C) 2.23% D) 7.60% E) 1.26%

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78) Vegan Delite stock is valued at $68.60 a share. The company pays a constant annual dividend of $2.40 per share. What is the total return on this stock? A) 3.62% B) 4.00% C) 3.50% D) 3.39% E) 3.82%

79) Last year, when the stock of Alpha Minerals was selling for $49.50 a share, the dividend yield was 3.4 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 2.2 percent? A) 6.13% B) 6.58% C) 6.40% D) 6.47% E) 6.38%

80) There are three open positions on the board of directors of XYZ Enterprises. The company has 264,000 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) 82,001 shares B) 75,001 shares C) 88,001 shares D) 72,000 shares E) 66,001 shares

81) A firm has four 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 387,500 shares of stock outstanding and uses cumulative voting? Each share is granted one vote.

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A) 33,334 shares B) 77,501 shares C) 75,251 shares D) 70,501 shares E) 96,876 shares

82) Miller's Hardware has 415,000 shares of stock outstanding with a current market value of $42 a share. You own 84,500 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) $28,518 C) $34,062 D) $62,958 E) $98,910

83) The Chip Dip Company has 685,500 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 five open seats? A) 335,167 shares B) 345,134 shares C) 345,876 shares D) 342,751 shares E) 337,134 shares

84) Laura owns 6,700 shares of GP Global stock worth $92,460. The firm has 15,000 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 four directors are up for election. How much more must Laura invest in this firm to guarantee her election to the board?

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A) $0 B) $6,554.00 C) $11,053.80 D) $8,406.15 E) $14,478.80

85) A preferred stock sells for $54.20 a share and has a market return of 9.68 percent. What is the dividend amount? A) $5.09 B) $5.14 C) $4.75 D) $5.42 E) $5.25

86) Spiral Staircase is offering preferred stock which is 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 require a rate of return of 9.5 percent? A) $66.70 B) $46.51 C) $49.63 D) $120.52 E) $105.26

87) Graphic Designs has 68,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid $1.60 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?

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A) $3.20 B) $4.80 C) $6.40 D) $7.50 E) $1.60

88) 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 $2.25 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) $3.35 C) $2.25 D) $4.50 E) $6.75

89) AZ stock closed today at $18.24, down .23. The dividend yield is 2.4 percent. What was yesterday’s closing price if the firm pays a constant $.40 per share quarterly dividend? A) $16.67 B) $18.01 C) $16.90 D) $18.47 E) $17.40

90) Today’s stock market report shows that SW Companies has a PE ratio of 9.8, a dividend yield of 2.2 percent, a closing price $29.86, and a net change of .11. What is the annual dividend amount?

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A) $.66 B) $1.08 C) $1.13 D) $1.28 E) $1.33

91) According to today’s stock report, BL Lumber shares were up .14, the stock dividend yield is 2.6 percent, and the PE ratio is 9.8. What is the amount of the next annual dividend if yesterday's closing price was $35.14? A) $.918 B) $.917 C) $.914 D) $.924 E) $9.31

92) TMS just paid an annual dividend of $2.84 per share on its stock. The dividends are expected to grow at a constant rate of 1.85 percent per year. If investors require a rate of return of 10.4 percent, what will be the stock price be in Year 11? A) $41.71 B) $40.64 C) $35.75 D) $41.39 E) $42.57

93) The next dividend payment by S&S will be $1.38 per share. The dividends are anticipated to maintain a 2.5 percent growth rate, forever. If the stock currently sells for $26.90 per share, what is the required return?

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A) 8.03% B) 7.82% C) 7.63% D) 8.74% E) 9.02%

94) A particular stock sells for $43.20 share and provides a total return of 11.6 percent. The total return is evenly divided between the capital gains yield and the dividend yield. Assuming a constant dividend growth rate, what is the current dividend per share? A) $2.24 B) $2.37 C) $2.34 D) $2.51 E) $2.47

95) The VIC Company has preferred stock outstanding that pays a $4.50 dividend annually and sells for $48.20 per share. What is the rate of return? A) 9.34% B) 6.89% C) 7.70% D) 8.23% E) 8.98%

96) Hi-Lo has 160,000 shares outstanding priced at $33 a share. There will be three open positions on its board in the next election. Currently, you are not a shareholder but would like to become one and also gain a seat on the board. How much will it cost you to buy a seat if the company uses straight voting? What if the firm uses cumulative voting?

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A) $1,760,033; $2,640,033 B) $2,710,033; $1,760,033 C) $2,710,033; $1,430,033 D) $2,640,033; $1,320,033 E) $2,640,033; $1,760,033

97) Russell Foods will pay a dividend of $2.28 next year. At a required return of 11.5 percent, the stock is valued at $43.20 a share. What is the dividend growth rate at this price? A) 5.99% B) 5.28% C) 6.12% D) 5.37% E) 6.22%

98) JL Tools is a young start-up company. The company expects to pay its first dividend of $.20 a share in Year 6 with annual dividend increases of 1.5 percent thereafter. At a required return of 12 percent, what is the current share price? A) $1.77 B) $1.08 C) $1.23 D) $1.90 E) $2.13

99) Gamma Corporation is expected to pay the following dividends over the next four years: $7.50, $8.25, $15, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return is 14 percent, what is the current share price?

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A) $35.20 B) $31.06 C) $38.18 D) $32.30 E) $34.90

100) JLT is a mature manufacturing firm. The company just paid an annual dividend of $3.62, but management expects to reduce future payouts by 3.5 percent per year, indefinitely. What is this stock worth today at a required return of 12.5 percent? A) $21.42 B) $21.83 C) $20.24 D) $23.56 E) $20.02

101) KIT Kars stock currently sells for $54.10 per share and has a fixed 2.5 percent dividend growth rate. What was the amount of the last dividend paid if the required rate of return is 11 percent? A) $4.49 B) $3.57 C) $5.30 D) $4.15 E) $4.36

102) Juniper Trees has earnings per share of $1.38, all of which is added to retained earnings. What is the value of a share of its stock if the PE ratio is 9.8 and market-to-book ratio is 2.5? A) $13.52 B) $13.67 C) $15.30 D) $33.80 E) $34.18

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103) Blasco International has sales of $389,700 and costs of $413,210. The company has 120,000 shares outstanding. What is the price-sales ratio if the stock has a book value of $19.20 per share and a market value per share of $8.60? A) 2.65 B) 1.89 C) 2.23 D) 2.48 E) 2.37

104) Resorts Corporation common stock is selling for $36.75 a share and has a dividend yield of 2.3 percent. What is the dividend amount? A) $.43 B) $.85 C) $4.21 D) $6.21 E) $8.41

105) The Painted Parlor paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 4? A) $1.43 B) $1.68 C) $1.46 D) $1.73 E) $1.70

106) Crocodile Swimwear pays a constant annual dividend of $1.88 per share. How much are you willing to pay for one share if you require a rate of return of 11.1 percent?

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A) $14.72 B) $16.94 C) $8.47 D) $1.69 E) $13.90

107) Bernard Fashionista pays a constant annual dividend of $3.75 a share and currently sells for $48.50 a share. What is the rate of return? A) 7.87% B) 8.60% C) 7.73% D) 8.04% E) 9.12%

108) The common stock of Duck Diagnostics is selling for $69.23 per share. The company pays a constant annual dividend and has a total return of 9.1 percent. What is the amount of the dividend? A) $4.25 B) $4.27 C) $6.30 D) $6.92 E) $6.03

109) Ground Chuck Processing just paid its annual dividend of $1.25 per share. The firm recently announced that all future dividends will be increased by 3 percent annually. What is one share of this stock worth to you if you require a rate of return of 11.5 percent? A) $14.89 B) $15.92 C) $15.15 D) $13.52 E) $15.05

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110) Business Calculators Incorporated will pay an annual dividend of $2.25 per share next year. The company just announced that future dividends will be increasing by 0.75 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 12.25 percent? A) $18.30 B) $19.57 C) $22.94 D) $19.28 E) $22.48

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Answer Key Test name: Chapter 07 Test Bank - Static 1) D 2) C 3) E 4) C 5) C 6) B 7) D 8) C 9) B 10) E 11) C 12) B 13) E 14) D 15) D 16) C 17) A 18) C 19) A 20) C 21) C 22) E 23) D 24) B 25) C 26) C Version 1

27) B 28) B 29) D 30) D 31) D 32) C 33) A 34) A 35) E 36) C 37) C 38) C 39) A 40) C 41) B 42) C 43) B 44) D 45) B 46) C 47) B Dividend = .019 × $44.25 = $.84 48) B Enter

1.1%

−$1.64

$0.00

I/Y

PMT

Solve for

$1.75

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49) B P = $1.21/.093 = $13.01 50) D R = $2.54/$52.60 = .0483, or 4.83% 51) C D = .1013 × $57.56 = $5.83 52) B P0 = ($1.62 × 1.028)/(.157 − .028) = $12.91 53) B P0 = $1.88/(.0968 − .012) = $22.17 54) B D1 = $32.60 × (.139 − .024) = $3.75 55) C D0 = [$42 × (.122 − .018)]/(1 + .018) = $4.29 56) A g = .0935 − ($1.58/$18.53) = .0082, or .82% 57) B P5 = [$1.15 × (1 + .0075)6]/(.123 − .0075) = $10.41 58) E P0 = $1.90/(.12 − .0325) = $21.71 P3 = [$1.90 × (1.0325)3]/(.12 − .0325) = $23.90 Capital gain = $23.90 − 21.71 = $2.19 59) B P0 = {$1.30 × [1 + (−.0275)]}/[.155 − (−.0275)] = $6.93 60) D $13.16 = (D0 × 1.056)/(.17 − .056) D0 = $1.42 61) D

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.1025 = $1.65/$28.75 + g g = .0451, or 4.51% 62) D P6 = ($2.80 × 1.0277)/(.16 − .027) = $25.37 63) A P0 = ($1.90/1.19651) + ($1.25/1.19652) + ($1.25/1.19653) + ($11.50/1.19654) = $8.80 64) A P3 = ($2.40 × 1.10 × 1.02)/(.12 − .02) = $26.928 P0 = [($2.40 × 1.10)/1.12] + [($2.40 × 1.10)/1.122] + {[($2.40 × 1.10) + $26.928]/1.123} P0 = $25.51 65) C P2 = ($1.50/.151) = $9.93 P0 = [$1.34/1.151] + [($1.45 + 9.93)/1.1512] P0 = $9.76 66) B P0 = ($.50/.15)/(1 + .15)5 = $1.66 67) A P5 = ($1.10 × 1.032)/(.131 − .032) = $11.47 P0 = ($1.10/1.1313) + ($1.10/1.1314) + [($1.10 + 11.47)/1.1315] = $8.22 68) A P3 = ($1.05 × 1.04)/(.16 − .04) = $9.10 P0 = ($.62/1.16) + ($.80/1.162) + [($1.05 + 9.10)/1.163] = $7.63 69) C P0 = $1.20/1.17 + $1.35/1.172 + $11.75/1.175 = $7.37 70) C P0 = $1.36/1.114 + $1.15/1.1142 + $1.35/1.1143 + $.40/1.1144 + $82.40/1.1146 P0 = $46.50 Version 1

71) E D1 = $.45 × 2 = $0.90 D2 = $0.90 × 2 = $1.80 D3 = D4 = Dt = $1.80 × 2 = $3.60 P3 = $3.60/.13 = $27.69 P0 = $0.90/1.13 + $1.80/1.132 + ($3.60 + 27.69)/1.133 P0 = $23.89 72) C P3 = ($1.68 × 1.034)/(.137 − .034) = $16.86 P0 = $1.40/1.137 + $1.68/1.1372 + ($1.68 + $16.86)/1.1373 P0 = $15.15 73) D Dividend yield = .141 − .0364 = .1046, or 10.46% 74) E Dividend yield = .1165 − .0821 = .0344, or 3.44% 75) E g = [($1.85 − 1.70)/$1.70 + ($2.00 − 1.85)/$1.85 + ($2.20 − 2.00)/$2.00 + ($2.50 − 2.20)/$2.20]/4 = .1014, or 10.14% 76) D g = .1167 − ($2.64/$48.30) = .0620, or 6.20% 77) B g = .0965 − ($.48/$38.24) = .0839, or 8.39% 78) C R = ($2.40/$68.60) + 0 = .0350, or 3.50% 79) C D0 = .034 × $49.50 = $1.683 Total return = [($1.683 × 1.022)/$41] + .022 = .0640, or 6.40% 80) E Shares needed = {[1/(3 + 1)] × 264,000} + 1 = 66,001 81) B Version 1

Shares needed = {[1/(4 + 1)] × 387,500} + 1 = 77,501 shares 82) A Shares needed = {[1/(4 + 1)] × 415,000} + 1 = 83,001 You already own sufficient shares to guarantee your election. 83) D Number of shares = (685,500/2) + 1 = 342,751 shares 84) C Investment needed = [(15,000/2) + 1 − 6,700] × ($92,460/6,700) = $11,053.80 85) E Dividend = .0968 × $54.20 = $5.25 86) B P0 = ($10/.095)/1.0959 = $46.51 87) C Preferred dividend = 4 × $1.60 = $6.40 88) C Minimum preferred dividend = $2.25 The firm needs to pay only the current dividend as the preferred stock is noncumulative. 89) D Yesterday’s closing price = $18.24 + .23 = $18.47 90) A Annual dividend = .022 × $29.86 = $.66 91) B Dividend = .026 × ($35.14 + .14) = $.917 92) D P11 = ($2.84 × 1.018512)/(.104 − .0185) = $41.39 93) C Required return = ($1.38/$26.90) + .025 = .0763, or 7.63% 94) B Version 1

(.116/2) = [D0 × (1 + (.116/2)]/$43.20 D0 = $2.37 95) A R = $4.50/$48.20 = .0934, or 9.34% 96) D CostStraight = $33 × [(160,000/2) + 1] = $2,640,033 CostCumulative = $33 × {[160,000/(3 + 1)] + 1} = $1,320,033 97) E g = .115 − ($2.28/$43.20) = .0622, or 6.22% 98) B P0 = [$.20/(.12 − .015)]/(1 + .12)5 = $1.08 99) A P4 = ($1.80 × 1.04)/(.14 − .04) = $18.72 P0 = ($7.50/1.14) + ($8.25/1.142) + ($15/1.143) + [($1.80 + 18.72)/1.144] = $35.20 100) B P0 = [$3.62 × (1 − .035)]/[.125 − (−.035)] = $21.83 101) A .11 = {[D0 × (1 + .025)]/$54.10} + .025 D0 = $4.49 102) A P = 9.8 × $1.38 = $13.52 103) A Price-sales ratio = $8.60/($389,700/120,000) = 2.65 104) B Dividend = .023 × $36.75 = $.85 105) D D4 = $1.64 × (1.013)4 = $1.73 106) B P = $1.88/.111 = $16.94 Version 1

107) C R = $3.75/$48.50 = .0773, or 7.73% 108) C D = .091 × $69.23 = $6.30 109) C P0 = ($1.25 × 1.03)/(.115 − .03) = $15.15 110) B P0 = $2.25/(.1225 − .0075) = $19.57

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) A project that costs $20,500 today will generate cash flows of $6,900 per year for seven years. What is the project's payback period? A) 2.38 years B) 2.48 years C) .34 years D) 3.00 years E) 2.97 years

Guerilla Radio Broadcasting has a project available with the following cash flows : Year 0 1 2 3 4

Cash Flow −$ 14,400 5,900 7,200 5,700 5,000

What is the payback period? A) 2.60 years B) 2.23 years C) 2.48 years D) 1.77 years E) 3.00 years

There is a project with the following cash flows : Year 0 1 2 3 4

Cash Flow −$ 26,100 7,700 8,050 7,450 5,800

What is the payback period?

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A) 3.50 years B) 3.77 years C) 2.61 years D) 3.95 years E) 4.00 years

There is a project with the following cash flows : Year 0 1 2 3 4 5

Cash Flow −$ 25,850 7,500 8,600 7,350 7,950 7,100

What is the payback period? A) 3.56 years B) 2.67 years C) 3.88 years D) 3.30 years E) 4.00 years

5) A project with an initial cost of $22,700 is expected to generate cash flows of $5,300, $7,400, $8,450, $7,350, and $6,100 over each of the next five years, respectively. What is the project's payback period? A) 3.82 years B) 3.21 years C) 3.41 years D) 3.32 years E) 3.57 years

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6) Mountain Frost is considering a new project with an initial cost of $270,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $21,300, $22,200, $24,600, and $18,200, respectively. What is the average accounting return? A) 14.65% B) 11.99% C) 17.12% D) 7.99% E) 15.98%

7) A new project has an initial cost of $210,000. The equipment will be depreciated on a straight-line basis to a zero book value over the five-year life of the project. The projected net income each year is $12,850, $17,200, $19,280, $14,750, and $11,100, respectively. What is the average accounting return? A) 14.32% B) 13.13% C) 10.21% D) 15.34% E) 6.10%

8) A new project has an initial cost of $142,000. The equipment will be depreciated on a straight-line basis to a book value of $45,000 at the end of the four-year life of the project. The projected net income each year is $14,300, $17,600, $22,400, and $14,200, respectively. What is the average accounting return? A) 18.32% B) 24.12% C) 9.65% D) 21.87% E) 19.62%

Filter Corporation has a project available with the following cash flows: Year 0

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Cash Flow −$ 13,500 3

1 2 3 4

6,300 7,600 4,700 4,300

What is the project's IRR? A) 32.14% B) 27.55% C) 30.61% D) 28.70% E) 29.85%

10)

Blinding Light Company has a project available with the following cash flows: Year 0 1 2 3 4 5

Cash Flow −$ 34,430 8,090 9,730 13,840 15,770 10,580

What is the project's IRR? A) 18.70% B) 20.26% C) 19.48% D) 20.78% E) 16.83%

11) A project with an initial cost of $67,100 is expected to generate annual cash flows of $16,690 for the next 7 years. What is the project's internal rate of return? A) 15.35% B) 14.54% C) 17.50% D) 17.95% E) 16.15%

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12)

Your company has a project available with the following cash flows: Year 0 1 2 3 4 5

Cash Flow −$ 80,300 21,900 25,800 31,600 26,400 20,600

If the required return is 16 percent, should the project be accepted based on the IRR? A) Yes, because the IRR is 17.98 percent. B) No, because the IRR is 17.26 percent. C) Yes, because the IRR is 18.70 percent. D) Yes, because the IRR is 17.26 percent. E) No, because the IRR is 18.70 percent.

13) Iron Works International is considering a project that will produce annual cash flows of $37,200, $45,900, $56,600, and $22,100 over the next four years, respectively. What is the internal rate of return if the project has an initial cost of $113,800? A) 16.38% B) 15.70% C) 14.56% D) 13.65% E) 15.02%

14) A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $758,600. What is the internal rate of return of this project? A) 12.12% B) 9.32% C) 11.18% D) 10.56% E) 9.94%

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15)

You are evaluating two projects with the following cash flows: Year 0 1 2 3 4

Project X −$ 541,800 219,500 229,400 236,600 196,300

Project Y −$ 512,000 209,200 219,000 226,900 187,700

What is the crossover rate for these two projects? A) 12.09% B) 13.30% C) 23.12% D) .61% E) 23.73%

16)

Matterhorn Mountain Gear is evaluating two projects with the following cash flows: Year 0 1 2 3

Project X −$ 316,800 147,400 164,900 130,000

Project Y −$ 294,500 137,950 155,150 120,900

What interest rate will make the NPV for the projects equal? A) 11.57% B) .46% C) 19.60% D) 13.01% E) 19.13%

17) You are considering the following two mutually exclusive projects. The crossover rate between these two projects is ___ percent and Project ___ should be accepted if the required return is greater than the crossover rate. Year 0 1 2

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Project A −$ 43,000 21,500 13,500

Project B −$ 43,000 13,760 11,500

13,500

26,000

A) 6.87; A B) 8.28; B C) 6.87; B D) 14.82; A E) 14.82; B

18)

A project has the following cash flows : Year 0 1 2 3 4

Cash Flows −$ 11,700 5,110 7,360 4,800 −1,640

Assuming the appropriate interest rate is 7 percent, what is the MIRR for this project using the discounting approach? A) 11.65% B) 17.95% C) 13.71% D) 9.71% E) 15.99%

19)

Yellow Day has a project with the following cash flows: Year 0 1 2 3 4

Cash Flows −$ 27,100 10,600 20,700 9,780 −3,650

What is the MIRR for this project using the reinvestment approach? The interest rate is 8 percent.

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A) 15.48% B) 10.95% C) 18.06% D) 20.02% E) 13.14%

20)

Green Submarine has a project with the following cash flows: Year

1 2 3 4

Cash Flows −$18,100 7,330 13,400 8,150 −3,300

The discounting rate is 10 percent and the reinvestment rate is 12 percent. What is the MIRR for this project using the combination approach? A) 19.32% B) 14.98% C) 17.35% D) 21.65% E) 15.51%

21)

POD has a project with the following cash flows: Year 0 1 2 3

Cash Flows −$ 259,000 146,600 164,100 129,200

The required return is 9.4 percent. What is the profitability index for this project? A) .875 B) 1.309 C) 1.428 D) .700 E) 1.190

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22)

A project has the following cash flows Year 0 1 2 3 4

Cash Flows −$ 130,000 60,200 63,800 51,600 28,100

The required return is 8.1 percent. What is the profitability index for this project? A) 1.101 B) 1.211 C) 1.321 D) .757 E) .946

23) A project with an initial cost of $32,000 is expected to provide cash flows of $12,900, $13,100, $16,200, and $10,700 over the next four years, respectively. If the required return is 8.1 percent, what is the project's profitability index? A) 1.141 B) 1.369 C) .731 D) 1.540 E) 1.255

24) A project is expected to provide cash flows of $11,100, $11,900, $15,000, and $9,500 over the next four years, respectively. At a required return of 9.3 percent, the project has a profitability index of 1.371. For this to be true, what is the project's cost at Time 0? A) $27,907 B) $52,455 C) Insufficient information. D) $44,587 E) $25,582

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25) A project with an initial cost of $53,200 is expected to provide annual cash flows of $17,800 over the 7-year life of the project. If the required return is 8.2 percent, what is the project's profitability index? A) 1.442 B) 1.586 C) 1.730 D) .578 E) 1.946

26) A project has an initial cost of $92,200, a life of 7 years, and equal annual cash inflows. The required return is 9 percent. According to the profitability index decision rule, what is the minimum annual cash flow necessary to accept the project? A) $13,171.43 B) $21,650.04 C) $19,984.65 D) $16,910.09 E) $18,319.27

27)

Living Colour Company has a project available with the following cash flows: Year 0 1 2 3 4 5

Cash Flow −$ 34,430 8,090 9,730 13,840 15,770 10,580

If the required return for the project is 8.3 percent, what is the project's NPV? A) $12,338.56 B) $11,695.93 C) $3,694.85 D) $23,580.00 E) $10,796.24

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28)

A company has a project available with the following cash flows: Year 0 1 2 3 4

Cash Flow −$31,430 13,140 14,740 20,990 12,140

If the required return for the project is 9.8 percent, what is the project's NPV? A) $19,396.85 B) $15,557.89 C) $8,619.88 D) $16,972.24 E) $29,580.00

29) Blink of an Eye Company is evaluating a 5-year project that will provide cash flows of $39,700, $82,470, $63,250, $61,360, and $44,600, respectively. The project has an initial cost of $185,280 and the required return is 8.7 percent. What is the project's NPV? A) $8,837.78 B) $43,625.67 C) $11,958.76 D) $16,270.30 E) $9,721.56

30) A project with an initial investment of $442,100 will generate equal annual cash flows over its 8-year life. The project has a required return of 8.3 percent. What is the minimum annual cash flow required to accept the project? A) $74,900.53 B) $77,810.01 C) $85,788.42 D) $72,403.85 E) $88,925.73

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31) A project that will last for 11 years is expected to have equal annual cash flows of $104,800. If the required return is 8.1 percent, what maximum initial investment would make the project acceptable? A) $709,826.05 B) $700,055.69 C) $744,547.36 D) $653,385.31 E) $1,753,779.38

32) Rossdale Flowers has a new greenhouse project with an initial cost of $275,000 that is expected to generate cash flows of $41,900 for 7 years and a cash flow of $57,300 in Year 8. If the required return is 7.5 percent, what is the project's NPV? A) $85,878.92 B) $60,623.49 C) $2,549.26 D) −$20,944.17 E) −$29,578.98

33) Carland, Incorporated, has a project available with the following cash flows. If the required return for the project is 7.5 percent, what is the project's NPV? Year 0 1 2 3 4 5

Cash Flow −$ 254,000 62,500 86,400 115,800 67,300 −11,600

A) $9,548.86 B) $14,432.90 C) $30,593.06 D) $10,912.98 E) $22,512.98

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34) Maud'Dib Intergalactic has a new project available on Arrakis. The cost of the project is $40,000 and it will provide cash flows of $23,000, $29,300, and $29,800 over each of the next three years, respectively. Any cash earned in Arrakis is "blocked" and must be reinvested in the country for one year at an interest of 2.7 percent. The project has a required return of 9.3 percent. What is the project's NPV? A) $28,391.14 B) $37,685.88 C) $24,261.39 D) $42,678.35 E) $46,558.20

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Answer Key Test name: Chapter 08 Test Bank - Algo 1) E Payback period = $20,500/$6,900 Payback period = 2.97 years 2) B Amount short after 2 years = $14,400 − 5,900 − 7,200 Amount short after 2 years = $1,300 Payback period = 2 + $1,300/$5,700 Payback period = 2.23 years 3) A Amount short after 3 years = $26,100 − 7,700 − 8,050 − 7,450 Amount short after 3 years = $2,900 Payback period = 3 + $2,900/$5,800 Payback period = 3.50 years 4) D Amount short after 3 years = $25,850 − 7,500 − 8,600 − 7,350 Amount short after 3 years = $2,400 Payback period = 3 + $2,400/$7,950 Payback period = 3.30 years 5) B Amount short after 3 years = $22,700 − 5,300 − 7,400 − 8,450 Amount short after 3 years = $1,550 Payback period = 3 + $1,550/$7,350 Payback period = 3.21 years 6) E AAR = [($21,300 + 22,200 + 24,600 + 18,200)/4]/[($270,000 + 0)/2] AAR = .1598, or 15.98% Version 1

7) A AAR = [($12,850 + 17,200 + 19,280 + 14,750+ 11,100)/5]/[($210,000 + 0)/2] AAR = .1432, or 14.32% 8) A AAR = [($14,300 + 17,600 + 22,400 + 14,200)/4]/[($142,000 + 45,000)/2] AAR = .1832, or 18.32% 9) B 0 = −$13,500 + $6,300/(1 + IRR) + $7,600/(1 + IRR)2 + $4,700/(1 + IRR)3 + $4,300/(1 + IRR)4 IRR = .2755, or 27.55% 10) A 0 = −$34,430 + $8,090/(1 + IRR) + $9,730/(1 + IRR)2 + $13,840/(1 + IRR)3 + $15,770/(1 + IRR)4 + $10,580/(1 + IRR)5 IRR = .1870, or 18.70% 11) E 0 = −$67,100 + $16,690(PVIFAIRR, 7) IRR = .1615, or 16.15% 12) D 0 = −$80,300 + $21,900/(1 + IRR) + $25,800/(1 + IRR)2 + $31,600/(1 + IRR)3 + $26,400/(1 + IRR)4 + $20,600/(1 + IRR)5 IRR = .1726, or 17.26% Because the IRR is greater than the required return, accept the project. 13) A 0 = −$113,800 + $37,200/(1 + IRR) + $45,900/(1 + IRR)2 + $56,600/(1 + IRR)3 + $22,100/(1 + IRR)4 IRR = .1638, or 16.38% 14) C

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0 = −$758,600 + $237,600/(1 + IRR) + $237,600/(1 + IRR)2 + $237,600/(1 + IRR)3 + $274,800/(1 + IRR)4 IRR = .1118, or 11.18% 15) A 0 = −$29,800 + $10,300/(1 + IRR) + $10,400/(1 + IRR)2 + $9,700/(1 + IRR)3 + $8,600/(1 + IRR)4 IRR = .1209, or 12.09% 16) D 0 = (−$316,800 − (−$294,500)) + ($147,400 − 137,950)/(1 + IRR) + ($164,900 − 155,150)/(1 + IRR)2 + ($130,000 − 120,900)/(1 + IRR)3 0 = −$22,300 + $9,450/(1 + IRR) + $9,750/(1 + IRR)2 + $9,100/(1 + IRR)3 IRR = .1301, or 13.01% 17) D 0 = (−$43,000 - (−$43,000)) + ($21,500 - 13,760)/(1 + IRR) + ($13,500 - 11,500)/(1 + IRR)2 + ($13,500 - 26,000)/(1 + IRR)3 0 = $0 + $7,740/(1 + IRR) + $2,000/(1 + IRR)2 + −$12,500/(1 + IRR)3 IRR = .1482, or 14.82% Since Project A has larger cash flows early, it will have the greater NPV at higher interest rates. 18) E 0 = [−$11,700 − $1,640/(1 + .07)4] + $5,110/(1 + MIRR) + $7,360/(1 + MIRR)2 + $4,800/(1 + MIRR)3 + $0/(1 + MIRR)4 MIRR = .1599, or 15.99% 19) E 0 = −$27,100 + $0/(1 + MIRR) + $0/(1 + MIRR)2 + $0/(1 + MIRR)3 + [$10,600(1 + .08)3 + $20,700(1 + .08)2 + $9,780(1 + .08) − $3,650]/(1 + MIRR)4 MIRR = .1314, or 13.14% 20) E Version 1

0 = [−$18,100 − $3,300/(1 + .10)4] + $0/(1 + MIRR) + $0/(1 + MIRR)2 + $0/(1 + MIRR)3 + [$7,330(1 + .12)3 + $13,400(1 + .12)2 + $8,150(1 + .12)]/(1 + MIRR)4 MIRR = .1551, or 15.51% 21) C PI = [$146,600/(1 + .094) + $164,100/(1 + .094)2 + $129,200/(1 + .094)3]/$259,000 PI = 1.428 22) C PI = [$60,200/(1 + .081) + $63,800/(1 + .081)2 + $51,600/(1 + .081)3 + $28,100/(1 + .081)4]/$130,000 PI = 1.321 23) B PI = [$12,900/(1 + .081) + $13,100/(1 + .081)2 + $16,200/(1 + .081)3 + $10,700/(1 + .081)4]/$32,000 PI = 1.369 24) A 1.371 = [$11,100/(1 + .093) + $11,900/(1 + .093)2 + $15,000/(1 + .093)3 + $9,500/(1 + .093)4]/Initial cost Initial cost = $27,907 25) C PI = [$17,800(PVIFA8.2%, 7)]/$53,200 PI = 1.730 26) E PI = 1.00 = C(PVIFA9%, 7)]/$92,200 C = $18,319.27 27) E NPV = −$34,430 + $8,090/(1 + .083) + $9,730/(1 + .083)2 + $13,840/(1 + .083)3 + $15,770/(1 + .083)4 + $10,580/(1 + .083)5 NPV = $10,796.24 Version 1

28) D NPV = −$31,430 + $13,140/(1 + .098) + $14,740/(1 + .098)2 + $20,990/(1 + .098)3 + $12,140/(1 + .098)4 NPV = $16,972.24 29) B NPV = −$185,280 + $39,700/(1 + .087) + $82,470/(1 + .087)2 + $63,250/(1 + .087)3 + $61,360/(1 + .087)4 + $44,600/(1 + .087)5 NPV = $43,625.67 30) B NPV = 0 = −$442,100 + C(PVIFA8.3%, 8) C = $77,810.01 31) C NPV = 0 = Time 0 cash flow + $104,800(PVIFA8.1%, 11) Time 0 cash flow = $744,547.36 32) D NPV = −$275,000 + $41,900(PVIFA7.50%, 7) + $57,300/(1 + .075)8 NPV = −$20,944.17 33) B NPV = −$254,000 + $62,500/(1 + .075) + $86,400/(1 + .075)2 + $115,800/(1 + .075)3 + $67,300/(1 + .075)4 − $11,600/(1 + .075)5 NPV = $14,432.90 34) C Year 2 cash flow = $23,000(1 + .027) = $23,621.00 Year 3 cash flow = $29,300(1 + .027) = $30,091.10 Year 4 cash flow = $29,800(1 + .027) = $30,604.60 NPV = −$40,000 + $0/(1 + .093) + $23,621.00/(1 + .093)2 + $30,091.10/(1 + .093)3 + $30,604.60/(1 + .093)4 NPV = $24,261.39

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) 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.

Net present value involves discounting an investment's: A) assets. B) future profits. C) liabilities. D) costs. E) future cash flows.

3) 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.

4) The average net income of a project divided by the project's average book value is referred to as the project's:

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A) required return. B) market rate of return. C) internal rate of return. D) average accounting return. E) discounted rate of return.

The internal rate of return is the: A) discount rate that causes a project’s aftertax income to equal zero. B) discount rate that results in a zero net present value for the project. C) discount rate that results in a net present value equal to the project's initial cost. D) rate of return required by the project's investors. E) project's current market rate of return.

6) 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

7) 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.

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8) 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

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

10) 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

11)

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) ignores cash flows that are distant in the future. E) is unaffected by the timing of an investment's cash flows.

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12) 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

13)

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.

14) 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.

15) Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.

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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

16) 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

17)

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 a project's cash flows.

18)

Generally speaking, 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

19)

Which one of the following is the primary advantage of payback analysis?

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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

20)

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

21)

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

22) Which one of the following methods of analysis has the greatest bias toward short-term projects? A) Net present value B) Internal rate of return C) Average accounting return D) Profitability index E) Payback

23)

Which one of the following methods of analysis ignores cash flows?

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A) Profitability index B) Payback C) Average accounting return D) Modified internal rate of return E) Internal rate of return

24) 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

25)

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.

26)

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

27)

Which one of the following is most closely related to the net present value profile?

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A) Internal rate of return B) Average accounting return C) Profitability index D) Payback E) Discounted payback

28) The internal rate of return is unreliable as an indicator of whether 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 of a different size. E) The cash flows are conventional.

29)

Which one of the following statements is correct? Assume cash flows are conventional.

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.

30) Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. A) Modified internal rate of return that is 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

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31) The modified internal rate of return is specifically designed to address the problems associated with: A) mutually exclusive projects. B) unconventional cash flows. C) long-term projects. D) negative net present values. E) crossover points.

32)

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 the cash flows, except for the initial cash flow, to the end of the project.

33) Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive 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

34) Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

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A) Internal rate of return B) Profitability index C) Net present value D) Modified internal rate of return E) Average accounting return

35) You are using a net present value profile to compare Projects 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.

36) 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.

37) An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?

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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.

38) Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? A) The firm should increase in value each time it 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.

39)

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.

40)

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.

41) Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?

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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

42) 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

43) You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only 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

44) In which one of the following situations would the payback method be the preferred method of analysis?

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A) A long-term capital-intensive project 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

45)

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 toward 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 applicable only if a project has conventional cash flows.

46)

Which one of the following indicates that an independent 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

47) What is the net present value of a project with the following cash flows if the discount rate is 12 percent? Year 0 1 2 3

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Cash flow −$ 27,500 14,800 19,400 5,200

A) $4,881.10 B) $11,900.00 C) $4,358.13 D) $11,035.24 E) $8,129.06

48) What is the net present value of a project with the following cash flows if the discount rate is 9 percent? Year 0 1 2 3

Cash Flow −$ 55,000 21,500 24,750 29,450

A) $7,126.22 B) $8,297.15 C) $20,700.00 D) −$7,126.22 E) −$6,456.23

49) What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $8,500 a year for 10 years if the discount rate is 13 percent? A) $4,678.09 B) $6,500.00 C) $6,123.07 D) $7,189.34 E) $6,712.03

50) Daniel’s Market is considering a project with an initial cost of $176,500. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $127,500 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?

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A) $105,222 B) −$6,500 C) $29,301.80 D) $621.30 E) −$601.03

51) Empire Industries is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value at a required rate of return of 14.8 percent? Year 0 1 2 3 4

Cash Flow −$ 62,000.00 $ 16,500.00 $ 23,800.00 $ 27,100.00 $ 23,300.00

A) $1,505.52 B) $1,067.24 C) $1,758.71 D) $1,519.58 E) $902.71

52) What is the net present value of the following set of cash flows at a discount rate of 6 percent? At 12 percent? Year 0 1 2 3 4

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Cash Flow −$ 47,500 12,500 18,500 21,500 22,000

A) $17,586; $10,332.46 B) $16,235.26; $7,693.47 C) −$1,190.80; −$6,287.92 D) $15,316.29; $6,869.17 E) $17,220.90; $8,673.98

53) Trident Office is considering remodeling the office building it leases to Robert Roberts, CPA. The remodeling costs are estimated at $225,000. If the building is remodeled, Robert Roberts, CPA has agreed to pay an additional $75,000 per year in rent for the next five years. The discount rate is 10 percent. What is the benefit of the remodeling project to Professional Properties? A) $59,309.01 B) −$69,158.56 C) $69,158.56 D) $68,399.15 E) −$61,417.03

54) A proposed project requires an initial cash outlay of $75,000 for equipment and an additional cash outlay of $25,000 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $50,000 a year. What is the net present value of this project at a discount rate of 12.2 percent? A) $9,385.06 B) $9,432.42 C) $8,851.67 D) $7,441.33 E) $53,948.34

55) John is considering a project with cash inflows of $1,100, $1,000, $1,050, and $1,200 over the next four years, respectively. The relevant discount rate is 12.5 percent. What is the net present value of this project if it the startup cost is $3,200?

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A) $54.50 B) $48.04 C) −$35.45 D) $89.33 E) $122.00

56) Charles Henri is considering investing $37,800 in a project that is expected to provide him with cash inflows of $11,600 at the end of each of the first two years and $20,000 at the end of the third year. What is the project’s NPV at a discount rate of 0 percent? At 5 percent? At 10 percent? A) $0; $1,045.91; −$2,641.47 B) $4,468.39; $38.29; −$2,784.08 C) $5,400; $1,045.91; −$2,641.47 D) $5,400; $417.92; −$3,406.10 E) $4,468.39; $38.29; −$2,641.47

57) Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent, but Rich demands a return of 12.5 percent. Who, if either, should accept this project? A) Joe, but not Rich B) Rich, but not Joe C) Neither Joe nor Rich D) Both Joe and Rich E) Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero

58) You are making an investment of $110,000 and require a rate of return of 14.6 percent. You expect to receive $48,000 in the first year, $52,500 in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net present value of this investment?

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A) $7,881.55 B) $4,305.56 C) $1,879.63 D) $633.33 E) $9,874.83

59) What is the net present value of the following cash flows if the relevant discount rate is 11.2 percent? Year 0 1 2 3 4

Cash Flow −$ 32,400 10,620 15,800 −3,110 26,600

A) $5,062.67 B) $5,006.19 C) $8,215.46 D) $13,058.39 E) $18,519.71

60) What is the net present value of the following cash flows if the relevant discount rate is 7 percent? Year 0 1 2 3 4 5

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Cash Flow −$ 11,520.00 $ 81.00 $ 650 $ 880 $ 2,300 $ 16,800.00

A) $2,311.92 B) $3,574.61 C) $2,900.15 D) $2,861.62 E) $3,248.87

61) What is the net present value of the following cash flows if the relevant discount rate is 5.75 percent? Year 0 1 2 3

Cash Flow $ 11,400 −2,500 −2,500 −9,500

A) −$1,482.15 B) −$1,232.68 C) $507.19 D) $1,211.40 E) $1,402.02

62)

A project has the following cash flows. What is the payback period? Year 0 1 2 3 4

Cash Flow −$ 10,000 1,800 3,600 5,000 6,000

A) 2.83 years B) 2.38 years C) 2.75 years D) 2.92 years E) 3.03 years

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63)

A project has the following cash flows. What is the payback period? Year 0 1 2 3 4

Cash Flow −$ 45,000 20,000 23,500 24,000 25,000

A) 1.72 years B) 1.83 years C) 2.06 years D) 2.33 years E) 2.65 years

64)

What is the payback period for a project with the following cash flows? Year 0 1 2 3 4

Cash Flow −$ 75,000.00 $ 15,000.00 $ 23,000.00 $ 25,000.00 $ 25,000.00

A) 2.56 years B) 2.89 years C) 3.08 years D) 3.48 years E) Never

65) The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 for the first year and $12,000 per year for the following four years. What is the payback period?

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A) 2.87 years B) 3.23 years C) 3.41 years D) 4.06 years E) 4.23 years

66) Today, Sweet Snacks is investing $491,000 in a new oven. As a result, the company expects its cash flows to increase by $64,000 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 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.

67) Greenbriar Cotton Mill is spending $284,000 to update its facility. The company estimates that this investment will improve its cash inflows by $50,500 a year for 8 years. What is the payback period? A) 4.03 years B) 4.95 years C) 5.48 years D) 5.62 years E) The project never pays back.

68) EKG, Incorporated, is considering a new project that will require an initial cash investment of $419,000. The project will produce no cash flows for the first two years. The projected cash flows for Years 3 through 7 are $69,000, $98,000, $109,000, $145,000, and $165,000, respectively. How long will it take the firm to recover its initial investment in this project?

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A) 3.81 years B) 3.98 years C) 5.57 years D) 5.99 years E) The project never pays back.

69) China Importers would like to spend $215,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $215,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $60,000 in the first year, $140,000 in the second year, and $150,000 a year for the following 2 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 2.10 years D) No; because the project never pays back E) No; because the money will not be recovered in time to repay the loan

70)

What is the payback period for a $16,700 investment with the following cash flows? Year 1 2 3 4 5

Cash Flow $ 2,100 6,800 6,900 7,300 5,100

A) 3.12 years B) 3.89 years C) 2.12 years D) 3.44 years E) 3.67 years

71) Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment? Version 1

A) 2.74 years B) 2.87 years C) 2.99 years D) 3.27 years E) 3.68 years

72) Delta Mu Delta is considering purchasing some new equipment costing $393,000. 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 $16,900, $25,300, $27,700, and $18,400. What is the average accounting rate of return? A) 11.23% B) 11.63% C) 12.01% D) 12.49% E) 10.87%

73) Auto Detailers is buying some new equipment at a cost of $188,900. This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life. The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years. What is the average accounting rate of return? A) 15.48% B) 17.76% C) 18.09% D) 22.68% E) 18.53%

74) Woodcrafters requires an average accounting return (AAR) of at least 17.5 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $169,700. This equipment will have a four-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 $7,100, $13,300, $18,600, and $19,200 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not?

Version 1

A) Yes; because the AAR is less than 17.5 percent B) Yes; because the AAR is equal to 17.5 percent C) Yes; because the AAR is greater than 17.5 percent D) No; because the AAR is less than 17.5 percent E) No; because the AAR is greater than 17.5 percent

75) You are considering an equipment purchase costing $167,000. This equipment will be depreciated straight-line to zero over its three-year life. What is the average accounting return if this equipment produces the following net income? Year 1 2 3

Net Income $ 15,600 14,200 13,500

A) 18.29% B) 18.38% C) 15.67% D) 17.29% E) 16.67%

76) An investment has an initial cost of $2.7 million and net income of $189,400, $178,600, and $172,500 for Years 1 to 3. This investment will be depreciated by $900,000 a year over the three-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 12.5 percent? Why or why not? A) Yes, because the AAR is 12.5 percent B) Yes, because the AAR is less than 12.5 percent C) Yes, because the AAR is greater than 12.5 percent D) No, because the AAR is greater than 12.5 percent E) No, because the AAR is less than 12.5 percent

77) An investment has an initial cost of $300,000 and a life of four years. This investment will be depreciated by $60,000 a year and will generate the net income shown below. Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9.5 percent? Why or why not? Version 1

Year 1 2 3 4

Net Income $ 14,500 16,900 19,600 23,700

A) Yes, because the AAR less than 9.5 percent B) Yes, because the AAR is 9.5 percent C) Yes, because the AAR is greater than 9.5 percent D) No, because the AAR is 9.5 percent E) No, because the AAR is greater than 9.5 percent

78) An investment has an initial cost of $462,000 and will generate the net income amounts shown below. This investment will be depreciated straight-line to zero over the four-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 14.75 percent? Why or why not? Year 1 2 3 4

Net Income $ 27,000 24,800 37,500 45,000

A) Yes, because the AAR is equal to 14.75 percent B) Yes, because the AAR is greater than 14.75 percent C) Yes, because the AAR is less than 14.75 percent D) No, because the AAR is greater than 14.75 percent E) No, because the AAR is less than 14.75 percent

79) The Nifty Fifty is considering opening a new store at a start-up cost of $628,000. The initial investment will be depreciated straight-line to zero over the 15-year life of the project. What is the average accounting rate of return given the following net income projections? Year 1-5 6-10 11-15

Version 1

Net Income $ 58,000 52,000 44,000

A) 16.42% B) 16.68% C) 17.01% D) 17.18% E) 16.35%

80)

A project has the following cash flows. What is the internal rate of return? Year 0 1 2 3

Cash Flow −$ 24,750 9,875 10,250 12,655

A) 14.79% B) 13.58% C) 12.96% D) 13.67% E) 13.10%

81)

A project has the following cash flows. What is the internal rate of return? Year 0 1 2 3

Cash Flow −$ 111,000 49,650 52,300 36,450

A) 15.17% B) 13.41% C) 13.68% D) 12.53% E) 13.15%

82)

A project has the following cash flows. What is the internal rate of return? Year 0

Version 1

Cash Flow −$ 12,500 26

1 2 3 4

2,750 3,100 3,333 5,260

A) 5.43% B) 5.50% C) 5.92% D) 5.57% E) 5.53%

83) Chasteen, Incorporated, is considering an investment with an initial cost of $145,000 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 $75,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?

A) 21.44% B) 20.62% C) 17.43% D) 17.55% E) 19.36%

84) You are considering an investment for which you require a rate of return of 8.5 percent. The investment costs $53,500 and will produce cash inflows of $20,000 for three years. Should you accept this project based on its internal rate of return? Why or why not? A) Yes; because the IRR is 5.96% B) Yes; because the IRR is 9.56% C) Yes; because the IRR is 8.50% D) No; because the IRR is 9.56% E) No; because the IRR is 5.96%

Version 1

85) Performance Needlework needs to purchase a new machine costing $1.25 million. Management is estimating the machine will generate cash inflows of $175,000 the first year and $500,000 for the following three years. If management requires a minimum 10 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not? A) Yes, because the IRR is 10.75% B) Yes, because the IRR is 11.28% C) No, because the IRR is 10.75% D) No, because the IRR is 11.28% E) The answer cannot be determined as there are multiple IRRs

86) The Steel Factory is considering a project that will produce annual cash flows of $43,800, $40,000, $46,000, and $41,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $127,900? A) 13.00% B) 10.19% C) 11.28% D) 12.24% E) 12.89%

87) Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in Year 4. What is the internal rate of return if the initial cost of the project is $219,000? A) −9.43% B) −8.29% C) −7.81% D) −8.42% E) −7.55%

88) Miller Brothers is considering a project that will produce cash inflows of $32,500, $38,470, $40,805, and $41,268 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $184,600?

Version 1

A) −7.39% B) −6.77% C) −6.47% D) −7.62% E) −6.24%

89) You are considering the following two mutually exclusive projects. What is the crossover point? Year 0 1 2 3

Project A −$ 52,000 0 33,000 40,000

Project B −$ 52,000 12,000 29,000 27,000

A) 20.76% B) 23.72% C) 25.89% D) 18.79% E) 22.08%

90) You are considering the following two mutually exclusive projects. The crossover point is _____ percent and Project _____ should be accepted at a discount rate of 9 percent. Year 0 1 2 3

Project A −$ 69,000 13,000 33,000 38,000

Project B −$ 69,000 29,000 24,000 27,000

A) 15.68%; B B) 11.38%; A C) 11.38%; B D) 15.68%; A E) 14.02%; B

Version 1

91) You are considering the following two mutually exclusive projects. The crossover point is _____ and Project _____ should be accepted if the discount rate is 14 percent. Year 0 1 2 3

Project A −$ 43,000 18,000 18,000 28,000

Project B −$ 43,000 29,000 14,000 21,000

A) 13.28%; B B) 13.28%; A C) 0%; B D) 15.96%; A E) 15.96%; B

92) Soft and Cuddly is considering a new toy that will produce the following cash flows. Should the company produce this toy based on IRR if the firm requires a rate of return of 17.5 percent? Year 0 1 2 3

Cash Flow −$ 132,000 97,000 42,000 28,000

A) Yes, because the project's rate of return is 16.45 percent B) Yes, because the project's rate of return is 11.47 percent C) No, because the project's rate of return is 16.45 percent D) No, because the project's rate of return is 11.47 percent E) No, because the internal rate of return is zero percent

93) The Flour Baker is considering a project with the following cash flows. Should this project be accepted based on its internal rate of return if the required return is 18 percent? Year 0 1 2 3

Version 1

Cash Flow −$ 49,000.00 $ 8,500.00 $ 23,400.00 $ 38,000.00

A) Yes; because the project's rate of return is 7.78 percent. B) Yes; because the project's rate of return is 16.06 percent. C) Yes; because the project's rate of return is 19.47 percent. D) No; because the project's rate of return is 19.47 percent. E) No; because the project's rate of return is 16.06 percent.

94) The Black Horse is currently considering a project that will produce cash inflows of $11,000 a year for three years followed by $6,500 in Year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 9 percent? A) .85 B) .93 C) 1.04 D) 1.09 E) 1.12

95) A firm is reviewing a project that has an initial cost of $67,000. The project will produce annual cash inflows, starting with Year 1, of $8,000, $13,400, $18,600, $24,100, and finally in Year 5, $37,900. What is the profitability index if the discount rate is 11 percent? A) .92 B) .98 C) 1.02 D) 1.05 E) 1.09

96) A project has expected cash inflows, starting with Year 1, of $900, $1,200, $1,500, and finally in Year 4, $2,000. The profitability index is 1.11 and the discount rate is 12 percent. What is the initial cost of the project?

Version 1

A) $3,899.16 B) $4,098.24 C) $3,692.71 D) $3,211.06 E) $4,250.00

97) The net present value of a project's cash inflows is $2,716 at a discount rate of 12 percent. The profitability index is 1.09 and the firm's tax rate is 34 percent. What is the initial cost of the project? A) $2,314.07 B) $2,018.50 C) $2,428.32 D) $2,491.74 E) $2,066.67

98) You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? Year 0 1 2 3

Project A −$ 24,000 9,500 16,200 8,700

Project B −$ 21,000 6,500 9,800 15,200

A) Project A; because it pays back faster B) Project A; because it has the higher profitability index C) Project B; because it has the higher profitability index D) Project B; because it has the higher net present value E) Project A; because it has the higher net present value

99) You are considering the following two mutually exclusive projects. The required return on each project is 12 percent. Which project should you accept and what is the best reason for that decision? Year

Version 1

Cash Flow (A)

Cash Flow (B) 32

0 1 2 3

−$ 32,000 11,500 15,900 13,200

−$ 26,000 3,500 5,800 24,900

A) Project A, because it pays back faster B) Project A, because it has the higher internal rate of return C) Project B, because it has the higher internal rate of return D) Project A, because it has the higher net present value E) Project B, because it has the higher net present value

100) Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, which project(s), if either, should it accept? Year 0 1 2 3 4

Cash Flow (A) −$ 62,000 7,100 9,800 28,700 45,900

Cash Flow (B) −$ 26,000 15,600 8,400 1,900 1,100

A) Reject both Projects A and B B) Accept Project A but not Project B C) Accept Project B but not Project A D) Both Project A and B are acceptable but you can select only one project E) Accept both Projects A and B

101) You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $29 million, which will be depreciated straight-line to zero over its three-year life. If the plant has projected net income of $1,848,000, $2,080,000, and $2,720,000 over these three years, what is the project's average accounting return (AAR)?

Version 1

A) 14.69% B) 14.14% C) 15.03% D) 15.28% E) 14.21%

102)

What is the IRR of the following set of cash flows?

Year 0 1 2 3

Cash Flow −$ 61,300.00 $ 18,900.00 $ 64,500.00 $ 7,600.00

A) 12.93% B) 14.90% C) 23.86% D) 16.33% E) 22.68%

103) What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent? Year 0 1 2 3

Cash Flow −$ 21,400.00 $ 11,600.00 $ 13,500.00 $ 12,200.00

A) $0; −$665.07 B) $0; $6,916.59 C) $0; $7,208.19 D) $15,900; $6,788.38 E) $15,900; $6,916.59

104)

Chestnut Tree Farms has identified the following two mutually exclusive projects:

Version 1

Year 0 1 2 3 4

Cash Flow (A) −$ 40,000 11,300 14,800 13,700 7,900

Cash Flow (B) −$ 40,000 17,400 14,100 12,900 2,200

Over what range of discount rates would you choose Project A? A) 7.13 percent or less B) 7.13 percent or more C) 6.38 percent or more D) 6.38 percent or less E) 6.57 percent or more

105) Jefferson International is trying to choose between the following two mutually exclusive design projects: Year 0 1 2 3

Cash Flow (A) −$ 55,000 12,300 15,100 50,000

Cash Flow (B) −$ 29,000 19,400 16,600 900

The required return is 13 percent. If the company applies the profitability index (PI) decision rule, which project should the firm accept? If the company applies the NPV decision rule, which project should it take? Given your first two answers, which project should the firm actually accept? A) Project A; Project B; Project A B) Project A; Project B; Project B C) Project B; Project A; Project A D) Project B; Project A; Project B E) Project B; Project B, Project B

106)

Consider the following two mutually exclusive projects:

Year 0 1 2

Version 1

Cash Flow (A) −$ 54,000 12,700 23,200

Cash Flow (B) −$ 23,000 11,600 11,200

3 4

27,600 46,500

12,500 6,000

Whichever project you choose, if any, you require a rate of return of 14 percent on your investment. If you apply the payback criterion, you will choose Project ______; if you apply the NPV criterion, you will choose Project ______; if you apply the IRR criterion, you will choose Project _____; if you choose the profitability index criterion, you will choose Project ___. Based on your first four answers, which project will you finally choose? A) A; B; A; A; B B) A; A; B; B; A C) A; A; B; B; B D) B; A; B; A; A E) B; A; B; B; A

107) Textiles Unlimited has gathered projected cash flows for two projects. At what interest rate would the company be indifferent between the two projects? Which project is better if the required return is 12 percent? Year 0 1 2 3 4

Cash Flow (A) −$ 105,000 42,200 34,600 38,700 40,500

Cash Flow (B) −$ 105,000 52,600 39,400 35,500 30,100

A) 11.76%; A B) 12.49%; A C) 12.49%; B D) −4.44%; A E) −4.44%; B

108) Quattro, Incorporated, has the following mutually exclusive projects available. The company has historically used a four-year cutoff for projects. The required return is 11 percent. Year 0 1 2 3

Version 1

Cash Flow (A) −$ 50,000 6,000 9,000 20,000

Cash Flow (B) −$ 60,000 7,000 12,000 22,000

25,000

20,000

The payback for Project A is ____ while the payback for Project B is ____. The NPV for Project A is _____ while the NPV for Project B is ____. Which project, if any, should the company accept? A) 2.782 years; 3.25 years; $7,090.12; $12,011.48; accept both Projects B) 3.92 years; 3.79 years; −$6,197.89; $14,693.39; accept Project B only C) 3.60 years; 3.95 years; −$6,197.89; −$14,693.39; reject both projects D) 3.96 years; 3.42 years; $17,780.85; −$1,211.48; accept Project A only E) 4.06 years; 3.79 years; $211.60; −$7,945.93; accept Project A only

109)

Miller and Sons is evaluating a project with the following cash flows:

Year 0 1 2 3 4 5

Cash Flow −$ 72,000 29,100 20,600 42,500 24,300 9,800

The company uses a 10 percent interest rate on all of its projects. What is the MIRR of the project using the reinvestment approach? The discounting approach? The combination approach? A) 18.54%; 17.29%; 14.61% B) 13.96%; 14.38%; 14.61% C) 18.54%; 17.29%; 13.67% D) 13.96%; 17.85%; 13.67% E) 18.54%; 18.23%; 18.61%

110) What is the net present value of a project with the following cash flows if the discount rate is 9 percent? Year 0 1 2 3

Version 1

Cash Flow −$ 15,000.00 4,800.00 5,700.00 6,250.00

A) −$972.61 B) $972.61 C) −$892.30 D) $892.30 E) $812.90

111) What is the net present value of a project with the following cash flows if the discount rate is 13 percent? Year 0 1 2 3

Cash Flow −$ 75,000 32,500 45,000 50,000

A) −$17,126.22 B) $23,655.17 C) $20,933.78 D) $17,126.22 E) −$16,456.23

112) What is the net present value of a project that has an initial cost of $25,000 and produces cash inflows of $ 5,500 a year for 8 years if the discount rate is 7 percent? A) $3,635.04 B) $6,500.00 C) $7,842.14 D) $6,189.34 E) $5,712.03

113) Murphy’s Authentic is considering a project with an initial cost of $124,000. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $85,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 15 percent. What is the project's net present value?

Version 1

A) $105,222 B) $3,136.43 C) −$3,140.95 D) $131,000 E) $3,606.89

114) What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 14 percent? Year 0 1 2 3 4

Cash Flow −$ 35,000 10,000 10,000 12,000 15,000

A) $7,586; $1,332.46 B) $4,319.18; −$1,552.53 C) −$3,190.80; −$7,287.92 D) $12,000; $10,000 E) $7,220.90; $3,673.98

115) A proposed project requires an initial cash outlay of $25,000 for equipment and an additional cash outlay of $8,000 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $16,000 a year. What is the net present value of this project at a discount rate of 9 percent? A) $4,817.17 B) $4,864.53 C) $4,238.78 D) $2,873.44 E) $3,948.34

Version 1

116) John is considering a project with cash inflows of $1,750, $1,850, $2,000, and $2,550 over the next four years, respectively. The relevant discount rate is 14 percent. What is the net present value of this project if it the start-up cost is $5,000? A) $818.35 B) $947.56 C) −$600.00 D) $693.61 E) $379.75

117)

A project has the following cash flows. What is the payback period?

Year 0 1 2 3 4

Cash Flow −$ 20,000 8,000 11,000 12,000 15,000

A) 2.50 years B) 2.24 years C) 2.25 years D) 2.08 years E) 2.95 years

Version 1

Answer Key Test name: Chapter 08 Test Bank - Static 1) C 2) E 3) E 4) D 5) B 6) B 7) C 8) A 9) C 10) C 11) A 12) E 13) D 14) C 15) D 16) E 17) C 18) A 19) B 20) D 21) D 22) E 23) C 24) C 25) A 26) C Version 1

27) A 28) D 29) C 30) C 31) B 32) E 33) E 34) C 35) D 36) B 37) C 38) A 39) E 40) A 41) C 42) D 43) D 44) E 45) B 46) A 47) A NPV = −$27,500 + $14,800/1.12 + $19,400/1.122 + $5,200/1.123 NPV = $4,881.10

48) B NPV = −$55,000 + $21,500/1.09 + $24,750/1.092 + $29,450/1.093 NPV = $8,297.15

49) C PV of Annuity Enter

Version 1

13%

−$8,500.00

I/Y

Solve for

PMT

$46,123.07

NPV = −$40,000 + $46,123.07 = $6,123.07 50) E NPV = −$176,500 + $127,500/1.174 + $127,500/1.175 + $127,500/1.176 NPV = −$601.03 51) C Year 0 1 2 3 4

Enter

Cash Flow −$ 62,000.00 $ 16,500.00 $ 23,800.00 $ 27,100.00 $ 23,300.00 Sum

PV −$ 62,000.00 $ 14,372.82 $ 18,058.98 $ 17,911.98 $ 13,414.93 $ 1,758.71 1

14.8%

I/Y

Solve for

Enter

Version 1

$0.00

−$16,500.00

PMT

$0.00

−$23,800.00

$14,372.82

14.8%

I/Y

Solve for

Enter

Solve for

PMT

$0.00

−$27,100.00

PMT

$0.00

−$23,300.00

PMT

$18,058.98

14.8%

I/Y

Solve for

Enter

$17,911.98

14.8%

I/Y

$13,414.93

52) B NPV6% = −$47,500 + $12,500/1.06 + $18,500/1.062 + $21,500/1.063 + $22,000/1.064 NPV6% = $16,235.26 NPV12% = −$47,500 + $12,500/1.12 + $18,500/1.122 + $21,500/1.123 + $22,000/1.124 NPV12% = $7,693.47

53) A Version 1

PV of Annuity Enter

Solve for

10%

I/Y

−$75,000.00

PMT

$284,309.01

NPV = −$225,000 + 284,309 = $59,309.01 54) A NPV = −$75,000 + (−$25,000/1.122) + $50,000/1.1222 + $50,000/1.1223 + $50,000/1.1224 NPV = $9,385.06 55) A NPV = −$3,200 + $1,100/1.125 + $1,000/1.1252 + $1,050/1.1253 + $1,200/1.1254 NPV = $54.50 56) C NPV0% = −$37,800 + $11,600/1.0 + $11,600/1.02 + $20,000/1.03 NPV0% = $5,400 NPV5% = −$37,800 + $11,600/1.05 + $11,600/1.052 + $20,000/1.053 NPV5% = $1,045.91 NPV10% = −$37,800 + $11,600/1.10 + $11,600/1.102 + $20,000/1.103 NPV10% = −$2,641.47 57) D

Version 1

NPVJoe = −$25,500 + $15,800/1.085 + $15,300/1.0852 NPVJoe = $2,058.88 NPVRich = −$25,500 + $15,800/1.125 + $15,300/1.1252 NPVRich = $633.33 Both Joe and Rich should accept the project as both NPVs are positive. 58) E Year 0 1 2 3 4

Enter

Cash Flow −$ 110,000.00 $ 48,000.00 $ 52,500.00 $ 58,000.00 −$ 900.00 Sum

PV −$ 110,000.00 $ 41,884.82 $ 39,975.67 $ 38,536.67 −$ 521.80 $ 9,874.83 1

14.6%

I/Y

Solve for

Enter

Version 1

$0.00

−$48,000.00

PMT

$0.00

−$52,500.00

PMT

$41,884.82

14.6%

I/Y

Solve for

$39,975.15

Enter

14.6%

I/Y

Solve for

$0.00

−$58,000.00

PMT

$38,536.67

Enter

14.6%

I/Y

Solve for

$0.00

PMT

$900.00

−$521.80

59) A Year 0 1 2 3 4

Version 1

Cash Flow −$ 32,400.00 $ 10,620.00 $ 15,800.00 −$ 3,110.00 −$ 26,600.00

PV −$ 32,400.00 $ 9,550.36 $ 12,777.55 $ 2,261.76 $ 17,396.52

Sum Enter

$ 5,062.67 1

11.2%

I/Y

Solve for

Enter

11.2%

I/Y

Solve for

Version 1

PMT

$0.00

−$15,800.00

PMT

$0.00

$3,110.00

PMT

$0.00

−$26,600.00

PMT

$12,777.55

11.2%

I/Y

Solve for

Enter

−$10,620.00

$9,550.36

Solve for

Enter

$0.00

−$2,261.76

11.2%

I/Y

$17,396.52

60) B Year 0 1 2 3 4 5

Enter

Cash Flow −$ 11,520.00 $ 81.00 $ 650.00 $ 880.00 $ 2,300.00 $ 16,800.00 Sum

PV −$ 11,520.00 $ 75.70 $ 567.74 $ 718.34 $ 1,754.66 $ 11,978.17 $ 3,574.61 1

I/Y

Solve for

Enter

Version 1

−$81.00

PMT

$0.00

−$650.00

PMT

$0.00

−$880.00

PMT

$75.70

I/Y

Solve for

Enter

$0.00

$567.74

I/Y

Solve for

Enter

$718.34

I/Y

Solve for

Enter

$0.00

−$2,300.00

PMT

$0.00

−$16,800.00

PMT

$1,754.66

I/Y

Solve for

$11,978.17

61) B NPV = $11,400 + (−$2,500/1.0575) + (−$2,500/1.05752) + (−$9,500/1.05753) NPV = −$1,232.68

62) D Payback = 2 + ($10,000 − 1,800 − 3,600)/$5,000 = 2.92 years

63) C Payback = 2 + ($45,000 − 20,000 − 23,500)/$24,000 = 2.06 years

64) D Year 0 1 2 3

Version 1

Cash Flow −$ 75,000.00 $ 15,000.00 $ 23,000.00 $ 25,000.00 3 Years plus

Recovery Bal −$ 75,000.00 −$ 60,000.00 −$ 37,000.00 −$ 12,000.00

$ 25,000.00

$ 13,000.00

= $12,000.00/$25,000.00 = .48 years = 3.48 years

65) D Year 0 1 2 3 4

Cash Flow −$ 46,700.00 $ 10,000.00 $ 12,000.00 $ 12,000.00 $ 12,000.00 4 Years plus

Recovery Bal −$ 46,700.00 −$ 36,700.00 −$ 24,700.00 −$ 12,700.00 −$ 700.00

$ 12,000.00

$ 11,300.00

= $700.00/$12,000.00 = .06 years = 4.06 years 66) E The project never pays back because the total cash inflow is only $422,000. 67) D Payback = $284,000/$50,500 = 5.62 years 68) D Payback = 5 + ($419,000 − 0 − 0 − 69,000 − 98,000 − 109,000)/$145,000 = 5.99 years 69) C Payback = 2 + ($215,000 − 60,000 − 140,000)/$150,000 = 2.10 years Yes, the company should accept the expansion project because it pays back within the required 2.5 years. 70) A Payback period = 3 + ($16,700 − 2,100 − 6,800 − 6,900)/$7,300 = 3.12 years

71) B Payback = 2 + ($26,000 − 2,500 − 11,700)/$13,500 = 2.87 years 72) A AAR = [($16,900 + 25,300 + 27,700 + 18,400)/4]/[($393,000 + 0)/2] = .1123, or 11.23%

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73) E AAR = {[(4 × $11,000) + (4 × $24,000)]/8}/{($188,900 + 0)/2} = .1853, or 18.53% 74) D AAR = [($7,100 + 13,300 + 18,600 + 19,200)/4]/[($169,700 + 0)/2] = .1715, or 17.15% Because the AAR is less than the required rate, the equipment should not be purchased. 75) D AAR = [($15,600 + 14,200 + 13,500)/3]/[($167,000 + 0)/2] = .1729, or 17.29%

76) C AAR = [($189,400 + 178,600 + 172,500)/3]/[($2,700,000 + 0)/2] = .1335, or 13.35%. The AAR is greater than the requirement, so the investment should be accepted. 77) C Average net income = ($14,500 + 16,900 + 19,600 + 23,700)/4 = $18,675 Average book value = ($300,000 + 240,000 + 180,000 + 120,000 + 60,000)/5 = $180,000 AAR = $18,675/$180,000 = .1038, or 10.38%. The project should be accepted because the AAR is greater than the required return.

78) E AAR = [($27,000 + 24,800 + 37,500 + 45,000)/4]/[($462,000 + 0)/2] = .1453, or 14.53% Because the AAR is less than the required rate, the project should be rejected.

79) E AAR = {[($58,000 × 5) + ($52,000 × 5) + ($44,000 × 5)]/15}/[($628,000 + 0)/2] = .1635, or 16.35%

80) A NPV = 0 = −$24,750 + $9,875/(1 + IRR) + $10,250/(1 + IRR)2 + $12,655/(1 + IRR)3 IRR = 14.79%

81) D NPV = 0 = −$111,000 + $49,650/(1 + IRR) + $52,300/(1 + IRR)2 + $36,450/(1 + IRR)3 IRR = 12.53%

82) A

Version 1

NPV = 0 = −$12,500 + $2,750/(1 + IRR) + $3,100/(1 + IRR)2 + $3,333/(1 + IRR)3 + $5,260/(1 + IRR)4 IRR = 5.43%

83) B Year 0 1 2 3 4 IRR

Cash Flow −$ 145,000 75,000 75,000 30,000 30,000 20.62%

84) E NPV = 0 = −$53,500 + $20,000/(1 + IRR) + $20,000/(1 + IRR)2 + $20,000/(1 + IRR)3 IRR = 5.96% The project should be rejected because the IRR is less than the required rate. 85) B NPV = 0 = −$1,250,000 + $175,000/(1 + IRR) + $500,000/(1 + IRR)2 + $500,000/(1 + IRR)3 + $500,000/(1 + IRR)4 IRR = 11.28% The project should be accepted because the IRR is greater than the required rate. 86) E Year 0 1 2 3 4 IRR

Cash Flow −$ 127,900 43,800 40,000 46,000 41,800 12.89%

87) D Year 0 1

Version 1

Cash Flow −$ 219,000 41,650

2 3 4 IRR

41,650 41,650 49,000 −8.42%

88) B Year 0 1 2 3 4 IRR

Cash Flow −$ 184,600 32,500 38,470 40,805 41,628 −6.77%

89) E Year 0 1 2 3

Project A −$ 52,000 0 33,000 40,000

Project B −$ 52,000 12,000 29,000 27,000

A − B $ 0 −12,000 4,000 13,000

NPV = 0 = –$12,000/(1 + IRR) + $4,000/(1 + IRR)2 + $13,000/(1 + IRR)3 IRR = 22.08%

90) D Year 0 1 2 3

Project A −$ 69,000 13,000 33,000 38,000

Project B −$ 69,000 29,000 24,000 27,000

A − B $ 0 −16,000 9,000 11,000

NPV = 0 = −$16,000/(1 + IRR) + $9,000/(1 + IRR)2 + $11,000/(1 + IRR)3 IRR = 15.68% NPVA = −$69,000 + $13,000/1.09 + $33,000/1.092 + $38,000/1.093 NPVA = $45.02 NPVB = −$69,000 + $29,000/1.09 + $24,000/1.092 + $27,000/1.093 NPVB = −$1,345.22 The crossover point is 15.68 percent. At 9 percent, Project A has the higher net present value and should be accepted.

91) C Year 0 1 2

Version 1

Project A −$ 43,000 18,000 18,000

Project B −$ 43,000 29,000 14,000

A − B $ 0 −11,000 4,000

28,000

21,000

7,000

NPV = 0 = −$11,000/(1 + IRR) + $4,000/(1 + IRR) + $7,000/(1 + IRR)3 IRR = 0% NPVA = −$43,000 + $18,000/1.14 + $18,000/1.142 + $28,000/1.143 NPVA = $5,539.09 NPVB = −$43,000 + $29,000/1.14 + $14,000/1.142 + $21,000/1.143 NPVB = $7,385.54 The crossover point is 0%. At 14%, Project B has the higher net present value and should be accepted. 2

92) C Year CF0 CF1 CF2 CF3 CPT

Cash Flow −$ 132,000.00 $ 97,000.00 $ 42,000.00 $ 28,000.00 IRR

IRR = 16.45% The project should be rejected because its IRR is less than the required rate of return.

93) E Year CF0 CF1 CF2 CF3 CPT

Cash Flow −$ 49,000.00 $ 8,500.00 $ 23,400.00 $ 38,000.00 IRR

IRR = 16.06% The project should be rejected because its IRR is lower than the required return.

94) A PI = ($11,000/1.09 + $11,000/1.092 + $11,000/1.093 + $6,500/1.094)/$38,000 PI = .85 95) D PI = ($8,000/1.11 + $13,400/1.112 + $18,600/1.113 + $24,100/1.114 + $37,900/1.115)/$67,000 PI = 1.05 96) C

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PI = 1.11 = ($900/1.12 + $1,200/1.122 + $1,500/1.123 + $2,000/1.124)/Initial cost Initial cost = $3,692.71 97) D PI = 1.09 = $2,716/Initial cost Initial cost = $2,491.74 98) E NPVA = −$24,000 + $9,500/1.14 + $16,200/1.142 + $8,700/1.143 NPVA = $2,670.96 NPVB = −$21,000 + $6,500/1.14 + $9,800/1.142 + $15,200/1.143 NPVB = $2,502.10 Payback has several flaws and is not the best method of comparison. The profitability index should not be used to evaluate mutually exclusive projects of varying sizes. The decision should be made based on net present value.

99) D NPVA = −$32,000 + $11,500/1.12 + $15,900/1.122 + $13,200/1.123 NPVA = $338.74 NPVB = −$26,000 + $3,500/1.12 + $5,800/1.122 + $24,900/1.123 NPVB = −$527.95 Payback has several flaws and is not the best method of comparison. The profitability index should not be used to evaluate mutually exclusive projects of varying sizes. The decision should be made based on net present value.

100) E PaybackA = 3 + [($62,000 − 7,100 − 9,800 − 28,700)/$45,900] = 3.36 years PaybackB = 3 + [($26,000 − 15,600 − 8,400 − 1,900)/$1,100 = 3.09 years The firm should accept both projects.

101) D AAR = [($1,848,000 + 2,080,000 + 2,720,000)/3] + [($29,000,000 + 0)/2] AAR = .1528, or 15.28% 102) C Year CF0 CF1 CF2

Version 1

Cash Flow −$ 61,300.00 $ 18,900.00 $ 64,500.00

CF3 CPT

$ 7,600.00 IRR

IRR = 23.86%

103) E NPV0 percent = −$21,400 + 11,600/1.0 + 13,500/1.02 + 12,200/1.03 NPV0 percent = $15,900 NPV15 percent = −$21,400 + 11,600/1.15 + 13,500/1.152 + 12,200/1.153 NPV15 percent = $6,916.59

104) D Year 0 1 2 3 4

Cash Flow (A) −$ 40,000 11,300 14,800 13,700 7,900

Cash Flow (B) −$ 40,000 17,400 14,100 12,900 2,200

A − B $ 0 −6,100 700 800 5,700

NPV = 0 = −$6,100/(1 + IRR) + $700/(1 + IRR)2 + $800/(1 + IRR)3 + $5,700/(1 + IRR)4 IRR = 6.38% NPVA =−$40,000 + $11,300/1.05 + $14,800/1.052 + $13,700/1.053 + $7,900/1.054 NPVA = $2,519.87 NPVB =−$40,000 + $17,400/1.05 + $14,100/1.052 + $12,900/1.053 + $2,200/1.054 NPVB = $2,313.99 Project A is preferred if the discount rate is 6.38 percent, or less.

105) C PIA = ($12,300/1.13 + $15,100/1.132 + $50,000/1.133)/$55,000 = 1.04 PIB = ($19,400/1.13 + $16,600/1.132 + $900/1.133)/$29,000 = 1.06 NPVA = −$55,000 + $12,300/1.13 + $15,100/1.132 + $50,000/1.133 = $2,362.98 NPVB = −$29,000 + $19,400/1.13 + $16,600/1.132 + $900/1.133 = $1,792.12 The firm should select Project A because the PI rule should not be applied to mutually exclusive projects of differing sizes.

106) D

Version 1

PaybackA = ($54,000 − 12,700 − 23,200)/$27,600 = 2.66 years PaybackB = ($23,000 − 11,600 − 11,200)/$12,500 = 2.02 years PIA = ($12,700/1.14 + $23,200/1.142 + $27,600/1.143 + $46,500/1.144)/$54,000 = 1.39 PIB = ($11,600/1.14 + $11,200/1.142 + $12,500/1.143 + $6,000/1.144)/$23,000 = 1.34 IRRA = − $54,000 + $12,700/(1 + IRR) + $23,200/(1 + IRR)2 + $27,600/(1 + IRR)3 + $46,500/(1 + IRR)4 = 28.50 percent IRRB = −$23,000 + $11,600/(1 + IRR) + $11,200/(1 + IRR)2 + $12,500/(1 + IRR)3 + $6,000/(1 + IRR)4 = 30.94 NPVA = −$54,000 + $12,700/1.14 + $23,200/1.142 + $27,600/1.143 + $46,500/1.144 = $21,152.94 NPVB = −$23,000 + $11,600/1.14 + $11,200/1.142 + $12,500/1.143 + $6,000/1.144 = $7,783.10 The company should select Project A based on net present value. Payback ignores some cash flows and the time value of money. Neither the internal rate of return nor the profitability ratio are reliable methods when projects are mutually exclusive and of differing sizes.

107) E Year 0 1 2 3 4

Cash Flow (A) −$ 105,000 42,200 34,600 38,700 40,500

Cash Flow (B) −$ 105,000 52,600 39,400 35,500 30,100

A − B $ 0 −10,400 −4,800 3,200 10,400

NPV = 0 = [−$10,400/(1 + IRR)] + [−$4,800/(1 + IRR)2] + $3,200/(1 + IRR)3 + $10,400/(1+ IRR)4 IRR = −4.44 NPVA = −$105,000 + $42,200/1.12 + $34,600/1.122 + $38,700/1.123 + $40,500/1.124 = $13,545.86 NPVB = −$105,000 + $52,600/1.12 + $39,400/1.122 + $35,500/1.123 + $30,100/1.124 = $17,771.02

108) C PaybackA = 3 + ($50,000 − 6,000 − 9,000 − 20,000)/$25,000 = 3.60 years PaybackB = 3 + ($60,000 − 7,000 − 12,000 − 22,000)/$20,000 = 3.95 years NPVA = −$50,000 + $6,000/1.11 + $9,000/1.112 + $20,100/1.113 + $25,000/1.114 NPVA = −$6,197.89 NPVB = −$60,000 + $7,000/1.11 + $12,000/1.112 + $22,000/1.113 + $20,000/1.114 NPVB = −$14,693.39

109) D

Version 1

Reinvestment approach: FV = $29,100 × 1.104 + $20,600 × 1.103 + $42,500 × 1.102 + $24,300 × 1.10 + (−$9,800) = 138,378.91 NPV = 0 = −$72,000 + $138,378.91/(1 + IRR)5 IRR = 13.96% Discounting approach: PV = − $72,000 + (−$9,800/1.105) = −$78,085.03 NPV = 0 = −$78,085.03 + $29,100/(1 + IRR) + $20,600/(1 + IRR)2 + $42,500/(1 + IRR)3 + $24,300/(1 + IRR)4 IRR = 17.85% Combination approach: PV = − $72,000 + (−$9,800/1.105) = −$78,085.03 FV = $29,100 × 1.104 + $20,600 × 1.103 + $42,500 × 1.102 + $24,300 × 1.10 + (−$19,600) = $128,578.91 PV = 0 = −$78,085.03 + $128,578.91/(1 + IRR)5 IRR = 13.67%

110) A NPV = −$15,000 + $4,800/1.09 + $5,700/1.092 + $6,250/1.093 NPV = −$972.61 111) B NPV = −$75,000 + $32,500/1.13 + $45,000/1.132 + $50,000/1.133 NPV = $23,655.17 112) C PV of Annuity Enter

Solve for

I/Y

−$5,500.00

PMT

32,842.14

NPV = −$25,000 + 32,842.14 = $7,842.14 Version 1

113) E NPV = −$124,000 + $85,000/1.154 + $85,000/1.155 + $85,000/1.156 NPV = $3,606.89 114) B NPV7% = −$35,000 + $10,000/1.07 + $10,000/1.072 + $12,000/1.073 + $15,000/1.074 NPV7% = $4,319.18 NPV14% = −$35,000 + $10,000/1.14 + $10,000/1.142 + $12,000/1.143 + $15,000/1.144 NPV14% = −$1,552.53 115) A NPV = −$25,000 + (−$8,000/1.09 + $16,000/1.092 + $16,000/1.093 + $16,000/1.094) NPV = $4,817.17 116) A NPV = −$5,000 + $1,750/1.14 + $1,850/1.142 + $2,000/1.143 + $2,550/1.144 NPV = $818.35 117) D Payback = 2 + ($20,000 − 8,000 − 11,000)/$12,000 = 2.08 years

Version 1

Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Shelton Company purchased a parcel of land six years ago for $875,500. At that time, the firm invested $147,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $55,000 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $927,000. What value should be included in the initial cost of the warehouse project for the use of this land? A) $0 B) $1,022,500 C) $927,000 D) $875,500 E) $1,074,000

2) You own a house that you rent for $1,225 per month. The maintenance expenses on the house average $225 per month. The house cost $224,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $246,000. If you sell the house you will incur $19,680 in real estate fees. The annual property taxes are $2,750. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office? A) $224,000 B) $222,120 C) $246,000 D) $226,320 E) $0

3) Bubbly Waters currently sells 460 Class A spas, 610 Class C spas, and 360 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does, it can sell 535 units per year. However, if the new spa is added, Class A sales are expected to decline to 305 units while the Class C sales are expected to increase to 635. The sales of the deluxe model will not be affected. Class A spas sell for an average of $15,100 each. Class C spas are priced at $7,600 and the deluxe models sell for $18,600 each. The new mid-range spa will sell for $9,600. What annual sales figure should you use in your analysis?

Version 1

A) $2,150,500 B) $7,286,500 C) $5,136,000 D) $7,666,500 E) $2,985,500

4) McCanless Company recently purchased an asset for $3,000,000 that will be used in a 3year project. The asset is in the 3-year MACRS class. The depreciation percentage each year is 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. What is the amount of depreciation in Year 2? A) $222,300 B) $444,300 C) $999,900 D) $1,333,500 E) $1,000,000

5) A company purchased an asset for $3,700,000 that will be used in a 3-year project. The asset is in the 3-year MACRS class. The depreciation percentage each year is 33.33 percent, 44.45 percent, and 14.81 percent, respectively. What is the book value of the equipment at the end of the project? A) $3,425,830 B) $2,466,790 C) $0 D) $274,170 E) $822,140

6) A company is evaluating a new 4-year project. The equipment necessary for the project will cost $3,000,000 and can be sold for $665,000 at the end of the project. The asset is in the 5year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 21 percent. What is the aftertax salvage value of the equipment?

Version 1

A) $561,638 B) $665,000 C) $695,786 D) $634,214 E) $525,350

7) Brummitt Corporation, is evaluating a new 4-year project. The equipment necessary for the project will cost $3,050,000 and can be sold for $323,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 25 percent. What is the aftertax salvage value of the equipment? A) $323,000 B) $271,990 C) $286,170 D) $242,250 E) $374,010

8) Power Manufacturing has equipment that it purchased 6 years ago for $2,700,000. The equipment was used for a project that was intended to last for 8 years and was being depreciated over the life of the project. However, due to low demand, the project is being shut down. The equipment was depreciated using the straight-line method and can be sold for $430,000 today. The company's tax rate is 23 percent. What is the aftertax salvage value of the equipment? A) $528,900 B) $430,000 C) $458,175 D) $373,650 E) $486,350

9) A project is expected to generate annual revenues of $118,500, with variable costs of $75,100, and fixed costs of $15,600. The annual depreciation is $3,900 and the tax rate is 21 percent. What is the annual operating cash flow?

Version 1

A) $59,819 B) $31,700 C) $27,800 D) $44,219 E) $22,781

10) Bennett Company has a potential new project that is expected to generate annual revenues of $246,800, with variable costs of $137,200, and fixed costs of $56,200. To finance the new project, the company will need to issue new debt that will have an annual interest expense of $16,000. The annual depreciation is $21,800 and the tax rate is 22 percent. What is the annual operating cash flow? A) $42,196 B) $165,805 C) $58,196 D) $75,200 E) $114,396

11) Bi-Lo Traders is considering a project that will produce sales of $43,650 and have costs of $25,100. Taxes will be $4,400 and the depreciation expense will be $2,575. An initial cash outlay of $2,050 is required for net working capital. What is the project's operating cash flow? A) $12,100 B) $16,725 C) $9,525 D) $14,150 E) $11,575

12) You have calculated the pro forma net income for a new project to be $46,110. The incremental taxes are $22,680 and incremental depreciation is $16,740. What is the operating cash flow?

Version 1

A) $46,110 B) $85,530 C) $68,790 D) $29,370 E) $62,850

13) Rock Haven has a proposed project that will generate sales of 1,950 units annually at a selling price of $38 each. The fixed costs are $20,900 and the variable costs per unit are $12.35. The project requires $37,600 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $10,100 and the tax rate is 22 percent. What is the operating cash flow? A) $27,261 B) $20,644 C) $30,984 D) $24,780 E) $8,474

14) A gym owner is considering opening a location on the other side of town. The new facility will cost $1.46 million and will be depreciated on a straight-line basis over a 20-year period. The new gym is expected to generate $557,000 in annual sales. Variable costs are 50 percent of sales, the annual fixed costs are $90,100, and the tax rate is 22 percent. What is the operating cash flow? A) $57,508 B) $380,242 C) $163,012 D) $219,952 E) $204,460

15) A cost-cutting project will decrease costs by $64,700 a year. The annual depreciation will be $14,700 and the tax rate is 22 percent. What is the operating cash flow for this project?

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A) $17,468 B) $53,700 C) $11,000 D) $50,466 E) $47,232

16) The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $322,000 and expenses by $220,000. The project will require $129,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 7-year life of the project. The company has a marginal tax rate of 25 percent. What is the depreciation tax shield? A) $9,167 B) $25,500 C) $4,607 D) $11,500 E) $16,125

17) Seeing Red has a new project that will require fixed assets of $923,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company has a tax rate of 25 percent. What is the depreciation tax shield for Year 3? A) $46,150 B) $73,840 C) $26,582 D) $44,304 E) $38,458

Version 1

18) Pear Orchards is evaluating a new project that will require equipment of $245,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $64,500. However, the company plans to keep the equipment for a different project in another state. The tax rate is 21 percent. What aftertax salvage value should the company use when evaluating the current project? A) $0 B) $69,154 C) $59,846 D) $64,500 E) $42,336

19) A 4-year project has an annual operating cash flow of $48,500. At the beginning of the project, $3,950 in net working capital was required, which will be recovered at the end of the project. The firm also spent $21,800 on equipment to start the project. This equipment will have a book value of $4,420 at the end of the project, but can be sold for $5,490. The tax rate is 24 percent. What is the Year 4 cash flow? A) $56,622 B) $57,683 C) $49,783 D) $12,896 E) $58,197

20) Burke's Corner currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory to provide a cooler weather option. The tops would sell for $57 each with expected sales of 4,100 tops annually. By adding the fleece tops, management feels the firm will sell an additional 265 pairs of jeans at $69 a pair and 400 fewer T-shirts at $30 each. The variable cost per unit is $37 on the jeans, $21 on the T-shirts, and $33 on the fleece tops. With the new item, the depreciation expense is $37,000 a year and the fixed costs are $74,000 annually. The tax rate is 23 percent. What is the project's operating cash flow?

Version 1

A) $17,996 B) $36,600 C) $15,244 D) $31,056 E) $23,540

21) Go Fly A Kite is considering making and selling custom kites in two sizes. The small kites would be priced at $11.30 and the large kites would be $24.30. The variable cost per unit is $5.45 and $11.90, respectively. Jill, the owner, feels that she can sell 3,000 of the small kites and 1,820 of the large kites each year. The fixed costs would be $2,120 a year and the depreciation expense is $1,300. The tax rate is 24 percent. What is the annual operating cash flow? A) $9,432 B) $28,878 C) $32,034 D) $30,802 E) $29,190

22) A project will reduce costs by $36,400 but increase depreciation by $16,900. What is the operating cash flow if the tax rate is 24 percent? A) $21,580 B) $31,720 C) $27,664 D) $12,792 E) $40,508

23) A project has annual depreciation of $25,500, costs of $101,900, and sales of $150,500. The applicable tax rate is 22 percent. What is the operating cash flow?

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A) $16,302 B) $43,518 C) $57,798 D) $37,908 E) $123,000

24) King Nothing is evaluating a new 6-year project that will have annual sales of $440,000 and costs of $302,000. The project will require fixed assets of $540,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 24 percent. What is the operating cash flow for Year 3? A) $119,810 B) $129,763 C) $126,480 D) $183,677 E) $58,003

25) A company is considering a new 6-year project that will have annual sales of $195,000 and costs of $120,000. The project will require fixed assets of $239,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 23 percent. What is the operating cash flow for Year 2? A) $75,340 B) $34,840 C) $64,083 D) $68,304 E) $66,912

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26) Bad Company has a new 4-year project that will have annual sales of 8,200 units. The price per unit is $19.70 and the variable cost per unit is $7.45. The project will require fixed assets of $92,000, which will be depreciated on a 3-year MACRS schedule. The annual depreciation percentages are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. Fixed costs are $32,000 per year and the tax rate is 23 percent. What is the operating cash flow for Year 3? A) $18,877 B) $61,191 C) $57,997 D) $80,480 E) $55,840

27) A project with a life of 9 years is expected to provide annual sales of $370,000 and costs of $261,000. The project will require an investment in equipment of $655,000, which will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-10 percent. The tax rate is 23 percent. What is the annual operating cash flow for the best-case scenario? A) $56,322 B) $102,789 C) $52,082 D) $149,256 E) $132,517

28) A 5-year project is expected to provide annual sales of $173,000 with costs of $91,500. The equipment necessary for the project will cost $300,000 and will be depreciated on a straightline method over the life of the project. You feel that both sales and costs are accurate to +/-15 percent. The tax rate is 23 percent. What is the annual operating cash flow for the worst-case scenario? A) $46,005 B) $23,420 C) $41,670 D) $32,205 E) $107,105

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29) A 6-year project is expected to generate annual sales of 8,500 units at a price of $72 per unit and a variable cost of $43 per unit. The equipment necessary for the project will cost $285,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $170,000 per year and the tax rate is 21 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price? A) $3,914 B) $4,447 C) $6,715 D) $6,044 E) $4,979

30) Sun Brite has a new pair of sunglasses it is evaluating. The company expects to sell 6,600 pairs of sunglasses at a price of $161 each and a variable cost of $113 each. The equipment necessary for the project will cost $345,000 and will be depreciated on a straight-line basis over the 5-year life of the project. Fixed costs are $270,000 per year and the tax rate is 22 percent. How sensitive is the operating cash flow to a $1 increase in variable costs per pairs of sunglasses? A) $5,148 B) $4,633 C) −$5,148 D) −$4,633 E) −$5,720

31) Bruno's Lunch Counter is expanding and expects operating cash flows of $20,800 a year for 5 years as a result. This expansion requires $57,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $5,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 14 percent?

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A) $16,724 B) $17,653 C) $15,609 D) $14,408 E) $12,005

32) Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $56,000 per year for 7 years. At the beginning of the project, inventory will decrease by $16,800, accounts receivables will increase by $21,400, and accounts payable will increase by $15,300. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $252,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating an aftertax cash flow of $50,000. What is the net present value of this project given a required return of 10.1 percent? A) $50,143 B) $48,281 C) $50,475 D) $60,963 E) $57,974

33) Gateway Communications is considering a project with an initial fixed assets cost of $1.74 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $232,000. The project will not change sales but will reduce operating costs by $383,500 per year. The tax rate is 23 percent and the required return is 10.7 percent. The project will require $48,000 in net working capital, which will be recouped when the project ends. What is the project's NPV? A) $337,457 B) $293,846 C) $348,705 D) $281,070 E) $324,478

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34) Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $9,900 per year and will cut annual operating costs by $13,500. The system will cost $46,800 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent and the required return is 12.6 percent. What is the NPV of purchasing the pressure cooker? A) $-3,083 B) $25,841 C) −$22,365 D) −$29,717 E) $45,123

35) The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $1.59 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The company believes that it can sell 26,000 tents per year at a price of $69 and variable costs of $29 per tent. The fixed costs will be $445,000 per year. The project will require an initial investment in net working capital of $213,000 that will be recovered at the end of the project. The required rate of return is 11.2 percent and the tax rate is 23 percent. What is the NPV? A) $1,384,380 B) $1,014,610 C) $857,840 D) $644,840 E) $736,960

36) Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $661,000 that would be depreciated on a straight-line basis to zero over the 4-year life of the project. The equipment will have a market value of $174,000 at the end of the project. The project requires $44,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $198,900 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 22 percent?

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A) –$33,511 B) −$37,234 C) −$28,275 D) −$40,099 E) −$19,054

37) Cirice Corporation is considering opening a branch in another state. The operating cash flow will be $151,600 a year. The project will require new equipment costing $565,000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $159,000 at the end of the project. The project requires an initial investment of $36,500 in net working capital, which will be recovered at the end of the project. The tax rate is 24 percent. What is the project's IRR? A) 17.91% B) 17.23% C) 14.27% D) 16.39% E) 18.64%

38) Outdoor Sports is considering adding a putt putt golf course to its facility. The course would cost $171,000, would be depreciated on a straight-line basis over its 4-year life, and would have a zero salvage value. The sales would be $98,400 a year, with variable costs of $27,900 and fixed costs of $12,500. In addition, the firm anticipates an additional $19,300 in revenue from its existing facilities if the putt putt course is added. The project will require $3,100 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 15 percent and a tax rate of 23 percent? A) $25,675 B) $28,775 C) $27,003 D) $91,582 E) $16,753

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39) Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $175,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $112,000, variable costs of $29,500, and fixed costs of $12,350. The project will also require net working capital of $2,950 that will be returned at the end of the project. The company has a tax rate of 25 percent and the project's required return is 11 percent. What is the net present value of this project?

A) $15,536 B) $19,997 C) $18,922 D) $17,935 E) $16,948

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Answer Key Test name: Chapter 09 Test Bank - Algo 1) C The opportunity cost of the building is what it could be sold for today, or $927,000 2) D Opportunity cost = $246,000 − 19,680 Opportunity cost = $226,320 3) E Sales = 535($9,600) + (305 − 460)($15,100) + (635 − 610)($7,600) Sales = $2,985,500 4) D Year 2 depreciation = .4445($3,000,000) Year 2 depreciation = $1,333,500 5) D Book value = $3,700,000 − 3,700,000(.3333 + .4445 + .1481) Book value = $274,170 6) D Book value = $3,000,000(.1152 + .0576) Book value = $518,400 Tax refund (due) = ($518,400 − 665,000)(.21) Tax refund (due) = −$30,786 Aftertax salvage value = $665,000 − 30,786 Aftertax salvage value = $634,214 7) E

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Book value = $3,050,000(.1152 + .0576) Book value = $527,040 Tax refund (due) = ($527,040 − 323,000)(.25) Tax refund (due) = $51,010 Aftertax salvage value = $323,000 + 51,010 Aftertax salvage value = $374,010 8) E Annual depreciation = $2,700,000/8 Annual depreciation = $337,500 Book value = $2,700,000 − 6($337,500) Book value = $675,000 Tax refund (due) = ($675,000 − 430,000)(.23) Tax refund (due) = $56,350 Aftertax salvage value = $430,000 + 56,350 Aftertax salvage value = $486,350 9) E OCF = ($118,500 − 75,100 − 15,600)(1 − .21) + .21($3,900) OCF = $22,781 10) C OCF = ($246,800 − 137,200 − 56,200)(1 − .22) + .22($21,800) OCF = $58,196 11) D OCF = $43,650 − 25,100 − 4,400 OCF = $14,150 12) E OCF = $46,110 + 16,740 OCF = $62,850 13) D OCF = [1,950($38 − 12.35) − $20,900](1 − .22) + .22($37,600/4) OCF = $24,780 Version 1

14) C OCF = [$557,000 − .50($557,000) − 90,100](1 − .22) + .22($1,460,000/20) OCF = $163,012 15) B OCF = $64,700(1 − .22) + .22($14,700) OCF = $53,700 16) C Depreciation tax shield = .25($129,000/7) Depreciation tax shield = $4,607 17) D Depreciation tax shield = .25($923,000(.1920)) Depreciation tax shield = $44,304 18) C Book value = $245,000 − 245,000(.2000 + .3200 + .1920 + .1152) Book value = $42,336 Tax refund (due) = ($42,336 − 64,500)(.21) Tax refund (due) = −$4,654 Aftertax salvage value = 64,500 − 4,654 Aftertax salvage value = $59,846 19) B Cash flow = $48,500 + 3,950 + 5,490 + .24($4,420 − 5,490) Cash flow = $57,683 20) D OCF = [4,100($57 − 33) + 265($69 − 37) − 400($30 − 21) − 74,000](1 − .23) + .23($37,000) Cash flow = $31,056 21) E

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OCF = [3,000($11.30 − 5.45) + 1,820($24.30 − 11.90) − 2,120](1 − .24) + .24($1,300) Cash flow = $29,190 22) B OCF = $36,400(1 − .24) + .24($16,900) OCF = $31,720 23) B OCF = ($150,500 − 101,900)(1 − .22) + .22($25,500) OCF = $43,518 24) B OCF = ($440,000 − 302,000)(1 − .24) + .24(.1920)($540,000) OCF = $129,763 25) A OCF = ($195,000 − 120,000)(1 − .23) + .23(.3200)($239,000) OCF = $75,340 26) E OCF = [8,200($19.70 − 7.45) − 32,000](1 − .23) + .23(.1481)($92,000) OCF = $55,840 27) D OCF = [$370,000(1.10) − 261,000(.90)](1 − .23) + .23($655,000/9) OCF = $149,256 28) A OCF = [$173,000(.85) − 91,500(1.15)](1 − .23) + .23($300,000/5) OCF = $46,005 29) C

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Base OCF = [8,500($72 − 43) − 170,000](1 − .21) + .21($285,000/6) Base OCF = $70,410 New OCF = [8,500($73 − 43) − 170,000](1 − .21) + .21($285,000/6) Base OCF = $77,125 Change in OCF = ($70,410 − 77,125)/(72 − 73) Change in OCF = $6,715 30) C Base OCF = [6,600($161 − 113) − 270,000](1 − .22) + .22($345,000/5) Base OCF = $51,684 New OCF = [6,600($161 − 114) − 270,000](1 − .22) + .22($345,000/5) Base OCF = $46,536 Change in OCF = ($51,684 − 46,536)/(113 − 114) Change in OCF = −$5,148 31) E NPV = 0 = −$57,000 − 5,000 + 20,800(PVIFA14%,5) + 5,000/1.145 NPV = $12,005 32) C Year 0 CF = −$252,000 + 16,800 − 21,400 + 15,300 Year 0 CF = −$241,300 Year 7 CF (w/o OCF) = $50,000 − 16,800 + 21,400 − 15,300 Year 7 CF (w/o OCF) = $39,300 NPV = −$241,300 + 56,000(PVIFA10.1%,7) + 39,300/1.1017 NPV = $50,475 33) B

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Year 0 CF = −$1,740,000 − 48,000 Year 0 CF = −$1,788,000 OCF = $383,500(1 − .23) + .23($1,740,000/10) OCF = $335,315 Year 10 CF (w/o OCF) = $48,000 + 232,000(1 − .23) Year 10 CF (w/o OCF) = $226,640 NPV = −$1,788,000 + 335,315(PVIFA10.7%,10) + 226,640/1.10710 NPV = $293,846 34) B OCF = ($9,900 + 13,500)(1 − .21) + .21($46,800/5) OCF = $20,452 NPV = −$46,800 + 20,452(PVIFA12.6%,5) NPV = $25,841 35) D Aftertax salvage value = ($1,590,000 × .10)(1 − .23) Aftertax salvage value = $122,430 OCF = [26,000($69 − 29) − 445,000](1 − .23) + .23($1,590,000/7) OCF = $510,393 NPV = −$1,590,000 − 213,000 + 510,393(PVIFA11.2%,7) + (122,430 + 213,000)/1.1127 NPV = $644,840 36) E NPV = −$661,000 − 44,000 + $198,900(PVIFA14%,4) + [$44,000 + (1 − .22)($174,000)]/1.144 NPV = −$19,054 37) B IRR = 0 = −$565,000 − 36,500 + $151,600(PVIFAIRR,6) + [$36,500 + (1 − .24)($159,000)]/(1 + IRR)6 IRR = 17.23%

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38) A OCF = ($98,400 + 19,300 − 27,900 − 12,500)(1 − .23) + .23($171,000/4) OCF = $69,354 NPV = −$171,000 − 3,100 + $69,354(PVIFA15%,4) + $3,100/1.154 NPV = $25,675 39) C Year 1 OCF = ($112,000 − 29,500 − 12,350)(1 − .25) + .25($175,000 × .3333) = $67,194 Year 2 OCF = ($112,000 − 29,500 − 12,350)(1 − .25) + .25($175,000 × .4445) = $72,059 Year 3 OCF = ($112,000 − 29,500 − 12,350)(1 − .25) + .25($175,000 × .1481) = $59,092 Year 4 OCF = ($112,000 − 29,500 − 12,350)(1 − .25) + .25($175,000 × .0741) = $55,854 NPV = −$175,000 − 2,950 + $67,194/1.12 + $72,059/1.122 + $59,092/1.123 + ($55,854 + 2,950)/1.124 NPV = $18,922

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as: A) eroded cash flows. B) deviated projections. C) incremental cash flows. D) directly impacted flows. E) opportunity cash flows.

2) Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? A) Forecast assumption principle B) Base assumption principle C) Fallacy principle D) Erosion principle E) Stand-alone principle

3) A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n): A) fixed cost. B) forgotten cost. C) variable cost. D) opportunity cost. E) sunk cost.

4) Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

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A) Side effect B) Erosion C) Sunk cost D) Opportunity cost E) Marginal cost

5) Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? A) Opportunity cost B) Sunk cost C) Erosion D) Replicated flows E) Pirated flows

A pro forma financial statement is a financial statement that: A) expresses all values as a percentage of either total assets or total sales. B) compares actual results to the budgeted amounts. C) compares the performance of a firm to its industry. D) projects future years' operating results. E) values all assets based on their current market values.

7) The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: A) tax shield. B) credit. C) erosion. D) opportunity cost. E) adjustment.

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8) Which one of the following refers to a method of increasing the rate at which an asset is depreciated? A) Noncash expense B) Straight-line depreciation C) Depreciation tax shield D) Accelerated cost recovery system E) Market-based depreciation

Forecasting risk is best defined as: A) reality risk. B) value risk. C) potential risk. D) management risk. E) estimation risk.

10) Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as: A) sensitivity analysis. B) erosion planning. C) scenario analysis. D) benefit planning. E) opportunity evaluation.

11) Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted? A) Sensitivity analysis B) Erosion planning C) Scenario analysis D) Benefit-cost analysis E) Opportunity cost analysis

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12) The opportunities that a manager has to modify a project once the project has started are called: A) sensitivity choices. B) managerial options. C) scenario adjustments. D) restructuring options. E) erosion control measures.

13)

Contingency planning focuses on the: A) opportunity costs involved with a project. B) sunk costs related to a project. C) economic effects on a project's profitability. D) managerial options implicit in a project. E) optional capital requirements of a project.

14) Which one of the following refers to the option to expand into related businesses in the future? A) Strategic option B) Contingency option C) Soft rationing D) Hard rationing E) Capital rationing option

15) Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best fits the situation facing the firm?

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A) Sensitivity analysis B) Capital rationing C) Soft rationing D) Contingency planning E) Sunk cost

16) Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called: A) soft rationing. B) hard rationing. C) opportunity cost allocation. D) divisional separation. E) strategic planning.

17) Dismal Outlook is unable to obtain financing for any new projects under any circumstances. This company is faced with: A) contingency planning. B) soft rationing. C) hard rationing. D) real options. E) sunk costs.

18) The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all the following in its analysis with the exception of:

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A) any expected changes in the sales levels of current products caused by adding the new product line. B) the cost of new display counters for the additional winter footwear. C) increased taxes from winter footwear profits. D) the research and development costs to produce the current winter footwear samples. E) the expected revenue from winter footwear sales.

19) Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. All the following are relevant costs to this project with the exception of: A) the cost of additional utilities required to operate the serving tray production operation. B) any change in the expected sales of plates and silverware gained from offering trays also. C) a percentage of the current operating overhead. D) the additional plastic raw materials that would be required. E) the cost to acquire the forms needed to mold the trays.

20) The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land? A) The sum of the cash paid to date for both the lot and the improvements B) The original purchase price only C) The current market value of the land plus the cash paid for the improvements D) The current market value of the land E) Zero because the land and the improvements were previously purchased with cash

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21) Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost? A) Erosion B) Book C) Sunk D) Market E) Opportunity

22) Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years. A) New tires that will be purchased this winter B) Costs of repairs needed so the truck can pass inspection next month C) Money spent last month repairing a damaged front fender D) Engine tune-up that is scheduled for this afternoon E) Cost for a truck driver for the remainder of the truck's useful life

23) CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project? A) Present value of the future income B) Cost of the remodeling C) Current market value of the building D) Initial cost of the building plus the remodeling costs E) Current market value of the building plus the remodeling costs

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24) Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, originally cost $1.8 million, is currently fully paid for, but needs modernized. Bruce is trying to decide whether to accept an offer and sell Beef and More, as is, for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause an aftertax net loss of $90,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant is $3.2 million. When analyzing the renovation project, what cost, if any, should be included for the current restaurant? A) $0 B) $1.1 million C) $1.1 million + $90,000 D) $1.8 million + 1.3 million + 90,000 E) $3.2 million − ($1.8 million + 1.3 million + 90,000)

25) Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's store. The cost of the expansion will be $148,000. She can use this additional space to add children’s clothing, an exclusive gifts department, or a home decor section. She estimates the present value of the cash inflows from these projects are $121,000 for children’s clothing, $178,000 for exclusive gifts, and $145,000 for decorator items. Which option(s), if any, should she accept? A) Children’s clothing only B) Exclusive gifts only C) Exclusive gifts and decorator items only D) All three options E) None of these options

26) Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis except the cost of the:

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A) property insurance premium increase. B) exterior landscaping that will be required once the expansion is complete. C) additional sales person that will be required. D) inventory required to fill the additional retail space. E) blueprints that have been drawn of the expansion area.

27) Thrill Rides is considering adding a new roller coaster to its amusement park. The addition is expected to increase its overall ticket sales. In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. All the following are side effects associated with the new roller coaster with the exception of the: A) increased food sales. B) additional sales for the existing coaster. C) increased food costs. D) reduced sales for the boat ride. E) ticket sales for the new coaster.

28)

The analysis of a new project should exclude: A) tax effects. B) erosion effects. C) side effects. D) sunk costs. E) opportunity costs.

29)

The net working capital invested in a project is generally: A) a sunk cost. B) an opportunity cost. C) recouped in the first year of the project. D) recouped at the end of the project. E) depreciated to a zero balance over the life of the project.

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30)

A proposed project will increase a firm's accounts payable. This increase is generally: A) treated as an erosion cost. B) treated as an opportunity cost. C) a sunk cost and should be ignored. D) a cash outflow at Time zero and a cash inflow at the end of the project. E) a cash inflow at Time zero and a cash outflow at the end of the project.

31)

Which of the following create cash inflows from net working capital? A) Decrease in accounts payable and increase in accounts receivable B) Decrease in both accounts receivable and accounts payable C) Increase in accounts payable and decrease in inventory D) Increase in both accounts receivable and inventory E) Increase in inventory and decrease in cash

32) The pro forma income statements for a proposed investment should include all the following except: A) fixed costs. B) forecasted sales. C) depreciation expense. D) taxes. E) changes in net working capital.

33) Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $75,000 worth of equipment last year that has a tax life of 5 years. The 5-year MACRS percentage rates, starting with Year 1, are: 20, 32, 19.2, 11.52, 11.52, and 5.76 percent. Both firms have a marginal tax rate of 21 percent and identical operating cash flows except for the depreciation effects. Given this, you know the:

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A) depreciation expense for Firm A will be greater than Firm B's expense every year. B) equipment has a higher value on Firm B's books than on Firm A's at the end of Year 2. C) operating cash flow of Firm A is greater than that of Firm B for Year 3. D) market value of Firm A's equipment is greater than the market value of Firm B's at end the first year. E) market value of Firm B's equipment is greater than the market value of Firm A's equipment at the end of Year 2.

34)

Assume an all-equity firm has positive net earnings. The operating cash flow of this firm: A) ignores both depreciation and taxes. B) is unaffected by the depreciation expense. C) must be negative. D) increases when the tax rate decreases. E) is equal to net income minus depreciation.

35)

The operating cash flows of a project: A) are unaffected by the depreciation method selected. B) are equal to the project's total projected net income. C) decrease when net working capital increases. D) include any aftertax salvage values. E) include erosion effects.

36)

The tax shield approach to computing the operating cash flow, given a tax-paying firm: A) ignores both interest expense and taxes. B) separates cash inflows from cash outflows. C) considers the changes in net working capital resulting from a new project. D) ignores all noncash expenses and their effects. E) recognizes that depreciation creates a cash inflow.

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37) Which one of the following will increase the operating cash flow as computed using the tax shield approach? A) Decrease in depreciation B) Decrease in sales C) Increase in variable costs D) Decrease in fixed costs E) Increase in the tax rate

38)

Scenario analysis is best described as the determination of the: A) most likely outcome for a project. B) reasonable range of project outcomes. C) variable that has the greatest effect on a project's outcome. D) effect that a project's initial cost has on the project's net present value. E) change in a project's net present value given a stated change in projected sales.

39) Which one of the following is a correct value to use if you are conducting a best-case scenario analysis? A) Sales price that is most likely to occur B) Lowest expected level of sales quantity C) Lowest expected salvage value D) Highest expected need for net working capital E) Lowest expected value for fixed costs

40)

Scenario analysis asks questions such as: A) How will changing the number of units sold affect the outcome of this project? B) What is the best outcome that should reasonably be expected? C) How much will a $1 increase in the variable cost per unit change the net present

value? D) Will the net present value increase or decrease if the quantity sold increases by 100 units? E) How will the operating cash flow change if the depreciation method is changed?

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41)

Scenario analysis:

A) determines the impact a $1 change in sales has on a project’s internal rate of return. B) determines which variable has the greatest impact on a project's net present value. C) helps determine the reasonable range of expectations for a project's anticipated outcome. D) evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return. E) determines the absolute worst and absolute best outcome that could ever occur.

42)

Sensitivity analysis:

A) looks at the most reasonably optimistic and pessimistic results for a project. B) helps identify the variable within a project that presents the greatest forecasting risk. C) is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional. D) is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. E) illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.

43) Turner Industries started a new project three months ago. Sales arising from this project are significantly less than anticipated. Given this, which one of the following is management most apt to implement? A) Option to wait B) Soft rationing C) Option to delay D) Option to expand E) Option to abandon

44)

Ignoring the option to wait:

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A) may overestimate the internal rate of return on a project. B) may underestimate the net present value of a project. C) ignores the ability of a manager to increase output after a project has been implemented. D) is the same as ignoring all strategic options. E) ignores the value of discontinuing a project early.

45) Which one of these has the least potential to increase the net present value of a proposed investment? Assume the project has a positive net present value in at least one set of circumstances. A) Ability to wait until the economy improves before making the investment B) Ability to immediately shut down a project should the project become unprofitable C) Option to increase production beyond that initially projected D) Option to place the investment on hold until a more favorable discount rate becomes available E) Option to discontinue a project at the end of its intended life

46)

The ability to delay an investment:

A) is commonly referred to as the best-case scenario. B) is valuable provided there are conditions under which the investment will have a positive net present value. C) ensures that the investment will have an expected net present value that is positive. D) offsets the need to conduct sensitivity analysis. E) is referred to as the option to abandon.

47) Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation?

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A) Division managers will be limited to accepting a single new project each. B) Division managers are being given blanket approval to accept all positive net present value projects. C) Division managers should expect to be treated equally, at least initially, in the capital distribution process. D) Division managers will not receive any funding for new projects but will be allowed to expand current operations. E) Division managers will not receive capital funding for any project.

48)

When a firm faces hard rationing,

A) all positive net present value projects will be accepted. B) each division within a firm will be allocated an amount for capital expenditures that will be less than the total value of its positive net present value projects. C) there will be no available funds for capital expenditures. D) the firm will fund only those projects that create value for its shareholders. E) the firm will finance only the projects that have the highest profitability index values.

49) The Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $480 for the press as scrap metal. The press is six years old and originally cost $174,000. The current book value is $3,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project? A) $0 B) $480 C) $3,570 D) $3,090 E) $4,050

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50) Left Eye Promotions is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $27,000 of T-shirts, $21,000 of sweatshirts, and $3,500 of caps. The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $25,000 of T-shirts, $17,000 of sweatshirts, $14,000 of Polo shirts, and $3,000 of caps. What sales amount should be used when evaluating the Polo shirt project? A) $13,300 B) $7,500 C) $6,700 D) $6,800 E) $7,900

51) Sherpa Outfitters sells specialty equipment for mountain climbers. Its sales for last year included $488,500 of tents and $800,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $537,350 of tents, $880,000 of climbing gear, and $150,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings? A) $0 B) $145,650 C) $128,850 D) $278,850 E) $256,850

52) Floral Shoppes has a new project in mind that will increase accounts receivable by $19,000, increase accounts payable by $4,000, increase fixed assets by $27,000, and decrease inventory by $2,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project? A) −$25,000 B) −$17,000 C) −$21,000 D) −$13,000 E) −$52,000

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53) British Metals is reviewing its current accounts to determine how a proposed project might affect the account balances. The firm estimates the project will initially require $81,000 in additional current assets and $57,000 in additional current liabilities. The firm also estimates the project will require an additional $9,000 a year in current assets in each of the first three of the four years of the project. How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured? A) $105,000 B) $24,000 C) $48,000 D) $68,000 E) $51,000

54) Shannon’s Irish Cookware is implementing a project that will initially increase accounts payable by $5,000, increase inventory by $3,200, and decrease accounts receivable by $1,800. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project? A) $500,00 B) $600 C) −$3,600 D) $2,500 E) $5,600

55) Jim's Hardware is adding a new product to its sales lineup. Initially, the firm will stock $36,000 of the new inventory, which will be purchased on 30 days' credit from a supplier. The firm will also invest $24,000 in accounts receivable and $11,000 in equipment. What amount should be included in the initial project costs for net working capital? A) −$49,000 B) −$47,000 C) −$3,000 D) −$13,000 E) −$24,000

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56) A five-year project is expected to generate annual revenues of $159,000, variable costs of $72,500, and fixed costs of $15,000. The annual depreciation is $19,500 and the tax rate is 21 percent. What is the annual operating cash flow? A) $71,500 B) $117,855 C) $72,430 D) $41,080 E) $60,580

57) A debt-free firm has net income of $142,658, taxes of $37,921.75, and depreciation of $27,500. What is the operating cash flow? A) $131,458 B) $142,658 C) $166,958 D) $170,158 E) $162,358

58) Logan Hunting has a proposed project that will generate sales of 2,200 units annually at a selling price of $29.95 each. The fixed costs are $15,000 and the variable costs per unit are $6.95. The project requires $42,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The salvage value of the fixed assets is $5,500 and the tax rate is 21 percent. What is the operating cash flow for Year 4? A) $30,329 B) $19,829 C) $21,124 D) $42,179 E) $22,564

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59) Your local athletic center is planning a $1.2 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $745,000 in additional annual sales. Variable costs are 39* percent of sales, the annual fixed costs are $140,000, and the tax rate is 21 percent. What is the operating cash flow for the first year of this project? A) $218,336.00 B) $201,015.00 C) $261,015.50 D) $371,615.50 E) $314,450.00

60) A cost-cutting project will decrease costs by $52,000 a year. The annual depreciation on the project's fixed assets will be $5,000 and the tax rate is 21 percent. What is the amount of the change in the firm's operating cash flow resulting from this project? A) $37,130 B) $52,000 C) $41,080 D) $46,080 E) $42,130

61) An all-equity firm has net income of $78,500, depreciation of $6,250, and taxes of $20,867. What is the firm's operating cash flow? A) $50,965 B) $72,250 C) $46,250 D) $84,750 E) $78,500

62) A new project is expected to generate an operating cash flow of $75,560 and will initially free up $12,250 in net working capital. Purchases of fixed assets costing $75,000 will be required to start up the project. What is the total cash flow for this project at Time zero?

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A) −$64,410 B) −$62,750 C) −$75,000 D) −$87,250 E) $62,250

63) The Outpost, a sole proprietorship currently sells short leather jackets for $369 each. The firm is considering selling long coats also. The long coats would sell for $719 each and the company expects to sell 820 a year. If the company decides to carry the long coat, management feels that the annual sales of the short jacket will decline from 1,120 to 1,040 units. Variable costs on the jacket are $228 and $435 on the long coat. The fixed costs for this project are $23,100, depreciation is $10,400 a year, and the tax rate is 21 percent. What is the projected operating cash flow for this project? A) $158,999 B) $131,264 C) $112,212 D) $131,062 E) $128,749

64) A project has sales of $600,000, costs of $366,500, depreciation of $34,500, interest expense of $5,500, and a tax rate of 21 percent. What is the value of the depreciation tax shield? A) $7,245.00 B) $7,645.00 C) $6,200.00 D) $98,800.00 E) $10,810,200.00

65) A project has annual depreciation of $15,028, costs of $92,582, and sales of $138,765. The applicable tax rate is 21 percent. What is the operating cash flow according to the tax shield approach?

