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1.

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

A. Articles of incorporation.

B. Corporate breakdown.

C. Agency problem.

D. Bylaws.

E. Legal liability.

2.

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

A. Daily cash deposit.

B. Income tax returns.

C. Equipment purchase analysis.

D. Customer credit approval.

E. Payment to a vendor.

3.

Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally.

A. Sole proprietorship.

B. Joint stock company.

C. Limited partnership.

D. Limited liability company.

E. Corporation.

4.

Which one of the following best states the primary goal of financial management?

A. Maximize current dividends per share.

B. Maximize the current value per share.

C. Increase cash flow and avoid financial distress.

D. Minimize operational costs while maximizing firm efficiency.

E. Maintain steady growth while increasing current profits.

5.

Which of the following are cash flows from a corporation into the financial markets?

I. Repayment of long-term debt.

II. Payment of government taxes.

III. Payment of loan interest.

IV. Payment of quarterly dividend.

A. I and II only.

B. I and III only.

C. II and IV only.

D. I, III, and IV only.

E. I, II, and III only.

6.

Wagner Industrial Motors, which is currently operating at full capacity, has sales of $2,330, current assets of $670, current liabilities of $360, net fixed assets of $1,520, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 10 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

A. $171.35

B. $54.85

C. $11.65

D. $233.00

E. $244.65

7.

A firm has a retention ratio of 37 percent and a sustainable growth rate of 11.60 percent. The capital intensity ratio is 1.37 and the debt-equity ratio is .72. What is the profit margin?

A. 23.75 percent

B. 16.33 percent

C. 28.09 percent

D. 22.38 percent

E. 20.50 percent

8.

Major Manuscripts, Inc.

2012 Income Statement

Net sales $ 7,900

Cost of goods sold 6,815

Depreciation 220

Earnings before interest and taxes $ 865

Interest paid 30

Taxable Income $ 835

Taxes 284

Net income $ 551

Dividends $ 228

Major Manuscripts, Inc.

2012 Balance Sheet

2012 2012

Cash $ 2,170 Accounts payable $ 1,470

Accounts rec. 860 Long-term debt 290

Inventory 2,700 Common stock $ 2,900

Total $ 5,730 Retained earnings 4,400

Net fixed assets 3,330

Total assets $ 9,060 Total liabilities & equity $ 9,060

Major Manuscripts, Inc., does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm’s maximum rate of growth?

A. 3.70 percent

B. 5.60 percent

C. 10.74 percent

D. 3.77 percent

E. 3.44 percent

9.

Major Manuscripts, Inc.

2012 Income Statement

Net sales $ 7,300

Cost of goods sold 6,500

Depreciation 180

Earnings before interest and taxes $ 620

Interest paid 41

Taxable Income $ 579

Taxes 215

Net income $ 364

Dividends $ 185

Major Manuscripts, Inc.

2012 Balance Sheet

2012 2012

Cash $ 2,290 Accounts payable $ 1,370

Accounts rec. 830 Long-term debt 320

Inventory 2,150 Common stock $ 2,400

Total $ 5,270 Retained earnings 4,450

Net fixed assets 3,270

Total assets $ 8,540 Total liabilities & equity $ 8,540

Major Manuscripts, Inc., is currently operating at 90 percent of capacity. All costs and net working capital vary directly with sales. The tax rate, the profit margin, and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 10 percent?

A. $330

B. $197

C. $193

D. $137

E. $527

10.

Thomas invests $104 in an account that pays 4 percent simple interest. How much money will Thomas have at the end of 6 years?

A. $124.80

B. $131.59

C. $133.12

D. $126.53

E. $128.96

11.

What is the future value of $2,968 invested for 9 years at 4.9 percent compounded annually?

A. $7,021.38

B. $3,680.90

C. $3,690.38

D. $6,884.70

E. $4,565.03

12.

One year ago, you invested $3,250.00. Today, it is worth $4,000.00. What rate of interest did you earn?

A. 23.08 percent

B. 1.92 percent

C. 11.54 percent

D. 4.33 percent

E. 5.33 percent

13.

Todd is able to pay $300 a month for 5 years for a car. If the interest rate is 6.1 percent, how much can Todd afford to borrow to buy a car?

$13,692.41

$18,000.00

$15,265.61

$15,791.41

$15,480.41

14.

You borrow $7,130 to buy a car. The terms of the loan call for monthly payments for 4 years a rate of interest of 5 percent. What is the amount of each payment?

$134.49

$158.75

$160.03

$164.20

$134.13

15.

Your car dealer is willing to lease you a new car for $359 a month for 48 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.6 percent, what is the current value of the lease?

$15,746.40

$15,991.72

$15,932.52

$15,714.42

$15,772.40

16.

Your credit card company charges you 1.10 percent per month. What is the annual percentage rate on your account?

A. 10.90 percent

B. 10.02 percent

C. 12.83 percent

D. 13.20 percent

E. 9.80 percent

17.

Wine and Roses, Inc. offers a 8.0 percent coupon bond with semiannual payments and a yield to maturity of 8.66 percent. The bonds mature in 16 years. What is the market price of a $1,000 face value bond?

$1,685.84

$1,257.58

$1,629.26

$943.42

$1,167.47

18.

The Lo Sun Corporation offers a 5.5 percent bond with a current market price of $844.50. The yield to maturity is 9.17 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?

10.97 years

30.71 years

2.74 years

5.49 years

10.49 years

19.

