Part 2 Comprehensive Exam on Section B

Question 1
A downward sloping yield curve means that shorter-term securities have a higher yield than longer-term
securities. When this happens, what does it signal about the future state of the economy?

A. Stable markets
B. Expansionary period
C. Recessionary period
D. Volatile markets

Question 2
Which of the following, when considered individually, would generally have the effect of increasing a
firm's cost of capital?

A. I, III, and IV
B. III and IV
C. II and IV
D. I and III

Question 3
Financial markets in which equity and debt instruments with maturities greater than one year are traded
are called what?

A. Money markets
B. Capital markets
C. Private placements
D. Eurocurrency markets

Question 4
You purchased 8,000 shares of Wallflower Technologies several years ago at $20 per share. The
company does not pay a regular cash dividend. You want to manufacture your own dividend by selling a
little bit of stock each quarter. The company's stock is currently trading at $60. If capital gains are taxed
at 15%, how many shares would you have to sell to receive at least $2,000 in cash after-tax (you cannot
sell a partial share)?

A. 34 shares
B. 100 shares
C. 38 shares
D. 50 shares

Question 5
Which of the following financial tools requires payment be made upon the completion of an obligated
action?
 Part 2 Comprehensive Exam on Section B

A. Letters of credit
B. Time drafts
C. Consignment
D. Sight drafts

Question 6
Which of the following is a key assumption for the constant growth dividend model used to value stock?

A. The price of the stock increases at a constant rate.

B. The dividend does not increase.
C. The dividend increases over time at a constant rate.
D. The price of the stock remains constant.

Question 7
If a bank wants to increase the promised return from a loan, without raising the interest rate charged, it
can:

A. decrease the reserve requirement.

B. increase the compensating balance.
C. increase the risk premium.
D. raise the prime rate.

Question 8
Which one of the following statements best characterizes U.S. Treasury bills?

A. They have no coupon rate, no default risk, and the return received is subject to federal income
tax.
B. They have an active secondary market, one- to twenty-four-month maturities, and monthly
interest payments.
C. They have an active secondary market, the return received is exempt from federal income tax,
and there is no interest rate risk.
D. They have no coupon rate, no interest rate risk, and are issued at par.

Question 9
Which of the following characteristics differentiates Eurodollar certificates of deposit (CDs) from Yankee
CDs?

A. Euro CDs are not highly marketable; Yankee CDs have an active secondary market.
B. Euro CDs are issued by foreign branches of U.S. banks and foreign banks; Yankee CDs are issued
by U.S. branches of foreign banks.
C. Euro CDs offer fixed interest rates; Yankee CDs offer variable interest rates.
D. Euro CDs typically mature in one to three months; most Yankee CDs mature between one and
three years.

Question 10
Global Manufacturing Company has a cost of borrowing of 12%. One of the firm's suppliers has just
offered new terms for purchases. The old terms were cash on delivery and the new terms are 2/10, net
45. Should Global pay within the first ten days?
 Part 2 Comprehensive Exam on Section B

A. Yes, the cost of not taking the trade discount exceeds the cost of borrowing.
B. The answer depends on whether the firm borrows money.
C. No, the use of debt should be avoided if possible.
D. No, the cost of trade credit exceeds the cost of borrowing.

Question 11
Which governing body oversees public firms’ financial reporting disclosure and filing requirements?

A. Financial Accounting Standards Board (FASB)

B. Public Company Accounting Oversight Board (PCAOB)
C. Internal Revenue Service (IRS)
D. Securities and Exchange Commission (SEC)

Question 12
The capital asset pricing model (CAPM) is used to determine the cost of what?

A. Cost of capital
B. Cost of debt
C. Cost of equity
D. Cost of leasing

Question 13
An investor is considering investing in companies in a particular industry. During research of different
companies within this industry, the investor begins to contact their investor relations departments.
Upon contacting the investor relations department of XYZ Company, they inform the investor that they
are going to be purchasing a competitor, providing them with a near monopoly within the industry. The
investor takes this information and purchases stock in XYZ Company; no abnormal gains result. This is an
example of what form of market efficiency?

A. Semi-weak form
B. Weak form
C. Semi-strong form
D. Strong form

Question 14
Which of the following would decrease a firm's net working capital?

