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Chapter 1

7. The Sarbanes-Oxley Act of 2002 is intended to:


a. protect financial managers from investors.
b. not have any affect on foreign companies.
c. reduce corporate revenues.
d. protect investors from corporate abuses.
e. decrease audit costs for U.S. firms.
Answer: d
Difficulty level: Easy
Topic: SARBANES-OXLEY

8. Which one of the following statements concerning a sole proprietorship is correct?


a. A sole proprietorship is the least common form of business ownership.
b. The profits of a sole proprietorship are taxed twice.
c. The owners of a sole proprietorship share profits as established by the partnership agreement.
d. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
e. A sole proprietorship is often structured as a limited liability company.
Answer: d
Difficulty level: Easy
Topic: SOLE PROPRIETORSHIP

9. A general partner:
a. has less legal liability than a limited partner.
b. has more management responsibility than a limited partner.
c. faces double taxation whereas a limited partner does not.
d. cannot lose more than the amount of his/her equity investment.
e. is the term applied only to corporations which invest in partnerships.
Answer: b
Difficulty level: Easy
Topic: PARTNERSHIP

10. Which one of the following statements is correct concerning corporations?


a. The largest firms are usually corporations.
b. The majority of firms are corporations.
c. The stockholders are usually the managers of a corporation,.
d. The ability of a corporation to raise capital is quite limited.
e. The income of a corporation is taxed as personal income of the stockholders.
Answer: a
Difficulty level: Easy
Topic: CORPORATION

11. Which one of the following business types is best suited to raising large amounts of capital?
a. sole proprietorship
b. limited liability company
c. corporation
d. general partnership
e. limited partnership
Answer: c
Difficulty level: Easy
Topic: CORPORATION
12. Which type of business organization has all the respective rights and privileges of a legal person?
a. sole proprietorship
b. general partnership
c. limited partnership
d. corporation
e. limited liability company
Answer: d
Difficulty level: Easy
Topic: CORPORATION
Topic: GOAL OF FINANCIAL MANAGEMENT

13 Which form of business structure faces the greatest agency problems?


a. sole proprietorship
b. general partnership
c. limited partnership
d. corporation
e. limited liability company
Answer: d
Difficulty level: Medium
Topic: AGENCY PROBLEM

14. Which of the following statements concerning auction markets is (are) correct?
I. NASDAQ is an auction market.
II. The NYSE is an auction market.
III. All trades involve a dealer in an auction market.
IV. An auction market is called an over-the-counter market.
a. I only
b. II only
c. I and III only
d. II and III only
e. II and IV only
Answer: b
Difficulty level: Medium
Topic: AUCTION MARKET

15. Sole proprietorships are predominantly started because:


a. they are easily and cheaply setup.
b. the proprietorship life is limited to the business owner's life.
c. all business taxes are paid as individual taxes.
d. All of these.
e. None of these.
Answer: d
Difficulty level: Easy
Topic: SOLE PROPRIETORSHIPS

18. Which one of the following statements is correct?


a. Both partnerships and corporations incur double taxation.
b. Sole proprietorships and partnerships are taxed in a similar fashion.
c. Partnerships are the most complicated type of business to form.
d. Both partnerships and corporations have bylaws.
e. All types of business formations have limited lives.
Answer: b
Difficulty level: Medium
Topic: BUSINESS TYPES

20. Managers are encouraged to act in the shareholders’ best interests by:
a. election of a board of directors who select management.
b. the threat of a takeover by another firm.
c. compensation contracts that tie compensation to corporate success.
d. Both A and B.
e. All of these.
Answer: e
Difficulty level: Medium
Topic: GOVERNANCE
Scrambling: Locked

Chapter 2
5. An increase in which one of the following will cause the operating cash flow to increase?
a. depreciation
b. change in net working capital
c. net working capital
d. taxes
e. costs
Answer: a

6. A firm starts its year with a positive net working capital. During the year, the firm acquires more short-
term debt than it does short-term assets. This means that:
a. the ending net working capital will be negative.
b. both accounts receivable and inventory decreased during the year.
c. the beginning current assets were less than the beginning current liabilities.
d. accounts payable increased and inventory decreased during the year.
e. the ending net working capital can be positive, negative, or equal to zero.
Answer: e

11. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500?

