1. Recently the S&P 500(the Standard and Poor’s 500) closed around:
A.900
B.2100
C.2600
D.4750
E.7400
F. 9000
G12800
H.26000

2. HaleyDunphy Inc. is a house hold products firm that is considering developing a new detergent. In evaluating whether to go ahead with the new detergent project, which of the following statement is most correct?
A. The company will produce the detergent in a building that they already own and there is absolutely no alternative use for the building. The cost of build is therefore zero and should be excluded from the analysis.
B. The company will need to use some equipment that it could have leased to another company. This equipment lease could have generated $200,000 per year in after-tax income. The $200,000 should not be considered a cost because the equipment can no longer be leased.
C. The company will need to hire 10 new workers whose salaries and benefits will total $400,000 per year. Labor costs are not part of capital budgeting and should be excluded.

3. When investors increase their required rate of return for a company, its cost of capital increases simultaneously.
A. True
B. False

4. Lily Tucker-Pritchett Boutique has a bond issue outstanding that matures in fourteen years. The bonds pay interest semi-annually. Currently, the bonds are selling for $980, the par value of the bonds is $1,000, and they carry and 8 percent coupon with interest paid semi-annually. The firm’s marginal tax rate is 35 percent and its average tax rate is 30 percent. What is the firm’s cost of debt?
A. 2.88 percent
B. 5.36 percent
C. 5.45 percent
D. 5.76 percent
E. 8.24 percent
F. 10.72 percent

5. Recently an Ahead of the Tape article cantered on Remy Cointreau, maker of Remy Martin cognac, and mentioned:
A. That it was just purchased by Pernod Ricard, which owns the brands Absolut, Jameson, Beefeater, and Glenlivet, and is moving to Ireland for tax purposes.
B. Is now also the world’s largest producer of electronic vapor cigarettes.
C. Is doing well because its competition, Hennessy Louis Vuitton, maker of Hennessy cognac is experiencing cognac shortages.
D. Lost over $79 million as a result of a security breach on its cloud server.
E. Over 40 percent of its cognac which is currently being aged has been hit by a fungus which may have been placed there by a competing firm.
F. In a 1978 acquisition, Remy Cointreau, purchased a bottling company which owned a contract that was overlooked at the time, but was a 1976 agreement which gives them a one-third ownership in marketing rights for all “present and future” Star War products, which last year accounted for over 10 percent of their total revenue.

6. Given the recent drop in mortgage interest rates you have decided to refinance your home. Exactly ten years ago, you obtained $200,000 30-year mortgage with monthly payments and a fixed annual rate of 8% with monthly payments. Today you can get a 30-year loan for the currently outstanding loan balance at 6% interest. What is the outstanding balance on the loan today, if you just made the 120th payment?
A. 72,743
B. 193,148
C. 184,692
D. 175,449
E. 187,394
F. 160,562

7. Which of the following is NOT included in computing EBT (earnings before taxes)?
A. Dividends
B. Depreciation expense
C. Marketing expenses
D. Cost of goods sold

8. Manny Delgado, Inc. is introducing a new product and has an expected change in EBIT of $800,000. Manny Delgado, Inc. has a 40 percent marginal tax rate. This project will also produce $100,000 of depreciation per year. In addition, this project will also cause the following changes:
　                   WITHOUT THE PROJECT WITHOUT THE PROJECT
Accounts receivable $35,000                         $63,000
Inventory                         65,000                                     70,000
Accounts payable          70,000                                     90,000

What is the project’s free cash flow?
A. $407,000
B. $527,000
C. $567,000
D. $593,000
E. $627,000
F. $633,000

9. Because much of project’s risk is diversified away within the firm, the project standing alone risk is an appropriate measure of the meaning full level of risk of a capital-budgeting project.
A. True.
B. False
C. None of the above.