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A) $21,540.09 B) $27,666.67 C) $27,157.02 D) $42,183.70 E) $39,640.45

66) A project requires $428,000 of equipment that is classified as seven-year property. What is the depreciation expense in Year 3 given the following MACRS depreciation allowances, starting with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent? A) $89,038.42 B) $48,447.30 C) $56,038.15 D) $74,857.20 E) $104,817.20

67) Woodland Lake Manufacturing has a new project that requires $652,000 of equipment. What is the depreciation in Year 5 of this project if the equipment is classified as seven-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent. A) $81,434.80 B) $58,158.40 C) $93,170.80 D) $58,223.60 E) $74,749.60

68) What is the Year 2 depreciation on equipment costing $148,315 if it is classified as fiveyear property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

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A) $37,968.64 B) $38,201.50 C) $41,984.30 D) $48,398.80 E) $47,460.80

69) Classic Cars is considering a project that requires $311,250 of fixed assets that are classified as five-year property for MACRS. What is the book value of these assets at the end of Year 3? The MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent. A) $153,742 B) $136,811 C) $89,640 D) $93,450 E) $144,504

70) Northern Lighting purchased some three-year MACRS property three years ago. What is the current book value of this equipment if the original cost was $385,000? The MACRS allowance percentages are as follows, commencing with Year 1: 33.33, 44.45, 14.81, and 7.41 percent. A) $0 B) $57,037.75 C) $28,528.50 D) $85,547.00 E) $96,250.00

71) Sandy Bottom, Incorporated, purchased some seven-year MACRS welding equipment six years ago at a cost of $60,000. Today, the company is selling this equipment for $10,000. The tax rate is 21 percent. What is the after-tax cash flow from this sale? The MACRS allowance percentages are as follows, commencing with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

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A) $6,212.86 B) $8.461.96 C) $9,587.14 D) $10,711.06 E) $11,824.41

72) Phil's Diner, a sole proprietorship purchased some new equipment two years ago for $32,600. Today, it is selling this equipment for $22,000. What is the aftertax cash flow from this sale if the tax rate is 21 percent? The applicable MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent. A) $20,666.08 B) $18,846.67 C) $24,223.20 D) $20,408.20 E) $25,153.33

73) Three years ago, Stock Tek purchased some five-year MACRS property for $82,600. Today, it is selling this property for $31,500. How much tax will the company owe on this sale if the tax rate is 21 percent? The MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent. A) −$2,451.81 B) −$5,857.08 C) $0 D) $5,857.08 E) $1,619.35

74) You are analyzing a project and have developed the following estimates. The depreciation is $13,600 a year and the tax rate is 21 percent. What is the base-case operating cash flow? Base-Case Unit sales Sales price per unit

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2,100 $ 55

Lower Bound Upper Bound 1,850 $ 53

2,350 $ 57 23

Variable cost per unit Fixed costs

$ 37 $ 14,800

$ 36 $ 13,800

$ 38 $ 15,800

A) $8,770 B) $6,204 C) $11,433 D) $21,026 E) $20,410

75) You are analyzing a project and have developed the following estimates. The depreciation is $5,800 a year and the tax rate is 21 percent. What is the best-case operating cash flow? Base-Case Unit sales Sales price per unit Variable cost per unit Fixed costs

800 $ 29 $ 13 $ 6,800

Lower Bound Upper Bound 750 $ 28 $ 11 $ 6,000

850 $ 30 $ 15 $ 7,600

A) $7,473.00 B) $4,196.80 C) $5,377.50 D) $6,701.40 E) $9,236.50

76) You are analyzing a project and have developed the following estimates. The depreciation is $1,020 a year and the tax rate is 21 percent. What is the worst-case operating cash flow? Base-Case Unit sales Sales price per unit Variable cost per unit Fixed costs

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1,300 $ 19 $ 12 $ 1,400

Lower Bound Upper Bound 1,150 $ 16 $ 10 $ 1,350

1,450 $ 22 $ 14 $ 1,450

A) $885.70 B) −$110.50 C) $209.00 D) −$64.10 E) $660.50

77) You are analyzing a project and have developed the following estimates. The depreciation is $17,340 a year and the tax rate is 21 percent. What is the best-case operating cash flow? Base-Case Unit sales Sales price per unit Variable cost per unit Fixed costs

5,200 $ 109 $ 71 $ 16,500

Lower Bound Upper Bound 4,500 $ 99 $ 69 $ 16,000

5,900 $ 119 $ 73 $ 17,000

A) $166,240.00 B) $224,051.40 C) $172,695.60 D) $167,904.00 E) $173,799.60

78) You are analyzing a project and have developed the following estimates. The depreciation is $47,900 a year and the tax rate is 21 percent. What is the worst-case operating cash flow? Base-Case Unit sales Sales price per unit Variable cost per unit Fixed costs

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11,300 $ 39 $ 25 $ 9,700

Lower Bound Upper Bound 9,800 $ 34 $ 24 $ 9,200

12,800 $ 44 $ 26 $ 10,200

A) −$2,545 B) $11,145 C) $88,855 D) $27,556 E) $63,937

79) You are analyzing a project and have developed the following estimates: unit sales = 2,600, price per unit = $109, variable cost per unit = $67, fixed costs per year = $38,000. The depreciation is $12,000 a year and the tax rate is 21 percent. What effect would the sale of one more unit have on the operating cash flow? A) $24.18 B) $16.66 C) $13.10 D) $33.18 E) $15.70

80) You are analyzing a project and have developed the following estimates: unit sales = 2,150, price per unit = $84, variable cost per unit = $57, fixed costs per year = $13,900. The depreciation is $8,300 a year and the tax rate is 21 percent. What effect would an increase of $1 in the selling price have on the operating cash flow? A) $1,698.50 B) $1,249.65 C) $1,320.65 D) $3,773.25 E) $1,430.35

81) A project has projected values of: unit sales = 1,650, price per unit = $19, variable cost per unit = $7, fixed costs per year = $4,700. The depreciation is $1,100 a year and the tax rate is 21 percent. What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

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A) −$8.58 B) −$1,089 C) −$912 D) $1,303.50 E) $912

82) Newton Industries is considering a project and has developed the following estimates: unit sales = 4,800, price per unit = $67, variable cost per unit = $42, annual fixed costs = $11,900. The depreciation is $14,700 a year and the tax rate is 21 percent. What effect would an increase of $1 in the selling price have on the operating cash flow? A) $3,792 B) $4,823 C) $1 D) $83,448 E) $82,368

83) Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The equipment can be sold for $220,000 after the four years. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $211,500 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 21 percent? A) −$9,908.14 B) −$8,309.18 C) −$10,747.11 D) $7,008.14 E) $1,309.54

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84) Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 21 percent? A) $11,309.11 B) $11,628.04 C) $12,737.26 D) $25,123.33 E) $14,900.41

85) A project has an initial requirement of $260,000 for fixed assets and $16,500 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $50,000. All the net working capital will be recouped at the end of the project. The annual operating cash flow is $82,500 and the discount rate is 12 percent. What is the project's net present value if the tax rate is 21 percent? A) $15,684.29 B) $12,345.34 C) $9,670.33 D) −$15,432.63 E) $16,343.27

86) Global Water Treatment, Incorporated is analyzing a proposed investment that would initially require $750,000 of new equipment. This equipment would be depreciated on a straightline basis to a zero balance over the four-year life of the project. The estimated salvage value is $150,000. The project requires $50,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $ 265,000 a year. What is the internal rate of return on this project if the relevant tax rate is 21 percent?

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A) 15.51% B) 15.98% C) 20.12% D) 17.64% E) 17.99%

87) The Golf Range is considering adding an additional driving range to its facility. The range would cost $229,000, would be depreciated on a straight-line basis over its seven-year life, and would have a zero salvage value. The anticipated revenue from the project is $62,500 a year with $18,400 of that amount being variable cost. The fixed cost would be $15,700. The firm believes that it will earn an additional $22,500 a year from its current operations should the driving range be added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 21 percent? A) 9.84% B) 8.68% C) 7.47% D) 11.09% E) 12.14%

88) A project has an initial requirement of $311,700 for fixed assets and $47,600 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and will be worthless at the end of the project. All the net working capital will be recouped after four years. The expected annual operating cash flow is $108,315. What is the project's internal rate of return if the tax rate is 21 percent? A) 12.06% B) 11.99% C) 10.69% D) 12.15% E) 10.87%

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89) Lee’s currently sells 13,800 motor homes per year at $87,900 each, and 1,100 luxury motor coaches per year at $139,900 each. The company wants to introduce a low-range camper to fill out its product line; it hopes to sell 7,200 of these campers per year at $17,500 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 1,100 units per year and reduce the sales of its luxury motor coaches by 610 units per year. What amount should be used as the annual sales figure when evaluating this project? A) $128,309,000 B) $97,480,000 C) $137,351,000 D) $106,542,000 E) $128,787,000

90) Consider an asset that costs $311,000 and is depreciated straight-line to zero over its sixyear tax life. The asset is to be used in a four-year project; at the end of the project, the asset can be sold for $58,000. If the relevant tax rate is 21 percent, what is the aftertax cash flow from the sale of this asset? A) $67,590.00 B) $68,411.19 C) $70,103.33 D) $40,466.67 E) $42,473.33

91) An asset used in a three-year project falls in the three-year MACRS class for tax purposes. The MACRS percentage rates starting with Year 1 are: 33.33, 44.45, 14.81, and 7.41. The asset has an acquisition cost of $2.6 million and will be sold for $1.1 million at the end of the project. If the tax rate is 21 percent, what is the aftertax salvage value of the asset? A) $742,519.10 B) $726,000.00 C) $832,056.60 D) $909,458.60 E) $887,560.15

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92) The Corner Shop is considering a new four-year expansion project that requires an initial fixed asset investment of $210,000. The fixed asset will be depreciated straight-line to zero over its four-year life, after which time it will be worthless. The project is estimated to generate $48,000 in annual sales, with costs of $31,000. If the tax rate is 21 percent, what is the OCF for this project? A) $24,455 B) $63,270 C) $69,250 D) $17,850 E) $29,640

93) The Sausage Hut is looking at a new sausage system with an installed cost of $187,400. This cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $25,000. The sausage system will save the firm $69,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $9,000, which will be recouped at project end. If the tax rate is 21 percent and the discount rate is 12 percent, what is the NPV of this project? A) $17,320.02 B) −$13,320.81 C) $15,560.24 D) $11,410.10 E) $18,211.15

94) JL & Company is contemplating the purchase of a new $428,000 computer-based order entry system. The system will be depreciated straight-line to zero over the project’s six-year life. The pretax resale value is $215,000. The system will save $148,000 before taxes per year in order processing costs and will reduce working capital by $46,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 21 percent, what is the IRR for this project?

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A) 15.51% B) 22.79% C) 29.11% D) 31.08% E) 14.20%

95) Cinram Machines has the following estimates for its new gear assembly project: price = $1,870 per unit; variable costs = $949 per unit; fixed costs = $1.4 million; quantity = 42,000 units. Suppose the company believes all its estimates are accurate only to within ± 3 percent. What value should the company use for its total variable costs when performing its best-case scenario analysis? A) $38,578,064 B) $39,822,128 C) $38,216,051 D) $41,802,137 E) $40,864,538

96) A project costs $2.43 million and has no salvage value. Depreciation is straight-line to zero over the five-year life of the project. Sales are projected at 64,000 units per year, price per unit is $73.29, variable cost per unit is $42.93, and fixed costs are $623,000 per year. The tax rate is 21 percent, and the required rate of return is 11 percent. What is the sensitivity of NPV to a 100-unit increase in the sales figure? A) $9,198.40 B) $8,609.18 C) $8,097.40 D) $8,864.39 E) $7,557.12

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97) Consider a three-year project with the following information: initial fixed asset investment = $347,600; straight-line depreciation to zero over the three-year life; zero salvage value; price per unit = $49.99; variable costs per unit = $30.82; fixed costs per year = $187,000; quantity sold per year = 65,500 units; tax rate = 21 percent. How sensitive is OCF to an increase of one unit in the quantity sold? A) $15.14 B) $11.67 C) $8.67 D) $9.08 E) $13.40

98) Herschbach Ad Pros is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $15,000 of T-shirts, $11,000 of sweatshirts, and $1,800 of caps. The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $14,000 of T-shirts, $9,800 of sweatshirts, $15,000 of Polo shirts, and $2,500 of caps. What sales amount should be used when evaluating the Polo shirt project? A) $19,300 B) $13,500 C) $12,700 D) $12,800 E) $13,900

99) Outdoors Essentials sells specialty equipment for mountain climbers. Its sales for last year included $255,000 of tents and $ 550,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $300,000 of tents, $600,000 of climbing gear, and $110,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings? A) $0 B) $205,000 C) $95,000 D) $145,000 E) $110,000

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100) Scrapping Products is implementing a project that will initially increase accounts payable by $3,000, increase inventory by $1,800, and decrease accounts receivable by $1,200. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project? A) $2,400 B) $2,100 C) −$2.400 D) −$2,100 E) $3,300

101) A five-year project is expected to generate annual revenues of $210,000, variable costs of $90,000, and fixed costs of $22,000. The annual depreciation is $24,000 and the tax rate is 21 percent. What is the annual operating cash flow? A) $71,500 B) $117,855 C) $72.430 D) $41,080 E) $82,460

102) A debt-free firm has net income of $210,000, taxes of $55,822.78, and depreciation of $42,000. What is the operating cash flow? A) $213,300 B) $248,800 C) $202,400 D) $252,000 E) $244,200

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103) Shay Hand Outfitters has a proposed project that will generate sales of 3,100 units annually at a selling price of $37.00 each. The fixed costs are $25,000 and the variable costs per unit are $11.95. The project requires $72,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The salvage value of the fixed assets is $9,700 and the tax rate is 21 percent. What is the operating cash flow for Year 4? A) $45,377.45 B) $27,377.45 C) $41,597.45 D) $52,655.00 E) $22,564.00

104) Your local athletic center is planning a $500,000 expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $175,000 in additional annual sales. Variable costs are 32 percent of sales, the annual fixed costs are $40,000, and the tax rate is 21 percent. What is the operating cash flow for the first year of this project? A) $62,410.00 B) $99,260.00 C) $67,660.00 D) $42,660.00 E) $31,450.00

105) A cost-cutting project will decrease costs by $37,000 a year. The annual depreciation on the project's fixed assets will be $2,750 and the tax rate is 21 percent. What is the amount of the change in the firm's operating cash flow resulting from this project? A) $27,057.50 B) $31,980.00 C) $29,230.50 D) $26,080.00 E) $29,807.50

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106) An all-equity firm has net income of $112,780, depreciation of $8,750, and taxes of $29,980. What is the firm's operating cash flow? A) $150,965 B) $142,760 C) $91,550 D) $121,530 E) $151,510

107) A new project is expected to generate an operating cash flow of $85,560 and will initially free up $10,475 in net working capital. Purchases of fixed assets costing $85,000 will be required to start up the project. What is the total cash flow for this project at Time zero? A) −$75,085 B) −$74,525 C) −$85,000 D) −$87,250 E) $62,250

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Answer Key Test name: Chapter 09 Test Bank - Static 1) C 2) E 3) E 4) D 5) C 6) D 7) A 8) D 9) E 10) C 11) A 12) B 13) D 14) A 15) B 16) A 17) C 18) D 19) C 20) D 21) C 22) C 23) C 24) B 25) B 26) E Version 1

27) E 28) D 29) D 30) E 31) C 32) E 33) C 34) D 35) E 36) E 37) D 38) B 39) E 40) B 41) C 42) B 43) E 44) B 45) E 46) B 47) C 48) C 49) B The relevant cost is the opportunity cost of $480. The previous book value is not relative to the new project, as the amount depreciated is a sunk cost. 50) B Sales = ($25,000 + 17,000 + 14,000 + 3,000) − ($27,000 + 21,000 + 3,500) = $7,500 51) C Version 1

Side effects = ($537,350 + 880,000) − ($488,500 + 800,000) = $128,850 52) D Net working capital requirement = −$19,000 + 4,000 + 2,000 = −$13,000 53) E Net working capital recovery = $81,000 − 57,000 + (3 × $9,000) = $51,000 54) C Net working capital recovery = −$5,000 + 3,200 − 1,800 = −$3,600 55) E Net working capital = −$36,000 + 36,000 − 24,000 = −$24,000 56) E Revenue Variable Costs Fixed Costs Depreciation EBT Taxes (21%) Net Income Depreciation

$ 159,000.00 −72,500.00 −15,000.00 −19,500.00 $ 52,000.00 −10,920.00 $ 41,080.00 19,500.00

OCF

$ 60,580.00

57) D Net Income Depreciation

$ 142,658.00 27,500.00

OCF

$ 170,158.00

58) A Revenue Variable Costs Fixed Costs

$ 65,890.00 2,200 units × $29.95/unit −15,290.00 2,200 units × $6.95/unit −15,000.00

Depreciation EBT

−10,500.00 42,000/4 years $ 25,100.00

Taxes (21%)

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−5,271.00

Net Income

$ 19,829.00

Depreciation

10,500.00

OCF

$ 30,329.00

59) C Sales

$ 745,000.00

Variable costs Fixed costs

−290,550.00 Sales × 0.39 −140,000.00

Depreciation EBT

−60,000.00 1,200,000/20 Years $ 254,450.00

Taxes (21%)

−53,434.50

Net income

$ 201,015.50

Depreciation OCF

60,000.00 $ 261,015.50

60) E EBT Taxes (21%)

$ 47,000.00 ($52,000 − 5,000) −9,870.00

Net income

$ 37,130.00

Depreciation OCF

5,000.00 $ 42,130.00

61) D Operating cash flow = $78,500 + 6,250 = $84,750 62) B CF0 = $12,250 − 75,000 = −$62,750 63) A Operating cash flow = {[820 × ($719 − 435)] + [(1,040 − 1,120) × ($369 − 228)] − $23,100} × {1 − .21} + {$10,400 × .21} = $158,999

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64) A Depreciation tax shield = $34,500 × .21 = $7,245.00 65) E Operating cash flow = ($138,765 − 92,582) × (1 − .21) + ($15,028 × .21) = $39,640.45 66) D Depreciation3 = $428,000 × .1749 = $74,857.20 67) D Depreciation5 = $652,000 × .0893 = $58,223.60 68) E Depreciation2 = $148,315 × .32 = $47,460.80 69) C Book value3 = $311,250 × (1 − .20 − .32 − .192) = $89,640 70) C Book value3 = $385,000 × (1 − .3333 − .4445 − .1481) = $28,528.50 71) C Asset Value at Acquisition (Book Value)

$ 60,000.00

Depreciation Year 1 Depreciation Year 2 Depreciation Year 3 Depreciation Year 4 Depreciation Year 5 Depreciation Year 6 Total Depreciation after 6 years Unused Depreciation

14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 86.61%

8,574.00 14,694.00 10,494.00 7,494.00 5,358.00 5,352.00 $ 51,966.00

Year 7 Year 8 Unused Depreciation

8.93% 4.46% 117.85%

$ 5,358.00 2,676.00 8,034.00 $ 60,000.00

Book Value in year Six Acquisition Book Value Less Accumulated Depreciation

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$ 60,000.00 51,966.00

Book Value in year Six

$ 8,034.00

Gain/Loss on Sale Market Value Less Book Value

$ 10,000.00 8,034.00

Gain/Loss on sale

$ 1,966.00

Depreciation Tax Shield Gain/Loss on sale Tax Rate Tax Impact

$ 1,966.00 21% $ 412.86

After Tax Cashflow from Sale of Asset Cashflow from Sale of Asset Tax Impact

$ 10,000.00 412.86

After Tax Cashflow from Sale of Asset

$ 9,587.14

72) A Aftertax cash flow = $22,000 − {[$22,000 − 32,600 × (1 − .20 − .32)] × .21} = $20,666.08 73) E Tax on salvage value = [$31,500 − $82,600 × (1 − .20 − .32 − .192)] × .21 = $1,619.35 74) D Base case operating cash flow = [2,100 × ($55 − 37) − $14,800] × [1 − .21] + [$13,600 × .21] = $21,026

75) E Best-case operating cash flow = [850 × ($30 − 11) − $6,000] × [1 − .21] + [$5,800 × .21] = $9,236.50

76) A Worst-case OCF = [1,150 × ($16 − 14) − $1,450] × [1 − .21] + [$1,020 × .21] = $885.70

77) B Best-case OCF = [5,900 × ($119 − 69) − $16,000] × [1 − .21] + [$17,340 × .21] = $224,051.40

78) E Worst-case OCF = [9,800 × ($34 − 26) − $10,200] × [1 − .21] + [$47,900 × .21] = $63,937

79) D Version 1

Change in OCF = ($109 − 67) × (1 − .21) = $33.18 80) A Change in OCF = (2,150 × $1) × (1 − .21) = $1,698.50 81) D Change in OCF = (1,650 × $1) × (1 − .21) = $1,303.50 A decrease in variable costs will increase the operating cash flow. 82) A Change in OCF = (4,800 × $1) × (1 − .21) = $3,792 83) A NPV = −$708,000 − 46,000 + ($211,500 × {1 − [1/(1 + .13)4]}/.13) + {$46,000 + [$220,000 × (1 − .21)]}/(1 + .13)4 NPV = −$9,908.14 84) D OCF = ($72,000 − 24,000 − 11,600 + 14,000) × (1 − .21) + ($138,000/5) × .21 = $45,612 NPV = −$138,000 − 3,000 + ($45,612 × {1 − [1/1.125]}/.12) + ($3,000/1.125) = $25,123.33 85) C NPV = −$260,000 − 16,500 + ($82,500 × {1 − [1/(1.12)4]}/.12) + [$16,500 + $50,000 × (1 − .21)]/1.124) NPV = $9,670.33 86) E NPV = 0 = −$750,000 − 50,000 + ($265,000 × { 1 − [1/(1 + IRR)4]}/IRR) + {$50,000 + [$150,000 × (1 − .21)]}/(1 + IRR)4 IRR = 17.99% 87) A

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OCF = ($62,500 − 18,400 − 15,700 + 22,500) × (1 − .21) + ($229,000/7) × .21 = $47,081 NPV = 0 = −$229,000 − 3,000 + $47,081(PVIFA7,IRR) + $3,000/(1 + IRR)7 IRR = 9.84% 88) B NPV = 0 = −$311,700 − 47,600 + $108,315(PVIFA4, IRR) + $47,600/(1 + IRR)4 IRR = 11.99% 89) C Sales = (1,100 × $87,900) + (−610 × $139,900) + (7,200 × $17,500) = $137,351,000 90) A Aftertax salvage value = $58,000 − [$58,000 − ($311,000 × 2/6)] × .21 = $67,590.00 91) D Aftertax salvage value = $1,100,000 − [$1,100,000 − ($2,600,000 × .0741)] × .21 Aftertax salvage value = $909,458.60 92) A OCF = ($48,000 − 31,000)(1 − .21) + ($210,000/4)(.21) = $24,455 93) A OCF = $69,000 (1 − .21) + ($187,400/4)(.21) = $64,348.50 NPV = −$187,400 − 9,000 + ($64,348.50 × {1 − [1/(1 + .12)4]}/.12) + {$9,000 + [$25,000 × (1 − .21)]}/(1 + .12)4 NPV = $17,320.02 94) C

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OCF = $148,000(1 − .21) + ($428,000/6)(.21) = $131,900.00 NPV = 0 = −$428,000 + 46,000 + ($131,900.00 × {1 − [1/(1 + IRR)6]}/IRR) + {−$46,000 + [$215,000 × (1 − .21)]}/(1 + IRR)6 IRR = 29.11% 95) B Total variable costs = (42,000 × 1.03) × ($949 × .97) = $39,822,128 96) D Change in OCF = (100)($73.29 − 42.93)(1 − .21) = $2,398.44 Change in NPV = $2,398.44(PVIFA11%, 5) = $8,864.39 97) A Change in OCF = 1 × ($49.99 − 30.82) × (1 − .21) = $15.14 98) B Sales = ($14,000 + 9,800 + 14,000 + 2,500) − ($15,000 + 11,000 + 1,800) = $13,500 99) C Side effects = ($300,000 + 600,000) − ($255,000 + 550,000) = $95,000 100) C Net working capital recovery = −$3,000 + 1,800 − 1,200 = −$2,400 101) E Revenue Variable Costs Fixed Costs Depreciation EBT Taxes (21%) Net Income Depreciation

$ 210,000.00 −90,000.00 −22,000.00 −24,000.00 $ 74,000.00 −15,540.00 $ 58,460.00 24,000.00

OCF

$ 82,460.00

102) D Net Income Depreciation

$ 210,000.00 42,000.00

OCF

$ 252,000.00

103) A Version 1

Revenue Variable Cost Fixed Costs

$ 114,700.00 3,100 units × $37.00/unit −37,045.00 3,100 units × $11.95/unit −25,000.00

Depreciation EBT

−18,000.00 72,000/4 years $ 34,655.00

Taxes (21%)

−7,277.55

Net Income

$ 27,377.45

Depreciation

18,000.00

OCF

$ 45,377.45

104) C Sales

$ 175,000.00

Variable Cost Fixed Costs

−56,000.00 Sales × .32 −40,000.00

Depreciation EBT

−25,000.00 500,000/20 Years $ 54,000.00

Taxes (21%)

−11,340.00

Net Income

$ 42,660.00

Depreciation

25,000.00

OCF

$ 67,660.00

105) E EBT Taxes (21%)

$ 34,250.00 ($37,000 − 2,750) −7,192.50

Net Income

$ 27,057.50

Depreciation OCF

2,750.00 $ 29,807.50

106) D

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Operating cash flow = $112,780 + 8,750 = $121,530 107) B CF0 = $10,475 − 85,000 = −$74,525

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) You purchased 520 shares of stock at a price of $58.17 per share. Over the last year, you have received total dividend income of $605. What is the dividend yield? A) 1.2% B) 12.1% C) 10.4% D) 54.1% E) 2.0%

2) Six months ago, you purchased 2,300 shares of ABC stock for $28.08 a share. You have received dividend payments equal to $.80 a share. Today, you sold all of your shares for $30.07 a share. What is your total dollar return on this investment? A) $6,417 B) $1,840 C) $12,834 D) $5,721 E) $4,577

3) Last year, you purchased a stock at a price of $60.00 a share. Over the course of the year, you received $1.60 per share in dividends and inflation averaged 2.1 percent. Today, you sold your shares for $64.50 a share. What is your approximate real rate of return on this investment? A) 9.6% B) 5.4% C) 10.2% D) 12.3% E) 8.1%

4) What are the arithmetic and geometric average returns for a stock with annual returns of 23 percent, 9 percent, −6 percent, and 12 percent?

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A) 9.50%; 9.00% B) 12.32%; 9.00% C) 9.00%; 9.50% D) 12.32%; 9.50% E) 9.50%; 12.32%

5) You own a stock that had returns of 12.78 percent, −16.46 percent, 22.04 percent, and 20.36 percent over the past four years. What was the arithmetic average return for this stock? A) 9.68% B) 9.07% C) 8.46% D) 10.49% E) 10.07%

6) You own a stock that had returns of 12.18 percent, −16.82 percent, 21.78 percent, 25.52 percent, and 9.48 percent over the past five years. What was the arithmetic average return for this stock? A) 11.30% B) 9.88% C) 9.32% D) 10.43% E) 10.85%

7) You own a stock that had returns of 9.70 percent, −6.90 percent, 22.80 percent, and 15.40 percent over the past four years. What was the geometric average return for this stock? A) 10.66% B) 9.68% C) 9.04% D) 11.10% E) 10.25%

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8) A stock had returns of 9.36 percent, −14.53 percent, 19.57 percent, 25.13 percent, and 7.27 percent over the past five years. What was the geometric average return for this stock? A) 8.45% B) 10.14% C) 9.36% D) 8.90% E) 9.73%

9) A bond had a price of $945.46 at the beginning of the year and a price of $976.26 at the end of the year. The bond's par value is $1,000 and its coupon rate is 4.3 percent. What was the percentage return on the bond for the year? A) 8.33% B) 6.83% C) 7.81% D) 4.40% E) 3.15%

10) A bond par value is $1,000 and the coupon rate is 4.3 percent. The bond price was $945.46 at the beginning of the year and $976.26 at the end of the year. The inflation rate for the year was 2.2 percent. What was the bond's real return for the year? A) 5.49% B) 4.40% C) 5.85% D) 7.81% E) 4.80%

11) You purchased a stock at a price of $53.85. The stock paid a dividend of $2.19 per share and the stock price at the end of the year is $60.25. What is the capital gains yield?

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A) 15.95% B) 10.62% C) 11.88% D) 10.09% E) 4.07%

12) You purchased a stock at a price of $47.28. The stock paid a dividend of $1.83 per share and the stock price at the end of the year is $53.23. What was the dividend yield? A) 4.26% B) 3.87% C) 16.46% D) 12.58% E) 4.64%

13) You purchased a stock at a price of $48.98. The stock paid a dividend of $1.63 per share and the stock price at the end of the year was $54.12. What was the total return for the year? A) 3.33% B) 10.49% C) 12.51% D) 13.17% E) 13.82%

14) You purchased a stock at a price of $67.63. The stock paid a dividend of $1.91 per share and the stock price at the end of the year is $60.35. What are your capital gains on this investment? A) −$5.37 B) −$7.28 C) −$6.33 D) −$1.91 E) −$6.80

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15) Three months ago, you purchased a stock for $68.09. The stock is currently priced at $73.71. What is the EAR on your investment? A) 33.02% B) 37.33% C) 40.73% D) 8.25% E) 30.26%

16) Seven months ago, you purchased 380 shares of Mitchum Trading for $61.23 per share. The stock pays a quarterly dividend of $.29 per share and is currently priced at $62.31. What is the total dividend income you received? A) $267.90 B) $220.40 C) $315.40 D) $410.40 E) $110.20

17) One year ago, you purchased 250 shares of Titan Wood Products for $56.66 per share. The stock has paid dividends of $.64 per share over the past year and is currently priced at $61.64. What is your total dollar return on your investment? A) $702.50 B) $1,325.00 C) $1,245.00 D) $1,451.83 E) $1,405.00

18) You purchased 400 shares of Barden Enterprises stock for $49.85 per share at the beginning of the year. The stock is currently priced at $51.90 per share. What is your dividend yield if you received total dividends of $481 over the year?

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A) 2.32% B) 2.41% C) 2.12% D) 2.49% E) 1.21%

19) You own 530 shares of Maslyn Tours stock that sells for $62.71 per share. If the stock has a dividend yield of 3.5 percent, how much do you expect to receive next year in dividend income from this investment? A) $1,202.05 B) $1,292.52 C) $1,163.27 D) $1,132.98 E) $1,235.97

20) One year ago, you purchased a stock at a price of $57.45 per share. Today, you sold your stock at a loss of 18.15 percent. Your capital loss was $12.32 per share. What was the dividend yield on this stock? A) 16.44% B) 17.94% C) 3.40% D) 3.29% E) 3.66%

21) One year ago, you purchased a stock at a price of $56.65 per share. Today, you sold your stock at a loss of 18.83 percent. Your capital loss was $13.25 per share. What was the total dividends per share paid on this stock over the year?

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A) $2.35 B) $4.18 C) $4.56 D) $2.87 E) $2.58

22) You purchased GARP stock one year ago at a price of $65.64 per share. Today, you sold your stock and earned a total return of 18.51 percent. The stock paid dividends of $2.64 per share over the year. What was the capital gains yield on your investment? A) 17.28% B) 13.17% C) 14.49% D) 16.10% E) 18.51%

23) You purchased Butterfly Wing Corporation stock exactly one year ago at a price of $75.92 per share. Over the past year, the stock paid dividends of $2.56 per share. Today, you sold your stock and earned a total return of 15.18 percent. What was the price at which you sold the stock? A) $91.82 B) $93.27 C) $87.44 D) $84.88 E) $89.63

24) Last year, you purchased 630 shares of Forever, Incorporated, stock at a price of $48.08 per share. You received $945 in dividends and a total of $34,971 when you sold the stock. What was the capital gains yield on this stock?

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A) 3.12% B) 13.24% C) 15.45% D) 14.68% E) 14.26%

25) You purchased 800 shares of Barrett Golf Corporation stock at a price of $35.80 per share. While you owned the stock, you received dividends totaling $.45 per share. Today, you sold your stock at a price of $38.75 per share. What was your total dollar return on the investment? A) $2,630 B) $2,540 C) $2,242 D) $2,360 E) $2,720

26) You purchased 1,450 shares of stock in Natural Chicken Wings, Incorporated, at a price of $43.64 per share. Since you purchased the stock, you have received dividends of $1.13 per share. Today, you sold your stock at a price of $47.82 per share. What was your total percentage return on this investment? A) 12.17% B) 12.98% C) 9.58% D) 10.87% E) 13.84%

27) You purchased 1,700 shares of stock in Natural Chicken Wings, Incorporated, at a price of $43.79 per share. Since you purchased the stock, you have received dividends of $1.23 per share. Today, you sold your stock at a price of $48.66 per share. What was your total percentage return on this investment?

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A) 15.85% B) 12.53% C) 13.93% D) 11.12% E) 14.86%

28) You purchased shares of stock one year ago at a price of $62.92 per share. During the year, you received dividend payments of $1.87 and sold the stock for $70.04 per share. If the inflation rate during the year was 2.27 percent, what was your real return? A) 10.59% B) 16.88% C) 14.32% D) 11.75% E) 8.85%

29) An asset has an average return of 10.63 percent and a standard deviation of 19.41 percent. What range of returns should you expect to see with a 68 percent probability? A) −8.78% to 30.04% B) −28.19% to 49.45% C) −8.78% to 12.48% D) −47.60% to 68.86% E) −18.49% to 39.75%

30) An asset has an average return of 11.09 percent and a standard deviation of 21.18 percent. What range of returns should you expect to see with a 95 percent probability? A) −10.09% to 12.09% B) −10.09% to 32.27% C) −52.45% to 74.63% D) −31.27% to 53.45% E) −20.68% to 42.86%

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31) What range of returns should you expect to see with a 99 percent probability on an asset that has an average return of 11.03 percent and a standard deviation of 24.73 percent? A) −26.07% to 48.13% B) −38.43% to 60.49% C) −63.16% to 85.22% D) −13.70% to 8.36% E) −13.70% to 35.76%

32) An asset has an average return of 11.33 percent and a standard deviation of 22.98 percent. What is the most you should expect to lose in any given year with a probability of 16 percent? A) −34.31% B) −23.14% C) −11.65% D) −34.63% E) −57.61%

33) An asset has an average return of 10.91 percent and a standard deviation of 23.55 percent. What is the most you should expect to lose in any given year with a probability of 2.5 percent? A) −36.19% B) −24.42% C) −12.64% D) −59.74% E) −58.01%

34) An asset has an average return of 10.97 percent and a standard deviation of 22.80 percent. What is the most you should expect to earn in any given year with a probability of 16 percent?

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A) 57.43% B) 11.83% C) 23.23% D) 34.63% E) 33.77%

35) An asset has an average return of 11.03 percent and a standard deviation of 23.73 percent. What is the most you should expect to earn in any given year with a probability of 2.5 percent? A) 34.76% B) 82.22% C) 58.49% D) 46.63% E) 70.36%

36) A stock had returns of 16.27 percent, 24.18 percent, −12.29 percent, and 9.62 percent over four of the past five years. The arithmetic average return over the five years was 13.28 percent. What was the stock return for the missing year? A) 4.04% B) 28.62% C) 15.34% D) 22.90% E) 25.76%

37)

A stock had the following year-end prices and dividends: Year 0 1 2 3

Price $ 59.11 69.34 62.02 70.86

Dividend — $ 1.17 1.39 1.52

What was the arithmetic average return for the stock?

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A) 11.43% B) 8.38% C) 14.75% D) 9.15% E) 14.85%

38) A stock had returns of 18.53 percent, −5.55 percent, and 20.78 percent for the past three years. What is the variance of the returns? A) .02130 B) .02840 C) .01704 D) .14596 E) .00881

39) A stock had returns of 17.68 percent, −5.04 percent, 20.27 percent, and 8.53 percent for the past four years. What is the variance of the returns? A) .11435 B) .01569 C) .01744 D) .00611 E) .01308

40) A stock had returns of 14.39 percent, 18.81 percent, −14.77 percent, 12.37 percent, and 25.20 percent for the past five years. What is the variance of the returns? A) .03133 B) .02820 C) .15329 D) .00274 E) .02350

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41) A stock had returns of 18.31 percent, −7.59 percent, and 23.99 percent for the past three years. What is the standard deviation of the returns? A) 9.83% B) 16.83% C) 13.33% D) 2.83% E) 28.34%

42) A stock had returns of 17.57 percent, −11.47 percent, 23.27 percent, and 13.65 percent for the past four years. What is the standard deviation of the returns? A) 13.80% B) 15.33% C) 23.51% D) 12.27% E) 2.35%

43) A stock had returns of 18.30 percent, 21.46 percent, −14.54 percent, 8.90 percent, and 27.97 percent for the past five years. What is the standard deviation of the returns? A) 13.25% B) 20.70% C) 27.43% D) 2.74% E) 16.56%

44) Over a certain period, large-company stocks had an average return of 11.99 percent, the average risk-free rate was 2.46 percent, and small-company stocks averaged 16.97 percent. What was the risk premium on small-company stocks for this period?

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A) 14.51% B) 9.53% C) 19.43% D) 11.61% E) 4.98%

45) If the risk premium on the stock market was 6.51 percent and the risk-free rate was 2.45 percent, what is the stock market return? A) 8.96% B) 9.77% C) 7.17% D) 4.06% E) 6.51%

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Answer Key Test name: Chapter 10 Test Bank - Algo 1) E Dividend yield = ($605/520)/$58.17 Dividend yield = .020, or 2.0% 2) A Total dollar return = 2,300 × ($30.07 − 28.08 + .80) Total dollar return = $6,417 3) E Nominal return = ($64.50 − 60.00 + 1.60)/$60.00 Nominal return = .102, or 10.2% Approximate real rate = 10.2% − 2.1% Approximate real rate = 8.1% 4) A Arithmetic Return = (.23 + .09 − .06 + .12)/4 Arithmetic Return = .0950, or 9.50% Geometric Return = [(1 + .23) × (1 + .09) × (1 − .06) × (1 + .12)] ¼ − 1 Geometric Return = .0900, or 9.00% 5) A Arithmetic return = (.1278 − .1646 + .2204 + .2036)/4 Arithmetic return = .0968, or 9.68% 6) D Arithmetic return = (.1218 − .1682 + .2178 + .2552 + .0948)/5 Arithmetic return = .1043, or 10.43% 7) B Geometric return = [(1 + .0970) × (1 − .0690) × (1 + .2280) × (1 + .1540)]1/4 − 1 Geometric return = .0968, or 9.68% Version 1

8) A Geometric return = [(1 + .0936) × (1 − .1453) × (1 + .1957) × (1 + .2513) × (1 + .0727)]1/5 − 1 Geometric return = .0845, or 8.45% 9) C Bond return = ($976.26 − 945.46 + 43)/$945.46 Bond return = .0781, or 7.81% 10) A Bond return = ($976.26 − 945.46 + 43)/$945.46 Bond return = .0781, or 7.81% r = [(1 + .0781)/(1 + .0220] − 1 r = .0549, or 5.49% 11) C Capital gains yield = ($60.25 − 53.85)/$53.85 Capital gains yield = .1188, or 11.88% 12) B Dividend yield = $1.83/$47.28 Dividend yield = .0387, or 3.87% 13) E Total return = ($54.12 − 48.98 + 1.63)/$48.98 Total return = .1382, or 13.82% 14) B Capital gain = $60.35 − 67.63 Capital gain = −$7.28 15) B 3-month return = ($73.71 − 68.09)/$68.09 3-month return = .0825, or 8.25% EAR = (1 + .0825)4 − 1 EAR = .3733, or 37.33% 16) B Version 1

Dividend income = $.29 × 2 × 380 Dividend income = $220.40 17) E Dollar return = ($61.64 − 56.66 + .64) × 250 Dollar return = $1,405.00 18) B Dividend yield = ($481.00/400)/$49.85 Dividend yield = .0241, or 2.41% 19) C Dividends = 530 × $62.71 × .035 Dividends = $1,163.27 20) D Dividend yield = −.1815 − (−$12.32/$57.45) Dividend yield = .0329, or 3.29% 21) E Dividend yield = −.1883 − (−$13.25/$56.65) Dividend yield = .0456, or 4.56% Dividends per share = $56.65 × .0456 Dividends per share = $2.58 22) C Dividend yield = $2.64/$65.64 Dividend yield = .0402, or 4.02% Capital gains yield = 18.51% − 4.02% Capital gains yield = 14.49% 23) D

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Dividend yield = $2.56/$75.92 Dividend yield = .0337, or 3.37% Capital gains yield = 15.18% − 3.37% Capital gains yield = 11.81% Ending price = $75.92(1 + .1181) Ending price = $84.88 24) C Capital gains yield = [($34,971/630) − 48.08]/$48.08 Capital gains yield = .1545, or 15.45% 25) E Total dollar return = ($38.75 − 35.80 + .45) × 800 Total dollar return = $2,720 26) A Total return = ($47.82 − 43.64 + 1.13)/$43.64 Total return = .1217, or 12.17% 27) C Total return = ($48.66 − 43.79 + 1.23)/$43.79 Total return = .1393, or 13.93% 28) D Nominal total return = ($70.04 − 62.92 + 1.87)/$62.92 Nominal total return = .1429, or 14.29% Real return = [(1 + .1429)/(1 + .0227)] − 1 Real return = .1175, or 11.75% 29) A Range = 10.63% +/− 19.41% Range = −8.78% to 30.04% 30) D Range = 11.09% +/− (21.18% × 2) Range = −31.27% to 53.45% 31) C Version 1

Range = 11.03% +/− (24.73% × 3) Range = −63.16% to 85.22% 32) C Maximum loss = 11.33% − 22.98% Maximum loss = −11.65% 33) A Maximum loss = 10.91% − (2 × 23.55%) Maximum loss = −36.19% 34) E Maximum gain = 10.97% + 22.80% Maximum gain = 33.77% 35) C Maximum gain = 11.03% + (2 × 23.73%) Maximum gain = 58.49% 36) B 13.28% = (16.27% + 24.18% − 12.29% + 9.62% + X)/5 X = 28.62% 37) D Year 1 return = ($69.34 − 59.11 + 1.17)/$59.11 = .1929, or 19.29% Year 2 return = ($62.02 − 69.34 + 1.39)/$69.34 = −.0855, or −8.55% Year 3 return = ($70.86 − 62.02 + 1.52)/$62.02 = .1670, or 16.70% Arithmetic average return = (.1929 − .0855 + .1670)/3 Arithmetic average return = .0915, or 9.15% 38) A Average return = (.1853 − .0555 + .2078)/3 Average return = .1125, or 11.25% Variance = 1/2[(.1853 − .1125)2 + (−.0555 − .1125)2 + (.2078 − .1125)2] Variance = .02130 39) E

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Average return = (.1768 − .0504 + .2027 + .0853)/4 Average return = .1036, or 10.36% Variance = 1/3[(.1768 − .1036)2 + (−.0504 − .1036)2 + (.2027 − .1036)2 + (.0853 − .1036)2] Variance = .01308 40) E Average return = (.1439 + .1881 − .1477 + .1237 + .2520)/4 Average return = .1120, or 11.20% Variance = 1/4[(.1439 − .1120)2 + (.1881 − .1120)2 + (−.1477 − .1120)2 + (.1237 − .1120)2 + (.2520 − .1120)2] Variance = .02350 41) B Average return = (.1831 − .0759 + .2399)/3 Average return = .1157, or 11.57% Variance = 1/2[(.1831 − .1157)2 + (−.0759 − .1157)2 + (.2399 − .1157)2] Variance = .02834 Standard deviation = .028341/2 Standard deviation = .1683, or 16.83% 42) B Average return = (.1757 − .1147 + .2327 + .1365)/4 Average return = .1076, or 10.76% Variance = 1/3[(.1757 − .1076)2 + (−.1147 − .1076)2 + (.2327 − .1076)2 + (.1365 − .1076)2] Variance = .02351 Standard deviation = .023511/2 Standard deviation = .1533, or 15.33% 43) E

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Average return = (.1830 + .2146 − .1454 + .0890 + .2797)/5 Average return = .1242, or 12.42% Variance = 1/4[(.1830 − .1242)2 + (.2146 − .1242)2 + (−.1454 − .1242)2 + (.0890 − .1242)2 + (.2797 − .1242)2] Variance = .02743 Standard deviation = .027431/2 Standard deviation = .1656, or 16.56% 44) A Small-company stock risk premium = 16.97% − 2.46% Small-company stock risk premium = 14.51% 45) A Market return = 6.51% + 2.45% Market return = 8.96%

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? A) Inflation premium B) Required return C) Real return D) Average return E) Risk premium

The variance is the average squared difference between which of the following? A) Actual return and average return B) Actual return and (average return/N − 1) C) Actual return and the real return D) Average return and the standard deviation E) Actual return and the risk-free rate

Which one of the following is the positive square root of the variance? A) Standard deviation B) Mean C) Risk-free rate D) Average return E) Real return

4) Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation?

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A) Arithmetic average return B) Variance C) Standard deviation D) Probability curve E) Normal distribution

5) Which one of the following is defined as the average compound return earned per year over a multiyear period? A) Geometric average return B) Variance of returns C) Standard deviation of returns D) Arithmetic average return E) Normal distribution of returns

Which one of the following best describes an arithmetic average return? A) Total return divided by N − 1, where N equals the number of individual returns B) Average compound return earned per year over a multiyear period C) Total compound return divided by the number of individual returns D) Return earned in an average year over a multiyear period E) Positive square root of the average compound return

7) An efficient capital market is best defined as a market in which security prices reflect which one of the following? A) Current inflation B) A risk premium C) All available information D) The historical arithmetic rate of return E) The historical geometric rate of return

Which one of the following is the hypothesis that securities markets are efficient?

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A) Geometric market hypothesis B) Standard deviation hypothesis C) Efficient markets hypothesis D) Capital market hypothesis E) Financial markets hypothesis

9) Which one of the following combinations will always result in an increased dividend yield? A) Increase in the stock price combined with a lower dividend amount B) Increase in the stock price combined with a higher dividend amount C) Decrease in the stock price combined with a lower dividend amount D) Decrease in the stock price combined with a higher dividend amount E) Increase in the stock price combined with a constant dividend amount

10) rate?

Which one of the following could cause the total return on an investment to be a negative

A) Constant annual dividend amount B) Increase in the annual dividend amount C) Stock price that remains constant over the investment period D) Stock price that declines over the investment period E) Stock price that increases over the investment period

11) Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?

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A) Without the size of an investment, the dollar return has less value than the percentage return. B) The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not. C) The dollar return considers the time value of money while the percentage return does not. D) Dollar returns are based on capital gains while percentage returns are based on the total rate of return. E) Dollar returns must either be zero or a positive value while percentage returns can be negative, zero, or positive.

12) One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the: A) stock price increased by 3.1 percent over the last year. B) stock increased in value over the past year. C) stock paid a dividend. D) dividend yield is greater than zero. E) sum of the dividend yield and the capital gains yield is 3.1 percent.

13) The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the: A) largest 20 percent of the stocks traded on the NYSE. B) stock returns for the largest 10 percent of the publicly traded firms in the U.S. C) returns of the 100 largest firms in the U.S. D) returns of all the stocks listed on the NYSE. E) stocks of the 500 companies included in the S&P 500 index.

14) Over the period of 1926-2020, which one of the following investment classes had the highest volatility of returns?

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A) Large-company stocks B) U.S. Treasury bills C) Small-company stocks D) Long-term corporate bonds E) Long-term government bonds

15)

Over the period of 1926-2020: A) long-term government bonds underperformed long-term corporate bonds. B) small-company stocks underperformed large-company stocks. C) inflation exceeded the rate of return on U.S. Treasury bills. D) U.S. Treasury bills outperformed long-term government bonds. E) large-company stocks outperformed all other investment categories.

16)

Over the period of 1926-2020:

A) the risk premium on large-company stocks was greater than the risk premium on small- company stocks. B) U.S. Treasury bills had a risk premium that was just slightly over 2 percent. C) the risk premium on long-term government bonds was zero percent. D) the risk premium on stocks exceeded the risk premium on bonds. E) U. S. Treasury bills had a negative risk premium.

17)

The rate of return on which one of the following has a risk premium of 0%? A) Long-term government bonds B) Long-term corporate bonds C) Intermediate-term government bonds D) U.S. Treasury bills E) Large-company stocks

18) Which one of the following had a zero standard deviation of returns for the period of 1926-2020?

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A) All of the listed security types had a standard deviation of returns in excess of zero percent. B) U.S. Treasury bills C) Long-term corporate bonds D) Large-company stocks E) Long-term government bonds

19) Which one of the following categories has the widest frequency distribution of returns for the period 1926-2020? A) Small-company stocks B) U.S. Treasury bills C) Long-term government bonds D) Inflation E) Large-company stock

20)

The period 1926-2020 illustrates that U.S. Treasury bills:

A) outperform inflation by approximately 1 percent every year. B) have a zero standard deviation. C) can either outperform or underperform inflation on an annual basis. D) produce a rate of return roughly equivalent to the rate of return on long-term government bonds. E) routinely have negative annual returns.

21) The historical record for the period 1926-2020 shows that the annual nominal rate of return on: A) risk-free securities has averaged around 5 percent. B) the Consumer Price Index has been positive every year. C) U.S. Treasury bills has, on average, been positive for the period. D) U.S. Treasury bills is constant. E) large company stocks has averaged around 9 percent.

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22) What was the average annual risk premium on small-company stocks for the period 1926-2020? A) 12.3% B) 11.2% C) 12.9% D) 13.2% E) 13.5%

23) Based on the period 1926-2020, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk? A) Between 0 and 1% B) Between 1 and 2% C) Between 2 and 3% D) Between 3 and 4% E) Between 4 and 5%

24)

Which one of the following statements is true regarding the period 1926-2020?

A) The returns on small-company stocks were less volatile than the returns on largecompany stocks. B) The risk-free rate of return remained constant over the time period. C) U.S. Treasury bills had a positive average real rate of return. D) Bonds had an average rate of return that exceeded the average return on stocks. E) The inflation rate was just as volatile as the return on long-term bonds.

25)

For the period 1926-2020, which one of the following had the smallest risk premium? A) Large-company stocks B) Small-company stocks C) Long-term corporate bonds D) U.S. Treasury bills E) Long-term government bonds

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26)

Which one of the following statements is correct? A) The risk-free rate of return has a risk premium of 1.0. B) The reward for bearing risk is called the standard deviation. C) Risks and expected return are inversely related. D) The higher the expected rate of return, the wider the distribution of returns. E) Risk premiums are inversely related to the standard deviation of returns.

27) Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2020? A) U.S. Treasury bills B) Large-company stocks C) Long-term government debt D) Small-company stocks E) Long-term corporate debt

28) The average risk premium on long-term government bonds for the period 1926-2020 was equal to: A) zero. B) 1 percent. C) the rate of return on the bonds plus the corporate bond rate. D) the rate of return on the bonds minus the T-bill rate. E) the rate of return on the bonds minus the inflation rate.

29) The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk. A) lower; lower B) lower; higher C) higher; lower D) higher; higher

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30)

The standard deviation measures the _____ of a security's returns over time. A) average value B) frequency C) volatility D) mean E) arithmetic average

31) Which one of the following has the narrowest distribution of returns for the period 19262020? A) Long-term corporate bonds B) Long-term government bonds C) Intermediate-term government bonds D) Large-company stocks E) Small-company stocks

32) What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed? A) .05% B) .5% C) 1.0% D) 2.5% E) 5.0%

33) When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns? A) When the set of returns includes only risk-free rates B) When the set of returns has a wide frequency distribution C) When the set of returns has a very narrow frequency distribution D) When all of the rates of return in the set of returns are equal to each other E) Never

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34) Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur? A) The risk premium on any security in that market will be zero. B) The price of any one security in that market will remain constant at its current level. C) Each security in the market will have an annual rate of return equal to the risk-free rate. D) The price of each security in that market will frequently fluctuate. E) The prices of each security will fall to zero because the net present value of the investments will be zero.

35) New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? A) The price of New Labs stock remains unchanged. B) The price of New Labs stock increases rapidly and then settles back to its preannouncement level. C) The price of New Labs stock increases rapidly to a higher price and then remains at that price. D) All stocks quickly increase in value and then all but New Labs stock fall back to their original values. E) The value of all stocks suddenly increase and then level off at their higher values.

36)

If the financial markets are efficient then:

A) stock prices should remain constant. B) stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets. C) an increase in the value of one security should be offset by a decrease in the value of another security. D) stock prices will change only when an event actually occurs, not at the time the event is anticipated. E) stock prices should respond only to unexpected news and events.

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37)

According to the efficient markets hypothesis, professional investors will earn:

A) excess profits over the long term. B) excess profits, but only on short-term investments. C) a dollar return equal to the value paid for an investment. D) a return that cannot be accurately predicted because investments are subject to the random movements of the markets. E) a return that "beats the market."

38)

Semistrong form market efficiency states that the value of a security is based on:

A) all public and private information. B) historical information only. C) all publicly available information. D) all publicly available information plus any data that can be gathered from insider trading. E) random information with no clear distinction as to the source of that information.

39) Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are: A) weak form efficient. B) strong form efficient. C) semistrong form efficient. D) efficient at any level. E) aware that the trader is an insider.

40)

If the financial markets are semistrong form efficient, then: A) only the most talented analysts can determine the true value of a security. B) only individuals with private information have a marketplace advantage. C) technical analysis provides the best tool to use to gain a marketplace advantage. D) no one individual has an advantage in the marketplace. E) every security offers the same rate of return.

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41) One year ago, you purchased 500 shares of stock for $22 a share. The stock pays $0.32 a share in dividends each year. Today, you sold your shares for $24.50 a share. What is your total dollar return on this investment? A) $1,250 B) $1,090 C) $1,199 D) $1,164 E) $1,410

42) One year ago, you purchased a 7 percent coupon bond with a face value of $1,000 when it was selling for 102.5 percent of par. Today, you sold this bond for 104 percent of par. What is your total dollar return on this investment? A) $85 B) $55 C) $70 D) $15 E) $100

43) Bandor Furniture pays a constant annual dividend. Last year, the dividend yield was 4.9 percent when the stock was selling for $43.50 per share. What is the current price of the stock if the current dividend yield is 4 percent? A) $35.51 B) $53.29 C) $38.62 D) $41.54 E) $42.07

44) The Lost Continent Store pays a constant dividend. Last year, the dividend yield was 5.75 percent when the stock was selling for $67.5 a share. What must the stock price be today if the market currently requires a 5.25 percent dividend yield on this stock?

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A) $73.93 B) $61.63 C) $59.04 D) $78.24 E) $71.52

45) The stock of Arbitrage Training is priced at $37 per share and has a dividend yield of 2.8 percent. The firm pays constant annual dividends. What is the amount of the next dividend per share? A) $1.15 B) $1.77 C) $1.04 D) $.96 E) $1.20

46) One year ago, you bought a stock for $37.25 per share. You received a dividend of $1.27 per share last month and sold the stock today for $39.75 per share. What is the capital gains yield on this investment? A) 5.95% B) −6.29% C) 6.71% D) 3.19% E) −3.19%

47) Paneer Asphalt Materials pays a constant annual dividend of $1.26 per share on its stock. Last year at this time, the market rate of return on this stock was 14.9 percent. Today, the market rate has fallen to 12.5 percent. What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?

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A) −16.11% B) −23.16% C) 9.35% D) 17.66% E) 19.20%

48) One year ago, Stacey purchased 100 shares of KNF stock for $3,245. Today, she sold those shares for $35.00 per share. What is the capital gains yield on this investment if the dividend yield is 1.4 percent? A) −7.29% B) −7.86% C) 5.96% D) 7.86% E) 7.11%

49) One year ago, Marcus purchased 400 shares of Maverick Data stock for $21,052. Today, he sold those shares for $56.00 per share. What is the total return on this investment if the dividend yield is 1.9 percent? A) 9.10% B) 8.30% C) 6.56% D) 5.39% E) 7.61%

50) One year ago, LaTresa purchased 300 shares of Outland Company stock for $7,092. The stock does not pay any regular dividends, but it did pay a special dividend of $.43 a share last week. This morning, she sold her shares for $24.35 a share. What was the total percentage return on this investment?

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A) 7.67% B) 4.82% C) 2.50% D) 3.55% E) 8.24%

51) Assume that last year, Catrin earned 9.8 percent on his investments while U.S. Treasury bills yielded 2.3 percent, and the inflation rate was 1.4 percent. What real rate of return did he earn on his investments last year? A) 8.76% B) 8.28% C) 10.69% D) 9.37% E) 7.52%

52) Assume you earned 12.3 percent on your investments for a time period when the risk-free rate was 4.25 percent and the inflation rate was 1.2 percent. What was your real rate of return for the period? A) −9.71% B) 8.21% C) 10.97% D) −10.35% E) 10.23%

53) Assume that, historically, U.S. Treasury bills had an average return of 3.5 percent as compared to 6.1 percent on long-term government bonds. During this same time period, assume inflation averaged 3.0 percent. What was the average nominal risk premium on the long-term government bonds?

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A) 3.1% B) .1% C) 2.9% D) 1.8% E) 2.6%

54) Assume that, historically, the inflation rate averaged 3.0 percent and the U.S. Treasury bill yield was 3.5 percent, and the historical risk premium on small-company stocks was 13.2 percent. If these averages hold, what nominal rate of return should you expect to earn on smallcompany stocks over the next several years? A) 15.5% B) 16.7% C) 19.7% D) 13.5% E) 13.7%

55) Assume that, historically, large-company stocks returned 12.1 percent on average. The risk premium on these stocks was 8.6 percent and the inflation rate was 3.0 percent. What was the average nominal risk-free rate of return for those years? A) 3.5% B) 9.1% C) 4.6% D) .5% E) 6.5%

56) Over the past five years, a stock returned 8.4 percent, −8.7 percent, −3.2 percent, 1.5 percent, and 11.5 percent, respectively. What is the variance of these returns?

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A) .041302 B) .043375 C) .006824 D) .165321 E) .005459

57) Windsor stock has produced returns of 13.8 percent, 11.7 percent, 3.2 percent, −21.4 percent, and 8.9 percent over the past five years, respectively. What is the variance of these returns? A) .020574 B) .031947 C) .035682 D) .019515 E) .020556

58) Five years ago, you purchased 800 shares of stock. The annual returns have been 6.4 percent, -18.7 percent, 2.1 percent, 14.4 percent, and 32.6 percent, respectively. What is the variance of these returns? A) .049888 B) .030021 C) .034858 D) .050133 E) .050284

59) Over the past six years, a stock had annual returns of 12 percent, −3 percent, 2 percent, 4 percent, 9 percent, and 14 percent, respectively. What is the standard deviation of these returns? A) 7.08% B) 6.47% C) 5.40% D) 6.89% E) 6.19%

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60) A stock has produced returns of 11 percent, 4 percent, −5 percent, −8 percent, and 9 percent for the past five years, respectively. What is the standard deviation of these returns? A) 8.49% B) 7.52% C) 4.20% D) 8.41% E) 9.23%

61) A stock has yielded returns of 9 percent, 16 percent, 12 percent, and −6 percent over the past four years, respectively. What is the standard deviation of these returns? A) 15.52% B) 15.86% C) 11.05% D) 9.60% E) 10.87%

62) Kelly decided to accept the risk and purchased a high growth stock. Her returns for the past five years are 32 percent, 24 percent, 48 percent, 12 percent, and −9 percent, respectively. What is the standard deviation of these returns? A) 21.44% B) 35.46% C) 17.88% D) 32.03% E) 28.39%

63) Over the past four years, the annual percentage returns on large-company stocks were 15, 7, 4, and 18 percent. For the same time period, U.S. Treasury bills produced the returns of 6, 3, 2, and 4 percent. Inflation averaged 2.8 percent over the four-year period. The average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills.

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A) 6.47; .92 B) 6.47; 1.08 C) 7.98; .92 D) 7.98; 1.08 E) 7.98; 1.22

64) Over the past four years, a stock produced returns of 6 percent, 8 percent, 19 percent, and 2 percent, respectively. Based on these four years, what range of returns would you expect to see 95 percent of the time? A) −.58% to 31.33% B) −5.80% to 27.02% C) −.23% to 24.39% D) −.02% to 24.39% E) −5.80% to 23.30%

65) Over the past four years, a stock produced returns of 13 percent, −9 percent, 8 percent, and 14 percent, respectively. Based on these four years, what range of returns would you expect to see 99 percent of the time? A) −25.48% to 38.48% B) −22.39% to 26.41% C) −32.39% to 48.56% D) −18.46% to 22.41% E) −18.46% to 24.39%

66) A security produced returns of 11 percent, 7 percent, 9 percent, 13 percent, and −14 percent over the past five years, respectively. Based on these five years, what is the probability that this stock will earn more than 16.16 percent in any one given year?

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A) .5% B) 1.0% C) 2.5% D) 5.0% E) 16.0%

67) A security produced returns of 12 percent, −11 percent, −2 percent, 15 percent, and 9 percent over the past five years, respectively. Based on these five years, what is the probability that an investor in this stock will lose more than 17.06 percent in any one given year? A) .50% B) 1.00% C) 1.25% D) 2.50% E) 5.00%

68) A bond has an average return of 11.2 percent and a standard deviation of 14.6 percent. What range of returns would you expect to see 68 percent of the time on this security? A) −18% to 43.9% B) −18% to 40.1% C) −3.4% to 27.8% D) −3.4% to 25.8% E) −2.5% to 13.9%

69) You own a stock with an average return of 14.6 percent and a standard deviation of 21.2 percent. In any one given year, you have a 95 percent chance that you will not lose more than _____ percent nor earn more than ____ percent on this stock.

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A) −25.2; 48.2 B) −27.8; 57.0 C) −42.4; 57.0 D) −43.6; 49.4 E) −38.4; 42.6

70) Home Grown Tomatoes stock returned 11.6 percent, 3.2 percent, 8.1 percent, 12.4, and 9.8 percent over the past five years, respectively. What is the arithmetic average return for this period? A) 9.38% B) 10.62% C) 9.02% D) 11.93% E) 10.10%

71) You purchased 400 shares of KNO stock five years ago and have earned annual returns of 8.3 percent, 9.6 percent, 18.25 percent, −7.7 percent, and 8.1 percent, respectively. What is your arithmetic average return? A) 5.47% B) 6.05% C) 6.23% D) 7.31% E) 8.01%

72) A stock produced returns of 11 percent, 19 percent, and 2 percent over three of the past four years, respectively. The arithmetic average for the past four years is 9 percent. What is the standard deviation of the stock's returns for the four-year period?

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A) 5.46% B) 8.54% C) 9.09% D) 6.83% E) 7.70%

73) A stock produced returns of 14 percent, 17percent, and −1 percent over three of the past four years, respectively. The arithmetic average for the past four years is 6 percent. What is the standard deviation of the stock's returns for the four-year period? A) 11.63% B) 15.94% C) 9.70% D) 6.25% E) 11.23%

74) Your portfolio has provided you with returns of 11.4 percent, 6.8 percent, −.7 percent, and 14.6 percent over the past four years, respectively. What is the geometric average return for this period? A) 7.25% B) 7.72% C) 7.87% D) 7.63% E) 7.55%

75) The common stock of Mountain Farms has yielded 14.2 percent, 11.7 percent, 4.3 percent, −2.8 percent, and 15.8 percent over the past five years, respectively. What is the geometric average return?

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A) 7.91% B) 8.03% C) 8.22% D) 8.41% E) 7.64%

76) A stock has produced returns of 11.9 percent, 5.6 percent, 14.6 percent, and −4.2 percent over the past four years, respectively. What is the geometric average return? A) 7.14% B) 7.47% C) 6.83% D) 6.72% E) 7.02%

77) Over the last four years, the common stock of Plymouth Shippers has had an arithmetic average return of 10.4 percent. Three of those four years produced returns of 16.1 percent, 15.6 percent, and 9.4 percent, respectively. What is the geometric average return for this four-year period? A) 9.72% B) 10.41% C) 8.93% D) 10.22% E) 9.38%

78) Over the last four years, a stock has had an arithmetic average return of 12.8 percent. Three of those four years produced returns of 22.6 percent, 15.2 percent, and −24.1 percent, respectively. What is the geometric average return for this four-year period?

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A) 10.18% B) 8.39% C) 11.67% D) 12.40% E) 12.67%

79) Suppose a stock had an initial price of $47 per share, paid a dividend of $0.63 per share during the year, and had an ending share price of $ 38. What was the capital gains yield? A) 20.31% B) −23.68% C) 17.39% D) −19.15% E) −18.53%

80) Suppose you bought a $1,000 face value bond with a 5 percent coupon one year ago for $1,020. The bond sells today for $986. If the inflation rate last year was 2.3 percent, what was your total real rate of return on this investment? A) .02% B) −.71% C) .31% D) .89% E) −.48%

81) A stock has returns for five years of 14 percent, −16 percent, 12 percent, 23 percent, and 4 percent, respectively. The stock has an average return of ______ percent and a standard deviation of _____ percent.

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A) 7.40; 13.54 B) 7.04; 14.63 C) 7.40; 14.72 D) 8.40; 14.63 E) 8.40; 16.15

82) You've observed the following returns on Blast It Corporation's stock over the past five years: 19 percent, −23 percent, 31 percent, 18 percent, and −7 percent, respectively. What was the variance of the returns over this period? A) .03598 B) .04838 C) .03692 D) .04714 E) .03781

83) You purchased a zero coupon bond one year ago for $296.50. The market interest rate is now 6.5 percent. If the bond had 15 years to maturity when you originally purchased it, what is your total return to date if the face value of the bond is $1,000? A) 37.74% B) 27.40% C) 23.35% D) 19.95% E) 32.58%

84) You bought a share of 7.5 percent preferred stock for $91.60 last year. The market price for your stock is now $89.10. What is your total return to date on this investment? A) 5.51% B) 4.73% C) 5.86% D) 6.10% E) 5.46%

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85) Assume that long-term corporate bonds had an average return of 6.4 percent and a standard deviation of 2.9 percent for a 50-year period. What range of returns would you expect to see on these bonds 68 percent of the time? A) 3.5% to 9.3% B) 3.5% to 10.9% C) 2.9% to 6.4% D) .6% to 11.9% E) .6% to 12.2%

86) Assume that large-company stocks had an average return of 12.1 percent and a standard deviation of 19.6 percent for a 40-year period. What range of returns would you expect to see on these stocks 95 percent of the time? A) −30.3% to 53.2% B) −30.3% to 73.9% C) −30.3% to 64.1% D) −27.1% to 53.2% E) −27.1% to 51.3%

87) Alpha Industries stock had returns of 17 percent, −11 percent, 9 percent, and 2 percent for four of the last five years, respectively. The average return of the stock over this period was 8.7 percent. What is the standard deviation of the stock's returns? A) 14.67% B) 12.90% C) 15.14% D) 15.47% E) 14.31%

88) A stock has had returns of 14 percent, −18 percent, 2 percent, 33 percent, 27 percent, and 6 percent over the last six years, respectively. What is the geometric return for this stock?

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A) 10.82% B) 9.32% C) 10.31% D) 9.47% E) 8.88%

89) One year ago, you purchased 800 shares of stock for $37 per share. The stock pays $0.25 a share in dividends each year. Today, you sold your shares for $43.25 per share. What is your total dollar return on this investment? A) $5,040 B) $4,880 C) $4,989 D) $5,000 E) $5,200

90) One year ago, you purchased a 7 percent coupon bond with a face value of $1,000 when it was selling for 104 percent of par. Today, you sold this bond for 102.5 percent of par. What is your total dollar return on this investment? A) $85 B) $55 C) $70 D) $15 E) $100

91) Skyler Parts pays a constant annual dividend. Last year, the dividend yield was 3.75 percent when the stock was selling for $19.75 per share. What is the current price of the stock if the current dividend yield is 5 percent?

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A) $17.81 B) $14.81 C) $17.92 D) $20.84 E) $21.37

92) The Fix Anything Store pays a constant dividend. Last year, the dividend yield was 4.5 percent when the stock was selling for $36.25 a share. What must the stock price be today if the market currently requires a 4 percent dividend yield on this stock? A) $40.78 B) $28.48 C) $25.89 D) $45.09 E) $38.37

93) The stock of Pepito Organic Foods is priced at $45 per share and has a dividend yield of 2.2 percent. The firm pays constant annual dividends. What is the amount of the next dividend per share? A) $1.10 B) $1.72 C) $.99 D) $.91 E) $1.15

94) One year ago, you bought a stock for $62.35 per share. You received a dividend of $1.40 per share last month and sold the stock today for $63.75 per share. What is the capital gains yield on this investment?

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A) 1.91% B) −2.30% C) 2.25% D) 2.40% E) −2.40%

95) Constant Dreamers Advertising pays a constant annual dividend of $1.45 per share on its stock. Last year at this time, the market rate of return on this stock was 11.5 percent. Today, the market rate has fallen to 10.2 percent. What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today? A) −13.11% B) −11.30% C) 11.35% D) 12.96% E) 12.75%

96) One year ago, Jeni purchased 250 shares of TMO stock for $12,658. Today, she sold those shares for $52 per share. What is the capital gains yield on this investment if the dividend yield is 1.1 percent? A) −3.00% B) −2.75% C) 3.10% D) 2.70% E) 1.95%

97) One year ago, Brookes purchased 200 shares of Surfer Bay stock for $22,250. Today, he sold those shares for $114.00 per share. What is the total return on this investment if the dividend yield is 1.2 percent?

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A) 4.47% B) 3.67% C) 1.93% D) .76 E) 2.98

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Answer Key Test name: Chapter 10 Test Bank - Static 1) E 2) A 3) A 4) E 5) A 6) D 7) C 8) C 9) D 10) D 11) A 12) E 13) E 14) C 15) A 16) D 17) D 18) A 19) A 20) C 21) C 22) C 23) D 24) C 25) D 26) D Version 1

27) D 28) D 29) A 30) C 31) C 32) D 33) E 34) D 35) C 36) E 37) C 38) C 39) B 40) B 41) E Total dollar return = 500 × ($24.50 − 22 + .32) = $1,410 42) A Total dollar return = (1.04 × $1,000) − (1.025 × $1,000) + (.07 × $1,000) = $85 43) B D = .049 × $43.5 = $2.13 P0 = $2.13/.04 = $53.29 44) A D = .0575 × $67.50 = $3.88 P0 = $3.88/.0525 = $73.93 45) C D = .028 × $37 = $1.04 46) C Capital gains yield = ($39.75 − 37.25)/$37.25 = .0671, or 6.71% 47) E Version 1

Capital gains yield = [($1.26/.125) − ($1.26/.149)]/($1.26/.149) = .1920, or 19.20% 48) D Capital gains yield = [$35.00 − ($3,245/100)]/($3,245/100) = .0786, or 7.86% 49) B Total return = [($56.0 − ($21,052/400)]/($21,052/400) + .019 = .083, or 8.30% 50) B Total return = [$24.35 − ($7,092/300) + $.43]/($7,092/300) = .0482, or 4.82% 51) B Real return = (1.098/1.014) − 1 = .0828, or 8.28% 52) C Real return = (1.123/1.012) − 1 = .1097, or 10.97% 53) E Nominal risk premium = 6.1% − 3.5% = 2.6% 54) B Nominal return on small-company stocks = 3.5% + 13.2% = 16.7% 55) A Nominal risk-free rate = 12.1% − 8.6% = 3.5% 56) C Average return = (.084 − .087 − .032 + .015 + .115)2/5 = .019 σ2 = [(.084 − .019)2 + (−.087 − .019)2 + (−.032 − .019)2 + (.015 − .019)2 + (.115 − .019)2]/(5 − 1) =.006824 57) E Average return = (.138 + .117 + .032 − .214 + .089)/5 = .0324 σ2 = [(.138 − .0324)2 + (.117 − .0324)2 + (.023 −.0324)2 + (−.214 − .0324)2 + (.089 − .0324)2]/(5 − 1) = .020556 58) C Version 1

Average return = (.064 − .187 + .021 + .144 + .326)/5 = .0736 σ2 = [(.064 − .0736)2 + (−.187 − .0736)2 + (.021 − .0736)2 + (.144 − .0736)2 + (.326 − .0736)2]/(5 − 1) = .034858 59) B Average return = (.12 − .03 + .02 + .04 + .09 + .14)/6 = .06333 σ2 = [(.12 − .06333)2 + (−.03 − .06333)2 + (.02 − .06333)2 + (.04 − .06333)2 + (.09 − .071667)2 + (.14 − .06333)2]/(6 − 1) = .004187 σ = .004187.5 = .0647, or 6.47% 60) D Average return = (.11 + .04 − .05 − .08 + .09)/5 = .022 σ2 = [(.11 − .022)2 + (.04 − .022)2 + (−.05 − .022)2 + (−.08 − .022)2 + (.09 − .022)2]/(5 − 1) = .00707 σ = .00707.5 = .08408, or 8.41% 61) D Average return = (.09 + .16 + .12 − .06)/4 = .0775 σ2 = [(.09 − .0775)2 + (.16 − .0775)2 + (.18 − .0775)2 + (−.06 − .0775)2 ]/(4 − 1) = .009225 σ = .009225.5 = .0960, or 9.60% 62) A Average return = (.32 + .24 + .48 + .12 − .09)/5 = .0214 σ2 = [(.32 − .0214)2 + (.24 − .0214)2 + (.48 − .0214)2 + (.12 − .0214)2 + (−.09 − .0214)2]/(5 − 1) = .04598 σ = .04598.5 = .2144, or 21.44% 63) C Large-company stocks: Average nominal return = (.15 + .07 + .04 + .18)/4 = .11 Average real rate: r = (1.11/1.028) − 1 = .0798, or 7.98% U.S. Treasury bills: Average nominal return = (.06 + .03 + .02 + .04)/4 = .0375 Average real rate: r = (1.0375/1.028) − 1 = .0092, or .92% Version 1

64) E Average return = (.06 + .08 + .19 + .02)/4 = .0875, or 8.75% σ2 = [(.06 − .0875)2 + (.08 − .0875)2 + (.19 − .0875)2 + (.02 − .0875)2]/(4 − 1) = .005292 σ = .005292.5 = .072744, or 7.2744% 95 percent probability range = 8.75% ± 2 × 7.2744% Range of returns = −5.80% to 23.30% 65) A Average return = (.13 − .09 + .08 + .14)/4 = .065, or 6.5% σ2 = [(.13 − .065)2 + (−.09 − .065)2 + (.08 − .065)2 + (.14 − .065)2]/(4 − 1) = .011367 σ = .011367.5 = .106615, or 10.6615% 99 percent probability range = 6.5% ± 3 × 10.6615% Range of returns = −25.48% to 38.48% 66) E Average return = (.11 + .07 + .09 + .13 − .14)/5 = .052 σ2 = [(.11 − .052)2 + (.07 − .052)2 + (.09 − .052)2 + (.13 − .052)2 + (−.14 − .052)2]/(5 − 1) = .012020 σ = .012020.5 = .1096 Upper end of 68 percent probability range = .052 + .1096 = .1616, or 16.16% Probability of earning more than 16.16% = (1 − .68)/2 = .16, or 16% 67) D Average return = (.12 − .11 − .02 + .15 + .09)/5 = .046 σ2 = [(.12 −.046)2 + (−.11 − .046)2 + (−.02 − .046)2 + (.15 − .046)2 + (.09 − .046)2]/(5 − 1) = .01173 σ = .01173.5 = .1083 Lower end of 95 percent probability range = .046 − (2 × .1083) = −.1706, or −17.06% Probability of losing more than 17.06% = (1 − .95)/2 = .025, or 2.5% Version 1

68) D 68% probability range = 11.2% ± 14.6% = −3.4% to 25.8% 69) B 95% probability range = 14.6% ± 2 × 21.2% = −27.8% to 57.0% 70) C Arithmetic average = (.116 + .032 + .081 + .124 + .098)/5 = .0902 of 9.02% 71) D Arithmetic average = (.083 + .096 + .1825 − .077 + .081)/5 = .0731, or 7.31% 72) E Average return = .09 = (.11 + .19 + .02 + x)/4 x = .04 σ2 = [(.11 - .09)2 + (.19 - .09)2 + (.02 - .09)2 + (.04 - .09)2]/(4 - 1) = .005933 σ = .005933.5 = .0770, or 7.70% 73) E Average return = .06 = (.14 + .17 − .01 + x)/4 x = −.06 σ2 = [(.14 −.06)2 + (.17 − .06)2 + (−.01 − .06)2 + (−.06 − .06)2]/(4 − 1) = .01260 σ = .01260.5 = .1123, or 11.23% 74) C Geometric average return = (1.114 × 1.068 × .993 × 1.146)1/4 − 1 = .0787, or 7.87% 75) D Geometric average return = (1.142 × 1.117 × 1.043 × .972 × 1.158)1/5 − 1 = .0841, or 8.41% 76) D

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Geometric average return = (1.119 × 1.056 × 1.146 × .958)1/4 − 1 = .0672, or 6.72% 77) D Arithmetic average return = .104 = (.161 + .156 + .094 + x)/4 x = .005 Geometric average return = [1.161 × 1.156 × 1.094 × 1.005)1/4 − 1 = .1022, or 10.22% 78) A Arithmetic average return = .128 = (.226 + .152 − .241 + x)/4 x = −.375, or 37.5% Geometric average return = [1.226 × 1.152 × .759 × 1.375)1/4 − 1 = .1018, or 10.18% 79) D Capital gains yield = ($38 − 47)/$47 = −.1915, or −19.15% 80) B Nominal return = ($986 − 1,020 + 50)/$1,020 = .015686 Real rate = (1.015686/1.023) − 1 = −.0071, or −.71% 81) C Average return = (.14 − .16 + .12 + .23 + .04)/5 = .074, or 7.40% σ2 = [(.14 − .074)2 + (−.16 − .074)2 + (.12 − .074)2 + (.23 − .074)2 + (.04 − .074)2]/(5 − 1) = .021680 σ = .021680.5 = .1472, or 14.72% 82) B Average return = (.19 − .23 + .31 + .18 − .07)/5 = .076 σ2 = [(.19 − .076)2 + (−.23 − .076)2 + (.31 − .076)2 + (.18 − .076)2 + (−.07 − .076)2]/(5 − 1) = .04838 83) A Enter

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3.25%

−$1,000

Solve for

I/Y

PMT

$408.39

Total return = ($408.39 − 296.50)/$296.50 = .3774 or 37.74% 84) E Total return = ($89.10 − 91.60 + 7.50)/$91.60 = .0546, or 5.46% 85) A 68% range = 6.4% ± 2.9% = 3.5% to 9.3% 86) E 95% range = 12.1% ± (2 × 19.6%) = −27.1% to 51.3% 87) E Average return = .087 = (.17 − .11 + .09 + .02 + x)/5 x = .265 σ2 = [(.17 − .087)2 + (−.11 − .087)2 + (.09 − .087)2 + (.02 − .087)2 + (.265 − .087)2]/(5 − 1) = .020470 σ = .020470.5 = .1431, or 14.31% 88) B Geometric average = (1.14 × .82 × 1.02 × 1.33 × 1.27 × 1.06)1/6 − 1 = .0932, or 9.32% 89) E Total dollar return = 800 × ( $43.25 − 37 + .25) = $5,200 90) B Total dollar return = (1.025 × $1,000) − (1.04 × $1,000) + (.07 × $1,000) = $55 91) B D = .0375 × $19.75 = $.74 P0 = $.74/.05 = $14.81 Version 1

92) A D = .045 × $36.25 = $1.63 P0 = $1.63/.04 = $40.78 93) C D = .022 × $45 = $.99 94) C Capital gains yield = ($63.75 − 62.35)/$62.35 = .0225, or 2.25% 95) E Capital gains yield = [($1.45/.102) − ($1.45/.115)]/($1.45/.115) = .1275, or 12.75% 96) D Capital gains yield = [$52.00 − ($12,658/250]/($12,658/250) = .0270, or 2.70% 97) B Total return = [($114.00 − ($22,250/200)]/($22,250/200) + .012 = .0367, or 3.67%

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) A portfolio consists of 195 shares of Stock C that sells for $36 and 160 shares of Stock D that sells for $39. What is the portfolio weight of Stock C? A) .4706 B) .5735 C) .5294 D) .5956 E) .4034

You own the following portfolio of stocks. What is the portfolio weight of Stock C? Stock A B C D

Number of Shares 120 630 400 180

Price per Share $ 23 $ 19 $ 43 $ 42

A) .3031 B) .4356 C) .1914 D) .7716 E) .0699

3) You own 410 shares of Stock X at a price of $39 per share, 280 shares of Stock Y at a price of $62 per share, and 345 shares of Stock Z at a price of $85 per share. What is the portfolio weight of Stock Y? A) .4679 B) .2551 C) .2770 D) .4010 E) .3116

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4) You have a portfolio of two stocks that has a total value of $36,000. The portfolio is 43 percent invested in Stock J. If you own 225 shares of Stock K, what is Stock K's share price? A) $85.12 B) $87.05 C) $81.07 D) $91.20 E) $87.05 F) $83.60

5) A portfolio consists of $14,800 in Stock M and $22,400 invested in Stock N. The expected return on these stocks is 8.70 percent and 12.30 percent, respectively. What is the expected return on the portfolio? A) 11.58% B) 10.87% C) 10.13% D) 10.50% E) 9.29%

6) You have a portfolio that is 26 percent invested in Stock R, 23 percent invested in Stock S, with the remainder in Stock T. The expected return on these stocks is 7.7 percent, 9.1 percent, and 11.4 percent, respectively. What is the expected return on the portfolio? A) 9.65% B) 9.91% C) 9.40% D) 8.62% E) 10.43%

7) You have gathered the following information on your investments. What is the expected return on the portfolio? Stock F

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Number of Shares 200

Price per Share $ 29

Expected Return 12.88% 2

G H

260 200

$ 15 $ 41

9.50% 10.26%

A) 11.91% B) 10.88% C) 11.43% D) 12.40% E) 10.94%

8) You have $15,800 to invest and would like to create a portfolio with an expected return of 10.35 percent. You can invest in Stock K with an expected return of 9.2 percent and Stock L with an expected return of 12.8 percent. How much will you invest in Stock K? A) $5,047.22 B) $9,856.71 C) $10,752.78 D) $6,729.63 E) $4,416.32

9) You recently purchased a stock that is expected to earn 25 percent in a booming economy, 14 percent in a normal economy, and lose 5 percent in a recessionary economy. There is 23 percent probability of a boom, 62 percent chance of a normal economy, and 15 percent chance of a recession. What is your expected rate of return on this stock? A) 11.33% B) 6.84% C) 13.00% D) 13.68% E) 2.94%

10)

Based on the following information, what is the expected return?

State of Economy Recession Normal Boom

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Probability of State of Economy .23 .26 .51

Rate of Return if State Occurs −11.10% 12.60% 21.40% 3

A) 14.19% B) 11.64% C) 16.74% D) 7.63% E) 9.64%

11) There is 12 percent probability of recession, 13 percent probability of a poor economy, 51 percent probability of a normal economy, and 24 percent probability of a boom. A stock has returns of −20 percent, 3.6 percent, 11.4 percent, and 27.1 percent in these states of the economy, respectively. What is the stock's expected return? A) 10.39% B) 5.53% C) 12.79% D) 15.19% E) 9.52%

12) If the economy booms, RTF, Incorporated, stock is expected to return 12 percent. If the economy goes into a recessionary period, then RTF is expected to only return 2 percent. The probability of a boom is 78 percent while the probability of a recession is 22 percent. What is the variance of the returns on RTF, Incorporated, stock? A) .001716 B) .000961 C) .001338 D) .041425 E) .049000

13)

Based on the following information, what is the variance?

State of Economy Recession Normal Boom

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Probability of State of Economy .22 .47 .31

Rate of Return if State Occurs −9.00% 10.50% 21.50%

A) .10972 B) .02408 C) .06690 D) .01204 E) .01806

14) A stock will have a loss of 10.2 percent in a bad economy, a return of 10 percent in a normal economy, and a return of 23.9 percent in a hot economy. There is 24 percent probability of a bad economy, 45 percent probability of a normal economy, and 31 percent probability of a hot economy. What is the variance of the stock's returns? A) .12551 B) .03151 C) .02363 D) .01575 E) .01182

15) If the economy booms, Meyer&Company stock will have a return of 20.9 percent. If the economy goes into a recession, the stock will have a loss of 13.2 percent. The probability of a boom is 62 percent while the probability of a recession is 38 percent. What is the standard deviation of the returns on the stock?

A) 15.05% B) 16.55% C) 9.43% D) 12.81% E) 13.97%

16)

Based on the following information, what is the standard deviation of returns?

State of Economy Recession Normal Boom

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Probability of State of Economy .24 .27 .49

Rate of Return if State Occurs −.110 .125 .235

A) 25.57% B) 27.89% C) 13.85% D) 19.71% E) 19.18%

17) A stock will have a loss of 12.5 percent in a recession, a return of 11.2 percent in a normal economy, and a return of 25.9 percent in a boom. There is 22 percent probability of a recession, 47 percent probability of normal economy, and 31 percent probability of boom. What is the standard deviation of the stock's returns? A) 12.64% B) 13.79% C) 19.01% D) 10.34% E) 11.82%

18) You have a portfolio that is invested 17 percent in Stock A, 44 percent in Stock B, and 39 percent in Stock C. The betas of the stocks are .78, 1.33, and 1.62, respectively. What is the beta of the portfolio? A) 1.52 B) 1.30 C) 1.24 D) 1.35 E) 1.11

19) You have a portfolio that is invested 18 percent in Stock R, 42 percent in Stock S, and the remainder in Stock T. The beta of Stock R is .77, and the beta of Stock S is 1.32. The beta of your portfolio is 1.09. What is the beta of the Stock T?

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A) 1.26 B) .85 C) 1.05 D) 1.09 E) .99

20) You have a portfolio that is equally invested in Stock F with a beta of 1.09, Stock G with a beta of 1.46, and the market. What is the beta of your portfolio? A) .85 B) 1.18 C) 1.28 D) 1.42 E) 1.14

21) You have a portfolio that is equally invested in Stock F with a beta of 1.07, Stock G with a beta of 1.44, and the risk-free asset. What is the beta of your portfolio? A) .84 B) .95 C) 1.30 D) 1.17 E) .90

22) You own a portfolio that has a total value of $230,000 and it is invested in Stock D with a beta of .83 and Stock E with a beta of 1.42. The beta of your portfolio is equal to the market beta. What is the dollar amount of your investment in Stock D? A) $66,271.19 B) $33,136.01 C) $163,728.81 D) $57,987.29 E) $49,703.60

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23)

What is the beta of a portfolio comprised of the following securities?

Stock A B C

Amount Invested $ 4,400 $ 5,400 $ 7,900

Security Beta 1.52 1.63 1.00

A) 1.321 B) 1.630 C) 1.383 D) 1.520 E) 1.000

24) Your portfolio has a beta of 1.57. The portfolio consists of 16 percent U.S. Treasury bills, 35 percent Stock A, and 49 percent Stock B. Stock A has a risk level equivalent to that of the overall market. What is the beta of Stock B? A) 2.49 B) .40 C) 4.49 D) 1.92 E) .87

25) You own a portfolio that has a total value of $75,000 and a beta of 1.17. You have another $16,000 to invest and you would like the beta of your portfolio to decrease to 1.10. What does the beta of the new investment have to be in order to accomplish this? A) .971 B) .675 C) 1.135 D) .772 E) .871

26) The risk-free rate is 2.6 percent and the market expected return is 12.3 percent. What is the expected return of a stock that has a beta of .90?

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A) 13.67% B) 10.07% C) 14.81% D) 11.33% E) 12.50%

27) The risk-free rate of return is 3.2 percent and the market risk premium is 10 percent. What is the expected rate of return on a stock with a beta of 1.3? A) 7.08% B) 14.16% C) 16.20% D) 13.00% E) 8.10%

28) The common stock of Flavorful Teas has an expected return of 12.00 percent. The return on the market is 8 percent and the risk-free rate of return is 3.0 percent. What is the beta of this stock? A) .56 B) .90 C) 1.72 D) 1.80 E) 3.00

29) The stock of Big Joe's has a beta of 1.56 and an expected return of 12.90 percent. The risk-free rate of return is 5.4 percent. What is the expected return on the market? A) 15.92% B) 8.65% C) 7.50% D) 4.48% E) 10.21%

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30) The expected return on HiLo stock is 14.50 percent while the expected return on the market is 13.2 percent. The beta of HiLo is 1.15. What is the risk-free rate of return? A) 5.68% B) 4.53% C) 1.30% D) 2.25% E) 2.27%

31) Which one of the following stocks is correctly priced if the risk-free rate of return is 3.1 percent and the market risk premium is 7.6 percent? Stock A B C D E

Beta .79 1.47 1.28 1.46 .95

Expected Return 8.47% 14.50 11.22 11.68 10.32

A) Stock A B) Stock B C) Stock E D) Stock D E) Stock C

32) A stock has a beta of .86 and an expected return of 8.45 percent. If the risk-free rate is 2.2 percent, what is the stock's reward-to-risk ratio? A) 9.83% B) 6.36% C) 8.55% D) 7.27% E) 6.71%

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33) A stock has a beta of 1.20 and a reward-to-risk ratio of 6.05 percent. If the risk-free rate is 3.5 percent, what is the stock's expected return? A) 10.35% B) 9.93% C) 9.42% D) 10.76% E) 2.13%

34) A stock has a beta of 1.16 and an expected return of 10.31 percent. If the stock's rewardto-risk ratio is 6.59 percent, what is the risk-free rate? A) 2.67% B) 2.46% C) 2.56% D) 1.39% E) 2.33%

35) A stock has an expected return of 11.25 percent and its reward-to-risk ratio is 7.3 percent. If the risk-free rate is 2.8 percent, what is the stock's beta? A) 1.08 B) 1.30 C) 1.16 D) 1.54 E) 1.35

36) A stock has an expected return of 10.32 percent. Based on the following information, what is the stock's return in a boom state of the economy? State of Economy Recession Normal Boom

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Probability of State of Economy .27 .42 .31

Rate of Return if State Occurs −9.5% 11.0% ?

A) 23.33% B) 24.99% C) 27.87% D) 29.09% E) 26.66%

37) You have a portfolio worth $58,500 that has an expected return of 13.1 percent. The portfolio has $16,700 invested in Stock O, $24,500 invested in Stock P, with the remainder in Stock Q. The expected return on Stock O is 17.9 percent and the expected return on Stock P is 11.1 percent. What is the expected return on Stock Q? A) 12.33% B) 14.03% C) 13.18% D) 11.30% E) 13.10%

38) You decide to invest in a portfolio consisting of 20 percent Stock A, 20 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy

Probability of State Economy

Boom Normal Recession

.21 .53 .26

Return if State Occurs Stock A Stock B Stock C -16.0% -2.5% -21.4% 12.2% 7.1% 15.7% 25.8% 14.4% 30.3%

A) 10.38% B) 11.33% C) 10.85% D) 12.27% E) 13.39%

39) You decide to invest in a portfolio consisting of 22 percent Stock A, 45 percent Stock B, and the remainder in Stock C. Based on the following information, what is the variance of your portfolio? Version 1

State of Economy

Probability of State Economy

Recession Normal Boom

.125 .687 .188

Return if State Occurs Stock A Stock B Stock C -11.20% -4.60% -13.60% 10.50% 10.88% 18.00% 21.77% 25.55% 30.25%

A) .00872 B) .01059 C) .01265 D) .00984 E) .00937

40) You decide to invest in a portfolio consisting of 22 percent Stock X, 43 percent Stock Y, and the remainder in Stock Z. Based on the following information, what is the standard deviation of your portfolio? State of Economy

Probability of State Economy

Normal Boom

.83 .17

Return if State Occurs Stock X Stock Y Stock Z 9.70% 3.10% 12.10% 17.00% 25.00% 16.50%

A) 2.23% B) 1.67% C) 4.72% D) 6.88% E) 5.90%

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Answer Key Test name: Chapter 11 Test Bank - Algo 1) C Weight of C = 195($36)/[195($36) + 160($39)] Weight of C = .5294 2) B Weight of C = (400 × $43)/[(120 × $23) + (630 × $19) + (400 × $43) + (180 × $42)] Weight of C = $17,200/$39,490 Weight of C = .4356 3) C Weight of Y = 280($62)/[410($39) + 280($62) + 345($85)] Weight of Y = .2770 4) D Dollar value of K = (1 − .43)($36,000) Dollar value of K = $20,520 Stock price of K = $20,520/225 shares Stock price of K = $91.20 5) B Weight of M = $14,800/($14,800 + 22,400) Weight of M = .3978 Portfolio expected return = .3978(8.7%) + (1 − .3978)(12.3%) Portfolio expected return = 10.87% 6) B Portfolio expected return = .26(7.7%) + .23(9.1%) + (1 − .26 − .23)(11.4%) Portfolio expected return = 9.91% 7) E Version 1

Portfolio value = 200($29) + 260($15) + 200($41) Portfolio value = $17,900 Weight of F = 200($29)/$17,900 = .3240 Weight of G = 260($15)/$17,900 = .2179 Weight of H = 200($41)/$17,900 = .4581 Portfolio expected return = .3240(12.88%) + .2179(9.50%) + .4581(10.26%) Portfolio expected return = 10.94% 8) C Portfolio expected return = 10.35% = 9.2%(wL) + 12.8%(1 − wL) wL = .6806 Amount to invest in L = .6806($15,800) Amount to invest in L = $10,752.78 9) D E(R) = .23(.25) + .62(.14) + .15(−.05) E(R) = .1368, or 13.68% 10) B E(R) = .23(−.111) + .26(.126) + .51(.214) E(R) = .1164, or 11.64% 11) A E(R) = .12(−.200) + .13(.036) + .51(.114) + .24(.271) E(R) = .1039, or 10.39% 12) A E(R) = .78(.12) + .22(.02) E(R) = .0980 σ2 = .78(.12 − .0980)2 + .22(.02 − .0980)2 σ2 = .000378 + .001338 σ2 = .001716 13) D

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E(R) = .22(−.090) + .47(.105) + .31(.215) E(R) = .0962, or 9.62% σ2 = .22(−.090 − .0962)2 + .47(.105 − .0962)2 + .31(.215 − .0962)2 σ2 = .01204 14) D E(R) = .24(−0.102) + .45(0.1) + .31(0.239) E(R) = .0946, or 9.46% σ2 = .24(−0.102 − .0946)2 + .45(0.1 − .0946)2 + .31(0.239 − .0946)2 σ2 = .01575 15) B E(R) = .62(.209) + .38(-.132) E(R) = .0794, or 7.94% σ2 = .38(-.132 − .0794)2 + .62(.209 − .0794)2 σ2 = .027396 σ = .0273961/2 σ = .1655, or 16.55% 16) C E(R) = .24(−.110) + .27(.125) + .49(.235) E(R) = .1225, or 12.25% σ2 = .24(−.110 − .1225)2 + .27(.125 − .1225)2 + .49(.235 − .1225)2 σ2 = .01918 σ = .019181/2 σ = .1385, or 13.85% 17) B E(R) = .22(−.125) + .47(.112) + .31(.259) E(R) = .1054, or 10.54% σ2 = .22(−.125 − .1054)2 + .47(.112 − .1054)2 + .31(.259 − .1054)2 σ2 = .01901 σ = .019011/2 σ = .1379, or 13.79% Version 1

18) D βPortfolio = .17(.78) + .44(1.33) + .39(1.62) βPortfolio = 1.35 19) E βPortfolio = 1.09 = .18(.77) + .42(1.32) + .40(βT) βT = .99 20) B βPortfolio = 1/3(1.09) + 1/3(1.46) + 1/3(1) βPortfolio = 1.18 21) A βPortfolio = 1/3(1.07) + 1/3(1.44) + 1/3(0) βPortfolio = .84 22) C βPortfolio = 1.0 = .83wD + (1 − wD)(1.42) wD = .712 Dollar investment in Stock D = .712($230,000) Dollar investment in Stock D = $163,728.81 23) A Portfolio value = $4,400 + 5,400 + 7,900 Portfolio value = $17,700 βPortfolio = 1.52($4,400/$17,700) + 1.63($5,400/$17,700) + 1.00($7,900/$17,700) βPortfolio = 1.321 24) A βPortfolio = 1.57 = .16(0) + .35(1.0) + .49βB 1.57 = .35 + .49βB βB = 2.49 The beta of a risk-free asset, i.e., a U. S. Treasury bill, is zero. The beta of the market is 1.0. 25) D

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βPortfolio = 1.10 = 1.17[$75,000/($16,000 + 75,000)] + βX[$16,000/($16,000 + 75,000)] βX = .772 26) D E(R) = .026 + .90(.123 − .026) E(R) = .1133, or 11.33% 27) C E(R) = .032 + 1.30(.10) E(R) = .1620, or 16.20% 28) D E(R) = .1200 = .030 + β(.080 − .030) .0900 = .050β β = 1.80 29) E E(R) = .129 = .054 + 1.56[E(RM) − .054] .075 = 1.56[E(RM) − .054] E(RM) = .1021, or 10.21% 30) B E(R) = .1450 = Rf + 1.15[.132 − Rf] .1450 = Rf + .1518 − 1.15Rf .15Rf = .0068 Rf = .0453, or 4.53% 31) C E(RA): = .031 + .79(.076) = .0910, or 9.10% Stock A is overpriced. E(RB): = .031 + 1.47(.076) = .1427, or 14.27% Stock B is underpriced. E(RC): = .031 + 1.28(.076) = .1283, or 12.83% Stock C is overpriced. E(RD): = .031 + 1.46(.076) = .1420, or 14.20% Stock D is overpriced. E(RE): = .031 + .95(.076) = .1032, or 10.32% Stock E is correctly priced. 32) D Reward-to-risk ratio = (.0845 − .022)/.86 Reward-to-risk ratio = .0727, or 7.27% Version 1

33) D Reward-to-risk ratio = .0605 = [E(R) − .035]/1.20 E(R) = .1076, or 10.76% 34) A Reward-to-risk ratio = .0659 = (.1031 − Rf)/1.16 Rf = .0267, or 2.67% 35) C Reward-to-risk ratio = .073 = (.1125 − .028)/β β = 1.16 36) E E(R) = .1032 = .27(−.095) + .42(.110) + .31X X = .2666, or 26.66% 37) D Value in Stock Q = $58,500 − 16,700 − 24,500 Value in Stock Q = $17,300 Portfolio expected return = .131 = .179($16,700/$58,500) + .111($24,500/$58,500) + E(RQ)($17,300/$58,500) E(RQ) = .1130, or 11.30% 38) A RRecession = .20(−.160) + .20(−.025) + .60(−.214) = −.1654 RNormal = .20(.122) + .20(.071) + .60(.157) = .1328 RBoom = .20(.258) + .20(.144) + .60(.303) = .2622 E(R) = .21(−.1654) + .53(.1328) + .26(.2622) E(R) = .1038, or 10.38% 39) E

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RRecession = .22(−.112) + .45(−.046) + .33(−.136) = −.0902 RNormal = .22(.105) + .45(.1088) + .33(.180) = .1315 RBoom = .22(.2177) + .45(.2555) + .33(.3025) = .2627 E(R) = .125(−.0902) + .687(.1315) + .188(.2627) E(R) = .1284, or 12.84% σ2 = .125(−.0902 − .1284)2 + .687(.1315 − .1284)2 + .188(.2627 − .1284)2 σ2 = .00937 40) C RNormal = .22(.097) + .43(.031) + .35(.121) = .0770 RBoom = .22(.170) + .43(.250) + .35(.165) = .2027 E(R) = .83(.0770) + .17(.2027) E(R) = .0984, or 9.84% σ2 = .83(.0770 − .0984)2 + .17(.2027 − .0984)2 σ2 = .00223 σ = .002231/2 σ = .0472, or 4.72%

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) 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? A) Expected return B) Real return C) Market rate D) Systematic return E) Risk premium

A portfolio is: A) a single risky security. B) any security that is equally as risky as the overall market. C) any new issue of stock. D) a group of assets held by an investor. E) an investment in a risk-free security.

3) Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? A) Portfolio variance B) Portfolio standard deviation C) Portfolio weight D) Portfolio expected return E) Portfolio beta

Systematic risk is defined as:

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A) any risk that affects a large number of assets. B) the total risk of an individual security. C) diversifiable risk. D) asset-specific risk. E) the risk unique to a firm's management.

Unsystematic risk can be defined by all of the following except: A) unrewarded risk. B) diversifiable risk. C) market risk. D) unique risk. E) asset-specific risk.

6) Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? A) Systematic B) Unsystematic C) Diversification D) Security market line E) Capital asset pricing model

7) The systematic risk principle states that the expected return on a risky asset depends only on the asset’s _____________blank risk. A) unique B) diversifiable C) asset-specific D) market E) unsystematic

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8) The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the: A) squared deviation. B) beta coefficient. C) standard deviation. D) mean. E) variance.

9) The security market line is a linear function that is graphed by plotting data points based on the relationship between the: A) risk-free rate and beta. B) market rate of return and beta. C) market rate of return and the risk-free rate. D) risk-free rate and the market rate of return. E) expected return and beta.

10)

The slope of the security market line represents the: A) risk-free rate. B) market risk premium. C) beta coefficient. D) risk premium on an individual asset. E) market rate of return.

11) The security market line is defined as a positively sloped straight line that displays the relationship between the: A) beta and standard deviation of a portfolio. B) systematic and unsystematic risks of a security. C) nominal and real rates of return. D) expected return and beta of either a security or a portfolio. E) risk premium and beta of a portfolio.

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12) Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive? A) Risk-free rate B) Market risk premium C) Expected return minus the risk-free rate D) Market rate of return E) Cost of capital

13) 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) An increase in the rate of return in a recessionary economy B) An increase in the probability of an economic boom C) A decrease in the probability of a recession occurring D) A decrease in the probability of an economic boom E) An increase in the rate of return for a normal economy

14) 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. A) E( RM) − Rf B) E( R) − E( RM) C) E( R) − [E( RM) + Rf] D) β[E( RM) − Rf] E) β[E( R) − Rf]

15) The expected rate of return on Delaware Shores 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?

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A) The variance must decrease if the probability of occurrence for a boom increases. B) The variance will remain constant as long as the sum of the economic probabilities is 100 percent. C) The variance can be positive, zero, or negative, depending on the expected rate of return assigned to each economic state. D) The variance must be positive provided that each state of the economy produces a different expected rate of return. E) The variance is independent of the economic probabilities of occurrence.

16)

Which one of the following statements is correct?

A) The risk premium on a risk-free security is generally considered to be one percent. B) The expected rate of return on any security, given multiple states of the economy, must be positive. C) There is an inverse relationship between the level of risk and the risk premium given a risky security. D) If a risky security is correctly priced, its expected risk premium will be positive. E) If a risky security is priced correctly, it will have an expected return equal to the riskfree rate.

17)

Which statement is true? A) The expected rate of return on any portfolio must be positive. B) The arithmetic average of the betas for each security held in a portfolio must equal

1.0. C) The beta of any portfolio must be 1.0. D) The weights of the securities held in any portfolio must equal 1.0. E) The standard deviation of any portfolio must equal 1.0.

18) Consider a portfolio comprised of four risky securities. Assume the economy has three economic states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?

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A) The portfolio beta must be 1.0. B) The portfolio expected rate of return must be the same for each economic state. C) The portfolio risk premium must equal zero. D) The portfolio expected rate of return must equal the expected market rate of return. E) There must be equal probabilities that the state of the economy will be a boom or a bust.

19) Which one of the following is the best example of an announcement that is most apt to result in an unexpected return? A) A news bulletin that the anticipated layoffs by a firm will occur as expected on December 1 B) Announcement that the CFO of the firm is retiring June 1 as previously announced C) Announcement that a firm will continue its practice of paying a $3 a share annual dividend D) Statement by a firm that it has just discovered a manufacturing defect and is recalling its product E) The verification by senior management that the firm is being acquired as had been rumored

20)

Which one of the following is the best example of unsystematic risk? A) Inflation exceeding market expectations B) A warehouse fire C) Decrease in corporate tax rates D) Decrease in the value of the dollar E) Increase in consumer spending

21)

Which one of these represents systematic risk?

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A) Major layoff by a regional manufacturer of power boats B) Increase in consumption created by a reduction in personal tax rates C) Surprise firing of a firm's chief financial officer D) Closure of a major retail chain of stores E) Product recall by one manufacturer

22)

Which one of these is the best example of systematic risk? A) Discovery of a major gas field B) Decrease in textile imports C) Increase in agricultural exports D) Decrease in gross domestic product E) Decrease in management bonuses for banking executives

23) Standard deviation measures _____________blank risk while beta measures _____________blank risk. A) systematic; unsystematic B) unsystematic; systematic C) total; unsystematic D) total; systematic E) asset-specific; market

24)

Which one of the following portfolios will have a beta of zero? A) A portfolio that is equally as risky as the overall market B) A portfolio that consists of a single stock C) A portfolio comprised solely of U. S. Treasury bills D) A portfolio with a zero variance of returns E) No portfolio can have a beta of zero.

25)

Which one of the following best exemplifies unsystematic risk?

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A) Unexpected economic collapse B) Unexpected increase in interest rates C) Unexpected increase in the variable costs for a firm D) Sudden decrease in inflation E) Expected increase in tax rates

26) The risk premium for an individual security is based on which one of the following types of risk? A) Total B) Surprise C) Diversifiable D) Systematic E) Unsystematic

27) 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? A) Security beta multiplied by the market rate of return B) Market risk premium C) Security beta multiplied by the market risk premium D) Risk-free rate of return E) Zero

28)

Systematic risk is: A) totally eliminated when a portfolio is fully diversified. B) defined as the total risk associated with surprise events. C) risk that affects a limited number of securities. D) measured by beta. E) measured by standard deviation.

29)

Which statement is correct?

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A) A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0. B) Any portfolio that is correctly valued will have a beta of 1.0. C) A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph. D) A risk-free security plots at the origin on a security market line graph. E) An underpriced security will plot above the security market line.

30)

Portfolio diversification eliminates: A) all investment risk. B) the portfolio risk premium. C) market risk. D) unsystematic risk. E) the reward for bearing risk.

31) 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? A) Increase the expected risk premium B) Reduce the beta of the portfolio to one C) Increase the security's risk premium D) Reduce the portfolio's systematic risk level E) Reduce the portfolio's unique risks

32) For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta: A) of zero. B) that is > 0 but < 1. C) of one. D) that is > 1. E) that is infinite.

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33)

The addition of a risky security to a fully diversified portfolio: A) must decrease the portfolio's expected return. B) must increase the portfolio beta. C) may or may not affect the portfolio beta. D) will increase the unsystematic risk of the portfolio. E) will have no effect on the portfolio beta or its expected return.

34) A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is .74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta: A) must be 1.0 because of the large number of securities in the portfolio. B) is the geometric average of the individual security betas. C) must be less than the market beta. D) will be between 0 and 1.0. E) will be greater than or equal to .74 but less than or equal to 1.51.

35) The beta of a risky portfolio cannot be less than _____________blank nor greater than _____________blank. A) 0; 1 B) 1; the market beta C) the lowest individual beta in the portfolio; market beta D) the market beta; the highest individual beta in the portfolio E) the lowest individual beta in the portfolio; the highest individual beta in the portfolio

36) If a security plots to the right and below the security market line, then the security has _____________blank systematic risk than the market and is _____________blank.

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A) more; overpriced B) more; underpriced C) less; overpriced D) less; underpriced E) less; correctly priced

37) Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio: A) for the portfolio must equal 1.0. B) for the portfolio must be less than the market risk premium. C) for each security must equal zero. D) of each security is equal to the risk-free rate. E) of each security must equal the slope of the security market line.

38)

Which statement is correct? A) An underpriced security will plot below the security market line. B) A security with a beta of 1.54 will plot on the security market line if it is correctly

priced. C) A portfolio with a beta of .93 will plot to the right of the overall market. D) A security with a beta of .99 will plot above the security market line if it is correctly priced. E) A risk-free security will plot at the origin.

39)

Which one of the following is the vertical intercept of the security market line? A) Market rate of return B) Individual security rate of return C) Market risk premium D) Individual security beta multiplied by the market risk premium E) Risk-free rate

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40) According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the: A) market risk premium. B) risk-free rate. C) market rate of return. D) security’s standard deviation. E) security’s beta.

41) 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? A) An increase in the risk-free rate B) Decrease in the security's beta C) Overpricing of the stock in the marketplace D) Increase in the market risk-to-reward ratio E) Decrease in the market rate of return

42)

The expected return on a security is not affected by the: A) security’s unique risks. B) risk-free rate. C) security’s risk premium. D) security’s beta. E) market rate of return.

43)

The capital asset pricing model:

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A) assumes the market has a beta of zero and the risk-free rate is positive. B) rewards investors based on total risk assumed. C) considers the relationship between the fluctuations in a security’s returns versus the market’s returns. D) applies to portfolios but not to individual securities. E) assumes the market risk premium is constant over time.

44) 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? A) Invest the entire $5,000 in a stock with a beta of 1.0 B) Invest $2,500 in a stock with a beta of 1.98 and $2,500 in a stock with a beta of 1.0 C) Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0 D) Invest $2,500 in a stock with a beta of 1.0, $1,250 in a risk-free asset, and $1,250 in a stock with a beta of 2.0 E) Invest $2,000 in a stock with a beta of 3, $2,000 in a risk-free asset, and $1,000 in a stock with a beta of 1.0

45) Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else held constant? A) An increase in the risk level of that security as measured by standard deviation B) An increase in the risk-free rate given a security beta of 1.42 C) A decrease in the market rate of return given a security beta of 1.13 D) A decrease in the market rate of return given a security beta of .78 E) A decrease in the risk-free rate given a security beta of 1.06

46) Midwest Fastener Supply stock is expected to return 16 percent in a booming economy, 12 percent in a normal economy, and −3 percent in a recession. The probabilities of an economic boom, normal state, or recession are 12 percent, 80 percent, and 8 percent, respectively. What is the expected rate of return on this stock?

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A) 11.28% B) 10.67% C) 10.95% D) 11.91% E) 11.70%

47) Crabby Shores stock is expected to return 15.7 percent in a booming economy, 9.8 percent in a normal economy, and 2.3 percent in a recession. The probabilities of an economic boom, normal state, or recession are 15 percent, 73 percent, and 12 percent, respectively. What is the expected rate of return on this stock? A) 10.07% B) 10.74% C) 10.61% D) 9.79% E) 8.68%

48) Southern Wear stock has an expected return of 15.1 percent. The stock is expected to lose 8 percent in a recession and earn 28 percent in a boom. The probabilities of a recession, a normal economy, and a boom are 2 percent, 87 percent, and 11 percent, respectively. What is the expected return on this stock if the economy is normal? A) 14.00% B) 17.04% C) 14.79% D) 15.26% E) 16.43%

49) Bernard Companies stock has an expected return of 9.5 percent. The stock is expected to return 11 percent in a normal economy and 14.3 percent in a boom. The probabilities of a recession, normal economy, and a boom are 10 percent, 84 percent, and 6 percent, respectively. What is the expected return if the economy is in a recession?

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A) −5.44% B) −2.97% C) −5.98% D) −10.98% E) −6.98%

50) Bass Clef Music Stores' stock has a risk premium of 7 percent while the inflation rate is 1.9 percent, and the risk-free rate is 2.2 percent. What is the expected return on this stock? A) 10.9% B) 7.3% C) 9.2% D) 10.8% E) 12.3%

51) Assume the economy has an 18 percent chance of booming, a 3 percent chance of being recessionary, and being normal the remainder of the time. A stock is expected to return 16.8 percent in a boom, 12.9 percent in a normal economy, and −4.5 percent in a recession. What is the expected rate of return on this stock? A) 7.98% B) 8.63% C) 9.17% D) 13.08% E) 10.68%

52) Malone Imports stock should return 12 percent in a boom, 10 percent in a normal economy, and 2 percent in a recession. The probabilities of a boom, normal economy, and recession are 5 percent, 85 percent, and 10 percent, respectively. What is the variance of the returns on this stock?

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A) .000522 B) .000611 C) .024718 D) .006107 E) .015254

53) The common stock of The Dominic Companies should return 29 percent in a boom, 12 percent in a normal economy, and −15 percent in a recession. The probabilities of a boom, normal economy, and recession are 12 percent, 86 percent, and 2 percent, respectively. What is the variance of the returns on this stock? A) .005809 B) .005019 C) .006047 D) .004701 E) .006270

54) North Around, Incorporated, stock is expected to return 22 percent in a boom, 13 percent in a normal economy, and −15 percent in a recession. The probabilities of a boom, normal economy, and a recession are 6 percent, 92 percent, and 2 percent, respectively. What is the standard deviation of the returns on this stock? A) 2.15% B) 4.6% C) 20.54% D) 18.79% E) 4.53%

55) Blue Bell stock is expected to return 8.4 percent in a boom, 8.9 percent in a normal economy, and 9.2 percent in a recession. The probabilities of a boom, normal economy, and a recession are 2 percent, 92 percent, and 6 percent, respectively. What is the standard deviation of the returns on this stock?

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A) .38% B) .55% C) .13% D) .42% E) .10%

56) You own a portfolio that is invested as follows: $22,575 of Stock A, $3,750 of Stock B, $12,500 of Stock C, and $5,800 of Stock D. What is the portfolio weight of Stock B? A) 8.47% B) 8.40% C) 10.96% D) 9.66% E) 13.08%

57) You own a $58,600 portfolio comprised of four stocks: A, B, C, and D. The values of Stocks A, B, and C are $12,100, $17,400, and $20,400, respectively. What is the portfolio weight of Stock D? A) 16.38% B) 14.85% C) 10.33% D) 12.10% E) 12.58%

58) You own a portfolio of two stocks, A and B. Stock A is valued at $84,650 and has an expected return of 10.6 percent. Stock B has an expected return of 4.6 percent. What is the expected return on the portfolio if the portfolio value is $97,500? A) 9.81% B) 9.62% C) 9.74% D) 10.09% E) 10.05%

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59) You own a portfolio that is invested 32 percent in Stock A, 43 percent in Stock B, and the remainder in Stock C. The expected returns on stocks A, B, and C are 11.5 percent, 15.2 percent, and 8.8 percent, respectively. What is the expected return on the portfolio? A) 11.71% B) 12.18% C) 12.83% D) 12.42% E) 12.49%

60) 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? Stock A B C D

Number of Shares 175 250 400 225

Price per share $ 9 18 56 39

Expected Return 11.2% 16.4% 8.7% 24.5%

A) 13.81% B) 12.91% C) 13.28% D) 14.14% E) 13.46%

61) You have compiled the following information on your investments. What rate of return should you expect to earn on this portfolio? Stock A B C D

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Number of Shares 500 200 300 250

Price per share $ 51 66 42 29

Expected Return 13.6% 14.8% 7.5% 2.1%

A) 11.57% B) 11.13% C) 11.87% D) 11.30% E) 11.61%

62) You want to create a $50,000 portfolio that consists of three stocks (A, B, and C) and has an expected return of 12.6 percent. Currently, you own $14,200 of Stock A and $21,700 of Stock B. The expected return for Stock A is 16.2 percent, and for Stock B it is 9.4 percent. What is the expected rate of return for Stock C? A) 13.67% B) 14.14% C) 13.90% D) 12.36% E) 12.11%

63) You would like to invest $24,000 and have a portfolio expected return of 11.5 percent. You are considering two securities, A and B. Stock A has an expected return of 18.6 percent and B has an expected return of 7.4 percent. Approximately how much should you invest in Stock A if you invest the balance in Stock B? A) $7,807 B) $8,786 C) $7,411 D) $7,137 E) $8,626

64) 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? State of Economy

Probability of State Occurring

Boom Normal Recession

.08 .87 .05

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Rate of Return if State Occurs: Stock A (%) Stock B (%) Stock C (%) 15.6 13.2 12.9 11.2 9.6 8 2.5 1.2 −5.6 19

A) 9.44% B) 11.3% C) 10.69% D) 9.2% E) 8.78%

65) 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? State of Economy

Probability of State Occurring

Boom Normal Recession

.12 .85 .03

Rate of Return if State Occurs: Stock A (%) Stock B (%) Stock C (%) 16.7 18.9 4.6 14.2 14.1 9.5 4.6 −3.8 11.2

A) 12.04% B) 12.16% C) 12.91% D) 13.15% E) 11.87%

66) 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? State of Economy Boom Normal

Probability of State Rate of Return if State Occurs: Occurring Stock A (%) Stock B (%) Stock C (%) .08 15.8 9.4 21.2 .92 10.6 8.6 10.4

A) .000602 B) .001490 C) .000153 D) .000205 E) .001143

67) 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? Version 1

State of Economy

Probability of State Occurring

Growth Stagnant

.08 .92

Rate of Return if State Occurs: Stock A (%) Stock B (%) Stock C (%) 21.6 12.8 16.1 7.4 7.2 10.1

A) 1.95% B) 1.13% C) 3.67% D) 2.91% E) 2.37%

68) 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? State of Economy

Probability of State Occurring

Growth Stagnant

.07 .93

Rate of Return if State Occurs: Stock A (%) Stock B (%) Stock C (%) 18.9 10.2 12.1 7.5 8.5 9.3

A) 1.68% B) 6.72% C) 3.16% D) 2.43% E) 1.49%

69) You want to create a $72,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 13.6 percent and Stock B has an expected return of 14.7 percent. You want to own $25,000 of Stock B. The risk-free rate is 3.6 percent and the expected return on the market is 12.1 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?