a. 21.38%
b. 23.88%
c. 25.76%
d. 34.64%
e. 39.00%
Answer: c
Feedback: Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($126,500 - $100,000) = $32,585;
Average tax rate = $32,585 ÷ $126,500 = .2576 = 25.76 percent
13. Thompson’s Jet Skis has operating cash flow of $218. Depreciation is $45 and interest paid is $35. A
net total of $69 was paid on long-term debt. The firm spent $180 on fixed assets and increased net
working capital by $38. What is the amount of the cash flow to stockholders?
a. -$104
b. -$28
c. $28
d. $114
e. $142
Answer: a
Feedback: Cash flow of the firm = $218 - $38 - $180 = $0; Cash flow to creditors =
Feedback: $35 - (-$69) = $104; Cash flow to stockholders = $0 - $104 = -$104

Reference: 02_65

14. Refer to the figure above. What is the change in the net working capital from 2007 to 2008?
a. $1,235
b. $1,035
c. $1,335
d. $3,405
e. $4,740
Answer: c
Feedback: Change in net working capital = ($7,310 - $2,570) - ($6,225 - $2,820) = $1,335
Difficulty level: Medium
15. Refer to the figure above. What is the amount of the non-cash expenses for 2008?
a. $570
b. $630
c. $845
d. $1,370
e. $2,000
Answer: d
Feedback: The non-cash expense is depreciation in the amount of $1,370.

16. Refer to the figure above. What is the operating cash flow for 2008?
a. $845
b. $1,930
c. $2,215
d. $2,845
e. $3,060
Answer: d
Feedback: Operating cash flow = $1,930 + $1,370 - $455 = $2,845
Refer To: 02_65

17. Refer to the figure above. What is the cash flow of the firm for 2008?
a. $430
b. $485
c. $1,340
d. $2,590
e. $3,100
Answer: a
Feedback: Operating cash flow = $1,930 + $1,370 - $455 = $2,845; Change in net working capital =
($7,310 - $2,570) - ($6,225 - $2,820) = $1,335; Net capital spending = $10,670 - $10,960 + $1,370 =
$1,080; Cash flow of the firm = $2,845 - $1,335 - $1,080 = $430

Refer To: 02_65

18. Refer to the figure above. What is the amount of net new borrowing for 2008?
a. -$225
b. -$25
c. $0
d. $25
e. $225
Answer: e
Feedback: Net new borrowing = $8,100 - $7,875 = $225
Refer To: 02_65

Reference: 02_84
19. Refer to the figure above. What is the operating cash flow for 2008?
a. $940.52
b. $985.71
c. $1,075.50
d. $1,230.00
e. $1,354.55
Answer: d
Feedback: Earnings before interest and taxes = $685.71 + $300 = $985.71 (See problem 84); Operating
cash flow = $985.71 + $450 - ($685.71 - $480) = $1,230 (See problem 84)
Refer To: 02_84

Chapter 3
7. If a firm produces a 10% return on assets and also a 10% return on equity, then the firm:
a. has no debt of any kind.
b. is using its assets as efficiently as possible.
c. has no net working capital.
d. also has a current ratio of 10.
e. has an equity multiplier of 2.
Answer: a

8. The only difference between Joe’s and Moe’s is that Joe’s has old, fully depreciated equipment. Moe’s
just purchased all new equipment which will be depreciated over eight years. Assuming all else equal:
a. Joe’s will have a lower profit margin.
b. Joe’s will have a lower return on equity.
c. Moe’s will have a higher net income.
d. Moe’s will have a lower profit margin.
e. Moe’s will have a higher return on assets.
Answer: d

10. Which two of the following are most apt to cause a firm to have a higher price-earnings ratio?
I. slow industry outlook
II. high prospect of firm growth
III. very low current earnings
IV. investors with a low opinion of the firm
a. I and II only
b. II and III only
c. II and IV only
d. I and III only
e. III and IV only
Answer: b
11. Marcie’s Mercantile wants to maintain their current dividend policy, which is a payout ratio of 40
percent. The firm does not want to increase their equity financing but are willing to maintain their current
debt-equity ratio. Given these requirements, the maximum rate at which Marcie’s can grow is equal to:
a. 40 percent of the internal rate of growth.
b. 60 percent of the internal rate of growth.
c. the internal rate of growth.
d. the sustainable rate of growth.
e. 60 percent of the sustainable rate of growth.
Answer: d

12. If a firm bases its growth projection on the rate of sustainable growth, and shows positive net income,
then the:
a. fixed assets will have to increase at the same rate, regardless of the current capacity level.
b. number of common shares outstanding will increase at the same rate of growth.
c. debt-equity ratio will have to increase.
d. debt-equity ratio will remain constant while retained earnings increase.
e. fixed assets, debt-equity ratio, and number of common shares outstanding will all increase.
Answer: d

