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Question: Assume that you hold a welldiversified portfolio that has an expected return of 12.0% and a beta of 1.20. You are in the process of buying 100 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock?
A 11.69%; 1.22
B 12.30%; 1.28
C 12.92%; 1.34
D 13.56%; 1.41
E 14.24%; 1.48
Question 2
Question: TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information for the justcompleted year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the justcompleted year?
A $383
B $425
C $468
D $514
E $566
Question 3
Question: Analysts who follow Howe Industries recently noted that, relative to the previous year, the companyâ€™s operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?
A The company cut its dividend.
B The company made a large investment in a profitable new plant.
C The company sold a division and received cash in return.
D The company issued new common stock.
Question 4
Question: Amram Companyâ€™s current ratio is 1.9. Considered alone, which of the following actions would reduce the companyâ€™s current ratio?
A Borrow using shortterm notes payable and use the proceeds to reduce accruals.
B Borrow using shortterm notes payable and use the proceeds to reduce longterm debt.
C Use cash to reduce accruals.
D Use cash to reduce shortterm notes payable.
E Use cash to reduce accounts payable.
Question 5
Question: Which of the following statements is CORRECT?
A The Capital Market Line (CML) is a curved line that connects the riskfree rate and the market portfolio.
B The slope of the CML is
C All portfolios that lie on the CML to the right of sM are inefficient.
D All portfolios that lie on the CML to the left of sM are inefficient.
E None of the above statements is correct.
Question 6
Question: Yonan Corporation’s stock had a required return of 11.50% last year, when the riskfree rate was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2%. The riskfree rate and Yonan’s beta remain unchanged. What is Yonan’s new required return? (Hint: First calculate the beta, then find the required return.)
A 14.03%
B 14.38%
C 14.74%
D 15.10%
E 15.48%
Question 7
Question: Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have?
A $114.00
B $120.00
C $126.00
D $132.30
E $138.92
Question 8
Question: Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT?
A The portfolioâ€™s beta is less than 1.2.
B The portfolioâ€™s expected return is 15%.
C The portfolioâ€™s standard deviation is greater than 20%.
D The portfolioâ€™s beta is greater than 1.2.
E The portfolioâ€™s standard deviation is 20%.
Question 9
Question: For managerial purposes, i.e., making decisions regarding the firm’s operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm’s operations. Related to these modifications, which of the following statements is CORRECT?
A The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
B The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisionsâ€™ performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units.
C The standard statements provide useful information on the firmâ€™s individual operating units, but management needs more information on the firmâ€™s overall operations than the standard statements provide.
D The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP.
E The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to â€œadjustâ€ the results to make earnings look better.
Question 11
Question: Hocking Manufacturing Company has a beta of 0.65, while Levine Industries has a beta of 1.40. The required return on the stock market is 11.00%, and the riskfree rate is 4.25%. What is the difference between Hocking’s and Levine’s required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
A 4.12%
B 4.34%
C 4.57%
D 4.81%
E 5.06%
Question 12
Question: You observe the following information regarding Companies X and Y:
Company X has a higher expected return than Company Y.
Company X has a lower standard deviation of returns than Company Y.
Company X has a higher beta than Company Y.
Given this information, which of the following statements is CORRECT?
A Company X has more companyspecific risk than Company Y.
B Company X has a lower coefficient of variation than Company Y.
C Company X has less market risk than Company Y.
D Company Xâ€™s returns will be negative when Yâ€™s returns are positive.
E Company Xâ€™s stock is a better buy than Company Yâ€™s stock.
Question 13
Question: Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal amounts invested in each of the three stocks. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero). Assume that there is an increase in the market risk premium, but the riskfree rate remains unchanged. Which of the following statements is CORRECT?
A The required return of all stocks will remain unchanged since there was no change in their betas.
B The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.
C The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.
D The required returns on all three stocks will increase by the amount of the increase in the market risk premium.
E The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.
Question 14
Question: Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
A Company HD has a lower equity multiplier.
B Company HD has more net income.
C Company HD pays more in taxes.
D Company HD has a lower ROE.
E Company HD has a lower times interest earned (TIE) ratio.
Question 15
Question: Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freedup by this change, how would that affect its net income, assuming other things are held constant?
A $267.34
B $281.41
C $296.22
D $311.81
E $328.22
Question 16
Question: Helmuth Inc.’s latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?
A $2.14
B $2.26
C $2.38
D $2.50
E $2.63
Question 17
Question: Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its yearend assets were $210,000. The firm’s totaldebttototalassets ratio was 42.5%. Based on the Du Pont equation, what was Vaughn’s ROE?
A 14.77%
B 15.51%
C 16.28%
D 17.10%
E 17.95%
Question 18
Question: Suppose you hold a diversified portfolio consisting of a $10,000 investment in each of 12 different common stocks. The portfolioâ€™s beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.34. What would the portfolioâ€™s new beta be?