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A) $12,921 B) $12,987 C) $13,550 D) $13,315 E) $12,775

70) A portfolio has an expected return of 13.4 percent. This portfolio contains two stocks and one risk-free security. The expected return on Stock X is 12.2 percent and on Stock Y it is 19.3 percent. The risk-free rate is 4.1 percent. The portfolio value is $48,000 of which $10,000 is the risk-free security. How much is invested in Stock X? A) $21,548.19 B) $19,514.14 C) $18,478.87 D) $22,200.14 E) $16,904.72

71) You own a $36,800 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 22.6 percent and has a beta of 1.48. Stock B has a beta of .72. What is the value of your investment in Stock A? A) $8,619 B) $12,333 C) $14,500 D) $13,558 E) $17,204

72) 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 .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 .58?

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A) $6,000 B) $9,000 C) $12,000 D) $15,000 E) $18,000

73)

What is the beta of the following portfolio?

Stock M N O P

Value $ 18,400 6,320 32,900 11,850

Beta .97 1.04 1.23 .88

A) 1.08 B) 1.15 C) 1.04 D) 1.11 E) .99

74)

What is the beta of the following portfolio?

Stock W X Y Z

Value $ 32,960 15,780 8,645 19,920

Beta .76 1.31 1.49 .00

A) .98 B) .76 C) 1.18 D) 1.21 E) 1.13

75) 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 1.39. 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? Version 1

A) .72 B) .97 C) 1.23 D) 1.55 E) 1.61

76) You currently own a portfolio valued at $52,000 that has a beta of 1.16. You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.15. What does the beta of the new investment have to be? A) 1.098 B) .889 C) .869 D) .924 E) 1.125

77) 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? Stock D E F

Value $ 13,640 15,980 23,260

Beta 1.13 1.48 .86

A) $7,023.15 B) $7,811.29 C) $8,666.67 D) $7,753.51 E) $8,318.50

78) You currently own a portfolio valued at $76,000 that is equally as risky as the market. Given the information below, what is the beta of Stock C? Stock A B

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Value $ 13,800 48,600

Beta 1.21 1.08 24

C Risk-free

8,400 ?

? ?

A) .91 B) .95 C) .81 D) 1.03 E) 1.06

79) Stock A has an expected return of 14.4 percent and a beta of 1.21. Stock B has an expected return of 12.87 percent and a beta of 1.06. Both stocks have the same reward-to-risk ratio. What is the risk-free rate? A) 2.06% B) 2.28% C) 1.79% D) 3.35% E) 1.92%

80) Currently, the risk-free rate is 3.2 percent. Stock A has an expected return of 11.4 percent and a beta of 1.11. Stock B has an expected return of 13.7 percent. The stocks have equal reward-to-risk ratios. What is the beta of Stock B? A) 1.27 B) 1.33 C) 1.36 D) 1.08 E) 1.42

81) Stock A has a beta of 1.09 while Stock B has a beta of .76 and an expected return of 8.2 percent. What is the expected return on Stock A if the risk-free rate is 4.6 percent and both stocks have equal reward-to-risk premiums?

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A) 11.12% B) 8.07% C) 9.76% D) 10.89% E) 11.73%

82) A stock has a beta of 1.32 and an expected return of 12.8 percent. The risk-free rate is 3.6 percent. What is the slope of the security market line? A) 6.49% B) 7.28% C) 6.97% D) 9.03% E) 7.99%

83) A stock has an expected return of 11.3 percent and a beta of 1.08. The risk-free rate is 4.7 percent. What is the slope of the security market line? A) 7.25% B) 6.11% C) 6.78% D) 5.92% E) 7.03%

84) Stock J has a beta of 1.52 and an expected return of 15.76 percent. Stock K has a beta of .98 and an expected return of 11.44 percent. What is the risk-free rate if these securities both plot on the security market line? A) 3.60% B) 3.34% C) 3.57% D) 3.52% E) 3.64%

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85) The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1 and an expected return of 13.1 percent. Stock B has a beta of .86 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not? A) No, Stock A is underpriced, and Stock B is overpriced. B) No, Stock A is overpriced, and Stock B is underpriced. C) No, Stock A is overpriced but Stock B is correctly priced. D) No, Stock A is underpriced but Stock B is correctly priced. E) No, both stocks are overpriced.

86) Bama Entertainment has common stock with a beta of 1.22. The market risk premium is 8.1 percent, and the risk-free rate is 3.9 percent. What is the expected return on this stock? A) 13.31% B) 12.67% C) 12.40% D) 13.78% E) 14.13%

87) The stock of Wiley United has a beta of .98. The market risk premium is 7.6 percent, and the risk-free rate is 3.9 percent. What is the expected return on this stock? A) 7.53% B) 7.69% C) 11.35% D) 11.52% E) 12.01%

88) BJB stock has an expected return of 17.82 percent. The risk-free rate is 4.6 percent, and the market risk premium is 8.2 percent. What is the stock's beta?

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A) 1.47 B) 1.51 C) 1.61 D) 1.48 E) 1.68

89) Ben & Terry's has an expected return of 13.2 percent and a beta of 1.08. The expected return on the market is 12.4 percent. What is the risk-free rate? A) 3.87% B) 4.24% C) 2.61% D) 3.29% E) 2.40%

90) You own a stock that has an expected return of 15.72 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.82 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market? A) 12.07% B) 12.77% C) 13.64% D) 14.09% E) 13.42%

91) A stock has a beta of 1.10, an expected return of 12.11 percent, and lies on the security market line. A risk-free asset is yielding 3.2 percent. You want to create a portfolio valued at $12,000 consisting of Stock A and the risk-free security such that the portfolio beta is .80. What rate of return should you expect to earn on your portfolio?

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A) 9.68% B) 9.16% C) 9.33% D) 9.41% E) 9.56%

92) You own a portfolio that has $2,200 invested in Stock A and $1,300 invested in Stock B. If the expected returns on these stocks are 11 percent and 17 percent, respectively, what is the expected return on the portfolio? A) 12.57% B) 11.14% C) 14.96% D) 13.23% E) 13.07%

93)

Consider the following information:

State of Economy Growth Stagnant

Probability of State Occurring .25 .75

Rate of Return if State Occurs: Stock A (%) Stock B (%) Stock C (%) 11.8 19.6 23.7 10.4 12.9 10.3

What is the variance of a portfolio invested 25 percent each in Stocks A and B and 50 percent in Stock C? A) .001427 B) .000863 C) .001289 D) .001128 E) .000740

94) You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.86 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

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A) 1.07 B) .54 C) 1.14 D) .14 E) .97

95) A stock has a beta of 1.04, the expected return on the market is 11.75 percent, and the risk-free rate is 3.75 percent. What must the expected return on this stock be? A) 9.89% B) 38.32% C) 13.56% D) 19.16% E) 12.07%

96) A stock has an expected return of 13.4 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.8 percent. What must the beta of this stock be? A) 1.67 B) .94 C) 1.08 D) 1.22 E) 1.33

97) A stock has a beta of 1.48 and an expected return of 17.3 percent. A risk-free asset currently earns 4.6 percent. If a portfolio of the two assets has a beta of .98, then the weight of the stock must be _____________blank and the risk-free weight must be_____________blank. A) .56; .44 B) .34; .66 C) .44; .56 D) .66; .34 E) .72; .28

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98) 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? A) 2.38% B) 2.76% C) 3.23% D) 3.69% E) 4.08%

99) Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent. If you create portfolio with the same risk as the market, what rate of return should you expect to earn? A) 10.67% B) 11.18% C) 11.62% D) 11.25% E) 11.13%

100)

Consider the following information on a portfolio of three stocks:

State of Economy

Probability of State Occurring

Boom Normal Bust

.05 .80 .15

Stock A (%) 7 9 10

Rate of Return Stock B (%) 15 12 2

Stock C (%) 28 17 −35

The portfolio is invested 40 percent in each Stock A and Stock C and 20 percent in Stock B. If the expected T-bill rate is 4.03 percent, what is the expected risk premium on the portfolio? A) 6.72% B) 5.62% C) 6.90% D) 5.38% E) 7.68%

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101) Popular Finger Foods stock is expected to return 20 percent in a booming economy, 14 percent in a normal economy, and −5 percent in a recession. The probabilities of an economic boom, normal state, or recession are 8 percent, 87 percent, and 5 percent, respectively. What is the expected rate of return on this stock? A) 13.53% B) 12.92% C) 13.20% D) 14.16% E) 13.95%

102) Crabby Shores stock is expected to return 16 percent in a booming economy, 11.5 percent in a normal economy, and 1.8 percent in a recession. The probabilities of an economic boom, normal state, or recession are 6 percent, 85 percent, and 9 percent, respectively. What is the expected rate of return on this stock? A) 8.96% B) 9.63% C) 9.50% D) 10.90% E) 7.57%

103) Bernard Companies stock has an expected return of 10.75 percent. The stock is expected to return 13.5 percent in a normal economy and 19.6 percent in a boom. The probabilities of a recession, normal economy, and a boom are 5 percent, 80 percent, and 15 percent, respectively. What is the expected return if the economy is in a recession? A) −59.80% B) −42.77% C) −68.20% D) −36.72% E) −63.76%

104) Sarina Stable Supply stock has a risk premium of 6.2 percent while the inflation rate is 1.7 percent, and the risk-free rate is 3.1 percent. What is the expected return on this stock?

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A) 10.2% B) 7.63% C) 9.3% D) 10.9% E) 12.4%

105) Assume the economy has a 6 percent chance of booming, am 8 percent chance of being recessionary, and being normal the remainder of the time. A stock is expected to return 22.5 percent in a boom, 11.5 percent in a normal economy, and −8 percent in a recession. What is the expected rate of return on this stock? A) 5.5% B) 9.15% C) 6.69% D) 10.60% E) 10.38%

106) A stock has a beta of .95, the expected return on the market is 13.25 percent, and the riskfree rate is 3.66 percent. What must the expected return on this stock be? A) 10.59% B) 39.02% C) 14.26% D) 19.86% E) 12.77%

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Answer Key Test name: Chapter 11 Test bank - Static 1) A 2) D 3) C 4) A 5) C 6) C 7) D 8) B 9) E 10) B 11) D 12) E 13) D 14) D 15) D 16) D 17) D 18) B 19) D 20) B 21) B 22) D 23) D 24) C 25) C 26) D Version 1

27) E 28) D 29) E 30) D 31) E 32) B 33) C 34) E 35) E 36) A 37) E 38) B 39) E 40) D 41) D 42) A 43) C 44) C 45) E 46) A State of Economy Boom Normal Recession

Probability of State .12 .80 .08

Stock return in given state .16 .12 −.03 Sum or

p × Return .0192 .0960 −.0024 .1128 11.28%

47) D State of Economy Boom Normal

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Probability of Stock return in State given state .15 .157 .73 .098

p × Return .0236 .0715

Recession

.12

.023

.0028 .0979

9.79%

48) A E(R) = .151 = (.02 × −.08) + (.87 × x) + (.11 × .28) E(R) = .151 = −.0016 + .87x + .0308 .1218 = .87x x = .1400, or 14.00% 49) C E(R) = .095 = (.10 × x) + (.84 ×.11) + (.06 × .143) E(R) = .095 = .10x + .09240 + .00858 −.00598 = .10x x = −.0598, or −5.98% 50) C Expected return = .022 + .07 = .092, or 9.2% 51) D State of Economy Boom Normal Recession

Probability of State .18 .79 .03

Stock return in given state .168 .129 −.045

p × Return .03024 .10191 −.00135 .1308

13.08%

52) B State of Economy

Probabilit Stock p × of State return Return in given state Boom .05 .120 .0060 Normal .85 .100 .0850 Recession .10 .020 .0020 E(R) .093

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E(R)

R − E(R)

.0930 .027000 .0930 .007000 .0930 −.073000

[R − E(R)]2

p × [R − E(R)]2

.000729 .000036 .000049 .000042 .005329 .000533 Variance .000611

53) D State of Economy

Boom Normal Recession

Probability Stock p × Return E(R) R − of State return E(R) in given state .12 .290 .0348 .14 .155 .86 .120 .1032 .14 −.015 .02 −.150 −.0030 .14 −.285 E(R) .135

[R − E(R)]2

p × [R − E(R)]2

.0240 .0002 .0812 Variance

.002883 .000194 .001625 .004701

54) E State of Probabilit Stock p × Economy y of State return in Return given state Boom 6.0% 22.0 1.3200 % % Normal 92.0 13.0 11.960 % % 0% Recessi 2.0% −15. −.3000 on 0% % E(R) .1298 or

E(R)

R − E(R)

12.980 9.0200% 0% 12.980 .0200% 0% 12.980 −27.980 0% 0%

12.98%

[R − E(R)]2

p × [R − E(R)]2 .8136% .0488 % .0000% .0000 % 7.8288% .1566 % Varianc .2054 e % Standar 4.532 d 1% Deviati on

55) E State of Economy

Boom Normal

Probabilit Stock p × y of State retur Return n in given state 2.0% 8.4% .1680%

92.0 % Recessio 6.0% n

8.9% 9.2% E(R)

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8.1880 % .5520% .0890 8

E(R) R − E(R)

[R − E(R)]2

8.908 −.5 % % 8.908 .0% % 8.908 .3% %

.0026%

p × [R − E(R)]2

.0001 % .0000% .0000 % .0009% .0001 % Variance .0001 %

8.908%

Standard .1017 Deviatio % n Standard .10% Deviatio n

56) B WeightC = $3,750/($22,575 + 3,750 + 12,500 + 5,800) = .084, or 8.40% 57) B WeightD = ($58,600 − 12,100 − 17,400 − 20,400)/$58,600 = .1485 or 14.85% 58) A Stock A B Total

V Value $ 84,650.00 $ 12,850.00 $ 97,500.00

P portfolio % .8682 .1318 1.0000

E(R) .1060 .0460

P × E(R) .0920 .0061 .0981

59) D Security Stock A Stock B Stock C

Portfolio % .32 .43 .25

Return .115 .152 .088 E(R)

% × Return .0368 .06536 .022 .12416

12.42%

60) E Stock Number Price per Stock $ of share Invested Shares A 175 $ 9 $ 1,575 B 250 $ $ 4,500 18 C 400 $ $ 56 22,400 D 225 $ $ 8,775 39 $ 37,250

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Portfolio Weight

Expected Return

p × Return

4.2% 12.1%

11.2% 16.4%

.004736 .019812

60.1%

8.7%

.052317

23.6%

24.5%

.057715

E(R)

.134579

E(R)

13.46%

61) B Stock Number Price per Stock $ of share Invested Shares A 500 $ $ 51 25,500 B 200 $ $ 66 13,200 C 300 $ $ 42 12,600 D 250 $ $ 7,250 29 $ 58,550

Portfolio Weight

Expected Return

p × Return

43.6%

13.6%

.059231

22.5%

14.8%

.033366

21.5%

7.5%

.01614

12.4%

2.1%

.0026

E(R)

.111338

E(R)

11.13%

62) C Value Stock C = $50,000 − 14,200 − 21,700 = $14,100 E( RP) = .126 = [($14,200/$50,000) × .162] + [($21,700/$50,000) × .094] + [($14,100/$50,000) × E( RC)] E( RC) = .1390, or 13.90% 63) B E( RP) = .115 = .186 x + .074(1 − x) x = .3661 InvestmentA = .3661 × $24,000 = $8,786 64) A Stat Probab Rate of Return if Stock Weight × Return Sum Probabi e of ility State Occurs A,B,C lity × Econ of Sum Stock A Stock B Stock C Stock A Stock B Stock omy State 30% 40% 30% C Occurr ing Boom .08 .1 .1 .1 .0 .0 .03 .13 56 32 29 46 52 87 83 .011 8 8 064 Norm .87 .1 .0 .0 .0 .0 .02 .09 .083 al 12 96 8 33 38 4 6 52

Version 1

Rece ssio n

.05

.0 25

.0 12

−. 05 6

6 .0 07 5

4 .0 04 8

−.0 168

−.0 045

−.00 0225

Port 0.09 E(R) 44

65) D State Probabili Rate of Return if Stock Weight × Sum of ty of State Occurs Return A,B,C Economy State Stoc Stock B Stoc Stoc Stoc Stock C Occurring k A 45% k C k A k B 35% 20% Boom .12 .167 .189 .046 .058 .085 .009 .1527 45 05 2 Normal .85 .142 .141 .095 .049 .063 .019 .1321 7 45 5 Recessi .03 .064 −.03 .112 .022 −.01 .022 .027 on 8 4 71 4 7 Port E(R)

Probabili ty × Sum

.0183 .1123 .0008 .1315

66) C Stat Probabi Rate of Stock Weight Sum Probabi E(R) R − e of lity of Return if × Return A,B, lity × E(R) Econ State State C Sum omy Occurri Occurs ng Sto Sto Sto Stoc Stoc Stoc ck ck ck k A k B k C A B C 40% 40% 20% Boom .08 .15 .09 .21 .063 .037 .042 .143 .011456 .101 .041 8 4 2 200 600 400 200 248 952 Norm .92 .10 .08 .10 .042 .034 .020 .097 .089792 .101 −.00 al 6 6 4 400 400 800 600 248 3648 Port .101248 E(R)

[R − P × E(R)] [R − 2 E(R) ]2

.0017 .000 60 141 .0000 .000 13 012 Varia .000 nce 153

67) E Stat Probabi Rate of Stock Weight Sum Probabi E(R) e of lity of Return if × Return A,B, lity × Econ State State C Sum omy Occurri Occurs ng Sto Sto Sto Stoc Stoc Stoc ck ck ck k A k B k C

Version 1

R − E(R)

[R − P × E(R)] [R − 2 E(R) ]2

Boom

.08

Norm al

.92

A B C 35% 30% 35% .21 .12 .16 .075 .038 .056 .170 .013628 .089 .080 6 8 1 600 400 350 350 850 500 .07 .07 .10 .025 .021 .035 .082 .076222 .089 −.00 4 2 1 900 600 350 850 850 7000 Port .089850 E(R)

.0064 .000 80 518 .0000 .000 49 045 Varia .023 nce 738

68) E Stat Probabi Rate of Stock Weight Sum Probabi E(R) R − e of lity of Return if × Return A,B, lity × E(R) Econ State State C Sum omy Occurri Occurs ng Sto Sto Sto Stoc Stoc Stoc ck ck ck k A k B k C A B C 40% 35% 25% Boom .07 .18 .10 .12 .075 .035 .030 .141 .009909 .087 .054 9 2 1 600 700 250 550 099 452 Norm .93 .07 .08 .09 .030 .029 .023 .083 .077190 .087 −.00 al 5 5 3 000 570 250 000 099 4099 Port .087099 E(R)

[R − P × E(R)]2 [R − E(R) ]2

.00296 .000 5 208 .00001 .000 7 016 Varian .000 ce 223 Standa .014 rd 939 Deviat ion

69) C E(RP) = .121 = [(x/$72,000) × .036] + {[($72,000 − x − 25,000)/$72,000 ] × .136} + [($25,000/$72,000) × .147] x = $13,550 70) C E(RP) = .134 = [($10,000/$48,000) × .041] + [(x/$48,000) × .122]+ {[($48,000 − 10,000 − x)/$48,000] × .193} x = $18,478.87 71) D

Version 1

β P = 1.0 = 1.48A + [.72 × (1 − A)] A = .368421 Investment in Stock A = $36,800 × .368421 = $13,558 72) C β P = .58 = [(A/$36,000) × 1.29] + [($36,000 − A − 18,000)/$36,000) × .90] + [.50 × 0] A = $12,000 73) A Portfolio value = $18,400 + 6,320 + 32,900 + 11,850 = $69,470 β P = ($18,400/$69,470)(.97) + ($6,320/$69,470)(1.04) + ($32,900/$69,470)(1.23) + ($11,850/$69,470)(.88) = 1.08

74) B Portfolio value = $32,960 + 15,780 + 8,645 + 19,920 = $77,305 β P = ($32,960/$77,305)(.76) + ($15,780/$77,305)(1.31) + ($8,645/$77,305)(1.49) + ($19,920/$77,305)(0) = .76

75) E 1/3(0) + 1/3(1.39) + 1/3(x) = 1.0 x = 1.61 76) A β P = 1.15 = ($52,000/$62,000)(1.16) + ($10,000/$62,000)x x = 1.098 77) D Portfolio value = $13,640 + 15,980 + 23,260 = $52,880 β P = (.90)(1.00) = [$13,640/$52,880][1.13] + [($15,980 − x)/$52,880)(1.48) + [$23,260/$52,880)(.86) + (x/$52,880)(0) x = $7,753.51

78) C Value of risk-free asset = $76,000 − 13,800 − 48,600 − 8,400 = $5,200 βP = 1 = ($13,800/$76,000)(1.21) + ($48,600/$76,000)(1.08) + ($8,400/$76,000)(βC) + ($5,200/$76,000)(0) βC = .81

79) A

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(.144- Rf)/1.21 = (.1287 − Rf)/1.06 Rf = .0206, or 2.06% 80) E (.114 − .032)/1.11 = (.137 − .032)/βB βB = 1.42 81) C (RA − .046)/1.09 = (.082 − .046)/.76 RA = .0976, or 9.76% 82) C Slope = (.128 − .036)/1.32 = .0697, or 6.97% 83) B Slope = (.113 − .047) /1.08 = .0611, or 6.11% 84) A (.1576 − Rf)/1.52 = (.1144 − Rf)/.98 Rf = .0360, or 3.60% 85) B E(RA) = .037 + 1.1(.123 − .037) = .1316, or 13.16% E(RB) = .037 + .86(.123 − .037) = .1110, or 11.10% Stock A is overpriced because its expected return lies below the security market line. Stock B is underpriced because its expected return lies above the security market line. 86) D E(R) = .039 + 1.22(.081) = .1378, or 13.78% 87) C E(R) = .039 + .98(.076) = .1135, or 11.35% 88) C E(R) = .1782 = .046 + β(.082) β = 1.61 89) E Version 1

E(R) = .132 = Rf + 1.08(.124 − Rf) Rf = .0240, or 2.40% 90) B E( R) = .1572 = .0382 + 1.33(RM − .0382) RM = .1277, or 12.77% 91) A E(R) = .1211 = .032 + 1.10(MRP) MRP = .0810 E(RP) = .032 + .80(.0810) = .0968, or 9.68% 92) D E(R) = [$2,200/($2,200 + 1,300)] × .11 + [$1,300/($2,200 + 1,300)] × .17 = .1323, or 13.23% 93) A E(RBoom) = (.25 × .118) + (.25 × .196) + (.50 × .237) = .19700 E(RBust) = (.25 × .104) + (.25 × .129) + (.50 × .103) = .10975 E(RPortfolio) = (.25 × .19700) + (.75 × .10975) = .1315625 Variance = .25(.19700 − .1315625)2 + .75(.10975 − .1315625)2 = .001427

94) C βP = 1 = (1/3)(0) + (1/3)(1.86) + (1/3)(x) x = 1.14 95) E E(Ri) = Rf + βi(E(RM) − Rf) E(Ri) = .0375 + 1.04(.1175 − .0375) E(Ri) = .1207, or 12.07% 96) D E(R) = .143 = .039 + β(.078) β = 1.22 97) D βP = .98 = x(1.48) + (1 –x)(0) x = .66 Stock weight is .66 and the risk-free weight is .34 Version 1

98) A (.137 − Rf)/1.28 = (.114 − Rf)/1.02 Rf = .0238, or 2.38% 99) D βP = 1.0 = 1.06x + .74(1 − x) x = .8125 E( RP) = .8125(.123) + (1 − .8125)(.067) = .1125, or 11.25% 100) B Stat Probability Rate of Return if State Stock Weight × Sum Prob e of of State Occurs Return A,B,C × Sum Econ Stock A Stock B Stock C Stock Stock Stoc omy 40% 20% 40% A B k C Boom . . . . . . .1 .1 .00 0 0 1 2 0 0 12 7 85 5 7 5 8 2 3 8 Norm . . . . . . .0 .1 .10 al 8 0 1 1 0 0 68 28 24 9 2 7 3 2 6 4 Rece . . . − . . − −. −. ssio 1 1 0 . 0 0 . 09 01 n 5 2 3 4 0 1 6 44 5 4 4 Port .09 E(R) 65 T −.0 Bill 403 rate Expected Risk Premium .05 62

101) A State of Economy Boom Normal Recession

Version 1

Probability of State .08 .87 .05

Stock return in given state .20 .14 −.53 Sum

p × Return .0160 .1218 −.0025 .1353

13.53%

102) D State of Economy Boom Normal Recession

Probability of State .06 .85 .09

Stock return in given state .160 .115 .018

p × Return .0096 .0978 .0016 .1090 10.90%

103) A E(R) = .1075 = (.05 × x) + (.80 × 135) + (.15 × 196) x = −.5980, or −59.80% 104) C Expected return = .031 + .062 = .093, or 9.3% 105) D State of Economy Boom Normal Recession

Probability of State .06 .86 .08

Stock return in given state .225 .115 −.008

p × Return .0135 .0989 −.0064 .106 10.60%

106) E E(Ri) = Rf + βi(E(RM) − Rf) E(Ri) = .0366 + .95(.1325 − .0366) E(Ri) = .1277, or 12.77%

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Judy's Boutique just paid an annual dividend of $2.41 on its common stock. The firm increases its dividend by 3.20 percent annually. What is the company's cost of equity if the current stock price is $38.68 per share? A) 9.17% B) 9.63% C) 10.00% D) 9.43% E) 8.91%

2) Countess Corporation is expected to pay an annual dividend of $3.97 on its common stock in one year. The current stock price is $68.04 per share. The company announced that it will increase its dividend by 3.20 percent annually. What is the company's cost of equity?

A) 8.53% B) 9.58% C) 9.22% D) 8.78% E) 9.03%

3) The stock in Bowie Enterprises has a beta of 1.19. The expected return on the market is 11.70 percent and the risk-free rate is 3.02 percent. What is the required return on the company's stock?

A) 12.98% B) 16.94% C) 15.15% D) 13.35% E) 12.61%

Version 1

4) Smathers Corporation stock has a beta of .86. The market risk premium is 6.90 percent and the risk-free rate is 2.87 percent annually. What is the company's cost of equity?

A) 8.80% B) 6.34% C) 6.16% D) 7.57% E) 5.98%

5) Rossdale Company stock currently sells for $73.53 per share and has a beta of 1.25. The market risk premium is 6.80 percent and the risk-free rate is 2.78 percent annually. The company just paid a dividend of $4.41 per share, which it has pledged to increase at an annual rate of 3.15 percent indefinitely. What is your best estimate of the company's cost of equity?

A) 7.80% B) 9.06% C) 10.31% D) 9.45% E) 11.10%

6) Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 4.40 percent that sells for $91.50 per share. If the par value is $100, what is the cost of the company's preferred stock?

A) 4.50% B) 4.61% C) 4.40% D) 4.81% E) 5.21%

7) Too Young, Incorporated, has a bond outstanding with a coupon rate of 7.3 percent and semiannual payments. The bond currently sells for $1,877 and matures in 19 years. The par value is $2,000. What is the company's pretax cost of debt?

Version 1

A) 8.27% B) 8.04% C) 3.90% D) 7.93% E) 8.54%

8) Galvatron Metals has a bond outstanding with a coupon rate of 5.9 percent and semiannual payments. The bond currently sells for $1,947 and matures in 21 years. The par value is $2,000 and the company's tax rate is 24 percent. What is the company's aftertax cost of debt?

A) 4.93% B) 3.06% C) 2.86% D) 4.66% E) 4.30%

9) Mojo Mining has a bond outstanding that sells for $2,102 and matures in 20 years. The bond pays semiannual coupons and has a coupon rate of 6.5 percent. The par value is $2,000. If the company's tax rate is 23 percent, what is the aftertax cost of debt?

A) 4.37% B) 5.74% C) 6.15% D) 5.02% E) 4.74%

10) Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 3.64 percent, a par value of $2,000 per bond, matures in 3 years, has a total face value of $4.3 million, and is quoted at 102 percent of face value. The second issue has a coupon rate of 6.41 percent, a par value of $1,000 per bond, matures in 23 years, has a total face value of $8.6 million, and is quoted at 92 percent of face value. Both bonds pay interest semiannually. The company's tax rate is 23 percent. What is the firm's weighted average aftertax cost of debt?

Version 1

A) 4.10% B) 4.34% C) 3.87% D) 5.63% E) 4.98%

11) Kim's Bridal Shoppe has 12,200 shares of common stock outstanding at a price of $56 per share. It also has 315 shares of preferred stock outstanding at a price of $90 per share. There are 380 bonds outstanding that have a coupon rate of 7.5 percent paid semiannually. The bonds mature in 37 years, have a face value of $2,000, and sell at 112 percent of par. What is the capital structure weight of the common stock?

A) .3979 B) .4952 C) .4643 D) .5447 E) .4372

12) Further From Center has 11,200 shares of common stock outstanding at a price of $46 per share. It also has 265 shares of preferred stock outstanding at a price of $88 per share. There are 620 bonds outstanding that have a coupon rate of 6.5 percent paid semiannually. The bonds mature in 27 years, have a face value of $1,000, and sell at 107 percent of par. What is the capital structure weight of the preferred stock?

A) .0194 B) .5520 C) .0647 D) .0961 E) .4286

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13) Here I Sit Sofas has 7,600 shares of common stock outstanding at a price of $99 per share. There are 800 bonds that mature in 35 years with a coupon rate of 7.3 percent paid semiannually. The bonds have a par value of $2,000 each and sell at 111 percent of par. The company also has 6,500 shares of preferred stock outstanding at a price of $52 per share. What is the capital structure weight of the debt?

A) .2625 B) .6649 C) .6196 D) .6963 E) .7375

14) Saint Nick Enterprises has 17,900 shares of common stock outstanding at a price of $71 per share. The company has two bond issues outstanding. The first issue has 9 years to maturity, a par value of $1,000 per bond, and sells for 102.5 percent of par. The second issue matures in 23 years, has a par value of $2,000 per bond, and sells for 107.5 percent of par. The total face value of the first issue is $270,000, while the total face value of the second issue is $370,000. What is the capital structure weight of debt?

A) .3189 B) .4185 C) .3920 D) .3467 E) .2045

15) Bermuda Cruises issues only common stock and coupon bonds. The firm has a debtequity ratio of .79. The cost of equity is 11.8 percent and the pretax cost of debt is 6.8 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 23 percent?

A) .6305 B) .5309 C) .4413 D) .6040 E) .5587

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16) The Two Dollar Store has a cost of equity of 12.9 percent, the YTM on the company's bonds is 5.2 percent, and the tax rate is 25 percent. If the company's debt-equity ratio is .64, what is the weighted average cost of capital?

A) 8.37% B) 7.41% C) 9.39% D) 7.68% E) 10.01%

17) Wentworth's Five and Dime Store has a cost of equity of 12.2 percent. The company has an aftertax cost of debt of 4.9 percent, and the tax rate is 23 percent. If the company's debt-equity ratio is .82, what is the weighted average cost of capital?

A) 7.21% B) 6.61% C) 8.40% D) 7.57% E) 8.91%

18) Kountry Kitchen has a cost of equity of 10.9 percent, a pretax cost of debt of 5.6 percent, and the tax rate is 21 percent. If the company's WACC is 8.71 percent, what is its debt-equity ratio?

A) 1.96 B) .34 C) 1.48 D) .51 E) .64

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19) Take It All Away has a cost of equity of 10.87 percent, a pretax cost of debt of 5.49 percent, and a tax rate of 25 percent. The company's capital structure consists of 75 percent debt on a book value basis, but debt is 39 percent of the company's value on a market value basis. What is the company's WACC?

A) 8.77% B) 8.39% C) 9.36% D) 8.24% E) 11.19%

20) Upton Umbrellas has a cost of equity of 11.7 percent, the YTM on the company's bonds is 6.3 percent, and the tax rate is 23 percent. The company's bonds sell for 103.3 percent of par. The debt has a book value of $411,000 and total assets have a book value of $953,000. If the market-to-book ratio is 2.77 times, what is the company's WACC?

A) 8.82% B) 10.19% C) 6.36% D) 8.69% E) 9.44%

21) Skolits Corp. has a cost of equity of 10.7 percent and an aftertax cost of debt of 4.77 percent. The company's balance sheet lists long-term debt of $395,000 and equity of $655,000. The company's bonds sell for 106.3 percent of par and the market-to-book ratio is 3.13 times. If the company's tax rate is 25 percent, what is the WACC?

A) 8.47% B) 9.69% C) 10.30% D) 8.98% E) 9.49%

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22) Western Electric has 26,500 shares of common stock outstanding at a price per share of $68 and a rate of return of 13.55 percent. The firm has 6,750 shares of 6.70 percent preferred stock outstanding at a price of $89.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $371,000 and currently sells for 105.5 percent of face. The yield to maturity on the debt is 7.75 percent. What is the firm's weighted average cost of capital if the tax rate is 23 percent?

A) 11.18% B) 10.59% C) 11.43% D) 10.79% E) 10.36%

23) Charlotte's Crochet Shoppe has 17,300 shares of common stock outstanding at a price per share of $85 and a rate of return of 12.01 percent. The company also has 380 bonds outstanding, with a par value of $2,000 per bond. The pretax cost of debt is 6.33 percent and the bonds sell for 100.2 percent of par. What is the firm's WACC if the tax rate is 25 percent?

A) 10.07% B) 9.53% C) 9.20% D) 9.03% E) 10.51%

24) Piedmont Hotels is an all-equity company. Its stock has a beta of .86. The market risk premium is 7.3 percent and the risk-free rate is 4.1 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 2.1 percent to the project's discount rate. What should the firm set as the required rate of return for the project?

Version 1

A) 8.95% B) 8.28% C) 6.85% D) 12.48% E) 10.38%

25) The required return on the stock of Moe's Pizza is 12.4 percent and aftertax required return on the company's debt is 3.88 percent. The company's market value capital structure consists of 70 percent equity. The company is considering a new project that is less risky than current operations and it feels the risk adjustment factor is minus 1.9 percent. The tax rate is 21 percent. What is the required return for the new project? A) 7.70% B) 11.50% C) 9.84% D) 7.94% E) 11.74%

26) Alpha Industries is considering a project with an initial cost of $8.7 million. The project will produce cash inflows of $1.87 million per year for 7 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.82 percent and a cost of equity of 11.41 percent. The debt-equity ratio is .67 and the tax rate is 24 percent. What is the net present value of the project?

A) $837,053 B) $870,535 C) $753,347 D) $717,474 E) $659,018

Version 1

27) Dyrdek Enterprises has equity with a market value of $12.6 million and the market value of debt is $4.45 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.9 percent. The new project will cost $2.56 million today and provide annual cash flows of $666,000 for the next 6 years. The company's cost of equity is 11.79 percent and the pretax cost of debt is 5.06 percent. The tax rate is 24 percent. What is the project's NPV?

A) $183,363 B) $536,049 C) $364,858 D) $194,561 E) $208,195

28) Based on market values, Gubler's Gym has an equity multiplier of 1.48 times. Shareholders require a return of 10.99 percent on the company's stock and a pretax return of 4.86 percent on the company's debt. The company is evaluating a new project that has the same risk as the company itself. The project will generate annual aftertax cash flows of $281,000 per year for 9 years. The tax rate is 24 percent. What is the most the company would be willing to spend today on the project?

A) $1,710,753 B) $1,984,346 C) $1,636,405 D) $1,581,858 E) $1,684,535

Version 1

Answer Key Test name: Chapter 12 Test Bank - Algo 1) B RE = [($2.41(1.0320)/$38.68] + .0320 RE = .0963, or 9.63% 2) E RE = ($3.97/$68.04) + .0320 RE = .0903, or 9.03% 3) D RE = .0302 + 1.19(.1170 − .0302) RE = .1335, or 13.35% 4) A RE = .0287 + .86(.0690) RE = .0880, or 8.80% 5) C RE = .0278 + 1.25(.0680) RE = .1128, or 11.28% RE = $4.41(1.0315)/$73.53 + .0315 RE = .0934, or 9.34% RE = (11.28% + 9.34%)/2 RE = 10.31% 6) D RP = $4.40/$91.50 RP = .0481, or 4.81% 7) D

Version 1

$1,877 = $73.00{1 − [1/(1 + R)38]}/R + $2,000/R38 R = .0397, or 3.97% YTM = 3.966% × 2 YTM = 7.93% Enter

38 N

Solve for

I/Y

−$1,877

$73.00

$2,000

PMT

−$1,947

$59.00

$2,000

PMT

3.97%

8) D $1,947 = $59.00{1 − [1/(1 + R)42]}/R + $2,000/R42 R = .0306, or 3.06% YTM = 3.060% × 2 YTM = 6.13% RD = 6.13%(1 − .24) RD = 4.66% Enter

42 N

Solve for

I/Y 3.06%

9) E $2,102 = $65.00{1 − [1/(1 + R)40]}/R + $2,000/R40R = .0308, or 3.08% YTM = 3.08% × 2 YTM = 6.15% RD = 6.15%(1 − .23) RD = 4.74% Enter

40 N

Solve for

I/Y

−$2,102

$65.00

$2,000

PMT

3.08%

10) B Version 1

Market value of debt = 1.02($4,300,000) + .92($8,600,000) Market value of debt = $4,386,000 + 7,912,000 Market value of debt = $12,298,000 YTM Bond 1 $2,040 = $36.40{1 − [1/(1 + R)6]}/R + $2,000/R6 R = .0147 YTM = .0147 × 2 = .0294, or 2.94% YTM Bond 2 $920 = $32.05{1 − [1/(1 + R)46]}/R + $1,000/R46 R = .0356 YTM = .0356 × 2 = .0712, or 7.12% Aftertax cost of debt = [2.94%($4,386,000/$12,298,000) + 7.12%($7,912,000/$12,298,000)](1 − .23) Aftertax cost of debt = 4.34% 11) E Common stock: Preferred stock: Debt:

12,200 × $56 = 315 × $90 = 380 × $2,000 × 1.12 =

Total value:

$ 683,200 28,350 851,200 $ 1,562,750

XE = $683,200/$1,562,750 XE = .4372 12) A Common stock: Preferred stock: Debt:

11,200 × $46 265 × $88 620 × $1,000 × 1.07

= = =

Total value:

$ 515,200 23,320 663,400 $ 1,201,920

XP = $23,320/$1,201,920 XP = .0194 13) C Common stock: Preferred stock:

Version 1

7,600 × $99 = 6,500 × $52 =

$ 752,400 338,000

Debt:

800 × $2,000 × 1.11 =

Total value:

1,776,000 $ 2,866,400

XD = $1,776,000/$2,866,400 XD = .6196 14) D Common stock: Bond 1: Bond 2:

17,900 × $71 1.025 × $270,000 1.075 × $370,000

= = =

Total value:

$ 1,270,900 276,750 397,750 $ 1,945,400

XD = ($276,750 + 397,750)/$1,945,400 XD = .3467 15) E XE = 1/(1 + .79) XE = .5587 16) C WACC = (1/1.64)(12.9%) + (.64/1.64)(5.2%)(1 − .25) WACC = 9.39% 17) E WACC = (1/1.82)(12.2%) + (.82/1.82)(4.9%) WACC = 8.91% 18) D WACC = .0871 = (1 − XD)(.109) + (XD)(.056)(1 − .21) XD = .3382 D/E = .3382/(1 − .3382) D/E = .51 19) D WACC = .61(10.87%) + .39(5.49%)(1 − .25) WACC = 8.24% 20) B

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Market value of debt = 1.033($411,000) Market value of debt = $424,563 Book value of equity = $953,000 − 411,000 Book value of equity = $542,000 Market value of equity = 2.77($542,000) Market value of equity = $1,501,340 Market value of company = $424,563 + 1,501,340 Market value of company = $1,925,903 WACC = 11.7%($1,501,340/$1,925,903) + 6.3%($424,563/$1,925,903)(1 − .23) WACC = 10.19% 21) B Market value of debt = 1.063($395,000) Market value of debt = $419,885 Market value of equity = 3.13($655,000) Market value of equity = $2,050,150 Market value of company = $419,885 + 2,050,150 Market value of company = $2,470,035 WACC = 10.7%($2,050,150/$2,470,035) + 4.77%($419,885/$2,470,035) WACC = 9.69% 22) A Common stock: Preferred stock: Debt: Total value:

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26,500 × $68 6,750 × $89.50 1.055 × $371,000

= = =

$ 1,802,000 604,125 391,405 $ 2,797,530

RP = $6.70/$89.50 RP = .0749, or 7.49% WACC = 13.55%($1,802,000/$2,797,530) + 7.49%($604,125/$2,797,530) + 7.75%($391,405/$2,797,530)(1 − .23) WACC = 11.18% 23) B Common stock: Debt:

17,300 × $85 380 × $2,000 × 1.002

= =

Total value:

$ 1,470,500 761,520 $ 2,232,020

WACC = 12.01%($1,470,500/$2,232,020) + 6.33%($761,520/$2,232,020)(1 − .25) WACC = 9.53% 24) D RE = 4.1% + .86(7.3%) RE = 10.38% Project's required return = 10.38% + 2.1% Project's required return = 12.48% 25) D WACC = .70(12.4%) + (1 − .70(3.88%)) WACC = 9.84% Project return = 9.84% − 1.9% Project return = 7.94% 26) A WACC = (1/1.67)(11.41%) + (.67/1.67)(5.82%)(1 − .24) WACC = 8.61% NPV = −$8,700,000 + $1,870,000(PVIFA8.61%,7) NPV = $837,053 27) E

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WACC = 11.79%($12,600,000/$17,050,000) + 5.06%($4,450,000/$17,050,000)(1 − .24) WACC = 9.72% Project return = 9.72% + 1.9% Project return = 11.62% NPV = −$2,560,000 + $666,000(PVIFA11.62%,6) NPV = $208,195 28) A D/E = 1.48 − 1 D/E = .48 WACC = 10.99%(1/1.48) + 4.86%(.48/1.48)(1 − .24) WACC = 8.62% NPV = 0 = Initial cost + $281,000(PVIFA8.62%,9) Initial cost = $1,710,753

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) 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? A) Weighted average cost of capital B) Pure play cost C) Cost of equity D) Subjective cost E) Cost of debt

2) 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 is referred to as the: A) pure play cost. B) cost of debt. C) weighted average cost of capital. D) subjective cost. E) cost of equity.

The weighted average cost of capital is defined as the weighted average of a firm's: A) return on all of its investments. B) cost of equity, cost of preferred stock, and its aftertax cost of debt. C) pretax cost of debt and its preferred and common equity securities. D) bond coupon rates. E) common and preferred stock.

4) Farmer's Supply 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 to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach?

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A) Equity approach B) Aftertax approach C) Subjective approach D) Market play E) Pure play approach

5) Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines. Kate is applying the _________blank approach. A) pure play B) divisional rating C) subjective D) straight WACC E) equity rating

6) 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? A) Amount of debt used to finance the project B) Use, or lack, of preferred stock as a financing option C) Mix of funds used to finance the project D) Risk level of the project E) Length of the project's life

7) Black Stone Furnaces wants to build a new facility. The cost of capital for this investment is primarily dependent on which one of the following? A) The firm's overall source of funds B) Source of the funds used to build the facility C) Current tax rate D) The nature of the investment E) Firm's historical average rate of return

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8) Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity? A) The rate of growth must exceed the required rate of return. B) The rate of return must be adjusted for taxes. C) The annual dividend used in the computation must be for Year 1 if you use Time 0’s stock price to compute the return. D) The cost of equity is equal to the return on the stock plus the risk-free rate. E) The cost of equity is equal to the return on the stock multiplied by the stock's beta.

9) A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 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 firm's weighted average cost of capital (WACC)? A) 12.4 percent because it is lower than 18.7 percent B) 18.7 percent because it is higher than 12.4 percent C) The arithmetic average of 12.4 percent and 18.7 percent D) The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent E) 13.5 percent

10)

When evaluating a project, the dividend growth model: A) can only be used by firms that pay increasing dividends. B) must be used by all dividend-paying firms. C) is only applicable when the growth rate of the project exceeds the dividend growth

rate. D) is relatively simple to use. E) must use the growth rate of the project as the rate of growth in the formula.

11)

The results of the dividend growth model:

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A) vary directly with the market rate of return. B) can only be applied to projects that have a growth rate equal to that of the current firm. C) are highly dependent upon the beta used in the model. D) are sensitive to the rate of dividend growth. E) are most reliable when the growth rate exceeds 10 percent.

12)

In an efficient market, the cost of equity for a highly risky firm: A) will be less than the market rate but higher than the risk-free rate. B) must equal the market rate of return. C) changes by 1 percent for every 1 percent change in the risk-free rate. D) decreases as the beta of the firm's stock increases. E) increases in direct relation to the stock's systematic risk.

13) Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the: A) market risk premium decreases. B) risk-free rate decreases. C) market rate of return decreases. D) beta decreases. E) either the risk-free rate or the market rate of return decreases.

14)

Which one of the following will increase the cost of equity, all else held constant? A) Increase in the dividend growth rate B) Decrease in beta C) Decrease in future dividends D) Increase in stock price E) Decrease in market risk premium

15)

An increase in a levered firm’s tax rate will:

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A) decrease the cost of preferred stock. B) increase both the cost of preferred stock and debt. C) decrease the firm’s cost of capital. D) decrease the cost of equity capital. E) increase the firm’s WACC.

16)

Which one of the following is used as the pretax cost of debt? A) Average coupon rate on the firm's outstanding bonds B) Coupon rate on the firm's latest bond issue C) Weighted average yield to maturity on the firm's outstanding debt D) Average current yield on the firm's outstanding debt E) Annual interest divided by the market price per bond for the latest bond issue

17)

Which one of the following will decrease the aftertax cost of debt for a firm? A) Decrease in the firm's beta B) Increase in tax rates C) Increase in the risk-free rate of return D) Decrease in the market price of the debt E) Increase in a bond's yield to maturity

18)

All else constant, an increase in a firm's cost of debt: A) could be caused by an increase in the firm's tax rate. B) will result in an increase in the firm's cost of capital. C) will lower the firm's weighted average cost of capital. D) will lower the firm's cost of equity. E) will increase the firm's capital structure weight of debt.

19)

The cost of preferred stock:

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A) increases when a firm's tax rate decreases. B) is constant over time. C) is unaffected by changes in the market price of the stock. D) is equal to the stock's dividend yield. E) increases as the price of the stock increases.

20)

Which statement is true?

A) An increase in the market value of preferred stock will increase a firm's weighted average cost of capital. B) The cost of preferred stock is unaffected by the issuer's tax rate. C) Preferred stock is generally the cheapest source of capital for a firm. D) The cost of preferred stock remains constant from year to year. E) Preferred stock is valued using the capital asset pricing model.

21) Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital? A) Decrease in the book value of a firm's equity B) Decrease in a firm's tax rate C) Increase in the market value of the firm's common stock D) Increase in the market risk premium E) Increase in the firm's beta

22)

Which one of the following statements concerning capital structure weights is correct?

A) Target capital structure rates for a firm are irrelevant to individual projects. B) The weights are unaffected when a bond issue matures. C) An increase in the debt-equity ratio will increase the weight of the common stock. D) The repurchase of preferred stock will increase the weight of debt. E) The issuance of additional shares of common stock will increase the weight of both the common and preferred stock.

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23) Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity. A) A firm may change its capital structure if the government changes its tax policies. B) A decrease in the dividend growth rate increases the cost of equity. C) A decrease in the systematic risk of a firm will increase the firm's cost of capital. D) A decrease in a firm's debt-equity ratio will decrease the firm's cost of capital. E) The cost of preferred stock decreases when the tax rate increases.

24) Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities? A) Cost of equity B) Pretax cost of debt C) Aftertax cost of debt D) Weighted average cost of capital E) Weighted average cost of preferred and common stock

25)

Which one of the following statements is accurate for a levered firm? A) WACC should be used as the required return for all proposed investments. B) A firm's WACC will decrease whenever the firm's tax rate decreases. C) An increase in the market risk premium will decrease a firm's WACC. D) The subjective approach totally ignores a firm's own WACC. E) A reduction in the risk level of a firm will tend to decrease the firm's WACC.

26)

Which statement is correct, all else held constant?

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A) Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred. B) A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. C) The aftertax cost of debt increases when the market price of a bond increases. D) If you have both the dividend growth and the security market line's costs of equity, you should use the higher of the two estimates when computing WACC. E) WACC is applicable only to firms that issue both common and preferred stock.

27) A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, an aftertax cost of debt of 5.2 percent, and a tax rate of 25 percent. Given this, which one of the following will increase the firm's weighted average cost of capital? A) Increasing the firm's tax rate B) Issuing new bonds at par C) Redeeming shares of common stock D) Increasing the firm's beta E) Increasing the debt-equity ratio

28) All else constant, the weighted average cost of capital for a risky, levered firm will decrease if: A) the firm's bonds start selling at a premium rather than at a discount. B) the market risk premium increases. C) the firm replaces some of its debt with preferred stock. D) corporate taxes are eliminated. E) the dividend yield on the common stock increases.

29) A firm that uses its weighted average cost of capital as the required return for all of its investments will:

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A) maintain a constant value for its shareholders. B) increase the risk level of the firm over time. C) make the best possible accept and reject decisions related to those investments. D) find that its cost of capital declines over time. E) accept only the projects that add value to the firm's shareholders.

30) Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. Given this, the firm should probably: A) require the highest rate of return from Division X since it has been in existence the longest. B) assign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions. C) use the firm's WACC as the cost of capital for Division Z as it provides analysis for the entire firm. D) use the firm's WACC as the cost of capital for Divisions Y and Z because they are part of the revenue-producing operations of the firm. E) allocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm.

31) A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm: A) automatically gives preferential treatment in the allocation of funds to its riskiest division. B) encourages the division managers to recommend only their most conservative projects. C) maintains the current risk level and capital structure of the firm. D) automatically maximizes the total value created for its shareholders. E) allocates capital funds evenly among its divisions.

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32) Kurt, who is a divisional manager, continually brags that his division's required return for its projects is one percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt's division? A) Kurt tends to overestimate the projected cash inflows on his projects. B) Kurt tends to underestimate the variable costs of his projects. C) Kurt has the most efficiently managed division. D) Kurt's division is less risky than the other divisions. E) Kurt's projects are generally financed with debt while the other divisions' projects are financed with equity.

33)

Which one of the following is the primary determinant of an investment's cost of capital? A) Life of the investment B) Amount of the initial cash outlay C) The investment’s level of risk D) The source of funds used for the investment E) The investment's net present value

34)

The cost of capital for a project depends primarily on which one of the following? A) Source of funds used for the project B) Division within the firm that undertakes the project C) Project's modified internal rate of return D) How the project uses its funds E) Project's fixed costs

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35) Marine Expeditors has three divisions. Division A is the core of the business and represents 80 percent of the firm's operations. Division B is involved only with contractual shortterm projects and therefore has about ten percent less risk than Division A. Division C develops and markets new products and is about ten percent riskier than Division A and about equal in size to Division B. The manager of Division A has suggested that the operations of his division be increased by 10 percent next year. The proposed project should probably be assigned a required return that is equal to _________blank percent of the firm's weighted average cost of capital. A) 90 B) 33 C) 80 D) 100 E) 110

36) Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered. A) Management decides to issue new stock to finance the project. B) The initial cash outlay requirement is reduced. C) She learns the project is riskier than previously believed. D) The aftertax cost of debt just decreased. E) The project's life is shortened.

37) 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 one of the following as the required return for the project? A) Boone Brothers' cost of capital B) Ace Builders' cost of capital C) Average of Boone Brothers' and Ace Builders' cost of capital D) Lower of Boone Brothers' or Ace Builders' cost of capital E) Higher of Boone Brothers' or Ace Builders' cost of capital

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38) You want 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? A) Firm size B) Firm location C) Firm experience D) Firm operations E) Firm management

39) When using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return that: A) is based on the actual source of funds that will be used to fund the project. B) creates a positive net present value for the project. C) reflects the size and life of the project. D) most closely correlates with the proposed investment's internal rate of return. E) best matches the risk level of the proposed investment.

40) 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) Another brick-and-mortar store that also sells online B) A wholesale toy distributor C) A toy store that sells online only D) The oldest online retailer of any product E) Derek's own store

41) Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firm uses a rate equal to WACC plus one 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 a discount rate to a specific project?

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A) The current market rate of interest B) Actual source of funds used to finance the project C) The perceived risk level of the project D) The division within the firm that will be assigned to manage the project E) The firm’s current debt-equity ratio

42) 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 numerous proposed investments? A) Assign every project a rate equal to the firm's cost of equity B) Assign every investment a random rate that varies between the firm's cost of debt and its cost of equity C) Assign every project a rate equal to the firm's WACC plus or minus a subjective adjustment D) Determine the best pure play rate for each project E) Assign every project a rate equal to the market rate of return at the time of the proposal

43) To value a non-dividend-paying firm, the terminal value used in the valuation calculation will most likely be based on a(n): A) subjective value determined by the firm’s senior managers. B) salvage value of zero. C) target ratio. D) pure play rate of return. E) expected book value of equity.

44) What is the primary reason why the cash flow from assets (CFA) is adjusted when used to value a firm?

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A) Net working capital (NWC) is excluded from firm valuations so the change in NWC must be added back to the "normal" CFA calculation B) Interest expense is a financing cost and thus the tax benefit of this expense needs to be eliminated from the CFA. C) CFA is normally based on historical performance but since firm valuations are forward looking the CFA must be adjusted for timing. D) The CFA must be lowered by the amount of the noncash expenses to ascertain a more accurate firm value. E) Depreciation is a noncash expense so both it and the depreciation tax shield must be eliminated from the CFA.

45) KellyAnne Public Relations just paid an annual dividend of $1.27 on its common stock and increases its dividend by 3.4 percent annually. What is the rate of return on this stock if the current stock price is $38.56 a share? A) 6.81% B) 7.87% C) 7.04% D) 7.69% E) 7.82%

46) City Equipment announced this morning that its next annual dividend will be decreased to $1.90 a share and that all future dividends will be decreased by an additional 1.9 percent annually. What is the current value per share if the required return is 16.8 percent? A) $8.80 B) $10.16 C) $10.36 D) $9.88 E) $10.42

47) Fire Hydrant Pet Supply just paid its first annual dividend of $.75 a share. The firm plans to increase the dividend by 2.9 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $16.90 per share?

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A) 14.64% B) 7.47% C) 9.78% D) 4.33% E) 5.34%

48) Mississippi Mud Products would like to issue new equity shares if its cost of equity declines to 9.5 percent. The company pays a constant annual dividend of $4.80 per share. What does the market price of the stock need to be for the firm to issue the new shares? A) $49.33 B) $48.83 C) $50.53 D) $51.63 E) $52.13

49) The common stock of Serenity Homescapes has a beta of 1.21 and a standard deviation of 17.8 percent. The market rate of return is 13.5 percent, and the risk-free rate is 3.2 percent. What is the cost of equity for this firm? A) 15.66% B) 13.61% C) 13.93% D) 16.25% E) 14.90%

50) Trendsetters has a cost of equity of 14.6 percent. The market risk premium is 8.1 percent and the risk-free rate is 3.9 percent. The company is acquiring a competitor, which will increase the company's beta to 1.4. What effect, if any, will the acquisition have on the firm's cost of equity capital?

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A) No effect B) Increase of .64 percent C) Decrease of .84 percent D) Increase of 1.06 percent E) Increase of .13 percent

51) The common stock of Silent Motors has a beta that is 5 percent greater than the overall market beta. Currently, the market risk premium is 8.25 percent while the U.S. Treasury bill is yielding 2.8 percent. What is the cost of equity for this firm? A) 11.66% B) 10.86% C) 11.81% D) 11.46% E) 10.75%

52) Musical Charts just paid an annual dividend of $1.84 per share. This dividend is expected to increase by 2.1 percent annually. Currently, the firm has a beta of 1.12 and a stock price of $31 a share. The risk-free rate is 4.3 percent, and the market rate of return is 12.3 percent. What is the cost of equity capital for this firm? A) 13.28% B) 11.21% C) 12.29% D) 11.95% E) 10.71%

53) Commercial Construction Builders has a beta of 1.34, a dividend growth rate of 2.1 percent for the foreseeable future, a stock price of $15 per share, and an expected annual dividend of $.45 per share next year. The market rate of return is 12.8 percent, and the risk-free rate is 4.2 percent. What is the firm's average cost of equity?

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A) 8.79% B) 10.41% C) 10.77% D) 10.35% E) 8.51%

54) The market rate of return is 12.65 percent, and the risk-free rate is 3.1 percent. Galaxy Company has 15 percent more systematic risk than the overall market and has a dividend growth rate of 3.75 percent. The firm's stock is currently selling for $53 a share and has a dividend yield of 4.53 percent. What is the firm's average cost of equity? A) 12.16% B) 11.18% C) 12.36% D) 10.87% E) 17.33%

55) Spartans has 6.5 percent bonds outstanding that mature in 18 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $985 each. What is the firm's pretax cost of debt? A) 6.77% B) 6.64% C) 6.94% D) 7.11% E) 6.20%

56) Three years ago, the Fairchildress Company issued 20-year, 7.75 percent semiannual coupon bonds at par. Today, the bonds are quoted at 102.6. What is this firm's pretax cost of debt?

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A) 57.32% B) 7.13% C) 7.48% D) 7.88% E) 7.34%

57) Pride of Lions has bonds outstanding that carry an annual coupon of 5.75 percent. The bonds mature in 9 years and are currently priced at 98 percent of face value. What is the firm's pretax cost of debt? A) 6.04% B) 9.850% C) 8.60% D) 11.28% E) 12.02%

58) Madison Square Stores has a $20 million bond issue outstanding that currently has a market value of $19.6 million. The bonds mature in 6.5 years and pay semiannual interest payments of $35 each. What is the firm's pretax cost of debt? A) 8.21% B) 7.59% C) 7.08% D) 7.39% E) 7.80%

59) Electronic Products has 22,500 bonds outstanding that are currently quoted at 101.6. The bonds mature in 8 years and pay an annual coupon payment of $90. What is the firm's aftertax cost of debt if the applicable tax rate is 21 percent?

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A) 5.47% B) 4.79% C) 5.75% D) 6.89% E) 6.67%

60) USA Manufacturing issued 30-year, 7.2 percent semiannual bonds 6 years ago. The bonds currently sell at 101 percent of face value. What is the firm's aftertax cost of debt if the tax rate is 21 percent? A) 4.82% B) 5.62% C) 3.76% D) 3.59% E) 4.40%

61) Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 8 percent, matures in 6 years, has a total face value of $5 million, and is quoted at 101.2 percent of face value. The second issue has a 7.5 percent coupon, matures in 13 years, has a total face value of $18 million, and is quoted at 99 percent of face value. Both bonds pay interest semiannually. What is the firm's weighted average aftertax cost of debt if the tax rate is 21 percent? A) 5.05% B) 5.12% C) 5.63% D) 5.95% E) 6.04%

62) The 7 percent preferred stock of Midwest Muffler and Towing is selling for $65 per share. What is the firm's cost of preferred stock if the tax rate is 21 percent and the par value per share is $100?

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A) 12.79% B) 11.21% C) 11.46% D) 10.55% E) 10.77%

63) The 5.25 percent preferred stock of Robert Bruce Security is selling for $50.26 a share. What is the firm's cost of preferred stock if the tax rate is 21 percent and the par value per share is $100? A) 8.57% B) 9.20% C) 10.45% D) 11.86% E) 10.21%

64) The preferred stock of Dolphin Pools pays an annual dividend of $5.20 a share and sells for $48 a share. The tax rate is 21 percent. What is the firm's cost of preferred stock? A) 9.67% B) 10.94% C) 10.83% D) 15.59% E) 16.47%

65) Dee's Dress Emporium has 50,000 shares of common stock outstanding at a price of $27 a share. It also has 1,000 shares of preferred stock outstanding at a price of $20 a share. There are 800 bonds outstanding that have a semiannual coupon payment of $25. The bonds mature in four years, have a face value of $1,000, and sell at 97 percent of par. What is the capital structure weight of the common stock?

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A) 48.20% B) 50.00% C) 48.15% D) 62.91% E) 50.08%

66) S&W has 21,000 shares of common stock outstanding at a price of $29 a share. It also has 2,000 shares of preferred stock outstanding at a price of $71 a share. The firm has 7 percent, 12-year bonds outstanding with a total market value of $386,000. The bonds are currently quoted at 100.6 percent of face and pay interest semiannually. What is the capital structure weight of the firm's preferred stock if the tax rate is 21 percent? A) 12.49% B) 9.00% C) 8.24% D) 11.84% E) 13.63%

67) Santa Claus Enterprises has 87,000 shares of common stock outstanding at a current price of $39 a share. The firm also has two bond issues outstanding. The first bond issue has a total face value of $230,000, pays 7.1 percent interest annually, and currently sells for 103.1 percent of face value. The second bond issue consists of 5,000 bonds that are selling for $887 each. These bonds pay 6.5 percent interest annually and mature in eight years. The tax rate is 21 percent. What is the capital structure weight of the firm's debt? A) 57.93% B) 51.39% C) 55.50% D) 60.52% E) 71.86%

68) Bermuda Cruises issues only common stock and coupon bonds. The firm has a debtequity ratio of .45. The cost of equity is 17.6 percent, and the pretax cost of debt is 8.9 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 21 percent?

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A) 66.75% B) 49.97% C) 52.93% D) 59.08% E) 68.97%

69) The Five and Dime Store has a cost of equity of 14.8 percent, a pretax cost of debt of 6.7 percent, and a tax rate of 21 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is .46? A) 10.18% B) 11.80% C) 11.53% D) 13.49% E) 14.93%

70) Country Cook's cost of equity is 16.2 percent and its aftertax cost of debt is 5.8 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is .42 and the tax rate is 21 percent? A) 12.54% B) 11.47% C) 13.12% D) 12.28% E) 13.01%

71) A firm wants to create a WACC of 11.2 percent. The firm's cost of equity is 16.8 percent, and its pretax cost of debt is 8.7 percent. The tax rate is 25 percent. What does the debt-equity ratio need to be for the firm to achieve its target WACC?

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A) .86 B) .67 C) 1.04 D) .94 E) 1.20

72) The Color Box uses a combination of common stock, preferred stock, and debt financing. The company wants preferred stock to represent 7 percent of the total financing. It also wants to structure the firm in a manner that will produce a weighted average cost of capital of 9.5 percent. The aftertax cost of debt is 4.8 percent, the cost of preferred is 8.9 percent, and the cost of common stock is 14.7 percent. What percentage of the firm's capital funding should be debt financing? A) 48.42% B) 52.03% C) 54.15% D) 44.78% E) 39.21%

73) Gulf Coast Tours currently has a weighted average cost of capital of 12.4 percent based on a combination of debt and equity financing. The firm has no preferred stock. The current debt-equity ratio is .47 and the aftertax cost of debt is 6.1 percent. The company just hired a new president who is considering eliminating all debt financing. All else constant, what will the firm's cost of capital be if the firm switches to an all-equity firm? A) 15.45% B) 12.92% C) 12.89% D) 13.37% E) 15.36%

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74) Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 8.81 percent. What is the firm's weighted average cost of capital if the tax rate is 25 percent? A) 14.52% B) 13.44% C) 14.64% D) 14.37% E) 13.92%

75) City Rentals has 44,000 shares of common stock outstanding at a market price of $32 a share. The common stock just paid a $1.50 annual dividend and has a dividend growth rate of 2.5 percent. There are 7,500 shares of $9 preferred stock outstanding at a market price of $72 a share. The outstanding bonds mature in 11 years, have a total face value of $825,000, a face value per bond of $1,000, a market price of $989 each, and a pretax yield to maturity of 8.3 percent. The tax rate is 21 percent. What is the firm's weighted average cost of capital? A) 7.76% B) 8.10% C) 9.29% D) 9.97% E) 10.30%

76) Beta Industries is considering a project with an initial cost of $6.9 million. The project will produce cash inflows of $1.52 million a year for seven years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is +2.2 percent. The firm has a pretax cost of debt of 9.1 percent and a cost of equity of 17.7 percent. The debt-equity ratio is .57 and the tax rate is 21 percent. What is the net present value of the project?

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A) −$698,442 B) −$187,121 C) −$776,522 D) $333,322 E) $2,545

77) Orchard Farms has a pretax cost of debt of 7.29 percent and a cost of equity of 16.3 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of 1.25 percent. The firm's tax rate is 21 percent, and its debt-equity ratio is .48. The project has an initial cost of $3.9 million and produces cash inflows of $1.26 million a year for 5 years. What is the net present value of the project? A) $412,063 B) $446,556 C) $514,370 D) $561,027 E) $478,721

78) Piedmont Hotels is an all-equity firm with 48,000 shares of stock outstanding. The stock has a beta of 1.19 and a standard deviation of 14.8 percent. The market risk premium is 7.8 percent, and the risk-free rate of return is 4.1 percent. The company is considering a project that it considers riskier than its current operations so has assigned an adjustment of 1.35 percent to the project's discount rate. What should the firm set as the required rate of return for the project? A) 9.85% B) 10.92% C) 15.39% D) 14.73% E) 17.33%

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79) Cromwell's Interiors is considering a project that is equally as risky as the firm's current operations. The firm has a cost of equity of 15.4 percent and a pretax cost of debt of 8.9 percent. The debt-equity ratio is .46 and the tax rate is 21 percent. What is the cost of capital for this project? A) 11.97% B) 12.40% C) 11.02% D) 11.62% E) 12.76%

80) International Exchange has three divisions: A, B, and C. Division A has the least risk and Division C has the most risk. The firm has an aftertax cost of debt of 6.1 percent and a cost of equity of 14.3 percent. The firm is financed with 37 percent debt and 63 percent equity. Division A's projects are assigned a discount rate that is 2.2 percent less than the firm's weighted average cost of capital. What is the discount rate applicable to Division A? A) 7.98% B) 8.27% C) 9.07% D) 9.48% E) 6.87%

81) Swizer Industries has two separate divisions. Division X has less risk, so its projects are assigned a discount rate equal to the firm's WACC minus .75 percent. Division Y has more risk, and its projects are assigned a rate equal to the firm's WACC plus 1 percent. The company has a debt-equity ratio of .48 and a tax rate of 21 percent. The cost of equity is 15.4 percent and the aftertax cost of debt is 5.4 percent. Presently, each division is considering a new project. Division Y's project provides a return of 12.9 percent while Division X's project is expected to earn 11.5 percent. Which project(s), if any, should the company accept? A) Accept both X and Y B) Accept X and reject Y C) Reject X and accept Y D) Reject both X and Y E) The answer cannot be determined based on the information provided.

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82) Bruceton’s is a specialty retailer with multiple brick-and-mortar stores and a cost of capital of 16.4 percent. Specialty Imports is a wholesaler of specialty items and has a cost of capital of 12.6 percent. Both firms are considering opening a new store in downtown Chicago at a cost of $1.1 million. Because this type of store would be trendy, it would have a life of only 8 years and no salvage value. The expected annual net cash flow is $229,000, regardless of which firm opens the store. Which company(ies), if either, should open the Chicago store? A) Bruceton’s only B) Specialty Imports only C) Neither company D) Both companies E) The answer cannot be determined based on the information provided.

83) Lester's is a globally diverse company with multiple divisions and a cost of capital of 15.8 percent. Med, Incorporated, is a specialty firm in the medical equipment field with a cost of capital of 13.7 percent. With the aging of America, both firms recognize the opportunities that exist in the medical field and are considering expansion in this area. At present, there is an opportunity for multiple firms to be involved in a new medical devices project. Each project will require an initial investment of $8.4 million with annual returns of $2.2 million per year for seven years. Which company(ies), if either, should become involved in the new projects? A) Lester's only B) Med, Incorporated, only C) Both Lester's and Med, Incorporated D) Neither Lester's nor Med, Incorporated E) The answer cannot be determined based on the information provided.

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84) Bob's is a retail chain of specialty hardware stores. The firm has 18,000 shares of stock outstanding that are currently valued at $82 a share and provide a rate of return of 13.2 percent. The firm also has 600 bonds outstanding that have a face value of $1,000, a market price of $1,032, and a coupon rate of 7 percent. These bonds mature in 7 years and pay interest semiannually. The tax rate is 21 percent. The firm is considering expanding by building a new superstore. The superstore will require an initial investment of $9.3 million and is expected to produce cash inflows of $1.07 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations. The initial investment will be depreciated on a straight-line basis to a zero book value over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for an aftertax value of $4.7 million. Should the firm accept or reject the superstore project and why? A) Accept; The project's NPV is $1.27 million. B) Accept; The NPV is $4.89 million. C) Reject; The NPV is $1.06 million. D) Reject; The NPV is −$1.15 million. E) Reject; The NPV is −$1.26 million.

85) Casper's is analyzing a proposed expansion project that is much riskier than the firm's current operations. Thus, the project will be assigned a discount rate equal to the firm's cost of capital plus 2.5 percent. The proposed project has an initial cost of $18.1 million that will be depreciated on a straight-line basis to a zero book value over 20 years. The project also requires additional inventory of $428,000 over the project's life. Management estimates the facility will generate cash inflows of $2.46 million a year over its 20-year life. After 20 years, the company plans to sell the facility for an aftertax amount of $1.4 million. The company has 58,000 shares of common stock outstanding at a market price of $52 a share. This stock just paid an annual dividend of $2.84 a share. The dividend is expected to increase by 3.6 percent annually. The firm also has 15,000 shares of 9 percent preferred stock with a market value of $87 a share. The preferred stock has a par value of $100. The company has $1.2 million of face value bonds with semiannual payments and a coupon rate of 9 percent. The bonds are currently priced at 102 percent of face value and mature in 13 years. The tax rate is 21 percent. Should the firm pursue the expansion project at this point in time? Why or why not? A) Reject; the NPV is −$.7 million. B) Accept; The NPV is $1.4 million. C) Accept; The NPV is $.7 million. D) Reject; the NPV is −$1.2 million. E) Reject; the NPV is −$3.0 million.

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86) Tim's Tools just issued a dividend of $2.22 per share on its common stock. The company is expected to maintain a constant 2.8 percent growth rate in its dividends indefinitely. If the stock sells for $19 a share, what is the company's cost of equity? A) 12.81% B) 13.37% C) 9.94% D) 14.81% E) 10.46%

87) Stock in ABC Enterprises has a beta of 1.28. The market risk premium is 7.4 percent, and T-bills are currently yielding 3.6 percent. ABC's most recently paid dividend was $1.62 per share, and dividends are expected to grow at an annual rate of 2 percent indefinitely. If the stock sells for $38 a share, what is your best estimate of ABC's cost of equity? A) 9.78% B) 7.82% C) 9.71% D) 9.41% E) 7.41%

88) Traditional Bank has an issue of preferred stock with an annual dividend of $7.50 that just sold for $62 a share. What is the bank's cost of preferred stock? A) 12.91% B) 12.10% C) 11.23% D) 13.47% E) 11.32%

89) Rockingham Motors issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 103.1 percent of its face value. The company's tax rate is 21 percent. What is the aftertax cost of debt?

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A) 2.72% B) 5.10% C) 5.69% D) 6.10% E) 5.99%

90) Healthy Snacks has a target capital structure of 60 percent common stock, 3 percent preferred stock, and 37 percent debt. Its cost of equity is 16.8 percent, the cost of preferred stock is 11.4 percent, and the pretax cost of debt is 8.3 percent. What is the company's WACC if the applicable tax rate is 21 percent? A) 13.29% B) 12.61% C) 12.34% D) 12.45% E) 12.85%

91) Precision Cuts has a target debt-equity ratio of .48. Its cost of equity is 16.4 percent, and its pretax cost of debt is 8.2 percent. If the tax rate is 21 percent, what is the company's WACC? A) 13.18% B) 11.72% C) 12.91% D) 11.28% E) 12.84%

92) Given the following information for Electric Transport, find the WACC. Assume the company's tax rate is 21 percent. Debt: 8,100, 6.9 percent coupon bonds outstanding. $1,000 par value, 17 years to maturity, selling for 101 percent of par, the bonds make semiannual payments. Common stock: 175,000 shares outstanding, selling for $77 per share, beta is 1.32. Preferred stock: 9,000 shares of $7.50 preferred stock outstanding, currently selling for $73 per share. Market: 7.9 percent market risk premium and 3.6 percent risk-free rate.

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A) 10.4% B) 12.0% C) 12.4% D) 10.7% E) 9.8%

93) You are given the following information concerning Around Town Tours: Debt: 7,500, 6.8 percent coupon bonds outstanding, with 11 years to maturity and a quoted price of 97.9. These bonds pay interest semiannually. Common stock: 284,000 shares of common stock selling for $68 per share. The stock has a beta of 1.04 and will pay a dividend of $2.62 next year. The dividend is expected to grow by 2.5 percent per year indefinitely. Preferred stock: 9,000 shares of $8 preferred stock selling at $88 per share. Market: 14.6 percent expected return, 4.1 percent risk-free rate Company: 21 percent tax rate. Calculate the WACC for this firm. A) 9.0% B) 8.7% C) 9.3% D) 9.6% E) 10.0%

94) Lawler's is considering a new project. The company has a debt-equity ratio of .64. The company's cost of equity is 14.9 percent, and the aftertax cost of debt is 5.3 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +1.8 percent. What is the project cost of capital if the tax rate is 21 percent? A) 12.53% B) 12.98% C) 12.95% D) 15.14% E) 15.68%

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95) Country Markets has an EBIT of $42,650, an increase in net working capital of $2,615, interest expense of $4,300, net capital spending of $3,620, and a tax rate of 21 percent. The firm’s WACC is 11.2 percent, and its growth rate is 3.1 percent. What is the adjusted value of the firm? A) $287,097.17 B) $311,208.16 C) $338,993.83 D) $238,009.72 E) $308,315.22

96) Big Tree Inn has an EBIT of $121,318, a decrease in net working capital of $1,204, interest expense of $5,200, net capital spending of $5,200, and a tax rate of 25 percent. The firm’s WACC is 12.6 percent, and its growth rate is 2.7 percent. What is the adjusted value of the firm? A) $694,311.08 B) $708,007.49 C) $878,712.12 D) $893,333.33 E) $978,022.15

97) Mercury Racquetballs just paid an annual dividend of $2.03 on its common stock and increases its dividend by 2.75 percent annually. What is the rate of return on this stock if the current stock price is $49.50 a share? A) 6.96% B) 7.71% C) 6.88% D) 7.53% E) 7.56%

98) Muttly Engineering announced this morning that its next annual dividend will be decreased to $2.45 a share and that all future dividends will be decreased by an additional 1.45 percent annually. What is the current value per share if the required return is 19.5 percent?

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A) $10.33 B) $11.69 C) $11.89 D) $11.41 E) $11.95

99) Sheepdog Rescue just paid its first annual dividend of $1.95 a share. The firm plans to increase the dividend by 1.75 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $31.45 per share? A) 6.31% B) 8.06% C) 10.38% D) 4.93% E) 5.94%

100) Bluff City Sushi Distributors would like to issue new equity shares if its cost of equity declines to 16.5 percent. The company pays a constant annual dividend of $2.11 per share. What does the market price of the stock need to be for the firm to issue the new shares? A) $11.59 B) $11.09 C) $12.79 D) $13.89 E) $14.39

101) The common stock of Pedestrian Automotive has a beta of .89 and a standard deviation of 15.8 percent. The market rate of return is 12.25 percent, and the risk-free rate is 2.9 percent. What is the cost of equity for this firm?

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A) 11.22% B) 9.16% C) 9.48% D) 11.80% E) 10.45%

102) The common stock of Shaky Building Supply has a beta that is 22 percent greater than the overall market beta. Currently, the market risk premium is 9.56 percent while the U.S. Treasury bill is yielding 3.3 percent. What is the cost of equity for this firm? A) 15.16% B) 14.36% C) 15.31% D) 14.96% E) 14.25%

103) Regulation Insurance has a beta of .90, a dividend growth rate of 2.5 percent for the foreseeable future, a stock price of $47 per share, and an expected annual dividend of $.60 per share next year. The market rate of return is 13.9 percent, and the risk-free rate is 3.4 percent. What is the firm's average cost of equity? A) 6.69% B) 8.31% C) 8.25% D) 8.67% E) 6.41%

104) Cool Fire, Incorporated, has 7.2 percent bonds outstanding that mature in 15 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $975. What is the yield to maturity on the bonds?

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A) 7.61% B) 7.48% C) 7.78% D) 7.95% E) 7.04%

105) The 8.4 percent preferred stock of Dynachili Distributing is selling for $48 per share. What is the firm's cost of preferred stock if the tax rate is 21 percent and the par value per share is $100? A) 19.52% B) 17.94% C) 18.19% D) 18.54% E) 17.50%

106) Empire Plumbing Supply has 100,000 shares of common stock outstanding at a price of $37 a share. It also has 6,000 shares of preferred stock outstanding at a price of $30 a share. There are 5,000 bonds outstanding that have a semiannual coupon payment of $25. The bonds mature in four years, have a face value of $1,000, and sell at 110 percent of par. What is the capital structure weight of the common stock? A) 24.74% B) 26.22% C) 24.69% D) 39.45% E) 26.62%

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Answer Key Test name: Chapter 12 Test Bank - Static 1) C 2) B 3) B 4) E 5) C 6) D 7) D 8) C 9) C 10) D 11) D 12) E 13) B 14) A 15) C 16) C 17) B 18) B 19) D 20) B 21) C 22) D 23) A 24) D 25) E 26) B Version 1

27) D 28) A 29) B 30) B 31) A 32) D 33) C 34) D 35) D 36) C 37) B 38) D 39) E 40) C 41) C 42) C 43) C 44) B 45) A RE = D1/P0 + g RE = 1.31318/38.56 + .034 RE = .068055 RE = .0681, or 6.81% 46) B P0 = $1.90/[.168 − (−.019)] = $10.16 47) B RE = D1/P0 + g RE = .77175/16.9 + .029 RE = .0747, or 7.47% 48) C Version 1

P0 = $4.80/.095 = $50.53 49) A RE = Rf + β × (E(RM) − Rf) RE = .032 + 1.21 × (.135 − .032) RE = .1566, or 15.66% 50) B RE = .039 + 1.4(.081) = .1524, or 15.24% Increase in cost of equity = 15.24% − 14.6% = .64% 51) D RE = Rf + β × (E(RM) − Rf ) RE = .028 + 1.05 × .0825 RE = .1146, or 11.46% 52) E RE = Rf + β × (E(RM) − Rf) RE = .043 + 1.12 × (.123 − .043) RE = .1326, or 13.26% RE = D1/P0 + g RE = $1.84(1.021)/$31 + .021 RE = .0816, or 8.16% Average RE = (13.26% + 8.16%)/2 = .1071, or 10.71% 53) B RE = Rf + β × (E(RM) − Rf) RE = .042 + 1.34 × (.128 − .042) RE = .1572, or 15.72% RE = D1/P0 + g RE = $.45/$15 + .021 RE = .0510, or 5.10% Average RE = (15.72% + 5.10%)/2 = .1041, or 10.41% Version 1

54) B RE = Rf + β × (E(RM) − Rf) RE = .031 + 1.15 × (.1265 − .031) RE = .1408, or 14.08% RE = D1/P0 + g RE = $53(.0453)/$53 + .0375 RE = .0828, or 8.28% Average RE = (14.08% + 8.28%)/2 = .1118, or 11.18% 55) B Enter

Solve for

I/Y

−$985.00

$32.50

PMT

−$1,026.00

$38.75

PMT

$1,000

3.32205%

YTM = 3.32205% × 2 = 6.64% 56) C Enter

Solve for

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I/Y

$1,000

3.73865%

YTM = 3.73865% × 2 = 7.48% 57) A Enter

Solve for

I/Y

−$980.00

$28.75

PMT

−$980.00

$35.00

PMT

−$1,016.00

$45.50

PMT

$1,000

3.02067%

YTM = 3.02067% × 2 = 6.04% 58) D Enter

Solve for

I/Y

$1,000

3.69653%

YTM = 3.69653% × 2 = 7.39% 59) D Enter

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I/Y

$1,000

Solve for

4.35903%

YTM = 4.35903% × 2 = 8.718% Aftertax cost of debt = 8.718% × (1 − .21) = .0689, or 6.89% 60) B Enter

Solve for

I/Y

−$1,010.00

$36.00

PMT

$1,000

3.55626%

YTM = 3.55626% × 2 = 7.1125% Aftertax cost of debt = 7.1125% × (1 − .21) = 5.62% 61) E $1,012 = [(.08 × $1,000)/2] × ({1 − 1/[1 + (RD/2)]12}/( RD/2)) + $1,000/[1 + (RD/2)]12 RD = 7.7462% $990 = [(.075 × $1,000)/2] × ({1 − 1/[1 + (RD/2)]26}/(RD/2)) + $1,000/[1 + (RD/2)]26 RD = 7.6226% Market values: ($5 million × 1.012) + ($18 million × .99) = $5.06 million + 17.82 million = $22.88 million Aftertax cost of debt = [($5.06 million/$22.88 million)(.077462) + ($17.82 million/$22.88 million)(.076226)] × (1− .21) = .0604, or 6.04% 62) E Rp = (.07 × $100)/$65 = .1077, or 10.77% Version 1

63) C Rp = (.0525 × $100)/$50.26 = .1045, or 10.45% 64) C Rp = $5.20/$48 = .1083, or 10.83% 65) D Common stock = 50,000 × $27 = $1,350,000 Preferred stock = 1000 × $20 = $20,000 Debt = 800 × (.97 × $1,000) = $776,000 Value = $1,350,000 + 20,000 + 776,000 = $2,146,000 Weight of common stock = $1,350,000/$2,146,000 = .6291, or 62.91% 66) A Common stock = 21,000 × $29 = $609,000 Preferred stock = 2,000 × $71 = $142,000 Debt = $386,000 Value = $609,000 + 142,000 + 386,000 = $1,137,000 Weight of preferred = $142,000/$1,137,000 = .1249, or 12.49% 67) A Common stock = 87,000 × $39 = $3,393,000 Debt = (1.031 × $230,000) + (5,000 × $887) = $4,672,130 Weight of debt = $4,672,130/($3,393,000 + 4,672,130) = .5793, or 57.93% 68) E Weight of equity = 1/1.45 = .6897, or 68.97% 69) B WACC = (1/1.46)(.148) + (.46/1.46)(.067)(1 − .21) = .1180, or 11.80% 70) C WACC = (1/1.42)(.162) + [(.42/1.42)(.058)] = .1312, or 13.12% 71) E

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WACC = .112 = (1 − x)(.168) + x(.087)(1 − .25) x = .5450 Debt-equity ratio = .5450/(1 − .5450) = 1.20 72) A .095 = (1 − .07 − x)(.147) + (.07)(.089) + (x)(.048) x = .4842, or 48.42% 73) E WACC = .124 = (1/1.47)(x) + (.47/1.47)(.061) x = .1536, or 15.36% 74) C Common stock: 21,000 × $61 = $1,281,000 Preferred stock: 11,000 × $48 = $528,000 Debt: 1.04 × $275,000 = $286,000 Value = $1,281,000 + 528,000 + 286,000 = $2,095,000 WACC = ($1,281,000/$2,095,000)(.156) + ($528,000/$2,095,000)($8/$48) + ($286,000/$2,095,000)(.0881)(1 − .25) = .1464, or 14.64% 75) B Common stock: 44,000 × $32 = $1,408,000 Preferred stock: 7,500 × $72 = $540,000 Debt: $989/$1,000 × $825,000 = $815,925 Value = $1,408,000 + 540,000 + 815,925 = $2,763,925 RE = [($1.50 × 1.025)/$32] + .025 = .073047 Rp = $9/$72 = .125 WACC = ($1,408,000/$2,763,925)(.073047) + ($540,000/$2,763,925)(.125) + ($815,925/$2,763,925)(.083)(1 − .21) = .0810, or 8.10% 76) C

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WACC = (1/1.57)(.177) + (.57/1.57)(.091)(1 − .21) = .138839 Project WACC = .138839 + .022 = .160839, or 16.0839% NPV = −$6.9 million + ($1.52 million)(PVIFA7, 16.0839%) = −$776,522 77) A Project cost of capital = [(1/1.48)(.163) + (.48/1.48)(.0729)(1 − .21)] + .0125 = .1413, or 14.13% NPV = −$3.9 million + $1.26 million(PVIFA5, 14.13%) = $412,063 78) D Project cost of capital = .041 + 1.19(.078) + .0135 = .1473, or 14.73% 79) E Project cost of capital = (1/1.46)(.154) + (.46/1.46)(.089)(1 − .21) = .1276, or 12.76% 80) C Division A cost of capital = (.63)(.143) + (.37)(.061) − .022 = .0907, or 9.07% 81) B WACC = (1/1.48)(.154) + (.48/1.48)(.054) = .1216 Division X: Required return =.1216 − .0075 = .1141, or 11.41% Division X's return of 11.5 percent exceeds the required rate of 11.41 percent, so its project should be accepted. Division Y: Required return = .1216 + .01 = .1316, or 13.16% Division Y's return of 12.9 percent is less than the required rate of 13.16 percent, so its project should be rejected. 82) C NPV = −$1.1 million + $229,000(PVIFA8, 16.4%) = −$118,008.96 Both firms should use Bruceton's cost of capital of 16.4 percent as the project cost of capital since that rate is most applicable to the project’s level of risk. At 16.4 percent, the NPV is negative, so neither company should open a Chicago store. 83) C Version 1

NPV = −$8.4 million + $2.2 million(PVIFA7, 13.7%) = $1,121,389 Both firms should use Med, Incorporated's, cost of capital. Since the project has a positive NPV at 13.7 percent, both firms should accept the new project. 84) E Stock: 18,000 × $82 = $1,476,000 Bonds: 600 × $1,032 = $619,200 Value = $1,476,000 + 619,200 = $2,095,200 $1,032 = [(.07 × $1,000)/2] × ({1/[1 + (r/2)]14}/(r/2)) + $1,000/[1 + (r/2)]14 r = 6.43% WACC = ($1,476,000/$2,095,200)(.132) + ($619,200/$2,095,200)(.0643)(1 − .21) = .1080, or 10.80% NPV = −$9.3 million + $1.07 million(PVIFA10, 10.80%) + $4.7 million/1.108010 = −$1.26 million The project should be rejected because the NPV is negative at the firm's cost of capital. 85) C

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Common: 58,000 × $52 = $3,016,000 Preferred = 15,000 × $87 = $1,305,000 Debt: 1.02 × $1.2 million = $1,224,000 Value = $3,016,000 + 1,305,000 + 1,224,000 = $5,545,000 RE = [($2.84 × 1.036)/$52] + .036 = .0926 Rp = (.09 × $100)/$87 = .1034 $1,020 = [(.09 × $1,000)/2] × {1 − 1/[1 + (r/2)]26}/(r/2) + $1,000/[1 + (r/2)]26 r = 8.74% Project cost of capital = ($3,016,000/$5,545,000)(.0926) + ($1,305,000/$5,545,000)(.1034) + ($1,224,000/$5,545,000)(.0874)(1 − .21) + .025 = .1149, or 11.49% NPV = −$18.1 million − $428,000 + $2.46 million(PVIFA20, 11.49%) + ($1.4 million + 428,000)/(1.1149)20 = $.7 million The firm should proceed with the expansion project because the NPV is positive. 86) D RE = ($2.22 × 1.028)/$19 + .028 = .1481, or 14.81% 87) C RE = .036 +1.28(.074) = .13072 RE = ($1.62 × 1.02)/$38 + .02 = .06348 Average = (.13072 + .06348)/2 = .0971, or 9.71% 88) B RP = $7.50/$62 = .1210, or 12.10% 89) D $1,031 = [(.08 × $1,000)/2] × ({1 − 1/[1 + (r/2)]54}/(r/2)) + $1,000/[1 + (r/2)]54 r = 7.725% Aftertax cost of debt = .07725 × (1 − .21) = .0610, or 6.10% 90) E Version 1

WACC = .60(.168) + .03(.114) + .37(.083)(1 − .21) = .1285, or 12.85% 91) A WACC = (1/1.48)(.164) + (.48/1.48)(.082)(1 − .21) = .1318 or 13.18% 92) D Common: 175,000 × $77 = $13,475,000 Preferred: 9,000 × $73 = $657,000 Debt: 8,100 × 1.01 × $1,000 = $8,181,000 Value = $13,475,000 + 657,000 + 8,181,000 = $22,313,000 RE = .036 + 1.32(.079) = .1403 RP = $7.50/$73 = .1027 $1,010 = [(.069 × $1,000)/2]×({1 − 1/[1 + (r/2)]34}/(r/2)) + $1,000/[1 + (r/2)]34 r = 6.80% WACC = ($13,475,000/$22,313,000)(.1403) + ($657,000/$22,313,000)(.1027) + ($8,181,000/$22,313,000)(.0680)(1 − .21) = .107, or 10.7% 93) C

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Common: 284,000 × $68 = $19,312,000 Preferred: 9,000 × $88 = $792,000 Debt: 7,500 × .979 × $1,000 = $7,342,500 Value = $19,312,000 + 792,000 + $7,342,500 = $27,446,500 RE = .041 + 1.04(.146 − .041) = .1502 RE = ($2.62/$68) + .025 = .0635 Average RE = (.1502 + .0635)/2 = .1069 RP = $8/$88 = .0909 $979 = [(.068 × $1,000)/2] × ({1 − 1/[1 + (r/2)]22}/(r/2)) + $1,000/[1 + (r/2)]22 r = 7.08% WACC = ($19,312,000/$27,446,500)(.1069) + ($792,000/$27,446,500)(.0909) + ($7,342,500/$27,446,500)(.0708)(1 − .21) = .093, or 9.3% 94) C Project cost of capital = (1/1.64)(.149) + (.64/1.64)(.053) + .018 = .1295, or 12.95% 95) C CFA* = EBIT × (1 − Tc) − Change in NWC − Net capital spending CFA* = $42,650 × (1 − .21) − $2,615 − 3,620 = $27,458.50 V0 = $27,458.50/(.112 − .031) = $338,993.83 96) C CFA* = EBIT × (1 − Tc) − Change in NWC − Net capital spending CFA* = $121,318 × (1 − .25) − (−$1,204) − $5,200 = $86,992.50 V0 = $86,992.50/(.126 − .027) = $878,712.12 97) A RE = D1/P0 + g RE = ($2.03)(1.0275)/$49.50 + .0275 RE = .0696, or 6.96% 98) B Version 1

P0 = $2.45/[.195 − (−.0145)] = $11.69 99) B RE = D1/P0 + g RE = ($1.95)(1.0175)/$31.45 + .0175 RE = .0806, or 8.06% 100) C P0 = $2.11/.165 = $12.79 101) A RE = Rf + β × (E(RM) − Rf) RE = .029 + .89 × (.1225 − .0229) RE = .1122, or 11.22% 102) D RE = Rf + β × (E(RM) − Rf) RE = .033 + 1.22 × .0956 RE = .1496, or 14.96% 103) B RE = Rf + β × (E(RM) − Rf) RE = .034 + .9 × (.139 − .034) RE = .1285, or 12.85% RE = D1/P0 + g RE = $.6/$47 + .025 RE = .0378, or 3.78% Average RE = (12.85% + 3.78%)/2 = .0831, or 8.31% 104) B Enter

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I/Y

−$975.00

$36.00

PMT

$1,000

Solve for

3.74005%

YTM = 3.74005% × 2 = 7.48% 105) E Rp = (.084 × $100)/$48 = .1750, or 17.50% 106) D Common stock = 100,000 × $37 = $3,700,000 Preferred stock = 6,000 × $30 = $180,000 Debt = 5,000 × (1.1 × $1,000) = $5,500,000 Value = $3,700,000 + 180,000 + 5,500,000 = $9,380,000 Weight of common stock = $3,700,000/$9,380,000 = .3945, or 39.45%

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The Greenbriar is an all-equity firm with a total market value of $548,000 and 21,600 shares of stock outstanding. Management is considering issuing $149,000 of debt at an interest rate of 8 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities? A) 6,526 shares B) 5,873 shares C) 470 shares D) 7,119 shares E) 43,840 shares

2) Ornaments, Incorporated, is an all-equity firm with a total market value of $707,000 and 37,200 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $101,900 if the economy is normal. If there is a recession, EBIT will be 20 percent lower, and if there is a boom, EBIT will be 30 percent higher. The tax rate is 23 percent. What is the EPS in a recession? A) $2.14 B) $1.25 C) $1.69 D) $1.78 E) $2.31

3) Summer Tan, Incorporated, is an all-equity firm with a total market value of $465,000 and 32,900 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $73,800 if the economy is normal. If there is a recession, EBIT will be 10 percent lower, and if there is a boom, EBIT will be 20 percent higher. The tax rate is 21 percent. What is the EPS in a boom?

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A) $1.18 B) $1.33 C) $1.63 D) $2.13 E) $1.48

4) Northern Wood Products is an all-equity firm with 23,900 shares of stock outstanding and a total market value of $373,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $36,500 if the economy is normal, $22,400 if the economy is in a recession, and $50,600 if the economy booms. Ignore taxes. Management is considering issuing $94,300 of debt with an interest rate of 7 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession? A) $1.67 B) $2.46 C) $1.20 D) $.66 E) $.88

5) Southern Wind is an all-equity firm with 18,900 shares of stock outstanding and a total market value of $357,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $28,500 if the economy is normal, $16,000 if the economy is in a recession, and $41,000 if the economy booms. Ignore taxes. Management is considering issuing $89,500 of debt with an interest rate of 7 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy booms? A) $2.66 B) $2.83 C) $1.57 D) $2.10 E) $2.45

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6) Cross Town Cookies is an all-equity firm with a total market value of $775,000. The firm has 46,000 shares of stock outstanding. Management is considering issuing $194,000 of debt at an interest rate of 8 percent and using the proceeds to repurchase shares. Before the debt issue, EBIT will be $70,400. What is the EPS if the debt is issued? Ignore taxes.

A) $1.59 B) $1.35 C) $1.72 D) $.99 E) $1.84

7) Kelso Electric is an all-equity firm with 46,250 shares of stock outstanding. The company is considering the issue of $315,000 in debt at an interest rate of 9 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 28,500 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans? A) $73,870 B) $45,520 C) $51,210 D) $80,026 E) $63,317

8) Hotel Cortez is an all-equity firm that has 6,400 shares of stock outstanding at a market price of $17 per share. The firm's management has decided to issue $36,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 9 percent. What is the break-even EBIT?

A) $8,393 B) $9,792 C) $10,608 D) $10 E) $9

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9) Simone's Sweets is an all-equity firm that has 9,700 shares of stock outstanding at a market price of $26 per share. The firm's management has decided to issue $96,000 worth of debt at an interest rate of 8 percent. The funds will be used to repurchase shares of the outstanding stock. What are the earnings per share at the break-even EBIT?

A) $5.46 B) $3.36 C) $2.50 D) $2.08 E) $3.64

10) Northwestern Lumber Products currently has 19,500 shares of stock outstanding. Patricia, the financial manager, is considering issuing $147,000 of debt at an interest rate of 6.8 percent. Given this, how many shares of stock will be outstanding once the debt is issued if the breakeven level of EBIT between these two capital structure options is $69,000? Ignore taxes. A) 15,841.29 shares B) 18,064.63 shares C) 15,563.37 shares D) 16,675.04 shares E) 14,292.89 shares

11) Southwest Sands currently has 20,500 shares of stock outstanding. It is considering issuing $119,000 of debt at an interest rate of 7.2 percent. The break-even level of EBIT between these two capital structure options is $71,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes. A) 2,680.01 shares B) 2,120.45 shares C) 2,473.86 shares D) 2,350.17 shares E) 1,943.75 shares

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12) Northeast Lobster currently has 20,700 shares of stock outstanding. It is considering issuing $232,000 of debt at an interest rate of 8.3 percent. The break-even level of EBIT between these two capital structure options is $165,000. For this to be true, what is the current stock price? Ignore taxes. A) $105.18 B) $100.61 C) $109.76 D) $91.23 E) $96.04

13) A firm is considering two different capital structures. The first option is an all-equity firm with 41,500 shares of stock. The levered option is 28,600 shares of stock plus some debt. Ignoring taxes, the break-even EBIT between these two options is $55,600. How much money is the firm considering borrowing if the interest rate is 7.8 percent? A) $198,802 B) $232,127 C) $210,497 D) $221,576 E) $253,229

14) Room and Board is considering two capital structures that have a break-even EBIT of $23,400. The all-equity capital structure would have 15,400 shares outstanding. The levered capital structure would have 11,350 shares of stock and $84,000 of debt. What is the interest rate on the debt? Ignore taxes. A) 6.57% B) 8.37% C) 6.96% D) 7.33% E) 7.67%

15) Taunton's is an all-equity firm that has 159,000 shares of stock outstanding. The CFO is considering borrowing $329,000 at 8 percent interest to repurchase 28,000 shares. Ignoring taxes, what is the value of the firm? Version 1

A) $1,868,250 B) $2,299,385 C) $2,414,354 D) $1,957,214 E) $2,135,143

16) Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 350,000 shares of stock and no debt. The second structure consists of 312,000 shares of stock and $2.18 million of debt. What is the price per share of equity? A) $65.56 B) $70.61 C) $74.14 D) $57.37 E) $60.10

17) The Tree House has a pretax cost of debt of 5.5 percent and a return on assets of 11.6 percent. The debt-equity ratio is .62. Ignore taxes. What is the cost of equity? A) 16.15% B) 15.38% C) 7.82% D) 16.78% E) 15.88%

18) The Outlet Mall has a cost of equity of 12.7 percent, a pretax cost of debt of 6.3 percent, and a return on assets of 10.9 percent. Ignore taxes. What is the debt-equity ratio? A) .39 B) 2.56 C) .48 D) 2.22 E) .45

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19) Debbie's Cookies has a return on assets of 8.7 percent and a cost of equity of 13.1 percent. What is the pretax cost of debt if the debt-equity ratio is .81? Ignore taxes. A) 3.63% B) 3.45% C) 3.27% D) 2.97% E) 3.78%

20) Brick House Cafe has a tax rate of 22 percent and paid total taxes of $53,300. The company had an interest expense of $23,700. What was the value of the interest tax shield? A) $13,090 B) $5,214 C) $18,847 D) $18,122 E) $8,791

21) Rappaport Industries has 6,100 perpetual bonds outstanding with a face value of $2,000 each. The bonds have a coupon rate of 6.1 percent and a yield to maturity of 6.4 percent. The tax rate is 21 percent. What is the present value of the interest tax shield? A) $253,028 B) $2,562,000 C) $744,200 D) $3,733,200 E) $265,472

22) Bassett Fruit Farm expects its EBIT to be $337,000 a year forever. Currently, the firm has no debt. The cost of equity is 12.3 percent and the tax rate is 24 percent. The company is in the process of issuing $2.3 million worth of bonds at par that carry an annual coupon of 5.9 percent. What is the unlevered value of the firm?

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A) $2,212,651 B) $1,857,001 C) $1,504,171 D) $2,082,276 E) $2,568,301

23) Kline Construction is an all-equity firm that has projected perpetual EBIT of $288,000. The current cost of equity is 11.5 percent and the tax rate is 22 percent. The company is in the process of issuing $904,000 worth of perpetual bonds with an annual coupon rate of 5.7 percent at par. What is the value of the levered firm? A) $2,152,271 B) $1,836,522 C) $1,898,376 D) $1,953,391 E) $1,487,583

24) Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $159,000 per year. The cost of equity is 11.5 percent and the tax rate is 23 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering taking on debt equal to 69 percent of its unlevered value. What is the firm's levered value? A) $1,007,213 B) $1,233,562 C) $808,826 D) $1,201,556 E) $898,696

25) A firm has a cost of debt of 6.7 percent and a cost of equity of 12.3 percent. The debtequity ratio is .81. There are no taxes. What is the firm's weighted average cost of capital?

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A) 8.81% B) 9.79% C) 9.04% D) 10.31% E) 8.16%

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Answer Key Test name: Chapter 13 Test Bank - Algo 1) B Shares repurchased = $149,000/($548,000/21,600) Shares repurchased = 5,873 shares 2) C EPS = [$101,900(1 − .20) − $101,900(1 − .20)(.23)]/37,200 EPS = $1.69 3) D EPS = [$73,800(1 + .20) − $73,800(1 + .20)(.21)]/32,900 EPS = $2.13 4) E Shares repurchased = $94,300/($373,000/23,900) Shares repurchased = 6,042.28 shares Shares outstanding = 23,900 shares − 6,042.28 shares Shares outstanding = 17,857.72 shares EPS = [$22,400 − 94,300(.07)]/17,857.72 EPS = $.88 5) E Shares repurchased = $89,500/($357,000/18,900) Shares repurchased = 4,738.24 shares Shares outstanding = 18,900 shares − 4,738.24 shares Shares outstanding = 14,161.76 shares EPS = [$41,000 − 89,500(.07)]/14,161.76 EPS = $2.45 6) A

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Shares repurchased = $194,000/($775,000/46,000) Shares repurchased = 11,514.84 shares Shares outstanding = 46,000 − 11,514.84 Shares outstanding = 34,485.16 shares EPS = [$70,400 − 194,000(.08)]/34,485.16 EPS = $1.59 7) A EBIT/46,250 = [EBIT − $315,000(.09)]/28,500 EBIT = $73,870 8) B Shares repurchased = $36,000/$17 Shares repurchased = 2,117.65 shares Shares outstanding = 6,400 − 2,117.65 Shares outstanding = 4,282.35 shares EBIT/6,400 = [EBIT − $36,000(.09)]/4,282.35 EBIT = $9,792 9) D Shares repurchased = $96,000/$26 Shares repurchased = 3,692.31 shares Shares outstanding = 9,700 − 3,692.31 Shares outstanding = 6,007.69 shares EBIT/9,700 = [EBIT − $96,000(.08)]/6,007.69 EBIT = $20,176 EPS = $20,176/9,700 EPS = $2.08 10) D $69,000/19,500 = [$69,000 − 147,000(.068)]/X X = 16,675.04 shares 11) C

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$71,000/20,500 = [$71,000 − 119,000(.072)]/X X = 18,026.14 shares Shares repurchased = 20,500 − 18,026.14 Shares repurchased = 2,473.86 shares 12) E $165,000/20,700 = [$165,000 − 232,000(.083)]/X X = 18,284.25 shares Shares repurchased = 20,700 − 18,284.25 Shares repurchased = 2,415.75 shares Share price = $232,000/2,415.75 Share price = $96.04 13) D $55,600/41,500 = [$55,600 − Debt(.078)]/28,600 Debt = $221,576 14) D $23,400/15,400 = [$23,400 − 84,000(X)]/11,350 X = .0733, or 7.33% 15) A Value per share = $329,000/28,000 Value per share = $11.75 Firm value = 159,000($11.75) Firm value = $1,868,250 16) D 350,000X = 312,000X + $2,180,000 X = $57.37 17) B RE = .116 + [(.116 − .055) × .62] RE = .1538, or 15.38% 18) A

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.127 = (.109 + [(.109 − .063) × D/E] D/E = .39 19) C .131 = .087 + [(.087 − RD) × .81] RD = .0327, or 3.27% 20) B Interest tax shield = .22($23,700) Interest tax shield = $5,214 21) B Interest tax shield = .21 × 6,100 × $2,000 Interest tax shield = $2,562,000 22) D VU = $337,000(1 − .24)/.123 VU = $2,082,276 23) A VU = $288,000(1 − .22)/.115 VU = $1,953,391 VL = $1,953,391 + .22($904,000) VL = $2,152,271 24) B VU = $159,000(1 − .23)/.115 VU = $1,064,609 VL = $1,064,609 + .23(.69)($1,064,609) VL = $1,233,562 25) B WACC = .123(1/1.81) + .067(.81/1.81) WACC = .0979, or 9.79%

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as: A) M&M Proposition I. B) capital restructuring. C) homemade leverage. D) M&M Proposition II. E) financial risk management.

Which one of the following statements matches M&M Proposition I without taxes?

A) The cost of equity capital has a positive linear relationship with a firm's capital structure. B) The dividends paid by a firm determine the firm's value. C) The cost of equity capital varies in response to changes in a firm's capital structure. D) The value of a firm is independent of the firm's capital structure. E) The value of a firm is dependent on the firm's capital structure.

3) 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? A) Static theory of capital structure B) M&M Proposition I without taxes C) M&M Proposition II without taxes D) Homemade leverage theory E) M&M Proposition I with taxes

Which one of the following is the equity risk arising from the daily operations of a firm?

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A) Strategic risk B) Financial risk C) Liquidity risk D) Industry risk E) Business risk

5) Which one of the following is the equity risk arising from the capital structure selected by a firm? A) Strategic risk B) Financial risk C) Liquidity risk D) Industry risk E) Business risk

6) Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship? A) Static theory of interest rates B) M&M Proposition I C) Financial risk D) Interest tax shield E) Homemade leverage

Which one of the following is a direct bankruptcy cost? A) Loss of customer goodwill resulting from a bankruptcy filing B) Legal and accounting fees related to a bankruptcy proceeding C) Management time spent on a bankruptcy proceeding D) Any financial distress cost E) Costs a firm spends trying to avoid bankruptcy

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8) Which one of the following terms applies to the costs incurred by a firm that is trying to avoid filing for bankruptcy? A) Indirect bankruptcy costs B) Direct bankruptcy costs C) Static theory cost D) Optimal capital structure cost E) Reorganization costs

9) Which one of the following terms is inclusive of both direct and indirect bankruptcy costs? A) Financial distress costs B) Capital structure costs C) Financial leverage D) Homemade leverage E) Cost of capital

10) 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? A) M&M Proposition I, with taxes B) M&M Proposition II, with taxes C) M&M Proposition I, without taxes D) Homemade leverage proposition E) Static theory of capital structure

11)

Which one of the following best defines legal bankruptcy? A) Negotiating new payment terms with a firm's creditors B) A temporary technical insolvency C) A legal proceeding for liquidating or reorganizing a business D) The internal process of revising the capital structure of a firm E) The failure of a firm to meet its financial obligations in a timely manner

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12)

Which one of the following terms refers to the termination of a firm as a going concern? A) Insolvency B) Reorganization C) Chapter 11 bankruptcy D) Prepack E) Liquidation

13) 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? A) Chapter 7 bankruptcy B) Liquidation C) Technical insolvency D) Accounting insolvency E) Reorganization

14) 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? A) Technical insolvency definition B) Absolute priority rule C) Accounting insolvency definition D) Chapter 7 of the Federal Bankruptcy Reform Act of 1978 E) Securities and Exchange Commission

15)

Which one of the following is minimized when the value of a firm is maximized? A) Return on equity B) WACC C) Debt D) Taxes E) Bankruptcy costs

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16) 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? A) The levered firm has higher EPS (earnings per share) than the unlevered firm at the break-even point. B) The levered firm will have higher EPS than the unlevered firm at all levels of EBIT. C) The unlevered firm will have higher EPS than the levered firm at relatively high levels of EBIT. D) The EPS for the unlevered firm will always exceed those of the levered firm. E) The unlevered firm will have higher EPS at relatively low levels of EBIT.

17)

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.

18) You are comparing two possible capital structures for a firm. The first option is an allequity 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: A) whenever EBIT is less than $428,000. B) only when EBIT is $428,000. C) whenever EBIT exceeds $428,000. D) only if the debt is decreased by $428,000. E) only if the debt is increased by $428,000.

19)

Which one of the following statements concerning financial leverage is correct?

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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.

20) T.L.C. Enterprises just revised its capital structure from a debt-equity ratio of .37 to a debt-equity ratio of .48. The firm's shareholders who prefer the old capital structure should: A) sell some shares and hold the sale proceeds in cash. B) sell all their shares and loan out the entire sale proceeds. C) do nothing. D) sell some shares and loan out the sale proceeds. E) borrow funds and purchase more shares.

21) Which one of the following statements is the core principle of M&M Proposition I, without taxes? A) A firm's cost of equity is directly related to the firm's debt-equity ratio. B) A firm's WACC is directly related to the firm's debt-equity ratio. C) The interest tax shield increases the value of a firm. D) The capital structure of a firm is totally irrelevant. E) Levered firms have greater value than unlevered firms.

22) Which one of the following supports the theory that the value of a firm increases as the firm's level of debt increases? A) M&M Proposition I without taxes B) M&M Proposition II without taxes C) M&M Proposition I with taxes D) Static theory of capital structure E) No theory suggests this.

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23)

Which one of the following is an implication of M&M Proposition II without taxes? A) A firm's optimal capital structure is 100 percent debt. B) WACC is unaffected by the capital structure of a firm. C) WACC decreases as the debt-equity ratio increases. D) A firm's capital structure is irrelevant. E) The risk of equity is affected by both financial and operating leverage.

24)

M&M Proposition II, without taxes, states that the: A) capital structure of a firm is highly relevant. B) weighted average cost of capital decreases as the debt-equity ratio decreases. C) cost of equity increases as a firm increases its debt-equity ratio. D) return on equity is equal to the return on assets multiplied by the debt-equity ratio. E) return on equity remains constant as the debt-equity ratio increases.

25)

The level of financial risk to which a firm is exposed is dependent on the firm's: A) tax rate. B) debt-equity ratio. C) return on assets. D) level of earnings before interest and taxes. E) operational level of risk.

26)

Which one of the following represents the present value of the interest tax shield? A) D × (1 − Tc) B) D/(1 − Tc) C) D/Tc D) D − D(Tc) E) Tc × D

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27) According to M&M Proposition I with taxes, the value of a levered firm will increase when the: A) value of the unlevered firm increases. B) tax rate is decreased. C) debt-equity ratio is lowered. D) interest rate on the debt is lowered. E) interest rate on the debt is increased.

28)

M&M Proposition I with taxes states that: A) the optimal capital structure is the all-equity option. B) the levered value of a firm exceeds the firm’s unlevered value. C) a firm’s capital structure is irrelevant. D) the value of a firm is independent of taxes. E) WACC remains constant given any debt-equity ratio.

29)

Which one of the following is an example of a direct bankruptcy cost? A) Operating at a debt-equity ratio that is less than the optimal ratio B) Reducing the dividend payout ratio as a means of increasing a firm's equity C) Forgoing a positive net present value project to conserve current cash D) Incurring legal fees for the preparation of bankruptcy filings E) Losing a key customer due to concerns over a firm's financial viability

30)

The static theory of capital structure assumes a firm: A) maintains a constant debt-equity ratio. B) has an all-equity structure. C) is fixed in terms of its assets and operations. D) pays no taxes. E) is operating at the point where financial distress costs are eliminated.

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31) Which one of the following conditions exists at the point where a firm maximizes its value? A) The tax benefit from an additional dollar of debt is zero. B) Financial distress costs are equal to zero. C) The debt-equity ratio is 1.0. D) WACC is minimized. E) The cost of equity is minimized.

32) Which one of the following statements related to the static theory of capital structure is correct? A) A firm begins to lose value as soon as the first dollar of debt is incurred. B) The actual value of a firm continually rises in direct proportion to the increased use of debt. C) The linear function of a firm's value has a constant positive slope. D) A firm's value is maximized when a firm operates at its optimal debt level. E) The value of a firm will automatically decrease whenever the debt-equity ratio is decreased.

33)

Which one of the following is correct based on the static theory of capital structure? A) A firm receives the greatest benefit from debt financing when its tax rate is relatively

low. B) A debt-equity ratio of 1 is considered to be the optimal capital structure. C) The costs of financial distress decrease the value of a firm. D) The more debt a firm assumes, the greater the incentive to acquire even more debt until such time as the firm is financed with 100 percent debt. E) At the optimal level of debt a firm also optimizes its tax shield on debt.

34) Assume both corporate taxes and financial distress costs apply to a firm. Given this, the static theory of capital structure illustrates that:

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A) a firm's value and its weighted average cost of capital are inversely related. B) a firm's value and its tax rate are inversely related. C) the maximum value of a firm is obtained when a firm is financed solely with debt. D) the value of a firm rises as the interest rate on debt rises. E) the value of a firm rises as both the interest rate on debt and the tax rate rise.

35)

When is a firm insolvent from an accounting perspective? A) When the firm is unable to meet its financial obligations in a timely manner B) When the firm's debt exceeds the value of the firm's equity C) When the firm has a negative net worth D) When the firm's revenues cease E) When the market value of the firm's equity equals zero

36) Peter’s Tools 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? A) Forgive the loan payment in its entirety B) Extend the due date on the missed loan payment C) Reduce the amount of the loan payments so Peter’s can pay on time D) Transfer some of Peter's assets to the bank in lieu of the loan payment E) Transfer all the equity shares in Peter’s to the lending bank

37) Which one of the following will generally receive the highest priority in a bankruptcy liquidation, assuming the absolute priority rule is followed? A) Claims by unsecured creditors B) Employee wages C) Government tax claims D) Contributions to employee retirement plans E) Bankruptcy administrative expenses

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38) Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005? A) Disallowance of bankruptcy prepacks B) Right granted to creditors to file their own reorganization plan once a firm is in bankruptcy for 18 months C) Disallowance of all management bonus payments while a firm is in bankruptcy D) Requirement that only creditors can file reorganization plans for a bankrupt firm E) Requirement for all Chapter 11 bankruptcies to be converted to Chapter 7 bankruptcies after 18 months

39)

Which statement is true? 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 be approved only if the firm's creditors all agree with the

plan.

40)

A prepack: A) guarantees full payment to all creditors but lengthens the time span of the debt. B) is the joint filing of both a bankruptcy filing and a creditor-approved reorganization

plan. C) protects the interests of both the current creditors and the existing shareholders. D) applies only if a firm files under Chapter 7 of the bankruptcy code. E) extends the time that a firm is protected by the bankruptcy process.

41)

Which one of the following statements is correct regarding bankruptcies post-2005?

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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 are no longer permitted under any circumstances. D) Labor contracts cannot be modified through the bankruptcy process. E) Section 363 speeds up the bankruptcy process via a bidding process.