10. Dr. Pepper is the world’s most perfect food.
A. True
B. False

11. Your company’s stock sells for $42.50 per share, the last dividend was $2.00, and its growth rate is a constant 5 percent. What is the firm’s cost of new equity kcs?
A. 9.20%
B. 9.94%
C. 10.50%
D. 11.75%
E. 12.30%

12. You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?
A. 47%
B. 19%
C. 4.7%
D. 12.8%

13. A company just paid a $2.00 per share dividend on its common stock. The dividend is expected to grow at a constant rate of 7 percent per year. The stock currently sells for $41 a share. What is the cost of newly issued common stock kcs ?
A. 11.76%
B. 11.88%
C. 11.98%
D. 12.22%
E. 12.30%

14. Last year Cheerios, Inc.’s operating income (EBIT) increased by 22 percent while its sales increased by 15%, while EPS rose by 44 percent. The firm’s tax rate is 33%. What is Cheerios, Inc.’s degree of operating leverage (DOL)?
A. 68
B. 2.0
C. 1.47
D. 2.19
E. 7.35
F. 29.48

15. The Phil Dunphy Real Estate Company has an equal amount of low-risk projects, average-risk projects, and high-risk projects. The Phil Dunphy Real Estate Company estimates that the overall company’s WACC (or weighted average cost of capital) is 12 percent. This is also the correct cost of capital for the company’s average-risk projects. The company’s CFO argues that, even though the company’s projects have different risks, the cost of capital for each project should be the same because the company obtains its capital form the same sources. If the company follows the CFO’s advice, what is likely to happen overtime?
A. The company will take on bad low-risk project and reject good high-risk projects.
B. The company will take on bad high-risk projects and reject good low-risk projects.
C. Things will generally even out over time, and therefore, the risk of the firm should remain constant over time.
D. Statements A and C are correct.
E. Statements B and C are correct.

16. Which of the following items should Claire’s Beverages Inc. take into account when evaluating a proposed prune juice project?
A. The company spent $300,000 two years ago to renovate its Cincinnati plant. These renovations are made in anticipation of another project that the company ultimately did not undertake.
B. If the company did not proceed with the prune juice project, the Cincinnati plant could generate leasing income of $75,000 a year.
C. If the company proceeds with the prune juice project, it is estimated that sales of the company’s apple juice will fall by 3 percent a year as a result of the prune juice project.
D. Statements B and C are correct
E. All of the statements above are correct

17. Storm King Associates has a total asset turnover ratio of 1.90 and a return on total assets of 7.2%. what is Storm King’s net profit margin?
A. 13.68
B. 3.79
C. 9.10
D. None of the above

18. One method of accounting for systematic risk for a project involves identifying a publicly traded firm that is engaged in the same business as that project and using its required rate of return to evaluate the project. The method is referred to as_______.
A. The accounting beta method
B. The certainty equivalent approach
C. The pure play method
D. Sensitivity analysis

19. Cameron Tucker Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process S has a cost of $8,000 and will produce net cash flows of $5,000 per year for 2 years. Process L will cost $11,500 and will produce cash flows of $4,000 per year for 4 years. The company has contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if Cameron Tucker’s cost of capital is 10 percent what would be the NPV of project S using a replacement chain to make it a 4-year project?
A. $677.69
B. $1,098.89
C. $1,179.46
D. $1,237.76
E. $1,312.31

20. Real options are traded on both the American Exchange and Chicago Board Options Exchange (CBOE)
A. True
B. False

21. A major corporation is considering a capital budgeting project that involves the development of a new technology. The controller estimates the net present value to be negative, yet argues that the company should invest in the project. Which of the following statements is most correct?
A. The controller should be fired for making such a poor decision.
B. The controller may be considering the option to expand or modify the project in the future.
C. The profitability index may be greater than one, giving an accept decision.
D. Capital rationing may exist for the current year.

22. On the income statement, sales revenue, minus cost of goods sold and operating expenses, equals which of the following?
A. Retained earnings
B. Net profit.
C. EBIT
D. Net income available to preferred shareholders.

23. The video in class on “The Retirement Gamble” featured:
A. Zooey Deschannel, who plays Jess on New Girl.
B. Taylor Shea, the retired 71 year-old inventor of Silly Putty.
C. Mark Zuckerberg, the CEO at Facebook.
D. Bart Simpson, the animated character.
E. Robert Hiltonsmith, a 31 year-old economist.
F. Lea Michele, who played Rachel Berry on Glee.
G. Ben E. King, the singer of the song “Stand by Me”, who was in his mid-70s when the documentary was shot (he died last week, but that is a current event and not in the video)
H. Terry Goodson, a 68 year-old retired rodeo cowboy.
I. Former Vice president Joe Biden.
J. Former Vice President Dick Cheney.