A. The firm purchases a fixed asset, paying 20% of the purchase price in cash and signing a long-
term note for the remaining balance.
B. The firm purchases inventory on account.
C. The firm receives payment on an outstanding accounts receivable.
D. The firm writes off a bad account (receivable). The firm uses the allowance method for bad
debts.

Question 15
The Dixon Corporation has an outstanding one-year bank loan of $300,000 at a stated interest rate of
8%. In addition, Dixon is required to maintain a 20%compensating balance in its checking account, which
 Part 2 Comprehensive Exam on Section B

it does. Assuming the bank does not pay interest on balances in checking accounts, the effective interest
rate on the loan is:

A. 9.6%.
B. 10.0%.
C. 8.0%.
D. 6.4%.

Question 16
Which one of the following situations would prompt a firm to issue debt, as opposed to equity, the next
time it raises external capital?

A. High breakeven point

B. Significant percentage of assets under finance lease
C. Low fixed-charge coverage
D. High effective tax rate

Question 17
In valuing a compensatory stock option using a computer pricing model, several variables must be
included in arriving at the value. Which of the following is not one of those variables?

A. The salary level of the employee

B. The length of time that the employee has to convert
C. The price volatility
D. The current difference between the stock price and the option price

Question 18
Tunerecord Unit Co. stock was trading last year at $24. There were two types of options available on the
stock. Call options with a strike price of $24, which expire at the end of the year, were trading at $9.60.
Put options with a strike price of $24, which expire at the end of the year, were trading for $2.40.
Berniss invested $144 in common stock. Jewel invested $144 in the call options. Reynardo invested $144
in the put options. At the end of one year the price of Tunerecord Unit stock is $20.00. How much
money did Jewel make or lose from this investment?

A. $0
B. $144 loss
C. $204 loss
D. $204 profit

Question 19
Keller Products needs $150,000 of additional funds over the next year in order to satisfy a significant
increase in demand. A commercial bank has offered Keller a one-year loan at a nominal rate of 8%,
which requires a 15% compensating balance. How much would Keller have to borrow, assuming it would
need to cover the compensating balance with the loan proceeds?

A. $130,435
B. $127,500
C. $176,471
 Part 2 Comprehensive Exam on Section B

D. $172,500

Question 20
Megatech Inc. is a large publicly held firm. The treasurer is making an analysis of the short-term
financing options available for the third quarter, as the company will need an average of $8 million for
the month of July, $12 million for August, and $10 million for September. The following options are
available.

A. Issue commercial paper, since it is approximately $14,200 less expensive than the line of credit.
B. Use the line of credit, since it is approximately $5,800 less expensive than issuing commercial
paper.
C. Use the line of credit, since it is approximately $15,000 less expensive than issuing commercial
paper.
D. Issue commercial paper, since it is approximately $35,000 less expensive than the line of credit.

Question 21
When two firms that make different parts used at different stages of the manufacturing process for the
same finished good are combined, it is referred to as what type of merger?

A. Vertical merger
B. An acquisition
C. Conglomerate merger
D. Horizontal merger

Question 22
Which one of the following combined transactions would cause net working capital to decrease?

A. A $1 million decrease in cash, and a $1 million increase in inventory.

B. A $1 million decrease in cash, and a $1 million decrease in accounts payable.
C. A $1 million decrease in cash, and a $1 million increase in fixed assets.
D. A $1 million increase in cash, and a $1 million increase in long-term debt.

Question 23
The transaction motive for holding cash is best described as:

A. synchronizing cash inflows and outflows so that excess cash balances can be invested in short-
term instruments.
B. using surplus liquid reserves to take advantage of short-term investments or other temporary
situations.
C. providing a buffer for unexpected cash needs that result from the unpredictable nature of cash
inflows and outflows.
D. maintaining sufficient cash or near-cash reserves to meet financial payments arising from
ordinary business operations.
 Part 2 Comprehensive Exam on Section B

Question 24
A publicly traded company is planning to divest its Division A for $100 million. Private investors have
pooled their capital of $10 million and plan to finance the balance of $90 million via debt financing with
Division A's assets as collateral. The new owners plan to give the new management a bigger stake in the
company by providing stock options. They also redesigned performance measures and incentive
schemes for employees to minimize inefficiencies and bureaucracy. This scenario most closely describes
a

A. management recapitalization.
B. management buyout.
C. leveraged recapitalization.
D. leveraged buyout.

Question 25
Which one of the following statements concerning cash discounts is correct?

A. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
B. The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
C. The cost of not taking a cash discount is generally higher than the cost of a bank loan.
D. If a firm purchases $1,000 of goods on terms of 1/10, net 30 and pays within the discount
period, the amount paid would be $900.

Question 26
The overall cost of capital is the:

A. average rate of return a firm earns on its assets.

B. rate of return on assets that covers the costs associated with the funds employed.
C. minimum rate a firm must earn on high-risk projects.
D. cost of the firm's equity capital at which the market value of the firm will remain unchanged.

Question 27
Country R's currency would tend to depreciate relative to Country T's currency when:

A. Country T has a rapid rate of growth in income that causes imports to lag behind exports.
B. Country R switches to a more restrictive monetary policy.
C. Country R has a rate of inflation that is lower than the rate of inflation in Country T.
D. Country R has real interest rates that are lower than real interest rates in Country T.

Question 28
Some states have laws that provide preemptive rights for shareholders. A preemptive right is when a
company must:

A. give existing shareholders the opportunity to maintain their proportionate ownership share in
the company when issuing a new public offering.
B. give dividends to the common shareholders first before giving dividends to the preferred
shareholders.
C. sell shares to existing shareholders equal to their proportionate ownership share in the
company when issuing a new public offering.
 Part 2 Comprehensive Exam on Section B

D. give existing shareholders stock warrants equal to their proportionate ownership share in the
company when issuing a new public offering.

Question 29
Which of the following reasons would not be considered a benefit of using U.S. Treasury securities as a
marketable security?

A. Low default risk

B. Actively traded on a secondary market
C. Backed by U.S. government
D. High rate of return

Question 30
Who must approve the payment of dividends?

A. Chief Executive Officer

B. Chief Financial Officer
C. Shareholders
D. Board of Directors

Question 31
Calciya Co. has a policy of returning a minimum of 40% of earnings to shareholders every year through
dividend issues and open-market stock repurchases. In each quarter this year, the company earned
$0.20 per share. In each of this year's four quarters, the company paid a regular cash dividend of $0.05
per share. The company has 8 million shares of common stock outstanding. What amount of stock
repurchases could the company's board approve to meet their target payout percentage?

A. Open market stock repurchases of $2,560,000.

B. Open market stock repurchases of $1,600,000.
C. No open market stock repurchase is necessary, stockholders have already received 40% of
earnings through the quarterly dividend.
D. Open market stock repurchases of $960,000.

Question 32
Newman Products has received proposals from several banks to establish a lockbox system to speed up
receipts. Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of
short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing results
and using a 365-day year, which one of the following proposals is optimal for Newman?

A. A fee of 0.03 percent of the amount collected.

B. A flat fee of $125,000 per year.
C. A $0.50 fee per check.
D. A compensating balance of $1,750,000.

Question 33
Baljit Inc. purchased machinery from a Japanese firm and will have to pay ¥278,450,000 in 90 days. Baljit
has three choices: (1) wait 90 days and purchase the Yen on the spot market on settlement date, (2)
enter into a forward contract with a rate of ¥105.46/$ to buy the required Yen on the settlement date,
 Part 2 Comprehensive Exam on Section B

or (3) purchase the Yen today on the spot market at a rate of ¥102.50/$. The risk-free rate is 6% in both
Japan and the US. What is the cost today if Baljit purchases the Yen today on the spot market?

A. $2,640,338
B. $2,601,318
C. $274,334,975
D. $2,676,439

Question 34
Osgood Products has announced that it plans to finance future investments so that the firm will achieve
an optimum capital structure. Which one of the following corporate objectives is consistent with this
announcement?

A. Minimize the cost of debt

B. Maximize earnings per share
C. Minimize the cost of equity
D. Maximize the net value of the firm

Question 35
Which of the following financial tools involves an exporter sending goods to an importer before the
good has been sold to a customer?

A. Letters of credit
B. Countertrading
C. Consignment
D. Sight drafts

Question 36
What is the payoff for the owner of a call option with a strike price of $35 if the underlying stock price at
expiration is $30?