42) Jones Inspection Services is an all-equity firm with a total market value of $1,245,000 and 25,000 shares of stock outstanding. Management is considering issuing $200,000 of debt at an interest rate of 6 percent and using the proceeds on a stock repurchase. As an all-equity firm, management believes its earnings before interest and taxes (EBIT) will be $210,000 if the economy is normal, $70,000 if it is in a recession, and $325,000 if the economy booms. Ignore taxes. What will the EPS be if the economy falls into a recession and the firm maintains its allequity status? A) $1.75 B) $2.80 C) $2.21 D) $2.50 E) $2.33

43) TriState Landscape and Turf is an all-equity firm with a total market value of $740,000 and 30,000 shares of stock outstanding. Management is considering issuing $150,000 of debt at an interest rate of 7.25 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.) A) 6,167 shares B) 6,232 shares C) 6,042 shares D) 6,207 shares E) 6,081 shares

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44) Flour Mills is an all-equity firm with a total market value of $891,860. The firm has 38,000 shares of stock outstanding. Management is considering issuing $265,000 of debt at an interest rate of 7.5 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares can the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.) A) 11,717 shares B) 11,618 shares C) 11,291 shares D) 11,656 shares E) 11,699 shares

45) Cross Road Realty is an all-equity firm with 50,000 shares of stock outstanding and a total market value of $744,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $126,560 if the economy is normal, $74,000 if the economy is in a recession, and $156,000 if the economy booms. Ignore taxes. Management is considering issuing $200,000 of debt at a coupon rate of 6.5 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession? (Round the number of shares repurchased down to the nearest whole share.) A) $.32 B) $1.67 C) $.71 D) $.23 E) $2.71

46) Cross Town Cookies is an all-equity firm with a total market value of $4,187,100. The firm has 127,500 shares of stock outstanding. Management is considering issuing $300,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares. The projected earnings before interest and taxes are $251,600. What are the anticipated earnings per share if the debt is issued? Ignore taxes. (Round the number of shares repurchased down to the nearest whole share.)

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A) $1.59 B) $1.76 C) $1.38 D) $1.67 E) $1.97

47) Destruction Builders has 10,000 shares of stock outstanding and no debt. The new CFO is considering issuing $65,000 of debt and using the proceeds to retire 750 shares of stock. The coupon rate on the debt is 7.2 percent. What is the break-even level of earnings before interest and taxes between these two capital structure options? A) $42,035 B) $43,695 C) $65,000 D) $60,200 E) $62,400

48) Northwestern Lumber Products currently has 12,400 shares of stock outstanding and no debt. Patricia, the financial manager, is considering issuing $160,000 of debt at an interest rate of 6.95 percent and using the proceeds to repurchase shares. Given this, how many shares of stock will be outstanding once the debt is issued if the break-even level of EBIT between these two capital structure options is $48,000? Ignore taxes. A) 2,873 shares B) 3,051 shares C) 3,025 shares D) 2,558 shares E) 2,667 shares

49) Chick 'N Fish is considering two different capital structures. The first option is an allequity firm with 22,500 shares of stock. The second option consists of 18,750 shares of stock plus $120,000 of debt at an interest rate of 7.8 percent. Ignore taxes. What is the break-even level of earnings before interest and taxes (EBIT) between these two options?

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A) $62,813 B) $54,204 C) $60,410 D) $56,150 E) $61,290

50) A firm is considering two different capital structures. The first option is an all-equity firm with 75,000 shares of stock. The second option is 50,000 shares of stock plus some debt. Ignoring taxes, the break-even level of earnings before interest and taxes between these two options is $92,500. How much money is the firm considering borrowing if the interest rate is 8 percent? A) $364,583 B) $395,833 C) $386,852 D) $400,186 E) $403,519

51) Traindriver Engineering has determined that $74,000 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 20,000 shares of stock. The second structure consists of 17,000 shares of stock and $110,000 of debt. What is the interest rate on the debt? A) 5.41% B) 5.88% C) 7.07% D) 9.24% E) 10.09%

52) Shoe Box Stores is currently an all-equity firm with 25,000 shares of stock outstanding. Management is considering changing the capital structure to 35 percent debt. The interest rate on the debt would be 8 percent. Ignore taxes. Jamie owns 600 shares of Shoe Box Stores stock that is priced at $22 a share. What should Jamie do if she prefers the all-equity structure, but Shoe Box Stores adopts the new capital structure?

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A) Borrow money and buy an additional 180 shares B) Borrow money and buy an additional 210 shares C) Keep her shares but loan out all of the dividend income at 8 percent D) Sell 210 shares and loan out the proceeds at 8 percent E) Sell 180 shares and loan out the proceeds at 8 percent

53) Katz is an all-equity development company that has 52,000 shares of stock outstanding at a market price of $40 a share. The firm's earnings before interest and taxes are $46,000. Katz has decided to issue $176,000 of debt at a rate of 8 percent and use the proceeds to repurchase shares. What should Leslie do if she owns 500 shares of Katz stock and wants to use homemade leverage to offset the leverage being assumed by the firm? A) Borrow money and buy an additional 53 shares B) Borrow money and buy an additional 56 shares C) Sell 42 shares and loan out the proceeds D) Sell 56 shares and loan out the proceeds E) Sell 53 shares and loan out the proceeds

54) Gabella's is an all-equity firm that has 36,000 shares of stock outstanding at a market price of $27 a share. The firm has earnings before interest and taxes of $57,600 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella's has decided to issue $125,000 of debt at a rate of 9 percent and use the proceeds to repurchase shares. Terry owns 500 shares of Gabella's stock and has decided to continue holding those shares. How will Gabella's debt issue affect Terry's annual dividend income? A) Decrease from $800 to $739 B) Decrease from $2,160 to $1,890 C) Decrease from $640 to $591 D) Increase from $1,890 to $2,160 E) No change

55) Alderanian’s is an all-equity firm that has 200,000 shares of stock outstanding. Neal, the financial vice president, is considering borrowing $300,000 at 8.5 percent interest to repurchase 50,000 shares. Ignoring taxes, what is the current value of the firm?

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A) $700,000 B) $1,240,000 C) $925,000 D) $960,000 E) $1,200,000

56) Horizon Landscape currently has 62,000 shares of stock outstanding and no debt. The price per share is $18.50. The firm is considering borrowing funds at 7 percent interest and using the proceeds to repurchase 12,000 shares of stock. Ignore taxes. How much is the firm borrowing? A) $240,000 B) $222,000 C) $184,000 D) $1 E) $225,000

57) The Bethlehem Inn is an all-equity firm with 9,000 shares outstanding at a value per share of $28.60. The firm is issuing $39,932 of debt and using the proceeds to reduce the number of outstanding shares. How many shares of stock will be outstanding once the debt is issued? Ignore taxes. A) 7,970 shares B) 7,510 shares C) 7,604 shares D) 8,030 shares E) 7,561 shares

58) Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 64,000 shares of stock and no debt. The second structure consists of 50,000 shares of stock and $1.11 million of debt. What is the price per share of equity?

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A) $75.50 B) $79.29 C) $72.14 D) $68.36 E) $74.00

59) The Woodworker has a pretax cost of debt of 6.25 percent and a return on assets of 15.5 percent. The debt-equity ratio is .41. Ignore taxes. What is the cost of equity? A) 18.46% B) 18.78% C) 19.43% D) 18.94% E) 19.29%

60) The Outlet Mall has a cost of equity of 16.3 percent, a pretax cost of debt of 7.9 percent, and a return on assets of 13.4 percent. Ignore taxes. What is the debt-equity ratio? A) .46 B) .53 C) .44 D) .59 E) .57

61) Weston Mines has a cost of equity of 14.9 percent, a pretax cost of debt of 3.7 percent, and a return on assets of 12.6 percent. Ignore taxes. What is the debt-equity ratio? A) .26 B) .84 C) .43 D) .77 E) .56

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62) Debbie's Cookies has a return on assets of 12.6 percent and a cost of equity of 14.8 percent. What is the pretax cost of debt if the debt-equity ratio is .38? Ignore taxes. A) 5.87% B) 95.29% C) 9.04% D) 7.31% E) 6.81%

63) The Park Place has a return on assets of 12.9 percent, a cost of equity of 16.2 percent, and a pretax cost of debt of 7.7 percent. What is the debt-equity ratio? Ignore taxes. A) .44 B) .47 C) .67 D) .91 E) .63

64) An all-equity firm has a return on assets of 17.5 percent. The firm is considering converting to a debt-equity ratio of .40. The pretax cost of debt is 7.5 percent. Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital structure? A) 21.95% B) 21.22% C) 22.54% D) 22.97% E) 21.50%

65) Brick House Markets has a tax rate of 21 percent and taxable income of $308,211. What is the value of the interest tax shield if the interest expense is $59,700?

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A) $12,537 B) $15,010 C) $15,595 D) $13,498 E) $16,023

66) Green Tea House has a tax rate of 25 percent and an interest tax shield valued at $8,046 for the year. How much did the firm pay in annual interest? A) $2,816.10 B) $2,304.11 C) $23,468.09 D) $32,184.00 E) $22,988.57

67) Newborn Nursery has 12,000 bonds outstanding with a face value of $1,000 each. The coupon rate is 6.9 percent, and the tax rate is 22 percent. What is the present value of the interest tax shield? A) $4.14 million B) $4.86 million C) $3.87 million D) $3.92 million E) $2.64 million

68) Southern Foods has a $13 million bond issue outstanding with a coupon rate of 7.15 percent and a yield to maturity of 7.39 percent. What is the present value of the tax shield if the tax rate is 24 percent? A) $283,140 B) $316,030 C) $4,053,400 D) $3,960,000 E) $3,120,000

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69) Granny's Home Remedy has a $27 million bond issue outstanding with a coupon rate of 8.75 percent and a current yield of 8.13 percent. What is the present value of the tax shield if the tax rate is 21 percent? A) $768,285 B) $826,875 C) $839,002 D) $8,160,000 E) $5,670,000

70) Graceful Funeral Group expects its earnings before interest and taxes to be $325,000 a year forever. Currently, the firm has no debt. The cost of equity is 19.5 percent, and the tax rate is 21 percent. The company is in the process of issuing $3.7 million of bonds at par that carry an annual coupon rate of 6.5 percent. What is the unlevered value of the firm? A) $1,455,524 B) $1,416,066 C) $1,191,500 D) $1,053,420 E) $1,316,667

71) Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $628,000. The current cost of equity is 17.6 percent, and the tax rate is 25 percent. The company is in the process of issuing $4.3 million of 8.3 percent annual coupon bonds at par. What is the levered value of the firm? A) $3,751,136 B) $3,541,085 C) $3,422,225 D) $2,713,185 E) $3,385,695

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72) Stevenson's Bakery is an all-equity company that has projected perpetual earnings before interest and taxes of $43,700 a year. The cost of equity is 15.2 percent, and the tax rate is 22 percent. The company can borrow money at 7.15 percent. If the company borrows $50,000, what will be its levered value? A) $187,613 B) $189,919 C) $235,250 D) $229,507 E) $203,682

73) Ready To Go is an all-equity firm specializing in hot ready-to-eat meals. Management has estimated the firm's earnings before interest and taxes will be $68,000 annually forever. The present cost of equity is 14.1 percent. Currently, the firm has no debt but is considering borrowing $450,000 at 8 percent interest. The tax rate is 24 percent. What is the value of the unlevered firm? A) $323,017 B) $346,511 C) $314,141 D) $366,525 E) $305,200

74) Great Lakes Shipping is an all-equity firm with anticipated earnings before interest and taxes of $386,000 annually forever. The present cost of equity is 17.1 percent. Currently, the firm has no debt but is considering borrowing $1.48 million at 8.5 percent interest. The tax rate is 25 percent. What is the value of the levered firm? A) $2,062,982 B) $2,006,519 C) $1,888,47 D) $1,666,667 E) $2,018,181

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75) Jericho Snacks is an all-equity firm with estimated earnings before interest and taxes of $624,000 annually forever. Currently, the firm has no debt but is considering borrowing $725,000 at 6.75 percent interest. The tax rate is 25 percent and the current cost of equity is 15.2 percent. What is the value of the levered firm? A) $3,187,271 B) $2,769,535 C) $3,307,271 D) $3,260,197 E) $3,506,418

76) The Fruit Mart is an all-equity firm with a current cost of equity of 17.4 percent. The estimated earnings before interest and taxes are $169,500 annually forever. Currently, the firm has no debt but is in the process of borrowing $400,000 at 9.5 percent interest. The tax rate is 21 percent. What is the value of the unlevered firm? A) $649,207 B) $753,571 C) $656,411 D) $719,307 E) $769,569

77) Roller Coaster's has a WACC of 11.6 percent, ignoring taxes. It has a target capital structure of 60 percent equity and 40 percent debt and a cost of equity of 14.27 percent. What is the cost of debt? A) 5.5% B) 7.6% C) 9.3% D) 9.4% E) 18.7%

78) A firm has a cost of debt of 7.8 percent and a cost of equity of 15.6 percent. The debtequity ratio is .52. There are no taxes. What is the firm's weighted average cost of capital?

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A) 11.76% B) 11.29% C) 12.93% D) 12.47% E) 10.20%

79) A firm has a weighted average cost of capital of 11.28 percent and a cost of equity of 14.7 percent. The debt-equity ratio is .72. There are no taxes. What is the firm's cost of debt? A) 6.53% B) 6.27% C) 6.44% D) 7.23% E) 7.08%

80) Jasper Industrial has no debt outstanding and a total market value of $216,000. Earnings before interest and taxes, EBIT, are projected to be $15,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 15 percent lower. There are currently 8,600 shares outstanding. Ignore taxes. What is the percentage change in EPS when a normal economy slips into recession? A) −15.5% B) −15.2% C) −15.0% D) −16.1% E) −14.8%

81) Gabe's Market is comparing two different capital structures. Plan I would result in 15,000 shares of stock and $210,000 in debt. Plan II would result in 13,000 shares of stock and $252,000 in debt. The interest rate on the debt is 8 percent. Ignoring taxes, compare both plans to an allequity plan assuming that EBIT will be $52,000. The all-equity plan would result in 25,000 shares of stock outstanding. Of the three plans, the firm will have the highest EPS with _________blank and the lowest EPS with _________blank.

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A) Plan I; Plan II B) Plan II; the all-equity plan C) Plan II; Plan I D) Plan I; the all-equity plan E) the all-equity plan; Plan I

82) Uptown Construction is comparing two different capital structures. Plan I would result in 16,000 shares of stock and $160,000 in debt. Plan II would result in 18,000 shares of stock and $110,000 in debt. The interest rate on the debt is 9 percent. Ignoring taxes, EPS will be identical for Plans I and II when EBIT equals which one of the following? A) $48,550 B) $50,400 C) $69,600 D) $53,700 E) $60,750

83) Bruno's is considering changing from its current all-equity capital structure to 30 percent debt. There are currently 7,500 shares outstanding at a price per share of $39. EBIT is expected to remain constant at $23,000. The interest rate on new debt is 7.5 percent and there are no taxes. Tracie owns $12,675 worth of stock in the company. The firm has a 100 percent payout. What would Tracie's cash flow be under the new capital structure assuming that she keeps all her shares? A) $998 B) $1,109 C) $1,115 D) $1,037 E) $1,016

84) Delta Mowers has a debt-equity ratio of .6. Its WACC is 11.8 percent, and its cost of debt is 7.7 percent. There is no corporate tax. What is the firm's cost of equity capital?

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A) 12.60% B) 14.26% C) 13.83% D) 14.29% E) 14.80%

85) Triangle Enterprises has no debt but can borrow at 8 percent. The firm's WACC is currently 13.2 percent, and there is no corporate tax. If the firm converts to 30 percent debt, what will its cost of equity be? A) 16.67% B) 12.95% C) 14.47% D) 16.39% E) 15.43%

86) The Piano Movers can borrow at 7.8 percent. The firm currently has no debt, and the cost of equity is 15 percent. The current value of the firm is $680,000. What will the value be if the firm borrows $140,000 and uses the proceeds to repurchase shares? The corporate tax rate is 22 percent. A) $820,000 B) $540,000 C) $750,000 D) $571,000 E) $710,800

87) Petrol Service Stations has a tax rate of 21 percent. Its total interest payment for the year just ended was $85,000. What is the interest tax shield for the year?

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A) $35,700 B) $17,850 C) $37,500 D) $32,300 E) $41,000

88) Burkhart and Mueller has no debt. Its current total value is $9.5 million. What will the company's value be if it sells $4 million in debt and has a tax rate of 21 percent? Assume all debt proceeds are used to repurchase equity. A) $11.84 million B) $13.59 million C) $6.84 million D) $8.59 million E) $10.34 million

89) Glass Growers has a cost of capital of 11.1 percent. The company is considering converting to a debt-equity ratio of .46. The interest rate on debt is 7.3 percent. What would be the company’s new cost of equity? Ignore taxes. A) 12.85% B) 11.13% C) 12.36% D) 12.44% E) 11.61%

90) Crowded Fund Capital is an all-equity firm with a total market value of $1,015,000 and 20,000 shares of stock outstanding. Management is considering issuing $300,000 of debt at an interest rate of 5.5 percent and using the proceeds on a stock repurchase. As an all-equity firm, management believes its earnings before interest and taxes (EBIT) will be $266,000 if the economy is normal, $110,000 if it is in a recession, and $387,000 if the economy booms. Ignore taxes. What will the EPS be if the economy falls into a recession and the firm maintains its allequity status?

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A) $13.30 B) $5.50 C) $19.35 D) $11.50 E) $12.33

91) Last Minute Loan Services is an all-equity firm with a total market value of $1,221,350 and 50,000 shares of stock outstanding. Management is considering issuing $225,000 of debt at an interest rate of 6.25 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.) A) 9,167 shares B) 12,116 shares C) 6,211 shares D) 3,211 shares E) 9,211 shares

92) Omnipotent, LLC is an all-equity firm with 75,000 shares of stock outstanding and a total market value of $984,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $226,560 if the economy is normal, $64,000 if the economy is in a recession, and $356,000 if the economy booms. Ignore taxes. Management is considering issuing $165,000 of debt at a coupon rate of 7.5 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession? (Round the number of shares repurchased down to the nearest whole share.) A) $.16 B) $.83 C) $.55 D) $.07 E) $.03

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93) Demolition Construction Services has 12,500 shares of stock outstanding and no debt. The new CFO is considering issuing $75,000 of debt and using the proceeds to retire 2,500 shares of stock. The coupon rate on the debt is 6.8 percent. What is the break-even level of earnings before interest and taxes between these two capital structure options? A) $15,300 B) $21,000 C) $16,860 D) $18,520 E) $18,240

94) A firm is considering two different capital structures. The first option is an all-equity firm with 110,000 shares of stock. The second option is 75,000 shares of stock plus some debt. Ignoring taxes, the break-even level of earnings before interest and taxes between these two options is $136,000. How much money is the firm considering borrowing if the interest rate is 8 percent? A) $542,576 B) $540,909 C) $575,909 D) $584,243 E) $592,576

95) Catapult Movers has determined that $98,000 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 30,000 shares of stock. The second structure consists of 20,000 shares of stock and $400,000 of debt. What is the interest rate on the debt? A) 3.48% B) 3.95% C) 5.14% D) 7.31% E) 8.17%

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96) Wookie’s is an all-equity firm that has 250,000 shares of stock outstanding. Neal, the financial vice president, is considering borrowing $450,000 at 7 percent interest to repurchase 60,000 shares. Ignoring taxes, what is the current value of the firm? A) $1,375,000 B) $1,945,000 C) $1,600,000 D) $1,635,000 E) $1,875,000

97) Infinity Completion, Incorporated, currently has 50,000 shares of stock outstanding and no debt. The price per share is $23.75. The firm is considering borrowing funds at 6 percent interest and using the proceeds to repurchase 5,000 shares of stock. Ignore taxes. How much is the firm borrowing? A) $138,000 B) $118,750 C) $84,000 D) $1 E) $125,000

98) Regional Fleet Sales has a pretax cost of debt of 7.30 percent and a return on assets of 20.5 percent. The debt-equity ratio is .46. Ignore taxes. What is the cost of equity? A) 25.74% B) 26.06% C) 26.71% D) 26.22% E) 26.57%

99) An all-equity firm has a return on assets of 21 percent. The firm is considering converting to a debt-equity ratio of .48. The pretax cost of debt is 6.9 percent. Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital structure?

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A) 28.22% B) 27.49% C) 28.81% D) 29.24% E) 27.77%

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Answer Key Test name: Chapter 13 Test Bank - Static 1) C 2) D 3) C 4) E 5) B 6) D 7) B 8) A 9) A 10) E 11) C 12) E 13) E 14) B 15) B 16) E 17) D 18) C 19) D 20) D 21) D 22) C 23) E 24) C 25) B 26) E Version 1

27) A 28) B 29) D 30) C 31) D 32) D 33) C 34) A 35) C 36) C 37) E 38) B 39) B 40) B 41) E 42) B EPSRecession = $70,000/25,000 = $2.80 43) E Shares repurchased = $150,000/($740,000/30,000) = 6,081 shares 44) C Shares repurchased = $265,000/($891,860/38,000) = 11,291 shares 45) B Shares repurchased $200,000/($744,000/50,000) = 13,441 shares Shares outstanding = 50,000 − 13,441 = 36,559 shares EPSRecession = [$74,000 − ($200,000 × .065)]/36,559 = $1.67 46) E Shares repurchased = $300,000/($4,187,100/127,500) = 9,135 shares Shares outstanding = 127,500 − 9,135 = 118,365 shares EPS = [$251,600 − ($300,000 × .06)]/118,365 = $1.97 47) E Version 1

EPSU = EPSL EBIT/10,000 = [EBIT − ($65,000 × .072)]/(10,000 − 750) EBIT = $62,400 48) A EPSU = EPSL $48,000/12,400 = [$48,000 − ($160,000 × .0695)]/(12,400 − x) x = 2,873 49) D EPSU = EPSL EBIT/22,500 = [EBIT − ($120,000 × .078)]/18,750 EBIT = $56,150 50) A EPSU = EPSL $95,000/75,000 = [$92,500 − (D × .08)]/50,000 D = $364,583 51) E EPSU = EPSL $74,000/20,000 = [$74,000 − ($110,000 × r)]/17,000 r = .1009, or 10.09% 52) D Since the firm is using 35 percent leverage, Jamie can offset the firm's leverage by selling shares and loaning out 35 percent of her investment at 8 percent interest. Number of shares to be sold = 600 shares × .35 = 210 shares 53) C

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Shares repurchased = $176,000/$40 = 4,400 Value of equity = (52,000 − 4,400) × $40 = $1,904,000 Value of debt = $176,000 Debt ratio = $176,000/($176,000 + 1,904,000) = .0846 Since the firm is using 8.46 percent debt, Leslie will need to reduce her investment in the firm by 8.46 percent. Shares to be sold = 500 × .0846 = 42 shares 54) A All-equity EPS = $57,600/36,000 = $1.60 Debt and equity EPS = [$57,600 − ($125,000 × .09)]/[36,000 − ($125,000/$27)] = $1.4775 Terry's all-equity dividend income = 500 × $1.60 = $800 Terry's debt and equity dividend income = 500 × $1.4775 = $739 55) E Value per share = $300,000/50,000 = $6 Firm value = 200,000 × $6 = $1,200,000 56) B 12,000 × $18.50 = $222,000 57) C 9,000 − ($39,932/$28.60) = 7,604 shares 58) B P = $1,110,000/(64,000 − 50,000) = $79.29 59) E RE = .155 + [(.155 − .0625) × .41] = .1929, or 19.29% 60) B .163 = .134 + [(.134 − .079) ×D/E] D/E = .53 61) A .149 = .126 + [(.126 − .037) × D/E] D/E = .26 Version 1

62) E .148 = .126 + [(.126 − RD) ×.38] RD = .0681, or 6.81% 63) E .162 = .129 + [(.129 − .077) × D/E] D/E = .63 64) E RE = .175 + [(.175 − .075) × .4] RE = .2150, or 21.50% 65) A Interest tax shield = .21 × $59,700 = $12,537 66) D Interest = $8,046/.25 = $32,184.00 67) E PV of tax shield = .22 × 12,000 × $1,000 = $2.64 million 68) E PV of tax shield = .24 × $13,000,000 = $3,120,000 69) E PV of tax shield = .21 × $27,000,000 = $5,670,000 70) E Vu = [$325,000 × (1 − .21)]/.195 = $1,316,667 71) A VU = [$628,000 × (1 − .25)]/.176 = $2,676,136 VL = $2,676,136 + (.25 × $4,300,000) = $3,751,136 72) C VU = [$43,700 × (1 − .22)]/.152 = $224,250 VL = $224,250 + (.22 × $50,000) = $235,250 73) D VU = [$68,000 × (1 − .24)]/.141 = $366,525 74) A Version 1

VU = [$386,000 × (1 − .25)]/.171 = $1,692,982.46 VL = $1,692,982.46 + (.25 × $1,480,000) = $2,062,982 75) D VU = [$624,000 × (1 − .25)]/.152 = $3,078,947.37 VL = $3,078,947.37 + (.25 × $725,000) = $3,260,197 76) E VU = [$169,500 × (1 − .21)]/.174 = $769,569 77) B .1427 = .116 + (.116 − RD) × (.40/.60) RD = .0760, or 7.6% 78) C WACC = [(1/1.52) × .156] + [(.52/1.52) × .078] = .1293, or 12.93% 79) A .1128 = [(1/1.72 × .147] + [(.72/1.72) × RD] RD = .0653, or 6.53% 80) C EPSNormal = $15,000/8,600 = $1.744 EPSRecession = $15,000(1 − .15)/8,600 = $1.483 Percentage change ($1.483 − 1.744)/$1.744 = −.1500, or −15.00% 81) B EPSAll-equity = $52,000/25,000 = $2.08 EPSPlan I = [$52,000 − ($210,000 × .08)]/15,000 = $2.35 EPSPlan II = [$52,000 − ($252,000 × .08)]/13,000 = $2.45 82) B [EBIT − ($160,000 × .09)]/16,000 = [EBIT − ($110,000 × .09)]/18,000 EBIT = $50,400 83) E

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All-equity value = 7,500 × $39 = $292,500 Shares repurchased = 7,500 × .30 = 2,250 shares EPS = [$23,000 − ($292,500)(.30)(.075)]/(7,500 − 2,250) = $3.1274 Cash flow = ($3.1274)($12,675/$39) = $1,016 84) B WACC = .118 = (1/1.6) RE + (.6/1.6)(.077) = .1426, or 14.26% 85) E WACC = .132 = .70 RE + .30(.08) RE = .1543, or 15.43% 86) E VL = $680,000 + (.22)($140,000) = $710,800 87) B Interest tax shield = $85,000 × .21 = $17,850 88) E VL = $9.5 million + ($4 million × .21) = $10.34 million 89) A WACC = .111 = (1/1.46)(RE) + (.46/1.46)(.073) RE = .1285, or 12.85% 90) B EPSRecession = $110,000/20,000 = $5.50 91) E Shares repurchased = $225,000/($1,221,350/50,000) = 9,211 shares 92) B Shares repurchased $165,000/($984,000/75,000) = 12,576 shares Shares outstanding = 75,000 − 12,576 = 62,424 shares EPSRecession = [$64,000 − ($165,000 × .075)]/62,424 = $.83 93) A

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EPSU = EPSL EBIT/12,500 = [EBIT − ($75,000 × .068)]/(12,500 − 2,500) EBIT = $15,300 94) B EPSU = EPSL $136,000/110,000 = [$136,000 − (D × .08)]/75,000 D = $540,909 95) E EPSU = EPSL $98,000/30,000 = [$98,000 − ($400,000 × r)]/20,000 r = .0817, or 8.17% 96) E Value per share = $450,000/60,000 = $7.5 Firm value = 250,000 × $7.5 = $1,875,000 97) B 5,000 × $23.75 = $118,750 98) E RE = .205 + [(.205 − .073) × .46] = .2657, or 26.57% 99) E RE = .21 + [(.21 − .069) × .48] RE = .2777, or 27.77%

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) You own 320 shares of stock in Halestorm, Incorporated, that currently sells for $84.55 per share. The company has announced a dividend of $3.75 per share with an ex-dividend date of February 4. Assuming no taxes, what is the value of the stock on February 4? A) $82.67 B) $88.30 C) $79.75 D) $80.80 E) $84.55

2) You own 210 shares of stock in Green Mild Chili Peppers, Incorporated, that currently sell for $50.20 per share. The company has announced a dividend of $2.47 per share with an exdividend date of May 3. Assuming no taxes, what is the value of your portfolio on May 3? A) $10,217.00 B) $10,023.30 C) $518.70 D) $10,298.30 E) $10,542.00

3) A company has declared a dividend of $6.45 per share on its stock. Capital gains are not taxed. Suppose the IRS has issued a new regulation that requires taxes of 10 percent be withheld at the time the dividend is paid. The stock currently sells for $99.25 per share. What will the exdividend price be? A) $92.80 B) $96.03 C) $99.25 D) $93.45 E) $98.61

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4) The stock of Red's Hardware closed at $58.10 per share today. Tomorrow morning, the stock goes ex-dividend, paying a dividend of $1.90 per share. The tax rate on dividends is 25 percent. All else the same, what price will the stock open at tomorrow morning? A) $57.15 B) $56.68 C) $58.10 D) $57.63 E) $56.20

5) A firm has a market value equal to its book value. Currently, the firm has excess cash of $6,700 and other assets of $25,300. Equity is worth $32,000. The firm has 550 shares of stock outstanding and net income of $3,300. What will the stock price per share be if the firm pays out its excess cash as a cash dividend? A) $52 B) $61 C) $58 D) $55 E) $46

6) Bowzer Company has just received $3.5 million from the sale of one of its divisions. The company has 415,000 shares outstanding that sell for $85.25 per share. If the company issues the entire proceeds from the sale as a special dividend, what will the ex-dividend stock price be? Ignore taxes. A) $85.25 B) $78.74 C) $76.82 D) $93.68 E) $85.13

7) Storico currently has 18,000 shares outstanding that sell for $45.71 per share. The company plans to issue a stock dividend of 17.5 percent. How many new shares will be issued?

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A) 3,290 shares B) 18,000 shares C) 21,150 shares D) 3,150 shares E) 3,400 shares

8) Westhaven Corporation currently has 39,000 shares outstanding that sell for $71 per share. The company plans to issue a stock dividend of 20 percent. The stock has a par value of $2. What is the total capital surplus on the new shares? A) $374,400 B) $538,200 C) $553,800 D) $568,300 E) $15,600

9) Murphy's, Incorporated, has 32,400 shares of stock outstanding with a par value of $1 per share. The market value is $14 per share. The balance sheet shows $88,750 in the capital in excess of par account, $32,400 in the common stock account, and $156,950 in the retained earnings account. The firm just announced a stock dividend of 14 percent. What will the market price per share be after the dividend? A) $13.16 B) $14.00 C) $14.16 D) $13.28 E) $12.28

10) Murphy's, Incorporated, has 30,000 shares of stock outstanding with a par value of $1 per share. The market value is $10 per share. The balance sheet shows $69,000 in the capital in excess of par account, $30,000 in the common stock account, and $130,500 in the retained earnings account. The firm just announced a stock dividend of 12 percent. What will the balance in the capital in excess of par account be after the dividend?

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A) $98,100 B) $97,800 C) $105,000 D) $101,400 E) $96,000

11) Robinson's has 46,000 shares of stock outstanding with a par value of $1 per share and a market price of $52 a share. The balance sheet shows $46,000 in the common stock account, $515,000 in the paid-in surplus account, and $530,000 in the retained earnings account. The firm just announced a 2-for-1 stock split. How many shares of stock will be outstanding after the split? A) 69,000 shares B) 92,000 shares C) 91,500 shares D) 23,000 shares E) 46,000 shares

12) Weiland, Incorporated, has 380,000 shares outstanding that sell for $88 per share. The company plans a 4-for-1 stock split. How many shares will be outstanding after the split? A) 1,520,000 shares B) 1,710,000 shares C) 95,000 shares D) 1,140,000 shares E) 1,900,000 shares

13) A company has 430,000 shares outstanding that sell for $94.66 per share. The company plans a 5-for-4 stock split. Assuming no market imperfections or tax effects, what will the stock price be after the split?

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A) $90.60 B) $118.33 C) $75.73 D) $94.66 E) $86.55

14) BGA has 375,000 shares outstanding that sell for $33 per share. The company plans a 5for-6 reverse stock split. How many shares will be outstanding after the split? A) 375,000 shares B) 312,500 shares C) 260,417 shares D) 357,143 shares E) 450,000 shares

15) LTE stock sells for $28.11 per share and there are 350,000 shares outstanding. The company plans a 2-for-1 reverse stock split. Assuming no market imperfections or tax effects, what will the stock price be after the split?

A) $28.11 B) $49.97 C) $56.22 D) $14.06 E) $28.11

16) A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,700 and other assets of $4,300. Equity is worth $6,000. The firm has 600 shares of stock outstanding and net income of $800. The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?

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A) 270 shares B) 440 shares C) 430 shares D) 450 shares E) 610 shares

17) Bo's Home Manufacturing has 310,000 shares outstanding that sell for $44.56 per share. The company has announced that it will repurchase $51,000 of its stock. What will the share price be after the repurchase? A) $44.40 B) $41.79 C) $38.85 D) $44.56 E) $44.72

18) A firm has a market value equal to its book value. Currently, the firm has excess cash of $500 and other assets of $5,000. Equity is worth $5,500. The firm has 550 shares of stock outstanding and net income of $770. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase? A) $2.37 B) $1.40 C) $1.54 D) $.83 E) $1.00

19) Boats and Bait has 59,000 shares outstanding that sell for a price of $55 per share. The stock has a par value of $2 per share. The company's balance sheet shows capital surplus of $90,000 and retained earnings of $130,000. If the company declares a stock dividend of 20 percent, what is the new common stock value on the balance sheet?

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A) $249,600 B) $108,000 C) $405,600 D) $264,000 E) $141,600

20) Quaker State Wings has 315,000 shares outstanding and net income of $975,000. The company stock is currently selling for $64.10 per share. If the company repurchases $633,000 of its stock, what is the earnings per share after the repurchase? A) $3.29 B) $3.20 C) $3.36 D) $3.24 E) $3.10

21) Green Thumb Nursery has 36,000 shares outstanding at a market price of $63.23 per share. The earnings per share are $3.23. The firm has total assets of $328,000 and total liabilities of $190,000. Today, the firm announced a share repurchase for $83,000 of its stock. What is the earnings per share after the repurchase? A) $3.47 B) $3.14 C) $3.23 D) $3.35 E) $3.41

22) The Cincinnati Chili Kitchen has just announced the repurchase of $100,000 of its stock. The company has 34,000 shares outstanding and earnings per share of $3.19. The company stock is currently selling for $75.44 per share. What is the price-earnings ratio after the repurchase?

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A) 23.65 times B) 22.08 times C) 24.11 times D) 22.73 times E) 24.57 times

23) Cookies and Cream has 34,000 shares outstanding at a market price of $89.40. What will the share price be if the company declares a stock dividend of 15 percent? A) $80.65 B) $102.81 C) $89.40 D) $77.74 E) $83.57

24) Heidi owns 580 shares of Boyd Enterprises, which is priced at $64.74 per share. The company plans a 5-for-1 stock split. How many shares will Heidi own and what will the share price be after the stock split? A) 2,900; $323.70 B) 2,900; $12.95 C) 2,900; $64.74 D) 116; $12.95 E) 116; $323.70

25) Timothy owns 960 shares of Countess Corporation, which is priced at $14.37 per share. The company plans a 2-for-3 reverse stock split. How many shares will Timothy own and what will the share price be after the reverse stock split? A) 640; $14.37 B) 640; $9.58 C) 640; $21.56 D) 1,440; $9.58 E) 1,440; $21.56

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Answer Key Test name: Chapter 14 Test Bank - Algo 1) D Ex-dividend price = $84.55 − 3.75 Ex-dividend price = $80.80 2) E Ex-dividend price = $50.20 − 2.47 Ex-dividend price = $47.73 Portfolio value = 210($47.73 + 2.47) Portfolio value = $10,542.00 3) D Aftertax dividend = $6.45(1 − .10) Aftertax dividend = $5.81 Ex-dividend price = $99.25 − 5.81 Ex-dividend price = $93.45 4) B Aftertax dividend = $1.90(1 − .25) Aftertax dividend = $1.43 Ex-dividend price = $58.10 − 1.43 Ex-dividend price = $56.68 5) E Market value = Book value = ($32,000 − 6,700)/550 shares Market value = $46 per share 6) C Dividend per share = $3,500,000/415,000 Dividend per share = $8.43 Ex-dividend price = $85.25 − 8.43 Ex-dividend price = $76.82 Version 1

7) D New shares = 18,000(.175) New shares = 3,150 shares 8) B New shares = 39,000(.20) New shares = 7,800 shares Capital surplus on new shares = 7,800($71 − 2) Capital surplus on new shares = $538,200 9) E Total market value = 32,400 shares × $14 per share Total market value = $453,600 New number of shares outstanding = 32,400(1 + .14) New number of shares outstanding = 36,936 shares New market price per share = $453,600/36,936 shares New market price per share = $12.28 10) D Additional shares issued = .12(30,000 shares) Additional shares issued = 3,600 shares Capital in excess of par per share = $10 − 1 Capital in excess of par per share = $9 New balance in capital in excess of par = $69,000 + (3,600 shares × $9 per share) New balance in capital in excess of par = $101,400 11) B New number of shares outstanding = 46,000(2/1) New number of shares outstanding = 92,000 shares 12) A New shares outstanding = 380,000(4/1) New shares outstanding = 1,520,000 shares 13) C Version 1

New share price = $94.66(4/5) New share price = $75.73 14) B New shares outstanding = 375,000(5/6) New shares outstanding = 312,500 shares 15) C New shares price = $28.11(2/1) New shares price = $56.22 16) C Market value per share = Book value per share = $6,000/600 shares Market value per share = $10 Number of shares repurchased = $1,700/$10 per share Number of shares repurchased = 170 shares Number of shares outstanding after the repurchase = 600 − 170 Number of shares outstanding after the repurchase = 430 shares 17) D The stock price will be unaffected by the repurchase and will remain at $44.56. 18) C Market value per share = Book value per share = $5,500/550 shares Market value per share = $10 Number of shares repurchased = $500/$10 per share Number of shares repurchased = 50 shares Number of shares outstanding after the repurchase = 550 − 50 Number of shares outstanding after the repurchase = 500 shares EPS after repurchase = $770/500 shares EPS after repurchase = $1.54 19) E

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Common stock account = 59,000($2) Common stock account = $118,000 New common stock account = $118,000(1 + .20) New common stock account = $141,600 20) B Shares repurchased = $633,000/315,000 Shares repurchased = 9,875.20 shares New EPS = $975,000/(315,000 − 9,875.20) New EPS = $3.20 21) D Shares after repurchase = 36,000 − ($83,000/$63.23) Shares after repurchase = 34,687.33 shares New EPS = ($3.23 × 36,000)/34,687.33 New EPS = $3.35 22) D Shares repurchased = $100,000.00/$75.44 Shares repurchased = 1,325.56 New shares outstanding = 34,000 − 1,325.56 = 32,674.44 New EPS = 34,000($3.19)/32,674.44 New EPS = $3.32 New PE = $75.44/$3.32 New PE = 22.73 times 23) D New stock price = $89.40/(1 + .15) New stock price = $77.74 24) B New shares = 580(5/1) New shares = 2,900 shares New price = $64.74(1/5) New price = $12.95 Version 1

25) C New shares = 960(2/3) New shares = 640 shares New price = $14.37(3/2) New price = $21.56

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Which one of the following is a payment of either cash or shares of stock that is paid out of earnings to a firm's shareholders? A) Interest B) Capital surplus C) Retained earnings D) Dividend E) Stock repurchase

2) Which one of the following is a payment by a firm to its shareholders from any source other than current or accumulated retained earnings? A) Interest B) Distribution C) Retained earnings D) Dividend E) Stock repurchase

Which one of the following best defines a regular cash dividend? A) Distribution by a firm to its shareholders B) Payment from any source by a firm to its owners C) One-time payment of cash by a firm to its shareholders D) Cash payment by a firm to its owners as part of a firm's normal operations E) Distribution of the proceeds from the sale of a portion of a firm's operations

4) Which one of the following is the date on which the board of directors agrees to pay a dividend and passes a resolution to do so?

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A) Date of record B) Ex-dividend date C) Payment date D) Declaration date E) Public announcement date

5) The ex-dividend date is defined as _________blank business day(s) before the date of record. A) one B) two C) three D) four E) five

6) On which one of the following dates is the determination made as to which shareholders will receive a dividend payment? A) Date of record B) Ex-dividend date C) Payment date D) Declaration date E) Public announcement date

On which one of the following dates are dividend checks mailed? A) Date of record B) Ex-dividend date C) Payment date D) Declaration date E) Public announcement date

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8) The clientele effect states that investors fall into various groups because of differences in their preferences for which one of the following? A) Share price levels B) Risk level C) Short-term versus long-term investments D) Rates of return E) Dividends

9) This morning, Structural Steel purchased 3,500 of its outstanding shares in the open market. What type of transaction was this? A) Stock payout B) Stock distribution C) Stock dividend D) Stock repurchase E) Stock reversal

10) Which of these is a noncash payment made by a firm to its shareholders that lessens the value of each outstanding share? A) Reverse stock split B) Cash distribution C) Stock dividend D) Regular dividend E) Liquidating dividend

11) Which one of the following reduces the number of shares outstanding but does not decrease the value of owners' equity? A) Stock repurchase B) Stock split C) Reverse stock split D) Cash distribution E) Liquidating dividend

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12) During the past year, ABC stock has sold for as little as $19 a share and as much as $33 a share. Which one of the following terms applies to these prices? A) Benchmark values B) Price splits C) Price dividers D) Split range E) Trading range

13) Which one of the following increases the number of shares outstanding but does not change a firm's equity account values? A) Reverse stock split B) Cash distribution C) Stock split D) Liquidation dividend E) Special dividend

14) Miller’s Hardware recently paid $1.21 per share in dividends. The company currently has excess cash and would like to distribute an additional $.35 a share to its shareholders. However, the company is concerned about increasing the dividend by that amount as it will not be able to afford a similar increase in the future and doesn't want to lower the dividend once it has been raised. Which one of the following is probably the best suggestion for distributing the $.35 per share? A) Pay a special dividend of $.35 per share B) Pay an extra cash dividend of $.35 per share C) Pay a liquidating dividend of $.35 per share D) Increase the regular dividend by $.12 and pay a special dividend of $.23 E) Increase the regular dividend by $.12 and pay an extra cash dividend of $23

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15) KL Electronics has paid a quarterly dividend of $.42 per share for the past two years. This quarter, the firm plans to pay $.42 plus an additional $.05 per share. The firm has stated that it is uncertain whether it will pay $.42 or $.47 per share next quarter. Which one of the following is the best description of the additional $.05 that is being paid this quarter? A) Liquidating dividend B) Special dividend C) Extra dividend D) Stock dividend E) Normal dividend

16)

Which one of the following is an example of a liquidating dividend?

A) Valley Feed Mills recently sold its grain storage facility and is distributing the proceeds of that sale to its shareholders. B) Kate's Winery has excess cash that it wishes to distribute to its shareholders in addition to its normal cash dividend. This extra distribution usually occurs about once every year. C) Kurt's Music is planning to increase its quarterly dividend by 3 percent. D) The Dried Florist is preparing to pay its first annual dividend of $.08 per share. E) Hi Tek had an extraordinarily profitable year and has decided to do a one-time only $10 per share cash dividend.

17) Which one of the following events must occur before a firm can offer a liquidating dividend? A) Bankruptcy filing B) Insolvency declaration C) Asset sale D) Negative equity E) Failed bond issue

18) Kelsey International declared a dividend on Friday, November 13, that is payable on Friday, December 11, to holders of record on Monday, November 30. What is the latest date that you can purchase this stock if you wish to receive this dividend? Assume there are no banking holidays within this period of time. Version 1

A) Tuesday, November 24 B) Wednesday, November 25 C) Thursday, November 26 D) Friday, November 27 E) Monday, November 30

19) Which one of the following dates is the date on which the board of directors votes to pay a dividend? A) Record date B) Declaration date C) Ex-dividend date D) Payment date E) Settlement date

20) Tuesday, December 1, is the ex-dividend date for Alpha stock. Which one of the following dates is the record date? Assume there are no banking holidays to consider. A) Friday, November 27 B) Monday, November 30 C) Wednesday, December 2 D) Thursday, December 3 E) Friday, December 4

21) Davis Engineering declared a dividend to shareholders of record on Monday, February 8, that is payable on Friday, February 26. Carla knows that her dividend check normally arrives three business days after the check is written. On which one of the following days should she expect to receive her dividend check? Assume a 365-day year. A) Wednesday, February 10 B) Thursday, February 11 C) Monday, March 1 D) Tuesday, March 2 E) Wednesday, March 3

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22) Davidson Interiors declared a dividend to holders of record on Thursday, October 15, that is payable on Monday, November 2. Suenette purchased 200 shares of Davidson Interiors stock on Monday, October 12, and Jake purchased 100 shares of this stock on the following day. Which one of the following statements is correct given this information? A) Both Suenette and Jake will receive this dividend. B) Suenette will receive the dividend but Jake will not. C) Jake will receive the dividend but Suenette will not. D) Neither Suenette nor Jake will receive this dividend. E) You cannot determine who will or will not receive this dividend based on the information provided.

23) Two weeks ago, Jensen’s declared a dividend of $1.34 a share. The ex-dividend date is tomorrow. All else constant, which one of the following is the best estimate of Jensen’s opening stock price tomorrow? A) $1.34 lower than today's closing price B) Today's closing price minus an amount approximately equal to the aftertax value of the dividend C) The same as today's closing price since the dividend is expected D) $1.34 higher than today's closing price E) Today's closing price plus an amount approximately equal to the aftertax value of the dividend

24)

Which one of the following statements is correct? A) Dividends are irrelevant. B) Flotation costs are a good reason to support a high-dividend payout. C) Current tax laws favor high current dividends for individual investors. D) Dividend policy is the time pattern of dividend payout. E) Corporate investors tend to prefer low-dividend payouts on securities they own.

25) The argument that dividend policy is irrelevant tends to be supported by which one of these factors?

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A) Flotation costs associated with equity issues B) Current tax laws C) An unsatisfied demand for high-dividend-paying stocks D) Current equilibrium in the clientele dividend market E) The current tax exclusion available to corporate investors

26)

Which one of the following would tend to favor a low-dividend payout? A) Higher tax rates on capital gains than on dividend income B) High flotation cost for equity issues C) Endowment fund investors who cannot spend principal D) Investors' desire for a high-dividend yield E) Elimination of the tax deferral on capital gains

27) pay?

Which one of the following is least apt to limit the amount of cash dividends a firm can

A) Lack of retained earnings B) A bankruptcy proceeding C) A bond indenture covenant D) State laws E) Increasing stock price

28)

Which one of these favors a high-dividend payout? A) Low transaction costs on stock trades B) Lower taxes on capital gains than on dividends C) Tax deferment on capital gains, but not on dividend income D) Flotation costs E) Corporate shareholders

29)

What percentage of capital gains are excluded from taxation for corporate shareholders?

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A) 0% B) 10% C) 25% D) 70% E) 75%

30) All the following investors generally receive a tax break on dividend income with the exception of: A) corporate shareholders. B) pension funds. C) trust funds. D) endowment funds. E) individuals.

31) Assume that satisfied clienteles exist. Given this assumption, which one of these statements is correct? A) A firm can increase its share price by increasing its dividend payout. B) Dividend policy is irrelevant if each clientele group remains satisfied. C) All firms will adopt a high-dividend-payout policy. D) All dividends become irrelevant. E) All firms should adopt a low-dividend-payout policy.

32) M&N stock is currently selling for $22 per share. The firm just made an offer to one of its major shareholders to repurchase all the shares owned by that shareholder for $26 per share. What type of offer is being made? A) Rights offer B) Secondary issue C) Targeted repurchase D) Tender offer E) Private issue

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33) JTL has 148,000 shares of stock outstanding. The firm has extra cash, so it announced this morning that it is willing to repurchase 18,000 of its shares. What type of offer is the firm making? A) Rights offer B) Secondary issue C) Targeted repurchase D) Tender offer E) Private issue

34) All the following are means of reducing the number of outstanding shares with the exception of a(n): A) open market purchase. B) reverse stock split. C) tender offer. D) rights offer. E) targeted repurchase.

35) Kelso's is considering spending $80,000 on either a stock repurchase or an extra cash dividend. Which one of the following values will be the same whether the firm pays a dividend or repurchases stock? Assume there are no taxes or market imperfections. A) Number of shares outstanding B) Price per share C) Earnings per share D) Price-earnings (PE) ratio E) Market value of equity per share

36)

A stock repurchase will:

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A) increase the number of shares outstanding. B) decrease the earnings per share. C) decrease the market price per share. D) increase the market value per share. E) decrease the PE ratio.

37)

Assume an all-equity firm has positive net income. If this firm pays a cash dividend the: A) number of shares outstanding will increase. B) earnings per share will decrease. C) firm’s total assets will remain constant. D) price-earnings ratio will decrease. E) firm’s total equity will increase.

38) Assume there are no taxes or imperfections. Given this assumption, which one of the following statements is correct? A) A cash dividend has no effect on the market price of the payer's stock. B) A cash dividend decreases shareholder wealth. C) Stock repurchases decrease the market value per share. D) Both a cash dividend and a share repurchase increase a firm's PE ratio. E) A stock repurchase has the same effect on a firm's market value balance sheet as does a cash dividend.

39)

A share repurchase will: A) increase both earnings per share and the PE ratio. B) increase the earnings per share but not affect the PE ratio. C) increase the earnings per share and decrease the PE ratio. D) not affect either the earnings per share nor the PE ratio. E) not affect the earnings per share but will decrease the PE ratio.

40)

Which statement is correct?

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A) Cash dividends and stock repurchases are treated equally for tax purposes. B) In total dollars, cash dividends outweighed stock repurchases for the period 20032020. C) Many firms either ceased paying or decreased their dividends per share in response to the 2003 change in dividend taxation. D) Firms tend to prefer cash dividends over share repurchases for their flexibility and tax benefits. E) A non-dividend-paying firm is more apt to do a stock repurchase than to commence paying dividends.

41)

Which statement is correct? A) Tax rates are the key determinant to a company’s dividend policy. B) Firms are equally likely to increase or decrease their normal dividends per share. C) Dividends tend to be more erratic than earnings. D) Mature firms are less apt to pay dividends than young firms. E) Dividend growth tends to lag earnings growth.

42)

Which statement is correct regarding US companies?

A) The personal taxes of investors is the key factor managers consider when establishing a dividend policy. B) Firms tend to increase their regular dividend as soon as they expect increased earnings in the future. C) Firms tend to react quickly to lower dividends any time the economy begins to slow. D) Firms tend to quickly adjust their dividends to changes in the firm's P/E ratio. E) Procter & Gamble is one example of a firm with a long history of increasing dividends.

43) Research conducted on firms' dividend policies over time support which one of the following conclusions?

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A) Aggregate dividends and stock repurchases have steadily declined in real terms. B) Dividends are required to be paid by all public corporations in existence for ten years or more. C) Managers tend to smooth dividends. D) Stock prices react quickly whenever an anticipated dividend amount is paid. E) Firms generally commence paying dividends prior to doing any stock repurchases.

44)

Normal cash dividends that are increased regularly tend to send which message? A) The firm is attempting to reduce its tax bill. B) The dividends are expected to increase the firm’s agency costs. C) The firm is planning on downsizing. D) The firm is discontinuing all stock repurchases. E) The firm expects to be profitable.

45)

Which statement is correct?

A) Stock dividends tend to reduce agency costs related to shareholders but stock repurchases do not. B) It is relatively easy to determine whether or not a firm has completed a planned stock repurchase. C) Fixed stock repurchases allow managers to repurchase shares only when they feel those shares are undervalued. D) Stock dividends may come at the expense of forgoing positive net present value projects. E) Stock repurchases send the exact same signals to investors as cash dividends send.

46)

Which one of the following is a drawback of cash dividends?

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A) Firms may have to obtain additional external financing which would not be required in the absence of the dividends. B) Stock prices tend to increase as annual dividend amounts increase. C) Cash dividends support stock prices. D) Dividends tend to lower agency costs. E) Dividend-paying firms tend to attract a wider field of investors than do non-dividendpaying firms.

47)

Most company managers overwhelming feel that:

A) dividends should be increased annually no matter what. B) dividends should be flexible and adjusted annually in response to changes in the firm's earnings. C) the personal taxes of their shareholders must be their primary consideration when setting dividend policy. D) once a dividend is increased, it should not be decreased. E) dividend smoothing is talked about but rarely affects dividend decisions.

48) Lexington Stables just declared a 15 percent stock dividend. Which one of the following increased by 15 percent as a result of this dividend? A) Book value of firm's equity B) Shareholders' wealth C) Number of shares outstanding D) Firm's cash balance E) Stock price

49)

Which one of the following is basically equivalent to a 2-for-1 stock split? A) 20 percent stock dividend B) 25 percent stock dividend C) 50 percent stock dividend D) 100 percent stock dividend E) 200 percent stock dividend

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50) Modern Homes just declared a 4-for-3 stock split. Which of the following occurred as a result of this split? 1.Number of shares outstanding increased by one-third 2.Number of shares outstanding decreased by one-fourth 3.Price per share increased by one-third 4.Price per share decreased by one-fourth A) I only B) I and III only C) I and IV only D) II and III only E) II and IV only

51) Of the following, which two are the best reasons for doing a reverse stock split? 1.Return a stock to its normal trading range 2.Eliminate small shareholders 3.Reduce shareholder costs 4.Avoid delisting A) I and II B) I and III C) II and III D) II and IV E) III and IV

52)

In the US, stock dividends: A) tend to change in direct proportion to changes in earnings. B) have steadily declined in nominal terms over the years. C) tend to decrease in amount just as frequently as they increase. D) are concentrated in a few mature firms. E) have steadily declined in real terms over the years.

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53) The common stock of Woods Bowling Balls closed at $59.65 a share today. Tomorrow morning, the stock goes ex-dividend. The dividend that is being paid this quarter is $1.37 per share. Assume the tax rate on dividends is 21 percent. All else equal, what should the opening stock price be tomorrow morning? A) $59.64 B) $58.43 C) $58.38 D) $58.57 E) $58.72

54) Cosmetics Emporium is preparing to pay its quarterly dividend of $1.76 a share. The stock closed at $79.65 a share today and goes ex-dividend tomorrow. What will the ex-dividend stock price be if the relevant tax rate is 21 percent and all else is held constant? A) $78.99 B) $78.91 C) $78.26 D) $78.04 E) $77.99

55) The common stock of Beasley International goes ex-dividend tomorrow. The stock closed at a price of $28.06 a share today. This quarter, the company is paying a cash dividend of $.17 a share and a liquidating dividend of $.32 a share. Assuming the tax rate on dividends is 20 percent, what will be the ex-dividend price tomorrow morning? A) $27.74 B) $27.67 C) $27.94 D) $33.96 E) $27.66

56) Overboard Excursions just announced it will be paying an annual dividend of $1.37 a share plus an extra dividend of $.56 a share this year. The company also announced that its regular dividend, which is all it anticipates paying after this year, will increase by 1.5 percent annually. What is the anticipated dividend per share next year? Version 1

A) $1.3855 B) $1.3924 C) $1.3906 D) $1.8088 E) $1.3745

57) Dragon Trucking just paid its annual regular cash dividend of $1.18 a share, along with a special dividend of $.12 a share. The company follows a policy of increasing its dividend by 1 percent annually. Which one of the following is the best estimate of the firm's next annual dividend payment? A) $1.1925 B) $1.0908 C) $1.2120 D) $1.1918 E) $1.1032

58) Dunder Imports has common stock outstanding at a market price of $57 per share. The total market value of the firm is $5,130,000. The firm plans on liquidating one of its divisions for $500,000 in cash, after taxes, and distributing the proceeds to the shareholders in the form of a liquidating dividend. What will be the amount per share of that dividend? A) $5.794 B) $5.556 C) $5.220 D) $5.308 E) $5.382

59) Fried Foods recently liquidated its fast-food division. That unit represented 30 percent of the firm's overall market value. Prior to the liquidation, the firm's stock was selling for $48 a share, the annual dividend was steady at $1.20 per share, and there were 18,000 shares outstanding. The firm is preparing to distribute the entire liquidation proceeds to shareholders. How much should shareholders expect to receive per share from this liquidating dividend? Ignore taxes.

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A) $14.24 B) $13.30 C) $14.40 D) $13.10 E) $13.80

60) Metal Fabricators recently sold its poorest performing division and realized net proceeds from the transaction of $1.36 million. The firm has 320,000 shares of stock outstanding and a market price of $49 a share. The firm is now preparing to distribute the entire sale proceeds in the form of a liquidating dividend. What is the best estimate of the ex-dividend stock price? Ignore taxes and market imperfections. A) $43.91 B) $41.38 C) $44.40 D) $43.79 E) $44.75

61) Dixie’s has a market value balance sheet as shown below. The firm currently has 2,200 shares of stock outstanding and net income of $10,500. Excess cash Other assets Total

Market Value Balance Sheet $ 14,300 Debt 215,460 Equity $ 229,760

Total

$ 84,600 145,160 $ 229,760

The firm has decided to spend $5,600 on new equipment and use the remaining excess cash to pay an extra cash dividend. What will the firm's PE ratio be after this dividend is paid, all else held constant? Ignore taxes. A) 14.20 B) 16.67 C) 13.08 D) 11.22 E) 13.00

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62) The Down Towner has a market value balance sheet as shown below. The firm currently has 12,000 shares of stock outstanding and net income of $17,500. Excess cash Other assets Total

Market Value Balance Sheet $ 14,300 Debt 215,460 Equity

$ 77,960 151,800

$ 229,760

Total

The firm has decided to repurchase 10 percent of its outstanding stock at the current market price and fund that purchase with new debt. After the repurchase there will be _________blank shares outstanding at a price per share of _________blank. A) 10,200; $11.50 B) 10,200; $12.65 C) 10,800; $12.65 D) 10,800; $11.50 E) 10,800; $14.05

63) Botanical Gardens Nursery has 7,500 shares of stock outstanding at a market price of $18 a share. The earnings per share are $1.23. The firm has total assets of $384,000 and total liabilities of $146,000. Today, the firm is paying a quarterly cash dividend of $.22 a share. What will be the earnings per share after the dividend is paid if the tax rate on dividends is 15 percent? A) $1.01 B) $1.04 C) $1.23 D) $1.17 E) $1.20

64) Bob’s Standard Station has 15,000 shares of stock outstanding at a market price of $15 a share. The current earnings per share are $1.26. The firm has total assets of $312,000 and total liabilities of $97,500. Next week, the firm will be repurchasing $37,500 worth of stock. Ignore taxes. What will be the earnings per share after the stock repurchase?

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A) $1.598 B) $1.547 C) $1.335 D) $1.512 E) $1.563

65) Water Front Rentals has 20,000 shares of stock outstanding at a market price of $24 each and earnings per share of $1.84. The firm has decided to repurchase $75,000 worth of stock. What will the PE ratio be after the repurchase, all else held constant? A) 11.55 B) 13.24 C) 9.50 D) 10.69 E) 11.01

66) Dress Boutique has 8,350 shares of stock outstanding at a price per share of $19. What will be the price per share if the firm pays a $.75 per share dividend and the applicable tax rate is 21 percent? Ignore market imperfections. A) $18.44 B) $18.68 C) $18.25 D) $18.36 E) $18.41

67) Davidson International has 13,700 shares of stock outstanding at a price per share of $28. The firm has decided to repurchase 500 of those shares in the open market. What will the price per share be after the share repurchase is completed? Ignore taxes and market imperfections.

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A) $29.14 B) $28.84 C) $28.89 D) $28.00 E) $29.06

68) Cookies and Cream has 5,000 shares of stock outstanding at a market price of $8.92 per share. What will be the price per share after a stock dividend of 8 percent? Ignore taxes and market imperfections. A) $7.24 B) $7.68 C) $7.45 D) $7.96 E) $8.26

69) Fresh Baked Goods has 36,800 shares of stock outstanding at a market price of $29.41 per share. What will be the price per share after a stock dividend of 6 percent? Ignore taxes and market imperfections. A) $24.90 B) $23.50 C) $25.00 D) $25.31 E) $27.75

70) Heidi owns 400 shares of Boyd Enterprises stock, which is valued at $13 a share. Boyd Enterprises just declared a stock dividend of 3 percent. How many shares will Heidi own and what will be the price per share after the dividend?

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A) 412; $12.62 B) 411.12; $13.00 C) 416; $12.50 D) 416; $13.00 E) 416; $13.50

71) Pluto United has 14,250 shares of stock outstanding at a price per share of $23. How many shares will be outstanding if the firm does a 4-for-3 stock split? A) 18,300 shares B) 19,033 shares C) 18,667 shares D) 19,000 shares E) 18,933 shares

72) B&K Lumber has 50,000 shares of stock outstanding at a price per share of $68. How many shares will be outstanding if the firm does a 5-for-2 stock split? A) 20,240 shares B) 22,300 shares C) 55,667 shares D) 126,500 shares E) 125,000 shares

73) The Meat Market has 16,000 shares of stock outstanding at a price per share of $7. What will be the price per share if the firm declares a 3-for-7 reverse stock split? A) $11.80 B) $4.50 C) $3.00 D) $15.00 E) $16.33

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74) Oak Tree Farms has common stock outstanding at a price of $13 a share. The total market value of the equity is $435,000. How many shares of stock will be outstanding if the firm does a reverse stock split of 2-for-5? A) 9,602 shares B) 36,000 shares C) 13,385 shares D) 37,500 shares E) 83,654 shares

75) Jessica currently owns 500 shares of Alpha stock valued at $19 share. What will her investment in Alpha be worth if the company declares a 4-for-3 stock split? A) $6,075 B) $9,500 C) $11,000 D) $7,125 E) $8,800

76) Taylor's stock has plummeted in value and is currently priced at $5 a share. The firm prefers the price exceed $10 a share and thus has decided to do a reverse stock split. However, when it does this, the firm wants the stock price increased to at least twice its preferred minimum as it is concerned the price will fall further. Which one of the following stock split ratios is most appropriate for this situation? A) 1-for-3 B) 1-for-4 C) 2-for-7 D) 4-for-1 E) 7-for-2

77) Innovative Technologies has 46,000 shares of stock outstanding at a market price of $6 a share. Which one of the following stock splits should the firm declare if it wants to increase the stock price to exactly $16 a share? Ignore any taxes or market imperfections.

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A) 5-for-2 stock split B) 3-for-1 stock split C) 1-for-3-reverse stock split D) 2-for-5 reverse stock split E) 3-for-8 reverse stock split

78) Kaylor's Tool Shoppe has 8,600 shares of stock outstanding at a market price of $8 a share. Which one of the following stock splits should the firm declare if it wants to increase the stock price to exactly $36 a share? Ignore any taxes or market imperfections. A) 2-for-9 reverse stock split B) 2-for-8 reverse stock split C) 3-for-4 stock split D) 2-for-11 stock split E) 2-for-7 reverse stock split

79) Your portfolio is 500 shares of Country Marine Parts that currently sells for $33 a share. The company has announced a cash dividend of $.75 per share with an ex-dividend date of tomorrow. Assume there are no taxes. What should you expect your portfolio value to be tomorrow morning assuming all else is held constant? A) $16,236 B) $16,500 C) $16,646 D) $16,764 E) $16,830

80) Tattler, Incorporated, has declared a dividend of $2.10 a share. Suppose capital gains are not taxed, but dividends are taxed at 21 percent and that the IRS regulations require that taxes be withheld at the time the dividend is paid. Tattler sells for $67 per share, and the stock is about to go ex-dividend. What do you think the ex-dividend price will be?

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A) $62.40 B) $65.22 C) $65.34 D) $66.67 E) $68.04

81) The equity section of a firm’s market value balance sheet has common stock of $100,000 (par value $1); capital surplus of $125,450; and retained earnings of $427,500. The firm’s stock sells for $36 a share. If the firm repurchases $55,000 of stock, what will be the new market value of the firm’s total equity? A) $582,521 B) $612,400 C) $632,950 D) $632,096 E) $597,950

82) Red’s Electronics has a balance sheet with equity account values of: common stock ($1 par) of $70,500; capital surplus of $141,600; and retained earnings of $208,300. How many shares will be outstanding if the firm declares a 2-for-9 reverse stock split? A) 5,833 shares B) 15,667 shares C) 18,000 shares D) 305,750 shares E) 317,250 shares

83) AIW, Incorporated, currently has 275,000 shares of stock outstanding that sell for $87 per share. Assuming no market imperfections or tax effects exist, what will be the share price after AIW implements a 7-for-3 stock split?

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A) $36.31 B) $37.29 C) $29.89 D) $39.55 E) $32.38

84) A market value balance sheet shows cash of $91,000; fixed assets of $327,000, and equity of $418,000. There are 16,000 shares of stock outstanding. The company has declared a dividend of $.82 per share. The stock goes ex-dividend tomorrow. Ignore any tax effects. What will be the firm's market equity value after the dividend is paid? A) $372,020 B) $404,880 C) $419,560 D) $418,000 E) $397,810

85) The Press has total assets of $848,000 and total debt of $402,000 on a market value basis. There are 25,000 shares of stock outstanding. The company has announced it is going to repurchase $40,000 worth of stock in the open market. What will be the price per share after the repurchase? A) $36.29 B) $17.84 C) $38.67 D) $39.42 E) $39.89

86) Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $10,000 would be spent. Current earnings are $2.10 per share, and the stock currently sells for $52 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be _________blank if the firm issues the dividend as compared to _________blank if the firm does the share repurchase.

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A) 22.38; 22.38 B) 24.87; 22.38 C) 20.23; 24.87 D) 22.38; 20.23 E) 20.23; 22.38

87) The common stock of Tina’s Tires closed at $68.25 a share today. Tomorrow morning, the stock goes ex-dividend. The dividend that is being paid this quarter is $1.56 per share. Assume the tax rate on dividends is 21 percent. All else equal, what should the opening stock price be tomorrow morning? A) $68.09 B) $66.88 C) $66.83 D) $67.02 E) $67.17

88) Breakers Engineering is preparing to pay its quarterly dividend of $1.36 a share. The stock closed at $51.25 a share today and goes ex-dividend tomorrow. What will the ex-dividend stock price be if the relevant tax rate is 21 percent and all else is held constant? A) $50.91 B) $50.83 C) $50.18 D) $49.96 E) $49.91

89) Sarandon Construction just announced it will be paying an annual dividend of $1.48 per share plus an extra dividend of $.56 a share this year. The company also announced that its regular dividend, which is all it anticipates paying after this year, will increase by 2.5 percent annually. What is the anticipated dividend per share next year?

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A) $1.5119 B) $1.5188 C) $1.5170 D) $1.9352 E) $1.5009

90) Harmerlin Enterprises has common stock outstanding at a market price of $72 per share. The total market value of the firm is $9,000,000. The firm plans on liquidating one of its divisions for $900,000 in cash, after taxes, and distributing the proceeds to the shareholders in the form of a liquidating dividend. What will be the amount per share of that dividend? A) $7.441 B) $7.200 C) $6.864 D) $6.952 E) $7.026

91) Jerry Springs Company has 20,000 shares of stock outstanding at a market price of $10 a share. The current earnings per share are $.55. The firm has total assets of $200,000 and total liabilities of $86,500. Next week, the firm will be repurchasing $25,000 worth of stock. Ignore taxes. What will be the earnings per share after the stock repurchase? A) $.629 B) $.715 C) $.664 D) $.563 E) $.452

92) Baby Fresh Diaper Service has 30,000 shares of stock outstanding at a market price of $37.50 each and earnings per share of $1.22. The firm has decided to repurchase $187,500 worth of stock. What will the PE ratio be after the repurchase, all else held constant?

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A) 26.16 B) 27.85 C) 24.11 D) 25.30 E) 25.61

93) Your portfolio is 700 shares of Conglomerated International that currently sells for $26.50 a share. The company has announced a cash dividend of $.45 per share with an exdividend date of tomorrow. Assume there are no taxes. What should you expect your portfolio value to be tomorrow morning assuming all else is held constant? A) $18,236 B) $18,550 C) $18,646 D) $18,764 E) $18,830

94) The equity section of a firm’s market value balance sheet has common stock of $250,000 (par value $1); capital surplus of $145,650; and retained earnings of $624,250. The firm’s stock sells for $27 a share. If the firm repurchases $75,000 of stock, what will be the new market value of the firm’s total equity? A) $949,471 B) $979,350 C) $999,900 D) $999,046 E) $944,900

95) Mercury Industries currently has 300,000 shares of stock outstanding that sell for $75 per share. Assuming no market imperfections or tax effects exist, what will be the share price after Mercury implements a 5-for-3 stock split?

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A) $45.00 B) $44.02 C) $47.26 D) $37.60 E) $40.09

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Answer Key Test name: Chapter 14 Test Bank - Static 1) D 2) B 3) D 4) D 5) A 6) A 7) C 8) E 9) D 10) C 11) C 12) E 13) C 14) A 15) C 16) A 17) C 18) C 19) B 20) C 21) E 22) A 23) B 24) D 25) D 26) B Version 1

27) E 28) E 29) A 30) E 31) B 32) C 33) D 34) D 35) D 36) E 37) D 38) E 39) C 40) E 41) E 42) E 43) C 44) E 45) D 46) A 47) D 48) C 49) D 50) C 51) D 52) D 53) D Ex-dividend price = $59.65 − ($1.37)(1 − .21) = $58.57 54) C Ex-dividend price = $79.65 − ($1.76)(1 − .21) = $78.26 Version 1

55) B Ex-dividend price = $28.06 − ($.17 + .32)(1 − .20) = $27.67 56) C D1 = $1.37 × 1.015 = $1.3906 57) D D1 = $1.18 × 1.01 = $1.1918 58) B Number of shares outstanding = $5,130,000/$57 = 90,000 shares Liquidating dividend per share = $500,000/90,000 Shares = $5.556 59) C Liquidating dividend per share = $48 × .30 = $14.40 60) E Post-dividend price per share = $49 − ($1,360,000/320,000) = $44.75 61) E EPS = $10,500/2,200 = $4.7727 Ex-dividend price per share = [$145,160 − ($14,300 − 5,600)]/2,200 = $62.0273 PE ratio = $62.0273/$4.7727 = 13.00

62) C Number of shares outstanding after repurchase = 12,000 × (1 − .10) = 10,800 Price per share = $151,800/12,000 = $12.65 The repurchase will not affect the market price per share.

63) C The cash dividend will not affect the earnings per share. 64) D New number of shares outstanding = 15,000 − ($37,500/$15) = 12,500 shares Earnings per share = ($1.26 × 15,000)/12,500 = $1.512 65) E

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New number of shares outstanding = 20,000 − ($75,000/$24) = 16,875 shares Earnings per share = ($1.84 × 20,000)/16,875 = $2.181 P/E = $24/$2.181 = 11.01 66) E Ex-dividend price = $19 − $.75 × (1 − .21) = $18.41 67) D The share repurchase will not affect the market price of the stock. 68) E Stock price = $8.92/1.08 = $8.26 69) E Stock price = $29.41/1.06 = $27.75 70) A Number of shares owned = 400 × 1.03 = 412 Price per share = $13 × (1/1.03) = $12.62 71) D Number of shares after the split = 14,250 × (4/3) = 19,000 72) E Number of shares after the split = 50,000 × (5/2) = 125,000 73) E Price per share = $7 × (7/3) = $16.33 74) C Number of shares outstanding = ($435,000/$13)(2/5) = 13,385 shares 75) B Value = [500 × (4/3)] × [$19 × (3/4)] = $9,500 76) B Minimum reverse split ratio = ($10 × 2)/$5 = 4 The firm needs to declare a 1-for-4 reverse stock split. 77) E

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Price ratio = $16/$6 = 8/3 The firm needs to declare a 3-for-8 reverse stock split. 78) A Price ratio = $36/$8 = 9/2 The firm needs to declare a 2-for-9 reverse stock split. 79) B Total value = Stock value + cash Total value = 500 × ($33 − .75) + (500 × $.75) = $16,500 80) C Ex-dividend price = $67 − [$2.10 × (1 − .21)] = $65.34 81) E Total equity = $100,000 + 125,450 + 427,500 − 55,000 = $597,950 82) B ($70,500/$1) × 2/9 = 15,667 shares 83) B $87 × (3/7) = $37.29 84) B $418,000 − 16,000 shares × $.82= $404,880 85) B Price per share before repurchase = ($848,000 − 402,000)/25,000 = $17.84 Shares repurchased = $40,000/$17.84 = 2,242 ($848,000 − 402,000 − 40,000)/(25,000 − 2,242) = $17.84 86) A

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If the firm issues the dividend: Dividends per share = $10,000/2,000 shares = $5.00 P/E = ($52 − 5.00)/$2.10 = 22.38 If the firm does the share repurchase: Shares repurchased = $10,000/$52 = 192.31 EPS after repurchase = ($2.10 × 2,000)/(2,000 − 192.31) = $2.3234 P/E = $52/$2.3234 = 22.38 87) D Ex-dividend price = $68.25 − ($1.56)(1 − .21) = $67.02 88) C Ex-dividend price = $51.25 − ($1.36)(1 − .21) = $50.18 89) C D1 = $1.48 × 1.025 = $1.5170 90) B Number of shares outstanding = $9,000,000/$72 = 125,000 shares Liquidating dividend per share = $900,000/125,000 shares = $7.200 91) A New number of shares outstanding = 20,000 − ($25,000/$10) = 17,500 shares Earnings per share = ($.55 × 20,000)/17,500 = $.629 92) E New number of shares outstanding = 30,000 − ($187,500/$37.50) = 25,000 shares Earnings per share = ($1.22 × 30,000)/25,000 = $1.464 P/E = $37.5/$1.464 = 25.61 93) B Total value = Stock value + cash Total value = 700 × ($26.50 − .45) + (700 × $.45) = $18,550 94) E Total equity = $250,000 + 145,650 + 624,250 − 75,000 = $944,900 Version 1

95) A $75 × (3/5) = $45.00

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The Peter Corporation and the Sellers Company have both announced IPOs. You place an order for 700 shares of each IPO. One of the IPOs is underpriced by $12.75 and the other is overpriced by $5.50. If you could get all of the shares you ordered for each IPO, what would your profit be? A) $8,925.00 B) $4,229.25 C) $4,652.13 D) $12,775.00 E) $5,075.00

2) The Bert Corporation and Ernie, Incorporated, have both announced IPOs. You place an order for 1,000 shares of each IPO. One of the IPOs is underpriced by $17.25 and the other is overpriced by $8.00. You will receive all of the shares you ordered of the overpriced IPO, but only one-half of the shares you ordered of the underpriced IPO. What profit do you expect? A) $6,041.75 B) $25,250.00 C) $8,625.00 D) $9,250.00 E) $625.00

3) Gravity, Incorporated, needs to raise $56 million to fund its expansion plans. The company will sell shares at a price of $29.60 in a general cash offer and the company's underwriters will charge a spread of 6.5 percent. How many shares need to be sold? A) 1,776,424 shares B) 1,522,649 shares C) 2,023,414 shares D) 1,891,892 shares E) 2,248,238 shares

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4) Jenny Corporation needs to raise $53 million to fund a new project. The company will sell shares at a price of $29.00 in a general cash offer and the company's underwriters will charge a spread of 7.5 percent. The direct flotation costs associated with the issue are $925,000. How many shares need to be sold? A) 1,827,586 shares B) 1,918,919 shares C) 1,763,833 shares D) 1,700,080 shares E) 2,010,252 shares

5) Disturbed Corporation needs to raise $57.5 million to fund a new project. The company will sell shares at a price of $23.80 in a general cash offer and the company's underwriters will charge a spread of 6 percent. The direct flotation costs associated with the issue are $750,000 and the indirect costs are $455,000. How many shares need to be sold? A) 2,624,039 shares B) 2,308,942 shares C) 2,297,249 shares D) 2,520,003 shares E) 2,415,966 shares

6) Under a firm commitment agreement, Zeke, Company went public and received $29.50 for each of the 6.6 million shares sold. The initial offer price was $32 and the stock rose to $33.75. The company paid $550,000 in direct flotation costs and $210,000 in indirect costs. What was the flotation cost as a percentage of funds raised? A) 25.31% B) 26.70% C) 14.86% D) 21.45% E) 8.79%

7) Northern Air would like to sell 4,300 shares of stock using Dutch auction underwriting. The bids received are:

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Bidder A B C D E

Quantity 850 950 1,350 1,550 1,750

Price $ 29.40 29.05 28.90 28.55 28.35

How much will the company raise in its offer? Ignore all flotation and transaction costs. A) $124,915 B) $170,115 C) $122,765 D) $126,420 E) $124,270

8) Kim placed an order with her broker for 550 shares of each of three IPOs being offered this week. Each of the IPOs has an offer price of $27. The number of shares allocated to Kim along with the closing prices on the first trading day are: Stock A B C

Shares Allocated 550 400 320

Price $ 26.15 30.43 33.43

What is Kim's total profit on these three stocks at the end of the first day of trading? A) $2,962.10 B) $3,385.30 C) $4,955.50 D) $3,958.80 E) $1,590.10

9) Draiman Guitars is offering 105,000 shares of stock in an IPO by a general cash offer. The offer price is $38 per share and the underwriter's spread is 7 percent. The administrative costs are $345,000. What are the net proceeds to the company?

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A) $3,710,700 B) $3,990,000 C) $3,365,700 D) $3,020,700 E) $3,645,000

10) Pawprints Paint recently went public in a best efforts offering. The company offered 150,000 shares of stock for sale at an offer price of $24 per share. The administrative costs associated with the offering were $390,000 and the underwriter's spread was 6.5 percent. After completing their sales efforts, the underwriters determined that they sold a total of 143,700 shares. What were the net proceeds to the company? A) $2,444,628 B) $2,586,000 C) $2,834,628 D) $3,224,628 E) $2,976,000

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Answer Key Test name: Chapter 15 Test Bank - Algo 1) E Profit = (700 × $12.75) − (700 × $5.50) Profit = $5,075.00 2) E Expected profit = (1,000 × 1/2 × $17.25) − (1,000 × $8.00) Expected profit = $625.00 3) C Required proceeds = $56,000,000/(1 − .065) Required proceeds = $59,893,048 Number of shares offered = $59,893,048/$29.60 Number of shares offered = 2,023,414 shares 4) E Required proceeds = ($925,000 + 53,000,000)/(1 − .075) Required proceeds = $58,297,297 Number of shares offered = $58,297,297/$29.00 Number of shares offered = 2,010,252 shares 5) A Required proceeds = ($57,500,000 + 750,000 + 455,000)/(1 − .06) Required proceeds = $62,452,128 Number of shares offered = $62,452,128/$23.80 Number of shares offered = 2,624,039 shares 6) C

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Net amount raised = (6,600,000 × $29.50) − 550,000 − 210,000 Net amount raised = $193,940,000 Total direct costs = $550,000 + ($32.00 − 29.50) × 6,600,000 Total direct costs = $17,050,000 Total indirect costs = $210,000 + ($33.75 − 32.00) × 6,600,000 Total indirect costs = $11,760,000 Total costs = $17,050,000 + 11,760,000 Total costs = $28,810,000 Flotation cost percentage = $28,810,000/$193,940,000 Flotation cost percentage = .1486, or 14.86% 7) C Including Bidder D, the total number of shares bid is: Shares including Bidder D = 850 + 950 + 1,350 + 1,550 Shares including Bidder D = 4,700 All shares will be sold at Bidder D's price, so: Amount raised = $28.55 × 4,300 Amount raised = $122,765 8) A Total profit = 550 × ($26.15 − 27) + 400 × ($30.43 − 27) + 320 × ($33.43 − 27) Total profit = $2,962.10 9) C Net proceeds = [105,000 × $38 × (1 − .07)] − $345,000 Net proceeds = $3,365,700 10) C Net proceeds = [143,700 × $24 × (1 − .065)] − $390,000 Net proceeds = $2,834,628

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Venture capital is most apt to be the source of funding for a: A) bankruptcy reorganization. B) global expansion of an established firm. C) new, high-risk venture. D) seasonal production costs. E) daily operations for an established, profitable firm.

2) Modern Art Online is preparing to sell new shares of stock to the general public. As part of this process, the firm just filed the required paperwork with the SEC that contains the material information related to this issue of stock. What is the name associated with this paperwork? A) Prospectus B) Red herring C) Security agreement D) Comment letter E) Registration statement

3) What is the legal document called that is provided to potential investors and describes a new security offering? A) Security agreement B) Prospectus C) Public statement D) Registration statement E) Formal filing

4) Caitlyn is interested in purchasing 1,500 shares of ABC, Incorporated, when the shares are issued. Her broker just gave her a preliminary prospectus to review as she waits for the shares to be cleared for sale. What is the name of this prospectus?

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A) Green Shoe B) Rights offer C) Red herring D) Spread E) Tombstone

5) What is the advertisement, commonly found in financial newspapers, that announces a public offering of securities and provides the name of the underwriters called? A) Prospectus B) Red herring C) Tombstone D) Green Shoe E) Underwriter's ad

6) Marti’s BBQ is offering 5,000 shares of stock to the general public on a cash basis. Which one of the following terms best applies to this offer? A) Rights offer B) General cash offer C) Green Shoe D) Red herring E) Prospectus

7) Deep Water Marina has 12,000 shares of stock outstanding that were sold to the general public last year. The firm has just decided to issue an additional 4,000 shares and will make these shares available to the firm's current shareholders before making any offer to the general public. Which type of offer is this? A) General cash offer B) Rights offer C) In-house offering D) Private placement E) Initial public offering

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An initial public offering refers to: A) the shares held by a firm's founder. B) the most recently issued shares that were offered to the firm’s existing shareholders. C) any shares issued to the public on a cash basis. D) the first sale of equity shares to the general public. E) all shares issued prior to the firm going public.

9) A new issue of common stock offered to the general public by a firm that is currently publicly held is called a(n): A) initial public offering. B) private placement. C) rights offer. D) venture capital offer. E) seasoned equity offering.

10) A.B. Securities assists issuers by pricing and selling new securities to the general public. Which one of the following terms best fits the role that A. B. Securities is playing? A) Underwriter B) Investment advisor C) Specialist D) Securities dealer E) Venture capitalist

11) GW Underwriters retains the difference between its buying price and its offering price on new securities. What is this amount called? A) Markup B) Commission C) Rights price D) Spread E) Offer

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12) What is the group of underwriters called who share both the risks and the marketing responsibilities for a securities offering? A) Syndicate B) Underwriting cartel C) Firm commitment group D) Dutch auction group E) Venture capitalists

13) Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares? A) Initial public offering B) Best efforts underwriting C) Firm commitment underwriting D) Rights offer E) Private placement

14) Florida Farms recently offered 12,000 shares of stock for sale but received payment for only 10,500 shares since that was all the shares the underwriters could sell. What type of underwriting was this? A) Syndicated B) Firm commitment C) Private placement D) Best efforts E) Dutch auction

15) Which one of the following is an underwriting of securities where the offer price is determined by investor bids?

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A) Private placement B) Best efforts underwriting C) Initial public offering D) Green Shoe option E) Dutch auction

16)

Which one of the following describes a Green Shoe provision? A) Determination of underwriters' fees B) Guarantee of sale for all offered shares C) Price auction D) Overallotment option E) Description of issue excluding the offer price

17) Which one of the following specifies the length of time that must pass after an initial public offering (IPO) before insiders are permitted to sell their shares? A) Lockup period B) Quiet period C) Comment period D) Green Shoe period E) Rights offer period

18) AJ’s Glass Works just arranged a three-year direct business loan. Which one of the following terms matches this loan arrangement? A) Term loan B) Private placement C) Rights offer D) Seasoned offer E) Shelf offer

19)

Which one of the following best describes a private placement?

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A) Interim financing for a new, high-risk entity B) Long-term loan by a limited number of investors C) Two-year direct business loan D) Three-year loan to a firm by its original founder E) New equity issue offered to current shareholders

20)

Which one of the following projects is most apt to be financed with venture capital? A) Additional warehouse space for a profitable trucking firm B) New product for an international plastics manufacturing company C) Prototype for a newly patented hand tool by an individual inventor D) Seasonal merchandise for a major retailer E) Domestic outlet for a large global exporter

21)

Which statement is true?

A) Venture capitalists tend to be long-term investors in a firm. B) Venture capitalists generally have an exit strategy. C) Venture capitalists generally provide all of their funding in one lump sum. D) Venture capital is relatively easy to obtain given today’s markets. E) Venture capitalists tend to invest in a vast array of enterprises rather than specialize in a few areas.

22) Which of the following are important factors to consider when seeking a venture capitalist? 1.Exit strategy 2.Management style 3.Personal contacts 4.Financial strength

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A) I and III only B) II and IV only C) III and IV only D) II, III, and IV only E) I, II, III, and IV

23) Assume the SEC approved the registration statement for a new securities issue this morning. Which one of the following statements must be true about this issue? A) The red herrings can finally be distributed as their distribution was awaiting SEC approval. B) The waiting period started when the approval was received this morning. C) The SEC believes the issue will be a profitable investment for all purchases made at the offer price. D) The issuer is following all the required rules and regulations in regard to this issue. E) The final prospectuses have all been delivered or the SEC would not have approved the issue.

24)

Which one of the following statements is correct?

A) Oral offers can be made for new securities during the waiting period. B) A Green Shoe letter must be provided to all investors who purchase shares of a new equity offering. C) Corporate directors have the authority to authorize additional shares of stock for a new issue. D) The underwriters must approve any increase in the authorized number of shares for a firm. E) When issuing new securities, the first step is the distribution of the prospectus.

25) When issuing securities, which of the following can occur prior to receiving the approval by the SEC of a registration statement? 1.Oral offer to buy shares 2.Written offer to buy shares 3.Final determination of the offer price 4.Distribution of a preliminary prospectus Version 1

A) I only B) III only C) III and IV only D) I and IV only E) None of the listed activities can occur until after the SEC approval is received.

26) You own 400 of the 21,000 outstanding shares of DLK stock. The firm just announced that it will be issuing an additional 3,000 shares to the general public in a cash offer at $16 per share. What type of event are you participating in if you opt to purchase 100 of these additional shares? A) Dutch auction B) Seasoned equity offering C) Private placement D) IPO E) Rights offer

27) Currently, you own 1.2 percent of the outstanding shares of Home Security. The firm has decided to issue additional shares of stock and has given you the first option to purchase 1.2 percent of those additional shares. What type of offer is this? A) Rights offer B) Red herring offer C) Private placement D) IPO E) General cash offer

28) Which of the following duties belong to the underwriters of a firm commitment securities offer? 1.Duty to offer the Green Shoe provision to all investors who buy at the offer price 2.Duty to set the offer price 3.Duty to distribute the offered shares 4.Duty to purchase any unsold shares

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A) I and III only B) II and IV only C) II, III, and IV only D) I, II, and III only E) I, II, III, and IV

29)

Who determines the offer price in a Dutch auction? A) Lead underwriter B) Chief financial officer of the issuing firm C) SEC D) Bidders E) Board of directors of the issuing firm

30) Which one of the following is an aftermarket function performed by the underwriters of a securities issue? A) Distributing the registration statements B) Distributing the red herrings C) Filing a letter of comment with the SEC D) Exercising the Green Shoe option E) Setting the market price

31)

Which statement is correct?

A) Underwriters exercise the Green Shoe option whenever the market price of an IPO declines initially. B) Underwriters guarantee the number of shares to be sold in a best efforts underwriting. C) Competitive underwriting is generally more expensive than negotiated underwriting. D) The majority of equity underwritings in the U.S. are competitive underwritings. E) Underwriters may receive warrants as part of their compensation.

32)

A lockup agreement ensures:

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A) the lead underwriter maintains an economic interest in the IPO it is managing. B) the issuer of new securities receives a minimally agreed upon amount from the issue. C) no research reports are issued during the waiting period. D) company insiders maintain an economic interest in the issuer of an IPO for a minimum period of time. E) an IPO is not underpriced by more than five percent.

33) Space Tours wants to do an IPO but is not comfortable that underwriters will set the most optimal offer price for the securities. Which one of the following might the firm consider to address this uncertainty? A) Extended quiet period B) Extended lockup period C) Best efforts underwriting D) Dutch auction underwriting E) Standby underwriting

34)

Which one of the following is an intended result of a lockup agreement?

A) Temporary support of the market price of IPO shares B) Maximization of the return to a firm's original owners from an initial spike in the market price of IPO shares C) Increase in the volume of trading for shares of a recent IPO D) Limitation on the price volatility of recent IPO shares caused by day trading E) Guarantee of a minimum number of sold shares for an IPO

35)

The quiet period is designed to:

A) prevent the original investors in a firm from selling their shares and destabilizing a security's price during the first six months of public trading. B) ensure that all potential investors have fair access to identical information. C) ensure that all bidders are heard in a Dutch auction. D) stabilize the aftermarket. E) silence the market so the SEC can fairly set the offer price on an IPO.

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36) Phil and Terry started a new business three years ago. Two years ago, they incorporated the business and issued themselves each 20,000 shares of stock. Last year, they took the company public in an IPO and issued an additional 100,000 shares of stock at that time. The offer price was $14 a share, the spread was 8 percent, and the lockup period was six months. The stock closed at $17 a share at the end of the first day of trading. During the first six months of trading, the stock had a price range of $13 to $23 per share. During the second six months of trading, the stock sold between $15 and $21 per share. Both Tracie and Amy purchased 100 shares at the offer price. Given this, which one of the following statements is correct? Ignore trading costs and taxes. A) Tracie could have earned a maximum profit of 100($23 − 17) on her investment. B) Phil could have sold 5,000 shares at $23 per share. C) The underwriters earned a spread per share equal to 8 percent of $17. D) The maximum price at which Terry could have sold his shares is $21. E) Amy paid 108 percent of $14 per share to purchase her 100 shares.

37) Which of the following have been offered as justification for IPO underpricing? 1.Young firms tend to be very risky. 2.The best IPOs are oversubscribed. 3.Underwriters like to avoid lawsuits. 4.Underpricing benefits the existing shareholders. A) I and III only B) II and IV only C) I, II, and III only D) II, III, and IV only E) I, II, III, and IV

38) Which one of the following is probably the most effective means of increasing investors' interest in an IPO?

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A) Extending the lockup period B) Issuing the IPO through a rights offering C) Underpricing the IPO D) Eliminating the quiet period E) Eliminating the Green Shoe option

39)

Which statement is correct?

A) IPO underpricing is minimal in China. B) IPO underpricing is limited to the U.S. markets. C) The percentage of underpricing remains stable over time in the U.S. D) The only period in the U.S. when underpricing produced first day returns of 50 percent or more was during the tech bubble of 1999-2000. E) Some of the greatest IPO underpricing has occurred in Saudi Arabia.

40)

An average individual investor who participates in an IPO: A) frequently earns high returns when shares are undersubscribed. B) generally receives his or her full allocation of shares if oversubscription occurs. C) often encounters the "winner's curse." D) is protected from financial loss by the Green Shoe provision. E) is subject to the lockup provision.

41)

Which statement is true? A) IPO underpricing primarily benefits a firm's pre-issue owners. B) IPO underpricing is a function of the underwriting spread. C) The more an issue is underpriced, the more it tends to be oversubscribed. D) Underpricing tends to discourage investors from participating in the IPO market. E) Undersubscribed shares generally tend to also be underpriced shares.

42) Stock prices tend to _________blank following the announcement of a new equity issue and tend to _________blank following the announcement of a new debt issue.

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A) increase; increase B) increase; decrease C) increase; remain relatively constant D) decrease; increase E) decrease; remain relatively constant

43)

Which statement is correct?

A) The financial market generally reacts the same to a new issue of equity as it does to a new issue of debt as long as the issuer is the same. B) Issuing new equity shares is always viewed by the market as a positive event. C) Informed managers tend to issue new securities when the existing securities are underpriced. D) A decline in the price of existing stock when a new issue is released is a direct cost of selling securities. E) A firm's existing shareholders would prefer that new securities be issued when those securities are overpriced rather than underpriced.

44) If the market price of existing publicly traded shares declines due to the announcement of a seasoned issue of stock, the decline is referred to as which one of the following? A) Spread B) Direct underwriting cost C) Underpricing D) Direct issue cost E) Abnormal return

45)

Which statement is correct?

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A) The underwriters pay the spread. B) Taxes are an indirect underwriting cost. C) Seasoned equity offerings (SEOs) tend to be less costly than IPOs. D) Straight bonds are more costly to issue than convertible bonds. E) The total direct cost as a percentage of gross proceeds for an IPO tends to decrease as the size of the offer decreases.

46) The Green Shoe option is most apt to be exercised when an IPO is _________blank and _________blank. A) underpriced; oversubscribed B) underpriced; undersubscribed C) correctly priced; neither over nor undersubscribed D) overpriced; oversubscribed E) overpriced; undersubscribed

47) The total direct costs of a debt issue, when expressed as a percentage of gross proceeds, tends to: A) increase as the quality of the debt increases. B) decrease as the size of the issue decreases. C) decrease when the bonds are convertible rather than straight. D) decrease as the proceeds of the bond issue increase. E) be relatively the same regardless of the type or quality of the debt issue.

48)

Which statement is correct? A) Rarely is debt issued privately in the U.S. B) All U.S. debt issues, private and public, must be registered with the SEC. C) Private placements generally have shorter maturities than term loans. D) It is easier to renegotiate a public issue than it is a private issue of debt. E) A direct placement of debt generally has more restrictive covenants than a public

issue.

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49)

Which statement is true? A) Firms often pay higher interest rates on term loans than on public issues of debt. B) The only difference between a term loan and a private placement is the size of the

issue. C) A prospectus is required for equity issues but not for debt issues. D) The flotation costs of issuing debt tend to be more expensive than for issuing equity. E) Direct long-term loans must be registered with the SEC.

50) Which one of the following correctly states a qualification an issuer must meet to be qualified to use Rule 415 for shelf registration? A) The issuer must never have defaulted on its debt. B) The issuer must have outstanding stock with a market value in excess of $250 million. C) The issuer must never have violated the Securities Act of 1934. D) The issuer must have an investment grade rating. E) The issuer cannot have defaulted on its debt within the past five years.

51)

Shelf registration: A) only applies to initial public offerings. B) only applies to debt securities. C) only applies to securities issued through crowdfunding. D) permits firms to sell the registered securities, if they so choose, over a two-year

period. E) requires that all registered securities be sold over a two-year period.

52) The maximum amount of securities a company can issue in a 12-month period through crowdfunding is:

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A) $50,000. B) $50,000 the first year and up to $100,000 per year after that. C) $100,000 per year during the first two years and up to $500,000 any year thereafter. D) $50 million. E) $100,000 per year up to a cumulative total of $1 million in all years.

53) Hulkster Company would like to sell 700 shares of stock using the Dutch auction method. The bids received are as follows: Bidder A B C D

Quantity 200 250 300 500

Price 21 19 18 17

Bidder A will receive _________blank shares and pay a price per share of _________blank. Bidder C will receive no allocation. A) 0; $0 B) 75; $17 C) 233; $17 D) 187; $18 E) 100; $18

54) Salem Pet Supply would like to sell 1,400 shares of stock using the Dutch auction method. The bids received are as follows: Bidder A B C D

Quantity 700 1200 1300 800

Price 32 31 30 29

Bidder C will receive _________blank shares and pay a price per share of _________blank.

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A) 0; $0 B) 1,400; $27.00 C) 455; $28.00 D) 455; $29.00 E) 700; $38.75

55) Pork King Farms would like to sell 2,600 shares of stock using a Dutch auction. The bids received are as follows: Bidder A B C D

Quantity 400 800 1200 1800

Price 36 35 34 33

What is the total amount the issuer will receive from this auction? Ignore costs. A) $59,400 B) $85,800 C) $88,400 D) $91,000 E) $93,600

56) Robert placed an order with his broker to purchase 500 shares of each of three IPOs that are being released this month. Each IPO has an offer price of $21 a share. The number of shares allocated to Robert, along with the closing stock price at the end of the first day of trading for each stock, are as follows: Stock A B C

Shares Allocated 220 450 175

End of Day 1 Price $ 23.60 18.00 29.10

What is his total profit or loss on these three stocks as of the end of the first day of trading for each stock?

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A) $639.50 B) −$369.50 C) −1,350.00 D) $572.00 E) $1,370

57) Nermine placed an order with her broker to purchase 1,500 shares of each of three IPOs that are being released this month. Each IPO has an offer price of $21 per share. The number of shares allocated to her along with the closing stock price at the end of the first day of trading for each stock, are as follows: Stock A B C

Shares Allocated End of Day 1 Price 750 $ 23.60 1500 18.00 950 29.10

What is her total profit or loss on these three stocks as of the end of the first day of trading for each stock? A) −$1,950 B) $4,500 C) $5,145 D) $3,220 E) $2,450

58) Mimi placed an order with her broker to purchase 500 shares of each of three IPOs that are being released soon. Each IPO has an offer price of $15 a share. The number of shares allocated to her along with the closing stock price at the end of the first day of trading for each stock, are as follows: Stock A B C

Shares Allocated 300 400 500

End of Day 1 Price $ 17.00 14.75 14.00

What is her total profit or loss on these three stocks as of the end of the first day of trading for each stock?

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A) −$500 B) −$100 C) −$50 D) $0 E) $500

59) Future Technology wants to raise $15 million to purchase equipment by issuing new securities. Management estimates the issue will cost the firm $926,250 for accounting, legal, and other costs. The underwriting spread is 6 percent, and the issue price is $25 per share. How many shares of stock must be sold if the firm is to have sufficient funds remaining after costs to purchase all of the desired equipment? A) 608,010 shares B) 521,121 shares C) 677,713 shares D) 647,666 shares E) 582,139 shares

60) Global Traders is offering 130,000 shares of stock to the public in a general cash offer. The offer price is $36 a share and the underwriter's spread is 8 percent. The administrative costs are estimated at $865,000. How much will Global Traders receive from this stock offering as net proceeds assuming the issue is completely sold? A) $3,440,600 B) $3,679,800 C) $4,490,000 D) $4,075,000 E) $3,828,400

61) Free Trade Partners needs to raise $22.4 million to expand its operations into South America. The company will sell new shares of common stock using a general cash offering. The underwriters will charge a spread of 7.6 percent, the administrative costs will be $631,000, and the offer price will be $32 per share. How many shares of stock must be sold if the firm is to raise the funds it desires?

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A) 778,916 shares B) 839,793 shares C) 911,502 shares D) 989,415 shares E) 1,051,515 shares

62) The Food Network needs to raise $16.8 million to expand its operations nationally. The company will sell new shares of common stock using a general cash offering. The underwriters spread will be 7.85 percent, the administrative costs will be $515,000, and the offer price will be $20 per share. How many shares of stock must be sold for the company to receive the expansion funds it needs? A) 894,763 shares B) 939,501 shares C) 947,222 shares D) 814,141 shares E) 892,674 shares

63) Deep Hollow Oil issued 135,000 shares of stock last week. The underwriters charged a spread of 8.25 percent in exchange for agreeing to a firm commitment. The legal and accounting fees amounted to $418,000 and the company incurred $48,000 in indirect costs. The offer price was $33 a share. Within the first hour of trading, the stock price increased to $36 a share. What was the flotation cost as a percentage of the funds raised? A) 28.89% B) 34.20% C) 26.47% D) 20.55% E) 33.87%

64) High Mountain Gear issued 358,000 shares of stock last week. The underwriters charged a spread of 7.2 percent in exchange for agreeing to a firm commitment. The legal and accounting fees were $302,000. The company incurred $39,000 in indirect costs. The offer price was $17 a share. Within the day of trading, the stock was selling for $18.80 a share. What was the flotation cost as a percentage of the funds raised? Version 1

A) 31.90% B) 35.78% C) 32.51% D) 26.83% E) 29.08%

65) Two companies have both announced IPOs at $16.50 per share. One of these is undervalued by $3, and the other is overvalued by $1.60, but you have no way of knowing which is which. You previously placed an order for 1,000 shares of each issue. If an issue is undervalued, it will be rationed, and only half your order will be filled. What profit do you now expect? A) −$100 B) −$600 C) $25 D) $150 E) $400

66) ALC needs to raise $12 million to finance its expansion into new markets and has decided to sell new shares of equity via a general cash offering. The offer price will be $28 per share, the accounting and legal fees are expected to be $645,000, and the company's underwriters will charge a spread of 8.6 percent. How many shares need to be sold? A) 494,100 shares B) 521,208 shares C) 523,467 shares D) 491,947 shares E) 515,323 shares

67) The Art Works needs to raise $6.2 million for a new facility. Assuming they issue new equity shares via a general cash offering, they expect to incur administrative costs of $412,000 in addition to the underwriting spread of 8.7 percent. If the offer price turns out to be $16 a share, how many shares need to be sold to finance the new facility?

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A) 448,210 shares B) 452,629 shares C) 406,211 shares D) 405,141 shares E) 487,923 shares

68) Cross Country Movers has just gone public. Under a firm commitment agreement, the firm received $19.84 for each of the 2.12 million shares sold. The initial offering price was $24.40 per share, and the stock rose to $25 per share in the first few minutes of trading. The company paid $626,000 in legal and other direct costs and $105,000 in indirect costs. What was the flotation cost as a percentage of the funds raised? A) 29.91% B) 27.85% C) 30.49% D) 28.24% E) 28.60%

69) Monster Truck Company would like to sell 700 shares of stock using the Dutch auction method. The bids received are as follows: Bidder A B C D

Quantity 200 250 300 500

Price 21 19 18 17

Bidder B will receive _________blank shares and pay a price per share of _________blank. Bidder C will receive no allocation. A) 0; $0 B) 75; $17 C) 100; $17 D) 233; $18 E) 100; $18

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70) Leanne Irish Pubworks would like to sell 1,400 shares of stock using the Dutch auction method. The bids received are as follows: Bidder A B C D

Quantity 700 1,200 1,300 800

Price 32 31 30 29

Bidder B will receive _________blank shares and pay a price per share of _________blank. A) 884; $31 B) 1,400; $27.00 C) 455; $28.00 D) 455; $29.00 E) 700; $38.75

71) Mushroom Veggie Meats would like to sell 3,000 shares of stock using a Dutch auction. The bids received are as follows: Bidder A B C D

Quantity 500 700 1,000 1,500

Price 45 44 43 42

What is the total amount the issuer will receive from this auction? Ignore costs. A) $128,600 B) $126,000 C) $127,400 D) $125,000 E) $129,600

72) Wendy placed an order with her broker to purchase 500 shares of each of three IPOs that are being released this month. Each IPO has an offer price of $23 a share. The number of shares allocated to Wendy, along with the closing stock price at the end of the first day of trading for each stock, are as follows: Stock

Shares Allocated

220

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End of Day 1 Price $ 23.60

B C

450 175

18.00 29.10

What is her total profit or loss on these three stocks as of the end of the first day of trading for each stock? A) $639.50 B) −$369.50 C) −$1,050.00 D) $572.00 E) $1,370

73) Gwen placed an order with her broker to purchase 1,500 shares of each of three IPOs that are being released this month. Each IPO has an offer price of $22 per share. The number of shares allocated to her along with the closing stock price at the end of the first day of trading for each stock, are as follows: Stock

Shares Allocated

A B C

750 1,500 950

End of Day 1 Price $ 23.60 18.00 29.10

What is her total profit or loss on these three stocks as of the end of the first day of trading for each stock? A) $1,945 B) $4,500 C) $5,145 D) $3,220 E) $2,450

74) Present Tense Tonic wants to raise $13 million to purchase equipment by issuing new securities. Management estimates the issue will cost the firm $875,500 for accounting, legal, and other costs. The underwriting spread is 6.5 percent, and the issue price is $24 per share. How many shares of stock must be sold if the firm is to have sufficient funds remaining after costs to purchase all of the desired equipment?

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A) 608,010 shares B) 521,121 shares C) 618,338 shares D) 647,666 shares E) 582,139 shares

75) Dingo Farms wants to raise $10 million to purchase equipment by issuing new securities. Management estimates the issue will cost the firm $625,000 for accounting, legal, and other costs. The underwriting spread is 8 percent, and the issue price is $20 per share. How many shares of stock must be sold if the firm is to have sufficient funds remaining after costs to purchase all of the desired equipment? A) 679,891 shares B) 655,500 shares C) 577,446 shares D) 500,000 shares E) 82,139 shares

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Answer Key Test name: Chapter 15 Test Bank - Static 1) C 2) E 3) B 4) C 5) C 6) B 7) B 8) D 9) E 10) A 11) D 12) A 13) C 14) D 15) E 16) D 17) A 18) A 19) B 20) C 21) B 22) E 23) D 24) A 25) D 26) B Version 1

27) A 28) C 29) D 30) D 31) E 32) D 33) D 34) A 35) B 36) D 37) C 38) C 39) E 40) C 41) C 42) E 43) E 44) E 45) C 46) A 47) D 48) E 49) A 50) D 51) D 52) D 53) D Bidder A's quantity = [700/(200 + 250 + 300)] × 200 = 187 shares All successful bidders will pay $18 a share.

54) A

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The shares will be allocated on a pro-rata basis to Bidders A and B and sell at $31 a share. Bidder C will receive no shares.

55) B Total value received = 2,600 × $33 = $85,800

56) A Stock

Shares Allocated

A B C Less IPO Price

220 450 175 Gain/Loss per share $ 2.60 −3.00 8.10

$21.00 21.00 21.00

End of Day 1 Price $ 23.60 18.00 29.10 Gain/Loss $ 572.00 −1,350.00 1,417.50 $ 639.50

57) C Stock

Shares Allocated

A B C Less IPO Price

750 1500 950 Gain/Loss per share $ 2.60 −3.00 8.10

$ 21.00 21.00 21.00

End of Day 1 Price $ 23.60 18.00 29.10 Gain/Loss $ 1,950.00 −4,500.00 7,695.00 $ 5,145.00

58) D Stock

Shares Allocated

A B C Less IPO Price

300 400 500 Gain/Loss per share $ 2.00 −.25

$ 15.00 15.00

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End of Day 1 Price $ 17.00 14.75 14.00 Gain/Loss $ 600.00 −100.00 28

15.00

1.00

500.00 $.00

59) C Number of shares = [($15,000,000 + 926,250)/(1 − .06)]/$25 = 677,713 60) A Net proceeds = [130,000 × $36 × (1 − .08)] − $865,000 = $3,440,600 61) A Number of shares = [($22,400,000 + 631,000)/(1 − .076)]/$32 = 778,916 62) B Number of shares = [($16,800,000 + 515,000)/(1 − .0785)]/$20 = 939,501 63) B Flotation costs = {[$36 − $33 × (1 − .0825)] × 135,000} + $418,000 + 48,000 = $1,238,537.50 Funds raised = [$33 × (1 − .0825) × 135,000] − $418,000 − 48,000 = $3,621,462.50 Cost percentage = $1,238,537.50/$3,621,462.50 = .3420, or 34.20% 64) D Flotation costs = {[$18.80 − $17 × (1 − .072)] × 358,000} + $302,000 + 39,000 = $1,423,592 Funds raised = [$17 × (1 − .072) × 358,000] − $302,000 − 39,000 = $5,306,808 Cost percentage = $1,423,592/$5,306,808 = .2683, or 26.83% 65) A Profit = (500 × $3) + [1,000 × (−$1.60)] = −$100 66) A Number of shares = [($12,000,000 + 645,000)/(1 − .086)]/$28 = 494,100 shares 67) B [($6,200,000 + 412,000)/(1 − .087)]/$16 = 452,629 shares Version 1

68) D Net amount raised = (2,120,000 × $19.84) − $626,000 − 105,000 = $41,329,800 Total costs = $626,000 + 105,000 + [($25 − 19.84) × 2,120,000] = $11,670,200 Flotation cost percentage = $11,670,200/$41,329,800 = .2824, or 28.24% 69) D Bidder A's quantity = [700/(200 + 250 + 300)] × 250 = 233 shares All successful bidders will pay $18 a share. 70) A Bidder B's quantity = [1,400/(700 + 1,200)] × 1,200 = 884 shares All successful bidders will pay $31 a share. 71) B Total value received = 3,000 × $42 = $126,000 72) C Stock Shares Allocated End of Day 1 Price A 220 $ 23.60 B 450 18.00 C 175 29.10 Less IPO Price Gain/Loss per Gain/Loss share $ 23.00 $ .60 $ 132.00 23.00 -5.00 -2,250.00 23.00 6.10 1,067.50 -$ 1,050.50

73) A Stock Shares Allocated End of Day 1 Price A 750 $ 23.60 B 1,500 18.00 C 950 29.10 Less IPO Price Gain/Loss per Gain/Loss share $ 22.00 $ 1.60 $ 1,200.00

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22.00 22.00

-4.00 7.10

-6,000.00 6,745.00 $ 1,945.00

74) C Number of shares = [($13,000,000 + 875,500)/(1 − .065)]/$24 = 618,338 shares 75) C Number of shares = [($10,000,000 + 625,000)/(1 − .08)]/$20 = 577,446 shares

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Road Kill Restaurant had the following account balances. The change in these accounts represents a net _________blank of cash for the year in the amount of _________blank. Beginning Balance Accounts receivable Accounts payable Inventory

$ 27,775 40,385 19,965

Ending Balance $ 25,520 41,730 23,810

A) Source; $245 B) Source; $2,935 C) Use; 4,755 D) Source; $4,755 E) Use; $245

2) A company has an inventory period of 26.2 days, an accounts payable period of 41.3 days, and an accounts receivable period of 33.8 days. What is the company's operating cycle? A) 18.7 days B) 48.9 days C) 101.3 days D) 60.0 days E) 33.7 days

3) Ives Corporation has an inventory period of 22.8 days, an accounts payable period of 38.3 days, and an accounts receivable period of 32.3 days. What is the company's cash cycle? A) 16.8 days B) 55.1 days C) 28.8 days D) 47.8 days E) 93.4 days

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4) You are researching a company and find that it has an inventory period of 23.3 days, an accounts payable period of 40.1 days, and an accounts receivable period of 33.3 days. The company's cash cycle is _________blank days and its operating cycle is _________blank days. A) 56.6; 16.5 B) 16.5; 56.6 C) 63.4; 30.1 D) 30.1; 63.4 E) 73.4; 50.1

5) Stoney Brooke, Incorporated, has sales of $1,020,000 and cost of goods sold of $785,700. The firm had a beginning inventory of $41,000 and an ending inventory of $56,000. What is the length of the inventory period? Assume 365 days per year. A) 19.05 days B) 18.79 days C) 22.22 days D) 22.53 days E) 17.36 days

6) On average, your firm sells $32,300 of items on credit each day. The average inventory period is 27 days and your operating cycle is 47 days. What is the average accounts receivable balance? A) $872,100 B) $1,518,100 C) $646,000 D) $904,400 E) $1,292,000

7) Gibson's has sales for the year of $540,400, cost of goods sold equal to 76 percent of sales, and an average inventory of $79,200. The profit margin is 6 percent and the tax rate is 21 percent. How many days, on average, does it take the company to sell an inventory item? Assume 365 days per year.

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A) 53.49 days B) 75.41 days C) 64.52 days D) 42.23 days E) 70.39 days

8) Mariota's has annual sales of $504,800 and cost of goods sold of $328,120. The beginning accounts receivable was $44,200 and the ending receivables is $48,700. How many days on average does it take the company to collect its accounts receivable? Assume 365 days per year. A) 33.59 days B) 35.21 days C) 30.79 days D) 31.96 days E) 10.87 days

9) The Monster Truck operates several specialty vehicles that provide hot food and beverages for firms that have workers employed in outlying regions. The company has annual sales of $625,700. Cost of goods sold average 33 percent of sales and the profit margin is 4.6 percent. The average accounts receivable balance is $34,800. On average, how long does it take the company to collect payment for its services? Assume 365 days per year. A) 18.35 days B) 16.75 days C) 18.61 days D) 17.98 days E) 20.30 days

10) The inventory turnover for Haute Hippie has gone from an average of 10.29 times to 11.12 times per year. How does this affect the inventory period? Assume 365 days per year.

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A) Decrease of 2.43 days. B) Decrease of 2.65 days. C) Decrease of 2.91 days. D) Increase of 2.65 days. E) Increase of 2.43 days.

11) Big Al's Meat Market has annual sales of $553,500 and cost of goods sold of $376,000. The profit margin is 6.3 percent and the accounts payable period is 31.2 days. What is the average accounts payable balance? Assume 365 days per year. A) $75,923.08 B) $32,140.27 C) $36,731.74 D) $34,436.01 E) $29,461.92

12) Underground Funeral Services has annual sales of $882,200. The cost of goods sold is equal to 87 percent of sales. The firm has an average accounts receivable balance of $87,000 and an average accounts payable balance of $72,750. How many days on average does it take the firm to pay its suppliers? A) 34.60 days B) 31.71 days C) 37.07 days D) 30.10 days E) 41.37 days

13) The Fried Green Tomatoes Restaurant has increased its operating cycle from 98.2 days to 103 days while the cash cycle has decreased by 3.3 days. How have these changes affected the accounts payable period?

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A) Increase of 4.8 days B) Decrease of 1.5 days C) Increase of 8.1 days D) Increase of 1.5 days E) Decrease of 8.1 days

14) Ferry's Furniture Outlet has an accounts receivable period of 51.19 days and an accounts payable period of 43.59 days. The company turns over its inventory 5.73 times per year. What is the length of the company's operating cycle? Assume 365 days per year. A) 114.89 days B) 107.29 days C) 94.78 days D) 71.30 days E) 20.11 days

15) The Fried Green Tomatoes Restaurant has increased its operating cycle from 98 days to 102.7 days while the cash cycle has decreased by 3.2 days. How have these changes affected the accounts payable period? A) Increase of 4.7 days. B) Decrease of 1.5 days. C) Decrease of 7.9 days. D) Increase of 7.9 days. E) Increase of 1.5 days.

16) Carter's Gym Supply currently has an operating cycle of 72.84 days. The company has a goal to increase its inventory turnover from 8.44 times to 9.58 times. What will the company's new operating cycle be if it can achieve this goal? Assume 365 days per year.

