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1) A decrease in the debt ratio will generally have no effect on___________ . a.

risk. b. Total risk. c. Business risk. d. Market risk. e. None of the above is correct. (It will
affect each type of risk above.)

2) Texas Products Inc. has a division that makes burlap bags for the citrus industry. The
division has fixed costs of $10,000 per month, and it expects to sell 42,000 bags per
month. If the variable cost per bag is $2.00, what price must the division charge in order
to break even? a. $2.24 b. $2.47 c. $2.82 d. $3.15 e. $2.00

3) Simon Utility expects to have net income of $5 billion this year. The company has an
estimated capital budget of $4 billion, and its capital structure consists of 65 percent
common equity and 35 percent debt. If the company follows a strict residual dividend
policy, what is the company’s expected dividend payout ratio? a. 0.00% b. 35.00% c.
48.00% d. 65.00% e. 100.00%

4) McKenna Motors is expected to pay a $1.00 per-share dividend at the end of the year
(D1 = $1.00). The stock sells for $20 per share and its required rate of return is 11
percent. The dividend is expected to grow at a constant rate, g, forever. What is the
growth rate, g, for this stock? a. 5% b. 6% c. 7% d. 8% e. 9%

5) NOPREM Inc. is a firm whose shareholders don’t possess the preemptive right. The
firm currently has 1,000 shares of stock outstanding; the price is $100 per share. The firm
plans to issue an additional 1,000 shares at $90.00 per share. Since the shares will be
offered to the public at large, what is the amount per share that old shareholders will lose
if they are excluded from purchasing new shares? a. $90.00 b. $5.00 c. $10.00 d. $0 e.

6) For the Cook County Company, the average age of accounts receivable is 60 days, the
average age of accounts payable is 45 days, and the average age of inventory is 72 days.
Assuming a 365-day year, what is the length of the firm’s cash conversion cycle? a. 87
days b. 90 days c. 65 days d. 48 days e. 66 days

7) A firm has $5,000,000 of inventory on average and annual sales of $30,000,000.

Assume there are 365 days per year. What is the firm’s inventory conversion period? a.
30.25 days b. 60.83 days c. 45.00 days d. 72.44 days e. 55.25 days

8) Matheson Manufacturing Inc. is planning to borrow $12,000 from the bank. The bank
offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, 1-year
installment loan, payable in 4 equal quarterly payments. What is the effective rate of
interest on the 10.19 percent add-on loan? a. 9.50% b. 10.19% c. 15.22% d. 16.99% e.
9) The Random Corporation is setting its terms on a new issue with warrants. The bonds
have a 30-year maturity and semiannual coupon. Each bond will have 20 warrants
attached that give the holder the right to purchase one share of Random stock per warrant.
Random’s investment banker estimates that each warrant has a value of $14.20. A similar
straight-debt issue would require a 10 percent coupon. What coupon rate must be set on
the bonds so that the package will sell for $1,000? a. 6.00% b. 7.00% c. 8.00% d. 9.00%
e. 10.00%

10) Northeast Company has 200,000 shares of common stock and 50,000 warrants
outstanding. Each warrant entitles its owner to buy one share at a price of $20 before
2010. The firm’s basic earnings per share is $2.50. What is the firm’s diluted earnings per
share? a. $2.50 b. $2.25 c. $1.50 d. $3.00 e. $2.00