A 1.15
B 1.21
C 1.28
D 1.34
E 1.41
Question 19
Question: Which of the following statements is CORRECT?
A Suppose a firmâ€™s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.
B Suppose a firmâ€™s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.
C The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
D Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.
E Suppose a firmâ€™s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.
Question 20
Question: Rodriguez Roofing’s stock has a beta of 1.23, its required return is 11.25%, and the riskfree rate is 4.30%. What is the required rate of return on the stock market? (Hint: First find the market risk premium.)
A 9.95%
B 10.20%
C 10.45%
D 10.72%
E 10.98%
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If these data are based on the sale of 20,000 units, the contribution margin per unit would
be:
A. $40.
B. $150.
C. $290.
D. $360.
E. an amount other than those above.
22. A recent income statement of Black Corporation reported the following data:
If these data are based on the sale of 20,000 units, the breakeven point would be:
A. 9,565 units (rounded).
B. 11,000 units (rounded).
C. 7,586 units (rounded).
D. 14,667 units (rounded).
E. an amount other than those above.
23. A recent income statement of Suni Corporation reported the following data:
If these data are based on the sale of 20,000 units, the breakeven point would be:
A. 7,500 units.
B. 11,628 units.
C. 12,500 units.
D. 33,333 units.
E. an amount other than those above.
24. A recent income statement of Yang Corporation reported the following data:
If these data are based on the sale of 5,000 units, the breakeven sales would be:
A. $2,000,000.
B. $2,206,000.
C. $2,500,000.
D. $10,000,000.
E. an amount other than those above.
25. Lawson, Inc. sells a single product for $12. Variable costs are $8 per unit and fixed
costs total $360,000 at a volume level of 60,000 units. Assuming that fixed costs do not
change, Lawson’s breakeven point would be:
A. 30,000 units.
B. 45,000 units.
C. 90,000 units.
D. negative because the company loses $2 on every unit sold.
E. a positive amount other than those given above.
26. Grey, Inc. sells a single product for $20. Variable costs are $8 per unit and fixed costs
total $120,000 at a volume level of 5,000 units. Assuming that fixed costs do not change,
Green’s breakeven sales would be:
A. $160,000.
B. $200,000.
C. $300,000.
D. $480,000.
E. an amount other than those above.
27. Orion recently reported sales revenues of $800,000, a total contribution margin of
$300,000, and fixed costs of $180,000. If sales volume amounted to 10,000 units, the
company’s variable cost per unit must have been:
A. $12.
B. $32.
C. $50.
D. $92.
E. an amount other than those above.
28. Strayer has a breakeven point of 120,000 units. If the firm’s sole product sells for $40
and fixed costs total $480,000, the variable cost per unit must be:
A. $4.
B. $36.
C. $44.
D. an amount that cannot be derived based on the information presented.
E. an amount other than those in choices “A,” “B,” and “C”, but one that can be derived
based on the information presented.
29. Ribco Co. makes and sells only one product. The unit contribution margin is $6 and
the breakeven point in unit sales is 24,000. The company’s fixed costs are:
A. $4,000.
B. $14,400.
C. $40,000.
D. $144,000.
E. an amount other than those above.
31. At a volume level of 500,000 units, Sullivan reported the following information:
The company’s contributionmargin ratio is closest to:
A. 0.33.
B. 0.40.
C. 0.60.
D. 0.67.
E. an amount other than those above.
44. A recent income statement of Dragonwood Corporation reported the following data:
If the company desired to earn a target profit of $1,270,000, it would have to sell:
A. 5,778 units.
B. 8,600 units.
C. 10,160 units.
D. 11,908 units.
E. an amount other than those above.
45. Yellow Dot, Inc. sells a single product for $10. Variable costs are $4 per unit and
fixed costs total $120,000 at a volume level of 10,000 units. What dollar sales level
would Yellow Dot have to achieve to earn a target profit of $240,000?
A. $400,000.
B. $500,000.
C. $600,000.
D. $750,000.
E. $900,000.
Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the
company has fixed costs that amount to $400,000. Current sales total 16,000 units.