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A) 67.69 days B) 77.99 days C) 34.74 days D) 72.84 days E) 29.59 days

17) GPR, Incorporated, has an inventory turnover of 21.66 times, a payables turnover of 12.49 times, and a receivables turnover of 8.36 times. What is the length of the company's cash cycle? Assume 365 days per year. A) 31.29 days B) 56.03 days C) 17.53 days D) 89.74 days E) 43.66 days

18) ABC, Incorporated, has a beginning receivables balance on January 1st of $630. Sales for January through April are $390, $420, $500 and $520, respectively. The accounts receivable period is 60 days. How much did the firm collect in the month of March? Assume that a year has 360 days. A) $520 B) $500 C) $390 D) $420 E) $630

19) Weisbro and Sons purchases its inventory one quarter prior to the quarter of sale. The purchase price is 60 percent of the sales price. The accounts payable period is 60 days. The accounts payable balance at the beginning of Quarter 1 is $25,000. What is the amount of the expected disbursements for Quarter 2 given the following expected quarterly sales? Quarter 1: $ 63,000 Quarter 2: $ 104,000 Quarter 3: $ 96,000 Quarter 4: $ 105,000 Version 1

A) $59,200 B) $62,600 C) $37,800 D) $54,600 E) $60,800

20) Wigmore, Incorporated, has estimated sales of $18,200, $19,950, $19,220, and $19,900 for each quarter next year, respectively. The accounts receivable period is 70 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days. A) $4,271.11 B) $4,433.33 C) $14,948.89 D) $14,155.56 E) $15,516.67

21) Westmore Products has projected the following quarterly sales. The accounts receivable at the beginning of the year is $355 and the collection period is 45 days. What are collections for the first quarter? Q1 Sales

$ 630

Q2 $ 685

Q3 $ 770

Q4 $ 990

A) $630.00 B) $666.67 C) $315.00 D) $670.00 E) $565.00

22) Dora Distribution has projected the following quarterly sales. The accounts receivable at the beginning of the year is $1,055 and the collection period is 60 days. What are collections for the first quarter? Q1

Version 1

Sales

$ 1,755

$ 1,790

$ 2,165

$ 2,160

A) $1,755.00 B) $1,932.50 C) $877.50 D) $1,640.00 E) $1,778.33

23) Chasteen Hall currently has 51 days in its cash cycle and 125 days in its operating cycle. The firm purchases its inventory from one supplier. This supplier has offered a 5 percent discount to the firm if it will pay for its purchases within 10 days instead of the normal 36 days. If the firm opts to take advantage of the discount offered, its new operating cycle will be _________blank days and its new cash cycle will be _________blank days. A) 99; 99 B) 99; 25 C) 125; 77 D) 151; 51 E) 125; 51

24) Dillingham, Incorporated, has a 60-day collection period. The projected sales for each quarter next year are shown below. What are collections for the third quarter? Sales

$ 3,550

$ 4,065

$ 4,555

$ 4,965

A) $4,228.33 B) $3,036.67 C) $4,828.33 D) $3,893.33 E) $4,391.67

25) The Lumber Yard has projected the sales below for the next four months. The company collects 38 percent of its sales in the month of sale, 43 percent in the month following the month of sale, 17 percent two months after the month of sale, and never collects 2 percent of its sales. How much will the company collect in April? Version 1

Sales

January

February

March

April

$ 137,750

$ 144,275

$ 151,975

$ 165,850

A) $153,593 B) $149,841 C) $152,899 D) $119,789 E) $155,654

26)

Keedis Products has projected the following sales for the coming year:

Sales

$ 18,650

$ 14,650

$ 15,475

$ 16,075

The company places orders each quarter that are 40 percent of the following quarter's sales and has a 60-day payables period. What is the payment of accounts for the second quarter? A) $5,860.00 B) $6,926.67 C) $6,080.00 D) $5,970.00 E) $4,126.67

27)

JoAnn Manufacturing has projected the following sales for the coming year:

Sales

$ 53,550

$ 59,850

$ 68,850

$ 74,150

The company places orders each quarter that are 35 percent of the following quarter's sales and has a 30-day payables period. What is the payment of accounts for the third quarter? A) $24,715.83 B) $25,334.17 C) $21,997.50 D) $25,967.52 E) $23,047.50

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28) The company places orders each quarter that are 50 percent of next quarter's sales and has a 30-day payables period. The projected sales for next year are: Sales

$ 53,775

$ 60,225

$ 69,075

$ 74,450

What is the accounts payable balance at the end of the second quarter? A) $20,075 B) $11,513 C) $10,038 D) $15,794 E) $23,025

29)

All That Remains Products has projected sales for next year of:

Sales

$ 75,700

$ 79,550

$ 86,350

$ 93,120

The company places orders each quarter that are 49 percent of the following quarter's sales and has a 60-day payables period. What is the accounts payable balance at the end of the third quarter? A) $12,993 B) $30,419 C) $15,210 D) $14,104 E) $22,262

30) A company has a collection period of 35 days and factors all receivables immediately at a discount of 2.5 percent. What is the effective annual cost of borrowing? Assume 365 days per year. A) 29.37% B) 26.74% C) 30.22% D) 27.74% E) 26.11%

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31) Franklin, Incorporated, has an inventory turnover of 18.1 times, a payables turnover of 10.8 times, and a receivables turnover of 9.3 times. What is the company's cash cycle? Assume 365 days per year. A) 29.28 days B) 52.88 days C) 47.00 days D) 14.71 days E) 25.62 days

32)

Gifts For All has projected sales for next year of:

Sales

$ 26,200

$ 28,400

$ 35,200

$ 42,700

Purchases are equal to 59 percent of next quarter's sales. Each month has 30 days, the accounts receivable period is 36 days, and the accounts payable period is 39 days. How much will the company pay suppliers in the third quarter? A) $22,686 B) $23,423 C) $19,916 D) $23,276 E) $19,029

33) The Cookie Shop's purchases are equal to 67 percent of the following month's sales. The accounts payable period for purchases is 30 days while all other expenditures are paid in the month they are incurred. Assume each month has 30 days. The company has compiled the following information. Sales Other expenses Interest and taxes

April

May

June

$ 8,200 2,450 490

$ 8,500 2,500 500

$ 8,900 2,750 520

What are the company's total cash disbursements for May?

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A) $9,233 B) $8,434 C) $8,695 D) $8,963 E) $8,494

34) The York Company has arranged a line of credit that allows it to borrow up to $41 milion at any time. The interest rate is .617 percent per month. Additionally, the company must deposit 3 percent of the amount borrowed in a noninterest-bearing account. The bank uses compound interest on its line-of-credit loans. What is the effective annual rate on this line of credit? A) 7.01% B) 7.90% C) 6.36% D) 8.77% E) 7.66%

35) Yoo, Incorporated, has arranged a line of credit that allows it to borrow up to $59 million at any time. The interest rate is .635 percent per month. Additionally, the company must deposit 5 percent of the amount borrowed in a noninterest-bearing account. The bank uses compound interest on its line-of-credit loans. If the company needs $35 million for 8 months, how much will it pay in interest? A) $1,246,643.59 B) $1,913,707.27 C) $1,532,332.75 D) $1,818,021.91 E) $2,126,341.41

36) Your company has arranged a revolving credit agreement for up to $67 million at an interest rate of 1.36 percent per quarter. The agreement also requires your company to maintain a compensating balance of 5 percent of the unused portion of the credit line, to be deposited in a noninterest-bearing account. Your company's short-term investment account at the same bank pays an interest rate of .50 per quarter. What is the effective annual interest rate if your company does not use the revolving credit arrangement during the year? Version 1

A) 2.53% B) 2.22% C) 5.55% D) 2.02% E) 2.96%

37) Your company has arranged a revolving credit agreement for up to $65 million at an interest rate of 1.34 percent per quarter. The agreement also requires your company to maintain a compensating balance of 3 percent of the unused portion of the credit line, to be deposited in a noninterest-bearing account. Your company's short-term investment account at the same bank pays an interest rate of .48 per quarter. What is the effective annual interest rate if your company borrows $30 million for one year? A) 5.96% B) 5.47% C) 6.09% D) 6.96% E) 5.54%

38) Your company has agreed to a $530 million fixed-commitment line of credit. The loan agreement calls for your company to pay 1.60 percent per quarter on any funds borrowed and maintain a 5 percent compensating balance on any funds borrowed at zero percent interest. What is the effective annual interest rate on this line of credit? A) 5.83% B) 6.73% C) 6.56% D) 5.62% E) 6.90%

39) Denver's Designs had sales for the year of $656,800 and cost of goods sold equal to 71 percent of sales. The inventory at the beginning of the year was $115,000 and the end-of-year inventory was $129,300. What was the inventory turnover?

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A) 5.38 times B) 3.82 times C) 3.61 times D) 4.06 times E) 3.16 times

40) Cloche's Hats had sales for the year of $632,000 and cost of goods sold equal to 66 percent of sales. The inventory at the beginning of the year was $107,800 and the end-of-year inventory was $120,500. What was the company's inventory period? Assume 365 days in a year. A) 91.10 days B) 94.33 days C) 87.87 days D) 99.89 days E) 105.44 days

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Answer Key Test name: Chapter 16 Test Bank - Algo 1) E Accounts receivable Accounts payable Inventory Net cash flow

$ 2,255 Source of cash 1,345 Source of cash −3,845 Use of cash −$ 245 Use of cash

2) D Operating cycle = 26.2 + 33.8 Operating cycle = 60.0 days 3) A Cash cycle = 22.8 + 32.3 − 38.3 Cash cycle = 16.8 days 4) B Cash cycle = 56.6 − 40.1 Cash cycle = 16.5 days Operating cycle = 23.3 + 33.3 Operating cycle = 56.6 days 5) D Inventory turnover = $785,700/[($41,000 + 56,000)/2] Inventory turnover = $785,700/$48,500 Inventory turnover = 16.2 times Inventory period = 365 days/16.2 Inventory period = 22.53 days 6) C Average A/R balance = $32,300(47 − 27) Average A/R balance = $646,000 7) E

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Inventory turnover = ($540,400 × .76)/$79,200 Inventory turnover = 5.1857 times Inventory period = 365/5.1857 Inventory period = 70.39 days 8) A Average receivables = ($44,200 + 48,700)/2 Average receivables = $46,450 Receivables turnover = $504,800/$46,450 Receivables turnover = 10.8676 times Receivables period = 365/10.8676 Receivables period = 33.59 days 9) E Accounts receivable turnover = $625,700/$34,800 Accounts receivable turnover = 17.9799 times Accounts receivable period = 365/17.9799 Accounts receivable period = 20.30 days 10) B Original inventory period = 365/10.29 = 35.47 days New inventory period = 365/11.12 = 32.82 days Change in inventory period = 35.47 days − 32.82 days Change in inventory period = 2.65 day decrease 11) B Average accounts payable = $376,000/365 × 31.2 Average accounts payable = $32,140.27 12) A Accounts payable turnover = ($882,200 × .87)/$72,750 Accounts payable turnover = 10.5500 times Accounts payable period = 365/10.5500 Accounts payable period = 34.60 days 13) C Version 1

Change in accounts payable period = (103.0 − 98.2) + 3.3 Change in accounts payable period = 8.1 day increase 14) A Days' sales in inventory = 365/5.73 Days' sales in inventory = 63.70 days Operating cycle = 51.19 + 63.70 Operating cycle = 114.89 days 15) D Change in accounts payable period = (102.7 − 98.0) + 3.2 Change in accounts payable period = 7.9 day increase 16) A Current inventory period = 365/8.44 = 43.25 days Current inventory period = 365/9.58 = 38.10 days New operating cycle = 72.84 − 43.25 + 38.10 New operating cycle = 67.69 days 17) A Cash cycle = (365/21.66) + (365/8.36) − (365/12.49) Cash cycle = 31.29 days 18) C Since the A/R period is 60 days, March collections will equal January sales. March collections = $390 19) E Q2 payments = 2/3 × Q1 purchases + 1/3 × Q2 purchases Q2 payments = 2/3 × (.60 × Q2 sales) + 1/3 × (.60 × Q3 sales) Q2 payments = 2/3 × (.60 × $104,000) + 1/3 × (.60 × $96,000) = $60,800 20) E Q2 accounts receivable = (70/90) × $19,950 Q2 accounts receivable = $15,516.67 Version 1

21) D Q1 collections = $355 + (90 − 45)/90 × $630 Q1 collections = $670.00 22) D Q1 collections = $1,055 + (90 − 60)/90 × $1,755 Q1 collections = $1,640.00 23) C The operating cycle will remain at 125 days. New cash cycle = 51 + 36 − 10 New cash cycle = 77 days 24) A Q3 collections = 60/90($4,065) + 30/90($4,555) Q3 collections = $4,228.33 25) C April collections = .38($165,850) + .43($151,975) + .17($144,275) April collections = $152,899 26) D Q2 payments = 60/90(.40)($14,650) + 30/90(.40)($15,475) Q2 payments = $5,970.00 27) B Q3 payments = 30/90(.35)($68,850) + 60/90(.35)($74,150) Q3 payments = $25,334.17 28) B Q2 accounts payable balance = 30/90(.50)($69,075) Q2 accounts payable balance = $11,513 29) B Q3 accounts payable balance = 60/90(.49)($93,120) Q3 accounts payable balance = $30,419 30) C

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Effective rate = (1 + 2.5/97.5)365/35 − 1 Effective rate = .3022, or 30.22% 31) E Cash cycle = (365/18.1) + (365/9.3) − (365/10.8) Cash cycle = 25.62 days 32) D Q3 payments = 39/90(.59 × $35,200) + [(90 − 39)/90](.59 × $42,700) Q3 payments = $23,276 33) C May disbursements = (.67 × $8,500) + $2,500 + 500 May disbursements = $8,695 34) B EAR without compensating balance = (1 + .00617)12 − 1 EAR without compensating balance = .0766, or 7.66% EAR with compensating balance = .0766/(1 − .03) EAR with compensating balance = .0790, or 7.90% 35) B Amount to borrow = $35,000,000/(1 − .05) Amount to borrow = $36,842,105.26 Total interest paid = $36,842,105.26(1 + .00635)8 − $36,842,105.26 Total interest paid = $1,913,707.27 36) D EAR = (1 + .0050)4 − 1 EAR = .0202, or 2.02% 37) E

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Opportunity cost = .03($65,000,000 − 30,000,000)(1.0048)4 − .03($65,000,000 − 30,000,000) Opportunity cost = $20,305.62 Interest expense = $30,000,000(1.0134)4 − $30,000,000 Interest expense = $1,640,610.50 EAR = ($20,305.62 + 1,640,610.50)/$30,000,000 EAR = .0554, or 5.54% 38) E EAR = [(1.0160)4 − 1]/(1 − .05) EAR = .0690, or 6.90% 39) B Inventory turnover = ($656,800 × .71)/[($115,000 + 129,300)/2] Inventory turnover = 3.82 times 40) D Inventory turnover = ($632,000 × .66)/[($107,800 + 120,500)/2] Inventory turnover = 3.65 times Inventory period = 365/3.65 Inventory period = 99.89 days

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Which one of the following commences on the day inventory is purchased and ends on the day the payment for the sale of that inventory is collected? Assume all sales and purchases are on credit. A) Inventory period B) Accounts receivable period C) Accounts payable period D) Operating cycle E) Cash cycle

The amount of time a firm holds inventory in stock is referred to as the: A) inventory period. B) accounts receivable period. C) accounts payable period. D) operating cycle. E) cash cycle.

3) The accounts receivable period is the time that elapses between the _________blank and the _________blank. A) purchase of inventory; payment to the supplier B) purchase of inventory; collection of the receivable C) sale of inventory; payment to supplier D) sale of inventory; collection of the receivable E) sale of inventory; billing to customer

The length of time a retailer owes its supplier for an inventory purchase is called the:

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A) inventory period. B) accounts receivable period. C) accounts payable period. D) operating cycle. E) cash cycle.

The cash cycle equals the: A) inventory period plus the accounts receivable period. B) inventory period plus the accounts payable period. C) operating cycle minus the inventory period. D) operating cycle minus the accounts payable period. E) operating cycle minus the accounts receivable period.

6) Which one of the following is a graphical representation of the operating and cash cycles? A) Operations line B) Production period C) Cash flow time line D) Inventory flow chart E) Customer service line

Which one of the following is directly related to increases in a firm's current assets? A) Reorder costs B) Shortage costs C) Restocking costs D) Out-of-stock events E) Carrying costs

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8) Which of the following are inversely related to increases in a firm's current assets? 1.Reorder costs 2.Shortage costs 3.Restocking costs 4.Carrying costs A) I and III only B) II and IV only C) I, II, and III only D) II, III, and IV only E) I, III, and IV only

9) Moore & Moore has just finished projecting its expected cash receipts and expenditures for next year. What is this projection called? A) Operating projection B) Receivables schedule C) Balance sheet D) Cash budget E) Compromise policy

10)

Which of these best describes a line of credit? A) Long-term, prearranged, committed bank loan B) Short-term loan secured by accounts receivable C) Short-term loan secured by inventory D) Long-term, prearranged, noncommitted bank loan E) Short-term prearranged bank loan that can be either committed or noncommitted

11) Accounts receivable financing is the term used to describe which one of the following types of loans that involve either the assignment or the factoring of a firm's accounts receivable?

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A) Secured short-term loan B) Unsecured short-term loan C) Secured long-term loan D) Unsecured long-term loan E) Trust receipt loan

12)

By definition, an inventory loan is which one of the following types of loan? A) Secured short-term loan B) Unsecured short-term loan C) Secured long-term loan D) Unsecured long-term loan E) Trust receipt loan

13)

Which of these activities is a source of cash? A) Decreasing long-term debt B) Increasing inventory C) Repurchasing shares of stock D) Increasing fixed assets E) Decreasing accounts receivable

14)

Which of these is a use of cash? A) Issuing new shares of stock B) Decreasing accounts receivable C) Decreasing inventory D) Decreasing fixed assets E) Decreasing accounts payable

15)

Which one of the following is a use of cash?

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A) Selling inventory at cost B) Paying a supplier for inventory you purchased last month C) Borrowing money from a local bank D) Collecting payment from a customer E) Selling a fixed asset such as a piece of machinery

16) Which of the following are sources of cash? 1.Decreasing accounts receivable 2.Increasing inventory 3.Increasing accounts payable 4.Increasing common stock A) I and III only B) II and IV only C) II and III only D) I and IV only E) I, III, and IV only

17)

Which one of these will increase the operating cycle? A) Decreasing the days' sales in inventory B) Decreasing the accounts payable period C) Increasing the accounts receivable turnover rate D) Decreasing the inventory turnover rate E) Decreasing the accounts payable turnover rate

18)

Which one of the following will increase the operating cycle? A) Decreasing the accounts payable period B) Increasing the accounts payable turnover rate C) Increasing the cash cycle D) Decreasing the accounts receivable turnover rate E) Decreasing the inventory period

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19)

Which one of the following actions will decrease the operating cycle? A) Increasing inventory B) Paying suppliers faster C) Paying for more inventory with cash rather than credit D) Granting customers more time to pay for their credit purchases E) Lessening the production time needed to manufacture a good for sale

20)

The operating cycle is equal to the: A) inventory period plus the accounts payable period. B) accounts receivable period plus the cash cycle. C) inventory period minus the accounts payable period plus the accounts receivable

period. D) accounts receivable period plus the inventory period. E) inventory period plus the cash cycle.

21) Which one of the following can occur if the operating cycle decreases while both the accounts receivable and the accounts payable periods remain constant? A) Inventory period remains constant B) Cash cycle increases C) Inventory turnover rate increases D) Accounts receivable turnover rate increases E) Cash cycle remains constant

22)

The operating cycle: A) illustrates the sources and uses of cash. B) is equal to the cash cycle plus the accounts receivable period. C) begins when a product is sold to a customer. D) is based on a 360-day year. E) describes how a product moves through the current asset accounts.

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23)

Which statement is true?

A) A decrease in the accounts receivable turnover rate decreases the cash cycle. B) Paying a supplier within the discount period rather than waiting until the end of the normal credit period will decrease the cash cycle. C) The number of days in the cash cycle can be positive, negative, or equal to zero. D) An increase in the inventory turnover rate must increase the cash cycle. E) The payables period must be shorter than the receivables period.

24)

The cash cycle is equal to the: A) inventory period minus the accounts payable period. B) operating cycle plus the accounts payable period. C) operating cycle minus the accounts receivable period. D) accounts receivable period minus the accounts payable period plus the inventory

period. E) inventory period minus the accounts receivable period minus the accounts payable period.

25)

Which industry is most apt to have the shortest operating cycle? A) Toy store B) Car manufacturer C) Local restaurant D) Furniture store E) Plastics manufacturer

26)

Which of these is most apt to decrease the cash cycle? A) Decreasing the credit period granted to a customer B) Decreasing the inventory turnover rate C) Decreasing the accounts payable period D) Decreasing the accounts receivable turnover rate E) Increasing the receivables period

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27)

Which statement is true?

A) The inventory period increases as the inventory turnover rate increases. B) The length of the inventory period depends on the length of the cash cycle. C) The inventory period is the average number of days a firm holds inventory on its shelves. D) The inventory period is equal to the operating cycle minus the accounts payable period. E) The inventory period has no effect on the cash cycle.

28)

Which firm is most apt to have the shortest inventory period? A) General merchandise retail store B) Hardware store C) Furniture store D) Locomotive manufacturer E) Delicatessen

29)

Which activity is most apt to reduce the inventory period for a grocery store? A) Replacing slow-moving items with faster-selling products B) Replacing fresh foods with canned goods C) Decreasing the amount of discounts offered to customers D) Increasing the amount of inventory on hand E) Decreasing the number of times the inventory turns over per year

30) Which of these is most apt to decrease the accounts receivable period for a store that has both cash and credit sales? A) Increasing the time granted to customers to pay for purchases B) Lengthening the cash cycle C) Increasing customer discounts for cash payment D) Selling inventory slower E) Paying suppliers faster

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31)

An increase in the accounts receivable period is most apt to: A) lengthen the accounts payable period. B) shorten the inventory period. C) shorten the operating cycle. D) lengthen the cash cycle. E) shorten the accounts payable period.

32) Suppose MMP changes its policy and starts requiring all of its customers to pay within 20 days rather than the 30 days that it currently allows. Which one of the following will result from this change? A) Increase in receivables period B) Increase in inventory period C) Decrease in cash cycle D) Increase in operating cycle E) Increase in accounts payable period

33) All else held constant, which of these statements is correct concerning the accounts payable period? A) The accounts payable period is equal to 360/(Sales/Average accounts payable). B) A decrease in the accounts payable period will increase the operating cycle. C) An increase in the accounts payable period will decrease the cash cycle. D) A decrease in the accounts payable period will decrease the operating cycle. E) An increase in the accounts payable turnover rate decreases the cash cycle.

34)

Which statement is true?

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A) If a firm decreases its inventory period, its accounts receivable period will also decrease. B) The longer the cash cycle, the more cash a firm typically has available to invest. C) A firm would prefer a negative cash cycle over a positive cash cycle. D) Decreasing the inventory period will automatically decrease the payables period. E) Both the operating cycle and the cash cycle must be positive values.

35) Tri-City Grocers is a chain of grocery stores that just hired a new CFO. Which of the following actions would you expect this CFO to adopt given her statement that she wants to implement a more flexible financing policy for the firm? 1.Easing the credit terms given to customers 2.Increasing the amount of inventory carried by each grocery store 3.Borrowing funds to keep more cash available for store operations 4.Decreasing the firms' investments in marketable securities A) I and III only B) II and IV only C) I, II, and III only D) II, III, and IV only E) I, II, III, and IV

36)

Which of these is the most indicative of a flexible short-term financial policy? A) High ratio of short-term debt to long-term debt B) Relatively small investment in current assets C) High ratio of current assets to sales D) Low level of net working capital E) Relatively low level of liquidity

37)

Which of these actions is indicative of a restrictive short-term financial policy?

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A) Granting increasing amounts of credit to customers B) Expanding the number of inventory items carried C) Increasing the firm's investment in the current accounts D) Minimizing the cash balances held by the firm E) Investing relatively large amounts in marketable securities

38) A flexible short-term financial policy will tend to have more of which of the following than a restrictive short-term financial policy will? 1.Uncollectable accounts receivable 2.Work stoppages for lack of raw materials 3.Carrying costs 4.Obsolete or out-of-date inventory A) I and II only B) III and IV only C) II and III only D) I, II, and III only E) I, III, and IV only

39) Which of the following costs will tend to increase if a firm switches to a restrictive shortterm financial policy from a flexible short-term policy? 1.Lost sales due to out-of-stock items 2.Inventory warehousing costs 3.Cash-outs 4.Total annual order costs A) I and III only B) II and IV only C) I, III, and IV only D) I, II, and IV only E) I, II, III, and IV

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40) Which of the following tend to rise when a firm switches to a flexible financial policy from a restrictive financial policy? 1.Restocking costs 2.Price reductions to offset limited selection 3.Storage costs 4.Current asset opportunity costs A) I and II only B) III and IV only C) I, III, and IV only D) I, II, and III only E) II, III, and IV only

41) The High Water Mark is operating at its optimal point. Which one of the following conditions exists given this firm's operating status? A) Carrying costs exceed shortage costs B) Carrying costs are equal to zero C) Both carrying costs and shortage costs are at their minimum levels D) Shortage costs are equal to zero E) Shortage costs equal carrying costs

42) Generally speaking, which of the following situations will occur if a seasonal company adopts a compromise financial policy? 1.Periods where short-term financing is required 2.Less long-term debt than if the firm followed a restrictive financial policy 3.Periods of excess funds which can be invested in short-term marketable securities 4.Lower investment in fixed assets than if the firm adopted a flexible financial policy A) I only B) II only C) I and III only D) II and IV only E) I, III, and IV only

43)

Which statement is correct?

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A) Firms should generally finance all of their assets with long-term debt. B) Firms that follow restrictive financial policies can generally avoid short-term debt financing. C) Short-term borrowing is generally more expensive than long-term borrowing. D) Long-term interest rates tend to be more volatile than short-term rates. E) A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.

44)

Which statement related to a cash budget is correct?

A) Capital expenditures are treated as a cash inflow on a cash budget. B) The cumulative surplus is computed prior to adjusting for the minimum cash balance. C) A positive net cash inflow for a period indicates the cash disbursements exceed the cash collections for the period. D) Financially healthy firms can have a negative quarterly net cash inflow. E) Firms generally set the minimum cash balance at zero for planning purposes.

45) Alderson Metals is compiling a cash balance projection by quarter for next year. Which one of the following adjustments to this projection will decrease the cumulative surplus? A) Reducing payroll costs from its current projection amount B) Decreasing the accounts receivable period by changing the firm's credit policy effective the first of next year C) Receiving more favorable credit terms from the firm's suppliers D) Increasing the dividend per share on the firm's outstanding common stock E) Refinancing the firm's long-term debt at a lower interest rate

46) To ensure an unsecured line of credit is used solely for short-term purposes, the loan arrangement frequently includes which one of the following?

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A) Cleanup period B) Grace period C) Revolver D) Factoring arrangement E) Lien on the borrower's inventory

47)

A committed line of credit:

A) guarantees that a set amount of funds will be available to a firm for a stated period of time regardless of events that might occur during that time period. B) is a guarantee that a bank will purchase a firm's accounts receivable at full value. C) provides greater assurance than a noncommitted credit line that funds will be available when needed by a firm. D) guarantees that any funds borrowed during a stated period of time will be charged the lowest rate of interest the lending bank offers to any of its customers. E) is a loan arrangement for a stated period of time which is free of all costs and fees other than the actual interest paid on the funds borrowed.

48)

Which type of financing is generally used by new car dealers to finance their inventories? A) Blanket inventory lien arrangement B) Trust receipt loans C) Committed line of credit D) Trade credit financing E) Field warehousing financing

49) The Corner Store is a small-sized, general store that stocks a minimal level of basic supplies and offers gasoline to a rural community. Which type of credit is probably best-suited for financing this store's inventory?

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A) Trust receipt financing B) Receivables factoring C) Field warehousing D) Blanket inventory lien E) Receivables assignment

50)

Which characteristic applies to commercial paper? A) Maturities of 270 days or more B) Offerings registered with the SEC C) Interest rates higher than comparable bank loans D) Issued directly by large-sized firms E) Issued primarily by low-rated firms

51) Dexter Companies has a conventional factoring arrangement with its local bank. Which of these would be a common characteristic of that type of financing arrangement? A) Dexter Companies will receive the full amount of the accounts receivable included in this arrangement on an agreed upon date sometime in the future. B) The responsibility for collecting the covered receivables lies with Dexter Companies. C) Any bad debt that results from an account receivable included in this arrangement will be a cost to the bank. D) Dexter Companies will pay a monthly fee to the bank and in turn will receive payment for the full amount of its accounts receivable. E) The arrangement keeps the receivables as an asset of Dexter Companies but places a lien on those accounts in favor of the lending bank.

52) Dover Wholesalers sells products exclusively to Benn Retailer. Benn Retailer buys exclusively from Dover Wholesalers. Dover Wholesalers has a receivables period of 44 days, an inventory period of 8 days, and a payables period of 63 days. Benn Retailer has an inventory period of 15 days, a receivables period of 22 days, and a payables period of 44 days. Which statement is correct given this information?

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A) Dover Wholesalers has a shorter operating cycle than does Benn Retailer. B) Benn Retailer has an operating cycle of 81 days. C) It takes Benn Retailer less time to collect payment on a sale than it does for the firm to sell its inventory. D) Dover Wholesalers is financing 100 percent of Benn Retailer's operating cycle. E) Dover Wholesalers has a cash cycle of 11 days.

53) Birdview Construction has the following current account values. These accounts represent a net _________blank of cash for the period in the amount of _________blank. Account Accounts Receivable Accounts Payable Inventory

Beginning Balance $ 31,300 26,500 52,600

Ending Balance $ 32,800 29,700 54,200

A) source; $3,100 B) source; $100 C) use; $100 D) source; $3,200 E) use; $3,200

54) A company has the following account balances. Which statement is correct concerning these balances? Account Accounts receivable Accounts payable Inventory Long-term debt Common stock

Beginning Balance $ 16,400 20,300 63,600 127,500 212,400

Ending Balance $ 17,800 24,400 60,100 125,800 215,900

A) Accounts receivable is a $1,400 source of cash. B) Common stock is a $3,500 source of cash. C) Net working capital, excluding cash, is a $6,100 use of cash. D) Long-term debt is a $1,700 source of cash. E) Total debt is a $2,400 source of cash.

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55) Pablano’s has sales for the year of $163,500 and cost of goods sold of $97,850. The firm carries an average inventory of $15,730 and has an average accounts payable balance of $15,900. What is the inventory period? A) 89.02 days B) 58.68 days C) 31.29 days D) 60.20 days E) 81.36 days

56) Wrecker Automotive has sales for the year of $356,450, cost of goods sold equal to 59 percent of sales, and an average inventory of $42,500. The profit margin is 6 percent, and the tax rate is 21 percent. How many days on average does it take the firm to sell an inventory item? A) 75.68 days B) 81.46 days C) 73.76 days D) 78.74 days E) 82.03 days

57) Gaming Station has to restock a popular electronic game every five days as it completely sells out in that period of time. What is the inventory turnover rate for this game? A) 115 times B) 105 times C) 99 times D) 118 times E) 73 times

58) The Appliance Giant has annual credit sales of $2,846,334 and cost of goods sold of $2,112,882. The average accounts receivable balance is $47,280. How many days on average does it take the firm to collect its accounts receivable?

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A) 5.64 days B) 7.97 days C) 8.94 days D) 8.17 days E) 6.06 days

59) The HOT Truck operates several specialty vehicles that provide hot food and beverages for firms that have workers employed in outlying regions. The company has annual sales of $489,500. Cost of goods sold average 59 percent of sales and the profit margin is 6.1 percent. The average accounts receivable balance is $41,700. On average, how long does it take this food truck to collect payment for its services? A) 27.84 days B) 28.17 days C) 31.09 days D) 35.12 days E) 41.90 days

60) The accounts receivable turnover rate for Tough Pants Clothing has gone from an average of 12.6 times to 14.1 times per year. How has this change affected the firm's accounts receivable period? A) Decrease of 1.98 days B) Decrease of 3.08 days C) Decrease of 3.28 days D) Increase of 3.28 days E) Increase of 3.08 days

61) The Happy Flapjack Diner increased its operating cycle from 72 days to 74 days while the cash cycle decreased by 3 days. How have these changes affected the accounts payable period?

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A) Decreased by 5 days B) Decreased by 4 days C) Decreased by 2 days D) Increased by 2 days E) Increased by 5 days

62) The Cash and Grab Market has annual sales of $913,200 and cost of goods sold of $681,600. The profit margin is 3.8 percent and the accounts payable period is 24 days. What is the average accounts payable balance? A) $64,818 B) $55,488 C) $44,818 D) $60,211 E) $60,046

63) AW Jones has annual sales of $2.438 million. The cost of goods sold is equal to 81 percent of sales. The average accounts receivable balance is $197,800 and the average accounts payable balance is $205,735. How many days on average does it take the firm to pay its suppliers? A) 30.83 days B) 45.22 days C) 41.31 days D) 38.03 days E) 29.61 days

64) Furniture Outlet has an accounts receivable period of 53 days and an accounts payable period of 87 days. The company turns over its inventory 4.3 times per year and marks up the inventory an average of 38 percent over its wholesale cost. What is the length of the firm's operating cycle?

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A) 137.88 days B) 147.88 days C) 89.22 days D) 60.88 days E) 125.68 days

65) Kar’s currently has a 208-day operating cycle. The company is concentrating on increasing its inventory turnover rate from 7.7 to 8.3 times. What will the firm's new operating cycle be if it can effectively make this change? A) 206.31 days B) 209.69 days C) 204.57 days D) 208.86 days E) 207.64 days

66) Geoff’s Entertainment has a receivables turnover rate of 17.8, a payables turnover rate of 12.5, and an inventory turnover rate of 24.9. What is the length of the firm's operating cycle? A) 35.61 days B) 49.71 days C) 34.89 days D) 39.80 days E) 43.86 days

67) The Shoe Tree currently has an operating cycle of 199 days and a cash cycle of 54 days. The company is implementing some changes that will reduce the inventory period by 11 days, decrease the receivables period by 6 days, and decrease the accounts payable period by 4 days. How many days will be in the new cash cycle once all of these changes become effective?

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A) 35 days B) 45 days C) 41 days D) 33 days E) 38 days

68) Metropolitan Realty currently has 54 days in its cash cycle and 98 days in its operating cycle. The firm purchases its entire inventory from one supplier. This supplier has offered a 2.5 percent discount on all purchases if Metropolitan will pay in 7 days. If the market opts to take advantage of the discount offered, its new operating cycle will be _________blank days and its new cash cycle will be _________blank days. A) 98; 105 B) 88; 81 C) 98; 81 D) 98; 91 E) 95; 81

69) Bee’s Honey currently has an inventory turnover of 26.8, a payables turnover of 10.8, and a receivables turnover of 14.4. How many days are in the cash cycle? A) 4.31 days B) 5.17 days C) 16.51 days D) 24.39 days E) 32.20 days

70) Robert’s Cards and Gifts has estimated quarterly sales for next year, starting with Quarter 1, of $43,930, $47,495, $37,835, and $91,655. The accounts receivable period is 13 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.

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A) $6,068.39 B) $13,239.06 C) $6,860.39 D) $6,345.44 E) $5,465.06

71) The Green Pickle has estimated quarterly sales for next year, starting with Quarter I, of $18,600, $21,300, $24,500, and $19,600. The accounts receivable period is 18 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days. A) $4,260 B) $4,900 C) $4,500 D) $4,667 E) $4,600

72) Coolman Outdoor has estimated monthly sales for February through May of $12,480, $13,260, $13,910, and $14,820, respectively. If the accounts receivable period is 45 days, how much will be collected in May? Assume each month has 30 days. A) $12,800 B) $12,870 C) $14,365 D) $13,585 E) $12,850

73) A company has expected sales for January through April of $9,800, $9,500, $13,800, and $9,500, respectively. Assume each month has 30 days and the accounts receivable period is 36 days. How much does the company expect to collect in the month of May?

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A) $10,646.67 B) $15,880.00 C) $10,360.00 D) $12,213.33 E) $15,406.00

74) The Brown Squirrel has estimated sales for January through May of $14,700, $16,900, $23,500, $36,700, and $42,300, respectively. Assume there are 30 days in each month and the accounts receivable period is 45 days. How much should the firm expect to collect in May? A) $36,700 B) $20,200 C) $30,100 D) $28,450 E) $39,500

75) The Lumber Yard has projected sales for April through July of $152,400, $181,600, $197,800, and $169,400, respectively. The firm collects 52 percent of its sales in the month of sale, 46 percent in the month following the month of sale, and the remainder in the second month following the month of sale. What is the amount of the July collections? A) $189,819 B) $182,708 C) $122,852 D) $175,500 E) $192,626

76) The Warehouse has projected sales for June through September of $57,600, $69,800, $72,000, and $54,300. The company collects 46 percent of its sales in the month of sale, 51 percent in the month following the month of sale, and 2 percent in the second month following the month of sale. The remaining sales are never collected. What is the amount of the August collections?

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A) $65,863 B) $68,565 C) $62,158 D) $69,870 E) $65,516

77) AC Sales has estimated quarterly sales for next year, starting with Quarter 1, of $16,200, $17,300, $18,700, and $20,400. If purchases are equal to 72 percent of the following quarter's sales, what is the estimated amount of purchases for Quarter 3? A) $12,960 B) $14,688 C) $12,456 D) $13,464 E) $13,720

78) Brilliant J Company has estimated quarterly sales for next year, starting with Quarter 1, of $16,974, $18,696, $21,279, and $20,295. Purchases are equal to 60 percent of the following quarter's sales. What is the cash outlay for accounts payable for Quarter 3 if the firm has a 30day accounts payable period? Assume each month has 30 days. A) $12,250.80 B) $12,373.80 C) $12,486.67 D) $12,966.67 E) $12,503.33

79) Show Place Decor has estimated quarterly sales for next year, starting with Quarter 1, of $38,600, $53,400, $48,900, and $69,800. Purchases are equal to 62 percent of the following quarter's sales and the accounts payable period is 30 days. Assume each month has 30 days. What is the estimated accounts payable balance at the end of Quarter 1?

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A) $10,106 B) $9,520 C) $11,036 D) $14,425 E) $14,200

80) NuParts, Incorporated, has estimated quarterly sales for next year, starting with Quarter 1, of $15,900, $16,800, $17,500, and $16,400. Purchases are equal to 67 percent of the following quarter's sales and the accounts payable period is 60 days. Assume 30 days in each month. How much will the firm owe its suppliers at the end of Quarter 3? A) $7,066.67 B) $7,816.67 C) $7,506.67 D) $7,325.33 E) $6,933.33

81) Candy Supplies purchases are equal to 68 percent of the following quarter's sales. Assume each month has 30 days, the accounts receivable period is 30 days, and the accounts payable period is 45 days. The estimated quarterly sales for next year, starting with Quarter 1, are $38,900, $40,600, $58,900, and $69,200, respectively. How much will the firm pay its suppliers in the third quarter? A) $41,379 B) $46,811 C) $44,514 D) $40,947 E) $43,554

82) The Grain and Feed Store purchases are equal to 68 percent of the following quarter's sales. The accounts receivable period is 15 days and the accounts payable period is 30 days. Assume there are 30 days in each month. The store has estimated quarterly sales for the next year, starting with Quarter 1, of $16,750, $18,220, $17,560, and $19,710, respectively. How much will the store owe its suppliers at the end of Quarter 1?

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A) $3,992.20 B) $4,129.87 C) $4,467.60 D) $4,508.10 E) $4,300.27

83) Red Barn has estimated quarterly sales, starting with Quarter 1, of $42,600, $45,300, $44,800, and $42,700. Purchases are equal to 71 percent of the following quarter’s sales. The accounts receivable period is 30 days and the accounts payable period is 45 days. Assume there are 30 days in each month. By how much will the firm’s collections exceed its payments for Quarter 3? A) $12,211.17 B) $14,088.86 C) $11,884.33 D) $13,904.17 E) $12,925.86

84) Diva Donuts purchases are equal to 79 percent of the following month's sales. The accounts payable period for purchases is 30 days while all other expenditures are paid in the month in which they are incurred. Assume each month has 30 days. The company has compiled the following information. Account Sales Other Expenses Interest and Taxes

May $ 10,500 $ 1,625 $ 625

June $ 11,000 $ 1,750 $ 750

July $ 12,000 $ 1,750 $ 875

What is the total amount of the firm's disbursements for the month of June? A) $10,500 B) $ 8,795 C) $10,795 D) $13,500 E) $11,190

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85) D’s Hardware’s monthly purchases are equal to 72 percent of the following month's sales. The accounts payable period for purchases is 45 days. All other expenses are paid when incurred. Assume each month has 30 days. The company has compiled the following information: Account Sales Other Expenses Interest and Taxes

July $ 18,500 1,900 1,000

August $ 19,200 2,100 1,100

September $ 20,400 1,900 1,200

October $ 17,800 1,800 1,000

What is the projected amount of disbursements for the month of September? A) $16,910 B) $19,708 C) $19,490 D) $17,356 E) $20,311

86) Industrial Supply has projected Q1 sales at $38,200, Q2 sales at $44,900, and Q3 sales at $42,300. Purchases equal 69 percent of the next quarter's sales. The accounts receivable period is 30 days and the accounts payable period is 60 days. At the beginning of Q1, the firm has an accounts receivable balance of $11,800 and an accounts payable balance of $23,300. The firm pays $1,600 a month in cash expenses and $800 a month in interest and taxes. At the beginning of Q1, the cash balance is $500, and the short-term loan balance is zero. During Q1, capital spending will be $2,100. The firm maintains a minimum cash balance of $200. Assume each month has 30 days. What is the cumulative cash surplus (deficit) at the end of Q1, prior to any short-term borrowing? A) −$560 B) −$983 C) −$91 D) $109 E) $360

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87) Juno's has projected its Q1 sales at $46,000 and its Q2 sales at $48,000. Purchases equal 71 percent of the next quarter's sales. The accounts receivable period is 30 days and the accounts payable period is 45 days. At the beginning of Q1, the accounts receivable balance is $12,200 and the accounts payable balance is $14,800. The firm pays $1,500 a month in cash expenses and $400 a month in taxes. At the beginning of Q1, the cash balance is $280, and the short-term loan balance is zero. The firm maintains a minimum cash balance of $250. Assume each month has 30 days. What is the cumulative cash surplus (deficit) at the end of the Q1, prior to any shortterm borrowing? A) $9,210 B) $9,684 C) $8,633 D) $8,880 E) $9,157

88) H&H Companies has an average collection period of 43 days and factors all of its receivables immediately at a discount of 1.1 percent. Assume all accounts are collected in full. What is the firm's effective cost of borrowing? A) 9.68% B) 9.73% C) 9.97% D) 9.84% E) 10.07%

89) A firm has an average collection period of 37 days and factors all of its receivables immediately at a discount of .98 percent. Assume all accounts are collected in full. What is the firm's effective cost of borrowing? A) 9.98% B) 10.13% C) 10.24% D) 10.38% E) 10.20%

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90) QT Stores has an average collection period of 28 days and factors all of its receivables immediately at a discount of 1.12 percent. What is the firm's effective cost of borrowing assuming all accounts are collected in full? A) 16.28% B) 15.81% C) 15.57% D) 16.33% E) 15.88%

91) Palm Beach Yachts has a line of credit with a local bank that permits it to borrow up to $1.8 million at any time. The interest rate is .78 percent per month. The bank charges compound interest and also requires that 5 percent of the amount borrowed be deposited into a noninterestbearing account. What is the effective annual interest rate on this loan? A) 10.29% B) 10.68% C) 10.43% D) 9.74% E) 9.91%

92) Kurt's Music has a line of credit with a local bank that permits it to borrow up to $650,000 at any time. The interest rate is .64 percent per month. The bank charges compound interest and also requires that 2 percent of the amount borrowed be deposited into a noninterestbearing account. How much interest will the firm pay if it needs $200,000 of cash for three months to pay its operating expenses? A) $3,943.50 B) $3,949.21 C) $4,017.02 D) $3,864.63 E) $3,902.11

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93) Holiday Tree Farm has a cash balance of $34 and a short-term loan balance of $180 at the beginning of Q1. The net cash inflow for the first quarter is $36 and for the second quarter there is a net cash outflow of $48. All cash shortfalls are funded with short-term debt. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. The minimum cash balance is $20. What is the short-term loan balance at the end of Q2? A) $184.3 B) $179.2 C) $138.6 D) $128.4 E) $193.1

94) Steep Mountain Oil has a cash balance of $15 and a short-term loan balance of $53 at the beginning of Q1. The net cash outflow for Q1 of $39 and for Q2 there is a net cash inflow of $23. All cash shortfalls are funded with short-term debt. The firm pays 1.1 percent of its prior quarter's ending loan balance as interest each quarter. The minimum cash balance is $15. What is the short-term loan balance at the end of the Q2? A) $70.6 B) $81.3 C) $65.9 D) $67.7 E) $76.8

95) Northern Beef has estimated quarterly sales for the coming year, starting with Quarter 1, of $680, $725, $740, and $720, respectively. The accounts receivable balance at the beginning of Q1 is $330 and the collection period is 60 days. How much cash will the firm collect in Q1, Q2, and Q3, respectively? A) $695.00; $498.03; $730.00 B) $695.00; $466.67; $626.67 C) $556.67; $695.00; $730.00 D) $556.67; $367.33; $626.67 E) $647.33; $626.67; $730.00

96)

Consider the following financial statement information:

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Account Inventory Accounts receivable Accounts payable Net sales Cost of goods sold

Beginning Ending Balance Balance $ 18,600 $ 19,400 4,200 4,500 5,800 5,200 76,400 51,700

Assume all sales and purchases are on credit. How long is the cash cycle? (Use average balance sheet account balances.) A) 80.21 days B) 116.09 days C) 101.03 days D) 113.58 days E) 73.57 days

97) P&M Industries has projected quarterly sales for the coming year, starting with Quarter 1, of $6,200, $6,500, $6,300, and $6,700, respectively. Sales in the year following this one are projected to be 4 percent greater in each quarter. Assume the company places orders during each quarter equal to 74 percent of projected sales for the next quarter. How much will the firm pay its suppliers in Q3 if the firm has a 30-day payables period? A) $4,859.33 B) $4,826.67 C) $4,603.18 D) $4,890.22 E) $4,711.46

98) Big Red’s purchases from suppliers in a quarter are equal to 71 percent of the next quarter's forecast sales. The payables period is 60 days; other expenses are paid when incurred. Wages, taxes, and other expenses are 24 percent of sales, and interest and dividends are $40 per quarter. No capital expenditures are planned. Projected quarterly sales, starting with Q1, are $1,520, $1,580, $1,630, and $1,590, respectively. Sales for the first quarter of the following year are projected at $1,540. What is the amount of the total disbursements for Q2?

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A) $1,564 B) $1,520 C) $1,601 D) $1,538 E) $1,553

99) Kacie’s has an average collection period of 23 days and factors all receivables immediately at a discount of .95 percent. What is the effective cost of borrowing? Assume that default is extremely unlikely. A) 16.32% B) 16.28% C) 16.36% D) 16.52% E) 16.49%

100) Kelso’s has projected sales for January through April of $136,000, $148,000, $144,000, and $146,000, respectively. The firm collects 59 percent of sales in the month of sale, 36 percent in the month following the sale, and the remainder in the second month following the sale. Assume all sales are collected. The accounts receivable balance at the end of the beginning of January was $56,050 ($47,643 of which was uncollected December sales). How much did the firm collect in the month of February? A) $138,539 B) $141,220 C) $140,208 D) $138,615 E) $142,090

101) Here are some important figures from the budget of Global Enterprises for the second quarter: Credit sales Credit purchases

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April

May

June

$ 524,600 359,100

$ 546,800 366,700

$ 568,100 384,200 32

Cash disbursements: Wages, taxes, and other Interest Fixed asset purchases

98,400 7,500 11,300

99,100 7,500 0

124,600 7,500 48,900

The company predicts that 2 percent of its credit sales will never be collected, 45 percent of its sales will be collected in the month of sale, and the remaining 53 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase. March credit sales were $487,900 and credit purchases were $349,500. What is the ending cash balance for April if the beginning cash balance was $39,500? A) $67,410 B) $67,457 C) $68,800 D) $64,440 E) $69,230

102) You've worked out a line of credit arrangement that allows you to borrow up to $2.1 million at any time. The interest rate is .72 percent per month. In addition, 3 percent of the amount you borrow must be deposited in a noninterest-bearing account. Assume your lender uses compound interest and that you need $1.3 million today which you will repay in five months. How much interest will you pay? A) $79,069 B) $48,947 C) $42,103 D) $47,479 E) $48,886

103) Fido’s Markets has a cash cycle of 24 days, an operating cycle of 39 days, and an inventory period of 2.3 days. The company reported cost of goods sold in the amount of $465,250, and credit sales were $600,000. What is the company's average balance in accounts payable?

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A) $19,120 B) $18,414 C) $20,203 D) $22,344 E) $23,515

104) Pepito’s has sales for the year of $166,569 and cost of goods sold of $94,600. The firm carries an average inventory of $21,100 and has an average accounts payable balance of $19,600. What is the inventory period? A) 89.02 days B) 81.41 days C) 31.29 days D) 60.20 days E) 81.06 days

105) French Vertical Systems has sales for the year of $425,860, cost of goods sold equal to 64 percent of sales, and an average inventory of $53,600. The profit margin is 6 percent and the tax rate is 21 percent. How many days on average does it take the firm to sell an inventory item? A) 75.68 days B) 81.46 days C) 71.78 days D) 78.74 days E) 82.03 days

106) Second Chance Gaming has to restock a popular electronic game every 2.5 days as it completely sells out in that period of time. What is the inventory turnover rate for this game? A) 115 times B) 105 times C) 99 times D) 118 times E) 146 times

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107) Kitchen and Laundry and More has annual credit sales of $2,473,701 and cost of goods sold of $1,838,207. The average accounts receivable balance is $56,736. How many days on average does it take the firm to collect its accounts receivable? A) 8.94 days B) 9.27 days C) 11.24 days D) 10.47 days E) 8.37 days

108) The accounts receivable turnover rate for Tiger Uniform has gone from an average of 14.1 times to 15.6 times per year. How has this change affected the firm's accounts receivable period? A) Decrease of 1.98 days B) Decrease of 2.49 days C) Decrease of 3.28 days D) Increase of 2.49 days E) Increase of 3.08 days

109) Organic Foods Mart increased its operating cycle from 63 days to 68 days while the cash cycle decreased by 2 days. How have these changes affected the accounts payable period? A) Decreased by 7 days B) Decreased by 4 days C) Decreased by 3 days D) Increased by 3 days E) Increased by 7 days

110) Corner Store Industries has annual sales of $662,070 and cost of goods sold of $494,160. The profit margin is 4.4 percent and the accounts payable period is 29 days. What is the average accounts payable balance?

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A) $52,603 B) $55,488 C) $39,262 D) $40,616 E) $38,046

111) DA West has annual sales of $2.8 million. The cost of goods sold is equal to 71 percent of sales. The average accounts receivable balance is $227,470 and the average accounts payable balance is $236,595. How many days on average does it take the firm to pay its suppliers? A) 30.84 days B) 45.22 days C) 30.94 days D) 43.44 days E) 29.61 days

112) Gerald Promotions has a receivables turnover rate of 21.4 a payables turnover rate of 15 and an inventory turnover rate of 27.4. What is the length of the firm's operating cycle? A) 42.52 days B) 39.80 days C) 30.38 days D) 43.86 days E) 49.71 days

113) Midwest Candles has estimated quarterly sales for next year, starting with Quarter 1, of $50,020, $54,619, $105,403, and $46,510. The accounts receivable period is 15 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.

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A) $8,419.92 B) $17,567.21 C) $9,103.17 D) $7,251.71 E) $6,465.06

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Answer Key Test name: Chapter 16 Test Bank - Static 1) D 2) A 3) D 4) C 5) D 6) C 7) E 8) C 9) D 10) E 11) A 12) A 13) E 14) E 15) B 16) E 17) D 18) D 19) E 20) D 21) C 22) E 23) C 24) D 25) C 26) A Version 1

27) C 28) E 29) A 30) C 31) D 32) C 33) C 34) C 35) C 36) C 37) D 38) E 39) C 40) B 41) E 42) C 43) E 44) D 45) D 46) A 47) C 48) B 49) D 50) D 51) C 52) D Benn Retailer's operating cycle of 37 days (15 + 22) is less than its payables period of 44 days. Since Benn Retailer buys exclusively from Dover Wholesalers, Dover is financing all of Benn’s operating cycle. 53) B Version 1

Account Accounts Receivable Accounts Payable

Source of Cash

Use of Cash $ 1,500

3,200

Inventory

$ 1,600 $ 3,200

$ 3,100

Total = Source of cash of $3,200 - Use of cash of $3,100 = Source of cash of $100

54) E Total debt increased from $147,800 to $150,200 which is a $2,400 source of cash. ($24,400 + 125,800) − ($20,300 + 127,500) = $2,400

55) B Days in inventory = 365/($97,850/$15,730) = 58.68 days 56) C Days in inventory = 365/[($356,450 × .59)/$42,500] = 73.76 days 57) E Inventory turnover = 365/5 = 73 times 58) E Days in receivables = 365/($2,846,334/$47,280) = 6.06 days 59) C Days in receivables = 365/($489,500/$41,700) = 31.09 days 60) B Change in days = 365/12.6 − 365/14.1 = −3.08 days 61) E Change in accounts payable period = (74 − 72) + 3 = 5 days 62) C Accounts payable balance = ($681,600/365) × 24 = $44,818 63) D Days in payables = 365/[($2,438,000 × .81)/$205,735] = 38.03 days 64) A Operating cycle = (365/4.3) + 53 = 137.88 days 65) C Version 1

New operating cycle = 208 − 365/7.7 + 365/8.3 = 204.57 days 66) A Operating cycle = (365/24.9) + (365/17.8) = 35.61 days 67) C New cash cycle = 54 −11 − 6 + 4 = 41 days 68) D The operating cycle will remain at 98 days. New cash cycle = 98 − 7 = 91 days 69) B Cash cycle = (365/26.8) + (365/14.4) − (365/10.8) = 5.17 days 70) C Q2 accounts receivable balance = (13/90) × $47,495 = $6,860.39 71) A Q3 accounts receivable balance = (18/90) × $21,300 = $4,260 72) D May collections = (.50 × $13,260) + (.50 × $13,910) = $13,585 73) C May collections = (6/30) × $13,800 + (24/30) × $9,500 = $10,360.00 74) C April collections = (15/30) × $36,700 + (15/30) × $23,500 = $30,100 75) B July collections = (.52 × $169,400) + (.46 × $197,800) + (.02 × $181,600) = $182,708 76) D September collections = (.46 × $72,000) + (.51 × $69,800) + (.02 × $57,600) = $69,870 77) B Q2 purchases = .72 × $20,400 = $14,688 78) B Q3 payments = 30/90(.6 × $21,279) + 60/90(.6 × $20,295) = $12,373.80 Version 1

79) C Q2 ending accounts payable = 30/90(.62 × $53,400) = $11,036 80) B Q3 ending accounts payable = 60/90(.67 × $17,500) = $7,816.67 81) E Q3 payments = 45/90(.68 × $58,900) + 45/90(.68 × $69,200) = $43,554 82) B Accounts payable balance Q3 = 30/90(.68 × $18,220) = $4,129.87 83) D Q3 collections = 30/90($45,300) + 60/90($44,800) = $44,966.67 Q3 payments = 45/90(.71 × $44,800) + 45/90(.71 × $42,700) = $31,062.50 Difference = $44,966.67 − 31,062.50 = $13,904.17 84) E June disbursements = (.79 × $11,000) + $1,750 + 750 = $11,190 85) D September disbursements = 45/90(.72 ×$19,200) + 45/90(.72 × $20,400) + $1,900 + 1,200 September disbursements = $17,356

86) A Q1 collections = $11,800 + (60/90)($38,200) = $37,267 Q1 payments = $23,300 + [(30/90) × .69 × $44,900] = $33,627 Net cash flow = $37,267 − 33,627 − 1,600 − 800 − 2,100 = −$860 Q1 cumulative deficit = $500 − 860 − 200 = −$560 87) E Q1 collections = $12,200 + (60/90)($46,000) = $42,867 Q1 payments = $14,800 + 45/90(.71 × $48,000] = $31,840 Q1 net cash flow = $42,867 − 31,840 − 1,500 − 400 = $9,127 Q1 cumulative deficit = $280 + 9,127 − 250 = $9,157 88) D EFF = {1 + [.011/(1 − .011)]}365/43 − 1 = .0984, or 9.84% 89) E Version 1

EFF = {1 + [.0098/(1 − .0098)]}365/37 − 1 = .1020, or 10.20% 90) B EFF = {1 + [.0112/(1 − .0112)]}365/28 − 1 = .1581, or 15.81% 91) A EFF = [(1.0078)12 − 1]/(1 − .05) = .1029 or 10.29% 92) A Loan amount = $200,000/(1 − .02) = $204,081.63 Interest = [$204,081.63 × 1.00643] − $204,081.63 = $3,943.50 93) A Q1

Beginning cash balance Net cash inflow Interest on short-term borrowing New short-term borrowing

$ 34.0 36.0 −3.6

$ 20.0 −48.0 −2.7 50.7

Short-term borrowing repaid

−46.4

Ending cash balance Minimum cash balance Cumulative surplus Beginning short-term borrowing New short-term borrowing

20.0 −20.0 $ 0.0 $ 180.0

20.0 −20.0 $ 0.0 $ 133.6 50.7

Short-term borrowing repaid

−46.4

Ending short-term borrowing

$ 133.6

$ 184.3

$ 15.0 −39.0 −.6 39.6

$ 15.0 23.0 −1.0

94) A Beginning cash balance Net cash inflow Interest on short-term borrowing New short-term borrowing Short-term borrowing repaid Ending cash balance Minimum cash balance

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−22.0 15.0 −15.0

15.0 −15.0

Cumulative surplus Beginning short-term borrowing New short-term borrowing

$ 0.0 $ 53.0 39.6

Short-term borrowing repaid Ending short-term borrowing

$ 0.0 $ 92.6

−22.0 $ 92.6

$ 70.6

95) C Q1 collections = $330 + 30/90($680) = $556.67 Q2 collections = 60/90($680) + 30/90($725) = $695.00 Q3 collections = 60/90($725) + 30/90($740) = $730.00 96) B Inventory period = 365/{$51,700/[($18,600 + 19,400)/2]} = 134.139 days Accounts receivable period = 365/{$76,400/[($4,200 + $4,500)/2]} = 20.782 days Accounts payable period = 365/{$51,700/[($5,800 + 5,200)/2]} = 38.830 days Cash cycle = 134.139 + 20.782 − 38.830 = 116.09 days 97) A Q3 payments = 60/90(.74 × $6,700) + 30/90(.74 × $6,300) = $4,859.33 98) E Q2 disbursements = 60/90(.71 × $1,580) + 30/90(.71 × $1,630) + (.24 × $1,580) + $40 Q2 disbursements = $1,553 99) C EFF = {1 + [.0095/(1 − .0095)]}365/23 − 1 = .1636, or 16.36% 100) E February collections = .59($148,000) + .36($136,000) + [.05/(.05 + .36)][$47,643] February collections = $142,090 101) B

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April ending cash balance = $39,500 + [.45($524,600) + .53($487,900)] − $349,500 − 98,400 − 7,500 − 11,300 = $67,457

102) B Loan amount = $1,300,000/(1 − .03) = $1,340,206.19 Interest = [$1,340,206.19 × 1.00725] − $1,340,206.19 = $48,947 103) A Accounts payable balance = ($465,250/365)(39 − 24) = $19,120 104) B Days in inventory = 365/($94,600/$21,100) = 81.41 days 105) C Days in inventory = 365/[($425,860 × .64)/$53,600] = 71.78 days 106) E Inventory turnover = 365/2.5 = 146 times 107) E Days in receivables = 365/($2,473,701/$56,736) = 8.37 days 108) B Change in days = (365/15.6) − (365/14.1) = −2.49 days 109) E Change in accounts payable period = (68 − 63) + 2 = 7 days 110) C Accounts payable balance = ($494,160/365) × 29 = $39,262 111) D Days in payables = 365/[($2,800,000 × .71)/$236,595] = 43.44 days 112) C Operating cycle = (365/27.4) + (365/21.4) = 30.38 days 113) C Q2 accounts receivable balance = (15/90) × $54,619 = $9,103.17

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) At the beginning of the day, a company had a ledger balance and available balance of $3,860. During the day, the company wrote three checks for $295, $660, and $920. The company also deposited checks for $435 and $875. What is the company's collection float? A) $2,550 B) $565 C) $1,875 D) $1,310 E) $3,185

2) On an average day, a company writes 49 checks worth a total of $7,950 that clear in 3.25 days. The company also collects 61 checks worth a total of $9,990 that clear in 2.75 days. What is the company's average collection float? A) $9,990 B) $25,838 C) $27,473 D) $7,950 E) $17,940

3) Madison Corner writes 36 checks a day for an average amount of $521 each. These checks generally clear the bank 2.75 days after they are written. In addition, the firm generally receives 73 checks with an average amount of $598 each. Deposited amounts are available after an average of 2.25 days. What is the amount of the firm's collection float? A) $43,654 B) $46,643 C) $51,579 D) $98,222 E) $18,756

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4) At the beginning of the day, a company has a cash balance of $11,500 and no float. During the day, the company wrote three checks for $650, $985, and $1,350. The company also deposited checks for $1,215 and $1,900. What is the company's disbursement float? A) $8,385 B) $6,100 C) $130 D) $2,985 E) $3,115

5) On an average day, a company writes 42 checks worth a total of $6,025 that clear in 2.25 days. The company also collects 64 checks worth a total of $8,140 that clear in 1.75 days. What is the company's average disbursement float? A) $13,556 B) $6,025 C) $6,105 D) $8,140 E) $14,245

6) Marston Corporation writes 27 checks a day for an average amount of $394 each. These checks generally clear the bank 2.75 days after they are written. In addition, the firm generally receives 39 checks with an average amount of $499 each. Deposited amounts are available after an average of 2.25 days. What is the firm's disbursement float? A) $29,255 B) $19,461 C) $14,533 D) $10,638 E) $43,787

7) On a typical day, a company writes 47 checks worth a total of $8,455 that clear in 2.75 days. The company also collects 59 checks worth a total of $10,220 that clear in 2.25 days. Is this a collection or disbursement float? What is the amount of the float?

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A) A disbursement float of $1,765 B) A collection float of $413 C) A collection float of $1,765 D) A collection float of $256 E) A disbursement float of $256

8) On a typical day, a company writes 75 checks worth a total of $10,600 that clear in 3 days. The company also collects 88 checks worth a total of $14,680 that clear in 2.5 days. Is this a collection or disbursement float? What is the float value? A) A collection float of $4,080 B) A disbursement float of $4,080 C) A collection float of $5,057 D) A disbursement float of $4,900 E) A collection float of $4,900

9) Ellcrys Corporation writes 53 checks a day for an average amount of $465 each. These checks generally clear the bank 2.75 days after they are written. In addition, the firm generally receives 50 checks with an average amount of $514 each. Deposited amounts are available after an average of 2.25 days. Is this a disbursement or collection float? What is the value of the float? A) A disbursement float of $9,949 B) A collection float of $9,949 C) A disbursement float of $7,802 D) A disbursement float of $11,744 E) A collection float of $11,744

10) Shannara Manufacturing writes 37 checks a day for an average amount of $525 each that generally clear 3 days after they are written. In addition, the firm generally receives 45 checks each day with an average amount of $604 each that are available after 2.5 days. Is this a collection or disbursement float? What is the amount of the float?

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A) A collection float of $9,675 B) A collection float of $10,569 C) A disbursement float of $9,675 D) A collection float of $11,470 E) A disbursement float of $11,470

11) Hoyes Lumber generally receives three checks per month. A check for $11,120 clears in 4 days, a check for $6,475 clears in 3 days, and a check for $7,710 clears in 2 days. Assuming 30 days in each month, what is the average daily float? A) $281.17 B) $2,644.17 C) $843.50 D) $2,274.33 E) $2,489.33

12) McCallister's just purchased $15,700 worth of inventory. The terms of the sale were 2/15, net 40. What is the implicit interest? A) $353 B) $293 C) $283 D) $314 E) $334

13) Your firm is offered credit terms of 2/20, net 40. What is the effective annual interest rate on this arrangement? Assume 365 days in each year. A) 32.85% B) 47.89% C) 36.50% D) 34.68% E) 44.59%

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14) Cosplay Unlimited sells 1,120 outfits per year at an average price of $144. The terms of the sale are 2/10, net 35. The discount is taken by 72 percent of customers. What is the company's accounts receivable balance? Assume 365 days per year. A) $9,487.06 B) $17,011.73 C) $8,499.37 D) $15,465.21 E) $7,511.67

15) Cat Supplies offers terms of 2/10, net 35. The discount is taken by 72 percent of customers. What is the company's average collection period? A) 17.00 days B) 15.77 days C) 22.50 days D) 19.75 days E) 21.47 days

16) Black Guard Security has annual sales of $349,000 and a collection period of 19.66 days. What is the company's average balance in accounts receivable? Assume 365 days per year. A) $18,274.99 B) $17,244.59 C) $18,798.19 D) $17,751.78 E) $19,424.80

17) Silver Eyes, Incorporated, has an average collection period of 23.90 days and its average daily accounts receivable is $375,000. What are the company's annual credit sales assuming 365 days per year?

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A) $7,821,992.68 B) $5,726,987.45 C) $6,681,485.36 D) $6,363,319.39 E) $8,962,500.00

18) A company has annual sales of $5,570,000 and its average daily accounts receivable is $389,000. What is the average days' sales in receivables? Assume 365 days per year. A) 28.32 times B) 29.74 times C) 22.03 times D) 14.32 times E) 25.49 times

19) Comfy Furniture sells 3,000 couches per year at an average price of $1,100. The carrying cost per couch is $10.10 and the fixed order cost is $150. What is the economic order quantity for the couches? A) 383.09 units B) 331.68 units C) 348.26 units D) 250.00 units E) 298.51 units

20) Harper Motors sells 25 cars per month at an average price of $23,800. The carrying cost per car is $130 and the fixed order cost is $680. How many orders should the company place per year? A) 5.36 orders B) 8.03 orders C) 25.00 orders D) 56.02 orders E) 16.17 orders

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Answer Key Test name: Chapter 17 Test Bank - Algo 1) D Collection float = $435 + 875 Collection float = $1,310 2) C Collection float = $9,990 × 2.75 Collection float = $27,473 3) D Collection float = 73 × $598 × 2.25 Collection float = $98,222 4) D Disbursement float = $650 + 985 + 1,350 Disbursement float = $2,985 5) A Disbursement float = $6,025 × 2.25 Disbursement float = $13,556 6) A Disbursement float = 27 × $394 × 2.75 Disbursement float = $29,255 7) E Disbursement float = $8,455 × 2.75 Disbursement float = $23,251 Collection float = $10,220 × 2.25 Collection float = $22,995 This is a disbursement float of $23,251 − 22,995 = $256 8) E

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Disbursement float = $10,600 × 3 Disbursement float = $31,800 Collection float = $14,680 × 2.5 Collection float = $36,700 This is a collection float of $36,700 − 31,800 = $4,900. 9) A Disbursement float = 53 × $465 × 2.75 Disbursement float = $67,774 Collection float = 50 × $514 × 2.25 Collection float = $57,825 This is a disbursement float of $67,774 − 57,825 = $9,949. 10) A Disbursement float = 37 × $525 × 3 Disbursement float = $58,275 Collection float = 45 × $604 × 2.5 Collection float = $67,950 This is a collection float of $67,950 − 58,275 = $9,675. 11) B Average daily float = [4($11,120) + 3($6,475) + 2($7,710)]/30 Average daily float = $2,644.17 12) D Implicit interest = $15,700(.02) Implicit interest = $314 13) E Effective annual rate = [1 + (.02/(.98))]365/20 − 1 Effective annual rate = .4459, or 44.59% 14) E

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Total sale = 1,120($144) Total sales = $161,280 Average collection period = .72(10) + .28(35) Average collection period = 17.00 days Receivables turnover = 365/17.00 Receivables turnover = 21.4706 Accounts receivable = $161,280/21.4706 Accounts receivable = $7,511.67 15) A Average collection period = .72(10) + .28(35) Average collection period = 17.00 days 16) C Accounts receivable turnover = 365/19.66 Accounts receivable turnover = 18.5656 times Average accounts receivable = $349,000/18.5656 Average accounts receivable = $18,798.19 17) B Accounts receivable turnover = 365/23.90 Accounts receivable turnover = 15.2720 times Credit sales = 15.2720($375,000) Credit sales = $5,726,987.45 18) E Accounts receivable turnover = $5,570,000/$389,000 Accounts receivable turnover = 14.3188 times Days' sales in receivables = 365/14.3188 Days' sales in receivables = 25.49 days 19) E EOQ = [(2 × 3,000 × $150)/$10.10]1/2 EOQ = 298.51 units 20) A Version 1

EOQ = [(2 × 25 × 12 × $680)/$130]1/2 EOQ = 56.02 units Orders per year = (25 × 12)/56.02 Orders per year = 5.36

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) AJ’s Market generally holds $50,000 in cash in case an unexpected investment opportunity arises. This is an example of the _________blank motive for holding cash. A) precautionary B) opportunistic C) speculative D) reserve E) transaction

Holding cash as a financial reserve is referred to as the _________blank motive. A) precautionary B) opportunistic C) speculative D) activity E) transaction

The transaction motive refers to the need to hold cash: A) as a safety margin. B) for unforeseen investment opportunities. C) for daily operations. D) as a financial reserve. E) for emergency situations.

Float is defined as the difference between the:

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A) beginning and ending cash balances as shown on a cash budget. B) ledger balance and the available balance. C) book balance and the ledger balance. D) collections and disbursements for any given period of time. E) available balance and the collected balance.

5) Which one of the following is a special post office mailbox that is used to speed up the collection of accounts receivable payments? A) Separation box B) Cash box C) Concentration account D) Lockbox E) Float box

Cash concentration is best defined as: A) combining an entire firm's daily receipts into one bank deposit. B) combining a week's worth of cash receipts into one bank deposit. C) combining cash from multiple bank accounts into a firm's main bank accounts. D) using multiple lockboxes for collecting cash payments. E) combining a firm's bills so that disbursement checks are mailed only monthly.

7) Which one of the following is a disbursement account into which funds are transferred from a master account only as the funds are needed to cover checks presented for payment? A) Lockbox account B) Cash concentration account C) Ledger account D) Zero-balance account E) Cash clearing account

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8) A disbursement account into which funds are transferred only as needed to cover the demands for payment is called a(n) _________blank account. A) master B) controlled disbursement C) bank controlled D) investment E) safety stock

The terms of sale are best defined as the: A) total invoice amount including all shipping costs and taxes. B) period of time during which a sale price applies. C) legal documents related to the credit sale of either goods or services. D) conditions under which a firm sells its goods or services for either cash or credit. E) process used to determine which customers will be granted credit and which will not.

10)

The process of determining the probability that potential customers will not pay is called: A) credit analysis. B) collection policy. C) account aging. D) credit terms. E) customer invoicing.

11)

Collection policy refers to the:

A) process of determining which customers will be granted credit. B) process of determining the probability that customers will not pay. C) set of guidelines used by a firm to determine the cost of offering credit to its customers. D) daily process of handling cash inflows and outflows of cash. E) set of procedures a firm follows in collecting accounts receivable.

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12)

The length of time a firm grants its customers to pay for their purchases is called the: A) lockbox period. B) discount period. C) credit period. D) cash cycle. E) receivables turnover period.

13)

A bill given to a customer for goods he or she purchased is called a(n): A) account reconciliation. B) invoice. C) docket. D) remittance advice. E) shipping receipt.

14)

The primary purpose of a cash discount is to: A) compensate customers for an out-of-stock item. B) compensate customers for faulty goods or services. C) offset the interest charges on an account receivable. D) induce customers to pay promptly. E) induce customers to purchase specialty items.

15)

Which of these is evidence of indebtedness? A) Terms of sale B) Credit cost curve C) Credit instrument D) Concentration policy E) Credit policy

16) The graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy is called the:

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A) aging report. B) economic credit function. C) optimal credit curve. D) credit analysis graph. E) credit cost curve.

17) A(n) _________blank is a subsidiary of a firm that exists solely to handle the credit functions of the parent company. A) internal credit organization B) bank C) credit association D) captive finance company E) credit union

18) The basic factors that are reviewed when evaluating the creditworthiness of a potential customer are called the: A) terms of sale. B) receivables factors. C) five Cs of credit. D) collection policy determinants. E) credit scores.

19)

Credit scoring is the:

A) categorizing of customers into groups based on the length of time it takes each customer to pay for purchases. B) compiling of a list of accounts receivables segregated by the length of time each receivable has been outstanding. C) evaluation of the opportunity costs of a credit policy. D) process of quantifying the probability of default when granting credit to customers. E) tracking of both the number and the size of customer orders over a period of time.

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20) Kelly just completed compiling a listing of her firm's accounts receivables with each invoice segregated according to the length of time the invoice has been outstanding. What is the name given to this listing? A) Aging schedule B) Collection report C) Credit evaluation report D) Invoice schedule E) Terms of credit

21)

The economic order quantity (EOQ) is best defined as the: A) minimum size of an order needed to qualify for free shipping. B) minimum amount that must be ordered to obtain the quantity discount. C) number of items that are sold on average each month. D) restocking quantity that minimizes the total cost of inventory. E) minimal amount of inventory that must be purchased to receive a cash discount.

22) The set of procedures used to determine the inventory levels for demand-dependent inventories is called: A) the inventory flow log. B) materials requirements planning. C) a just-in-time inventory system. D) the Kanban. E) the keiretsu.

23) Which one of the following is a system for managing demand-dependent inventories that minimizes the amount of inventory on hand?

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A) Inventory flow log B) Materials requirements planning C) Just-in-time inventory system D) Kanban E) Keiretsu

24)

Which of these is a speculative motive for holding cash?

A) Buying extra inventory because a key supplier offered a special one-time discount B) Paying a $100 bonus to all employees at year-end C) Paying the annual insurance premium on the firm's assets D) Needing to purchase a new delivery truck because the old one was totally destroyed in an accident E) Contributing $1,000 to help fund medical care for an uninsured neighbor

25)

Which of these represents a transaction motive for holding cash?

A) Buying extra inventory in response to an unexpected sale offered by a supplier B) Distributing the weekly paychecks C) Increasing the minimum cash balance for the firm's main bank account D) Unexpectedly purchasing a competitor's firm E) Holding cash in anticipation that the firm may need to close for a few days if floodwaters keep rising

26) Laurie's Ice Rink keeps an extra $1,000 in its checking account in case an emergency arises. Which type of motive for holding cash does this represent? A) Speculative B) Float requirement C) Transaction D) Precautionary E) Availability

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27) BJ’s just reconciled its bank account and has $10,800 in outstanding deposits, $26,300 in checks outstanding, and a positive checkbook balance. The firm sells on a cash-only basis and deposits its receipts at the bank daily. The deposited funds are available to the firm the following day. The firm writes and mails checks on a daily basis also. These checks generally clear the bank in three days. What do you know about the firm's float given this information? A) The firm has disbursements float but no collection float. B) The collection float generally exceeds the disbursement float. C) The firm has a net collection float. D) The disbursement float generally exceeds the collection float. E) Since transactions occur daily, the firm has no float.

28) Alicia wrote a check for $18 on Friday, May 6. The check cleared the bank on Wednesday, May 11. There were no other checks or deposits outstanding during the month. Given this, which one of the following statements is correct? A) On May 6, the available balance decreased by $18. B) On May 11, the available balance was $18 less than the ledger balance. C) On May 12, the ledger balance was $18 less than the available balance. D) On May 14, the available balance increased by $18. E) On May 10, the ledger balance was $18 less than the available balance.

29)

The Check Clearing Act for the 21st Century has caused: A) increased check kiting. B) zero-balance accounts to disappear. C) the elimination of all lockboxes. D) a reduction in collection float, but not disbursement float. E) a reduction in both collection and disbursement float.

30) Taylor's Market received five checks today and went to the bank to deposit all of them. Unfortunately, the bank was closed for the day due to a robbery. How does the bank closure affect the firm's float assuming these five checks are the only outstanding bank items?

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A) Collection float increased B) Collection float decreased C) Disbursement float increased D) Disbursement float decreased E) Net float remained unchanged

31)

Which one of the following will reduce the disbursement float of a firm?

A) Mailing a check from a very remote location B) Mailing an unsigned check so that it must be returned for a signature C) Paying a loan payment at the bank rather than mailing a check to the bank D) Requiring that all checks be held one day before mailing so they can be reviewed by a manager E) Writing checks on a zero-balance account rather than on the master account

32)

Which statement is correct?

A) Disbursement float is the period of time between a firm making a bank deposit and the funds from that deposit being available to the firm. B) Disbursement float decreases when a check is delayed in the mail due to an extended holiday weekend. C) Disbursement float causes the available balance to exceed the ledger balance. D) Disbursement float is being totally eliminated by the Check Clearing Act for the 21st Century. E) Disbursement float exists when the available balance is less than the book balance.

33) Which of these practices will reduce a firm's collection float? 1.Installing a lockbox system 2.Utilizing zero-balance accounts 3.Depositing checks daily rather than weekly 4.Reducing the processing delay by one day

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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

34) To minimize collection float, a firm should do which of the following? 1.Deposit its collections at least daily 2.Make sure all checks it receives at the sales counter are properly dated and signed 3.Pay its bills in a timelier manner 4.Eliminate its regional lockboxes and have only one central lockbox located near the firm's home office A) I and II only B) III and IV only C) II, III, and IV only D) I, II, and III only E) I, II, III, and IV

35) Al's Bakery has a checkbook balance of $1,650. A $700 deposit was made today and will be added to the available balance tomorrow. There are two outstanding checks that total to $623 that should clear tomorrow. There are no other outstanding items. Which one of the following statements accurately reflects this situation? A) The disbursement float is $1,650. B) The firm's current available balance is equal to $1,650 plus $700 minus $623. C) The firm's collection float exceeds its disbursement float. D) The firm's available balance is greater than its book balance. E) The firm has a net disbursement float.

36) A firm's float management policy is most apt to include which one of the following statements?

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A) All invoices are to be paid the same day they are received. B) All outgoing checks are to be delivered by the fastest means possible. C) The depository bank needs to process all deposits in accordance with the Check Clearing Act for the 21st Century. D) Any check received is to be held until the customer's account has been updated to record the payment. E) Accounts payable processing should be given priority over accounts receivable processing.

37)

Which statement is correct?

A) Firms cannot use lockboxes if they use cash concentration accounts. B) Firms prefer to increase processing delay on disbursements. C) Firms prefer to eliminate all types of float. D) Firms open regional offices so their employees can pick up lockbox payments throughout the day. E) The Check Clearing Act for the 21st Century is designed to reduce total collection time to one day.

38)

Which of these is most apt to delay the collection of cash? A) Having customers mail checks to a local lockbox rather than the home office B) Depositing checks throughout the day C) Posting payments to accounts receivable prior to making deposits D) Collecting mail more frequently E) Supplying customers with bar coded payment slips

39)

Which of these is most likely the fastest method of collecting cash? A) Requiring customers to submit all payments to a lockbox B) Requiring customers to submit all payments to the home office C) Initiating a financial electronic data interchange at the time of sale D) Offering customers credit terms of 1/5, net 15 E) Eliminating all disbursement float

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40) How quickly can a bank receive payment once it transmits a copy of a check to the bank on which the check was drawn? A) Immediately B) In one day C) Between one and two days D) In two days E) Between two and three days

41)

Lockboxes should be located: A) in every town where a firm has a customer. B) geographically close to a firm's primary customers. C) only in major urban areas since those are the key financial areas of the country. D) close to a firm's home office. E) only in cities where the firm has regional offices.

42)

How are checks that are deposited into a typical lockbox handled?

A) The checks are deposited into a local bank which then overnights one check for the entire amount to the firm. B) The checks are collected once a day, normally in the early morning, by a bank employee. C) The checks are posted to the customer's account prior to being deposited. D) The checks are collected throughout the day and immediately deposited into the firm's account. E) The checks are collected and sent overnight to the firm's main office for processing.

43)

The checks received in a lockbox are deposited:

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A) into a local bank and then transferred electronically to a concentration account. B) into a local bank and immediately invested in short-term investments. C) as soon as they are posted to the customer's account. D) the following day and immediately invested. E) directly into an investment account.

44)

Cash concentration accounts: A) are no longer needed since the Check Clearing Act for the 21st Century has been

passed. B) eliminate the need for lockboxes. C) decrease a firm's disbursement float by reducing mail and processing delays. D) allow firms to more efficiently handle cash. E) tend to decrease a firm's investment income.

45)

Which of these is the most ethical practice related to cash disbursement management? A) Intentionally delaying payments by creating a complex accounts payable system B) Taking the cash discount but paying after the discount period C) Paying a supplier from a zero-balance account D) Purposely losing a supplier's invoice and requiring the supplier to submit another copy E) Mailing a check from the most remote location possible

46) Which one of the following is a primary benefit of implementing zero-balance accounts into a cash management system? A) Increased disbursements float B) Total elimination of all safety stocks C) Additional cash availability D) Decreased collection float E) Elimination of all float

47)

When are funds generally transferred into zero-balance accounts?

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A) Monthly B) Weekly C) Daily D) As needed E) Never

48)

Which statement is true concerning a controlled disbursement account? A) The number of checks that can be disbursed on any one day is limited. B) The bank will inform the firm of the amount that needs to be transferred on a daily

basis. C) The amount that can be disbursed on any given day is limited to the balance in the account when the bank opens in the morning. D) The total number of checks that can be written in any one month is limited. E) The amount of the disbursements is limited to the amount the firm has available on its bank line of credit.

49) Which of the following characteristics apply to U.S. Treasury bills? 1.Interest income taxed at both the federal and state level 2.Minimal, if any, default risk 3.Marketable, but not liquid 4.Short maturities 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

50) Which of these are money market securities? 1.Jumbo CDs 2.Short-term municipal debt 3.U.S. Treasury bills 4.Commercial paper

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A) I and IV only B) II and III only C) I, II, and IV only D) II, III, and IV only E) I, II, III, and IV

51) What is the key difference between an ordinary preferred stock and a money market preferred stock? A) Issuer B) Maturity C) Fixed versus floating dividend D) Voting rights E) Absence of any dividend

52)

Which characteristic generally applies to commercial paper? A) Issued only by financial institutions B) Issued only by corporations C) Maturities limited to 90 days or less D) Unsecured E) Secured by accounts receivable

53)

Which statement is correct? A) Commercial paper is highly marketable. B) All T-bills are issued with 90-day maturities. C) A certificate of deposit is a short-term loan to the government. D) Any CD with a face amount of $10,000 or more is classified as a jumbo CD. E) Money market preferred securities have less price volatility than ordinary preferred.

54)

A firm offers credit terms of 1/5, net 25. How long is the net credit period?

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A) 1 day B) 5 days C) 20 days D) 25 days E) 30 days

55)

Which of these will tend to decrease the credit period? A) Perishable product B) Long production and sales cycle C) Well-established customer D) Heavy reliance on sales to that particular customer E) Specialized new product

56) A firm grants credit with terms of 2/10, net 30. The firm's customers have _________blank days to pay in order to receive a _________blank percent discount. A) 2; 10 B) 10; 2 C) 15; 2 D) 20; 2 E) 30; 20

57)

Which one of the following will tend to increase the length of the credit period? A) Decrease in product cost B) Decrease in consumer demand C) Decrease in collateral value D) Increase in credit risk E) Increase in product standardization

58)

Which of these will tend to decrease the length of the credit period?

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A) Decrease in default risk B) Increase in the cost of the product C) Increase in competition D) Decrease in the size of the account E) Decrease in turnover rate

59) Which of these would be the most common evidence of indebtedness when a sale is made on open account? A) Sight draft B) Commercial draft C) Banker's acceptance D) Promissory note E) Invoice

60)

Which one of the following is most commonly used in international trades? A) Sight draft B) Time draft C) Commercial paper D) Banker's acceptance E) Open account

61)

For which one of the following instruments does a bank guarantee payment by the buyer? A) Money market preferred stock B) Commercial paper C) Banker's acceptance D) Invoice E) Time draft

62)

The optimal credit policy of any firm will:

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A) maximize sales. B) minimize bad debts. C) maximize units sold. D) minimize the total costs of granting credit. E) minimize carrying costs.

63) Which of the following characteristics will tend to cause a firm to adopt a more liberal credit policy? 1.Repeat customers 2.Excess capacity 3.High variable costs 4.Limited competition A) I and II only B) III and IV only C) I, II, and III only D) II, III, and IV only E) I, II, III, and IV

64)

Which of these refers to a customer's willingness to meet his or her credit obligations? A) Capital B) Conditions C) Capacity D) Character E) Collateral

65) Which one of the five Cs refers to the general economic climate in a customer's line of business?

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A) Capital B) Conditions C) Capacity D) Character E) Collateral

66) Which of these tends to create an unexpected increase in a firm's average collection period? A) Increased credit sales B) The implementation of a cash discount C) Increased customer delinquencies D) Increased dollar value per each sale E) Increased collection efforts

67) Which report identifies the percentage of accounts receivable that are delinquent by 90 days or more? A) Cash budget B) Five Cs of credit C) Credit analysis D) Aging schedule E) Credit scoring report

68)

Which of these is the best example of a raw material? A) Set of tires for an automaker B) Partially assembled airplane C) Cabinets ready to be shipped D) Can of paint waiting to be sold E) Completed product awaiting customer delivery

69)

Which one of the following best illustrates the concept of derived demand?

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A) A minimum wage worker tends to buy more off-brand products than do more highly paid professionals. B) A windshield company has to step up production because auto sales are increasing. C) A grocery store is selling more fresh fruits and vegetables. D) Restaurant sales are rising because unemployment is falling. E) Retail stores have increased sales around the holiday season.

70)

Which of these is a shortage cost? A) Restocking cost B) Opportunity cost of capital C) Inventory obsolescence D) Insurance cost E) Inventory theft

71)

The primary goal of inventory management is to minimize the: A) number of orders per year. B) average inventory level. C) total costs of holding inventory. D) level of inventory for the most expensive items. E) total opportunity costs.

72) Kate's Korner Market monitors 3 percent of its inventory on a daily basis, another 20 percent on a weekly basis, and the remaining inventory on a quarterly basis. What inventory management approach is being used? A) ABC B) EOQ C) MRP D) Q* E) JIT

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73) The economic order quantity approach states that inventory order sizes should be determined by: A) dividing annual item sales by the carrying cost per item and multiplying by 2. B) computing the average number of items sold each month. C) equating restocking costs with carrying costs. D) dividing the inventory into various groups based on the value per item. E) computing the amount of the derived demand.

74) A firm uses the extended economic order quantity approach to inventory management. Which one of the following inventory levels is considered to be the minimum inventory level given this approach? A) Zero inventory B) Reorder point level C) Safety stock level D) 50 percent of the reorder quantity E) Safety stock plus the reorder quantity

75) Which one of the following inventory management approaches determines the finished goods inventory level and then works backward until the raw material needs are determined? A) Extended EOQ B) Just-in-time C) ABC approach D) Materials requirements planning E) Economic order quantity

76) As of Monday morning, the ledger balance and the available balance for a firm was $3,000. During the day, the firm wrote three checks in the amounts of $750, $225, and $452. The firm deposited a check for $560 and a check for $258. What is the amount of the collection float as of the end of the day assuming none of these checks have cleared?

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A) $755 B) $1,427 C) $609 D) $818 E) $2,245

77) As of this morning, a firm had a ledger balance of $1,695 with no outstanding deposits or checks. Today, the firm deposited five checks in the amount of $32 each and wrote a check in the amount of $465. What is the amount of the collection float as of the end of the day assuming none of these checks had cleared? A) $305 B) $625 C) $283 D) $160 E) $1,070

78) On any given day, a firm receives and deposits numerous checks worth an average combined total of $9,125. The funds from the deposited checks are generally available after two days. Every day, the firm mails out checks totaling $7,300 that generally take three days to clear the bank. What is the amount of the collection float if the opening bank balance was $9,200? A) $14,230 B) $15,970 C) $18,430 D) $7,300 E) $18,250

79) On any given day, Daisy’s receives and deposits numerous checks worth an average combined total of $3,428. The funds from these checks are generally available in 1.6 days. Every day the firm mails out checks totaling $2,850 that generally take 1.9 days to clear the bank. What is the amount of the disbursement float if the opening bank balance was $945 with no outstanding items?

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A) $5,388 B) $5,505 C) $4,560 D) $5,415 E) $5,700

80) The UpTowner writes 39 checks a day for an average amount of $819 each. These checks generally clear the bank 2.5 days after they are written. In addition, the firm generally receives an average of $53,419 a day in checks. The checks that are received are deposited immediately and the funds are generally available the following day. What is the amount of the firm's disbursement float? A) $36,086 B) $89,505 C) $17,333 D) $79,853 E) $106,838

81) KL Textiles writes 22 checks a day for an average amount of $872 each. These checks generally clear the bank 3.5 days after they are written. In addition, the firm generally receives an average of $23,902 a day in checks. Deposited amounts are available after one day. What is the amount of the firm's disbursement float? A) $11,951 B) $23,902 C) $39,777 D) $67,144 E) $63,679

82) Larry Imports writes three checks a day for an average amount of $11,500 each. These checks generally clear the bank 2.1 days after they are written. In addition, the firm generally receives and deposits checks amounting to $19,500 each day. All deposits are available the next day. What is the firm's net float?

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A) Net collection float of $19,500 B) Net collection float of $52,950 C) Net collection float of $91,950 D) Net disbursement float of $52,950 E) Net disbursement float of $91,950

83) Spice it Up! writes 57 checks a day with an average amount of $298 each. These checks generally clear the bank in 2.7 days. In addition, the firm generally receives an average of $20,900 a day in checks that are deposited immediately. Deposited funds are available in an average of .5 days. What is the firm's net float? A) Net disbursement float of $36,318 B) Net disbursement float of $34,027.10 C) Net disbursement float of $35,412.20 D) Net collection float of $36,318 E) Net collection float of $34,027.10

84) During a normal month, Hank’s receives a total of nine checks with a total value of $148,500. On average, it takes 1 day from the date of deposit for the funds from these checks to be available to the firm. Assume each month has 30 days. What is the average daily float? A) $4,950 B) $44,800 C) $22,400 D) $112,000 E) $89,600

85) Harvest Foods generally receives three checks a month in the amounts of $38,950, $16,570, and $63,800. It takes an average of one day 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? Assume a 30-day month.

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A) $4,333.33 B) $3,983.33 C) $4,209.33 D) $3,977.33 E) $4,020.00

86) On May 12, you purchased $6,200 of merchandise from a supplier. The terms of the sale were 2/10, net 20. The discounted amount due is _________blank which is payable no later than _________blank. May has 31 days. A) $2,960; June 1 B) $3,515; June 1 C) $5,580; May 22 D) $6,076; May 22 E) $5,960; May 22

87) On April 14, Robertsons’s purchased $10,200 worth of inventory. The terms of sale were 3/10, net 30. The implicit interest is _________blank and the effective annual rate is _________blank percent. A) $300; 14.95 B) $306; 74.35 C) $306; 25.65 D) $300; 25.65 E) $400; 44.59

88) On June 22, Roy's Welding Shop purchased $2,618 worth of goods. The terms of the sale were 2/15, net 45. What is the effective annual rate of interest for the credit period for this sale? A) 27.86% B) 31.38% C) 29.42% D) 25.73% E) 28.63%

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89) You purchased an item costing $4,895 on April 15. The terms of sale were 2/7, net 15. What is the last day you can pay the discounted price? A) April 22 B) April 31 C) April 29 D) April 17 E) April 21

90) Treble Note Music sells 1380 musical instruments a year at an average price per instrument of $795. All sales are credit sales with terms of 2/10, net 30. The company has found that 76 percent of its customers take advantage of the discounted price. What is the amount of the firm's average accounts receivable? The discount amount is applied to a customer’s account only after payments have been received and processed. Assume a 365-day year. A) $43,565 B) $44,485 C) $45,890 D) $46,825 E) $46,100

91) The Pet Emporium offers credit terms of 2/10, net 20 to all of its customers. Historically, 79 percent of its customers take advantage of the discount. What is the firm's average collection period? A) 12.1 days B) 14.2 days C) 9.73 days D) 11.83 days E) 9.08 days

92) Beauty Aids has an average collection period of 8.4 days and annual credit sales of $978,300. What is the average investment in accounts receivable as shown on the balance sheet? Assume a 365-day year.

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A) $18,850 B) $20,375 C) $22,514 D) $18,906 E) $21,582

93) Electronics and More offers credit terms of 2/7, net 30. What is the effective annual rate on a $4,500 purchase if you forgo the discount? A) 41.83% B) 38.59% C) 44.99% D) 37.80% E) 32.58%

94) Rock Bottom Carpets sells 3,100 carpets a year at an average price per carpet of $1,640. The carrying cost per unit is $281.40. The company orders 500 carpets at a time and has a fixed order cost of $78 per order. The carpets are sold out before they are restocked. What is the economic order quantity? A) 38 carpets B) 66 carpets C) 47 carpets D) 51 carpets E) 41 carpets

95) Used Furniture sells 1,330 sofas a year at an average price per sofa of $549. The carrying cost per unit is $31.60. The company orders 75 sofas at a time and has a fixed order cost of $96 per order. The sofas are sold out before they are restocked. What is the economic order quantity?

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A) 76 sofas B) 72 sofas C) 81 sofas D) 90 sofas E) 101 sofas

96) The Flowering Vine buys hanging plants for $4 each and resells them for $10.95 each. The firm sells 6,200 plants per year. Generally, the firm orders 250 plants at a time and has a fixed cost per order of $49. The carrying cost per unit is $22.32. To avoid newer plants mixing with older plants, the inventory is totally sold out before it is restocked. Given the current ordering system, the total annual carrying cost is _________blank and the total annual restocking cost is _________blank. A) $2,811; $1,215 B) $2,811; $1,269 C) $2,790; $1,215 D) $2,790; $1,225 E) $3,212; $1,269

97) You have $32,618 on deposit at the bank with no outstanding checks or deposits. If you write a check for $9,800, what will be your book balance on that day if the check will take 3 days to clear? A) $23,718 B) $29,651 C) $41,518 D) $30,022 E) $22,818

98) You place an order for 380 units of Good Y at a unit price of $44. The supplier offers terms of 2/10, net 30. The supplier is offering you a discount of _________blank on your order if you pay within _________blank days.

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A) $372.40; 10 B) $1,489.60; 30 C) $334.40; 10 D) $1,489.60; 10 E) $372.40; 30

99) You place an order for 1,800 units of widgets at a unit price of $14.99. The supplier offers terms of 2/10, net 30. If you don't take the discount, how much interest on your order are you paying implicitly? A) $568.33 B) $539.64 C) $519.36 D) $540.65 E) $564.80

100) In a typical month, a company receives 39 checks totaling $168,000. The payment on these checks is normally delayed by an average of 2.7 days. What is the average daily float? Assume 30 days in a month. A) $14,500 B) $15,333 C) $15,120 D) $16,217 E) $14,667

101) Stinkey sells 2,250 units of its perfume collection each year at a price per unit of $199. All sales are on credit with terms of 2/7, net 30. The discount is taken by 91 percent of the customers. What is the average amount of the company's accounts receivable?

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A) $11,126 B) $11,246 C) $11,003 D) $14,815 E) $14,778

102) PP&M sells earnings forecasts for international securities. Its credit terms are 1/5, net 20. Based on experience, 66 percent of all customers take the discount. What is the average collection period? A) 10.4 days B) 10.1 days C) 11.1 days D) 10.6 days E) 10.9 days

103) Forest Living has annual credit sales of $11.65 million. The average collection period is 18 days. What is the average investment in accounts receivable as shown on the balance sheet? Assume a 365-day year. A) $546,000 B) $625,450 C) $510,899 D) $574,521 E) $493,156

104) A firm offers terms of 2/5, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? A) 21.69% B) 24.42% C) 28.97% D) 31.08% E) 34.31%

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105) Westpond’s has an average collection period of 36 days. Its average daily investment in accounts receivables is $62,456. What are its annual credit sales? Assume a 365-day year. A) $759,881 B) $633,234 C) $735,369 D) $725,295 E) $749,472

106) As of Monday morning, the ledger balance and the available balance for a firm was $3,000. During the day, the firm wrote three checks in the amounts of $750, $225, and $452. The firm deposited a check for $560 and a check for $258. What is the amount of the collection float as of the end of the day assuming none of these checks have cleared? A) $723 B) $2,431 C) $609 D) $854 E) $1,269

107) As of this morning, a firm had a ledger balance of $1,252 with no outstanding deposits or checks. Today, the firm deposited three checks in the amount of $63 each and wrote a check in the amount of $235. What is the amount of the collection float as of the end of the day assuming none of these checks had cleared? A) $46 B) $828 C) $424 D) $189 E) $1,070

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108) On any given day, Marlene’s receives and deposits numerous checks worth an average combined total of $2,348. The funds from these checks are generally available in 1.5 days. Every day the firm mails out checks totaling $1,900 that generally take 1.7 days to clear the bank. What is the amount of the disbursement float if the opening bank balance was $1,015 with no outstanding items? A) $2,850 B) $2,950 C) $3,800 D) $3,230 E) $3,865

109) Roberts Trucking writes two checks a day for an average amount of $17,750 each. These checks generally clear the bank 2.3 days after they are written. In addition, the firm generally receives and deposits checks amounting to $25,650 each day. All deposits are available the next day. What is the firm's net float? A) Net collection float of $25,650 B) Net collection float of $56,000 C) Net collection float of $107,300 D) Net disbursement float of $56,000 E) Net disbursement float of $107,300

110) During a normal month, Jim’s Gems receives a total of nine checks with a total value of $97,500. On average, it takes 1 day from the date of deposit for the funds from these checks to be available to the firm. Assume each month has 30 days. What is the average daily float? A) $3,250 B) $13,000 C) $26,000 D) $65,000 E) $52,000

111) Eastlake’s has an average collection period of 25 days. Its average daily investment in accounts receivables is $43,566. What are its annual credit sales? Assume a 365-day year.

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A) $530,053 B) $636,064 C) $512,955 D) $505,928 E) $522,792

112) On April 14, Dominic’s purchased $7,800 worth of inventory. The terms of sale were 1.5/10, net 30. The implicit interest is _________blank and the effective annual rate is _________blank percent. A) $100; 68.24 B) $117; 31.76 C) $117; 15.82 D) $200; 31.76 E) $200; 15.82

113) Cymbal Sales sells 725 musical instruments a year at an average price per instrument of $750. All sales are credit sales with terms of 2/10, net 30. The company has found that 67 percent of its customers take advantage of the discounted price. What is the amount of the firm's average accounts receivable? The discount amount is applied to a customer’s account only after payments have been received and processed. Assume a 365-day year. A) $23,565 B) $24,729 C) $25,890 D) $26,825 E) $26,100

114) The Pet Center offers credit terms of 2/10, net 30 to all of its customers. Historically, 79 percent of its customers take advantage of the discount. What is the firm's average collection period?

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A) 12.1 days B) 14.2 days C) 9.73 days D) 11.83 days E) 9.08 days

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Answer Key Test name: Chapter 17 Test Bank - Static 1) C 2) A 3) C 4) B 5) D 6) C 7) D 8) B 9) D 10) A 11) E 12) C 13) B 14) D 15) C 16) E 17) D 18) C 19) D 20) A 21) D 22) B 23) C 24) A 25) B 26) D Version 1

27) D 28) E 29) E 30) A 31) C 32) C 33) D 34) A 35) C 36) C 37) B 38) C 39) C 40) A 41) B 42) D 43) A 44) D 45) C 46) C 47) D 48) B 49) B 50) E 51) C 52) D 53) E 54) D 55) A 56) B Version 1

57) B 58) D 59) E 60) D 61) C 62) D 63) A 64) D 65) B 66) C 67) D 68) A 69) B 70) A 71) C 72) A 73) C 74) C 75) D 76) D Collection float = $560 + 258 = $818 77) D Collection float = 5 × $32 = $160 78) E Collection float = 2 × $9,125 = $18,250 79) D Disbursement float = 1.9 × $2,850 = $5,415 80) D Disbursement float = 39 × $819 × 2.5 = $79,853 81) D Version 1

Disbursement float = 22 × $872 × 3.5 = $67,144 82) D Collection float = 1 × $19,500 = $19,500 Disbursement float = 3 × $11,500 × 2.1 = $72,450 Net disbursement float = $72,450 − 19,500 = $52,950 83) C Collection float = .5 × $20,900 = $10,450 Disbursement float = 57 × $298 × 2.7 = $45,862.20 Net disbursement float = $45,862.20 − 10,450 = $35,412.20 84) A Average daily float = $148,500/30 × 1 = $4,950 85) D Average daily float = [($38,950 + 16,570 + 63,800)/30] × 1 = $3,977.33 86) D Last day for discount = May 12 + 10 days = May 22 Discounted price = $6,200 × (1 − .02) = $6,076 87) B Implicit interest = .03 × $10,200= $306 Days of credit granted = 30 − 10 = 20 days Effective annual rate = (1 + {(.03 × $10,200)/[(1 − .03) × $10,200]})365/20 − 1 = .7435, or 74.35% 88) A Days of credit granted = 45 − 15 = 30 days Effective annual rate = (1 + {(.02 × $2,618)/[(1 − .02) × $2,618]})365/30 − 1 = .2786, or 27.86% 89) A Last day for discount = April 15 + 7 days = April 22 90) B

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Total sales = 1,380 × $795 = $1,097,100 Average collection period = (.76 × 10) + (.24 × 30) = 14.8 days Average accounts receivable = $1,097,100/365 × 14.8 = $44,485 91) A Average collection period = (.79 × 10) + (.21 × 20) = 12.1 days 92) C Average investment in receivables = ($978,300/365) × 8.4 = $22,514 93) D Days in period = 30 − 7 = 23 days Effective annual rate = (1 + {(.02 × $4,500)/[(1 − .02) × $4,500]})365/23 − 1 = .3780, or 37.80% 94) E EOQ = [(2 × 3,100 × $78)/$281.40].5 = 41 carpets 95) D EOQ = [(2 × 1,330 × $96)/$31.60].5 = 90 sofas 96) C Total annual carrying cost = [(250 + 0)/2] × $22.32 = $2,790 Total restocking cost = (6,200/250) × $49 = $1,215 97) E Book balance = $32,618 − 9,800 = $22,818 98) C Discount = 380 × $44 ×.02 = $334.40 The discount is received if the invoice is paid within 10 days 99) B Implicit interest = 1,800 × $14.99 ×.02 = $539.64 100) C Average daily float = $168,000/30 × 2.7 = $15,120 101) A Average collection period = (.91 × 7) + (.09 × 30) = 9.07 days Accounts receivable = [(2,250 × $199)/365] × 9.07 = $11,126 Version 1

102) B Average collection period = (.66 × 5) + (.34 × 20) = 10.1 days 103) D Average accounts receivable = $11,650,000/365 × 18 = $574,521 104) E EAR = ({1 + [.02/(1 − .02)]}365/(30 − 5)) − 1 = .3431, or 34.31% 105) B Annual Credit Sales = ($62,456/36)(365) = $633,234 106) D Collection float = $356 + 498 = $854 107) D Collection float = 3 × $63 = $189 108) D Disbursement float = 1.7 × $1,900 = $3,230 109) D Collection float = 1 × $25,650 = $25,650 Disbursement float = 2 × $17,750 × 2.3 = $81,650 Net disbursement float = $81,650 − 25,650 = $56,000 110) A Average daily float = $97,500/30 × 1 = $3,250 111) B Average collection period = ($43,566/25)(365) = $636,064 112) B Implicit interest = .015 × $7,800 = $117 Days of credit granted = 30 − 10 = 20 days Effective annual rate = (1 + {(.015 × $7,800)/[(1 − .015) × $7,800]})365/20 − 1 = .3176, or 31.76% 113) B

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Total sales = 725 × $750 = $543,750 Average collection period = (.67 × 10) + (.33 × 30) = 16.6 days Average accounts receivable = $543,750/365 × 16.6 = $24,729 114) B Average collection period = (.79 × 10) + (.21 × 30) = 14.2 days

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The exchange rate is 1.31 Swiss francs per dollar. How many U.S. dollars are needed to purchase 11,000 Swiss francs? A) $14,410.00 B) $11,403.47 C) $8,396.95 D) $14,680.00 E) $7,633.59

2) The exchange rate is .7671 U.S. dollars per Brazilian real. How many U.S. dollars are needed to purchase 8,600 Brazilian reals? A) $6,867.06 B) $8,904.06 C) $10,191.87 D) $11,211.05 E) $6,597.06

3) You are planning a trip to the United Kingdom and expect that you will spend 2,700 pounds. How much will your spending be in U.S. dollars if the exchange rate is .7359 pounds per dollar? A) $3,335.43 B) $2,256.93 C) $3,668.98 D) $2,827.95 E) $1,986.93

4) You just returned from a trip to Italy and have 470 euros remaining. How many dollars will you receive when you return home if the exchange rate is .9233 euros per U.S dollar?

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A) $493.43 B) $509.04 C) $538.99 D) $433.95 E) $451.98

5) Your German friend has decided to come visit you in the U.S. You estimate the cost of her trip will be $3,600. What is the cost of her trip in euros if the U.S. dollar equivalent of the euro is 1.1434? A) €3,858.12 B) €3,148.50 C) €3,257.07 D) €4,116.24 E) €2,982.79

6) You can exchange $1 for either .8959 euro or .7181 British pounds. What is the cross-rate in terms of pounds per euro? A) £1.2476/€ B) £.8015/€ C) £1.1516/€ D) £.6433/€ E) £.7125/€

7) You can exchange $1 for either Can$1.1459 or ¥127.15. What is the cross-rate between the Canadian dollar and Japanese yen? A) Can$145.7012/¥ B) Can$.0083/¥ C) Can$98.6318/¥ D) Can$110.9608/¥ E) Can$.0090/¥

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8) Currently, you can purchase either 113 Canadian dollars or 10,700 Japanese yen per $100. What is the yen/Canadian dollar cross-rate? A) ¥94.6903/Can$ B) ¥.0132/Can$ C) ¥99.9508/Can$ D) ¥.0106/Can$ E) ¥.0097/Can$

9) The spot rate for the British pound is £.7169 = $1 and the Canadian dollar is Can$1.0717 = $1. What is the £/Can$ cross-rate? A) £1.4949/Can$ B) £.6175/Can$ C) £.8362/Can$ D) £1.5780/Can$ E) £.6689/Can$

10) Currently, you can exchange $1 for either ¥105.38 or €.7538 in New York. In Tokyo, the exchange rate is ¥/€.0073. If you have $1,200, how much profit can you earn with triangle arbitrage? A) $24.63 B) $22.74 C) $30.79 D) $27.37 E) $25.93

11) The exchange rates in New York for $1 are Can$1.0953 or £.7267. In Toronto, Can$1 will buy £.6724. How much profit can you earn on $9,000 using triangle arbitrage?

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A) $151.40 B) $111.80 C) $127.49 D) $121.12 E) $114.39

12) Your favorite running shoes cost $88 in the U.S. while the identical shoes cost Can$116.10 in Canada. According to absolute purchasing power parity, what is the Can$/$ exchange rate? A) Can$1.3721/$ B) Can$1.4136/$ C) Can$.7909/$ D) Can$.7580/$ E) Can$1.3193/$

13) A ski resort hotel room in Switzerland costs SF350. A ski resort hotel room in Colorado costs $340. Assuming the slopes and hotel rooms are identical, what is the Swiss franc/U.S. dollar exchange rate? A) SF1.0706/$ B) SF.9714/$ C) SF1.1029/$ D) SF1.0137/$ E) SF1.0294/$

14) A set of golf clubs costs $1,200 in the United States. The current exchange rate is $1.3643/£. Assuming absolute purchasing power parity holds, what is the price of the clubs in Scotland?

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A) £879.57 B) £1,637.16 C) £1,555.30 D) £914.75 E) £942.40

15) The current spot rate between the pound and dollar is £.7598/$. The expected inflation rate in the U.S is 2.95 percent and the expected inflation rate in the U.K. is 1.84 percent. Assuming relative purchasing power parity holds, what will the exchange rate be next year? A) £.7682/$ B) £.7814/$ C) £.7814/$ D) £.7514/$ E) £.7962/$

16) The current spot rate between the euro and dollar is €1.1041/$. The annual inflation rate in the U.S is expected to be 1.79 percent and the annual inflation rate in euroland is expected to be 2.99 percent. Assuming relative purchasing power parity holds, what will the exchange rate be in two years? A) €1.0778/$ B) €1.1173/$ C) €1.0909/$ D) €1.1443/$ E) €1.1308/$

17) The annual inflation rate in the U.S is expected to be 1.79 percent and the annual inflation rate in Poland is expected to be 4.61 percent. The current spot rate between the zloty and dollar is Z4.1232/$. Assuming relative purchasing power parity holds, what will the exchange rate be in four years?

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A) Z4.6083/$ B) Z4.4820/$ C) Z4.3590/$ D) Z3.6774/$ E) Z3.7841/$

18) The spot rate between Canada and the U.S. is Can$1.2404/$, while the one-year forward rate is Can$1.2403/$. The risk-free rate in Canada is 4.35 percent and risk-free rate in the United States is 2.62 percent. How much in profit can you earn on $5,000 utilizing covered interest arbitrage? A) $86.92 B) $86.08 C) $69.54 D) $76.06 E) $96.84

19) The spot rate between the U.K. and the U.S. is £.7519/$, while the one-year forward rate is £.7521/$. The risk-free rate in the U.K. is 1.97 percent and risk-free rate in the United States is 1.64 percent. How much in profit can you earn on $10,000 utilizing covered interest arbitrage? A) $24.23 B) $26.50 C) $35.71 D) $40.18 E) $30.29

20) The one-year forward rate for the Swiss franc is SF1.1457/$. The spot rate is SF1.1581/$. The interest rate on a risk-free asset in Switzerland is 2.59 percent. If interest rate parity exists, what is the one-year risk-free rate in the U.S.?

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A) 2.96% B) 3.70% C) 3.24% D) 3.47% E) 1.49%

21) The spot rate between the Japanese yen and the U.S. dollar is ¥108.78/$, while the oneyear forward rate is ¥108.91/$. The one-year risk-free rate in the U.S. is 3.07 percent. If interest rate parity exists, what is the one-year risk-free rate in Japan? A) 2.84% B) 2.76% C) 2.58% D) 3.19% E) 2.95%

22) Assume interest rate parity holds. The one-year risk-free rate in the U.S. is 2.58 percent and the one-year risk-free rate in Japan is 3.00 percent. The spot rate between the Japanese yen and the U.S. dollar is ¥110.55/$. What is the one-year forward exchange rate? A) ¥111.00/$ B) ¥112.87/$ C) ¥110.10/$ D) ¥113.84/$ E) ¥110.55/$

23) The one-year risk-free rate in the U.S. is 4.34 percent and the one-year risk-free rate in Mexico is 6.64 percent. The one-year forward rate between the Mexican peso and the U.S. dollar is MXN12.37/$. What is the spot exchange rate? Assume interest rate parity holds.

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A) MXN14.939/$ B) MXN12.099/$ C) MXN13.969/$ D) MXN12.639/$ E) MXN12.366/$

24) A U.S. firm has total assets valued at €848,000 located in Germany. This valuation did not change from last year. Last year, the exchange rate was €.9482/$. Today, the exchange rate is €.9009/$. By what amount did these assets change in value on the firm's U.S. financial statements? A) $40,110.40 B) −$40,110.40 C) $0 D) −$46,954.85 E) $46,954.85

25) Last year, the Mexican peso/U.S. dollar exchange rate was MXN13.1450/$. Today, the exchange rate is MXN13.8643/$. A U.S. firm has total assets worth MXN12,150,000 located in Mexico that did not change in value over the year. What was the change in the value of the assets in dollars on the company's U.S. balance sheet? A) $0 B) $31,603.19 C) −$31,603.19 D) −$47,954.33 E) $47,954.33

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Answer Key Test name: Chapter 18 Test Bank - Algo 1) C Dollars needed = SF11,000($1/SF1.31) Dollars needed = $8,396.95 2) E Dollars needed = Real 8,600(.7671$ per Real) Dollars needed = $6,597.06 3) C Dollars needed = £2,700($1/£.7359) Dollars needed = $3,668.98 4) B Dollars needed = €470($1/€.9233) Dollars needed = $509.04 5) B Euros needed = $3,600(€/$1.1434) Euros needed = €3,148.50 6) B £.7181 = €.8959 £.8015/€ 7) E Can$1.1459 = ¥127.1500 Can$.0090/¥ 8) A ¥10,700 = Can$113 ¥94.6903/Can$ 9) E

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£.7169 = Can$1.0717 £.6689/Can$ 10) A Profit = [$1,200(¥105.38/$1)(€.0073/¥)($1/€.7538)] − $1,200 Profit = $24.63 11) D Profit = [$9,000(Can$1.0953/$1)(($1/£.7267)(£.6724/Can$1)] − $9,000 Profit = $121.12 12) E Can$116.10/$88 Can$1.3193/$ 13) E SF350 = $340 SF1.0294/$ 14) A Price = $1,200(£/$1.3643) Price = £879.57 15) D Forward rate = £.7598[1 + (.0184 − .0295)] Forward rate = £.7514 16) E Forward rate = €1.1041[1 + (.0299 − .0179)]2 Forward rate = €1.1308 17) A Forward rate = Z4.1232[1 + (.0461 − .0179)]4 Forward rate = Z4.6083 18) A Profit = $5,000(Can$1.2404/$)(1.0435)($/Can$1.2403) − $5,000(1.0262) Profit = $86.92 Version 1

19) E Profit = $10,000(£.7519/$)(1.0197)($/£.7521) − $10,000(1.0164) Profit = $30.29 20) B 1.1457/1.1581 = 1.0259/(1 + RUS) RUS = .0370, or 3.70% 21) D 108.91/108.78 = (1 + RJ)/1.0307 RJ = .0319, or 3.19% 22) A F1/S0 = F1/¥110.55 = 1.0300/1.0258 F1 = ¥111.00/$ 23) D F1/S0 = MXN12.366/S0 = 1.0664/1.0434 S0= MXN12.639/$ 24) E Change = €848,000($/€.9009) − €848,000($/€.9482) Change = $46,954.85 25) D Change = MXN12,150,000($/€13.8643) − MXN12,150,000($/€13.1450) Change = −$47,954.33

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) An American Depositary Receipt is defined as a security: A) that has been deposited in an interest-bearing account at a U.S. bank. B) issued outside the U.S. that represents shares of a U.S. stock. C) issued in the U.S. that represents shares of a foreign stock. D) that has a guarantee of payment from a U.S. bank. E) issued in multiple countries but denominated in U.S. currency.

2) You are given the exchange rate between the U.S. dollar and the Canadian dollar. You are also given the exchange rate between the U.S. dollar and the Mexican peso. What is the name given to the Canadian dollar per Mexican peso exchange rate derived from the information that was provided? A) Swap rate B) Depositary rate C) Forward rate D) London Interbank rate E) Cross-rate

3) Eurobonds are best defined as international bonds issued in _________blank and denominated in _________blank. A) a single country; multiple currencies B) a single country; a single currency C) multiple countries; multiple currencies D) multiple countries; a single currency E) Euroland; euros

Which one of the following is the best definition of Eurocurrency?

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A) Any paper money used by a country that has adopted the euro as its common currency B) Money deposited in a financial institution outside the country whose currency is involved C) Both paper and coins officially adopted under the euro system of coinage D) U.S. dollars owned by any country that has adopted the euro as its currency E) Any exchange of funds between two countries that have adopted the euro as their official currency

5) Which one of the following terms is used to describe international bonds issued in a single country and generally denominated in that country's currency? A) Eurobonds B) American Depositary Receipts C) Foreign bonds D) Swaps E) Gilts

6) Prior to 2020, which one of the following was the rate that most international banks charged when they loaned Eurodollars to other banks? A) ADR B) LIBOR C) Cross-rate D) Gilt rate E) Swap rate

Which of these is defined as an agreement to exchange two securities or two currencies? A) Hedge B) Swap C) SWIFT D) Gilt E) Arbitrage

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The market where euros, pesos, dollars, and pounds are traded is referred to as the: A) ADR market. B) LIBOR market. C) gilt market. D) euromarket. E) foreign exchange market.

Which one of the following is the best universal definition of an exchange rate?

A) Price of one country's currency expressed in terms of another country's currency B) Number of foreign dollars that can be purchased for every one U.S. dollar paid C) Price of a country's currency expressed in terms of that country's currency unit D) Number of units of a currency that were originally required to obtain one euro when a country adopted the euro as its official currency E) Price that must be paid to obtain a good or service from another country

10) A trader in Switzerland just agreed to trade Swiss francs for British pounds based on today's exchange rate. The trade is expected to settle tomorrow. What term best describes this exchange? A) Arbitrage transaction B) Forward trade C) Spot trade D) Purchasing power parity E) Interest rate parity

11)

The spot exchange rate is the exchange rate that applies to a(n): A) LIBOR transaction. B) ADR transaction. C) spot trade. D) forward trade. E) future transaction.