A. $30
B. $(5)
C. $5
D. $0

Question 37
Turquoise Electronics Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected
to be 10% next year and then zero thereafter, then what is its cost of equity capital if the price of its
common shares is currently $25.71?

A. 7.27%
B. 8.00%
C. 18.00%
D. 6.6%

Question 38
Which of the following financing vehicles would a commercial bank be likely to offer to its customers?
 Part 2 Comprehensive Exam on Section B

A. I and II
B. III and IV
C. I, II, III, and IV
D. I, III, and IV

Question 39
Your firm has a quick ratio of 0.9 and a current ratio of 2.1. Industry averages are 1.0 for the quick ratio
and 2.0 for the current ratio. Which of the following is true about the firm's working capital position?

A. The firm has more accounts receivable than other firms in the industry.
B. The firm has less accounts receivable than other firms in the industry.
C. The firm has more inventory than other firms in the industry.
D. The firm has less inventory than other firms in the industry.

Question 40
What is the effective annual interest rate on a $5 million loan with an interest rate of 8%, a commitment
fee of ¼ %, and a compensating balance of 10%?

A. 8.25%
B. 9.17%
C. 8.89%
D. 8%

Question 41
If the real return on US Treasury bills is 14% while the rate of expected inflation is anticipated to be 8%,
then what should nominal rate of return be?

A. 14%
B. 6%
C. 22%
D. 11%

Question 42
On January 1, Year 1, Liberty Company sold one of its product lines to Bell Corporation in an “arms
length” transaction. Bell signed a noninterest bearing note requiring payment of $20,000 annually for 10
years. The first payment was made on January 1, Year 1. The prevailing rate of interest for this type of
note at date of issuance was 12%. Information on present value factors is as follows:*
 Part 2 Comprehensive Exam on Section B

Liberty should record the above sale in January, Year 1 at:

A. $126,560.
B. $106,560.
C. $133,000.
D. $113,000.

Question 43
A primary benefit a firm expects to gain from lengthening a credit period is:

A. improved inventory control resulting from relatively stable demand.

B. increased profitability resulting from increased sales.
C. fewer collections procedures necessary for past due accounts.
D. increased revenue from interest charges on past due accounts.

Question 44
Which of the following firms’ stock price would increase the most if the market increased by 5%?

A. Firm A with a beta of 1.25

B. Firm B with a beta of 0.75
C. Firm C with a beta of 0.25
D. Firm D with a beta of 1.50

Question 45
Which of the following markets is involved with the trading of debt securities with maturities of less
than one year?

A. Derivatives markets
B. Capital markets
C. Money markets
D. Forex markets

Question 46
Which of the following best describes negotiated financing arrangements exemplified by lines of credit
and revolvers?

A. Bankers' acceptances
B. Trade credit
C. Commercial paper
D. Unsecured short-term bank loans

Question 47
Company A is offering a common stock that is expected to pay the following dividends: $10 next year,
$20 the following year, and after that grow in perpetuity of 2%. Meanwhile, Company B offers a
preferred stock with a par value of $200 and a 12% dividend rate. Both companies have an 8% cost of
capital. If both stocks are being offered at $300, which is a better investment?

A. Company A
B. Company B
 Part 2 Comprehensive Exam on Section B

C. Either, both companies have the same value

D. Neither, because both companies' intrinsic values are below the price for which they are being
offered (i.e., $300)

Question 48
An industry management technique designed to minimize inventory investment by having materials
arrive at the time they are needed for use is known as:

A. material resource planning.

B. just-in-time (JIT).
C. first-in, first-out.
D. the economic order quantity model.

Question 49
Powell Industries deals with customers throughout the country and is attempting to more efficiently
collect its accounts receivable. A major bank has offered to develop and operate a lockbox system for
Powell at a cost of $90,000 per year. Powell averages 300 receipts per day at an average of $2,500 each.
Its short-term interest cost is 8% per year. Using a 365-day year, what reduction in average collection
time would be needed in order to justify the lockbox system?

A. 1.2 days
B. 1.5 days
C. 1.25 days
D. 0.67 days

Question 50
Fortune Hotels issues an IPO on a best-effort basis. The company's investment bank demands a spread
of 20 percent of the selling price. Five million shares are issued. The average selling price remains at $31.
What are the net proceeds per share for the issuer?