A bond that pays interest annually yields a rate of return of 8.00 percent. The inflation rate for the same period is 3 percent. What is the real rate of return on this bond?

A. 11.00 percent

B. 1.05 percent

C. 2.67 percent

D. 3.00 percent

E. 4.85 percent

20.

The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 4.2 percent. The current rate of inflation is 2.4 percent. What is the nominal rate of return on these bonds?

A. 1.02 percent

B. 6.70 percent

C. 1.80 percent

D. 1.07 percent

E. 6.60 percent

21.

The nominal rate of return on the bonds of Stu’s Boats is 9.75 percent. The real rate of return is 2.9 percent. What is the rate of inflation?

A. 4.88 percent

B. 6.66 percent

C. 3.36 percent

D. 6.85 percent

E. 6.33 percent

22.

Leslie’s Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 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 13.70 percent return on your equity investments?

A. $27.40

B. $14.60

C. $11.70

D. $15.70

E. $6.85

23.

The common stock of Eddie’s Engines, Inc. sells for $44.18 a share. The stock is expected to pay $2.60 per share next year. Eddie’s has established a pattern of increasing their dividends by 4.7 percent annually and expects to continue doing so. What is the market rate of return on this stock?

A. 10.59 percent

B. 13.24 percent

C. 5.75 percent

D. 16.99 percent

E. 5.89 percent

24.

Shares of common stock of the Samson Co. offer an expected total return of 15.2 percent. The dividend is increasing at a constant 6.9 percent per year. The dividend yield must be:

A. 22.10 percent.

B. 8.30 percent.

C. 15.20 percent.

D. 2.20 percent.

E. 6.90 percent.

25.

Weisbro and Sons common stock sells for $51 a share and pays an annual dividend that increases by 4.0 percent annually. The market rate of return on this stock is 9.70 percent. What is the amount of the last dividend paid by Weisbro and Sons?

A. $3.03

B. $2.80

C. $4.76

D. $1.96

E. $2.76

26.

The Bell Weather Co. 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

27.

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.57 a share. The following dividends will be $0.62, $0.77, and $1.07 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.8 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 12 percent?

A. $14.11

B. $13.54

C. $10.84

D. $14.06

E. $2.71

28.

What is the net present value of a project with the following cash flows and a required return of 15 percent?

Year Cash Flow

0 –$57,300

1 15,700

2 32,530

3 3,600

A. -$16,328.36

B. -$16,683.41

C. -$19,891.76

D. $16,328.36

E. $16,683.41

29.

What is the internal rate of return on an investment with the following cash flows?

Year Cash Flow

0 –$103,000

1 42,400

2 38,500

3 48,600

A. 41.91 percent

B. 26.51 percent

C. 8.84 percent

D. 12.08 percent

E. 13.97 percent

30.

What is the profitability index for an investment with the following cash flows given a 9 percent required return?

Year Cash Flow

0 –$40,000

1 17,200

2 19,500

3 18,900

A. 1.09

B. 1.17

C. 0.85

D. 1.39

E. 0.72

31.

It will cost $2,900 to acquire a small ice cream cart. Cart sales are expected to be $2,100 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

A. 0.46 years

B. 2.17 years

C. 4.14 years

D. 1.38 years

E. 0.72 years

32.

A project has an initial cost of $58,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $2,200, $4,000, $4,600, and $4,500 a year for the next four years, respectively. What is the average accounting return?

A. 7.58 percent

B. 26.38 percent

C. 49.66 percent

D. 6.59 percent

E. 13.19 percent

33.

Marshall’s & Co. purchased a corner lot in Eglon City five years ago at a cost of $640,000. The lot was recently appraised at $670,000. At the time of the purchase, the company spent $30,000 to grade the lot and another $3,200 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1,110,000. What amount should be used as the initial cash flow for this building project?

A. $1,780,000

B. $1,783,000

C. $1,756,200

D. $1,750,000

E. $1,786,200

34.

Use the table below to answer this question.

MACRS 5-year property

Year Rate

1 20.00%

2 32.00%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

Ronnie’s Custom Cars purchased some fixed assets two years ago for $35,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $19,500 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34 percent?

A. $19,500.00

B. $16,800.00

C. $14,926.32

D. $18,582.00

E. $16,297.20

35.

A project is expected to create operating cash flows of $30,000 a year for three years. The initial cost of the fixed assets is $62,000. These assets will be worthless at the end of the project. An additional $5,000 of net working capital will be required throughout the life of the project. What is the project’s net present value if the required rate of return is 13 percent?

A. $2,076.92

B. $2,299.83

C. $12,299.83

D. $3,834.58

E. $7,299.83

36.

Thornley Machines is considering a 3-year project with an initial cost of $930,000. The project will not directly produce any sales but will reduce operating costs by $450,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $140,000. The tax rate is 34 percent. The project will require $25,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley’s requires a rate of return of 13 percent? Why or why not?

A. yes; The NPV is $76,491.89

B. yes; The NPV is $4,129.14

C. yes; The NPV is $107,200.00

D. yes; The NPV is $190,963.03

E. no; The NPV is $101,491.89

37.

A firm is reviewing a project with labor cost of $9.00 per unit, raw materials cost of $25.25 a unit, and fixed costs of $13,000 a month. Sales are projected at 11,000 units over the 3-month life of the project. What are the total variable costs of the project?

A. $277,750

B. $363,750

C. $389,750

D. $194,875

E. $376,750

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