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12) An agreement to exchange currencies sometime in the future is referred to as which one of the following? A) Forward trade B) Hedge C) Gilt D) Forward exchange rate E) Spot trade

13) Which one of the following is the agreed-upon exchange rate that is to be used when currencies are exchanged at some point in the future based on an agreement made today? A) Spot rate B) ADR rate C) London Interbank Offer Rate D) Forward exchange rate E) Cross-rate

14) Which one of the following terms is used to identify the concept that exchange rates vary to keep purchasing power constant among currencies? A) Exchange rate equilibrium B) Exchange rate parity C) Universal parity D) Market equilibrium E) Purchasing power parity

15) Which of these states that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate?

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A) Arbitrage equilibrium B) Relative purchasing power parity C) Absolute purchasing power parity D) Interest rate parity E) Cross-rate parity

16) Which term is defined as having international operations in a world where relative currency values change? A) Political risk B) Relative purchasing power parity C) Interest rate parity D) Absolute purchasing power parity E) Exchange rate risk

17) Which one of the following is the risk arising from changes in value caused by political actions? A) Exchange rate risk B) Political risk C) Translation risk D) LIBOR risk E) Cross-rate risk

18) You live in the U.S. and want to invest in a Chinese company, which will be referred to as "CC," because you believe its stock is uniquely positioned to be unusually profitable over the next five years. However, you do not have direct access to the Chinese financial markets. You may be able to indirectly invest in CC by purchasing a(n): A) swap. B) American depository receipt. C) gilt. D) Bulldog bond. E) Samurai bond.

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19) Rembrandt, Samurai, Yankee, and Bulldog are all names associated with which one of the following? A) Eurobonds B) Currencies C) Cross-rate D) Foreign bonds E) Foreign interest rates

20)

Which country is correctly matched with its currency? A) Canada—pound B) China—yuan C) Mexico—real D) Japan—lira E) United Kingdom—euro

21)

Which statement is correct?

A) Exchange rates are adjusted each morning and held constant until the following morning. B) The four most commonly traded currencies in the foreign exchange markets are the U.S. dollar, French franc, European euro, and Brazilian real. C) All South American countries use the peso as their currency. D) New Zealand uses the same currency as Australia and that is the A$. E) The foreign exchange market is the largest financial market in the world.

22) Which of the following parties are participants in the foreign exchange market? 1.U.S. importers 2.U.S. exporters 3.U.S. travelers to Europe 4.Foreign portfolio managers who purchase American securities

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A) I and III only B) II and IV only C) I, III, and IV only D) II, III, and IV only E) I, II, III, and IV

23)

Assume the exchange rates for the Canadian dollar versus the U.S. dollar are: USD equiv

Last week This week

Currency per USD

.8759 .8761

1.1417 1.1414

Which statement is correct given this information? A) Last week, it took C$.8759 to purchase $1. B) This week you can exchange C$1 for $1.1414. C) It is cheaper for an American to travel in Canada this week than it was last week. D) The Canadian dollar depreciated from last week to this week. E) You would have made a profit if you had invested $100 in Canadian dollars last week and then converted your money back to U.S. dollars this week. Ignore any interest earnings.

24) The U.S. dollar equivalent is .3897 for the Brazilian real and 1.5649 for the UK pound. Which one of the following statements is correct given this information? A) One U.S. dollar will buy .3897 Brazilian reals. B) If you have .3897 Brazilian reals, they are worth 1.5649 UK pounds. C) One UK pound will buy 1.5649 U.S. dollars. D) One Brazilian real will buy 1.5649 UK pounds. E) One U.S. dollar will buy 1.5649 UK pounds.

25) Assume you can exchange $1 for either £1 or €.50 in the U.S. In the London market, you can exchange £1 for €.52. This situation creates an opportunity to profit immediately from which one of the following?

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A) Futures arbitrage B) Currency hedge C) Interest rate swap D) Absolute purchasing power parity E) Triangle arbitrage

26) Later this week, you are traveling from the U.S. to Canada for a week's vacation. This morning, you exchanged some U.S. dollars for Canadian dollars in preparation for that trip. Which one of the following best describes this exchange? A) Forward trade B) Spot trade C) Arbitrage transaction D) Cross-rate exchange E) Eurocurrency transaction

27) Which one of the following best describes an agreement you make today to exchange U.S. dollars for British pounds three months from now? A) Forward trade B) Spot trade C) Arbitrage transaction D) Cross-rate exchange E) Eurocurrency transaction

28) You have just agreed to a forward trade that will be settled six months from now. When is the exchange rate for this transaction determined? A) Today B) Three months from today because that is the halfway point C) Anytime you prefer within the next six months D) Whenever the spot rate six months from today is known E) Six months from now

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29) Assume a canned soft drink costs $1 in the U.S. and $1.30 in Canada. At the same time, the currency per U.S. dollar is C$1.30. Which one of the following conditions exists in this situation? A) Absolute purchasing power parity B) Interest rate parity C) Relative purchasing power parity D) Translation exposure E) Equal spot and forward rates

30) Assume that PE is the euro price of a product, PUS is the U.S. price of the identical product, and S0 is the spot exchange rate, quoted as the amount of foreign currency per dollar. Given this, which one of the following correctly expresses absolute purchasing power parity? A) PUS = S0/PE B) PUS = S0 × PE C) PUS = S0 + PE D) PE = S0/PUS E) PE = S0 × PUS

31) Relative purchasing power parity is based on the principle that the expected percentage change in the exchange rate between two countries is equal to which one of the following? A) Difference in the risk-free interest rates in the two countries B) Average interest rate in the two countries C) Average inflation rate of the two countries D) Difference in the inflation rates of the two countries E) Difference between the two countries' average inflation and interest rates

32) Assume you can currently exchange $1 for ¥100. Also assume the inflation rate will be 2.5 percent annually in the U.S. and 2 percent in Japan. Given these assumptions, how many yen should you expect in exchange for $1 next year?

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A) More than 100 B) Either 100 or more than 100 C) Exactly 100 D) Either 100 or less than 100 E) Less than 100

33) Currently, you can exchange $1 for SF1.14. Assume the average inflation rate in the U.S. over the next two years will be 2.5 percent annually as compared to 3 percent in Switzerland. Based on this information and relative purchasing power parity, which of the following assumptions can you make regarding the next two years? A) The Swiss franc will appreciate against all currencies. B) The Swiss franc will appreciate against the U.S. dollar. C) The U.S. dollar will appreciate against all currencies. D) The U.S. dollar will appreciate against the Swiss franc. E) Both the U.S. dollar and the Swiss franc will appreciate against all other currencies.

34) Suppose you could buy 1,115 South Korean won or 100 Pakistani rupees last year for $1. Today, $1 will buy you 1,113 won or 102 rupees. Which one of the following occurred over the past year? A) The dollar appreciated against the won. B) The dollar depreciated against the rupee. C) The dollar appreciated against both the won and the rupee. D) The won depreciated against the dollar. E) The rupee depreciated against the dollar.

35) Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the $1 is borrowed and S0 = spot rate; F1 = one-year forward rate; RF = foreign country risk-free rate; and RUS = U.S. risk-free rate.

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A) $1 × F1 × (1 + RF)/S0 − $1 × (1 + RUS) B) $1 × S0 × (1 + RF)/F1 − $1 × (1 + RUS) C) $1 × F1 × (1 + RF)/S0 + $1 × (1 + RUS) D) $1 × S0 × (1 + RF) − $1 × (1 + RUS)/F1 E) $1 × S0 × (1 + RF)/F1 + $1 × (1 + RUS)

36)

Which of these must be significantly eliminated if interest rate parity is to exist? A) Absolute purchasing power parity B) Short-run exposure to exchange rate risk C) Covered interest arbitrage opportunities D) Relative purchasing power parity E) Translation exposure

37)

Interest rate parity defines the relationships among which of the following? A) Spot exchange rates, future exchange rates, interest rates, and inflation rates B) Real and nominal interest rates across countries C) Real interest and inflation rates D) Forward exchange rates, relative interest rates, and spot exchange rates E) Spot exchange rates, forward exchange rates, nominal interest rates, and real interest

rates

38)

Which of these occurs when interest rate parity exists between Countries A and B? A) Country A investors are indifferent between risk-free investments in Countries A and

B. B) Forward exchange rates for Countries A and B must be equal for all time periods. C) Risk-free interest rates in Countries A and B must be equal. D) Spot and forward exchange rates between the currencies of the two countries must be equal. E) Significant covered interest arbitrage opportunities between currencies of Countries A and B must exist.

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39) Which one of the following is an example of long-run exposure to exchange rate risk? Ignore all fees and transaction costs. A) A U.S. firm owns land in Mexico valued at three million pesos. That value has remained constant in Mexican pesos for the past year. However, the firm's financial statement reflects a 3 percent decrease in the value of that land for last year. B) A U.S. firm sells $250,000 worth of goods to Peru. However, when the payment for those goods arrives and the U.S. firm exchanges the foreign currency, it receives only $248,700. C) A U.S. firm purchases $120,000 worth of goods from Canada. However, by the time the goods arrive and the invoice is payable, the cost of those goods has increased to $120,400. D) A few years ago, a U.S. firm built a factory in Asia to take advantage of the lower labor costs. Today, the Asian labor costs have increased such that the Asian factory no longer provides a cost advantage over a U.S. factory. E) A U.S. traveler withdrew an extra $2,000 in cash from her savings account to take with her as emergency funds when she traveled to Mexico. Before leaving on her trip, she exchanged this money into Mexican pesos. She never used any of this money during her vacation, so exchanged all of it back into U.S. dollars on her return and received $1,960.

40) Short-run exposure to exchange rate risk is best illustrated by which one of the following? A) Change in book value when the market value of an asset remains constant B) Daily fluctuations in the spot rate C) Increases in the forward rate as the time to settlement increases D) Changes in relative economic conditions between two countries E) Unrealized foreign exchange gains

41) Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory. This firm is most likely trying to greatly reduce, or eliminate, which one of the following?

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A) Interest rate disparities B) Short-run exposure to exchange rate risk C) Long-run exposure to exchange rate risk D) Political risk associated with the foreign operations E) Translation exposure to exchange rate risk

42) The foreign subsidiary of a U.S. firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S. dollars. This is an example of which one of the following? A) Interest rate disparities B) Short-run exposure to exchange rate risk C) Long-run exposure to exchange rate risk D) Political risk associated with the foreign operations E) Translation exposure to exchange rate risk

43) Which one of the following is the suggested method of handling exchange rate risk for a large, multinational firm headquartered in the U.S.? Assume the operations in each country represent a different division of the firm. A) At the division level B) At a level that combines all divisions representing a separate geographic continent C) At a level that combines divisions based on the currency used by each division D) By segregating U.S. operations and foreign operations E) On a centralized basis for all divisions

44) Which one of these most likely represents the greatest political risk for a U.S.-based firm? A) A product assembly plant located in a foreign country B) A foreign sales office C) Accounting office that handles all payroll functions and is located in a foreign country D) Natural ore mine in a foreign country E) Subassembly plant in a foreign country that uses U.S.-made components

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45) Which one of the following is an example of the political risks associated with foreign operations? A) Technological changes B) Exchange rate fluctuations C) Translation exposure to exchange rate risk D) Changes in foreign tax laws E) Changes in relative wage rates between the home country and the foreign country

46) Assume the exchange rate is 1.05 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,250 Swiss francs? A) $1,315.79 B) $1,190.48 C) $1,128.80 D) $1,140.00 E) $1,318.46

47) You are going to London and plan on spending £5,300. How many dollars will this trip cost you if the currency per $1 is £.77? A) $6,875.95 B) $6,892.16 C) $6,883.12 D) $6,890.01 E) $7,044.04

48) You just returned from a trip to Germany and have 277 euros in your pocket. How many dollars will you receive when you exchange this money if the U.S. dollar equivalent of the euro is .89?

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A) $202.56 B) $246.53 C) $204.35 D) $397.18 E) $262.56

49) You are planning an extended trip to India and have located some housing that you can lease for 32,750 rupees per month. What is the cost per month in U.S. dollars if the exchange rate is Rs1 = $.01606? A) $1,208.15 B) $598.24 C) $1,311.27 D) $525.97 E) $709.30

50) You are debating between spending a week in Brazil or a week in Chile. You've estimated the cost of the Brazilian trip at 56,300 reals and the Chilean trip at 13.6 million pesos. The currency per U.S. dollar is 2.5658 reals and 609.10 pesos. If you prefer the less expensive trip, as measured in U.S. dollars, you should travel to _________blank because you can save _________blank. A) Brazil; $460.45 B) Brazil; $518.74 C) Chile; $384.29 D) Chile; $613.33 E) Brazil; $385.55

51) Your German friend has decided to come and visit you in the U.S. You estimate the cost of her trip at $2,200. What is the cost to her in euros if the U.S. dollar equivalent of the euro is 1.4043?

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A) €1,566.62 B) €1,766.78 C) €1,908.50 D) €2,739.44 E) €2,806.16

52) Assume you can exchange $1 for either €.8031 euro or £.6039. What is the cross-rate between the pound and the euro? A) £.7520/€1 B) £.8356/€1 C) £.7957/€1 D) £1.0852/€1 E) £1.5577/€1

53) Assume you can exchange $1 for either C$1.1417 or ¥249.17. What is the cross-rate between the Canadian dollar and the Japanese yen? A) C$.009625/¥1 B) C$.003723/¥1 C) C$.004582/¥1 D) C$138.2191/¥1 E) C$135.43/¥1

54) Assume you can purchase either 114 Canadian dollars or 11,568 Japanese yen for $100. What is the ¥/C$ cross-rate? A) ¥104.08/C$1 B) ¥99.94/C$1 C) ¥101.47/C$1 D) ¥106.27/C$1 E) ¥107.08/C$1

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55) Assume the spot rate for the pound is £.6930 = $1 and for the Canadian dollar is C$1.1417 = $1. What is the £/C$ cross-rate? A) £.5597/C$1 B) £.6070/C$1 C) £.7295/C$1 D) £.7594/C$1 E) £.7608/C$1

56) Assume you can exchange $1 for ¥111.57 or €.89 in New York. In Tokyo, the exchange rate is ¥1 = €.008. If you have $1,100, how much profit can you earn using triangle arbitrage? A) $1.79 B) $1.98 C) $3.16 D) $3.82 E) $6.85

57) Assume that in New York, you can exchange $1 for €.89 or £.6391. In Berlin, £1 costs €1.16. How much profit can you earn on $1,000 using triangle arbitrage? A) $912.81 B) $138.56 C) $200.50 D) $317.75 E) $187.47

58) Assume the exchange rates in New York for $1 are C$1.1382 and £.6387 while in Toronto, C$1 will buy £.5612. How much profit can you earn on $10,000 using triangle arbitrage?

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A) $.91 B) $1.08 C) $.97 D) $1.03 E) $1.11

59) Assume your favorite running shoes cost $119 in the U.S. while the identical shoes cost C$139.50 in Canada. According to purchasing power parity, what is the C$/$ exchange rate? A) C$.8530/$1 B) C$.8426/$1 C) C$1.0918/$1 D) C$1.1723/$1 E) C$1.2305/$1

60) A good steak dinner in the U.S. costs 59 USD while the exact meal costs 825 MXN across the border in Mexico. Based on purchasing power parity, what is the implied MXN/USD exchange rate? A) 13.76MXN/1USD B) 13.98MXN/1USD C) 14.04MXN/1USD D) 14.23MXN/1USD E) 14.11MXN/1USD

61) Assume the spot rate is SF.9652 = $1. A hotel room in a resort area of Switzerland costs SF375. Based on absolute purchasing power parity, what should an identical room in the U.S. cost? A) $374.24 B) $388.52 C) $387.05 D) $361.95 E) $339.90

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62) A particular set of golf clubs in the U.S. costs $879. According to absolute purchasing power parity, what should the identical set of clubs cost in the UK if the spot rate is £.6421 = $1? A) £1,368.95 B) £1,428.08 C) £533.80 D) £547.50 E) £564.41

63) Assume the current spot rate between the UK and the U.S. is £.6391 per $1, the expected inflation rate in the U.S. is 1.9 percent, and the expected inflation rate in the UK is 2.1 percent. If relative purchasing power parity exists, what will the exchange rate be next year? A) £.6389/$1 B) £.6404/$1 C) £.6823/$1 D) £.6322/$1 E) £.6336/$1

64) Assume the current spot rate between the UK and the U.S. is £.6402 per $1. The expected inflation rate in the U.S. is 1.9 percent. The expected inflation rate in the UK is 2.1 percent. If relative purchasing power parity exists, what will the exchange rate be two years from now? A) £.6549/$1 B) £.6404/$1 C) £.6417/$1 D) £.6382/$1 E) £.6453/$1

65) Assume you can currently exchange $100 for €80.25. The inflation rate in Europe is expected to be 1.8 percent as compared to 2.4 percent in the U.S. Based on relative purchasing power parity, what should the exchange rate be four years from now?

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A) €.8219/$1 B) €.8014/$1 C) €.7970/$1 D) €.8073/$1 E) €.7834/$1

66) Currently, you can exchange €100 for $124.15. The inflation rate in Europe is expected to be 3.3 percent as compared to 3.1 percent in the U.S. Assuming that relative purchasing power parity exists, what should the exchange rate be five years from now? A) €.8098/$1 B) €.8136/$1 C) €.8071/$1 D) €.8039/$1 E) €.7975/$1

67) Currently, you can exchange €100 for $112.55. The inflation rate in Europe is expected to be 1.4 percent. In one year, it is expected that €100 can be exchanged for $113.50. Assume relative purchasing power parity exists. What is the expected inflation rate in the U.S.? A) 2.69% B) 2.98% C) 2.24% D) 3.65% E) 3.98%

68) The spot rate on the Canadian dollar is 1.34. Interest rates in Canada are expected to average 3.4 percent while they are anticipated to be 3.9 percent in the U.S. What is the expected exchange rate three years from now?

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A) C$1.37 B) C$1.32 C) C$1.36 D) C$1.29 E) C$1.28

69) The spot rate on the Norwegian kroner is 8.49. The exchange rate one year from now is expected to be 8.53 assuming that relative interest rate parity exists. Interest rates in Norway are 2 percent. What is the interest rate in the U.S.? A) 1.53% B) 2.0% C) 1.77% D) 1.04% E) 1.24%

70) The spot rate on the Hong Kong dollar is 7.84. Interest rates in Hong Kong are expected to be 2.75 percent while they are anticipated to be 2.5 percent in the U.S. What is the expected exchange rate two years from now? A) HK$7.9825 B) HK$7.1808 C) HK$7.8792 D) HK$8.3778 E) HK$8.4141

71) The spot rate between Canada and the U.S. is C$1.1381 = $1, while the one-year forward rate is Can$1.1407 = $1. The risk-free rate in Canada is 2.4 percent. The risk-free rate in the U.S. is 2.1 percent. How much profit can you earn on a loan of $1,000 by utilizing covered interest arbitrage?

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A) $.81 B) $.67 C) $.36 D) $.49 E) $.57

72) Assume the spot rate between the UK and the U.S. is £.6789 = $1, while the one-year forward rate is £.6782 = $1. The risk-free rate in the UK is 3.1 percent. The risk-free rate in the U.S. is 2.9 percent. How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest arbitrage? A) $4.09 B) $2.78 C) $3.15 D) $4.60 E) $3.55

73) Assume the one-year forward rate for the British pound is £.6381 = $1. The spot rate is £.6392 = $1. The interest rate on a risk-free asset in the UK is 4.4 percent. If interest rate parity exists, what is the one-year risk-free rate in the U.S.? A) 4.68% B) 4.58% C) 4.77% D) 4.63% E) 4.67%

74) Assume the one-year forward rate for the Swiss franc is SF.9556 = $1. The spot rate is SF .9702 = $1. The interest rate on a risk-free asset in Switzerland is 3.8 percent. If interest rate parity exists, a one-year risk-free security in the U.S. is yielding _________blank percent.

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A) 4.21 B) 5.39 C) 3.98 D) 4.40 E) 4.31

75) Assume the spot rate between Japan and the U.S. is ¥119.37 = $1, while the one-year forward rate is ¥119.07 = $1. A one-year risk-free security in the U.S. is yielding 4.2 percent. What is the rate of return on a one-year risk-free security in Japan assuming that interest rate parity exists? A) 3.82% B) 3.94% C) 3.44% D) 3.49% E) 4.46%

76) Assume the one-year forward rate between the U.S. and Japan is ¥120.38 = $1. A oneyear risk-free security in Japan is yielding 4.3 percent while it is 3.8 percent in the U.S. Assume interest rate parity exists. What is the spot rate between the U.S. and Japan? A) ¥120.41 B) ¥121.08 C) ¥119.80 D) ¥120.94 E) ¥119.03

77) A U.S. firm has total assets valued at €918,000 located in Germany. This valuation did not change from last year. Last year, the exchange rate was €.92 = $1. Today, the exchange rate is €.80 = $1. By what amount did these assets change in value for the year on the firm's U.S. financial statements?

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A) −$149,673.91 B) −$162,311.19 C) $0 D) $149,673.91 E) $162,311.19

78) A U.S. firm has total assets valued at £318,000 located in London. This valuation did not change from last year. Last year, the exchange rate was £.61 = $1. Today, the exchange rate is £.63 = $1. By what amount did these assets change in value on the firm's U.S. financial statements? A) −$16,549.57 B) −$13,511.03 C) −$12,248.91 D) $13,511.03 E) $0

79) Assume the USD equivalent of the Norwegian krone is .1425. If you have NKr5,500, how much do you have in US dollars? A) $861.42 B) $42,608.14 C) $38,596.49 D) $783.75 E) $16,216.50

80) Assume $1 = €.8036 = A$1.1757. What is the cross-rate for Australian dollars in terms of euros?

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A) A$1.1066/€1 B) A$1.2908/€1 C) A$1.3929/€1 D) A$1.4630/€1 E) A$1.5042/€1

81) Given the following exchange rates, which of the following currencies are selling at a premium against the dollar? USD equiv Australia dollar 1-mo forward Japan yen 1-mo forward Switzerland franc 1-mo forward UK pound 1-mo forward

.8507 .8489 .00843 .00844 1.0357 1.0362 1.5649 1.5646

Currency per USD 1.1755 1.1780 118.62 118.49 .9655 .9651 .6390 .6391

A) Japanese yen only B) Swiss franc and Australian dollar only C) UK pound only D) Australian dollar, Swiss franc, and UK pound only E) Japanese yen and Swiss franc only

82) Suppose the spot exchange rate for the Canadian dollar is C$1.34 and the six-month forward rate is C$1.37. Assuming absolute PPP holds, what is the current cost in the United States of a hamburger if the price in Canada of an equivalent burger in Canada is C$5.80? A) $55.36 B) $5.15 C) $4.33 D) $54.99 E) $44.23

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83) Suppose the Swiss franc exchange rate is SF.9703 = $1, and the euro exchange rate is €.8024 = $1. What is the cross-rate in terms of Swiss francs per euro? A) SF.7692/€1 B) SF.7786/€1 C) SF1.1054/€1 D) SF1.1832/€1 E) SF1.2092/€1

84) The treasurer of a major U.S. firm has $8.2 million to invest for three months. The interest rate in the U.S. is .53 percent per month. The interest rate in the UK is .54 percent per month. The spot exchange rate is £.64, and the three-month forward rate is £.65. Ignore transaction costs. The treasurer should invest the funds in the _________blank because he can earn an additional _________blank. A) UK; $9,418.02 B) US; $131,072.23 C) UK; $38,522.47 D) US; $125,722.20 E) UK; $121,510.67

85) Suppose the spot exchange rate for the Hungarian forint is HUF246. Interest rates in the United States are 4.3 percent per year. They are 3.4 percent in Hungary. What do you predict the exchange rate will be in four years? A) HUF237.26 B) HUF236.90 C) HUF241.59 D) HUF254.98 E) HUF261.19

86) Assume a Big Mac sells for $4.39 in the United States and Ps62.5 in Mexico, what is the Ps/$ exchange rate according to the purchasing power parity theory?

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A) Ps.0702/$1 B) Ps.0752/$1 C) Ps13.29/$1 D) Ps14.24/$1 E) Ps14.32/$1

87) Assume the exchange rate is .98 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,750 Swiss francs? A) $1,715.79 B) $1,785.71 C) $1,728.80 D) $1,740.00 E) $1,818.46

88) You are going to London and plan on spending £4,200. How many dollars will this trip cost you if the currency per $1 is £.82? A) $5,875.95 B) $5,892.16 C) $5,121.95 D) $5,890.01 E) $6,044.04

89) You just returned from a trip to Germany and have 523 euros in your pocket. How many dollars will you receive when you exchange this money if .95 U.S. dollars equal one euro? A) $502.56 B) $496.85 C) $504.35 D) $497.18 E) $562.56

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90) Assume you can exchange $1 for ¥110.23 or €.86 in New York. In Tokyo, the exchange rate is ¥1 = €.009. If you have $900, how much profit can you earn using triangle arbitrage? A) $130.58 B) $127.56 C) $138.21 D) $129.87 E) $135.88

91) Assume that in New York, you can exchange $1 for €.81 or £.62. In Berlin, £1 costs €1.22. How much profit can you earn on $1,250 using triangle arbitrage? A) $88.58 B) $91.81 C) $83.75 D) $98.56 E) $87.47

92) Assume the current spot rate between the UK and the U.S. is £.6058 per $1, the expected inflation rate in the U.S. is 2.2 percent, and the expected inflation rate in the UK is 3 percent. If relative purchasing power parity exists, what will the exchange rate be next year? A) £.6389/$1 B) £.6106/$1 C) £.6223/$1 D) £.6022/$1 E) £.6336/$1

93) Assume the current spot rate between the UK and the U.S. is £.6402 per $1. The expected inflation rate in the U.S. is 2.8 percent. The expected inflation rate in the UK is 2.4 percent. If relative purchasing power parity exists, what will the exchange rate be two years from now?

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A) £.6349/$1 B) £.6204/$1 C) £.6351/$1 D) £.6182/$1 E) £.6253/$1

94) Currently, you can exchange €100 for $112.55. The inflation rate in Europe is expected to be 1.4 percent. In one year, it is expected that €100 can be exchanged for $113.50. Assume relative purchasing power parity exists. What is the expected inflation rate in the U.S.? A) 4.99% B) 5.92% C) 5.05% D) 5.69% E) 5.48%

95) The spot rate on the Canadian dollar is 1.21. Interest rates in Canada are expected to average 2.8 percent while they are anticipated to be 3.2 percent in the U.S. What is the expected exchange rate three years from now? A) C$1.31 B) C$1.20 C) C$1.29 D) C$1.26 E) C$1.28

96) Suppose the spot exchange rate for the Canadian dollar is C$1.22 and the six-month forward rate is C$1.27. Assuming absolute PPP holds, what is the current cost in the United States of a hamburger if the price in Canada of an equivalent burger in Canada is C$6.00?

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A) $5.36 B) $5.15 C) $4.92 D) $4.99 E) $4.23

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Answer Key Test name: Chapter 18 Test Bank - Static 1) C 2) E 3) D 4) B 5) C 6) B 7) B 8) E 9) A 10) C 11) C 12) A 13) D 14) E 15) D 16) E 17) B 18) B 19) D 20) B 21) E 22) E 23) E 24) C 25) E 26) B Version 1

27) A 28) A 29) A 30) E 31) D 32) E 33) D 34) E 35) B 36) C 37) D 38) A 39) D 40) B 41) C 42) E 43) E 44) D 45) D 46) B SF1,250 × ($1/SF1.05) = $1,190.48 47) C £5,300 × ($1/£.77) = $6,883.12 48) B €277 × ($.89/€1) = $246.53 49) D Rs32,750 × ($.01606/Rs1) = $525.97 50) E

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R$56,300 ($1/R$2.5658) = $21,942.47 13,600,000CLP ($1USD/609.10CLP) = $22,328.02 Difference = $22,328.02 − 21,942.47 = $385.55 51) A $2,200 × (€1/$1.4043) = €1,566.62 52) A £.6039 = €.8031 £.7520 = €1 53) C C$1.1417 = ¥249.17 C$.004582 = ¥1 54) C ¥11,568 = C$114 ¥101.47 = C$1 55) B £.6930 = C$1.1417 £.6070 = C$1 56) C [$1,100(¥111.57/$1)(€.008/¥1)($1/€.89)] − $1,100 = $3.16 57) C [$1,000(€.89/$1)(£1/€1.16)($1/£.6391)] − $1,000 = $200.50 58) A [$10,000(C$1.1382/$1)(£.5612/C$1)($1/£.6387)] − $10,000 = $.91 59) D C$139.50/$119 = C$1.1723/$1 60) B 825MXN/59USD = 13.98MXN/1USD 61) B SF375 × ($1/SF.9652) = $388.52 62) E Version 1

$879 × (£.6421/$1) = £564.41 63) B £.6391 × [1 + (.021 − .019)]1 = £.6404 64) C £.6391 × [1 + (.021 − .019)]2 = £.6417 65) E €.8025 × [1 + (.018 − .024)]4 = €.7834 66) B €100 = $124.15 €.8055 = $1 €.8055 × [1 + (.033 − .031)]5 = €.8136 67) C €100 = $112.55 €88.85 = $1 €100 = $113.50 €.8811 = $1 €.8885 × [1 + (.014 − x)]1 = €.8811 x = .0224, or 2.24% 68) B C$1.34 × [1 + (.034 − .039)]3 = C$1.32 69) A NKr8.49 × [1 + (.02 − x)]1 = NKr8.53 x = .0153 or 1.53% 70) C HK$7.84 × [1 + (.0275 − .025)]2 = HK$7.8792 71) B $1,000(Can$1.1381/$1)(1.024)($1/Can$1.1407) − $1,000(1.021) = $.67 72) D $1,500(£.6789/$1)(1.031)($1/£.6782) − $1,500(1.029) = $4.60 73) B Version 1

.6381/.6392 = 1.044/(1 + x) x = .0458, or 4.58% 74) B .9556/.9702 = 1.038/(1 + x) x = .0539, or 5.39% 75) B 119.07/119.37 = (1 + x)/1.042 x = .0394, or 3.94% 76) C ¥120.38/x = 1.043/1.038 x = ¥119.80 77) D €918,000($1/€.92) − €918,000($1/€.80) = $149,673.91 78) A £318,000($1/£.61) − £318,000($1/£.63) = −$16,549.57 79) D NKr5,500($.1425/NKr1) = $783.75 80) D A$1.1757 = €.8036 A$1.4630 = €1 81) E Since the Japanese yen and Swiss franc are more expensive in terms of dollars in the future than they are now, they are selling at a premium.

82) C C$5.80($1/Can$1.34) = $4.33 83) E SF.9703 = €.8024 SF1.2092 = €1 84) D

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Earnings in U.S. $ from U.S. investment: [$8.2m(1.0053)3] − $8.2m = $131,072.23 Earnings in U.S. $ from UK investment: [$8.2m(£.64/$1)(1.0054)3($1/£.65)] − $8.2m = $5,350.03 Difference in earnings = $131,072.23 − 5,350.03 = $125,722.20 85) A HUF246 × [1 + (.034 − .043)]4 = HUF237.26 86) D Ps62.5 = $4.39 Ps14.24 = $1 87) B SF1,750 × ($1/SF.98) = $1,785.71 88) C £4,200 × ($1/£.82) = $5,121.95 89) B 523 × ($.95/€1) = $496.85 90) C [$900(¥110.23/$1)(€.009/¥1)($1/€.86)] − $900 = $138.21 91) A [$1,250(€.81/$1)(£1/€1.22)($1/£.62)] − $1,250 = $88.58 92) B £.6058 × [1 + (.03 − .022)]1 = £.6106 93) C £.6402 × [1 + (.024 − .028)]2 = £.6351 94) C

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€100 = $118 €.8475 = $1 €100 = $121.59 €.8224 = $1 €.8475 × [1 + (.021 − x)]1 = €.8224 x = .0505, or 5.05% 95) B C$1.21 × [1 + (.028 − .032)]3 = C$1.20 96) C C$6.00($1/Can$1.22) = $4.92

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) A portfolio manager who adds commodities to a portfolio of traditional investments is most likely seeking to: A) both increase expected returns and decrease portfolio variance. B) decrease portfolio variance only. C) increase expected returns only.

2) A Hong Kong hedge fund was valued at HK$400 million at the end of last year. At year's end the value before fees was HK$480 million. The fund charges 2 and 20. Management fees are calculated on end- of-year values. Incentive fees are independent of management fees and calculated using no hurdle rate. The previous year the fund’s net return was 2.5%. The annualized return for the last two years is closest to: A) 8.1%. B) 13.6%. C) 7.9%.

3) A Canadian hedge fund has a value of C$100 million at the beginning of the year. The fund charges a 2% management fee based on assets under management at the beginning of the year and a 20% incentive fee with a 10% hard hurdle rate. Incentive fees are calculated net of management fees. The value at the end of the year before fees is C$112 million. The net return to investors is closest to: A) 10%. B) 9%. C) 8%.

4) For a given set of underlying real estate properties, the type of real estate index that is most likely to have the lowest standard deviation is a(n):

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A) REIT trading price index. B) appraisal index. C) repeat sales index.

An example of a relative value hedge fund strategy is: A) convertible arbitrage. B) merger arbitrage. C) market neutral.

6) A hedge fund that charges an incentive fee on all profits, but only if the fund's rate of return exceeds a stated benchmark, is said to have a: A) hard hurdle rate. B) high water mark. C) soft hurdle rate.

7) A hedge fund has a 2-and-20 fee structure, based on beginning-of-period assets, with a soft hurdle rate of 5%. Incentive fees are calculated before management fees. An endowment invests $60.0 million in the hedge fund. The value of the endowment's investment, before fees, decreases to $56.2 million after one year and increases to $58.0 million the next year. In the second year the endowment will be charged management and incentive fees closest to: A) $1.10 million. B) $1.70 million. C) $1.15 million.

Relatively infrequent valuations of private equity portfolio companies most likely cause: A) correlations of fund returns with equity returns to be biased downward. B) standard deviations of fund returns to be biased upward. C) average fund returns to be biased upward.

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9) Adjusted funds from operations (AFFO) is best described as an estimate of a real estate investment trust's: A) free cash flow. B) net operating income. C) operating cash flow.

10) To exit an investment in a portfolio company through a trade sale, a private equity firm sells: A) the portfolio company to one of the portfolio company’s competitors. B) shares of a portfolio company to the public. C) the portfolio company to another private equity firm.

11)

If a commodity futures market is in backwardation: A) the futures price is of the commodity is higher than the spot price. B) a long futures position will have a negative roll yield. C) the commodity has a high convenience yield.

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Answer Key Test name: Alternative Investments 1) B Unlike most alternative investments, expected returns on commodities are typically less than expected returns on traditional investments. However, because their returns typically have a low correlation with returns on traditional investments, adding commodities to a portfolio of traditional investments can decrease portfolio variance. 2) C Management fee is HK$480 million × 0.02 = HK$9.6 million. Incentive fee is (HK$480 million − HK$400 million) × 0.20 = HK$16.0 million. Total fee is HK$9.6 million + HK$16.0 million = HK$25.6 million. Net of fee: HK$480.0 − HK$25.6 = HK$454.4 million Net return: (HK$454.4 / HK$400.00) − 1 = 13.6% Two year annualized return is(1.136 × 1.025)1/2 − 1 = 7.9% (Study Session 17, Module 50.2, LOS 50.d) 3) A

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Management Fee: C$100.0 × 2.0% = C$2.0 million Gross value at end of year (given) = C$112.0 million Incentive fee = [(C$112.0 − C$100.0 − C$2.0 − (C$100.0 × 10.0%)] × 20% = C$0 Total fee = C$2.0 million Net of fee: C$112.0 − C$2.0 = C$110.0 million Net return = (C$110.0 / C$100.0) − 1 =10.0% (Study Session 17, Module 50.2, LOS 50.d) 4) B Appraisal index returns are based on estimates of property values. Because estimating values tends to introduce smoothing into returns data, appraisal index returns are likely to have lower standard deviations than index returns based on repeat sales or trading prices of REIT shares. (Study Session 17, Module 50.1, LOS 50.e) 5) A Relative value strategies include convertible arbitrage fixed income, asset-backed fixed income, general fixed income, volatility, and multistrategy. Market neutral is an equity hedge strategy. Merger arbitrage is an event driven strategy. 6) C With a soft hurdle rate, a hedge fund charges an incentive fee on all profits, but only if the fund's rate of return exceeds a stated benchmark. With a hard hurdle rate, a hedge fund charges an incentive fee only on the portion of returns that exceed a stated benchmark. With a high water mark, a fund's value must exceed its highest previous value before the fund may charge an incentive fee.

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7) B Year 1: Management fee = $60.0 million × 2% = $1.2 million. No incentive fee is charged because the fund decreased in value. Value after fees = $56.2 million − $1.2 million = $55.0 million. Year 2: Management fee = $55.0 million × 2% = $1.1 million. Year 2 return = $58.0 million / $55.0 million − 1 = 5.45% which is greater than the hurdle rate. With a soft hurdle rate and no high water mark provision, the entire gain is eligible for incentive fees: ($58.0 million − $55.0 million) × 20% = $0.6 million. Total fees in Year 2 = $1.1 million + $0.6 million = $1.7 million. 8) A Infrequent valuation results in downward bias in both standard deviations and correlations. 9) A AFFO equals funds from operations minus recurring capital expenditures and is analogous to free cash flow. 10) A A trade sale involves selling a portfolio company to a competitor or another strategic buyer. An IPO involves selling all or some shares of a portfolio company to the public. A secondary sale involves selling a portfolio company to another private equity firm or a group of investors. 11) C

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Backwardation refers to a situation where the futures price is less than the spot price for a commodity. Because commodities have no monetary yield, only a convenience yield greater than the opportunity (interest) cost and storage costs of holding the commodity can lead to backwardation. When a futures market is in backwardation, the roll yield is positive because the futures price moves towards the spot price over the life of the contract.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The before-tax cost of debt for Hardcastle Industries, Incorporated is currently 8.0%, but it will increase to 8.25% when debt levels reach $600 million. The debt-to-total assets ratio for Hardcastle is 40% and its capital structure is composed of debt and common equity only. If Hardcastle changes its target capital structure to 50% debt / 50% equity, which of the following describes the effect on the level of new investment at which the cost of debt will increase? The level will: A) decrease. B) change, but can either increase or decrease. C) increase.

2) An analyst gathered the following information about a capital budgeting project: ● The proposed project cost $10,000. ● The project is expected to increase pretax net income and cash flow by $3,000 in each of the next eight years. ● The company has 50% of its capital in equity at a cost of 12%. ● The pretax cost of debt capital is 6%. ● The company’s tax rate is 33%. The project’s net present value is closest to: A) $1,551. B) $6,604. C) $7,240.

3) Which of the following stakeholders are most likely to benefit from a company’s growth and excellent financial performance? A) Governments. B) Creditors. C) Customers.

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4) Lincoln Coal is planning a new coal mine, which will cost $430,000 to build, with the expenditure occurring next year. The mine will bring cash inflows of $200,000 annually over the subsequent seven years. It will then cost $170,000 to close down the mine over the following year. Assume all cash flows occur at the end of the year. Alternatively, Lincoln Coal may choose to sell the site today. What minimum price should Lincoln set on the property, given a 16% required rate of return? A) $376,872. B) $280,913. C) $325,859.

5) Which of the following statements about corporate governance is most accurate? Corporate governance: A) best practices are essentially the same in developed economies. B) is defined in the same way in most countries. C) may be focused only on shareholder interests.

6) Arlington Machinery currently has assets on its balance sheet of $300 million that is financed with 70% equity and 30% debt. The executive management team at Arlington is considering a major expansion that would require raising additional capital. Jeffery Marian, an analyst with Arlington Machinery, has put together the following schedule for the costs of debt and equity: Amount of New Debt After-tax Cost Amount of New Equity Cost of Equity (in millions) of Debt (in millions) $0 to $49 4.0% $0 to $99 7.0% $50 to $99 4.2% $100 to $199 8.0% $100 to $149 4.5% $200 to $299 9.0%

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In a presentation to Arlington’s executive management team, Marian makes the following statements: Statement 1: If we maintain our target capital structure of 70% equity and 30% debt, the breakpoint at which our cost of equity will increase to 9.0% is approximately $286 million in new capital. Statement 2: If we want to finance total assets of $600 million, our weighted average cost of capital (WACC) for the additional financing needed will be 7.56%. Marian’s statements are:

A) B) C)

Statement 1

Statement 2

Correct Incorrect Correct

Incorrect Incorrect Correct

A) Option A B) Option B C) Option C

7) The effect of a company announcement that they have begun a project with a current cost of $10 million that will generate future cash flows with a present value of $20 million is most likely to: A) only affect value of the firm’s common shares if the project was unexpected. B) increase the value of the firm’s common shares by $20 million. C) increase value of the firm’s common shares by $10 million.

8) The following is a schedule of Tiger Company’s new debt and equity capital costs ($ millions): Amount of New Debt After-tax Cost of Debt < $30 3.5% $30 − $60 4.0% > $60 4.7%

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Amount of New Equity < $60 $60 − $90 > $90

Cost of Equity 8.5% 10.3% 12.5%

The company has a target capital structure of 30% debt and 70% equity. Tiger needs to raise an additional $135.0 million of capital for a new project while maintaining its target capital structure. The company’s second debt break point and its marginal cost of capital (MCC) are closest to:

Debt Break Point #2 A) B) C)

MCC

$200 million $100 million $200 million

8.4% 8.4% 10.0%

A) Option A B) Option B C) Option C

9) Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting: Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project. Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project. Which of the following regarding Lutz’s statements is most accurate?

A) B) C)

Statement 1

Statement 2

Incorrect Correct Correct

Correct Correct Incorrect

A) Option A B) Option B C) Option C

10)

The stakeholders most likely to be concerned with their legal liabilities are:

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A) directors. B) regulators. C) creditors.

11) Meredith Suresh, an analyst with Torch Electric, is evaluating two capital projects. Project 1 has an initial cost of $200,000 and is expected to produce cash flows of $55,000 per year for the next eight years. Project 2 has an initial cost of $100,000 and is expected to produce cash flows of $40,000 per year for the next four years. Both projects should be financed at Torch’s weighted average cost of capital. Torch’s current stock price is $40 per share, and next year’s expected dividend is $1.80. The firm’s growth rate is 5%, the current tax rate is 30%, and the pre-tax cost of debt is 8%. Torch has a target capital structure of 50% equity and 50% debt. If Torch takes on either project, it will need to be financed with externally generated equity which has flotation costs of 4%. Suresh is aware that there are two common methods for accounting for flotation costs. The first method, commonly used in textbooks, is to incorporate flotation costs directly into the cost of equity. The second, and more correct approach, is to subtract the dollar value of the flotation costs from the project NPV. If Suresh uses the cost of equity adjustment approach to account for flotation costs rather than the correct cash flow adjustment approach, will the NPV for each project be overstated or understated?

A) B) C)

Project 1 NPV

Project 2 NPV

Understated Understated Overstated

Understated Overstated Overstated

A) Option A B) Option B C) Option C

12) Assume a firm uses a constant WACC to select investment projects rather than adjusting the projects for risk. If so, the firm will tend to:

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A) reject profitable, low-risk projects and accept unprofitable, high-risk projects. B) accept profitable, low-risk projects and reject unprofitable, high-risk projects. C) accept profitable, low-risk projects and accept unprofitable, high-risk projects.

13) The debt of Savanna Equipment, Incorporated has an average maturity of ten years and a BBB rating. A market yield to maturity is not available because the debt is not publicly traded, but the market yield on debt with similar characteristics is 8.33%. Savanna is planning to issue new ten-year notes that would be subordinate to the firm’s existing debt. The company’s marginal tax rate is 40%. The most appropriate estimate of the after-tax cost of this new debt is: A) More than 5.0%. B) Between 3.3% and 5.0%. C) 5.0%.

14) Hanson Aluminum, Incorporated is considering whether to build a mill based around a new rolling technology the company has been developing. Management views this project as being riskier than the average project the company undertakes. Based on their analysis of the projected cash flows, management determines that the project’s internal rate of return is equal to the company’s marginal cost of capital. If the project goes forward, the company will finance it with newly issued debt with an after-tax cost less than the project’s IRR. Should management accept or reject this project? A) Accept, because the marginal cost of the new debt is less than the project’s internal rate of return. B) Reject, because the project reduces the value of the company when its risk is taken into account. C) Accept, because the project returns the company’s cost of capital.

15) The financial manager at Genesis Company is looking into the purchase of an apartment complex for $550,000. Net after-tax cash flows are expected to be $65,000 for each of the next five years, then drop to $50,000 for four years. Genesis’ required rate of return is 9% on projects of this nature. After nine years, Genesis Company expects to sell the property for after-tax proceeds of $300,000. What is the respective internal rate of return (IRR) and net present value (NPV) on this project?

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A) 6.66%; −$64,170. B) 7.01%; −$53,765. C) 13.99%; $166,177.

16) A firm has $4 million in outstanding bonds that mature in four years, with a fixed rate of 7.5% (assume annual payments). The bonds trade at a price of $98 in the open market. The firm’s marginal tax rate is 35%. Using the bond-yield plus method, what is the firm’s cost of equity risk assuming an add-on of 4%? A) 13.34%. B) 12.11%. C) 11.50%.

17)

The stakeholder theory of corporate governance is primarily focused on:

A) the interests of various stakeholders rather than the interests of shareholders. B) increasing the value a company. C) resolving the competing interests of those who manage companies and other groups affected by a company’s actions.

18) A company prepares a chart with the net present value (NPV) profiles for two mutually exclusive projects with equal lives of five years. Project Jones and Project Smith have the same initial cash outflow and total undiscounted cash inflows, but 75% of the cash inflows for Project Jones occur in years 1 and 2, while 75% of the cash inflows for Project Smith occur in years 4 and 5. Which of the following statements is most accurate regarding these projects? A) Project Smith has a higher internal rate of return than Project Jones. B) There is a range of discount rates in which the company should choose Project Jones and a range in which it should choose Project Smith. C) There is a range of discount rates in which the optimal decision is to reject both projects.

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19) Which of the following steps is least likely to be an administrative step in the capital budgeting process? A) Forecasting cash flows and analyzing project profitability. B) Conducting a post-audit to identify errors in the forecasting process. C) Arranging financing for capital projects.

20) A North American investment society held a panel discussion on the topics of capital costs and capital budgeting. Which of the following comments made during this discussion is the least accurate? A) Any given project’s NPV will decline when a breakpoint is reached. B) An increase in the after-tax cost of debt may occur at a break point. C) A project’s internal rate of return decreases when a breakpoint is reached.

21) Axle Corporation earned £3.00 per share and paid a dividend of £2.40 on its common stock last year. Its common stock is trading at £40 per share. Axle is expected to have a return on equity of 15%, an effective tax rate of 34%, and to maintain its historic payout ratio going forward. In estimating Axle’s after-tax cost of capital, an analyst’s estimate of Axle’s cost of common equity would be closest to: A) 9.2%. B) 8.8%. C) 9.0%.

22) Stolzenbach Technologies has a target capital structure of 60% equity and 40% debt. The schedule of financing costs for the Stolzenbach is shown in the table below: Amount of New Debt After-tax Cost Amount of New Equity Cost of Equity (in millions) of Debt (in millions) $0 to $199 4.5% $0 to $299 7.5% $200 to $399 5.0% $300 to $699 8.5% $400 to $599 5.5% $700 to $999 9.5%

Stolzenbach Technologies has breakpoints for raising additional financing at both:

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A) $400 million and $700 million. B) $500 million and $700 million. C) $500 million and $1,000 million.

23) An analyst with Laytech Corporation is evaluating two machines as possible replacements for an existing stamping machine. He estimates that machine 1 has a cost of $5 million and that purchasing it would produce a profitability index of 1.20. He estimates that machine 2 has a cost of $6 million and that purchasing it would produce a profitability index of 1.17. Based on these estimates he should conclude that: A) machine 2 should be chosen. B) neither project is preferred to the other. C) machine 1 should be chosen.

24) Which of the following is most accurate for two independent projects with conventional cash flows? A) An analyst will not encounter the problem of multiple IRRs. B) A firm that rations investment capital will choose the one with the higher NPV. C) The project with the higher IRR will also have the higher NPV.

25) Pfluger Company’s accounts payable department receives an invoice from a vendor with terms of 2/10 net 30. If Pfluger pays the invoice on its due date, the cost of trade credit is closest to: A) 27.9%. B) 43.5%. C) 44.6%.

26) With sales of $45 million, the operating earnings of Poston Industries are $3.8 million. Fixed operating costs are $4.2 million, net profit margin is 4.5%, and unit variable costs are $35.50. At the current level of sales, Poston’s degree of operating leverage is closest to:

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A) 1.2. B) 1.6. C) 2.1.

27) Randox Industries has the following investment policy statement: "In order to achieve the safety and liquidity necessary in the investment of excess cash balances, the CFO or his designee may invest excess cash balances in 30-day U.S. Treasury bills, or in banker’s acceptances with maturities of less than 31 days or 30-day certificates of deposit, where the credit rating of the issuing bank is A+ or higher." This policy statement is: A) inappropriate because both banker’s acceptances and certificates of deposit are illiquid. B) inappropriate because it is too restrictive. C) appropriate because these are all safe, liquid securities.

28) An investment policy statement for a firm’s short-term cash management function would least appropriately include: A) procedures to follow if the investment guidelines are violated. B) information on who is allowed to invest corporate cash. C) a list of permissible securities.

29) A firm is choosing among three short-term investment securities: Security 1: A 30-day U.S. Treasury bill with a discount yield of 3.6%. Security 2: A 30-day banker’s acceptance selling at 99.65% of face value. Security 3: A 30-day time deposit with a bond equivalent yield of 3.65%. Based only on these securities’ yields, the firm would: A) prefer the time deposit. B) prefer the banker’s acceptance. C) prefer the U.S. Treasury bill.

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30) Which of the following strategies is most likely to be considered good payables management? A) Paying trade invoices on the day they arrive. B) Taking trade discounts only if the firm’s annual return on short-term investments is less than the discount percentage. C) Paying invoices on the last day to still get the supplier’s discount for early payment.

31)

Which of the following is least likely an indicator of a firm’s liquidity? A) Cash as a percentage of sales. B) Amount of credit sales. C) Inventory turnover.

32) An appropriate cash management strategy for a company that has a seasonally high need for cash prior to the holiday shopping season would least likely include: A) investing in U.S. Treasury notes at other times of the year because they are highly liquid. B) allowing short-term securities to mature without reinvestment. C) borrowing funds though a bank line of credit.

33) A firm has average days of receivables outstanding of 22 compared to an industry average of 29 days. An analyst would most likely conclude that the firm: A) has a lower cash conversion cycle than its peer companies. B) has better credit controls than its peer companies. C) may have credit policies that are too strict.

34) a(n):

A banker’s acceptance that is priced at $99,145 and matures in 72 days at $100,000 has

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A) bond equivalent yield greater than its effective annual yield. B) money market yield greater than its discount yield. C) discount yield greater than its bond equivalent yield.

35)

With respect to inventory management,:

A) a decrease in a firm’s days of inventory on hand indicates better inventory management and can lead to increased profits. B) an increase in days of inventory on hand can be the result of either good or poor inventory management. C) a firm with inventory turnover higher than the industry average can be expected to have better profitability as a result.

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Answer Key Test name: Corporate Finance 1) A A break point refers to a level of new investment at which a component’s cost of capital changes. The formula for break point is:

2) A WACC = (wd)(kd)(1 − t) + (wce)(kce) WACC = (0.5)(6%)(1 − 0.33) + (0.5)(12%) = 8.0% The increase in after-tax cash flows for each year is 3,000 × (1 − 0.33) = $2,010. I = 8; N = 8; PMT = $2,010; CPT→PV = $11,550.74 NPV = PV income − cost = $11,550.74 − $10,000 = $1,550.74 3) A Governments receive greater tax revenues when financial performance is excellent and profits are higher. Creditors do not receive extra returns for performance better than that is adequate to repay debt. Customers seek company stability and ongoing relationships with the company. 4) B The key to this problem is identifying this as a NPV problem even though the first cash flow will not occur until the following year. Next, the year of each cash flow must be property identified; specifically: CF0 = $0; CF1 = −430,000; CF2−8 = +$200,000; CF9 = −$170,000. One simply has to discount all of the cash flows to today at a 16% rate. NPV = $280,913. 5) C

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Under the shareholder theory of corporate governance, practices are primarily those that support shareholder interests, while under the stakeholder theory of corporate governance, the interests of various affected groups are considered and balanced. Corporate governance practices and definitions vary across countries. 6) C Marian’s first statement is correct. A breakpoint calculated as (amount of capital where component cost changes / weight of component in the WACC). The component cost of equity for Arlington will increase when the amount of new equity raised is $200 million, which will occur at ($200 million / 0.70) = $285.71 million, or $286 million of new capital. Marian’s second statement is also correct. If Arlington wants to finance $600 million of total assets, the firm will need to raise $600 − $300 = $300 million of additional capital. Using the target capital structure of 70% equity and 30% debt, Arlington will need to raise $300 × 0.70 = $210 million in new equity and $300 × 0.30 = $90 million in new debt. Looking at the capital schedules, these levels of new financing correspond with rates of 9.0% and 4.2% for costs of equity and debt respectively, and the WACC is equal to (9.0% × 0.70) + (4.2% × 0.30) = 7.56%. 7) A Stock prices reflect investor expectations for future investment and growth. A new positive-NPV project will increase stock price only if it was not previously anticipated by investors. 8) C Debt break point #2 = $60 million / 0.30 = $200 million. $135 million × 30% = $40.5 million new debt $135 million × 70% = $94.5 million new equity MCC = 4.0%(0.30) + 12.5%(0.70) = 9.95%. Version 1

9) C Lutz’s first statement is correct. The timing of cash flows is important for making correct capital budgeting decisions. Capital budgeting decisions account for the time value of money. Lutz’s second statement is incorrect. Capital budgeting decisions should be based on incremental after-tax cash flows, not net (accounting) income. 10) A Directors are legally responsible for their decisions and actions as board members. Neither regulators nor creditors face significant legal liabilities for their actions. 11) C

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The incorrect method of accounting for flotation costs spreads the flotation cost out over the life of the project by a fixed percentage that does not necessarily reflect the present value of the flotation costs. The impact on project evaluation depends on the length of the project and magnitude of the flotation costs, however, for most projects that are shorter, the incorrect method will overstate NPV, and that is exactly what we see in this problem. Correct method of accounting for flotation costs: After-tax cost of debt = 8.0% (1 − 0.30) = 5.60% Cost of equity = ($1.80 / $40.00) + 0.05 = 0.045 + 0.05 = 9.50% WACC = 0.50(5.60%) + 0.50(9.50%) = 7.55% Flotation costs Project 1 = $200,000 × 0.5 × 0.04 = $4,000 Flotation costs Project 2 = $100,000 × 0.5 × 0.04 = $2,000 NPV Project 1 = −$200,000 − $4,000 + (N = 8, I = 7.55%, PMT = $55,000, FV = 0 →CPT PV = $321,535) = $117,535 NPV Project 2 = −$100,000 − $2,000 + (N = 4, I = 7.55%, PMT = $40,000, FV = 0 →CPT PV = $133,823) = $31,823 Incorrect Adjustment for cost of equity method for accounting for flotation costs: After-tax cost of debt = 8.0% (1 − 0.30) = 5.60% Cost of equity = [$1.80 / $40.00(1 − 0.04)] + 0.05 = 0.0469 + 0.05 = 9.69% WACC = 0.50(5.60%) + 0.50(9.69%) = 7.65% NPV Project 1 = −$200,000 + (N = 8, I = 7.65%, PMT = $55,000, FV = 0 →CPT PV = $320,327) = $120,327 NPV Project 2 = −$100,000 + (N = 4, I = 7.65%, PMT = $40,000, FV = 0 →CPT PV = $133,523) = $33,523 12) A

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The firm will reject profitable, low-risk projects because it will use a hurdle rate that is too high. The firm should lower the required rate of return for lower risk projects. The firm will accept unprofitable, highrisk projects because the hurdle rate of return used will be too low relative to the risk of the project. The firm should increase the required rate of return for high-risk projects. 13) A The after-tax cost of debt similar to Savanna’s existing debt iskd(1 − t) = 8.33% (1 − 0.4) = 5.0%. Because the anticipated new debt will be subordinated in the company’s debt structure, investors will demand a higher yield than the existing debt carries. Therefore, the appropriate after-tax cost of the new debt is more than 5.0%. 14) B The marginal (or weighted average) cost of capital is the appropriate discount rate for projects that have the same level of risk as the firm’s existing projects. For a project with a higher degree of risk, cash flows should be discounted at a rate higher than the firm’s WACC. Since this project’s IRR is equal to the company’s WACC, its NPV must be zero if the cash flows are discounted at the WACC. If the cash flows are discounted at a rate higher than the WACC to account for the project’s higher risk, the NPV must be negative. Therefore, the project would reduce the value of the company, so management should reject it. A company considers its capital raising and budgeting decisions independently. Each investment decision must be made assuming a WACC which includes each of the different sources of capital and is based on the long-run target weights. 15) B

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IRR Keystrokes: CF0 = −$550,000; CF1 = $65,000; F1 = 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 = 1. NPV Keystrokes: CF0 = −$550,000; CF1 = $65,000; F1 = 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 = 1. Compute NPV, I = 9. Note: Although the rate of return is positive, the IRR is less than the required rate of 9%. Hence, the NPV is negative. 16) B If the bonds are trading at $98, the required yield is 8.11%, and the market value of the issue is $3.92 million. To calculate this rate using a financial calculator (and figuring the rate assuming a $100 face value for each bond), N = 4; PMT = 7.5 = (0.075 × 100); FV = 100; PV = −98; CPT → I/Y = 8.11. By adding the equity risk factor of 4%, we compute the cost of equity as 12.11%. 17) C Resolving the conflicting interests of both shareholders and other stakeholders is the focus of corporate governance under stakeholder theory. Shareholders are among the groups whose interests are considered under stakeholder theory. 18) C If the total undiscounted cash flows from two projects are equal, their NPV profiles intersect the vertical axis at the same value. The NPV profile will have a steeper slope for Project Smith, which has more of its cash inflows occurring later in its life, and therefore the IRR of Project Smith (its intersection with the horizontal axis) must be less than the IRR of Project Jones. The NPV for Project Jones will be greater at any rate of discount, and Project Jones will be preferred over the entire range. However, if the discount rate applied to the cash flows is greater than the IRR of Project Jones, both projects will have negative NPVs and the company should reject both of them. Version 1

19) C Arranging financing is not one of the administrative steps in the capital budgeting process. The four administrative steps in the capital budgeting process are: 1.Idea generation 2.Analyzing project proposals 3.Creating the firm-wide capital budget 4.Monitoring decisions and conducting a post-audit 20) C The internal rate of return is independent of the firm’s cost of capital. It is a function of the amount and timing of a project’s cash flows. 21) A We can estimate the company’s expected growth rate as ROE × (1 − payout ratio): g = 15% × (1 − 2.40/3.00) = 3% The expected dividend next period is then £2.40(1.03) = £2.47. Based on dividend discount model pricing, the required return on equity is 2.47 / 40 + 3% = 9.18%. 22) C Stolzenbach will have a break point each time a component cost of capital changes, for a total of three marginal cost of capital schedule breakpoints. Break pointDebt > $200mm = ($200 million ÷ 0.4) = $500 million Break pointDebt > $400mm = ($400 million ÷ 0.4) = $1,000 million Break pointEquity > $300mm = ($300 million ÷ 0.6) = $500 million Break pointEquity > $700mm = ($700 million ÷ 0.6) = $1,167 million 23) A The NPV of purchasing machine 1 is 1.20(5 million) − 5 million = 1 million. The NPV of purchasing machine 2 is 1.17(6 million) − 6 million = 1.02 million. Parker should choose machine 2 because it has the higher NPV. Version 1

24) A The problem of multiple IRRs is encountered only when the cash flows have an unconventional pattern. 25) C "2/10 net 30" is a discount of 2% of the invoice amount for payment within 10 days, with full payment due in 30 days. Cost of trade credit on day 30 =

26) C Operating earnings = EBIT = Sales − TVC − Fixed operating costs

27) B The policy statement is inappropriate because it is too restrictive. A policy statement should focus on meeting the specific safety and liquidity needs of the firm but should also allow the flexibility to increase yield within these constraints. There are many other securities potentially suitable for cash management that would provide equivalent or better liquidity and safety of principal at least equivalent to that of the securities issued by A+ rated banks. 28) C An investment policy statement typically begins with a statement of the purpose and objective of the investment portfolio, some general guidelines about the strategy to be employed to achieve those objectives, and the types of securities that will be used. A list of permitted securities for investment would be limited and likely too restrictive. A list of permitted security types is appropriate and can provide the necessary flexibility to increase yield within the safety and liquidity constraints appropriate for the firm. 29) B

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We can compare the yields of these securities on any single basis. The preferred basis is the bond equivalent yield. Security 1 = discount is 3.6% (30 / 360) = 0.3% BEY = (0.3 / 99.7) (365 / 30) = 3.661% BEY of Security 2 = (0.35 / 99.65) × (365 / 30) = 4.273% BEY of Security 3 = 3.65% 30) C Paying invoices on the last day to get a discount (for early payment) is likely the most advantageous strategy for a firm. If the annualized percentage cost of not taking advantage of the discount is less than the firm’s short-term cost of funds, it would be advantageous to pay on the due date. However, the discount percentage is not an annualized rate, so it cannot be compared directly to the firm's annual return on short-term investments. Paying prior to the discount cut-off date or prior to the due date sacrifices interest income for no advantage. 31) B No inferences about liquidity are warranted based on this measure. A firm may have higher credit sales than another simply because it has more sales overall. Cash as a proportion of sales and inventory turnover are indicators of liquidity. 32) A Treasury notes have maturities between 2 and 10 years and, thus, have maturities longer than those of securities suitable for cash management. Allowing short-term securities to mature without reinvesting the cash generated would be one way to meet seasonal cash needs. Short-term bank borrowing or issuing commercial paper that can be paid off when holiday sales generate cash would be appropriate strategies for dealing with a predictable short-term need for cash. 33) C Version 1

The firm’s average days of receivables should be close to the industry average. A significantly lower average days receivables outstanding, compared to its peers, is an indication that the firm’s credit policy may be too strict and that sales are being lost to peers because of this. We can not assume that stricter credit controls than the average for the industry are “better.” We cannot conclude that credit sales are less, they may be more, but just made on stricter terms. The average days of receivables are only one component of the cash conversion cycle. 34) B The money market yield is the holding period yield times 360/72 and is always greater than the discount yield which is the actual discount from face value times 360/72, since the holding period yield is always greater than the percentage discount from face value. A security’s discount yield and its money market yield are always less than its bond equivalent yield, and its effective annual yield is always greater than its bond equivalent yield. 35) B An increase in inventory could indicate poor sales and an accumulation of obsolete items or could be the result of a conscious effort to have adequate supplies to avoid losses from not having items to satisfy customer orders (stock outs). Higher-than-average inventory turnover could indicate better inventory management or could indicate that a less than optimal inventory is being maintained by the company.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The process that ensures that two securities positions with identical future payoffs, regardless of future events, will have the same price is called: A) the law of one price. B) arbitrage. C) exchange parity.

2) When interest rates and futures prices for an asset are uncorrelated and forwards are less liquid than futures, it is most likely that the price of a forward contract is: A) equal to the price of a futures contract. B) greater than the price of a futures contract. C) less than the price of a futures contract.

3) An analyst determines that a portfolio with a 35% weight in Investment P and a 65% weight in Investment Q will have a standard deviation of returns equal to zero. ● Investment P has an expected return of 8%. ● Investment Q has a standard deviation of returns of 7.1% and a covariance with the market of 0.0029. ● The risk-free rate is 5% and the market risk premium is 7%. If no arbitrage opportunities are available, the expected rate of return on the combined portfolio is closest to: A) 7%. B) 6%. C) 5%.

Which of the following is an example of an arbitrage opportunity?

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A) A stock with the same price as another has a higher rate of return. B) A portfolio of two securities that will produce a certain return that is greater than the risk- free rate of interest. C) A put option on a share of stock has the same price as a call option on an identical share.

5) MBT Corporation recently announced a 15% increase in earnings per share (EPS) over the previous period. The consensus expectation of financial analysts had been an increase in EPS of 10%. After the earnings announcement the value of MBT common stock increased each day for the next five trading days, as analysts and investors gradually reacted to the better than expected news. This gradual change in the value of the stock is an example of: A) efficient markets. B) inefficient markets. C) speculation.

6) The spot price of an asset is 62 and the risk-free rate is 2.5%. If the net cost of carry for the asset over the next six months is −3 in present value terms, the no-arbitrage 6-month forward price is closest to: A) 66.6 B) 65.8 C) 59.7

7) It is possible to profit from arbitrage when there are no costs or benefits to holding the underlying asset and the forward contract price is: A) greater than the present value of the spot price. B) less than the future value of the spot price. C) less than the present value of the spot price.

A net benefit from holding the underlying asset of a forward contract will:

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A) decrease the value of the forward contract at expiration. B) increase the value of the forward contract during its life. C) decrease the no-arbitrage forward price at initiation.

9) Bea Moran wants to establish a long derivatives position in a commodity she will need to acquire in six months. Moran observes that the six-month forward price is 45.20 and the sixmonth futures price is 45.10. This difference most likely suggests that for this commodity: A) there is an arbitrage opportunity among forward, futures, and spot prices. B) futures prices are negatively correlated with interest rates. C) long investors should prefer futures contracts to forward contracts.

10)

Derivatives valuation is based on risk-neutral pricing because: A) this method provides an intrinsic value to which investors apply a risk premium. B) the risk of a derivative is based entirely on the risk of its underlying asset. C) risk tolerances of long and short investors are assumed to offset.

11)

Which of the following is the best interpretation of the no-arbitrage principle? A) The information flow is quick in the financial market. B) There is no way you can find an opportunity to make a profit. C) There is no free money.

12)

Which of the following statements about arbitrage opportunities is most accurate?

A) Engaging in arbitrage requires a large amount of capital. B) The market prices of two assets or portfolios that have the same future payoffs cannot differ for protracted periods. C) Arbitrage is referred to as the law of one price.

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13)

The price of a pay-fixed receive-floating interest rate swap is: A) determined by expected future short-term rates. B) negative when floating rates are highly volatile. C) zero when floating rates and fixed rates are equal.

14) Compared to European put options on an asset, otherwise identical American put options on the asset are most likely to be more valuable if: A) the asset value is significantly lower than the exercise price. B) the options are out-of-the-money. C) the asset pays dividends during the life of the option.

15)

The calculation of derivatives values is based on an assumption that: A) arbitrage opportunities do not arise in real markets. B) arbitrage opportunities are exploited rapidly. C) investors are risk neutral.

16) For two European put options that differ only in their time to expiration, which of the following is most accurate? The longer-term option: A) is worth at least as much as the shorter-term option. B) is worth more than the shorter-term option. C) can be worth less than the shorter-term option.

17)

Which of the following portfolios has the same future cash flows as a protective put? A) Long call option, long risk-free bond, short the underlying asset. B) Long call option, long risk-free bond. C) Short call option, long risk-free bond.

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18)

For a European style put option: A) exercise value is equal to the underlying stock price minus its exercise price. B) intrinsic value is equal to its market price plus its exercise value. C) time value is equal to its market price minus its exercise value.

19)

The time value of a European call option with 30 days to expiration will most likely be: A) less than the current option premium if the option is currently in-the-money. B) equal to the intrinsic value if the exercise price is greater than the current spot price. C) greater than the current option premium if the option is currently out-of-the-money.

20)

The value of a European put option at expiration is most likely to be increased by: A) a lower risk-free interest rate. B) a higher exercise price. C) higher volatility of the underlying asset price.

21) Other things equal, a short put position would become more valuable as a result of an increase in: A) the price of the underlying asset. B) the volatility of the price of the underlying asset. C) the time to expiration.

22)

The time value of an option is most accurately described as: A) increasing as the option approaches its expiration date. B) the amount by which the intrinsic value exceeds the option premium. C) equal to the entire premium for an out-of-the-money option.

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Answer Key Test name: Derivatives 1) B If two securities have identical payoffs regardless of events, the process of arbitrage will move prices toward equality. Arbitrageurs will buy the lower priced position and sell the higher priced position, for an immediate profit without any future liability. The law of one price (for securities with identical payoffs) is not a process; it is ‘enforced’ by arbitrage. 2) A When interest rates and futures prices are uncorrelated the prices of forward and futures on the same asset will be equal. Liquidity is not an issue as no-arbitrage prices are based on riskless hedges that are held until settlement of the derivative security. 3) C If the no-arbitrage condition is met, a riskless portfolio (a portfolio with zero standard deviation of returns) will yield the risk-free rate of return. 4) B An arbitrage opportunity exists when a combination of two securities will produce a certain payoff in the future that produces a return that is greater than the risk-free rate of interest. Borrowing at the riskless rate to purchase the position will produce a certain future amount greater than the amount required to repay the loan. 5) B

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A critical element of efficient markets is that asset prices respond immediately to any new information that will affect their value. Large numbers of traders responding in similar fashion to the new information will create a temporary imbalance in supply and demand, and this will adjust asset market values. 6) B F0(T) = [S0 − net cost of carry] × (1 + Rf)T = [62 − (−3)] × (1.025)6/12 = 65.81 7) B An opportunity for arbitrage exists if the forward price is not equal to the future value of the spot price, compounded at the risk-free rate over the period of the forward contract. 8) C Compared to an underlying asset with no net holding cost or benefit, a net benefit from holding the underlying asset will decrease the noarbitrage forward price at initiation and the value of a forward contract during its life. Holding costs and benefits have no effect on the value of a forward contract at expiration. 9) B Differences may exist between forward and futures prices for otherwise identical contracts if futures prices are correlated with interest rates. If futures prices are negatively correlated with interest rates, daily settlement of long futures contracts will require cash when interest rates are increasing and produce cash when interest rates are decreasing. As a result the futures price will be lower than the forward price. The difference in price does not provide an arbitrage opportunity or suggest that investors should prefer forward or futures contracts. 10) B

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Because the risk of a derivative is based entirely on the risk of its underlying asset, we can construct a perfectly hedged portfolio of a derivative and its underlying asset. The future payoff of a perfectly hedged position is certain and can therefore be discounted at the riskfree rate. 11) C An arbitrage opportunity is the chance to make a riskless profit with no investment. In essence, finding an arbitrage opportunity is like finding free money. As you recall, in arbitrage, you observe two identical assets with different prices. Your immediate response should be to buy the cheaper one and sell the expensive one short. You can then deliver the cheap one to cover your short position. Once you take the initial arbitrage position, your arbitrage profit is locked in. The no-investment statement referenced in the text refers to the assumption that when you short the expensive asset, you will be given access to the cash created by the short sale. With this cash, you now have the money to buy the cheaper asset. The no-investment assumption means that the first person to observe a market pricing error will have the financial resources to correct the pricing error instantaneously all by themselves. 12) C Arbitrage is often referred to as the law of one price. Because when exploiting an arbitrage opportunity an arbitrageur will often simultaneously sell the higher-priced asset and buy the lower-priced asset, no capital may be required. Price differences may persist when short sales are not possible of because the difference is not great enough to outweigh the transaction costs of exploiting it. 13) A

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The price of an interest rate swap refers to the fixed rate specified in the swap. This price is calculated as a function of expected future short-term rates. 14) A Early exercise of an in-the-money American put option is valuable when the asset value is significantly below the exercise price (i.e. they are deep in-the money). The payment of interest or dividends from the underlying asset increases put values, so it does not make early exercise valuable as it does with call options. 15) B Derivatives valuation is based on the assumption that any arbitrage opportunities in financial markets are exploited rapidly so that assets with identical cash flows are forced toward the same price. It does not assume arbitrage opportunities do not arise or that investors are risk neutral. 16) C For European puts, it is possible that the longer term option can be less valuable than a shorter-term option. 17) B The put-call parity relationship shows that a protective put (long put, long underlying asset) has the same future payoff as a fiduciary call (long call, long risk-free bond). 18) C The time value of an option (either a put or a call) is equal to its market price minus its exercise value. A put's exercise value is the maximum of zero or its exercise price minus the stock price. Intrinsic value is another term for exercise value. 19) A

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The option premium is made up of time value and intrinsic value. Intrinsic value is positive if an option is in-the-money and zero otherwise. Time value is always positive for call options. If the option still has 30 days until expiration and is in-the-money, the option premium will be the positive intrinsic value, plus the positive time value. Hence, the time value will be less than the premium. If the option is out-of-the-money, the intrinsic value will be zero, and the option premium will be equal to the time value. If the exercise price is greater than the current spot price, the call option is out-of-the-money and hence the intrinsic value again is zero. But as the call option still has time to expiration, the time value will be positive. 20) B The value of an option at expiration is the greater of zero or its exercise value. A higher exercise price increases the exercise value of a put option because it gives the holder the right to sell the underlying asset for a higher price. The risk-free interest rate and volatility of the underlying asset price only affect the time value of options, which is zero at expiration. 21) A An increase in the price of the underlying asset would decrease the value of a put option, which would make a long position in the put less valuable and a short position more valuable. An increase in either the volatility of the underlying asset price or time to expiration would increase the put value and decrease the value of a short position. 22) C

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The price (or premium) of an option is its intrinsic value plus its time value. An out-of-the-money option has an intrinsic value of zero, so its entire premium consists of time value. Time value is zero at an option’s expiration date. Time value is the amount by which an option's premium exceeds its intrinsic value.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) If money wages increase, other things equal, the most likely result is a: A) short-run inflationary gap. B) long-run inflationary gap. C) short-run recessionary gap.

When demand for a good is inelastic, a higher price will: A) have no impact on the demand for the good. B) lead to an increase in total expenditures for the good. C) fail to reduce the quantity demanded for the good.

3) Which of the following is least relevant when explaining why monopoly firms can earn positive economic profits over the long term? A) The existence of economies of scale. B) Control over production input resources. C) The ability to use price discrimination.

4) A price index that is calculated using the current weights of the index’s basket of goods and services is known as a: A) hedonic price index. B) chained price index. C) Laspeyres price index.

5) Which of the following is least accurate regarding the allocative efficiency associated with price discrimination? Price discrimination:

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A) leads to production where the sum of consumer surplus and producer surplus is greater than it would be otherwise. B) results in gains to the discriminating firm by selling to consumers with relatively inelastic demand. C) leads to a decrease in allocative efficiency.

6) The current annual inflation rate, as measured by using the Consumer Price Index (CPI), is best defined as: A) percentage change in the CPI from its base period. B) percentage change in the CPI from a year ago. C) increase in the CPI from a year ago.

7) Which of the following is least likely to be considered a reason why regulation of monopolies is not effective? A) Regulators do not know the firm’s cost structure. B) Regulation shifts industry demand and increases prices. C) Regulation reduces the incentive for firms to reduce costs. Regulation is not associated with a shift in industry demand.

8) If the government is running a budget deficit, which of the following relationships are least likely to occur in the economy at the same time? Exports relative to imports

Savings relative to investment

exports < imports exports < imports exports > imports

private savings > private investment private savings < private investment private savings < private investment

A) B) C)

A) Option A B) Option B C) Option C

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9) Which of the following is least accurate with regard to advertising for firms operating under monopolistic competition? A) Advertising expenses are high relative to perfect competition and monopoly. B) Advertising may decrease average total cost. C) The increase to average total costs associated with advertising increases as output increases.

10)

In order for effective price discrimination to occur the seller must:

A) maximize revenue by selling at the highest price possible. B) face a demand curve with a negative slope. C) have more than one identifiable group of customers with the same price elasticities of demand for the product.

11) Which of the following is least accurate regarding the relationship between price (P), marginal revenue (MR), average total cost (ATC), and marginal cost (MC) at the profit maximizing output under monopoly? A) P = MR. B) MR = MC. C) MR < ATC.

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12) Steve Walker, CFA, is attending an economics lecture, during which the lecturer makes the following two statements about consumer price inflation: Statement 1: High-definition televisions are considerably more expensive than traditional models. This means consumers are spending more money per television unit, which represents a form of inflation. Statement 2: Employment contracts with automatic increases based on the Consumer Price Index fail to increase wages as much as the increase in the cost of living because of biases in the price index. Should Walker agree or disagree with these statements?

A) B) C)

Statement 1

Statement 2

Disagree Disagree Agree

Disagree Agree Agree

A) Option A B) Option B C) Option C

13)

In a perfectly competitive industry, the short-run supply curve for the market is the: A) marginal cost curve above the average variable cost curve. B) sum of the individual supply curves for all firms in the industry. C) marginal cost curve above the average total cost curve.

14)

If private saving equals private business investment, a trade surplus implies that there is: A) no fiscal surplus or deficit. B) a fiscal surplus. C) a fiscal deficit.

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15) In the long-run, after all firms in a perfectly competitive industry have adopted new technology, the: A) price will equal minimum average total cost. B) individual firm supply will increase as demand decreases. C) price will be set where average variable cost is equal to marginal revenue.

16) For price discrimination to work, the seller must face a market with all of the following characteristics EXCEPT: A) a downward sloping demand curve. B) high barriers to entry. C) a way of preventing customers from purchasing the product at a lower price and reselling it at a higher price.

17) Which of the following amounts is least likely to be subtracted from gross domestic product in order to calculate national income? A) Statistical discrepancy. B) Indirect business taxes. C) Capital consumption allowance.

18) Based on the concept of diminishing returns, as the quantity of output increases, the short-run marginal costs of production eventually: A) rise at an increasing rate. B) fall at a decreasing rate. C) rise at a decreasing rate.

19)

Manufacturing and trade sales are best described as a:

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A) leading indicator. B) lagging indicator. C) coincident indicator.

20)

What is the relationship between price and marginal revenue for a price searcher? A) Marginal revenue = price. B) Marginal revenue < price. C) Marginal revenue > price.

21) When potential real GDP is less than actual real GDP, the economy is most likely experiencing: A) underemployment. B) recession. C) inflation.

22) Even though the producer surplus increases under a monopoly scenario, relative to one of perfect competition, the consumer surplus decreases by: A) an equal amount. B) a greater amount. C) a lesser amount.

23) If a fiscal budget deficit increases, which of the following factors must also increase if all other factors are held constant? A) Trade surplus. B) Savings. C) Investment.

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24)

In the dominant firm model of oligopoly, it is least likely that one firm: A) has a significant cost advantage over its competitors. B) effectively sets the price in the market. C) is the innovation leader in product development.

25) The kinked demand model assumes that below the current price, the demand curve becomes: A) more elastic because competitors will decrease their prices. B) less elastic because competitors will decrease their prices. C) less elastic because competitors will not decrease their prices.

26)

Consider the following statements:

Statement 1: “When oligopoly firms cheat on price fixing agreements, the result increases economic efficiency.” Statement 2: “Monopolistic competition is inefficient because a large deadweight loss from advertising and marketing costs is a characteristic of this form of competition.” With respect to these statements: A) both are correct. B) only one is correct. C) both are incorrect.

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27) Assume that the market for paper supplies and the market for toothpicks have the following characteristics: The Market for Paper Supplies is comprised of: ● A large number of independent sellers ● Differentiated products ● Low barriers to entry/exit The Market for Toothpicks is comprised of: ● A large number of independent sellers ● Homogeneous products ● No barriers to entry/exit The Papyrus Company operates in the market for paper supplies and Wudden Floss operates in the toothpick market. The sales managers for both companies want to know how a change in price will affect the quantity sold. Which of the following choices best completes the following sentence? If both firms increase prices, the quantity sold by Papyrus Company will: A) decrease, and so will the quantity sold by Wudden Floss. B) increase, and the quantity sold by Wudden Floss will decrease. C) decrease, and Wudden Floss will sell nothing.

28)

Average weekly initial claims for unemployment insurance are classified as a: A) coincident indicator. B) leading indicator. C) lagging indicator.

29) A company has estimated that the price elasticity of demand for its output is −1.1. If the company increases the price of its product by 5%, it is most likely that: A) both total revenue and profits will decrease. B) total revenue will decrease but profits may increase. C) total revenue will increase but profits may decrease.

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30) If domestic savings are insufficient to finance domestic private investment and exports are greater than imports, it is most likely that the fiscal budget has: A) a deficit that is less than the trade surplus. B) a surplus that is greater than the trade surplus. C) a deficit that is greater than the trade surplus.

31) An economist calculates the following value: National income + transfer payments to households − indirect business taxes − corporate income taxes − undistributed corporate profits The most appropriate term for the value she has calculated is: A) disposable income. B) GDP. C) personal income.

32) In the short run, will an increase in the money supply increase the price level and real output? A) Only one will increase in the short run. B) Both will increase in the short run. C) Neither will increase in the short run.

33) Which of the following events is most likely to increase short-run aggregate supply (shift the curve to the right)? A) Inflation that results in an increase in goods prices. B) An increase in government spending intended to increase real output. C) High unemployment puts downward pressure on money wages.

34)

With respect to the IS-LM model, a change in the price level will shift:

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A) the LM curve, but not the aggregate demand curve. B) the aggregate demand curve, but not the LM curve. C) both the LM and aggregate demand curves.

35)

Compared to a competitive market result, a single-price monopoly will most likely: A) adopt a marginal cost pricing strategy, which will decrease consumer surplus. B) result in lower output, deadweight loss, and less producer and consumer surplus. C) result in a higher price, less consumer surplus, and more producer surplus.

36) The spot rate for Japanese yen per UK pound is 138.78. If the UK interest rate is 1.75% and the Japanese interest rate is 1.25%, the 6-month no-arbitrage forward rate is closest to: A) 138.10 JPY/GBP. B) 138.44 JPY/GBP. C) 138.95 JPY/GBP.

37) The spot rate for Chinese yuan per Canadian dollar is 6.4440. If the Canadian interest rate is 2.50% and the Chinese interest rate is 3.00%, the 3-month no-arbitrage forward rate is closest to: A) 6.436 CNY/CAD. B) 6.475 CNY/CAD. C) 6.452 CNY/CAD.

38) If households are holding larger real money balances than they desire, which of the following is least likely?

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A) The opportunity cost of holding money balances will decrease. B) The interest rate is higher than its equilibrium rate in the market for real money balances. C) The central bank must issue securities to absorb the excess money supply and establish equilibrium.

39) According to the quantity theory of money, if nominal GDP is $7 trillion, the price index is 150, and the money supply is $1 trillion, then the velocity of the money supply is closest to: A) 7.0. B) 10.5. C) 4.7.

40) The spot exchange rate for United States dollars per United Kingdom pound (USD/GBP) is 1.5775. If 30-day interest rates are 1.5% in the United States and 2.5% in the United Kingdom, and interest rate parity holds, the 30-day forward USD/GBP exchange rate should be: A) 1.5788. B) 1.5621. C) 1.5762.

41) Participants in foreign exchange markets that can be characterized as "real money accounts" most likely include: A) insurance companies. B) hedge funds. C) central banks.

42) Which of the following relationships in regard to the quantity theory of money is least accurate?

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A) Nominal GDP = Price × Money Supply. B) Nominal GDP = Money Supply × Velocity = Price × Real Output. C) Money × Velocity = Money Supply × Velocity.

43) In the context of the foreign exchange market, investment accounts are said to be leveraged if they: A) buy currencies on margin. B) use derivatives. C) borrow and sell foreign currencies.

44) If a bank needs to borrow funds from the Federal Reserve to fund a temporary shortage in reserves, it would borrow funds at the: A) prime rate. B) discount rate. C) federal funds rate.

45) Assuming the federal government maintains a balanced budget, the most likely effects of a tax increase on government expenditures and real GDP are: Government Expenditures

Real GDP

Increase Increase Decrease

Increase Decrease Decrease

A) B) C)

A) Option A B) Option B C) Option C

46)

Spot and one-month forward exchange rates are as follows:

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EUR/DEF EUR/GHI EUR/JKL

Spot

1-month forward

2.5675 4.3250 7.0625

2.5925 4.2800 7.0075

Based on these exchange rates, the EUR is closest to a 1-month forward: A) premium of 1% to the GHI. B) discount of 1% to the JKL. C) premium of 1% to the DEF.

47)

Frequent changes in advertised prices are one of the costs of: A) unexpected inflation only. B) both expected and unexpected inflation. C) expected inflation only.

48) The exchange rate for Australian dollars per British pound (AUD/GBP) was 1.4800 five years ago and is 1.6300 today. The percent change in the Australian dollar relative to the British pound is closest to: A) depreciation of 9.2%. B) appreciation of 10.1%. C) depreciation of 10.1%.

49) Which of the following statements about the demand and supply of money is most accurate? People who are: A) buying bonds to reduce their money balances will increase the demand for bonds with an associated increase in interest rates. B) holding money when interest rates are lower will try to increase their money balances and, as a result, the supply of money increases. C) holding money when interest rates are higher will try to reduce their money balances and, as a result, the demand for money decreases.

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50) The spot exchange rate for CHF/EUR is 0.8342 and the 1-year forward quotation is −0.353%. The 1- year forward exchange rate for EUR/CHF is closest to: A) 1.2022. B) 0.8313. C) 1.2029.

51) Contractionary monetary policy is least likely to decrease consumption spending by decreasing: A) the foreign exchange value of the currency. B) securities prices. C) expectations for economic growth.

52) Other things equal, a real exchange rate (stated as units of domestic currency per unit of foreign currency) will decrease as a result of an increase in the: A) nominal exchange rate (domestic/foreign). B) domestic price level. C) foreign price level.

53) In the balance of payments accounts, goods and financial assets that migrants bring to a country are included in the: A) financial account. B) capital account. C) current account.

54) If the money interest rate is measured on the y-axis and the quantity of money is measured on the x- axis, the money supply curve is:

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A) vertical. B) downward sloping to the lower right. C) upward sloping to the upper right.

55) According to the Fisher effect, which of the following interest rates includes a premium for the expected rate of inflation? A) Neither yields on short-term government debt nor yields on long-term corporate debt. B) Both yields on short-term government debt and yields on long-term corporate debt. C) Yields on long-term corporate debt, but not yields on short-term government debt.

56) A country is experiencing a core inflation rate of 7% during a recessionary period of real GDP growth. If the central bank has a single mandate to achieve price stability and uses inflation targeting with an acceptable range of zero to 4%, its monetary policy response is most likely to decrease: A) the foreign exchange value of the country’s currency. B) short-term interest rates. C) GDP growth in the short run.

57) In 20X5, Carthage’s merchandise imports exceeded the value of its merchandise exports. In this case, Carthage would most likely have which of the following? A) Current account surplus. B) Balance of trade surplus. C) Capital account surplus.

58)

The least likely result of import quotas and voluntary export restraints is: A) a decrease in the quantity of imports of the product. B) increased revenue for the government. C) a shift in production toward higher-cost suppliers.

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59) The USD/EUR spot exchange rate is 1.3500 and 6-month forward points are −75. The 6month forward exchange rate is: A) 1.3575, and the USD is at a forward discount. B) 1.3425, and the USD is at a forward discount. C) 1.3425, and the USD is at a forward premium.

60) Assume that the long-term equilibrium money market interest rate is 4% and the current money market interest rate is 3%. At this current rate of 3%, there will be an excess: A) supply of money in the money market, and investors will tend to be net buyers of securities. B) demand for money in the money market, and investors will tend to be net buyers of securities. C) demand for money in the money market, and investors will tend to be net sellers of securities.

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Answer Key Test name: Economics 1) C An increase in the wage rate decreases short-run aggregate supply, leading to a short-run recessionary gap. 2) B When demand is relatively inelastic, consumers do not reduce their quantity demanded very much when the price increases. That is, a given percentage increase in price results in a smaller percentage reduction in quantity demanded. Thus, total expenditures on the good increase. "Fail to reduce the quantity demanded for the good" is inaccurate because that would only be true if demand was perfectly inelastic. 3) C High entry barriers due to economies of scale, government licensing, resource controls, and patents prevent new firms from entering the market to exploit positive economic profit opportunities. 4) B A chained or chain-weighted price index uses updated weights for each good and service in its market basket. A price index that is not chainweighted, such as a Laspeyres index, is calculated using weights for each good and service in the market basket as of the index’s base period. Hedonic pricing is a technique used to adjust a price index for upward bias from quality changes of goods in its market basket. 5) C

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Allocative efficiency occurs when the quantity produced maximizes the sum of consumer and producer surplus. That is, where marginal benefit equals marginal cost. Price discrimination reduces the allocative inefficiency that exists when prices are greater than marginal cost by increasing output toward the quantity where price equals marginal cost. Firms gain by selling to customers with inelastic demand while still providing goods to customers with more elastic demand. This may even cause production to take place at a level where it would not take place otherwise. 6) B The inflation rate is the percentage change in the price index from a year earlier. 7) B 8) C A government budget deficit, a trade surplus, and an excess of private investment over private savings cannot all occur at the same time. If the government runs a budget deficit, the deficit must be financed by a trade deficit (exports < imports), surplus private savings (private savings > private investment), or both. 9) C

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Advertising expenses are high for firms in monopolistic competition. Not only because firms need to inform consumers about the unique features of a firm’s products, but also to create or increase a perception of differences between products that are actually quite similar. Advertising costs increase average total costs, but the increase to average total cost attributable to advertising decreases as output increases because more fixed advertising dollars are being averaged over a larger quantity. If advertising increases output (sales) significantly, it can actually decrease a firm’s average total cost if there are economies of scale. 10) B In order for effective price discrimination to occur, the seller must have a downward sloping demand curve. The seller must also have at least two identifiable groups of customers with price elasticities of demand for the product, and the seller must be able to prevent customers from reselling the product. 11) A To maximize profit, all firms expand output until marginal revenue equals marginal cost. Price is determined from the demand curve, which is above the marginal revenue curve since a monopoly faces a downward sloping demand curve. 12) A Walker should disagree with both statements. Price changes resulting from increases in the quality of goods, do not represent inflation. However, the Consumer Price Index is affected by biases from product quality, as well as new goods and substitution, causing it to overstate the rate of inflation. As a result, increases in wages that are based on CPI will more than compensate for actual increases in the cost of living.

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13) B The short-run supply curve for a firm is its marginal cost curve above the average variable cost curve. The short-run supply curve of the market is the sum of the supply curves for all firms in the industry. 14) B The fundamental relationship among saving, investment, the fiscal balance, and the trade balance is stated as: (G − T) = (S − I) − (X − M). If S = I, this equation becomes (G − T) = − (X − M), or (T − G) = (XM). In this case, if the trade balance is in surplus (exports are greater than imports), the fiscal balance must also be in surplus (taxes are greater than government spending). 15) A After some firms in an industry adopt a technological change, the existing firms that use the old technology will experience losses and either adopt the technology or exit the industry. Long-run equilibrium with price equal to minimum average total cost for the new technology will be established. 16) B Price discrimination is the practice of charging different consumers different prices for the same product or service. For price discrimination to work the seller must: 1) have a downward sloping demand curve, 2) have at least two identifiable groups of customers with different price elasticities of demand, 3) must be able to prevent customers in the lower-price group from reselling the product to customers in the higherprice group. 17) B Indirect business taxes are not subtracted because they are included in national income. Version 1

18) A The law of diminishing returns states that as more variable resources are a production process combined with a fixed input, output will eventually increase at a decreasing rate. In the short run, as the quantity produced rises, costs rise at an increasing rate. 19) C Manufacturing and trade sales are a coincident indicator that generally reflects the current phase of the business cycle. 20) B For a price searcher, demand is downward sloping, marginal revenue is less than price since price must be reduced to sell additional units of output. 21) C The economy is in an inflationary phase if actual real GDP is greater than potential real GDP. When actual real GDP equals potential real GDP, the economy is said to be at full employment. The economy is in a recessionary phase if real GDP is less than potential GDP. 22) B The consumer surplus decreases by a greater amount than the producer surplus increases, with the difference representing a deadweight loss. 23) B The relationship between the fiscal balance, savings, investment, and the trade balance is (G − T) = (S − I) − (X − M). An increase in a fiscal budget deficit (G − T) must be funded by an increase in savings (S), a decrease in investment (I), or a decrease in net exports (X − M), which would decrease a trade surplus or increase a trade deficit. 24) C

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The dominant firm model of oligopoly is based on the assumption that one firm has a significant cost advantage which allows it to set the price in the market and control a relatively large share of the industry’s production and sales. It does not assume that the firm will be the innovation leader in product development. In fact, being more innovative is one of the factors that allow smaller competitors that work at a cost disadvantage to survive. 25) B The kinked demand model of oligopoly behavior assumes that a firm’s competitors will not match a price increase, but will match the price of a competitor that offers a lower price. The result is a demand curve that is more elastic above the current price, but less elastic below it. 26) B With a price-fixing agreement, producers in an oligopoly market restrict output to increase price and joint profits just as a monopoly producer does. Such agreements decrease economic efficiency. When these agreements are violated, quantity produced increases, increasing economic efficiency. Therefore Statement 1 is accurate. The efficiency of monopolistic competition is not clear. While increased opportunity cost is associated with the intensive marketing and advertising activities that are characteristic of monopolistic competition, consumers definitely benefit from these selling activities because they receive information that often enables them to make better purchasing decisions. Hence the advertising and marketing costs may be more than the efficient amount, but do not represent a deadweight loss. Therefore Statement 2 is inaccurate. 27) C

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Papyrus Company is an example of a price searcher engaged in monopolistic competition (low barriers to entry). Thus, the company faces a downward sloping demand curve and highly elastic demand. An increase in price will result in fewer units sold. Wudden Floss is an example of a price taker operating in a purely competitive market. Thus, the firm faces a horizontal demand curve and perfectly elastic demand. An increase in price will result in no units sold. In a purely competitive market, the firm must take the market price. 28) B Initial claims for unemployment insurance are considered a leading indicator. 29) B Price elasticity of −1.1 tells us that a 5% increase in price will reduce sales by more than 5%, so total revenue will decrease. Whether profits increase or decrease will depend on whether the cost reduction from producing less output is greater or less than the decrease in total revenue. 30) B The fundamental relationship among saving, investment, the fiscal balance and the trade balance is expressed as (S − I) = (G − T) + (X − M). If domestic savings (S) are not sufficient to finance private investment (I), then (S − I) is negative and the sum (G − T) + (X − M) must also be negative. With exports greater than imports, (X − M) is positive so (G − T) must be negative and larger than (X − M). If (G − T) is negative, taxes (T) are greater than government spending (G) and the government has a fiscal surplus. 31) C

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Personal income is calculated by adding transfer payments to national income and subtracting indirect business taxes, corporate income taxes, and undistributed corporate profits. Disposable income is personal income minus personal taxes. GDP is national income plus a capital consumption allowance and an adjustment for statistical discrepancy between the income and expenditure approaches. 32) B In the short run, an increase in the money supply will increase aggregate demand. The new short-run equilibrium will be at a higher price level and a greater level of real output (GDP). 33) C Falling money wages would cause businesses to increase (profitmaximizing) output levels at each price level for final goods and services. Changes in the price level of goods and services are represented by a movement along a short-run aggregate supply curve, not a shift in the curve. A rise in resource prices will decrease aggregate supply. An increase in government spending will shift the aggregate demand curve but not the aggregate supply curve. 34) A Because an LM curve is constructed for a given level of the real money supply, a change in the price level (which affects the real money supply) will shift the LM curve. The aggregate demand curve is determined by changing the price level, which produces alternative LM curves. Changing price levels determines the aggregate demand curve from the intersections of alternative LM curves with the IS curve. 35) C

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A firm in a monopoly position will reduce output to where MC = MR, which will increase price, decrease consumer surplus, and increase producer surplus. A marginal cost pricing strategy refers to regulation which requires a firm to set price equal to marginal cost. 36) B The calculation is as follows:

37) C The calculation is as follows:

38) C If households' real money balances are larger than they desire, the interest rate (opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their undesired cash to buy securities, bidding up securities prices and reducing the interest rate until the equilibrium rate is achieved. This market process does not require any action by the central bank. 39) A The equation of exchange is MV = PY. Nominal GDP = PY, so that MV = nominal GDP. Therefore, ($1.0 trillion)(V) = $7.0 trillion. V = $7.0 trillion / $1.0 trillion. V = 7.0. 40) C Forward USD/GBP = spot USD/GBP × (1 + U.S. interest rate) / (1 + UK interest rate) = 1.5775 × [(1 + 0.015/12) / (1 + 0.025/12)] = 1.5762 41) A

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Real money accounts are foreign exchange buy-side investors that do not use derivatives. Many mutual funds, pension funds, and insurance companies can be classified as real money accounts. Hedge funds typically use derivatives. Central banks usually do not act as investors in foreign exchange markets but may intervene in foreign exchange markets to achieve monetary policy objectives. 42) A The quantity theory of money holds that: Money Supply × Velocity = Nominal GDP = Price × Real Output. 43) B Leveraged accounts in the foreign exchange market refer to investment accounts that use derivatives. 44) B Banks are able to borrow from the Fed at the discount rate. The federal funds rate is the interest rate banks charge other banks to borrow reserves from other banks. The prime rate is the rate that commercial banks charge their best customers. 45) A The amount of the spending program exactly offsets the amount of the tax increase, leaving the budget unaffected (balanced budget). The multiplier effect is stronger for government spending versus the tax increase. Therefore, the balanced budget multiplier will be positive. All of the government spending enters the economy as increased expenditure, whereas only a portion of the tax increase results in lessened expenditure (determined by the marginal propensity to consume), because part of the tax increase will come from the savings of the taxpayer (determined by the marginal propensity to save). 46) A Version 1

The EUR is at a forward premium to the GHI because the EUR/GHI forward rate is less than the EUR/GHI spot rate. The base currency, GHI, is at a forward discount of forward/spot − 1 = 4.2800 / 4.3250 − 1 = −1.04%. The EUR is at a forward discount to the DEF and a forward premium to the JKL. 47) B Inflation imposes "menu costs" on an economy as businesses must frequently change their advertised prices, regardless of whether inflation is expected or unexpected. 48) A To correctly calculate the percentage change in AUD relative to GBP, convert the exchange rates so that AUD is the base currency: 1 / 1.4800 = 0.6757 GBP/AUD five years ago and 1 / 1.6300 = 0.6135 GBP/AUD today. The percentage change in the Australian dollar against the British pound is 0.6135 / 0.6757 − 1 = −9.2%. Note that the GBP has appreciated against the AUD by 1.6300 / 1.4800 − 1 = 10.1% over the same period. 49) C Buying bonds would drive bond prices up and interest rates down. Selling bonds would have the opposite effect; driving bond prices down and interest rates up. When interest rates are lower, there is an excess demand for money. The supply of money is determined by the monetary authorities. 50) C The forward rate for CHF/EUR is 0.8342 × (1 − 0.00353) = 0.8313. The 1-year forward EUR/CHF exchange rate is 1 / 0.8313 = 1.2030. 51) A

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Contractionary monetary policy is likely to increase the value of the domestic currency in the foreign exchange market, which decreases foreign demand for the country's exports. Contractionary monetary policy should cause both securities prices and expectations for economic growth to decrease, each of which is likely to cause consumers to decrease spending. 52) B An increase in the domestic price level, other things equal, will decrease a real exchange rate. Increases in the nominal exchange rate or the foreign price level, other things equal, will increase a real exchange rate. 53) B The capital account includes goods and financial assets that migrants bring when they come to a country or take with them when they leave. 54) A The money supply schedule is vertical because it is not affected by changes in the interest rate but is determined by the monetary authorities such as the Federal Reserve System (Fed) in the United States. 55) B The Fisher effect holds that all nominal interest rates include a premium for expected inflation. 56) C If the central bank has a price stability mandate, it will most likely respond to the above-target inflation rate by decreasing the money supply, even though GDP growth is in a recessionary phase. Decreasing the money supply will result in higher short-term interest rates and appreciation of the currency, but will likely cause GDP growth to decrease further in the short run.

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57) C If a country is running a current account deficit, it must have an inflow of foreign capital, creating a surplus in the capital account. 58) B Import quotas and voluntary export restraints, unlike tariffs, do not necessarily generate tax revenue. The other choices describe effects that result from tariffs, quotas, and VERs. 59) C For an exchange rate quoted to four decimal places, each forward point represents 0.0001. The 6- month forward exchange rate is 1.3500 − 0.0075 = 1.3425 USD/EUR. The USD is expected to appreciate against the EUR and is trading at a forward premium. 60) C At interest rates below 4% (the long-term equilibrium rate), the quantity of money demanded exceeds the quantity of money supplied. At belowequilibrium rates, investors will sell bonds to obtain the desired extra cash. As they sell more bonds, the prices of bonds fall, and interest rates start to move back towards the 4% equilibrium.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements best describes the overreaction effect? A) Low returns over a three-year period are followed by high returns over the following three years. B) High returns over a one-year period are followed by low returns over the following three years. C) High returns over a one-year period are followed by high returns over the following year.

2) Equal weighting is the most common weighting methodology for indexes of which of the following types of assets? A) Hedge funds. B) Equities. C) Fixed income securities.

Which of the following option positions is said to be a long position? A) Writer of a put option. B) Buyer of a put option. C) Writer of a call option.

4) An investor bought a stock on margin. The margin requirement was 60%, the current price of the stock is $80, and the stock price was $50 one year ago. If margin interest is 5%, how much equity did the investor have in the investment at year-end? A) 73.8%. B) 60.6%. C) 67.7%.

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5) Peg Fisk, CFA, states that two of the objectives of market regulation which CFA Institute attempts to address are minimum standards of competence among investment professionals and ease of performance evaluation for investors. Fisk is accurate with regard to: A) only one of these objectives B) both of these objectives. C) neither of these objectives.

6) The idea that uninformed traders, when faced with unclear information, observe the actions of informed traders to make decisions, is referred to as: A) narrow framing. B) herding behavior. C) information cascades.

7) Which of the following statements least likely describes the role of a portfolio manager in perfectly efficient markets? Portfolio managers should: A) quantify client's risk tolerance, communicate portfolio policies and strategies, and maintain a strict buy and hold policy avoiding any changes in the portfolio to minimize transaction costs. B) construct diversified portfolios that include international securities to eliminate unsystematic risk. C) construct a portfolio that includes financial and real assets.

8) Which of the following conditions is most likely necessary for capital to be allocated to its most valuable uses? A) There are no barriers to the flow of complete information to the financial markets. B) Investors are well informed about the risk and return of various investments. C) Financial markets are frictionless (i.e., free of taxes or transactions costs).

The value of a total return index:

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A) may increase at either a faster or slower rate than the value of a price return index with the same constituent securities and weights. B) can be calculated by multiplying the beginning value by the geometrically linked series of periodic total returns. C) is determined by the price changes of the securities that constitute the index.

10)

Which of the following statements about indexes is CORRECT?

A) An equal weighted index assumes a proportionate market value investment in each company in the index. B) A market weighted series must adjust the denominator to reflect stock splits in the sample over time. C) A price-weighted index assumes an equal number of shares (one of each stock) represented in the index.

11) If the momentum effect persists over time, it would provide evidence against which of the following forms of market efficiency? A) Weak form only. B) Both weak form and semi strong form. C) Semi strong form only.

12)

Which of the following statements concerning market efficiency is least accurate?

A) Tests of the semi-strong form of the EMH require that security returns be riskadjusted using a market model. B) Market efficiency assumes that individual market participants correctly estimate asset prices. C) If weak-form market efficiency holds, technical analysis cannot be used to earn abnormal returns over the long-run.

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13) An analyst with Guffman Investments has developed a stock selection model based on earnings announcements made by companies with high P/E stocks. The model predicts that investing in companies with P/E ratios twice that of their industry average that make positive earnings announcements will generate significant excess return. If the analyst has consistently made superior risk-adjusted returns using this strategy, which form of the efficient market hypothesis has been violated? A) Strong, semi strong, and weak forms. B) Weak form only. C) Semi strong and strong forms only.

14) A stock's price currently is $100. An analyst forecasts the following for the stock: ● The normalized trailing price earnings (P/E) ratio will be 12×. ● The stock is expected to pay a $5 dividend this coming year on projected earnings of $10 per share. If the analyst were to buy and hold the stock for the year, the projected rate of return based on these forecasts is closest to: A) 15%. B) 25%. C) 20%.

15) A firm has a constant growth rate of 7% and just paid a dividend of $6.25. If the required rate of return is 12%, what will the stock sell for two years from now based on the dividend discount model? A) $133.75. B) $149.80. C) $153.13.

16)

Which of the following industries is most likely to operate in a fragmented market?

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A) Pharmaceuticals. B) Oil services. C) Confections.

17) When constructing a peer group of firms, an analyst should least appropriately consider the firms’: A) industry classification. B) cost structures. C) business cycle sensitivity.

18) In a period when U.S. equity prices are increasing and the U.S. dollar is depreciating, which of the following investors in U.S. equities is most likely to earn the highest return in the investor's local currency? A) U.S. investor who reinvests dividends. B) Non-U.S. investor who reinvests dividends. C) Non-U.S. investor who does not reinvest dividends.

19) Assume a company has earnings per share of $5 and pays out 40% in dividends. The earnings growth rate for the next 3 years will be 20%. At the end of the third year the company will start paying out 100% of earnings in dividends and earnings will increase at an annual rate of 5% thereafter. If a 12% rate of return is required, the value of the company is closest to: A) $102.80. B) $92.90. C) $55.70.

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20) Given the following estimated financial results for the next period, value the stock of FishnChips, Incorporated, using the infinite period dividend discount model (DDM). ● Sales of $1,000,000. ● Earnings of $150,000. ● Total assets of $800,000. ● Equity of $400,000. ● Dividend payout ratio of 60.0%. ● Average shares outstanding of 75,000. ● Real risk free interest rate of 4.0%. ● Expected inflation rate of 3.0%. ● Expected market return of 13.0%. ● Stock Beta at 2.1. The per share value of FishnChips stock is approximately: (Note: Carry calculations out to at least 3 decimal places.) A) $17.91. B) $26.86. C) $30.89.

21) Because of dividend displacement of earnings, the net effect on firm value of increasing the dividend payout ratio is: A) to increase firm value. B) indeterminate. C) to decrease firm value.

22)

The experience curve, which illustrates the cost per unit relative to output: A) slopes upward. B) slopes downward. C) slopes upward in the early years and downward in the later years.

23) Which of the following is least likely a reason the price to cash flow (P/CF) model has grown in popularity?

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A) CFs are used extensively in valuation models. B) CFs are more easily estimated than future dividends. C) CFs are generally more difficult to manipulate than earnings. CFs are not easier to estimate than dividends.

24) Declining prices that result from the development of substitute products are most likely to characterize an industry in the: A) shakeout stage. B) mature stage. C) decline stage.

25) Use the following information and the multi-period dividend discount model to find the value of Computech’s common stock. ● Last year’s dividend was $1.62. ● The dividend is expected to grow at 12% for three years. ● The growth rate of dividends after three years is expected to stabilize at 4%. ● The required return for Computech’s common stock is 15%. Which of the following statements about Computech's stock is least accurate? A) At the end of two years, Computech's stock will sell for $20.69. B) The dividend at the end of year three is expected to be $2.28. C) Computech's stock is currently worth $17.46.

26) What value would be placed on a stock that currently pays no dividend but is expected to start paying a $1 dividend five years from now? Once the stock starts paying dividends, the dividend is expected to grow at a 5 percent annual rate. The appropriate discount rate is 12 percent. A) $9.08. B) $14.29. C) $8.11.

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27)

Which of the following is least likely an advantage of using price/sales (P/S) multiple?

A) P/S multiples provide a meaningful framework for evaluating distressed firms. B) P/S multiples are not as volatile as P/E multiples and hence may be more reliable in valuation analysis. C) P/S multiples are more reliable because sales data cannot be distorted by management.

28)

Industry analysis is most likely to provide an analyst with insight about a company's: A) pricing power. B) financial performance. C) competitive strategy.

29) Yong Kim, CFA, buys a preferred stock that has a 6% dividend yield (defined as the ratio of the preferred dividend to the market price of the preferred stock). One year later, Kim sells the stock when it is selling at a 5% dividend yield. The preferred stock pays a fixed annual dividend, which Kim received right before selling. What rate of return did Kim realize on his investment? A) 26%. B) 14%. C) 20%.

30) A conglomerate is in the following lines of business, with segment revenue as a percentage of total revenue: 30% banking, 30% automobiles, 25% apparel, and 15% heavy machinery. Based on the Global Industry Classification Standard, the sector classification for this company is most likely: A) industrials. B) financial services. C) consumer discretionary.

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Answer Key Test name: Equity Investments 1) A The overreaction effect refers to stocks with poor returns over three to five-year periods that had higher subsequent performance than stocks with high returns in the prior period. The result is attributed to overreaction in stock prices that reverses over longer periods of time. Stocks with high previous short- term returns that have high subsequent returns show a momentum effect. 2) A Most hedge fund indexes are equal-weighted. Equity and fixed income indexes are predominately market capitalization weighted. 3) B The buyer of an option (either a call or put) is said to be long the option and the writer of an option is said to be short the option. Note that with put options, the long (put option holder) benefits when the price of the underlying asset decreases, while the short (put option writer) benefits when the price of the underlying asset increases. We say that a put buyer is long the option but has short exposure to the underlying asset price. 4) A Margin debt = 40% × $50 = $20; Interest = $20 × 0.05 = $1. Equity % = [Value − (margin debt + interest)] / Value $80 − $21 / $80 = 73.8% 5) B

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CFA Institute attempts to address both of these objectives of market regulation. The CFA Program is part of the effort to encourage minimum standards of competency among finance professionals. Global Investment Performance Standards are part of the effort to make performance evaluation easier for investors. 6) C “Information cascades” refers to uninformed traders watching the actions of informed traders when making investment decisions. Herding behavior is when trading occurs in clusters, not necessarily driven by information. Narrow framing refers to investors viewing events in isolation. 7) A A portfolio manager should quantify each client's risk tolerance and communicate portfolio policies and strategies. However, portfolio managers should monitor client's needs and changing circumstances and make appropriate changes to the portfolio. Adhering to a strict buy and hold policy would not be in the client's best interest. Portfolios need to be rebalanced and changed to meet client’s changing needs. 8) B Capital will flow to its most valuable uses if markets function well and investors are well informed about the risk and return characteristics of various investments. Allocation of capital to its most valuable uses does not require that all investors have complete information or that financial markets are frictionless. 9) B

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The value of a total return index can be calculated by multiplying the beginning value by the geometrically linked series of index total returns. The value of a total return index includes both the price changes of the securities that constitute the index and any cash flows from the securities (dividends, interest, and other distributions). A total return index cannot increase at a slower rate (or decrease at a faster rate) than an otherwise identical price return index because cash flows from the securities cannot be negative. 10) C The descriptions of value weighted and unweighted indexes are switched. The denominator of a price- weighted index must be adjusted to reflect stock splits and changes in the sample over time. A market value-weighted series assumes you make a proportionate market value investment in each company in the index. 11) B The momentum effect suggests it is possible to earn abnormal returns using market data. All three forms of market efficiency (weak form, semi strong form, and strong form) assume that market prices fully reflect market data. 12) B Market efficiency does not assume that individual market participants correctly estimate asset prices, but does assume that their estimates are unbiased. That is, some agents will over-estimate and some will underestimate, but they will be correct, on average. 13) C

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The semi strong form of EMH states that security prices rapidly adjust to reflect all publicly available information. If the analyst can use his model, which is based on publicly available information, to earn above average returns, the semi strong form of the EMH has been violated. If the semi strong form of EMH is violated, the strong form of EMH is also violated. 14) B The forecast year-end price, P, is: P = EPS × (P/E) = 10(12) = 120

15) C 16) B Most areas of the oil services industry are characterized by many small competitors. The confections and pharmaceutical industries each have a small number of very large firms. 17) C A peer group should consist of firms that are alike in their principal lines of business, along with other similarities such as cost structures and access to capital. Firms can be similar in business cycle sensitivity but dissimilar in terms of their business activities (e.g., a firm in the home building industry and a firm in the heavy equipment manufacturing industry). 18) A

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Sources of return on equity securities include price appreciation or depreciation, dividend income, and foreign exchange gains or losses for investors outside the country. In an increasing equity market, reinvesting dividends is likely to increase returns compared to not reinvesting dividends. If the currency is depreciating, investors from outside the country will experience foreign exchange losses that decrease their returns. 19) A First, calculate the dividends in years 0 through 3:(We need D3 to calculate the value in Year 2) D0 = (0.4)(5) = 2 D1 = (2)(1.2) = 2.40 D2 = (2.4)(1.2) = 2.88 D3 = E3 = 5(1.2)3 = 8.64 BecauseD3 will grow at a constant rate, we can use it to estimate a terminal value for the stock at t = 2: P2 = D3 / (k − g) = 8.64 / (0.12 − 0.05) = $123.43 Present value of the cash flows = value of stock =2.4 / (1.12)1 + 2.88 / (1.12)2 + 123.43 / (1.12)2 = 102.83 20) B

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Here, we are given all the inputs we need. Use the following steps to calculate the value of the stock: First, expand the infinite period DDM: DDM formula:P0 = D1 / (ke − g) D1 = (Earnings × Payout ratio) / average number of shares outstanding = ($150,000 × 0.60) / 75,000 = $1.20 ke = nominal risk free rate + [beta × (expected market return − nominal risk free rate)] Note: Nominal risk-free rate = (1 + real risk free rate) × (1 + expected inflation) − 1 = (1.04) × (1.03) − 1 = 0.0712, or 7.12%. ke = 7.12% + [2.1 × (13.0% – 7.12%)] = 0.19468 g = (retention rate × ROE) Retention = (1 − Payout) = 1 − 0.60 = 0.40. ROE = (net income / sales)(sales / total assets)(total assets / equity) = (150,000 / 1,000,000)(1,000,000 / 800,000)(800,000 / 400,000) = 0.375 g = 0.375 × 0.40 = 0.15 Then, calculate:P0 = D1 / (ke − g) = $1.20 / (0.19468 − 0.15) = 26.86. Version 1

21) B The net effect on firm value of increasing the dividend payout ratio is ambiguous because the positive effect of larger dividends may be offset by a negative effect on the firm's sustainable growth rate. If increasing the payout ratio always increased firm value, all firms would have 100% payout ratios. 22) B The experience curve, which shows the cost per unit relative to output, slopes downward because of increases in productivity and economies of scale, especially in industries with high fixed costs. 23) B 24) C The decline stage of the industry life cycle is often characterized by declining prices as substitute products or global competition emerge, or as a result of decreasing demand due to societal changes. 25) C The dividends for years 1, 2, and 3 are expected to be ($1.62)(1.12) = $1.81; ($1.81)(1.12) = $2.03; and ($2.03)(1.12) = $2.27. At the end of year 2, the stock should sell for $2.27 / (0.15 − 0.04) = $20.64. The stock should sell currently for ($20.64 + $2.03) / (1.15)2 + ($1.81) / (1.15) = $18.71. 26) A P4 = D5/(k − g) = 1/(.12 − .05) = 14.29 P0 = [FV = 14.29; n = 4; i = 12] = $9.08. 27) C

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Accounting data on sales is used to calculate the P/S multiple. The P/S multiple is thought to be more reliable because sales figures are not as easy to manipulate as the earnings and book value, both of which are significantly affected by accounting conventions. However, it is not true that "sales data cannot be distorted by management" because aggressive revenue recognition practices can influence reported sales. 28) A Industry analysis provides a framework for an analyst to understand a firm in relation to its competitive environment, which determines how much pricing power a firm has. Competitive strategy and financial performance are aspects of company analysis. 29) A The dividend can be of any size. Suppose it is $1.00. The purchase price is 1.00 / 0.06 = 16.667. The sale price is 1.00 / 0.05 = 20. Kim pays 16.667 and receives 20.00 plus a 1.00 dividend one year later. The rate of return is [(20 + 1) / 16.667] − 1 = 26%. 30) C Automobiles and apparel are classified as consumer discretionary; banking is classified as financial services; and heavy machinery is classified as industrials. Based on revenues, a majority of the firm’s sales (55%) are derived from the consumer discretionary sector.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) An analyst finds a stock that has had a low beta given its historical return, but its total risk has been commensurate with its return. When writing a research report about the stock for clients with well- diversified portfolios, according to Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to mention:

A) the relationship of the historical beta and return only. B) the relationship of the historical total risk to return only. C) both the historical beta and total risk and return.

