QUESTION 1

1. For a company that is not planning to change its target capital structure, the proportions of debt
and equity used in calculating the weighted cost of capital should be based on the current ____
value weights of the individual components.
a. replacement
b. market
c. book
d. accounting

0.5 points   
QUESTION 2
1. Archive Storage earned $3.20 a share on sales of $13.6 million. Archive has determined that its
degree of operating leverage is 1.87 and its degree of financial leverage is 2.91. If sales are
expected to increase 15%, what will be the EPS forecast?
a. $2.61
b. $4.60
c. $5.81
d. $3.68

0.5 points   
QUESTION 3
1. Dividend payments reduce all of the following balance sheet items EXCEPT ____.
a. retained earnings
b. fixed assets
c. cash
d. stockholders' equity

0.5 points   
QUESTION 4
1. The cost of internal equity is cheaper than the cost of external equity. Which of the following
statements is (are) correct?
 I.  External equity may incur expenses that are deducted from the capital received for the sale of
the
     security.
II. Corporations generally discount the price of the securities that are sold to the public in order
to raise
     capital.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements I and II are correct.
d. Neither statement I nor II is correct.

0.5 points   
QUESTION 5
1. Which type of financial model yields a distribution of possibilities rather than a single value?
a. deterministic
 b. probabilistic
c. optimization
d. static

0.5 points   
QUESTION 6
1. The financial plan that is a “blueprint” detailing where the firm wants to be at some future point
in time is the ___________.
a. Operational Plan
b. Strategic Plan
c. Executive Manifest
d. FASB Plan

0.5 points   
QUESTION 7
1. Strategic planning for a firm deals with which of the following items?
 I. The overall direction of the firm
II. Marketing and production needs
a. Both statements I and II are correct.
b. Neither statement I nor II is correct.
c. Only statement II is correct.
d. Only statement I is correct.

0.5 points   
QUESTION 8
1. The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget
of $200,000. If Altern Music raises all its funds internally and follows the "passive residual
policy," what are the annual dividends per share?
a. $1.70
b. $2.55
c. $2.81
d. $1.39

0.5 points   
QUESTION 9
1. Cash budgets are typically prepared on a(n) ________ basis and subdivided into __________.
a. annual; months
b. annual; quarters
c. monthly; weeks
d. monthly; days

0.5 points   
QUESTION 10
1. Borkstran has sales of $7.8 million, a variable cost ratio of 0.6, EBIT of $1.1 million, and a
degree of combined leverage of 3.4. What is Borkstran's degree of financial leverage?
 a. 0.84
b. 0.73
c. 1.20
d. 2.29

0.5 points   
QUESTION 11
1. More frequent compounding results in ____ future values and ____ present values than does less
frequent compounding at the same interest rate.
a. higher; lower
b. lower; lower
c. lower; higher
d. higher; higher

0.5 points   
QUESTION 12
1. A DFL (degree of financial leverage) of 3.0 indicates a 27% increase in EPS is the result of a(n)
____ increase in EBIT.
a. 6%
b. 81%
c. 9%
d. 3%

0.5 points   
QUESTION 13
1. The third step in the preparation of a cash budget is the determination of ____________.
a. cash receipts
b. asset value
c. desired monthly beginning cash balance
d. future spending

0.5 points   
QUESTION 14
1. The expectations, liquidity premium, and market segmentation theories all attempt to ____.
a. define investors' required rates of return
b. account for the differences between systematic and unsystematic risks in the securities
market
c. predict the values of effective interest rates
d. explain the shape of the yield curve

0.5 points   
QUESTION 15
1. Over the 10-year period from 1978 through 1987, the compound annual rate of return on U.S.
Treasury bills was 9.17%. Over the same time period, the average annual inflation rate was
6.39%. Therefore, the ____.
 a. required rate of return was 6.39 percentage points
b. inflation premium was 2.78 percentage points
c. real expected rate of return was 9.17 percentage points
d. realized real rate of return was 2.78 percentage points