A. $6.20
B. $37.20
C. $31
D. $24.80

Question 51
Shown below are selected data from Fortune Company's most recent financial statements.

What is Fortune's net working capital?

 Part 2 Comprehensive Exam on Section B

A. $45,000
B. $35,000
C. $50,000
D. $80,000

Question 52
All of the following statements concerning American Depository Receipts (ADRs) are correct except

A. ADRs allow foreigners to raise capital in the U.S.

B. ADRs facilitate the banking procedures for U.S. multinational firms.
C. ADRs are securities issued by American banks acting as custodians of shares of foreign firms.
D. ADRs allow Americans to invest abroad.

Question 53
Which of the following is an example of a low-risk investment?

A. Corporate bond
B. Real-estate holding
C. Government bond
D. Mutual fund

Question 54
When purchasing temporary investments, which one of the following best describes the risk associated
with the ability to sell the investment in a short period of time without significant price concessions?

A. Financial risk
B. Interest rate risk
C. Liquidity risk
D. Investment risk

Question 55
Thomas Company's capital structure consists of 30% long-term debt, 25% preferred stock, and 45%
common equity. The cost of capital for each component is shown below.

If Thomas pays taxes at the rate of 40%, what is the company's after-tax weighted average cost of
capital (WACC)?

A. 11.9%
B. 11.3%
C. 10.94%
D. 9.5%

Question 56
Mandel Inc. has a zero-balance account with a commercial bank. The bank sweeps any excess cash into
 Part 2 Comprehensive Exam on Section B

a commercial investment account earning interest at the rate of 4% per year, payable monthly. When
Mandel has a cash deficit, a line of credit is used which has an interest rate of 8% per year, payable
monthly based on the amount used. Mandel expects to have a $2 million cash balance on January 1 of
next year. Net cash flows for the first half of the year, excluding the effects of interest received or paid,
are forecasted (in millions of dollars) as:

Assuming all cash-flows occur at the end of each month, approximately how much interest will Mandel
incur for this period?

A. $77,000 net interest paid

B. $17,000 net interest paid
C. $50,000 net interest paid
D. $53,000 net interest paid

Question 57
Which of the following is best described as unsecured (without collateral), short-term borrowing by very
large, creditworthy firms

A. Commercial paper
B. Eurodollars
C. Repurchase agreements
D. Bankers’ acceptances

Question 58
The suppliers of a company provide cash discounts at 1/10, n/40. Other suppliers offer cash discounts of
3/10, n/40. Assuming the current market borrowing rate is 15%, which of the following decisions should
the company take?

A. The company should not avail itself of the cash discount as the scheme represents an
opportunity cost of 12.29%, which is lower than the market borrowing rate.
B. The company should avail itself of the cash discount as the scheme represents an opportunity
cost of 37.63%, which is higher than the market borrowing rate.
C. The company should make payments in 35 days to break even with the market rate of
borrowing.
D. The company should not avail itself of the cash discount as the scheme represents an
opportunity cost of 37.63%, which is higher than the market borrowing rate.

Question 59
The management of Old Fenske Company (OFC) has been reviewing the company's financing
arrangements. The current financing mix is $750,000 of common stock, $200,000 of preferred stock ($50
par) and $300,000 of debt. OFC currently pays a common stock cash dividend of $2. The common stock
sells for $38, and dividends have been growing at about 10% per year. Debt currently provides a yield to
maturity to the investor of 12%, and preferred stock pays a dividend of 9% to yield 11%. Any new issue
of securities will have a flotation cost of approximately 3%. OFC has retained earnings available for the
 Part 2 Comprehensive Exam on Section B

equity requirement. The company's effective income tax rate is 40%. Based on this information, the cost
of capital for retained earnings is:

A. 5.8%.
B. 15.8%.
C. 15.3%.
D. 5.3%.

Question 60
Schmidt, Inc. issues a $10 million bond with a 6% coupon rate, 4-year maturity, and annual interest
payments when market interest rates are 7%. Time value of money factors are listed below.

PV of $1 @ 7% for 4 years = 0.7629

PV ordinary annuity @ 7% for 4 years = 3.38721*

Solutions are computed using present value tables. Due to rounding errors, the solution may be slightly
different if a calculator is used.

What is the initial carrying value of the bonds?