46. Narchie:
A. will breakeven by selling 8,000 units.
B. will breakeven by selling 13,333 units.
C. will breakeven by selling 20,000 units.
D. will breakeven by selling 1,000,000 units.
E. cannot breakeven because it loses money on every unit sold.
47. Each unit that Narchie sells will:
A. increase profit by $20.
B. increase profit by $30.
C. increase profit by $50.
D. increase profit by some other amount.
E. decrease profit by $5.
48. In order to produce a target profit of $22,000, Narchie’s dollar sales must total:
A. $8,440.
B. $21,100.
C. $1,000,000.
D. $1,055,000.
E. an amount other than those above.
49. If Narchie sells 24,000 units, its safety margin will be:
A. $200,000.
B. $400,000.
C. $1,000,000.
D. $1,200,000.
E. an amount other than those above.
50. The difference between budgeted sales revenue and breakeven sales revenue is the:
A. contribution margin.
B. contributionmargin ratio.
C. safety margin.
D. target net profit.
E. operating leverage.
51. Maxine’s budget for the upcoming year revealed the following figures:
If the company’s breakeven sales total $750,000, Maxine’s safety margin would be:
A. $(90,000).
B. $90,000.
C. $246,000.
D. $336,000.
E. $696,000.
52. Brooklyn sells a single product to wholesalers. The company’s budget for the
upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable
cost per unit of $8, and total fixed costs of $360,000. Brooklyn’s safety margin in units
is:
A. (13,400).
B. 0.
C. 1,600.
D. 13,600.
E. an amount other than those above.
53. Brooklyn sells a single product to wholesalers. The company’s budget for the
upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable
cost per unit of $8, and total fixed costs of $360,000. If Brooklyn’s unit sales are 200
units less than anticipated, its breakeven point will:
A. increase by $12 per unit sold.
B. decrease by $12 per unit sold.
C. increase by $8 per unit sold.
D. decrease by $8 per unit sold.
E. not change.
54. Brooklyn sells a single product to wholesalers. The company’s budget for the
upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable
cost per unit of $8, and total fixed costs of $360,000. If Brooklyn’s unit sales are 300
units more than anticipated, its breakeven point will:
A. increase by $12 per unit sold.
B. decrease by $12 per unit sold.
C. increase by $8 per unit sold.
D. decrease by $8 per unit sold.
E. not change.
56. Danielle sells a single product at $20 per unit. The firm’s most recent income
statement revealed unit sales of 100,000, variable costs of $800,000, and fixed costs of
$400,000. If a $4 drop in selling price will boost unit sales volume by 20%, the company
will experience:
A. no change in profit because a 20% drop in sales price is balanced by a 20% increase in
volume.
B. an $80,000 drop in profit.
C. a $240,000 drop in profit.
D. a $400,000 drop in profit.
E. a change in profit other than those above.
60. O’Dale sells three products: R, S, and T. Budgeted information for the upcoming
accounting period follows.
The company’s weightedaverage unit contribution margin is:
A. $3.00.
B. $3.55.
C. $4.00.
D. $19.35.
E. an amount other than those above.
Jamal & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these
products are as follows:
Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.
62. The weightedaverage unit contribution margin is:
A. $4.80.
B. $9.00.
C. $9.25.
D. $17.00.
E. an amount other than those above.
63. Assuming that the sales mix remains constant, the total number of units that Jamal
must sell to break even is:
A. 2,432.
B. 2,647.
C. 4,737.
D. 5,000.
E. an amount other than those above.
64. Assuming that the sales mix remains constant, the number of units of Plain that Jamal
must sell to break even is:
A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.
65. Assuming that the sales mix remains constant, the number of units of Fancy that
Jamal must sell to break even is:
A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.
77. The following information relates to Dazie Company:
Dazie’s operating leverage factor is closest to:
A. 0.067.
B. 0.167.
C. 0.400.
D. 2.500.
E. 6.000.
78. The following information relates to Paternus Company:
If a manager at Paternus desired to determine the percentage impact on income of a given
percentage change in sales, the manager would multiply the percentage increase/decrease
in sales revenue by:
A. 0.25.
B. 0.40.
C. 2.50.
D. 4.00.
E. 10.00.
Edmonco Company produced and sold 45,000 units of a single product last year, with the
following results:
79. Edmonco’s operating leverage factor was:
A. 4.
B. 5.
C. 6.
D. 7.
E. 8.
80. If Edmonco’s sales revenues increase 15%, what will be the percentage increase in
income before income taxes?
A. 15%.
B. 45%.
C. 60%.
D. 75%.
E. An amount other than those above.
83. A company, subject to a 40% tax rate, desires to earn $500,000 of aftertax income.
How much should the firm add to fixed costs when figuring the sales revenues necessary
to produce this income level?
A. $200,000.
B. $300,000.
C. $500,000.
D. $833,333.
E. $1,250,000.
84. Barrey, Inc. is subject to a 40% income tax rate. The following data pertain to the
period just ended when the company produced and sold 45,000 units:
How many units must Barrey sell to earn an aftertax profit of $180,000?
A. 42,000.
B. 45,000.
C. 51,000.
D. 61,000.
E. An amount other than those above.
85. Barrey, Inc. is subject to a 40% income tax rate. The following data pertain to the
period just ended when the company produced and sold 45,000 units:
How many units must Barrey sell to earn an aftertax profit of $225,000?
A. 67,250.
B. 62,250.
C. 61,000.
D. 51,000.
E. An amount other than those above
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