1) Which of the following is NOT an example of an agency cost? A) Paying an accounting firm to audit your financial statements B) Paying an insurance company to assure that building codes have been...

1) Which of the following is NOT an example of an agency cost?
A) Paying an accounting firm to audit your financial statements
B) Paying an insurance company to assure that building codes have been met for new
construction
C) Paying a landscaping firm to maintain your firm's grounds
D) All of the above are agency costs.

2) Which of the statements below is FALSE?
A) Officers of a company or others who have a fiduciary responsibility to the owners can trade
on their acquired private information about the company prior to the information being made
public.
B) One potential problem in the world of finance can arise when some owners or potential
owners have access to more information about a company than do others.
C) Regulation Fair Disclosure (or Reg FD) requires companies to release all material information
to all investors at the same time.
D) The 10-K must be filed within sixty days after the end of the company's fiscal year.
3) Dan Preston made $18,000 in the first movie he ever starred in. Dan soon made more and
more movies and more and more money. At a 46.18% rate of salary increase per movie, how
many movies did Dan make in order to earn $5,350,000 in a single movie?
A) 84 movies
B) 34 movies
C) 22 movies
D) 15 movies
We can solve for the number of movies using the present value formula.
Present value = Future value/(1+r)^n
18000 = 5,350,000/(1+.4618)^n
1.4618^n = 5,350,000/18,000
N log (1.4618) = Log (297.2222)
Solving, we get n = 14.99 (or) 15
4) A wealthy woman just died and left her pet cats the following estate: $50,000 per year for the
next 15 years with the first cash flow today. At a discount rate of 3.2%, what is the feline estate
worth in today's dollars?
A) $588,352.84
B) $607,180.14
C) $750,000.00
D) $774,000.00
Present value of annuity due = A x (1-(1/(1+r)^n))/r * (1+r)
 50,000 x (1-(1/(1+.032)^15))/.032 * (1+.032)
 607,180.14
5) James is a rational investor wishing to maximize his return over a 20-year period. The current
yield curve is inverted with one-year rates at 5.00% and 20-year rates at 3.50%. James will invest
in the lower-rate 20-year bonds if:
A) he thinks rates will fall in the future and locking in long-term rates today may provide the
highest long-run average return.
B) he thinks rates will rise in the future and locking in long-term rates today may provide the
lowest long-run average return.
C) he thinks rates will remain flat at 5% in the future and locking in long-term rates today will
prevent him from appearing greedy to those without this investment opportunity.
D) James has no idea what to do and should just skip this question.
6) Which of the choices below is FALSE?
A) When issuing a putable bond, the firm anticipates that interest rates will rise over the life of
the bond.
B) When issuing a callable bond, the firm anticipates that interest rates will fall over the life of
the bond.
C) When issuing a callable bond, the firm anticipates that interest rates will rise over the life of
the bond.
D) A putable bond is essentially the reverse of a callable bond.
7) In ________ , current prices reflect the price history and trading volume of the stock. It is of
no use to chart historical stock prices to predict future stock prices such that you can identify
mispriced stocks and routinely outperform the market.
A) weak-form efficient markets
B) strong-form efficient markets
C) semi-strong-form efficient markets
D) operational efficient markets
8) Both assets A and B plot on the SML. Asset A has an expected return of 15% and a beta of
1.7. Asset B has an expected return of 12% and a beta of 1.1. What is the risk-free rate of return?
A) 5.0%
B) 6.5%
C) 11.5%
D) It cannot be determined from this information.
As per the CAPM,
Expected return = Risk free rate + Beta (market risk premium)
.15 = RF + 1.7 RP – Equation (1)
.12 = RF + 1.1 RP – Equation (2)
We have to solve the above 2 equations algebraically.
Solving, we get:
.03 = 0.6 RP
RP = .03/.6 = 0.05 (or) 5.0%
9) Lennon, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax
cost of $80,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are:
$15,000, $25,000, $35,000, $45,000 and $55,000. Lennon uses the net present value method and
has a discount rate of 9%. Will Lennon accept the project?
A) Lennon accepts the project because the NPV is $129,455.25.
B) Lennon accepts the project because the NPV is 79,455.25.
C) Lennon accepts the project because the NPV is $49,455.25.
D) Lennon accepts the project because the NPV is less than zero
Year PV factor Cash PV of cash
at 9% flows flows
0 1.00000 ($80,000) ($80,000.00)
1 0.91743 $15,000 $13,761.47
2 0.84168 $25,000 $21,042.00
3 0.77218 $35,000 $27,026.42
4 0.70843 $45,000 $31,879.13
5 0.64993 $55,000 $35,746.23
NPV = $49,455.25
10) At the end of a project's life, we will recover any initial increases in ________ from the
beginning of the project.
A) working capital
B) depreciation
C) taxes
D) start-up costs
11) Your firm has $2,000,000 available for investment in capital projects. Which combination of
projects is the best, given this budget constraint?
Project Initial Investment NPV
A $750,000 $100,000
B $1,500,000 $125,000
C $500,000 $75,000
D $500,000 $35,000
A) B,C
B) A,B,C
C) A,B,C,D
D) A,C,D
A) B, C = Total NPV = 200,000
B) A, B, C = Budget constraint
C) A, B, C, D = Budget constraint
D) A, C, D = 210,000
12) An adjustment in the pro forma statement may be necessary for ________ expenses in line
with known changes to these expenses that may not correspond directly with sales or production.
A) cash
B) credit
C) selling, general, and administrative
D) cash and credit
13) Managing the relationship between current assets and current liabilities of the firm in order
to improve the flow of funds is called ________.
A) the business operating cycle
B) the cash conversion cycle
C) working capital management
D) the production cycle
14) Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its
manufacturer. The carrying cost is $0.10 per shirt per year. The order cost is $500 per order.
What is the optimal order quantity for the t-shirt inventory (rounded to...