A. $9,661,326
B. $9,400,000
C. $10,000,000
D. $10,338,721

Question 61
If the price of the underlying asset increases, what happens to the value of call and put options?

A. Put options will be worth more, call options will be worth less.
B. Put options will be worth less, call options will be worth more.
C. Both call and put options will be worth more.
D. Both call and put options will be worth less.

Question 62
Which of the following is an inventory control practice that minimizes investments in inventory by
completing all operations as they are needed?

A. Kanban
B. Economic order quantity
C. Just-in-time (JIT)
D. Safety stock analysis

Question 63
Which of the following is a reason a firm can benefit from going public?

A. Paying the legal fees, auditing fees, consulting fees, and regulatory fees associated with the IPO
process
B. Size of capital raised
C. Not always being able to sell stock in an IPO at what they believe is the firm's value
 Part 2 Comprehensive Exam on Section B

D. More disclosure requirements

Question 64
Which of the following is an example of an indirect exchange rate from an American perspective?

A. £0.5125/$
B. $0.006900/¥
C. $1.5637/€
D. 115.23/€

Question 65
Which of the following is true when a company's equity beta is 0.9?

A. Returns on the stock will be less volatile than the overall market.
B. Returns on the stock will be more volatile than the overall market.
C. The stock incurs the same level of systematic risk as stocks with similar credit ratings.
D. The stock incurs the same level of unsystematic risk as stocks with similar credit ratings.

Question 66
A bankers' acceptance (BA) is best described as

A. a means of effecting payment for merchandise sold in import-export transactions.

B. a form of credit pledging accounts receivable for collateral.
C. a form of credit pledging inventory for collateral.
D. a source of unsecured short-term financing based on an advance rate.

Question 67
The following information relates to Eagle Company's material A:

Assuming that the units of material A will be required evenly throughout the year, the safety stock and
reorder point, respectively, would be:

A. 600; 750.
B. 750; 600.
C. 600; 1,350.
D. 750; 1,350.

Question 68
A company plans to tighten its credit policy. The new policy will decrease the average number of days in
collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70% − 60%.
The company estimates that projected sales would be 5% less if the proposed new credit policy is
implemented. If projected sales for the coming year are $50 million, calculate the dollar impact on
 Part 2 Comprehensive Exam on Section B

accounts receivable of this proposed change in credit policy. Assume a 365-day year and do not round
intermediate calculations.

A. $3,082,191.78 decrease
B. $2,636,986.30 decrease
C. $3,287,671.23 decrease
D. $1,335,614.44 decrease

Question 69
Which of the following financial instruments generally provides the largest source of short-term credit
for small firms?

A. Installment loans
B. Trade credit
C. Commercial paper
D. Mortgage bonds

Question 70
The shares of Milton Inc. fell sharply today after the company announced that it is increasing its regular
cash dividend distributions. Which of the following explanations may explain investors’ negative
reaction?

A. Changes in regular cash dividends are made frequently so that the company's management can
adjust for changes in short-term earnings.
B. Investors previously believed the company had many lucrative growth opportunities. By
announcing higher regular cash dividends, the company is sending a signal that it doesn't have
enough positive NPV projects to use all the money.
C. Investors expected that the company would announce a stock repurchase rather than a cash
dividend increase. Since a change in dividend policy is commonly viewed as a weaker signal than
a stock repurchase, the share price fell on the news of the dividend increase.
D. Although cash flow increased by a large amount, net income was lower than expected.

Question 71
A professional association has arranged for a lockbox system to process annual conference registration
fees. How will this decision affect cash collections?

A. Mail float may be lengthened, but availability float is shortened.

B. Mail float and clearing float are both shortened.
C. Clearing float is reduced because deposits are handled on the day they are received.
D. Processing float is reduced because deposits are handled on the day they are received.

Question 72
Price earnings ratios are often used to compare the values of different companies. Which of the
following is most likely to be used if a company currently has no profits?

A. Some analysts will compare the growth rate of sales.

B. No one would consider buying a stock with no income.
C. Some analysts will compare price per share to earning per share anyway.
 Part 2 Comprehensive Exam on Section B

D. Some analysts will compare price to sales ratios, or price to operating income ratios.

Question 73
A Company is set to offer a plain vanilla senior bond at a spread of 50 basis points. B Company is also
offering a plain vanilla senior bond at a spread of 75 basis points. Based on Moody's, the credit rating of
A and B companies are Aaa and A, respectively. Just a week after the issuance of the mentioned bonds,
C Company offered a similar debt instrument and was rated by Moody's as Aa. Which of the following
best describes the spread that investors will likely take for C Company's debt issuance?

