Name___________________________________

I. MULTIPLE CHOICE (25 questions, 3 points each). Choose the one alternative that best completes the

statement or answers the question.

1) Cash and Equivalents are $1,561, Short-Term Investments are $1,052, Accounts Receivables are $3,616, Accounts

Payable is $5,173, Short-Term Debt is $288, Inventories are $1,816, Other Current Liabilities are $1,401, and Other Current

Assets are $707. What are the Total Current Assets? 1) _______

A) $6,936 B) $8,752 C) $6,862 D) $5,136

2) In 1975, the era of major league baseball free agency began. The average player salary was $16,000. In 1980, the average

salary was $30,000. What was the average annual growth in the minimum salary in major league baseball over those five

years? 2) _______

A) 13.40% B) 10.67% C) 37.50% D) 5.92%

3) You have just won the Reader’s Digest lottery of $5,000 per year for twenty years, with the first payment today

followed by nineteen more start-of-the-year cash flows. At an interest rate of 5%, what is the present value of your

winnings? 3) _______

A) $100,000.00 B) $62,311.05 C) $65,426.60 D) $47,641.18

4) You are saving money for a down payment on a new house. You intend to place $5,000 at the end of each year for three

years into an account earning 6% per year. At the end of the fourth year, you will place $10,000 into this account. How

much money will be in the account at the end of the fourth year? 4) _______

A) $26,518.17 B) $26,873.08 C) $25,918.00 D) $25,000.00

5) If you borrow $50,000 at an annual interest rate of 12% for six years, what is the annual payment (prior to maturity) on

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a fully amortized loan? 5) _______

A) $6,000.00 B) $8,333.33 C) $0.00 D) $12,161.29

6) You have the opportunity to purchase mineral rights to a property in North Dakota with expected annual cash flows of

$10,000 per year for eight years. If you discount these cash flows at a rate of 12% per year, what are these cash flows

worth today if the cash flows occur at the end of each period? 6) _______

A) $49,676.40 B) $80,000.00 C) $122,996.93 D) $55,637.57

7) Suppose you invest $2,000 today, compounded monthly, with an annual interest rate of 7.50%. What is your investment

worth in one year? 7) _______

A) $2,155.27 B) $2,154.77 C) $2,152.81 D) $2,150.00

8) The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face value of $1,000. If the annual

coupon rate is 10% and the current yield to maturity is 12%, what is the firm’s current price per bond? 8) _______

A) $1,170.27 B) $1,171.59 C) $850.61 D) $849.54 9) Ten years ago Bacon Signs Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since

then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now 7%. Given this information,

what is the price today for a Bacon Signs bond? 9) _______

A) $1,116.54 B) $1,091.08 C) $1,000 D) $914.41

10) Rogue Racing Inc. has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon

payments. If there are twelve years remaining prior to maturity and these bonds are selling for $876.40, what is the yield

to maturity for these bonds? 10) ______

A) 8.00% B) 8.33% C) 9.77% D) 9.80%

11) The next dividend (Div1) is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock

price, according to the constant growth dividend model? 11) ______

A) $15.00 B) $31.80 C) $30.80 D) $30.00

12) Musial Corp. has just issued nonconvertible preferred stock (cumulative) with a par value of $50 and an annual

dividend rate of 7.25%. The preferred stock is currently selling for $38.75 per share. What is the yield or return (r) on this

preferred stock? 12) ______

A) 9.341% B) 9.351% C) 9.355% D) 9.345%

13) Amy bought a share of stock for $64.50 that paid a dividend of $.50 and sold nine months later for $64.00. What was

her dollar profit or loss and holding period return? 13) ______

A) -$0.50, -0.78%

B) $0.50, 0.78%

C) $0.00, 0.00%

D) There is no correct solution to this question.

14) Richard owns the following portfolio of securities. What is the beta for the portfolio?

Company Beta Percent of Portfolio

Apple 2.50 25%

Wells Fargo 0.65 50%

Ebay 1.70 25%

14) ______ *¦*

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A) 1.62 B) 1.00 C) 1.38 D) 0.65

15) Assume the following information about the market and JumpMasters’ stock. JumpMasters’ beta = 1.50, the risk-free

rate is 3.50%, the market risk premium is 10.0%. Using the SML, what is the expected return for JumpMasters’ stock?

15) ______

A) 13.50% B) 7.50% C) 18.50% D) 27.00%

16) Given the expected returns and probabilities of various states of the world in this table, what is the expected return for

Carbide Company?

Carbide Company

State of the Economy Probability of State Return on State Boom .30 18%

Steady .55 10%

Recession .15 -5%

16) ______

A) 5.50% B) 10.15% C) -0.75% D) 5.40%

17) Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective

future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo

uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project? 17) ______

A) Geronimo rejects the project because the NPV is about -$2,375.60.