2) Jan Hirsh, CFA, is employed as manager of a college endowment fund. The college’s board of directors has recently voted to consider divesting from companies located in a country that has a poor civil rights record. Hirsh has personal investments in several firms in the country. Hirsh needs to:

A) disclose her ownership in the stocks to her supervisor only. B) do nothing since the board has not made a decision yet. C) disclose her ownership in the stocks to both her supervisor and the board.

3) An analyst meets with a new client. During the meeting, the analyst sees that the new client’s portfolio is heavily invested in one over-the-counter stock. The analyst has been following the stock and thinks it will perform well in the long run. The analyst arranges through a brokerage firm to simultaneously sell a large number of shares of the stock via a series of cross trades from the new client’s portfolio to various existing clients. He arranges the trades to be executed at a price that approximates the current market price. This action is:

A) not in violation of the Standards. B) a violation of Standard III(B), Fair Dealing. C) a violation of Standard III(A), Loyalty, Prudence, and Care.

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4) Carol Hull, CFA, is an investment advisor whose prospective client, Frank Peters, presents special requirements. To construct an investment policy statement for Peters, Hull inquires about Peters’ investment experience, risk and return objectives, and financial constraints. Peters states that he has a great deal of investment experience in the capital markets and does not wish to answer questions about his tolerance for risk or his other holdings. Under Standard III(C), Suitability, Hull:

A) may accept Peters’ account but may only manage his portfolio to a benchmark or index. B) must decline to enter into an advisory relationship with Peters. C) is permitted to manage Peters’ account without any knowledge of his risk preferences.

5) Michael Malone, CFA, is an investment analyst for a large brokerage firm in New York who covers the airlines industry. After hours in his personal time, Malone maintains an online blog on which he expresses his personal opinions about various investment opportunities, including, but not limited to, the airlines industry. On his blog, he posts a very negative investment opinion about WestAir stock. Malone knows that WestAir's stock will be downgraded to a “sell” by his firm next week. Malone has most likely violated: A) violated Standard IV(A) Loyalty. B) Standard VI(B) Priority of Transactions. C) violated Standard II(A) Material Nonpublic Information.

6) Which of the following actions would be a violation of the Standard VII(A) Conduct as Participants in CFA Institute Programs? A) Misrepresenting information on the Professional Conduct Statement. B) Using the CFA designation without submitting a Professional Conduct Statement and paying annual dues. C) Exaggerating the implications of holding the CFA designation.

7) Which of the following statements is least accurate regarding being a part of Standard III(B), Fair Dealing?

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A) At the same time notify clients for whom an investment is suitable of a new investment recommendation. B) Shorten the time between decision and dissemination. C) Maintain a list of clients and their holdings.

8) Francisco Perez, CFA, CPA, is a portfolio manager for an investment advisory firm. Due to the prominence of his position, he is often invited to attend free marketing and educational events hosted by firms which seek to inform the investment community about their investment processes. One such firm, Unlimited Horizons, has invited Perez to attend free educational events which qualify for Continuing Education credits which could help Perez maintain his CPA designation. Perez should most likely: A) decline to attend the event as it could result in a violation of Standard I(A) "Knowledge of the Law." B) accept the invitation as no cash compensation is involved and the primary intent is to educate and inform the investment community. C) decline to attend the event as it could result in a violation of Standard I(B) "Independence and Objectivity."

9) Lucy Ackert and Chris Brown prepared the following information to be included in the promotional materials of their employer, Lofton Securities. ● Lucy Ackert is one of five CFAs at Lofton Securities. She satisfied all requirements for the CFA designation in 1998. ● Chris Brown holds a CFA Level I designation, which he passed in 2001. He is registered to take the next scheduled Level II examination. Are the promotional materials prepared by Ackert and Brown fully consistent with the Standards of Professional Conduct? A) Ackert: No. Brown: Yes. B) Ackert: Yes. Brown: No. C) Ackert: No. Brown: No.

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10) Victor Logan is a portfolio manager for McCoy Advisors, and Jack Brisco is the Director of Research for McCoy. Brisco has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the McCoy model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. Brisco frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Logan has conducted very thorough research on his own, using the same process that Brisco uses to validate his findings. Logan feels the model is missing some key elements that would further reduce the list of acceptable securities to purchase, however, Brisco has refused to look at Logan's research. Frustrated by this, Logan applies his own version of the model, with the justification that he is still only purchasing securities on the buy list. Because of the conflict with Brisco, he does not disclose the use of the model to anyone at McCoy or to clients. Which of the following statements regarding Logan and Brisco is CORRECT? Logan is:

A) not violating the Standards by applying his version of the model, but is violating the Standards by not disclosing it to clients. Brisco is not violating the Standards. B) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is violating the Standards by failing to consider Logan's research. C) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is not violating the Standards.

11) Sometimes a CFA Institute member simplyfeels a law has been violated by his firm, and sometimes the memberknows a law has been violated. Which of the following pairs of guidelines is CORRECT with respect to the first step a member should take in each case? The member should first contact:

A) the firm's counsel if he feels a law has been violated and the SEC if he knows a law has been violated. B) his supervisor in the firm if he feels a law has been violated and contact the firm's counsel if he knows a law has been violated. C) the firm's counsel if he feels a law has been violated and contact his supervisor if he knows a law has been violated.

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12) Amanda Brad, CFA, is a security analyst at UpTrend, Incorporated During a routine visit to a beauty salon, she learns that a major cosmetic company, Lorean, is expected to present a revolutionary formula for facial cream. Brad buys Lorean stock for her portfolio and prepares a special report on the company. Brad also makes a call to Hillary Lang, another security analyst at UpTrend, to inform her about the news. Lang starts trading on her clients’ portfolios. Brad’s report states that given the on-going research activity at Lorean within the last months, investors can expect some successful new products and a sharp increase in the price of the stock. Lang’s actions:

A) violate the Standard of Objectivity and Independence. B) violate the Standards because she trades on inside information. C) violate the Standard of Fair Dealing.

13)

An analyst preparing a report needs to cite which of the following?

A) A recent quote from the Federal Reserve Chairman. B) The individual who developed a chart from the same firm. C) Estimates of betas provided by Standard & Poor's.

14) Sue Parsons, CFA, works full-time as an investment advisor for the Malloy Group, an asset management firm. To help pay for her children’s college expenses, Parsons wants to engage in independent practice in which she would advise individual clients on their portfolios. She would conduct these investment activities only on weekends. She is currently only in the preparation stage and has not started independent practice yet. Which of the following statements about Standard IV(A), Loyalty to Employer, ismost accurate? Standard IV(A):

A) does not require Parsons to notify Malloy of preparing to undertake independent practice under the current conditions. B) requires Parsons to obtain written consent from both Malloy and the persons from whom she undertakes independent practice. C) requires Parsons to notify Malloy in writing about her intention to undertake an independent practice.

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15) A CFO who is a CFA Institute member is careful to make his press releases—some of them containing material and previously undisclosed information—clear and understandable to his readers. While writing a new release, he often has his current intern proofread rough drafts. He also sends electronic copies to his brother, an English teacher, to get suggestions concerning style and grammar. With respect to Standard II(A), Material Nonpublic Information, the CFO is:

A) not in violation of the Standard. B) violating the standard by either showing the pre-release version to his intern or sending it to his brother. C) only in violation by e-mailing the pre-release version to his brother but not the intern, because the intern is in essence an employee of the firm.

16) An analyst who is a CFA Institute member receives an invitation from a business associate’s firm to spend the weekend in a high-quality resort. In order to abide by the Standards, the analyst should (may):

A) do both of the actions listed here. B) obtain written consent from his supervisor if the offer is contingent on achieving a target investment return. C) refuse the invitation if the associate is from a firm he analyzes for his employer.

17) One year ago, Karen Jason left the employment as a portfolio manager of Howe Advisors. The departure was contentious and both parties threatened legal action. As a result, both parties signed a settlement in which Jason was paid a pro rated bonus, but agreed not to work on the portfolios of any existing Howe client for two years. The terms of the agreement were that both parties agreed to keep all aspects of the agreement confidential, including the fact that there was hostility surrounding the departure. Jason now works for Torre Advisors, who has the Stein Company as a new client. At the time Jason left Howe, Stein was a client of Howe, although Jason did not personally work on the Stein portfolio. Jason's supervisor at Torre wants Jason to work on the Stein portfolio. Jason should:

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A) inform her supervisor that she cannot work on the portfolio because of a legal agreement, but cannot tell him why. B) work on the portfolio because she did not personally work on the portfolio when she was at Howe. C) inform her supervisor that she cannot work on the portfolio because of a non-compete agreement.

18) Nick O'Donnell, CFA, unsuspectingly joins the research team at Wickett & Company, an investment banking firm controlled by organized crime. None of the managers at Wickett are CFA Institute members. Because of his tenuous situation at Wickett, O'Donnell begins making preparations for independent practice. He knows he will be terminated if he informs management at Wickett that he is preparing to leave. Consequently, he determines that "if he can just hang on for one year, he will likely have a client base sufficient for him to strike out on his own." This action is: A) a violation of his duty to disclose conflicts to his employer. B) not a violation of his duty to employer. C) a violation of his fiduciary duties.

19) Gordon McKinney, CFA, works in the trust department of a bank. The bank's trust account holds a large block of a particular company. McKinney learns that this company is going to buy back one million shares at a 15% premium to the market price on a first-come-first-served basis. McKinney immediately tells his mother-in-law to tender her shares but waits until the end of the day to tender the trust's shares. McKinney hasmost likely violated:

A) Standard VI(B), Priority of Transactions. B) Standard IV(A), Loyalty to Employer. C) Standard II(A), Material Nonpublic Information.

20) A stockbroker who is a member of CFA Institute has a part-time housekeeper who also works for the CEO of Festival, Inc. One day the housekeeper mentions to the broker that she saw the CEO of Festival having a conversation at his home with John Tater, who is a nationally known corporate lawyer and consultant. The stockbroker is restricted from trading on this information:

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A) for both of the reasons listed here. B) only if the broker knows that the meeting is non-public information. C) if the housekeeper says the meeting concerned a tender offer and the broker knows that it is non-public information.

21) In accordance with Standard III (A) Loyalty, Prudence and Care, which of the following statements is not a required or recommended action? A) Submit to clients, at least quarterly, itemized statements detailing all of the period’s transactions. B) Vote all proxies on behalf of clients in a responsible manner. C) Utilize client brokerage to the sole benefit of the client.

22) Regarding (1) not voting all client proxies, and (2) using a directed brokerage arrangement, a member would violate the Standards by: A) engaging in neither of these practices. B) using a directed brokerage arrangement. C) not voting all proxies for client stocks.

23) Denise Weaver is a portfolio manager who manages a mutual fund and has pension clients. When Weaver receives a proxy for stock in the mutual fund, she gives it to Susan Griffith, her administrative assistant, to complete. When the proxy is for a stock owned in a pension plan, she asks Griffith to send the proxy on to the sponsor of the pension fund. Weaver has: A) violated the Standards by her policy on mutual fund and pension fund proxies. B) violated the Standards by her policy on mutual fund proxies, but not her policy on pension fund proxies. C) not violated the Standards.

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24) Liam McCoy has lunch with a wealthy client whose portfolio he manages. McCoy advises the client to double his current position in the JKM Corporation due to an anticipated increase in sales. In accordance with Standard (V) Investment Analysis, Recommendations and Actions, when McCoy returns to his office he should: A) document the details of the conversation with the client with regard to his investment recommendation. B) verify the suitability of the investment recommendation before placing the client’s order. C) identify other clients for whom JKM may be a suitable investment and notify them immediately of his recommendation.

25) Rhonda Meyer, CFA, is preparing a research report on Moon Ventures, Incorporated In the course of her research she learns the following: ● Moon had its credit rating downgraded by a prominent rating agency 3 years ago due to sales pressure in the industry. The rating was restored 3 months later when the pressure resolved. ● Moon’s insider trading has been substantial over the last 3 months. Holdings of Moon shares by officers, directors, and key employees were reduced by 50% during that period. In Meyer’s detailed report making a buy recommendation for Moon, both the credit rating downgrade and the insider trading were omitted from the report. Meyer has: A) not violated the Code and Standards in her report. B) violated the Code and Standards by not including the insider trading information in her report. C) violated the Code and Standards by not including the insider trading information and by not including the credit rating downgrade in her report.

26) Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning:

A) Disclosure of Conflicts to Clients and Prospects. B) Loyalty, Prudence, and Care. C) Disclosure of Referral Fees.

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27) Steve Jones is a portfolio manager for Gregg Advisors. Gregg has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Gregg model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Jones thoroughly understands the model and uses it with all of his clients. Jones is: A) violating the Standards in purchasing stocks without a thorough research basis and in not disclosing all alterations of the model to clients. B) not violating the Standards either in purchasing stocks without a thorough research basis or in not disclosing all alterations of the model to clients. C) violating the Standards in not disclosing all alterations of the model to clients, but not in purchasing stocks without a thorough research basis.

28)

A code of ethics: A) provides the public with assurance of a minimum level of ethical behavior. B) should not be used for marketing purposes. C) may be rules-based or principles-based.

29) Lynne Jennings is a chemical industry research analyst for a large brokerage company. That industry is currently seeing an increase in mergers and acquisitions. While flying through Chicago, Jennings sees several senior officers who she knows are from the largest and fourth largest chemical companies walk into a conference room. She concludes that negotiations for an acquisition might be taking place. Jennings: A) may not act or cause others to act on this information. B) should inform her compliance officer that she has material nonpublic information on firms she covers. C) may use this information to support an investment recommendation.

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30) Joni Black, CFA, works for a portfolio management firm. Black is a partner of the firm and is primarily responsible for managing several large pension plans. Black has just finished a research report in which she recommends Zeta Corporation as a “Strong Buy.” Her rating is based on solid management in a growing and expanding industry. She just handed the report to the marketing department of the firm for immediate dissemination. Upon returning to her desk she notices a news flash by CNN reporting that management for Zeta Corporation is retiring. Black wishes she did not recommend Zeta Corporation as a “Strong Buy,” but believes the corporation is still a good investment regardless of the management. What course of action for Black is best? Black: A) should revise the recommendation based on this new information. B) should report the new information to her immediate supervisor so that they can determine whether or not the marketing department should send out the report as written. C) may send out the report as written as long as a follow up is disseminated within a reasonable amount of time reflecting the changes in management.

31) Recommended procedures to comply with the Standard concerning priority of transactions are least likely to include: A) limited front-running by employees. B) disclosure to clients of the firm’s policies in regard to personal investing. C) blackout periods.

32) An analyst finds a stock with historical returns that are not correlated with interest rate changes. The analyst writes a report for his clients that have large allocations in fixed-income instruments and emphasizes the observed lack of correlation. He feels the stock would be of little value to investors whose portfolios are composed primarily of equities. The clients with allocations of fixed income instruments are the only clients to see the report. According to Standard V(B), Communication with Clients and Prospective Clients, the analyst has: A) not violated the Standard. B) violated the Standard concerning fair dealings with all clients. C) violated the article in the Standard concerning facts and opinions.

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33) Patricia Hoolihan is an individual investment advisor who uses mutual funds for her clients. She typically chooses funds from a list of 40 funds that she has thoroughly researched. The Burns, a married couple that are a client, asked her to consider the Hawkeye fund for their portfolio. Hoolihan had not previously considered the fund because when she first conducted her research three years ago, Hawkeye was too small to be considered. However, the fund has now grown in value, and cursory research uncovers no fundamental flaws with the fund. She puts the fund in the Burns' portfolio but not in any of her other clients' portfolios. The fund ends up being the best performing fund on her list. Hoolihan has: A) violated the Standards by not having a reasonable and adequate basis for making the recommendation. B) not violated the Standards. C) violated the Standards by not dealing fairly with clients.

34) Which of the following statements about a code of ethics is most accurate? A code of ethics: A) must include rules-based standards of conduct. B) does not need to include standards of conduct. C) must include principles-based standards of conduct.

35) An analyst has found an investment with what appears to be a great return-to-risk ratio. The analyst double-checks the data for accuracy, keeps careful records, and is careful to not make any misrepresentations as he simultaneously sends an e-mail to all his clients with a “buy” recommendation. According to Standard V(A), Diligence and Reasonable Basis, the analyst has:

A) fulfilled all obligations. B) violated the Standard if he does not verify whether the investment is appropriate for all the clients. C) violated the Standard by communicating the recommendation via e-mail.

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36) Abner Flome, CFA, is writing a research report on Paulsen Group, an investment advisory firm. Flome’s brother-in-law holds shares of Paulsen stock. Flome has recently interviewed for a position with Paulsen and expects a second interview. According to the Standards, Flome’smost appropriate action is to disclose in the research report:

A) his brother-in-law’s holding of Paulsen stock and that he is being considered for a job at Paulsen. B) that he is being considered for a job at Paulsen. C) his brother-in-law’s holding of Paulsen stock.

37) Lance Tuipulotu, CFA, manages investments for 400 individuals and families and often finds his resources stretched. When his largest investors petition him to include a 5% to 7% allocation of noninvestment-grade bonds in their portfolios, he decides he needs additional help to meet the request. He considers various independent advisors to use as submanagers, but determines that the most qualified advisors would be too expensive. Reasoning that a lower-cost provider would enable him to pass the savings along to his clients, he chooses that provider to invest the new bond allocation. Tuipulotu has violated:

A) Both Standard III(C) Suitability and Standard V(A) Diligence and Reasonable Basis. B) Standard III(C) Suitability by failing to consider the appropriateness of the noninvestment-grade bonds. C) Standard V(A) Diligence and Reasonable Basis by letting fee structure determine the selection of the submanager.

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38) Cynthia Abbott, a CFA charterholder, is preparing a research report on Boswell Company for her employer, Capital Asset Management. Bob Carter, president of Boswell, invites Abbott and several other analysts to visit his company and offers to pay her transportation and lodging. Abbott pays for her own transportation and lodging, but while visiting the company, accepts an item of small value from Carter. Abbott does not disclose this gift to her supervisor at Capital when she returns. In the course of the company visit, Abbott overhears a conversation between Carter and his chief financial officer that the company’s earnings per share (EPS) are expected to be $1.10 for the next quarter. Abbott was surprised that this EPS is substantially above her initial earnings estimate of $0.70 per share. Without further investigation, Abbott decides to include the $1.10 EPS in her research report on Boswell. Using the high EPS positively affects her recommendation of Boswell. Which of the following statements about whether Abbott violated Standard V(A), Diligence and Reasonable Basis and Standard I(B), Independence and Objectivity is CORRECT? Abbott: A) violated Standard V(A) but she did not violate Standard I(B). B) did not violate Standard V(A) but she violated Standard I(B). C) violated both Standard V(A) and Standard I(B).

39) Ken James has been an independent financial advisor for 15 years. He received his CFA Charter in 1993, but did not feel it helped his business, so he let his dues lapse this year. He still has several hundred business cards with the CFA designation printed on them. His promotional materials state that he received his CFA designation in 1993. James: A) must cease distributing the cards with the CFA designation, but can continue to use the existing promotional materials. B) must cease distributing the cards with the CFA designation and the existing promotional materials. C) can continue to use the existing promotional materials, and can use the cards until his supply runs out—his new cards cannot have the designation.

40) An investment advisor goes straight from a research seminar to a meeting with a prospective new client with whom she has never been in contact. The advisor is very excited about the information she just received in the seminar and begins showing the prospect the new ideas her firm is coming up with. This is most likely a violation of:

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A) both of these. B) Standard III(C), Suitability. C) Standard III(B), Fair Dealing.

41) Lee Hurst, CFA, is an equity research analyst who has recently left a large firm to start independent practice. He is able to re-create several of his previous recommendation reports, based on his clear recollection of supporting documentation he compiled at his previous employer. He publishes the reports and obtains several new clients. Hurst is most likely: A) in violation of Standard V(C) Record Retention. B) in violation of Standard V(A) Diligence and Reasonable Basis. C) not in violation of any Standard.

42) Martin Tripp, CFA, is vice-president of the equity department at Walker Financial, a large money management firm. Of the twenty analysts in his department for whom he has supervisory responsibility, eight are subject to CFA Institute Standards of Professional Conduct. Tripp believes that he cannot personally evaluate the conduct of the twenty analysts on a continuing basis. Therefore, he plans to delegate some of his supervisory duties to Sarah Green, who is subject to the Standards, and some to Bob Brown, who is not subject to the Standards. According to CFA Institute Standards of Professional Conduct, which of the following statements about Tripp's ability to delegate supervisory duties is most accurate? A) Tripp may delegate some or all of his supervisory duties only to Green because she is subject to the Standards. B) Tripp may not delegate any of his supervisory duties to either Green or Brown. C) Tripp may delegate some or all of his supervisory duties to Brown, even though Brown is not subject to the Standards.

43) Andy Rock, CFA, is an analyst at Best Trade Company The company is going to announce a sell recommendation on Biomed stock in one hour. Rock was a member of the team who reached the decision on Biomed. Rock’s wife has an account at Best Trade Comapany that contains Biomed stock. According to the Code and Standards, trading on Rock’s wife’s account can begin:

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A) only after the recommendation is announced to the general public. B) as soon as the information is disseminated to all clients. C) only after Rock, as a beneficial owner, has given an appropriate amount of time for clients and his employer to act.

44) Jacob Allen, CFA, decides he could make more money if he started his own company. Which of the following steps would most likely violate Standard IV(A) Loyalty? A) Using his notes from prior research of a firm in a creating a new research report on the firm, after leaving his current employer. B) Soliciting, without written permission from his current employer, the business of former clients after he leaves his current employer. C) Renting space for his new company and interviewing several candidates for the position of manager at the new company.

45) An analyst has several groups of clients who are categorized according to their specific needs. Compared to research reports distributed to all of the clients, reports for a specific group:

A) may generally exclude more basic facts. B) will not be allowed because it violates the Standard III(B), Fair Dealing. C) will definitely include more basic facts.

46) Ron Vasquez is registered to sit for the Level II CFA exam. Unfortunately, Vasquez has failed the exam the past two years. In his frustration, Vasquez posted the following comment on a popular internet bulletin board: “I believe that CFA Institute is intentionally limiting the number of charterholders in order to increase its cash flow by continuing to fail candidates. Just look at the pass rates.” Which of the following statements regarding Vasquez’s conduct is most accurate? Vasquez is:

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A) in violation of both Standard I(D) Misconduct and Standard VII(A) Conduct as Participants in CFA Institute Programs. B) not in violation of Standard I(D) Misconduct or Standard VII(A) Conduct as Participants in CFA Institute Programs C) in violation of Standard VII(A) Conduct as Participants in CFA Institute Programs, but not in violation of Standard I(D) Misconduct.

47) Judy Gonzales is a portfolio manager with Brenly Capital and works on Johnson Company's account. Brenly has a policy against accepting gifts over $25 from clients. The Johnson portfolio has a fantastic year, and in appreciation, the pension fund manager sent Gonzales a rare bottle of wine. Gonzales should:

A) inform her supervisor in writing that she received additional compensation in the form of the wine. B) return the bottle to the client explaining Brenly's policy. C) present the bottle of wine to her supervisor.

48) Rey Sanchez, CFA, covers the specialty chemical industry for Rock Advisory Associates. Until today he has had a buy recommendation on ChemStar, and many of the firm’s customers have purchased shares based upon his recommendation. The firm’s client accounts are divided into two fundamental categories: trading and buy-and-hold accounts. The firm holds discretionary trading authority over the trading accounts, but not the buy-and-hold accounts. Sanchez has recently come to believe that the fundamentals are changing for the worse at ChemStar, and is preparing a sell recommendation. He calls a meeting of the firm’s portfolio managers with accounts holding ChemStar and tells them of the pending release of the sell recommendation. On this basis, the portfolio managers sell all positions in the discretionary accounts but not in the buy-and-hold accounts. Sanchez completes and mails the report to all clients two days later, and, shortly thereafter, many of the buy-and-hold accounts sell their ChemStar positions. With regard to these actions, Sanchez is:

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A) not in violation of the Standard on Fair Dealing; the portfolio managers are in violation of the Standard on Fair Dealing. B) in violation of the Standard on Fair Dealing; the portfolio managers are in violation of the Standard on Fair Dealing. C) in violation of the Standard on Fair Dealing; the portfolio managers are not in violation of the Standard on Fair Dealing.

49) Steve Phillips is the new director of equity research for a brokerage company. He receives a call from a reporter at the Financial News, a weekly publication that comes out on Mondays. The reporter explains the relationship she had with his predecessor. They would share information that they both learned on stocks—the former director would benefit the company's clients by news he obtained from the reporter in exchange for information he gave to her. The former director could ask her not to publish any information he gave her until after a certain date, ensuring that the brokerage clients would be informed before the publication date. After the conversation, Phillips called the former director, who confirmed that the reporter was trustworthy with respect to honoring the agreement for delaying publication until clients have been informed. Philips should:

A) only disclose research that has already been disseminated to clients, as long as the reporter is providing valuable information of her own. B) disclose research not yet disclosed to clients, as long as the reporter promises not to publish the information until after all clients have received the research, and the reporter provides valuable information of her own. C) not disclose any research even after it has been disseminated to clients regardless of the value of the information that the reporter may have.

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50) Preston Partners is an investment management firm that adopted the Code and Standards as part of its policy manual. Gerald Smithson, CFA, has recently added the stock of Utah Biochemical Company and Norgood PLC to all his client's investment portfolios. Shortly afterwards Utah Biochemical and Norgood announced a merger that increased the share price of both companies. Smithson contends he saw the president of Utah Biochemical dining with the chairman of Norgood, but did not overhear their conversation. Smithson researched both companies extensively and determined that each company was a good investment. He put in a block trade for shares in each company. Preston's policies were not clear in this area as he allocated the shares by starting with his largest client accounts and working down to the small accounts. Some of Smithson's clients were very conservative personal trust accounts, others were pension funds who had aggressive investment objectives. Which standard was NOT broken?

A) Standard III(C)—Suitability. B) Standard V(A)—Diligence and Reasonable Basis. C) Standard IV(C)—Responsibilities of Supervisors.

51) Jason Blackwell, CFA, works as an investment manager for Mega Capital, a large multinational brokerage firm. Mega Capital is based in a country whose applicable law is stricter than the CFA Institute Code and Standards, but does business with clients in a country whose applicable law is less strict than the Code and Standards. Blackwell decides to follow the requirements of the Code and Standards for clients in the less strict country, which is sufficient to also comply with that less-strict country’s local laws. While Blackwell is still employed at Mega, Lego Associates verbally asks Blackwell to review client portfolios during evenings and weekends for a fee. Blackwell gets written consent from his immediate supervisor at Mega to undertake this independent activity for a one-month trial basis. Which of the following statements about Blackwell’s actions involving Standard I, Professionalism, and Standard IV(A), Loyalty is most accurate? Blackwell: A) violated Standard I but did not violate Standard IV(A). B) violated both Standard I and Standard IV(A). C) did not violate either Standard I or Standard IV(A).

52) Which of the following statements regarding allocating trades is CORRECT? It is permissible under the Standards to allocate trades:

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A) on a pro-rata basis over all suitable accounts. B) based upon any method the firm deems suitable so long as the allocation procedure has been disclosed to all clients. C) based upon compensation arrangements.

53) Paul Drake is employed by a company to provide investment advice to participants in the firm's 401(k) plan. Company stock is one of the investment options in the plan. Drake feels that the stock is too risky for employees to own in their 401(k) plan and starts advising them to pull out of the stock. The Treasurer of the company calls Drake and tells him that he will be fired if he continues making such advice because he is violating his fiduciary duty to the company. Drake should: A) continue to advise employees to sell their stock. B) make sell recommendations but point out that the company Treasurer has a differing and valid point of view. C) tell employees that he cannot provide advice on company stock because of a conflict of interest.

54) Paul Thomas, CFA, is designing a new layout for research reports his firm writes and issues on individual stocks. In his design, Thomas includes a stock chart on the first page of each report. He does not reference that the charts are copied from the Standard & Poor's web site. Thomas has:

A) violated CFA Institute Standards of Professional Conduct because he did not state the source of the charts. B) violated CFA Institute Standards of Professional Conduct because he did not make sure that the information in these charts is accurate. C) not violated CFA Institute Standards of Professional Conduct because these charts are widely available over the Internet.

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55) Klaus Gerber, CFA, is a regular contributor to the Internet site WizeGuy. This past week Gerber has been incorrectly quoted as recommending that investors buy shares in Bradford, Incorporated. He is unaware that this message has been placed on the site as the quote was placed as a prank by an unknown source. This is the third time this has happened over the past month and each time the stock being mentioned moved in price according to the buy or sell recommendation. Fritz Fox, CFA, maintains and updates the WizeGuy site and has learned how to determine if the quotes being attributed to Gerber are actually valid. Several days later, he observes an investment recommendation, posted on the site, to buy Gresham, Incorporated. The investment recommendation is purported to be from Gerber, but Fox actually knows it to be bogus. He immediately sells 1,000 Gresham short and e-mails Gerber to inform him of the bogus recommendation. Gerber immediately issues a rebuttal, and Gresham falls by 14%. Fox's action is: A) not in violation of the Code and Standards. B) a violation of the Standard concerning use of material nonpublic information. C) a violation of the Standard concerning fiduciary duties.

56) Caroline Turner, an analyst for Lansing Asset Management, just completed an investment report in which she recommends changing a “buy” to a “sell” for Gallup Company. Her supervisor at Lansing approves of the change in recommendation. Turner wonders about whether she needs to disseminate this investment recommendation to Lansing’s clients and if so, how to distribute this information. According to CFA Institute Standards of Professional Conduct, Turner is: A) not required to disseminate the change of recommendation from a buy to a sell because the change is not material. B) required to disseminate the change in a prior investment recommendation to all clients and customers on a uniform basis. C) required to design an equitable system to disseminate the change in a prior investment recommendation.

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57) Fern Baldwin, CFA, as a representative for Fernholz Investment Management, is compensated by a base salary plus a percentage of fees generated. In addition, she receives a quarterly performance bonus on a particular client’s fee if the client’s account increases in value by more than 2 points over a benchmark index. Baldwin had a meeting with a prospect in which she described the firm’s investment approach but did not disclose her base salary, percentage fee, or bonus. Baldwin has: A) not violated the Standards because there is no conflict of interest with a potential prospect in the employment arrangements. B) violated the Standards by not disclosing her salary, fee percentage, and performance bonus. C) violated the Standards by not disclosing her performance bonus.

58)

The CFA Institute Professional Conduct Program may impose sanctions on:

A) CFA charterholders, member firms, and candidates for the CFA designation. B) CFA charterholders and candidates for the CFA designation. C) CFA charterholders only.

59) An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal where he provides money management advice in lieu of paying dues. Which of the following must the analyst do?

A) Must treat the charitable organization as his employer. B) Resign from the position because the relationship is a conflict with the Standards. C) Nothing since he is not an employee of the charitable organization.

60) Bjorn Sandvik, CFA, completes a research report with a buy recommendation for Acorn Properties. In the early afternoon, Sandvik e-mails this recommendation to his clients who had responded to his request that they provide Sandvik with their e-mail addresses. Later that afternoon, the printed recommendation is forwarded to the postal service for normal delivery to all customers, who receive the mailing 1 to 3 days later. Sandvik has:

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A) violated the Code and Standards by sending the e-mail recommendation to only some of his clients. B) not violated the Code and Standards because he acted fairly in disseminating research information to his clients. C) violated the Code and Standards by sending the e-mail recommendation in advance of the printed report.

61) A profession is most accurately described as an occupational group that requires its members to: A) put client interests first. B) have specialized expert knowledge. C) abide by a code of ethical conduct.

62) Which of the following is least likely to be a reason for imposing a suspension on a member or candidate? A) Discussing a question from the CFA exams on social media. B) Misdemeanor charge for possession of narcotics. C) Failing to return the annual professional conduct statement.

63) John Hill, CFA, has been working for Advisors, Incorporated, for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, a former client of Advisors calls Hill at his home about his new firm. The former client says that he is very happy that Hill is leaving Advisors because now he and Hill can resume a professional relationship. The client says that he would never become a client of Advisors again. Hill promises to call the client back after he has left Advisors. Hill does not tell his employer about the call. Hill hasmost likely:

A) not violated the Standards. B) violated the Standard concerning loyalty to employer. C) violated the Standard concerning disclosure of conflicts.

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64) Nancy McCoy, CFA, is preparing a report on Gourmet Food Mart. As part of her research, she contacts the company’s contractors, suppliers, and competitors. McCoy is told by the CEO of a major produce vendor that he is about to file a lawsuit against Gourmet Food Mart, seeking significant damages. McCoy incorporates this information into her research report, which projects a decline in profitability for Gourmet Food Mart due to the impending litigation. According to the CFA Institute Standards of Professional Conduct, McCoy: A) has not violated any Standard. B) has violated the Standards by disseminating confidential information. C) has violated the Standards by utilizing material nonpublic information.

65) The following information pertains to the Galaxy Trust, a trust established by Stephen P. House and managed by Gamma Investment LLC: ● At the time the trust was established House provided $5 million in cash to fund the trust, but Gamma was aware that 93% of his personal assets were in the form of Oracle stock. ● Gamma has been asked to view his funds and the trust as a single entity for planning purposes, since House’s will stipulates that all of his estate will pass to the trust upon his death. ● The investment policy statement, developed in September 1996, stipulates that the trust should maintain a short position in Oracle stock and use the proceeds to diversify the trust more adequately. ● House was able to sell all of his Oracle shares back to the corporation in January 1999 for cash. ● The policy statement redrawn in September 1999 continues to stipulate that the trust hold a short position in Oracle stock. ● House has given the portfolio manager in charge of the trust an all expenses paid vacation package anywhere in the world each year at Christmas. The portfolio manager has reported this fact in writing to his immediate supervisor at Gamma. Which of the following is most correct? The investment manager is:

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A) in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances but is not in violation with regard to the acceptance of the gift from House. B) in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances and is in violation with regard to the acceptance of the gift from House. C) not in violation of the Code and Standards for not properly updating the investment policy statement in light of the change in the circumstances and is not in violation with regard to the acceptance of the gift from House.

66) Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. It is Hatfield’s opinion that interest rates will fall in the near future. Based upon this, Hatfield begins increasing the bond allocation of each portfolio. In order to comply with Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to:

A) inform the clients of the change and tell them it is based upon an opinion and not a fact. B) perform both of these functions. C) make sure that the change is identical for both clients.

67) Bill Valley has been working for Advisors, Incorporated, for several years, and he just joined CFA Institute. Valley’s sister just received a large bonus in the form of stock options in Zephyr, Incorporated. Valley’s sister knows nothing about financial assets and offers Valley a week at her holiday home each year in exchange for Valley monitoring Zephyr and the value of her stock options. In order to comply with the Code and Standards, Valley needs to inform Advisors of:

A) both the use of the holiday home and his sister's options. B) the compensation in the form of the use of the holiday home only. C) nothing since no money is involved and it is a favor for a family member.

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68) Roger Smith, CFA, has been invited to join a group of analysts in touring the riverboats of River Casino Corporation. For the tour, River Casino has arranged chartered flights from casino to casino since commercial flight schedules are not practical for the group’s time schedule. River Casino has also arranged to pay for the analysts’ lodging for the three nights of the tour. According to CFA Institute Standards of Professional Conduct, Smith:

A) is required to pay for his flight and lodging. B) may accept the arrangements as they are. C) may accept the flight but is required to pay for his lodging.

69) Fred Dean, CFA, has just taken a job as trader for LPC. One of his first assignments is to execute the purchase of a block of East Street Industries. While working with East Street on an assignment for his previous employer, he learned that East Street’s sales have weakened and will likely be significantly below the LPC analyst’s estimate, but no public announcement of this has been made. Which of the following actions would be themost appropriate for Dean to take according to the Standards?

A) Contact East Street’s management and urge them to make the information public and make the trade if they refuse. B) Post the information about the drop in sales on an internet bulletin board to achieve public dissemination and inform his supervisor of the posting. C) Request that the firm place East Street’s stock on a restricted list and decline to make any trades of the company’s stock.

70) Graham Carson, CFA, is an investment advisor to Ron Grayson, a client with moderate risk tolerance and an investment horizon of 15 years. Grayson calls Carson to complain about two stocks in his account that have performed poorly. He feels that one stock was too risky for him as it paid no dividend and had a beta of 1.4. The other stock had a beta of 0.9 and paid a dividend of 3%, but financial regulators have indicated that the firm’s reported earnings were incorrectly stated. Based on this information, Carson hasmost likely:

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A) not violated the Standards. B) violated both the Standard on suitability and the Standard on diligence and reasonable basis. C) violated only the Standard on suitability.

71) Fran Lester, CFA, works for a broker based in a country in which participation in any IPO is permitted with her employer’s permission. She lives and works in a country that has no restrictions on her participation in IPOs. If Lester’s firm is distributing shares of an oversubscribed IPO through the office Lester works in, can Lester receive shares in the IPO?

A) Yes, because the applicable law is that of her home country. B) No, not under any circumstances. C) Yes, but she must obtain permission from her employer.

72) Recommended procedures to comply with the Standard related to fair dealing aremost likely to include:

A) publishing personnel guidelines for pre-dissemination that prohibit those who know about a pending recommendation from discussing or acting on it. B) simultaneously informing all investment representatives in the firm about pending recommendation changes. C) requiring investment committee approval for all recommendation changes.

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Answer Key Test name: Ethical and Professional Standards 1) A Using reasonable judgment, an analyst may exclude certain factors from research reports. Since the report will be delivered to clients with welldiversified portfolios, total risk is not as important as beta. Given that the total risk has been only commensurate with historical return, furthermore, then the analyst is not negligent by not mentioning it. 2) B From the given information, there is no conflict of interest and no violation of Standard VI(A), Disclosure of Conflicts. A conflict could arise if the board were to ask Hirsh what the effect on the college’s endowment would be if they were to divest. At that time she would have to reveal her ownership in the stocks to make known the possible conflict of interest. 3) A There is no violation. It is in the best interest of the client to be diversified and selling via a series of cross trades will likely reduce price impact costs when compared to selling directly into the market. The analyst appears to have reasonable basis for putting the securities in the accounts of other clients. 4) C

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Hull would not violate Standard III(C), Suitability, by managing Peters’ account without knowledge of his risk preferences. She made a reasonable inquiry into Peters’ investment experience, risk and return objectives, and financial constraints, as the Standard requires. If a client chooses not to provide some of this information, the member or candidate can only be responsible for assessing the suitability of investments based on the information the client does provide. 5) A By expressing his investment analysis on his personal blog ahead of his employer, Malone deprived his employer of the benefits of his skills and abilities and therefore violated Standard IV(A) Loyalty. Malone did not possess material nonpublic information about WestAir and no transactions have taken place. 6) A Misrepresenting information on the Professional Conduct Statement is a direct violation of Standard VII(A) Conduct as Participants in CFA Institute Programs. The other choices are violations of Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program. 7) A All of these are part of Standard III(B) except notifying clients at the same time. Standard III(B) states that clients for whom the investment is suitable should be notified atapproximately the same time. 8) C

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Perez should decline the invitation as it creates the impression of lack of independence. If he does not accept the free continuing education courses, he would have to pay for them some other way so the free courses are a form of compensation. Nothing in the vignette suggests the free classes are illegal. 9) C Neither statement is fully consistent with Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program. The CFA designation must always be used as an adjective and never as a noun as Ackert used in her promotional description. Correct use of the CFA designation would be: “Lucy Ackert is one of five CFA charterholders at Lofton Securities.” No designation exists for someone who has passed Level I of the CFA examination. Thus, Brown’s statement saying that he “holds a CFA Level I designation” represents incorrect use. A correct statement would be: “Chris Brown passed Level I of the CFA examination in 2001.” 10) A Because the research is thoroughly conducted, and Logan has authority to make individual security selection decisions, Logan is not violating the Standards by applying his model. However, Logan is violating the Standard on communication with clients and prospective clients by excluding relevant factors of the investment process. The use of his model is an important aspect of the investment process and should be disclosed to clients. Brisco is not violating the Standards by not considering Logan’s research. 11) C

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Standard I(A) says that when a member feels a law has been broken, the member should seek advice from the firm’s counsel. If the member feels the advice is unbiased and competent, the member should follow it. If the member knows a law has been violated, the member should contact a supervisor. 12) C Lang violates Standard III(B), Fair Dealing, which imposes the requirement to start trading on the clients’ portfolios only after the information is disseminated to all clients. We don't know if the information is non-public which would make it insider information if it were. 13) A Statistics provided by a recognized agency, such as Standard and Poor’s, do not need to be cited. Charts, quotes, and algorithms developed by the firm would need to be cited when they are used but the individual(s) who developed the materials within the firm do not need to be cited. 14) A Standard IV(A), Loyalty to Employer, requires that Parsons obtain written consent only from her employer before she undertakes independent practice that could result in compensation or other benefit in competition with Malloy. It is not required to get permission from your employer when only preparing to go into independent practice. 15) B Standard II(A), Material Nonpublic Information, says that a member must be careful about handling material non-public information. As a member of CFA Institute, the CFO must limit the people who see important information before it is released. It would not be appropriate to involve an intern or a relative in the process. Version 1

16) A According to Standard I(B) Independence and Objectivity, the analyst should refuse the invitation if it is from a firm the analyst covers for his employer. The analyst can accept the invitation if it is from a client but the analyst must get written consent from his employer if the offer is contingent on future performance, to comply with Standard IV(B) Additional Compensation Arrangements. 17) A Jason must inform her supervisor of the conflict, but she cannot violate the terms of the confidentiality agreement and she cannot work on the portfolio. 18) B O’Donnell is required to obtain consent from his employer if he is attempting to practice in competition with his employer. Merely undertaking preparations to leave, which do not violate a duty, is not a violation of the Code and Standards. 19) A

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Standard VI(B), Priority of Transactions, applies. If an analyst decides to make a recommendation about the purchase or sale of a security, he must give his customers or employer adequate opportunity to act on this recommendation before acting on his own behalf. Personal transactions include those made for the member's own account and family accounts. Here, McKinney violated Standard VI(B) by acting on his mother-inlaw's behalf and then waiting until the end of the day to act on his employer's behalf. Explanations for other responses: ● Standard IV(A), Loyalty to Employer, does not apply. This standard concerns a member competing with his/her employer (independent practice), for example a member who engages in outside consulting. ● Standard II(A), Material Nonpublic Information, does not apply. The question does not indicate that the information is not public. 20) C Standard II(A), Material Nonpublic Information, states “a member cannot trade or cause others to trade in a security while the member possesses material nonpublic information” A tender offer would certainly be material nonpublic information. Knowing that the meeting took place, and nothing else, does not restrict the broker. A reasonable investor would need to know more to determine if the information was material. 21) B Because of the time and expense involved in voting a proxy, Members and Candidates are not required to vote every proxy. A cost benefit analysis can be performed to determine if it is necessary to vote a proxy. Standard III(A) requires that client brokerage be used to benefit the client. Quarterly statements to clients are recommended.

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22) A Proxies have economic value to the client. To comply with Standard III(A) Loyalty, Prudence, and Care, the analyst is obligated to vote proxies in an informed and responsible manner. A cost benefit analysis may show that voting all proxies may not benefit the client, so voting proxies may not be necessary in all instances. Directed brokerage occurs when the client requests that a portion of the client's brokerage be used to purchase services that directly benefit the client. Although this may prevent best execution, it does not violate the Standards as it was directed by the client, not the brokerage firm. 23) A Proxies should be taken seriously, and although it is likely that Griffith can understand some of the issues, it is likely that she is not capable of making responsible decisions on all potential proxy issues. Proxies for a pension plan should be voted in the best interests of the beneficiaries, not the plan sponsor. The sponsor's interests will not always be the same as the beneficiary's interest. 24) A Standard V(C) Record Retention requires that Members and Candidates document all recommendation and communications with clients. McCoy should document the details of the conversation, including any resulting investment decisions and/or actions. The suitability of the investment should have already been considered before the recommendation and McCoy should not execute the order until the client instructs him to. Identifying other clients for this investment would fall under Standard III(B) Fair Dealing. 25) B

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Standard V(B), Communication with Clients and Prospective Clients, requires analysts to use reasonable judgment regarding the inclusion or exclusion of relevant factors in their research reports. It would not be unreasonable to exclude the temporary credit downgrade from 3 years earlier. 26) B Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by Standard III(A), Loyalty, Prudence, and Care. 27) B Jones and Gregg are using reasonable judgment in not continually disclosing all of the alterations of the model. It is acceptable to use a pure quantitative model as a sole basis for purchasing stocks, as long as it is thoroughly researched. 28) C A code of ethics may be rules-based or principles-based. There can be no assurance that none of a group or professionals will violate a code of ethics. There is no requirement that a group of professionals agreeing to a code of ethics cannot be held out to the public as a positive thing for clients. 29) C The fact that the company officers met is not material nonpublic information. As long as she bases her investment recommendation on her own independent research, Jennings will not violate any Standards if she uses this additional information to support it. 30) A

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This question is related to Standard V(B) which states that CFA Institute members should use reasonable judgment regarding the inclusion or exclusion of relevant factors in research reports. The change in management was a relevant factor and must be disclosed before dissemination. 31) A Standard VI(B) Priority of Transactions. Front-running is the purchase or sale of securities in advance of client trades to take advantage of knowledge of client activity and should be completely prohibited, not simply limited. Blackout periods and pre-clearance of employee trades are ways of accomplishing this. 32) A Recommending a stock whose return is uncorrelated with interest rate changes is appropriate for the clients described in the problem. Emphasizing the lack of correlation is appropriate as long as the analyst makes no guarantees concerning the relationship in the future. Reporting historical correlation is a presentation of fact, and is not in violation. The analyst is free to show the report only to investors for whom the investment is appropriate. 33) A Despite the fact the addition of the fund was successful, Hoolihan acted improperly in not conducting the same degree of research as she did for the other funds on her list. 34) B A code of ethics may include standards of conduct, but does not require them. 35) A

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If the analyst had been an investment manager, it would have been inappropriate for him to make a blanket recommendation for all of his clients without considering the unique needs of each. However, the analyst is merely stating that given the qualities of the investment, it is an attractive buy. He has kept adequate records, and made fair disclosure of his rating decision. 36) B The possibility of employment with Paulsen creates a potential conflict of interest which Flome must disclose. Standard VI(A) Disclosure of Conflicts does not require disclosure of his brother-in-law’s ownership of Paulsen stock. 37) A Both Standard III(C) Suitability and Standard V(A) Diligence and Reasonable Basis were violated. Tuipulotu must perform a full IPS review to determine the appropriateness of the new portfolio allocations. Submanagers should not be selected by cost structure alone, as the quality and appropriateness of the submanager is Tuipulotu’s responsibility. 38) A Abbott violated Standard V(A), Diligence and Reasonable Basis, because she did not have a reasonable and adequate basis to support the $1.10 EPS without further investigation. By including the $1.10 EPS in her report, she did not exercise diligence and thoroughness to ensure that any research report finding is accurate. If Abbott suspects that any information in a source is not accurate, she should refrain from relying on that information. Abbott did not violate Standard I(B), Independence and Objectivity, because the gift from Carter would not reasonably be expected to compromise her independent judgment.

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39) A Use of the CFA designation must be stopped immediately, however, the receipt of the Charter is a matter of fact. 40) A It is a violation of Standard III(B) because the advisor should act first on behalf of existing clients whose needs and characteristics she already knows. It is a violation of Standard III(C) because she has never met the prospect and does not know if the new ideas are appropriate for the prospect. Thus, “both of these” is the best response. 41) A Hurst is most likely in violation of Standard V(C) Record Retention because the supporting documentation is unavailable. He needs to recreate the supporting records based on information gathered through public sources or the covered company. He may have a reasonable basis for his recommendations and have been diligent in his analysis, but must reconstruct the records of this analysis before issuing the reports. 42) C Standard IV(C) Responsibilities of Supervisors permits Tripp to delegate supervisory duties to Green, Brown, or both, but such delegation does not relieve Tripp of his supervisory responsibility. 43) B

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Family accounts that are client accounts should be treated like any other firm account and should neither be given special treatment nor be disadvantaged because of an existing family relationship with the member or candidate. Members or candidates may undertake transactions in accounts for which they are a beneficial owner only after their clients and employers have had adequate opportunity to act on the recommendation. Personal transactions include those made for the member or candidate's own account, for family (including spouse, children, and other immediate family members) accounts, and for accounts in which the member or candidate has a direct or indirect pecuniary interest, such as a trust or retirement account. It could be argued that Rock is a beneficial owner of his wife's account and the reason why his wife's account should be treated like any other client account is because it does not state that Rock makes the trades in his wife's account. From that we are to infer that another person other than Rock is managing his wife's account thus she should be treated like any other client. 44) A Allen’s notes from his research are employer records and even though he prepared them, it is a violation to take them from his employer without permission. Soliciting former clients’ business is not, in itself, a violation as long has Allen has not misappropriated client information from his former employer. Preparations to start a new business are not necessarily a violation of the Standard, although soliciting current clients or recruiting other firm personnel for the new venture, before formally leaving his employer, would be violations of the Standards. 45) A

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According to Standard V(B), an analyst can use reasonable judgment regarding the exclusion of some facts and should include more basic facts for reports to wider audiences. The key issue is that analysts should tailor their reports to the intended audience. 46) B Standard VII(A) Conduct as Participants in CFA Institute Programs does not prohibit expressing opinions about the program or the CFA Institute. Thus, Vasquez is not in violation. Nothing in the facts indicates a violation of Standard I(D, Misconduct. Standard I(D) deals with professional conduct involving dishonesty, fraud, or deceit. 47) B By not returning the bottle she would be violating the Standard on disclosure of conflicts to the employer, which states that employees must comply with prohibitions imposed by their employer. 48) B Sanchez is in violation of the Standard III(B), Fair Dealing, since he has disseminated his recommendation preferentially to the portfolio managers in advance of making the report available to all clients who hold shares of ChemStar. The portfolio managers are in violation of the Standard since they are effectively giving preferential treatment to the trading accounts over the buy-and-hold accounts in the placement of orders based upon the change in recommendation. 49) A In no case should information be disclosed to a reporter before all clients are provided with the research—doing so will violate the Standard on fair dealing. However, once clients have been informed, there is no violation in releasing the information to the reporter, and in doing so Phillips might obtain information that can further help his clients. Version 1

50) B Standard V(A)—Diligence and Reasonable Basis was not broken because Smithson conducted thorough and diligent research. Standard III(C)—Suitability, Smithson failed to consider the needs of his conservative and aggressive clients. Standard IV(C)—Responsibilities of Supervisors, Preston Partners didn't have policies explaining how to allocate shares among clients. 51) A Blackwell violated Standard I, Professionalism. Jameson must comply with the strictest requirements among the laws of the country where his firm is based, the CFA Institute Code and Standards, and the laws of the country where he is doing business. Because the applicable laws in Mega Capital’s home country are stricter than the Code and Standards, Jameson must additionally adhere to that more strict law. 52) A It is permissible to allocate trades on a pro-rata basis over all suitable accounts. It is not permissible to base allocations upon compensation arrangements. Any method is not necessarily suitable, and disclosure does not absolve the member from ensuring that the allocation is necessarily fair. 53) A Although Drake is paid by the company, his fiduciary duty is to the plan participants. His advice cannot be compromised by business considerations, otherwise he will be violating the Standard on loyalty, prudence, and care. 54) A

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Standard I(C) Misrepresentation. Members should not copy or use material prepared by others without acknowledging and identifying the source of such material. Using charts and graphs without stating their source is a violation of the Standard. Data from recognized statistical reporting services may be used without attribution, but charts, analysis, and other such creative content may not. 55) B Even though the information is false, this fact is known only to Fox and is thus nonpublic information. Since such recommendations have in the past had a significant effect on the price of the security in question, the information is clearly material. Fox is in violation of Standard II(A) Material Nonpublic Information. 56) C Standard III(B) – Fair Dealing requires dealing fairly and objectively with all clients and prospects when disseminating material changes in prior investment recommendations. Note that the standard requires the dissemination be fair, but not necessarily equal due to the impossibility of contacting all clients simultaneously. A change of recommendation from “buy” to “sell” is generally material. 57) C Standard VI(A) requires members to disclose all matters that could reasonably be expected to impair the member’s ability to make unbiased and objective recommendations. Compensation based on a percentage of fees generated does not create an inherent bias. If, however, a performance bonus is paid for investment results, it may unduly encourage the manager to take more risk than is proper and prudent, and so the existence of the bonus opportunity must be disclosed to the client. 58) B

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The CFA Institute Professional Conduct Program may impose sanctions on CFA charterholders and candidates for the CFA designation. Firms are not members of CFA Institute. 59) A An employee/employer relationship does not necessarily mean monetary compensation for services. If the analyst is performing services for the organization, then the analyst must treat the position as if he were an employee. 60) B Standard III(B) Fair Dealing requires that members deal fairly with all clients in disseminating investment recommendations. It does not require uniform or equal treatment. Sandvik’s approach in sending e-mail correspondence to those of his clients who had given him their e-mail addresses, having made the request to all of his clients, and sending regular mail correspondence the same day, is fair to all of his clients. 61) B A profession is an occupational group (e.g., doctors or lawyers) that has requirements of specialized expert knowledge, and often a focus on ethical behavior and service to the larger community or society. While many professions require their members to put clients first or encourage them to serve the wider community, these are not defining characteristics of a profession. 62) B A misdemeanor charge not related to professional conduct is not grounds for a suspension. The other choices are violations of the Code and Standards and may result in CFA Institute imposing a suspension of membership or participation. 63) A Version 1

Based on the information here, Hill has done nothing wrong. He took a call at his home, presumably on his own time, and the client made it clear that he would never be a client of Advisors. Therefore, there was no breach of loyalty to Advisors by Hill, nor is there a conflict of interest. 64) C According to Standard II(A) Material Nonpublic Information, an analyst must not act or cause others to act on material nonpublic information. The information is material to the company’s future profitability, and is nonpublic because the lawsuit has not yet been filed and is not yet a matter of public record. 65) A The investment manager is in violation of the Standard requiring him to make a reasonable inquiry into the client’s financial situation and update the investment policy statement since such a dramatic change in the client’s circumstances would undoubtedly alter the investment policy statement and would probably eliminate the need to hold a short position in Oracle. The investment manager is not in violation of the Standard concerning additional compensation, since the gift has been reported to his supervisor and has come from a client. If there was a failure to report such a gift, if the firm had a rule in place against the acceptance of gifts from clients, or if the gift had come from a non-client, there would be a violation of the standard. 66) A According to Standard V(B), the analyst must inform the clients of the change and tell them it is based upon an opinion and not a fact. Making an identical change in two portfolios may be a violation of this standard if the needs of the clients are not identical.

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67) A According to Standard IV(A), Loyalty to Employer, Valley must inform Advisors of his outside consultation even if it is not for monetary compensation. According to Standard VI(A), Disclosure of Conflicts, Valley must also disclose possible conflicts of interest, and his sister’s position qualifies. 68) B Because the itinerary required charter flights due to a lack of commercial transportation, River Casino can appropriately provide them. While Standard I(B) Independence and Objectivity recommends that members pay their own room costs, it is not required and it is not unusual for members to accept accommodations. 69) A Standard II(A) Material Nonpublic Information requires that members and candidates who possess material nonpublic information not act or cause others to act on the information. Refusing the trade would violate this Standard because it would be acting or causing others to act on the nonpublic information. Dean should seek to have East Street make the information public. If East Street does not do so, Dean must act as he would have acted if he did not possess the information. Refusing to make the trade he was instructed to make would be “acting” on the information in this case. The obligation here is to the integrity of financial markets. 70) A

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Carson has not violated either Standard based on the information given. The suitability of an investment is to be determined based on the risk and return characteristics of the portfolio and not on the risk and return characteristics of each individual security. The fact that a security does not pay a dividend and has a beta higher than the market is not enough to determine its suitability in a portfolio context. The fact that regulators have called previously reported earnings into question does not necessarily mean that Carson’s analysis was not diligent or that he did not have a reasonable basis for his selection of this security. 71) B Standard I(A) Knowledge of the Law requires members and candidates to comply with the strictest requirement among the law where they reside, the law in the area where they do business, and the Code and Standards. In this case, the Code and Standards is the strictest. Standard III(B) Fair Dealing prohibits members and candidates from withholding shares in oversubscribed IPOs from clients for their own benefit. 72) A Recommended procedures for compliance with Standard III(B) Fair Dealing include limiting the number of people in the firm who know that a change in recommendation will be made. Requiring investment committee approval for all recommendation changes is not among the recommended procedures.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a company least likely required to present according to International Accounting Standard (IAS) No. 1? A) Statement of changes in owners’ equity. B) A summary of accounting policies. C) Disclosures of material events.

2) According to IFRS guidance for management’s commentary, addressing the company’s key relationships is: A) neither recommended nor required. B) required. C) recommended.

3) Selected information from Able Company’s financial activities is as follows: ● Net Income was $720,000. ● 1,000,000 shares of common stock were outstanding on January 1. ● 1,000 shares of 8%, $1,000 par value preferred shares were outstanding on January 1. ● The tax rate was 40%. ● The average market price per share for the year was $20. ● 6,000 shares of 3%, $500 par value preferred shares, convertible into common shares at a rate of 40 common shares for each preferred share, were outstanding for the entire year. Able’s basic and diluted earnings per share (EPS) are closest to:

A) B) C)

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Basic EPS

Diluted EPS

$0.64 $0.55 $0.55

$0.64 $0.52 $0.55

A) Option A B) Option B C) Option C

4) A company has the following sequence of events regarding their stock: ● One million shares outstanding at the beginning of the year. ● On June 30th, they declared and issued a 10% stock dividend. ● On September 30th, they sold 400,000 shares of common stock at par. Basic earnings per share at year-end will be computed on how many shares? A) 1,200,000. B) 1,000,000. C) 1,100,000.

5) Books Forever, Incorporated, uses short-term bank debt to buy inventory. Assuming an initial current ratio that is greater than 1, and an initial quick (or acid test) ratio that is less than 1, what is the effect of these transactions on the current ratio and the quick ratio? A) Both ratios will decrease. B) Neither ratio will decrease. C) Only one ratio will decrease.

6) David Chance, CFA, is analyzing Grow Corporation. Chance gathers the following information: Net cash provided by operating activities Net cash used for fixed capital investments Cash paid for interest Income before tax Income tax expense Net income

$ 3,500 $ 727 $ 195 $ 4,400 $ 1,540 $ 2,860

Grow’s free cash flow to the firm (FCFF) is closest to:

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A) $2,900. B) $2,260. C) $2,640.

The following footnote appeared in Crabtree Company’s 20X7 annual report:

“On December 31, 20X7, Crabtree recognized a restructuring charge of $20 million, of which $5 million was for severance pay for employees who will be terminated in 20X8 and $15 million was for land that became permanently impaired in 20X7.” Based only on these changes, Crabtree’s net profit margin and fixed asset turnover ratio (using year- end financial statement values) in 20X8 as compared to 20X7 will be: Net profit margin

Fixed asset turnover

Lower Higher Higher

Higher Unchanged Higher

A) B) C)

A) Option A B) Option B C) Option C

8) Do the following characteristics have to be met in order to classify a liability as current on the balance sheet? Characteristic #1 – Settlement is expected within one year or operating cycle, whichever is less. Characteristic #2 – Settlement will require the use of cash within one year or operating cycle, whichever is greater.

A) B) C)

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Characteristic #1

Characteristic #2

No Yes No

No No Yes

A) Option A B) Option B C) Option C

9) Which of the following transactions would least likely be reported in the cash flow statement as investing cash flows? A) Sale of held-to-maturity securities for cash. B) Purchase of plant and equipment used in the manufacturing process with financing provided by the seller. C) Principal payments received from loans made to others.

10) During 2007, Brownfield Incorporated purchased $140 million of inventory. For the year just ended, Brownfield reported cost of goods sold of $130 million. Inventory at year-end was $45 million. Calculate inventory turnover for the year. A) 2.89. B) 3.25. C) 3.71.

11) McQueen Corporation prepared the following common-size income statement for the year ended December 31, 20X7: Sales 100% Cost of goods sold 60% Gross profit 40%

For 20X7, McQueen sold 250 million units at a sales price of $1 each. For 20X8, McQueen has decided to reduce its sales price by 10%. McQueen believes the price cut will double unit sales. The cost of each unit sold is expected to remain the same. Calculate the change in McQueen’s expected gross profit for 20X8 assuming the price cut doubles sales.

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A) $80 million increase. B) $50 million increase. C) $150 million increase.

12) What would be the impact on a firm’s return on assets ratio (ROA) of the following independent transactions, assuming ROA is less than one? Transaction #1 – A firm owned investment securities that were classified as available-for-sale and there was a recent decrease in the fair value of these securities. Transaction #2 – A firm owned investment securities that were classified as trading securities and there was recent increase in the fair value of the securities. Transaction #1

Transaction #2

Higher Higher Lower

Lower Higher Higher

A) B) C)

A) Option A B) Option B C) Option C

13) A segment of a common-size balance sheet for Olsen Company in its most recent year shows the following data: Common stock Additional paid-in capital Preferred stock

1% 19% 15%

How should an analyst most appropriately interpret these data?

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A) Proceeds from the issuance of common stock are 20% of total assets. B) Shareholders’ equity is 35% of total assets. C) Preferred stock is 15% of shareholders’ equity.

14) Orange Company’s net income for 2004 was $7,600,000 with 2,000,000 shares outstanding. The average share price in 2004 was $55. Orange had 10,000 shares of eight percent $1,000 par value convertible preferred stock outstanding since 2003. Each preferred share was convertible into 20 shares of common stock. Orange Company’s diluted earnings per share (Diluted EPS) for 2004 is closest to: A) $3.80. B) $3.45. C) $3.40.

15) In converting a statement of cash flows from the indirect to the direct method, which of the following adjustments should be made for a decrease in unearned revenue when calculating cash collected from customers, and for an inventory writedown (when market value is less than cost) when calculating cash payments to suppliers?

A) B) C)

Cash collections from customers:

Cash payments to suppliers

Add decrease in unearned revenue Subtract decrease in unearned revenue Subtract decrease in unearned revenue

Subtract an inventory writedown Add an inventory writedown Subtract an inventory writedown

A) Option A B) Option B C) Option C

16) In preparing its cash flow statement for the year ended December 31, 20x4, Giant Corporation collected the following data:

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Gain on sale of equipment

$ 6,000

Proceeds from sale of equipment

10,000

Purchase of Zip Company bonds for

180,000

Amortization of bond discount Dividends paid

(maturity value $200,000)

2,000 (75,000)

Proceeds from sale of Treasury stock

38,000

In its December 31, 20x4, statement of cash flows, under U.S. GAAP, what amounts should Giant report as net cash used in investing activities and net cash used in financing activities? Investing Activities A) B) C)

$178,000 $170,000 $170,000

Financing Activities −$37,000 $37,000 −$38,000

A) Option A B) Option B C) Option C

17) According to International Financial Reporting Standards, how do cash dividends received from trading securities and financial securities measured at fair value through OCI affect net income? Trading securities

Fair value through OCI

No effect Increase Increase

Increase No effect Increase

A) B) C)

A) Option A B) Option B C) Option C

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18) The following data pertains to the Sapphire Company: ● Net income equals $15,000. ● 5,000 shares of common stock issued on January 1st. ● 10% stock dividend issued on June 1st. ● 1,000 shares of common stock were repurchased on July 1st. ● 1,000 shares of 10%, $100 par preferred stock each convertible into 8 shares of common were outstanding the whole year. What is the company’s diluted earnings per share (EPS)? A) $2.50. B) $1.00. C) $1.15.

19)

Duster Company reported the following financial information at the end of 2007: in millions

Unearned revenue Common stock at par Capital in excess of par Accounts payable Treasury stock Retained earnings Accrued expenses Accumulated other comprehensive loss Long-term debt

$ 240 30 440 1,150 2,000 5,160 830 210 1,570

Calculate Duster’s liabilities and stockholders’ equity as of December 31, 2007.

A) B) C)

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Liabilities

Stockholders' equity

$3,790 million $3,550 million $3,790 million

$3,420 million $7,840 million $7,420 million

A) Option A B) Option B C) Option C

20) Matrix, Incorporated’s common size income statement for the years ended December 31, 20X1 and 20X2 included the following information (percent of net sales): 20X1

20X2

Sales Cost of Goods Sold

100 (55) 45

100 (60) 40

Selling General & Administrative Depreciation

(5) (7) 33

(5) (8) 27

Interest Expense

(15) 18

(6) 21

Income Tax Expense

(6) 12

(7) 14

Analysis of this data indicates that from 20X1 to 20X2:

A) the effective tax rate increased. B) interest expense per dollar of sales declined. C) cost of goods sold increased.

21) Convenience Travel Corporation’s financial information for the year ended December 31, 20X4 included the following: Property Plant & Equipment Accumulated Depreciation

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$15,000,000 9,000,000

The only asset owned by Convenience Travel in 20X5 was a corporate jet airplane. The airplane was being depreciated over a 15-year period on a straight-line basis at a rate of $1,000,000 per year. On December 31, 20X5 Convenience Travel sold the airplane for $10,000,000 cash. Net income for the year ended December 31, 20X5 was $12,000,000. Based on the above information, and ignoring taxes, what is cash flow from operations (CFO) for Convenience Travel for the year ended December 31, 20X5?

A) $8,000,000. B) $11,000,000. C) $13,000,000.

22) Joplin Corporation reports the following in its year-end financial statements: ● Net income of $43.7 million. ● Depreciation expense of $4.2 million. ● Increase in accounts receivable of $1.5 million. ● Decrease in accounts payable of $2.3 million. ● Increase in capital stock of $50 million. ● Sold equipment with a book value of $7 million for $15 million after-tax. ● Purchased equipment for $35 million. Joplin’s free cash flow to the firm (FCFF) is closest to: A) $66 million. B) $24 million. C) $16 million.

23) What is the appropriate measurement basis for equipment used in the manufacturing process? A) Historical cost B) Fair value C) Lower of cost or net realizable value

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24) Financial information for Jefferson Corporation for the year ended December 31st, was as follows: Sales Purchases Inventory at Beginning Inventory at Ending Accounts Receivable at Beginning Accounts Receivable at Ending Accounts Payable at Beginning Accounts Payable at Ending Other Operating Expenses Paid

$ 3,000,000 1,800,000 500,000 800,000 300,000 200,000 100,000 100,000 400,000

Based upon this data and using the direct method, what was Jefferson Corporation’s cash flow from operations (CFO) for the year ended December 31st? A) $1,200,000. B) $900,000. C) $800,000.

25)

A firm’s balance sheet prepared under IFRS is least likely to include: A) market value of inventory. B) fair value of firm PPE. C) market value of the firm’s equity.

26) Is an acquisition of treasury stock or a loss from the write-down of inventory under the lower-of-cost-or- market rule included in comprehensive income?

A) B) C)

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Inventory write-down

Acquisition of treasury stock

No No Yes

No Yes No

A) Option A B) Option B C) Option C

27)

To convert an indirect statement of cash flows to a direct basis, the analyst would: A) reduce cost of goods sold by any decreases in inventory. B) increase cost of goods sold by any depreciation that was included. C) reduce cost of goods sold by any decreases in accounts payable.

28) A company reports a gain of €100,000 on the sale of an asset and a loss of €100,000 due to foreign currency translation adjustment. Which of these items will be included in the company’s comprehensive income? A) Only one of these items is included in comprehensive income. B) Both of these items are included in comprehensive income. C) Neither of these items is included in comprehensive income.

29) An analyst compiled the following information for Universe, Incorporated for the year ended December 31, 20X4: ● Net income was $850,000. ● Depreciation expense was $200,000. ● Common stock was sold for $100,000. ● Preferred stock (eight percent annual dividend) was sold at par value of $125,000. ● Common stock dividends of $25,000 were paid. ● Preferred stock dividends of $10,000 were paid. ● Equipment with a book value of $50,000 was sold for $100,000. Using the indirect method and assuming U.S. GAAP, what was Universe Incorporated’s cash flow from operations (CFO) for the year ended December 31, 20X4?

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A) $1,000,000. B) $1,050,000. C) $1,015,000.

30) Wells Incorporated reported the following common size data for the year ended December 31, 20X7: Income Statement Sales Cost of goods sold Operating expenses Interest expense Income Statement Income tax Net income Balance sheet

% 100.0 58.2 30.2 0.7 % 5.7 5.2 %

Cash Accounts receivable Inventory Net fixed assets Total assets

4.8 14.9 49.4 30.9 100.00

% Accounts payable Accrued liabilities Long-term debt Common equity Total liabilities & equity

15.0 13.8 23.2 48.0 100.0

For 20X6, Wells reported sales of $183,100,000 and for 20X7, sales of $215,600,000. At the end of 20X6, Wells’ total assets were $75,900,000 and common equity was $37,800,000. At the end of 20X7, total assets were $95,300,000. Calculate Wells’ current ratio and return on equity ratio for 20X7. Current ratio

Return on equity

2.4 4.6 2.4

24.5% 25.2% 26.8%

A) B) C)

A) Option A B) Option B C) Option C

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31) The following information is for Trotters Diversified as of year-end: ● Average common shares outstanding of 5.0 million. ● Average market price for common stock of $35.00 per share. ● Net income of $9.0 million. ● Common stock dividends paid of $1.2 million. ● Tax rate of 40%. ● 500,000 shares of cumulative convertible preferred stock with $30 par value and 10% dividend. Each preferred share is convertible into 5 common shares. Preferred dividends of $1.5 million were paid. ● 10,000 convertible $1,000 par bonds with a 6.0% coupon, each convertible into 8 shares of common stock. ● 400,000 stock options with an exercise price of $32.00 per share. All of these securities were outstanding for the full year. Diluted EPS for Trotters Diversified is closest to: A) $1.19. B) $1.23. C) $1.50.

32) For the year ended December 31, 2007, Challenger Company reported the following financial information: Revenue Cost of goods sold Cash operating expenses Depreciation expense Tax expense Net income Increase in accounts receivable Decrease in inventory Increase in short-term notes payable Decrease in accounts payable

$ 100,000 (40,000) (20,000) (5,000) (3,000) $ 32,000 $ 7,500 $ 2,500 $ 3,000 $ 1,000

Calculate cash flow from operating activities using the direct method and the indirect method. A)

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Direct method

Indirect method

$34,000

$34,000 14

B) C)

$31,000 $31,000

$34,000 $31,000

A) Option A B) Option B C) Option C

33) Galaxy, Incorporated’s U.S. GAAP balance sheet as of December 31, 20X4 included the following information (in $):

Accounts Payable Dividends Payable Common Stock Retained Earnings

12-31-X3

12-31-X4

300,000 200,000 1,000,000 700,000

500,000 300,000 1,000,000 1,000,000

Galaxy’s net income in 20X4 was $800,000. What was Galaxy’s cash flow from financing (CFF) in 20X4? A) −$300,000. B) −$500,000. C) −$400,000.

34) Darth Corporation’s most recent income statement shows net sales of $6,000, and Darth’s marginal tax rate is 40%. Cash expenses reported were $3,200. In addition, depreciation expense was reported at $800. A further examination of the most recent balance sheets reveals that accounts receivable during that period increased by $1,000. The cash flow from operating activities reported by Darth should be: A) $2,200. B) $1,000. C) $1,200.

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35) Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over 36 months for customers who make a minimum down payment of 10%. Historically, Galaxy has experienced bad debt losses equal to 1% of sales. Galaxy also provides a 24 month unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3% of sales. Ignoring taxes, how does the recognition of bad debt expense and warranty expense at the time of sale affect Galaxy’s liabilities? Bad debt expense

Warranty expense

No effect No effect Increase

No effect Increase No effect

A) B) C)

A) Option A B) Option B C) Option C

36) A 12 percent $100,000 convertible bond was issued on October 1, 2004. It is dilutive and can be converted into 18,000 shares. The effective income tax rate for the year was 40%. What adjustments should be made to calculate diluted earnings per share? Interest added to the numerator

Shares added to the denominator

$3,000 $3,000 $1,800

18,000 4,500 4,500

A) B) C)

A) Option A B) Option B C) Option C

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37) Holden Company’s fixed asset footnote included the following: ● During 20X7, Holden sold machinery for a gain of $100,000. The machinery had an original cost of $500,000 and its accumulated depreciation was $240,000. ● At the end of 20X7, Holden purchased machinery at a cost of $1,000,000. Holden paid $400,000 cash. The balance was financed by the seller at 8% interest. ● Depreciation expense was $2,080,000 for the year ended 20X7. Calculate Holden’s cash flow from investing activities for the year ended 20X7. A) $300,000 outflow. B) $40,000 outflow. C) $360,000 inflow.

38) A company reports the following unusual events: ● Loss on discontinued operations. ● Restructuring and severance costs applicable to asset sales. ● Plant shutdown costs. Which of these items would most likely be considered nonrecurring and included in operating income? A) Loss on discontinued operations and restructuring and severance costs applicable to asset sales. B) Restructuring and severance costs applicable to asset sales and plant shutdown costs. C) Loss on discontinued operations and plant shutdown costs.

39) Red Oak Corporation is a furniture manufacturer located in Canada. Red Oak is financed with a combination of debt and equity. The debt consists of unsecured zero-coupon bonds that mature in 20 years. For income tax purposes, interest on the bonds is deductible when accrued. Red Oak’s equity consists of common stock and preferred stock. No dividends have ever been paid on Red Oak’s common stock; however, dividends are paid quarterly to the preferred shareholders. Should the accrued interest on the zero-coupon bonds and the dividends paid to the preferred shareholders be reported as a nonoperating component of Red Oak’s net income?

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Accrued interest

Preferred dividends

Yes

B) C)

Yes No

No Yes

A) Option A B) Option B C) Option C

40) Selected information from Feder Corporation’s financial activities for the year is as follows: ● Net income was $7,650,000. ● 1,100,000 shares of common stock were outstanding on January 1. ● The average market price per share was $62. ● Dividends were paid during the year. ● The tax rate was 40%. ● 10,000 shares of 6% $1,000 par value preferred shares convertible into common shares at a rate of 20 common shares for each preferred share were outstanding for the entire year. ● 70,000 options, which allow the holder to purchase 10 shares of common stock at an exercise price of $50 per common share, were outstanding the entire year. Feder Corporation’s diluted earnings per share (EPS) was closest to: A) $5.32. B) $5.87. C) $4.91.

41)

Consider the following:

Statement #1: One approach to presenting a common-size cash flow statement is to express each inflow of cash as a percentage of total cash inflows and each outflow of cash as a percentage of total cash outflows. Statement #2: Expressing each line item of the cash flow statement as a percentage of revenue is useful in forecasting future cash flows. Which of these statements regarding a common-size cash flow statement is (are) CORRECT?

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A) Only statement #1 is correct. B) Both statements are correct. C) Only statement #2 is correct.

42) Statement #1 – As compared to the price-to-earnings ratio, the price-to-cash flow ratio is easier to manipulate because management can easily control the timing of the cash flows. Statement #2 – A firm with earnings per share of $2 is more profitable than a firm with earnings per share of $1. With respect to these statements: A) both are incorrect. B) both are correct. C) only one is correct.

43) A common-size cash flow statement is least likely to provide payments to employees as a percentage of: A) total cash outflows for the period. B) revenues for the period. C) operating cash flow for the period.

44) The First National Bank is a commercial bank that specializes in consumer financing, particularly automobile loans. The majority of the loans are funded from customer deposits. In addition, the bank purchases various investment securities with available cash. The investments are debt securities and have an average maturity date of less than 30 days. Should First National Bank report the interest received from the consumer loans and the interest received from the investment securities as an operating or as a nonoperating component in its year-end income statement?

A) B)

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Consumer loans

Investment securities

Nonoperating Operating

Operating Nonoperating 19

Operating

A) Option A B) Option B C) Option C

45) Young Distributors, Incorporated issued convertible bonds two years ago, and those bonds are the only potentially dilutive security Young has issued. In 20X5, Young’s basic earnings per share (EPS) and diluted EPS were identical, but in 20X4 they were different. Which of the following factors is least likely to explain the difference between basic and diluted EPS? The: A) bonds were antidilutive in 20X5 but not in 20X4. B) bonds were redeemed by Young Distributors at the beginning of 20X5. C) average market price of Young common stock increased in 20X5.

46)

Selected financial information gathered from the Matador Corporation follows:

Average debt Average equity Return on assets Quick ratio Sales Cost of goods sold

2007

2006

2005

$ 792,000 $ 215,000 5.9% 0.3 $ 1,650,000 $ 1,345,000

$ 800,000 $ 294,000 6.6% 0.5 $ 1,452,000 $ 1,176,000

$ 820,000 $ 364,000 7.2% 0.6 $ 1,304,000 $ 1,043,000

Using only the data presented, which of the following statements is most correct? A) Gross profit margin has improved. B) Leverage has declined. C) Return on equity has improved.

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47) A firm has a cash conversion cycle of 80 days. The firm's payables turnover goes from 11 to 12, what happens to the firm's cash conversion cycle? It: A) may shorten or lengthen. B) lengthens. C) shortens.

48) An analyst compiled the following information from Hampshire, Incorporated’s financial activities in the most recent year: ● Net income was $2,800,000. ● 100,000 shares of common stock were outstanding on January 1. ● The average market price per share for the year was $250. ● 10,000 shares of 6%, $1,000 par value preferred shares were outstanding the entire year. ● 10,000 warrants, which allow the holder to purchase 10 shares of common stock for each warrant held at a price of $150 per common share, were outstanding the entire year. ● 30,000 shares of common stock were issued on September 1. Hampshire, Incorporated’s diluted earnings per share are closest to: A) $14.67. B) $18.38. C) $20.00.

49) Selected information from Gerrard, Incorporated’s financial activities in the most recent year was as follows: ● Net income was $330,000. ● The tax rate was 40%. ● 700,000 shares of common stock were outstanding on January 1. ● The average market price per share for the year was $6. ● Dividends were paid during the year. ● 2,000 shares of 8% $500 par value preferred shares, convertible into common shares at a rate of 200 common shares for each preferred share, were outstanding for the entire year. ● 200,000 shares of common stock were issued on March 1. Gerrard, Incorporated’s diluted earnings per share (diluted EPS) was closest to:

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A) $0.261. B) $0.289. C) $0.197.

50) 50 . Which of the following statements about a firm with convertible preferred stock outstanding is most accurate? A) If diluted EPS is less than basic EPS then the convertible preferred is said to be antidilutive. B) Diluted EPS is calculated with net income minus preferred dividends in the numerator. C) If diluted and basic EPS are equal, the firm must report both basic and diluted EPS.

51) Barracuda Corporation, a U.S. corporation, owns a subsidiary located in Germany. The German subsidiary’s financial statements are maintained in euros. If the euro recently appreciated relative to the U.S. dollar, how would the unrealized translation gain affect Barracuda’s retained earnings and total stockholders’ equity? Retained earnings

Total stockholders' equity

No effect No effect Increase

No effect Increase Increase

A) B) C)

A) Option A B) Option B C) Option C

52) The “All Faiths” church is building a new church for $2 million on land acquired several years ago. The contractor estimates the cost at $1.3 million and the project is to be completed over a 2-year period with the payments split evenly between the 2 years. During the first year, the total costs incurred were $700,000. During the second year the contractor experienced cost overruns and costs incurred were $1.0 million. How much revenue and income should the contractor recognize in the second year of the project?

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Revenue A) B) C)

$ 923,077 $ 1,076,923 $ 1,000,000

Income −$ 76,923 $ 376,923 $ 0

A) Option A B) Option B C) Option C

53) Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship. She is trying to educate the owner on the importance of monitoring cash flows. Operating information as of the end of the most recent month appears below: ● Cash from sale of truck of $7,000. ● Cash salaries paid of $17,000. ● Cash from customers of $45,000. ● Depreciation expense of $5,500. ● Interest on bank line of credit of $1,000. ● Cash paid to suppliers of $22,000. ● Other cash expenses, including rent, of $6,300. ● No taxes due. Using this information and U.S. GAAP, what is the cash flow from operations for the month? A) −$1,300. B) $11,200. C) −$300.

54) Which costs are least likely to be reported as an expense in the current accounting period? A) Period costs. B) Loan interest that has not yet been paid. C) Costs of producing inventory.

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55)

Determine the cash flow from operations given the following table.

Item Cash payment of dividends Sale of equipment Net income Purchase of land Increase in accounts payable Sale of preferred stock Increase in deferred taxes Profit on sale of equipment

Amount $ 30 $ 25 $ 25 $ 15 $ 20 $ 25 $ 5 $ 15

A) $20. B) $45. C) $35.

56) For a manufacturing company reporting under U.S. GAAP, interest received is most likely reported as: A) an investing cash flow and as non-operating income. B) an operating cash flow but as non-operating income. C) both an operating cash flow and operating income.

57) Which costs are least likely to be reported as an expense in the current accounting period? A) Period costs. B) Loan interest that has not yet been paid. C) Costs of producing inventory.

58) A U.S. GAAP reporting company invests $50 million in a bond portfolio yielding 4% with an average maturity of seven years. After one year, interest rates have fallen by 50 basis points. The company will report the highest retained earnings if the securities in the portfolio are classified as:

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A) trading securities. B) available-for-sale. C) held-to-maturity.

59) From Thorpe Company’s cash flow statement, an analyst discovers that during the most recent period Thorpe spent $2 million on what the firm describes as “investment in capital improvements.” If the analyst believes this expenditure will not give Thorpe any enduring benefit beyond the current period, the most appropriate adjustment is to: A) decrease both CFO and CFI. B) increase CFO and decrease CFI. C) decrease CFO and increase CFI.

60) A common-size cash flow statement is least likely to show each cash inflow as a percentage of: A) revenue. B) total cash flows. C) all cash inflows.

61) Which of the following items would affect owners’ equity and also appear on the income statement? A) Unrealized gains and losses on available-for-sale securities. B) Dividends paid to shareholders. C) Unrealized gains and losses on trading securities.

62)

The revaluation model for investment property is permitted under: A) both IFRS and U.S. GAAP. B) neither IFRS nor U.S. GAAP. C) IFRS, but not U.S. GAAP.

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63) Train, Incorporated’s cash flow from operations (CFO) in 20X8 was $14 million. Train paid $8 million cash to acquire a franchise at the beginning of 20X8 that was expensed in 20X8. If Train had elected to amortize the cost of the franchise over eight years, 20X8 cash flow from operations (CFO) would have been: A) $21 million. B) $14 million. C) $22 million.

64) A manufacturing firm shuts down production at one of its plants and offers the facility for rent. Based on the market for similar properties, the firm determines that the fair value of the plant is €500,000 more than its carrying value. If this firm uses the cost model for plant and equipment and the fair value model for investment property, should it recognize a gain on its income statement? A) No, because the firm must continue to use the cost model for valuation of this asset. B) Yes, because the plant will be reclassified as investment property. C) No, because the increase in value does not reverse a previously recognized loss.

65) A firm acquires investment property for €3 million and chooses the fair value model for financial reporting. In Year 1 the market value of the investment property decreases by €150,000. In Year 2 the market value of the investment property increases by €200,000. On its financial statements for Year 2, the firm will recognize a: A) €150,000 increase in shareholders’ equity. B) €200,000 gain on its income statement. C) €150,000 gain on its income statement and a €50,000 revaluation surplus in shareholders’ equity.

66) For a company which owns a majority of the equity of a subsidiary, whether to create a deferred tax liability for undistributed profits from the subsidiary depends on an “indefinite reversal criterion” under:

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A) U.S. GAAP, but not IFRS. B) both IFRS and U.S. GAAP. C) IFRS, but not U.S. GAAP.

67) Diabelli Incorporated is a manufacturing company that is operating at normal capacity levels. Which of the following inventory costs is most likely to be recognized as an expense on Diabelli’s financial statements when the inventory is sold? A) Selling cost. B) Administrative overhead. C) Allocation of fixed production overhead.

68) Christophe Incorporated is an electronics manufacturing firm. It owns equipment with a tax basis of $800,000 and a carrying value of $600,000 as the result an impairment charge. It also has a tax loss carryforward of $300,000 that is expected to be utilized within the next year or two. The tax rate on these items is 40% but the tax rate will decrease to 35%. Which of the following is closest to the effect on the income statement of the change in tax rate? A) Decrease income tax expense by $5,000. B) Increase income tax expense by $5,000. C) Increase income tax expense by $25,000.

69) A tax rate that has been substantively enacted is used to determine the balance sheet values of deferred tax assets and deferred tax liabilities under: A) both IFRS and U.S. GAAP. B) IFRS only. C) U.S. GAAP only.

70) A company issues 5% semiannual coupon, 3-year, $1,000 par value bonds on January 1, 20X0, when the market interest rate is 13.3%. The sale proceeds are $800. Under the effective interest rate method, what amount of interest expense per $1,000 par value will the company record for the year ending December 31, 20X1? Version 1

A) $106.40. B) $116.29. C) $66.29.

71) For a firm that uses the cost basis for valuing its long-lived assets, fair value is a consideration when calculating a gain or loss on: A) selling an asset. B) abandoning an asset. C) exchanging an asset.

72) The inventory turnover ratio and the number of days in inventory are least likely used to evaluate the: A) age of a firm's inventory. B) effectiveness of a firm's inventory management. C) stability of a firm's inventory levels.

73) Which of the following statements regarding the disclosure of deferred taxes in a company’s balance sheet is most accurate? A) Current deferred tax liability and noncurrent deferred tax asset are netted, resulting in the disclosure of a net noncurrent deferred tax liability or asset. B) There should be a combined disclosure of all deferred tax assets and liabilities that are likely to reverse in the current period. C) Deferred tax assets and liabilities are classified as noncurrent.

74) Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?

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A) U.S. GAAP. B) Both IFRS and U.S. GAAP. C) IFRS.

75) Which of the following factors is least likely to cause a difference between a firm’s effective tax rate and statutory rate? A) Tax credits. B) Non-deductible expenses. C) Deductible expenses.

76)

When bonds are issued at a premium:

A) earnings of the firm increase over the life of the bond as the bond premium is amortized. B) coupon interest paid decreases each period as bond premium is amortized. C) earnings of the firm decrease over the life of the bond as the bond premium is amortized.

77) Under which financial reporting standards is the full amount of a deferred tax asset shown on the balance sheet, regardless of its probability of being realized fully? A) IFRS, but not U.S. GAAP. B) U.S. GAAP, but not IFRS. C) Neither IFRS nor U.S. GAAP.

78) Barber Incorporated, which uses LIFO inventory accounting under U.S. GAAP, sells DVD recorders. On October 14, it purchased a large number of recorders at a cost of $90 each. Due to an oversupply of recorders remaining in the marketplace due to lower than anticipated demand during the Christmas season, the selling price at December 31 is $80 and the replacement cost is $73. The normal profit margin is 5 percent of the selling price and the selling costs are $2 per recorder. What is the value of the recorders on December 31?

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A) $78. B) $73. C) $74.

79) Selected information from the financial statements of Salvo Company for the years ended December 31, 20X3 and 20X4 is as follows (in $ millions):

Sales Cost of Goods Sold Gross Profit Cost of Franchise Other Expenses Net Income Cash Accounts Receivable Inventory Property, Plant & Equipment (net) Total Assets Accounts Payable Long-term Debt Common Stock Retained Earnings Total Liabilities and Equity

20X3

20X4

$ 21 (8) 13 (6) (6) $ 1 $ 4 6 9 12 $ 31 $ 7 10 8 6 $ 31

$ 23 (9) 14 0 (6) $ 8 $ 5 5 7 15 $ 32 $ 5 5 8 14 $ 32

If Salvo had amortized the cost of the franchise acquired in 20X3 over six years instead of expensing it, Salvo’s return on average total equity for 20X4 would have been closest to: A) 31.1%. B) 35.6%. C) 38.9%.

80)

Under U.S. GAAP, a lessee must recognize a balance sheet liability for:

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A) finance leases, but not operating leases. B) operating leases, but not finance leases. C) both finance leases and operating leases.

81) Cushinson Corporation had a beginning inventory of $9,500 (250 units) and made three inventory purchases during the fiscal year:

3/1/X6 7/1/X6 9/1/X6

Purchases

Units Total Cost

400 450 550

$ 14,800 $ 14,850 $ 15,950

The company began operations on Jan. 1, 20X6. Costing uses the LIFO method of determining cost of goods sold. First year sales were 1,300 units. The most likely effects of using LIFO inventory costing as compared to FIFO in Cushinson’s 20X6 financial statements are: A) lower net income; lower working capital. B) higher net income; higher working capital. C) higher net income; lower working capital.

82) A reconciliation of beginning and ending carrying values for each class of property, plant, and equipment is required for firms reporting under: A) U.S. GAAP. B) both U.S. GAAP and IFRS. C) IFRS.

83) An IFRS-reporting firm reclassifies a building it owns from “owner-occupied” to “investment property.” The fair value of the building is greater than its carrying value. Under the fair value model for investment property, the firm will recognize a gain:

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A) in other comprehensive income but not on the income statement. B) only if it reverses a previously recognized loss. C) equal to the difference between fair value and carrying value.

84) Alter Incorporated determines that it has $35,000 of accounts receivable outstanding at the end of 20X8. Based on past experience, it recognizes an allowance for bad debt equal to 10% of its credit sales. The tax base of Alter’s accounts receivable at the end of 20X8 is closest to: A) $35,000. B) $31,500. C) $3,500.

85) A bond is issued at the end of the year 20X0 with an 8% semiannual coupon rate, 5 years to maturity, and a par value of $1,000. The bond's yield at issuance is 10%. Using the effective interest method, if the yield has decreased to 9% at the end of the year 20X1, the balance sheet liability for the bond is closest to: A) $967. B) $935. C) $923.

86) A company purchases a new pizza oven for $12,675. It will work for 5 years and have no salvage value. The company will depreciate the oven over 5 years using the straight-line method for financial reporting, and over 3 years for tax reporting. If the tax rate for years 4 and 5 changes from 41% to 31%, the deferred tax liability as of the end of year 3 isclosest to:

A) $1,040. B) $2,080. C) $1,570.

87) The effect of an inventory writedown on a firm’s return on assets (ROA) is most accurately described as:

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A) higher ROA in the current period and lower ROA in later periods. B) lower ROA in the current period and higher ROA in later periods. C) lower ROA in the current period and no effect on ROA in later periods.

88) Selected information from Jenner, Incorporated’s financial statements for the year ended December 31 included the following (in $): Cash Accounts Receivable

$ 200,000 300,000

Inventory Property, Plant & Equipment Total Assets

1,500,000 11,000,000

LIFO Reserve at January 1 LIFO Reserve at December 31 Net Income (after 40% tax rate)

13,000,000

Accounts Payable Deferred Tax Liability Long-term Debt Common Stock Retained Earnings Total Liabilities & Equity

$ 300,000 600,000 8,100,000 2,200,000 1,800,000 $ 13,000,000

400,000 600,000 800,000

Jenner uses the last in, first out (LIFO) inventory cost flow assumption. If Jenner had used first in, first out (FIFO), return on total equity would: A) increase to 21.1%. B) decrease to 18.3%. C) increase to 23.0%.

89) Selected financial data from Krandall, Incorporated’s balance sheet for the year ended December 31 was as follows (in $): Cash Accounts Receivable Inventory

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$ 1,100,000 300,000 2,400,000

Accounts Payable Deferred Tax Liability Long-term Debt

$ 400,000 700,000 8,200,000 33

Property, Plant & Equipment Total Assets

LIFO Reserve at January 1 LIFO Reserve at December 31

8,000,000

Common Stock

1,000,000

11,800,000

Retained Earnings Total Liabilities & Equity

1,500,000 11,800,000

600,000 900,000

Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40%. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assetsto-equity ratio would be closest to: A) 3.73 B) 4.06 C) 4.18

90) A health care company purchased a new MRI machine on 1/1/X3. At year-end the company recorded straight-line depreciation expense of $75,000 for book purposes and accelerated depreciation expense of $94,000 for tax purposes. Management estimates warranty expense related to corrective eye surgeries performed in 20X3 to be $250,000. Actual warranty expenses of $100,000 were incurred in 20X3 related to surgeries performed in 20X2. The company’s tax rate for the current year was 35%, but a tax rate of 37% has been enacted into law and will apply in future periods. Assuming these are the only relevant entries for deferred taxes, the company’s recorded changes in deferred tax assets and liabilities on 12/31/X3 are closest to:

A) B) C)

DTA

DTL

$52,500 $55,500 $55,500

$6,650 $6,650 $7,030

A) Option A B) Option B C) Option C

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91) U.S. GAAP least likely requires property, plant, and equipment to be tested for impairment: A) when events indicate the firm may not recover the asset’s carrying value. B) when an asset is reclassified as held-for-sale. C) at least annually.

92) Moore Limited uses the LIFO inventory cost flow assumption. Its cost of goods sold in 20X8 was $800. A footnote in its financial statements reads: “Using FIFO, inventories would have been $70 higher in 20X8 and $80 higher in 20X7.” Moore’s COGS if FIFO inventory costing were used in 20X8 is closest to: A) $730. B) $790. C) $810.

93) Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the: A) net realizable value minus selling costs. B) market price minus selling costs minus normal profit margin. C) net realizable value.

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94) Enduring Corporation operates in a country where net income from sales of goods are taxed at 40%, net gains from sales of investments are taxed at 20%, and net gains from sales of used equipment are exempt from tax. Installment sale revenues are taxed upon receipt. For the year ended December 31, 2004, Enduring recorded the following before taxes were considered: ● Net income from the sale of goods was $2,000,000, half was received in 2004 and half will be received in 2005. ● Net gains from the sale of investments were $4,000,000, of which 25% was received in 2004 and the balance will be received in the 3 following years. ● Net gains from the sale of equipment were $1,000,000, of which 50% was received in 2004 and 50% in 2005. On its financial statements for the year ended December 31, 2004, Enduring should apply an effective tax rate of: A) 26.67% and increase its deferred tax liability by $1,000,000. B) 22.86% and increase its deferred tax liability by $1,000,000. C) 22.86% and increase its deferred tax asset by $1,000,000.

95) Capitalizing interest costs related to a company’s construction of assets for its own use is required by: A) U.S. GAAP only. B) IFRS only. C) both IFRS and U.S. GAAP.

96) A U.S. company uses the LIFO method to value its inventory for their income tax return. For its financial statements prepared for shareholders, the company may: A) use the FIFO method, but must disclose a LIFO reserve. B) only use the LIFO method. C) use any other inventory method under generally accepted accounting principles (GAAP).

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97) Novak, Incorporated owns equipment with a historical cost of $20,000, a useful life of 5 years, and an estimated salvage value of $5,000. Using the double declining balance method, depreciation expense in Year 3 for this equipment is: A) $3,000.00 B) $2,200.00 C) $2,880.00

98) A company redeems $10,000,000 of bonds that it issued at par value for 101% of par or $10,100,000. In its statement of cash flows, the company will report this transaction as a: A) $10,100,000 CFO outflow. B) 10,100,000 CFF outflow. C) $10,000,000 CFF outflow and $100,000 CFO outflow.

99)

For a lessor that reports under U.S. GAAP, a lease is classified as an operating lease if:

A) ownership risks are not substantially transferred to the lessee. B) the fair value of the asset is greater than the sum of the lease payments and the asset’s expected residual value. C) it cannot be classified as a sales-type lease or a direct financing lease.

100) A firm has deferred tax assets of $315,000 and deferred tax liabilities of $190,000. If the tax rate increases, adjusting the value of the firm's deferred tax items will: A) have no effect on income tax expense. B) decrease income tax expense. C) increase income tax expense.

101) For a firm financed with common stock and long-term fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates?

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A) Cash flow from financing. B) Interest paid. C) Debt-to-equity ratio.

102) On December 31, 20X3 Okay Company issued 10,000 $1000 face value 10-year, 9% bonds to yield 7%. The bonds pay interest semi-annually. On its financial statements (prepared under U.S. GAAP) for the year ended December 31, 20X4, the effect of this bond on Okay's cash flow from operations is: A) −$755,735. B) −$900,000. C) −$700,000.

103) A U.S. GAAP firm writes down inventory to net realizable value. In the period of the writedown, what is the most likely effect on cost of goods sold? A) No effect. B) Increase. C) Decrease.

104) A company issues an annual-pay bond with the following characteristics: Face value $ 67,831 Maturity Coupon

4 7%

Market interest rates

years

What is the unamortized discount at the end of the first year?

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A) $1,209. B) $1,750. C) $499.

105)

Deferred tax items should be measured based on the: A) tax rate that will apply when the temporary difference reverses. B) firm’s effective tax rate at the time when the temporary difference reverses. C) statutory tax rate at the time when the temporary difference is recognized.

106) A company acquires an intangible asset for $100,000 and expects it to have a value of $20,000 at the end of its 5-year useful life. If the company amortizes the asset using the doubledeclining balance method, amortization expense in year 4 of the asset’s useful life is closest to: A) $8,640. B) $6,910. C) $1,600.

107) In analyzing disclosures related to the financing liabilities of a company, which of the following disclosures would be least helpful to the analyst? A) The present value of the future bond payments discounted at the coupon rate of the bonds. B) The interest expense for the period as provided on the income statement or in a footnote. C) Filings with the Securities and Exchange Commission (SEC) that disclose all outstanding securities and their features.

108) Dubois Company bought land for company use five years ago for €2 million and presents its balance sheet value as €2.2 million. If the fair value of the land decreases to €1.8 million, Dubois will:

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A) decrease shareholders’ equity by €400,000 but will not recognize a loss. B) recognize a loss of €400,000 and decrease shareholders’ equity by €200,000. C) recognize a loss of €200,000 and decrease shareholders’ equity by €400,000.

109) Under IFRS, deferred tax assets and deferred tax liabilities are classified on the balance sheet as: A) either current or noncurrent items. B) noncurrent items. C) current items.

110) Deferred taxes must be recognized for undistributed earnings from an investment in an associate firm under: A) neither IFRS nor U.S. GAAP. B) U.S. GAAP only. C) both IFRS and U.S. GAAP.

111) Fred Company has a deferred tax liability of $1,200,000. If Fred’s tax rate increases from 30% to 40%, the impact of this tax rate change will: A) increase Fred’s income tax expense by $400,000. B) decrease Fred’s income tax expense by $120,000. C) increase Fred’s income tax expense by $120,000.

112) Robbins, Incorporated, reports under IFRS and uses the effective interest rate method for valuing its bond liabilities. Robbins sells a 10-year, $100 million, 5% annual coupon bond issue for $98 million and paid $500,000 in issuance costs. Two years later, the bond liability Robbins will report on its balance sheet for this debt is closest to:

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A) $98.1 million. B) $98.0 million. C) $97.9 million.

113) Which of the following is least likely required for a lease to be classified as a direct financing lease by the lessor under U.S. GAAP? A) The lease transfers substantially all the benefits and risks of ownership to the lessee. B) The sum of the lease payments and asset’s residual value is not less than the asset value. C) A third party guarantees the payment of the residual value of the lease to the lessor.

114) Cody Scott would like to screen potential equity investments to identify value stocks and selects firms that have low price-to-sales ratios. Unfortunately, screening stocks based only on this criterion may result in stocks that have poor profitability or high financial leverage, which are undesirable to Scott. Which of the following filters could be added to the stock screen to best control for poor profitability and high financial leverage? Filter #1 – Include only stocks with a debt-to-equity ratio that is above a certain benchmark value. Filter #2 – Include only dividend paying stocks. Filter #3 – Include only stocks with an assets-to-equity ratio that is below a certain benchmark value. Filter #4 – Include only stocks with a positive return-on-equity.

A) B) C)

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Poor profitability

High financial leverage

Filter #2 Filter #4 Filter #4

Filter #3 Filter #3 Filter #1

A) Option A B) Option B C) Option C

115)

Mechanisms that enforce discipline over financial reporting quality least likely include: A) government securities regulators. B) counterparties to private contracts. C) accounting standard-setting bodies.

116) Portsmouth Industries has stated that in the market for their medical imaging product, their strategy is to grow their market share in the premium segment by leveraging their research and development capabilities to produce machines with greater resolution for the most challenging cases of spinal degeneration. An analyst examining their financials for subsequent periods would most likely conclude that they are successfully pursuing this strategy if she finds: A) increasing research and development expense and decreasing operating margins. B) an increase in revenue and operating margins. C) an increase in gross margins greater than the increase in operating margins.

117) A significant increase in days payables above historical levels is most likely associated with: A) an unsustainable increase in reported earnings. B) an increase in net working capital. C) low quality of the cash flow statement.

118) Baetica Company reported the following selected financial statement data for the year ended December 31, 20X7: in millions

% of Sales

For the year ended December 31, 20X7:

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Sales Cost of goods sold Selling and administration expenses Depreciation Net income As of December 31, 20X7:

$ 500 (300) (125) (50) $ 25

100% 60% 25% 10% 5%

Non-cash operating working capitala Cash balance

$ 100 $ 35

20% N/A

Non-cash operating working capital = Receivables + Inventory − Payables

Baetica expects that sales will increase 20% in 20X8. In addition, Baetica expects to make fixed capital expenditures of $75 million in 20X8. Ignoring taxes, calculate Baetica’s expected cash balance, as of December 31, 2008, assuming all of the common-size percentages remain constant. A) $80 million. B) $30 million. C) $40 million.

119) An analyst has decided to identify value stocks for investment by screening for companies with high book-to-market ratios and high dividend yields. A potential drawback of using these screens to find value stocks is that the firms selected may: A) be those that have significantly underperformed the market. B) be concentrated in specific industries. C) have unsustainable dividend payments.

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120) National Scooter Company and Continental Chopper Company are motorcycle manufacturing companies. National’s target market includes consumers that are switching to motorcycles because of the high cost of operating automobiles and they compete on price with other manufacturers. The average age of National’s customers is 24 years. Continental manufactures premium motorcycles and aftermarket accessories and competes on the basis of quality and innovative design. Continental is in the third year of a five-year project to develop a customized hybrid motorcycle. Which of the two firms would most likely report higher gross profit margin, and which firm would most likely report higher operating expense stated as a percentage of total cost? Higher gross profit margin A) B) C)

National Continental Continental

Higher percentage operating expense Continental National Continental

A) Option A B) Option B C) Option C

121) The most likely problem with using financial statement ratios to screen for stocks to include in a portfolio is that: A) specific industries are often over-represented. B) firm characteristics are not identified well by financial statement measures. C) firms with undesirable characteristics will be included.

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Answer Key Test name: Financial Reporting and Analysis 1) C International Accounting Standard (IAS) No. 1 defines which financial statements are required and how they must be presented. The required financial statements are:● Balance sheet. ● Statement of comprehensive income. ● Cash flow statement. ● Statement of changes in equity. ● Explanatory notes, including a summary of accounting policies. Disclosures of material events that affect the company are required by the Securities and Exchange Commission (Form 8-K) for firms that are publicly traded in the United States. 2) C IFRS recommends that management commentary address the company’s key relationships, resources, and risks, as well as the nature of the business, management’s objectives, the company’s past performance, and the performance measures used. Securities regulators may impose requirements for publicly traded firms to address certain topics in management’s commentary, but accounting standards do not. 3) B

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Able’s basic earnings per share ((Net Income − Preferred Stock Dividends) / weighted average shares outstanding) for 2004 was [($720,000 − ($500 × 6,000 × 0.03) − ($1,000 × 1,000 × 0.08)] / 1,000,000 =$0.55. If the convertible preferred were converted to common stock on January 1, 6,000 × 40 = 240,000 additional shares would have been issued. Also, dividends on the convertible preferred would not have been paid. So diluted EPS was ($720,000 − 80,000) / (1,000,000 + 240,000) = $0.52. 4) A 1,000,000(12) = 12,000,000 100,000(12) = 1,200,000 400,000(3) = 1,200,000 Total = 14,400,000 / 12 = 1,200,000 5) A As an example, start with CA = 2, CL = 1, and Inv = 1.2. We begin with a current ratio of 2 and a quick ratio of 0.8. If the firm increases shortterm bank debt (a current liability) by 1 to buy inventory (a current asset) of 1, both the numerator and denominator increase by 1, resulting in 3 / 2 = 1.5 (new current ratio) and (3 − 2.2) / 2 = 0.4 (new quick ratio). 6) A 7) B

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The restructuring charge and asset write-down are non-recurring transactions; thus, net income will be higher in 20X8, all else equal. In 20X8, fixed asset turnover will be the same as 20X7, all else equal. The asset impairment charge is a one-time charge, so fixed assets will not be reduced further in 20X8. 8) A A current liability is expected to be settled within one year or operating cycle, whichever is greater. It is not necessary to settle a current liability with cash. There are a number of ways to settle a current liability. For example, unearned revenue is a liability that is settled by providing goods or services. 9) B The purchase of plant and equipment with financing provided by the seller is a non-cash transaction. Non-cash transactions are disclosed separately in a note or supplementary schedule to the cash flow statement. 10) B First, calculate beginning inventory given COGS, purchases, and ending inventory. Beginning inventory was $35 million [$130 million COGS + $45 million ending inventory – $140 million purchases]. Next, calculate average inventory of $40 million [($35 million beginning inventory + $45 million ending inventory) / 2]. Finally, calculate inventory turnover of 3.25 [$130 million COGS / $40 million average inventory]. 11) B

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20X7, gross profit is equal to $100 million ($1 × 250 million units sold × 40% gross profit margin). The 10% price cut to $0.90 will increase cost of goods sold to 67% of sales [COGS = 0.6($1) = $0.60; $0.60 / $0.90 = 67%.]. As a result, gross profit will decrease to 33% of sales. If unit sales double in 20X8, gross profit will equal $150 million ($0.90 × 500 million units × 33% gross profit margin). Therefore, gross profit will increase $50 million ($150 million 20X8 gross profit – $100 million 20X7 gross profit). 12) B Available-for-sale securities are reported on the balance sheet at fair value and any unrealized gains and losses bypass the income statement and are reported as an adjustment to equity. Thus, a decrease in fair value will result in a higher ROA ratio (lower assets). Trading securities are also reported on the balance sheet at fair value; however, the unrealized gains and losses are recognized in the income statement. Therefore, an increase in fair value will result in higher ROA. In this case, both the numerator and denominator are higher; however, since the ratio is less than one, the percentage change of the numerator is greater than the percentage change of the denominator, so the ratio will increase. 13) A Common-size balance sheets express each balance sheet item as a percentage of total assets. Contributed capital from issuing common shares may be included in common stock (at par value) or additional paid-in capital (for proceeds in excess of par value). Shareholders’ equity is unlikely to consist only of common and preferred stock, as it also includes components such as retained earnings and accumulated other comprehensive income. 14) C Version 1

Orange’s basic EPS ((net income − preferred dividends) / weighted average common shares outstanding) is [($7,600,000 − (10,000 × $1,000 × 0.08)] / 2,000,000 = $3.40. To check for dilution, EPS is calculated under the assumption that the convertible preferred shares are converted into common shares at the beginning of the year. The preferred dividends paid are added back to the numerator of the Diluted EPS equation, and the additional common shares are added to the denominator of the equation. Orange’s if-converted EPS is $7,600,000 / (2,000,000 + 200,000) = $3.45. Because if- converted EPS is higher than basic EPS, the preferred stock is antidilutive and no adjustment is made to basic EPS. 15) C Beginning with net sales, calculating cash collected from customers requires the addition (subtraction) of any increase (decrease) in unearned revenue. Cash advances from customers represent unearned revenue and are not included in net sales, so any advances must be added to net sales in order to calculate cash collected. An inventory writedown, as a result of applying the lower of cost or market rule, will reduce ending inventory and increase COGS for the period. However, no cash flow is associated with the writedown, so COGS is reduced by the amount of the writedown in calculating cash paid to suppliers. 16) B

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Investing Activities: $10,000 − $180,000 = −$170,000 cash flow from investing or $170,000 used Financing Activities: $38,000 − $75,000 = −$37,000 cash flow from financing or $37,000 used Note that the question asked for net cash used therefore this is a positive cash outflow. 17) C Dividends received from trading securities and available-for-sale securities are recognized in the income statement. The difference in trading and available-for-sale classifications relates to the treatment of any unrealized gains and losses. 18) B

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Number of average common shares: 1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,000 7/1 1,000 shares repurchased × 6 months = −6,000 = 60,000 60,000 shares / 12 months = 5,000 average shares Preferred dividends = ($10) (1,000) = $10,000 Number of shares from the conversion of the preferred shares = (1,000 preferred shares) (8 × 1.1 shares of common/share of preferred) = 8,800 common Diluted EPS = [$15,000(NI) − $10,000(pfd) + $10,000(pfd)] / (5,000 common shares + 8,800 shares from the convertible preferred) = $15,000 / 13,800 shares = $1.09/share This number needs to be compared to basic EPS to see if the preferred shares are antidilutive. Basic EPS = [$15,000(NI) − $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/share Since the EPS after the conversion of the preferred shares is greater than before the conversion the preferred shares are antidilutive and they should not be treated as common in computing diluted EPS. Therefore diluted EPS is the same as basic EPS or $1/share. 19) A

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Liabilities are equal to $3,790 million ($240 million unearned revenue + $1,570 long-term debt + $1,150 accounts payable + $830 accrued expenses). Stockholders’ equity is equal to $3,420 million ($30 common stock at par + $440 capital in excess of par − $2,000 treasury stock + $5,160 retained earnings − $210 accumulated other comprehensive loss). 20) B On a common size income statement, all amounts are stated as a percentage of sales. Interest expense per dollar of sales has declined from 0.15 to 0.06. The other interpretations listed are not necessarily correct. COGS increased as a percentage of sales, but if sales decreased, COGS may have decreased as well. The company's effective tax rate (income tax expense / pretax income) can be calculated from a commonsize income statement. Here the effective tax rate was 33% in both years. 21) A Using the indirect method, CFO is net income increased by 20X5 depreciation ($1,000,000) and decreased by the gain recognized on the sale of the plane [$10,000,000 sale price − ($15,000,000 original cost − $10,000,000 accumulated depreciation including 20X5) = $5,000,000]. $12,000,000 + $1,000,000 − $5,000,000 = $8,000,000. 22) C Operating cash flow is equal to $36.1 million ($43.7 million net income + $4.2 million depreciation expense − $8 million gain on sale − $1.5 million increase in receivables − $2.3 million decrease in payables). Net capital expenditures are equal to $20 million ($35 million equipment purchased − $15 million proceeds from sale). Free cash flow to the firm is equal to $16.1 million ($36.1 million operating cash flow − $20 million net capital expenditures).