A. Less than 50 basis points

B. More than 75 basis points
C. More than 75 basis points or less than 50 basis points
D. Between 50 and 75 basis points

Question 74
Tunerecord Unit Co. stock was trading last year at $24. There were two types of options available on the
stock. Call options with a strike price of $24, which expire at the end of the year, were trading at $9.60.
Put options with a strike price of $24, which expire at the end of the year, were trading for

$2.40. Berniss invested $144 in common stock. Jewel invested $144 in the call options. Reynardo
invested $144 in the put options. At the end of one year the price of Tunerecord Unit stock is $20.00.
How much money did Berniss make or lose from this investment?

A. $0
B. $24 profit
C. $24 loss
D. $120 profit

Question 75
When calculating the weighted-average cost of capital (WACC), an adjustment is made for taxes because

A. equity is risky.
B. the interest on debt is tax deductible.
C. preferred stock is used.
D. equity earns higher return than debt.

Question 76
Storm Electronics has set up a formal line of credit of $2 million with First Kentucky Bank. The line of
credit is good for up to three years. The bank will be charging them an interest rate of 6.25% on the
loan, and in addition the firm will pay an annual fee of 60 basis points, 0.60%, on the unused balance.
The firm borrowed $1,500,000 on the first day the credit line became available, and this amount is
outstanding all year. What is the firm's effective interest rate on this line of credit? Round your final
percentage answer to two decimal places.

A. 6.85%
B. 5.65%
C. 6.25%
D. 6.45%
 Part 2 Comprehensive Exam on Section B

Question 77
Using a 360-day year, what is the opportunity cost to a buyer of not accepting terms 3/10, net 45?

A. 30.86%
B. 10.29%
C. 31.81%
D. 24.74%

Question 78
A stock has a beta of 1.5 and an expected return of 14%. Given a risk-free rate of 2% and a market risk
premium of 6%, an investor should:

A. Buy the stock because it is undervalued.

B. Buy the stock because it is overvalued.
C. Sell the stock because it is undervalued.
D. Sell the stock because it is overvalued.

Question 79
A U.S. company currently has domestic operations only. It is considering an equal-size investment in
either Canada or Britain. The data on expected rate of return and the risk associated with each of these
proposed investments are given below.

A. Neither investment
B. The British investment
C. Unable to determine based on data given
D. The Canadian investment

Question 81
What is the payoff for the owner of a put option with a strike price of $63 if the underlying stock price at
expiration is $43?

A. $106
B. $43
C. $20
D. $63
 Part 2 Comprehensive Exam on Section B

Question 82
UltraFlex Diving Boards Inc. just paid a dividend of $1.50. If the firm's growth in dividends is expected to
remain at a flat 4 percent forever, then what is the cost of equity capital for Ultra Flex Diving Boards if
the price of its common shares is currently $26.00?

A. 5.77%
B. 6.00%
C. 9.77%
D. 10.00%

Question 83
Factoring is best described as:

A. assigning a spread to a base interest rate.

B. requiring a percentage of an unsecured loan to be held on deposit.
C. the liquidation of inventory when a loan goes into default.
D. the sale or transfer of accounts receivable in a secured short-term loan to a third party.

Question 84
Daniel Co. stock is currently trading at $38.15 per share. The company pays a regular cash dividend of
$0.80 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. Assuming there is
no new information released about the company. How much do you expect the company's stock to
trade for tomorrow? Assume there are no taxes involved.

A. $0.80
B. $37.35
C. $38.95
D. $38.15

Question 85
Which of the following types of business divestitures takes place when a firm creates a new company
based on one of its product lines?

A. Spin-off
B. Equity carve-out
C. Split-up
D. Tracking stock

Question 86
The Frame Supply Company has just acquired a large account and needs to increase its working capital
by $100,000. The controller of the company has identified the following three alternative sources of
funds.

Alternative A: Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be
required.

Alternative B: Issue $110,000 of 6-month commercial paper to net $100,000. (New paper would be
issued every six months.)
 Part 2 Comprehensive Exam on Section B

Alternative C: Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance
would be required.