B) Geronimo rejects the project because the NPV is about -$12,375.60.

C) Geronimo rejects the project because the NPV is about -$22,375.73.

D) Geronimo accepts the project because the NPV is greater than $10,000.00.

18) Find the Modified Internal Rate of Return (MIRR) for the following series of future cash flows, given a discount rate of

11%: Year 0: -$22,000; Year 1: $5,000; Year 2: $6,000; Year 3: $7,000; Year 4: $7,500; and, Year 5: $8,000. 18) ______

A) About 13.12% B) About 12.13% C) About 13.04% D) About 12.88%

19) Dice, Inc. is considering a very risky five-year project that has an initial outlay or cost of $70,000. The future cash

inflows from its project for years 1, 2, 3, 4, and 5 are all the same at $35,000. Dice uses the internal rate of return method to

evaluate projects. Will Dice accept the project if its hurdle rate is 41.00%? 19) ______

A) Dice will probably accept this project because its IRR is about 41.04%, which is slightly above its hurdle rate.

B) Dice will accept this project because its IRR is about 41.50%.

C) Dice will accept this project because its IRR is over 45.50%.

D) Dice will probably reject this project because its IRR is about 39.74%, which is slightly below its hurdle rate.

20) The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years 1, 2, 3 and 4

are: $500,000, $300,000, $300,000 and $300,000. What is the payback period without discounting cash flows? 20)

______ *¦*

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A) About 2.50 years B) About 3.67 years

C) About 2.67 years D) About 4.50 years

21) Bacon Signs Inc., purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS

with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%, etc.

The firm has a tax rate of 40%. If the machine is sold at the end of two years for $50,000, what is the cash flow from

disposal? 21) ______

A) $50,000 B) $33,600 C) $43,440 D) $39,875

22) The following information comes from the Galaxy Construction balance sheet. The value of common stock is $10,000,

retained earnings equals $7,000, total common equity equals $17,000, preferred stock has a value of $3,000, and long-term

debt totals $15,000. If the cost of debt is 8.00%, preferred stock has a cost of 10.00%, common stock has a cost of 12.00%,

and the firm has a corporate tax rate of 30%, calculate the firm’s WACC adjusted for taxes. 22) ______

A) 10.00%

B) 9.09%

C) 10.11% D) There is not enough information to answer this question.

23) Use the dividend growth model to determine the required rate of return for equity. Your firm intends to issue new

common stock. Your investment bankers have determined that the stock should be offered at a price of $20.00 per share

and that you should anticipate paying a dividend of $0.75 in one year. If you anticipate a constant growth in dividends of

3.00% per year and the investment banking firm will take 8.00% per share as flotation costs, what is the required rate of

return for this issue of new common stock? 23) ______

A) 7.08% B) 6.83% C) 10.20% D) 7.19%

24) Perfect Purchase Electronics

Selected Income Statement Items, 2009

Cash Sales $1,500,000

Credit Sales $7,500,000

Total Sales $9,000,000

COGS $6,000,000

Perfect Purchase Electronics

Selected Balance Sheet Accounts

12/31/2009 12/31/2008 Change

Accounts Receivable $270,000 $240,000 $30,000

Inventory $125,000 $100,000 $25,000

Accounts Payable $110,000 $90,000 $20,000

Using the information provided, what is the accounts payable cycle for the firm? 24) ______

A) 6.08 days B) 24.33 days C) 4.87 days D) 4.06 days

25) Orange Electronics Inc. has a profitability ratio of 0.14, an asset turnover ratio of 1.7, a debt to equity ratio of 0.60 and a

total asset to equity ratio of 1.60. What is the firm’s ROE? 25) ______

A) 38.08% B) 14.28% C) 41.76% D) 22.85%

II. SHORT ANSWER (5 questions 5 points each). Write a paragraph answers the question.

26) Assume that today’s date is August 15, 2010 and that the Rite Aid Bond is an annual-coupon bond. Describe what each

of the following terms mean and how each value was determined if appropriate.

Company Price Coupon Rate Maturity DateYTM Current Yield Rating

Rite Aid 84.00 6.875% 8-15-2015 10.576% 8.185% B2

26) _____________

27) Why is an understanding of cash flow so important in the study of finance?

28) The Fisher Effect states the relationship between the nominal rate (r), the real rate (r*), and inflation (h). Suppose r= 5%

and h = 4%. Many would say that the nominal rate is 9%. Is this true? Explain in terms of the relationship between the real

rate and the inflation rate over time.

29) Explain the distinction between profits and cash flow. 30) Market value ratios try to answer what question for potential investors? Do financial statements contain all of the

necessary information to answer this question? Explain in terms of the P/E (price earnings) ratio.

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