24. Given the following information on Javier Delgado Inc.’s capital structure, compute the company’s weighted average cost of capital.
Type of Percent of          Before-Tax
Capital Capital Structure Component Cost

Bonds             40%                7.50%
Preferred Stock 5%                11%
Common Stock 55%                15%

The company’s marginal tax rate is 40%
A. 13.3%
B. 7.1%
C. 10.6%
D. 10%
E. 7.83%

25. If a company’s tax rate increase, then, all else equal, its weighted average cost of capital will increase.
A. True
B. False

26. In the video “Thinking Money” which of the following did NOT take place?
A. Someone drank wine while getting an MRI
B. Why we like furniture that we have to put together was discussed.
C. The words “Ba, ba, ba” were spoken by the same person with different mouth movements.
D. A clip from the movie Wolf of Wall Street was examined.
E. There was a video of shopping in a Safeway grocery store taken from the movie Moscow on the Hudson where someone has a breakdown and falls down in the aisle.
F. Looked at buying jam and the problems when there are too many choices.
G. A clip from the 2006 James Bond movie Casino Royale illustrating how people find individuals with wealth to be more attractive.
H. How the percent of people participating in organ donation is impacted by automatically enrolling people.

27. In general, the least expensive source of capital is ________.
A. Preferred stock.
B. New common stock.
C. Debt
D. Retained earnings.
E. Bitcoin.

28. You have been offered a credit card with an interest rate of 1.5% per month. This is equivalent to an effective annual rate (EAR) of:
A. 24.00%
B. 19.56%
C. 18.00%
D. 12.17%

29. Which of the following would you NOT consider when making a capital budgeting decision?
A. The additional taxes a firm would have to pay in the next year.
B. The cost of a marketing study completed last year.
C. The opportunity to lease out a warehouse instead of using it to house a new production line.
D. The change in direct labor expense due to the purchase of a new machine.

30. An attempt to profit by converting dollars to yen, yen to euros, and euros back to dollars would be an example of:
A. Hedging.
B. Speculation.
C. Intervention.
D. Arbitrage.

31. Which of the following would decreases free cash flows? A decrease in:
A. Depreciation
B. Interest payments
C. Dividend payments
D. EBIT
E. Answers A, B, and D
F. Answers A and D
G. Answers A, B, C, and D.

32. Interest payments on a loan obtained specifically to fund a new project should be considered an incremental cash flow for the new project when determining the accept/reject decision.
A. True
B. False

33. If the market price of a bond increases, then:
A. The coupon rate increases
B. The yield to maturity decreases
C. They yield to maturity increases
D. None of the above

34. Which of the following has a beta of zero?
A. The market
B. A risk-free asset.
C. A high-risk asset.
D. Both A and B

35. Bonds cannot be worth less than their book value.
A. True
B. False

36. If a market is weak form efficient, an investor can make higher than expected profits by studying the past price patterns of a stock.
A. True
B. False

37. The issuance of bonds to raise capital for a corporation:
A. Magnifies the returns to the stockholders.
B. Is a cheaper form of capital than the issuance of common stock.
C. Increases risk to the stockholders.
D. All of the above.

38. Last year Gloria Delgado-Prichett, Inc., experienced a 34% increase in earnings per share on 11% increase in sales. If management knows that Gloria Delgado-Pritchett’s DOL is 1.5, what is its DFL?
A. 3.09
B. 2.06
C. 3.55
D. 1.67

39. In a perfectly efficient market, all assets would plot on the Security Market Line.
A. True
B. False

40. Advantages of privately placing debt include all of the following except:
A. Speed
B. Flexibility
C. Restrictive covenants
D. Reduced placement costs

41. What is the contribution margin on this product?

Sales Price per unit = $10
Units sold = 500
Variable Cost per unit = $4
Total Fixed Cost = $400
Marginal Tax Rate = 40%
Average Tax Rate = 30%

A. 4.8%
B. 8%
C. 24%
D. 28%
E. 40%
F. 60%

42. For any number of compounding periods per year greater than 1, EAR (also called the APY) will always be greater than the APR.
A. True
B. False

43. A bond’s “spread” refers to the difference between its Moody’s rating and its Standard & Poor’s rating.
A. True
B. False

44. Seriously, the world’s most perfect food really is Dr. Pepper.
A. True
B. None of the above.

1. Recently the S&amp;P 500(the Standard and Poor’s 500) closed aro...

1. Recently the S&P 500(the Standard and Poor’s 500) closed aro...