The annual effective interest rate cost of Alternative B is:

A. 10.0%.
B. 20.0%.
C. 9.1%.
D. 18.2%.

Question 87
A market specialist who facilitates exchanges by buying and selling securities from their own holdings is
called a(n)

A. investor.
B. broker.
C. dealer.
D. investment banker.

Question 88
What should be used when importers and exporters are prohibited from exchanging money?

A. Letter of credit
B. Draft
C. Countertrade
D. Bill of exchange

Question 89
A company's current dividend is $2 for a share of stock currently selling at $50. If the company issues
new common stock, it expects to pay flotation costs of 10%. The company's marginal tax rate is 40%. If
the company projects a long-term growth in dividends of 8%, its after-tax cost of new equity is closest
to:

A. 12.44%.
B. 12.32%.
C. 12.8%.
D. 12%.

Question 90
Which of the following provides a spontaneous source of financing for a firm?

A. Accounts payable
B. Mortgage bonds
C. Accounts receivable
D. Debentures

Question 91
Fortune Hotels issues an IPO on a best-effort basis. The company's investment bank demands a spread
 Part 2 Comprehensive Exam on Section B

of 20 percent of the selling price. Five million shares are issued. The average selling price remains at $31.
How much did the investment bank receive?

A. $124.0 million
B. $186.0 million
C. $31.0 million
D. $155.0 million

Question 92
There are three common factors that influence both the shape and level of yield curves. Which of the
following is not one of the three factors?

A. Interest rate risk

B. The real rate of interest
C. The foreign exchange rate
D. Expected rate of inflation

Question 93
A positive change in net working capital represents:

A. an increase in fixed assets greater than a decrease in cash.

B. an increase in accounts receivable greater than a decrease in inventory.
C. an increase in cash equal to a decrease in accounts receivable.
D. an increase in inventory equal to an increase in accounts payable.

Question 94
A(n)_______________________ is when a firm offers additional ownership shares for a stock that is
already publicly listed.

A. secondary public offering

B. initial public offering
C. stock trade
D. public debt-offering

Question 95
Baljit Inc. purchased machinery from a Japanese firm and will have to pay ¥278,450,000 in 90 days. Baljit
has three choices: (1) wait 90 days and purchase the Yen on the spot market on settlement date, (2)
enter into a forward contract with a rate of ¥105.46/$ to buy the required Yen on the settlement date,
or (3) purchase the Yen today on the spot market at a rate of ¥102.50/$. The risk-free rate is 6% in both
Japan and the US. Assuming Baljit is risk averse, what is its best option?

A. Wait and purchase the Yen on the spot market on settlement date.
B. Enter into the forward contract to purchase the Yen.
C. Purchase the Yen today on the spot market.
D. Baljit does not need to purchase Yen.

Question 96
In practice, dividends:
 Part 2 Comprehensive Exam on Section B

A. fluctuate more widely than earnings.

B. are usually set as a fixed percentage of earnings.
C. are usually changed every year to reflect earnings changes.
D. usually exhibit greater stability than earnings.

Question 97
An example of a hedging approach to financing is:

A. increasing earnings by purchasing stock puts.

B. matching assets with liabilities of the same maturity.
C. financing building projects with accounts payable.
D. using five-year bonds to finance inventory acquisition.

Question 98
The cross-rates for foreign exchange are shown below.

FCU = foreign currency unit

A. triangular arbitrage.
B. exchange rate hedging.
C. purchasing power parity.
D. interest rate parity.

Question 99
A lockbox system:

A. accelerates the inflow of funds.

B. reduces the need for compensating balances.
C. provides security for late-night deposits.
D. reduces the risk of having checks lost in the mail.

Question 100
Following is an excerpt from Albion Corporation's balance sheet

Albion's bonds are currently trading at $1,083.34, reflecting a yield to maturity of 8%. The preferred
stock is trading at $125 per share. Common stock is selling at $16 per share, and Albion's treasurer
estimates that the firm's cost of equity is 17%. If Albion's effective income tax rate is 40%, what is the
firm's current cost of capital?

A. 12.6%
 Part 2 Comprehensive Exam on Section B

B. 13.9%
C. 13.1%
D. 13.6%