16. A firm has a return on equity of 15 percent. The debt-equity ratio is 50 percent. The total asset
turnover is 1.25 and the profit margin is 8 percent. The total equity is $3,200. What is the amount of the
net income?
a. $480
b. $500
c. $540
d. $600
e. $620
Answer: a
Feedback: Using the Du Pont identity: Total assets = (1 + .50) x $3,200 = $4,800; Total sales = $4,800 x
1.25 = $6,000; Net income = $6,000 x .08 = $480
Difficulty level: Medium
Reference: 03_95
17. Refer to the figure above. How many days on average does it take Bayside to sell their inventory?
(Use 2008 values.)
a. 126.1 days
b. 127.9 days
c. 153.8 days
d. 176.5 days
e. 178.9 days
Answer: e
Feedback: Inventory turnover for 2008 = $4,060 ÷ $1,990 = 2.04; Days’ sales in inventory = 365 ÷
178.9 days
Refer To: 03_95

18. Refer to the figure above. What is the times interest earned ratio for 2008?
a. 30
b. 36
c. 40
d. 50
e. 54
Answer: c
Feedback: Times interest earned for 2008 = $1,200 ÷ $30 = 40
Refer To: 03_95
19. The Green Giant has a 5% profit margin and a 40% dividend payout ratio. The total asset turnover is
1.40 and the equity multiplier is 1.50. What is the sustainable rate of growth?
a. 6.30 percent
b. 6.53 percent
c. 6.72 percent
d. 6.80 percent
e. 6.83 percent
Answer: c
Feedback: Return on equity = .05 x 1.40 x 1.50 = .105; Sustainable growth = {.105 x (1 - .40)} ÷ {1 -
[.105 x (1 - .40)]} = .06724 = 6.72 percent

20. Katelyn’s Kites has net income of $240 and total equity of $2,000. The debt-equity ratio is 1.0 and the
plowback ratio is 40 percent. What is the internal growth rate?
a. 2.46 percent
b. 3.00 percent
c. 4.92 percent
d. 5.88 percent
e. 6.00 percent
Answer: a
Feedback: Total assets = $2,000 + $2,000 = $4,000 (The debt-equity ratio of 1.0 means TD = TE.);
Return on assets = $240 ÷ $4,000 = .06; Internal growth = [.06 x .40] ÷ [1 - (.06 x .40)] = 2.46 percent

Chapter 004
2. You are comparing two investment options. The cost to invest in either option is the same today. Both
options will provide you with $20,000 of income. Option A pays five annual payments starting with
$8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual
payments of $4,000 each. Which one of the following statements is correct given these two investment
options?
a. Both options are of equal value given that they both provide $20,000 of income.
b. Option A is the better choice of the two given any positive rate of return.
c. Option B has a higher present value than option A given a positive rate of return.
d. Option B has a lower future value at year 5 than option A given a zero rate of return.
e. Option A is preferable because it is an annuity due.
Answer: b
Difficulty level: Medium
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE

3. You are comparing two annuities with equal present values. The applicable discount rate is 7.5 percent.
One annuity pays $5,000 on the first day of each year for twenty years. How much does the second
annuity pay each year for twenty years if it pays at the end of each year?
a. $4,651
b. $5,075
c. $5,000
d. $5,375
e. $5,405
Answer: d
Feedback:
Feedback: Because each payment is received one year later, then the cash flow has to equal:
Feedback: $5,000 x (1 + .075) = $5,375
Difficulty level: Medium
Topic: ORDINARY ANNUITY VERSUS ANNUITY DUE

6. You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is
6.5 percent. If you want to have this debt paid in full within five years, how much must you pay each
month?
a. $471.30
b. $473.65
c. $476.79
d. $479.37
e. $480.40
Answer: d

Feedback:
Difficulty level: Medium
Topic: ORDINARY ANNUITY PAYMENTS AND PRESENT VALUE

7. Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on
the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9
percent, what is the current value of the lease?
a. $15,882.75
b. $15,906.14
c. $15,947.61
d. $16,235.42
e. $16,289.54
Answer: c

