Study

Question 1

What did the Dodd-Frank Act seek to prevent?

Banks making loans to borrowers with low incomes

Financial institutions becoming too big to fail

Conflicts of interest in audits by accounting firms

The loss of capital gains by large institutional investors

Answer 1

Financial institutions becoming too big to fail

Question 2

What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with the rules of FINRA and Securities and Exchange Commision (SEC)?

Sales practices
Purchase practices
Payroll practices
Production practices

Answer 2

Sales practices

Question 3

Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933?

Prospectus
Annual report
10-K
10-Q

Answer 3

Prospectus

Question 4

Which company control is required by the Sarbanes-Oxley Act?
Disclosure of off-balance sheet debts

Monthly evaluation of internal controls

Publication of detailed prospectus for investors

Announcement of annual public shareholder meetings

Answer 4

Disclosure of off-balance sheet debts

Question 5

How does the SEC regulate the financial industry?

By requiring public disclosure of information about entities that sell public equity or debt

By providing advice to institutions and individuals who are considering making financial investments

By designing software, management systems, and other technologies to coordinate financial exchanges

By investigating the reasons behind poor investment decisions and organizational underperformance

Answer 5

By requiring public disclosure of information about entities that sell public equity or debt

Question 6

Which term describes the amount of cash a firm needs in order to pay its immediate bills?

Operating balance
Reserve balance
Beginning balance
Working capital

Answer 6

Operating balance

Question 7

What is the reason for holding cash and cash equivalents?

To provide liquidity

To ensure opportunity cost coverage

To ensure shortage cost coverage

To provide credibility

Answer 7

To provide liquidity

Question 8

Which financial ratio is used to measure a company’s effectiveness in extending credit as well as collecting debts?

Accounts receivable turnover

Rate of return on sales

Times interest earned ratio

Earnings per share

Answer 8

Accounts Receivable Turnover

Question 9

Which hybrid security has special claims on a corporation’s profits or , in case of liquidation, corporate assets?

Answer 9

Preferred stock

Question 10

A person needs to determine the cost to replace a company’s property, plant, and equipment using the replacement cost method. Which value does this person need to consider in order to make this determination?

Book value
Present value
Market value
Historical value

Answer 10

Market Value

Question 11

Which type of investment will a risk-averse investor most likely invest in?

Individual securities

Actively managed funds

Floating-rate securities

Index funds

Answer 11

Index funds

Question 12

Which action is an important part of managing accounts receivable?

Setting credit terms
Determining optimal inventory levels
Managing disbursement float
Evaluating opportunity costs

Answer 12

Setting credit terms

Question 13

What is the main benefit associated with holding inventory?
It maximizes the value of the company.
It makes it possible to meet the demands of customers.
It provides the company with an income tax shield.
It reduces current liabilities.

Answer 13

It makes it possible to meet the demands of customers.

Question 14

How will an increase in corporate tax rates affect a firm’s cost of capital?

The cost of debt will decrease.
The cost of debt will increase.
The cost of equity will decrease.
The cost of equity will increase.

Answer 14

The cost of debt will decrease.

Question 15

Why would a company prefer to raise capital by issuing debt instead of issuing new equity?

Debt financing provides greater solvency risk.
Debt financing provides interest tax benefits.
Debt financing provides less shareholders’ control.
Debt financing provides optimal capital structure.

Answer 15

Debt financing provides interest tax benefits.

Question 16

How does the anticipation of bankruptcy affect a firm’s capital structure?

A firm facing bankruptcy will increase the relative amount of debt in order to increase payment to creditors rather than shareholders.

A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.

A firm facing bankruptcy is not affected by any costs and therefore does nothing to restructure capital.

A firm facing bankruptcy is exempt from repaying debt and therefore restructures its capital structure towards debt.

Answer 16

A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.

Question 17

Company Y has a greater degree of financial risk than Company Z.

What would be a result of a 1% decrease in EBIT for both companies?

A greater percentage decrease in Company Y’s pre-tax profit
A greater percentage decrease in Company Z’s pre-tax profit
A greater percentage increase in Company Z’s pre-tax profit
A greater percentage increase in Company Y’s pre-tax profit

Answer 17

A greater percentage decrease in Company Y’s pre-tax profit

Question 18

Company A has a degree of operating leverage of 1.85, and Company B has a degree of operating leverage of 6.5.

What does the degree of operating leverage say about these two companies?

Company A has lower risk than Company B.
Company A must have a lower increase in sales than Company B to achieve the same operating income.
Company A has lower debt than Company B.
Company A has higher fixed costs than Company B.

Answer 18

Company A has lower risk than Company B.