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23) A Equipment is reported in the balance sheet at historical cost less accumulated depreciation. 24) B CFO = sales $3,000,000 − change in accounts receivable ($200,000 − $300,000) − purchases $1,800,000 − other cash operating expenses $400,000 = $900,000. Note that no adjustment for inventories is necessary because purchases are given. From the inventory equation, P = COGS + EI − BI. 25) C The market value of the firm’s common equity (common stock) is not included on the balance sheet. IFRS allows some PP&E assets to be carried at fair value and some types of inventory to be carried at their market values. 26) C Comprehensive income includes all transactions that affect shareholders’ equity except transactions with shareholders. Thus, any transaction that affects net income would also affect comprehensive income. Since the inventory write-down is included in net income, it is part of comprehensive income. The acquisition of treasury stock is a transaction with shareholders; thus, it is not a part of comprehensive income. 27) A Decreases in inventory represent a source of cash so these would be subtracted from cost of goods sold. Any depreciation and/or amortization included in the cost of goods sold does not represent an actual use of cash, so this amount should be subtracted from cost of goods sold. Decreases in accounts payable represent a use of cash so these should be added to cost of goods sold. Version 1

28) B Both items are included in comprehensive income. Comprehensive income includes all items that affect owners’ equity except transactions with the company’s owners. Any items that are included in net income are also included in comprehensive income. The gain on sale is reported in net income. The foreign currency translation loss is taken directly to owners’ equity (i.e., not reported in the income statement). 29) A Cash flow from operations (CFO) using the indirect method is computed by taking net income plus noncash expenses (i.e. depreciation) less gains from the equipment sale. Note that cash flow from operations must be adjusted downward for the amount of the gain on the sale of the equipment. Cash flow from operations is ($850,000 + $200,000 – ($100,000 – $50,000)) = $1,000,000. The other information relates to financing cash flows. 30) C The current ratio is equal to 2.4 [(4.8% cash + 14.9% accounts receivable + 49.4% inventory) / (15.0% accounts payable + 13.8% accrued liabilities)]. This ratio can be calculated from the common size balance sheet because the percentages are all on the same base amount (total). Return on equity is equal to net income divided by average total equity. Since this ratio mixes an income statement item and a balance sheet item, it is necessary to convert the common-size inputs to dollars. Net income is $11,211,200 ($215,600,000 × 5.2%) and average equity is $41,772,000 [($95,300,000 × 48.0%) + $37,800,000] / 2. Thus, 2007 ROE is 26.8% ($11,211,200 net income / $41,772,000 average equity). 31) A Version 1

Only the options and convertible preferred stock are dilutive. First, calculate basic EPS to use as a benchmark to determine dilutive capital components. Basic EPS = (net income − preferred dividends) / weighted average common shares outstanding = (9.0 − 1.5) / 5.0 = $1.50. Next, check for dilution.● The stock options are dilutive because the exercise price is less than the average stock price. There is no numerator impact from the options. The denominator impact = # options − [(# options × exercise price) / average stock price)] = 400,000 − [(400,000 × 32) / 35] = 34,286 or 0.034 million. ● To check whether the convertible preferred stock is dilutive we need to determine whether it decreases EPS. To the numerator, we add back the preferred dividend. The denominator impact = (# preferred shares × conversion rate) = 500,000 × 5 = 2,500,000, or 2.5 million. Then, EPS = (9.0 − 1.5 + 1.5) / (5.0 + 2.5) = $1.20. Thus the convertible preferred stock is dilutive. ● To check whether the convertible bonds are dilutive we need to determine whether they decrease EPS. To the numerator, we add back the after-tax impact of the coupon, or (face value × coupon × (1 − t)), or (10,000 bonds × 1,000 par × 0.06 coupon × 0.6 ) = 360,000, or $0.360 million. The denominator impact = (# convertible bonds × conversion rate) = 10,000 × 8 = 80,000, or 0.080 million. Then, EPS = (9.0 − 1.5 + 0.360) / (5.0 + 0.080) = $1.55. Thus the bonds are antidilutive. Finally, calculate diluted EPS: Diluted EPS = (9.0 − 1.5 + 1.5) / (5.0 + 2.5 + 0.034) = $1.1946. 32) C

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CFO is the same under both methods, the only difference is presentation. Direct method: $92,500 cash collections ($100,000 revenue − $7,500 increase in receivables) − $38,500 cash paid to suppliers (− $40,000 COGS + $2,500 decrease in inventory − $1,000 decrease in payables) − $20,000 cash operating expenses − $3,000 tax expense = $31,000. Indirect method: $32,000 net income + $5,000 depreciation expense − $7,500 increase in receivables + $2,500 decrease in inventory − $1,000 decrease in payables = $31,000. The increase in short-term notes payable is a financing activity. 33) C Dividends declared are net income less the increase in retained earnings ($800,000 − $300,000 = $500,000). Dividends declared less the increase in dividends payable is dividends paid ($500,000 − ($300,000 − $200,000) = $400,000). This is a cash outflow so it is a negative number. Dividends paid are always cash flow from financing under U.S. GAAP. Note that accounts payable changes are included in cash flow from operations (CFO). 34) B Net income is ($6,000 − 3,200 − 800)(1 − 0.4) = $1,200. Adjustments to reconcile net income to cash flow from operating activities will require that depreciation ($800) be added back, and increase in accounts receivable ($1,000) be subtracted: $1,200 + 800 − 1,000 = $1,000. 35) B

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The recognition of bad debt expense has no effect on liabilities, current revenues are reduced by the expected amount of uncollectable accounts. Bad debt expense reduces net income and reduces assets. The recognition of expected warranty expense decreases net income (following the matching principle), and since it is not currently paid (doesn’t reduce assets) it creates or increases a liability at the time of sale. 36) C The interest expense for three months net of tax is added to the numerator (12% × $100,000 × 3/12 × 60 %) = $1,800. The number of shares added to the denominator are 4,500. (18,000 × 3 / 12). 37) B Given the gain of $100,000 and book value of the machinery sold of $260,000 ($500,000 original cost −$240,000 accumulated depreciation), the proceeds from the sale of the machinery were $360,000 ($100,000 gain + $260,000 book value). For 20X7, CFI was an outflow of $40,000 ($360,000 sale proceeds − $400,000 machinery purchase). The $600,000 financed by the seller is a non-cash transaction and is reported in the notes to the cash flow statement. 38) B Restructuring and plant shutdown costs are considered part of a company’s normal operations. Gains and losses related to discontinued operations are reported separately in the income statement because these activities are no longer included as part of the company’s continuing operations. 39) B

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Since Red Oak is a nonfinancial firm, the accrued interest is considered a nonoperating activity, related to how the firm is financed. Dividends paid to preferred shareholders do not affect net income. 40) A Feder’s basic earnings per share ((net income − preferred dividends) / weighted average shares outstanding) was (($7,650,000 − ($1,000 × 10,000 × 0.06)) / 1,100,000 =) $6.41. If the convertible preferred stock was converted to common stock at January 1, (10,000 × 20 =) 200,000 additional common shares would have been issued, dividends on the preferred stock would not have been paid, and Diluted EPS would have been ($7,650,000 / (1,100,000 + 200,000) = $5.88. Because $5.88 is less than basic EPS of $6.41, the preferred shares are dilutive. Using the treasury stock method, if the options were exercised cash inflow would be (70,000 × 10 × $50 =) $35,000,000. The number of Feder shares that can be purchased with the inflow (cash inflow divided by the average share price) is ($35,000,000 / $62 =) 564,516. The number of shares that would have been created is (700,000 − 564,516 =) 135,484. Diluted EPS was [($7,650,000 − ($1,000 × 10,000 × 0.06)] / (1,100,000 + 135,484) =) $5.71. Because this is less than the EPS of $6.41, the options are dilutive. Combining the calculations, Diluted EPS was (($7,650,000) / (1,100,000 + 200,000 + 135,484) = $5.32. (Study Session 7, Module 21.4, LOS 21.h) 41) B

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A cash flow statement can be presented in common-size format by expressing each line item as a percentage of total revenue or by expressing each inflow of cash as a percentage of total cash inflows and each outflow as a percentage of total cash outflows. Expressing each line item of the cash flow statement as a percentage of revenue is useful in forecasting future cash flows since revenue usually drives the forecast. 42) A Although manipulation of cash flow can occur, the P/E ratio is easier to manipulate because earnings are based on the numerous estimates and judgments of accrual accounting. EPS does not facilitate direct comparisons of profitability. Two firms may have the same amount of earnings but their number of shares outstanding may differ significantly. 43) C There are two formats for a common-size cash flow statement, expressing each type of outflow as a percentage of total cash outflows or as a percentage of total revenue for the period. Operating cash flow for the period mixes inflows and outflows and is not used to calculate percentage flows for payment made. 44) C Interest received from customers and interest received from investments are a part of normal operations of a financial institution. Thus, the First National Bank will report the interest income from both sources as components of operating income. 45) C

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Average stock price is not a factor in determining whether convertible bonds are dilutive or antidilutive. If Young redeemed the bonds, they would have no potentially dilutive securities outstanding in 20X5 and diluted EPS, if the company reported it, would equal basic EPS. Basic and diluted EPS would also be equal in 20X5 if the bonds were antidilutive in that year. 46) C Leverage increased as measured by the debt-to-equity ratio from 2.25 in 2005 to 3.68 in 2007. Gross profit margin declined from 20.0% in 2005 to 18.5% in 2007. Return on equity has improved since 2005. One measure of ROE is ROA × financial leverage. Financial leverage (assets / equity) can be derived by adding 1 to the debt-to-equity ratio. In 2005, ROE was 23.4% [7.2% ROA × (1 + 2.25 debt- to-equity)]. In 2007, ROE was 27.6% [5.9% ROA × (1 + 3.68 debt-to-equity)]. 47) B CCC = collection period + Inv Period − Payment period. Payment period = (365 / payables turnover) = (365 / 11) = 33; (365 / 12) = 30. This means the CCC actually increased to 83. 48) A

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To compute Hampshire’s basic EPS ((net income − preferred dividends) / weighted average common shares outstanding), the weighted average common shares must be computed. 100,000 shares were outstanding from January 1, and 30,000 shares were issued on September 1, so the weighted average is 100,000 + (30,000 × 4 / 12) = 110,000. Basic EPS is ($2,800,000 − (10,000 × $1,000 × 0.06)) / 110,000 = $20.00. If the warrants were exercised, cash inflow would be 10,000 × $150 × 10 = $15,000,000 for 10 × 10,000 = 100,000 shares. Using the treasury stock method, the number of Hampshire shares that can be purchased with the cash inflow (cash inflow / average share price) is $15,000,000 / $250 = 60,000. The number of shares that would be created is 100,000 − 60,000 = 40,000. Diluted EPS is $2,200,000 / (110,000 + 40,000) = $14.67. 49) A To compute Gerrard’s basic earnings per share (EPS) ((net income − preferred dividends) / weighted average common shares outstanding), the weighted average common shares outstanding must be computed. 700,000 shares were outstanding from January 1, and 200,000 shares were issued on March 1, so the weighted average is 700,000 + (200,000 × 10 / 12) = 866,667. Basic EPS was $330,000 − (2,000 × $500 × 0.08)) / 866,667 = $0.289. If the convertible preferred shares were converted to common stock, 2,000 × 200 = 400,000 additional common shares would have been issued and dividends on the preferred stock would not have been paid. Diluted EPS was $330,000 / (866,667 + 400,000) = $0.261. 50) C

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A firm with any potentially dilutive securities outstanding must report both basic and diluted EPS, even if the two are equal. If convertible preferred stock is dilutive to earnings per share, the preferred dividend is added back to the numerator as if the preferred has been converted to common shares. If diluted EPS is less than basic EPS then the convertible preferred is said to be dilutive. 51) B Unrealized foreign currency translation gains and losses are not reported in the income statement; thus, retained earnings are unaffected. However, unrealized foreign currency gains and losses are included in comprehensive income. Comprehensive income includes all changes in equity except those that result from transactions with shareholders. So, the translation gain increases stockholders’ equity by increasing comprehensive income. 52) A During the first year, the revenue was 700,000 / 1,300,000 × 2,000,000 = 1,076,923 The total revenue for both years = $2,000,000 The second year revenue was 2,000,000 − 1,076,923 = $923,077 The second year income = revenues − costs = 923,077 − 1,000,000 = $−76,923 53) A The format of the question information suggests the use of the direct cash flow method. In this method, depreciation is not a component of cash flow from operations. Cash flow from operations = (all numbers in thousands of dollars) 45 − 17 − 22 − 6.3 − 1.0 = −1.3, or −$1,300. 54) C

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Inventory costs are expensed when items are sold under the matching principle. As an extreme example, if no sales are made, no costs of inventory production are expensed for the period. Period costs are expensed during the period. Under the accrual method, interest accrued during the period is expensed, regardless of whether it has been paid during the period. 55) C Using the indirect method, CFO = Net income 25 + increase in accounts payable 20 + increase in deferred taxes 5 − profit on sale of equipment 15 = $35. Increases in accounts payable and deferred taxes are sources of operating cash that are not included in net income and must be added. Profit on sale of equipment is a CFI item that must be removed from net income. No adjustment needs to be made for cash payment of dividends (CFF), sale of preferred stock (CFF), or purchase of land (CFI) because they are not included in net income. Only the profit on sale of equipment, not the full proceeds from sale, is included in net income. 56) B Under U.S. GAAP, interest received is reported as an operating cash flow. For a non-financial services company, interest received is typically reported as non-operating income. 57) C

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Inventory costs are expensed when items are sold under the matching principle. As an extreme example, if no sales are made, no costs of inventory production are expensed for the period. Period costs are expensed during the period. Under the accrual method, interest accrued during the period is expensed, regardless of whether it has been paid during the period. 58) A The trading securities classification includes the unrealized gain from the bond in net income, which increases retained earnings. Unrealized gains on available-for-sale securities are reported as other comprehensive income for the period and are recorded in accumulated other comprehensive income, a component of owner's equity. Unrealized gains on held-to-maturity securities are not reported on the financial statements. 59) C The analyst believes an expenditure the firm classified as an investing cash outflow should have been classified as an operating cash outflow. Thus, the analyst should adjust CFO downward and CFI upward. 60) B Common-size cash flow statements show each cash flow item as a percentage of revenue or show each cash flow outflow as a percentage of all cash outflows and each cash inflow as a percentage of all cash inflows. 61) C

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Unrealized gains and losses from trading securities are reflected in the income statement and affect owners' equity. However, unrealized gains and losses from available-for-sale securities are included in other comprehensive income. Transactions included in other comprehensive income affect equity but not net income. Dividends paid to shareholders reduce owners' equity but not net income. 62) B For long-lived assets classified as investment property, IFRS allows either the cost model or the fair value model. The revaluation model is permitted for long-lived assets that are not classified as investment property. U.S. GAAP only permits the cost model for valuation of longlived assets and does not identify investment property as a specific subset of long-lived assets. 63) C If Train decided to amortize the cost, the franchise would be capitalized as a balance sheet asset and the cash outflow would have been classified as CFI. As a result CFO would have been $8 million higher, or $14 million + $8 million = $22 million. Amortization would be a non-cash expense. 64) C According to IFRS, property held for the purpose of earning rental income is classified as investment property. However, when a property is transferred from owner-occupied to investment property, a firm using the fair value model must treat any increase in the property's value as a revaluation. That is, the firm may only recognize a gain on the income statement to the extent that it reverses a previously recognized loss. 65) B

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Under the fair value model, all gains and losses from changes in the value of investment property are recognized on the income statement. The firm will recognize a loss of €150,000 in Year 1 and a gain of €200,000 in Year 2. 66) A Undistributed profits from a subsidiary do not require the creation of a deferred tax liability under U.S. GAAP if the subsidiary meets the indefinite reversal criterion. For IFRS, there are circumstances where a DTL is not created but the test for this treatment is not called or equivalent to the indefinite reversal criterion detailed in U.S. GAAP. 67) C Assuming normal capacity levels, allocation of fixed production overhead is a product cost that is capitalized as part of inventory. Thus, this cost will not be recognized as an expense until the inventory is sold (it becomes part of COGS for that period). Administrative overhead and selling costs are period costs that must be expensed in the period incurred. 68) C

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The $200,000 difference between the tax base and the carrying value of the equipment gives rise to a deductible temporary difference that leads to a deferred tax asset (DTA) of $80,000 ($200,000 × 40%). The tax loss carryforward of $300,000 also leads to a DTA but for $120,000 ($300,000 × 40%). The decrease in the tax rate from 40% to 35% will reduce the DTA of the equipment by $10,000 ($200,000 × 5%). It will reduce the DTA of the tax loss carryforward by $15,000 ($300,000 × 5%). In total, the DTA will decrease by $25,000. The decrease in the value of the DTA will increase income tax expense by $25,000 in the period when the DTA is decreased. 69) B Under IFRS, a tax rate that has been enacted or substantively enacted is used to measure deferred tax items. Under U.S. GAAP, only a tax rate that has actually been enacted can be used. 70) B Based on a semiannual interest rate of 6.65% (13.30% / 2): Period

Coupon Payment

Discount Amortization

Interest Expense 0.00

Bond Carrying Value $ 800.00

1 2 3 4

53.20 55.08 57.08 59.21

25.00 25.00 25.00 25.00

28.20 30.08 32.08 34.21

828.20 858.28 890.36 $ 924.57

Interest expense for Year 2 is $57.08 + $59.21 = $116.29. 71) C

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When exchanging one long-lived asset for another, a gain or loss is recorded as the difference between the old asset's carrying value and its fair value (or the fair value of the asset received in exchange, if that value is more evident). When selling an asset, the gain or loss is the difference between the carrying value and the cash received. When abandoning an asset, a firm records a loss equal to the carrying value of the asset. 72) C Neither metric is directly relevant in evaluating the stability of a firm's inventory levels. Determining stability would presumably require other information such as purchase and sales levels, for example. The inventory turnover ratio and the number of days in inventory can be used to evaluate the relative age of a firm's inventory as well as the effectiveness of a firm's inventory management. 73) C Deferred tax items are classified as noncurrent. 74) A Estimated amortization expense for the next five years is required by U.S. GAAP but is not required by IFRS. 75) C Permanent tax differences such as tax credits, non-deductible expenses, and tax differences between capital gains and operating income give rise to differences in the effective and statutory tax rates. 76) A As bond premium is amortized, interest expense will be successively lower each period, thus increasing earnings over the life of the bond. 77) B

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Under U.S. GAAP, the full amount of a DTA is shown on the balance sheet, with a contra account (valuation allowance) if it is likely that the full amount of the DTA will not be realized in the future. Under IFRS, the reported value of a DTA is reduced if there is a positive probability that the full amount of the DTA will not be realized in the future. 78) C Under U.S. GAAP, a LIFO firm values inventory at the lower of cost or market. Market is equal to the replacement cost subject to replacement cost being within a specific range. The upper bound is net realizable value (NRV), which is equal to selling price ($80) less selling costs ($2) for an NRV of $78. The lower bound is NRV ($78) less normal profit (5% of selling price = $4) for a net amount of $74. Since replacement cost ($73) is less than NRV minus normal profit ($74), then market equals NRV minus normal profit ($74). As well, we have to use the lower of cost ($90) or market ($74) principle so the recorders should be recorded at the lower amount of $74. 79) A

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If the franchise cost had been amortized over six years beginning in 20X3, net income in 20X3 would have been $6 million instead of $1 million due to the cost of franchise expense of $6 million being eliminated and replaced by franchise amortization of $1 million. Net income in 20X4 would have been reduced by the franchise amortization to $7 million instead of $8 million. On the equity side, retained earnings at the end of 20X3 would have been $11 million ($5 million higher), and total equity for 20X3 would have been $8 + $11 = $19 million. Retained earnings for 20X4 would be the 20X3 retained earnings of $11 million increased by 20X4 net income of $7 million for a total of $18 million, and total equity for 20X4 would be $8 + $18 = $26 million. If the franchise cost were amortized, return on total equity for 20X4 would be $7 / ((19 + 26) / 2) = 31.1%. 80) C U.S. GAAP requires the lessee to recognize a balance sheet liability for both finance leases and operating leases. 81) B The first step is to determine the direction of prices: Purchase Begin inventory 3/1/X6 Purchase 7/1/X6 9/1/X6

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Total Cost $ 9,500 14,800 Total Cost 14,850 15,950

Units ÷ 250 ÷ 400 Units ÷ 450 ÷ 550

Per-unit Cost = $ 38 = $ 37 Per-unit Cost = $ 33 = $ 29

Notice that per-unit prices are falling. Under falling prices, LIFO inventory costing will result in higher net income because the recent units were cheaper than the older purchases (and beginning inventory), making the cost of goods sold lower and net income higher. Working capital will be higher because LIFO inventory is greater than FIFO inventory when prices are falling. 82) C The required disclosures for long-lived assets under IFRS are more extensive than they are under U.S. GAAP. IFRS requires a reconciliation of beginning and ending carrying values for classes of PP&E, while U.S. GAAP does not. 83) B When reclassifying a property from owner-occupied to investment property and using the fair value model for valuation of investment property, IFRS specifies that the firm should treat the event as a revaluation, recognizing a gain only if it reverses a previously recognized loss. 84) A For tax purposes, bad debt expense cannot be deducted until the receivables are deemed worthless. Therefore, the tax base is $35,000 since no bad debt expense has been deducted on the tax return. Note that the carrying value would be $31,500 since bad debt expense is reflected on the income statement. 85) B

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Using the effective interest method, the value of the liability is calculated using the bond’s yield at issuance. At the end of 20x1 the bond will have 8 semiannual periods remaining until maturity. N = 8; I/Y = 10 / 2 = 5; PMT = 8 / 2 × 1,000 = 40; FV = 1,000; CPT PV = −935.37. 86) C At the end of year 3, the oven has a tax base of zero (it has been fully depreciated for tax reporting) and a carrying value on the balance sheet of $12,675 − 3(0.2)($12,675) = $5,070. The deferred tax liability, valued at the 31% tax rate that will apply when the temporary difference reverses, is ($5,070 − $0)(0.31) = $1,571.70. 87) B Writing down inventory to net realizable value decreases both net income and total assets in the period of the writedown. Because net income is most likely less than assets, the result in the period is a decrease in ROA. In later periods, lower-valued inventory will decrease COGS and increase net income. Combined with a lower value of total assets, this will increase ROA. 88) A

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Return on total equity (net income / total equity) was $800,000 / ($2,200,000 + $1,800,000) = 20%. Under FIFO, net income increases by the increase in the LIFO reserve multiplied by (1 − tax rate). FIFO net income was $800,000 + ($600,000 − $400,000) (1 − 0.40) = $920,000. Total equity increases by the amount of accumulated FIFO profits that are added to retained earnings, which is calculated by multiplying the amount of the ending LIFO reserve by (1 − tax rate) for an increase of ($600,000) × (1 − 0.40) = $360,000. Total equity is $2,200,000 + $1,800,000 + $360,000 = $4,360,000. FIFO return on total equity is $920,000 / $4,360,000 = 21.1%. 89) B With FIFO instead of LIFO:● Inventory would be higher by $900,000, the amount of the ending LIFO reserve. ● Cumulative pretax income would also be higher by $900,000, so taxes paid would be higher by 0.40($900,000) = $360,000. Therefore cash would be lower by $360,000. ● Cumulative retained earnings would be higher by (1 − 0.40)($900,000) = $540,000. So assets under FIFO would be $11,800,000 + $900,000 − $360,000 = $12,340,000 and equity would be $1,000,000 + $1,500,000 + $540,000 = $3,040,000. The assets-to-equity ratio would be $12,340,000 / $3,040,000 = 4.06. 90) C DTL = (tax depreciation − financial statement depreciation) × future tax rate = ($94,000 − $75,000) × 37% = $7,030. DTA = (estimated warranty expense − actual warranty expense) × future tax rate = ($250,000 − $100,000) × 37% = $55,500. 91) C

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Under U.S. GAAP, a PP&E asset is tested for impairment when events and circumstances indicate the firm may not recover its carrying value through future use, or if the asset is reclassified from held-for- use to held-for-sale. Under IFRS, firms are also required to assess at least annually whether events and circumstances indicate impairment may have occurred. 92) C The ending LIFO reserve is $70 and the beginning LIFO reserve is $80. FIFO COGS = LIFO COGS − (ending LIFO reserve − beginning LIFO reserve) $800 − ($70 − $80) = $810 93) B When inventory is written down to market, the replacement cost of the inventory is its market value, but the “market value” must fall between net realizable value (NRV) and NRV less normal profit margin. NRV is the market price of the inventory less selling costs. Therefore the minimum value is the market price minus selling costs minus normal profit margin. 94) B Total taxes eventually due on 2004 activities were (($2,000,000 × 0.40) + ($4,000,000 × 0.20) =) $1,600,000. Permanent differences are adjusted in the effective tax rate, which is ($1,600,000 / $7,000,000 =) 22.86%. Of the $1,600,000 taxes due, (($2,000,000 × 0.50 × 0.40) + ($4,000,000 × 0.25 × 0.20) =) $600,000 were paid in 2004 and $1,000,000 ($1,600,000 − $600,000) is added to deferred tax liability. 95) C Both U.S. GAAP and IFRS require companies to capitalize the interest that accrues during the construction of capital assets for their own use. Version 1

96) B The LIFO conformity rule in the U.S. requires firms to use LIFO for their financial statements if they use LIFO for income tax purposes. 97) B DDB depreciation in each year is 2/5 of the carrying value at the beginning of the year, until the carrying value reaches the estimated salvage value. Year 1 DDB depreciation = $20,000 × 2/5 = $8,000 Carrying value = $20,000 − $8,000 = $12,000 Year 2 DDB depreciation = $12,000 × 2/5 = $4,800 Carrying value = $12,000 − $4,800 = $7,200 Year 3 DDB depreciation = $7,200 × 2/5 = $2,880 Because $7,200 − $2,880 = $4,320 would depreciate the equipment below its salvage value, depreciation in Year 3 is limited to $7,200 − $5,000 = $2,200. 98) B Cash paid to redeem a bond is classified as a cash flow from financing activities. 99) C

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Under U.S. GAAP accounting standards for lessors, a lease is classified as an operating lease if it cannot be classified as either a sales-type lease or a direct financing lease. If ownership risks are substantially transferred to the lessee and collection of the payments is reasonably assured, the lessor classifies the lease as a sales-type lease. If ownership risks are not substantially transferred, but a third party guarantees the residual value of the asset and the sum of the lease payments and the residual value is at least equal to the fair value of the asset, the lessor classifies the lease as a direct financing lease. 100) B An increase in the tax rate increases the values of both DTAs and DTLs. Because the firm's DTAs are greater than its DTLs, the net effect of adjusting their values for an increase in the tax rate will be to decrease income tax expense. 101) C For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will change the debt-to-equity ratio. 102) B The coupon payment is a cash outflow from operations. ($10,000,000 × 0.09) = $900,000. 103) B

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A write-down of inventory to net realizable value is typically recognized under U.S. GAAP as an increase in cost of goods sold in the period of the write-down. Consider the inventory equation: ending inventory = beginning inventory + purchases − cost of goods sold A write-down to NRV decreases ending inventory, with no effect on beginning inventory or purchases. For the inventory equation to hold, cost of goods sold must increase. 104) B Face value of bonds = $67,831 Proceeds from bond sale: I/Y = 8; N = 4; PMT = $67,831 × 0.07 = $4,748.17; FV = $67,831; CPT PV = $65,582 Unamortized discount at issuance = $67,831 − $65,582 = $2,249. First year interest expense = $65,582 × 0.08 $5,247 Coupon payment = $67,831 × 0.07 = $4,748 Change in discount = $5,247 − $4,748 = $499 Unamortized discount at end of first year = $2,249 − $499 = $1,750. 105) A Measurement of deferred tax items is based on the tax rate that will apply when the temporary difference reverses. In some cases this may depend on how a temporary difference is settled, which determines whether a capital gains tax rate or income tax rate will apply. 106) C

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Net book value at the end of year 3 is $100,000 × 3/5 × 3/5 × 3/5 = $21,600. DDB amortization in year 4 of 2/5 × $21,600 = $8,640 would amortize the asset below its salvage value, so amortization expense is the remaining $1,600 that will amortize net book value to $20,000. 107) A When analyzing disclosures related to financing liabilities, analysts would review the balance sheet and find the present value of the promised future liability payments. These payments would then be discounted at the rate in effect at issuance (i.e., the yield to maturity), not the coupon rate of the bonds. 108) C Because the land is valued above its historical cost on the balance sheet, Dubois is using the revaluation model. The land’s revaluation up to €2.2 million would have been reflected in shareholders’ equity with a revaluation surplus of €200,000. The decrease in fair value to €1.8 million will reduce the revaluation surplus to zero, and the amount of the writedown below historical cost (€2 million − €1.8 million = €200,000) will be recognized as a loss on Dubois’s income statement. This loss, combined with the removal of the revaluation surplus, will decrease shareholders’ equity by €400,000. Note that the land was purchased for company use and therefore would not be classified as investment property. 109) B Under IFRS, deferred tax assets and liabilities are classified as noncurrent. Under U.S. GAAP, deferred tax items may be current or noncurrent, depending on how the underlying asset or liability is classified. 110) B

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Deferred taxes must be recognized for undistributed earnings from an investment in an associate firm under U.S. GAAP. Under IFRS, no deferred taxes are reported for undistributed earnings if the investor firm controls the sharing of profits and it is probable the temporary difference will not be reversed in the future. 111) A The change in Fred’s rates causes its deferred tax liability to increase [(40 − 30) / 30] × $1,200,000 = $400,000. This is reported on the income statement as an increase in current income tax expense. 112) C Under IFRS, bond liabilities are reported under the effective interest method and issuance costs are deducted from the proceeds to determine the initial liability. The yield at issuance is: PV = 97.5 million; FV = −100 million; PMT = −5 million; N = 10; CPT I/Y = 5.33. Change N to 8 and CPT PV after two years as 97.9 million. 113) A A direct finance lease under U.S. GAAP is a lessor classification for leases that do not meet the transfer of ownership criteria. The other two conditions must be met. If a lease transfers substantially all the benefits and risks of ownership to the lessee, the lessor classifies it as a salestype lease. 114) A

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Firms that have poor profitability are more likely to be non-dividend paying. Selecting only dividend paying stocks can serve as a check on poor profitability. Using positive ROE to control for poor performance can result in bogus results without additional filters. For example, if both the numerator (net income) and the denominator (average equity) are negative, ROE will be positive. The higher the assets-to-equity ratio, the higher the leverage. Selecting only stocks with an assets-to-equity ratio below a certain cut-off point will eliminate stocks with high leverage. Debt-to-equity above a certain point would include firms with higher, not lower, financial leverage. 115) C Accounting standard-setting bodies issue financial reporting standards but do not enforce compliance with them. Securities regulators and counterparties to private contracts are among the mechanisms that discipline financial reporting quality. 116) C A shift to premium, rather than commodity-like, products should result in higher gross margins, higher average revenue per unit (selling price per unit), and an increase in gross margins relative to operating margins (because of the increase in R&D and marketing expenditures). A successful shift to a premium product should increase operating margins rather than increase operating income through increased unit sales. Revenue would not necessarily increase as the company shifted to premium products. 117) C

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A significant increase in days payables may indicate that payables have been "stretched" (not paid or paid more slowly), which increases operating cash flow in an unsustainable manner and calls the quality of the reported cash flow values into question. Stretching payables does not affect earnings because the related expenses were recognized in the period incurred. An increase in days payables will decrease net working capital, other things equal. 118) B 2008 sales are expected to be $600 million ($500 million 2007 sales × 1.2) and 20X8 net income is expected to be $30 million ($600 million 20X8 sales × 5%). 2008 non-cash operating working capital is expected to be $120 million ($600 million 20X8 sales × 20%). The change in cash is expected to be −$5 million ($30 million 20X8 net income + $60 million 20X8 depreciation − $20 million increase in noncash operating working capital − $75 million 20X8 capital expenditures). The 20X8 ending balance of cash is expected to be $30 million ($35 million beginning cash balance − $5 million decrease in cash). 119) B A screen for firms with high dividend yields and high book-to-market ratios would likely result in an inordinate proportion of financial services companies and add a significant element of industry (sector) risk. Uncertainty about sustainability of dividend payments and recent market underperformance are typical characteristics of value stocks in general and not a drawback to using this screen to identify them. 120) C

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Continental likely has the highest gross profit margin percentage since it is selling a customized product and does not compete primarily based on price. Because of the research and development costs of developing a new hybrid motorcycle, Continental likely has the higher operating expense stated as a percentage of total cost. 121) A It is often the case a screening metric, such as low P/E, high dividend yield, or high ROE, will identify many stocks in the same industry. Undesirable characteristics can be avoided by including additional screening metrics. Financial statement measures provide a great amount of information about a firm’s characteristics.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) A 4 percent Treasury bond has 2.5 years to maturity. Spot rates are as follows: 6 month 2%

1 year 2.5%

1.5 years 3%

2 years 4%

2.5 years 6%

The note is currently selling for $976. Determine the arbitrage profit, if any, that is possible. A) $37.63. B) $43.22. C) $19.22.

2) An investor holds $100,000 (par value) worth of TIPS currently trading at par. The coupon rate of 4% is paid semiannually, and the annual inflation rate is 2.5%. What coupon payment will the investor receive at the end of the first six months? A) $2,000. B) $2,025. C) $2,050.

3) Venenata Foods has a 10-year bond outstanding with an annual coupon of 6.5%. If the bond is currently priced at $1,089.25, which of the following is closest to the semiannual-bond basis yield? A) 5.42%. B) 5.33%. C) 5.26%.

A yield curve for coupon bonds is composed of yields on bonds with similar:

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A) coupon rates. B) issuers. C) maturities.

5) In a commercial mortgage-backed security (CMBS), which of the following is an example of CMBS- level call protection? A) Yield maintenance charges. B) Prepayment lockout. C) Residual tranche.

Which of the following statements about floating-rate notes is most accurate?

A) Inverse floating-rate notes are attractive to investors who expect interest rates to rise, while floating-rate notes are attractive to investors who expect interest rates to fall. B) The coupon payment on a floating-rate note at each reset date is typically based on LIBOR as of that date. C) Floating-rate notes have built-in floors, while inverse floating-rate notes have built-in caps.

7) The interest rate on excess reserves borrowed by one bank from another bank is most accurately described as a(n): A) reserve swap rate. B) interbank lending rate. C) central bank funds rate.

The reference rate for a floating-rate note should least likely match the note’s: A) reset frequency. B) maturity. C) currency.

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9) A covenant that requires the issuer not to let the insurance coverage lapse on assets pledged as collateral is an example of a(n): A) negative covenant. B) affirmative covenant. C) inhibiting covenant.

10) Which of the following statements about U.S. Treasury Inflation Protection Securities (TIPS) is most accurate? A) The inflation-adjusted principal value cannot be less than par. B) Adjustments to principal values are made annually. C) The coupon rate is fixed for the life of the issue.

11)

A bond’s indenture least likely specifies the: A) source of funds for repayment. B) covenants that apply to the issuer. C) identity of the lender.

12) Allcans, an aluminum producer, needs to issue some debt to finance expansion plans, but wants to hedge its bond interest payments against fluctuations in aluminum prices. Jerrod Price, the company’s investment banker, suggests a commodity index floater. This type of bond is least likely to provide which of the following advantages? A) Payment structure helps protect Allcan's credit rating. B) The bond's coupon rate is linked to the price of aluminum. C) Allows Allcans to set coupon payments based on business results.

13) Suppose that the six-month spot rate is equal to 7% and the two-year spot rate is 6%. The one-and a half-year forward rate starting six months from now has to:

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A) be more than 6%. B) be less than 6%. C) lie between 6% and 7%.

14) A $1,000 par, semiannual-pay bond is trading for 89.14, has a coupon rate of 8.75%, and accrued interest of $43.72. The flat price of the bond is: A) $935.12. B) $891.40. C) $847.69.

15) A five-year bond with a 7.75% semiannual coupon currently trades at 101.245% of a par value of $1,000. Which of the following is closest to the current yield on the bond? A) 7.75%. B) 7.65%. C) 7.53%.

16)

A waterfall structure is least likely describe: A) credit card ABS. B) auto loan ABS. C) agency RMBS.

17) Bond X is a noncallable corporate bond maturing in ten years. Bond Y is also a corporate bond maturing in ten years, but Bond Y is callable at any time beginning three years from now. Both bonds carry a credit rating of AA. Based on this information: A) The zero-volatility spread of Bond X will be greater than its option-adjusted spread. B) Bond Y will have a higher zero-volatility spread than Bond X. C) The option adjusted spread of Bond Y will be greater than its zero-volatility spread.

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18)

A renegotiable mortgage has a fixed interest rate that: A) the borrower may change to a variable rate. B) changes to a different fixed rate during its life. C) changes to a variable rate during its life.

19) Which of the following statements concerning the support tranche in a planned amortization class (PAC) CMO backed by agency RMBS is least accurate? A) If prepayments are too low to maintain the scheduled PAC payments, the shortfall is provided by the support tranche. B) The purpose of a support tranche is to provide prepayment protection for one or more PAC tranches. C) The support tranches are exposed to high levels of credit risk.

20)

A repurchase agreement is described as a “reverse repo” if: A) the repurchase price is lower than the sale price. B) a bond dealer is the lender. C) collateral is delivered to the lender and returned to the borrower.

21) The one-year spot rate is 7.00%. One-year forward rates are 8.15% one year from today, 10.30% two years from today, and 12.00% three years from today. The value of a 4-year, 11% annual pay, $1,000 per bond is closest to: A) $1,052. B) $1,060. C) $984.

22)

One of the primary benefits of securitization is that it:

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A) removes problem assets from the issuing firm’s balance sheet. B) improves the collectability of the loans that are securitized. C) improves the legal claims of the security holders to the loans that are securitized.

23) If yield to maturity and risk factors remain constant over the remainder of a coupon bond's life, and the bond is trading at a discount today, it will have a: A) positive current yield and a capital gain. B) positive current yield, only. C) negative current yield and a capital gain.

24)

Which of the following embedded bond options tends to benefit the borrower? A) Put option. B) Conversion option. C) Interest rate cap.

25)

A 10-year spot rate is least likely the: A) yield-to-maturity on a 10-year zero-coupon bond. B) yield-to-maturity on a 10-year coupon bond. C) appropriate discount rate on the year 10 cash flow for a 20-year bond.

26) Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of 104.75 and accrued interest since the last coupon of $33.50. Ignoring transaction costs, how much will the seller receive at the settlement date? A) $1,081.00. B) $1,014.00. C) $1,047.50.

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27)

With respect to auto-loan backed ABS: A) the underlying loans are collateralized so no credit enhancement is necessary. B) all of them have some sort of credit enhancement. C) some of them have some sort of credit enhancement.

28) If a callable bond has an option-adjusted spread (OAS) of 75 basis points, this most likely suggests: A) the bond has a zero-volatility spread greater than 75 basis points. B) the 75 basis points represent the investor’s compensation for credit risk, liquidity risk, and volatility risk. C) the implied cost of the call option is the bond’s nominal spread minus 75 basis points.

29)

An investor most concerned with reinvestment risk would be least likely to: A) prefer a noncallable bond to a callable bond. B) eliminate reinvestment risk by holding a coupon bond until maturity. C) prefer a lower coupon bond to a higher coupon bond.

30) If the yield curve is downward-sloping, the no-arbitrage value of a bond calculated using spot rates will be: A) greater than the market price of the bond. B) equal to the market price of the bond. C) less than the market price of the bond.

31)

Medium-term notes (MTNs) most likely: A) have maturities between 2 and 10 years. B) are sold through an underwritten offering. C) have less liquidity than long-term bonds of the same issuer.

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32) The bonds of Grinder Corporation trade at a G-spread of 150 basis points above comparable maturity U.S. Treasury securities. The option adjusted spread (OAS) on the Grinder bonds is 75 basis points. Using this information, and assuming that the Treasury yield curve is flat: A) the zero-volatility spread is 225 basis points. B) the option cost is 75 basis points. C) the zero-volatility spread is 75 basis points.

33) An annual-pay, 4% coupon, 10-year bond has a yield to maturity of 5.2%. If the price of this bond is unchanged two years later, its yield to maturity at that time is: A) greater than 5.2%. B) 5.2%. C) less than 5.2%.

34) A five-year corporate bond and its benchmark government bond had the following yields over a one- month period:

Corporate bond yield Government bond yield

Beginning of Month

End of Month

6.75% 4.25%

7.00% 4.75%

Over this month, the price of the corporate bond most likely experienced: A) unfavorable macroeconomic factors and favorable microeconomic factors. B) unfavorable macroeconomic and microeconomic factors. C) favorable macroeconomic factors and unfavorable microeconomic factors.

35) Which of the following is least likely an advantage of estimating the duration of a bond portfolio as a weighted average of the durations of the bonds in the portfolio?

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A) It is easier to calculate than the alternative. B) It can be used when the portfolio contains bonds with embedded options. C) It is theoretically more sound than the alternative.

36) An investor buys a bond that has a Macaulay duration of 3.0 and a yield to maturity of 4.5%. The investor plans to sell the bond after three years. If the yield curve has a parallel downward shift of 100 basis points immediately after the investor buys the bond, her annualized horizon return is most likely to be: A) less than 4.5%. B) greater than 4.5%. C) approximately 4.5%.

37)

The factors that must be considered when estimating the credit risk of a bond include: A) the bond rating, the recovery rate, and the yield volatility. B) only the bond rating and the recovery rate. C) only the bond rating.

38)

Which of the following will be the greatest for a putable bond at relatively high yields? A) Modified duration of the bond ignoring the option. B) Macaulay duration of the bond ignoring the option. C) Effective duration of the bond.

39)

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40)

41) Jane Walker has set a 7% yield as the goal for the bond portion of her portfolio. To achieve this goal, she has purchased a 7%, 15-year corporate bond at a discount price of 93.50. What amount of reinvestment income will she need to earn over this 15-year period to achieve a compound return of 7% on a semiannual basis? A) $624. B) $574. C) $459.

42) An investor purchases a fixed coupon bond with a Macaulay duration of 5.3. The bond’s yield to maturity decreases before the first coupon payment. If the YTM then remains constant and the investor sells the bond after three years, the realized yield will be: A) lower than the YTM at the date of purchase. B) equal to the YTM at the date of purchase. C) higher than the YTM at the date of purchase.

43) Steven Company has EBITDA/interest and debt-to-capital ratios that are both higher compared to Joseph Company to a degree consistent with one level of issuer credit rating. Based only on this information, the credit rating of Steven is most likely to be: A) the same as Joseph. B) lower than Joseph. C) higher than Joseph.

44) All else being equal, which of the following bond characteristics will lead to lower levels of coupon reinvestment risk for bonds that are held to maturity?

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A) Shorter maturities and higher coupon levels. B) Longer maturities and higher coupon levels. C) Shorter maturities and lower coupon levels.

45) In comparing the price volatility of putable bonds to that of option-free bonds, a putable bond will have: A) more price volatility at higher yields. B) less price volatility at higher yields. C) less price volatility at low yields.

46) When using duration and convexity to estimate the effect on a bond’s value of changes in its credit spread, an analyst should most appropriately use: A) the same method used when estimating the effect of changes in yield. B) Macaulay duration rather than modified duration. C) a convexity measure that has been adjusted for the bond’s credit risk.

47)

Structural subordination means that a parent company’s debt: A) ranks pari passu with a subsidiary’s debt with respect to the subsidiary’s cash flows. B) has a higher priority of claims to a subsidiary’s cash flows than the subsidiary’s debt. C) has a lower priority of claims to a subsidiary’s cash flows than the subsidiary’s debt.

48) Duration and convexity are most likely to produce more accurate estimates of interest rate risk when the term structure of yield volatility is: A) downward sloping. B) upward sloping. C) flat.

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49) Holding other factors constant, the interest rate risk of a coupon bond is higher when the bond's: A) yield to maturity is lower. B) coupon rate is higher. C) current yield is higher.

50)

If the term structure of yield volatility slopes upward: A) short-term interest rates are less than long-term interest rates. B) long-term interest rates are more variable than short-term interest rates. C) forward interest rates are higher than spot interest rates.

51) An investment advisor states, “An investor’s annualized holding period return from investing in a bond consists of three parts: the coupon interest payments, the return of principal, and any capital gain or loss that the investor realizes on the bond.” The advisor is: A) incorrect, because these are not the only sources of return from investing in a bond. B) incorrect, because an investor who holds a bond to maturity will not realize a capital gain or loss. C) correct.

52) All else equal, which of the following is least likely to increase the interest rate risk of a bond? A) A longer maturity. B) A decrease in the YTM. C) Inclusion of a call feature.

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Answer Key Test name: Fixed Income 1) C The no-arbitrage price of a bond is determined by discounting each of its cash flows at the appropriate spot rate. Any difference between the no-arbitrage price and the market price of a bond represents a potential arbitrage profit. = 19.80 + 19.51 + 19.13 + 18.48 + 879.86 = $956.78 976 − 956.78 = $19.22

2) B This coupon payment is computed as follows:

3) C First, find the annual yield to maturity of the bond as: FV = $1,000; PMT = $65; N = 10; PV = −1,089.25; CPT → I/Y = 5.33%. Then, find the semiannual-bond basis yield as:2 × [(1 + 0.0533)0.5 − 1] = 0.0526 = 5.26%. 4) B Yield curves are typically constructed for bonds of the same or similar issuers, such as a government bond yield curve or AA rated corporate bond yield curve. 5) C Call protection in the context of a CMBS refers to protection against prepayment risk. Structuring a CMBS with a residual (equity or firstloss) tranche provides investors in the senior tranches with CMBS- level call protection. Prepayment lockout periods and yield maintenance charges are examples of loan- level call protection because they apply to the individual loans. 6) C Version 1

The lowest possible reference rate is zero. If this occurs, the coupon on a floating-rate note cannot go lower than its quoted margin. Hence, the quoted margin is a floor coupon for a floating-rate note. The coupon on an inverse floater is determined by a formula such as “15% − 1.5 × reference rate.” If the reference rate goes to zero, the coupon on this inverse floater can go no higher than 15%. 7) C Required reserves are deposits with a country’s central bank. Banks that deposit more than the required amount with the central bank are said to have excess reserves and may lend these to other banks. This lending is said to take place in the central bank funds market and the interest rates on such loans are known as central bank funds rates. 8) B An appropriate reference rate for a floating-rate note should match its currency and the frequency with which its coupon rate is reset, such as 90-day yen Libor for a yen-denominated note that resets quarterly. 9) B Covenants are classified as negative or affirmative. Affirmative covenants specify administrative actions a bond issuer is required to take, such as maintaining insurance coverage on assets pledged as collateral. Negative covenants are restrictions on a bond issuer’s actions, such as preventing an issuer from selling any assets that have been pledged as collateral or pledging them again as collateral for additional debt. 10) C

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The coupon rate is set at a fixed rate determined via auction. This is called the real rate. The principal that serves as the basis of the coupon payment and the maturity value is adjusted semiannually. Because of the possibility of deflation, the adjusted principal value may be less than par (however, at maturity the Treasury redeems the bonds at the greater of the inflation-adjusted principal and the initial par value). 11) C The identity of the lender (i.e., the bondholder) is not specified in a bond’s indenture because a bond may be traded during its life. An indenture or trust deed is a legal contract that specifies a bond issuer’s obligations and restrictions. The indenture may include covenants that require the issuer to take or refrain from taking certain actions and may specify the source of funds for repayment, such as a project to be funded or the taxing power of a government. 12) C The coupon rate is set in the bond agreement (indenture) and cannot be changed unilaterally. Non- interest rate indexed floaters are indexed to a commodity price such as oil or aluminum. Business results could be impacted by numerous factors other than aluminum prices. Both of the other choices are true. By linking the coupon payments directly to the price of aluminum (meaning that when aluminum prices increase, the coupon rate increases and vice versa), the noninterest index floater allows Allcans to protect its credit rating during adverse circumstances. 13) B

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The following relationship has to hold: (1 + spot rate0,0.5/2)1 × (1 + forward rate0.5,2/2)3 = (1 + spot rate0,2/2)4. For this relationship to hold the forward rate has to be less than 6%. 14) B The flat price of the bond is the quoted price, 89.14% of par value, which is $891.40. 15) B The current yield is computed as: (Annual Cash Coupon Payment) / (Current Bond Price). The annual coupon is: ($1,000)(0.0775) = $77.50. The current yield is then: ($77.50) / ($1,012.45) = 0.0765 = 7.65%. 16) C A waterfall structure, where principal losses are allocated first to the lowest priority securities issued, would most likely describe auto loan ABS or credit card ABS, which often have a senior-subordinated structure. Agency RMBS are pass-through securities and do not have a senior-subordinated structure. 17) B Bond Y will have the higher Z-spread due to the call option embedded in the bond. This option benefits the issuer, and investors will demand a higher yield to compensate for this feature. The option-adjusted spread removes the value of the option from the spread calculation, and would always be less than the Z-spread for a callable bond. Since Bond X is noncallable, the Z-spread and the OAS will be the same. 18) B

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A renegotiable or rollover mortgage has an initial fixed-rate period after which the interest rate changes to another fixed rate. A hybrid mortgage has an initial fixed-rate period after which the interest rate changes to a variable rate. A convertible mortgage may be changed from fixed-rate to variable-rate or from variable-rate to fixed-rate at the borrower’s option. 19) C The support tranches are exposed to high levels of prepayment risk, not credit risk. 20) B Bond dealers frequently use repurchase agreements as sources of funding. When a bond dealer enters a repo as the lender instead of the borrower, the agreement is referred to as a reverse repo. 21) B Spot Rates: Year 1 = 7%. Year 2 = [(1.07)(1.0815)]1/2 − 1 = 7.57%. Year 3 = [(1.07)(1.0815)(1.103)]1/3 − 1 = 8.48%. Year 4 = [(1.07)(1.0815)(1.103)(1.120)]1/4 − 1 = 9.35%. Bond Value: N = 1; FV = 110; I/Y = 7; CPT → PV = 102.80 N = 2; FV = 110; I/Y = 7.57; CPT → PV = 95.06 N = 3; FV = 110; I/Y = 8.48; CPT → PV = 86.17 N = 4; FV = 1,110; I/Y = 9.35; CPT → PV = 776.33 102.80 + 95.06 + 86.17 + 776.33 = 1,060.36 22) C

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Securitization reduces the cost of funding the assets. One way that is accomplished is through the transfer of the underlying financial assets to a special purpose entity so that securities holders have clear legal claim to them, something they may not have if they were to invest only in the securities of the securitizer, such as a bank. Securitization does not have improved collectability as a primary benefit. Problem loans are not good candidates for securitization because institutional investors require a minimum credit quality and even well performing loans can require internal or external credit enhancement for the securitized assets. 23) B A coupon bond will have a positive current yield. It will not have a capital gain because its price will increase toward par along its constantyield price trajectory as long as its YTM remains constant. 24) C The interest rate cap benefits the borrower who issues a floating rate bond. The cap places a restriction on how high the coupon rate can become during a rising interest rate environment. Therefore, the floating rate borrower is protected against ever-rising interest rates. 25) B A 10-year spot rate is the yield-to-maturity on a 10-year zero-coupon security, and is the appropriate discount rate for the year 10 cash flow for a 20-year (or any maturity greater than or equal to 10 years) bond. Spot rates are used to value bonds and to ensure that bond prices eliminate any possibility for arbitrage resulting from buying a coupon security, stripping it of its coupons and principal payment, and reselling the strips as separate zero-coupon securities. The yield to maturity on a 10-year bond is the (complex) average of the spot rates for all its cash flows.

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26) A The full price is equal to the flat or clean price plus interest accrued from the last coupon date. Here, the flat price is 1,000 × 104.75%, or 1,000 × 1.0475 = 1,047.50. Thus, the full price = 1,047.50 + 33.50 = 1,081.00. 27) B All automobile loan ABS have some sort of credit enhancement to make them attractive to institutional investors. 28) A For a bond with an embedded call option, the OAS is less than its zerovolatility spread by the option cost. Therefore, the zero-volatility spread is greater than the OAS for callable bonds. If the embedded call option has any value to the issuer, a callable bond with an OAS of 75 basis points will have a Z- spread that is greater than 75 basis points. Because the OAS represents the bond’s spread to the spot yield curve excluding the effect of the embedded option, it does not include any compensation for the volatility risk related to the option. The implied cost of an embedded option is the difference between the bond’s zerovolatility spread (not the nominal spread) and its OAS. 29) B

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The key term here is coupon bond. While an investor in a fixed-coupon bond can usually eliminate interest rate risk by holding a bond until maturity, the same is not true for reinvestment risk. The receipt of periodic coupon payments exposes the investor to reinvestment risk. A noncallable bond reduces reinvestment risk by reducing the risk of repayment. Thus, an investor most concerned with reinvestment risk would prefer a noncallable bond to a callable bond. Since lower coupon bonds have lower reinvestment risk, this same investor would prefer a lower coupon bond to a higher coupon bond. (Study Session 14, Module 42.2, LOS 42.f, Study Session 15, Module 46.1, LOS 46.a) 30) B The value of a bond calculated using appropriate spot rates is its noarbitrage value. If no arbitrage opportunities are present, this value is equal to the market price of a bond. 31) C As they are most often custom debt instruments, medium-term notes typically have less liquidity than a regular bond issue from the same issuer. Medium-term notes can have any maturity and are sold through agents. 32) B The option cost is the difference between the zero volatility spread and the OAS, or 150 − 75 = 75 bp. With a flat yield curve, the G-spread and zero volatility spread will be the same. 33) A

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This bond is priced at a discount to par value because its 4% coupon is less than its 5.2% yield to maturity. As the bond gets closer to maturity, the discount will amortize toward par value, which means its price will increase if its yield remains unchanged. For its price to remain unchanged, its yield would have to increase. Price with 10 years to maturity: N = 10; I/Y = 5.2; PMT = 40; FV = 1,000; CPT PV = −908.23 Yield with 8 years to maturity: N = 8; PMT = 40; FV = 1,000; PV = −908.23; CPT I/Y = 5.446% 34) A The benchmark yield increased, which suggests macroeconomic factors were unfavorable for bond prices overall. The corporate bond’s spread to its benchmark decreased from 250 basis points to 225 basis points, which suggests microeconomic factors were favorable for the bond’s price. 35) C Compared to portfolio duration based on the cash flow yield of the portfolio, portfolio duration calculated as a weighted average of the durations of the individual bonds in the portfolio is easier to calculate and can be used for bonds with embedded options. Portfolio duration calculated using the cash flow yield for the entire portfolio is theoretically more correct. 36) C With Macaulay duration equal to the investment horizon, market price risk and reinvestment risk approximately offset and the annualized horizon return should be close to the yield to maturity at purchase. 37) B Version 1

Credit risk is calculated with the probability of default (estimated from the bond rating) and the estimated recovery value should the bond default. Yield volatility is combined with duration to estimate the price risk of a bond. 38) B Modified duration is less than Macaulay duration. The effective duration of a putable bond is less than its modified duration ignoring the put option. 39) B Credit risk is calculated with the probability of default (estimated from the bond rating) and the estimated recovery value should the bond default. Yield volatility is combined with duration to estimate the price risk of a bond. 40) B Modified duration is less than Macaulay duration. The effective duration of a putable bond is less than its modified duration ignoring the put option. 41) B 935(1.035)30 = $2,624 Bond coupons: 30 × 35 = $1,050 Principal repayment: $1,000 2,624 − 1,000 − 1050 = $574 required reinvestment income 42) C If the investment horizon is shorter than the Macaulay duration, the price impact of a decrease in YTM dominates the loss of reinvestment income and the realized yield will be higher than the YTM at purchase. 43) A

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Steven’s higher EBITDA/interest ratio is consistent with a higher credit rating than Joseph but its higher debt-to-capital ratio is consistent with a lower credit rating. Steven is most likely to have the same credit rating as Joseph. 44) C Other things being equal, the amount of reinvestment risk embedded in a bond will decrease with lower coupons because there will be a lesser dollar amount to reinvest and with shorter maturities because the reinvestment period is shorter. 45) B The only true statement is that putable bonds will have less price volatility at higher yields. At higher yields the put becomes more valuable and reduces the decline in price of the putable bond relative to the option-free bond. On the other hand, when yields are low, the put option has little or no value and the putable bond will behave much like an option-free bond. Therefore at low yields a putable bond will not have more price volatility nor will it have less price volatility than a similar option-free bond. 46) A We can use duration and convexity to estimate the price effect of changes in spread in the same way we use them to estimate the price effect of changes in yield: Percent change in bond value = −duration (change in yield or spread) + (1/2) (convexity) (squared change in yield or spread) No adjustment for credit risk is needed and an analyst should use modified or effective duration. 47) C

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Structural subordination means that cash flows from a subsidiary are used to pay the subsidiary’s debt before they may be paid to the parent company to service its debt. As a result, parent company debt is effectively subordinate to the subsidiary's debt. 48) C Duration and convexity assume the yield curve shifts in a parallel manner. A downward (upward) sloping term structure of yield volatility suggests shifts in the yield curve are likely to be non-parallel because short-term interest rates are more (less) volatile than long-term interest rates. 49) A In this case the only determinant that will cause higher interest rate risk is having a low yield to maturity. A higher coupon rate and a higher current yield will result in lower interest rate risk. 50) B If the term structure of yield volatility slopes upward, long-term interest rates are more variable than short-term interest rates. 51) A The advisor’s description of the sources of return from investing in a bond is incomplete because it does not include the income from reinvesting the bond’s coupon payments. Although it is true that an investor who holds a bond to maturity will not realize a capital gain or loss, this is not why the advisor’s statement is incorrect. 52) C Inclusion of a call feature will decrease the duration of a fixed income security. The other choices increase duration.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Portfolios that plot on the security market line in equilibrium: A) have only systematic (beta) risk. B) may be concentrated in only a few stocks. C) must be well diversified.

2) Which of the following statements regarding the covariance of rates of return is least accurate? A) Covariance is positive if two variables tend to both be above their mean values in the same time periods. B) Covariance is not a very useful measure of the strength of the relationship between rates of return. C) If the covariance is negative, the rates of return on two investments will always move in different directions relative to their means.

All portfolios on the capital market line: A) contain different risky assets. B) are perfectly positively correlated. C) are unrelated except that they all contain the risk-free asset.

4) Which of the following statements about active and passive asset management is most accurate? A) Active management may use fundamental analysis, technical analysis, or a “smart beta” approach to outperform a chosen benchmark. B) Active management has been gaining market share over time versus passive management. C) Passive management’s share of industry revenues is smaller than its share of assets under management.

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5) When comparing portfolios that plot on the security market line (SML) to those that plot on the capital market line (CML), a financial analyst would most accurately state that portfolios that lie on the SML: A) have only systematic risk, while portfolios on the CML have both systematic and unsystematic risk. B) are not necessarily well diversified, while portfolios on the CML are well diversified. C) are not necessarily priced at their equilibrium values, while portfolios on the CML are priced at their equilibrium values.

6) An investor with a buy-and-hold strategy who makes quarterly deposits into an account should most appropriately evaluate portfolio performance using the portfolio’s: A) money-weighted return. B) geometric mean return. C) arithmetic mean return.

Three portfolios have the following expected returns and risk:

Portfolio Jones Kelly Lewis

Expected return 4% 6% 7%

Standard deviation 2% 5% 8%

A risk-averse investor choosing from these portfolios could rationally select:

A) Jones or Kelly, but not Lewis. B) Jones, but not Kelly or Lewis. C) any of these portfolios.

8) An investor buys one share of stock for $100. At the end of year one she buys three more shares at $89 per share. At the end of year two she sells all four shares for $98 each. The stock paid a dividend of $1.00 per share at the end of year one and year two. What is the investor’s time-weighted rate of return? Version 1

A) 6.35%. B) 0.06%. C) 11.24%.

9) Charlie Smith holds two portfolios, Portfolio X and Portfolio Y. They are both liquid, well-diversified portfolios with approximately equal market values. He expects Portfolio X to return 13% and Portfolio Y to return 14% over the upcoming year. Because of an unexpected need for cash, Smith is forced to sell at least one of the portfolios. He uses the security market line to determine whether his portfolios are undervalued or overvalued. Portfolio X's beta is 0.9 and Portfolio Y's beta is 1.1. The expected return on the market is 12% and the risk-free rate is 5%. Smith should sell: A) either portfolio X or Y because they are both properly valued. B) portfolio Y only. C) both portfolios X and Y because they are both overvalued.

10)

When the market is in equilibrium, all: A) assets plot on the CML. B) investors hold the market portfolio. C) assets plot on the SML.

11)

In equilibrium, an inefficient portfolio will plot: A) on the CML and below the SML. B) below the CML and below the SML. C) below the CML and on the SML.

12)

According to the capital asset pricing model (CAPM):

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A) a stock with high risk, measured as standard deviation of returns, will have high expected returns in equilibrium. B) an investor who is risk averse should hold at least some of the risk-free asset in his portfolio. C) all investors who take on risk will hold the same risky-asset portfolio.

13) On January 1, Jonathan Wood invests $50,000. At the end of March, his investment is worth $51,000. On April 1, Wood deposits $10,000 into his account, and by the end of June, his account is worth $60,000. Wood withdraws $30,000 on July 1 and makes no additional deposits or withdrawals the rest of the year. By the end of the year, his account is worth $33,000. The time-weighted return for the year is closest to: A) 5.5%. B) 7.0%. C) 10.4%.

14)

Which of the following statements about the efficient frontier is least accurate?

A) The efficient frontier shows the relationship that exists between expected return and total risk in the absence of a risk-free asset. B) Portfolios falling on the efficient frontier are fully diversified. C) Investors will want to invest in the portfolio on the efficient frontier that offers the highest rate of return.

15) A model that estimates expected excess return on a security based on the ratio of the firm’s book value to its market value is best described as a: A) single-factor model. B) multifactor model. C) market model.

16)

A portfolio’s excess return per unit of systematic risk is known as its:

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A) Treynor measure. B) Jensen’s alpha. C) Sharpe ratio.

17) An analyst wants to determine whether Dover Holdings is overvalued or undervalued, and by how much (expressed as percentage return). The analyst gathers the following information on the stock: ● Market standard deviation = 0.70 ● Covariance of Dover with the market = 0.85 ● Dover’s current stock price (P0) = $35.00 ● The expected price in one year (P1) is $39.00 ● Expected annual dividend = $1.50 ● 3-month Treasury bill yield = 4.50%. ● Historical average S&P 500 return = 12.0%. Dover Holdings stock is: A) overvalued by approximately 1.8%. B) undervalued by approximately 2.1%. C) undervalued by approximately 1.8%.

18) Which of the following is the most accurate description of the market portfolio in Capital Market Theory? The market portfolio consists of all: A) risky assets in existence. B) risky and risk-free assets in existence. C) equity securities in existence.

19)

Which of the following is least likely considered a source of systematic risk for bonds? A) Market risk. B) Purchasing power risk. C) Default risk.

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20)

A stock's abnormal rate of return is defined as the: A) expected risk-adjusted rate of return minus the market rate of return. B) actual rate of return less the expected risk-adjusted rate of return. C) rate of return during abnormal price movements.

21) Kendra Jackson, CFA, is given the following information on two stocks, Rockaway and Bridgeport. ● Covariance between the two stocks = 0.0325 ● Standard Deviation of Rockaway’s returns = 0.25 ● Standard Deviation of Bridgeport’s returns = 0.13 Assuming that Jackson must construct a portfolio using only these two stocks, which of the following combinations will result in the minimum variance portfolio? A) 80% in Bridgeport, 20% in Rockaway. B) 50% in Bridgeport, 50% in Rockaway. C) 100% in Bridgeport.

22) Which of the following statements best describes an investment that is not on the efficient frontier? A) The portfolio has a very high return. B) There is a portfolio that has a lower return for the same risk. C) There is a portfolio that has a lower risk for the same return.

23) According to the CAPM, a rational investor would be least likely to choose as his optimal portfolio: A) a 100% allocation to the risk-free asset. B) a 130% allocation to the market portfolio. C) the global minimum variance portfolio.

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24) James Franklin, CFA, has high risk tolerance and seeks high returns. Based on capital market theory, Franklin would most appropriately hold: A) the market portfolio as his only risky asset. B) a high risk biotech stock, as it will have high expected returns in equilibrium. C) a high-beta portfolio of risky assets financed in part by borrowing at the risk-free rate.

25)

All portfolios that lie on the capital market line: A) contain at least some positive allocation to the risk-free asset. B) contain the same mix of risky assets unless only the risk-free asset is held. C) have some unsystematic risk unless only the risk-free asset is held.

26) Which of the following pooled investment shares is least likely to trade at a price different from its NAV? A) Exchange-traded fund shares. B) Closed-end mutual fund shares. C) Open-end mutual fund shares.

27) Smith has more steeply sloped risk-return indifference curves than Jones. Assuming these investors have the same expectations, which of the following best describes their risk preferences and the characteristics of their optimal portfolios? Smith is: A) less risk averse than Jones and will choose an optimal portfolio with a lower expected return. B) more risk averse than Jones and will choose an optimal portfolio with a higher expected return. C) more risk averse than Jones and will choose an optimal portfolio with a lower expected return.

28) When a risk-free asset is combined with a portfolio of risky assets, which of the following is least accurate?

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A) The standard deviation of the return for the newly created portfolio is the standard deviation of the returns of the risky asset portfolio multiplied by its portfolio weight. B) The variance of the resulting portfolio is a weighted average of the returns variances of the risk-free asset and of the portfolio of risky assets. C) The expected return for the newly created portfolio is the weighted average of the return on the risk-free asset and the expected return on the risky asset portfolio.

29) An investor buys a non-dividend paying stock for $100 at the beginning of the year with 50% initial margin. At the end of the year, the stock price is $95. Deflation of 2% occurred during the year. Which of the following return measures for this investment will be greatest? A) Leveraged return. B) Real return. C) Nominal return.

30)

Which of the following is not necessarily included in an investment policy statement? A) A benchmark against which to judge performance. B) An investment strategy based on the investor’s objectives and constraints. C) Procedures to update the IPS when circumstances change.

31)

A head and shoulders pattern is most likely to precede a reversal in trend if:

A) volume decreases between the left shoulder and the head, then increases between the head and the right shoulder. B) the left shoulder, the head, and the right shoulder occur on increasing volume. C) the left shoulder, the head, and the right shoulder occur on decreasing volume.

32)

Which of the following uses of data is most accurately described as curation?

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A) An analyst adjusts daily stock index data from two countries for their different market holidays. B) A data technician accesses an offsite archive to retrieve data that has been stored there. C) An investor creates a word cloud from financial analysts’ recent research reports about a company.

33)

The advantages of using technical analysis include: A) the incorporation of psychological reasons behind price changes. B) complete objectivity. C) ease in interpreting reasons behind stock price trends.

34) While assessing an investor’s risk tolerance, a financial adviser is least likely to ask which of the following questions? A) “What rate of investment return do you expect?” B) “Is your home life stable?” C) “How much insurance coverage do you have?”

35) A government decides it will privatize vehicle registrations if the province’s auto insurance companies can record and maintain ownership titles using distributed ledger technology. This application of distributed ledger technology is best characterized as: A) blockchain. B) tokenization. C) smart contracts.

36)

The resistance level signifies the price at which a stock's supply would be expected to: A) cause the stock price to "break out". B) increase substantially. C) decrease substantially.

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37) When performing strategic asset allocation, properly defined and specified asset classes should: A) each contain assets that have a broad range of risk and expected return. B) have high returns correlations with other asset classes. C) approximate the investor's total investable universe as a group.

38) An endowment is required by statute to pay out a minimum percentage of its asset value each period to its beneficiaries. This investment constraint is best classified as: A) unique circumstances. B) liquidity. C) legal and regulatory.

39) The manager of the Fullen Balanced Fund is putting together a report that breaks out the percentage of the variation in portfolio return that is explained by the target asset allocation, security selection, and tactical variations from the target, respectively. Which of the following sets of numbers was the most likely conclusion for the report? A) 33%, 33%, 33%. B) 50%, 25%, 25%. C) 90%, 6%, 4%.

40) Based on a questionnaire about investment risk, an advisor concludes that an investor’s risk tolerance is high, but based on an analysis of the client's income needs and time horizon, he concludes the investor's risk tolerance is low. The most appropriate action for the advisor is to: A) educate the client about investment risk and re-administer the questionnaire. B) emphasize bonds over stocks. C) emphasize stocks over bonds.

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Answer Key Test name: Portfolio Management 1) B All portfolios plot on the SML in equilibrium according to the capital asset pricing model. 2) C Negative covariance means rates of return for one security will tend to be above its mean return in periods when the other is below its mean return, and vice versa. Positive covariance means that returns on both securities will tend to be above (or below) their mean returns in the same time periods. For the returns to always move in opposite directions, they would have to be perfectly negatively correlated. Negative covariance by itself does not imply anything about the strength of the negative correlation, it must be standardized by dividing by the product of the securities’ standard deviations of return. 3) B The introduction of a risk-free asset changes the Markowitz efficient frontier into a straight line. This straight efficient frontier line is called the capital market line (CML). Since the line is straight, the math implies that the returns on any two portfolios on this line will be perfectly, positively correlated with each other. Note: Whenra,b = 1, then the equation for risk changes tosport = WAsA + WBsB, which is a straight line. The risky assets for each portfolio on the CML are the same, the tangency (or market) portfolio of risky assets. 4) C

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Because fees for passive management are lower than fees for active management, passive management represents a smaller share of industry revenues than assets under management. Passive management has been gaining market share over time versus active management. Smart beta is a passive management strategy that focuses on a specific market risk factor. 5) B Although the risk measure on the capital market line diagram is total risk, all portfolios that lie on the CML are well diversified and have only systematic risk. This is because portfolios on the CML are all constructed from the risk-free asset and the (well-diversified) market portfolio. Any portfolio, including single securities, will plot along the SML in equilibrium. Their unsystematic risk can be significant, but it is not measured on the SML diagram because unsystematic risk is not related to expected return. Both the CML and the SML reflect relations that hold when prices are in equilibrium. 6) B Geometric mean return (time-weighted return) is the most appropriate method for performance measurement as it does not consider additions to or withdrawals from the account. 7) C Risk aversion means that to accept greater risk, an investor must be compensated with a higher expected return. For the three portfolios given, higher risk is associated with higher expected return. Therefore a risk-averse investor may select any of these portfolios. A risk-averse investor will not select a portfolio if another portfolio offers a higher expected return with the same risk, or lower risk with the same expected return. 8) B Version 1

The holding period return in year one is ($89.00 − $100.00 + $1.00) / $100.00 = −10.00%. The holding period return in year two is ($98.00 − $89.00 + $1.00) / $89 = 11.24%. The time-weighted return is [{1 + (−0.1000)}{1 + 0.1124}]1/2 − 1 = 0.06%. 9) B Portfolio X’s required return is 0.05 + 0.9 × (0.12 − 0.05) = 11.3%. It is expected to return 13%. The portfolio has an expected excess return of 1.7% Portfolio Y’s required return is 0.05 + 1.1 × (0.12 − 0.05) = 12.7%. It is expected to return 14%. The portfolio has an expected excess return of 1.3%. Since both portfolios are undervalued, the investor should sell the portfolio that offers less excess return. Sell Portfolio Y because its excess return is less than that of Portfolio X. 10) C When the market is in equilibrium, expected returns equal required returns. Since this means that all assets are correctly priced, all assets plot on the SML. By definition, all stocks and portfolios other than the market portfolio fall below the CML. (Only the market portfolio is efficient). 11) C An inefficient portfolio will plot below the CML. In equilibrium, all portfolios will plot on the SML. 12) C

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One of the assumptions of the CAPM is that all investors who hold risky assets will hold the same portfolio of risky assets (the market portfolio). Risk aversion means an investor will accept more risk only if compensated with a higher expected return. In capital market theory, all investors exhibit risk aversion, even an investor who is short the riskfree asset. In the CAPM, a stock’s risk is measured as its beta, not its standard deviation of returns. 13) C January − March return = 51,000 / 50,000 − 1 = 2.00% April − June return = 60,000 / (51,000 + 10,000) − 1 = −1.64% July − December return = 33,000 / (60,000 − 30,000) − 1 = 10.00% Time-weighted return = [(1 + 0.02)(1 − 0.0164)(1 + 0.10)] − 1 = 0.1036 or 10.36% 14) C The optimal portfolio for each investor is the highest indifference curve that is tangent to the efficient frontier. 15) A A model that estimates a stock’s expected excess return based only on the book-to-market ratio is a single-factor model. The market model is a single-factor model that estimates expected excess return based on a security’s sensitivity to the expected excess return of the market portfolio. A multifactor model would estimate expected excess return based on more than one factor. 16) A

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The Treynor measure is excess return relative to beta. The Sharpe ratio measures excess return relative to standard deviation. Jensen’s alpha measures a portfolio’s excess return relative to return of a portfolio on the SML that has the same beta. 17) A

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To determine whether a stock is overvalued or undervalued, we need to compare the expected return (or holding period return) and the required return (from Capital Asset Pricing Model, or CAPM). Step 1: Calculate Expected Return (Holding period return) The formula for the (one-year) holding period return is: HPR = (D1 + S1 − S0) / S0, where D = dividend and S = stock price. Here, HPR = (1.50 + 39 − 35) / 35 = 15.71% Step 2: Calculate Required Return The formula for the required return is from the CAPM:RR = Rf + (ERM − Rf) × Beta Here, we are given the information we need except for Beta. Remember that Beta can be calculated with:Betastock = [covS,M] / [σ2M]. Here we are given the numerator and the denominator, so the calculation is: 0.85 / 0.702 = 1.73. RR = 4.50% + (12.0 − 4.50%) × 1.73 = 17.48%. Step 3: Determine over/under valuation The required return is greater than the expected return, so the security is overvalued. The amount = 17.48% − 15.71% = 1.77%. 18) A The market portfolio, in theory, contains all risky assets in existence. It does not contain any risk-free assets. Version 1

19) C Default risk is based on company-specific or unsystematic risk. 20) B Abnormal return = Actual return − expected risk-adjusted return 21) C First, calculate the correlation coefficient to check whether diversification will provide any benefit. rBridgeport, Rockaway = covBridgeport, Rockaway / [( σBridgeport) × (σRockaway)] = 0.0325 / (0.13 × 0.25) = 1.00 Since the stocks are perfectly positively correlated, there are no diversification benefits and we select the stock with the lowest risk (as measured by variance or standard deviation), which is Bridgeport. 22) C The efficient frontier outlines the set of portfolios that gives investors the highest return for a given level of risk or the lowest risk for a given level of return. Therefore, if a portfolio is not on the efficient frontier, there must be a portfolio that has lower risk for the same return. Equivalently, there must be a portfolio that produces a higher return for the same risk. 23) C According to the CAPM, rational, risk-averse investors will optimally choose to hold a portfolio along the capital market line. This can range from a 100% allocation to the risk-free asset to a leveraged position in the market portfolio constructed by borrowing at the risk-free rate to invest more than 100% of the portfolio equity value in the market portfolio. The global minimum variance portfolio lies below the CML and is not an efficient portfolio under the assumptions of the CAPM. 24) A Version 1

According to capital market theory, all investors will choose a combination of the market portfolio and borrowing or lending at the risk-free rate; that is, a portfolio on the CML. (Study Session 18, Module 53.1, LOS 53.a) 25) B All portfolios on the CML include the same tangency portfolio of risky assets, except the intercept (all invested in risk-free asset). The tangency portfolio contains none of the risk-free asset and “borrowing portfolios” can be constructed with a negative allocation to the risk-free asset. Portfolios on the CML are efficient (well-diversified) and have no unsystematic risk. (Study Session 18, Module 53.1, LOS 53.b, 53.c) 26) C Shares of open-end mutual funds trade at NAV. The others may deviate from NAV. 27) C Steeply sloped risk-return indifference curves indicate that a greater increase in expected return is required as compensation for assuming an additional unit of risk, compared to less-steep indifference curves. The more risk-averse Smith will choose an optimal portfolio with lower risk and a lower expected return than the less risk-averse Jones's optimal portfolio. 28) B This statement is not correct; the standard deviation of returns for the resulting portfolio is a weighted average of the returns standard deviation of the risk-free asset (zero) and the returns standard deviation of the risky-asset portfolio.

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29) B No calculations are needed. The real return is greater than the nominal return because the inflation rate is negative. The leveraged return is more negative than the nominal return because the investment lost value and leverage magnifies the loss. 30) C At a minimum an IPS should contain a clear statement of client circumstances and constraints, an investment strategy based on these, and some benchmark against which to evaluate the account performance. The investment must periodically update the IPS as circumstances change, but explicit procedures for these updates are not necessarily included in the IPS itself. 31) C Decreasing volume on each of the high prices in a head and shoulders pattern (or each of the low prices in an inverse head and shoulders) suggests weakening in the supply and demand forces that were driving the price trend. 32) A Curation is ensuring the quality of data—for example, by adjusting for bad or missing data. Word clouds are a visualization technique. Moving data from a storage medium to where they are needed is referred to as transfer. 33) A Technical analysis avoids having to use fundamental data and adjusting for accounting problems, incorporates psychological as well as economic reasons behind price changes, and tells WHEN to buy; not WHY investors are buying. Drawbacks include subjective interpretation of charts and graphs. 34) A

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While the degree of risk tolerance will have an affect on expected returns, assessing the risk tolerance comes first, and the resulting set of feasible returns follows. The other questions address risk tolerance. 35) B Tokenization refers to maintaining ownership records for physical assets on a distributed ledger. This might, but would not necessarily, use a blockchain, which is a subcategory of distributed ledgers. Smart contracts are computerized agreements designed to automatically carry out certain actions if defined conditions are met. 36) B Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling. Generally, a resistance level tends to develop after a stock has experienced a steady decline from a higher price level. Technicians believe that the decline in price will cause some investors who acquired the stock at a higher price to look for an opportunity to sell it near their break-even points. Therefore, the supply of stock owned by investors is overhanging the market. When the price rebounds to the target price set by these investors, this overhanging supply of stock comes to the market and dramatically reverses the price increase on heavy volume. 37) C

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When taken together, the asset classes should approximate the investor's total investible universe. Properly defined and specified asset classes should each have a low return correlation to the other asset classes, and within each asset class should be assets that have similar expected risk and return. 38) C Legal and regulatory constraints are those that apply to an investor by law. 39) C Several studies support the idea that approximately 90% of the variation in a single portfolio’s returns can be explained by its target asset allocations, with security selection and tactical variations from the target (market timing) playing a much less significant role. In fact, for actively managed funds, actual portfolio returns are slightly less than those that would have been achieved if the manager strictly maintained the target allocation, thus illustrating the difficultly of improving returns through security selection or market timing. 40) B When determining an investor's risk tolerance, an advisor must consider both the investor's ability and willingness to bear risk. Even though the investor has a high willingness to bear risk, his ability to take risk (based on his financial situation) is low, and this should take precedence. A portfolio that emphasizes bonds over stocks has less investment risk and is the most appropriate choice.

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) A successful investor has decided to set up a scholarship fund for deserving students at her alma mater. Her plan is for the fund to be capable of awarding $25,000 annually in perpetuity. The first scholarship is to be awarded and paid out exactly four years from today. The funds will be deposited into an account immediately and will grow at a rate of 4%, compounded semiannually, for the foreseeable future. How much money must the investor donate today to fund the scholarship? A) $528,150. B) $549,487. C) $574,253.

2) An investment manager has a pool of five security analysts he can choose from to cover three different industries. In how many different ways can the manager assign one analyst to each industry? A) 60. B) 10. C) 125.

3) A company says that whether it increases its dividends depends on whether its earnings increase. From this we know:

A) P(dividend increase | earnings increase) is not equal to P(earnings increase). B) P(earnings increase | dividend increase) is not equal to P(earnings increase). C) P(both dividend increase and earnings increase) = P(dividend increase).

Determining the number of ways five tasks can be done in order, requires:

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A) only the factorial function. B) the permutation formula. C) the labeling formula.

Which of the following is an a priori probability?

A) The probability the Fed will lower interest rates prior to the end of the year. B) For a stock, based on prior patterns of up and down days, the probability of the stock having a down day tomorrow. C) On a random draw, the probability of choosing a stock of a particular industry from the S&P 500.

6) The probability of a new office building being built in town is 64%. The probability of a new office building that includes a coffee shop being built in town is 58%. If a new office building is built in town, the probability that it includes a coffee shop isclosest to:

A) 58%. B) 37%. C) 91%.

7) A firm is going to create three teams of four from twelve employees. How many ways can the twelve employees be selected for the three teams?

A) 34,650. B) 495. C) 1,320.

The "likelihood" of an event occurring is defined as:

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A) an unconditional probability. B) a conditional probability. C) a joint probability.

9) Compute the present value of a perpetuity with $100 payments beginning four years from now. Assume the appropriate annual interest rate is 10%.

A) $1,000. B) $751. C) $683.

10) Nikki Ali and Donald Ankard borrowed $15,000 to help finance their wedding and reception. The annual payment loan carries a term of seven years and an 11% interest rate. Respectively, the amount of the first payment that is interest and the amount of the second payment that is principal areapproximately:

A) $1,650; $1,702. B) $1,650; $1,468. C) $1,468; $1,702.

11) Marc Schmitz borrows $20,000 to be paid back in four equal annual payments at an interest rate of 8%. The interest amount in the second year’s payment would be:

A) $6038.40. B) $1116.90. C) $1244.90.

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12) Natalie Brunswick, neurosurgeon at a large U.S. university, was recently granted permission to take an 18-month sabbatical that will begin one year from today. During the sabbatical, Brunswick will need $2,500 at the beginning of each month for living expenses that month. Her financial planner estimates that she will earn an annual rate of 9% over the next year on any money she saves. The annual rate of return during her sabbatical term will likely increase to 10%. At the end of each month during the year before the sabbatical, Brunswick should save approximately: A) $3,505.00 B) $3,330.00 C) $3,356.00

13)

A parking lot has 100 red and blue cars in it.

● 40% of the cars are red. ● 70% of the red cars have radios. ● 80% of the blue cars have radios. What is the probability that the car is red given that it has a radio? A) 47%. B) 28%. C) 37%.

14) Optimal Insurance is offering a deferred annuity that promises to pay 10% per annum with equal annual payments beginning at the end of 10 years and continuing for a total of 10 annual payments. For an initial investment of $100,000, what will be the amount of the annual payments?

A) $42,212. B) $38,375. C) $25,937.

15)

The real risk-free rate can be thought of as:

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A) exactly the nominal risk-free rate reduced by the expected inflation rate. B) approximately the nominal risk-free rate plus the expected inflation rate. C) approximately the nominal risk-free rate reduced by the expected inflation rate.

16) A local loan shark offers 4 for 5 on payday. What it involves is that you borrow $4 from him and repay $5 on the next payday (one week later). What would the stated annual interest rate be on this loan, with weekly compounding? Assuming 52 weeks in one year, what is the effective annual interest rate on this loan? Select the respective answer choices closest to your numbers. A) 25%; 300%. B) 1,300%; 10,947,544%. C) 25%; 1,300%.

17) At a charity fundraiser there have been a total of 342 raffle tickets already sold. If a person then purchases two tickets rather than one, how muchmore likely are they to win?

A) 0.50. B) 2.10. C) 1.99.

18) Consider the following set of stock returns: 12%, 23%, 27%, 10%, 7%, 20%,15%. The third quartile is:

A) 23%. B) 20.0%. C) 21.5%.

19) Jim Franklin recently purchased a home for $300,000 on which he made a down payment of $100,000. He obtained a 30-year mortgage to finance the balance on which he pays a fixed annual rate of 6%. If he makes regular, fixed monthly payments, what loan balance will remain just after the 48th payment? Version 1

A) $186,109. B) $192,444. C) $189,229.

20) The probability of each of three independent events is shown in the table below. What is the probability of A and C occurring, but not B? Table 1: Event A B C

Probability of Occurrence 25% 15% 42%

A) 8.9%. B) 3.8%. C) 10.5%.

21)

Which of the following statements about probability is most accurate?

A) A conditional probability is the probability that two or more events will happen concurrently. B) An outcome is the calculated probability of an event. C) An event is a set of one or more possible values of a random variable.

22)

As the number of compounding periods increases, what is the effect on the EAR? EAR:

A) increases at an increasing rate. B) does not increase. C) increases at a decreasing rate.

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23) Elise Corrs, hedge fund manager and avid downhill skier, was recently granted permission to take a 4 month sabbatical. During the sabbatical, (scheduled to start in 11 months), Corrs will ski at approximately 12 resorts located in the Austrian, Italian, and Swiss Alps. Corrs estimates that she will need $6,000 at the beginning of each month for expenses that month. (She has already financed her initial travel and equipment costs.) Her financial planner estimates that she will earn an annual rate of 8.5% during her savings period and an annual rate of return during her sabbatical of 9.5%. How much does she need to put in her savings account at the end of each month for the next 11 months to ensure the cash flow she needs over her sabbatical? Each month, Corrs should save approximately:

A) $2,070. B) $2,080. C) $2,065.

24) Distribution X has a mean of 10 and a standard deviation of 20. Distribution Y is identical to Distribution X in all respects except that each observation in Distribution Y is three times the value of a corresponding observation in Distribution X. The mean and standard deviation of Distribution Y are closest to:

A) B) C)

Mean

Standard deviation

30 10 30

20 60 60

A) Option A B) Option B C) Option C

25)

Which of the following statements is least accurate regarding covariance? A) The covariance of a variable with itself is one. B) Covariance can only apply to two variables at a time. C) Covariance can exceed one.

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26) If 10 equal annual deposits of $1,000 are made into an investment account earning 9% starting today, how much will you have in 20 years? A) $42,165. B) $39,204. C) $35,967.

27) To compare the returns over the past three years on a mutual fund to the returns on a certificate of deposit with annual compounding over the same period, an analyst is least likely to use the mutual fund’s annual:

A) geometric mean return. B) arithmetic mean return. C) time-weighted return.

28) Selmer Jones has just inherited some money and wants to set some of it aside for a vacation in Hawaii one year from today. His bank will pay him 5% interest on any funds he deposits. In order to determine how much of the money must be set aside and held for the trip, he should use the 5% as a:

A) required rate of return. B) discount rate. C) opportunity cost.

29) Given the following table about employees of a company based on whether they are smokers or nonsmokers and whether or not they suffer from any allergies, what is the probability of both suffering from allergies and not suffering from allergies? Table 2: Suffer from Allergies Smoker Nonsmoker Total

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35 55 90

Don't Suffer from Allergies 25 185 210

Total 60 240 300

A) 1.00. B) 0.00. C) 0.50.

30) There is a 40% chance that an investment will earn 10%, a 40% chance that the investment will earn 12.5%, and a 20% chance that the investment will earn 30%. What is the mean expected return and the standard deviation of expected returns, respectively?

A) 17.5%; 5.75%. B) 15.0%; 7.58%. C) 15.0%; 5.75%.

31) An investor will receive an annuity of $5,000 a year for seven years. The first payment is to be received 5 years from today. If the annual interest rate is 11.5%, what is the present value of the annuity?

A) $23,185.00 B) $15,000.00 C) $13,453.00

32) Compute the standard deviation of a two-stock portfolio if stock A (40% weight) has a variance of 0.0015, stock B (60% weight) has a variance of 0.0021, and the correlation coefficient for the two stocks is −0.35?

A) 0.07%. B) 2.64%. C) 1.39%.

33) How much should an investor have in a retirement account on his 65th birthday if he wishes to withdraw $40,000 on that birthday and each of the following 14 birthdays, assuming his retirement account is expected to earn 14.5%?

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A) $272,977. B) $234,422. C) $274,422.

34) Based on the annual returns on a stock index over the last ten years, the arithmetic mean return is calculated as zero percent. It ismost likely that the average compound rate of return for an investment in the index over that period is:

A) positive. B) zero. C) negative.

35)

Which of the following rules is used to calculate an unconditional probability? A) Addition rule. B) Total probability rule. C) Multiplication rule.

36) The probability of A is 0.4. The probability ofAC is 0.6. The probability of (B | A) is 0.5, and the probability of(B | AC) is 0.2. Using Bayes’ formula, what is the probability of (A | B)?

A) 0.125. B) 0.625. C) 0.375.

37)

Which of the following is a joint probability? The probability that a: A) stock increases in value after an increase in interest rates has occurred. B) stock pays a dividend and splits next year. C) company merges with another firm next year.

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38) What is the standard deviation of a portfolio if you invest 30% in stock one (standard deviation of 4.6%) and 70% in stock two (standard deviation of 7.8%) if the correlation coefficient for the two stocks is 0.45? A) 6.83%. B) 0.38%. C) 6.20%.

39)

If X and Y are independent events, which of the following is most accurate? A) P(X or Y) = P(X) + P(Y). B) P(X or Y) = (P(X)) × (P(Y)). C) P(X | Y) = P(X).

40) Shawn Choate wants to choose a variable of study that has the most desirable statistical properties. The statistic he is presently considering has the following characteristics: ● The expected value of the sample mean is equal to the population mean. ● The variance of the sampling distribution is smaller than that for other estimators of the parameter. ● As the sample size increases, the standard error of the sample mean increases and the sampling distribution is centered more closely on the mean. Choate’s estimator is: A) unbiased and consistent. B) efficient and consistent. C) unbiased and efficient.

41) Which of the following could be the set of all possible outcomes for a random variable that follows a binomial distribution?

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A) (1,2). B) (0, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11). C) (-1, 0,1).

42) For a test of the equality of the mean returns of two non-independent populations based on a sample, the numerator of the appropriate test statistic is the: A) larger of the two sample means. B) average difference between pairs of returns. C) difference between the sample means for each population.

43) The number of days a particular stock increases in a given five-day period is uniformly distributed between zero and five inclusive. In a given five-day trading week, what is the probability that the stock will increase exactly three days?

A) 0.600. B) 0.167. C) 0.333.

44) Which of the following statements about a confidence interval for a population mean is most accurate? A) When a z-statistic is acceptable, a 95% confidence interval for a population mean is the sample mean plus-or-minus 1.96 times the sample standard deviation. B) If the population variance is unknown, a large sample size is required in order to estimate a confidence interval for the population mean. C) For a sample size of 30, using a t-statistic will result in a wider confidence interval for a population mean than using a z-statistic.

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45) A stock price decreases in one period and then increases by an equal amount in the next period. The investor calculates a holding period return for each period and calculates their arithmetic mean. The investor also calculates the continuously compounded rate of return for each period and calculates the arithmetic mean of these. Which of the arithmetic means will be greater?

A) The mean of the continuously compounded returns. B) The mean of the holding period returns. C) Neither, because both will equal zero.

46) Suppose the mean debt/equity ratio of the population of all banks in the United States is 20 and the population variance is 25. A banking industry analyst uses a computer program to select a random sample of 50 banks from this population and compute the sample mean. The program repeats this exercise 1000 times and computes the sample mean each time. According to the central limit theorem, the sampling distribution of the 1000 sample means will be approximately normal if the population of bank debt/equity ratios has:

A) any probability distribution. B) a normal distribution, because the sample is random. C) a Student's t-distribution, because the sample size is greater than 30.

47) For a certain class of junk bonds, the probability of default in a given year is 0.2. Whether one bond defaults is independent of whether another bond defaults. For a portfolio of five of these junk bonds, what is the probability that zero or one bond of the five defaults in the year ahead?

A) 0.4096. B) 0.7373. C) 0.0819.

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48) A researcher is testing whether the average age of employees in a large firm is statistically different from 35 years (either above or below). A sample is drawn of 250 employees and the researcher determines that the appropriate critical value for the test statistic is 1.96. The value of the computed test statistic is 4.35. Given this information, which of the following statements is least accurate? The test: A) indicates that the researcher is 95% confident that the average employee age is different than 35 years. B) indicates that the researcher will reject the null hypothesis. C) has a significance level of 95%.

49)

Cumulative Z-Table

z 1.2 1.3 1.4 1.5 1.6

0.04 0.8925 0.9099 0.9251 0.9382 0.9495

0.05 0.8944 0.9115 0.9265 0.9394 0.9505

0.06 0.8962 0.9131 0.9279 0.9406 0.9515

0.07 0.8980 0.9147 0.9292 0.9418 0.9525

0.08 0.8997 0.9162 0.9306 0.9429 0.9535

0.09 0.9015 0.9177 0.9319 0.9441 0.9545

Maria Huffman is the Vice President of Human Resources for a large regional car rental company. Last year, she hired Graham Brickley as Manager of Employee Retention. Part of the compensation package was the chance to earn one of the following two bonuses: if Brickley can reduce turnover to less than 30%, he will receive a 25% bonus. If he can reduce turnover to less than 25%, he will receive a 50% bonus (using a significance level of 10%). The population of turnover rates is normally distributed. The population standard deviation of turnover rates is 1.5%. A recent sample of 100 branch offices resulted in an average turnover rate of 24.2%. Which of the following statements ismost accurate?

A) Brickley should not receive either bonus. B) For the 50% bonus level, the critical value is -1.65 and Huffman should give Brickley a 50% bonus. C) For the 50% bonus level, the test statistic is -5.33 and Huffman should give Brickley a 50% bonus.

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50) A stock increased in value last year. Which will be greater, its continuously compounded or its holding period return?

A) Neither, they will be equal. B) Its continuously compounded return. C) Its holding period return.

51) Consider a random variable X that follows a continuous uniform distribution: 7 ≤ X ≤ 20. Which of the following statements isleast accurate?

A) F(10) = 0.23 B) F(12 ≤ X ≤ 16) = 0.307. C) F(21) = 0.00.

52)

A multivariate distribution is best defined as describing the behavior of: A) two or more independent random variables. B) two or more dependent random variables. C) a random variable with more than two possible outcomes.

53)

A p-value of 0.02% means that a researcher:

A) cannot reject the null hypothesis at either the 5% or 1% significance levels. B) can reject the null hypothesis at both the 5% and 1% significance levels. C) can reject the null hypothesis at the 5% significance level but cannot reject at the 1% significance level.

54) Which of the following statements regarding the central limit theorem (CLT) isleast accurate? The CLT:

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A) holds for any population distribution, assuming a large sample size. B) gives the variance of the distribution of sample means as σ2/n, where σ2 is the population variance and n is the sample size. C) states that for a population with mean µ and variance σ2, the sampling distribution of the sample means for any sample of size n will be approximately normally distributed.

55)

Which of the following statements about probability distributions ismostaccurate?

A) A binomial distribution gives the probabilities only for whole number outcomes for a random variable. B) A discrete uniform random variable has varying probabilities for each outcome that total to one. C) A continuous uniform distribution has a lower limit but no upper limit.

56)

When sampling from a population, themost appropriate sample size:

A) is at least 30. B) minimizes the sampling error and the standard deviation of the sample statistic around its population value. C) involves a trade-off between the cost of increasing the sample size and the value of increasing the precision of the estimates.

57) A discount brokerage firm states that the time between a customer order for a trade and the execution of the order is uniformly distributed between three minutes and fifteen minutes. If a customer orders a trade at 11:54 A.M., what is the probability that the order is executed after noon?

A) 0.250. B) 0.750. C) 0.500.

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58) In addition to the usual parameters that describe a normal distribution, to completely describe 10 random variables, a multivariate normal distribution requires knowing the:

A) 10 correlations. B) 45 correlations. C) overall correlation.

59)

Critical values from Student’s t-distribution for a two-tailed test at a 5%

significance level: df 28 29 30

2.048 2.045 2.042

A researcher wants to test a hypothesis that two variables have a population correlation coefficient equal to zero. For a sample size of 30, the appropriate critical value for this test is plus-or-minus: A) 2.048 B) 2.045 C) 2.042

60) What kind of test is being used for the following hypothesis and what would a z-statistic of 1.68 tell us about a hypothesis with the appropriate test and a level of significance of 5%, respectively? H0: B ≤ 0 HA: B > 0

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A) Two-tailed test; fail to reject the null. B) One-tailed test; reject the null. C) One-tailed test; fail to reject the null.

61)

Which of the following wouldleastlikely be categorized as a multivariate distribution?

A) The returns of the stocks in the DJIA. B) The return of a stock and the return of the DJIA. C) The days a stock traded and the days it did not trade.

62)

The sample mean is an unbiased estimator of the population mean because the:

A) sample mean provides a more accurate estimate of the population mean as the sample size increases. B) expected value of the sample mean is equal to the population mean. C) sampling distribution of the sample mean has the smallest variance of any other unbiased estimators of the population mean.

63) An analyst wants to determine whether the mean returns on two stocks over the last year were the same or not. What test should she use, assuming returns are normally distributed?

A) Chi-square test. B) Paired comparisons test. C) Difference in means test.

64)

Which of the following isleast likely a step in stratified random sampling?

A) The sub-samples are pooled to create the complete sample. B) The size of each sub-sample is selected to be the same across strata. C) The population is divided into strata based on some classification scheme.

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65) A range of estimated values within which the actual value of a population parameter will lie with a given probability of 1 − α is a(n): A) α percent point estimate. B) (1 − α) percent confidence interval. C) α percent confidence interval.

66) a:

The probability density function of a continuous uniform distribution isbest described by

A) line segment with a 45-degree slope. B) line segment with a curvilinear slope. C) horizontal line segment.

67)

The standard normal distribution ismost completely described as a:

A) symmetrical distribution with a mean equal to its median. B) normal distribution with a mean of zero and a standard deviation of one. C) distribution that exhibits zero skewness and no excess kurtosis.

68) Mei Tekei just celebrated her 22nd birthday. When she is 27, she will receive a $100,000 inheritance. Tekei needs funds for the down payment on a co-op in Manhattan and has found a bank that will give her the present value of her inheritance amount, assuming an 8.0% stated annual interest rate with continuous compounding. Will the proceeds from the bank be sufficient to cover her down payment of $65,000? A) Yes, Tekei will receive $68,058. B) No, Tekei will only receive $61,878. C) Yes, Tekei will receive $67,028.

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69) The variance of 100 daily stock returns for Stock A is 0.0078. The variance of 90 daily stock returns for Stock B is 0.0083. Using a 5% level of significance, the critical value for this test is 1.61. Themost appropriate conclusion regarding whether the variance of Stock A is different from the variance of Stock B is that the:

A) variances are not equal. B) variances are equal. C) variance of Stock B is significantly greater than the variance of Stock A.

70) An article in a trade journal suggests that a strategy of buying the seven stocks in the S&P 500 with the highest earnings-to-price ratio at the end of the calendar year and holding them until March 20 of the following year produces significant trading profits. Upon reading further, you discover that the study is based on data from 1993 to 1997, and the earnings-to-price ratio is calculated using the stock price on December 31 of each year and the annual reported earnings per share for that year. Which of the following biases isleast likely to influence the reported results?

A) Time-period bias. B) Look-ahead bias. C) Survivorship bias.

71) An analyst conducts a two-tailed test to determine if mean earnings estimates are significantly different from reported earnings. The sample size is greater than 25 and the computed test statistic is 1.25. Using a 5% significance level, which of the following statements is most accurate? A) To test the null hypothesis, the analyst must determine the exact sample size and calculate the degrees of freedom for the test. B) The analyst should reject the null hypothesis and conclude that the earnings estimates are significantly different from reported earnings. C) The analyst should fail to reject the null hypothesis and conclude that the earnings estimates are not significantly different from reported earnings.

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72) The average return on small stocks over the period 1926-1997 was 17.7%, and the standard deviation of the sample was 33.9%. Assuming returns are normally distributed, the 95% confidence interval for the return on small stocks next year is: A) −16.2% to 51.6%. B) −48.7% to 84.1%. C) 16.8% to 18.6%.

73) A sample of five numbers drawn from a population is (5, 2, 4, 5, 4). Which of the following statements concerning this sample ismostaccurate? A) The mean of the sample is ∑X / (n − 1) = 5. B) The sample variance is: ∑(x1 − mean of the sample) 2 / (n − 1) = 1.5. C) The sampling error of the sample mean is equal to the standard error of the sample.

74) A test of a hypothesis that the means of two normally distributed populations are equal based on two independent random samples:

A) is done with a t-statistic. B) is a paired-comparisons test. C) is based on a chi-square statistic.

75)

A cumulative distribution function for a random variable X is given as follows: x 5 10 15 20

F(x) 0.14 0.25 0.86 1.00

The probability of an outcome less than or equal to 10 is:

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A) 25%. B) 39%. C) 14%.

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Answer Key Test name: Quantitative Methods 1) B The investor has to ensure that the amount deposited now will grow into the amount needed to fund the perpetuity. With semiannual compounding, the effective annual rate (EAR) earned on funds in the account is:

2) A We can view this problem as the number of ways to choose three analysts from five analysts when the order they are chosen matters. The formula for the number of permutations is

3) B If two events A and B are dependent, then the conditional probabilities of P(A | B) and P(B | A) will not equal their respective unconditional probabilities (of P(A) and P(B), respectively). Both remaining choices may or may not occur, e.g., P(A | B) = P(B) is possible but not necessary. 4) A The factorial function, denoted n!, tells how many different ways n items can be arranged where all the items are included. 5) C Apriori probability is based on formal reasoning and inspection. Given the number of stocks in the airline industry in the S&P500 for example, the apriori probability of selecting an airline stock would be that number divided by 500. 6) C P(A|B) = P(AB) / P(B). The probability of a new coffee shop given a new office building is 58% / 64% = 90.63%. 7) A

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This problem is a labeling problem where the 12 employees will be assigned one of three labels. It requires the labeling formula. There are [(12!) / (4! × 4! × 4!)] = 34,650 ways to group the employees. 8) B “Likelihood” is defined in the Level I curriculum as a conditional probability, the probability of an observation, given a particular set of conditions (although, in general, it is often used as a synonym for probability). An unconditional probability refers to the probability of an event occurring regardless of past of future events. A joint probability is the probability that two events will both occur. 9) B Compute the present value of the perpetuity at (t = 3). Recall, the present value of a perpetuity or annuity is valued one period before the first payment. So, the present value at t = 3 is 100 / 0.10 = 1,000. Now it is necessary to discount this lump sum to t = 0. Therefore, present value att = 0 is 1,000 / (1.10)3 = 751. 10) A

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Step 1: Calculate the annual payment. Using a financial calculator (remember to clear your registers): PV = 15,000; FV = 0; I/Y = 11; N = 7; PMT = $3,183 Step 2: Calculate the portion of the first payment that is interest. Interest1 = Principal × Interest rate = (15,000 × 0.11) = 1,650 Step 3: Calculate the portion of the second payment that is principal. Principal1 = Payment − Interest1 = 3,183 − 1,650 = 1,533 (interest calculation is from Step 2) Interest2 = Principal remaining × Interest rate = [(15,000 − 1.533) × 0.11] = 1,481 Principal2 = Payment − Interest1 = 3,183 − 1,481 = 1,702 11) C With PV = 20,000, N = 4, I/Y = 8, computed Pmt = 6,038.42. Interest (Yr1) = 20,000(0.08) = 1600. Interest (Yr2) = (20,000 − (6038.42 − 1600))(0.08) = 1244.93 12) C

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This is a two-step problem. First, we need to calculate the present value of the amount she needs over her sabbatical. (This amount will be in the form of an annuity due since she requires the payment at the beginning of the month.) Then, we will use future value formulas to determine how much she needs to save each month (ordinary annuity). Step 1: Calculate present value of amount required during the sabbatical Using a financial calculator: Set to BEGIN Mode, then N = 12 × 1.5 = 18; I/Y = 10 / 12 = 0.8333; PMT = 2,500; FV = 0; CPT → PV = 41,974 Step 2: Calculate amount to save each month Make sure the calculator is set to END mode, then N = 12; I/Y = 9 / 12 = 0.75; PV = 0; FV = 41,974; CPT → PMT = -3,356 13) C Given a set of prior probabilities for an event of interest, Bayes’ formula is used to update the probability of the event, in this case that the car we already know has a radio is red. Bayes’ formula says to divide the Probability of New Information given Event by the Unconditional Probability of New Information and multiply that result by the Prior Probability of the Event. In this case, P(red car has a radio) = 0.70 is divided by 0.76 (which is the Unconditional Probability of a car having a radio (40% are red of which 70% have radios) plus (60% are blue of which 80% have radios) or ((0.40) × (0.70)) + ((0.60) × (0.80)) = 0.76.) This result is then multiplied by the Prior Probability of a car being red, 0.40. The result is (0.70 / 0.76) × (0.40) = 0.37 or 37%. 14) B 0

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$ 100,000

At the end of the 10-year deferral period, the value will be: $100,000 × (1 + 0.10)10 = $259,374.25. Using a financial calculator: N = 10, I = 10, PV = $100,000, PMT = 0, Compute FV = $259,374.25. Using a financial calculator and solving for a 10-year annuity due because the payments are made at the beginning of each period (you need to put your calculator in the “begin” mode), with a present value of $259,374.25, a number of payments equal to 10, an interest rate equal to ten percent, and a future value of $0.00, the resultant payment amount is $38,374.51. Alternately, the same payment amount can be determined by taking the future value after nine years of deferral ($235,794.77), and then solving for the amount of an ordinary (payments at the end of each period) annuity payment over 10 years. 15) C The approximate relationship between nominal rates, real rates and expected inflation rates can be written as: Nominal risk-free rate = real risk-free rate + expected inflation rate. Therefore we can rewrite this equation in terms of the real risk-free rate as: Real risk-free rate = Nominal risk-free rate − expected inflation rate The exact relation is: (1 + real)(1 + expected inflation) = (1 + nominal) 16) B Stated Weekly Rate = 5/4 − 1 = 25% Stated Annual Rate = 1,300% Annual Effective Interest Rate = (1 + 0.25)52 − 1 = 109,476.44 − 1 = 10,947,544% 17) C

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If you purchase one ticket, the probability of your ticket being drawn is 1/343 or 0.00292. If you purchase two tickets, your probability becomes 2/344 or 0.00581, so you are 0.00581 / 0.00292 = 1.99 times more likely to win. 18) A The third quartile is calculated as:Ly = (7 + 1) (75/100) = 6. When we order the observations in ascending order: 7%, 10%, 12%, 15%, 20%, 23%, 27%, “23%” is the sixth observation from the left. 19) C With monthly payments, we need a monthly rate: 6% / 12 = 0.5%. Next, solve for the monthly payment. The calculator keystrokes are: PV = 200,000; FV = 0; N = 360; I/Y = 0.5; CPT → PMT = −$1,199.10. The balance at any time on an amortizing loan is the present value of the remaining payments. There are 312 payments remaining after the 48th payment is made. The loan balance at this point is: PMT = −1,199.10; FV = 0; N = 312; I/Y = 0.5; CPT → PV = $189,228.90. Note that only N has to be changed to calculate this new present value; the other inputs are unchanged. 20) A Using the multiplication rule: (0.25)(0.42) − (0.25)(0.15)(0.42) = 0.08925 or 8.9% 21) C Conditional probability is the probability of one event happening given that another event has happened. An outcome is the numerical result associated with a random variable. 22) C

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There is an upper limit to the EAR as the frequency of compounding increases. In the limit, with continuous compounding the EAR = eAPR – 1. Hence, the EAR increases at a decreasing rate. 23) B This is a two-step problem. First, we need to calculate the present value of the amount she needs over her sabbatical. (This amount will be in the form of an annuity due since she requires the payment at the beginning of the month.) Then, we will use future value formulas to determine how much she needs to save each month. Step 1: Calculate present value of amount required during the sabbatical Using a financial calculator: Set to BEGIN Mode, then N = 4; I/Y = 9.5 / 12 = 0.79167; PMT = 6,000; FV = 0; CPT → PV = -23,719. Step 2: Calculate amount to save each month Using a financial calculator: Make sure it is set to END mode, then N = 11; I/Y = 8.5 / 12.0 = 0.70833; PV = 0; FV = 23,719; CPT → PMT= 2,081, or approximately $2,080. 24) C If the observations in Distribution Y are three times the observations in Distribution X, the mean and standard deviation of Distribution Y are three times the mean and standard deviation of Distribution X. The standard deviation of a data set measured in feet, for example, will be 3 times the standard deviation of the data set measured in yards (since 1 yard = 3 feet). 25) A The covariance of a variable with itself is its variance. Both remaining statements are true. Covariance represents the linear relationship between two variables and is not limited in value (i.e., it can range from negative infinity to positive infinity). 26) B Version 1

Switch to BGN mode. PMT = –1,000; N = 10, I/Y = 9, PV = 0; CPT → FV = 16,560.29. Remember the answer will be one year after the last payment in annuity due FV problems. Now PV10 = 16,560.29; N = 10; I/Y = 9; PMT = 0; CPT → FV = 39,204.23. Switch back to END mode. 27) B The arithmetic mean will overstate the average annual compound return of the mutual fund. The average annual compound rate of return is calculated as the geometric mean return over the period. The annual time-weighted return is a geometric mean return. 28) B He needs to figure out how much the trip will cost in one year, and use the 5% as a discount rate to convert the future cost to a present value. Thus, in this context the rate is best viewed as a discount rate. 29) B These are mutually exclusive, so the joint probability is zero. 30) B Mean = (0.4)(10) + (0.4)(12.5) + (0.2)(30) = 15% Var = (0.4)(10 − 15)2 + (0.4)(12.5 − 15)2 + (0.2)(30 − 15)2 = 57.5 Standard deviation = √57.5 = 7.58 31) B With PMT = 5,000; N = 7; I/Y = 11.5; value (at t = 4) = 23,185.175. Therefore, PV (at t = 0) = 23,185.175 / (1.115)4 = $15,000.68. 32) B The standard deviation of the portfolio is found by: [w12σ12 + w22σ22 + 2w1w2σ1σ2ρ1,2]0.5 = [(0.40)2(0.0015) + (0.60)2(0.0021) + (2)(0.40)(0.60)(0.0387)(0.0458)(−0.35)]0.5 = 0.0264, or 2.64%. Version 1

33) C This is an annuity due so set your calculator to the BGN mode. N = 15; I/Y = 14.5; PMT = –40,000; FV = 0; CPT → PV = 274,422.50. Switch back to END mode. 34) C Unless the returns were equal for all ten years (unlikely), the geometric mean return over the period will be less than the arithmetic mean return. 35) B Given a mutually exclusive and exhaustive set of outcomes for random variable R, the total probability rule for expected value states that the unconditional expected value of R is the sum of the conditional expected values of R for each outcome multiplied by their probabilities: E(R) = E(R | S1) × P(S1) + E(R | S2) × P(S2) + ... + E(R | Sn) × P(Sn) 36) B Using the total probability rule, we can compute the P(B): P(B) = [P(B | A) × P(A)] + [P(B | AC) × P(AC)] P(B) = [0.5 × 0.4] + [0.2 × 0.6] = 0.32 Using Bayes’ formula, we can solve for P(A | B): P(A | B) = [ P(B | A) ÷ P(B) ] × P(A) = [0.5 ÷ 0.32] × 0.4 = 0.625 37) B A joint probability applies to two events that both must occur. 38) C

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The standard deviation of the portfolio is found by: [W12σ12 + W22σ22 + 2W1W2σ1σ2r1,2]0.5, or [(0.30)2(0.046)2 + (0.70)2(0.078)2 + (2)(0.30)(0.70)(0.046)(0.078)(0.45)]0.5 = 0.0620, or 6.20%. 39) C Note that events being independent means that they have no influence on each other. It does not necessarily mean that they are mutually exclusive. Accordingly, P(X or Y) = P(X) + P(Y) − P(X and Y). By the definition of independent events, P(X|Y) = P(X). 40) C The estimator is unbiased because the expected value of the sample mean is equal to the population mean. The estimator is efficient because the variance of the sampling distribution is smaller than that for other estimators of the parameter. The estimator is not consistent. To be consistent, as the sample size increases, the standard error of the sample mean must decrease. 41) B This reflects a basic property of binomial outcomes. They take on whole number values that must start at zero up to the upperlimitn. The upper limit in this case is 11. 42) B A hypothesis test of the equality of the means of two normally distributed non-independent populations (hypothesized mean difference = 0) is a t-test and the numerator is the average difference between the sample returns over the sample period.

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43) B If the possible outcomes are X: (0,1,2,3,4,5), then the probability of each of the six outcomes is 1 / 6 = 0.167. 44) C Although thet-distribution begins to approach the shape of a normal distribution for large sample sizes, at a sample size of 30 at-statistic produces a wider confidence interval than az-statistic. A confidence interval for the population mean is the sample mean plus-or-minus the appropriate critical value times thestandard error, which is the standard deviation divided by the square root of the sample size. If a population is normally distributed, we can use at-statistic to construct a confidence interval for the population mean from a small sample, even if the population variance is unknown. 45) B The holding period returns will have a positive arithmetic mean. For example, a fall from 100 to 90 is a decrease of 10%, but a rise from 90 to 100 is an increase of 11.1%. The continuously compounded returns will have an arithmetic mean of zero. Using the same example values, ln (90/100) = −10.54% and ln (100/90) = 10.54%. 46) A The central limit theorem tells us that for a population with a mean µ and a finite variance σ2, the sampling distribution of the sample means of all possible samples of sizen will be approximately normally distributed with a mean equal to µ and a variance equal to σ2/n,no matter the distribution of the population, assuming a large sample size. 47) B

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The outcome follows a binomial distribution where n = 5 and p = 0.2. In this case p(0) = 0.85 = 0.3277 and p(1) = 5 × 0.84 × 0.2 = 0.4096, so P(X=0 or X=1) = 0.3277 + 0.4096. 48) C This test has asignificance levelof 5%. The relationship between confidence and significance is: significance level = 1 – confidence level. We know that the significance level is 5% because the sample size is large and the critical value of the test statistic is 1.96 (2.5% of probability is in both the upper and lower tails). 49) C

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Using the process of Hypothesis testing: Step 1: State the Hypothesis. For 25% bonus level -Ho: m ≥ 30% Ha: m < 30%; For 50% bonus level - Ho: m ≥ 25% Ha: m < 25%. Step 2: Select Appropriate Test Statistic. Here, we have a normally distributed population with a known variance (standard deviation is the square root of the variance) and a large sample size (greater than 30.) Thus, we will use thez-statistic. Step 3: Specify the Level of Significance. α = 0.10. Step 4: State the Decision Rule. This is a one-tailed test. The critical value for this question will be thez-statistic that corresponds to an α of 0.10, or an area to the left of the mean of 40% (with 50% to the right of the mean). Using thez-table (normal table), we determine that the appropriate critical value = -1.28(Remember that we highly recommend that you have the “common” z-statistics memorized!) Thus, we will reject the null hypothesis if the calculated test statistic is less than -1.28. Step 5: Calculate sample (test) statistics. Z (for 50% bonus) = (24.2 − 25) / (1.5 / √ 100) = −5.333. Z (for 25% bonus) = (24.2 − 30) / (1.5 / √ 100) = −38.67. Step 6: Make a decision. Reject the null hypothesis for both the 25% and 50% bonus level because the test statistic is less than the critical value. Thus, Huffman should give So berg a 50% bonus.The other statements are false. The critical value of −1.28 is based on the significance level, and is thus the same for both the 50% and 25% bonus levels. 50) C Version 1

When a stock increases in value, the holding period return is always greater than the continuously compounded return that would be required to generate that holding period return. For example, if a stock increases from $1 to $1.10 in a year, the holding period return is 10%. The continuously compounded rate needed to increase a stock's value by 10% is Ln(1.10) = 9.53%. 51) C F(21) = 1.00. For a cumulative distribution function, the expression F(x) refers to the probability of an outcome less than or equal to x. In this distribution all the possible outcomes are between 7 and 20. Therefore the probability of an outcome less than or equal to 21 is 100%. The other choices are true. A. F(10) = (10 − 7) / (20 − 7) = 3 / 13 = 0.23 B. F(12 ≤ X ≤ 16) = F(16) − F(12) = [(16 − 7) / (20 − 7)] − [(12 − 7) / (20 − 7)] = 0.692 − 0.385 = 0.307 52) B A multivariate distribution describes the relationships between two or more random variables, when the behavior of each random variable is dependent on the others in some way. 53) B A p-value of 0.02% means that the smallest significance level at which the hypothesis can be rejected is 0.0002, which is smaller than 0.05 or 0.01. Therefore the null hypothesis can be rejected at both the 5% and 1% significance levels. 54) C

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This question is asking you to select the inaccurate statement. The CLT states that for a population with mean µ and a finite varianceσ2, the sampling distribution of the sample means becomes approximately normally distributedas the sample sizebecomes large. The other statements are accurate. 55) A Binomial probability distributions give the result of a single outcome and are used to study discrete random variables where you want to know the probability that an exact event will happen. A continuous uniform distribution has both an upper and a lower limit. A discrete uniform random variable has equal probabilities for each outcome. 56) C A larger sample reduces the sampling error and the standard deviation of the sample statistic around its population value. However, this does not imply that the sample should be as large as possible, or that the sampling error must be as small as can be achieved. Larger samples might contain observations that come from a different population, in which case they would not necessarily improve the estimates of the population parameters. Cost also increases with the sample size. When the cost of increasing the sample size is greater than the value of the extra precision gained, increasing the sample size is not appropriate. 57) B The limits of the uniform distribution are three and 15. Since the problem concerns time, it is continuous. Noon is six minutes after 11:54 A.M. The probability the order is executed after noon is (15 − 6) / (15 − 3) = 0.75. 58) B

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The number of correlations in a multivariate normal distribution ofn variables is computed by the formula ((n) × (n-1)) / 2, in this case (10 × 9) / 2 = 45. 59) A The test statistic for a hypothesis test concerning population correlation follows a t-distribution with n − 2 degrees of freedom. For a sample size of 30 and a significance level of 5%, the sample statistic must be greater than 2.048 or less than −2.048 to reject the hypothesis that the population correlation equals zero. 60) B The way the alternative hypothesis is written you are only looking at the right side of the distribution. You are only interested in showing that B is greater than 0. You don't care if it is less than zero. For a one-tailed test at the 5% level of significance, the critical z value is 1.645. Since the test statistic of 1.68 is greater than the critical value we would reject the null hypothesis. 61) C The number of days a stock traded and did not trade describes only one random variable. Both of the other cases involve two or more random variables. 62) B An unbiased estimator is one for which the expected value of the estimator is equal to the parameter you are trying to estimate. 63) B

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Portfolio theory teaches us that returns on two stocks over the same time period are unlikely to be independent since both have some systematic risk. Because the samples are not independent, a paired comparisons test is appropriate to test whether the means of the two stocks’ returns distributions are equal. A difference in means test is not appropriate because it requires that the samples be independent. A chi-square test compares the variances of two samples, rather than their means. 64) B In stratified random sampling we first divide the population into subgroups, called strata, based on some classification scheme. Then we randomly select a sample from each stratum and pool the results.The size of the samples from each strata is based on the relative size of the strata relative to the population and are not necessarily the same across strata. 65) B A 95% confidence interval for the population mean (α = 5%), for example, is a range of estimates within which the actual value of the population mean will lie with a probability of 95%. Point estimates, on the other hand, aresingle (sample) values used to estimate population parameters. There is no such thing as a α percentpoint estimate or a (1 − α) percentcross-sectional point estimate. 66) C By definition, for a continuous uniform distribution, the probability density function is a horizontal line segment over a range of values such that the area under the segment (total probability of an outcome in the range) equals one. 67) B

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The standard normal distribution is defined as a normal distribution that has a mean of zero and a standard deviation of one. The other choices apply to any normal distribution. 68) C Because the rate is 8% compounded continuously, the effective annual rate ise0.08 - 1 = 8.33%. To find the present value of the inheritance, enter N=5, I/Y=8.33, PMT=0, FV=100,000 CPT PV = 67,028. Alternatively,100,000e-0.08(5) = 67,032. 69) B A test of the equality of variances requires an F-statistic. The calculated F-statistic is 0.0083/0.0078 = 1.064. Since the calculated F value of 1.064 is less than the critical F value of 1.61, we cannot reject the null hypothesis that the variances of the 2 stocks are equal. 70) C Survivorship bias is not likely to significantly influence the results of this study because the authors looked at the stocks in the S&P 500 at the beginning of the year and measured performance over the following three months. Look-ahead bias could be a problem because earningsprice ratios are calculated and the trading strategy implemented at a time before earnings are actually reported. Finally, the study is conducted over a relatively short time period during the long bull market of the 1990s. This suggests the results may be time-specific and the result of time-period bias. 71) C

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The null hypothesis is that earnings estimates are equal to reported earnings. To reject the null hypothesis, the calculated test statistic must fall outside the two critical values. IF the analyst tests the null hypothesis with a z-statistic, the critical values at a 5% confidence level are ±1.96. Because the calculated test statistic, 1.25, lies between the two critical values, the analyst should fail to reject the null hypothesis and conclude that earnings estimates are not significantly different from reported earnings. If the analyst uses at-statistic, the upper critical value will be even greater than 1.96, never less, so even without the exact degrees of freedom the analyst knows any t-test would fail to reject the null. 72) B A 95% confidence interval is ± 1.96 standard deviations from the mean, so 0.177 ± 1.96(0.339) = (− 48.7%, 84.1%). 73) B The mean of the sample is ∑X / n = 20 / 5 = 4. The sampling error of the sample is the difference between a sample statistic and its corresponding population parameter. 74) A We have two formulas for test statistics for the hypothesis of equal sample means. Which one we use depends on whether or not we assume the samples have equal variances. Either formula generates a test statistic that follows a T-distribution. 75) A

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A cumulative distribution function (cdf) gives the probability of an outcome for a random variable less than or equal to a specific value. For the random variableX, the cdf for the outcome 10 is 0.25, which means there is a 25% probability thatX will take a value less than or equal to 10.

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