Feedback:
Difficulty level: Medium
Topic: ANNUITY DUE PAYMENTS AND PRESENT VALUE

8. Winston Enterprises would like to buy some additional land and build a new factory. The anticipated
total cost is $136 million. The owner of the firm is quite conservative and will only do this when the
company has sufficient funds to pay cash for the entire expansion project. Management has decided to
save $450,000 a month for this purpose. The firm earns 6% compounded monthly on the funds it saves.
How long does the company have to wait before expanding its operations?
a. 184.61 months
b. 199.97 months
c. 234.34 months
d. 284.61 months
e. 299.97 months
Answer: a

Feedback:
Difficulty level: Medium
Topic: ORDINARY ANNUITY TIME PERIODS AND FUTURE VALUE

9. Today, you are retiring. You have a total of $413,926 in your retirement savings and have the funds
invested such that you expect to earn an average of 3 percent, compounded monthly, on this money
throughout your retirement years. You want to withdraw $2,500 at the beginning of every month, starting
today. How long will it be until you run out of money?
a. 185.00 months
b. 213.29 months
c. 227.08 months
d. 236.84 months
e. 249.69 months
Answer: b
Feedback:
Difficulty level: Medium
Topic: ANNUITY DUE TIME PERIODS AND PRESENT VALUE

10. You have been investing $120 a month for the last 15 years. Today, your investment account is worth
$47,341.19. What is your average rate of return on your investments?
a. 9.34%
b. 9.37%
c. 9.40%
d. 9.42%
e. 9.46%
Answer: e

Feedback:
Feedback: This can not be solved directly, so it’s easiest to just use the calculator method to get an
answer. You can then use the calculator answer as the rate in the formula just to verify that you answer is
correct.

Feedback:
Difficulty level: Medium
Topic: ORDINARY ANNUITY INTEREST RATE

12. You are considering a job offer. The job offers an annual salary of $52,000, $55,000, and $60,000 a
year for the next three years, respectively. The offer also includes a starting bonus of $2,000 payable
immediately. What is this offer worth to you today at a discount rate of 6 percent?
a. $148,283.56
b. $148,383.56
c. $150,283.56
d. $150,383.56
e. $152,983.56
Answer: d
Feedback:
Difficulty level: Easy
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE

13. One year ago, the Jenkins Family Fun Center deposited $3,600 in an investment account for the
purpose of buying new equipment four years from today. Today, it is adding another $5,000 to this
account. It plans on making a final deposit of $7,500 to the account next year. How much will be
available when it is ready to buy the equipment, assuming it earns a 7% rate of return?
a. $18,159.65
b. $19,430.84
c. $19,683.25
d. $20,194.54
e. $20,790.99
Answer: e

Feedback:
Difficulty level: Medium
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE

14. The Bluebird Company has a $10,000 liability it must pay three years from today.
The company is opening a savings account so that the entire amount will be available when this debt
needs to be paid. The plan is to make an initial deposit today and then deposit an additional $2,500 a year
for the next three years, starting one year from today. The account pays a 3% rate of return. How much
does the Bluebird Company need to deposit today?
a. $1,867.74
b. $2,079.89
c. $3,108.09
d. $4,276.34
e. $4,642.28
Answer: b

Feedback:
Difficulty level: Medium
Topic: PRESENT VALUE, PAYMENTS AND FUTURE VALUE

16. You are paying an effective annual rate of 13.8% on your credit card. The interest is compounded
monthly. What is the annual percentage rate on your account?
a. 11.50%
b. 12.00%
c. 13.00%
d. 13.80%
e. 14.71%
Answer: c

Feedback:
Difficulty level: Medium
Topic: ANNUAL PERCENTAGE RATE

18. You have $2,500 that you want to use to open a savings account. You have found five different
accounts that are acceptable to you. All you have to do now is determine which account you want to use
such that you can earn the highest rate of interest possible. Which account should you use based upon the
annual percentage rates quoted by each bank?

a. Account A
b. Account B
c. Account C
d. Account D
e. Account E
Answer: b

Feedback:
Difficulty level: Medium
Topic: EFFECTIVE ANNUAL RATE

20. The Smart Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.9%
annual percentage rate. What is the maximum rate the bank can actually earn based on the quoted rate?
a. 7.90%
b. 8.18%
c. 8.20%
d. 8.22%
e. 8.39%
Answer: d
Feedback: EAR = e.079 - 1 = 2.71828.079 - 1; EAR = 8.22 percent
Feedback: Using ex on a financial calculator: EAR = 8.22 percent
Feedback: On the Texas Instruments BA II Plus, the input is:
Feedback: .079, 2nd, ex, -1, = .0822 = 8.22 percent
Difficulty level: Medium
Topic: CONTINUOUS COMPOUNDING

