1. ________ indicates management's effectiveness in managing the firm's income statement.
   1. Gross profit margin
   2. Operating profit margin
   3. Net profit margin
   4. Return on assets

1. The effective annual rate increases when the ________ increases.
   1. number of compounding periods in a year
   2. number of years invested
   3. quoted rate
   4. both A and C

1. An increase in ________ will decrease present value.
   1. the discount rate per period
   2. the original amount invested
   3. the number of periods
   4. both A and C

1. What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession, 2.0% return; 65% probability of a moderate economy, 9.5% return; 17% probability of a strong economy, 14.2% return.
   1. 3.68%
   2. 1.23%
   3. 8.47%
   4. 6.66%

1. Assume that a firm purchases foreign currency in order to complete the purchase of raw material from an overseas supplier. The currency is purchased today at an exchange rate that is good only for today. This transaction is referred to as a (n) ________ transaction.
   1. forward
   2. arbitrage
   3. spot
   4. hedge

1. Which of the following portfolios is clearly preferred to the others?

1. Expected Standard
2. Return Deviation

A 14% 12%

B 22% 20%

C 18% 16%

1. Investment A
   1. Investment B
   2. Investment C
   3. Cannot be determined

1. Your broker mailed you your year-end statement. You have $25,000 invested in Amazon, $18,000 tied up in Boeing, $36,000 in Caterpillar stock, and $11,000 in DuPont. The betas for each of your stocks are 1.43 for Amazon, .79 for Boeing, 1.37 for Caterpillar, and 1.71 for DuPont. What is the beta of your portfolio?
   1. 1.33
   2. 1.31
   3. 1.00
   4. 5.30

1. Treize Industries' common stock has an expected return of 13% and a beta of 1.3. If the expected risk-free return is 3%, what is the expected return for the market (round your answer to the nearest .1%)?
   1. 7.7%
   2. 9.6%
   3. 10.0%
   4. 10.7%

1. A bond with a face value of $1,000 has annual coupon payments of $100 and was issued seven years ago. The bond currently sells for $1,085, has eight years left to maturity. This bond's ________ must be less than 10%.
   1. current yield
   2. coupon rate
   3. current yield and coupon rate
   4. yield to maturity and current yield

1. McDonald's stock currently sells for $123. It's expected earnings per share are $5.12. The average P/E ratio for the industry is 24. If investors expected the same growth rate and risk for McDonald's as for an average firm in the same industry, its stock price would
   1. Stay about the same.
   2. Rise.
   3. Fall.
   4. There is not enough information.

1. Profitable companies often prefer to issue debt rather than preferred stock because
   1. Debt creates less risk for the company.
   2. Interest payments are fixed but preferred shareholders expect dividends to grow.
   3. Preferred shares dilute the voting rights of common shareholders but bonds do not.
   4. Interest on debt is deductible for tax purposes, but preferred dividends are not.

1. Which of the following is considered to be a deficiency of the IRR?
   1. It fails to properly rank capital projects.
   2. It could produce more than one rate of return.
   3. It fails to utilize the time value of money.
   4. It is not useful in accounting for risk in capital budgeting.

1. Which of the following techniques might be useful in situations where mutually exclusive projects have unequal lives?
   1. IRR
   2. Equivalent annual cost (EAC).
   3. PI
   4. Discounted payback

1. Thaler & Co. anticipates an increase of $1,000,000 in Net Operating Income from first year sales of a new product. Taxes will be $350,000 and the company took $150,000 in depreciation expense. Operating cash flow equals
   1. $1,000,000.
   2. $500,000.
   3. $800,000.
   4. $650,000.

1. In 2017, Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000. Expected production costs are $600 per unit. In 2018, volume is expected to increase by 10%, while inflation will increase both the sales price and the cost per unit by 3%. In nominal dollars, expected gross profit for 2018 is
   1. $40 million.
   2. $45.32 million.
   3. $48.20 million.
   4. $50 million.

1. Mork Pharmaceuticals believes that changes in health insurance may increase demand by as much as 10%, but also lower prices by as much as 10%. It is also concerned that the cost of materials may increase as much as 10% and the company may or may not be able to pass these higher costs on to its customers. To estimate expected, best case and worst case results, Mork should use
   1. Sensitivity analysis.
   2. Scenario analysis.
   3. Political risk analysis.
   4. Probability analysis.

1. Reliable Metals plans to issue bonds that will mature in 20 years, will have a semi-annual coupon rate of 7%., and a Moody's rating of Aa2. Bonds of other metals companies with similar maturities and ratings currently yield an average of 6.3%.
   1. Reliable's bonds will sell at a price to yield about 6.3% because that is the investors' opportunity cost.
   2. Reliable's bonds should be priced to yield a rate close to the coupon rate.
   3. Reliable's bonds should yield more than 6.3% because they are new.
   4. Reliable's bonds should yield less than 6.3% because they are new.

1. Capital leasing is mutually advantageous to lessor and lessee when
   1. When the lessee only needs the asset for a fraction of its useful life.
   2. When the lessee does not want to have additional debt on the balance sheet.
   3. When the lessee has a higher tax rate than the lessor.
   4. The lessor has a higher tax rate than the lessee.

1. The Modigliani and Miller dividend irrelevancy theorem states that
   1. Dividends are preferable to stock repurchases.
   2. The timing of cash distributions is important.
   3. The timing of cash distributions is unimportant.
   4. Stock repurchases are preferable to dividends.

1. Which of the following terms would tend to minimize a firm's investment in accounts receivable?
   1. net 15
   2. net 30
   3. 1/15 net 45
   4. 2/10 net 30

Section B. Please research these questions and provide the relevant responses

1. The Cycle. The operating cycle of a firm, domestic or multinational, consists of the following four time periods. For each of these periods, explain whether a cash outflow or a cash inflow is associated with the beginning and the end of the period.

a. Quotation period.

b. Input sourcing...

c. Inventory.

d. Accounts receivable.

2 Generally, forward contracts are negotiated long-term contracts between the firm managing its risk exposure and a financial intermediary such asan investment bank. The primary advantage of this type of bilateral arrangement is that the contract can be tailored to thespecific needs of the firm that is engaging in risk management. However, there are some potentially serious limitations ofthis approach.

1. Credit risk exposure...

2. Sharing of strategic information...

3. Market values of negotiated contracts are not easily determined.

3. Using the following information for McDonovan, Inc.'s stock, calculate their expected return and standard deviation.

State Probability Return

Boom 20% 40%

Normal 60% 15%

Recession 20% (20%)

4. a. and b. Here are the annual rates of return, and the arithmetic and geometric averages, for Harris:

1. If we wish to find a 3-year return that would get us from the t = 1 price to the t= 4 price, we would solve the following:

1. If we earn 50% in 3 years with Harris, how much do we earn, on average, each year? What single rate, if earned 3 years in a row, would take us from our initial $10 price to our final $15 price?

1. These average annual returns are the geometric averages!
2. Merriweather Printing Companys project has the following cash flows:

If this projects payback period is 2.5 years, then its initial cost equals the total (undiscounted) of the first two years cash flows, plus half of the third years:

Section C Essays

1) Explain how securities markets provide a link between the corporation and investors.

2) Describe the tax benefits to a corporation of issuing debt rather than issuing stock.