 Question 1

Which one of the following is a capital budgeting decision?

Selected
Answer: determining how much inventory to keep on hand
Answers: determining how much debt should be borrowed from a
particular lender

deciding whether or not to open a new store

deciding when to repay a long-term debt
determining how much inventory to keep on hand
determining how much money should be kept in the
checking account
 Question 2
The decision to issue debt rather than additional shares of stock is an example
of:

Selected
Answer: the capital structure
decision.
Answers: working capital
management.
a net working capital
decision.
capital budgeting.
a controller's duties.

the capital structure

decision.
 Question 3
The primary goal of financial management is to:

Selected
Answer: maximize the current value per share of the
existing stock.
Answers: maximize current dividends per share of the
existing stock.

maximize the current value per share of the

existing stock.
avoid financial distress.
minimize operational costs and maximize firm
efficiency.
maintain steady growth in both sales and net
earnings.
 Question 4
Which one of the following actions by a financial manager creates an agency
problem?

Selected
Answer: refusing to borrow money when doing so will create losses for
the firm
Answers: refusing to borrow money when doing so will create losses for
the firm
refusing to lower selling prices if doing so will reduce the net
profits

agreeing to expand the company at the expense of

stockholders' value
agreeing to pay bonuses based on the market value of the
company stock
increasing current costs in order to increase the market value
of the stockholders' equity
 Question 5
The internal growth rate of a firm is best described as the:

Selected
Answer: maximum growth rate achievable without external financing of
any kind.
Answers: minimum growth rate achievable if the firm does not pay out any
cash dividends.
minimum growth rate achievable if the firm maintains a constant
equity multiplier.

maximum growth rate achievable without external financing of

any kind.
maximum growth rate achievable without using any external
equity financing while maintaining a constant debt-equity ratio.
maximum growth rate achievable without any limits on the level
of debt financing.
 Question 6
The sustainable growth rate of a firm is best described as the:

Selected
Answer: maximum growth rate achievable without using any external
equity financing while maintaining a constant debt-equity ratio.
Answers: minimum growth rate achievable if the firm does not pay out any
cash dividends.
minimum growth rate achievable if the firm maintains a constant
equity multiplier.
maximum growth rate achievable without external financing of
 any kind.

maximum growth rate achievable without using any external

equity financing while maintaining a constant debt-equity ratio.
maximum growth rate achievable without any limits on the level
of debt financing.
 Question 7

Creative Analysis, Inc. does not want to incur any additional external financing.
The dividend payout ratio is constant. What is their maximum rate of growth?

Selected
Answer: 4.82
percent
Answers:
3.09
percent
3.16
percent
3.84
percent
4.71
percent
4.82
percent
 Question 8
 If Creative Analysis, Inc. decides to maintain a constant debt-equity ratio, what
rate of growth can they maintain?

Selected
Answer: 3.09
percent
Answers: 3.09
percent

4.82
percent
5.12
percent
6.67
percent
7.40
percent
 Question 9

Assume that Delalo, Inc. is operating at full capacity. Also assume that assets,
costs, and current liabilities vary directly with sales. The dividend payout ratio
is constant. What is the external financing needed if sales increase by 10
percent?

Selected
Answer: $616.36
Answers:

$630.64
$332.36

$616.36
$661.60
$1,109.36
 Question 10
 A preferred stock pays an annual dividend of $3.75. What is one share of this
stock worth today if the rate of return is 8 percent?

Selected
Answer: $46.
88
Answers: $.30
$4.0
5
$8.0
0

$46.
88
$52.
50
 Question 11
All else constant, a coupon bond that is selling at a discount, must have:

Selected
Answer: a coupon rate that is less than the yield
to maturity.
Answers: a coupon rate that is equal to the yield
to maturity.
a market price that is more than par
value.
semi-annual interest payments.
a yield to maturity that is less than the
coupon rate.

a coupon rate that is less than the yield

to maturity.
 Question 12
Which one of the following bonds has the greatest interest rate risk?