22. You hope to buy your dream house six years from now. Today your dream house costs $189,900. You
expect housing prices to rise by an average of 4.5% per year over the next six years. How much will your
dream house cost by the time you are ready to buy it?
a. $240,284.08
b. $246,019.67
c. $246,396.67
d. $246,831.94
e. $247,299.20
Answer: e

Feedback:
Difficulty level: Medium
Topic: FUTURE VALUE

Chapter 5

2. The annual coupon payment of a bond divided by its market price is called the:
a. coupon rate.
b. current yield.
c. yield to maturity.
d. bid-ask spread.
e. capital gains yield.
Answer: b
Difficulty level: Easy
Topic: CURRENT YIELD

4. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
a. a premium; higher than
b. a premium; equal to
c. at par; higher than
d. at par; less than
e. a discount; higher than
Answer: e
Difficulty level: Medium
Topic: BOND PRICES AND YIELDS

9. The market price of _____ maturity bonds fluctuates _____ compared with _____ maturity bonds as
interest rates change.
a. shorter; less; longer
b. longer; less; shorter
c. shorter; more; longer
d. Both b. and c.
e. None of these.
Answer: a
Difficulty level: Medium
Topic: BOND VALUES

13. Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. The bond is
currently priced at $894.60 and has a par value of $1,000. Interest is paid semiannually. What is the yield
to maturity?
a. 8.67%
b. 10.13%
c. 10.16%
d. 10.40%
e. 10.45%
Answer: d

Feedback:
Feedback: This can not be solved directly, so it’s easiest to just use the calculator method to get an
answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is
correct.

Feedback:
Difficulty level: Medium
Topic: YIELD TO MATURITY

14. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the
change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?
a. 11.11 % decrease
b. 12.38 % decrease
c. 12.38 % increase
d. 14.13 % decrease
e. 14.13 % increase
Answer: b
Feedback:
Difficulty level: Medium
Topic: INTEREST RATE RISK

15. D’Angelo’s bonds have a face value of $1,000 and a current market price of $1010. The bonds have a
7% coupon rate. What is the current yield on these bonds?
a. 6.93%
b. 6.97%
c. 7.00%
d. 7.03%
e. 7.07%
Answer: a

Feedback:
Difficulty level: Easy
Topic: CURRENT YIELD

17. The bonds of Frank’s Welding, Inc. pay an 8% coupon, have a 7.98% yield to maturity and have a
face value of $1,000. The current rate of inflation is 2.5%. What is the real rate of return on these bonds?
a. 5.32%
b. 5.35%
c. 5.37%
d. 5.42%
e. 5.48%
Answer: b
Feedback: (1 + .0798) = (1 + r) x (1 + .025); r = 5.35%
Difficulty level: Medium
Topic: FISHER EFFECT

18 A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond
matures in 25 years. What is the implicit interest, in dollars, for the first year of the bond’s life?
a. $9.08
b. $12.56
c. $14.48
d. $21.47
e. $31.25
Answer: c
Feedback:

Difficulty level: Medium


Topic: ZERO COUPON BOND AND IMPLICIT INTEREST

19. If a taxable bond yields 10% and a municipal bond of comparable risk and maturity yields 7%, at
what tax rate is the investor indifferent to either bond?
a. 20%
b. 25%
c. 28%
d. 30%
e. 35%
Answer: d
Feedback: .10 x (1 - t*) = .07 = (1 - t*) = .70 = t = .30 or 30%
Difficulty level: Medium
Topic: MUNICIPAL BONDS

20. A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end
of each year. The current price of the bond is $932. What is the yield to maturity for this bond?
a. 5.05%
b. 6.48%
c. 8.58%
d. 10.15%
e. 11.92%
Answer: d
Feedback: Current Price = Int(PVIFAr,4) + Face value(PVIFr,4)
Feedback: $932 = $80[1 - 1/(1 + r)4]/r + $1000/(1 + r)4
Feedback: r = 10.152
Difficulty level: Medium
Topic: YIELD TO MATURITY

Chapter 6
3. The voting procedure where a shareholder grants authority to another individual to vote his/her shares
is called _____ voting.
a. democratic
b. cumulative
c. straight
d. deferred
e. proxy
Answer: e
Difficulty level: Easy
Topic: PROXY VOTING
5. The electronic system used by the New York Stock Exchange which enables orders to be transmitted
directly to a specialist is called the ______ system.
a. NASDAQ
b. SuperDOT
c. Instinet
d. Internet
e. brokerage
Answer: b
Difficulty level: Easy
Topic: SUPERDOT SYSTEM