0.5 points   
QUESTION 16
1. Computerized financial planning models may be classified as any of the following EXCEPT
____________.
a. deterministic
b. optimistic
c. probabilistic
d. None of these are correct

0.5 points   
QUESTION 17
1. What would be the degree of financial leverage for Foggy Futures Weather Forecasters if the
company has earnings before interest and taxes of $750,000, has a 4.5% loan on $1,000,000, and
is in the 38% tax bracket? The firm does not have any preferred stock outstanding.
a. 1.06
b. 1.78
c. 1.22
d. 0.97

0.5 points   
QUESTION 18
1. Which of the following factors influence a firm's ability and/or willingness to pay dividends?
a. liquidity
b. borrowing capacity and access to capital markets
c. earnings stability
d. All of these are correct

0.5 points   
QUESTION 19
1. Kermit's Hardware's (KH) fixed operating costs are $20.8 million, and its variable cost ratio is
0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has
200,000 shares of common stock outstanding. The firm has revenues of $32.2 million, and its
marginal tax rate is 40%. Compute KH's degree of combined leverage.
a. 4.7
b. 5.5
c. 26.8
d. 29.1

0.5 points   
QUESTION 20
 1. There are two primary ways that capital is raised. Which of the following statements is (are)
correct?
 I.  Capital is raised internally by using retained earnings.
II. Capital is raised externally by selling fixed assets.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements I and II are correct.
d. Neither statement I nor II is correct.

0.5 points   
QUESTION 21
1. Firms with the ____ earnings growth tend to have the ____ dividend payout ratio.
a. highest; highest
b. lowest; highest
c. lowest; lowest
d. highest; lowest

0.5 points   
QUESTION 22
1. Which of the following does not contain restrictive covenants?
a. Preferred stock agreements
b. Agency restrictions
c. Bond indentures
d. Lease contracts

0.5 points   
QUESTION 23
1. The present value of a single payment can be represented as _____.
a. PV0 = FVn ÷ (PVIFi,n)
b. PV0 = FVn [1/(1 + i)n]
c. PV0 = FVn(PVIFAi,n)
d. None of these are correct

0.5 points   
QUESTION 24
1. Unlike long-term financial forecasts, short-term financial forecasts (one year or less) tend to be
more ___________.
a. speculative
b. detailed
c. helpful
d. strategic

0.5 points   
QUESTION 25
 1. Surfin’ Bubba Surfboard Shop is currently selling for $34.25 a share with a current dividend of
$1.00. It is estimated that Surfin’ Bubba will have a growth rate in earnings of 10% into the
foreseeable future. If Surfin’ Bubba plans to raise new capital for expansion, what is the cost of
new equity if flotation costs are 8% of the price?
a. 13.49%
b. 12.21%
c. 11.57%
d. 10.87%

0.5 points   
QUESTION 26
1. In 1998, Hepler Company's sales were $26 million and its total assets were $10 million. Current
liabilities were $4 million, and total equity was $2 million. Hepler Company's sales for 1999 are
forecasted to be $34 million, earnings after taxes are expected to be 5 percent of sales, and
dividends of $800,000 are expected to be paid. Assuming that the ratios "assets to sales" and
"current liabilities to sales" in 1998 remain the same in 1999, determine the approximate amount
of additional financing required.
a. $1,446,154
b. $1,746,154
c. $6,946,154
d. $946,154

0.5 points   
QUESTION 27
1. The cost of common stock equity may be estimated by using which of the following?
a. Price/Earnings ratio
b. Earnings curve
c. Capital asset pricing model
d. Dupont analysis

0.5 points   
QUESTION 28
1. A negative DOL indicates the percentage ____ in operating losses that occurs as the result of a
1% increase in output.
a. increase
b. reduction
c. change
d. None of these are correct

0.5 points   
QUESTION 29
1. The cost of debt must account for all of the following inputs EXCEPT ____.
a. issuance costs
b. the tax rate
c. bond ratings
 d. flotation costs