Selected
Answer: 7-year; 4 percent
coupon
Answers: 3-year; 4 percent
coupon
3-year; 6 percent
coupon
5-year; 6 percent
coupon
7-year; 6 percent
coupon
 7-year; 4 percent
coupon
 Question 13
You own a bond that has an 8 percent coupon and matures 8 years from now.
You purchased this bond at par value when it was originally issued. If the
current market rate for this type and quality of bond is 8.25 percent, then you
would expect:

Selected
Answer: next semi-annual interest payment to be $41.25.
Answers: the yield to maturity on your bond to be 8.12 percent
today.
the current yield to maturity to be 8 percent.

to realize a capital loss if you sold the bond at the

market price today.
next semi-annual interest payment to be $41.25.
the current yield today to be less than 8 percent.
 Question 14
You expect interest rates to decline and wish to capitalize on the anticipated
changes in bond prices. To realize your maximum gain, all else constant, you
should purchase _____ bonds.

Selected
Answer: short-term; high
coupon
Answers: short-term; low
coupon
short-term; high
coupon

long-term; zero
coupon
long-term; low
coupon
long-term; high
coupon
 Question 15
The bonds issued by Jordache Jewelers bear a 7.5 percent coupon, payable
semiannually. The bonds mature in 13 years and have a $1,000 face value.
Currently, the bonds sell at par. What is the yield to maturity?

Selected
Answer: 7.50
percent
 Answers: 7.33
percent
7.41
percent
7.46
percent

7.50
percent
7.67
percent
 Question 16
Westover Ridge offers a 9 percent coupon bond with semiannual payments
and a yield to maturity of 11.68 percent. The bonds mature in 16 years. What
is the market price per bond if the face value is $1,000?

Selected
Answer: $807.8
6
Answers:
$807.8
6
$863.0
8
$916.2
6
$1,453.
10
$1,322.
88
 Question 17
Gerold's Travel Service just paid $1.79 to its shareholders as the annual
dividend. Simultaneously, the company announced that future dividends will
be increasing by 3.2 percent. If you require a 10.5 percent rate of return, how
much are you willing to pay to purchase one share of this stock?

Selected
Answer: $25.
31
Answers: $17.
59
$20.
64
$24.
08
$24.
52
 $25.
31
 Question 18
Jessica's Pharmacy made two announcements concerning their common stock
today. First, the company announced the next annual dividend will be $1.48 a
share. Secondly, all dividends after that will increase by 2.5 percent annually.
What is the maximum amount you should pay to purchase a share of this stock
if your goal is to earn a 12 percent rate of return?

Selected
Answer: $15.
58
Answers: $12.
33
$12.
64
$13.
27

$15.
58
$15.
97
 Question 19
The common stock of BJ's Auto Clinic sells for $38.25 a share. The stock is
expected to pay $1.90 per share next month when the annual dividend is
distributed. BJ's has established a pattern of increasing their dividends by 2.5
percent annually and expects to continue doing so. What is the market rate of
return on this stock?

Selected
Answer: 7.47
percent
Answers: 4.41
percent
4.97
percent
7.38
percent

7.47
percent
7.59
percent
 Question 20
The discount rate that makes the net present value of an investment exactly
 equal to zero is called the:

Selected
Answer: internal rate of
return.
Answers: external rate of
return.

internal rate of
return.
average accounting
return.
profitability index.
equalizer.
 Question 21
The internal rate of return method of analysis:

Selected
Answer: may lead to incorrect decisions when comparing mutually
exclusive projects.
Answers: may produce multiple rates of return when cash flows are
conventional.

may lead to incorrect decisions when comparing mutually

exclusive projects.
is rarely used in the business world today.
is the preferred method of analysis when projects are either
mutually exclusive or have unconventional cash flows.
is dependent upon prespecified rates used to discount the cash
flows.
 Question 22
Which two of the following methods of project analysis are the most biased
towards short-term projects?

Selected
Answer: NPV and IRR
Answers: NPV and IRR
PI and IRR

payback and discounted

payback
NPV and discounted
payback
AAR and PI
 Question 23
 You are considering the following two mutually exclusive projects. The required
rate of return is 10.75 percent for project A and 12 percent for project B. Which
project should you accept and why?

Selected
Answer: project B; because it returns all its cash flows within two
years
Answers: project A; because it has the lower required rate of return

project A; because its NPV is about $796 more than the

NPV of project B
project B; because it has the largest total cash inflow
project B; because it returns all its cash flows within two
years
project B; because it is the largest sized project
 Question 24
You are considering a project with an initial cost of $6,400. What is the
payback period for this project if the cash inflows are $900, $1,350, $2,800,
$1,350, and $500 a year over the next five years, respectively?