Question 19

Why do companies strive for a lower cost of capital?

Less money dedicated to financing means more money is available for production and operations.

More money dedicated to financing means more money is available for production and operations.

A lower cost of capital positively affects credit rating.

A lower cost of capital means a higher debt-to-equity ratio.

Answer 19

Less money dedicated to financing means more money is available for production and operations.

Question 20

Which advantage does the capital asset pricing model (CAPM) have over the Gordon growth model?

CAPM does not rely on an estimate of the market risk.

CAPM is tied to relative market risk, which provides a less reliable estimate growth.

CAPM considers risk of a stock relative to the market to determine expected return.

The relative market risk is always constant.

Answer 20

CAPM considers risk of a stock relative to the market to determine expected return.

Question 21

What are two examples of sunk costs?

The cost of a market study conducted prior to the decision
The cost of feasibility consulting incurred before the decision point
The cost of scrapping an old machine to replace with a new machine
The cost of disposing an old asset

Answer 21

The cost of a market study conducted prior to the decision

The cost of feasibility consulting incurred before the decision point

Question 22

Which three pieces of data are needed to perform a capital budget analysis?

Choose 3 answers.

Annual cash flows for the life of the new project
Cash flow when the firm terminates the project
The estimated value of the firm’s stock price
The initial cost of the new project
The estimated value of the firm’s capital assets

Answer 22

Annual cash flows for the life of the new project

Cash flow when the firm terminates the project

The initial cost of the new project

Question 23

How is the amount of discretionary financing that is needed by a firm determined?

Projected total assets − projected total liabilities + projected owner’s equity

Projected total assets + projected total liabilities − projected owner’s equity

Projected total assets + projected total liabilities + projected owner’s equity

Projected total assets − projected total liabilities − projected owner’s equity

Answer 23

Projected total assets − projected total liabilities − projected owner’s equity

Question 24

Which two techniques are effective ways to manage the growth of a firm, if additional financing is not available?

Choose 2 answers.

Increasing sales prices
Altering capacity
Increasing dividend payouts
Increasing costs

Answer 24

Increasing sales prices

Altering capacity

Question 25

What is the difference between a common stock and a preferred stock?

Common stock has no fixed maturity, and a preferred stock has a fixed maturity.

Common stock has fixed maturity, and a preferred stock does not have a fixed maturity.

Skipping a declared preferred stock dividend results in dividends in arrears.

Skipping a common stock dividend means a preferred stock dividend may not be paid.

Answer 25

Skipping a declared preferred stock dividend results in dividends in arrears.

Question 26

Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?

There is a linear decrease in risk.
Risk decreases at a slower rate.
All risk can be diversified away.
Risk remains constant.

Answer 26

Risk decreases at a slower rate.

Question 27

What are two primary benefits of the capital asset pricing model (CAPM)?

Choose 2 answers.

CAPM provides a way to forecast actual return for stocks.
CAPM provides a way to determine the expected return for stocks.
CAPM provides a way to estimate the required return.
CAPM provides a way to adjust a portfolio to a market beta of one (1).

Answer 27

CAPM provides a way to determine the expected return for stocks.

CAPM provides a way to estimate the required return.

Question 28

What is the acceptance criteria when using internal rate of return to evaluate a project?
Accept when the project return is greater than the required return
Accept when the required return is greater than the project return
Accept when the internal rate of return equals the net present value
Accept when the net present value is positive

Answer 28

Accept when the project return is greater than the required return

Question 29

A broker is considering purchasing common stock in a company that has average but consistent operating performance.

Which factor should lead this broker to purchase shares in this company?

A recent buying frenzy has driven the current price 50% higher than the previous trailing 12-month high price.
The current price of the stock is 25% below its intrinsic value.
The broker receives a tip that the company is about to announce a market breakthrough, and the price is above intrinsic value.
Intrinsic value is 25% below the current stock price.

Answer 29

The current price of the stock is 25% below its intrinsic value.

Question 30

Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)?
Any time the number of compounding periods is greater than annual.
Any time the number of compounding periods is exactly 1.0.
Any time the effective annual rate equals the APR.
Any time the stated nominal rate equals the APY.

Answer 30

Any time the number of compounding periods is greater than annual.

Question 31

Why does a long-term bond resemble an interest-only loan?
A portion of the principal is repaid monthly.
None of the principal is repaid until the bond matures.
All the principal is repaid before the bond matures.
Interest accrues and is paid when the bond matures.

Answer 31

None of the principal is repaid until the bond matures.

Question 32

A bond that matures in 30 months is sold at a premium.

What is the yield to maturity (YTM)?