6. The Koster Co. currently pays an annual dividend of $1.00 and plans on increasing that amount by 5%
each year. The Keyser Co. currently pays an annual dividend of $1.00 and plans on increasing its
dividend by 3% annually. Given this, it can be stated with certainty that the _____ of the Koster Co. stock
is greater than the _____ of the Keyser Co. stock.
a. market price; market price
b. dividend yield; dividend yield
c. total return; total return
d. capital gains; dividend yield
e. None of these.
Answer: c
Difficulty level: Medium
Topic: DIVIDEND YIELD VS. CAPITAL GAINS YIELD

[Question]
7. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC
stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to
_____ if Fred is to achieve his 10% rate of return.
a. remain constant
b. decrease by 5%
c. increase by 5%
d. increase by 10%
e. increase by 15%
Answer: c
Difficulty level: Medium
Topic: DIVIDEND YIELD AND CAPITAL GAINS

8. Jack owns 35 shares of stock in Beta, Inc. and wants to exercise as much control as possible over the
company. Beta, Inc. has a total of 100 shares of stock outstanding. Each share receives one vote.
Presently, the company is voting to elect two new directors. Which one of the following statements must
be true given this information?
a. If straight voting applies, Jack is assured one seat on the board.
b. If straight voting applies, Jack can control both open seats.
c. If cumulative voting applies, Jack is assured one seat on the board.
d. If cumulative voting applies, Jack can control both open seats.
e. Regardless of the type of voting employed, Jack does not own enough shares to control any of the seats.
Answer: c
Difficulty level: Medium
Topic: CUMULATIVE VOTING
10. Common stock shareholders are generally granted rights which include the right to:
I. share in company profits.
II. vote for company directors.
III. vote on proposed mergers.
IV. residual assets in a liquidation.
a. I and II only
b. II and III only
c. I and IV only
d. I, II, and IV only
e. I, II, III, and IV
Answer: e
Difficulty level: Medium
Topic: SHAREHOLDER RIGHTS

11. The owner of preferred stock:


a. is entitled to a distribution of income prior to the common shareholders.
b. has the right to veto the outcome of an election held by the common shareholders.
c. has the right to declare the company bankrupt whenever there are insufficient funds to pay dividends to
the common shareholders.
d. receives tax-free dividends if he is an individual and owns more than 20% of the outstanding preferred
shares.
e. has the right to collect payment on any unpaid dividends as long as the stock is non-cumulative
preferred.
Answer: a
Difficulty level: Medium
Topic: PREFERRED STOCK

13. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on
this information, which one of the following statements is correct?
a. The closing price on the previous day was $1.42 higher than today’s closing price.
b. A dealer will buy the stock at $22.87 and sell it at $26 a share.
c. The stock increased in value between yesterday’s close and today’s close by $.0142.
d. The earnings per share are equal to 1/26th of $22.87.
e. The earnings per share have increased by $1.42 this year.
Answer: d
Difficulty level: Medium
Topic: STOCK MARKET REPORTING

15. 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?
a. 2.5%
b. 3.5%
c. 5.5%
d. 6.0%
e. 9.5%
Answer: e

Feedback:
Difficulty level: Medium
Topic: REQUIRED RETURN

16. Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by
5% annually. The market rate of return on this stock is 9%. What is the amount of the last dividend paid
by Weisbro and Sons?
a. $.77
b. $.80
c. $.84
d. $.87
e. $.88
Answer: b

Feedback:
Difficulty level: Medium
Topic: DIVIDEND AMOUNT

18. Bill Bailey and Sons pays no dividend at the present time. The company plans to start paying an
annual dividend in the amount of $.30 a share for two years commencing two years from today. After that
time, the company plans on paying a constant $1 a share dividend indefinitely. How much are you willing
to pay to buy a share of this stock if your required return is 14%?
a. $4.82
b. $5.25
c. $5.39
d. $5.46
e. $5.58
Answer: b

Feedback:
Difficulty level: Challenge
Topic: DIFFERENTIAL GROWTH DIVIDENDS

20. Jim owns shares of Abco, Inc. preferred stock which he says provides him with a constant 6.58% rate
of return. The stock is currently priced at $45.60 a share. What is the amount of the dividend per share?
a. $3.00
b. $3.15
c. $3.50
d. $3.54
e. $3.62
Answer: a
Feedback: D = .0658 x $45.60 = $3.00
Difficulty level: Easy
Topic: PREFERRED STOCK