Selected
Answer: 4
years
Answers: 2
years
3
years

4
years
4.5
years
5
years
 Question 25
A project has an initial cost of $14,500 and produces cash inflows of $4,600,
$6,100, and $8,500 over the next three years, respectively. What is the
discounted payback period if the required rate of return is 15 percent?

Selected
Answer: never
Answers: 2.36
years
 2.45
years
2.55
years
2.62
years

never
 Question 26
A project has an average book value of $22,000 and a four-year life. The
projected net income from the project is $1,500, $1,800, $1,900, and $2,000 a
year for the next four years, respectively. What is the average accounting
return?

Selected
Answer: 8.18
percent
Answers: 4.09
percent
6.82
percent

8.18
percent
8.64
percent
9.09
percent
 Question 27
An investment has the following cash flows. Should the project be accepted if it
has been assigned a required return of 14 percent? Why or why not?

Selected
Answer: Yes; The IRR exceeds the required return by about
1.08 percent.
Answers: No; The IRR exceeds the required return by about
1.08 percent.
No; The IRR is less than the required return by about
0.97 percent.

Yes; The IRR exceeds the required return by about

1.08 percent.
Yes; The IRR is less than the required return by about
 0.97 percent
Yes; The IRR is less than the required return by about
1.08 percent.
 Question 28
You are considering an investment with the following cash flows. If the required
rate of return for this investment is 15.25 percent, should you accept the
investment based solely on the internal rate of return rule? Why or why not?

Selected
Answer: You cannot apply the IRR rule in this case because there are
multiple IRRs.
Answers: Yes; The IRR exceeds the required return.
Yes; The IRR is less than the required return.
No; The IRR is less than the required return.
No; The IRR exceeds the required return.

You cannot apply the IRR rule in this case because there are
multiple IRRs.
 Question 29
You are considering two independent projects both of which have been
assigned a discount rate of 9 percent. Based on the profitability index, what is
your recommendation concerning these projects?

Selected
Answer: You should accept project B and reject project
A.
Answers: You should accept both projects.
You should reject both projects.
You should accept project A and reject project
B.

You should accept project B and reject project

A.
You should accept project A and be indifferent
to project B.
 Question 30
You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1
percent and the face value is $1,000. What is the current market price?
 Selected
Answer: $73.3
3
Answers: $2.20
$69.2
7

$73.3
3
$263.
20
$270.
79
 Question 31
Gloria's Boutique recently paid $1.65 as an annual dividend. Future dividends are
projected at $1.68, $1.72, $1.76, and $1.80 over the next four years, respectively.
Beginning five years from now, the dividend is expected to increase by 2.5 percent
annually. What is one share of this stock worth to you if you require an 11 percent
rate of return on similar investments?
Selected
Answer: $19.6
8
Answers: $25.90

$19.6
8
$21.3
3
 Question 32
Martha's Vineyard recently paid a $3.60 annual dividend on its common stock.
This dividend increases at an average rate of 3.5% per year. The stock is
currently selling for $62.10 a share. What is the market rate of return?
Selected
Answer: 9.5
%
Answers: 8.5
%

6.0%

9.5
%
7.5
%
 Question 33
 All else constant, a bond will sell at _____ when the yield to maturity is _____
the coupon rat
Selected
Answer: a discount; higher
than
Answers: a premium; higher
than

a discount; higher
than
a premium;
equal to
at par; less than
 Question 34
A bond that pays interest annually yields a 7.25% rate of return. The inflation
rate for the same period is 3.5%. What is the real rate of return on this bond?

Selected
Answer: 3.62%
Answers: 3.57%

3.62%
3.50%
3.75%
 Question 35
Please complete the financial modeling for financial forecasting spreadsheet as attached:
Fill in the equations in the Red highlighted cells.Remember: No hard-wired numbers, just equations.

1. Compute the latest year IGR and SGR before forecasting. Then link the SGR and IGR to your Growt

2. complete the forecasted balance sheet and make sure it is balanced.

3. Conduct sensitivity analysis between growth rate and EFN.

4. Make recommendation which growth rate IGR or SGR the company should grow for the next five ye

6. Attached your completed spreadsheet.