0.5 points   
QUESTION 30
1. Calculate Bodacious Bodywear’s weighted average cost of capital under the following
conditions:
*The firm has 30% debt, 10% preferred stock, and 60% equity.
*The cost of common equity is 14% and the cost of preferred stock is 9%.
*The firm’s debt has a before-tax cost of debt of 10% (including flotation costs).
*The firm is in the 40% tax bracket.
a. 8.5%
b. 11.1%
c. 10.5%
d. 12.3%

0.5 points   
QUESTION 31
1. In those industries in which capacity can be added only in discrete or “lumpy” increments, fixed
assets are increased in a ____ manner as sales increase.
a. proportional
b. stepwise
c. discriminant
d. direct relationship

0.5 points   
QUESTION 32
1. The degree of combined leverage is equal to the degree of operating leverage ____ the degree of
financial leverage.
a. multiplied by
b. divided by
c. subtracted from
d. added to

0.5 points   
QUESTION 33
1. You sold 100 shares of stock today for $30 per share that you paid $20 for 6 years ago.
Determine the average annual rate of return on your investment, assuming the stock paid no
dividends.
a. 150%
b. 25%
c. 8.33%
d. 7%

0.5 points   
QUESTION 34
 1. Finance researcher Myron Gordon argues that ____.
a. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's
value
b. the clientele effect has no influence on share value
c. risk-averse shareholders may prefer some dividends over the promise of future capital
gains if the interest rate is expected to decline
d. the existence of transaction costs has no impact on the dividend decision

0.5 points   
QUESTION 35
1. The dividend ____ states that investors will tend to be attracted to firms that have dividend
policies consistent with the investor's objectives.
a. "clientele effect"
b. signal
c. passive residual theory
d. "informational content"

0.5 points   
QUESTION 36
1. The ____ theory of the yield curve takes into account the supply and demand interactions
between buyers and lenders of securities.
a. liquidity premium
b. market segmentation
c. preferred habitat
d. expectations

0.5 points   
QUESTION 37
1. Rent, insurance, and the salaries of top management are examples of ____.
a. fluctuating costs
b. fixed costs
c. variable costs
d. capital costs

0.5 points   
QUESTION 38
1. Jones Company's sales last year were $25 million, and its total assets were $8 million. Accounts
payable were $2 million, and common stock and retained earnings were $5 million. Jones' sales
are forecasted to be $30 million this year, earnings after tax are expected to be 3% of sales, and
dividends of $250,000 are expected to be paid. Assuming that the ratio of assets to sales and
current liabilities to sales remain the same this year as last year, determine the amount of
additional financing required.
a. $550,000
b. $1,200,000
c. $300,000
 d. None of these are correct

0.5 points   
QUESTION 39
1. Your brother, who is 6 years old, just received a trust fund that will be worth $25,000 when he is
21 years old. If the fund earns 10 percent interest compounded annually, what is the value of the
fund today?
a. $104,602
b. $5,975
c. $6,875
d. $6,575

0.5 points   
QUESTION 40
1. Using rounded whole percents for the various costs and weighted costs, what is the weighted
average cost of capital for Foggy Futures Weather Forecasters? The firm is in the 40% tax
bracket. The optimal capital structure is listed below:

Source of Capital
Weight
Long-Term Debt
25%
Preferred Stock
20%
Common Stock
55%

Debt:
The firm can issue $1,000 par value, 8% coupon interest bonds with a 20-year maturity date. The bond
has an average discount of $30 and flotation costs of $30 per bond. The selling price is $1,000.

Preferred Stock:
The firm can sell preferred stock with a dividend that is 8% of the current price. The stock costs $95. The
cost of issuing and selling the stock is expected to be $5 per share.

Common Stock:
The firm’s common stock is currently selling for $90 per share. The firm expects to pay cash dividends of
$7 per share next year. The dividends have been growing at 6%. The stock must be discounted by $7, and
flotation costs are expected to amount to $5 per share.

Retained Earnings:
The firm expects to have enough retained earnings in the coming year to be used in place of any new
stock being issued.

a.
8%

b.
15%

c.
18%

d.
12%