Higher than the coupon rate
Equal to the coupon rate
Lower than the coupon rate
Not enough information to determine YTM

Answer 32

Lower than the coupon rate

Question 33

Which statement is true about fluctuations in bond prices?

When market interest rates fluctuate, the bond coupon rate is unchanged.
When market interest rates are stagnant, the bond coupon rate fluctuates.
When market interest rates fluctuate, the bond coupon rate fluctuates.
When the market interest rates fluctuate, the required rate of return equals the bond coupon rate.

Answer 33

When market interest rates fluctuate, the bond coupon rate is unchanged.

Question 34

What is the par value (face value) of a bond?

The interest accrued on the bond through expiration
The sum of money that the corporation promises to pay upon expiration of the bond
The transaction costs associated with bond issuance
The coupon yield of the bond

Answer 34

The sum of money that the corporation promises to pay upon expiration of the bond

Question 35

What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules?

The firm must have been paid for the product.
The product must have been delivered.
The price of the product must have included sales tax.
The price of the product must have been exempt from sales tax.

Answer 35

The product must have been delivered.

Question 36

A broker is considering buying a dividend-paying stock. The dividend will be paid at the end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend. (The ex-dividend date is not a consideration; the broker will receive the full $2.25.) The broker expects a 12% rate of return.

What is the highest price this broker should be willing to pay for this stock?

Answer 36

$34.15

N=1
I/Y=12

FV = Stock price + dividend
FV==38.25

Question 37

A person buys shares of a company at $45 and recently paid a $2 annual dividend that is expected to grow by 10% per year.

What is the expected return per year?

Answer 37

14.9%

Remember

Stock Price= [dividend *(1+rate)]/[expetected rate- current rate]

Convert that into

Expected rate= (dividend(1+rate)/stock) = Current rate)

Question 38

Stock Dividend formula

Answer 38

Stock= dividend * (1+rate)/ expected rate-current rate

Question 39

The market rate of return is 9%. The face value of a bond is $1,000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years.

What is the value of this bond?

Answer 39

1,000

Question 40

A company issues bonds at a market price of $925. The face value is $1,000. The bonds mature in 10 years, and the coupon rate is 6% compounded semiannually.

What is the yield to maturity (YTM) on this company’s bonds?

Answer 40

7.06%

Question 41

A bond pays $27.50 semiannually, matures in nine years, and is currently priced at $1,090.

What is the yield to maturity for this bond?

Answer 41

4.28%

Question 42

A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt of 6%, a cost of preferred equity of 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity.

What is this company’s weighted average cost of capital?

Answer 42

9.7%

Question 43

A machine will reach the end of its useful life in Year 5. The realizable salvage value is expected to be $50,000 with a book value of zero. The company’s marginal tax rate is 34%.
What is the tax implication on the sale of the new machine at Year 5?

Tax shield of $17,000
Tax liabilities of $17,000
Tax shield of $33,000
Tax liabilities of $33,000

Answer 43

Tax liabilities of $17,000

salvage = sell 50,000 x .34 =17,000

Question 44

A company would like to invest in a capital budget project that will be worth $500,000 in 40 years.

How much should this company invest today, assuming an average inflation rate of 2% and a 10% annual return?

Answer 44

$24,393

inflation adjusted return. That is done by doing the following:

(1 + Return Rate)
———————– - 1 = Inflation Adjusted Rate of Return
(1 + Inflation Rate)

If Annual Return = 10% Inflation = 3%

(1 + .10) 1.10
———– - 1 = —– - 1 = .068 or 6.8%
(1 + .03) 1.03

Once you have the adjusted return it becomes your I/Yr number.

Question 45

A company is preparing a pro forma balance sheet. The company forecast $10 million in projected sales. The projected cash needed 6% of sales, accounts receivable are 19% of sales, and PP&E are 50% of sales. Accounts payable have been 12% of sales, historically.

Shareholders’ equity is $1.5 million. Pro forma income is $3.6 million. The company has no long-term debt.

What is the discretionary financing needed?

$1.2 million
$5.1 million
$6.3 million
$6.9 million

Answer 45

$1.2 million

Question 46

Average inflation rate formula

Answer 46

(1 + Return Rate)
———————– - 1 = Inflation Adjusted Rate of Return
(1 + Inflation Rate)

Question 47

A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this amount is expected to be collected next period.

How will this change in accounts receivable affect the cash flows from the operating activities section?

The change will decrease cash flows from operations by $2,500.
The change will increase cash flows from operations by $2,500.
The change will increase cash flows from operations by $5,000.
The change will decrease cash flows from operations by $5,000.

Answer 47

The change will decrease cash flows from operations by $5,000.